A valuable framework to move your company from inertia to innovation is McKinsey’s Three Horizons Model. Here I look at who can use the model, what it is and how companies can put it into practice to drive continuous growth today and in the future.
When companies are born, they are filled with forward momentum, innovation and growth. As the years wear on, that innovative spirit is often replaced with inertia. Organisations get bogged down with the day to day and aren’t as proactive about looking toward the future. That’s precisely the set of affairs McKinsey’s Three Horizons of Growth framework is setup to address. Since this model can help most organizations, let’s take a look at what it involves and some ways companies can put it into practice.
Who can use McKinsey’s Three Horizons Model?
Any company that needs a simple framework to inspire growth and innovation can benefit from the Three Horizons model. Featured in the book Alchemy of Growth, this framework won’t just impact your organisation’s financial goals, it can invigorate your team and ignite their passion once again. Based on three years of research into how high-performing companies sustain growth, the Three Horizons Model won’t jeopardise today’s business as it maximises future opportunities. Every organisation needs consistent growth over its life, and that’s precisely what the Three Horizons model provides.
What are the Three Horizons of the Model?
Horizon 1: Maintain Core Business
Horizon 1 is about your core business as it stands today and priorities to improve performance on the current drivers of profits and cash flow. It’s the products and services that are most closely tied to your success right now and your plans to squeeze out every bit of profitability by improving efficiencies and margins.
Horizon 2: Develop Emerging Business
These are business opportunities that will require investment, but could result in substantial profits in the future. These activities represent an extension of your proven business model, so even though they require investment of time and money, the revenue potential is solid. These are things such as expanding your business to a new geographical area or adding new product lines.
Horizon 3: Create New Business
This horizon is all about expanding into entirely untapped elements that don’t exist in your business today. Examples of initiatives in this horizon would be pilot or research projects that would require upfront investment to vet the potential business for your organisation. Microsoft was operating in Horizon 3 when it launched the gaming console Xbox which was entirely removed from Microsoft’s core offerings at the time when they were in the business and productivity arenas.
How Can Your Organization Use McKinsey’s Three Horizons Model?
The first thing every organization needs to understand is that these horizons are worked on simultaneously—you don’t complete Horizon 1 and move on to 2 and 3. Part of the objective of this model is continuous growth, and it requires that your team works on initiatives in every horizon. This model gives voice to the strategic needs of the future while maximizing your current reality.
When you’re first launching this framework in your organisation, you need to be sure you have a firm understanding of your biggest assets and drivers of success for today. Then, consider what would happen if you lost all of those.
Next, you’ll jump to Horizon 3, because this is the place where you are dealing with entirely new business—nothing you relied on in Horizon 1—and would be where you jumped to if everything you relied on in Horizon 1 were lost. Horizons 2 and 3 require more C-suite involvement, because these horizons demand more financial investment and approvals to allocate resources on “what-ifs” rather than guaranteed income producing activity. As your organisation has conversations about the possible future, your team will have to navigate the tension and uncertainties inherent in going beyond your comfort zone.
Horizon 2 is the bridge that gets you from Horizon 1 to 3. Once you know where you’re heading, you can create an action plan to get from Horizon 1 to 3 and the activities of Horizon 2 will help you close the gap between the two.
The 70/20/10 Rule
When you put the Three Horizons into practice in your organisation, the 70/20/10 Rule is a good way to plan your activities. Seventy percent of your activity needs to be focused on Horizon 1 since your survival today is crucial for getting to tomorrow. Then, allocate 20 percent of your activities to Horizon 2 which should be enough to account for the failures and missteps your team will experience to bridge to Horizon 3. That leaves 10% of your activities for the research and experimentation of Horizon 3.
By segmenting your innovation thinking and priorities into three horizons, McKinsey’s Three Horizons Model can help set the foundation for your organization’s continuous growth today and for the future.