Sustainable business growth using the Three Horizons model for portfolio management

For companies managing comprehensive project portfolios, one of they key challenges is how to incorporate future-readiness into their portfolio management approach. As innovation takes a more prominent place on the stage of modern-day business, accelerated development create a challenge for companies that want to remain relevant – now as well as in the future. For business leaders, it’s no longer sufficient to simply manage current affairs, keeping the engine running and making sure the light stays on – they must look at the future, at what’s around the corner and actively pursue future business opportunities. This goes well beyond business development and sales – as the world evolves, businesses must evolve with it. Nobody wants to be the next Blockbuster in a world that’s watching Netflix.

McKinsey & Company’s Three Horizon model might offer an answer to the challenge of managing a future-ready portfolio: using an approach in which three different perspectives are used to classify projects in terms of maturity and risk, companies are able to better manage their project portfolio in terms of growth.

The Three Horizons model was first coined in the book “The Alchemy of Growth”, published in 2000. The key of this approach lies in three different approaches for different types of projects – after all, you’ll want to manage projects that are more innovative (or even speculative) in nature differently than operational projects affecting your current affairs. Success is defined differently in these cases, and metrics should be adopted accordingly as projects across all three horizons are not competing in the same race – to judge them by the same metrics would be unfair.

As the name implies, the Three Horizons approach classifies projects in three categories (or horizons). Together, they work as a funnel, through which ideas move from experimentation, to development and investment, to optimization. Let’s briefly examine these horizons, and what differentiates them between one another.

Horizon 1: product optimization

The first horizon is mainly focused on projects affecting established products. Gains are to be made here in terms of efficiency and cost reductions. In this perspective, you’re working with your established customer base and in your current business model – which you know works. The goal here is to effectively work towards a more efficient enterprise. Offering your current clients the same business value using less resources, or faster using the same resources. The focus is on incremental growth.

To use a relatable example to envision this stage, let’s take a florist. In the first horizon, the business owner would include initiatives related to optimizing logistics, improving marketing and creating a better customer experience in the flower shop.

Horizon 2: product building

The next horizon is focused on extending your business to new products or service offerings. We’re talking about more radical changes here, actual new endeavors instead of incremental changes. This is the stage in which you’re still experimenting with your new product offering or heavily investing in gaining a foothold within new segments or industries. Your new product or service line might not be at a level of profitability yet, and as such it shouldn’t be measured on that metric. You’re still on your way to figuring out how to turn this offering into a viable business model. Essentially, you’re extending your company’s core competencies. Metrics that might work are related to gaining traction in emerging markets, creating a competitive advantage or amassing market share. And while solving the puzzle of profitability, you’ll want to beat your competitors to it.

Tracing back our steps to our imaginary flower shop, we’d see activities in the second horizon such as expanding flower sales to new markets such as opening a new store in a second location, marketing and selling a new range of bouquets or starting a flower delivery service.

Horizon 3: product ideation

The third horizon is by far the most experimental one, in which ambiguity reigns and ideas and opportunities can be either hit or miss, and more likely the latter in many cases. Instead of managing current competencies, as you do in horizon 1, or extending your competencies as in horizon 2, this horizon is about going back to the drawing board and imagining the company of the future. You’ll have to try and recognize what competencies will be critical success factors in the future, with the goal of eventually developing these and adopting these within your business. In the third horizon, you’ll measure success by gaining speed in the development and prototyping of new ideas, and by creating and growing a set of ideas that you have available to explore. In this stage, risks are by far the highest – and part of the third horizon is figuring out how big the risks and how feasible it is to create a business model around the idea.

The third horizon for our flower business would be the research into unique cross-breeds of flowers or even entirely new types of hospitality products to be on offer, and so on.

Working with the three horizons

Together, the three horizons act as stepping stones for projects to move from experimentation and ambiguity towards being a part of the core business portfolio. The key takeaway is that ideas amass at the third horizon, and move towards the second horizon as they pass key risk assessments and prove to hold some value for creating a sustainable business model around them. Eventually, after being developed and shaped into a profitable revenue generator in the second horizon, the focus shifts to efficiency and optimization as products move to the first horizon. Successful portfolio managed, in terms of the three horizons, is all about finding the right balance between forward-thinking and envisioning your business of the future, and managing and improving your current business model.

The idea of working with these three horizons isn’t necessarily ground-breaking, but the approach does provide a backbone for managing your business around these levels of risk and ambiguity. We’ve mentioned the need for relevant metrics to be used in each of the three horizons, but as a business you’ll also have to adapt your HR to attract and develop employee competencies to work in each stage. It’s a great starting point for companies that have identified a lack of innovation and future-readiness as one of the key business challenges today.