184

GrowingConcernsTopics of

particular interest toowners and managers

of smallerbusinesses

Edited byDavid E. Gumpert

Milestonesfor successfulventure planning

Zenas Block andIan C. MacMillan

Entrepreneurs draw up busi-ness plans for new ventures to makevarious marketing, pricing, financialand other projections. More often thannot. though, their estimates bear littlerelationship to reality. These authorsargue that planning for new enter-prises differs fundamentally fromplanning for existing companies, giventhe inherent instability of start-ups.How can managers launching newventures plan effectively for the manyunknowns they will encounter^ Iden-tifying milestones over the project'slife enables planners to both learnfrom experience about the enterprise'sviability and make adjustments instrategy and goals as necessary. Theauthors describe ten typical mile-stones that new businesses pass, in-cluding concept and product testing,first financing, market testing, produc-tion start-up, and competitive reac-tions. At each stage, executives mustmatch their assumptions with actualoutcomes and determine whether andhow to proceed to the next milestone.

Messrs. Block and MacMil-lan are professors of management atthe Center for Entrepreneurial Studiesat New York University's GraduateSchool of Business. MacMillan, who isalso director of the center, publisheda previous HBR article, "The Politics

of New Venture Management," whichappeared in the November-December1983 issue. This is Block's first contri-bution to HBR.

Starting a new business is es-sentially an experiment. Implicit in tbeexperiment are a number of hypotheses(commonly called assumptions) thatcan be tested only by experience. Theentrepreneur launches tbe enterpriseand works to establish it while simul-taneously validating or invalidatingthe assumptions. Because some will hedead wrong and others partially wrong,an important goal of the husiness planmust he to continually produce andhuild on new knowledge. Managersmust justify moving to each new stageor milestone in the plan on the basis ofinformation learned in the previousstage.

Learning in an evolutionaryway is valuable not only for venturemanagers hut also for investors, seniorcorporate managers, and directors.It can help them make informed deci-sions about whether to fund eachstage, as indications of the husiness'spotential unfold. They can use ourmilestone approach to measure man-agement performance hy examining

what has heen learned and how effec-tively the venture planners have modi-fied plans to respond to new informa-tion-rather than use projections versusperformance as the measure.

Milestone planning is hardlynew. Traditionally, though, such fore-thought relies on predetermined datesset for reviews or project completions.The problem with date milestones isthat they are totally unreliable for newventures. Therefore, we suggest thatmanagers make financing decisions in-stead as events are completed, usingwhat they have just learned to makego, no-go, or redirection decisions.Ohviously, new enterprises may needsome deadlines and constraints. Forinstance, a recent proposal for a healthand indoor tennis center included acompletion date that would allow thecluh to open for the coming winter sea-son. Every milestone was linked tomeeting this deadline.

For most ventures, however,significant events-not dates-shoulddetermine milestones. The only harddates in the plan should he externallyimposed, for example, hy factors likecontract agreements or competitivepressures.

This approach to milestoneplanning has three advantages forenterprises:

1 It helps avoid costly mistim-ing errors.

2 It gives logical and practicalmilestones for learning andfor reevaluating the entireventure.

3 It offers a methodology for"replanning" based on agrowing hody of ever harderinformation.

Writing the plan

To give an event milestonemaximum learning value, the businessplan must define the event's comple-tion so that managers can test anyassumptions they make. For example,a plan would not read:

"Milestone-completion ofproduct development."

Harvard Business Review September-October 1985 185

A better, more specific state-ment would be:

"Milestone-completion ofproduct development. Completion of aprototype machine that costs no morethan $150,000; that can he manufac-tured for a direct cost of $ 12,000; thatcan produce 40 widgets per minute at30 cents per widget; that the FCC willapprove; and tbat bigh school gradu-ates can operate with three days oftraining."

As planners reach each mile-stone, they can compare results withthe detailed specifications to ascertainwbetber their original assumptionsstill hold. Then they can use tbeir ex-perience to make decisions about tbenext steps.

As an example, suppose youare managing tbe project we have justdescribed and you learn after comple-tion of product development that theassumptions appear well founded ex-cept that tbe direct cost will be $30,000instead of $ 12,000. You know that youneed to find out bow you can cbangethe price. Is there still a market at an-other price? Do you continue the proj-ect, redirect it, or ahort it? How doesthe new target market differ from theone you originally projected? Does theprototype bave any other features-negative or pt)sitive - you had notanticipated? Hnw will you go aboutchanging your plan? What will thechanges teach you?

