Ready to take your company's strategic planning to the next level? Let's dive into the McKinsey Three Horizon Framework!
We'll break down the framework's three horizons of growth and give you some real-life examples of companies that nailed it. Plus, we've got a free template for you to use in your own strategic planning process.
By the end of this article, you'll be a pro at planning for the future and your competition will be shaking in their boots.
Here’s what you’ll discover in this article:
- What Is The Three Horizons Framework?
- What Are The Three Horizons Of Growth?
- What Does Mckinsey's Three Horizons Of Growth Help You To Achieve?
- How Do You Apply The Three Horizons Model To Your Business?
- Hidden Trap Of The Three Horizons Framework You Should Be Aware Of (And How To Avoid It)
- Three Horizons Framework Template
- Conquer The Future With Cascade 🚀
What is the Three Horizons Framework?
McKinsey’s Three Horizons Framework is a strategic planning approach used to help organizations manage their growth strategy and unlock transformational potential. It takes an adaptive management approach based on three distinct categories of growth—Horizon 1, Horizon 2, and Horizon 3—which provide a framework for identifying and responding to changes in the business environment.
What Are The Three Horizons Of Growth?
The Three Horizons Framework, also known as the Three Horizons of Growth, consists of three horizons:
- Horizon 1: Maintain and defend the core business
- Horizon 2: Nurture emerging business
- Horizon 3: Create genuinely new business
Let’s take a look at each a bit more in-depth:
Horizon 1: Maintain & defend core business
This is the first horizon of growth and focuses on leveraging existing products and services. Think of it as "business as usual." For a retailer, this would include the day-to-day goals associated with selling, marketing, and serving your product and customers.
Some other examples of Horizon 1 initiatives could include product upgrades, new features, or adding new services to existing products. Or introducing a subscription model for existing products or launching new services such as customer service, technical support, or digital marketing.
Your goals in Horizon 1 should be focused on improving margins, improving current business processes, and increasing short-term profits.
Horizon 2: Nurture emerging business
The second horizon of growth focuses on taking what you already have and extending it into new areas of revenue-driving activity. It’s all about trying out new approaches as a response to the shifts in the market. You should focus on creating new innovations in the existing market or exploring new markets.
There may be an initial cost associated with your Horizon 2 activities, but these investments should return fairly reliably.
This is based on them being an extension of your existing business model. Examples of Horizon 2 strategic initiatives include launching new product lines or expanding your business geographically.
Some of these initiatives will be absorbed into your business as usual, others will pave the way for the emergence of radically different strategic initiatives under Horizon 3.
Horizon 3: Create genuinely new business
This horizon is the third and most distant of the planning horizons. It’s typically characterized by long-term goals and investments that have unprecedented strategic or competitive implications. The third horizon can encompass up to ten years or more and focuses on creating opportunities, exploring new markets, and making discretionary investments to capitalize on those opportunities.
For example, your organization could invest in the development of new products, the research and development of AI or automation, and the development of new technologies or services. This could also involve things like research projects, pilot programs, or the start up of completely new business units through mergers and acquisitions.
What Does McKinsey's Three Horizons of Growth Help You to Achieve?
Most organizations want growth. Most organizations also acknowledge that innovation is a critical component of achieving that growth. Yet so many of them treat innovation as a one-off event, such as a huge project to be delivered or a set "innovation program" to be introduced.
One of the most common reasons for this approach is the perceived gap between the innovation of tomorrow and the reality of running a business today.
McKinsey's Three Horizons of Growth aims to help you bridge this intellectual gap. It does this by creating stepping stones between running your business profitably today and growing it for the future.
This strategy framework helps ensure that you consistently balance your focus between the needs of today (Horizon 1), the future state of your business (Horizon 3), and the steps that you need to take to get there (Horizon 2).
The Three Horizons of Growth framework is an extremely versatile strategy framework applicable to most organizations. In particular, the framework lends itself to organizations that have identified that growth and innovation have been a stumbling block.
If you feel as though your organization is mired in "chugging along" and delivering business as usual, McKinsey's Three Horizons of Growth might just be the right strategic framework for you.
📚Recommended reading: Innovation and Strategy: The Correlation
How Do You Apply the Three Horizons Model to Your Business?
OK, so you've decided that growth and innovation are indeed critical to your business, and you're willing to give McKinsey's Three Horizons Model a shot at helping you get there. This is how to go about applying it to your own organization:
1. Start with a deep understanding of your Horizon 1
You first need to identify your biggest assets today. The main reasons why your business makes revenue or succeeds at what it does. If you were Starbucks, this would be your brand and perhaps your distribution channels.
If you were Microsoft back in the 1990s, it would be your enterprise products and perhaps your partner network.
Name these drivers of success for your business today.
Now, imagine that you lost them entirely. Imagine that you're Microsoft, and businesses refuse to buy your software anymore...
2. Your Horizon 3 is what you would do if that were to happen
Yep, that's not a typo. We're moving straight to Horizon 3. Let's stick with Microsoft as an example. The Microsoft Xbox was launched in 2001. On the surface, it was a million miles away from playing to Microsoft's core strengths at the time, which was firmly in the business and productivity space. And that was exactly the point.
The Xbox wasn't a shot in the dark—it was Microsoft's Horizon 3. They'd identified something at which they thought they could succeed (you still need core capabilities that will allow you to win). However, they didn't rely on the things that were making them a success today.
But how did they go from strength in business software/productivity to winning in the ultra-competitive gaming hardware industry?
