The Three-Horizons Model

One Line Summary of The Three-Horizons Model:

The Three-Horizons Model offers a framework for organizations to manage present operations while planning for future growth through sustained innovation.

Why Is It Important?:

In a rapidly evolving business landscape, the Three-Horizons Model serves as a vital tool for companies to allocate resources effectively across current and future projects. It ensures that while the core business is optimized for today’s profits, there is also a clear strategic path for future growth. Without such a balanced approach, companies risk stagnation or being outpaced by more future-oriented competitors.

Detailed Explanation:

The Concept and Its Evolution: Originally developed by McKinsey & Company, the Three-Horizons Model has become a central strategy tool for businesses looking to innovate while maintaining their market position. The model breaks down business opportunities into three categories, or ‘horizons,’ each with a different focus in terms of time frame and innovation level.

Horizon 1 (H1): The Present: The first horizon concerns the current business operations—the primary source of revenue. These are mature, established offerings that require optimization and efficiency. In H1, the focus is on incremental innovation, such as process improvements or extensions of existing product lines. The goal here is to defend and extend the core business while maximizing cash flow.

Horizon 2 (H2): The Evolving: This horizon is about emerging opportunities that are beginning to generate revenue but are not yet fully established. H2 initiatives are often in a rapid growth phase and require significant investment to scale. They are expected to become the future core businesses, replacing or supplementing H1 activities. These opportunities are characterized by a higher degree of uncertainty than H1 but are crucial for sustaining long-term growth.

Horizon 3 (H3): The Future: The third horizon represents long-term prospects. These are ideas and innovations that could transform the industry or create entirely new markets. They often involve high risk and require substantial investment in research and development. H3 initiatives are the seeds for future H2 opportunities and require a different management approach, focused on exploration and learning.

Strategic Balance Across Horizons: The model’s strength lies in its advocacy for a balanced portfolio across all three horizons. Organizations often struggle with allocating resources between short-term performance pressures and long-term growth opportunities. The Three-Horizons Model provides a structure to address this, ensuring that each horizon receives appropriate attention and investment.

How to Use The Three-Horizons Model in Marketing?:

Marketing in Horizon 1: In H1, marketing efforts focus on driving efficiency and extracting maximum value from the current customer base. Tactics include customer loyalty programs, refinement of customer service processes, and marketing campaigns aimed at reinforcing the brand’s position in the market.

Marketing in Horizon 2: For H2, marketers need to be more agile, often working to establish a market presence in new areas. This requires a keen understanding of emerging customer needs and the competitive landscape. Marketing activities could involve launching products in new markets or demographic segments, investing in brand-building activities to establish a presence in a new market, or piloting innovative marketing channels.

Marketing in Horizon 3: The marketing approach in H3 is experimental. It’s about identifying nascent trends and customer behaviors that could shape future markets. Marketing strategies could include forming partnerships with startups to co-create products, investing in cutting-edge technologies like augmented reality for brand experiences, or conducting market research to identify potential future customer needs.

Integrating the Three-Horizons Model with Marketing Strategies:

Understanding Customer Evolution: Marketers can use the Three-Horizons framework to understand how customer needs and behaviors might evolve, preparing to meet these changes proactively.

Innovation in Product and Service Offerings: By understanding where a product or service falls within the three horizons, marketers can better craft messages and campaigns that resonate with the intended audience and align with the company’s strategic objectives.

Portfolio Management: Similar to financial portfolio management, marketing resources should be allocated across initiatives in all three horizons to ensure a balanced approach that drives short-term performance while investing in long-term growth.

Brand Evolution: The model also applies to brand management. Brands must be managed to maintain relevance today (H1), grow and adapt to changing markets (H2), and anticipate the future landscape of customer needs (H3).

Further Reading Materials:

Foundational Texts:

  • “The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise” by Mehrdad Baghai, Stephen Coley, and David White: This book is the seminal work on the Three-Horizons Model, offering a comprehensive exploration of its principles and applications.

Strategic Development Resources:

  • McKinsey & Company Insights: Articles and white papers from McKinsey offer contemporary perspectives on applying the model within current business contexts.
  • Harvard Business Review: Case studies and analyses on companies that have successfully applied the Three-Horizons Model can be found in the HBR archives.

Marketing Specific Literature:

  • “Marketing Management” by Philip Kotler and Kevin Lane Keller: While not specifically about the Three-Horizons Model, this text provides foundational marketing strategies that can be adapted to the model’s framework.
  • “Crossing the Chasm” by Geoffrey A. Moore: This book discusses marketing and selling disruptive products to mainstream customers, a concept that aligns with H2 and H3 strategies.