Learn how to use McKinsey’s Three Horizons Model for top level planning of business growth and innovation.
Before, we discussed strategy map as a framework for the articulation of the innovation strategy. What about other popular frameworks? They certainly help to organize high-level thoughts about innovations and formulate a bird’s-eye view on a company’s innovation strategy.
In this article, I suggest to discuss:
- McKinsey’s Three Horizons Model, and
- Dual Transformation Framework
Three Horizons Model
McKinsey’s Three Horizons Model defines three perspectives (horizons) to look at. The model underlines that all three horizons should exist in the organization at the same time.
| Subject | Time scope | Innovation plan | |
|---|---|---|---|
| Horizon 1 | Core business | Now | Innovating existing business model. |
| Horizon 2 | Extending business | Near term | Innovating by addressing goals in the “comfort zone.” |
| Horizon 3 | New business | Future | Focusing on the trends that might become disruptive. |
Decades after its creation, the model was widely analyzed by business experts, who found some challenges that you would need to address when adopting this framework.
Challenge 1 – Shifting time bounds
The initial idea1 presented in 1999 was that the horizons should be defined by time bounds:
- A shorter time frame for incremental improvements (horizon 1) and
- A longer time frame (years) for developing disruptive technologies (horizon 3).
As noticed by Steve Blank 2, today’s examples of disruptive businesses show that it’s no longer about time. Respectively, we cannot say for sure if today’s initiatives are focused on one horizon only. The product’s function that you are working on right now might be a minor improvement or become a strategic, disruptive change for your organization.
Challenge 2 – Resource Distribution
The Three Horizons Model helps to visualize a top view over the resources allocation. The classical diagram is presented with horizons of equal sizes, while the more realistic approach is to apply a 70-20-10 rule, where 70% of time/resources is spent on Horizon 1, 20% on Horizon 2 and 10% on Horizon 3, respectively.
Another helpful tool in this context is VRIO analysis. It can be used to understand the importance of developing certain resources and capabilities.
Challenge 3 – Horizon 2 Vacuum
Another known difficulty of applying the Horizons model in practice is the so-called vacuum of horizon 23. Compared to Horizon 1 with well-defined processes and Horizon 3 with all the hype and business experts around, the Horizon 2 ideas are often under-presented in board meetings.
The Three Horizons Model in BSC Designer
The Three Horizons Model is available as one of the frameworks in the pre-installed templates in BSC Designer.
You will find there the perspectives (horizons) with their corresponding questions:
- Horizon 1. How do we maintain and strengthen core business?
- Horizon 2. How do we develop new opportunities and grow business?
- Horizon 3. How do we prepare for disruptive challenges?
Three Horizons Model Template.We have added examples of the goals to the template:
- H1 goal: Improve the company’s core activities
- H2 goal: Explore opportunities to reach new customers
- H3 goal: Analyze changing customer habits, test waters
Validating business achievements by performance measurement is one of the pillars of the McKinsey horizon model methodology. Respectively, the goals from the horizons should be quantified and measured by adequate metrics.
In the template, we used common metrics like:
- “Resource allocation metrics” and “Effectiveness metrics” for the H1 goal
- “Market analysis metrics” and “Market penetration metrics” for the H2 goal
- “Innovative culture awareness” and “Successful prototypes and startups” for the H3 goal
You can find more examples of common KPIs in the examples section on our website, we also discussed the specific examples of metrics for innovations.
Alternatives to the Three Horizon Model
A modern (respective book published in 2017) Dual Transformation Framework4, suggests a different approach to thinking about innovations. This framework suggests focusing on A and B of innovation, where:
- A is keeping today’s business running
- B is focusing on the challenges of tomorrow
These two are glued by a Capabilities Links – a set of unique skills and resources.
Another modification of the Three Horizons model was presented by Christian Terwiesch and Karl Ulrich in Innovation Tournaments.5 The diagram has changed to have “market” and “technology” on axes, but the core idea remained the same.
A simpler, yet powerful alternative to the Three Horizons framework is a tool called Strategic Change Agenda. In contrast to Three Horizons, it focuses on a single “horizon” – future. Having a change agenda document is an excellent way to make the goals on the strategy map more contextual and achieve better acceptance by the stakeholders.
Match Innovation Frameworks with Strategy Map
The results of these frameworks can be reflected on the strategy map:
- The Horizon 1 and Horizon 2 goals, as well as the ideas from the A category (Dual framework), will probably go to the “Internal perspective.”
- The goals from Horizon 3 and the B category from the Dual framework will most likely correspond to the “Learning and Growth” perspectives on the strategy map.
What innovation frameworks are used in your organization? What are your findings of the successful application of those frameworks?
What's next?
- Access templates. Sign-up with a free plan at BSC Designer for immediate access to 31 scorecard templates, including Three Horizons Model Template discussed in this article.
- Master skills. Learn how to break down ambiguous goals like "improve quality" and "increase resilience" into specific strategies.
- Automate. Learn what Balanced Scorecard software is and how it can make your life easier by automating strategy execution, KPIs, and strategy maps.
More About Strategic Planning
Comparative Table of Strategic Planning Frameworks
- Strategy execution frameworks. Such as the Balanced Scorecard for the overall strategy and the more lightweight OKR framework for specific challenges.
- Strategy formulation frameworks. SWOT, Three Horizons, Constraints Analysis, PESTEL, Gap Analysis, etc. that help organizations to generate new ideas.
- The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise, Mehrdad Baghai, Steve Coley, David White, Stephen Coley, Basic Books, 2000 ↩
- McKinsey’s Three Horizons Model Defined Innovation for Years. Here’s Why It No Longer Applies, Steve Blank, 2019, Harvard Business Review ↩
- To Succeed in the Long Term, Focus on the Middle Term, Geoffrey Moore, Harvard Business Review, July–August 2007 Issue ↩
- Dual Transformation: How to Reposition Today’s Business While Creating the Future, Scott Anthony, Clark Gilbert, Mark Johnson, Harvard Business Review Press, 2017 ↩
- Innovation Tournaments: Creating and Selecting Exceptional Opportunities, Harvard Business Review Press, 2009 ↩
BSC Designer is a Balanced Scorecard software that is helping companies to better formulate their strategies and make the process of strategy execution more tangible with KPIs.