The 3 horizons in lean innovation portfolio management
In this article we will cover the 3 horizons of innovation. We will link these horizons to lean innovation portfolio management. Next to this, we will explain how to calculate a match / mismatch with the desired situation.
The '3 horizons framework' was originally published by Baghai, Coley et al (2000) and has been an important model for growth, change and innovation ever since.
The original model is focused on growth. The model offers a framework to look to the future without losing the context of today. Core idea is that a company is working on activities simultaneously in all three horizons. Only in this way continuous, long term growth can be achieved.
The 3 horizons
H1: Horizon 1
Horizon 1 is about the current way of doing things. It is the stuff where the company is known for, and where profits and cash flows stem from. In Horizon 1 innovation does take place, but this innovation is more about continuing, improving and extending the current business lines. We do this in a planned and orderly fashion, we minimalize risks and uncertainties. Next to this we continuously improve our performance, keep costs low and maximize value.
H3: Horizon 3
Horizon 3 is the future. How would the future look like if you could start all over again, without any legacy? What would you do if you could take into account all new exciting technologies and other developments? Developments in these horizons are potentially disruptive, but at a minimum revolutionary.
H2: Horizon 2
Horizon 2 is in between. This is why we discuss this horizon last. In horizon 2 we have developments that are way beyond the scope of horizon 1, and that are already incorporating a bit of the long term vision of what will happen in the future. Developments however are real and take place today. an entrepreneurial mindset is required, at the same time people can learn and benefit from experiences in the past.
A different perspective
Thinking from the perspective of the three three horizons also helps to see where we stand as a human being. Do I enjoy working on actual, real-life business or am I more a dreamer? Bill Sharpe speaks about three voices: the H1 manager that must ensure business-as-usual is running, the H2 entrepreneur trying new stuff and the H3 visionary creating opportunities from his imagination. The good news is: companies need all types to be successful in the long run.
Lean innovation portfolio management
source Steve Blank
This model left lean innovation and the three horizons. Horizon 1 is about process innovation, or execution of the current business model.
Horizon 2 is about business model innovation. This means that certain elements of your existing business model are changed (for example new target group, new distribution channel, new income model), which may result in other elements of your business model that need to adapt.
Horizon 3 is both an unknown market and an unknown solution. These are new business models that potentially disrupt the existing ones. So this is revolution.
Practical approach to portfolio management
In our approach to portfolio management we build on the model of Steve Blank. We have seen that listing all innovation initiatives and linking this to the best fitting horizon gives a good overview of what is going right and wrong in a company in the innovation domain.
This canvas is called the 'Horizons Canvas'. We can name the three horizons as following:
We then divide into 3 boxes based on Design Thinking:
Define: Initiatives in this box are not much more than an idea, maybe a concept.
Design: Initiatives in this box are in designing stage, a business model is being developed, initial tests will start in this stage.
develop: Based on the learnings of previous stages, initiatives in this box are already being developed.
Try for yourself
Draw the 9 boxes of this canvas on a flipover and write down all your (innovation) projects on a post-it (1 project per post-it). Paste the post-it in the right box. This will give a first indication about balance / unbalance within the current portfolio.
Horizons portfolio MATCH / MISMATCH
We now want to identify whether there is a (mis) match between strategy and current project portfolio.
First, think / agree on how you would ideally divide 100% innovation budget over the three horizons.
Now take the previous canvas. Note per project (from design stage, if acknowledged as a project) the total project budget on the post-it. Calculate the total. Now you can calculate the percentage for all three horizons.
Now subtract the desired percentage of the real percentage. The result is the mismatch per area.
Improve: 70% - 95% = - / - 25%
New: 20-5% = 15%
Revolution: 10% - 0% = 10%
In this example we see that there is too much focus on H1: Improve. And too little focus on H2 and H3.
The above example is not accidental. We see many companies focusing on H1. They innovate quite substantially but it is more of the same. The problem is that the riskier and immature ideas required for H2 and H3 have to compete for budget with H1 projects. And they will loose this battle. For this reason it is wise to create separate portfolios for H1, H2 and H3. For every portfolio other decision criteria and new product development processes are used. This enables a fair comparison.
So a first step could be to start with this. Then, in the gate meetings you will make sure that H2 and H3 get a fair chance to be able to proceed. And you will have a critical look at your current H1 portfolio. Are all projects worth the while? Because often we see that as soon as an idea has become a project, this project will be delivered no matter what. If you apply portfolio management in a healthy way, you would also kill initiatives.
 Baghai, M., Coley, S., et al. (2000). The alchemy of growth: practical insights for building the enduring enterprise, San Francisco, CA: Perseus Publishing.