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While many businesses claim to be interested in innovation, actually charting a roadmap for progress can be challenging. Without tangible targets and practices, innovation strategy turns into a lot of “running in place.” Building a strategic framework for innovation helps ensure that efforts are not wasted. The three horizons methodology helps focus innovation efforts so your entire organization has a clear understanding of the processes and key activities behind your strategy.
The Three Horizon Model is a powerful way to conceptualize transformative innovation. While many businesses claim to prioritize innovation, formulating a roadmap for progress can be difficult, resulting in a stagnant innovation strategy.
Three Horizons Model Definition: What is The Three Horizon Framework
The 3 Horizons model, developed by McKinsey, serves as a business growth strategy framework to envision the future trajectory of a company. This model is instrumental in orchestrating coordinated growth efforts. It is important to note that some individuals mistakenly associate it with an innovation strategy framework. However, this is inaccurate. The primary purpose of the 3 Horizons model is to establish or question a growth strategy, subsequently informing an innovation strategy. The innovation strategy, in reciprocity, plays a pivotal role in influencing or questioning the business growth strategy. It is the harmonious interplay between these two strategies that propels a company forward in the ever-evolving business landscape.
The Three Horizons Model framework helps conceptualize and focus your efforts to push your business forward. Think of it as a roadmap to help guide your strategy, the Three Horizons are Improving an existing business, Transforming an existing business, and Innovating an entirely new business.
The Unite three horizons of growth provides organizations with a strategic framework to navigate different timeframes for growth. In the first horizon, the focus is on optimizing existing core business activities, emphasizing incremental improvements and operational efficiency to generate short-term profits. Moving into the second horizon, attention shifts to emerging opportunities that promise growth in the medium term. This involves exploring new products, services, or markets, balancing calculated risks with the potential for substantial returns.
Finally, the third horizon is dedicated to innovative disruption and long-term growth. Here, organizations venture into entirely new business models, technologies, or markets, acknowledging the higher degree of uncertainty and risk associated with these forward-thinking initiatives. By comprehensively addressing each horizon, businesses can maintain a balanced and sustainable approach to growth, aligning short-term objectives with a visionary outlook for the future.
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As we’ll see, each horizon requires a different commitment and approach that’s unique to your plans and situation.
Understanding The Three Horizons of Growth Model
The Three Horizons of Growth model, pioneered by McKinsey & Company, offers a comprehensive strategy for organizations to navigate the complexities of both immediate priorities and long-term vision.
- Horizon 1, the focus is on optimizing existing core business operations, ensuring short-term success through incremental improvements and cost efficiencies.
- Horizon 2 extends the strategic vision into the medium term, exploring emerging opportunities such as new products, services, or markets. Here, organizations seek growth beyond their current operations, investing in innovations and new ventures.
- Horizon 3 is dedicated to the pursuit of long-term, transformative initiatives. Organizations operating on this horizon engage in disruptive innovations, exploring entirely new business models or technologies.
The Three Horizons model provides a structured framework for organizations to allocate resources effectively, balancing the demands of immediate profitability with the imperative of sustained innovation for future success. Regular evaluation and adaptation of activities in each horizon enable businesses to stay agile in response to evolving market conditions and maintain a dynamic approach to growth.
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The UNITE Approach To Portfolio Allocation Across The 3 Horizons
Horizon 1 Execute and incrementally improve an existing business
Horizon 1, in the context of the Three Horizons of Growth model, refers to the first timeframe or category of activities within an organization’s growth strategy. This horizon is focused on the immediate and current business operations.
Here your organization executes its existing business model (composed of the six domains: the service, revenue stream, cost structure, operating model, value proposition, and performance model). It uses existing assets and capabilities mapping and has a low risk of getting the next product out the door. Management focuses its efforts on this horizon by building repeatable and scalable processes, procedures, incentives and KPIs to execute and continuously improve the existing business model (and if they’re smart, they’ll teach their teams to operate with mission and intent, not just processes and procedures).
Innovation and improvement occur on this horizon on the level of processes, procedures, and costs. Product management in this horizon uses existing product management tools, such as StageGate® or its equivalents.
