In 2000, Consultants from McKinsey & Company, Inc proposed a portfolio management approach known as the Three Horizons. Each of these horizons describes projects at a point of evolution. The premise of the book “The Alchemy of Growth” in which the approach was first described is that an organization must have initiatives in each of the three horizons to ensure long-term success.
We used the Three Horizons approach in the Innovation team at LexisNexis, and we have recently started using this vernacular at ReadyTalk. We are coming at it in a descriptive fashion, attempting to classify the initiatives we already have in flight, and there is enough difference in opinion that often we abandon the effort. Is the classification really important, or is it just semantics to help us feel we are being sufficiently diversified in our initiatives?
Ultimately, it is important to understand the difference in these horizons – and it is much more clear if we look at the project lifecycle. There are two reasons this classification is important from the standpoint of the success for each specific initiative, in addition to the importance of portfolio management and diversification.
1. PROJECT SUCCESS METRICS AND RISKS: There are different questions to be answered and risks to be mitigated in each horizon. Those must be clear to stakeholders to be able to assess if a project is still on track and should continue to be pursued.
2. PEOPLE: There are different skills required for those operating in each horizon
The authors of The Alchemy of Growth describe a staircase, but I see the easiest way to look at the three horizons is as a funnel. All ideas start out in horizon 3, and then activities must be undertaken to be sure the idea has merit and be a viable business. Once the initiative has achieved product/market fit (see: all the lean startup books that are out there now), has identified its engine of growth, and has validated it has the potential to be profitable, it can exit from horizon 3. Many of the ideas in horizon 3 may never become profitable, so the focus is on the velocity of learning and having a pool of ideas to explore. This is the wide end of the funnel.
If you have an idea and you’re not sure:
1. does it solve a customer need? (market risk)
2. is it technically feasible? (technical risk)
3. do you have a financially feasible engine of growth? (business model fit/risk)
It’s horizon 3. Work on answering these questions as quickly as possible. If you get a No at any stage, it’s time to pivot or kill the idea.
The people in this stage must be creative, curious and flexible. I’ve heard that the best person you should get into this role is “the black sheep”, someone who is willing to push limits and not simply follow the rules.
If you can answer a yes to the three questions above, the idea moves onto horizon 2. At that point, it’s time to start looking at developing something that has growth targets. Can you get traction? In horizon 2 you’re likely still investing money into the project – profitability is not yet the main focus. Rather, you are still just trying to make sure you can attain the positional advantage and market share necessary for the business to be sustainable.
At this point, you need individuals who are business savvy and diligent. They must be bought into data-driven decision-making.
Once the product is profitable and you have traction, it can be considered to be a horizon 1 project. At this point, your focus is on profitability: cost optimization, efficiency and increasing margins. Horizon 1 businesses are those that generate the revenues to finance the activities in the other two horizons. Individuals who thrive at this stage are focused on optimization and efficiency.
I have seen descriptions of each stage that mention that H1 is your flagship, H2 is adjacent markets or different business models. I think that this can describe initiatives in these horizons, but it should not be the way to classify them. You can have several H1 initiatives that have different business models, that are both profitable. You could have two products serving different markets, again, both profitable. it is more about the activities taking place in the different stages and the maturity of the product than the market it serves.
This classification also means you can have individuals with particular talents or proclivities at each stage. Some people are naturally more creative and don’t want to be bothered with analyzing usage metrics. Others may thrive in such an environment. By identifying the critical activities at various stages of a product lifecycle, you can ensure the best resources are being put to the task, and appropriate measures of progress and success can be identified.