Rita Gunther McGrath, an associate professor at Columbia Business School, has studied corporate new ventures extensively. In the process, Dr. McGrath concluded that many traditional tools for corporate planning, while useful in relatively stable markets, aren't much help when companies are dealing with new, uncertain business initiatives.

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MIT Sloan Management Review senior editor Martha E. Mangelsdorf spoke with Dr. McGrath on behalf of Business Insight. Here are edited excerpts from that interview.

BUSINESS INSIGHT: You and Prof. Ian C. MacMillan of the Wharton School of the University of Pennsylvania wrote a book called "Discovery-Driven Growth." What is discovery-driven growth?

DR. MCGRATH: Discovery-driven growth is a way of planning to grow that doesn't require a lot of analytical information at the outset. It recognizes that many of the data that you need to make decisions don't exist at the time that you have to make the decisions. It's a plan to learn.

Rita Gunther McGrath Lisa Berg

I think we all live with a conceptual overhang from an industrial era when things were more predictable. You had big production runs. At least if you were an American company, you had a lot of markets with very little competition, and what competition there was was more or less predictable. In many businesses you could use the past as an adequate guide to what the future held for you.

In more and more industries, those conditions no longer apply. You're seeing temporary advantages, very rapid swings in who's on top competitively, new technologies that make older ones irrelevant at an ever-faster clip—the usual litany of things people moan about today. But I think one of the things that has not yet quite been fully recognized is that these have an impact on our management processes—or should.

BUSINESS INSIGHT: How did you get started studying corporate planning for new ventures?

DR. MCGRATH: My dissertation was about how established organizations can create new capabilities. I got fascinated by the conundrum of how is it that big, established companies really struggle so often when they have to get into areas that are new to them. In the course of that research, I ran across what I call flops—corporate new ventures that were big, massive disasters.

What got me intrigued was when you look at the history of these corporate new-venture flops, what you found was a characteristic pattern: They were all, by and large, beautifully planned. And yet, the way they were planned caused the decision makers to make erroneous choices.

BUSINESS INSIGHT: Can you say more about what companies often do wrong when planning new ventures?

DR. MCGRATH: The first thing is they take the untested assumptions that underlie the plan and treat them as facts. And what happens then is two interrelated cognitive things start to kick in. The first one is confirmation bias, our all-too-human tendency to embrace data that support what we believe to be true and reject data that might call into question what we believe to be true.

When you're planning for a new business, you start to get evidence that, gee, the market isn't quite what you thought, or the investment's going to be a little more or the technology doesn't quite do. It's very easy in a new business to say, "Oh, well, that doesn't really matter" or "We can work around that."

The second problem is a little bit more insidious. Because you have to make decisions with the best data that are available to you, you start to surround your life with reality. You build buildings. You invest in marketing campaigns. You hire people. You do all these things based on these untested assumptions, and it becomes really hard, then, to remember that just because you put up the plant doesn't mean that you know a lot more than you did when you made the initial assumption.

BUSINESS INSIGHT: What's a better approach?

DR. MCGRATH: First of all, write down your assumptions when you create your business plan, because you forget what assumptions you made if you don't write them down.

We have an approach that we call an assumption checklist, in which you capture what the assumption was, why you thought it was sensible, and what the source of the data was. When did you last check it? A lot of assumptions linger in plans without ever being checked.

What we do is tie testing the assumptions to the unfolding of the business. Let's say you have 20 milestones you can envisage between today and the launch of the business. At each checkpoint, stop and evaluate assumptions—because we know a lot of them are not going to be right. What we ask you to think about is: Which assumptions are you going to test at which milestone?

Now what you've got is a roadmap to when you're going to learn what. What you then can do is say, "If there are a bunch of assumptions that we can test early and cheaply, let's do that first before we start messing around investing in plant and equipment." Instead of the goal being to predict what's going to happen, your goal is to cost your company the minimum amount you possibly can while you're learning what you need to learn.