In today’s fast-paced business environment, strategic planning is more crucial than ever. Organizations must balance immediate needs with future aspirations to thrive amidst constant change. Without a structured approach, initiatives can become fragmented, and growth opportunities may be missed. A well-defined strategy not only provides direction but also ensures that all efforts are aligned towards common objectives.
What is the Three Horizon Framework?
The Three Horizon Framework by McKinsey is a robust growth strategy framework designed to facilitate innovation and sustained growth. This model helps businesses balance short-term, medium-term, and long-term goals effectively. Horizon 1 focuses on maintaining and improving the current core business. Horizon 2 targets emerging opportunities that will take shape in the next two to five years. Horizon 3 looks at long-term goals, involving groundbreaking innovations and new market explorations. By categorizing goals across these horizons, organizations can plan strategically to ensure ongoing growth and innovation.
For more granular details on strategic planning, check out our guide on Strategic Goals
Origins of the Three Horizon Framework
The Three Horizon Framework, often described as a growth strategy framework, was introduced by McKinsey consultants in 1999. This innovation framework by McKinsey was designed to help businesses balance short-term performance with long-term growth. The model was outlined in the book The Alchemy of Growth by Mehrdad Baghai, Stephen Coley, and David White. It has since become a cornerstone for strategic planning and innovation management.
Three Horizon Framework divides growth strategies into three planning horizons:
Horizon 1 (H1): Current Core Business: This horizon focuses on optimizing and defending the current core business activities. It involves initiatives that enhance existing products and improve short-term profits, typically within a 1-3 year timeframe.
Horizon 2 (H2): Emerging Opportunities: The second horizon identifies new opportunities that can complement and build on the core business. This includes launching new product lines or expanding into new markets. These activities usually take 2-5 years to yield results.
Horizon 3 (H3): Long-Term Goals: This horizon is all about exploring transformative opportunities that could shape the future of the business over the next 5-12 years. It often involves pursuing disruptive innovations, entering entirely new markets, or developing new technologies.
The Three Horizon Framework helps businesses maintain a balance between immediate operational needs and future growth ambitions. It ensures that companies do not become too focused on short-term gains at the expense of long-term innovation.
Understanding Each Horizon of the Three Horizon Framework
Horizon 1: Core Business
In the Three Horizon Framework by McKinsey, Horizon 1 focuses on leveraging existing strengths to maintain the core business. This horizon is integral in securing short-term gains and ensuring the continued competitiveness of your current offerings. Here’s how you can effectively manage this phase:
Develop Short-Term Focus: Identify and execute immediate improvements to enhance your products or services. This can include optimizing processes, upgrading technology, or refining your customer service.
Evaluate Strengths and Weaknesses: Regularly assess your company’s current performance. Recognize what is working well and pinpoint areas that require enhancement or even abandonment. This helps in ensuring that only the most effective practices are targeted for development.
Defend Core Business: Keep a vigilant eye on the market dynamics to defend your core business from competitors. This involves understanding market trends, customer needs, and competitive moves to ensure your offerings remain relevant and competitive.
Resource Allocation: Implement the 70/20/10 rule as suggested in the Three Horizons Framework. Allocate 70% of resources to Horizon 1 activities to maximize the potential of your existing business infrastructure. This ensures a steady stream of revenue while also setting a stable foundation for future growth.
Interaction with Creately’s 3 Horizons Model tool can significantly streamline the evaluation and resource allocation processes. Creately’s collaborative workspace allows business strategists to visually map out current business strengths and weaknesses, facilitating better strategic planning and execution.
By strengthening core business operations, companies can use the Three Horizon Frameworkcreate a solid base to explore emerging opportunities and long-term goals, thus ensuring sustained growth and innovation.
Horizon 2: Emerging Opportunities
Horizon 2 in the Three Horizon Framework focuses on identifying and capitalizing on emerging opportunities within the next 2-5 years. This phase is critical for companies aiming to stay ahead of the curve and explore new markets, products, or technologies that complement their existing portfolio.
