strategy tools / McKinsey's Three Horizons of Growth

In short

Manage current operations and plan for future growth effectively.
Can be used for: Business Model Design
McKinsey's Three Horizons of Growth is a strategic framework that helps organizations manage their current operations while simultaneously planning for future growth. The tool divides the company's activities into three horizons: Horizon 1 focuses on optimizing existing core businesses, Horizon 2 involves expanding and extending current business activities, and Horizon 3 explores new opportunities and business models for future growth. By balancing short-term profitability with long-term innovation, companies can effectively allocate resources and investments across all three horizons to ensure sustained success and competitiveness in the market.
Type of tool: Innovation Management
Expected outcomes:
- Enhanced strategic planning capabilities by aligning current operations with future growth opportunities
- Improved resource allocation across different horizons for optimal performance and innovation
- Increased agility and adaptability to market changes through a structured approach to growth
- Clearer vision and direction for the organization by identifying and prioritizing growth initiatives
- Strengthened competitive positioning by balancing short-term profitability with long-term sustainability
- Enhanced decision-making processes by considering multiple horizons of growth simultaneously
- Fostered a culture of innovation and continuous improvement by exploring new business models and opportunities
- Facilitated collaboration and communication within the organization by providing a common framework for growth planning
- Enhanced leadership alignment and commitment to long-term strategic goals
- Improved risk management by diversifying growth initiatives across different horizons

In detail

McKinsey's Three Horizons of Growth is a powerful strategic framework that provides organizations with a structured approach to managing their current operations while simultaneously planning for future growth and innovation. This tool is designed to help companies navigate the complex landscape of strategic planning and visioning by dividing their activities into three distinct horizons, each with its own focus and objectives.

In Horizon 1, the primary emphasis is on optimizing and maximizing the performance of the organization's existing core businesses. This horizon is all about driving efficiency, improving processes, and enhancing profitability within the current business model. Companies operating in Horizon 1 are focused on maintaining their competitive edge, meeting customer demands, and delivering consistent results in the short term.

Moving on to Horizon 2, the focus shifts towards expanding and extending the current business activities to capture new growth opportunities. This horizon involves exploring adjacent markets, launching new products or services, and leveraging existing capabilities to drive innovation and revenue growth. Companies operating in Horizon 2 are looking to build on their current success and capitalize on emerging trends and market dynamics to secure their position in the future.

Finally, Horizon 3 represents the exploration of entirely new opportunities and business models for future growth and sustainability. This horizon is all about fostering creativity, experimentation, and disruptive thinking to identify and capitalize on potential game-changing ideas. Companies operating in Horizon 3 are willing to take risks, invest in unproven concepts, and explore new frontiers to stay ahead of the curve and drive long-term success.

By balancing their focus across all three horizons, organizations can effectively allocate resources, investments, and efforts to ensure sustained success and competitiveness in the market. McKinsey's Three Horizons of Growth encourages companies to strike a delicate balance between optimizing current operations, exploring new growth avenues, and envisioning the future landscape of their industry.

Ultimately, this strategic framework serves as a guiding tool for leaders and decision-makers to align their strategic planning and visioning efforts with the broader goals and objectives of the organization. By adopting a holistic approach that spans across different time horizons and business priorities, companies can navigate uncertainty, drive innovation, and position themselves for long-term success in an ever-evolving market environment.

How to use it

Understand the Three Horizons: Familiarize yourself with McKinsey's Three Horizons of Growth framework, which divides business activities into three horizons - Horizon 1, Horizon 2, and Horizon 3.
Assess Current Operations: Evaluate your current business operations and identify which activities fall under each horizon - optimizing core businesses in Horizon 1, expanding current activities in Horizon 2, and exploring new opportunities in Horizon 3.
Allocate Resources: Determine the allocation of resources and investments across all three horizons to balance short-term profitability with long-term innovation and growth.
Enhance Strategic Planning: Use the framework to align current operations with future growth opportunities, improving strategic planning capabilities within the organization.
Improve Decision-Making: Consider multiple horizons of growth simultaneously to enhance decision-making processes and ensure a structured approach to growth.
Foster Innovation: Encourage a culture of innovation and continuous improvement by exploring new business models and opportunities in Horizon 3.
Facilitate Collaboration: Use the framework to facilitate collaboration and communication within the organization by providing a common language and framework for growth planning.
Strengthen Competitive Positioning: Balance short-term profitability with long-term sustainability to strengthen the organization's competitive positioning in the market.
Align Leadership: Ensure leadership alignment and commitment to long-term strategic goals by using the Three Horizons framework to provide a clearer vision and direction for the organization.
Manage Risks: Diversify growth initiatives across different horizons to improve risk management and adaptability to market changes.

