Business lore is full of stories about smart companies that incur huge losses when they enter unknown territory—new alliances, new markets, new products, new technologies. The Walt Disney Company’s 1992 foray into Europe with its theme park had accumulated losses of more than $1 billion by 1994. Zap-mail, a fax product, cost Federal Express Corporation $600 million before it was dropped. Polaroid lost $200 million when it ventured into instant movies. Why do such efforts often defeat even experienced, smart companies? One obvious answer is that strategic ventures are inherently risky: The probability of failure simply comes with the territory. But many failures could be prevented or their cost contained if senior managers approached innovative ventures with the right planning and control tools.
Discovery-driven planning is a practical tool that acknowledges the difference between planning for a new venture and planning for a more conventional line of business. Conventional planning operates on the premise that managers can extrapolate future results from a well-understood and predictable platform of past experience. One expects predictions to be accurate because they are based on solid knowledge rather than on assumptions. In platform-based planning, a venture’s deviations from plan are a bad thing.
The platform-based approach may make sense for ongoing businesses, but it is sheer folly when applied to new ventures. By definition, new ventures call for a company to envision what is unknown, uncertain, and not yet obvious to the competition. The safe, reliable, predictable knowledge of the well-understood business has not yet emerged. Instead, managers must make do with assumptions about the possible futures on which new businesses are based. New ventures are undertaken with a high ratio of assumption to knowledge. With ongoing businesses, one expects the ratio to be the exact opposite. Because assumptions about the unknown generally turn out to be wrong, new ventures inevitably experience deviations—often huge ones—from their original planned targets. Indeed, new ventures frequently require fundamental redirection.
Rather than trying to force startups into the planning methodologies for existing predictable and well-understood businesses, discovery-driven planning acknowledges that at the start of a new venture, little is known and much is assumed. When platform-based planning is used, assumptions underlying a plan are treated as facts—givens to be baked into the plan—rather than as best-guess estimates to be tested and questioned. Companies then forge ahead on the basis of those buried assumptions. In contrast, discovery-driven planning systematically converts assumptions into knowledge as a strategic venture unfolds. When new data are uncovered, they are incorporated into the evolving plan. The real potential of the venture is discovered as it develops—hence the term discovery-driven planning. The approach imposes disciplines different from, but no less precise than, the disciplines used in conventional planning.
Euro Disney and the Platform-Based Approach
Even the best companies can run into serious trouble if they don’t recognize the assumptions buried in their plans. The Walt Disney Company, a 49% owner of Euro Disney (now called Disneyland Paris), is known as an astute manager of theme parks. Its success has not been confined to the United States: Tokyo Disneyland has been a financial and public relations success almost from its opening in 1983. Euro Disney is another story, however. By 1993, attendance approached 1 million visitors each month, making the park Europe’s most popular paid tourist destination. Then why did it lose so much money?
In planning Euro Disney in 1986, Disney made projections that drew on its experience from its other parks. The company expected half of the revenue to come from admissions, the other half from hotels, food, and merchandise. Although by 1993, Euro Disney had succeeded in reaching its target of 11 million admissions, to do so it had been forced to drop adult ticket prices drastically. The average spending per visit was far below plan and added to the red ink.
The point is not to play Monday-morning quarterback with Disney’s experience but to demonstrate an approach that could have revealed flawed assumptions and mitigated the resulting losses. The discipline of systematically identifying key assumptions would have highlighted the business plan’s vulnerabilities. Let us look at each source of revenue in turn.
Admissions Price.
In Japan and the United States, Disney found its price by raising it over time, letting early visitors go back home and talk up the park to their neighbors. But the planners of Euro Disney assumed that they could hit their target number of visitors even if they started out with an admission price of more than $40 per adult. A major recession in Europe and the determination of the French government to keep the franc strong exacerbated the problem and led to low attendance. Although companies cannot control macroeconomic events, they can highlight and test their pricing assumptions. Euro Disney’s prices were very high compared with those of other theme attractions in Europe, such as the aqua palaces, which charged low entry fees and allowed visitors to build their own menus by paying for each attraction individually. By 1993, Euro Disney not only had been forced to make a sharp price reduction to secure its target visitors, it had also lost the benefits of early-stage word of mouth. The talking-up phenomenon is especially important in Europe, as Disney could have gauged from the way word of mouth had benefited Club
