The Three Horizons

Menno van Dijk 1
September 12th, 2018
Article by: Menno van Dijk, Valeria Mecozzi
The Three Horizons

All enterprises, both large and small, engage in strategic planning. The daily activities of a management team revolve around analyzing the internal and external situations, formulating strategies which will be turned into operational plans, and then acting on these plans, with evaluations and adjustments being made along the way.

 

Think of it like competitive sailing. The racing course provides a clear sense of direction, and yet there is no predefined track because any seemingly perfect trajectory depends on many uncertainties: the winds can change, or the course tactics of your competitors might even take the wind away from your sails. Sailors constantly decide how to adjust their sails and yield to the advantages of sudden opportunities. The challenge lies in withstanding the force of the winds with the water, coupled with the guiding overall direction to complete the racing course in the shortest possible time. It is exciting, heart-thumping, neck-breaking sport. How is it possible, then, that these activities at work become so tedious to many entrepreneurs?

 

What happens is that these activities typically focus on medium-term cycles of quarterly- and yearly-planning and budgets. Developing an innovative business within rapidly changing markets makes it impossible to predict the events and results of the coming year.  The annual budgets are out-of-date the moment they leave the printer. Strategic planning does not reflect the essence of entrepreneurship, i.e., the agility to capture unexpected opportunities as these emerge. It never anticipates what actually ended up happening.

three horizons
Think about the daily activities of a management team like competitive sailing. The racing course provides a clear sense of direction, and yet there is no predefined track. #leadership #business #threehorizons Click To Tweet

The Three Horizons

To avoid falling victim to these uncertainties and losing grip on which projects are worth their time and impact. The Three Horizons framework, originally conceived by McKinsey & Company, provides a method to distinguish how daily actions impact current, medium and long-term goals for long-term success. It shows how to bucket today’s actions into three distinct categories:

N.B., It is important to understand that Three Horizons is not the depiction of three consecutive phases, the way it might logically appear.  They are ways to bucket your time and efforts into intended outcome times.

Horizon 1 – Current Business

Horizon 1 is about sustenance. Horizon 1 activities have a short-term impact, and are typically low-risk – there is a large degree of control over execution and results.  So, they should be done as quickly as possible, but with consistency, reliability, and high-quality levels. Survival in this stage is made up of daily iteration of tasks, maintenance, and follow-up. Neglecting to execute each of these with consistency will, in turn, make you extremely vulnerable.

If your current business is as yet non-existing or in jeopardy, it makes sense to secure it first, otherwise risking everything. An example is entrepreneurs starting a new business: it helps to keep your current job and maintain a secured income until the new business is afloat. Similarly, large enterprises who invest in the development of an innovative new product do so while first ensuring the profitability of the existing business. This provides them with the safe base to allow entrepreneurial risk-taking.

Entrepreneurs must always keep their eye on this part of the endeavor. What are the short-term actions that need to happen this week to keep a steady supply stream?  Consider the consequences of losing control of this dimension. Giving these your weekly attention ensures that your bases are consistently covered and that you can allow for greater risks in Horizons 2 and 3.

three horizons
If your current business is non-existent or in jeopardy, it makes sense to secure it first, otherwise you risk everything. Click To Tweet

Horizon 2 – Big Bets

Bold, new initiatives – this is what Horizon 2 is all about. Here you make moves into new markets, which can mean introducing a totally new product category or innovating your business model. For more established enterprises, mergers and acquisitions are also Horizon 2. These activities always come with a significant risk – it is uncertain how the market will react and whether the organization can pull it off.

Horizon 2 is the big bet. It only pays off when you know what you are doing. You have to deeply grasp its implications, give it your full force and quickly adjust, as your initial assumptions will prove to be invariably wrong.

Some entrepreneurs and enterprises never get to work on Horizon 2: the current business (Horizon 1) requires their full attention. There is always a need to resolve another short issue or an opportunity to further optimize operations. In the meantime, competitors are introducing innovations, adopting new business models and making you run the risk of turning your business obsolete. Give Horizon 2, the next big bet for your business, a substantial share of your daily attention.

Note here that Venture Capitalists will love you for taking a big bet. It suits their need for their portfolio to thicken as you prune your business, but remember that what is risky for you is not necessarily risky for them. Don’t give your entire life and business to one big passion project: always combine Horizon 2 with a secure and consistent Horizon 1.

three horizons
Horizon 2 is all about innovating your business model. #innovation #businessmodel #business #entrepreneurship Click To Tweet

Horizon 3 – Long-term Opportunities

Horizon 3 activities are designed for long-term impact. Think about conducting explorative travel, meeting people in new fields of expertise, or investing time into wild ideas. These activities have a highly uncertain outcome and are qualified low probability, so there is a realistic possibility of not getting anywhere.

Many entrepreneurs have very broad interests and maintain their edge by being true omnivores in their pursuits. They are always open to meet someone new, approaching each chance as an interesting perspective to explore and will try anything once. They, whether knowingly or not, dedicate a real share of their workday to Horizon 3.  But some entrepreneurs and enterprises do not spend any time and money on Horizon 3.  The returns are just too uncertain for them, and the expected returns are only a blur in the future. When the time comes for this to materialize, those who have invested some time and money early will have a real head start.

Understand this: Horizon 3 activities typically will not be successful. An elite few will become a winning idea. That is why it makes sense to maintain a portfolio of Horizon 3 projects and invest relatively little in each and ensure the projects are unrelated, covering a broad range of potential avenues. Think basic option theory and keep focus. It’s easy to underestimate this stage, but Horizon 3 is the greenhouse for what might eventually become a Horizon 2.

three horizons
Entrepreneurs have very broad interests and maintain their edge by being true omnivores in their pursuits: they are always open to approaching each chance as an interesting perspective to explore. Click To Tweet

40-40-20 balance

Each Horizon constitutes a unique set of activities. Together they provide a balanced portfolio. So how to create a good personal balance between these Three priorities? We asked many practitioners and when combined our own experiences, conclude that it works best as a 40-40-20 split, either weekly or daily. This means spending about 20% of one’s time and resources on longer-term options while equally splitting the remainder of time between sustaining the running business and creating the next big thing.

This is a sustainable investment and division of time for senior executives, business leaders, and entrepreneurs alike. The optimal time allocation could vary substantially depending on the situation or over time, as well as inevitable daily obligations.  In mature industries, we have also heard a 60-30-10 ratio being promoted. It is clear that in markets that are not undergoing major change, the time and resource commitment to the current business can and should be much larger than in markets that are currently under disruption.

In large organizations, the Horizons are often associated with different parts of the enterprise. The more mature businesses with a finely-tuned cash flow constitute Horizon 1. Business Development and M&A undertake the Horizon 2 big bet investments. The R&D lab works on Horizon 3 future technologies and possibilities. Here you might need to think about how to change entire mindsets. But for smaller companies and startups there aren’t the resources available to have each Horizon separate in the organization. The leaders and their teams have to carve out time in the week to each of the Horizons.

What makes it hard to maintain the Three Horizons in balance? First of all, any Horizon can easily occupy all of your attention: the existing business can be under threat, or situations may spiral out of your control, requiring your full focus for a certain amount of time. The launch of the next big thing can become all-encompassing. Each Horizon requires a different mindset, capability, metric, and process so learning to juggle each is vital skill. The leadership team might have a natural affinity with one of the Horizons and give it too much emphasis. As a leader, you must be sure to keep the boat afloat by maintaining a rhythm, keeping focus, and being made accountable on a consistently, flowing basis.

To master the three horizons in your own business, join the THNK Executive Leadership Program. Download the brochure or find out if you qualify.

menu-close-white