Mapping Your Growth Strategy: The McKinsey Three Horizons Approach

​As businesses seek to grow and remain competitive, they need to explore new opportunities while maintaining their existing operations and and core business. The McKinsey Three Horizons of Growth framework offers a strategic approach to balancing short-term and long-term growth opportunities in the market by categorizing and prioritizing them into three horizons. 

​Each horizon represents a different time frame, risk level, and potential for growth. In this article, we will explore the McKinsey Three Horizons of Growth framework in detail, including its benefits and challenges, the process for applying it, and examples of companies that have successfully used this approach. Each horizon represents a different time frame, risk level, and potential for growth. Lets takes a closer look at each of these horizons.

Horizon 1

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​Horizon 1 represents the core business of the organization and includes its current products, services, and markets. The focus of Horizon 1 opportunities is on optimizing and improving the existing business model, products, and services to maintain competitiveness and profitability. Horizon 1 opportunities may include improving operational efficiency, optimizing pricing strategies, and expanding the customer base.

Horizon 2

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​Horizon 2 represents emerging opportunities that have the potential to become a new source of growth for the organization. These opportunities may involve expanding into new markets, developing new products or services, or creating new business models. Horizon 2 opportunities may require more investment and risk than Horizon 1 opportunities but offer greater potential for growth. The goal of Horizon 2 is to create a pipeline of opportunities that can be developed over time to sustain the organization's growth.

Horizon 3

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​Horizon 3 represents opportunities that are further out in the future, often involving new technologies, markets, or business models that do not yet exist. These opportunities require significant investment and may take longer to develop, but they have the potential to become significant sources of growth in the future. Horizon 3 opportunities may involve exploring new and emerging technologies, developing new business models, or entering entirely new markets. The goal of Horizon 3 is to create a portfolio of options that can be pursued as the organization's core business matures and new opportunities emerge.

The McKinsey Three Horizons of Growth framework helps organizations to balance short-term and long-term growth opportunities, prioritize investment in innovation and growth, and allocate resources effectively across different horizons. By evaluating growth opportunities across different horizons, organizations can create a more comprehensive and strategic approach to growth and innovation.

Benefits

• Provides a structured approach to evaluating growth opportunities: The framework provides a clear structure for organizations to evaluate and prioritize growth opportunities across different horizons, which helps in creating a more strategic approach to growth.
• ​Balances short-term and long-term goals: By considering opportunities across all three horizons, the framework helps companies to balance short-term goals with longer-term strategic planning.
• Encourages innovation and creativity: The framework encourages companies to explore new markets, technologies, and business models, which fosters innovation and creativity.
• Helps allocate resources effectively: By prioritizing growth opportunities across different horizons, the framework helps organizations to allocate resources more effectively and efficiently.

Challenges

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• Oversimplifies complex issues: The framework can oversimplify the complexities of growth and innovation, leading to a potential oversimplification of the strategic planning process.
• Focuses more on internal growth: The framework focuses primarily on internal growth opportunities, which may not account for external market forces or competition.
• May not account for unique industry factors: Different industries may have unique factors that affect growth opportunities, which may not be captured in the framework.
• Requires significant investment in horizon 3 opportunities: Pursuing horizon 3 opportunities can be risky and require significant investment, which may not always yield the desired return on investment.

While the McKinsey Three Horizons of Growth framework provides a useful structure for evaluating growth opportunities, it should be used in conjunction with other strategic planning tools to ensure a comprehensive analysis of growth opportunities.

The Process

The process for applying the McKinsey Three Horizons of Growth framework involves the following steps:
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• Identify and map out your current business model: Begin by identifying your organization's current products, services, and markets and mapping out your current business model across key components such as customer segments, value proposition, channels, revenue streams, and cost structure. This will help you understand your current business and its strengths and weaknesses.
• Brainstorm Horizon 2 and Horizon 3 growth opportunities: Identify potential Horizon 2 and Horizon 3 growth opportunities by brainstorming new products, services, technologies, markets, and business models that align with your organization's strategic goals and vision. Consider emerging trends and disruptive technologies that could impact your industry and create new opportunities.
• Evaluate and prioritize growth opportunities: Evaluate each growth opportunity by considering factors such as the potential for revenue growth, the level of investment required, the level of risk involved, and the alignment with your organization's values and strategic goals. Prioritize opportunities based on their potential for growth, risk level, and strategic fit.
• Develop a roadmap for pursuing growth opportunities: Once you have identified and prioritized growth opportunities across all three horizons, develop a roadmap for pursuing them. This should include a detailed plan for executing Horizon 1 opportunities, developing a pipeline of Horizon 2 opportunities, and building a portfolio of Horizon 3 options. It should also include a timeline for executing each opportunity and a plan for allocating resources effectively.
• ​Monitor progress and adjust as necessary: Monitor progress regularly and adjust your plan as necessary based on feedback, changing market conditions, and new opportunities that arise. Continuously evaluate your growth opportunities across all three horizons to ensure that you are balancing short-term and long-term growth effectively.

