You are constantly looking for ways to grow your business, create more value for customers, and stay ahead of the competition. It can be challenging to realize and sustain your growth. You have set targets for the overall company, but achieving those targets is not straightforward.
The crucial strategic question to ask when thinking about growth and defining growth targets is: “Where does our growth come from?”
Today, the mature business is the biggest in terms of revenues, customers served, and profits. Typically, a mature business in your portfolio grows between 2-5% or even not at all anymore. A younger business in your portfolio that has achieved product-market fit grows double digits. The younger businesses might replace or even eclipse the mature business in a couple of years time.
As leadership team, you want to make sure that you have a good understanding on what might be next. Having this point of view can help make the right investment decisions so that your portfolio of businesses is robust and growing.
In addition, we suggest to not just look at growth in terms of financials, but also in terms of positive impact. Your future portfolio should have businesses that deliberately reduce footprint (negative socio-environmental effects) and generate a handprint (positive socio-environmental effects). Such businesses that do good and do well are the businesses of the future.
The Three Horizons framework, which was created by McKinsey and published in Alchemy of Growth, offers valuable guidance for making investment decisions related to portfolio growth. This framework divides growth into horizons that relate to both time and profit/value. The primary idea is to increase profit and value in the future by looking further than your current core business. The horizons (1,2,3) serve to look beyond today. Horizon 1 of your growth strategy focuses on extending and defending your core businesses. Horizon 2 includes emerging businesses that are currently being built, while Horizon 3 is further away and involves creating viable options for the future. To give you a clearer picture, see the image down below:
Growing your business can be achieved in many ways, such as mergers, acquisitions, investing in start-ups, building capabilities, or adapting your current business model. In this mix, we believe that business model innovation can be the key driver of growth across all three horizons. By innovating your business model, you can respond to changing markets, adopt new technologies, and meet evolving customer needs. This can help unlock new revenue streams, reduce costs, and give you a competitive advantage in your industry.
To engage in business model innovation, growth initiatives should be defined on all horizons and allocated to a team that are ready to make a change.
Teams responsible for running the current businesses. These teams
execute and optimize, innovating incrementally within current business models.
Growth initiatives are related to sales programs, product development, marketing & distribution, cost reduction through innovation. Aim is to maximize the value and profit of the current business with expected return in a 0–36 month time frame.
Teams responsible for building and growing new businesses. These teams innovate and validate, continually working on the next business models. Growth initiatives focus on adjacent business models. Aim is to build scalable business model as new sources of revenue and profit. Returns can be expected on an 18-36 month time horizon.
Teams responsible for exploring new businesses in a highly uncertain context. These teams experiment and pivot, work on radical, completely new business models, and are held accountable using innovation metrics. Returns to be expected in the long term (>36 months).
In our latest playbook we share how to start building your future (circular) business, whilst successfully growing the one you have today.
Apple achieves growth on horizon 1 through initiatives around product development to improve products, expanding market reach through partnership and distribution (e.g., expansion of the number of Apple stores) and making the supply chain more resilient by relocating factories. These initiatives are within the scope of the current product business model and drive growth on the short term.
Apple grows on horizon 2 through services. Think of services like Apple Music, Apple TV+, iCloud and Apple Pay. Initiatives are around building a new entire new business model, meaning new offerings, tapping into new channels and types of revenue stream. Building new teams and defining new process while finding the right new partners. The horizon 2 opportunities can often help boost growth from revenue perspective but are not easy to pull off. They require significant investments over a longer period, while it often remains uncertain if the new business model can become profitable enough in an ever-growing competitive landscape.
Apple is investing in the healthcare sector to grow on horizon 3. Apple aims to empower users on their personal health journey. They do this through wearables but also by collaborating with the medical community. Their horizon 3 efforts go further than just creating a business model, they are building a powerful ecosystem within healthcare. As horizon 3 opportunities are often hard to seize and require long-term significant investments, Apple smartly uses their hardware business (iPhones and Apple Watch), and Service business (App store/developer community).
Growing your business on horizon 1, 2 or 3? If you're ready to go all-in on designing your growth strategy, our strategy designers can help drive the co-creation in your team. Get in touch!
