Three Horizons Strategy Forming

From Psychological Safety 145 (newsletter).

Imagine that the lower part is nearer, and the top is further away. Horizon 1 (the closest) is at the bottom, 2 in the middle, and 3 further away at the top. For Rumelt, this would be a practice to adopt when we’ve made our diagnosis of the challenge and defined our approach - the Three Horizons helps us to create and refine our coherent set of actions, and know which ones to spend most of our valuable time and resources on.

Let’s look at what each of the three horizons mean:

Horizon 1

Horizon 1 activities are those that sustain your core business, enhance your efficiency, and are the things that your customers or service users actually want from you right now. For example, for an organisation like Toyota, H1 is the core activity of building high quality cars - doing it efficiently, getting them into customers’ hands, and providing great service. It’s also contextual activities like marketing, finance, and facilities. For a healthcare organisation like the NHS, H1 would be along the lines of direct patient care & safety, ensuring that people can access healthcare regardless of location, ability, or income. Horizon 1 keeps your organisation alive.

Sears is a good example of an organisation that failed to focus enough on H1: Sears had their own message boards and a form of email before the internet was even invented, they had their own credit cards and insurance company, but failed simply in terms of operational capability and efficiency in their core business. They lost sight of their traditional niche, distracted by new and shiny innovations, and were outcompeted by lower price stores who had a lower cost base.

Horizon 2

Horizon 2 activities help you grow and scale your organisation in the near future. These might be new products and services, and new and emerging markets. These are incremental improvements, and usually low-ish risk. For Toyota, this might be coming up with new electric car models to replace older ICE cars, or reaching new markets where they’ve not previously operated. In healthcare, this horizon could be trying out new protocols and treatments for patients, finding better suppliers, or delivering healthcare to more remote communities. This horizon requires iterative experimentation and testing ideas out in the real world. OODA is a useful mental model to apply in this horizon. Horizon 2 helps your organisation grow and keep up with a changing world and a competitive marketplace.

Horizon 3

Horizon 3 is the further future, where it’s all uncertain and unpredictable. Here, we’re playing with completely new ideas, disruptive technologies and ways of working, which may come with a high-risk of failure. For Toyota, this could be as wild as flying cars, automated mass-transportation systems, different fuels or even innovative power generation technologies. In healthcare, this is the realm of drone-delivered and virtual healthcare, nanotechnology, and entirely new models of healthcare systems. You could use the Gartner Hype Cycle to catalyse innovative thinking in this space. Horizon 3 requires expertise, highly psychologically safe teams, multi-organisational partnerships, and a willingness to embrace risk and uncertainty - this is truly the realm of intelligent failures.

These are the things that we might have to rely on if the market changes dramatically and quickly, or if our initial idea fails to take off. Blockbuster video is a good example of an organisation that neglected H3 activities - by neglecting to proactively engage in H3 innovation activities, they were too late to respond to a rapidly changing market that was moving to streaming. At its peak, Blockbuster was incredibly successful, making $5.9 billion a year. However, this success, including the decision to turn down purchasing Netflix for just $50 million, masked an underlying failure to anticipate and adapt to industry changes. Blockbuster now consists of a single store in Bend, Oregon.

Limitations of The Three Horizons

Note, the 3 Horizons model can’t tell you exactly what to do. We still need to do the work of understanding our organisation, our marketplace, the economic conditions, carry out competitor analysis, and all of that stuff. But the 3 Horizons practice helps us turn those insights into a “set of coherent actions towards a challenge”. And this is why I turned it into a triangle - in our strategy workshops, we use a giant triangle on the wall, and list our activities on post-it notes, placing them where we believe they sit. Are they Horizon 1, 2 or 3? If we’re not sure, then we can have a good discussion about it - maybe we shouldn’t be doing that at all. After all, good strategy is as much about what we don’t do, as what we do. If we don’t have any post-its in Horizon 3, then we’d better come up with some! And if we don’t have any in Horizon 1, then it might already be too late...

A balance of activities

When we have that all described, we can look at our balance of activities. In general, I like to suggest a balance of roughly 10-15% on Horizon 3, 25-35% on 2, and 50 - 75% on 1. If we spend all our resources on H1 activities, we risk being outcompeted quickly, or our customers becoming bored and jaded with our products and services. We’re also highly vulnerable to external change, such as economic shocks or new competition. If we focus too much on H3 or H2 to the detriment of H1, we risk losing the capability to actually deliver on those innovative ideas or to satisfy the new customers we already have. And we might find that our cost base increases too high because we’ve lost our focus on efficiency.

This balance depends on the type and stage of organisation that you are, of course: For a startup, in search of a successful business model, we’re going to lean more towards Horizon 3 activities, whilst for an established and successful organisation, more towards Horizon 1. But all organisations need to have a balance of activities across each horizon.

Finally, this is not a one-time event that creates some sort of verbose and brittle strategy document with Gannt charts, dependencies, critical paths and milestones. This is a living, evolving tool that should be constantly revisited and adapted. Activities should gradually move down from H3 to H2, and from H2 to H1. Some things from each horizon will also need to be discarded or offloaded. We can’t do everything - again, strategy is often more about what we choose not to do, than what we choose to do