Do better business with the Three Horizons model from McKinsey

A good entrepreneur succeeds in keeping his business alive not only in the short but also in the long term and remaining relevant. This means that you are also an innovator in addition to being an entrepreneur: you tap into existing markets and introduce new products from time to time. Not because you happen to like that, but because it is simply must to stay alive. But how do you achieve something like that? How do you achieve operational management that leads you to be innovative and, also in the (distant) future, remains relevant to your target group? A useful and frequently used tool that you can use for this is the Three Horizons model.

Although introduced by top entrepreneur Mehrdad Baghai in his book The Alchemy of Growth, the model became famous around the turn of the millennium when it was embraced by consultancy firm McKinsey. Since then, it has been regarded as one of the most important models for setting up future-proof business operations.

The three horizons in a row

The Three Horizons model takes its name from the three types of innovation that are central to the model. The premise of the model is that the most successful companies - and this includes successful and short-term success - are able to achieve and maintain a perfect balance in running those three types of innovation. Only if all three fronts are invested in accordance with the correct dose will you, as a company, remain healthy and relevant in the short, medium and long term. We examine the three types below and supplement them with examples.

The first horizon includes innovating and improving your current processes, products and services. Everything within this horizon is all about getting better at what you are already doing. You ensure a satisfied customer base and earn money with good products. The Three Horizons model recommends that you invest seventy percent of your resources (in capital and FTEs) in this horizon. Within this horizon, you compete daily with your most important competitors in the market.

We take the telecom sector in the early 1990s as an example. You could refer to the development of fixed telephone lines as the first horizon. Analogue lines slowly became digital, which improved the sound quality and enabled more conversations at the same time (ISDN). These are all innovations and improvements within the first horizon.

The second horizon is often about innovations with existing products.

The second horizon is often explained as what is between the first and third horizon. Within the second horizon, it is basically about innovations that will follow current products and services in a market. These innovations often consist of developments that are already taking place elsewhere (for example elsewhere in the market), but that still have to find their way to your services. According to the Three Horizons model, you invest twenty percent of your resources in this horizon.

Returning to the example of the telecom sector in the early nineties, the introduction of ADSL internet via existing telephone connections could be seen as an innovation from the second horizon. The intranet / internet principle has been around for more than ten years. Slowly but surely the telecom sector developed methods to add internet technology to the telephone network and thus make internet access accessible to everyone. This was made possible by the targeted addition of innovations that had developed elsewhere to their own services.

The third horizon includes innovations that are far in the future and that are completely new, both for your company and for the market. You actually speak of the development of completely new solutions. Many developments in the third horizon never make it to the store shelves. This is about launching ideas, daring to fail and being creative. In the third horizon there are innovations that, perhaps well into the future, could become the lifeblood of your company. You invest the remaining ten percent of the resources in this third horizon according to the Three Horizons model.

For the telecom sector in 1990 you could see the rise of the smartphone as a development in the third horizon. Internet and telephony already existed, but the innovation that could turn the industry upside down was a device that you could use to take those services on the road. Today, the (further) development of the smartphone has naturally become an innovation from the first horizon.

Interaction between horizons

This immediately illustrates a nice interaction between the horizons. They follow each other and swallow each other during that process. There is therefore no hard boundary between the first and second horizon (or between the second and third). Shifting an innovation from the third to the second and ultimately first horizon is an evolution that is taking place very gradually.

How do you apply the Three Horizons model?

Apply the Three Horizons model

That sounds good, that Three Horizons model - but how do you apply it in practice in your company? How do you know if you are working on the right innovations or developments?

First of all, it is important to identify which projects and innovations are currently being worked on in your company. What are your resources spent on? Categorize them and try to estimate which horizon they fall into. For many companies, almost all resources are spent on innovations in the first horizon and virtually nothing on the third horizon. In the long term, this means that you will be overtaken by newcomers to the market or competitors.

After you get a picture of all your projects and the horizons they belong to, you may come to the conclusion that you want to invest more in your second and / or third horizon. It is then important that every new project that you launch finds some basis in trends relevant to your market. Also trends can be divided into three categories: micro trends (short term), maxi trends (medium term) and megatrends (long term). The Three Horizons model naturally fits in well with this with three types of horizons. Every innovation that you start therefore ideally connects to a substantiated, defined trend from the corresponding category.

Once you have implemented the Three Horizons and aligned your policy with this, it is important to pay close attention to the allocation of your budgets and to maintain the 70-20-10 distribution. Realize that initiatives are shifting from the horizon and that certain developments from the first horizon will eventually be phased out. Anyone who wants to work seriously with the Three Horizons model is therefore never really ready. But that is precisely the challenge for the real entrepreneur, right?