Innovation for Now and for the Future

One of the important ideas that follows from managing innovation as a process is that to be successful at it, you need to manage a portfolio of different innovation initiatives. This means that you need to have a mix of incremental and radical innovation ideas. One good way of building an innovation portfolio is to use 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. Sheldon Laube recently wrote a good post on this model as well, which included a nice visualisation of it, which apparently comes from Innovation Tournaments by Christian Terwiesch and Karl Ulrichwhich. I have adapted it slightly here:

three horizons

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.

  • Innovation must be linked to strategy: tools like the 3 Horizons framework are good ways to connect innovation with strategy. As you develop strategy, it will provide some guidance about where you want to end up in the future – you can then orient your H2 & H3 efforts in alignment with these future goals.
  • Think of innovation efforts as a portfolio: we need to have innovation taking place across all three time horizons. Thinking about this directly helps us ensure that we have a balanced portfolio. We need to be innovating enough in H1 to make sure that we stay competitive. H2 is the area where we use existing competencies to drive growth. To protect ourselves against disruptive innovations, we also need to be placing some small bets (or taking real options) on where our industry might go in the future – this is the H3 domain.
  • A balanced portfolio does not mean 1/3 or our resources in each area: Google uses a 70/20/10 split – most of their innovation resources are put into improving what they are currently doing – H1 initiatives. They have relatively less invested in the longer-term ideas. In most cases, these seem like reasonable investment proportions. If your environment is particularly turbulent, you can increase the investments into H2 and H3 innovation – it all depends on the situation you face.

The tricky part in all of this is management. It takes different skills to innovate in H1, where most of the ideas are incremental, than it does to innovate in H3, where many of the ideas are more radical. Nevertheless, organisations that are successful over time figure out how to do this well.

Thinking of innovation as a portfolio is one good way to manage the process more effectively.

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

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28 thoughts on “Innovation for Now and for the Future

  1. Tim,

    I really like the idea of looking at innovation through a portfolio perspective. I had a similar idea for marketing: http://www.digitaltonto.com/2010/the-problem-with-direct-response-marketing/

    However, I do think that there are some additional factors that need to be taken into account; such as culture for risk, financial position (i.e. debt to equity ratio), economic outlook, competitive position, etc.

    Nevertheless, it would be interesting to track investment in the three horizons over time and see what actually comes of it. Do you know if anybody has actually done that?

    – Greg

  2. I’m aware of a fair number of organisations that use this type of model to help plan investments, but I’m not directly of any that have built metrics around it, aside from Google:

    http://timkastelle.org/blog/2009/12/some-innovation-lessons-from-google/

    The Australian branch of Deloitte uses it a fair bit, and I’ve used it in some of my consulting work as well. In my case, it has helped firms organise innovation, but they’re not measuring yet based on it.

    Interestingly, John & I use the framework to assess our collaborative research. We’re in the process of scaling up an area that a year ago we thought was an H3 type line of research, but which is starting to look increasingly promising. If we hadn’t used this model, I wouldn’t have been able to convince him to consider it in the first place!

  3. I’ve found it to be a very useful tool – and one that managers can relate to pretty easily. It always seems to work both in the classroom and in consulting…

  4. Intuit uses the multi-horizon model and they seem to be very happy with it. It came up at a conversation in a TEDxBayArea event a couple of months back. I made a mental note to look further into it but it slipped down the list… until now. Thanks for the refresh!