3. Horizon 2 is the bridge that gets you there
This is where Horizon 2 comes in. Once you know what you want to do for your Horizon 3, work backward from that (and forward from your Horizon 1) to create a plan of action that will bridge the gaps.
For Microsoft, that involved launching their own line of computer games (famous ones include Age of Empires and Microsoft Flight Simulator). It also included a range of "light" hardware, such as keyboards and mice.
This gave them the experiences they needed (and a bit of extra revenue too) in both gaming and hardware, which ultimately resulted in them creating the Xbox.
Your Horizon Two doesn't have to be a revenue generator per se, but it should contain enough of your core assets from Horizon One to give you a fighting chance of it being profitable.
The bigger picture, though, is that it helps you to bridge the gap between your current state and your desired future state (Horizon 3).
The 70 / 20 / 10 Rule
To put this into practice for your strategic plan, try to ensure that around 70% of your activity is playing toward your Horizon 1. After all, you need to survive and thrive today to have any chance of succeeding tomorrow.
Then, allocate around 20% of your effort to those Horizon 2 "bridging' opportunities. That might sound like a lot, but Horizon 2 will contain failures and false starts, so it's important that you have enough irons in the fire to get you to Horizon 3.
For Horizon 3, that leaves 10% of your overall effort. That 10% is important. Without it, you can easily lose sight of your ultimate goals, and get lost in a never-ending cycle of horizon 2's.
Microsoft, for example, experimented with a range of simple game controllers throughout the 1990s called the Microsoft Sidewinder. Most of your Horizon 3 10% efforts will be on research and experimentation, with a few light product launches towards the end if you're lucky.
Hidden Trap Of The Three Horizons Framework You Should Be Aware Of (And How To Avoid It)
The Three Horizons model was first articulated in the 20th century by Baghai, Coley, and White to explain the need for an ambidextrous organization. In the past, organizations assigned a relative delivery time to each of the horizons, such as new features delivered in 3–12 months or business model extensions delivered 24–36 months out.
In today’s world, disruptive innovations happen at lightning speed. Just look at Airbnb, Uber, Craigslist, Tesla, and the explosion of artificial intelligence and machine learning solutions, such as OpenAI and ChatGPT. Every industry is at risk.
What can you do about it?
Don't fall into the trap of using traditional strategic planning cycles. Instead, focus on shorter, more agile cycles that allow you to quickly pivot when needed. Identify opportunities, move fast, and innovate better than your industry's disruptors. You can partner with startups, acquire external innovators, or rapidly copy the new disruptive innovators.
This is similar to a tennis match, where players must quickly read the opponent's moves, anticipate their next move, and then adjust their strategy as quickly as possible to stay ahead of the game. Speed, agility, and adaptability are key to ensuring success.
📚Recommended read: Strategy Report 2022: You're doomed or you adapt
Three Horizons Framework Template
Are you ready to elevate your strategic planning game? Our Three Horizons Strategy Template is the perfect solution to help you do just that. Not only does it lay out the three horizons (current, emerging, and future) in a user-friendly way, but it also comes with some powerful features to keep your planning and strategy execution super adaptable.
Plus, it’s pre-filled with examples that can guide you through the planning process, or you can customize it with your own organization’s information. No matter what industry you are in or the size of your organization.
With this template, you'll be able to:
- Identify and prioritize opportunities in each horizon and make data-driven decisions for your business's growth.
- Monitor progress and make adjustments on the fly with live dashboards.
Say goodbye to scattered planning and hello to cohesive, successful strategy execution.
Conquer The Future With Cascade 🚀
Alright, that’s a wrap! We hope you enjoyed learning about the McKinsey Three Horizons of Growth and how Cascade's template can help you put it into action.
Utilizing the Three Horizons of Growth can lead to tremendous success, so why not give it a try?
An easy place to start is to take a look at your existing strategic plan and overlay what you've learned about the different horizons of that plan. Ask yourself the following questions:
- How close are you to the 70 / 20 / 10 rule?
- Do you have a clear understanding of your current reasons for success?
- Do you have a plan for if they were to be taken away from you?
If you're not happy with your answers to those questions, then McKinsey's Three Horizons of Growth could be just the framework for you.
And let's not forget, Cascade is the best choice for strategic planning and strategy execution because of the powerful features it has to offer, the user-friendly interface, and the capability to monitor progress and adjust the strategy on the fly.
So, go forth and conquer, strategists! With Cascade by your side, you'll be unstoppable.
👉 Get started today with Cascade’s Three Horizons Strategy Template.
Three Horizons Framework FAQs
Who created the Three Horizons Framework?
The Three Horizons Framework was first introduced in 1999 in the book with the title The Alchemy of Growth, written by Mehrdad Baghai, Stephen Coley, and David White. Later on, the three horizons framework got an in-depth introduction from IFF (International Futures Forum) Member Bill Sharpe's book Three Horizons: The Patterning of Hope.
What are Three Horizons Framework alternatives to help me shape our business strategy?
There are countless other strategy frameworks out there, and we have already covered a few key frameworks that we think are extremely flexible and have been battle-tested over the years. Check them out below!
- The Ansoff Matrix Helps Organizations To Grow
- The Benefits of Applying The Stakeholder Theory
- Maslow's Hierarchy As a Business Framework
- Unlocking the Power of the Balanced Scorecard
- Value Disciplines Model & Your Competitive Advantage
- Using the VRIO Framework to Create Sustained Competitive Advantage