The Three Horizons of Growth Model: A Roadmap to Successful Innovation Strategy

While many businesses claim to be interested in innovation, actually charting a roadmap for progress can be challenging. Without tangible targets and practices, innovation strategy turns into a lot of “running in place.” Building a strategic framework for innovation helps ensure that efforts are not wasted. The three horizons methodology helps focus innovation efforts so your entire organization has a clear understanding of the processes and key activities behind your strategy.

The Three Horizon Model is a powerful way to conceptualize transformative innovation. While many businesses claim to prioritize innovation, formulating a roadmap for progress can be difficult, resulting in a stagnant innovation strategy. To assist businesses in driving innovation, Digital Leadership offers Innovation Consulting service. Through tailored strategies, the launch of new ventures, and the cultivation of positive relationships, we help businesses identify industry gaps By integrating the Three Horizons Model, which encompasses improving an existing business, transforming an existing business, and innovating an entirely new business, organizations can allocate their resources effectively and ensure their innovation efforts are focused and productive.

What is the Three Horizons Model?

The Three Horizons Model framework helps conceptualize and focus your efforts to push your business forward. Think of it as a roadmap to help guide your strategy, the Three Horizons are Improving an existing business, Transforming an existing business, and Innovating an entirely new business.

As we’ll see, each horizon requires a different commitment and approach that’s unique to your plans and situation.

Understanding The Three Horizons of Growth Model?

Horizon 1: Execute and incrementally improve an existing business

Here your organization executes its existing business model (composed of the six domains: the service, revenue, cost, operating, value, and performance model). It uses existing assets and capabilities and has a low risk of getting the next product out the door. Management focuses its efforts on this horizon by building repeatable and scalable processes, procedures, incentives and KPIs to execute and continuously improve the existing business model (and if they’re smart, they’ll teach their teams to operate with mission and intent, not just processes and procedures).

Innovation and improvement occur on this horizon on the level of processes, procedures, and costs. Product management in this horizon uses existing product management tools, such as StageGate® or its equivalents.

The risks in this first horizon are typically low: organizations and management, in general, know how to approach such incremental changes since they are part of everyday business.

Horizon 2: Transform and make a step-change improvement to an existing business

In this horizon, an organization looks for new opportunities within the realms of its existing business model. To do so, you will change at least one of the six domains (service, revenue, cost, operating, value, and performance model) in a more significant way. This is the moment to be very cautious: changing one of the domains in this horizon typically has quite severe effects on other horizons and domains! These effects are often overlooked and underestimated.

Developing an existing business is often done on an ad hoc basis based on a particular insight. But it can also be done systematically, through Business Model innovation practices.

Since this horizon uses mostly existing capabilities augmented with new ones, it has a moderate risk of successfully developing new products.

Horizon 3: Radically innovate a new business model

In this third horizon, an organization is essentially really incubating something novel, similar in purpose to a start-up. A start-up, in contrast to an established business that is executing its current business, is in the (sometimes desperate) search for a new business model. These types of innovations are new and could potentially lead to disruptive business models.

This type of initiative is substantially different in nature compared to operating and developing an existing business, so it typically makes sense to physically separate the creation of new business from operating divisions (in a corporate incubator, or their own facility). And they need their specific approaches, procedures, policies, incentives, and KPIs different from those that you use when executing an existing business.

Three Horizons Framework

The “What” and “Where” of Transformation: Ways of Thinking

Understanding the “what” and “where” is the quintessential prerequisite to any successful innovation and transformation initiative. The best way to frame and understand the different types of innovation might be through the “Innovation Ambition Matrix.”

Our research suggests that a company clearly differentiates its innovations across three categories called “horizons” and allocates its resources in line with those. Each horizon is defined by whether it is working to improve an existing business model or whether it deals with changing (innovating) or searching and creating entirely new business models.

Horizon 1

Deals with executing and incrementally improving an existing business model. This is well understood; this is what most people work on every day when they recognize and solve short-term problems.

Horizon 2

Transforming and making a step-change improvement to an existing business model is focused on evolving your existing business in new ways. You will bring change to at least one of the six domains (the service, revenue, cost, operating, value, or performance model) in a more significant way. A step change is measurable, focused, and gives particular thought to new customers, new markets, or new products.

