The horizon model originally came from the book “The Alchemy of Growth” by Stephen Coley, Mehrdad Baghai, David White. The purpose for the model was to help businesses think about their need to develop new revenue sources over time.
Near term, you must protect your existing revenue sources and if possible, even extend them. But at the same time, you must consider products or markets that are in decline and how you might replace that revenue. The trick is, you have to start building the replacements today in order to realize the revenue in the future.
At some point, the Innovation Industry co-opted the original Horizon model, confusing the definitions of the horizons. Businesses that have incorporated the adapted horizon model often become confused about the nature of innovation and how new revenue sources might be created.
What Happened to the Horizon Model?
Innovation is one possible source of new revenue. The likelihood of that happening is, of course, dependent on your definition of innovation.
Horizon 1 describes the work necessary to protect and extend existing revenue sources that can be done in the near term, as a regular course of doing business. Adding new features might enable you to take market share. Changing prices, new packaging, different marketing tactics, trying new sales scripts, improving support, partnering with or acquiring synergistic companies — there’s an endless list of things a company might do to protect or extend existing revenues.
Horizon 1 doesn’t require innovation. It’s simply about “incremental improvement”. It’s viewed purely as an execution exercise, all about operational efficiency. Work is measured by return on investment, which typically means increased margins. In the extreme, this means an idea that increases revenue or market share may not be enough to justify investment.
The problem with the innovator’s take is that it is product focused and time boxed. In other words, there’s nothing “innovative” that can be done in an H1 timeframe. But couldn’t a new feature be innovative? Or a new pricing scheme? Or a new marketing channel?
A Horizon 1 initiative depends on the length of time to achieve a return on money invested on the initiative. Whether the idea is “innovative” or not is immaterial. Determining how much to invest in the idea should depend on the level of effort required and the amount of evidence in support of the idea.
- Low effort/High evidence is a no brainer
- Low effort/low evidence should receive low funding for generating evidence
- High effort/High evidence should be evaluated based on expected returns over time
- High effort/low evidence should perhaps receive some funding for testing depending on competing ideas
Horizon 2 defines new revenue streams. They come from sources which likely require 3-5 years to scale as a replacement for today’s sources. Sources could include launching into new geographic markets based on existing products or launching new products that take several years to mature. They could also represent products or markets that were launched a few years ago, and are still several years away from maturing. A source could be an acquired company that is still scaling toward H1 size.
Horizon 2 is defined as “incremental” innovation, which typically means modifying existing products or technology to create new markets, or applying external technology in new ways.
It’s arbitrary to declare that an “incremental” change to a product takes 3-5 years. Put another way, it’s arbitrary to declare a feature that takes 1 year to develop and release “an incremental improvement”, or declare engineering work that takes 5 years to achieve ROI “incremental innovation.” Product development just doesn’t work that way. If a company decides to rewrite it’s kludged back-end over several years, while increasing efficiency, saving the company money, and increasing customer satisfaction, is that incremental innovation? I don’t know. Does it matter?
If the end goal is to grow revenues or maintain existing size, the company must evaluate different ideas as an organization, not by degree of innovation. This is why evidence determines time horizon, not arbitrary characterizations of the type of work.
Horizon 2 initiatives that show evidence they will be at the scale of existing revenue streams in 3-5 years include:
- Any new products already launched
- New product ideas
- Existing product improvements
- Acquired companies
- New geographies
- New channels
- Business model changes
Horizon 3 describes launching initiatives today that will create future businesses at today’s scale. This final layer is about fundamentally replacing existing revenue streams.
Horizon 3 is breakthrough or disruptive innovation. This is the worst take for several reasons:
- Most companies WILL NEVER DO disruptive innovation
- Most companies DO NOT NEED disruptive innovation
- Disruptive innovation DOES NOT happen by people deciding to do it.
It takes 1000 startups to get to a unicorn. Companies that assign a few teams to go do breakthrough innovation are going to be disappointed. More than that, they will soon defund those teams.
Big “new” revenue streams will come only if companies fund enough ideas that are advanced and scaled based on evidence. They will come from a combination of efforts:
- Scouting technology to learn how existing needs will be solved in the future
- Maintaining awareness of emerging geographies and changing demographics
- Keeping tabs on startups to learn about technology applications, new marketing channels, business model experiments, etc.
- Running experiments to test ideas for leveraging core strengths, including science, engineering, distribution, resource supply chains, etc.
- Continuous empathy work and testing in adjacent markets
H3s have nothing to do with disruptive innovation. However, if disruptive innovation does emerge, being prepared to defend and be able to adapt, because of doing the work above and the ideas below, will enable a company to “protect and extend”, even though that is supposedly an H1 activity!
Whether experiencing disruptive innovation or a collapsed supply chain due to a ship stuck in a bottle, a company is best prepared to deal with changes in the world when the back office functions are “innovative.” I call this Horizon Zero.
A company cannot be faster or more agile than its core internal processes. This means finance. This means HR. This means IT. This means Legal, Operations, and Facilities. These groups must not only continuously improve the services they supply their internal customers, they must also sometimes reinvent their processes in order to meet the challenges of the new world. In order for them to take advantage of new technology, new techniques, new leadership skills.
All of the time horizons apply to the internal functions. They need to change today and prepare for change in the future. They must enable the other functions and divisions within the company to deal with uncertainty and increased complexity. In many ways, they can actually lead the effort, if given the right mindset and training.
The original Horizon Model still offers value to those organizations adapting it. The time horizons are too long for the modern world, but the model recognizes the various methods of achieving revenue as an important consideration. The Innovator’s take on the Horizon Model forgot all that. Applying arbitrary characterizations to the horizons doesn’t allow for proper planning or alignment to existing product portfolio and strategic initiatives.
Uncertainty is the one constant in the business world today. Evidence for how to overcome the uncertainty is how a company will maintain its existing markets, while seeking new revenue streams for the future. The amount of market-based evidence for an idea determines its true horizon.
Brant Cooper is the author of the NYT bestseller, The Lean Entrepreneur. His next book, Disruption Proof is available for preorder now. Order from your favorite retailer or for bonus bundles, go to https://brantcooper.com/disruption-proof/.