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Tacettin İKİZ



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McKinsey’s Strategic Horizons :Strategy Frameworks Top CEOs Use

Started by Tacettin İKİZ, December 30, 2024, 02:17:44 PM

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Tacettin İKİZ

Understanding McKinsey's Strategic Horizons


1. Overview: The Three Horizons
McKinsey's framework organizes a company's innovation and growth initiatives into three overlapping horizons:

  • Horizon 1 (H1)Core businesses generating most current revenue and profit. Focus on defending and extending your core.
  • Horizon 2 (H2)Emerging or adjacent opportunities with potential for significant future growth. Need investment and scaling.
  • Horizon 3 (H3)Future or disruptive ideas that may reshape the market. High uncertainty but possibly game-changing payoff.

Why three horizons? To balance short-term performance (H1) with medium-term growth (H2) and long-term breakthrough bets (H3), preventing over-focus on immediate returns or, conversely, on distant possibilities.



2. Detailed Explanation of Each Horizon

Horizon 1 (H1)
  • Focus: Profitability, market share, and operational excellence in the existing core.
  • Activities: Incremental product improvements, cost efficiencies, strong sales/marketing.
  • Risk: Over-reliance can lead to stagnation if new growth avenues aren't pursued.
Horizon 2 (H2)
  • Focus: Emerging businesses or adjacent markets that need scaling.
  • Activities: New product lines, market expansions, partnerships or alliances.
  • Risk: Requires dedicated resources; can be overshadowed by H1 priorities if not protected.
Horizon 3 (H3)
  • Focus: Long-term, potentially disruptive future bets.
  • Activities: R&D, incubators, experimenting with radical innovations or business models.
  • Risk: High uncertainty, many experiments may fail; must manage time and capital carefully.



3. Sample Scenario: "TechNova"
Imagine a midsized consumer electronics firm, TechNova:

  • H1 – Core Business: Smartphone accessories (chargers, cases) that bring 80% of revenue.
    - Focus on cost efficiency, branding, and defending market share.
  • H2 – Emerging: A new smart home device line gaining traction.
    - Needs channel partnerships and marketing to scale properly.
  • H3 – Disruptive: R&D into wearable health-tech products (e.g., AI-driven monitoring).
    - Uncertain but huge potential if it succeeds.

Budget Allocation Example: 
- 70% to H1, 20% to H2, 10% to H3 
- Ensures stable cash flow from the core, fuels near-term expansion in smart home devices, and funds exploration in the health-tech space.



4. Simple Formulation: Balancing the Horizons
A common resource split is:
H1 : 70%
H2 : 20%
H3 : 10%
But actual ratios vary by industry and company risk tolerance.

You can define:
B(H1) + B(H2) + B(H3) = B(Total)
Then track each horizon's KPIs:
[ul]
  • H1 KPI: Operating margin, market share, core product sales.
  • H2 KPI: Growth in new segments, pilot expansions, profitability of emerging products.
  • H3 KPI: R&D milestones, prototypes tested, patents, or new market tests.
[/ul]
Adjust allocation over time if an H2 project matures into a new core (H1) or if an H3 venture shows exceptional promise.



5. Strategy Execution Tips
  • Leadership Alignment: Top management must support both today's business and tomorrow's innovations.
  • Org Structure: Some firms set up separate units for H2/H3 to protect them from day-to-day demands of H1.
  • Incentives: H1 teams may have short-term profit goals; H3 teams need exploration KPIs (learning, prototypes).
  • Learning Loops: If an H3 idea gains traction, move it to H2 for scaling, then eventually into H1 as it matures.



6. Common Pitfalls
[ul]
  • Overemphasis on H1: Future growth suffers when everything goes to core maintenance.
  • Neglecting the Core: Chasing many new bets can starve H1 of resources, undermining the cash engine.
  • Poor Governance: Mixing H2/H3 with day-to-day operations without dedicated focus can stall innovation.
  • Rigid Ratios: The "70–20–10" rule is a guideline, not absolute. Adapt based on strategic context.
[/ul]



Conclusion
McKinsey's Strategic Horizons helps leaders manage immediate performance while continuously investing in medium-term growth and long-term disruption. By allocating resources, setting goals, and structuring teams for each horizon, a firm balances steady cash flow from the core (H1), cultivates promising new ventures (H2), and explores transformative innovations (H3), ensuring a robust pipeline of future opportunities.
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