How the 3 horizons of innovation help to promote continuous innovation

The 3 Horizons of Innovation

The 3 horizons of innovation are used as a model making a distinction between various types of innovation. The exact distinction between the various horizons is sometimes a bit vague. The following picture explains the model.

H1: Horizon 1

Horizon 1 is incremental innovation. Technology, solutions, markets and customers are well known. In this horizon, products and services are developed for which the company is known for, and where profits and cash flows stem from. In Horizon 1 innovation is about continuing, improving and extending the current business lines.

Focus is on efficiency and doing things right. Work takes place in a planned and orderly fashion, risks and uncertainties are avoided or minimised.

H3: Horizon 3

Horizon 3 is the far future. Technology and solutions are virtually unknown – at least in your industry. It may also concern unknown markets and customer groups. We call this horizon disruptive innovation, because developments in this horizon might have a big impact on your company, industry and lives. Focus in this horizon lies on learning what works. How can we use new technology in our context?

H2: Horizon 2

Horizon 2 is in between. In horizon 2 we have developments that are beyond the scope of horizon 1. They are already incorporating a bit of the long term vision of what will happen in the future. The technology or solutions are known, but not yet to your company. Markets and customers are existant, but not yours yet. Developments are real and take place today. Focus in this horizon is on discovering new business models.

Background of the model

The ‘Three horizons framework’ was originally published by Baghai, Coley et al (2000) and has been an important model for growth, change and innovation ever since. It has been promoted by McKinsey. More and more organisations start working with this model, because it is practical and gives many new insights.

Why use the 3 Horizons?

The 3 horizons model help to make a corporate innovation strategy tangible. Using this model helps to define pragmatic and achievable goals. It helps you to measure their progress. In order to achieve long term continuity, organisations need to work in all 3 horizons simultaneously. Business models don’t work for ever, and at some point they will get in decline. Companies need to have the new successor ready at that point. The only way to do this, is by starting today. This is illustrated in the following picture.

Today, pockets of the future can already be found and seen. The organisation needs to learn what works in their own context. By working on all 3 horizons of innovation simultaneously, the succeeding solution will be available at the transformation point. This will ensure business continuity. Business continuity is indicated by the red line.

Innovation methodology per Horizon

Larger organisations striving for continuous innovation, operate with different processes and speeds. The organisation is focused on execution of the core business model. Next to this it is also working on innovating that very same business model. The focus is different per horizon, as can be seen in the following picture.

A different focus also calls for a different way of developing solutions. Since we are developing in unknown terrains, the usual approach will not work. We need methods that are better suited for exploration, for searching new business models, for learning. That is why in Horizon 2 and 3, Lean Startup and Design Thinking are more suitable approaches.

Ringfenced budgets

Imagine a management team has to decide to invest in one of two alternatives, both initiatives cost € 100.000,-.

Plan A, is the next generation product and has a predicted ROI of 20% in two years time. Plan B is an initiative to start working with a startup to find out how artificial intelligence could impact the company’s services.

You can imagine what happens right? The budget will be allocated to initiative A.

This is why we recommend ringfencing the innovation budgets. Horizon 1 initiatives compete against horizon 1 initiatives, horizon 3 initiatives against horizon 3, etc.

Innovation budget allocation

A common allocation between the three horizons is 70% of the innovation budget for Horizon 1, 20% for Horizon 2 and 10% for Horizon 3. However, the division depends on the context of your organization and industry. The higher paced your environment and industry, the more should be allocated to Horizon 2 and 3.

How to get started

A good way to start is by making an inventory of all your existing initiatives. Try to list them, and together with a team try to define where they are on the x- and y- axis of the three horizons model. You can use a simple 10 point scale of market newness versus technological newness. This will generate a chart like this.

This chart will give you an indication of where you currently put your effort in. It will promote a discussion for the desirability of that division. It is an excellent starting point for innovation portfolio management.

Horizons overview from Enpidi Innovation Portfolio Management Software

About the author

Joyce Oomen is co-founder of NPD Consult. NPD Consult has launched a new solution in innovation portfolio management, Enpidi. Enpidi portfolio management software was developed to cater for the needs of larger organisations looking for a more strategic, innovation-focused approach to portfolio management. NPD Consult supports in both the implementation of innovation portfolio management as in implementation of Enpidi Software.

You can contact me directly at [email protected]

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