I will try to deep dive what McKinsey’s Three Horizons Framework is and also try to explain how to use it as a part of the strategic plan with case studies for those who want to complete strategy in the digital age.
Before going into details, I want to take your attention to the importance of this framework for your strategic plan. Every single part of your strategy will depend on these horizons. If you write properly and separate all areas very clearly, you will see that these horizons and their priorities are going to help you to tackle digital disruption.
First of all, let’s start briefly with what Three Horizons means. It’s one of the quickest ways to describe and prioritize innovation ideas in a large company. Prioritization has two important branches: profit and time. At this point, we need to know what to measure and how to measure it.
• Horizon 1: Extend & Defend Core Businesses
• Horizon 2: Drive Growth In Emerging New Businesses
• Horizon 3: Seed Options For Growth Businesses
Horizon One: Extend & Defend Core Businesses
It is related to the company’s core business and its direct lines. In other words, this is the part which provides a huge portion of cash flow today. Focusing on Horizon One is mostly improving the performance of current businesses to increase potential value from the remaining parts that are unreached yet. Even if profit is the lowest among other horizons, we must keep focusing on Horizon One to survive in the current market and also use all free rooms as much as we can to get a competitive advantage among competitors in terms of liquidity and financial power. My recommendation is that, aim to limit your spending on Horizon 1 activities to around 70% of your business budget. This budget allocation will unlock your resources to invest in the future growth activates.
Horizon Two: Drive Growth in Emerging New Businesses
“Drive growth in emerging new businesses” may not generate any revenue in the very short term, but you can expect to have resulted in the mid-term. It is not guaranteed to get ROI from these ventures but that would definitely need investment at the beginning to keep its growth in its new ecosystem. We can also think that this horizon is the incubation for companies to accelerate their next core strengths. Smart companies usually allocate 20% of their business resources on Horizon 2 activities.
Horizon 3: Seed Options for Growth Businesses
This is the horizon that I love to drive. It creates an option for future business. Unfortunately, almost all big companies and their professionals do not focus on this horizon and pay enough attention. Some of the activities in the horizon 3 will prove their success and contribute to cash flow in the long term. All activities, which will start with the idea generation from recent conditions for future revenue, and investments in Horizon 3 are generally for protecting companies to be disrupted in the future. Businesses typically spend 10% of their budgets on Horizon 3 activities.
Horizon 1 is the improvement, extensions and cost reduction with the mature technology in the existing market. Horizon 2 is generally about next-generation products or services with emerging technology in the emerging market. Horizon 3 is completely new categories that are transformative and new to the world.
Let’s have a look at the insurance sector within the framework and also explore remarkable startups and their business models.