Few entrepreneurs usesuch planning for their new ventures,explicitly mapping out a sequence ofevents. More common are tbe horrify-ing consequences of not planningthoroughly: tbe attendant mistimings,heightened cash-flow burn rates, andthe accumulation of losses.

Obviously, all enterprises aredifferent, and while every event in aproduct's history can teach something,our experience suggests several impor-tant milestones tbat are likely to hemost significant. We describe them inthis article, and for each importantevent, we ask appropriate questionsand offer lessons based on actual cases.

Milestone 1-completionof concept and producttesting

This stage has a very lowcost relative to future steps and pre-cedes complete product development;indeed, it often comes before any prod-uct development at all. Tbis phase'spurpose is to determine whether toproceed witb any further development.At this point, planners consider wheth-er a real market need exists for theproduct as tbey bave conceived it orthe model they have developed, orwhether it has a potentially fatal fl-aw.At tbis milestone, entrepreneurs mayhave discovered a different opportunityas the result of testing tbeir originalconcept and changing it.

Tbe concept testing chal-lenges assumptions made ahout de-sired product characteristics, targetmarkets, pricing range, and perceptionof need. Planners need to ask them-selves the following questions:

Have we confirmed that anopportunity exists witb sufficient up-side gain to warrant the necessary risksand costs?

Wbat has this test taughtus tbat modifies our assumptions andtherefore, possibly, product develop-ment objectives and target markets?

Concept and product modeltesting are probably the least expensiveways of avoiding costly failure if plan-ners link product development deci-sions to results. While some actualproduct development, production, andtest marketing may appear cheapenough to warrant eliminating tbisstage, it bas tremendous value as a safe-guard against self-delusion and as asource of alternative opportunity iden-tification in every situation.

For example, long heforestarting development work, entrepre-neurs in a word processor venturein the 1970s identified through inter-views witb potential users highlydesirable characteristics for the proces-sor. Tbey then looked at important tar-get markets with special programmingneeds in law firms and governmentagencies. Long hefore they initiated ex-pensive microprogramming efforts, thefounders radically revised tbe initialproduct concept, hased on the researchresults, to be a software product rather

tban a combined bardware-softwareproduct.

Milestone 2-conipIetionof prototype

Entrepreneurs can obtainmucb useful information from care-fully analyzing prototype develop-ment. They must look carefully atwbat caused roadblocks and disap-pointments and how tbey overcametbem; the seeds of significant, hiddenopportunities he in the creative solu-tions to these frustrations.

For example, the softwareprogrammer in one venture to developa specialized, interactive informationretrieval service eventually bad towork out some radically new program-ming procedures to overcome a seriousdata-searching bottleneck. When theentrepreneurs looked for lessons in thesituation, they realized they had an im-portant invention on their hands. Theyare now patenting it. Tbe invention'sprofit potential is ten times greatertban that of the original business, anddeveloped at a fraction of tbe cost.

To apply lessons from proto-type completion, entrepreneurs mustanswer the following questions:

What assumptions did wemake about development time andcosts and how have they changed?Why?

Wbat impact have thosechanges had on our plans and timingwitb respect to new hires, plant con-struction, marketing, and so forth?

How do tbey affect financialneeds and timing?

What have we learned ahoutlahor, material, and equipment avail-ability and costs and how does thisaffect our pricing plans?

Do our observations andassumptions ahout our target mar-kets still bold? If not, how bave theychanged, and how will the changes af-fect ourplans-ohjectives, timing, andresource utilization-for each succeed-ing event?

Do the product's characteris-tics fit witb the original concept andplan? Does tbis create any new oppor-tunities? How should we modify ouractions as a consequence?

Are our assumptions regard-ing significant competitors and com-[Continuedon page 188|

188 Harvard Business Review September-October 1985

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petitive product characteristics stillvalid?

How should we revise ourinvestment requirements?

Are our projections aboutimportant suppliers and service dis-tributors still valid?

If planners expect productdevelopment time to he lengthy, theymay find it useful to divide develop-ment activities into suhmilestones for

Milestone 3-firstfinancing

Whether the first outsidefinancing is for seed money to test theconcept's potential, start-up financingfor product development and markettesting, or first-stage financing to initi-ate manufacturing or sales, the entre-preneur must understand how inves-tors perceive the venture.

