Three Horizons of Innovation

In the year 2000, McKinsey consutlants, Mehrdad Baghai, Stephen Coley and David White wrote The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise.  It proposed an approach for achieving sustainable growth known as the Three Horizons.

The Three Horizons framework of innovation is simple. It has developed out of the S curve which presupposes that an innovation has three sequences of growth: 

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• At the beginning there is a period of a lot of investment and little progress, 

• in the middle there is rapid growth and good returns

• at the top of the S curve revenue falls and profits decline.

The Three Horizons framework assumes that there are three different stages of investment in new products within a company. Each leads to the other although it must be stressed that it is assumed that all three horizons are worked on simultaneously. The blue dots in the Three Horizons diagram (below) are intended to represent different innovation initiatives and their predicted value against a timeline.

Horizon 1: Maintaining the core business. These are growth opportunities associated with the core business and could include such as improving margins, improving processes, adding new customers etc. this is the safest horizon in which to generate growth and it should attract most capital and attention.

In Horizon 1 there is a focus on operational excellence, customer experience, and market expansion. These are all related to the core business. Operational efficiency is achieved through streamlining processes, reducing costs, and enhancing productivity. There is an investment in customer experience and understanding customer needs. More service offerings are built into the company's portfolio. Expansion takes place both geographically and with product lines.

Horizon 2: Extending the existing business. These are growth opportunities that come from launching new products to existing customers or finding new customers for existing products. These are important new developments for the company because they are relatively safe and easy to implement.

In Horizon 2 the focus is on change. Now the company focuses on new product development, on market expansion, and on changing the business model. There is a recognition that new products are necessary for the pipeline if the company is to grow. Resources are allocated for research and development. The company will explore partnerships or acquisitions to enter new territories and explore new business models that could disrupt existing markets.

Horizon 3: Creating new business opportunities. These are long-term opportunities. They are growth opportunities that may lie outside the existing business. They are therefore more risky ventures and require significant amounts of time and money to get them moving. 

In Horizon 3 the company is in search of Blue Ocean opportunities and investing in disruptive technologies. With its cash pile, the company will consider investing in start-ups and emerging technologies. Everything is focused on breakthrough innovations.

It will be noted that there are similarities in this framework to the Ansoff framework. The idea of the McKinsey Three Horizons of growth is that at any one time a company will have some products "cooking" in each of the horizons. It is suggested that the involvement of senior leadership becomes greater in projects in Horizons 2 and 3.

Some things to think about:

• Where is your company on the Three Horizons curve? It isn't easy to locate a precise position but it is important to know what stage you are in. The stage you are in will affect your actions – building your core business, extending the existing business, or moving into new pastures.

  
  

• How far ahead can you look in your business? It is important when using this framework to have a long-term perspective. It is also necessary to have an appetite for risk, especially as the company moves towards Horizon 3. It would be easy to be complacent or even defeatist at this stage when in fact an entrepreneurial mindset is required.