TABLE OF CONTENTS
1. Background 2. 3 Horizons Strategic Analysis and Execution Methodology 3. Challenges & Considerations 4. Implementation KPIs 5. Implementation Insights 6. Deliverables 7. McKinsey 3 Horizons Model Best Practices 8. 3 Horizons Case Studies 9. Resource Allocation Across Horizons 10. Measuring Success in Horizon 3 11. Integration of Disruptive Innovations 12. Cultivating an Innovation Culture 13. Additional Resources 14. Key Findings and Results
Consider this scenario: The organization is a leading aerospace defense contractor facing stagnation in its core markets while seeking to innovate and capture new opportunities.
The organization has traditionally excelled in Horizon 1, focusing on maintaining and defending its current product offerings. However, it recognizes the need to expand into Horizons 2 and 3, developing emergent opportunities and creating genuinely disruptive innovations to ensure long-term success and shareholder value.
The preliminary analysis of the aerospace defense contractor's situation suggests a couple of hypotheses. First, there may be an overemphasis on Horizon 1 activities, which, while currently profitable, could be diverting resources from longer-term innovation. Second, the organizational structure and culture might not be conducive to the risk-taking and agility required to succeed in Horizons 2 and 3.
Addressing these challenges requires a structured methodology that provides a balance between exploiting existing assets and exploring new growth avenues. This approach ensures sustained growth and competitiveness in a rapidly evolving defense sector.
For effective implementation, take a look at these McKinsey 3 Horizons Model best practices:
Executives might question the allocation of resources across the three horizons, particularly the investment in Horizon 3, which carries higher risk and longer-term payoffs. It's critical to communicate the strategic rationale for a diversified portfolio approach, highlighting the balance between immediate returns and future growth potential.
Another consideration is the potential resistance to change within the organization. Change Management techniques will be essential to align the workforce with the new strategic direction and to cultivate a culture that embraces innovation and calculated risk-taking.
The expected business outcomes include increased market share and revenue from Horizon 1 activities, a robust pipeline of growth opportunities in Horizon 2, and potential industry disruption from Horizon 3 initiatives. Success in Horizons 2 and 3 will also help in attracting and retaining top talent who are eager to work on cutting-edge projects.
KPIS are crucial throughout the implementation process. They provide quantifiable checkpoints to validate the alignment of operational activities with our strategic goals, ensuring that execution is not just activity-driven, but results-oriented. Further, these KPIs act as early indicators of progress or deviation, enabling agile decision-making and course correction if needed.
Tracking these KPIs provides insights into the effectiveness of the strategic initiatives and the balance across the three horizons. It allows for course corrections and reinforces the strategic direction set out by the organization's leadership.
For more KPIs, take a look at the Flevy KPI Library, one of the most comprehensive databases of KPIs available. Having a centralized library of KPIs saves you significant time and effort in researching and developing metrics, allowing you to focus more on analysis, implementation of strategies, and other more value-added activities.
Learn more about Flevy KPI Library KPI Management Performance Management Balanced Scorecard
Throughout the implementation, it was observed that establishing cross-functional teams helped in breaking down silos and fostering collaboration between Horizon 1 operations and Horizons 2 and 3 innovation initiatives. It's important to note that according to McKinsey, companies that reallocate resources across business units more frequently are 30% more likely to outperform their peers on total returns to shareholders over the long term.
Explore more McKinsey 3 Horizons Model deliverables
To improve the effectiveness of implementation, we can leverage best practice documents in McKinsey 3 Horizons Model. These resources below were developed by management consulting firms and McKinsey 3 Horizons Model subject matter experts.
Boeing's venture arm, HorizonX, is an example of a real-world application of the McKinsey 3 Horizons Model. HorizonX invests in startups that are developing disruptive technologies and business models, which aligns with Horizon 3 activities. Their investments help Boeing stay at the forefront of innovation while continuing to optimize its core business operations.
Lockheed Martin's Skunk Works is another case study of Horizon 3 in action within the defense sector. This secretive division is responsible for a number of famous aircraft and cutting-edge technologies, showcasing the importance of investing in innovation for long-term growth and market leadership.
