This article explains the Mckinsey Three Horizons of Growth model in a practical way. After reading it, you understand the basics of this strategy tool.
What is the McKinsey Three Horizons of Growth model?
The American consultancy firm McKinsey is the founder of the Three Horizons of Growth innovation strategy model. In terms of strategy, it is good for most companies to focus on growth and innovation. For many companies, sitting still is indicative of decline. Growth is a general objective of organisations and most recognise that innovation is crucial in achieving it. However, innovation is not a one-off event, but rather is a continuous process. The McKinsey Three Horizons of Growth model can help to prevent a gap between what an organisation wants in the future and where it stands today. This McKinsey Three Horizons of Growth model gives companies step-by-step insight into their growth and the achievement of their ultimate strategic goal.
Three different horizons are categorised and placed in a model. On the one hand, the y-axis represents the value for the company and the profitability (value) from low to high. On the other hand, on the x-axis, the time is arranged in order: from short (3 to 12 months), to long (5 to 7 years). It is a strategic framework that helps to align the focus consistently between today’s needs (Horizon 1), the future state of the company (Horizon 3), and the steps that lead to it (Horizon 2). The framework provides organisations with insight into stumbling blocks that prevent growth and innovation. Through setting clear goals, all layers within an organisation know what is expected of them:
First of all, the value of the organisation must be identified: what does the company stand for, and what is its core business? Within the McKinsey Three Horizons of Growth model, this horizon focuses on the short term, from three months to a year. By knowing what the organisation does, all core activities can be described, as well as the associated unique selling points and other success factors. The main activities of the organisation are safeguarded, maintained, and communicated strongly to customers and competitors. It may not be profitable yet, but it lays the foundation for further expansion and innovation. The next step is to develop activities that best fit in with the current activities. Strategies such as market penetration (e.g. setting up a new branch), or product development (e.g. expansion of the product range), fit in perfectly with Horizon 1.
The value is already increasing for the company; in time, one has to think of a medium term of two to three years. During this period, the organisation will expand ideas and explore opportunities to reach new customers, markets, or goals. Upcoming expansion is one of the possibilities. For example, market development can be chosen as a strategy, with the organisation focusing on a new geographical market. It is also possible to tap into other target groups. There will likely be initial costs associated with this horizon, but these investments will be recovered with ease. Horizon 2 is, in principle, the bridge that leads to Horizon 3. Once it is clear what needs to be achieved in Horizon 3, an organisation can work backwards and make an action plan within Horizon 2 which bridges any gaps.
The value now represents an enormous amount (perhaps in the millions); in time, one has to think of the long term (say, five to seven years) progression. Horizon 3 actually follows the first horizon; if the strategic goal is clear, then Horizon 2 can be filled in from the base with intermediate steps. This is about creating completely new opportunities and perhaps starting new businesses. The strategic growth of diversification is now in place; here, the organisation is focusing on a totally different or new market, by means of a new product line. This can be done by setting up new divisions as part of the organisation, but it is also possible to start up other business units. Of course, this requires a considerable investment, but such is offset by new and successful sources of income.
According to McKinsey, each horizon within the McKinsey Three Horizons of Growth model requires a different focus and this focus includes a different form of management. After all, these are short, medium, and long-term objectives. The goals for Horizon 1 can be carried out by the operational management. The goals of Horizon 2 are perfect for the tactical departmental management. The goals for Horizon 3 are so strategic that they are really only suited for top management. If the different horizons are not linked, things will move in all directions, and the final goal will not be achieved. McKinsey indicates that tactical goals (Horizon 2) must be formulated from the strategic goal (Horizon 3). From there, the operational objectives (Horizon 1) are formed, so that all employees are on the same page.
The McKinsey Three Horizons of Growth model must also take disturbances into account. These can be external disturbances that an organisation has to deal with. Examples include changing legislation, economic, and technological changes. Internal disruptions, including acquisitions, mergers, bankruptcies, or other restructuring, can also lead to far-reaching changes. As soon as an organisation has no influence on this, all management layers must be alert and able to respond effectively. This means that a change in objective must be drawn up on all three horizons. Nevertheless, it is necessary to look at the prioritisation of previously formulated innovation initiatives.
Now it’s your turn
What do you think? Do you recognize the explanation of the McKinsey Three Horizons of Growth? Does this model help your organisation to avoid the gap between what an organisation wants in the future and where it stands now? What insights has the McKinsey Three Horizons of Growth given you? Do you have any tips or comments?
Share your experience and knowledge in the comments box below.
- Baghai, M., Coley, S., & White, D. (2000). The alchemy of growth. Basic Books.
- Curry, A., & Hodgson, A. (2008). Seeing in multiple horizons: connecting futures to strategy. Journal of Futures Studies, 13(1), 1-20.
- Matheson Connell, C. (2007). Pursuing three horizons of growth–three cases: Bombardier (Canada), Disney (US) and Hutchison Whampoa (China). Business Strategy Series, 8(1), 14-25.
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