Now, New, Next: Innovating the Way Organizations Innovate. Why McKinsey’s 3 Horizons Model of Innovation No Longer Applies
“The pace of change has never been this fast, yet it will never be this slow again” – what a great line from Justin Trudeau, Canada’s Prime Minister’s speech at the Davos 2018 World Economic Forum meeting. The pace of change and disruption is accelerating and will continue to accelerate in the future. To cope with this challenge, organizations will have to rely more and more on innovation and agility.
Innovation by itself has to change, what we call “Innovating innovating.” One of the changes in the innovation process and management was highlighted by Steve Blank, the developer of the methodology that, eventually, became the foundation of the Lean Startup movement and he’s currently an adjunct professor of entrepreneurship at Stanford University and lecturer at other universities. On February 2019 He published an HBR (Harvard Business Review) article titled “McKinsey’s Three Horizons Model Defined Innovation for Years. Here’s Why It No Longer Applies.”
McKinsey’s experts published in 2016 a model of three-time horizons for managing the innovation portfolio, in their article “Now, New, Next: How Growth Champions Create New Value.” The model describes the idea that companies should manage their innovation portfolio in three-time horizons (time-buckets):
- Horizon 1: Now – new ideas based on the current business model and existing core capabilities to provide continuous innovation (also called sustainable by Prof. Christensen).
- Horizon 2: New – new ideas that extend a company’s existing business model and core capabilities to new customers or markets.
- Horizon 3: Next – the creation of new capabilities to take advantage of or respond to disruptive opportunities.
This model was also described in chapter 5 of our e-book “Doing Digital” (https://bit.ly/2odl5th). Steve Blank now claims that in the 21st century, this model has a fatal flaw that risks making companies lag behind their competitors. His main claim is that the focus on the horizons is based on time-frame of each horizon. The Horizon 1 focused on innovations that could be delivered in a short term of 3 to 12 months. Horizon 2 could be delivered in 24 to 36 months and Horizon 3, focused on creating new disruptive business models, could be delivered in 36 to 72 months. This time-based definitions made sense in the past, but are no longer valid in our current and future dynamic business environment. Today, Horizon 3 innovations could be delivered as fast as Horizon 1 innovations.
To make his point Steve Blank uses some examples. Companies like Uber, Airbnb, Lyft, Tesla, Netflix built their disruptive business models using existing technologies (smartphones, GPS, Mobile internet, Big Data and many more) and deployed their solutions in extremely short periods of time. They have used the Minimum Viable Product concept to enter the market with barely finished, iterative, and incremental prototypes (what we call agile working methods). Incumbent companies can’t wait 36 to 72 months to deploy their counter solutions. It’s too late! Therefore organizations must find ways to shorten the Horizon 3 innovations.
Steve Blank provides some ways that incumbent organizations can deal with that challenge:
- Using startups to build and deliver products rapidly for incumbent organizations.
- Acquiring external innovators who can operate at the speed of the disruptors.
- Copy some of the new innovations and use the incumbent business model to dominate.
- Innovate better than disruptors.
None of the above alternatives are easy for incumbents, but waiting 36 to 72 months for Horizon 3 innovations to be deployed is not an option, in some cases.
In chapter 9 of the e-book “Doing Digital” Raz Heiferman & Prof. Yesha Sivan propose organizations to understand the five platforms for innovation. This conceptual framework provides some ideas of how organizations can speed up their innovation processes (e.g., using ready-made digital components for innovation).