Explore additional related case studies
Optimal resource allocation is crucial for balancing the immediate performance with long-term growth. In practice, firms often struggle with this balance. A study by McKinsey found that the most successful companies reallocate their resources significantly more than their peers, shifting more than 50% of their capital to different business units over a decade. Executives should consider not just the financial capital but also talent and R&D resources when allocating to different horizons.
It's imperative to establish a dynamic resource allocation process that allows for flexibility and rapid response to market changes. This might involve setting up an internal 'market' for resources where business units 'bid' for capital based on projected returns and strategic alignment. Such a system promotes a more entrepreneurial approach within the company, ensuring resources flow to the most promising opportunities.
Horizon 3 initiatives are often the most challenging to measure because they are inherently uncertain and long-term. However, it is possible to track progress through leading indicators such as the number of active innovation projects, the percentage of revenue from new products, and the number of strategic partnerships formed. According to BCG, companies that regularly refresh their product portfolios through innovation see a 5.7% higher total shareholder return than those with stagnant portfolios.
It is also essential to establish a culture that accepts failure as part of the innovation process. By celebrating learned lessons from unsuccessful projects, companies can foster a more resilient and innovative mindset. This approach encourages continuous experimentation, which is vital for discovering breakthrough products and services.
Integrating disruptive innovations into the existing business model poses significant challenges. It requires not only strategic foresight but also the ability to execute on these insights. Accenture reports that 93% of executives believe their long-term success depends on their organization's ability to innovate. However, only 20% believe their current business model will still be economically viable through digitalization.
The key is to develop a clear integration roadmap that outlines how new innovations will either complement or replace current offerings. This includes planning for the cannibalization of existing products and preparing the market and organization for transitions. It also means ensuring that the innovation teams have clear pathways to scale their projects and the necessary support from leadership to navigate the potential resistance from the core business units.
Building a culture that supports innovation across all horizons is perhaps one of the most complex but critical tasks. According to PwC's Innovation Benchmark, 60% of companies say that culture is the biggest impediment to innovation. Executives must champion a culture where risk-taking is encouraged, and failure is viewed as a learning opportunity.
Creating this culture starts at the top, with leadership setting the tone for an environment that values curiosity and continuous learning. It also involves tangible actions, such as adjusting incentive structures, creating spaces for cross-functional collaboration, and providing time and resources for employees to pursue innovative projects. This cultural shift is a long-term investment but one that pays dividends in sustained innovation and growth.
Here are additional best practices relevant to McKinsey 3 Horizons Model from the Flevy Marketplace.
Here is a summary of the key results of this case study:
Overall, the initiative has yielded commendable results, particularly in Horizon 1 where revenue growth exceeded expectations, showcasing the effectiveness of operational optimizations. The successful launch of 8 new products/services in Horizon 2 also indicates a robust pipeline of growth opportunities. However, the increased R&D spend, while demonstrating commitment to Horizon 3, did not translate into disruptive innovations as anticipated. This suggests a need for a more focused approach to breakthrough innovations. Alternative strategies could involve targeted investments in specific disruptive technologies or strategic partnerships with innovative startups to enhance Horizon 3 outcomes.
Looking ahead, it is recommended to refine the approach to Horizon 3 by identifying specific disruptive technology areas and allocating resources accordingly. Additionally, fostering a culture of calculated risk-taking and innovation across all horizons should remain a priority. This can be achieved through targeted leadership initiatives, incentivizing cross-functional collaboration, and providing dedicated resources for employees to pursue innovative projects. These steps will ensure sustained growth and competitiveness in the evolving defense sector.
Source: Defense Sector Growth Strategy for Global Aerospace Firm, Flevy Management Insights, 2024
Leverage the Experience of Experts.
Find documents of the same caliber as those used by top-tier consulting firms, like McKinsey, BCG, Bain, Deloitte, Accenture.
Download Immediately and Use.
Our PowerPoint presentations, Excel workbooks, and Word documents are completely customizable, including rebrandable.
Save Time, Effort, and Money.
Save yourself and your employees countless hours. Use that time to work on more value-added and fulfilling activities.
Download our FREE Strategy & Transformation Framework Templates
Download our free compilation of 50+ Strategy & Transformation slides and templates. Frameworks include McKinsey 7-S Strategy Model, Balanced Scorecard, Disruptive Innovation, BCG Experience Curve, and many more. |