McKinsey’s Strategic Horizons: A Strategic Framework

 

 

1.    1. McKinsey’s Strategic Horizons: A Strategic Framework

Frameworks are the tools to implement strategies effectively to achieve goals and objectives. There are a variety of frameworks which are used in strategic planning and management. Sometimes, we get confused which framework is should be used or not. For your convenience, I divided all frameworks into five categories based on their nature, function and application.

1.      A.  Frameworks to Analyze your Organization:

2.      B.  Frameworks to Analyze your Environment: (Market)

3.      C.   Frameworks to Analyze your Customer:

4.      D.  Frameworks to Analyze your Competitor:

5.       E.  Frameworks to Analyze & Assess your Progress:

Why we are discussing this framework first? The answer is very simple because when we are going to start a business, we have to decide what will be our core product/s or service/s. This framework helps you to define and prioritize your product/s or service/s.

Three Horizons was developed by Bill Sharpe of International Futures Forum as part of work for the UK Foresight Program’s Intelligent Infrastructures Project.

 

McKinsey’s Strategic Horizons is used to analyze the core/primary, secondary and tertiary business of any organization. We can say that it belongs to the first category “Frameworks to analyze your organization.”

Before going ahead, it is the utmost desire to define your core, secondary and tertiary business and this framework play a vital role to do so.

While creating goals for your strategy, apply your strategic framework to the goals you've created. This process will force you into thinking deeply about alignment between your goals, strategic framework and overarching vision.

 

McKinsey's Strategic Horizons is all about keeping you focused on growth and innovation. This strategy framework requires you to categorize your goals into 3 different 'horizons':

The first thing every organization needs to understand is that these horizons are worked on simultaneously—you don't complete Horizon 1 and move on to 2 and 3. Part of the objective of this model is continuous growth, and it requires that your team works on initiatives on every horizon. This model gives voice to the strategic needs of the future while maximizing your current reality.

When you’re first launching this framework in your organization, you need to be sure you have a firm understanding of your biggest assets and drivers of success for today. Then, consider what would happen if you lost all of those.

Next, you'll jump to Horizon 3, because this is the place where you are dealing with an entirely new business—nothing you relied on in Horizon 1—and would be where you jumped to if everything you relied on in Horizon 1 were lost. Horizons 2 and 3 require more C-suite involvement because these horizons demand more financial investment and approvals to allocate resources on "what-ifs" rather than guaranteed income-producing activity. As your organization has conversations about the possible future, your team will have to navigate the tension and uncertainties inherent in going beyond your comfort zone.

Horizon 2 is the bridge that gets you from Horizon 1 to 3. Once you know where you’re heading, you can create an action plan to get from Horizon 1 to 3 and the activities of Horizon 2 will help you close the gap between the two.  

 

Horizon 1: Core Business

This includes the activities that are most closely aligned to your current business. Most of your immediate revenue-making activity will sit in horizon 1. If you're a retailer, this includes the day-to-day goals associated with selling, marketing and serving your product/customers. Your goals in horizon 1 will be mostly around improving margins, bettering existing processes and keeping cash coming in.

Horizon 2: Emerging Opportunities

Emerging opportunities are about taking what you already have, and extending it out into new areas of revenue-deriving activity. There may be an initial cost associated with your horizon 2 activities. However, these investments should return fairly reliably based on them being an extension of your current proven business model. Examples of this could include launching new product lines or expanding your business geographically or into new markets.

Horizon 3: Blue Sky

Your blue sky horizon 3 goals will be all about taking your business in new directions. These may be unproven and potentially unprofitable for a significant period. This would include things like research projects, pilot programmes or entirely new revenue lines that require a significant upfront investment.

Whilst there are no hard and fast rules, we advise clients to aim for a 70/20/10 split between the 3 horizons. This will change based on your risk appetite and resource availability.

Why this is one of the best strategy frameworks:

McKinsey's Strategic Horizons is a great strategy framework. This is because it keeps you focused on constantly growing your organization and creating future revenue streams. Many organizations become fixated on driving their current profit margins. This is great for the short-term but the lack of diversity introduces significant risk to your business. This may be from changes in the market, customer demand or competitive activity.

 

What kind of organizations might use McKinsey's Strategic Horizons?

This is a very versatile framework and applies to the vast majority of organizations and industries. The framework is particularly popular among fast-growing organizations such as startups who need to maintain a fine balance between their cash-flows and their growth rate.

 

The 70/20/10 Rule

When you put the Three Horizons into practice in your organization, the 70/20/10 Rule is a good way to plan your activities. Seventy per cent of your activity needs to be focused on Horizon 1 since your survival today is crucial for getting to tomorrow. Then, allocate 20 per cent of your activities to Horizon 2 which should be enough to account for the failures and missteps your team will experience to bridge to Horizon 3. That leaves 10% of your activities for the research and experimentation of Horizon 3.

By segmenting your innovative thinking and priorities into three horizons, McKinsey's Three Horizons Model can help set the foundation for your organization's continuous growth today and for the future.

Conclusion:

In summary, the three horizon model for innovation is a reasonably simple idea: with Horizon One (h1) being the current business focus, Horizon Two (h2) being more the related emerging business opportunities and Horizon Three (h3) being those that are moving towards a completely new business that can have the potential to disrupt the existing one. These three horizons interchangeable after some time, market demand and customer needs.