The McKinsey Horizon Model, also known as the Three Horizons Model, is a strategic framework used to identify and manage innovation within an organization. The model was developed by McKinsey & Company in the 1990s and has since become widely used in the business world.
The framework consists of three horizons, each representing a different time frame and level of innovation:
- Horizon one: This represents the core business activities of an organization. These are the activities that generate the majority of the organization's revenue and profit. Horizon one activities typically have a short-term focus and are characterized by incremental improvements to existing products or services.
- Horizon two: This represents emerging business opportunities that have the potential to become significant revenue generators in the medium term. These opportunities typically involve some degree of innovation and experimentation and may require investment in new technologies or business models.
- Horizon three: This represents the long-term future of the organization. Horizon three activities involve exploring new business opportunities that may not yet be fully understood or developed. High levels of uncertainty and risk characterize these activities.
The McKinsey Horizon Model is useful for organizations looking to manage their innovation portfolio and balance short-term priorities with longer-term strategic goals. By identifying and investing in opportunities across all three horizons, organizations can ensure that they’re not neglecting their core business while also positioning themselves for future growth and success.
Such an approach is especially useful when facilitating strategic planning sessions, or when building a longer-term strategic plan.
Allocation of resources across the three horizons
Allocating resources to the different horizons of the McKinsey Horizon Model involves a strategic process that takes into consideration the level of risk, uncertainty, and potential impact of each opportunity. Here are some general steps to follow when allocating resources:
- Identify and prioritize opportunities: Start by identifying and prioritizing opportunities that fall into each of the three horizons. This may involve conducting market research, analyzing industry trends, and assessing the organization's capabilities and resources.
- Develop strategies: Develop strategies for each horizon based on the level of risk, uncertainty, and potential impact. For Horizon one, the focus may be on optimizing existing products or services, improving operational efficiency, and maintaining market position. For Horizon two, the focus may be on exploring emerging opportunities and investing in new technologies or business models. For Horizon three, the focus may be on exploring entirely new business opportunities that may disrupt the industry.
- Allocate resources: Allocate resources based on the strategies developed for each horizon. This may involve investing a larger percentage of resources in Horizon one activities to maintain the core business while allocating smaller portions of resources to Horizon two and Horizon three activities. However, the allocation of resources should be flexible and adjusted over time based on changing business needs and market conditions.
- Monitor and measure progress: Monitor and measure progress across all three horizons to ensure that resources are being allocated effectively. This may involve setting key performance indicators (KPIs) for each horizon, tracking progress against these KPIs, and making adjustments as needed.
Overall, allocating resources to the different horizons of the McKinsey Horizon Model involves a strategic and flexible approach that takes into consideration the organization's priorities, capabilities, and the changing business environment.
The McKinsey Horizon Model in action: a real-life case study
Amazon’s innovation strategy is a real-life example of the McKinsey Horizon Model in action.
Amazon's Horizon one activities include its core business of selling books, electronics, and other products online. Amazon continues to invest in improving its customer experience, expanding its product offering, and optimizing its supply chain to maintain its market position and generate revenue.
In Horizon two, Amazon is exploring new business opportunities such as Amazon Web Services (AWS), a cloud computing platform that provides a range of services to businesses. AWS has become a significant revenue generator for Amazon and has helped the company expand beyond its traditional retail business.
Finally, in Horizon three, Amazon is investing in emerging technologies such as drones and autonomous delivery vehicles. These technologies have the potential to disrupt the traditional retail industry and create new opportunities for Amazon in the future.
By investing in activities across all three horizons, Amazon has been able to balance short-term priorities with longer-term strategic goals. The company has maintained its position as a leader in online retail while also expanding into new areas and exploring potentially disruptive technologies.
Overall, the McKinsey Horizon Model is a powerful tool for organizations looking to manage innovation and balance short-term priorities with long-term strategic goals. By adopting a structured approach to innovation management and investing across all three horizons, organizations can position themselves for success in an ever-changing business landscape.
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