This article provides a detailed response to: How do you measure the success of initiatives within each of the Three Horizons, and how do these metrics differ across horizons? For a comprehensive understanding of McKinsey Three Horizons of Growth, we also include relevant case studies for further reading and links to McKinsey Three Horizons of Growth best practice resources.
TLDR Learn how to measure success across the Three Horizons of Strategic Planning and Innovation Management, focusing on unique metrics like ROI, market penetration, and future growth potential for sustainable organizational growth.
Before we begin, let's review some important management concepts, as they related to this question.
Measuring the success of initiatives within the Three Horizons framework involves understanding the distinct objectives and expected outcomes across each horizon. This framework, widely recognized in Strategic Planning and Innovation Management, categorizes organizational growth initiatives into three horizons based on their current stage of development, potential for growth, and time frame for realization. Each horizon requires specific metrics for evaluation, reflecting its unique contribution to the organization's long-term success.
Horizon 1: Core Business Initiatives
Horizon 1 focuses on initiatives that strengthen and extend the core business. These are typically short-term projects with a focus on Operational Excellence, Risk Management, and incremental innovation. The success of Horizon 1 initiatives is often measured by financial metrics such as Return on Investment (ROI), revenue growth, cost savings, and market share expansion. For example, a McKinsey report on digital transformation in the banking sector highlighted how banks measure the success of their digital initiatives—aimed at enhancing the core business—by improvements in customer satisfaction scores, reduction in operational costs, and increased digital sales percentages.
Operational metrics also play a critical role in Horizon 1. These can include production efficiency, quality rates, and customer service improvements. For instance, in manufacturing, Key Performance Indicators (KPIs) such as defect rates, production uptime, and order fulfillment times are crucial. The emphasis here is on enhancing current capabilities and ensuring the organization remains competitive in its established markets.
Customer feedback and engagement metrics, including Net Promoter Score (NPS) and customer retention rates, are also vital for Horizon 1 initiatives. They provide immediate insights into the effectiveness of improvements and innovations aimed at satisfying current customer needs and expectations.
Horizon 2: Emerging Opportunities
Horizon 2 initiatives aim at building emerging opportunities that have the potential to become significant parts of the business. These initiatives often focus on expanding into new markets, developing new products, or significantly improving existing products. The success metrics here shift towards growth potential and market validation. This can include metrics such as market penetration rates, growth in new customer segments, and the pace of scaling new products or services.
Investment in Horizon 2 is typically riskier than in Horizon 1, and thus, organizations often look at strategic metrics such as the speed of market entry, the rate of innovation adoption, and the ability to disrupt existing markets or create new ones. For example, a report from BCG on innovation strategy highlighted the importance of measuring the success of Horizon 2 initiatives by their ability to capture new value pools and create competitive differentiation.
Another critical set of metrics for Horizon 2 revolves around learning and adaptation. This includes measures of how quickly an organization can pivot based on market feedback, the rate of iteration on new products or services, and the effectiveness of scaling strategies. These metrics acknowledge the uncertainty and learning curve associated with Horizon 2 initiatives.
Horizon 3: Creating Future Options
Horizon 3 is about creating options for future growth through radical innovations or venturing into uncharted business territories. Success metrics for Horizon 3 initiatives are less about immediate financial returns and more about long-term potential and learning. They often include qualitative assessments of technological feasibility, market desirability, and business model viability. For instance, an Accenture study on innovation highlighted the importance of measuring strategic alignment and potential market impact for Horizon 3 initiatives, even in the absence of immediate revenue.
Given the exploratory nature of Horizon 3, metrics such as the number of patents filed, partnerships formed, or prototypes developed can indicate progress. These initiatives are about positioning the organization for future success, so metrics also focus on the development of new capabilities and competencies that will enable future growth.
Finally, Horizon 3 success is often measured by the organization's ability to foster a culture of innovation and its capacity to allocate resources effectively between all three horizons. This includes evaluating how well the organization balances its portfolio of initiatives across the Three Horizons to ensure sustainability and long-term growth.
Understanding and applying the appropriate metrics for each horizon allows organizations to effectively manage and measure the success of their strategic initiatives. By recognizing the distinct objectives and challenges of each horizon, leaders can allocate resources more wisely, make better strategic decisions, and ultimately drive their organizations toward sustainable growth and innovation.
Best Practices in McKinsey Three Horizons of Growth
Here are best practices relevant to McKinsey Three Horizons of Growth from the Flevy Marketplace. View all our McKinsey Three Horizons of Growth materials here.
Explore all of our best practices in: McKinsey Three Horizons of Growth
McKinsey Three Horizons of Growth Case Studies
For a practical understanding of McKinsey Three Horizons of Growth, take a look at these case studies.
Growth Strategy Redesign for Professional Services in Competitive Market
Scenario: The organization in question operates within the professional services industry, facing stagnation in its core offerings while grappling with the challenge of allocating resources effectively across the McKinsey Three Horizons of Growth framework.
Telecom Infrastructure Expansion Strategy in D2C
Scenario: The organization is a mid-sized telecom provider specializing in direct-to-consumer services, facing stagnation in its core business and seeking to identify new growth avenues.
Strategic Growth Framework for Space Technology Firm in Competitive Market
Scenario: A firm specializing in space technology is struggling to balance its current operations with innovation and new market expansion, in line with the McKinsey 3 Horizons Model.
Horizon Growth Strategy for Aerospace Manufacturer
Scenario: The organization is a leading player in the aerospace industry, grappling with the challenge of sustaining long-term growth amid rapid technological changes and competitive pressures.
Industrial Chemicals Growth Strategy for Specialty Materials Firm
Scenario: The organization is a specialty chemicals producer in the industrial sector, grappling with the challenge of sustaining growth while maintaining profitability.
Luxury Brand Diversification Strategy Development
Scenario: The organization is a well-established luxury fashion house looking to innovate and expand its portfolio.
Explore all Flevy Management Case Studies
Related Questions
Here are our additional questions you may be interested in.
Source: Executive Q&A: McKinsey Three Horizons of Growth Questions, Flevy Management Insights, 2024
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