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Financial valuation – the next generation

Clayton Christensen (author of the legendary “The Innovator’s Dilemma”) on a method of financial projection he’s associated with :

… discounted cash flow or net present value is the most commonly used method to determine what an innovation is worth today. But the mathematics have an implicit assumption within them that if we don’t do this innovation, the way things are today will maintain themselves in the future. That’s not true. The company’s current financial condition will not persist. By comparing the innovation against the do-nothing scenario, you’re biased.

… there’s a method that’s the brainchild of Rita McGrath at Columbia and Ian Macmillan at Wharton called “discovery-driven planning.” It’s a much better way to assess the value of projects. Most companies, when they look at the financial projections [of a potential innovation project], if they look good, they do it. If they don’t, they don’t.

But the desirability of attractive numbers has never been an issue. Why shine the spotlight on the numbers? Rather, a better way to do it is: We all know how good the numbers need to look for this to be attractive. But what assumptions have to prove true in order for those numbers to materialize out of this innovation? So you focus the spotlight on what assumptions have to prove true, and you launch a project to test those assumptions. It’s a much better way.