Management and Assumptions

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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 plans, test these assumptions and think of hedging actions and what-if scenarios. 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. The dilemma is that corporate planning techniques often presume more knowledge than exists, leading to grave errors in managing innovation projects [1]. The managers’ solution to this problem is to make assumptions; their best try to predict the future. Some of the assumptions made during the planning process are very likely to come true; the outcome of others is very much uncertain, though not less important. Assumption based planning is about the identification and testing of the assumptions made in a business plan, the formulation of “hedging actions” and the construction of “what-if” scenario’s. In short, this means that uncertainties are identified, a test is designed to make things clear and while waiting for the uncertainty to become certain you think of what (not) to do if the original prediction proves to be false. The point of assumption based planning is therefore not to demand the highest degree of accuracy for all assumptions made in a business plan, but to build a reasonable model to assess the order and magnitude of the challenges a new project or company will face. 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. Assumption-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. Discovery-Driven Planning by Rita Gunther McGrath and Ian C. MacMillan: 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 *Position in 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: Paul and Harvey, two experienced entrepreneurs, are planning to start a new company, which is going to sell a glow-in-the-dark shampoo. During the business planning process they give a description of the potential customer base and the size of the market for their product. They write down the number of people that could buy their glow-in-the-dark shampoo and the number of bottles they hope to sell to each customer. The claims about the market made by Paul and Harvey are assumptions, based on a combination of gut feeling, market research and maybe some information gathered out of past experiences of both entrepreneurs. In order to avoid surprises Paul and Harvey take assumption based planning to hand and start asking themselves the following questions: How are we going to prove that there exists a customer base of more than 2 million people? And what is a clear sign that there actually are more than 2 million people, to whom we could sell our shampoo? What proves that the average customer will...
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