Businesses must compete inthe capital as well as product marketsto survive. Entrepreneurs should viewsecuring financing as an opportunity tolearn ahout their ventures' acceptablefinancial and expense structure in viewof the highly competitive financialmarket.

For example, a puhlisherseeking funds for a new magazine soonlearned that investors ohiected toher plan because she had hudgeted forthe purchase of a large piece of capi-tal equipment. In a revised plan, shehudgeted for leasing the equipment atconventional rateS; once again sheencountered resistance. Eventually, shepersuaded a supplier to lend her theequipment for the first nine months ofoperations. This favorable assist tocash-flow projections, along witb herdetermination, enabled her to securethe funding she needed. What was im-portant in tbis case was that she treat-ed each rejection as an opportunity toask why the plan had heen turneddown, and she learned what investorsconsidered to he an aeeeptahle finan-cial structure.

Milestone 4-Completionof initial plant tests (orpilot operation for a serviceventure)

Entrepreneurs should usepilot operations to challenge or cbange

their assumptions and to produceinformation about the following:

Material suitahility andcosts

Processing costs and skills

Investment prerequisites

Training needs for produc-tion personnel, reject per-centages and costs, and qual-ity control requirements

Material uniformity fromsuppliers

Processing specifications,run time, and maintenance

Early data about tbese fac-tors will improve performance and costestimates during full-scale operations.In one case, entrepreneurs who were pi-lot testing a new process to be licensedfor tbe manufacture of a frozen foodproduct aimed at the traditional mar-ket for such products-the food servicemarket-discovered tbat the productwas physically more durable than any-one bad thought it would he. By mak-ing a point of asking themselves wbatnew opportunity tbis difference creat-ed, tbe founders identified tbe possibil-ity of consumer marketing. Because theproduct was rohust enough, tbey couldautomatically produce it in small pack-ages and give it bigb product visibility-sometbing tbat bad never heenachieved hefore in tbis product catego-ry. Tbe planners had assumed that thenew product, like the old, would hefragile and would require exorhitantlyexpensive manual packaging. Compa-ny executives revised the marketingplan to include consumer as well asfood service marketing.

Fortunately, the executiveshad also decided not to enter any li-censing agreements until tbey badlearned all they could from the pilotstudies. Now they could raise projectedroyalties without potential clientsaccusing tbem of reneging on prioragreements.

Milestone 5 - markettesting

Tbe first truly demandingchallenges of tbe venture's basic mar-

190 Harvard Business Review September-October 1985

ket assumptions occur at tbis mile-stone. The questions managers askthemselves now are:

Have customers demonstrat-ed that they'll buy the product? Whyare they buying it? Why are they notbuying it?

Is it really different from andsuperior to the competition?

Are the pricing assumptionsstill valid, considering emerging infor-mation about costs?

Does the product performwell in varying field applications?Where do the problems lie and why?

How should we modify esti-mates of achievahle market share andsize and target markets?

Are our servicing require-ments assumptions accurate ?

Wbat impact does tbis infor-mation have on plans and timing?

A group of people wbo haddeveloped a new electronic device foramateur band musicians decided tbeycould huild a worthwhile small busi-ness. The first step was to produce afew hundred units for market testing.The entrepreneurs decided to make nocommitment to fixed costs until theyhad learned from market tests at whatvolumes tbe product would sell. Sotbey subcontracted all tasks and pro-ceeded to test market witb virtually nooverhead. Test market results sbowedthe business potential to be marginal,and the inventors dropped the projectwith a negligible loss.

Milestone 6-productionstart-up

The first successful produc-tion run tests the revised assumptionsgenerated from pilot operations. Thefirst runs are likely to reveal a host ofproblems tbat need solving. Most im-portant, project planners will learn thetrue costs of producing a steady flow ofthe product and of meeting the qualityrequirements. Unfortunately, entrepre-neurs consistently miscalculate thetime tbis process takes and its impacton tbe timing for future events -espe-cially plans for expanding tbe market-ing effort and financing requirements.

Selling and making deliverycommitments in anticipation of plantproduction can lead to extreme pres-sure to get tbe product out. Attempting

to squeeze product out of a plant that isrunning into start-up problems can re-sult in compromises in product qualityalong with production at enormousrejection rates, botb of which give riseto customer dissatisfaction and wastehuge amounts of resources. This vi-cious circle can destroy a new venture.

