Part 1: Three Innovation Horizons

This is the first in a short series of posts where I explore this common innovation concept, look at how progress occurs and industries form, and offer some alternative frameworks.

The Three Horizons Model

In articles recently posted, we’ve taken a look at ‘Strategic Foresight’, our term for a mindset and toolset that prompts you to stretch your view to look out beyond the horizon. Then we examined how Design Farm Collective can solidify the vision by defining your “North Star” and help your business get there.

These articles referenced ideas related to the notable ‘3 Horizons’ model of innovation. In conversations with business leaders across Australia we are often asked about this model. This article will explore the model in more detail.

The ‘3 Horizons’ model was created to help organisations plan investments across a portfolio of initiatives that balance maximising the current business while considering areas where they can grow in the future. The interest is a sign that many recognise both the need for a systematic approach and the increasing pressures to innovate. The reasons for this pressure is a topic for another article, the focus of this series is to explore the horizons and associated approaches.

The model captures the attention of many because it is simple and yet powerful. It provides a simple structure to facilitate and make sense of innovation initiatives. In brief, the Horizons are commonly defined as:

• Horizon 1: Innovating within the core of your current, mature business with a focus on maximising efficiency and cashflow.
• Horizon 2: Innovation through creatively utilising existing capabilities and partnerships to extend the business model to take advantage of adjacent opportunities.
• Horizon 3: Mining for emerging opportunities for new businesses and potential growth to ‘future proof’ the organisation.

The Three Innovation Horizons

It is powerful, in part, because of the following implications;

• Your line of sight is limited: From where your business spends most of its time, you often can only see clearly to the first horizon. Only through action, stepping out, will your view increase.
• Matching horizon demands: Each horizon demands something different from the organisation. From different expectations, to funding, time-scales and people.
• Understanding your environment: That there is a need to look beyond the current occupations of BAU to consider where future growth will come from. Plus, you need to consider the possible forces that may impact your current market position. The model encourages logical parallels to be drawn between what you invest in an optimise for today and what you think the future might bring.
• Detecting Change: At further horizons uncertainty and ambiguity increase. New patterns develop in emergent ways and it is not yet certain where winners will come from. However, you can increase your ability to detect change, adapt and shape the direction of change.
• Preparing for the future: That what you identify in further out horizons might not immediately make sense within the constraints and mindset of the current organisation. Some of what you do will be to intentionally challenge the current thinking. While, in the medium term you will need to be positioning and building capability for what comes next.
• Maximising efficiency vs novelty: As organisations and industries mature, they will face increasing competition and resulting declining growth. Established industries positioned deep in the current dominant S-curve (market paradigm) will be facing increased commoditisation and declining differentiated profits. The energy to maximise performance today is likely to favour efficiency over novelty.
• Avoid becoming short sighted: Unless carefully balanced, near horizon concerns such as maximising extracted value and efficiency will overwhelm further horizon concerns.
• Simultaneously work on all 3 horizons: Successful organisations invest in a portfolio of activities across all horizons continuously. It is not something that is done once every few years nor a map of what can be delayed until later.
• Be responsive: The initiatives, tailored to the ambitions of each Horizon, are part of a series of feedback loops stretching across the organisation and through current perspectives to the future. Developing a responsive organisation requires careful nurturing of these feedback loops

In this post (Part 1), I will dig deeper to outline each horizon and briefly cover how Design Farm (the collective I work with) aims to play a role.

Horizon 1

Horizon 1 (H1) is potentially the most comfortable for many organisations but requiring careful balancing and examination of your current capabilities.

This closest horizon represents the core of an organisation’s current business with a corresponding emphasis is on maximising cash-flow and improving performance. For most established businesses they will be seeking to maximise the remaining value on the current curve through exploiting the advantages of scale and delivering on existing promises. For example, this is achieved through incremental product development, maximising share of value from existing markets, reducing operating costs and standardising processes and practices. The cycles of attention are typically short, within the current fiscal period.

Horizon 1 activities are valuable because they are the engine that earns you the right to grow. An efficient and profitable Horizon 1 business is essential to allow you to invest in further horizons. A business in turmoil or experiencing industry decline will find they have little freedom to take the time to explore and experiment. However, a short-term crisis mindset is often adopted too early with overbearing focus on what is urgent and required to overcome short term obstacles. Too much focus on the here-and-now renders organisations powerless to react with the required force when circumstances change. This focus becomes the very thing that quickens their decline.

It’s often argued that if your industry in on the decline, then it is too late to start to think about what comes next. Your fiercest/smartest competitors will have been spending years developing the capabilities and infrastructure for the new paradigm.

Many traditional consulting services are at home in this near horizon. Born from the Accounting profession, their expertise was producing rigorous analysis, looking in detail at the numbers, applying standard models and controlled processes. There are tried and trusted patterns to apply, optimise and replicate. There is enormous value in this, but it becomes much less effective if you don’t know what happens next. In times of transition or disruption, you can’t engage the inherent uncertainty and complexity with a rigid model. The power in the 3 Horizons framework is knowing when to apply a practice and when it will be counterproductive.

Perspectives on Horizon 1:

Narrow: Incremental innovation within your existing business.

Broad: Enhancing the effectiveness of your organisation to earn the right to grow and innovate. Plus, nurturing feedback loops that reveal much about the constraints, abilities and lifespan of your existing business and processes.

Design Farm’s role in Horizon 1:

Design Farm will often come in contact with parts of your business here. At times we will need to navigate these realities to make change and new things happen.