The risks in this first horizon are typically low: organizations and management, in general, know how to approach such incremental changes since they are part of everyday business.
Horizon 2: Transform and Make a Step-Change improvement to an existing business
On this horizon, an organization looks for new opportunities within the realms of its existing business model. To do so, you will change at least one of the six domains (service, revenue, cost, operating, value, and performance model) in a more significant way. This is the moment to be very cautious: changing one of the domains in this horizon typically has quite severe effects on other horizons and domains! These effects are often overlooked and underestimated.
Developing an existing business is often done on an ad hoc basis based on a particular insight. But it can also be done systematically, through Business Model innovation practices.
Since this horizon uses mostly existing capabilities augmented with new ones, it has a moderate risk of successfully developing new products.
Horizon 3: Radically innovate a new business model
In this third horizon, an organization is essentially really incubating something novel, similar in purpose to a start-up. A start-up, in contrast to an established business that is executing its current business, is in the (sometimes desperate) search for a new business model. These types of innovations are new and could potentially lead to disruptive business models.
This type of initiative is substantially different in nature compared to operating and developing an existing business, so it typically makes sense to physically separate the creation of new business from operating divisions (in a corporate incubator, or their own facility). They need their specific approaches, procedures, policies, incentives, and KPIs different from those that you use when executing an existing business.
How to Use The Three Horizons Framework
Utilizing the Three Horizons Framework involves a strategic approach to balance short-term goals with long-term vision for sustained growth and innovation.
The “What” and “Where” of Transformation: Ways of Thinking
Understanding the “what” and “where” is the quintessential prerequisite to any successful innovation and transformation initiative. The best way to frame and understand the different types of innovation might be through the “Innovation Ambition Matrix.”
Our research suggests that a company clearly differentiates its innovations across three categories called “horizons” and allocates its resources in line with those. Each horizon is defined by whether it is working to improve an existing business model or whether it deals with changing (innovating) or searching and creating entirely new business models.
Horizon 1
Deals with executing and incrementally improving an existing business model. This is well understood; this is what most people work on every day when they recognize and solve short-term problems.
Horizon 2
Transforming and making a step-change improvement to an existing business model is focused on evolving your existing business in new ways. You will bring change to at least one of the six domains (the service, revenue, cost, operating, value proposition, or performance model) in a more significant way. A step change is measurable, focused, and gives particular thought to new customers, new markets, or new products.
Horizon 3
Innovating a new business model is focused on radical innovation; you venture beyond and explore unknown business models through a process of searching.
This distinction may sound trivial, but an understanding of the three horizons has severe implications: a different purpose requires a different context, tools, resources, and approaches.
That’s why understanding which horizon you work on is incredibly useful. The problem: in practice, most organizations treat the 3 horizons in a very undifferentiated way. Often the approaches from horizon 1, “executing and incrementally improving the existing business model,” are applied everywhere! The result is a misappropriation of a considerable investment.
The Innovation Ambition Matrix
The Innovation Ambition Matrix maps the three horizons (existing/transform/innovate) against the Market or customer segment and the Value Proposition:
- Horizon 1: Are you working on your existing Value Proposition (and/or your market/customer segment)?
- Horizon 2: Do you want to transform your Value Proposition (and/or your market/customer segment)?
- Horizon 3: Are you hoping to radically innovate your Value Proposition (and/or your market/customer segment)?
The Three Horizons Model Way of Thinking
Leading an innovation and transformation initiative requires clearly differentiating between an exploitative business with the strategic intent of managing cost and profit through operations management and efficiency increasing measures with incremental innovation and more exploratory types of innovations with the strategic intent of innovation and growth with critical tasks being adaptability, new products and the development of breakthrough innovations (O’Reilly III and Tushman, 2017).
