As companies mature, they tend to focus on optimizing how they conduct business and may lose sight of new opportunities for growth. What they need is a framework that allows them to grow consistently throughout their life. Lean innovation combines the concept of McKinsey's three horizons of innovation with that of the lean startup.
Listen to Steve Blank explain the Horizons model for innovation, originally developed by McKinsey & Company, and its application to the lean startup. He discusses the focus of each Horizon:
- Horizon One focuses on executing the existing business model
- Horizon Two focuses on extending or modifying the existing business model
- Horizon Three focuses on exploring or adopting new business models
Video Transcript: “Horizons” in Lean Innovation Management
“Horizons” is a product of McKinsey from about a decade or so ago, that’s a framework for company leadership to use to think about how to do more than just manage their existing product line or their existing businesses. And the original McKinsey version of Horizons said “Listen, let’s think about three horizons of innovation.”
Horizon One is our core business or businesses, and these are the ones you kind of think about, when you think about what the company does that provides the greatest profits and cash flow. And so it’s what you know typically execs are managing and worrying about 98% of their time. But they also offered there are two more horizons that senior leadership and corporations need to be thinking about. And they said Horizon Two are kind of rapidly growing businesses or emerging opportunities that might generate future profits but require much more investment in either people, resources, or time.
And Horizon Three are the crazy things: they’re emerging businesses. These are things that you know you might want to invest in or you know you have a small R&D group who historically was the province of advanced R&D. That was kind of how McKinsey kind of laid this out as I said a decade or two ago. But we have a much better and more efficient way to think about these horizons now.
So lean innovation actually combines this three-horizon model with what we know as lean startups. It basically says, let’s use the horizon words, but actually talk about it in context of what’s called the business model. And so in Horizon One, these are activities that we now define that support your existing business model.
It’s your core business but here we’re executing a known business model that is we know who our customers are, what features they want, who our competitors are, pricing channels, supply chain etc. this uses all the existing capabilities and has low risk in getting the next product out the door.
And management in this horizon works by building repeatable and scalable processes, procedures, incentives and KPI’s to execute and measure the business model.
Innovation and improvements occurs in Horizon One, historically on processes, procedures, and costs. Now, Horizon Two in the lean innovation model, instead of executing a business model, extends a core business model. Here, the company looks for new opportunities in an existing business model. Maybe let’s take the same product and put it in a different channel, or that use the same technology but go after a new customer segment. Or, sell existing customers new products, that is you have a series of knowns but let’s try some variables on the business model.
So, Horizon Two uses mostly existing capabilities but has moderate risk in getting those out the door. And management of Horizon Two is a little different. It’s not only KPI’s and processes and procedures, you’re kind of using pattern recognition and experimentation inside the current business model.
But Horizon Three, is where companies put their crazy entrepreneurs. These are all the people that you almost want to strangle or fire, but trying to keep in mind that outside of your company they’d probably be the CEO of a startup.
These innovators want to create new and potentially disruptive business models. Here, the company’s essentially incubating a startup. And they’re doing this with speed and urgency to find a new, repeatable, and scalable business model.
Now, our experience in going all the way back to when IBM set up their first PC group says, Horizon Three groups need to be physically separate from operating divisions in a corporate incubator, or in their own facility. And more importantly, they need to have their own very separate plans, procedures, processes that are different from those in Horizon One.