Understanding the 3 Horizons model
The 3 Horizons model can help you to achieve the right balance between pragmatic and visionary thinking in your strategy.
What is the 3 Horizons model?
The 3 Horizons model is one of my favourite tools for helping people to think more strategically.
The 3 Horizons model suggests that a sustainable business plan should include a combination of 3 types of initiatives or projects:
- Horizon 1 - Improve includes all the initiatives that you need to do to improve, maintain and fix your existing business. This includes:
- continuous improvement programmes,
- quality improvement programmes,
- regulatory compliance,
- systems maintenance and upgrades and
- general maintenance, fixing and improvements to existing processes.
- developing new products and services and
- entering new markets.
- taking your business into new places in the value chain,
- developing new business models and
- disruptive innovation.
It should include at least one initiative that could transform your industry. The so-called category killer. The objective here is to disrupt before you are disrupted.
The 3 Horizons model was originally put forward by McKinsey Consulting in 2000. Since then, the exact definitions of the 3 Horizons has varied from time to time as the model is applied to different contexts. The exact definitions don't really matter that much. It is the concept that matters. That is why I prefer the quite simple definitions outlined above.
3 Horizons Example - Uber
You can easily see all 3 Horizons at play in a company like Uber.
- In Horizon 1 it is grappling with challenges to its employment practices and from traditional taxi firms and licensing authorities. It is tweaking its pricing model in response to conditions on the ground.
- In Horizon 2 it continues to expand into new cities and to develop new services.
- In Horizon 3 it is investing heavily in the development of autonomous vehicles. These will undoubtedly change the very nature of car ownership and personal transportation.
To succeed as a business, it must operate successfully across all 3 horizons at the same time.
Problems the 3 Horizons model helps to solve
The 3 Horizons model is helpful in countering two problems I frequently encounter.
- Businesses that use strategy development as a precursor to the annual budget cycle tend to omit or significantly under-weight Horizon 3 initiatives. Restricted budgets keep people focused on the immediate issues of the day. They demand only incremental growth from existing business. They see real change as an unaffordable luxury.
- Businesses that approach strategy from a 'blue sky visioning' perspective tend to underplay Horizon 1 and 2 initiatives. As a result, the strategy is distant from most stakeholders' experiences of the organisation. It is removed from its day-to-day operations. In some cases, businesses go as far as developing separate skunk-works to progress the strategy. Whilst this has some advantages, it can make progress difficult to integrate back into the business.
An organisation which is too focused on visionary transformation may not survive long enough to see it bear fruit. An organisation which is too focused on the here and now may be overtaken by events and rendered redundant by the competition.
Advantages of using the 3 Horizons model
Applying the 3 Horizons model to your strategy has three advantages:
- It quickly highlights whether your strategy is biased towards either the near term priorities or longer-term transformation.
- It can help you rebalance your strategy by filling in any evident gaps.
- It helps stakeholders to understand the need to balance all 3 Horizons and pay attention to all of them on an ongoing basis.
Mistakes people make using the 3 Horizons model
I see people making two mistakes when using the 3 Horizons model:
- They mistake the 3 Horizons for a sequence. First do the Horizon 1, then do Horizon 2, and only after that do Horizon 3. It is important to focus on all three at the same time. It is important to start exploring and laying the groundwork for Horizon 3 immediately. That is why, for example, Uber is investing so heavily in autonomous vehicles event though it still has lots of work to do in Horizon 1 and 2.
- They mistake the 3 Horizons as an expression of how long it will take for initiatives to deliver value. For example, Horizon 1 will deliver value within one year. Think low-hanging fruit. Horizon 2 in 2 to 5 years, and Horizon 3 in 5 to 10 years. Usually, there is some truth to the idea that Horizon 3 initiatives will take longer to bear fruit. But some industries operate on shorter change cycles than others. And sometimes, disruptive change can be just around the corner.
You can now do your own 3 Horizons analysis using the innovative StratNavApp.com online tool for collaborative business strategy development and execution. Simple click on StratNavApp.com, register or log in, and add the 3 Horizons tool in the "Planning" quadrant.
The chart right, illustrating the 3 Horizons, was produced using StratNavApp.com.