However, we will not typically focus our effort here. There will be people in your organisation or other partners well placed to handle it. What you learn in your Horizon 2 and 3 activities will inform you activities here. Where possible we will help reveal and make sense of them. However, our focus should be elsewhere on Horizon 2 and 3. Getting too deeply involved in the status quo can inhibit our purpose of pursuing innovation.

Horizon 2

Horizon 2 (H2) can be a tricky one to define because it sits in a kind of no-man’s-land in many organisations.

The middle horizon represents the pursuit of opportunities that are new to the organisation and have potential to delay the inevitable decline of mature businesses. This includes incubating entrepreneurial ventures, new partnerships and markets. The emphasis is on investing to extend the business model and bring to fruition opportunities that might not be realised within normal activities, but represent nearer term growth potential.

Horizon 2 activities represent a critical bridge between the exploration at Horizon 3 and focussed exploitation and execution at Horizon 1. It requires a mix of the two and more.

H2 activities can be divided into three categories;

1. Incubating and commercialising emerging businesses,
2. Pursuing imminent growth opportunities where you can leverage partnerships to leap there faster,
3. Leveraging partnerships or external ecosystems to bridge a critical gap that you are unable to organically nurture.

The latter is both a defensive and offensive play. As the pace of change in many industries steepens, organisations need to evolve faster and tap into a wider pool of capabilities than traditionally available within them. The evolutionary metaphor is particularly relevant here as it is a true test of survival of the fittest. In evolution, the game is not to expend all your resources and energy to fight to hold a particular position or bet on an uncertain future. Instead the key is to maximise the choices available to you so you can fight another day. It is less about executing on a defined path, but maximising your ability to learn and adopt new strategies.

Particularly in the early phases, H2 opportunities will need to be protected from the ravenous demands on attention and resources from H1 activities. After all, these provide most of the current profit, they’ve evolved to exploit the current conditions and typically very mature in the ability to demand resources. Unlike H1 activities, which have moderate market risk, H2 opportunities are higher risk. The market has not been fully established and many default practices and measures will not be directly transferable. Particularly in changing environments, the key risk is premature optimisation and application of structures that inhibit learning. Perceived short term risks are set against profound long term risks of inaction.

For this reason, an organisation needs people who will be able to engage problems in creative ways and with the energy and humility to deal with uncertainty. They will sometimes need to prioritise things that aren’t comfortable, such as adaptability over local efficiency. Most of all, they will need to be adept at iteratively building a viable business by identifying and acquiring customers, quickly activating the ‘Ah ha!’ moment, and building engagement to create value over time. Patience is required as activities will start with uncertainty and not necessarily be contained within a single budgeting cycle.

Perspectives on Horizon 2:

Narrow: Using your existing capabilities to reach into adjacent opportunities.

Broad: Cultivating the bridge between the existing (declining) and emerging worlds. Developing a creative entrepreneurial space to enhance your change ability, practice doing things differently and expand the set of choices available.

Design Farm’s role in Horizon 2:

Design Farm’s actions are often rooted here. While you need an eye on the future, your actions today and ability to successfully pursue adjacent opportunities is the key to tangible, sustained success. We will orchestrate the balance between achieving success today while being ready for tomorrow.

Horizon 3

Horizon 3 (H3) is potentially both the most inspiring and fundamentally challenging in focus. The far horizon represents the ideas for future businesses and potential growth down the road. The focus is to mine for hidden or more distant emerging opportunities with the aim of future proofing your organisation.

Unlike Horizon 1; which is about delivering better on existing promises and Horizon 2; which is about affecting the maturity curve and building capability, Horizon 3 is about the shift to the next s-curve or paradigm.

Given time, the flywheel of the H1 business will inevitably decline and the things for which it is optimised for become anchors. We know that these cycles are accelerating through unprecedented evolution and availability of new technologies. The tsunami is coming, and the future won’t be a continuation of the past. What effect might this have on the organisation?

The emphasis in H3 is on searching for weak signals of behavioural and market transitions and developing a strategic narrative to guide the organisation. This can feed both curiosity and focus. Curiosity because it encourages you to look wider and consider potential impacts of emerging things. Focus because you can create frameworks and principles that ground and contextualise new information, technologies and behaviours. It stops you from lurching from one hyped thing to the next without a way to make sense of it. It forces you to synthesise a model of the world.

Activities in Horizon 3 should also focus on identifying something novel. If you identify something that everyone else has, then it is worthless at this horizon. By definition, the next curve represents a reorganisation of the current order, a breakdown of barriers between industries and novel market behaviours. Ideas in the further horizons will sound crazy to many, particularly those embedded in a Horizon 1 world. It requires an embrace of the unknown. Over time, as the organisation progresses towards the horizon, some H3 perspectives will become H1 and new H3 challenges will emerge.

Perspectives on Horizon 3:

Narrow: Things that are new to the organisation

Broad: Cultivating consciousness of and ability to adapt to the next, emerging technology/market/behavioural paradigms.

Design Farm’s role in Horizon 3:

Design Farm look here and use it to focus and guide our work. We can develop ideas, foster partnerships and challenge mindsets in a way that sets you up better for Horizon 3 challenges.

We have tools and expertise to bring creativity and adopt a broad focus. We can help develop a north-star to guide your vision and map a path forward.

Having outlined the three horizons and their different roles in business innovation initiatives it is clear that each of these horizons is crucial to the long term success. To ensure that a business is prepared for the future you need to keep all three horizons in sight and don’t get caught up in a myopic view of your business and industry. At Design Farm we assist in ensuring that this is not the case, helping you to create a balance between achieving success today whilst being ready for tomorrow.

In the next post, here, I will extend this exploration to look at how technology/structural progress happens and industries form.