McKinsey's Three Horizons of Growth Can Help You to Innovate
by Tom Wright, on Apr 20, 2018 3:49:56 PM
This is the first in a series of articles where we'll be diving into different strategic frameworks. We will explore which ones work best for different types of strategies. We're going to kick things off with one of my favorite strategy frameworks: McKinsey's Three Horizons of Growth.
There are countless strategy frameworks out there, and we have already covered a few key frameworks which we think are extremely flexible and battle-tested over the years:
- The Ansoff Matrix Helps Organizations To Grow
- The Benefits of Applying The Stakeholder Theory
- Maslow's Hierarchy As a Business Framework
- Unlocking the Power of the Balanced Scorecard
- Value Disciplines Model & Your Competitive Advantage
- Using the VRIO Framework to Create Sustained Competitive Advantage
For a detailed dive into McKinsey's Three Horizons of Growth - read on!
What are McKinsey's Three Horizons of Growth?
McKinsey’s Three Horizons of Growth are all about keeping you focused on growth and innovation. This strategy framework requires you to categorize your goals into 3 different ‘horizons’:
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 in 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 significant upfront investment.
What does McKinsey's Three Horizons of Growth help me to achieve?
Most organizations want growth. Most organizations also acknowledge that innovation is a critical component of achieving that growth. Yet so many of them treat innovation as one-off events. Such as a huge project to be delivered, or a set 'innovation program' to be introduced. One of the most common reasons for this approach is the perceived gap between the innovation of tomorrow versus the reality of running the business today.
McKinsey's Three Horizons of Growth aims to help you bridge this intellectual gap. It does this by creating stepping stones between running your business profitably today and growing it for the future.
This strategy framework helps ensure that you consistently balance your focus between the needs of today (horizon 1), the future state of your business (horizon 3) and the steps that you need to take to get there (horizon 2).
The Three Horizons of Growth framework is an extremely versatile strategy framework, applicable to most organizations. In particular the framework lends itself to organizations who've identified that growth and innovation have been a stumbling block. If you feel as though your organization is mired in 'chugging along' delivering business as usual - McKinsey's Three Horizons of Growth might just be the right strategy framework for you.
How do I apply McKinsey's Three Horizons of Growth to my Business?
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 1990's) 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 were 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 backwards 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, that 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 the 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 1990's 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.
If you're liking the sound of McKinsey's Three Horizons of Growth, have a go at applying it to your own business. An easy place to start is to take a look at your existing strategic plan, and overlay what you've learnt about the different horizons to that plan. Ask yourself the following questions:
- How close are you to the 70 / 20 / 10 rule?
- Do you have a clear understanding about your current reasons for success?
- Do you have a plan for if they were to be taken away from you?
If you're not satisfied with your answers to those questions, then McKinsey's Three Horizons of Growth could be just the framework for you.