#1. Three Horizons of Growth. Some of the most cutting-edge firms are one-trick ponies dependent on a single product, notes Jeff Chan of McKinsey & Company in Toronto. To sustain growth, many firms are adopting a three-horizon approach:
Horizon One: a strong core business
Horizon Two: new businesses that are being formed and may not even be profitable yet. Management is focused on increasing revenues and market share.
Horizon Three: new ideas and dream businesses. Top management encourages various pilot projects in hope of developing a new product or business model, but will quickly cut off investment if the project looks doomed.
# 2. Staircases to Growth. In the mid-80’s, as major corporate mergers and diversification programs fell apart, the experts started saying “Stick to your knitting.” But restricting a business to “core competencies”, says Chan, limits a company’s growth prospects. “We see that great growth companies are ones that have a very expansive mindset about what their company is and what industries they will compete in. Over time, they tend to grow way beyond the bounds of their old business and their current capabilities.” The secret? “These businesses start off with a number of small steps. Having taken one step based on current capabilities, you start to build new capabilities, which in turn allow you to take more steps.” That way, companies expand their areas of expertise without jeopardizing all by taking big leaps that might be beyond their capabilities.
Source: PROFIT , September/1998, p. 41
Post 2000 Report on the Nation: Management
Three Horizons of Growth: Companies need to balance present operations against future possibilities to ensure success
By Mehrdad Baghai and Jeff Chan
Many companies in Western economies are suffering from restructuring fatigue. Managers are asking, as are their concerned shareholders, about growth. Specifically they’re asking about strategies to make their companies grow.
The need to grow is deemed to be so great that in some economies such as Germany and France seeking solutions to corporate growth has become part of the national agenda. This is because of its significant impact on employment
For three years, McKinsey & Company has examined the ways companies grow. The research sought explanations as to why few companies are able to sustain profitable growth in sales as well as in total returns to shareholders for 10 consecutive years or more. The project drew on detailed case studies of 40 successful growth companies from 10 industry sectors in 12 countries across Europe, North America, Australia and Asia. Bombardier Inc. and Barrick Gold were the Canadian stars included in our work.
We found early in our interviews with chief executives that growth was high on their agenda. This was not surprising because many empirical studies have confirmed that profitable growth is the best way to create shareholder value. For many chief executives this was the single most powerful argument for growth but we also found that few senior executives succeed in sustaining profitable growth in their companies over long periods of time. Statistically fewer than 20% of the company’s growing faster than their industry peers will still be growing at this rate five years from now and fewer than 10% a decade from now. Indeed for many CEOs who’ve spent most of their careers cutting costs, restructuring, and reengineering current businesses, new business creation is something they seem unprepared to undertake. Most companies therefore missed the opportunities for stimulating organizational vitality, competitive renewal, and wealth creation that usually accompany sustained profitable growth.
If you take a snapshot of any company that has managed fast profitable growth for over a decade the picture will reveal a pipeline of businesses at different stages of development from large core businesses, to emerging businesses, to options for future businesses. Because these business building activities will pay off over different time horizons we refer to them as the Three Horizons.
Horizon One represents the company’s core businesses today. By definition these tend to be fairly mature so management must unlock and realize their remaining potential before maximizing the value of the businesses through their decline. These businesses may be divested. Most often however, there is room to grow simply by extending and defending the core. There are still several kinds of initiatives that can drive profits of these businesses in the near term (typically zero to three years): sales force stimulation programs, new product or marketing initiatives ( especially pricing) and restructuring and cost reduction initiatives.
Horizon Two includes the rising stars of the company that will, over time, become new core businesses. These businesses may be step-outs from the core or more related extensions that simply require new capabilities and time to build. Regardless of their form they have the potential to shift to the company’s revenue base and replace the current cash generators. Like all new businesses they tend to focus on high top-line revenue growth, and generally require heavy capital commitments. In this high-growth phase management must assemble or build the necessary capabilities for companies use to succeed and then accelerate the replication of a proven business model to drive growth. At any given time a good growth company is likely to have several Horizon Two businesses on the boil.
Horizon Three consists of nascent business ideas and opportunities that could be future growth engines But with uncertainty at an unprecedented level in today’s business environment even the best analysis to determine probable outcomes will leave many unknowns about these potential businesses. Nevertheless building successful future businesses requires much seeding. The challenge is to nurture each option carefully while rigorously excising those whose promise wanes. These options must be consistent with possible scenarios that could reshape or perhaps entirely transform industries. Typically they require little investment and entail no obligation, but they can be expanded if and when appropriate.
Using the Three Horizons approach to management, business leaders can adopt an evolutionary perspective across the entire business portfolio. This management approach highlights the need to drive performance improvement initiatives to expand and defend the core business, while simultaneously building businesses that will become drivers of revenue growth for the medium-term and creating viable options that will secure the company’s longer-term future.
Three Horizons thinking should not be confused with short-, medium-, and long-term planning. The latter involves a series of plans about successive actions over time. Growth companies do not pursue these three types of initiatives in sequence. They concurrently manage all three types to produce a continuous pipeline of new business creation ideas and to ensure growth momentum is sustained over the next decade or longer.
Simply put companies need to pursue all three horizons concurrently to secure growth over time. A strong Horizon One provides a healthy flow of capital, human resources and capabilities to the other horizons. Strengths in Horizons Two and Three increases the company’s market value by raising expectations of future growth. The challenge lies in achieving the proper balance across the Three Horizons to maximize shareholder value.
----------------------------------------------------------------------------------------------- Mehrdad Baghai is a principal in the Toronto office of McKinsey & Co. He is a founding co-leader of the firm’s worldwide growth practice and co-author of the forthcoming book, The Alchemy of Growth. Jeff Chan is a senior growth expert in the Toronto office of McKinsey & Co., and is a founding co-leader of the firm’s worldwide growth practice.
Source: National Post, Post 2000, November 22, 1997, p. 18