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What is the 3 horizons model?
McKinsey’s Three Horizons of Growth are all about keeping you focused on growth and innovation.
As companies grow, it can be difficult to keep innovating at the same pace. Innovation is often discarded in favor of inertia. To keep up their momentum, organizations have to balance their existing business with potential growth opportunities. That’s where the 3 Horizons framework comes in.
First introduced in The Alchemy of Growth, the 3 Horizons of Growth model helps companies assess potential growth opportunities while finding ways to maintain existing business. C-suite leaders use the 3 Horizons model as a blueprint for investing in current products and services while looking to the future. But its use is not confined to the C-suite. Teams across the organization can make use of the 3 Horizons model to ensure their projects map to the organization’s goals.
What does the 3 horizons model do?
Looking at it, you’ll notice that the model has an axis of TIME and an axis of VALUE (sometimes labeled profit). The 3 horizons are simply 3 S-curves that occur one after the other, representing each innovation project.
How long each horizon lasts will vary depending on whether you’re in a slow- or fast-moving industry, but this version will still give you an indication.
Horizon 1: Maintain & Defend Core Business
Activities that are most closely aligned to your current business.
Most of your immediate revenue-making activity will sit on horizon 1. For a retailer, this would include the day-to-day goals associated with selling, marketing, and serving your product/customers.
Your goals in horizon 1 will be mostly around improving margins, bettering existing processes, and keeping cash coming in.
Horizon 2: Nurture Emerging Business
Taking what you already have, and extending it into new areas of revenue-driving activity.
There may be an initial cost associated with your horizon 2 activities, but these investments should return fairly reliably.
This is based on them being an extension of your current proven business model. Examples of this could include launching new product lines or expanding your business geographically or into new markets.
Horizon 3: Create Genuinely New Business
Introducing entirely new elements to your business that don't exist today.
These ideas may be unproven and potentially unprofitable for a significant period of time. This would encompass things like research projects, pilot programs, or entirely new revenue lines that require a significant upfront investment.
What are the benefits of the Horizons of Growth model?
Take stock of current opportunities. To start, the Horizons of Growth model requires you to make a note of all current opportunities. This exercise helps frame the rest of the model and ensure you’re aligned with your team.
Identify future opportunities for investment. The Horizons model empowers you to pinpoint opportunities to maximize cash flow. Use the model to brainstorm with your team and come up with ideas for quick wins.
Experiment and iterate. Many C-suite execs use the Horizons of Growth model to find potential areas for experimentation. Those might include research projects, pilot programs, or minority stakes in new business.
When to use the 3 Horizons of Growth model
To foster a culture of innovation
To create a framework necessary for achieving long-term initiatives
To identify opportunities for new business
To enhance business analysis and focus on potential challenges
To prepare a developmental plan
How to Apply McKinsey's Three Horizons
OK, so you've decided that growth and innovation are indeed critical to your business, and you're willing to give McKinsey's Three Horizons a shot at helping you get there. This is how to go about applying it to your own organization:
Start with a Deep Understanding of Your Horizon 1
You first need to identify your biggest assets today. The main reasons why your business makes revenue or succeeds at what it does. If you were Starbucks, this would be your brand and perhaps your distribution channels.
If you were Microsoft (back in the 1990s) it would be your enterprise products and perhaps your partner network. Name these drivers of success for your business today.
Now, imagine that you lost them entirely. Imagine that you're Microsoft and businesses refuse to buy your software anymore...
Your horizon 3 is What You Would Do if That Were to Happen
Yep, that's not a typo - we're moving straight to horizon 3. Let's stick with Microsoft as an example. The Microsoft Xbox was launched in 2001. On the surface, it was a million miles away from playing to Microsoft's core strengths at the time, which was firmly in the business and productivity space. And that was exactly the point.
The Xbox wasn't a shot in the dark - it was Microsoft's horizon 3. They'd identified something at which they thought they could succeed (you still need core capabilities that will allow you to win). However, they didn't rely on the things that were making them a success today.
But how did they go from strength in business software/productivity to winning in the ultra-competitive gaming hardware industry?
Horizon 2 is the Bridge That Gets You There
This is where Horizon 2 comes in. Once you know what you want to do for your horizon 3, work backward from that (and forwards from your horizon 1) to create a plan of action that will bridge the gaps.
For Microsoft, that involved launching their own line of computer games (famous ones include Age of Empires and Microsoft Flight Simulator). It also included a range of 'light' hardware such as keyboards and mice.
This gave them the experiences they needed (and a bit of extra revenue too) in both gaming and hardware, which ultimately resulted in them creating the Xbox.
Your horizon 2 doesn't have to be a revenue generator per se, but it should contain enough of your core assets from horizon 1 to give you a fighting chance of it being profitable.
The bigger picture though, is that it helps you to bridge the gap between your today and your desired future state (horizon 3).
The 70 / 20 / 10 Rule
To put this into practice for your strategic plan, try to ensure that around 70% of your activity is playing towards your horizon 1. After all, you need to survive and thrive today to have any chance of succeeding tomorrow.
Then, allocate around 20% of your effort to those horizon 2 'bridging' opportunities. That might sound like a lot, but horizon 2 will contain failures and false starts, so it's important that you have enough irons in the fire to get you to horizon 3.
For horizon 3, that leaves 10% of your overall effort. That 10% is important. Without it, you can easily lose sight of your ultimate goals, and get lost in a never-ending cycle of horizon 2's.
Microsoft for example experimented with a range of simple game controllers throughout the 1990s called the Microsoft Sidewinder. Most of your horizon 3 10% efforts will be on research and experimentation, with a few light product launches towards the end if you're lucky.
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The Three Horizons model is a helpful one, but The Alchemy of Growth as a book is both a tragedy and a black comedy, viewed from even a few years after it was written. As evidence for the model it provides approving comments on a set of company case studies that include Enron and several other companies that crashed and burned within a few years of publication.