Focus on Business Opportunities: Horizon 2 requires businesses to look beyond immediate gains and plan for medium-term growth. It involves exploring new avenues that could significantly impact the company’s trajectory. Examples include launching a new product line, entering a different geographic market, or adapting innovative technologies from adjacent industries.
Identify New Markets and Customers: Businesses should conduct comprehensive market research to uncover untapped markets and potential customer segments. Understanding these new opportunities can provide a competitive edge and help diversify revenue streams. The goal is to build upon current strengths while venturing into promising areas.
Complement Existing Portfolio and Goals: Innovations or new projects in Horizon 2 should align with the company’s core competencies and long-term strategic goals. By doing so, businesses can leverage their existing resources and capabilities to maximize the chances of success. For instance, a software company could expand into cloud-based solutions to complement its existing offerings.
Analyze Investment Required: Initiatives in Horizon 2 often demand substantial investment in terms of time, financial resources, and manpower. These ventures involve a higher level of risk compared to Horizon 1 but offer potentially higher rewards. Companies must be willing to allocate around 20% of their resources to support these emerging opportunities while maintaining a balance with their core business.
Horizon 3: Long-term goals
Horizon 3 in the Three Horizon Framework represents investments in opportunities that are 5-12 years away from fruition. This horizon is all about anticipating future shifts and disruptions, making it the segment with the highest risk but potentially the highest reward.
Focus on New Markets and Businesses: Horizon 3 involves venturing into entirely new markets or creating new businesses. This could mean developing cutting-edge technologies, entering untapped markets, or spearheading ambitious research projects. For instance, when Microsoft developed the Xbox, it focused on a market entirely different from its core competencies at the time, capitalizing on gaming and entertainment.
Significant Financial Commitment: Investing in Horizon 3 projects demands substantial financial resources. Often, these high-stakes investments involve initiatives like mergers and acquisitions or establishing new divisions. Though this can be a drain on current resources, the potential future returns can be extraordinarily rewarding.
Analyze Risk-Reward Ratio: The projects and ventures in Horizon 3 come with a high degree of uncertainty. Many ideas might be unproven, and it could take years before they become profitable. However, successful projects can redefine an industry, capture significant market share, and pave the way for dominance in new sectors.
It’s crucial for organizations to allocate around 10% of their resources to this horizon to ensure that they don’t miss out on future opportunities. Resources here could include not just financial investment but also talent and technological capabilities. This risk tolerance is what allows companies to innovate and grow sustainably.
Using Creately for visual planning can help teams map out these long-term initiatives using the Three Horizon Framework. By leveraging Creately’s strategic planning tools, businesses can visualize complex plans and collaborate in real-time, ensuring alignment across all three horizons.
Implementing Three Horizon Framework
The Three Horizon Framework is indispensable in balancing short-term success with long-term growth. Here’s how you can implement this into your strategic planning:
Identify Horizon 1 assets: Start by assessing your current core business. Evaluate what drives your current success and consider scenarios where they might no longer be viable.
Envision Horizon 3 innovations: Imagine future opportunities that differ significantly from your existing business. This involves thinking about market disruptions, potential technological advancements, and emerging customer needs.
Bridge with Horizon 2 plans: Develop a strategy to transition from current assets to future innovations. This could involve launching new product lines, entering new markets, and making strategic partnerships.
Real-World Examples
Many companies have successfully implemented the Three Horizon Framework to fuel their growth:
Microsoft: Known for its Xbox development, Microsoft followed this framework by enhancing its core (software products), experimenting with new opportunities (video games), and eventually launching a completely new business unit (Xbox).
Google: Google’s journey from a search engine to a tech giant includes maintaining search engine dominance, introducing new revenue-generating services like Google Ads and Google Cloud, and exploring future technologies with projects like Waymo and Google Glass.
These examples show how crucial it is to continually adapt and innovate while ensuring the current business remains robust. Implementing the Three Horizon Framework allows strategic foresight, preparing companies for sustainable and transformative long-term growth.
Utilizing tools like Creately can significantly ease this process. Creately’s collaborative visual workspace enables mapping out goals for all horizons, ensuring seamless alignment and efficient execution. With features tailored for business strategy planning, cloud architecture design, and software architecture, it serves as an excellent platform for implementing the Three Horizon Framework effectively.
