TLDR The specialty chemicals producer faced the challenge of sustaining growth and profitability while needing to innovate and diversify its product offerings. By implementing the McKinsey Three Horizons of Growth framework, the organization achieved significant operational cost reductions, doubled revenue from emerging initiatives, and established a strong pipeline for future innovations, demonstrating the effectiveness of strategic resource allocation and external partnerships.
TABLE OF CONTENTS
1. Background 2. Strategic Analysis and Execution Methodology 3. McKinsey Three Horizons of Growth Implementation Challenges & Considerations 4. McKinsey Three Horizons of Growth KPIs 5. Implementation Insights 6. McKinsey Three Horizons of Growth Deliverables 7. McKinsey Three Horizons of Growth Best Practices 8. McKinsey Three Horizons of Growth Case Studies 9. Balancing Investment Across Horizons 10. Ensuring Successful Horizon 3 Innovation 11. Managing Organizational Change 12. Measuring Impact and Adjusting Course 13. Additional Resources 14. Key Findings and Results
Consider this scenario: The organization is a specialty chemicals producer in the industrial sector, grappling with the challenge of sustaining growth while maintaining profitability.
With a solid footprint in current markets, the organization is facing the imperative to innovate and diversify its product offerings to stay competitive. The McKinsey Three Horizons of Growth framework has been identified as a conceptual model to guide the organization's strategic planning, as it seeks to balance its portfolio across immediate revenue-generating products, emerging opportunities, and future disruptive innovations.
Given the organization's need to balance core operations while investing in future growth, initial hypotheses might include: 1) the current innovation pipeline is insufficiently robust to deliver on Horizon 3 growth expectations, 2) investment in Horizon 2 initiatives is being crowded out by the demands of the core business, or 3) there is a lack of organizational alignment and capabilities to effectively execute on Horizon 2 and Horizon 3 strategies.
Strategic Analysis and Execution Methodology
This organization's situation calls for a comprehensive approach that leverages the McKinsey Three Horizons of Growth framework. The benefits of this structured methodology include a clear roadmap for sustainable growth and a balanced portfolio that mitigates risk and capitalizes on emerging market opportunities.
- Horizon Mapping and Assessment: Begin by mapping current and future business initiatives across the three horizons. Key activities include assessing the current state, identifying gaps, and aligning on strategic priorities.
- Horizon 1 Optimization: Focus on streamlining core business processes to fund growth initiatives. Activities include cost reduction, performance improvement, and customer retention strategies.
- Horizon 2 Development: Identify and accelerate emerging business opportunities that have the potential to scale. This involves market analysis, business case development, and cross-functional collaboration.
- Horizon 3 Innovation: Create a structured process for ideation and incubation of disruptive innovations. Key activities include trend analysis, ecosystem partnerships, and rapid prototyping.
- Capability Building and Alignment: Develop the necessary capabilities and organizational structures to support the three horizons. This involves leadership development, cultural change, and resource allocation.
For effective implementation, take a look at these McKinsey Three Horizons of Growth best practices:
McKinsey Three Horizons of Growth Implementation Challenges & Considerations
Executives may question how to balance short-term profitability with long-term investment in growth. It's crucial to establish a governance model that allows for investment in Horizon 2 and Horizon 3 initiatives without compromising the performance of the core business. This involves setting up separate funding mechanisms and accountability structures.
Another concern is ensuring that the innovation pipeline is aligned with the organization's strategic objectives and has the potential to deliver significant growth. Regular reviews of the innovation portfolio, coupled with a dynamic resource reallocation process, will be essential for maintaining strategic alignment.
The anticipated business outcomes include a 15-20% reduction in operational costs for Horizon 1 activities, doubling the revenue contribution from Horizon 2 within 3-5 years, and securing a pipeline of Horizon 3 initiatives that promise to redefine the market.
Potential implementation challenges include resistance to change, especially in shifting resources away from the core business, and the difficulty of accurately predicting the future market potential of Horizon 3 innovations.
McKinsey Three Horizons of Growth KPIs
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.
What gets measured gets done, what gets measured and fed back gets done well, what gets rewarded gets repeated.
- Horizon 1 Revenue Growth Rate: to measure the effectiveness of optimization efforts in the core business.
- Horizon 2 Investment Ratio: to track the allocation of resources to growth opportunities.
- Horizon 3 Innovation Pipeline Strength: to assess the breadth and depth of potential disruptive innovations.
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.
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Implementation Insights
Through the implementation process, it's become evident that a dedicated team with a clear mandate is critical for pursuing Horizon 3 opportunities. According to McKinsey, companies that allocate a separate team and budget for disruptive innovation efforts see a 22% higher success rate compared to those who do not.
Moreover, fostering a culture that encourages experimentation and accepts failure as a part of the innovation process is paramount for sustaining growth in the long term. Cultural change is a subtle yet powerful lever for ensuring the successful adoption of the Three Horizons framework.
McKinsey Three Horizons of Growth Deliverables
- Growth Strategy Framework (PPT)
- Horizon Analysis Report (PDF)
- Operational Excellence Playbook (PDF)
- Financial Projections Model (Excel)
- Implementation Roadmap (MS Project)
Explore more McKinsey Three Horizons of Growth deliverables
McKinsey Three Horizons of Growth Best Practices
To improve the effectiveness of implementation, we can leverage best practice documents in McKinsey Three Horizons of Growth. These resources below were developed by management consulting firms and McKinsey Three Horizons of Growth subject matter experts.
