McKinsey's Three Horizons of Growth

Developing Future Opportunities

McKinsey's Three Horizons of Growth - Developing Future Opportunities

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Over time, many organizations go through distinct stages of growth and decline. They're born, they mature and then – seemingly inevitably – they fade away.

However, some organizations avoid the downturn. They manage to sustain their growth over decades, and continue to surprise customers with their innovation and creativity.

They do this by devoting time, energy and resources to developing new ideas. These then mature and become profitable, replacing older products and businesses as they fall away.

In this article, we'll look at McKinsey's Three Horizons of Growth, a model that organizations can use to focus their energy and resources on projects that sustain their growth over the long term.

About the Model

Mehrdad Baghai, Stephen Coley and David White, partners at McKinsey & Company, published the Three Horizons of Growth model in their 2000 book, "The Alchemy of Growth."

The model, shown in Figure 1 below, outlines three different types of innovation that need to go on in parallel for a business to be successful. Organizations must invest in each one, and meet the specific management challenges that accompany them, to sustain long-term growth.

The framework focuses your organization on developing future revenue streams and business opportunities, so that, when existing products have run their course, new ones are ready to take their place.

Figure 1: The Three Horizons of Growth

The three phases are:

  • Horizon 1: This refers to your organization's current core businesses – the products and brands generating the most profit right now.
  • Horizon 2: This relates to your organization's emerging businesses or products. These are still in their early stages, and require investment or research to thrive. However, they generate plenty of interest among your investors and customers.
  • Horizon 3: This focuses on your organization's seedling investments, and ideas for future business. These could be research projects, early discussions or alliances, or products still being prototyped.

According to the model, organizations must invest time, energy and resources in exploring all three of these horizons at the same time. Without the continuous innovation that this brings, growth eventually stagnates and organizations decline.

Benefits

The Three Horizons of Growth model keeps your attention focused on defending and developing your current brand, investing in upcoming businesses, and generating new ideas and opportunities.

It also prevents organizations from making common mistakes when they are seeking to achieve sustained growth. For example, some focus entirely on Horizon 1 products. Then, when these start to decline, they find that there are no other opportunities waiting to replace them.

Another common mistake is to become overly obsessed with growth and new business. Here, organizations put too much focus on Horizons 2 and 3, and lose sight of their Horizon 1 products. This is dangerous, because core products and businesses provide the money to support the development of new opportunities, and it's easy to underinvest in improving these further.

Note:

Each horizon has its own time frame. For example, your investments in Horizon 3 opportunities might not pay off for years, while those in Horizon 2 might start to generate a profit in a year or two.

That's why it's necessary to pay attention to all three horizons at the same time, so that you always have opportunities ready to mature and generate growth and profitability.

Uses

As well as developing new products, the Three Horizons of Growth can guide your expansion efforts.

In Horizon 1, for example, your organization might be comfortably settled in the United States, with a strong brand and customer base. In Horizon 2, you might want to expand into Europe with slightly modified products. Your Horizon 3 plan could include breaking into an Asian market, which might require entirely new products.

You could also use the framework to develop a long-term recruitment plan.

For example, while your existing team might continue working in current operations, a Horizon 2 recruitment drive might bring in entrepreneurial professionals who excel at building new businesses. A recruitment initiative for Horizon 3, however, could target researchers, visionaries and dreamers, or even rebels, who are skilled at thinking outside the box and coming up with new ideas.

How to Apply the Three Horizons

For your organization to thrive in the long term, you need to be working effectively across all three horizons. Below, we've outlined strategies that you can use to achieve this goal.

Horizon 1

Horizon 1 represents your organization's core businesses. These are the brands, products or services that customers associate with your company right now.

You need to work on safeguarding and enhancing these, so that they continue to generate profits and growth.

First, conduct a SWOT Analysis for your most significant products to understand your current strengths and weaknesses, and to identify the threats and opportunities that your organization faces. Then, conduct a USP Analysis to think about how these products can compete more effectively in the market.

