Jun24
It is common for business leaders to become so engrossed in managing everyday activities that they overlook how the evolving external environment will impact their core operations in the future. This short-sightedness can impede their companies’ ability to adapt and thrive in the long run. Even initially successful companies may eventually falter if they fail to consider their long-term strategy. Maintaining a competitive edge and continuously seeking new growth avenues is crucial in today’s fast-paced business landscape. Nonetheless, juggling these priorities can be challenging. This is where the Three Horizons of Growth framework becomes invaluable.
Introduced by Baghai, Coley, and White in their 1999 book “The Alchemy of Growth,” the Three Horizons of Growth framework aids businesses in visualising the stages of business maturity and setting strategic priorities to defend their core business while laying the foundation for long-term growth.
Each horizon in this framework represents a unique focus within the organisation, forming the basis for a healthy and sustainable business. Each horizon presents distinct management challenges that leaders must navigate. Let’s delve into each horizon individually.
Horizon 1 centres on strengthening the company’s core operations. “Core business” refers to a company’s primary activities or operations, typically encompassing its key products or services and main markets. This horizon is vital for most businesses, generating most of their revenue and profits. However, it is also the most vulnerable to disruption from competitors or market changes.
To sustain a competitive advantage, businesses must continuously innovate and enhance their existing products, services, and operational processes. This might involve investing in new technology, streamlining operations to improve margins, or launching product extensions. The aim is to maximise the untapped potential within these core areas to achieve robust short-term performance and accumulate sufficient resources to fund Horizon 2 and Horizon 3 initiatives.
Horizon 2 involves developing new revenue streams by scaling growth opportunities and taking calculated risks. This may entail entering new competitive arenas, developing new products or services, or acquiring and scaling new businesses.
Businesses in this horizon already have some customers and revenue, indicating customer-solution fit and traction towards product-market fit. While substantial profits may be a few years away, these ventures show promising potential to complement and eventually replace the company’s core business. Achieving this requires significant investments to accelerate business expansion. Here, the focus is increasing revenue and market share to reach a profit-market fit.
Companies must have a few Horizon 2 businesses in the pipeline, actively transforming promising opportunities into future core profit generators. It’s essential to carefully select an optimal number, as Horizon 2 ventures are resource-intensive in terms of both leadership and capital. Without Horizon 2 initiatives, companies may find themselves without replacements once their core business loses momentum.
Horizon 3 is about preparing for the long term. It involves making “small bets” on opportunities that, if successful, could eventually match the profitability of Horizon 1. These bets may include investing in research projects, acquiring minority stakes in promising ventures, or fostering a culture of experimentation.
In the UK, consider Tesco’s investment in grocery home delivery services or British Airways’ exploration of sustainable aviation fuel. Horizon 3 initiatives must be tangible activities and investments, not merely ideas on a whiteboard. Through these bets, companies ensure they are pursuing future opportunities without overcommitting resources, bridging the gap between current capabilities and future needs, and fostering a growth mindset.
Business leaders must understand that numerous Horizon 3 bets are necessary, as most will fail. Successful bets may take several years to materialise, progressing from Horizon 3 to Horizon 2 and eventually to Horizon 1. It’s crucial not to hesitate to eliminate bets that fail to meet expectations, but equally important to continue pursuing Horizon 3 opportunities to safeguard long-term growth prospects.
The Three Horizons of Growth can enable businesses to achieve sustainable growth by balancing short-term considerations with long-term objectives. This framework provides a structured approach to maintaining a competitive edge through continuous innovation and enhancement of products and processes, equipping companies to navigate future challenges and seize opportunities.
The Three Horizons of Growth framework is pivotal in setting priorities in strategic planning. Business leaders can ensure a balanced focus on present and future success by categorising these priorities into three distinct horizons.
A word of caution: the numerical sequence of the horizons does not imply a sequential approach. Businesses must manage all three horizons concurrently. Strategic priorities across the three horizons and the initiatives and resources allocated to each should be defined in parallel. Over time, successful ventures may transition from Horizon 2 to Horizon 1 or from Horizon 3 to Horizon 2.
Business leaders can follow these steps to harness the Three Horizons of Growth framework effectively:
Define the company’s vision and mission and conduct thorough internal and external analyses to identify strategic priorities. Robust priorities leverage the company’s strengths to address its opportunities and threats.
The identified priorities are categorised into three horizons. Priorities focused on core operations belong to Horizon 1, while those targeting emerging opportunities and future growth fall into Horizon 2 and Horizon 3, respectively. Remember, all priorities should be pursued simultaneously.
Allocate resources appropriately across the three horizons. Resources encompass budget, operating expenses, capital expenditure, talent, and leadership time. Horizon 1 requires individuals with deep business understanding and efficiency improvement skills, Horizon 2 needs entrepreneurial leaders comfortable with ambiguity, and Horizon 3 demands unconventional thinkers capable of uncovering new opportunities.
Review and adjust strategies regularly as the market evolves. This may involve reallocating resources or seizing new opportunities. Performance metrics should align with the specific focus of each horizon: short-term results for Horizon 1, market share and revenue growth for Horizon 2, and project-based milestones for Horizon 3.
Numerous companies have successfully implemented the Three Horizons framework. In the UK, consider BT Group’s expansion from telecommunications (Horizon 1) into broadband and digital services (Horizon 2) and its exploration of AI and IoT technologies (Horizon 3).
The Three Horizons of Growth framework offers a strategic approach to managing innovation and growth. By addressing the distinct focus areas of each horizon, businesses can achieve sustainable growth and remain competitive in a rapidly evolving market.
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By Andrew Constable MBA, LSSBB
Keywords: Business Strategy, Innovation, Leadership
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