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QUESTION
Global Strategy
WHAT ARE MCKINSEY’S THREE HORIZONS OF GROWTH?
cKinsey’s Three Horizons of Growth are all about keeping you focused on growth and innovation.
This strategy framework requires you to categorize your goals into 3 different ‘horizons’:
HORIZON 1: MAINTAIN & DEFEND CORE BUSINESS
Activities that are most closely aligned to your current business.
Most of your immediate revenue making activity will sit in horizon 1. For a retailer, this would include the
day-to-day goals associated with selling, marketing and serving your product/customers. Your goals in
horizon 1 will be mostly around improving margins, bettering existing processes and keeping cash coming
in.
HORIZON 2: NURTURE EMERGING BUSINESS
Taking what you already have and extending it into new areas of revenue-driving activity.
There may be an initial cost associated with your horizon 2 activities, but these investments should return
fairly reliably. This is based on them being an extension of your current proven business model. Examples
of this could include launching new product lines or expanding your business geographically or into new
markets.
HORIZON 3: CREATE GENUINELY NEW BUSINESS
Introducing entirely new elements to your business that don’t ex ist today.
These ideas may be unproven and potentially unprofitable for a significant period of time. This would
encompass things like research projects, pilot programs or entirely new revenue lines that require
significant upfront investment.
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WHAT DOES MCKINSEY’S THREE HORIZONS OF GROWTH HELP ME TO ACHIEVE?
ost organizations want growth. Most organizations also acknowledge that innovation is a critical
component of achieving that growth. Yet so many of them treat innovation as one-off events. Such
as a huge project to be delivered, or a set ‘innovation program’ to be introduced. One of the most
common reasons for this approach is the perceived gap between the innovation of tomorrow versus the
reality of running the business today.
McKinsey’s Three Horizons of Growth aims to help you bridge this intellectual gap. It does this by creating
stepping stones between running your business profitably today and growing it for the future.
This strategy framework helps ensure that you consistently balance your focus between the needs of
today (horizon 1), the future state of your business (horizon 3) and the steps that you need to take to get
there (horizon 2).
The Three Horizons of Growth framework is an extremely versatile strategy framework, applicable to mos t
organizations. In particular the framework lends itself to organizations who’ve identified that growth and
innovation have been a stumbling block. If you feel as though your organization is mired in ‘chugging
along’ delivering business as usual – McKinsey’s Three Horizons of Growth might just be the right strategy
framework for you.
HOW DO I APPLY MCKINSEY’S THREE HORIZONS OF GROWTH TO MY BUSINESS?
o you’ve decided that growth and innovation are indeed critical to your business, and you’re willing
to give McKinsey’s Three Horizons a shot at helping you get there. This is how to go about applying
it to your own organization:
Start with a deep understanding of your horizon 1
You first need to identify your biggest assets today. The main reasons why your business makes revenue
or succeeds at what it does. If you were Starbucks, this would be your brand and perhaps your distribution
channels. If you were Microsoft (back in the 1990’s) it would be your enterprise products and perhaps your
partner network. Name these drivers of success for your business today.
Now, imagine that you lost them entirely. Imagine that you’re Microsoft and businesses refuse to buy your
software anymore…
Your horizon 3 is what you would do if that were to happen
Yep, that’s not a typo – we’re moving straight to horizon 3. Let’s stick with Microsoft as an example. The
Microsoft Xbox was launched in 2001. On the surface, it was a million miles away from playing to
Microsoft’s core strengths at the time, which were firmly in the business and productivity space. And that
was exactly the point. The Xbox wasn’t a shot in the dark – it was Microsoft’s horizon 3. They’d identified
something at which they thought they could succeed (you still need core capabilities that will allow you to
win). However they didn’t rely on the things that were making them a success today.
But how did they go from strength in business software/productivity to winning in the ultra -competitive
gaming hardware industry?
Horizon 2 is the bridge that gets you there
This is where horizon 2 comes in. Once you know what you want to do for your horizon 3, work backwards
from that (and forwards from your horizon 1) to create a plan of action that will bridge the gaps.
For Microsoft, that involved launching their own line of computer games (famous ones include Age of
Empires and Microsoft Flight Simulator). It also included a range of ‘light’ hardware such as keyboards
and mice. This gave them the experiences they needed (and a bit of extra revenue too) in both gaming
and hardware, that ultimately resulted in them creating the Xbox.
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Your horizon 2 doesn’t have to be a revenue generator per -se, but it should contain enough of your core
assets from horizon 1 to give you a fighting chance of it being profitable. The bigger pictur e though, is that
it helps you to bridge the gap between your today and your desired future state (horizon 3).
THE 70 / 20 / 10 RULE
o put this into practice for your strategic plan, try to ensure that around 70% of your activity is
playing towards your horizon 1. After all, you need to survive and thrive today to have any chance of
succeeding tomorrow.
Then, allocate around 20% of your effort to the those horizon 2 ‘bridging’ opportunities. That might sound
like a lot, but horizon 2 will contain failures and false-starts, so it’s important that you have enough irons in
the fire to get you to horizon 3.
