McKinsey’s Three Horizons of Growth

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Organizations undergo different phases of development.  Some reach maturity and then decline over time, whereas others just fade away in the startup phase.

A few businesses, however, evade collapse and maintain growth for years.  They keep surprising their customers with novel product or service offerings.  They accomplish this by allocating dedicated resources, investment, time, and effort into the creation of unique concepts, testing and nurturing those, and ousting defunct products.

McKinsey & Company partners published the Three Horizons (3H) of Growth framework in 2000.  The model is useful in managing Innovation, evaluating the maturity and potential of innovation projects, and allocating resources accordingly.

The 3 Horizons framework directs the attention of an organization toward bolstering its existing portfolio as well as developing future revenue streams and business opportunities.

The 3 Horizons strategic framework outlines 3 different types of Innovation horizons that should run in parallel for a business to be successful.  Organizations must invest in each of these horizons and tackle the specific challenges that accompany them to achieve sustainable long-term growth.  The growth horizons include:

1. Horizon 1 – Defend and extend core businesses
2. Horizon 2 – Build emerging businesses
3. Horizon 3 – Create viable options

These horizons make it easier to appropriately respond to disruptions brought about by changes in the market, technology, or regulations.  Each horizon of the 3H framework requires a distinct management approach.

The 3 Horizons of Growth framework facilitates organizations in:

• Maintaining a consistent focus on the present (Horizon 1), the future state of business (Horizon 3), and the necessary actions to get there (Horizon 2).
• Understanding where to direct efforts in the short, medium, and long term.
• Retaining a diversified portfolio of initiatives across the three horizons and managing risks effectively by balancing stability and cash flow alongside the risks inherent in innovation.
• Keeping a laser focus on upholding and expanding a particular brand, ideating novel concepts, and investing in viable projects.
• Averting common mistakes—e.g., emphasizing solely on new opportunities or future initiatives and neglecting the existing core value propositions.
• Expanding into new geographies and modifying or creating entirely new product or service offerings.
• Building or acquiring new capabilities by hiring key talent is integral to succeeding in creating new Business Models.

Let’s delve deeper into these horizons of growth.

Horizon 1. Defend and Extend Core Businesses

The first Horizon of Growth relates to “business-as-usual” activities necessary for the survival of core businesses.  This is the initial growth horizon, which focuses on short-term growth (1-3 years) in maintaining and growing the margins and profits from existing, cash-generating core businesses.

Leadership needs to evaluate the organization’s strengths and weaknesses, value propositions that work, and those that should be retired or abandoned altogether.  Product revisions, the introduction of accessory product features, new services, Digital Marketing, and improved customer support are examples of Horizon 1 initiatives.

Horizon 2. Build Emerging Businesses

The second horizon demands directing efforts towards extending the existing portfolio by exploring new areas of revenue generation and experimenting with new innovations to respond to changing markets. The emphasis of this horizon is on complementing the existing business model(s) by looking into the prospects of acquiring new skillsets and technologies and studying new market segments.

This horizon concerns exploring medium-term (2-5 year) plans through the addition of new product lines or geographical expansion.  The capital costs associated with pursuing Horizon 2 activities are expected to generate a reliable return on investment.

Horizon 3. Create Viable Options

The third horizon of growth pertains to research, the development of new concepts and ideas for future long-term growth (5-12 years), and the development of entirely new businesses.  For instance, investing in new Product Development, M&A, Automation, or Artificial Intelligence.

Interested in learning more about the Horizons of Growth framework? You can download an editable PowerPoint presentation on McKinsey’s Three Horizons of Growth here on the Flevy documents marketplace.

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