The following table provides an overview of the way of thinking of the Three Horizons Model:
| Key properties/horizon | Horizon 1: execute & incrementally improve an existing business | Horizon 2: transform & make a step-change improvement to an existing business | Horizon 3: (radically) innovate a new business model |
| Where | Inside the box | Inside but going beyond | Outside the box |
| Purpose | Exploit: making the most of what we have | Pursuing new opportunities | Breaking new ground: develop new (and possibly disruptive) business |
| Business Model | Known. Executing the business model. | Partially understood. Testing / validating an iterated business model. | Unknown, business model not identified. In search of a business model. |
| Service-, revenue-, cost-, operating-, value- & performance model | Incremental | Step-change to at least one domain (with impact on all others!) | New / radical |
| Way of working | Execute; incremental, sustaining | Execute / Search; upgrading, substantial | Search; transformational or radical, disruptive |
| Strategic intent | Cost, profit | Growth | Innovation |
| Competencies | Operational | Change Management | Entrepreneurial |
| Critical tasks | Operations, efficiency, incremental innovation | New Product / Service Development, change management, organizational change | Adaptability, new products/services breakthrough innovation |
| Culture | Efficiency, low risks, error prevention | Opening-up, adaptability | Risk-taking, speed, flexibility, experimentation |
What Does the Horizons of Growth Matrix Imply for My Organization?
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The challenge of enterprises of all types today is to work in parallel across all three horizons, running a large number of initiatives across the 2nd horizon (transforming the existing business) and 3rd horizon (innovating–radically–new business) simultaneously while relentlessly improving the way it executes its current business model and serves its existing customers (1st horizon). In other words, as a thought leader and Silicon Valley entrepreneur Steve Blank puts it, an organization has “to chew gum and walk at the same time.”
The key takeaway is? It is a vastly different world. You need to be aware of what you intend to achieve in order to put the right capabilities, assets, processes, people, key resources and approaches in place.
The “How” of Innovation and Transformation: Ways of Working
Horizon 2 or Horizon 3 types of innovations range from relatively simple and basic (i.e. rearranging existing components into a new business model) to very complex and research-intensive (i.e. developing a fully autonomous self-driving car).
The more fundamental type of research projects, such as autonomous cars, new medical treatments, or delivery by drones have their very own and specific approaches. But even such fundamental new projects need to ultimately develop into a new offering, and so here again the Horizon principles apply.
Three Horizons Model Framework “Ways of Working”
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- Context
Before we cover all aspects of the way of working, let’s wrap our heads again around the basic properties of the three horizons:
| Transformation dimension | Horizon 1: execute & incrementally improve an existing business | Horizon 2: transform & make a step-change improvement to an existing business | Horizon 3: (radically) innovate a new business model |
| Purpose | Exploit: making the most of what we have | Pursuing new opportunities | Breaking new ground: develop new (and possibly disruptive) business |
| Business Model | Known. Executing the business model. | Partially understood. Testing/validating an iterated business model. | Unknown, business model not identified. In search of a business model. |
| Strategic intent | Cost, profit | Growth | Innovation |
| Reward | Low (single-digit % improvements) | Moderate (double-digit % improvements) | High (triple-digit % improvements) |
| Risk | Low | moderate | high |
Like any initiative, risk and reward need to be in balance. The three horizons offer very different risk/reward structures.
- Organizational structure
Which organizational structure do we need to apply to run each initiative successfully?
| Horizon | Horizon 1 | Horizon 2 | Horizon 3 |
| Place in the organization | Within the existing business | Temporary slightly separated to test, then change management to the core organization | Separated, outside |
| Org-structure | Hierarchical (we specialize), division of work | Adaptive | Loose, flat (we learn together) |
- Approach and feedback mechanisms
Which fundamental approach is most adequate and how do we learn whether we are on track?
| Horizon | Horizon 1 | Horizon 2 | Horizon 3 |
| Approach | Process management, stability, repeatability, risk management | Testing the central hypotheses. Development of market prototype. | Development of a Minimum Viable Product (MVP). Agile; managing uncertainty; highest risks get tackled first; pivoting |
| Methodology (exemplary) | Six Sigma, Kaizen | Design Thinking, StageGate | Design Thinking, Customer Development, MVP, |
| Controls, rewards | Margins, productivity | Milestones, test metrics | Learning and growth metrics |
| KPIs | Margin, Productivity | Feedback on test results, answer to the hypothesis | Customer understanding |
Leadership & Team
What kind of people does it take? And how to lead them?
