This article provides a detailed response to: How can companies effectively allocate resources between the three horizons without jeopardizing current operations or future growth? 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 Effective resource allocation across the Three Horizons Framework involves Strategic Planning, Portfolio Management, innovation, and Risk Management to balance current operations with future growth opportunities.
TABLE OF CONTENTS
Overview Understanding the Three Horizons Framework Strategic Planning and Portfolio Management Encouraging Innovation and Managing Risk Real World Examples Best Practices in McKinsey Three Horizons of Growth McKinsey Three Horizons of Growth Case Studies Related Questions
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Allocating resources effectively between the three horizons of growth—maintaining and defending core business (Horizon 1), developing emerging opportunities (Horizon 2), and creating genuinely new lines of business (Horizon 3)—is a critical challenge for organizations aiming to ensure both current operational success and future growth. This strategic balancing act requires a nuanced approach, blending disciplined investment, innovation, and a keen eye on market and internal capabilities.
Understanding the Three Horizons Framework
The Three Horizons Framework, originally developed by McKinsey & Company, provides a structured approach for organizations to assess and manage their current and future growth initiatives. Horizon 1 focuses on core businesses that generate the majority of an organization's current cash flow. Horizon 2 involves emerging opportunities that have the potential to become significant but are currently in a development phase. Horizon 3 is about creating future options with new themes that could eventually evolve into future growth engines. Effective allocation across these horizons ensures a balanced portfolio that secures current operational needs while investing in future growth.
Organizations often struggle with this balance, tending to over-focus on Horizon 1 due to its immediate contribution to financial performance. However, neglecting Horizons 2 and 3 can jeopardize long-term competitiveness and survival. A strategic allocation of resources, therefore, involves not just financial investment but also the allocation of time, talent, and attention from senior leadership.
Key to this approach is the understanding that each horizon requires different management strategies, performance metrics, and expectations. For example, Horizon 1 initiatives might be evaluated based on profit margin and market share improvements, while Horizon 3 initiatives might be assessed based on learning milestones and the development of new capabilities.
Strategic Planning and Portfolio Management
Strategic Planning plays a pivotal role in balancing the three horizons. It involves setting clear strategic priorities that align with the organization's long-term vision and mission. This process should include a rigorous analysis of market trends, customer needs, and competitive dynamics to identify areas of potential growth and disruption. Tools such as SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and scenario planning can provide valuable insights into where to play and how to win across the three horizons.
Portfolio Management is another critical element, which requires organizations to view their investments across the three horizons as a portfolio of strategic options. This perspective helps in making informed decisions about where to allocate resources to maximize overall value. According to a study by BCG, companies that actively manage their business portfolio and reallocate resources accordingly can achieve a shareholder return up to 30% higher than those that do not.
Effective Portfolio Management also involves regular reviews and adjustments based on performance and changing market conditions. This dynamic approach allows organizations to pivot as necessary, divesting from underperforming initiatives and doubling down on those with the most promise.
Encouraging Innovation and Managing Risk
Innovation is at the heart of Horizons 2 and 3, where the focus shifts from defending and expanding the core business to exploring new opportunities and business models. Encouraging a culture of innovation requires organizations to embrace risk, but in a calculated manner. This involves setting aside dedicated resources for innovation initiatives, including budget, time, and talent, and establishing a governance model that supports experimentation while managing risk.
One effective approach is to establish separate teams or 'innovation labs' focused on Horizon 2 and 3 initiatives, equipped with the autonomy to explore new ideas without the constraints of the core business operations. Google's "20% time," which encourages employees to spend 20% of their time on projects outside their main job, has led to the development of key products like Gmail and AdSense, illustrating the potential of this approach.
However, managing risk does not mean avoiding it altogether. It means recognizing the different risk profiles of each horizon and applying appropriate risk management strategies. For Horizon 1 initiatives, this might involve incremental improvements and efficiency gains. For Horizon 3, it might mean a portfolio of small bets in potentially disruptive technologies or business models, accepting that not all will succeed but those that do could significantly impact the organization's future growth trajectory.
Real World Examples
Amazon is a prime example of an organization that effectively balances its resource allocation across the three horizons. Its core retail business (Horizon 1) is supported by continuous investments in logistics and customer experience enhancements. At the same time, it has developed significant new lines of business like AWS (Amazon Web Services), which falls into Horizon 2, and continues to invest in future technologies such as artificial intelligence and space exploration through its Blue Origin venture, representing Horizon 3.
Another example is Apple, which maintains its leadership in the highly competitive technology sector by excelling in Horizon 1 through its range of products and services while investing in emerging technologies like augmented reality and autonomous vehicles as part of its Horizon 2 and 3 strategies.
These examples underscore the importance of a balanced approach to resource allocation across the three horizons. By maintaining a focus on operational excellence in the core business while actively investing in future growth areas, organizations can navigate the complexities of today's business environment and position themselves for long-term success.
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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