Assumption-based planning: Difference between revisions

Revision as of 05:53, 25 October 2008

Revision as of 21:43, 1 December 2008

Line 1:

'''Assumption based planning''' in [[project management]] is a post-planning method, that helps companies to deal with uncertainty. It is used to identify the most important assumptions in a company’s [[business plan]]s, test these assumptions and think of hedging actions and what-if scenarios.

== Assumption Based Planning in General ==

== Overview ==

Conventional business planning methods operate on the premise that managers can extrapolate future results from a well-understood base of information from the past. However, for new businesses and projects this way of planning often does not comply. Most of the time there is no past-knowledge and if there’s any past knowledge available, predicting the future out of it is nearly impossible.

Line 10 ⟶ 9:

There are a couple of different assumption based planning methods available, among others:

* [[Critical assumption planning]] (CAP) by D. Dunham & Co. : Aims to help managers and entrepreneurs to maximize business development learning at least cost by means of challenging and testing assumptions.

|* RaisingAssumption-based planning by [[RAND]] : Aims raising the visibility of the make-or-break uncertainties common to new ventures at the lowest possible cost by means of forcing managers to articulate what they don’t know.

* [[Assumption-based planning]] by [[RAND]] and

|To* Discovery-Driven Planning by [[McGrath]] : aims to identify the critical assumptions underlying an organization’s thinking and operations, and then to understand which of those assumptions may become vulnerable and how.

* [[Discovery-Driven Planning]] by [[McGrath]]

Each of these methods has a different goal, but they share their intent to prepare managers for surprises and improve the robustness and adaptability of business plans. Table 1 summarizes the goals of the assumption based planning methods listed above.

{|

|+ Table 1 The Goals of Assumption Based Planning Methods

|-

! width="250px" | Method

! Goal

|-

| [[Critical assumption planning]] by D. Dunham & Co.

| To help managers and entrepreneurs to maximize business development learning at least cost by means of challenging and testing assumptions.

|-

| Discovery-driven planning by McGrath and MacMillan

| Raising the visibility of the make-or-break uncertainties common to new ventures at the lowest possible cost by means of forcing managers to articulate what they don’t know.

|-

| [[Assumption-based planning]] by [[RAND]]

|To identify the critical assumptions underlying an organization’s thinking and operations, and then to understand which of those assumptions may become vulnerable and how.

|}

== The position of ABP in the Business Planning process ==

== Assumption Basedbased Planningplanning in Generaltopics ==

=== The position of ABPPosition in the Business Planning process ===

Most business planning methods or books about “how to write a business plan” do indicate that you have to write down your financial assumptions at the end of your plan. Few works however actually support you to actively plan and monitor the validation of these assumptions. Assumption planning does just that. Consider the following situation:

Line 47 ⟶ 28:

Sometimes the mere identification of assumptions immediately leads to a change in the business plan. It is for that reason that ABP should be strongly interwoven into the whole business planning process.

=== Implicit and Explicitexplicit Assumptionsassumptions ===

Assumptions according to Wikipedia are “[[proposition]]s that are assumed, i.e., treated within the context of a discussion as if it were known to be true or false”. But although the Wikipedia definition of an assumption is correct, a better definition of assumptions in the context of business planning and ABP is given by [[RAND]].

Line 60 ⟶ 41:

{|

|+ Callout 1 Some Dangerous Implicit Assumptions<ref>McGrath, R. G. and I. C. MacMillan (1995). ''Discovery-Driven Planning''. Harvard Business Review.</ref>

|-

| style="background-color: #CCC; border: 2px solid black" |

Line 73 ⟶ 54:

# We will have no trouble attracting the right staff

# Customers will run no risk in buying from us instead of continuing to buy from their past suppliers

List copied from McGrath (1995)

|-

|}

=== Primary and Derivativederivative Assumptionsassumptions ===

Besides the distinction between implicit and explicit assumption the Crital Assumption Planning method distinguishes two other types of assumptions: primary and derivative assumptions.

Line 105 ⟶ 84:

== The Assumption Based Planning Process ==

[[Image:ABP process.gif|framethumb|none320px|The Assumption Based Planning Process]]

In order to provide a general overview of assumption based planning process a simplified process-data diagram is presented. This diagram is based on the “common” aspects of the [[Critical Assumption Planning]], [[Assumption-based planning]] by [[RAND]] and Discovery-Driven planning methods. It is advisable to check out the separate methods for a more detailed description of the ABP process.