In the start-up of a bakedfood business, a new plant scaled upfrom a pilot operation ran into qualityproblems from trying to produce toomuch too soon. Because the ownershad already made significant deliverycommitments to customers, many ofwhom bad in tum employed salesforces to sell the product, tbe new husi-ness found itself operating at full scalewitb rejects at 20 times tbe plannedlevel. The owners needed months tosolve the problems and years to recoverfrom the losses.

Planners can best manageproduction start-ups by making up aseparate critical-path milestone planfor them and by providing for inven-tory accumulation before sbipmentsbegin.

Milestone 7-bellwethersale

In the industrial market, thisis tbe first substantial sale to an ex-pected major account. In the consumerbusiness, this is the first important saleto a significant distributor. Achievingthis sale is likely to give the newbusiness a big pusb forward; failureto achieve it can become a stumblingblock to sales growth. Entrepreneursleam the following from this mile-stone:

How their product compareswitb tbe competition in thereal world rather tban on alimited test basis.

Whether the product isfunctional.

Wbetber to continue or alterthe initial selling method.

Information about servicerequirements on a continu-ing basis.

Additional data regardingquality controls and spec-ifications.

Ideally, the hellwether salewill be to an important prospect whohas been in contact with the ownersduring the entire development of tbenew business and whose needs tbeowners bave considered along the way.New opportunities may present them-selves as well.

Federal Express's experiencewith IBM as an early large customerillustrates the learning opportunitiesthis milestone offers. Instead of con-gratulating itself on its good fortune,Federal Express investigated why IBMwas so strong a customer and learnedtbat the company was using its serviceto reduce inventories of very expensiveparts that IBM service bureaus held tosupport customer service. FederalExpress then modified its marketingeffort and targeted a significant por-tion of its promotion on the particularneeds of its industrial customers ratherthan only promoting package deliveryservice. The company thus rapidlyidentified and secured a much largerindustrial business tban it hadexpected.

Milestone 8-firstcompetitive action

It's obviously impossible forentrepreneurs to know in advance howcompetitors will respond to a newproduct or service. It is possible, how-ever, to plan altemative responses topossihle moves and study these movesto learn wbat rivals' true competitiveposition is.

Consider the case of an in-strument company tbat in early 1984developed a highly innovative micro-processor-hased device. Its entiremarketing campaign depended on howclose a significant competitor was tocoming out with an equivalent prod-uct. Tbe top executives reasoned that ifthe competitor were close, the responseto the new product would be to cut theprices of its existing products to reduceinventories. On the other hand, thecompetitor would likely first attemptto defend share by increasing its salespromotion, advertising, and other mar-keting efforts if it weren't ready witb asimilar new product. Wben tbe compe-tition did not cut prices, the instrumentcompany moved aggressively into themarket and by late 1984 it still had themarket to itself.[Continued on page 192]

192 Harvard Business Review

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In another instance, a lead-ing travel wholesaler introduced aseries of tours to the Middle East buthoped to discourage its biggest compet-itor's standard foUow-the-leader reac-tion. The wholesaler deliberately heldoff from its largest advertising and pro-motion activities until the competitoracted. The wholesaler figured that ifthe competitor entered the market in atentative manner by offering only oneor two tours, that would signify onlyhalf-hearted commitment. If it enteredon a grander scale, it meant business.When the competitor offered only onetour, the wholesaler responded with ablockbuster marketing campaign,which appears to have scared the com-petition off permanently.

Milestone 9-first redesignor redirection

Entrepreneurs may discoverat any point on the milestone path aneed to redesign the product or alterthe target market. This redirectionmay recast prospects for the entire ven-ture or, at the other extreme, createwhole new areas of opportunity bydefining follow-on product or marketneeds. At this point, entrepreneurslearn the differences between whatthey have offered and what the marketneeds.

The redesign or redirectiondecision is a time for reexaminmg allthe basic assumptions concerning mar-ket size, segments, investment require-ments, pricing, and financing [bothneeds and availability). A dramatic ex-ample is the design and marketing ofApple Computer's Lisa to combat theIBM PC with enhanced features and ca-pability. Although greatly admired forIts technical aspects, Lisa sales lagged,and Apple discontinued it. The com-pany did notice, however, a potentialmarket in the personal computerarena for many of Lisa's features. Appleincorporated several of them into itsMacintosh at a much lower price andreached a mass market.

Another case involves Ther-mo-Fax, which failed when 3M intro-duced it for researchers in copyinglibrary documents. The company rede-signed the product for the office mar-ket and it became highly profitable.

