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What Is The McKinsey Horizon Model And Why It Matters In Business

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.

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 growth strategy should not be confused with an innovation strategy. Instead, the three horizons model should be used to implement a growth strategy – 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.

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.

Connected Business Frameworks

Porter’s Five Forces

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Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces.

SWOT Analysis

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A SWOT Analysis is a framework used for evaluating the business‘s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

BCG Matrix

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In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.

Balanced Scorecard

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First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.

Blue Ocean Strategy 

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A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

GAP Analysis

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A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.

Scenario Planning

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Businesses use scenario planning to make assumptions about future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts to better strategic decision-making by avoiding two pitfalls: underprediction, and overprediction.

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