The Three Horizons of Strategy
The Three Horizons of Strategy
This is the second in our series of strategy-based newsletters, and there are a few more to come which will be interspersed throughout the next few months. I hope you find them useful and interesting! In these articles, I reflect on some of the higher level, strategic and delivery-oriented practices and concepts that I’ve adopted through my career so far, and how we use them in our work at Iterum Organisational Learning (the organisation behind psychsafety.com) Whilst this sort of strategy work is only adjacent to psychological safety concepts, poor strategic decisions can lead to organisational failure, as well as undermine trust and risk damaging psychological safety. Conversely, psychological safety is absolutely fundamental to the conditions in which we can collectively make good strategic decisions.
Recently, we explored a strategic concept created, or at least codified, by John Boyd – OODA loops. Whilst OODA loops are a useful way of thinking about decisions to make when running a business, we still actually need some way of doing that strategic thinking and planning.
We should also remind ourselves what strategy actually is. Richard Rumelt, in “Good strategy, Bad Strategy” (one of the best books on strategy that I’ve read) describes a strategy as a “cohesive response to an important challenge. Unlike a stand-alone decision or a goal, a strategy is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge.”
Good Strategy
Objectives, OKRs, aspirations, guiding principles, mission statements, or core values – none of these constitute a strategy. Strategy is essentially your response to a challenge. Rumelt even suggests that the term ‘strategy’ should be replaced with ‘action agenda.’
The essence of any strategy is composed of three elements: first, a diagnosis: a clear identification of the challenge itself; second, guiding policies, which represent your general approach for addressing the challenge; and third, coherent actions: a series of specific steps to execute the guiding policies and overcome the challenge. The most frequent reason for ineffective strategy is a poor diagnosis of what the challenge actually is. The second most frequent reason is mistaking objectives for strategy. We can easily come up with a load of objectives and everyone will be kept very busy trying to deliver them for the next year or two (and praised when they achieve them), but we won’t necessarily be overcoming the challenge in front of us. As Deming said: “Create constancy of purpose toward improvement of product and service, with the aim to become competitive and to stay in business, and to provide jobs.”
In developing a strategy from the beginning, we should focus on the “crux” of the problem. In rock climbing, the crux is the most difficult part of the climb – if you can’t get over the crux on a V9, maybe you should try an easier V8 first. Your strategy needs to be realistic, and consider what your capabilities, time, resources and skills actually allow.
Different types and stages of organisation face different types of challenges. I like to define a startup as “a temporary organisation in search of a successful business model” – so in a startup, your strategy needs to be adaptable and flexible as you learn more about the challenges, or choose different ones as you pivot – this is a reflection of Jabe Bloom’s “Differentiation” economy. Likewise, in a more established organisation, your strategy (and your challenge) will likely be more about scaling, efficiency and consistency, with a degree of differentiation thrown in to keep ahead of the competition.
Bad Strategy
Remember what Rumelt’s “bad strategy” is too: fluff, failure to face the challenge, mistaking goals for strategy, and bad strategic objectives. This practice below can’t guarantee success, but combined with high psychological safety, cross-functional expertise, effective sensemaking, and operational excellence, it can mitigate against us creating and persisting with bad strategies.
The Three Horizons
This is one of my favourite strategic practices: my personal adaptation of McKinsey’s Three Horizons model. Now, this is very much an adaptation – it’s not how MicKinsey would do it, but I think this way is easier and clearer. You can read more about McKinsey’s Three Horizons protocol here.
The Three Horizons practice as adapted by me:
Imagine that the lower part is nearer, and the top is further away. Horizon 1 (the closest) is at the bottom, 2 in the middle, and 3 further away at the top. For Rumelt, this would be a practice to adopt when we’ve made our diagnosis of the challenge and defined our approach – the Three Horizons helps us to create and refine our coherent set of actions, and know which ones to spend most of our valuable time and resources on.
Let’s look at what each of the three horizons mean:
Horizon 1 activities are those that sustain your core business, enhance your efficiency, and are the things that your customers or service users actually want from you right now. For example, for an organisation like Toyota, H1 is the core activity of building high quality cars – doing it efficiently, getting them into customers’ hands, and providing great service. It’s also contextual activities like marketing, finance, and facilities. For a healthcare organisation like the NHS, H1 would be along the lines of direct patient care & safety, ensuring that people can access healthcare regardless of location, ability, or income. Horizon 1 keeps your organisation alive.
Sears is a good example of an organisation that failed to focus enough on H1: Sears had their own message boards and a form of email before the internet was even invented, they had their own credit cards and insurance company, but failed simply in terms of operational capability and efficiency in their core business. They lost sight of their traditional niche, distracted by new and shiny innovations, and were outcompeted by lower price stores who had a lower cost base.
