Linking Innovation to Strategy, part 3

One of the more alarming aspects of the global financial crisis has been the corresponding downturn in innovation-related spending by firms. Obviously, if you lost your job or your house or your retirement savings this issue doesn’t seem so critical, but I think it is important even so. The reason is that future jobs and future prosperity require innovation efforts right now. One of the big challenges in managing innovation is maintaining a portfolio of innovation efforts that cover everything from incremental to radical innovations. One of the tools that we’ve found very useful in doing this is the three horizons model.

The three horizons model was first published in The Alchemy of Growth by Merhdad Baghai, Stephen Coley, and David White in 1999. The fundamental idea behind the model is that we need to be thinking about innovation across three time frames.

3horizons

When you innovate using the three horizons framework, the first horizon involves implementing innovations that improve your current operations, horizon two innovations are those that extend your current competencies into new, related markets, and horizon three innovations are the ones that will change the nature of your industry. In general, H1 innovations tend to be incremental, while H3 are more often radical innovations. There are several key ideas that arise when using the three horizons model.

The first is that you must have innovation efforts aimed at all three time horizons. If you only look at the exciting transformative H3 innovations, you’ll lose business to current competitors who are using incremental innovations to improve their operations. Consequently, you might have the best ideas for the future, but you’re no longer around to execute them. On the other hand, if you only focus on H1 incremental innovations that make your current business better, you’ll end up being replaced by organisations that are driving disruptive innovations in your field. Using the three horizons framework helps us balance our innovation efforts between incremental and radical, which is important.

The second issue is that horizon 2 is incredibly difficult to manage. H2 innovations seem very similar to your current products and services, and the overpowering temptation is to use the same metrics to assess their success. However, because these ideas are new, it takes time to get them configured effectively. This means that if you treat H2-oriented innovations just like H1-oriented innovations, you are likely to abandon them too quickly because it will seem like they’re not performing well. You have to figure out a way to ringfence H2 innovation efforts.

The final point is that people often mistake the three horizons model for a planning tool – it isn’t. John and I have talked about this before (here and here, to start with)- this is one of the critical mistakes people make when applying this tool. While the diagram has a scale that says ‘time’, it really means ‘information’. This diagram from a UK Foresight report is useful:

The key issue is the amount of information that we have available to plan for the time horizons. So H3 is not ’5 years from now’ – it is ‘a time where we don’t really know what will be happening’. For some industries that might be 25 years down the road, like, well, I can’t think of many good examples actually. For others, that time might be right now – the news industry is a good example of this. Turbulence can compress the three horizons so that we’re dealing with all of them at once. When this happens, it is very chaotic and stressful, but it’s also a time of great opportunity.

If you are using a three horizons type approach to innovation, it becomes clear that you need to continue investing in innovative activities across all three time horizons, even if you’re in the middle of a global financial crisis. To do this effectively, you need to have some idea of where you’re heading in the future, and that’s why I think it’s a useful tool for linking innovation to strategy.

Extra resources:

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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13 thoughts on “Linking Innovation to Strategy, part 3

  1. Thanks for that link Graham – that’s a terrific framework. We’ve talked a bit about real options, but that is beautiful summary post!

  2. Just referring back to the frame posted by Graham, interesting but Xerox have adopted this from recent presentations I attended. It seems to be a really good frame for exploring (open) innovation