Navigating the Pitfalls of the Three Horizons Model
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Chapter 1: Understanding the Three Horizons Model
The three horizons model serves as a framework for leaders across various sectors to outline their organization’s future strategy. This model has gained traction since its inception in the early 2000s, mainly due to its association with McKinsey & Company. However, while it offers a structured way to visualize both present and future objectives, it also presents significant challenges.
To better grasp this model, let’s delve into its three distinct horizons:
Horizon 1: "This horizon includes the core businesses that are most synonymous with the company and generate the highest profits and cash flow. The primary goal here is to enhance performance and maximize existing value."¹
Horizon 2: "The second horizon focuses on emerging opportunities, such as new ventures that could yield substantial profits in the future but may require significant investments."¹
Horizon 3: "The third horizon is concerned with ideas for future growth, including small projects like research initiatives, pilot programs, or minority investments in new enterprises."¹
While the model may initially seem beneficial, it has three critical shortcomings that warrant discussion.
Here’s a quote that highlights the essence of this discussion.
Section 1.1: The Issue of Forgetting the Past
One major flaw of the three horizons model is its disregard for historical context. The creators aimed to prevent individuals from fixating on past successes or failures, but in doing so, they ignore valuable lessons learned. For organizations—especially startups—that often experience numerous setbacks before achieving success, it’s crucial to reflect on past experiences to avoid repeating mistakes.
Neglecting historical data can lead organizations to fall into familiar traps disguised in new forms. These challenges often resurface when attempting to scale operations, and without understanding the lessons of the past, current successes may be jeopardized.
Subsection 1.1.1: The Current Horizon's Fragility
The second shortcoming of the model lies in the fragility of the current horizon. Many organizations, especially startups, seek to differentiate themselves from competitors by exploring diverse revenue streams. However, if the revenue from core businesses is weak or declining, efforts to optimize it may be in vain.
Organizations must assess whether their revenue sources are robust and sustainable before venturing into new opportunities. If the first horizon lacks stability, attempting to progress to the next horizons becomes akin to chasing a dream.
Section 1.2: The Illusion of the Final Horizon
The third horizon represents the long-term vision of an organization, but it often feels like an elusive goal. When current revenue streams are faltering, investing in potentially risky ventures can be counterproductive. Organizations should prioritize initiatives that demonstrate a clear potential for success before committing resources.
The timeline for realizing the benefits of new ventures can be lengthy, and without proper modifications, even promising solutions may fail to deliver sustainable results. A tailored approach is essential; otherwise, organizations may find themselves celebrating short-term gains that quickly fade.
Chapter 2: Reevaluating the Three Horizons Approach
The first video, "How do you grow your business? Use McKinsey's Three Horizons framework!" offers insights into leveraging this model effectively while highlighting its potential pitfalls.
The second video, "McKinsey's Strategic Three Horizons Model Framework Template," provides a framework for understanding how to navigate this strategic approach.
In Conclusion
In summary, while the three horizons model may appear to be a comprehensive strategy for organizational growth, it often functions more like a creative writing exercise. Executives may favor this model because it allows them to overlook past failures and focus solely on future potential. However, this approach can lead organizations astray, akin to a moth drawn to a flame without a clear path to follow. I’d love to hear your thoughts—feel free to comment and connect. Until next time, happy learning!