The McKinsey Horizon Model helps a business focus on innovation and growth. The model is a strategy framework divided into three broad categories, otherwise known as horizons. Thus, the framework is sometimes referred to as McKinsey’s Three Horizons of Growth.
Component
Description
Origin
Developed by management consultants at McKinsey & Company.
Purpose
The model helps organizations categorize and manage their innovation and growth initiatives by dividing them into three distinct horizons based on their timeframes and risk profiles.
Components
The McKinsey Horizon Model comprises three horizons:
1. Horizon 1: This represents the core business operations and includes activities focused on optimizing existing products, services, and processes. It has a short-term focus.
2. Horizon 2: This horizon focuses on emerging opportunities and growth initiatives that have the potential to become significant contributors to the organization’s future. It has a medium-term focus.
3. Horizon 3: Horizon 3 involves exploring entirely new and disruptive innovations that could reshape the organization’s future. It has a long-term focus and is typically more experimental and uncertain.
Purpose of Each Horizon
– Horizon 1 is about optimizing the current business and delivering short-term results.
– Horizon 2 is about building and scaling innovations to drive growth.
– Horizon 3 is about exploring radical innovations and potential game-changers for the future.
Risk and Return
Each horizon comes with its own risk and return profile. Horizon 1 typically has lower risk but also offers lower returns compared to the other horizons. Horizon 3 involves higher risks but can yield significant rewards if successful.
Resource Allocation
Organizations need to allocate resources strategically across the three horizons to balance short-term stability with long-term growth and innovation. Resource allocation decisions depend on the organization’s goals and appetite for risk.
Applications
– Strategic planning and portfolio management.
– Innovation management and product development.
– Identifying and prioritizing growth opportunities.
Benefits
– Provides a structured approach to balancing short-term and long-term goals.
– Helps organizations diversify their innovation efforts.
– Supports better resource allocation and risk management.
Drawbacks
– Oversimplification: The model may not fully capture the complexity of innovation and growth initiatives.
– Execution Challenges: Transitioning from one horizon to another can be challenging, especially for large organizations.
Tools
– The model can be used in conjunction with other strategic planning and innovation management tools, such as SWOT analysis, portfolio analysis, and innovation pipelines.
Key Takeaway
The McKinsey Horizon Model provides a framework for organizations to manage their innovation and growth initiatives systematically. By categorizing initiatives into distinct horizons, businesses can strike a balance between short-term optimization and long-term transformation.
Table of Contents
Understanding the McKinsey Horizon Model
The McKinsey Horizon Model was developed after two decades of extensive research on high-growth companies.
At this point, it is useful to make the distinction that McKinsey’s growthstrategy should not be confused with an innovationstrategy.
Instead, the three horizons model should be used to implement a growthstrategy – which in turn drives future strategies centered on innovation.
McKinsey’s model is also ideal for large businesses with expansive member boards that have different visions for the future of the organization.
Here, the model seeks to create a united and cohesive plan for growth over time. Ideally, milestones are set regarding investments, results, and profits.
Ultimately, the McKinsey Horizon Model is an adaptable future tool. It identifies short, medium, and long term changes to an industry and details how a business might react to these changes.
Using the McKinsey Horizon Model in practice
Imagine that three horizons are plotted on a graph, with time on the x-axis and the potential growth of the company on the y-axis.
Let’s take a look at each horizon according to its position on the graph.
First horizon
At the bottom left of the graph, a business is at the start of its journey with low potential growth.
As a result, the first horizon usually describes activities that currently contribute to revenue generation and company stability.
Once stability has been achieved, the business can look at short-term projects that will deliver growth in the next 1-3 years – but actual timeframes will vary from industry to industry.
For example, a tech start-up might experience higher initial growth than a new café.
Second horizon
In the middle of the graph, several years have passed and the business has experienced a moderate amount of growth.
Second horizon growth strategies should ideally span 2-5 years and often relate to adopting processes, revenue streams, or technologies from other industries.
Therefore, the chance of successful growth is relatively high, despite the longer time frames.
Third horizon
After a significant amount of time has passed, the company now has more resources to devote to large and complex strategies that may take 5-15 years to materialize.
These strategies may relate to research, pilot programs, and brand new product offerings.
Given their large upfront cost, third horizon strategies often have a focus on incremental improvements.
But because of their longer time frame and a large number of variables, many strategies are risky and can become unprofitable.
Case Studies
Technology Company:
First Horizon (Short Term): Focus on improving user experience and increasing market share through regular software updates and enhancements.
