Critical Assumption Planning Process

There are five CAP steps that together form a CAP cycle:

• Define the Concept
• Identify Assumptions
• Identify Critical Assumptions
• Develop a Cost Effective Assumption Test Program(s)
• Run Test(s) and Assess Results

Completion of the fifth step achieves a milestone and becomes the starting point for the first step in the next cycle. These "learning" cycles continue through market launch.

Step 1 - Define the Concept

The first step in the cycle is to construct a qualitative snapshot of the concept :

• customer need,
• target market,
• product description,
• price,
• competition,
• channel,
• etc.

Next, develop a "back-of-the-envelope" quantitative model of the business:

• number of customers,
• unit sales,
• price,
• Cost of goods sold (COGS),
• other expense

Step 2 - Identify Assumptions

Using the qualitative description and the "back of the envelope" financial model, the team can quickly develop an initial set of assumptions. An assumption is a specific, quantified statement.

That is why putting an initial financial model together is valuable. It is, in effect, a summary of all the quantitative facts and assumptions in the business proposition.

Step 3 - Identify Critical Assumptions

The CAP product management process is not concerned about all assumptions. The focus is on the show-stoppers, the critical assumptions. These are the risky assumptions that must be managed.

To determine whether an assumption is critical the first step is to assess its uncertainty range (i.e., the realistic high and low value). This is done for all assumptions considered potentially dangerous.

Step 4 - Develop a Cost Effective Assumption Test Program

It's not enough just to measure the financial impact of an assumption. The need is to test critical assumptions quickly and economically.

Elimination of all uncertainty is not the goal of an assumption test program. The challenge is to design a test program that gives the most uncertainty reduction (measured by NPV range reduction) per dollar of test cost. The cost includes the incremental cost of running the test, plus the budgeted venture expense and capital costs that will be incurred during the test period.

The critical assumptions to be tested first are determined by their negative impact or their wide range of uncertainty. This contrasts with the conventional approach for corporate developers which is to test assumptions in a linear sequence of milestones from R&D to engineering to manufacturing to marketing to sales.

Step 5 - Run Test(s) and Assess the Results

Each CAP learning cycle ends with a venture reassessment. The business plan is updated, replacing earlier assumptions with the facts collected in the recent test program.

The business plan for a venture should not become just a sales document to get management approval, and then be shelved until the next corporate budget cycle. This may work for an established business, but not for new ventures. The plan must be updated each time the development team completes a fresh CAP cycle.

During the reassessment, the venture team and management focus on what was learned and make a decision whether to take the next step, change direction, or stop.

Summary

There is a way to reduce the costs of new ventures and get a better return on R&D investment. The key is to get venture and product development teams focused earlier on identifying and testing the critical assumptions in the plan. The stage-gate process considers assumptions, but explores them in sequence through a linear development process.

This approach will almost always fail to turn up critical assumptions until later stages. The idea behind CAP is to cut through to the critical issues up front and focus the team on managing them sooner.

The learning approach that CAP represents requires changing how venture and development teams operate. Traditionally, corporations treat development teams as they would managers of existing businesses. They measures teams against "meeting plan."

Teams should be judged by a set of learning parameters: astute identification of critical assumptions, cost effective assumption test planning, and creative response to what was learned from the assumption tests.

With a focus on learning and a flexible approach to planning, less time and money is wasted during development and in disappointing market launches.

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Lower Development Costs Through Critical Assumption Planning^sm PDMA, April, 98