Sustaining Growth with the Three Horizons Model for Innovation
In 2000, Consultants from McKinsey & Company, Inc proposed a portfolio management approach known as the Three Horizons. Each horizon describes the maturity and relative risk of projects, and is a way to allow companies to manage a portfolio of projects for current and future growth.
The model was first introduced in the book “The Alchemy of Growth”, with the premise that a company must have active projects in each of the three horizons to ensure sustained growth. This allows a company to fund speculative projects for the future from today’s successes.
This is a portfolio model because projects across the horizons must be evaluated differently. If you attempted to use the same metrics to compare an established, profitable product with a new product idea, the speculative one would never, ever win. By classifying projects into these horizons and allocating your investment accordingly, you can manage your risk while preparing your company for the future.
I was first exposed to the Three Horizons model at LexisNexis, where I worked as a Sr. Idea Designer on their Customer Discovery and Innovation team. We had dedicated designers, researchers and analysts across each of the horizons, specialized to mitigate the most pressing risk of projects at that stage.
Horizon 1: Keeping the Lights On
At LexisNexis, we referred to the team working on Horizon 1 projects our “Core” innovation team. These innovators worked on incremental innovation on our established product, for our existing customers.
Often Horizon 1 work focuses on cost reduction and efficiencies. You know your customer, you have an established business model and ideally you’re profitable, so you are fine-tuning.
My perspective on Horizon 1 work is that this is “product management as usual.”
Over time growth and profitability will decline on Horizon 1 projects, so they must be replaced, with…
Horizon 2: Building Future Businesses
Horizon 2 is a typical middle child; it’s easy to describe Horizons 1 and 3, and #2 is sorta stuck there in the middle. Indeed, your Horizon 2 projects flow from Horizon 3 investigations to Horizon 1 as you mitigate various risks to the business.
In Horizon 2, intrapreneurs are working hard to build the product or business that will eventually replace your existing core offering.
Horizon 2 projects may be revenue generating, but they are generally not yet profitable.
Since you can’t measure the work by profitability, your targets should be related to traction, and ultimately identifying a viable business model. Can you attain the positional advantage and market share necessary for the business to be sustainable? This is the time to capitalize on the opportunities in front of you; moving from ideation to execution before competitors fill the gap you’ve identified.
At this point, you need individuals who are business savvy and diligent. They must be bought into data-driven decision-making. When I think of Horizon 2, I think of Eric Ries’ work on “The Lean Startup” — learning and iterating as quickly as you can to build a viable business.
At LexisNexis, our ‘Emerging Innovation” team was working on a product for an adjacent market, including figuring out a business model that differed from the traditional monthly subscriptions that had been LexisNexis’ bread and butter for over two decades. This team built a new business that would serve this attractive new customer segment, recognizing that what had served LexisNexis’ existing customer base wasn’t a fit for these previous non-consumers.
Horizon 3: Imagining the Future
Horizon 3 is the furthest from a company’s core competencies (and comfort level). It is the place of ideas and opportunities, many of which may go nowhere. It is about operating away from the constraints of today, because you are inventing the company of the future. In the book, it goes so far as to say this is the stage where you identify competencies you don’t yet possess in your organization but recognize are critical to success, and set about developing them.
In Horizon 3, the focus is on the velocity of learning and having a pool of ideas to explore.
I’ll readily admit, I had a little envy of the “Rapid Innovation” team at LexisNexis. They were the prototypers, throwing quick ideas out to get feedback, and either iterating or moving on.
In Horizon 3, you’re really trying to identify possible options for further investment. The three questions to be asking at this stage are:
- Does it solve a customer need? (market risk)
- Is it technically feasible? (technical risk)
- Do you have a financially feasible engine of growth? (business model fit/risk)
You should be laser-focused on answering these questions as quickly as possible. If you can’t get past a No to any of these questions, it’s time to pivot or kill the idea. Once you get a Yes to these questions, though, the idea graduates to Horizon 2 and your business builders can work on really establishing the business that will serve you in the future.
The people investigating Horizon 3 options must be creative, curious and flexible. The best person you should get into this role is “the black sheep”, someone who is willing to push limits and not simply follow the rules. Note how different that is from the Operators and Business Builders from the other two horizons!
Although the authors of The Alchemy of Growth describe the three horizons as a staircase, I find it more useful to think of it as a funnel. You will have many possibilities in Horizon 3, at the top of the funnel. Through experimentation and learning, you’ll prune down the pool of options to ones that are more likely to become successful businesses. As you mitigate your risks and eliminate non-viable options, you can actually invest more in building out the more promising prospects that make it through the funnel.
I have seen descriptions of each stage that mention that H1 is your flagship, H2 is adjacent markets or different business models. This may describe initiatives in these horizons, but it should not be the way to classify them. You can have several H1 initiatives that have different business models, that are both profitable. You could have two products serving different markets, again, both profitable. Classifying a project as belonging to a certain horizon is more about the activities taking place and the maturity of the product than the market it serves.
This classification also means you can have individuals with particular talents or proclivities at each stage. Some people are naturally more creative and don’t want to be bothered with analyzing usage metrics. Others may thrive in such an environment. By identifying the critical activities at various stages of a product lifecycle, you can ensure the best resources are being put to the task, and appropriate measures of progress and success can be identified.
Hopefully the value of the activities happening in each horizon is evident, but sometimes knowing something rationally doesn’t mean we put it in practice. The Alchemy of Growth also includes an assessment tool, to determine how well a company is participating in each horizon, and where there are areas of improvement.
“The best time to plant a tree was 20 years ago. The second best time is now”
-Chinese Proverb
If you want your company to grow and thrive in the future, the time to plant your Horizon 3 tree is now.
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