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The 3 Horizons of Growing Your Business

In this article, we'll be diving into a strategic framework for sustainable business planning.

"A Strategic Framework is a comprehensive picture of an organization's strategy. It clarifies how individual efforts and team projects can be connected to achieve the best outcome. It includes meaningful target measures and a sequence of activities that help focus on the key efforts that implement the strategy."

Based on research into how companies sustain growth, the 'McKinsey's Three Horizons of Growth' approach illustrates how to manage current performance while maximizing future opportunities for growth categorising your goals into 3 different 'horizons':

Horizon one represents those core activities most readily identified with the company name and those that provide the greatest profits and cash flow. Most of your immediate revenue making activity will sit in horizon one. If you were a retailer, this would include the day-to-day goals associated with selling, marketing and serving your product/customers.Here the focus is on improving performance margins and bettering processes to maximize the remaining value.

Horizon two encompasses emerging opportunities, including rising entrepreneurial ventures likely to generate substantial profits in the future but that could require considerable investment. These investments should return fairly reliably based on them being an extension of your current proven business model. Examples of this could include launching new product lines or expanding your business geographically or into new markets.

Horizon three contains ideas for profitable growth down the road. These ideas may be unproven and potentially unprofitable for a significant period of time. This would encompass things like research projects, pilot programs and minority stakes in new business that require significant upfront investment.

WHAT DOES 'McKinsey's Three Horizons of Growth' HELP ME TO ACHIEVE?

Most organisations want growth and acknowledge that innovation is crucial to achieving that growth. Yet so many organisations treat innovation as once-off events due to the perceived gap between the 'innovation of tomorrow' versus 'the reality of running the business today'.
'McKinsey's Three Horizons of Growth' aims to help you bridge this intellectual gap and helps ensure that you consistently balance your focus between the needs of today (horizon 1), the future state of your business (horizon 3) and the steps that you need to take to get there (horizon 2).

HOW DO I APPLY 'McKinsey's Three Horizons of Growth' TO MY BUSINESS?

Start with a deep understanding of your horizon 1 - Identifying your biggest assets, the main reasons why your business makes revenue or succeeds at what it does and name these drivers of success in your current business.

Now, imagine that you lost them entirely…

Your horizon 3 is what you would do if that were to happen. (Yep, that's not a typo – we're moving straight to horizon 3.) Let's use Microsoft as an example. The Microsoft Xbox was launched in 2001. On the surface, it was a million miles away from their core strengths at the time, and that was exactly the point. The Xbox wasn't a shot in the dark – it was Microsoft's horizon 3. They'd identified something at which they thought they could succeed (you still need core capabilities that will allow you to win), but which relied on none of the things that were making them a success today.

But how did they go from strength in business software to winning in the ultra-competitive gaming hardware industry?

This is where horizon 2 is the bridge that got them there. For Microsoft, that involved initially launching their own line of computer games as well as a range of 'light' hardware such as keyboards and mice prior to the Xbox. This gave them the experiences (and extra revenue) they needed in both gaming and hardware, which ultimately resulted in them creating the Xbox.
Your horizon 2 doesn't have to be a revenue generator per-se, but it should contain enough of your core assets from horizon 1 to give you a fighting chance of it being profitable. The bigger picture though, is that it helps you to bridge the gap between your today and your desired future state (horizon 3).

THE 70 / 20 / 10 RULE:

To put this into practice for your strategic plan, try to ensure that around 70% of your activity is playing towards your horizon 1. After all, you need to survive and thrive today to have any chance of succeeding tomorrow.
Then, allocate around 20% of your effort to the horizon 2 'bridging' opportunities. That might sound like a lot, but horizon 2 will contain failures and false-starts, so it's important that you have enough irons in the fire to get you to horizon 3.
For horizon 3, that leaves 10% of your overall effort. That 10% is important – because without it, you can easily lose sight of your ultimate goals, and get lost in a never-ending cycle of horizon 2's.

So, what next?
If you like the sound of 'McKinsey's Three Horizons of Growth' - then answer the following questions:

  • How close are you to the 70 / 20 / 10 rule?
  • Do you have a clear understanding about your current reasons for success?
  • Do you have a back-up plan if your core business gets taken away from you?

If you're not satisfied with your answers to those questions, then 'McKinsey's Three Horizons of Growth' could be just the framework for you.

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