Overall, the McKinsey Three Horizons of Growth framework provides a structured approach to evaluating and prioritizing growth opportunities across different time frames and risk levels, which helps organizations to balance short-term and long-term goals and allocate resources effectively.

Alternative Approaches

There is no one-size-fits-all approach to strategic planning and evaluating growth opportunities, as different organizations have different needs and contexts. While the McKinsey Three Horizons of Growth framework is still widely used and can be effective in many cases, there are other approaches that can also be considered, depending on the specific situation. Here are some other approaches to strategic planning and evaluating growth opportunities that have gained popularity in recent years:

• Design Thinking: This approach emphasizes customer-centricity and focuses on creating innovative solutions to address customer needs and pain points. It involves a highly collaborative and iterative process that encourages experimentation and prototyping.
• Lean Startup: This approach emphasizes rapid experimentation and validation of business ideas through a lean and iterative process. It encourages startups to test and validate assumptions about their business model, product-market fit, and customer needs through a minimum viable product (MVP) before scaling up.
• Doblin’s Ten Types of Innovation Framework: In the Ten Types of Innovation framework, the different types of innovations are divided into three main categories: configuration, offering and experience. In layman’s terms, business model, product and marketing.
  
• ​Business Model Canvas: This approach is a visual tool that helps organizations to map out and analyze their business model across key components, including customer segments, value proposition, revenue streams, and cost structure. It encourages a holistic view of the organization and helps identify opportunities for growth and optimization.
• ​Agile Strategic Planning: This approach is a more flexible and adaptable version of traditional strategic planning that emphasizes continuous learning and improvement. It involves breaking down strategic goals into smaller, more manageable tasks and regularly reviewing and adjusting the plan based on feedback and changing circumstances.

Ultimately, the best approach to strategic planning and evaluating growth opportunities depends on the organization's specific context, resources, and goals. It is important to consider a variety of approaches and tools and tailor them to the specific needs and challenges of the organization.

The Framework in Action

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Here are some examples of companies that have successfully used the McKinsey Three Horizons of Growth framework:
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• Amazon: Amazon has successfully used the framework to grow its business by focusing on all three horizons simultaneously. Horizon 1 for Amazon includes its core retail business, while Horizon 2 includes its expansion into new markets such as AWS, Prime Video, and Echo. Horizon 3 includes its exploration of new technologies such as drones, artificial intelligence, and autonomous vehicles.
• GE: GE has used the framework to transform its business by divesting its Horizon 1 businesses such as appliances and lighting, while investing in Horizon 2 businesses such as aviation, power, and healthcare. GE is also exploring new technologies such as additive manufacturing and digital twins, which fall under Horizon 3.
• Toyota: Toyota has used the framework to diversify its product portfolio and expand into new markets. Horizon 1 for Toyota includes its core automotive business, while Horizon 2 includes its expansion into hybrid and electric vehicles, and Horizon 3 includes its exploration of new mobility solutions such as autonomous vehicles and connected cars.
• Apple: Apple has used the framework to launch new products and enter new markets while maintaining its core business. Horizon 1 for Apple includes its core product lines such as iPhones and Macs, while Horizon 2 includes new products such as Apple Watch and HomePod. Horizon 3 includes Apple's exploration of emerging technologies such as augmented reality and self-driving cars.

These are just a few examples of how companies have successfully used the McKinsey Three Horizons of Growth framework to balance short-term and long-term growth opportunities and allocate resources effectively.

In Summary

The McKinsey Three Horizons of Growth framework is a useful tool for organizations to categorize and prioritize growth opportunities across different horizons. By evaluating growth opportunities in this way, organizations can balance short-term and long-term goals and allocate resources effectively. The framework encourages organizations to focus on optimizing and improving their current business (Horizon 1), developing emerging opportunities that have the potential for growth (Horizon 2), and exploring new and emerging technologies, markets, or business models that do not yet exist (Horizon 3).

While there are pros and cons to using this approach, it remains a popular strategic tool for organizations today. Ultimately, the success of the McKinsey Three Horizons of Growth framework will depend on how effectively organizations apply it to their specific business context and goals.​