The book “The Alchemy of Growth” (Merhdad Baghai, Stephen Coley, David White) describes the 3 Horizons model that differentiates three levels of innovation and growth.
- Horizon 1 is about the core business where the company make its main money. In horizon 1 you won’t do very risky things but innovation is still necessary to optimize the product/service and get ahead of the competition (or to stay ahead of the competition).
- Horizon 2 is about the upcoming future business. In horizon 2 companies develop the business models and products/services that should make essential money in 2 to 4 years.
- Horizon 3 is about the vague ideas with an unclear future. These are the startup-like ideas and statistically 9 out of 10 ideas won’t make it into relevant products/services.
Every horizon has to be managed differently and needs different optimization criteria (like KPIs), types of people, processes and structures.
The purpose of the products/services on horizon 1 is not only to pay the salaries and make money for the shareholders but also to finance horizon 2 and 3. The products/services of horizon 1 need a compromise of stability and innovation for optimization. The goal of the optimization is to ensure (or even improve) the market position. The successful products/services need to be improved (and often cost reduction is an important part of this improvement).
The products/services and the market in horizon 1 are well understood and relatively stable. Therefore it is possible to calculate business cases for innovations. Every innovation should have a short payback period and the payback forecast will often match the reality.
The purpose of horizon 2 is to develop the products/services that will move to horizon 1 in a few years. The innovations of horizon 2 often need new organizational structures and processes. The business model is not yet validated and relevant users needs are still unknown. Therefore detailed long term planning doesn’t make much sense. A rough sketch of the key features and best guess for budget and time (e.g. one team with 8 developers for 6 months) are as accurate as it can get. The details are figured out during the development with short feedback cycles and intense market/customer contact.
For the products/services in horizon 2 there is a high confidence that they will be successful in the market. Therefore minimizing time-to-market is essential. The team should work full time on the product/service and must not be restrained be bureaucratic stage gate processes.
When horizon 1 and 2 are mixed, conflicts will arise and most times horizon 1 wins (since it makes the money). But also in an environment where horizon 2 is isolated from horizon 1 conflicts will occur, when horizon 2 products/services are developed and move to horizon 1. Therefore horizon 1 innovations need a powerful driver (e.g. CEO).
Example: Steve Jobs drove the first iPhone and then the iPad development.
The purpose of horizon 3 is to obtain and secure options and validate business ideas. In horizon 3 most of the bad ideas should be eliminated and most of the options won’t be exercised.
MVPs, (Minimum Viable Products), prototypes and mockups are king. Often there is no real product development necessary in horizon 3. Within horizon 3 we need to accept that most of our attempts will fail. We need to embrace failure and need to minimize learning cycles.
Every horizon needs another type of product ownership. According to the three types of product owners Eric may serve horizon 3 best, Jeff may be necessary to drive a horizon 2 innovation and Marty may be best suited for horizon 1 innovations.