Critical Assumption Planningsm (CAP) - Five Step Process

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

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 the life of the program.

Step 1 – Explore/Define the Opportunity (Imagine)

Outline a quick, qualitative snapshot of the opportunity that includes: customer need; target market; product description; price; competition; channel; etc.

Outline a "back-of-the-envelope" quantitative model that captures the key drivers of revenue and cost including, for example: number of customers; unit sales; price; COGS; development costs and marketing costs.

Using the qualitative and quantitative profiles explore how the opportunity might be expanded (think BIG!).

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Step 2 - Identify Assumptions (De-risk)

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.

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Step 3 - Determine Critical Assumptions (De-risk)

Not all assumptions are equally dangerous. The focus is on the show-stoppers, the critical assumptions. These are the risky assumptions that must be managed with urgency.

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 that the team considers potentially dangerous.

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Step 4 – Develop Action Plan (Tests & Contingencies) (Adapt)

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 action plan. The challenge is to design test programs that reduces uncertainty the most (measured by NPV range reduction) per dollar of test cost, in the least amount of time. By developing several test options the team is more likely to come up with a cost-effective program.

Before the test is run teams should think through a contingency plan.  How will the concept be adapted if an assumption proves wrong?

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Step 5 – Review Results and Refine Opportunity (Adapt)

Following the test(s) the concept or strategy is refreshed and updated, replacing earlier assumptions with the new learning collected from the recent test program.

During the reassessment, the venture team and management focus on what was learned and make a decision whether to invest in the next development step, change direction, or stop and re-allocate resources to other initiatives.

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Summary

The learning approach that CAP represents requires changing how growth strategies and projects are developed. Teams should be judged by a set of learning parameters: astute identification of critical assumptions, cost effective action plans, and creative response to what was learned from examining the assumptions. In this way, attitudes toward taking and managing risk are changed and the culture is transformed towards growth.

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