| Horizon | Horizon 1 | Horizon 2 | Horizon 3 |
| People | Highly specialized experts | The core team from the existing organization combined with an innovation team | Entrepreneurial leaders. The team has a very broad background of experience. T-shaped people. Ideally with a very broad skill set. |
| Leadership role | Authoritative, top-down | Change Management | Visionary, involved |
| Closing Knowledge gaps | Find internal expertise, promote internally | Mixed | Predominantly learn and hire from outside |
- Marketing
Who is your target group? How do you reach them? What steps will lead to market development?
| Horizon | Horizon 1 | Horizon 2 | Horizon 3 |
| Target group | Existing customers | More often than not new customers (!) | Typically new customers |
| Customer approach | Let’s churn out products and tell them! | Testing of the changed aspects of the six domains with the different customer segments | let’s ask them whether they like it! Let’s invite them to participate in a new product/service experience (take your churners!) |
| Marketing approach | Mass marketing: make people want things. | Adapted | Learn from the customer & particularly the churners!: Make things people want |
| Feedback mechanisms | Process management, market research | Interviews, sampling, customer feedback | First-hand, small-sample customer feedback |
Horizon 2 is often very difficult to manage. We believe we know it well, but in practice, it often develops in unexpected ways. In practice, we often find it is actually most adequate to market a product or service to a new customer group! This is because a slightly tweaked service, revenue, value, operating, cost, or performance model often results in a slightly different audience!
- Managing risks
What is the risk involved? How connected are we to the status quo? What is the view on managing failures? And how do we manage the risk involved?
| Horizon | Horizon 1 | Horizon 2 | Horizon 3 |
| Degree of uncertainty | Low | Moderate | High |
| Managing failures | No failures allowed; risk minimization | Hypotheses on the changes within the six domains are identified and tested | Failures are part of the learning curve! Run tests as early as possible as to gain feedback and learn from confronting your idea with reality |
| Risk Management | Adjustments based on KPI measurement | ———– | Portfolio approach. “Pivot” or kill. |
In Horizon 3, we often hold on too long to an idea instead of putting it to a customer test early and quickly with the intent to learn and adjust the course: doing a “pivot.” If despite several pivots, a start-up does not seem to gain traction, it is critical to kill it and use the resources for other better-placed initiatives.
- Working together with others
If you decide to partner, who is it that you partner with and how do you manage the relationship? Is everyone involved on the same page?
| Horizon | Horizon 1 | Horizon 2 | Horizon 3 |
| Motivation to partner | Gain access to resources, prolong work-bench | Access to strategic capabilities or assets | Experience in running horizon 3, strategic knowledge |
| Partnership approach | Procurement, working with Service Providers | Business-driven, working with external knowledge champions “who have been there” | Partnership is driven: working with a true partner who is equally involved with equal votes |
| Commercial Model | Budgeting-led approach: fixed price / fixed scope | Time & Material | Shared success; alternatively T&M + shared success |
- Technology
What is the most suited approach to technology and development?
| Horizon | Horizon 1 | Horizon 2 | Horizon 3 |
| Technology setup | Operations best practices, large-scale IT, stability | Test-Setups | Outside enterprise IT: lightweight, highly flexible, time-to-market over perfection |
| Development approach | Release Management; sometimes still waterfall | Most often agile | One mixed team working in agile mode organised in short sprints |
What Can Enterprises Learn from Working with the Three Horizons Model?
The trap many organizations fall into
Whenever organizations work on innovation, they typically do what they are good at (and what typically works very well!): they apply their processes from their existing business, designed for managing and improving the existing business model, to the innovation setting. This lack of differentiation between the three horizons is a fundamental mistake of many organizations: most organizations use similar approaches for the exploitative and explorative horizons. As a result, most innovation initiatives inevitably fail, since the patterns required are fundamentally different.
As we have seen, your selected horizon deeply influences your choices. Recognizing and understanding your setting is a prerequisite to success.
