Three Horizons Model
The Three Horizons Model places product bets and investments in three different categories based on how quickly they are expected to deliver a return on investment. It enables companies to plan and approach product development in different ways for different horizons, effectively allowing high risk bets to proceed in a controlled way but not stifle them based on standard operating procedures and expectations for mature products.
Horizon 1 investments generate “today’s cash flow”, effectively paying back in the same year in which they are brought to the market. These are typically existing products or offers introduced into mature, tested markets.
Horizon 2 investments are expected to generate “today’s revenue growth” and “tomorrow’s cash flow”. They are expected to pay back significantly, but not in the year of their launch. These are expected to grow fast but start from a small base, so it may take time to reach a material size. While investments in Horizon 2 are in development, they may require a significant investment of the current go-to-market resources, so they “demand patience”.
Horizon 3 investments are options for future high-growth ideas, which will “pay out in the years beyond the current planning horizon”. While such ideas require R&D budget investments, they do not place demands on go-to-market resources.
The model was introduced by Mehrdad Baghai, Stephen Coley and David White in the book Alchemy of Growth and popularised by Geoffrey Moore in the book Escape Velocity.
Adopting the view of different horizons is critical for allowing innovative products to escape the gravitational pull of existing successful products in an organization, and develop into future successes.
Moore suggests that the best practice is to “subdivide portfolio resource allocations into three separate competitions” across the three horizons, so that each horizon has a dedicated pool of resources. A good way to do that is to apply the Pioneers, Settlers, Town Planners organization.
Horizon 2 Gap
Moore argues that there is a logical path of ideas and products from Horizon 3 to Horizon 2 and then Horizon 1, but that without clearly different management policies “Horizon 2 initiatives are doomed from birth”.
Horizon 2 ideas do not generate nearly as much revenue as Horizon 1, but they can be seen as more attractive and innovative to work on, creating a political divide in an organization.
Due to a complete disconnect between, on one hand, a field-facing management team driven by a Horizon 1 charter and a compensation plan, and on the other a covey of needy product and market managers with a Horizon 2 set of market development requirements. When these two forces collide, it is no contest: Horizon 1 prevails, hands down. Hence the prevalence of what we have come to call of the Horizon 2 gap, a primary symptom of enterprises experiencing Christensen’s innovator’s dilemma.
– Geoffrey A. Moore, Escape Velocity
Companies can usually manage the difference between Horizon 1 and Horizon 3 initiatives, but Horizon 2 efforts tend to fall through the gaps. Moore suggests that Horizon 2 efforts initially get measured by the standards for Horizon 3, which are relatively slack, and then after a period of low expectations suddenly get re-evaluated using Horizon 1 metrics that are too strict.
| time frame | Horizon 1 | Horizon 2 | Horizon 3 |
|---|---|---|---|
| Driving goal | maximise returns | become a concern | create a category |
| Key performance indicators | Revenue, bookings, market share… | sales velocity, segment share…. | PR buzz, deal size, name-brand customers… |
Setting different measurements also has an impact on governance, hiring and compensation. For useful patterns check out Moore’s book, Escape Velocity.
A critical goal for Horizon 2 initiatives should be to move from having a few flagship customers to becoming a going concern, and the fastest way to do that, according to Moore, is to have at least one niche market adopt the new Horizon 2 idea as standard, effectively achieving Market Power from the Hierarchy of Powers model. This will create a persistent market with committed customers, and allows the Horizon 2 ideas to start scaling.
Learn more about the Three Horizons Model
- The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise, ISBN 978-0738203096, by Mehrdad Baghai, Stephen Coley, David White (2000)
- Escape Velocity: Free Your Company's Future from the Pull of the Past, ISBN 978-0062312730, by Geoffrey A. Moore (2011)