Applying the 70/20/10 Rule
Resource allocation plays a crucial role in successful implementation of the Three Horizon Framework. The 70/20/10 rule is a guiding principle designed to help businesses allocate their resources to different horizons effectively. This rule suggests that 70% of efforts should be directed towards Horizon 1, 20% towards Horizon 2, and the remaining 10% towards Horizon 3. Let’s delve into why this allocation is beneficial and how it fosters innovation and growth.
Understanding the 70/20/10 Rule
The core idea of the 70/20/10 rule is to ensure a balanced investment across short-term, medium-term, and long-term goals, preserving the company’s current core business while simultaneously exploring future opportunities.
70% for Horizon 1: This allocation focuses on maintaining the current core business. The aim here is to leverage existing products and services, improve margins, and increase short-term profits. By devoting most resources to Horizon 1, businesses can strengthen their stable revenue base, ensuring they remain competitive and effective today.
20% for Horizon 2: Horizon 2 encapsulates medium-term opportunities that can materialize within two to five years. Allocating 20% of resources here allows businesses to experiment with and develop emerging opportunities, such as launching new product lines or expanding into new geographic locations. This investment is vital for bridging the gap between current performance and future potential.
10% for Horizon 3: The smallest allocation is for long-term projects in Horizon 3, which can take five to twelve years to realize. Although it’s a high-risk investment, this horizon is where groundbreaking innovations and disruptive technologies are nurtured. Focusing 10% of resources here ensures that the business continually investigates new markets and revolutionary technologies, providing visionary ideas and long-term growth prospects.
Allocating Resources Effectively
Applying the 70/20/10 rule requires strategic planning and continuous reassessment to effectively implement the Three Horizon Framework. Effective resource allocation involves:
Prioritizing core activities: Assigning 70% of your resources to Horizon 1 preserves the existing business infrastructure, ensuring its robustness.
Encouraging innovation: The 20% for Horizon 2 focuses on adaptable and flexible initiatives that transition smoothly from tested projects to ambitious, market-shifting innovations.
Investing in future potential: The final 10% investment in Horizon 3 drives long-term innovations, perhaps through developing groundbreaking technologies, exploring new markets, or creating entirely new business models.
To put this model into practice, tools like Creately’s collaborative visual workspace can prove invaluable. Creately’s robust features for business strategy planning, cloud architecture design, and software design make it simple to visualize, share, and refine plans, ensuring effective resource distribution and strategic alignment across all horizons.
Balancing Short-Term and Long-Term Goals
One of the most significant challenges is balancing short-term and long-term goals. Maintaining focus on the core business (Horizon 1) while investing in emerging opportunities (Horizon 2) and long-term innovation (Horizon 3) requires a delicate balancing act. Companies must resist the pressure to prioritize immediate returns over more lucrative, long-term investments. Using frameworks like the Three Horizon Framework Framework can help in visualizing and managing these competing priorities without losing sight of the broader growth strategy.
Successfully implementing the Three Horizon Framework demands a comprehensive approach. Education and communication are key: ensure all team members understand the framework and its objectives. Allocate resources according to the 70/20/10 rule —70% to Horizon 1, 20% to Horizon 2, and 10% to Horizon 3. Embrace tools like Creately to map out and share strategic plans collaboratively. By integrating these practices, companies can improve their adaptability and sustain profitable growth across all horizons.
Challenges in Implementing the Three Horizons Model
While the Three Horizons Framework offers a structured approach to innovation and growth, its implementation can present several challenges:
Balancing Resource Allocation: Adhering to the 70/20/10 rule can be difficult, especially when short-term pressures demand immediate attention. Organizations often struggle to maintain the discipline required to invest in longer-term horizons.
Organizational Silos: Different horizons may be managed by separate teams or departments, leading to a lack of coordination and potential conflicts in resource allocation.
Measuring Success Across Horizons: Defining and measuring success can be challenging, particularly for Horizon 3 initiatives where traditional metrics may not apply.
Maintaining Long-Term Focus: In the face of quarterly pressures and short-term market volatility, sustaining focus on long-term goals can be challenging for many organizations.