Horizon 3

Innovating a new business model is focused on radical innovation; you venture beyond and explore unknown business models through a process of searching.

This distinction may sound trivial, but an understanding of the three horizons has severe implications: a different purpose requires a different context, tools, resources, and approaches.

That’s why understanding which horizon you work on is incredibly useful. The problem: in practice, most organizations treat the 3 horizons in a very undifferentiated way. Often the approaches from horizon 1, “executing and incrementally improving the existing business model,” are applied everywhere! The result is a misappropriation of a considerable investment.

The Innovation Ambition Matrix

The Innovation Ambition Matrix maps the three horizons (existing / transform / innovate) against the Market or customer segment and the Value Proposition:

• Horizon 1: Are you working on your existing Value Proposition (and/or your market/customer segment)?
• Horizon 2: Do you want to transform your Value Proposition (and/or your market/customer segment)?
• Horizon 3: Are you hoping to more radically innovate your Value Proposition (and/or your market/customer segment)?

The Three Horizons Model Way of Thinking

Leading an innovation and transformation initiative requires clearly differentiating between an exploitative business with the strategic intent of managing cost and profit through operations management and efficiency increasing measures with incremental innovation and more exploratory types of innovations with the strategic intent of innovation and growth with critical tasks being adaptability, new products and the development of breakthrough innovations (O’Reilly III and Tushman, 2017).

The following table provides an overview of the way of thinking of the Three Horizons Model:

Key properties/horizon	Horizon 1: execute & incrementally improve an existing business	Horizon 2: transform & make a step-change improvement to an existing business	Horizon 3: (radically) innovate a new business model
Where	Inside the box	Inside but going beyond	Outside the box
Purpose	Exploit: making the most of what we have	Pursuing new opportunities	Breaking new ground: develop new (and possibly disruptive) business
Business Model	Known. Executing the business model.	Partially understood. Testing / validating an iterated business model.	Unknown, business model not identified. In search of a business model.
Service-, revenue-, cost-, operating-, value- & performance model	Incremental	Step-change to at least one domain (with impact on all others!)	New / radical
Way of working	Execute; incremental, sustaining	Execute / Search; upgrading, substantial	Search; transformational or radical, disruptive
Strategic intent	Cost, profit	Growth	Innovation
Competencies	Operational	Change Management	Entrepreneurial
Critical tasks	Operations, efficiency, incremental innovation	New Product / Service Development, change management, organizational change	Adaptability, new products/services  breakthrough innovation
Culture	Efficiency, low risks, error prevention	Opening-up, adaptability	Risk-taking, speed, flexibility, experimentation

What does the Innovation Ambition Matrix imply for my organization?

The challenge of enterprises of all types today is to work in parallel across all three horizons, running a large number of initiatives across the 2nd horizon (transforming the existing business) and 3rd horizon (innovating–radically–new business) simultaneously while relentlessly improving the way it executes its current business model and serves its existing customers (1st horizon). In other words, as a thought-leader and Silicon Valley entrepreneur Steve Blank puts it, an organization has “to chew gum and walk at the same time.”

The key takeaway is? It is a vastly different world. You need to be aware of what you intend to achieve in order to put the right capabilities, assets, processes, people, resources, and approaches in place.

The “how” of innovation and transformation: Ways of Working

Horizon 2 or Horizon 3 types of innovations range from relatively simple and basic (i.e. rearranging existing components into a new business model) to the very complex and research-intensive (i.e. developing a fully autonomous self-driving car).

The more fundamental type of research projects, such as autonomous cars, new medical treatments, or delivery by drones has their very own and specific approaches. But even such fundamental new projects need to ultimately develop into a new offering, and so here again the Horizon principles apply.

Three Horizons Model Framework “Ways of Working”

1. Context

Before we cover all aspects of the way of working, let’s wrap our head again around the basic properties of the three horizons:

Transformation dimension	Horizon 1: execute & incrementally improve an existing business	Horizon 2: transform & make a step-change improvement to an existing business	Horizon 3: (radically) innovate a new business model
Purpose	Exploit: making the most of what we have	Pursuing new opportunities	Breaking new ground: develop new (and possibly disruptive) business
Business Model	Known. Executing the business model.	Partially understood. Testing / validating an iterated business model.	Unknown, business model not identified. In search of a business model.
Strategic intent	Cost, profit	Growth	Innovation
Reward	Low (single-digit % improvements)	Moderate (double-digit % improvements)	High (triple-digit % improvements)
Risk	Low	moderate	high

Like any initiative, risk and reward need to be in balance. The three horizons offer very differently risk/reward structures.

