The McKinsey 3 Horizon Framework for Business Growth Explained

“Long range planning does not deal with future decisions, but with the future of present decisions.” — Peter Drucker

I learned about the 3 Horizon framework some years ago as a way of planning business growth and aligning innovation for the future business.

It’s a simple model, and that it’s strength.  And it creates a common language for talking about business investments up and down the chain.

The problem is that I see a lot of leaders misunderstand it or misuse it.

The most common way I see people misuse it is to simply stick a bunch of big interesting projects in Horizon 3 and call it the future.

I think more people would use the McKinsey 3 Horizon model better if they read the McKinsey article, Enduring Ideas: The three horizons of growth,  read the article by Steve Blank, The Fatal Flaw of the Three Horizons Model, and read THE book by the original McKinsey team, The Alchemy of Growth that explains the model, its origins, its intent, and its use in detail.

That said, let’s take a quick tour of the 3 Horizon model and why it’s a big deal for business leaders…

What is McKinsey’s 3 Horizon Model for Business Growth?

The 3 Horizons of Growth was developed by Steve Coley at McKinsey as a way to think about business growth

Here is a visual of the McKinsey 3 Horizon framework:

• Horizon 1 = Extend and defend core businesses
• Horizon 2 = Build emerging businesses
• Horizon 3 = Create viable options

It’s a way to align innovation efforts with future challenges and opportunities to grow the business–“changing the plane, while flying the plane”.

You use the 3 Horizon framework to evaluate your future plans for your product and service strategy.  When you implement this framework, you create a common language that you can use from top to bottom in the organization to describe how you are investing and preparing for growth.

The 3 Horizon Framework Combines S-Curves with Weed, Seed, and Feed

According to Steve Coley, the 3 Horizon framework emerged from two different strands of thought:

1. S-Curves of Business Life.   First, S-Curves of business life.  In the very beginning, a lot of investment and very little progress and then there’s a period of accelerating growth. At the top of the S, revenue and profit growth slows down or declines.
2. Weed, Seed, and Feed.  Second, more often than not, companies that had been growing for a long time of time, were reinvigorating their portfolio through some sort of a weed, seed, and feed process and we put those two ideas together.

If you add up S-curves for different time frames, you get what looks to be like the 3 Horizon framework.

Metrics, People, and Capabilities Vary by Horizon

Each horizon within the 3 Horizon framework has different metrics, people, and capabilities.

Here’s a summary per Steve Coley:

	Horizon 1	Horizon 2	Horizon 3
Metrics	Return on investment capital (ROIC)	Net Present Value (NPV)	Option value
People	Business maintainers	Business builders	Champions and visionaries
Capabilities	Fully assembled capability platform	Capabilities being acquired or developed	Capability requirements may be unclear

According to Steve Coley:

“It does take a different kind of leadership and organizational approach to make it work.
The same performance metrics and organizational style for Horizon 1 businesses are not the same that are appropriate for Horizon 2 and Horizon 3 — it’s important to differentiate where you manage the initiatives in each one of these horizons.”

99% of the Norm Focus on Horizon 1 Core Businesses

Another aspect of the 3 Horizon framework is to manage all 3 horizons concurrently.   The challenge is that the norm is for 99% of the organization to focus on Horizon 1 core businesses:

According to Steve Coley:

“Another aspect is to manage all 3 of these horizons concurrently as opposed to the norm where 99% of the focus of the organization is on horizon 1 core businesses.”

CEOs and Senior Leaders Need to Focus More on Horizon 2 and 3

What McKinsey also learned is that Horizons 2 and 3 need more CEO and senior level support.

Otherwise, Horizons 2 and 3 end up starved for resources (and ultimately, starving the future of the company):

According to Steve Coley:

“Counterintuitively, we found that Horizons 2 and 3 need more senior management and CEO attention than what you would commonly expect.

Initiatives in Horizons 2 and 3 are the ones that are often times spending money and sucking up cash flow that the organization will inevitably starve these initiatives and not make resources available to them in order to make their annual budget.

Only with very senior leadership can you overcome those instinctive organizational attitudes towards starving what is ultimately going to be the future of the company.”

