Sustain profits for over a decade with Three Horizons

Making a profit at all in business can be challenging. By the ten-year mark, over 66% of new business ventures will have failed. Being profitable year after year is even more difficult. Expecting that to be sustained for over ten years is impossible, right?

Wrong.

In fact, with some strategic planning, you can ensure business success for many years to come. It’s not difficult but does require a shift in thinking and some dedicated planning time.

What I learnt from the masters

Recently, two of my colleagues at Alpin, Andrew Murray and Don Holdsworth, introduced me to the Three Horizons Model. It was great to get these insights straight from a couple of strategic planning experts!... Let me do my best to translate it for you here…

Don spent some time at McKinsey & Co., during which time the ‘3 horizons’ concept was kickstarted as a research project in response to a series of questions from clients asking for advice on sustainable growth. McKinsey tapped into their network around the world and looked at over 700 companies in ten different countries. They wrote up about seventy case studies, also looking at businesses that managed to restart growth after a period of nothing, and those who could not sustain it at all.

What was different about those unicorn companies that managed to sustain growth year after year, stretching over more than a decade? The research culminated in the publication of the Alchemy of Growth in 2000, which has endured for nearly twenty years and is still just as relevant today.

Keep an eye on the horizon!

So, what was that secret sauce? When it comes down to it, planning for the future.

That sounds obvious, but it’s also a common challenge. Many companies think they’re doing a great job of it, but when properly examined, there are often gaping holes in one part of their plan or another, leaving them with a real chance of the opportunity maturing and leaving a hole in the bottom line when it no longer plays out to the level it is today.

Many think that running a business day to day and making decisions around business growth are mutually exclusive. Some schools of thought say you can’t do both at the same time. You can either run your business properly, or you can grow it - and when you’re in growth mode you risk your core business model. That’s not true. In fact, the secret to success is the opposite - you need to have multiple initiatives for growth over different timeframes and with different objectives… all whilst maintaining momentum in your current business.

It’s not sufficient to just have ideas on how to grow your core business. Eventually, it will either mature or other circumstances will halt the growth in the market. It’s critical that you’re always planning for the next stage and the stage after that. That is the crux of the three horizons model.

Three Horizons traversed by Three Arcs

The model is so named because it splits initiatives into three horizons, or arcs if you like.

Arc One is the core business that you’re working on today to shore up profitability and deliver returns. These ideas will be profitable in a zero to three-year timeframe.

Arc Two is a series of things that are extending the core business out into related initiatives and businesses that you’re pretty confident you can pull off. They may lose money initially but you’re confident you can turn a profit in the next three years or so. This may include things such as a new geographical location or related industries.

And finally, Arc Three, which comprises longer-term growth initiatives that have a five-year maturity. This third horizon focuses on options for growth that are beyond your core business so that you can extend and diversify. Here you’re making bets on future sources of growth, perhaps technologies, emerging businesses, or capabilities that are a long way from fruition.

Your portfolio needs to be balanced with initiatives in all three so that you can continue to deliver returns now, tomorrow, and beyond. Without all three, the research shows that you’ll either run out of steam at some point or end up in a valley where growth slows or stops altogether.

A great way to get started is to do an audit and see where you stand in each arc, remembering that all three are important. Many focus on the big moves far into the future, but if you don’t have enough in horizon one, it doesn’t matter what grand plans you have, you can’t deliver them - without profits now, you won’t ever get the chance to realise them. Similarly, if you forget the middle, you’ll have a great beginning but you’re likely to run into a huge slump halfway through and will still never get the opportunity to make your long-term dreams a reality. It’s all about maintaining a balanced perspective across all three.

A few tips straight from Walt’s playbook

One company that has excelled at the Three Horizon system is Disney. They’re fairly unique in that we can easily examine nearly one hundred years of company history. Much is known about the company in the very early days, all the way through to current innovations.

Disney started as an animation and character licensing business that led into publishing and comics. From there, the core business grew into stores and merchandising opportunities, which is still a part of the business today.

From the early days, Walt had a desire to get into animated films. This was his second horizon initially and was realised in the 1930s. Rather than rest on his laurels, this then evolved into television and media productions in future years. During all this, Walt’s ultimate dream was percolating: the creation of a leisure park where adults and children could get together and all enjoy their day. It took him nearly twenty years to achieve this, with Disneyland opening in 1955.

A key part of the three horizons framework is that you constantly replenish the portfolio, moving things from Arc Two to Arc One as they become sustainable and create new Arc Three goals.

For Walt, the theme parks moved on to more new and huge innovations. All those people coming to Disneyland needed somewhere to stay and so he opened hotels. Then in the mid-1990s the company started a new initiative to bring the experience to the customer in a whole other way with the invention of Disney cruise lines.

Throughout all of this, the core business of making films and television never changed. Multiple theme parks, hotels, and then cruise ships all offered another layer that could leverage their existing customer base and add fuel to the next layer of growth again. Just recently, Disney launched their subscription television service, entering the huge market currently dominated by players such as Netflix. The service has already made waves!

The Disney company is always thinking about what’s next, and what’s next after that, and therein lies the secret to their sustained success. Big or small, businesses that aren’t working on what’s coming next right now will be too late by the time tomorrow is here. Particularly for smaller businesses, it’s often easier to rest when you’re onto a good thing. The company is going well, spitting out money, and all is great. With limited resources, you ignore arcs two and three, until it’s too late.

Getting the balance right

Most business owners tend to fall into two spectrums, people that are either highly entrepreneurial, diving into new markets without the data or validation to back up some of the decisions or cautious business leaders ‘growth-lacking’ in their responses, and too afraid to take a big step.

The balance needs to be found in between.

A good way to think about each horizon is as a continuum. Are there things you could be doing in the core business right now to drive profitability? Do you have enough validated investment options available to grow quickly? Are you placing enough bets on the future so you don’t fall off a cliff?

One huge mistake many make is not making their third horizon big enough. Keep your options open, but use criteria to screen options on their scale and their ability to deliver impact on the business. It will be difficult to see whether they will be profitable yet. You’re making bets on emerging innovations because as the existing business matures, you need to have initiatives in place and ready to go to replace them.

Lastly, don’t forget to revisit your portfolio often and make sure everything is still in check. By continually replenishing the portfolio in each horizon and moving things between arcs as appropriate - it allows you to manage different initiatives differently. Core business initiatives need to be managed differently from horizon two, and different again to things in horizon three. Consider deliberately splitting teams or use outside influence initially. Don’t distract people working on the core business.

When they’re overlaid, the three horizons create a smooth, progressive flow to sustain growth over long periods, creating sales for years to come.

I really enjoyed learning about this model with Andrew and Don. If you’re keen to learn more, please let me know or reach out to Andrew or Don directly!