The "blue" part of the figure depicts the process steps of a general assumption based planning method, the "white" part identifies the separate deliverables. Every step is described in the assumption based planning process list displayed below the picture. <ref>The modelling method in general is a result from a method engineering approach as proposed by the [[University of Utrecht]] in theit's [["Method Engineering Encyclopedia]]"</ref> The steps are:

* Identify Assumptions : Collect all assumptions implicit, explicit, primary and derivative, out of the (business) plan.

[[Image:ABP process.gif|frame|none|The Assumption Based Planning Process]]

* Determine Criticality : Try to quantify the assumptions as much as possible in order to determine which assumptions have the greatest (financial) impact. You can for example restate the statement “If we are later than 12 months, we will lose the opportunity” to “For each month delay in product availability, beyond the 12th month, we will lose a market share of 3%”.

* Design Tests : Design a test for every critical assumption. In a test design you state how to test the assumption and what proves the assumption wrong or right.

===Identify Assumptions===

* Schedule Test : Every critical assumption needs to be tested, but not all assumptions can be tested in the present. So future assumptions tests are scheduled in a test schedule. Some possible reasons to schedule a test in the future are a lack of information in the present or a dependency on the test outcomes of other tests.

Collect all assumptions implicit, explicit, primary and derivative, out of the (business) plan.

When* Test Assumption : Then an assumption is tested this results in a test outcome, which proves the assumption right or wrong.

* Reassess Venture Plan : Based on the test outcomes and the test schedule one might decide to reassess the venture plan and update the business plan with the new insights gathered in the ABP process.

===Determine Criticality===

* Plan Re-testing of Assumptions : The assumptions need to be re-tested regularly if not constantly. There should be a retest schedule of every critical assumption.

Try to quantify the assumptions as much as possible in order to determine which assumptions have the greatest (financial) impact. You can for example restate the statement “If we are later than 12 months, we will lose the opportunity” to “For each month delay in product availability, beyond the 12th month, we will lose a market share of 3%”.

* Create or update the Assumption Plan : The assumption plan holds all data gathered during the ABP process.

===Design Tests===

Design a test for every critical assumption. In a test design you state how to test the assumption and what proves the assumption wrong or right.

===Schedule Test===

Every critical assumption needs to be tested, but not all assumptions can be tested in the present. So future assumptions tests are scheduled in a test schedule. Some possible reasons to schedule a test in the future are a lack of information in the present or a dependency on the test outcomes of other tests.

===Test Assumption===

When an assumption is tested this results in a test outcome, which proves the assumption right or wrong.

===Reassess Venture Plan===

Based on the test outcomes and the test schedule one might decide to reassess the venture plan and update the business plan with the new insights gathered in the ABP process.

===Plan Re-testing of Assumptions===

The assumptions need to be re-tested regularly if not constantly. There should be a retest schedule of every critical assumption.

===Create or update the Assumption Plan===

The assumption plan holds all data gathered during the ABP process.

== References ==

{{reflist}}

{{verify}}

McGrath, R. G. and I. C. MacMillan (1995). Discovery-Driven Planning. Harvard Business Review.

Sykes, H. B. and D. Dunham (1995). "Critical assumption planning: A practical tool for managing business development risk." Journal of Business Venturing 10(6): 413-424.

Dewar, J.A., Builder C.H., et al. (1993) "Assumption-Based Planning: A Planning Tool for Very Uncertain Times", Santa Monica, [[RAND]].

Also available as a free download from http://www.rand.org/pubs/monograph_reports/MR114/ (Link checked April 13, 2006)

== Further reading ==

Dewar, J.A. (2002) "Assumption-Based Planning: A Tool for Reducing Avoidable surprises", Cambridge UK, Cambridge Press.

* Dewar, J.A., Builder C.H., et al. (1993) "[http://www.rand.org/pubs/monograph_reports/MR114/ Assumption-Based Planning: A Planning Tool for Very Uncertain Times]", Santa Monica, [[RAND]].

* Dewar, J.A. (2002) "Assumption-Based Planning: A Tool for Reducing Avoidable surprises", Cambridge UK, Cambridge Press.

* McGrath, R. G. and I. C. MacMillan (1995). ''Discovery-Driven Planning''. Harvard Business Review.

* Sykes, H. B. and D. Dunham (1995). "Critical assumption planning: A practical tool for managing business development risk." Journal of Business Venturing 10(6): 413-424.

[[Category:Project management]]