THREE HORIZONS OF GROWTH
“Plan for the future because that’s where you are going to spend the rest of your life.”
– Mark Twain, American Storyteller
In business, we often find ourselves caught up in the now. There are always fires to fight, this month’s or quarter’s goals to hit, and today’s to do list. It can be awfully difficult to take a step back and think about 5-10 years from now, or even 3-5 years from now. Yet, if you want to build an enduring business that will pass the test of time and grow beyond your wildest dreams, you have to have an eye on the future, and McKinsey’s Three Horizon of Growth framework can help.
What are the Three Horizons of Growth?
The three horizons of growth simply outline the idea that a business needs to manage three horizons of growth and innovation.
Horizon 1 is about defending & expanding the current core business. Horizon 2 is about fostering emerging new business(es). And, horizon 3 is about seeding future business(es). It seems simple enough, but there are some interesting implications for the framework.
Let’s go over a little background on the Three Horizons of Growth. In the 1990s, Mehrdad Baghai, Steve Coley, David White of McKinsey were researching company growth and had the insight that a company, especially larger companies, are typically managing many current and future adoption curves. The vast majority of resources are usually focused on horizon 1, trying to manage the existing and predominant adoption curve(s) of the business. Due to the typical short-term focus and incentives of traditional managers, horizon 2 and 3 ideas and initiatives usually get choked off from the resources they need to succeed. Which, of course, can set up a nasty predicament down the road. The key is to manage all three horizons of growth concurrently, though with different mindsets, metrics, and incentives.
Horizon 1 – The Now – 1-3 Years
The vast majority of management teams are focused on horizon 1, the “current business.” The goal in Horizon 1 is to defend and expand the current business. You’re typically in the battle with the competitors in your existing market(s) for every customer, and you have to satisfy current customers while making tactical improvements to the customer value proposition and go-to-market to extend the business to capture new customers. The typical timeframe of horizon 1 is 1-3 years but is really dependent on the market you are in and where you are on the current adoption curve. Some markets have very compressed timeframes for their adoption curves, think digital apps and consumer electronics. While other markets have longer timeframes, such as pharmaceuticals and industrial equipment. The real key to horizon 1 is to shave off some of the cash flow and resources for horizon 2 and horizon 3 ideas and initiatives.
Horizon 2 – Emerging – 2-5 Years
Horizon 2 is typically 2-5 years down the road, and the goal is to foster new emerging businesses. Horizon 2 is characterized by the disruptions and innovations that will start eating into your core business, capturing target customers, and reshape existing markets. Horizon 2 can also be about new target customers, products and services and new markets. The problem is Horizon 2 necessitates a disproportionate amount of resources and focus than most companies give it. You’re trying to build new businesses, innovative products, and services. It can be challenging to cross the chasm from early adopters to the early majority of customers. To cross the chasm, you often need to overinvest in Horizon 2.
Furthermore, Horizon 2 needs the focus of your more entrepreneurial and innovative managers, since Horizon 2 is about thinking differently, innovating, evolving quickly to figure out what works, and taking bold leaps to prime the market. And, it needs a different set of metrics than horizon 1, such as customer acquisition, awareness, and adoption. Lastly, Horizon 2 initiatives need strong champions from the executive leadership, or they may wither away since they can be more of a distraction and nuisance to good managers focused on achieving horizon 1 goals.
Often, traditional companies neglect horizon 2 the most, given that they are confident of their existing leadership, and their potential focus on the cool next-generation innovations of horizon 3. In the meantime, startups, innovative small companies, and competitors are focused on the innovative products and services that will grab share in horizon 2. Horizon 2 is where your next cash cows will emerge from, and the horizon 2 initiatives are delicate, given you are trying to change the behavior and win over new customers. If you find your company missing the boat on horizon 2, you should strongly consider carving off some leadership mindshare and dedicating some resources and talent to invest in horizon 2 initiatives.
Horizon 3 – Transformation – 5-10 Years
What can destroy your market in 5-10 years? Nanotechnology, artificial intelligence, robots, drones, virtual reality, etc.?
Whatever it may be, you should be investing some time and energy into understanding the dynamics that will fundamentally reshape markets in 5-10 years. Think of it as your R&D to ensure you’ll be relevant and potentially dominant in 5-10 years. And, maybe it isn’t what will destroy your market, but innovations synergistic with your business that will enable you to destroy other markets or create entirely new ones. Whatever the situation, horizon 3 needs some focus today. And, trust me, your current management team probably doesn’t have the bandwidth or patience, so similar to horizon 2, it needs dedicated focus and resources, though not at the level of horizon 2 initiatives.
Today, horizon 3 can be fuzzy, since many, many dynamics will play out to reshape the world over the next 5-10 years. Think about horizon 3 as seeding future business(es). What are the new, new technologies and innovations that can dramatically change customer and market dynamics? Are there ways to start understanding their potential impact, potentially own them through patents, partnerships, expertise, and research? Can you accelerate them to your advantage? These are pretty nebulous questions, but never the less important. I’ve done a lot of research on the history of companies, and it is impressive to look at how creative destruction rapidly changes entire industries. As researched by the Macarthur Foundation, less than half of the companies that were on the Fortune 500 list in 1995 were still on the list 15 years later.
DOWNLOAD THE THREE HORIZONS OF GROWTH WORKSHEET
To get you going on your Three Horizons of Growth brainstorming, download the free and editable Three Horizons of Growth PowerPoint Worksheet.
1. THREE HORIZONS OF GROWTH DIAGNOSTIC EXERCISE WORKSHEET
Use the worksheet to think through and document the mega-trends and significant dynamics that will affect each business model dimension over horizon 1 (1-2 years), 2 (3-5 years) and 3 (5-10 years).
2. THREE HORIZONS OF GROWTH INITIATIVES EXERCISE WORKSHEET
Utilize the growth initiatives template to organize potential initiatives in Horizon 1, focusing on defending and expanding the core. Then, move onto potential initiatives for Horizon 2, focused on fostering new emerging businesses. Next, brainstorming initiatives for Horizon 3, focused on seeding new businesses.