Neglecting Horizon 2 (Spending All Their Time in Horizons 1 and 3)

Another pattern of mistakes that business leaders make is to focus on Horizon 1 and Horizon 3, but neglect Horizon 2.

The issue is that Horizon 2 is where the emerging businesses are.

Business leaders will focus intensely on Horizon 1 to try to get the most out of their core businesses, and only loosely coordinate in Horizon 3:

According to Stev Coley:

“An example of the value of this framework is a large tech company found they were spending all their time on Horizon 1 and Horizon 3 and neglecting Horizon 2.

They were intensely focused on managing their core businesses and trying to get the most out of them.

And they had an enormous number of initiatives and experiments that were only loosely coordinated if at all in Horizon 3.”

Cluster Horizon 3 Initiatives and Move Some to Horizon 2 for Commerical Viability

What business leaders need to do to ensure their future is to cluster Horizon 3 initiatives and move some of them to Horizon 2 as quickly as possible to turn them into commercial businesses:

 

According to Steve Coley:

“They had to begin to take control of all the initiatives in Horizon 3 and start clustering them and move some of them as quickly as possible into Horizon 2, so they actually had some commercial viability.

If the organization is not managing these horizons in a concurrent way, you’re not preparing for your future.

What companies do wrong is they will have a lot of activity in horizon 1 and a 1ot of activity in Horizon 3.   What they need to do is cluster activity in Horizon 3 and start turning the opportunities into viable commercial businesses.”

Steve Blank on the Fatal Flaw of the 3 Horizons Model

While Steve Blank is a fan of the3 Horizon model, he says there’s a fatal flaw in that the model was based on time, but now time no longer applies:

“Today, disruption – Horizon 3 ideas – can be delivered as fast as Horizon 1 ideas.”

In his article, The Fatal Flaw of the 3 Horizon Model , Blank  writes:

“In the past we assigned relative delivery time to each of the Horizons.

For example, some organizations defined Horizon 1 as new features that could be delivered in 3-12 months; Horizon 2 as business/mission model extensions 24-36 months out; and Horizon 3 as creating new disruptive products/business/mission models 36-72 months out.

This time-based definition made sense in the 20th century when new disruptive ideas took years to research, engineer and deliver.”

Blank describes the 3 Horizons this way:

1. Horizon 1 ideas provide continuous innovation to a company’s existing business model and core capabilities.
2. Horizon 2 ideas extend a company’s existing business/model and core capabilities to new customers, markets or targets.
3. Horizon 3 is the creation of new capabilities to take advantage of or respond to disruptive opportunities or to counter disruption.

Steve Blank writes:

“However, in the 21stcentury the Three Horizons model has a fatal flaw that could put companies out of business and government agencies behind their adversaries.

While traditional analysis suggests that Horizon 3 disruptive innovations take years to develop, in today’s world this is no longer the case. The three horizons are not bound by time. Horizon 3 ideas – disruption – can be delivered as fast as ideas for Horizon 1 – existing products.

In order to not be left behind, companies / government agencies need to focus on speed of delivery and deployment across all three horizons.”

Interestingly, for me, I hadn’t actually associated the horizons with time.   Maybe because of my introduction to the model, I just imagined Horizon 3 as “outside the core”, while Horizon 1 was “core”.     That said, I do see a lot of confusion as business leaders interpret the model in different ways, and I can easily see how any business leader would naturally associate Horizons to a time frame.

Read The Alchemy of Growth (The Book on the McKinsey 3 Horizon Model)

A friend pointed me to The Alchemy of Growth early on when I was first learning the 3 Horizon model.

It helped me learned from the original team and understand the original intent of the model so this gave me a much better foundation for using the model.

The Alchemy of Growth by Mehrdad Baghai, Steve Coley, and David White (Amazon)

Call to Action

1. Read the article Enduring Ideas: The three horizons of growth.
2. Read Steve Blank’s blog post, The Fatal Flaw of the Three Horizons Model.
3. Read the book The Alchemy of Growth by Mehrdad Baghai, Steve Coley, and David White

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