The 3 horizons in lean innovation portfolio management

The 3 horizons in lean innovation portfolio management
In this article we will discuss the 3 horizons of innovation. We link this to lean innovation portfolio management. In addition, we explain how you can calculate whether there is a match or mismatch in relation to the desired situation.

The Three Horizons Framework was originally published by Baghai, Coley et al (2000)[1] and has since proven to be an important model for growth, change and innovation within organizations.

lean innovation portfolio management

The original model focuses on growth. The model provides a structure to look to the future without losing sight of the present. The basic idea is that a company works simultaneously on activities from all three horizons. Only in this way can continuous, long-term growth be achieved.

The 3 horizons

H1: Horizon 1

Horizon 1 describes the current way of doing things. This is about the things the company is known for, and where the greatest profits and cash flow come from. Innovation also takes place in Horizon 1, but it is more about maintaining, improving and expanding things that we already do. We do this in a planned and orderly manner, we ensure that uncertainties and risks are minimized.[2] In addition, we try to continuously improve our performance, keep costs low and maximize value. After all, the chimney should keep smoking.

H3: Horizon 3

Horizon 3 is the future. What would the future look like if you could start over, without constraints and taking new emerging technologies and other developments into account? Developments appropriate to this horizon are revolutionary in nature.

H2: Horizon 2

Horizon 2 is right in between. That is also the reason why it is discussed last. Horizon 2 contains matters that go much further than what happens in Horizon 1, and also include what will change in the environment in the long term. However, developments do take place in the here and now. A entrepreneurial mindset is needed, at the same time learning and benefiting from past experiences.

A different thinking perspective

Thinking from the perspective from the three horizons also helps to see where we stand as a person: do I prefer to deal with current, concrete matters or am I much more of a dreamer? Bill Sharpe talks about three voices: the manager from H1 who has to keep the business running; the entrepreneur from H2 who wants to try new things and the visionary from H3 who creates opportunities from his imagination. The good news is, companies need all types to be successful in the long term.

Lean innovation portfolio management

In my previous blog I described some lean innovation portfolio management is. In this I also have Steve Blank's model[3] discussed.

3 horizons

Source Steve Blank

This model makes the link between lean innovation and the three horizons. Horizon 1 is about process innovation, or execution of the existing business model.

Horizon 2 is business model innovation. This means that you change certain elements of your current business model (for example, new target group, different distribution channel, or different payment method), which sometimes also changes other elements of your business model.

For Horizon 3, there is both an unknown market and an unknown solution. These are completely new business models, which can potentially even undermine the current business model. So revolution.

Practical approach to portfolio management

Our approach to portfolio management is based on the Steve Blank model. It turns out that mapping all innovation initiatives, and linking them to the right horizon, provides a lot of insight into what is going right or wrong in a company.

3 Horizons canvas (plus 1)

horizons canvas

The canvas above is the so-called 'Horizons Canvas'. The three horizons can be briefly and powerfully translated into one word as follows

H1: Improve

H2: New

H3: TRANSFORMATION

Next, we'll use a breakdown resulting from Design Thinking:

Define: Initiatives in this field are not much more than an idea, at most a concept.

Design: Initiatives in this field are still on the drawing board, a business model is being developed, and the first tests start in this phase.

DeLiver: Based on what has been learned from the previous phase, initiatives in this field are already in the development phase.

Try it for yourself

Draw the 9 boxes of this canvas on a flipchart (forget Horizon 0 for a moment), and write all your projects on a post-it (1 project per post-it). Paste the post-it in the appropriate box. This already provides an initial overview of the balance / imbalance within the current portfolio.

3 Horizons portfolio MATCH / MISMATCH

We then check whether there is a (mis) match between the strategy and the current project portfolio.

First, determine how ideally you would like to distribute 100% innovation budget across the three horizons.

For instance

Improve: 70%
New: 20%
Revolution: 10%

Then grab the canvas from the previous exercise. Write down the project budget per project (from design, provided it has been 'recognized' as a project) on the yellow card. Calculate the total. Now the percentage ratio can be calculated between the three horizons.

For instance

Improve: 95%
New: 5%
Revolution: 0%

Now subtract the actual percentage from the desired percentage. The result is a mismatch per area:

For instance

Improve: 70% - 95% = - / - 25%
New: 20-5% = 15%
Revolution: 10% - 0% = 10%

In this example it becomes clear that there is too much focus on H1: Improve. Too little attention is paid to H2: New and H3: Revolution.

And then?

The above example does not come out of the blue. We see at many companies that the focus is almost entirely on H1. A lot of innovation is being done, but if you zoom in a little deeper it is often about improvements, next generations etc. The problem is also that the more immature and riskier ideas needed for H2 and H3 have to compete for budget with H1 projects. For that reason it is useful to create separate portfolios for H1, H2 and H3. Different criteria and production processes are used for each portfolio. And apples are compared to apples and not pears.

So a first step could be to get started. Then you will ensure that more H2 and H3 projects are given a chance in your project selection policy. In addition, you will take another critical look at your H1 portfolio. Are all projects really worthwhile? We often see that once an idea has become a project, it is realized at any cost. While initiatives are also stopped with healthy portfolio management.

[1] Baghai, M., Coley, S., et al. (2000). The alchemy of growth: practical insights for building the enduring enterprise, San Francisco, CA: Perseus Publishing.

[2] Sharpe, Bill. Three Horizons and working with change (Jan 2014)

[3] https://steveblank.com/2015/06/26/lean-innovation-management-making-corporate-innovation-work/

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