McKinsey’s 3 Horizons

McKinsey’s Three Horizons is a Strategic framework that sets different priorities for companies over time.

 

Its objective is to maximize the profit of a company in the long term.

 

To do so, it establishes 3 Main periods:

• Horizon 1: Current period.
• Horizon 2: Future in the Medium term.
• Horizon 3: Future in the Long term.

According to the McKinsey’s 3 horizons model, your Company’s Strategy should focus on:

 

Horizon 1: Consolidate your Current Business model.

• In this Stage, you should focus on what you actually have:
  • Increasing your margins.
  • Improving your processes.
  • etc.

 

Horizon 2: Expand your activity.

• In this stage, you should diversify your Business model:
  • Offer new products or services.
  • Search for new opportunities.
  • etc.

 

Horizon 3: Consolidate your New Business model.

• In this stage, you should focus on your new Business activity:
  • Adapting to the new dynamic..
  • Obtaining the highest possible profitability.
  • etc.

Now, let’s see the first example:

 

If there is a company that has developed a successful expansion Strategy over time… that is Amazon.

 

Amazon started a a “simple” book e-commerce Site. That is all.

But years went by, and the more diversified their Business became, the more Profit and success they had.

 

Horizon 1

When Amazon only sold books, their Main Goal was:

• Become a profitable online bookstore.

 

Horizon 2

 

Then, Amazon started to diversify their Business, offering other products and services:

• All types off products (not only books).
• Logistic services.
• Web services.
• etc.

 

Horizon 3

 

For the Third horizon, Amazon had to improve the profitability in all those New economic activities.

 

Amazon grew so much, that its Market Capitalization exceeded 1 Trillion dollars.

 

McKinsey’s 3 Horizons – Amazon example

As you can guess, lots of companies don’t really plan for the long term.

• They have so many problems that long-term planning seems like a luxury.

 

That is why now, we will discuss why you should always keep in mind McKinsey’s 3 horizon model.

Long-term planning may seem a sterile effort.

But, trust us: it is not.

 

We have studied, restructured and invested in dozens of companies that failed.

• Remember: we come from the Venture Capital sector.

 

And what all those companies had in common was a lack of planning.

 

Planning for the long-term is a very good exercise, which makes you think about:

• What you want to achieve.
• How you can you do it.

 

And McKinsey’s 3 Horizons is an easy-to-use tool that can help you in that regard.

* We recommend you to check our “Scenario Planning” Page.

• There you will find other interesting approaches to long-term planning.

 

Let’s now explain when you should use McKinsey’s 3 Horizons framework:

We always suggest using McKinsey’s 3 Horizons as soon as a Business has defined its Main economic activity.

 

Once you start improving and focusing on a certain Business model, it is time to think about the future.

• You want to always be thinking about improving your Business … and your Profits.

 

Let’s see some examples:

In these examples, we have developed McKinsey’s 3 Horizons for 4 different successful companies.

 

We have tried to imagine how the different Strategy teams saw (and see) the future of these companies.

 

Let’s begin:

 

Microsoft was born with the goal of offering Operating Systems.

• With their legendary MS-DOS.

 

But, once they became the undisputed Market leaders, they thought:

• “Maybe, we can improve our user’s experience… even more”.

 

Horizon 1

 

When Microsoft started, their Main goal was to obtain as much profit as they could, with their Operative Systems.

• And, of course, they were extremely successful.

 

Horizon 2

 

Pretty soon, Microsoft had to offer new Tools and Solutions, in order to help their users as much as they could.

• In those years, things changed very quickly.
  • They could not be left behind.

 

Horizon 3

 

Their ultimate goal was to offer a complete Microsoft environment with all user needs met.

• Microsoft Office.
• Internet Explorer (now it is called Edge).
• Visual Studio.
• etc.

 

However, since this economic sector is constantly changing, Microsoft surely has to go through this cycle over and over again.

• For each new Windows, Microsoft Office, the new Microsoft Edge, etc.

 

McKinsey’s 3 Horizons – Microsoft example.

 

Coca-Cola is one of the most emblematic Companies in the world.

