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THREE HORIZONS OF GROWTH

“Plan for the future because that’s where you are going to spend the rest of your life.”
– Mark Twain, American Storyteller

In business, we often find ourselves caught up in the now. There are always fires to fight, this month’s
or quarter’s goals to hit, and today’s to do list. It can be awfully difficult to take a step back and think
about 5-10 years from now, or even 3-5 years from now. Yet, if you want to build an enduring business
that will pass the test of time and grow beyond your wildest dreams, you have to have an eye on the
future, and McKinsey’s Three Horizon of Growth framework can help.

WHAT ARE THE THREE HORIZONS OF GROWTH?

The three horizons of growth simply outline the idea that a business needs to manage three horizons
of growth and innovation.
Horizon 1 is about defending & expanding the current core business. Horizon 2 is about fostering
emerging new business(es). And, horizon 3 is about seeding future business(es). It seems simple
enough, but there are some interesting implications for the framework.
Let’s go over a little background on the Three Horizons of Growth. In the 1990s, Mehrdad Baghai,
Steve Coley, David White of McKinsey were researching company growth and had the insight that a
company, especially larger companies, are typically managing many current and
future adoption curves. The vast majority of resources are usually focused on horizon 1, trying to
manage the existing and predominant adoption curve(s) of the business. Due to the typical short-term
focus and incentives of traditional managers, horizon 2 and 3 ideas and initiatives usually get choked
off from the resources they need to succeed. Which, of course, can set up a nasty predicament down
the road. The key is to manage all three horizons of growth concurrently, though with different
mindsets, metrics, and incentives.
Horizon 1 – The Now – 1-3 Years
The vast majority of management teams are focused on horizon 1, the “current business.” The goal in
Horizon 1 is to defend and expand the current business. You’re typically in the battle with the
competitors in your existing market(s) for every customer, and you have to satisfy current customers
while making tactical improvements to the customer value proposition and go-to-market to extend the
business to capture new customers. The typical timeframe of horizon 1 is 1-3 years but is really
dependent on the market you are in and where you are on the current adoption curve. Some markets
have very compressed timeframes for their adoption curves, think digital apps and consumer
electronics. While other markets have longer timeframes, such as pharmaceuticals and industrial
equipment. The real key to horizon 1 is to shave off some of the cash flow and resources for horizon 2
and horizon 3 ideas and initiatives.

Horizon 2 – Emerging – 2-5 Years

Horizon 2 is typically 2-5 years down the road, and the goal is to foster new emerging businesses.
Horizon 2 is characterized by the disruptions and innovations that will start eating into your core
business, capturing target customers, and reshape existing markets. Horizon 2 can also be about new
target customers, products and services and new markets. The problem is Horizon 2 necessitates a
disproportionate amount of resources and focus than most companies give it. You’re trying to build
new businesses, innovative products, and services. It can be challenging to cross the chasm from early
adopters to the early majority of customers. To cross the chasm, you often need to overinvest in
Horizon 2.
Furthermore, Horizon 2 needs the focus of your more entrepreneurial and innovative managers, since
Horizon 2 is about thinking differently, innovating, evolving quickly to figure out what works, and
taking bold leaps to prime the market. And, it needs a different set of metrics than horizon 1, such as
customer acquisition, awareness, and adoption. Lastly, Horizon 2 initiatives need strong champions
from the executive leadership, or they may wither away since they can be more of a distraction and
nuisance to good managers focused on achieving horizon 1 goals.
Often, traditional companies neglect horizon 2 the most, given that they are confident of their existing
leadership, and their potential focus on the cool next-generation innovations of horizon 3. In the
meantime, startups, innovative small companies, and competitors are focused on the innovative
products and services that will grab share in horizon 2. Horizon 2 is where your next cash cows will
emerge from, and the horizon 2 initiatives are delicate, given you are trying to change the behavior
and win over new customers. If you find your company missing the boat on horizon 2, you should
strongly consider carving off some leadership mindshare and dedicating some resources and talent to
invest in horizon 2 initiatives.

Horizon 3 – Transformation – 5-10 Years

What can destroy your market in 5-10 years? Nanotechnology, artificial intelligence, robots, drones,
virtual reality, etc.?
Whatever it may be, you should be investing some time and energy into understanding the dynamics
that will fundamentally reshape markets in 5-10 years. Think of it as your R&D to ensure you’ll be
relevant and potentially dominant in 5-10 years. And, maybe it isn’t what will destroy your market, but
innovations synergistic with your business that will enable you to destroy other markets or create
entirely new ones. Whatever the situation, horizon 3 needs some focus today. And, trust me, your
current management team probably doesn’t have the bandwidth or patience, so similar to horizon 2,
it needs dedicated focus and resources, though not at the level of horizon 2 initiatives.
Today, horizon 3 can be fuzzy, since many, many dynamics will play out to reshape the world over the
next 5-10 years. Think about horizon 3 as seeding future business(es). What are the new, new
technologies and innovations that can dramatically change customer and market dynamics? Are there
ways to start understanding their potential impact, potentially own them through patents,
partnerships, expertise, and research? Can you accelerate them to your advantage? These are pretty
nebulous questions, but never the less important. I’ve done a lot of research on the history of
companies, and it is impressive to look at how creative destruction rapidly changes entire industries.
As researched by the Macarthur Foundation, less than half of the companies that were on the Fortune
500 list in 1995 were still on the list 15 years later.

1. THREE HORIZONS OF GROWTH DIAGNOSTIC EXERCISE WORKSHEET

Use the worksheet to think through and document the mega-trends and significant dynamics that will
affect each business model dimension over horizon 1 (1-2 years), 2 (3-5 years) and 3 (5-10 years).

2. THREE HORIZONS OF GROWTH INITIATIVES EXERCISE WORKSHEET

Utilize the growth initiatives template to organize potential initiatives in Horizon 1, focusing on
defending and expanding the core. Then, move onto potential initiatives for Horizon 2, focused on
fostering new emerging businesses. Next, brainstorming initiatives for Horizon 3, focused on seeding
new businesses.