Strategizing with the Three Horizons Model: Balancing Now and the Future

Navigating the Three Horizons Model for Business Growth Leadership and Management

In today’s complex business landscape, senior executives must learn to simultaneously manage businesses along three qualitatively distinct horizons. For example, horizon 3 incremental innovations, such as AMD’s recent launch of its cheaper central processors, can cause long-term market disruptions.

To avoid disruption, companies must also work on horizon two initiatives, such as identifying new niches for growth. To do this, they must first evaluate their current assets and identify opportunities for growth.

Exploring Horizon 1: Maximizing Current Business Operations

Developed by McKinsey consultants Mehrdad Baghai, Stephen Coley, and David White in 1999, the three horizon model offers a framework that helps companies stay focused on innovation and sustainable growth. The framework consists of a short-term horizon that focuses on building and maintaining current core business operations, a medium-term horizon that involves exploring potential new opportunities, and a long-term horizon for research and development into future opportunities and innovation.

To successfully use the horizon model, your company must manage each horizon concurrently rather than sequentially. This helps your company avoid two common mistakes that can derail its ability to innovate and achieve long-term success.

The first mistake occurs when your company neglects to spend sufficient time evaluating and improving its current business. It is important to continually improve your current product offerings and services so that you continue to attract a loyal customer base and maintain market leadership.

A second mistake occurs when your company neglects to invest enough resources in the development of new and emerging opportunities. This may include experimenting with intraprenurial projects that have a high risk of failure but have the potential to revolutionize your industry. For example, the automobile industry is a good place to look for innovations that could change the nature of driving and car ownership.

The third horizon represents entirely new opportunities for your company. It may include developing entirely new products, pursuing long-term research initiatives, or piloting new programs. For example, Microsoft was operating in horizon three when it launched the Xbox gaming console that was completely different from its core offerings. While horizon three activities have the highest risk, they also offer the greatest rewards in terms of future market share and profit.

Horizon 2: Navigating the Path of Emerging Opportunities

Since its emergence in 1999, the McKinsey Three Horizons Model has evolved in significant ways. But it still provides a valuable framework that can help executives balance their current business operations with exploring new opportunities for growth. It can help executives and teams with varying levels of experience, expertise and worldviews come to a shared understanding of their current challenges, future needs and opportunities.

The first horizon represents the company’s current operating status, with a focus on defending existing assets and maximizing value from proven activities. For most companies, this horizon accounts for 70% of the company’s value creation. The second horizon represents emerging opportunities to grow and expand the business into new territories or industries over the next two to five years. For example, Microsoft launched the Xbox gaming console as an entirely new business horizon in a space that is far removed from their core software and hardware operations.

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Lastly, the third horizon involves research and ideas for future opportunities for growth and innovation over the longer term of 5 to 12 years. In this horizon, you can identify potential “category killer” innovations that could transform your industry by offering something that is completely different and more effective than existing solutions. The risk in this horizon is that some of these ventures may fail, but if you can manage the risks effectively, you will reap rewards from a number of successful initiatives that will carry your company to the next level. This horizon typically takes the longest time to bear fruit and requires substantial resources. It is important to not starve initiatives in this horizon to ensure that they receive sufficient funding throughout the year to reach their annual growth goals.

Horizon 3: Visioning and Investing in Long-Term Innovations

The horizon model is one of the most valuable tools to help companies balance current working operations, and grow in new directions. If your company struggles to find a good balance between these two aspects of business growth, the three horizons model may be just what you need to set your organization on the path to success.

When implementing the horizon model, it’s important to keep in mind that each horizon must be managed concurrently. For example, if your team is struggling to deliver results in horizon one, you must still find ways to make progress on horizon two. This could include conducting new market research, developing pilot programs, or experimenting with long-term innovations that require more time to develop.

While you’ll need to invest more time and resources in horizon two, it is also critical to remember that this is an important stepping stone toward the development of new opportunities in horizon three. This horizon involves the search for radical innovations that will redefine industry standards, or even transform your organization altogether. This is often the hardest horizon to manage and will often require your team to engage in experimentation with a variety of ideas until they find something that works.

If your team is struggling to see the value of the horizon model, consider internal education and communication as an essential tool to move your team from inertia to innovation. Once your employees understand how the horizon model can help them navigate change, they’ll be more likely to support the long-term efforts required to achieve their goals. Similarly, if they know that their investment in horizon two will not immediately pay off, they’ll be less likely to feel frustrated or disappointed by the process of developing innovative ideas.

Integrating the Three Horizons for Sustainable Growth

The horizon model encourages you to balance short-term performance with long- term innovation. This can be difficult, but it’s essential for maintaining a competitive edge in today’s business environment. By developing a plan for each of the three horizons, you can ensure that your organization’s future is bright without jeopardizing its present success.

The first horizon involves projects related to improving existing products and services. This horizon includes initiatives such as increasing efficiency and lowering costs. It also entails enhancing marketing and creating a more engaging customer experience. These types of projects are less risky and can have a greater return on investment than the more experimental or speculative work associated with the other two horizons.

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In the second horizon, you will focus on identifying emerging opportunities and expanding the boundaries of your current business. This horizon encompasses activities such as market research, prototype development, and pilot programs. For example, a florist may explore new products and strategies for attracting more customers in the second horizon.

The third horizon focuses on exploring entirely new growth opportunities. This horizon can include launching new businesses, pursuing research into groundbreaking clean technologies, and fostering innovative solutions to environmental challenges. By unifying your business’s long-term growth strategy with its environmental goals, you can create tremendous success while contributing to a better world for future generations. Using the three horizons model as your framework for managing sustainable growth enables you to effectively move your organization from inertia into innovation. Our team is happy to provide additional resources and templates on McKinsey’s three horizons model if you want to learn more about how it can help your company. We can also assist you in building a digital marketing campaign that integrates this model into your overall strategy.

Case Studies: Successful Application of the Horizon Model

The Horizon Model works most effectively when you use it to distinguish between different kinds of future-oriented business activities. Managing these activities in a way that makes sense for your organization depends on the management style required by each horizon. Horizon one, which focuses on maintaining and improving your current Value Proposition and market position, can be managed by team leads focused on the short term. Horizon two, which focuses on innovating new competitive opportunities, requires more attention from CEOs and senior managers who oversee long-term strategic initiatives.

While you need to invest in horizon two, it is important to recognize that not all of these new ventures will be successful. You will need to weed out those that aren’t viable and provide resources to those that are most likely to succeed.

Once you have successfully identified your emerging opportunities in horizon two, you will need to identify how they fit into your overall business strategy. They should be a clear extension of your current strengths and offer substantial growth potential in an attractive market. For example, Microsoft’s wildly successful Xbox video game was far from their core productivity software capabilities at the time, but it was strategically a good fit for the company.

To maximize the effectiveness of your Three Horizons strategy, apply the 70/20/10 rule to plan and allocate your business resources. Seventy percent of your efforts should be on maximizing the performance of existing services and improving profitability in Horizon 1. Twenty percent should be dedicated to bridging from Horizon 1 to Horizon 2, and 10 percent should be set aside for the research and experimentation of Horizon 3. For best results, ensure that everyone is on board with your organizational strategy by using a strategic planning tool like Cognician. With live dashboards, strategy reports, integrations and collaboration features, our planning platform is the ideal way to manage your three-horizon approach. Click here to get free access and try it out for yourself!

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