Next, make sure that your production line (whether it's in-house or outsourced) is as streamlined and error-free as possible. Efficiency here will cut costs and quicken your time to market. Use approaches like lean manufacturing to improve this.

Profitability is extremely important: remember, your Horizon 1 businesses will provide financial support for the other two horizons while they're in development, and at the early stages of growth.

Last, look at your market share. Is it stable or expanding? You might want to segment your market to gain a better understanding of it, and to identify new opportunities for growth.

Horizon 2

Now it's time to look at what your organization invests in. Often, Horizon 2 businesses are a natural expansion of the products and services that you already offer in Horizon 1.

Has your organization invested in viable businesses that have the potential to replace your current moneymakers? Are you gaining momentum in your respective markets, or are they stagnant or declining?

You'll also want to conduct a PEST Analysis to map out "big picture" changes that might threaten your current products, or open up new opportunities for them; this could include new technology or upcoming government or industry regulations.

You need to think about how to push the most promising of your Horizon 2 businesses to a new level. Here, use the Boston Matrix to determine which of them warrant additional investment and resources.

If you don't have any products or services on this second horizon, brainstorm ways that you could further enhance existing, successful products. How could you expand your current offering and add more value to it? Doblin's 10 Types of Innovation® can help you think about this in many different areas of your business.

Also, explore and understand your organization's core competencies, and think about how you can strengthen them and use them to develop new businesses.

Horizon 3

Your last step is to look at ideas and growth opportunities that might be years away from production or profitability. These might be nothing more than drawings from your last brainstorming session, or research projects that are underway.

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First, look at the variety of ideas and projects that you have in the pipeline. Do you have a number of options, or are they all focused in one area? If the scope is too narrow, look at how you can widen it. Your goal is to have a rich source of potential products and businesses that fit with your organization's business model and mission.

Encourage team members to submit their ideas for future businesses or products, and make sure that your culture rewards innovation, creativity and risk taking.

If you haven't invested much time or energy in developing these opportunities, it's time to start. Regularly set time and resources aside to brainstorm ideas with your team members, and to encourage people to “think big” about what the organization could achieve.

Last, it's not enough to have good ideas; you need to be able to develop the best ones, so that they can make the transition into Horizon 2. Learn how to run effective business experiments to identify and pursue your best prospects.

Key Points

McKinsey partners Mehrdad Baghai, Stephen Coley and David White published the Three Horizons of Growth in their 2000 book, "The Alchemy of Growth." The model outlines three different types of innovation that need to go on in parallel for a business to be successful in the long term:

  • Horizon 1: This is routine innovation within your organization's current core businesses – the products and brands generating the most profit right now.
  • Horizon 2: This refers to innovation and investment in your organization's emerging businesses or products.
  • Horizon 3: This describes your organization's seedling investments, and ideas for future businesses.

You can improve how your organization grows over the long term by understanding the importance of each horizon, and the specific management challenges it raises.

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Comments (6)
  • Over a month ago Yolande wrote
    Hi NeilR

    Thanks for your great comment and also for the reference you provided.

    I think one of the most difficult things sometimes, is to look at your own business from an objective viewpoint and see what you need to change. While good ideas may come from employees and even from within management & board of directors - there will always be a bit of subjectivity. A pet project or 'first love' in a business may very well mean the end of it too if you aren't able to change and adapt as and when necessary.

    I'd love to hear more comments on this topic!
  • Over a month ago NeilR wrote
    I think this can apply to small and large businesses . Large business can fail because they become absolutely excellent at the first horizon whilst the world has moved on and substitutional ideas and products make their brilliant defence of the first horizon redundant . See Clay Christiansen ; the Innovators Dilemna . It is incredibly difficult if a product in horizon 3 would cannibalise the current profits in horizon 1 . However if you don't do it to yourself someone else will .
  • Over a month ago Midgie wrote
    Hi samiha,
    I do believe that this theory can be applied to small businesses, as well as large one. The size is all relative.

    I'm curious as to the reasons why you are asking. Are you in an individual business and looking at your potential growth?

    It would be interesting to hear how you applied this to your situation.
    Midgie
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