Better Thinking

Three Horizons Strategy

The Three Horizons Strategy is a framework balancing short-term performance and long-term innovation by managing "current core business," "emerging opportunities," and "future options" to ensure sustainable growth.

Categories
Strategic AnalysisInnovation MethodsMcKinsey
Target Users
Business managersEntrepreneursConsultantsProduct Manager
Applicable
Corporate strategy planningbusiness innovationlong-term growth planning
#strategy #innovation management #business growth

What is the Three Horizons Strategy?

The Three Horizons Strategy is a framework developed by McKinsey to balance short-term performance with long-term innovation.

  • Horizon 1: Core business, focusing on current profitability and efficiency.
  • Horizon 2: Emerging opportunities, requiring investment and nurturing for medium-term growth.
  • Horizon 3: Future options, representing disruptive innovations and breakthrough ideas.

In simple terms, Horizon 1 is the tree you harvest from today, Horizon 2 is the young tree growing, and Horizon 3 is the seeds you’re experimenting with.

Origin and Key Figures

  • Background: First introduced in the 1990s by McKinsey in strategy research.
  • Proposed by: McKinsey & Company.
  • Representative users: Shell, Google, Unilever.
  • Examples:
    • Google: H1 = ads business; H2 = Android, YouTube; H3 = self-driving cars, AI.
    • Shell: H1 = oil & gas; H2 = investments in renewable energy; H3 = research into future clean energy solutions.

How to Use the Strategy

  1. Identify the three horizons
    • Map out H1 (current core), H2 (growth engines), H3 (future bets).
  2. Allocate resources
    • Typical allocation: 70% H1, 20% H2, 10% H3.
  3. Create management structures
    • H1 = efficiency; H2 = entrepreneurial flexibility; H3 = innovation culture.

Case Studies

  • Case 1 (Corporate):

    Huawei: H1 = telecom equipment; H2 = consumer devices; H3 = self-developed chips and operating systems.

    Insight: Diversifying across horizons prevents obsolescence.

  • Case 2 (Startup):

    A startup: H1 = cash flow business (outsourcing services); H2 = SaaS platform; H3 = AI-driven industry solutions.

    Insight: Even startups need a balance between today’s survival and tomorrow’s growth.

Pros and Cons

Pros

  • Balances short-term and long-term
  • Provides a structured framework
  • Encourages sustainable growth

Cons

  • Resource conflicts between horizons
  • Requires strong leadership and governance

FAQ

  1. Is the framework suitable for small businesses?
    • Yes, but with smaller scale and adapted resource allocation.
  2. Must the ratio always be 70-20-10?
    • No, it depends on the company’s industry and stage.

Recommended Resources

Books

  • The Alchemy of Growth — McKinsey consultants, explains the framework in detail.
  • The Innovator’s Dilemma — Clayton Christensen, emphasizes the importance of disruptive innovation.

Other Resources

  • McKinsey reports on the Three Horizons Framework
  • Harvard Business Review articles

Essence in One Sentence

“Three Horizons Strategy: strengthen today, grow tomorrow, invent the future.”