The Fatal Flaw of the Three Horizons Model

A version of this article first appeared in the Harvard Business Review

I’m a big fan of McKinsey’s Three Horizons Model of innovation. (if you’re not familiar with it there’s a brief description a few paragraphs down.) It’s one of the quickest ways to describe and prioritize innovation ideas in a large company or government agency.

However, in the 21stcentury the Three Horizons model has a fatal flaw that could put companies out of business and government agencies behind their adversaries. While traditional analysis suggests that Horizon 3 disruptive innovations take years to develop, in today’s world this is no longer the case. The three horizons are not bound by time. Horizon 3 ideas – disruption – can be delivered as fast as ideas for Horizon 1 – existing products.

In order to not be left behind, companies / government agencies need to focus on speed of delivery and deployment across all three horizons.


When first articulated by Baghai, Coley and White in the 20th century, the Three Horizons model was a simple way to explain to senior management the need for an ambidextrous organization – the idea that companies and government agencies need to execute existing business / mission models while simultaneously creating new capabilities.

The Three Horizons provided an incredibly useful taxonomy. The model described innovation occurring in three time horizons:

  • Horizon 1 ideas provide continuous innovation to a company’s existing business model and core capabilities.
  • Horizon 2 ideas extend a company’s existing business/model and core capabilities to new customers, markets or targets.
  • Horizon 3 is the creation of new capabilities to take advantage of or respond to disruptive opportunities or to counter disruption.

Each horizon requires different focus, different management, different tools and different goals. McKinsey suggested that to remain competitive in the long run a company allocate its research and development dollars and resources across all three horizons.

And here’s the big idea. In the past we assigned relative delivery time to each of the Horizons. For example, some organizations defined Horizon 1 as new features that could be delivered in 3-12 months; Horizon 2 as business/mission model extensions 24-36 months out; and Horizon 3 as creating new disruptive products/business/mission models 36-72 months out.  This time-based definition made sense in the 20th century when new disruptive ideas took years to research, engineer and deliver.

That’s no longer true in the 21st century.

Today, disruption Horizon 3 ideas – can be delivered as fast as Horizon 1 ideas.

For example, Uber took existing technology (smartphone app, drivers) but built a unique business model (gig economy disrupting taxis) and the Russians used existing social media tools to wage political warfare. Fast disruption happens by building on existing technologies uniquely configured, packaged and/or delivered, and combining them with a “speed of good-enough deployment as a force multiplier” mindset.

What’s an Example of Rapid Horizon 3 Implementation?
In the commercial space AirBnB, Uber, Craigslist, Tesla, and the explosion of machine learning solutions (built on hardware originally designed for computer graphics (Nvida)) are examples of radical disruption using existing technologies in extremely short periods of time.

In the government space, Russian interference with elections, and China building island bases in the South China Sea as well as repurposing ICBMs as conventional weapons to attack aircraft carriers, are examples of radical disruption using existing technologies deployed in extremely short periods of time.

What’s Different about Rapid Horizon 3 Disruption?
These rapid Horizon 3 deliverables emphasize disruption, asymmetry and most importantly speed, over any other characteristic. Serviceability, maintainability, completeness, scale, etc. are all secondary to speed and asymmetry.

To existing competitors or to existing requirements and acquisition systems they look like minimum viable products – barely finished, iterative and incremental prototypes. But the new products get out of the building, disrupt incumbents and once established, they then refactor and scale. Incumbents now face a new competitor/threat that obsoletes their existing product line/infrastructure/business/mission model.

Why Do the Challengers/new Entrants Have the Edge?
Ironically rapid Horizon 3 disruption is most often used not by the market leaders but by the challengers/new entrants (startups, ISIS, China, Russia, etc.). The new players have no legacy systems to maintain, no cumbersome requirements and acquisition processes, and are single-mindedly focused on disrupting the incumbents.

Four Strategies to Deal With Disruption
For incumbents, there are four ways to counter rapid disruption:

  • Incentivize external resources to focus on your goal/mission. For example, NASA and Commercial Resupply Services with SpaceX and OrbitalATK, Apple and the App Store, DARPA Prize challenges. The large organizations used startups who could rapidly build and deliver products for them – by offering something the startups needed – contracts, a distribution platform, or prizes. This can be a contract with a single startup or a broader net to incentivize many.
  • Combine the existing strengths of a company/agency and its business/mission model by acquiring external innovators who can operate at the speed of the disruptors. For example, Google buying Android. The risk here is that the mismatch of culture, process and incentives may strangle the newly acquired innovation culture.
  • Rapidly copy the new disruptive innovators and use the incumbent’s business/mission model to dominate. For example, Microsoft copying Netscape’s web browser and using its dominance of operating system distribution to win, or Google copying Overture’s pay per click model and using its existing dominance in search to sell ads. The risk here is that copying innovation without understanding the customer problem/mission can result in solutions that miss the target.
  • Innovate better than the disrupters. (Extremely difficult for large companies/government agencies as it is as much a culture/process problem as a technology problem. Startups are born betting it all. Large organizations are executing and protecting the legacy.) Successful examples, Apple and the iPhone, Amazon and Amazon Web Services (AWS). Gov’t agency and armed drones.

