In today’s fast-paced business world, companies face a central challenge: How can they simultaneously optimize their current performance, unlock future opportunities, and develop entirely new business fields? The answer lies in the strategic Three Horizons Model – a proven framework already successfully used by global corporations like Google, Amazon, and Microsoft.
What is the Three Horizons Model and why is it crucial?
The Three Horizons Model, developed by McKinsey & Company, is a strategic planning framework that helps companies systematically allocate their resources and investments across three different time horizons. Instead of focusing solely on short-term profits or long-term visions, this model enables a balanced approach to sustainable growth.
Why is strategic Three Horizons planning indispensable today?
In an era of disruptive technologies and changing consumer habits, it is no longer enough to just optimize the existing business. Companies that want to remain successful in the long term must simultaneously:
- Maintain stability in their core businesses
- Drive growth in emerging markets
- Foster innovation for future business opportunities
The Three Horizons Model offers a systematic method to manage these three critical areas simultaneously without them cannibalizing each other.
The three core elements of the Three Horizons Model
Horizon 1: Optimize the core business (70% of resources)
Focus: Existing business models and products
Timeframe: 0-2 years
Goal: Maximum efficiency and profitability
Horizon 1 represents a company’s current core business – the products and services already established and generating the majority of current revenue.
Typical activities in Horizon 1:
- Cost optimization in existing processes
- Quality improvements in established products
- Increasing customer retention and satisfaction
- Defending market shares in existing markets
For a sock subscription service, Horizon 1 would include optimizing monthly deliveries, improving fabric quality, and increasing customer satisfaction.
Horizon 2: Develop emerging opportunities (20% of resources)
Focus: Emerging business opportunities
Timeframe: 2-5 years
Goal: Unlock new growth areas
Horizon 2 focuses on business areas that are already emerging in the market but not yet fully established. These investments aim to secure the company’s future growth.
Characteristic Horizon 2 initiatives:
- Expansion into adjacent markets
- Development of new product lines
- Building strategic partnerships
- Pilot projects for innovative business models
For our sock service, Horizon 2 could mean expanding into other clothing categories (underwear, T-shirts) or developing a personalized styling app.
Horizon 3: Create transformative innovations (10% of resources)
Focus: Disruptive technologies and entirely new
markets
Timeframe: 5-10+ years
Goal: Anticipate future business revolutions
Horizon 3 represents experimental investments in completely new technologies or business models with the potential to transform entire industries.
Horizon 3 examples:
- Research and development in future technologies
- Startup incubators and venture capital
- Experimental business models
- Partnerships with universities and research institutions
For the sock service, Horizon 3 could include researching smart textiles with integrated sensors or developing an AI-driven fashion platform.
Step-by-step guide to implementation
Step 1: Conduct a status quo analysis
Start with an honest assessment of your current resource allocation:
- Financial resources: Where is your budget currently
going?
- Personnel capacities: What are your teams mainly
working on?
- Time investment: How much time does management spend in the different areas?
Create a detailed overview showing how your current investments are distributed across the three horizons.
Step 2: Define strategic goals for each horizon
For Horizon 1:
- Define clear KPIs for your core business
- Identify optimization potentials
- Set realistic efficiency improvement targets
For Horizon 2:
- Analyze market trends and emerging opportunities
- Assess your core competencies for new markets
- Define pilot projects with measurable milestones
For Horizon 3:
- Identify disruptive technologies in your industry
- Evaluate long-term megatrends
- Define experimental fields for radical innovations
Step 3: Optimize resource allocation
Review your current distribution and adjust according to the 70-20-10 rule:
- 70% for Horizon 1: Secure the foundation of your
business
- 20% for Horizon 2: Invest in near-future
opportunities
- 10% for Horizon 3: Experiment with radical innovations
This distribution is a guideline – depending on industry and company situation, adjustments may be appropriate.
Step 4: Establish governance structure
Create clear responsibilities for each horizon:
- Horizon 1: Operational management focused on
efficiency
- Horizon 2: Business development teams with market
expertise
- Horizon 3: Innovation labs or separate venture units
Step 5: Implement monitoring and adjustment
Develop a dashboard system that monitors all three horizons:
- Short-term metrics for Horizon 1
(monthly/quarterly)
- Mid-term indicators for Horizon 2
(semi-annually/annually)
- Long-term signals for Horizon 3 (annually/multi-year)
Practical example: Sock subscription service with Three Horizons strategy
Let’s illustrate the theory with a concrete example – an innovative sock subscription service aiming to stand out from the competition.
