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.

OriginDeveloped by management consultants at McKinsey & Company.
PurposeThe 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.
ComponentsThe 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 ReturnEach 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 AllocationOrganizations 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 TakeawayThe 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.

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.

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 innovation strategy in itself. Instead, it is a tool to implement a growth strategy 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.

McKinsey’s Related Frameworks

GE McKinsey

The GE McKinsey Matrix was developed in the 1970s after General Electric asked its consultant McKinsey to develop a portfolio management model. This matrix is a strategy tool that provides guidance on how a corporation should prioritize its investments among its business units, leading to three possible scenarios: invest, protect, harvest, and divest.

7-S Model

The McKinsey 7-S Model was developed in the late 1970s by Robert Waterman and Thomas Peters, who were consultants at McKinsey & Company. Waterman and Peters created seven key internal elements that inform a business of how well positioned it is to achieve its goals, based on three hard elements and four soft elements.

McKinsey Horizon Model

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.

McKinsey’s Seven Degrees of Freedom

McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.

Minto Pyramid

The Minto Pyramid Principle was created by Barbara Minto, who spent twenty years in corporate reporting and writing at McKinsey & Company. The Minto Pyramid Principle is a framework enabling writers to attract the attention of the reader with a simple yet compelling and memorable story.

McKinsey Organizational Structure

McKinsey & Company has a decentralized organizational structure with mostly self-managing offices, committees, and employees. There are also functional groups and geographic divisions with proprietary names.

Connected Business Frameworks

Porter’s Five Forces

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

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

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

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 

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

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

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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