McKinsey's 3 Horizons of Growth & Why they Matter

Clare Anderson
28th September 2020

During these challenging times, are all eyes in your business on current market growth and expansion - and is innovation getting left behind? Whilst focusing on improving core business is essential to maximize profits, targeting emerging opportunities and innovative ventures are also important for future growth. So how, you might be asking, do you easily juggle all these balls? McKinsey’s ‘Three Horizons of Growth’ provides a classic framework to align innovation efforts with potential future challenges. It’s a structure for companies to assess potential opportunities for growth without neglecting performance in the present.

What’s the short version of what exactly these ‘Three Horizons’ are? Well, this strategy framework requires you to categorize your goals into three different horizons - and Steve Coley, a McKinsey Director Emeritus and co-author, describes them this way:-

Horizon One (your existing business) represents those core businesses most readily identified with the company name and those that provide the greatest profits and cash flow. Here the focus is on improving performance to maximize the remaining value. 

Horizon Two (a company in transition) encompasses emerging opportunities, including rising entrepreneurial ventures likely to generate substantial profits in the future but that could require considerable investment. 

Horizon Three (a new business emerges) contains ideas for profitable growth down the road - for instance, small ventures such as research projects, pilot programs, or minority stakes in new businesses.

The point is that companies need to manage businesses along all three horizons concurrently. The immediacy of concerns around Horizon One businesses can easily overwhelm other efforts important to the future of a company. Senior executives can use the Three Horizons model as a blueprint for balancing attention to and investments in both current performance and opportunities for growth. Through the use of these horizons, entrepreneurs and innovators can focus on broad challenges and plausible futures. This leads to more sustainable innovation that is correctly timed, rather than primarily focusing on the business result cycle.

Why should you use this Three Horizon Methodology? Consider the following:-

  • To foster thinking about the future within the corporate structure
  • To create a culture of innovative product or policy initiatives
  • To create the internal framework needed to guarantee the success of long-term innovation initiatives
  • To enhance business analysis that focuses on both opportunities and potential future challenges
  • To prepare a developmental plan/strategy allowing for the vision to be fulfilled within the respective timeframe.

Application of this framework needs a thorough understanding of the First Horizon to start with. Ask yourself questions like ‘what are the company’s biggest assets today?’ ‘How do we generate our revenue - and is this process effective?’ Secondly, imagine the loss of your biggest strengths. What would your business need to focus on to survive and thrive? The bridge between Horizon One and Horizon Three is the Horizon Two process. Knowing where you are right now and where you want to go in the future will help you identify the processes that will reduce risks and enable you to be profitable in the future.

This framework is especially useful in uncertain times. It can help future-proof your strategy and ensure you move from inertia to innovation, driving continuous growth today and in the future. If outsourcing is also part of your future strategy, download our eBook, '30 Essential Questions to Ask a Provider Before You Outsource’. It will ensure you're informed and have the right questions to ask when considering the next step.

 

New call-to-action

Access our Outsourcing Questions Guide