Horizon 1: Optimize core business (70% of resources)
Current focus: Perfecting monthly sock subscriptions
Concrete measures:
- Supply chain optimization: Reduce delivery times
from 7 to 3 days
- Quality assurance: Implement stricter material
testing
- Customer experience: Improve unboxing experience
with personalized packaging
- Retention optimization: Develop a loyalty program for long-term customers
Measurable goals:
- Customer satisfaction: 90%+ positive reviews
- Churn rate: Reduce to under 5% monthly
- Delivery accuracy: 99%+ on-time deliveries
These optimizations lay the foundation for sustainable growth while increasing profitability.
Horizon 2: Unlock new growth areas (20% of resources)
Strategic focus: Expansion into adjacent markets
Planned initiatives:
- Product extension: Launch underwear and T-shirt
lines
- Target group expansion: Develop special business
and sports collections
- Geographic expansion: Market launch in three new
European countries
- B2B business: Corporate packages for companies
Pilot projects:
- Personalization app: AI-based style recommendations
based on customer preferences
- Sustainability Plus: Premium line made from 100%
recycled materials
- Community platform: Social features for customers to share their outfits
These investments aim to generate 30% of total revenue within 2-3 years and open new customer segments.
Horizon 3: Explore revolutionary innovation (10% of resources)
Visionary focus: The future of personalized fashion
Experimental areas:
- Smart textiles: Research partnership to develop
socks with integrated health sensors
- 3D printing technology: Pilot project for on-demand
produced, perfectly fitting socks
- Augmented reality: AR app for virtual try-on and
style advice
- Blockchain transparency: Complete supply chain tracking for conscious consumers
Long-term vision:
- Complete personalization: Every customer receives
unique designs based on their digital footprint
- Sustainability 2.0: Circular economy with full
recycling of all products
- Fashion-as-a-Service: Subscription model for a complete, AI-curated wardrobe
These experiments may seem futuristic today but prepare the company for the fashion revolution of the next decade.
Common mistakes when implementing the Three Horizons Model
Mistake 1: Unbalanced resource allocation
The problem: Many companies invest too much in Horizon 1 (often 90%+) and neglect Horizon 2 and 3 completely.
The solution: Disciplined adherence to the 70-20-10 rule, even if it feels painful in the short term.
Tip: Treat Horizon 2 and 3 investments like a “tax” – they are not optional but vital for survival.
Mistake 2: Horizon confusion
The problem: Mixing the different horizons leads to unclear goals and inefficient resource use.
The solution: Clear separation of horizons with dedicated teams, budgets, and success metrics.
Mistake 3: Short-term thinking dominates
The problem: Under budget pressure, Horizon 2 and 3 investments are cut first.
The solution: Institutionalize a long-term perspective through separate innovation budgets and protection from short-term cuts.
Mistake 4: Lack of experimentation culture
The problem: Horizon 3 is treated like a traditional business, stifling innovation.
The solution: Create a “safe space” for experiments where failure is allowed and encouraged.
Remember: 90% of Horizon 3 experiments will fail – but the 10% successful ones can transform the entire company.
Mistake 5: Lack of integration between horizons
The problem: The three horizons work in silos without learning from each other or leveraging synergies.
The solution: Regular cross-horizon meetings and deliberate knowledge transfer between areas.
Integration into overall strategy
Alignment with company values
The Three Horizons Model should be seamlessly integrated into your existing corporate strategy:
- Vision and mission: Each horizon contributes to the
overarching company vision
- Core values: All horizons must adhere to the same
ethical standards
- Stakeholder expectations: Balance between short-term results and long-term innovation
Change management for Three Horizons
Implementation often requires a cultural shift:
Leadership level:
- Commitment to long-term investments even under short-term
pressure
- Tolerance for uncertainty and experiments
Middle management:
- Understanding different success metrics per horizon
- Balancing operational excellence and innovation
Operational teams:
- Openness to new ways of working and experimental fields
- Cross-functional collaboration between horizons
Measurement and success control
Develop a balanced scorecard system:
Horizon 1 metrics:
- Revenue and profitability
- Market share and customer satisfaction
- Operational efficiency KPIs
Horizon 2 metrics:
- Pipeline of new business opportunities
- Market penetration in new segments
- Learning velocity in pilot projects
Horizon 3 metrics:
- Number and quality of experiments
- Speed of learning cycles
- Breakthrough potential of innovations
Conclusion: Three Horizons as the key to sustainable success
The Three Horizons Model offers companies a proven framework to successfully navigate an uncertain future. By systematically distributing resources across short-term optimization, mid-term expansion, and long-term innovation, companies can achieve stability and growth simultaneously.
The greatest strength of this framework lies in its simplicity and simultaneous depth – it provides clear guidelines for strategic decisions while allowing enough flexibility for industry-specific adjustments. Companies that successfully implement the Three Horizons Model are better prepared for market changes and can seize opportunities faster.
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