2. Organizational structure

Which organizational structure do we need to apply to run each initiative successfully?

Horizon	Horizon 1	Horizon 2	Horizon 3
Place in the organization	Within the existing business	Temporary slightly separated to test, then change management to the core organization	Separated, outside
Org-structure	Hierarchical (we specialize), division of work	Adaptive	Loose, flat (we learn together)

3. Approach and feedback mechanisms

Which fundamental approach is most adequate and how do we learn whether we are on track?

Horizon	Horizon 1	Horizon 2	Horizon 3
Approach	Process management, stability, repeatability, risk management	Testing the central hypotheses. Development of market prototype.	Development of a Minimum Viable Product (MVP). Agile; managing uncertainty; highest risks get tackled first; pivoting
Methodology (exemplary)	Six Sigma, Kaizen	Design Thinking, StageGate	Design Thinking, Customer Development, MVP,
Controls, rewards	Margins, productivity	Milestones, test metrics	Learning and growth metrics
KPIs	Margin, productivity	Feedback on test results, answer to the hypothesis	Customer understanding

Leadership & Team

What kind of people does it take? And how to lead them?

Horizon	Horizon 1	Horizon 2	Horizon 3
People	Highly specialized experts	The core team from the existing organization combined with an innovation team	Entrepreneurial leaders. The team has a very broad background of experience. T-shaped people. Ideally with a very broad skill set.
Leadership role	Authoritative, top-down	Change Management	Visionary, involved
Closing Knowledge gaps	Find internal expertise, promote internally	Mixed	Predominantly learn and hire from outside

5. Marketing

Who is your target group? How do you reach them? What steps will lead to market development?

Horizon	Horizon 1	Horizon 2	Horizon 3
Target group	Existing customers	More often than not new customers (!)	Typically new customers
Customer approach	Let’s churn out products and tell them!	Testing of the changed aspects of the six domains with the different customer segments	let’s ask them whether they like it! Let’s invite them to participate in a new product/service experience (take your churners!)
Marketing approach	Mass marketing: make people want things.	Adapted	Learn from the customer & particularly the churners!: Make things people want
Feedback mechanisms	Process management, market research	Interviews, sampling, customer feedback	First-hand, small-sample customer feedback

Horizon 2 is often very difficult to manage. We believe we know it well, but in practice, it often develops in unexpected ways. In practice, we often find it is actually most adequate to market a product or service to a new customer group! This is because a slightly tweaked service, revenue, value, operating, cost, or performance model often results in a slightly different audience!

6. Managing risks

What is the risk involved? How connected are we to the status quo? What is the view on managing failures? And how do we manage the risk involved?

Horizon	Horizon 1	Horizon 2	Horizon 3
Degree of uncertainty	Low	Moderate	High
Managing failures	No failures allowed; risk minimization	Hypotheses on the changes within the six domains are identified and tested	Failures are part of the learning curve! Run tests as early as possible as to gain feedback and learn from confronting your idea with reality
Risk Management	Adjustments based on KPI measurement	———–	Portfolio approach. “Pivot” or kill.

In Horizon 3, we often hold on too long to an idea instead of putting it to a customer test early and quickly with the intent to learn and adjust the course: doing a “pivot.” If despite several pivots, a start-up does not seem to gain traction, it is critical to kill it and use the resources for other better-placed initiatives.

7. Working together with others

If you decide to partner, who is it that you partner with and how do you manage the relationship? Is everyone involved on the same page?

Horizon	Horizon 1	Horizon 2	Horizon 3
Motivation to partner	Gain access to resources, prolong work-bench	Access to strategic capabilities or assets	Experience in running horizon 3, strategic knowledge
Partnership approach	Procurement, working with Service Providers	Business-driven, working with external knowledge champions “who have been there”	Partnership is driven: working with a true partner who is equally involved with equal votes
Commercial Model	Budgeting-led approach: fixed price / fixed scope	Time & Material	Shared success; alternatively T&M + shared success

8. Technology

What is the most suited approach to technology and development?