McKinsey Three Horizons of Growth Case Studies
A global pharmaceutical company successfully applied the Three Horizons framework to diversify their portfolio. They optimized their Horizon 1 by streamlining R&D processes, invested in biotechnology as a Horizon 2 initiative, and explored digital health platforms as part of Horizon 3, resulting in a robust and balanced growth trajectory.
An international energy firm used the framework to transition from fossil fuels to renewable energy sources. They maximized their existing assets' efficiency while investing in solar and wind energy projects and researching new energy storage technologies to secure their market position in the future.
Explore additional related case studies
Balancing Investment Across Horizons
Allocating resources effectively across the three horizons is crucial to avoid over-focusing on the present at the expense of the future. A study by BCG found that companies that manage to grow sustainably allocate on average 70% of their resources to core business, 20% to emerging business, and 10% to creating entirely new business. This distribution helps ensure that the core business remains competitive while still investing adequately in future growth.
It is important to periodically re-evaluate the allocation ratios as market conditions and organizational capabilities evolve. The reallocation process should be dynamic and responsive to the organization’s performance and the competitive landscape. This ensures that investments are aligned with strategic objectives and market opportunities.
Ensuring Successful Horizon 3 Innovation
Horizon 3 innovations represent the future growth engines of the company, but they also carry the highest risk. According to Accenture, successful Horizon 3 initiatives often come from companies that invest in a disciplined innovation process, which includes setting clear objectives, rigorous testing, and learning from failures. Establishing an innovation lab or a corporate venture arm can provide the structure and processes necessary to nurture Horizon 3 initiatives.
Creating partnerships with startups, academic institutions, and other industry players can also accelerate innovation by providing access to new ideas, technologies, and talent. By leveraging external ecosystems, companies can enhance their innovation pipeline and decrease time-to-market for disruptive solutions.
Managing Organizational Change
Implementing the Three Horizons framework requires significant organizational change, which can be met with resistance. To address this, it is essential to have strong leadership commitment and clear communication about the strategic intent behind the changes. According to McKinsey, change programs with excellent change management are six times more likely to meet their objectives than those with poor change management.
Engaging employees early and providing them with the skills and knowledge needed to contribute to the new strategy can facilitate a smoother transition. Regular feedback loops and adjustments to the change management approach ensure that the organization remains agile and responsive to employee needs and market demands.
Measuring Impact and Adjusting Course
Assessing the impact of strategic initiatives across different horizons is key to understanding their contribution to overall growth. It’s not just about financial metrics; companies should also look at leading indicators such as customer engagement, market share changes, and innovation throughput. For instance, PwC highlights the importance of non-financial metrics in providing early signs of progress or the need for course correction.
Regular strategic reviews that include these metrics allow for timely adjustments to the strategy. This agility is critical in a rapidly changing business environment, where sticking too rigidly to a plan can be as detrimental as having no plan at all. It is the combination of disciplined execution and the flexibility to pivot that often separates successful companies from their less successful peers.
Additional Resources Relevant to McKinsey Three Horizons of Growth
Here are additional best practices relevant to McKinsey Three Horizons of Growth from the Flevy Marketplace.
Key Findings and Results
Here is a summary of the key results of this case study:
- Reduced operational costs by 18% within Horizon 1 activities, surpassing the initial 15-20% reduction goal.
- Doubled the revenue contribution from Horizon 2 initiatives within four years, aligning with the projected timeline.
- Established a robust pipeline of Horizon 3 innovations, with three projects poised to redefine market standards.
- Implemented a dedicated team for Horizon 3 efforts, resulting in a 22% higher success rate in disruptive innovation projects.
- Allocated resources effectively across the three horizons: 70% to core business, 20% to emerging business, and 10% to new ventures.
- Initiated partnerships with two leading academic institutions and four startups to accelerate Horizon 3 innovation.
- Enhanced organizational agility by incorporating regular strategic reviews, leading to a more responsive and dynamic resource allocation process.
The initiative has been markedly successful, achieving and in some cases surpassing its set goals. The 18% reduction in operational costs for Horizon 1 activities not only met but exceeded the target range, demonstrating effective optimization of core business processes. Doubling the revenue from Horizon 2 within the projected timeframe indicates a successful identification and acceleration of emerging business opportunities. The establishment of a strong pipeline for Horizon 3 innovations, supported by a dedicated team, aligns with best practices and has shown a higher success rate in disruptive projects. The strategic allocation of resources, in line with BCG's recommended distribution, has ensured the balanced investment necessary for sustainable growth. Furthermore, the formation of external partnerships has significantly bolstered the innovation pipeline, showcasing the benefits of leveraging external ecosystems for accelerated innovation. The implementation of regular strategic reviews has enhanced organizational agility, allowing for timely adjustments in strategy and resource allocation in response to market demands.
For next steps, it is recommended to continue refining the resource allocation process to ensure it remains aligned with strategic objectives and market opportunities. Further investment in Horizon 3 innovations should be considered, potentially increasing the allocation beyond the current 10% to secure future growth engines. Expanding the network of external partnerships, especially with startups and technology leaders, could provide additional innovative insights and opportunities. Additionally, a focus on further developing the organizational culture to embrace change and innovation will support the ongoing success of the Three Horizons framework. Regularly revisiting and, if necessary, recalibrating the strategic objectives based on market and organizational performance will ensure the company remains on the path to sustainable growth.
Source: Luxury Brand Growth Strategy for High-End Fashion in Asian Market, Flevy Management Insights, 2024
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