Why the Three Horizons Model in Innovation is SO Important

How many times have we heard…or God forbid even said it ourselves… “We’ll just catch up to X.? We’re probably not that far behind them anyways”. ?

Sadly enough, at best that’s wishful thinking; at worst it could be game over.? Essentially, it’s putting the future of your entire business or organization at risk hoping that your competitors or the other entities in the space are also not innovating in regards to their products, services, processes, customer interfaces and deliverables.?

That’s a really bad strategy especially now with there being so few barriers to entry and the lack of ‘protected moats’ that most legacy companies had traditionally relied upon.? ?

Innovation is the lifeblood of sustained corporate success. In an ever-evolving business environment, organizations are constantly pressured to come up with new ideas and improve existing processes to stay ahead of their competitors.

One of the frameworks that help businesses manage their innovation strategy effectively is the Three Horizons of Growth Model. Developed by consultants at McKinsey & Company, this model provides a structured approach to balancing the allocation of resources between immediate, mid-term and long-term growth initiatives.

Understanding the Three Horizons Model

The Three Horizons model established that to ensure ongoing growth, companies should think of their innovations in three different categories or 'horizons.' ?Each one of these horizons represents a different focus for managing initiatives that contribute to a company's growth:

Horizon 1 focuses on improving and extending the current core business. These are innovations that enhance your existing products or services and make your current business operations more efficient. ?Horizon 1 initiatives typically provide the most immediate revenue contributions and are crucial for sustaining current business needs.

Horizon 2 involves emerging opportunities that can potentially transform the current business model. ?

These innovations explore new markets or develop new products that can generate substantial revenues in the near future. They require more investment and carry higher risk compared to Horizon 1 but are also essential for mid-term growth.

Horizon 3 is centered around creating future opportunities. ?These are long-term innovations that involve ventures into uncharted territory, such as developing radically new products or services or tapping into markets that do not yet exist. ?Horizon 3 is the most speculative horizon, involving high risks and uncertain returns, but it is vital for the long-term survival and success of the company.

Importance of the Three Horizons Model in Corporate Strategy

1. Balancing Short-term and Long-term Goals

One of the critical advantages of the Three Horizons framework is its ability to help businesses balance their short-term and long-term goals. ?By categorizing innovations into three distinct horizons, companies can ensure that they are not just focusing on the immediate presence at the expense of long-term growth and possibility. ?This balance is crucial for sustainable growth, as focusing too heavily on short-term gains can jeopardize future opportunities from not only never being considered but never being realized.

2. Ensuring Continuous Innovation

The model encourages continuous innovation by explicitly requiring companies to think about the future while managing the present. ?This continuous loop of innovation helps companies from becoming complacent or stagnant. ?

It instills a culture of looking forward, which can inspire employees and attract talent who are eager to work in a forward-thinking environment.

It's literally the definition of what the answer is when someone inquires about a companies ‘pipeline’.? Companies that are not thinking about their innovation process through the framework of the Three Horizons Model will usually over time lose their dominance and position as technology or price advantages shift to favor another entity.

One needs to look no further than the once ‘darling’ of semiconductor chip maker Intel in comparison with Nvidia.? Intel seems to have gotten stuck in the classic loop of maximizing profit on existing products and lost focus on mid and long-range innovations. ????

3. Effective Allocation of Resources

Resource allocation is significantly enhanced by the Three Horizons framework. Companies can allocate capital, talent, and time more effectively by understanding which horizon each innovation initiative falls under. ?Horizon 1 initiatives may require more immediate but lower risk investments, while Horizon 3 might need more significant resources but over a longer term, balancing risk and reward across the portfolio.

4. Managing Risk Through Diversification

The model inherently promotes risk management through diversification of innovation initiatives. ?By investing in multiple horizons simultaneously, companies can mitigate the risk associated with Horizon 3 ventures with the steady income from Horizon 1 innovations.

This spread across different maturity stages of growth ensures that a failure in one area does not cripple the company and can smooth out more challenging periods when revenue stagnates when a company’s product or service as at the end of it’s ‘Innovation S Curve’.

5. Future-Proofing the Business

Perhaps most importantly, the Three Horizons framework helps in future-proofing the business. ?By continuously investing in Horizon 3 innovations, companies prepare themselves for future market shifts and technological advancements. ?This proactive approach to innovation ensures that companies remain relevant and competitive in a fast-changing world.

Implementing the Three Horizons Model in Practice

Successful implementation of the Three Horizons model requires a clear understanding of the company's or organization’s current capabilities and future aspirations. It involves careful planning and the involvement of all levels of management and key personnel. Here are some steps companies can take to effectively apply this framework:

Assessment of Current Innovations: Companies need to evaluate their current products and services to categorize them into the appropriate horizons.

Strategic Planning: Develop a strategic plan that addresses goals for each horizon and the resources required to achieve these goals.

Culture of Innovation: Cultivate an organizational culture that values and supports innovation across all horizons.

Monitoring and Adjustment: Regularly review the progress of initiatives in each horizon and adjust strategies as market conditions and technologies evolve.

Conclusion

The Three Horizons model is more than just a theoretical framework; it is a vital tool for strategic planning and sustainable growth in today's competitive business environment. By helping companies and organizations allocate resources wisely, balance risk, and continuously innovate, the theory ensures that businesses can adapt and thrive over the long term.

As we look to the future, embracing such frameworks will be crucial for any organization aiming to not just survive but to progressively innovate and stay relevant in the marketplace.

There are endless stories of once giants of industry that dominated their market but at some point were completely unseated from not only the top position but from even being a factor at all.?

On the surface this would be quite hard to believe if it weren’t for evidence in the archives that details story after story of these organization’s hubris and perhaps arrogance that left them behind.

Certainly there are a litany of potential reasons why a business or organization is at risk to go away but the biggest reason is the decision to continually ‘exploit ‘… letting the ‘bean counters’ exclusively drive the organization’s future… versus the decision to ‘explore’ and listen to the innovators and disruptors.