In the 20th century, McKinsey created their infamous Three Horizons model (The Alchemy of Growth, Mehirdad Baghai, Stephen Coley and David White – published in 1999) to explain how businesses typically invest in current products, incremental reforms, and breakthrough innovations. The framework relied on time as a guiding factor. It assumed that truly breakthrough innovations take years to develop. However, breakneck technological advances over the past decade have made that assumption inaccurate. Take, for example, Tesla, Amazon, and Apple; they have all proven that you can seize existing opportunities and build for resiliency and competitive advantage with technology.
When the three innovation horizons paper was published almost 20 years ago, it brought much-needed focus on why organizations need to understand their innovation horizons. More importantly, why they must spend time thinking about staying relevant. Since then, with technological breakthroughs, alternative models of thinking, tools, and processes have emerged, but the core message remains unchanged today. What must we do to stay relevant? How can we be resilient in the face of constant change?
Just look at the COVID-19 impact. This once in a lifetime event has forced massive economic, social & geopolitical modifications. For example, the world has seen a decade’s worth of e-commerce adoption take place in just eight weeks, following the first lockdown. It’s a trend that is likely to continue. Welcome to the new normal! As is the case most often, most business frameworks are not meant to be descriptive. Instead, they provide a common vocabulary and a reference guide to help people communicate better, especially when their organization’s future is at stake.
So what are the three ‘famous’ innovation horizons?
In summary, the three innovation horizons focus on ’the source of value creation with time’.
H1 – Superior Execution – Extend & defend core businesses
- Have experienced business managers
- The focus tends to be on maximizing profit, return on capital investment, and cash flow.
- Time Horizon: 1 to 12 months
H2: Positional Advantage – Build emerging businesses
- Have entrepreneurs, people with a ‘business builder’ mindset, and have flexible budgets at their disposal.
- The focus tends to be on revenue and net present value.
- Time Horizon: 24 to 36 months.
H3: Insight & Foresight – Create viable options
- Have people that are passionate about their ideas and can move quickly to monetize them, focusing clearly on commercial progress
- The focus tends to be on achieving milestones & market orientation and take advantage of and respond to disruptive opportunities (e.g. COVID-19)
- Time Horizon: 36 to 72 months
Initiatives in H2 and H3 require active and direct leadership support, as they typically require a constant injection of resources, cash, money, time etc. Organizations that are relatively comfortable living in H1 starve initiatives in other horizons and appear less flexible and resistant to change. Data collected over the years show that successful businesses concurrently manage all three horizons to continue to deliver sustainable value and ultimately remain relevant. That being said, as much as this model has helped organizations in the past twenty or so years, dare I say, it is no longer relevant. Businesses today cannot afford to be working on new ideas that cannot commercialize quickly.
The time to respond to new opportunities and disruptive events is now. The astronomical breakthroughs in technology and the adoption of the best of breed business models and tools make this possible. In other words, organizations can still think in terms of H1, H2 and H3, perhaps to organize their thoughts. However, they better be prepared to deliver H2 & H3 initiatives along with their H1 initiatives – or risk being put out of business.
We’ve now entered the accelerated innovation stage, and companies (private or public) need to note what needs to happen. For starters, there must be a collective and deliberate mind-shift to focus on delivery speed. If we adopt this principle, perhaps only then can organizations have meaningful discussions about what innovation could mean to them. To get to a place where an organization can deliver H3 ideas or even repurpose existing H1 and H2 ideas, the organization needs to be open to leveraging existing technological breakthroughs, tools and methods. A lot needs to happen along the way – perhaps most importantly, getting away as far as possible from the gravitational pull of the legacy environment, systems and thinking constraints.