Overcoming Resistance to Change: Employees and stakeholders may resist changes required for Horizon 2 and 3 initiatives, especially if they threaten the status quo of
Role of Leadership in Managing the Three Horizons
Leadership plays a crucial role in successfully implementing and managing the Three Horizons Framework:
Setting the Vision: Leaders must articulate a clear, compelling vision that spans all three horizons, providing direction and inspiration for the entire organization.
Balancing Priorities: Effective leaders maintain a delicate balance between short-term performance and long-term innovation, ensuring resources are appropriately allocated across all horizons.
Fostering an Innovation Culture: Leadership is responsible for creating an environment that encourages experimentation, calculated risk-taking, and learning from failure.
Making Tough Decisions: Leaders must be prepared to make difficult choices, such as divesting from declining Horizon 1 businesses or investing heavily in uncertain Horizon 3 initiatives.
Communicating Across Horizons: Effective communication is crucial to ensure all stakeholders understand the importance of each horizon and how they interconnect.
Building Adaptive Capabilities: Leaders need to develop organizational capabilities that allow for quick pivots between horizons as market conditions change.
By leveraging tools like Creately, leaders can create visual representations of their Three Horizons strategy, facilitating better communication and alignment across the organization. This approach helps in maintaining a balanced focus on current operations, emerging opportunities, and future innovations, ensuring long-term success and adaptability in an ever-changing business landscape.
How Creately Helps in Planning for Each Horizon
Creately provides a collaborative visual workspace that is particularly useful for implementing the three horizon framework. This framework, crucial for strategic planning, emphasizes balancing short-term, medium-term, and long-term goals. Creately’s features facilitate structured planning and visualization, allowing teams to map out goals effectively and ensure alignment with overall strategic initiatives.
Creately offers a robust collaborative visual workspace that excels in implementing the Two Horizons framework, a critical tool for strategic planning. This framework focuses on balancing current core business (Horizon 1) with future opportunities and innovations (Horizon 2). Creately’s features facilitate structured planning and visualization, enabling teams to effectively map out goals and ensure alignment with overall strategic initiatives across both horizons.
Creately provides several tools and features tailored for strategic planning and the Two Horizons framework:
1. Visual Strategy Mapping:
Create comprehensive strategy maps that clearly delineate Horizon 1 and Horizon 2 initiatives.
Use pre-built templates specific to the Two Horizons framework for quick start and consistency.
Customize diagrams with color coding, icons, and shapes to distinguish between current core business and future opportunities.
2. Collaborative Workspace:
Enable real-time collaboration among team members, fostering brainstorming and idea sharing for both horizons.
Utilize commenting and feedback features to discuss and refine strategies collectively.
Share strategy maps with stakeholders, ensuring alignment across the organization.
3. Timeline and Roadmap Tools:
Visualize the transition from Horizon 1 to Horizon 2 using interactive timelines.
Create detailed roadmaps that outline the steps needed to move from current operations to future innovations.
Set milestones and track progress for both short-term and long-term goals.
4. SWOT and Gap Analysis Features:
Conduct SWOT analysis for current business (Horizon 1) and future opportunities (Horizon 2).
Identify gaps between present capabilities and future requirements using gap analysis tools.
Visualize the strategic moves needed to bridge these gaps and transition successfully to Horizon 2.
5. Scenario Planning Tools:
Develop multiple future scenarios for Horizon 2 using decision trees and scenario mapping features.
Compare and evaluate different strategic options visually to inform decision-making.
By leveraging these features, organizations can use Creately to create a comprehensive, visual strategic plan that balances current operations with future innovations, ensuring long-term success and adaptability in a changing business landscape.
By integrating the Three Horizon Framework into your strategic planning, your organization can ensure sustained innovation and growth. Embracing this model not only aligns various teams and stakeholders on strategic initiatives but also facilitates structured planning across different timeframes.
For effective implementation, consider leveraging collaborative tools like Creately, which offers a comprehensive visual workspace perfect for mapping out your short, medium, and long-term goals. With the right approach and tools, you’ll be well-equipped to navigate the complexities of modern business landscapes and achieve long-term success.
