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McKinsey's Three Horizons of Growth
Developing Future Opportunities
Over time, many organizations go through distinct stages of growth and decline. They're born,
they mature and then – seemingly inevitably – they fade away.
However, some organizations avoid the downturn. They manage to sustain their growth over
decades, and continue to surprise customers with their innovation and creativity.
They do this by devoting time, energy and resources to developing new ideas. These then mature
and become profitable, replacing older products and businesses as they fall away.
In this article, we'll look at McKinsey's Three Horizons of Growth, a model that organizations can
use to focus their energy and resources on projects that sustain their growth over the long term.

About the Model

Mehrdad Baghai, Stephen Coley and David White, partners at McKinsey & Company, published
the Three Horizons of Growth model in their 2000 book, "The Alchemy of Growth."
The model, shown in figure 1 below, outlines three different types of innovation that need to go on
in parallel for a business to be successful. Organizations must invest in each one, and meet the
specific management challenges that accompany them, to sustain long-term growth.
The framework focuses your organization on developing future revenue streams and business
opportunities, so that, when existing products have run their course, new ones are ready to take
their place.

Figure 1: The Three Horizons of Growth

The three phases are:

 • Horizon 1: This refers to your organization's current core businesses – the products and
brands generating the most profit right now.
• Horizon 2: This relates to your organization's emerging businesses or products. These are
still in their early stages, and require investment or research to thrive. However, they generate
plenty of interest among your investors and customers.
• Horizon 3: This focuses on your organization's seedling investments, and ideas for future
business. These could be research projects, early discussions or alliances, or products still
being prototyped.
According to the model, organizations must invest time, energy and resources in exploring all
three of these horizons at the same time. Without the continuous innovation that this brings,
growth eventually stagnates and organizations decline.

Benefits
The Three Horizons of Growth model keeps your attention focused on defending and developing
your current brand, investing in upcoming businesses, and generating new ideas and
opportunities.
It also prevents organizations from making common mistakes when they are seeking to achieve
sustained growth. For example, some focus entirely on Horizon 1 products. Then, when these start
to decline, they find that there are no other opportunities waiting to replace them.
Another common mistake is to become overly obsessed with growth and new business. Here,
organizations put too much focus on Horizons 2 and 3, and lose sight of their Horizon 1 products.
This is dangerous, because core products and businesses provide the money to support the
development of new opportunities, and it's easy to underinvest in improving these further.

Note:
Each horizon has its own time frame. For example, your investments in Horizon 3 opportunities
might not pay off for years, while those in Horizon 2 might start to generate a profit in a year or
two.
That's why it's necessary to pay attention to all three horizons at the same time, so that you always
have opportunities ready to mature and generate growth and profitability.

Uses
As well as developing new products, the Three Horizons of Growth can guide your expansion
efforts.
In Horizon 1, for example, your organization might be comfortably settled in the United States,
with a strong brand and customer base. In Horizon 2, you might want to expand into Europe with
slightly modified products. Your Horizon 3 plan could include breaking into an Asian market,
which might require entirely new products.
You could also use the framework to develop a long-term recruitment plan .
For example, while your existing team might continue working in current operations, a Horizon 2
recruitment drive might bring in entrepreneurial professionals who excel at building new
businesses. A recruitment initiative for Horizon 3, however, could target researchers, visionaries
and dreamers, or even rebels , who are skilled at thinking outside the box and coming up with
new ideas.

How to Apply the Three Horizons

For your organization to thrive in the long term, you need to be working effectively across all three
horizons. Below, we've outlined strategies that you can use to achieve this goal.

Horizon 1
Horizon 1 represents your organization's core businesses. These are the brands, products or
services that customers associate with your company right now.
You need to work on safeguarding and enhancing these, so that they continue to generate profits
and growth.
First, conduct a SWOT Analysis  for your most significant products to understand your
current strengths and weaknesses, and to identify the threats and opportunities that your
organization faces. Then, conduct a USP Analysis  to think about how these products can
compete more effectively in the market.
Next, make sure that your production line (whether it's in-house or outsourced) is as streamlined
and error-free as possible. Efficiency here will cut costs and quicken your time to market. Use
approaches like lean manufacturing  to improve this.
Profitability is extremely important: remember, your Horizon 1 businesses will provide financial
support for the other two horizons while they're in development, and at the early stages of growth.
Last, look at your market share. Is it stable or expanding? You might want to segment your
market  to gain a better understanding of it, and to identify new opportunities for growth.

Horizon 2
Now it's time to look at what your organization invests in. Often, Horizon 2 businesses are a
natural expansion of the products and services that you already offer in Horizon 1.
Has your organization invested in viable businesses that have the potential to replace your current
moneymakers? Are you gaining momentum in your respective markets, or are they stagnant or
declining?
You'll also want to conduct a PEST Analysis to map out "big picture" changes that might
threaten your current products, or open up new opportunities for them; this could include new
technology or upcoming government or industry regulations.
You need to think about how to push the most promising of your Horizon 2 businesses to a new
level. Here, use the Boston Matrix  to determine which of them warrant additional
investment and resources.
If you don't have any products or services on this second horizon, brainstorm  ways that you
could further enhance existing, successful products. How could you expand your current offering
and add more value to it? Doblin's 10 Types of Innovation®  can help you think about this
in many different areas of your business.
Also, explore and understand your organization's core competencies , and think about how
you can strengthen them and use them to develop new businesses.

Horizon 3
Your last step is to look at ideas and growth opportunities that might be years away from
production or profitability. These might be nothing more than drawings from your last
brainstorming session, or research projects that are underway.
First, look at the variety of ideas and projects that you have in the pipeline. Do you have a number
of options, or are they all focused in one area? If the scope is too narrow, look at how you can
widen it. Your goal is to have a rich source of potential products and businesses that fit with your
organization's business model and mission.
Encourage team members to submit their ideas for future businesses or products, and make sure
that your culture rewards innovation, creativity and risk taking.
If you haven't invested much time or energy in developing these opportunities, it's time to start.
Regularly set time and resources aside to brainstorm ideas with your team members, and to
encourage people to “think big” about what the organization could achieve.
Last, it's not enough to have good ideas; you need to be able to develop the best ones, so that they
can make the transition into Horizon 2. Learn how to run effective business experiments  to
identify and pursue your best prospects.

Key Points
McKinsey partners Mehrdad Baghai, Stephen Coley and David White published the Three
Horizons of Growth in their 2000 book, "The Alchemy of Growth." The model outlines three
different types of innovation that need to go on in parallel for a business to be successful in the
long term:

• Horizon 1: This is routine innovation within your organization's current core businesses –
the products and brands generating the most profit right now.
• Horizon 2: This refers to innovation and investment in your organization's emerging
businesses or products.
• Horizon 3: This describes your organization's seedling investments, and ideas for future
businesses.
You can improve how your organization grows over the long term by understanding the
importance of each horizon, and the specific management challenges it raises.

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