McKinsey’s Three Horizons of Growth – An Analysis

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Introduction

Companies often face decline in their growth as they grow old. To achieve consistent levels of growth, it is essential for companies to attend existing businesses by considering the areas they can grow in future. McKinsey’s 3 horizons of framework provide a structure for companies to access the potential opportunities that are required for growth without ignoring the present performance.

Some organizations avoid downturn and manage to sustain growth over decades. They keep on surprising the customers with innovation and creativity. Companies do this by devoting sufficient, time, energy and resources. As they keep on replacing older products, they become mature and profitable. According to this framework, there are a number of factors that experience consistent growth, which could be represented by the below three horizons.

About McKinsey’s 3 Horizons of Framework

Business leaders have been analyzing on how to compete and how to grow since years. Organizations are looking for ways to improve their business. Strategic frameworks help business owners inform these decisions and offer a smooth qualitative analysis of potential scenarios to adopt.

The three horizon framework represents core businesses that are identified with the company name and provide great profits and cash flow. The prime focus of Horizon one is to improve performance to maximize the remaining value of the business. Horizon two focuses on encompassing emerging opportunities and generating substantial profits. The second Horizon require considerable amount of investment. Horizon three is comprised of a number of ideas for profitable growth or minority stakes in business.

Companies should know how to manage businesses along all these three horizons. Business owners should know the cycle by which businesses move from Horizon one to Horizon two, or from Horizon two to Horizon three.

Explaining the 3 Horizons

Horizon 1 – Extending and Defending Core Business

Horizon one is about a strong core business. This contains business that generates profits as well as cash flow. It is all about protecting the existing resources and revenue that comprises of the key products and services. Business owners should know whether their business is healthy or not at early stages. It is the stage at which companies market and sell their products. They provide the necessary skills and resources that are needed for growth.

Horizon 1 is about finding better ways to deliver the current business. One should aim to shore their competitive position and unlock the remaining potential. Though most of the businesses spend 100% of their resources in Horizon 1, they should limit it to 85%, and invest the remaining in future activities.

Horizon 2 – Identifying and Building Emerging Businesses

Horizon 2 comprises of the business on rise, where fast-moving and entrepreneurial ventures come. These companies may not generate profits in short term and need to invest continually. These companies are expected to turn out to be important revenue makers over a medium period. Innovation in businesses implies the materialization of fresh ideas, and hence one should aim to fuel growth in new businesses. Businesses typically should spend 12.5% of resources on horizon 2 activities.

Reaching Horizon 2 is the biggest step for most managers due to the costs that bring no return in short term. If you are in Horizon 1 and are worried about moving to the next level, then you should consider how external help can support you. You should be able to explore different fund raising options available.

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Horizon 3 – Creating Options for Successful Business in Future

Horizon 3 is about seeing multiple options for a successful future. Some of the options may prove beneficial and result in significant profits for long term. This may involve undertaking a variety of research activities such as – pilot projects, start-up projects etc. Horizon 3 is about identifying different options, and hence one should spend 2.5% of their resources on the activities performed in Horizon 3.

In a business, preparation is the key, not only in terms of development but also with respect to the internal resources that support delivery. You should have answers to questions like – Will you need to up the sales and marketing resources? When should you introduce new products and services? And so on. This step is very beneficial, especially for technology firms where the products are more complex. You need to make sure all the employees of your company are aware of your objectives and the direction you are heading in. You may need to work on some documentation before you enter Horizon 3.

If the new product you are going to launch has brought any adjustment in the business strategy, then you should filter down through the policies of your organization. You may consider revising individual objectives and align them with the key objectives of your business. All the activities that support development of the products and services need to be budgeted well, to make sure that the business can achieve maximum revenue from the product.

Once you have entered Horizon 3, you need to think of preparing for long-term research and development. You should be able to stand in a good position to innovate your way towards growth and development.

Summary

McKinsey's Three Horizons of Growth framework continues to be beneficial, particularly in uncertain times. This framework can be used by C-Suite leaders as a blueprint for balancing their investment in current opportunities for growth. For a business to prospect, it must invest in more than one product. By investing in different products or project at the same time, the focus and resources of the company will be diffused, and the sequencing of products becomes important.

McKinsey's Three Horizons of Growth help organizations think through the sequencing of products or projects. It helps business owners to answer questions, like – Which project the company should take on first? What should be the ultimate vision for the business? What is the probability of success? And so on.

McKinsey's Three Horizons of Growth framework is a great strategic tool and can be very beneficial for your start up. Though this framework lacks the time aspect, it helps in framing the strategic opportunities in an effective manner. You will be allowed to think out of the box and focus on creating long-term value for your business.

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