Things that don’t grow or change are inanimate or dead.
The same is true of organizations. But for mature corporations, change is especially thorny. Real innovation can seem entirely out of reach. It turns out that many strong minds have been put to the problem, and a framework exists by which mature organizations can innovate with the speed, flexibility and results of a young, small, lean startup.
The framework was first articulated by researchers Mehrdad Baghai, Stephen Coley and David White in their 2000 book, The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise. Intended to help companies maintain growth even through economic downturns and uncertainty, the book addresses companies’ potential for growth without neglecting performance in the present.
The key concept that emerged from this research is that of the Three Horizons framework of growth. According to Alchemy coauthor Stephen Coley, the framework emerged from observing correlations between the S-curve and the technology-adoption curve. The latter is also known as the Rogers bell curve, named for Everett Rogers, who suggested it in his 1962 book Diffusion of Innovations.
Stages of the S-Curve
Steve Coley, now a McKinsey&Company director emeritus, points out that declining growth commonly accompanies a company’s maturation as inertia gradually outpaces innovation. How a company avoids becoming inanimate or dead is, in effect, by splitting itself into three parts over time, as if proceeding over three horizons, each one of greater value than the one before it. Schematically, it looks like this:
Horizon 1 comprises the current, “core” business at the heart of the organization, the business activities most readily associated with the company’s brand. These are the activities that, Coley says, provide the bulk of a company’s cash flow. For example, when we think of Atlassian, we’re likely to associate enterprise software; for CastleBranch, it’s background screening and compliance; for Deloitte, it’s audit, consulting, tax, and advisory services.
Horizon 1 is the land of mature businesses with a strong performance focus. Their metrics of success are profit, return on capital, and cash flow. Their goals boil down to improving margins (i.e., increasing profit, reducing expenses), improving processes, and staying the course.
HDFC Life, a long-term life insurance provider headquartered in Mumbai, has undertaken a Three Horizons approach as part of its tech strategy. The first horizon is to become a fully digital insurer by implementing an organization-wide “frictionless” automated platform. It’s a strategy focused upon making their core business more efficient.
Horizon 2 is often viewed as a transitional stage between Horizons 1 and 3. Horizon 2 encompasses the emerging opportunities of rapidly growing, related businesses. It’s a land of continuous innovation with a strong likelihood of producing future profit. So the environment is decidedly entrepreneurial. H2 metrics focus on revenue earning and net present value. To succeed, the C Suite at H2 organizations recognize the need for flexible budgets, and they focus on milestones. They extend what the core business is already doing by spinning off new products or technologies, by entering into new markets over the course of a three-to-five-year time frame.
LexisNexis. Andrea F Hill first became exposed to the Three Horizons framework while working for LexisNexis, where she was Senior Idea Designer on their Customer Discovery and Innovation team. At LexisNexis the H1 team is known as the “Core Innovation” team. The H2 team is the Emerging Innovation team. And the H3 team is the “Rapid Innovation” team.
According to Hill, “In Horizon 2, intrapreneurs are working hard to build the product or business that will eventually replace your existing core offering.” She writes that, “since you can’t measure the work by profitability” in Horizon 2, “your targets should be related to traction, and ultimately identifying a viable business model.”
For HDFC Life, the second horizon is identifying external ecosystems upon which people will become reliant; for example, e-commerce ecosystems providing shopping, grocery and payment options in a single networked community. HDFC LIfe is identifying similar ecosystems having relevance to life insurance products with the aim of becoming a preferred partner within those ecosystems.
As Coley puts it, Horizon 3 “contains ideas for profitable growth down the road,” “where companies put their crazy entrepreneurs.” H3 is uncharted territory, where a company truly incubates a startup, something completely new, emerging and disruptive, likely formed over a five-to-12-year time frame. Here, companies are “trying to create privileged positions in a new emerging technology or business opportunity,” Coley says. “Metrics tend to be more exclusively milestone based, more market oriented.” Leading the way over this horizon are the champions, the visionaries.
Andrea Hill at LexisNexis ads that “Horizon 3 is the furthest from a company’s core competencies (and comfort level)” than any other initiative. At Horizon 3, the team is working precisely along the lines of lean startup, wholly focused on customer discovery, technical feasibility, and financial viability.