Pros and Cons

Pros	Cons
Provides a structured approach to managing current operations while planning for future growth Helps organizations balance short-term profitability with long-term innovation Enables effective resource allocation and investment across different horizons Encourages a forward-thinking mindset and exploration of new opportunities Facilitates strategic planning and visioning for sustained success and competitiveness Enhances organizational agility and adaptability to changing market dynamics Promotes a holistic view of the business landscape and potential growth avenues Supports decision-making by identifying priorities and strategic focus areas Fosters a culture of innovation and continuous improvement within the organization Aligns business activities with long-term strategic goals and objectives	Overemphasis on short-term profitability in Horizon 1 may lead to neglect of long-term innovation and growth opportunities in Horizons 2 and 3. Difficulty in accurately predicting future market trends and customer needs for Horizon 3 initiatives, leading to potential investment in unsuccessful ventures. Risk of resource allocation imbalance, where too much focus on Horizon 1 optimization may hinder investment in Horizon 2 and 3 initiatives, impacting future growth. Limited flexibility in adapting to rapidly changing market conditions and disruptive technologies, as the framework may not easily accommodate sudden shifts in the business environment. Potential for internal resistance and conflicts among different business units or departments over resource allocation priorities across the three horizons. Inherent challenge in effectively managing and coordinating activities across all three horizons simultaneously, requiring significant organizational alignment and communication efforts. Tendency to overlook potential synergies or overlaps between the different horizons, leading to missed opportunities for collaboration and innovation. Risk of tunnel vision within each horizon, where teams may become too focused on their specific goals and objectives, potentially missing out on broader strategic insights and connections. Difficulty in accurately measuring and evaluating the success and impact of initiatives across the three horizons, making it challenging to assess the overall effectiveness of the strategic framework. Potential for the framework to become rigid and outdated over time, as market dynamics evolve and new growth opportunities emerge, requiring continuous adaptation and refinement of the strategic approach.

Pros

Cons

Provides a structured approach to managing current operations while planning for future growth
Helps organizations balance short-term profitability with long-term innovation
Enables effective resource allocation and investment across different horizons
Encourages a forward-thinking mindset and exploration of new opportunities
Facilitates strategic planning and visioning for sustained success and competitiveness
Enhances organizational agility and adaptability to changing market dynamics
Promotes a holistic view of the business landscape and potential growth avenues
Supports decision-making by identifying priorities and strategic focus areas
Fosters a culture of innovation and continuous improvement within the organization
Aligns business activities with long-term strategic goals and objectives

Overemphasis on short-term profitability in Horizon 1 may lead to neglect of long-term innovation and growth opportunities in Horizons 2 and 3.
Difficulty in accurately predicting future market trends and customer needs for Horizon 3 initiatives, leading to potential investment in unsuccessful ventures.
Risk of resource allocation imbalance, where too much focus on Horizon 1 optimization may hinder investment in Horizon 2 and 3 initiatives, impacting future growth.
Limited flexibility in adapting to rapidly changing market conditions and disruptive technologies, as the framework may not easily accommodate sudden shifts in the business environment.
Potential for internal resistance and conflicts among different business units or departments over resource allocation priorities across the three horizons.
Inherent challenge in effectively managing and coordinating activities across all three horizons simultaneously, requiring significant organizational alignment and communication efforts.
Tendency to overlook potential synergies or overlaps between the different horizons, leading to missed opportunities for collaboration and innovation.
Risk of tunnel vision within each horizon, where teams may become too focused on their specific goals and objectives, potentially missing out on broader strategic insights and connections.
Difficulty in accurately measuring and evaluating the success and impact of initiatives across the three horizons, making it challenging to assess the overall effectiveness of the strategic framework.
Potential for the framework to become rigid and outdated over time, as market dynamics evolve and new growth opportunities emerge, requiring continuous adaptation and refinement of the strategic approach.

When to Use

Businesses evolve from a simple idea into complex entities that undergo various stages of growth, learning, and adaptation before ultimately reinventing themselves to remain competitive. Throughout these stages, leveraging the right tools can significantly enhance success and efficiency. Below are the typical stages highlighting the stages where this tool will be useful. Click on any business stage to see other tools to include in that stage.

Stage	Include
Brand Development
Brand and Reputation Management
Bureaucracy Reduction and Process Optimization
Business Planning	✓
Concept Refinement
Continuous Learning and Adaptation	✓
Feedback Loop
Financial Management and Funding
Global Expansion	✓
Idea Generation
Initial Marketing and Sales
Innovation and Product Development	✓
Leadership Development and Succession Planning	✓
Legal Formation
Market Expansion	✓
Market Research
Minimum Viable Product Launch
Operational Setup
Prototype Development
Regulatory Compliance and Risk Management
Scaling Operations	✓
Strategic Partnerships and Alliances	✓
Sustainability Practices	✓
Team Building
Technology Integration and Digital Transformation	✓

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