Lessons Learned

  • The Three Horizons model is still very useful as a shorthand for prioritizing innovation initiatives.
  • Some Horizon 3 disruptions do take long periods of development
  • However, today many Horizon 3 disruptions can be rapidly implemented by repurposing existing Horizon 1 technologies into new business/mission models
  • Speed of deployment of a disruptive/asymmetric product is a force multiplier
  • The attackers have the advantage, as the incumbents are burdened with legacy
  • Four ways for the incumbents to counter rapid disruption:
    • Incentivize external resources
    • Acquire external innovators
    • Rapidly copy
    • Innovate better than the disrupters

K&S Ranch

In 1976 Saul Steinberg created the March 29th cover of the New Yorker and created a visual meme of a city who was completely self-absorbed.

Kirby Scudder, a neighbor on the California coast just did a poster of the view of Palo Alto as the center of universe.

Palo Alto poster Kirby has done several of these city posters here.  I thought it was a fun poster given its unique vantage point from the Pacific Ocean looking towards San Francisco Bay.

I was wondering where our ranch would be on the map until I looked closer.

K&S Ranch has been memorialized on the poster!

 

kands

 

The Four Steps to the Epiphany is Now in French

The Four Steps to the Epiphany (Les quatre étapes vers l’épiphanie) is now available in French.

Order it from the Bookediton.com  (Search for Les quatre étapes vers l’épiphanie)

Thanks to Antoine Bruyns for making the French version happen.

It joins the Japanese version (アントレプレナーの教科書 [単行本(ソフトカバー)available on Amazon.
Thanks to Tsutsumi Takashi for making it happen in Japanese.

Collect the set!

Now Hear This

Much like my career, in the last two years this blog has traveled a serendipitous path. I orignally wrote it with four goals in mind:

  • First, to explain to my kids, then just graduating from High School, stories about their dad’s life when he was their age. And with the 30-year statute of limitations now passed, stories about who I worked for (and the names of agencies.)
  • Second, to share how my how my thinking about entrepreneurship as a distinct practice and how Customer Development as one of its central components has evolved over the last decade.
  • Third, to share both thinking and practice as I learned how to teach entrepreneurs (the way one teaches artists and musicians.)
  • Fourth, as a public official in the State of California, to offer a window on how public policy on California Coastal protection gets made. The Coastal stories are going to have to wait until I’m no longer a public official. (With Jerry Brown as our new governor I’m up for reappointment so you might get to hear the stories soon, or may have to wait a bit longer.)

On my first day as a blogger I got 20 views. Now I’ve had days with 20 viewers per minute. So Happy New Year to my 100,000-plus monthly readers throughout the world, and to many more who read my posts via some of the most important media in the startup/tech/entrepreneurship world, in more languages and places than I can keep track of.

Now Hear This
For 2011, I’m glad to announce that you can now hear my blog posts via a podcast that you can subscribe to, download or have emailed to you a few days after each blog post goes live. An innovative entrepreneur put his company to work delivering the podcasts with his compliments. Marcos Polanco, founder of Clearshore and himself a serial entrepreneur, “never found time to read the blog, no matter how much I loved it. “I told Steve” said Marcus, “in true hacker fashion, I was too lazy to read his blog, and I figured others must be in the same spot, so I proposed to turn the blog into a podcast instead.”

Marcos has agreed that the list of podcast subscribers will never be rented, sold or traded to anyone (same goes with our own email list). His big payoff from this effort is the chance to put a few lines of copy about his latest venture, Clearshore, at the bottom of each podcast link email. Clearshore is a “matchmaker” that helps small businesses get their fair share of the $60-billion US government budget for R&D and innovation. Today, startups receive only 4% of those funds, something Clearshore–now in the customer discovery phase–is out to change.

To add your email to the free podcast alert service, click here.

Listen to the post here: Download the Podcast here

Happy Holidays

On Vacation until the New Year. Have have a happy holiday.

Penguin in Patagonia

 

On The Road

I’ve been traveling –  New York/Cairo/Tel Aviv – for the last three weeks.

Posts will resume in July.

Egyptian Fallujah on the nile at Luxor

On Blog Vacation

I’m off the web for the next week or so.  I’m in a place with no cell or internet coverage.

Back blogging by the end of March.

steve

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