Subrat Mohanty, senior executive vice president of HDFC Life, sees their third horizon as building out “optionality” in the long term. “This includes adoption of blockchain, thinking of different ways to sell insurance using AI and machine learning tools and parameterized insurance,” he said in an interview. “These won’t have resonance immediately (or might never), but we are keen on learning about them.”
As you would expect, the Three Horizons framework is essentially one of increased risk. Steve Blank maps the horizons accordingly upon Lean Startup validation and the business-model canvas:
Here’s the key, as Steve Coley points out: In order to maintain consistent growth, “companies must manage businesses along all three horizons concurrently.” This is what Steve Blank means when he says, “An organization that executes its core business while innovating simultaneously is said to be ‘ambidextrous.’”
Each business needs to have it’s own leadership, budget and resources. Horizon 3 startups need to be separate from core business, even in their own, dedicated facility, as in a corporate incubator. Even the performance metrics appropriate to one horizon are inappropriate to another horizon. Each horizon, he says, requires different techniques; each initiative must be managed differently.
Additional points that Coley emphasizes:
- Initiatives at H2 and H3 require more CEO attention and effort than most people may expect, largely because H2 and H3 businesses are cash-and-resource hungry. But the instinctive reaction of most leadership would be to starve what otherwise could become the future of the company.
- The source of value creation (labeled “Sales” on Blank’s Y axis, above) in H2 is positional advantage; i.e., becoming situated to take advantage of new opportunities.
- The source of value creation in H3 is insight and foresight, creating enterprises one believes will someday have potential.
Consider NASA: Prior to Sep. 12, 1962, NASA’s core “business” was aeronautics and rocketry, a purely Horizon 1 endeavor born out of national defense. The moon landings themselves, focused wholly on pure science and exploration—they were Horizon 3, generating previously unimagined technologies.
Prior to the moon landings, the ultimate goal of the one-man Mercury missions was not to put a man into orbit. Nor was it the ultimate goal of the two-man Gemini missions to accomplish space walks or to perfect docking maneuvers. Those were critical, short-terms goals—pure investments really, and expensive ones at that. No, Mercury—as well as Gemini and all the Apollo missions preceding Apollo 11—were Horizon 2 endeavors: expensive, entrepreneurial in nature, and extending, logically and planfully, from NASA’s core business (flight) to achieve something essentially different (planetary science). Today the very phrase “moon shot” represents not only ultimate human endeavor but also the ultimate in Horizon 3 innovation with its many unanticipated technology spinoffs.
Every company desiring long-term growth should be aiming for its own moon shot.
Because each successive horizon bears increased risk, most consultants recommend that a company allocate its innovation resources across the three horizons in fairly consistent ratios, usually within the 70:20:10 ballpark: 70 percent to Horizon 1, 20 percent to Horizon 2, and 10 percent to Horizon 3.
The soon-to-be discovered country
While many colleges are still working toward practical adoption of frameworks as progressive as Three Horizons, medical and other companies are farther along.
ResMed (NYSE:RMD) is a medical device maker that is making its investors very happy lately. The company is focused not only on CPAP machines and accessories but also on “executing its “Three Horizons 2020” growth strategy,” as reported here. “This plan calls for the company to increase demand for its core sleep apnea products, grow its software solutions segment, and expand its reach into new growth markets like sleep health and wellness, chronic disease management, and out-of-hospital software.”
Microsoft. Cascade Strategy cites Microsoft’s introduction of the Xbox as an example of McKinsey’s Three Horizons model in action. Working out of their core strengths in the business and productivity space, Microsoft launched an original line of computer games and some light hardware such as keyboards and mice. This was their Horizon 2 bridge between their core H1 and their innovative H3, resulting in the Xbox.
Consciousness. OK, that’s not a company. But Daniel Christian Wahl, also writing in Medium, demonstrates just how far afield the Three Horizons framework can be adapted. In this case he takes it well beyond the confines of any tech space and into global cultural transformation “that fosters understanding and future consciousness.”
tekMountain. What does an entrepreneurial and innovation center have to do with background screening? Everything. That’s because the commitment to Horizons 2 and 3, stemming from within the core of CastleBranch’s DNA, is precisely a commitment to continued growth and evolution through innovation. You might say it’s a commitment to living long and prospering.
Join us to find out how your organization can traverse the Three Horizons and grow into your innovative future.