Second Horizon (Medium Term): Explore partnerships with other tech firms to integrate complementary technologies or services, expanding the product ecosystem.
Third Horizon (Long Term): Invest in research and development for emerging technologies, such as artificial intelligence or blockchain, to create entirely new product lines.
Retail Chain:
First Horizon (Short Term): Optimize inventory management and supply chain processes to reduce costs and improve margins.
Second Horizon (Medium Term): Launch new store formats or online sales channels to reach untapped customer segments.
Third Horizon (Long Term): Experiment with innovative retail concepts, such as cashier-less stores or personalized shopping experiences, to shape the future of retail.
Automotive Manufacturer:
First Horizon (Short Term): Streamline production processes to increase efficiency and reduce production costs.
Second Horizon (Medium Term): Invest in electric and hybrid vehicle technologies to meet evolving consumer preferences and regulatory requirements.
Third Horizon (Long Term): Explore autonomous driving solutions and mobility-as-a-service platforms for the future of transportation.
Financial Institution:
First Horizon (Short Term): Enhance customer service and digital banking capabilities to improve customer retention.
Second Horizon (Medium Term): Expand into new geographic markets with tailored financial products and services.
Third Horizon (Long Term): Investigate blockchain technology and decentralized finance (DeFi) solutions to transform traditional banking practices.
Pharmaceutical Company:
First Horizon (Short Term): Streamline research and development processes to accelerate drug development timelines.
Second Horizon (Medium Term): Explore partnerships with biotechnology firms to access innovative drug candidates.
Third Horizon (Long Term): Invest in gene therapy and precision medicine research for groundbreaking treatments.
Food and Beverage Manufacturer:
First Horizon (Short Term): Optimize production and distribution to reduce waste and improve sustainability.
Second Horizon (Medium Term): Launch new product lines or acquire brands that cater to health-conscious consumers.
Third Horizon (Long Term): Research alternative protein sources and sustainable packaging solutions to address future food industry challenges.
Key takeaways
The McKinsey Horizon Model is a strategy that is particularly beneficial for mature companies that tend to devote fewer resources to growth.
The McKinsey Horizon Model helps large businesses with different points of view settle on a unified direction for the future of the company.
The McKinsey Horizon Model offers a framework of three horizons. These act as stepping stones for businesses that want to balance current profitability with future growth.
Key highlights of the McKinsey Horizon Model:
Framework for Growth: The McKinsey Horizon Model, also known as McKinsey’s Three Horizons of Growth, is a strategy framework designed to help businesses focus on innovation and growth. It provides a structured approach to planning for the future.
Three Horizons: The model divides growth strategies into three broad categories or horizons, each with its own time frame and focus. These horizons represent different stages of a company’s growth journey.
Not an Innovation Strategy: It’s important to note that the McKinsey Horizon Model is not an innovationstrategy in itself. Instead, it is a tool to implement a growthstrategy that can drive future innovation efforts.
Large Business Focus: This model is particularly useful for large businesses with diverse stakeholders and visions for the future. It helps create a unified and cohesive growth plan that aligns with the organization’s goals and objectives.
Adaptability: The model is adaptable and can be applied to various industries and business types. It identifies short-term, medium-term, and long-term changes in the industry and guides how a company can respond to these changes.
First Horizon: The first horizon represents the initial stage of a company’s journey, where there is low potential for growth. This phase typically involves activities that contribute to revenue generation and stability. Short-term growth projects (1-3 years) are considered here.
Second Horizon: In the second horizon, the company has experienced moderate growth. This phase spans 2-5 years and often involves adopting processes, revenue streams, or technologies from other industries. The likelihood of successful growth is relatively high in this horizon.
Third Horizon: The third horizon is characterized by significant time passing and the availability of more resources. Strategies in this horizon may take 5-15 years to materialize and often involve research, pilot programs, and the development of brand-new product offerings. Due to the longer time frame and complexity, these strategies can be riskier.
Balancing Profitability and Growth: The McKinsey Horizon Model helps businesses balance current profitability with future growth. It allows companies to allocate resources strategically across the three horizons based on their growth potential and risk.
Alignment of Stakeholders: For companies with diverse stakeholder perspectives, the model serves as a tool to align these perspectives toward a common vision for the company’s future.
Resource Allocation: The model guides decision-makers in setting milestones, making investments, and measuring results across the three horizons, ensuring that resources are allocated effectively.
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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