In the worst cases, enterprises are applying their large-scale waterfall or other heavy-type of planning approaches to their pilot programs. These orchestrated efforts demonstrate dramatic overconfidence in planning and judgment in the context of an innovation setting, which has by its very nature a high likelihood of failure. This leads to large-scale programs with a focus on building (as opposed to learning), consequently high investments, and a long time-to-market, without a chance to find proof of concept.
This type of approach systematically fails (too expensive, too heavy-loaded, no customer feedback), never reaches its potential should it ever go live (due to a lack of pivoting among other factors), and should, quite frankly, not exist anymore. They are fundamentally linear approaches designed for managing the existing business and do not work in a non-linear, change-driven setting.
The Success Pattern
The success pattern is critical to understand: consider what you have to do. Do you want to execute and incrementally improve your existing business, transform and make a step-change to your existing business, or (radically) innovate entirely new business models? Create the required context in the function of the same – our discussion will provide you with the key perspectives to consider.
Do not compromise: the risk of failure is too great to start off with the wrong structure. Particularly more radical types of innovations will not survive against the fierce competition in case you compromise in any significant way.
Stay also clear for doing “a bit of this and a bit of that” type of settings: either you want to go for it, in which case you design the appropriate prerequisites, or you do not go for it. No half measures.
The entire organization must be incentivized to value and embrace not only continuous incremental innovation as part of the current core business but more transformational and innovation initiatives. With the Three Horizons Framework, you can best understand your organization’s core capabilities, leverage its strengths and ensure that all levels have the same focus.
We will finish with an example of the challenges an organization might face if they’re not completely prepared to utilize Three Horizons Model Thinking. As you’ll see, only partially using the Horizon Model invites disaster.
Case Study: an organization wants to “only” change its target customer
The typical assumption is that “the rest” remains the same.
In practice, however, changing the target customer has severe implications:
- Changing the service model: way to serve, customer care procedures
- Changing the cost model: new billing procedures, different customer sales approach, and after-sales processes
- Changing the revenue model: new pricing structure, labour-intensive price changes applied to the ERP system
- Changing the operating model: different cost model and different revenue models changes the operating model significantly
When you dive at change without a roadmap, you risk entirely missing out on the benefits of looking back on both successful and failed initiatives. To prevent this from happening, adapting a business has to be approached and tested largely in similar ways as a radical business idea, to optimize its structure and really make it work. The Horizon Model is useful in directing your innovation strategy to best achieve your business’s future potential.
Connecting The Dots: The UNITE Business Model Framework
How to Create Innovation includes a number of canvases that focus on value creation and finding the right business model to meet your customer segment and customer needs. The framework is built to inspire drastic changes that help you find a competitive advantage. Our hope is that your company grows through business model innovation, and so we again encourage you to look deeper into our website and the book.
Here is a summary of the key ingredients of the framework:
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Business Models
The centerpiece is the Business Model Canvas, which covers the six main areas of a Business Model (the Operating, Value, Service, Experience, Cost, and Revenue Models).
The eXtended Business Model Canvas adds the immediate business context, including Business Drivers, customers, and the team, as well as the Unfair Advantage.
Detailed Models
A Business Model can be broken out into its numerous aspects. Depending on what challenges you face, you can zoom in on your area of interest using an appropriate tool or canvas:
- Your Business Intention and objectives as well as your Massive Transformative Purpose summarize your drivers and give direction to what you do.
- The Value Proposition Canvas details the central components of your offering (the product or service).
- To dig into your Customer Segments, work with data-driven Personas.
- The JTBD Customer Job Statement and Job Map frame the JTBD of your customers.
- The Business Model Environment puts your Business Model in a market context composed of emerging trends and disruptive forces.
- The Innovation Culture Canvas helps you understand and consciously shape a culture that supports innovation.
- The Innovation team structure enables you to draft a team structure for your innovation initiative.
- Using learning and growth metrics, you can measure progress at the initial stages of development. These metrics help you focus on what really matters instead of creating a detailed business plan that will not really help you. Later on, you can expand the financial aspect of the Revenue and Cost Models with a full business case.
- The Operating Model Canvas helps you think through the Operating Model.
Related:
Book How to Create Innovation