Different phases of organizational development exist. Some reach maturity and then decline with time, whereas others simply vanish during the initial phase.
However, few businesses are able to avoid bankruptcy and sustain long-term growth. They continue to amaze consumers with their innovative products and services. They accomplish this by devoting resources, investment, time, and effort to the development of novel ideas, testing and cultivating these ideas, and discarding obsolete products.
McKinsey & Company created the Three Horizons (3H) of Growth framework in the year 2000. The model is beneficial for Managing Innovation, evaluating the maturity and potential of Innovation initiatives, and allocating resources accordingly.
The 3 Horizons framework directs an organization's attention toward enhancing its current portfolio and developing future sources of revenue and business opportunities.
The 3H strategic framework defines three distinct Innovation horizons that must coexist for a business to accomplish growth. To achieve sustainable long-term growth, organizations must invest in each of these horizons and address the corresponding challenges. The three horizons include:
- Horizon 1 – Defend and extend core businesses
- Horizon 2 – Build emerging businesses
- Horizon 3 – Create viable options
The 3 Horizons framework facilitates appropriate responses to market, technological, and regulatory disruptions. Each horizon requires a distinct management approach.
- Maintaining a consistent focus on the present (Horizon 1), the future state of the business (Horizon 3), and the necessary actions to get there (Horizon 2).
- Knowledge of where to direct short-, medium-, and long-term efforts.
- Maintaining a diversified portfolio of initiatives across the three horizons and effectively managing risks by balancing stability and cash flow with innovation's inherent risks.
- Maintaining a focus on maintaining and expanding a particular brand, conceiving original ideas, and investing in viable projects.
- Avoiding common mistakes, such as concentrating solely on new opportunities or future initiatives and disregarding existing core value propositions.
- Expansion into new geographies and the modification or introduction of wholly new products and services.
- Developing or acquiring new competencies through the recruitment of top talent.
Let's investigate these growth horizons in depth.
Horizon 1. Defend and Extend Core Businesses
The first Horizon of Growth relates to "business-as-usual" activities that are essential for the survival of the principal (core) business. This growth strategy focuses on short-term expansion (1-3 years) by maintaining and expanding margins and profits from existing, cash-generating primary operations.
Leadership must evaluate the organization's strengths and weaknesses, as well as its effective value propositions and those that must be discontinued. Horizon 1 initiatives consist of product revisions, the introduction of product accessory features, new services, Digital Marketing, and improved customer support.
Horizon 2. Build Emerging Businesses
The second horizon requires refocusing efforts on expanding the current portfolio by exploring new revenue-generating opportunities and experimenting with new innovations in response to fluctuating markets. This horizon concentrates on improving existing business models by investigating the prospect of acquiring new skillsets and technologies and analyzing new market segments.
This horizon focuses on the accomplishment of medium-term (2 to 5 year) objectives through the addition of new product lines or geographic expansion. Horizon 2 activities are anticipated to generate a reliable rate of return on capital expenditures.
Horizon 3. Create Viable Options
The third development horizon involves research, the creation of new conceptions for prospective long-term growth (5-12 years), and the formation of altogether new businesses. Investing in new Product Development, M&A, Automation, or Artificial Intelligence are examples of such endeavors.
Interested in learning more about the Horizons of Growth framework? You can download an editable PowerPoint presentation on McKinsey's Three Horizons of Growth here on the Flevy documents marketplace.
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