• It is the second most understood word, after “OK”.

But, even Coca-Cola had a beginning.

 

This is a “tricky” example because Coca-Cola has focused mainly on one single product: Coke.

• Their 3 Horizons Strategy has worked especially in their Marketing and Promotion campaigns.

 

Let’s see what this 3 Horizons model looks like:

 

Horizon 1

 

At the beginning, Coca-Cola had to promote its drink highlighting its properties:

• Refreshing.
• Delicious.
• Relieves fatigue.
• etc.

Nobody knew Coca-Cola so, they had to communicate its most basic “characteristics”.

 

This is the most basic and direct Promotion campaign for new products.

 

Horizon 2

 

Years went by, and people already knew what a Coke was.

However, Coca-Cola still had to “remind” its customers to consume Coca-Cola.

 

To do so, they:

• Placed Coca-Cola ads everywhere (from Times Square to Picadilly).
• Sponsored Movies where people drink Coca-Cola.
• etc.

 

With this Strategy, Coca-Cola started to “associate” values to its brand.

• Depending on who you choose to Sponsor, your brand will be associated to one value… or another.

 

Horizon 3

 

Finally, they got what they wanted.

Coca-Cola was associated to the deepest and strongest value of all: Happiness.

• Coca-Cola is regarded by everybody as “something more” than “just a drink”.

They no longer need to highlight any features of their product.

 

Coca-Cola ads are 100% related to feelings.

• They have nothing to do with taste, price, etc.

 

Once a Brand achieve that “status”, becomes almost invincible.

 

McKinsey’s 3 Horizons – Coca-Cola example

 

Tesla is a very curious company to analyze.

It has barely made a profit in the past few years… And yet its market capitalization is huge.

 

Why?

How is it possible that Testa is worth more than Ford when Ford makes 5.5 million cars per year and Tesla only makes 100,000?

 

Let’s see the 3 horizons of Tesla to understand it:

 

Horizon 1

 

When Tesla started its activity, its main goal was to develop a successful and profitable electric car: the Model S.

• To do so, they designed the best batteries as well as a highly automated manufacturing process.

 

Horizon 2

 

Although Tesla still had no earnings on the Model S, they started developing new vehicles:

• Model X, Model 3… And announced the Cybertruck.

 

But … How is it possible that investors “love” so much a company with virtually no profit?

 

You’ll understand it with the 3rd Horizon.

 

Horizon 3

 

Tesla not only plans to design electric cars.

Their ultimate goal is to change the way we move.

 

They have invested heavily in self-driving technology.

• And that’s what can become “the next big thing.”

Imagine: Self-driving Trucks, Taxis, etc.

 

The economic potential is incalculable.

 

 

What can we say about Google that you don’t know yet?

• Where would we be without Google?

 

Let’s take a look at the beginning of this impressive company and what its 3 Horizon could be like:

 

Horizon 1

 

When Google started, its 1st Horizon was surely to become a successful Search Engine.

• We do not know how far they intended to grow… And if they hoped to be so successful.

 

Horizon 2

 

Some years later, Google started offering new and successful services.

• Google Earth.
• Google Maps.
• Google Drive.
• etc.

They used all these applications to collect as much valuable data as they could.

 

Horizon 3

 

Finally, Google began to process all this data to offer the most accurate solutions to its users.

 

Google no longer offers a common answer for everyone:

• Each user receives a personalized and adjusted response that best suits their needs.

 

With this accuracy, Google has become much more than a Search Engine:

• It is a “solution environment” where people can solve virtually all their information related problems.

 

McKinsey’s 3 Horizons is a framework that helps companies planning their strategy by settings different priorities over time.

• Its ultimate goal is to maximize long-term profit.

 

It establishes 3 Main Horizons and Goals:

• Horizon 1: Consolidate your Current Business model.
• Horizon 2: Expand your activity.
• Horizon 3: Consolidate your New Business model.

 

We suggest using McKinsey’s 3 Horizons as soon as a Business has defined its Main economic activity.

 

Remember:

• “Plans are nothing; planning is everything”. – US President Dwight D Eisenhower.