Horizon	Horizon 1	Horizon 2	Horizon 3
Technology setup	Operations best practices, large-scale IT, stability	Test-Setups	Outside enterprise IT: lightweight, highly flexible, time-to-market over perfection
Development approach	Release Management; sometimes still waterfall	Most often agile	One mixed team working in agile mode organised in short sprints

What Can Enterprises Learn from Working with the Three Horizons Model?

The trap many organizations fall into

Whenever organizations work on innovation, they typically do what they are good at (and what typically works very well!): they apply their processes from their existing business, designed for managing and improving the existing business model, to the innovation setting. This lack of differentiation between the three horizons is a fundamental mistake of many organizations: most organizations use similar approaches for the exploitative and explorative horizons. As a result, most innovation initiatives inevitably fail, since the patterns required are fundamentally different.

As we have seen, your selected horizon deeply influences your choices. Recognizing and understanding your setting is a prerequisite to success.

In the worst cases, enterprises are applying their large-scale waterfall or other heavy-type of planning approaches to their pilot programs. These orchestrated efforts demonstrate dramatic overconfidence in planning and judgment in the context of an innovation setting, which has by its very nature a high likelihood of failure. This leads to large-scale programs with a focus on building (as opposed to learning), consequently high investments, and a long time-to-market, without a chance to find proof of concept.

This type of approach systematically fails (too expensive, too heavy-loaded, no customer feedback), never reaches its potential should it ever go live (due to a lack of pivoting among other factors), and should, quite frankly, not exist anymore. They are fundamentally linear approaches designed for managing the existing business and do not work in a non-linear, change-driven setting.

The Success Pattern

The success pattern is critical to understand: consider what you have to do. Do you want to execute and incrementally improve your existing business, transform and make a step-change to your existing business, or (radically) innovate entirely new business models? Create the required context in the function of the same – our discussion will provide you with the key perspectives to consider.

Do not compromise: the risk of failure is too great to start off with the wrong structure. Particularly more radical types of innovations will not survive against the fierce competition in case you compromise in any significant way.

Stay also clear for doing “a bit of this and a bit of that” type of settings: either you want to go for it, in which case you design the appropriate prerequisites, or you do not go for it. No half measures.

The entire organization must be incentivized to value and embrace not only continuous incremental improvement as part of the current core business but more transformational and innovation initiatives. With the Three Horizons Framework, you can best understand your organization’s core capabilities, leverage its strengths and ensure that all levels have the same focus.

We will finish with an example of the challenges an organization might face if they’re not completed prepared to utilize Three Horizons Model Thinking. As you’ll see, only partially using the Horizon Model invites disaster.

Case Study: an organization wants to “only” change its target customer

The typical assumption is that “the rest” remains the same.

In practice, however, changing the target customer has severe implications:

• Changing the service model: way to serve, customer care procedures
• Changing the cost model: new billing procedures, different customer sales approach, and after-sales processes
• Changing the revenue model: new pricing structure, labor-intensive price changes applied to the ERP system
• Changing the operating model: different cost model and different revenue model changes the operating model significantly

When you dive at change without a roadmap, you risk entirely missing out on the benefits of looking back on both successful and failed initiatives. To prevent this from happening, adapting a business has to be approached and tested largely in similar ways as a radical business idea, as to optimize its structure and really make it work. The Horizon Model is useful in directing your innovation strategy to best achieve your business’s future potential.

Connecting The Dots: The UNITE Business Model Framework

How to Create Innovation includes a number of canvases that focus on value creation and finding the right business model to meet your customer segment and customer needs. The framework is built to inspire drastic changes that help you find a competitive advantage. Our hope is that your company grows through business model innovation, and so we again encourage you to look deeper into our website and the book.

Here is a summary of the key ingredients of the framework:

Related:

• Introducing the UNITE eXtended Business Model Canvas
• Radical Innovation Definitions & Examples
• The UNITE Value Proposition Canvas: The Beating Heart of the Business Model
• Incremental Innovation Definition, Examples & Goals
• The UNITE Operating Model Canvas: Bridging the Strategy-Execution Gap
• Jobs to be Done Framework, Examples, and Statements (JTBD)
• The UNITE Culture Canvas – Identifying Organizational Culture Critical Elements