How to build a better future for your business: the McKinsey model

There’s no magic solution to building a better future for your business. Exactly how you shape your business depends on the market you work in, the products and/or services that you sell and the people you employ.

Yet there are certain indicators of success that can be applied to any company, regardless of their output or the industry they operate in. If we take The Three Horizons model, it is possible to broadly understand the thinking required to ensure future growth and use it to positively impact business strategy.

The Three Horizons is based on the McKinsey model for growth companies and was developed from McKinsey & Co.’s discoveries of the common factors amongst companies that experience significant and consistent growth. That is, companies achieving in excess of 30% growth in each year for a ten year period (equating to a ten-fold increase in ten years).

When these successful companies were analysed, McKinsey identified that they could be represented by three horizons. These consist of:

Horizon 1: Extend and defend core businesses/enterprises

The ‘extend and defend’ stage is all about protecting existing revenue sources, which usually consist of a business’s main products and services. As an example, Megatron Computing receives the bulk of its revenue from the manufacture and the sale of PC 1. In short: revenues from PC 1 are used to sustain the company.

Horizon 1 is where all businesses, healthy or not, find themselves in the early stages. It’s the stage at which we usually know how to market and sell our product or service, we know who it appeals to and we don’t have to reinvent the wheel to gain revenue from it. But it’s also when a comfort zone can set in.

Breaking out of this comfort zone is fundamental to ensuring the long-term survival of any business. In fact, McKinsey & Co. identified that by year 4 or 5, a significant percentage of growth company revenue comes from products or services that aren’t in existence at start-up, with the implication that defence of existing revenue will only take a business so far.

In the example of Megatron Computing, by year 3 the features of PC 1 have become outdated, creating pressure for PC 2. And it’s this move towards future development that takes us to the 2nd horizon.

Horizon 2: Identify future options and build platform for emerging businesses

Reaching the 2nd horizon is arguably the biggest step for most manager/owners, due to the inevitable costs to the business that bring no return in the short-term. For example, to develop the right features for PC 2, Megatron needs to undertake a combination of market research, internal development and strategy revision – none of which directly contribute to company revenue. It is this drain on existing resources that can unnecessarily delay development and lead to periods of stagnation or decline.

If you are currently in horizon 1 and nervous about moving to the next level, do consider how external help could support you through this. Venture capital firms will be able to explore fund-raising options with you and here at 2nd Head there are numerous fund-raising options available.

Horizon 3: Create and implement viable options

Preparation is key with any new product or service, not only in terms of development, but also with regards to internal resources that support its external delivery. In the example of Megatron Computing, the business needs to ask itself questions like: do we have enough technical people to provide ongoing helpdesk support? Will we need to up sales or marketing resource, or re-focus these teams to maximise exposure?

Once you are sure that this new offering is right for, and can be supported by your business, make sure that all your employees are aware of the direction you’re heading in and why. When new products or services are introduced there is often a degree of resistance and a subsequent learning curve that is necessary to get to grips with the new product.

This is particularly true in engineering or technology firms, where products are usually more complex and therefore require more training than for example, clothes or confectionery. So you will need to gauge the level and complexity of briefing required to keep it appropriate for your business. Do remember that even with the simpler products, work is still needed to make your employees support and endorse your product.

For example, you may want to hold workshops that incorporate a visual story, which explains how you’ve arrived at this new product or service. If you are still in the naming stage and looking for inspiration, your employees could become integral to this process through something as simple as a naming competition – helping you to engage them prior to launch.

Some documentation may be required, but try not to go overboard. Most employees will only concern themselves with what they perceive to be relevant information, so asking them to wade through a 15 page analysis of product viability will only serve to stunt their interest. If employees do need higher levels of detail, then one to one or group training sessions should be used in conjunction with any documentation. Immediate access to documents via company intranets is also essential to support the learning process.

If the new product has brought about an adjustment to business strategy and planning, try where possible to filter this down through the organisation. You may need to consider revising individual and/or departmental objectives to align them fully with business goals.

Of course, all activities that support the development of this product or service need to be well funded and properly budgeted for, to ensure the business can enter the market with this product as soon as possible and thereby achieve maximum revenue.

Carry on the good work

Most importantly, once you’ve entered horizon 3, you need to adjust your thinking to prepare for continuous long-term research and development. Once the second product/ stage of development is complete, it should stand you in good stead to continue innovating your way to growth.

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