The 3 horizons of innovation
The 3 horizons of innovation are used as a model to distinguish between the different types of innovation. The exact boundary between the horizons is sometimes difficult to determine. The following picture can help:
The boundary between the horizons is determined by whether we already know something well, whether it is new to us, or new to our industry / the world. In addition, we look at new technology and / or solutions on the x-axis. On the y-axis we check whether the market and / or customers are already known.
H1: Horizon 1
Horizon 1 is incremental innovation or improvement / renewal. Technology, solutions, market and customers are well known. In this horizon, products are developed that the company is known for, and where profits and cash flow come from. In Horizon 1, innovation is all about operating, improving and extending the current product lines.
The focus is on efficiency and doing things right. Work is carried out in a planned and orderly manner, risks and uncertainties are avoided or minimized.
H3: Horizon 3
Horizon 3 is the distant future. Technology and solutions are virtually unknown - at least in your industry. It can also concern completely unknown markets or customer groups. We call this horizon disruptive innovation, because developments in this horizon can have a major impact on your company, industry, life. The focus in this horizon is on learning what works. It's really about entrepreneurship. How can we use new technology in our context? How does this market work?
H2: Horizon 2
Horizon 2 is in the middle of it. In horizon 2 we are working on matters that go further in scope than horizon 1. They already take some of what is expected to happen in the more distant future. The technology or solutions are known, but not yet at your organization. Market and customers are not new, but they are for your organization. There is a good idea, but how to market it is difficult to determine. Focus in this horizon is on discovering new business models.
Ho: Horzon 0
This is our own addition to the model. Any innovation aimed at improving the internal organization falls under Horizon 0. These innovations also require resources and, depending on how new it is to the organization, a different approach may be required. Don't you want to map out all your initiatives from a portfolio perspective?
Background of the model
The Three Horizons Framework was originally published by Baghai, Coley et al (2000) and has since been an important model for growth, change and innovation. It is used by McKinsey. More and more organizations are working with this model because it is practical and provides many new insights.
Why use the 3 Horizons?
The 3 horizons model helps make a corporate innovation strategy tangible. It helps you to formulate pragmatic and achievable goals. It helps you measure its progress. In order to achieve long-term continuity, organizations should develop initiatives in all 3 horizons simultaneously. Business models don't last forever, at some point there will be a decline. Companies will have to have the successor ready at that time. The only way to do this is to start today. This is illustrated in the following picture.
Elements of the future can already be noticed now. The organization must learn what works within their own context. By working in all 3 horizons of innovation simultaneously, the next solution will be available at the transformation point. This ensures business continuity, which is indicated by the red line.
Innovation method per Horizon
Larger organizations that strive for continuous innovation work with different processes and speeds. The organization must focus on the implementation of the basic business model. In addition, it must also innovate that same model. The focus is therefore different per horizon, as shown in the following picture.
A different focus also requires a different way of developing solutions. Since we are entering unknown territory, the usual way of working will not help. We need methods that are better suited for exploration, for searching for new business models, for learning. For that reason, Lean Startup and Design Thinking are more suitable methods in Horizon 2 and 3.
Suppose a management team has to choose between two alternatives, both require a budget of € 100.000.
Plan A, is the next generation product and has a predicted ROI of 20% within two years. Plan B is an initiative to get started with a startup to see what impact artificial intelligence can have on the services of the company.
You can imagine what will happen! The budget goes to initiative A.
For this reason, we recommend that you use separate budgets. In this way, initiatives in Horizon 1 'compete' against Horizon 1 initiatives, Horizon 3 initiatives against Horizon 3, etc.
Innovation budget distribution
A common division between the 3 horizons is 70% of the innovation budget for Horizon 1, 20% for Horizon 2 and 10% for Horizon 3. However, the division depends on the context of your organization and industry. The faster the developments go in the immediate vicinity, the more should go to Horizon 2 and 3.
How to start?
A good way to start is to make an inventory of all existing initiatives. Make a list and together with a team you determine how they score on the axes of the 3 horizons model. Use the 4 horizons canvas for this, which can be downloaded for free on our site.
This visualization gives you a first indication of what you are focusing on at the moment. It will start a discussion about the desirability of this distribution. It is an excellent starting point for innovation portfolio management.
Portfolio management is not easy. Introducing it should lead to a small cultural change. Pimcy is happy to help you as a guide in this process.