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ARTICLES

  • Riikka Tanner

The Bet

I admit, I am a big fan of different frameworks. But why wouldn't I be, if someone has invented and battle tested useful ways of making sense of this world, we should embrace those with open arms and look ways how to make those even better.



One framework that has been rooted into my thinking for more than a decade now is something called McKinsey's Three Horizons. I have applied the original one alongside of multiple variations in very different setups ranging from strategic development initiatives to personal growth and personnel competence development plans and used as 70/20/10 rule for customer portfolio management and designing strategy roadmaps. Straightforward yet robust. Just my kind of thing.   


70/20/10 rule 

The three horizons framework originated late 90's by McKinsey consultants book "The Alchemy of Growth" as a general management framework but was soon adopted by innovators and transformed into 70/20/10 rule by which you allocate your resources to different innovation activities.


It is a highly structured and incredibly simple way of handling uncertainty in this fast changing world. Executives around the world are trying to figure out just how much they need to spend on different innovation activities and especially how to divide efforts between improving current business and processes for lowering cost to serve or improving customer experience vs. how much should be spent on new technologies and disruptive innovation which everybody seems to be expecting them of! Betting big and investing millions into something that has absolutely no guarantees makes you a touch nervous doesn't it? The ultimate gamble.   


I have caught myself saying very often in past couple of years that if "it works for Google, it works for us too" (disclaimer: there's no frigging guarantees!) as Google has been ranked as one of the most innovative companies in the world. They are also big fans of 70/20/10 rule. 

Three Horizons Framework slightly modified from Greg Satell

Core business deserves 70% of your attention

According to this rule, 70 % of your innovation budget should go for sustaining innovation activities and improving your core business. Most profitable opportunities are usually within your core business so horizon 1 is where the bulk of your innovation efforts and resources should go. Now we need to be careful not to translate this as 70% of our resources should go into keeping the lights on and doing business as usual. Just to keep up with competition, you need to constantly innovate your core by looking into your business with holistic lenses.


Today, it's simply not enough to improve product performance. And adding new features to a product that gets the job done after a certain level is simply wasting time and money. Our customers are expecting more but not in terms of product efficiency, they want ease of access, smooth service, better alignment with their own values and overall customer experience. To achieve these, organizations need to innovate their product systems, structure, processes, figure out their own place in the wider value network and come up with new profit models. Successful innovators analyze the patterns and conventions of their industry and then choose to innovate where others don't.  


This is the innovation zone where you as a leader are expecting to see some tangible results and benefits for your business. Return on investment comes in many forms and ways but for each innovation initiative there should be clear set of KPI's to measure success against.   


Emerging business - the next 20 %

Horizon 2 looks into adjacent markets and capabilities or in plain language, how do we move into new markets or build new competences? This is the most lucrative mid-term area for business potential or finding your next revenue engine. Adjacent, because it is still somehow connected to your core business and is more like expanding your current product or service portfolio. You might be already running some experiments on these business areas but they haven't evolved into a mature business yet.


Majority of what is known as disruptive innovation, stems from horizon 2 activities or the 20% you invest in these new areas. From return on investment perspective, these investment efforts should start paying off in few years but there are no guarantees. Some of your initiatives might grow into something, others will completely fall flat.   


Small bets, big potential gains with 10 %

Then there are the long-term bets or moonshots in horizon 3 where you have no business yet or clear understanding what you could do with new technology for example. These could be something like genomics or nanobots. Or ideas that seem radical for your industry. This 10% is all about experimentation and learning, gaining better understanding of certain markets or technologies to begin with.


Majority of large companies work together with scientists and research academia to keep tabs with latest research findings, just in case there might pop up something that sparks interest in their industry. There exists no ROI calculations on this zone but if one of those bets pays off, it could do so handsomely.  


The key, of course, is to future-proof your organization by driving innovation and development activities on all three horizons simultaneously. 


For further reading about Three Horizons Framework in innovation management, I recommend HBR article "Managing Your Innovation Portfolio".



© 2020 by Riikka Tanner

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