Changing Innovation Horizons

McKinsey’s Three Horizons model provides a useful taxonomy for innovation yet the dynamics of how we understand it have changed significantly

Three Horizons presents a way that organisations can concurrently manage optimising for current growth opportunities whilst discovering and building potential future opportunities for growth. But it is important for businesses to recognise the differences in the way in which you manage each one. For example approaches to risk and payback, sources of value creation, measures, and the allocation of senior management time.

The source of value creation in Horizon 1 comes from superior execution, in Horizon 2 from ‘positional advantage’ (where you are trying to gain a better position relative to your competitors), and in Horizon 3 from insight and foresight around changing customer and market contexts and opportunities.

McKinsey found that Horizon 2 and 3 required more time from senior leaders, but also a commitment to avoid starving these innovations of resources due to short-term financial pressures. They also found that in Horizon 3, whilst the general hit rate may be lower, successful innovators clustered their experiments into between two to five themes depending on the size of the organisation.

Measures through the Horizons also differed. Horizon 1 is more about profit, cash flow and return on invested capital, overseen by experienced business managers. Horizon 2 is more entrepreneurial, so is supervised by ‘business builders’ whose metrics for success might be revenue milestones and net present value. Horizon 3 is far more emergent and so requires visionaries and ‘champions’ who are focused on emerging technological and commercial value milestones.

The point that Steve Blank makes concerns the delivery time for each horizon and how this has fundamentally changed. The McKinsey model accounts for the fact that different industries may have different timescales for innovations to return value (short cycle industries for example may seen value created quicker), but in general the impact on profit and cash flow, and current market value is far longer with more emergent innovations than it is for extending core capabilities. Horizon 1 may therefore deliver impact in the short-term since it is focused on models and capabilities that are already contributing the majority of value and profit today. Horizon 2 may take 3–5 years to see a return since it involves extending existing businesses and capabilities. And Horizon 3 may take as long as 5–12 years as it involves more disruptive creation of value.

In the modern environment however, Blank notes that the time it can take for disruptive ideas to be researched, engineered and scaled to market has been radically transformed by digital technologies and networks. Horizon 2 and 3 may now happen at speed. The potential for new, emergent, even disruptive, ideas to be rapidly prototyped and then to generate scale and take on a life of their own has added an entirely new dynamic:

The Three Horizons, whilst still a valid and important way of understanding the different types of innovation that businesses need to continuously focused on, is no longer bound by time. Disruptive businesses, unencumbered by legacy technologies and systems, and entrenched, slower moving processes, can move quicker towards generating return from newer, disruptive technologies and models.

Blank defines four key ways in which incumbents can counter this kind of rapid disruption:

Three Horizons remains an extremely useful taxonomy, but the trap is that we under-appreciate the impact of re-purposing existing Horizon 1 technologies into new models at speed, and the rapidity with which new, emergent propositions can be iterated and scaled.

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