Horizon 2 activities help you grow and scale your organisation in the near future. These might be new products and services, and new and emerging markets. These are incremental improvements, and usually low-ish risk. For Toyota, this might be coming up with new electric car models to replace older ICE cars, or reaching new markets where they’ve not previously operated. In healthcare, this horizon could be trying out new protocols and treatments for patients, finding better suppliers, or delivering healthcare to more remote communities. This horizon requires iterative experimentation and testing ideas out in the real world. OODA is a useful mental model to apply in this horizon. Horizon 2 helps your organisation grow and keep up with a changing world and a competitive marketplace.
Horizon 3 is the further future, where it’s all uncertain and unpredictable. Here, we’re playing with completely new ideas, disruptive technologies and ways of working, which may come with a high-risk of failure. For Toyota, this could be as wild as flying cars, automated mass-transportation systems, different fuels or even innovative power generation technologies. In healthcare, this is the realm of drone-delivered and virtual healthcare, nanotechnology, and entirely new models of healthcare systems. You could use the Gartner Hype Cycle to catalyse innovative thinking in this space. Horizon 3 requires expertise, highly psychologically safe teams, multi-organisational partnerships, and a willingness to embrace risk and uncertainty – this is truly the realm of intelligent failures.
Horizon 3 is what we might have to rely on if the market changes dramatically and quickly, or if our initial idea fails to take off. Blockbuster video is a good example of an organisation that neglected H3 activities – by neglecting to proactively engage in H3 innovation activities, they were too late to respond to a rapidly changing market that was moving to streaming. At its peak, Blockbuster was incredibly successful, making $5.9 billion a year. However, this success, including the decision to turn down purchasing Netflix for just $50 million, masked an underlying failure to anticipate and adapt to industry changes. Blockbuster now consists of a single store in Bend, Oregon.
Limitations of The Three Horizons
Note, the 3 Horizons model can’t tell you exactly what to do. We still need to do the work of understanding our organisation, our marketplace, the economic conditions, carry out competitor analysis, and all of that stuff. But the 3 Horizons practice helps us turn those insights into a “set of coherent actions towards a challenge”. And this is why I turned it into a triangle – in our strategy workshops, we use a giant triangle on the wall, and list our activities on post-it notes, placing them where we believe they sit. Are they Horizon 1, 2 or 3? If we’re not sure, then we can have a good discussion about it – maybe we shouldn’t be doing that at all. After all, good strategy is as much about what we don’t do, as what we do. If we don’t have any post-its in Horizon 3, then we’d better come up with some! And if we don’t have any in Horizon 1, then it might already be too late…
A balance of activities
When we have that all described, we can look at our balance of activities. In general, I like to suggest a balance of roughly 10-15% on Horizon 3, 25-35% on 2, and 50 – 75% on 1. If we spend all our resources on H1 activities, we risk being outcompeted quickly, or our customers becoming bored and jaded with our products and services. We’re also highly vulnerable to external change, such as economic shocks or new competition. If we focus too much on H3 or H2 to the detriment of H1, we risk losing the capability to actually deliver on those innovative ideas or to satisfy the new customers we already have. And we might find that our cost base increases too high because we’ve lost our focus on efficiency.
This balance depends on the type and stage of organisation that you are, of course: For a startup, in search of a successful business model, we’re going to lean more towards Horizon 3 activities, whilst for an established and successful organisation, more towards Horizon 1. But all organisations need to have a balance of activities across each horizon.
Finally, this is not a one-time event that creates some sort of verbose and brittle strategy document with Gannt charts, dependencies, critical paths and milestones. This is a living, evolving tool that should be constantly revisited and adapted. Activities should gradually move down from H3 to H2, and from H2 to H1. Some things from each horizon will also need to be discarded or offloaded. We can’t do everything – again, strategy is often more about what we choose not to do, than what we choose to do.
In conclusion
Strategy is dynamic: it constantly evolves and changes in response to our actions and the changing world around us. And the success of our strategy hinges partly on our ability to maintain a balance across the three horizons. While it’s essential to focus on the core activities that sustain our organisation today, we must also invest in growth and innovation to secure our future. This balance will look different for each organisation, depending on its stage, industry, and specific challenges.
Of course, the true power of a strategy lies in its execution. We can have all the fancy reports and documents, but it’s the actions we take and the decisions we make that lead to success or failure – and that’s where psychologically safe, high performance teams are essential. Culture eats strategy for breakfast.
Further Reading:
McKinsey: Enduring Ideas: The three horizons of growth
Why bad strategy is a ‘social contagion’ – Richard Rumelt
Why Does Culture ‘Eat Strategy For Breakfast’?
Related Articles:
John Boyd, OODA Loops and Strategy