IContinuedonpage 196]

196 Harvard Business Review September-October 1985

Milestone 10-firstsignificant price change

New venture planners mustbase all their pro forma activities onassumptions regarding prices, costs,and competition, but the true value ofa product or service is difficult to knowuntil the company launches it in acompetitive environment. Changes incompetition, technology, and costs mayforce a large price revision, which, be-cause of its direct effect on the bottomline, can make this milestone the mostimportant in determining whether toabandon a project or redirect it. Entre-preneurs need to ask themselves at thisstage:

Will the price change be per-manent or temporary?

Is the business viable if thischange is permanent?

If not, what can we do to re-structure fixed and variablecosts to make it viable ?

Can we isolate the pricechange to a particular mar-ket segment?

In one case, the managers ofan electronics business wanted to sup-ply digital switching gear to the tele-communications field, hut they en-countered strong price resistance fromtelecommunications companies whenthey offered the equipment for sale as aunit. The price assumptions had beenwrong because an insufficient incen-tive existed for replacing tbe existingproduct. Management offered to installthe equipment and charge on a per us-age basis but still had no success. Theirprice assumptions were still wrongbecause the new charge would be toohigh for the companies' clients. Finally,management unbundled the servicesand offered standard switching at a lowper usage cost for the direct customersand specialized switching options[such as automatic disaster or otheremergency signals) for tbe customers'clients on a monthly rental basis. Thisapproach succeeded.

Milestones, millstones, ortombstones?

Milestone reviews are point-less unless managers use tbem formaking decisions. The decisions helpplanners determine wbat they can doto ensure success or reduce tbe cost offailure.

Each new venture has itsown set of milestones. Descriptions ofthese important events should includea statement of the significant ques-tions that managers need to ask to testtheir assumptions at each stage. Such adesign forces planners to learn as wellas to replan on the basis of wbat theyhave learned. Tbe milestone approachsatisfies the dual need for planningand flexibility and makes obvious thehazards of neglecting linkages betweencertain events.

Decision choices at eacbmilestone are not limited to eitherpourmg more money in to make tbehighly improbable occur or abortingthe project altogether. Equally feasiblepossibilities include slowing down,speeding up, trying something to learnmore, redirecting, changing scale, orpostponing or resequericing certain ac-tions. Tbe point is that milestone plan-ning takes entrepreneurs at the lowestpossible cost to tbe next importantstage, where they can make informeddecisions rather than blunder alongadhering to a fixed plan that out ofignorance they have based on faultyprojections.

In summary, we recommendthat new venture managers adopt thefollowing procedure when developing ahusiness plan:

1 Identify the most importantevents or actions that must occur toachieve your objectives.

2 Determine which events areprerequisites to others, that is, thenecessary sequential links betweenevents.

3 Develop a critical-path mile-stone chart that graphically displaysthe sequence.

4 Identify the significantassumptions on which tbe venture'ssuccess depends.

5 Ask if an event on the mile-stone chart will test each assumption.

If not, design such a step and insert it.Specify wbat information will replacethe assumption and bow you willohtain it.

6 As each event occurs andreplaces assumptions witb informa-tion, review the planned future events.Where necessary, change their se-quence and nature. Evaluate tbe busi-ness based on evolving and changingprojections. Ask yourself along tbeway: Do the upside gain, downsiderisk, and feasibility assessment stilljustify moving ahead?

7 Estahlisb a review schedulethat relates to event completion aswell as time factors. Evaluate perfor-mance based on what you have learnedand what you can apply.

8 Rather than argue aboutwhether results met projections, designfinancing rewards-and resource allo-cations and rewards-based on the re-sults achieved. ^

Elsewherein HBRother articles in this issue exam-ine basic issues in marketing andmanufacturing of importance tosmaller companies.

In the Getting Things Done fea-ture, Benson P. Shapiro analyzesimplementation aspects of themarketing mix concept in his arti-cle, "Rejuvenating the MarketingMix." And the challenge of inte-grating purchasing departmentsinto the process o( new productdevelopment is examined byDavid N. Burt and William R.Soukup in "Purchasing's Role inNew Product Development."

In a Special Report, Sumer C.Agganval analyzes the sometimesconfusing assortment of manu-facturing systems designed toimprove production efficiency; hisarticle is "MRP. JIT OPT FMS?"And Jeffrey G. Miller and ThomasE. Voilmann evaluate the strikingimpact of overhead manufacturingcosts in their article, 'The HiddenFactory."