For horizon 3, that leaves 10% of your overall effort. That 10% is important. Without it, you can easily lose
sight of your ultimate goals, and get lost in a never-ending cycle of horizon 2’s. Microsoft for example
experimented with a range of simple game controllers throughout the 1990’s called the Microsoft
Sidewinder. Most of your horizon 3 10% efforts will be on research and experimentation, with a few light
product launches towards the end if you’re lucky.
SO…WHAT NEXT?
f you’re liking the sound of McKinsey’s Three Horizons of Growth, have a go at applying it to your own
business. An easy place to start is to take a look at your existing strategic plan, and overlay what
you’ve learnt about the different horizons to that plan. Ask yourself the following questions:
- How close are you to the 70 / 20 / 10 rule?
- Do you have a clear understanding about your current reasons for success?
- Do you have a plan for if they were to be taken away from you?
- If you’re not satisfied with your answers to those questions, then McKinsey’s Three Horizons of
Growth could be just the framework for you.
Source: https://www.executestrategy.net/blog/mckinseys-three-horizons-of-growth/
| Subject | Business | Pages | 7 | Style | APA |
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Answer
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Question 1
The Proposed Strategy Statement for Airbnb
A strategy statement is a statement that communicates the strategy of a company clearly and succinctly to all stakeholders. The company’s competitive advantage must be included in the strategy statement and so is the objective and the scope of the company’s activities (Elaine Yuen, Moodie, Cunningham & Oram Cardy, 2020). The strategy statement of Airbnb should therefore read as follows.
‘Our goal is to provide a home away from home to discerning travelers, holiday makers and business travelers that provides a sense of belonging and delivers unforgettable local experiences and cuisines. Everywhere you go should be home and everything you do while there should be memorable, exceptional and the experience should be just extraordinary”
Question 2
“Three-horizons” analysis for Airbnb for both existing and future activities
The first horizon involves maintaining and defending the core business of the company. In the case of Airbnb, the core business is renting private homes and private properties to individuals at a fee paid by both the host and the guest at a certain percentage. This is a type of a hotel service that the company offers. The company’s goals in this case involves improving property listings, ensuring good quality pictures are uploaded, pricing is competitive and the company culture is upheld (Smith, Gilbert & Sutherland, 2017).
The next horizon involves nurturing emerging business opportunities. This will involve embracing sharing culture such as partnering with similar internet Apps such as Girl meets a Dress and Easy Car to increase customer base and grow revenues. The company also introduced Airbnb Neighborhoods and local lounges and also partnered with local coffee shops which offer Wi-Fi for free to attract new customers. The company also provided comfortable settings and local guide books to assist customers move around and enjoy their stay unhindered. To connect guests to local people the company acquired a startup that specializes in that business (Pugliese, Bortoluzzi & Zupic, 2016).
The third horizon activities involve creating new business that is genuine and in this case the company plans to transform itself from one that offers hotel service to one that is offering a lifestyle solution to travelers, holiday makers, conference delegates and business travelers among others (Pugliese, Bortoluzzi & Zupic, 2016).
How this might affect its future strategic direction
The company will encounter legal and regulatory challenges as it implements its strategy. Already hotel establishments in San Francisco have been forced to lower their prices to compete with Airbnb service offerings. Players in the industry have raised issues on the Airbnb arguing they are dangerous and unsafe as they cannot guarantee safety, health and quality cannot be assured as it was not regulated by the authorities (Innocenti & Zampi, 2019). There will also be regulatory issues which will arise on listing of homes and permits to rental premises from the regulatory authorities. These may reduce the number of listings if the company does not take proactive measures to ensure the requirements are not too difficult to meet (Pugliese, Bortoluzzi & Zupic, 2016). For instance, in New York, “the illegal hotel law” to prevent people from renting their homes for periods less than 29 days was passed. The question of the host paying tax on their earnings will continue to be an issue. Authorities are likely to pass laws to ensure hosts are paying taxes which might affect its pricing policies (Mckelvie, Brattström, & Wennberg, 2017).
New players have also entered the industry offering similar services which compete with Airbnb. These include Roomorama. HouseTrip, Flipkey and Trip Advisor holiday rentals among others. These will definitely reduce the company’s market share. The company has been rumored to be the hottest initial public share offer in the industry. This implies that the company will not have a problem raising funds to finance growth activities. However, there have been instances when guests have used private homes to shoot adult films which is likely to dent the image of the company if this practice is not checked and curtailed (da Silva Alves & Pimenta-Bueno, 2018).
The company’s culture of encouraging dialogue and allowing people to speak on the big issues ‘elephants”, the past issues “dead fish and the issues that must be spoken “vomit” risk to be heralded as the company grows. Even if the company has ground control staff to ensure culture comes alive with increased growth this may be a challenge to ensure it is upheld and is uniformly applied (Pugliese, Bortoluzzi & Zupic, 2016).
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References
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