The 3 horizons of innovation drive business continuity
The 3 horizons of innovation model is an excellent way to visualise the balance in your innovation portfolio. A distinction is made between various types of innovation, for which the exact difference is somewhat ambiguous. In the following picture I have tried to visualise the model in a simple way.
The distinction between the horizons is determined by whether we know something already fairly well, or that it is new to us or to the world/ our industry. On the x-axis we look at new technology and/or new solutions. On the y-axis we assess how familiar customers and markets are.
Background of the model
The ‘Three horizons framework’ was originally published by Baghai, Coley et al (2000) and has been an important model for growth, change and innovation ever since. It has been promoted by McKinsey. More and more organisations start working with this model, because it is practical and gives many new insights.
H1: Horizon 1
Horizon 1 is incremental innovation. Technology, solutions, markets and customers are well known. In this horizon, products and services are developed for which the company is known for, and where profits and cash flows stem from. In Horizon 1 innovation is about continuing, improving and extending the current business lines.
Focus is on efficiency and doing things right. Work takes place in a planned and orderly fashion, risks and uncertainties are avoided or minimised.
H3: Horizon 3
Horizon 3 is the far future. Technology and solutions are virtually unknown – at least in your industry. It may also concern unknown markets and customer groups. We call this horizon disruptive innovation, because developments in this horizon might have a big impact on your company, industry and lives. Focus in this horizon lies on learning what works. How can we use new technology in our context?
H2: Horizon 2
Horizon 2 is adjacent innovation. In horizon 2 we have developments that are beyond the scope of horizon 1. They are already incorporating a bit of the long term vision of what will happen in the future. The technology or solutions are known, but not yet to your company. Markets and customers are existant, but not yours yet. Developments are real and take place today. Focus in this horizon is on discovering new business models.
What about H0?
Horizon Zero is not officially part of the model, but I find it practical to use it. Resources are consumed not only by innovation initiatives, but also for a large deal by initiatives that are required to run the organisation. These initiatives are also very important as they form the foundation of the company, it is the big enabler to make innovation happen anyway. But a project like introducing Office 365, should not be seen as part of Horizon 1 in my view. For this reason I have created H0, so that we will not forget how important this is and how many resources are claimed by these type of projects.
Why use the 3 Horizons?
The 3 horizons model help to make a corporate innovation strategy tangible. Using this model helps to define pragmatic and achievable goals. In order to achieve long term continuity, organisations need to work in all 3 horizons simultaneously. Business models don’t work for ever, and at some point they will get in decline. Companies need to have the new successor ready at that point. The only way to do this, is by starting today.
In order to survive you have to be prepared for today, tomorrow and the day after tomorrow! (Peter Hinssen in his book “The day after tomorrow”)
By working in all 3 horizons of innovation simultaneously, the succeeding solution will be available at the transformation point. Today, pockets of the future can already be discovered. Some of them can be applied immediately! The organisation needs to learn what works in the company’s context. This will ensure business continuity. Business continuity is indicated by the red line.
Innovation methodology per Horizon
Larger organisations striving for continuous innovation, apply different processes. The organisation is focused on improving the core business model. Next to this it is also working on innovating that very same business model. And in horizon 3, they are trying to discover the impact of emerging technologies and markets. This means that the focus is different per horizon, as can be seen in the following picture.
A different focus also calls for a different way of developing solutions. Since we are developing in unknown terrains, the usual approach will not work. We need methods that are better suited for exploration, for searching new business models, for learning. That is why in Horizon 2 and 3, Lean Startup and Design Thinking are more suitable approaches.
Imagine a management team has to decide to invest in one of two alternatives, both initiatives cost € 100.000,-.
Plan A, is the next generation product and has a predicted ROI of 20% in two years time. Plan B is an initiative to start working with a startup to find out how artificial intelligence could impact the company’s services.
You can imagine what happens right? The budget will be allocated to initiative A.
This is why we recommend ringfencing the innovation budgets. Horizon 1 initiatives compete against horizon 1 initiatives, horizon 3 initiatives against horizon 3, etc.
Innovation budget allocation: 70-20-10
A common allocation of resources/budget between the three horizons is 70% of the innovation budget for Horizon 1, 20% for Horizon 2 and 10% for Horizon 3. However, the split depends on the context of your organisation and industry. The higher paced your environment and industry, the more should be allocated to Horizon 2 and 3.
How to get started?
A good way to start is by making an inventory of all your existing initiatives. Try to list them, and together with a team try to define where they are on the x- and y- axis of the three horizons model. You can use the below 4 horizons canvas, which you can download for free on our website.
This visualisation will give you a first indication where your focus is at this moment. It will prompt a discussion about the desirability of this division. It is an excellent starting point for innovation portfolio management.
Portfolio management isn’t easy. Introduction of portfolio management will lead to a small culture change. Pimcy can help you in this complicated process.