Friends,
I hope that all is well with you and yours, and that this e-mail finds you on a boat with shoddy connection, in the tropics, three months after I sent it.
A couple of updates before we go-go
Just in time for my one-and-a-half-year old daughter to leave kindergarten for summer, the weather in Sweden has switched from hot to cold, from to-the-beach to into-the-couch. The next two weeks will be interesting. If I do not make it through, I loved you all.
Officially, I will be on vacation for a month now. Unofficially, I will work on the book every spare minute that I get.
On that topic, I can reveal - and this makes you among the first to know - that we have secured a world class writer/thinker/professional to do the foreword. Things are shaping up embarrassingly well. Just need to steer the ship home.
And, lastly, to keep the theme consistent, it gives me great pleasure to introduce today’s fantastic guest writer: my co-author Steven McCrone. The newsletter is, as always, split in such a way that the main text is available for everyone, with additional practical takeaways available to premium subscribers below the paywall. Let us get into it.
Waiting is Failure
The danger of Three Horizons
Akin to the cargo pants I wore in the late 1990s, the Three Horizons model is starting to make a comeback. Just like the loosely cut outdoor pants, it makes us feel comfortable, has the appearance of being useful – and has had its time.
What is the Three Horizons model?
Developed by McKinsey in the early 2000s and introduced by Baghai, Coley, and White in Alchemy of Growth, the Three Horizons model was heralded as a breakthrough in describing how companies need to invest in current innovation, build business models to accommodate new ideas, and take a chance on radical disruption. Ever since, it has been utilised across the globe as a way to stimulate discussion and investment into innovation and business change.
The kernel of the model is the idea that innovation is anchored in a time-based flow.
Horizon One is typically thought of as 1-3 years, or “one planning cycle”, in most organizations. In this timeframe, innovation occurs within the existing business model and core capabilities. Key Question: What else could we do to create value?
Horizon Two is 2-5 years. There is an expectation that we will find ideas and opportunities in adjacent markets and sectors, and shift or extend our core business to take advantage of these. We may need to develop additional competencies and skills in order to do this. Key Question: What can we learn, borrow or steal from other industries?
Horizon Three is five years and beyond. Here, we expect to see disruption to our core business. We need to start investing in the innovation that may lead to this disruption. We will most likely need to develop new capabilities and adopt radically different technologies. Key Questions: What might kill our current business? How can we participate in its creation?
Utility of the Three Horizons model
There is nothing inherently wrong with using the Three Horizons for enabling a discussion about the flow of innovation or the things that might disrupt us. The model can be used as a way to bring a diverse range of views to the table and to challenge those who advocate for the status quo.
While engaging with clients in the agricultural sector, I helped set up and chair the New Zealand agricultural futures forum. Combining forecasting techniques with science-fiction was not merely intellectually rewarding and interesting, but also allowed us to create wonderful and often scary future scenarios. We would then use Three Horizons to provide a time scale for the expectation of change. Eventually, we released quarterly reports that detailed our findings. These became widely read and distributed, and we saw that as an early sign of success.
But the feedback I received turned out to be multiple variations on a singular theme: “It was interesting creating the Three Horizons, but change is happening now. Most of the things we think will happen won’t and loads of things are happening now that we haven’t even considered.”
I realized there was a problem. Well, in fact, there were three.
Three problems with Three Horizons
Problem one: the Three Horizons make us feel comfortable and in control
Humans and the systems they build usually strive to reduce surprise and unpredictability; avoidance of uncertainty is deeply embedded in our psyche. Research shows that a 100% guarantee of a negative outcome is far less stressful than a 50% chance of a negative outcome.
There are three ways to manage surprise:
Ignore it. Not really a strategy for success, but as the saying goes, ignorance is bliss.
Suppress it. This usually involves a lot of energy at a systems level. A good example is road rules, designed to suppress surprise by creating conditions where we have reasonable confidence that we can predict the behavior of the drivers around us.
Adapt to it. Create the ability to redeploy resources, learn, and innovate in the face of change or unexpected events.
In order to adapt to surprise and uncertainty, we need to develop the capacity to detect and respond to change. This requires us to shift away from the things that ignore and suppress surprise, and shift towards things that allow us to engage with it.
Techniques such as Three Horizons create the illusion of control of a system where we can make incremental changes now in Horizon One, will have time to develop new models in Horizon Two, and plan for future disruption in Horizon Three. This moves the bulk of the uncertainty out at least 2-5 years, effectively suppressing and ignoring surprise.
Ironically, if the result of your innovation planning leaves you feeling comfortable and in control, you are about to be surprised. Techniques that push our thinking into a murky third horizon are of limited utility outside of allowing us to shut our eyes to uncertainty. In reality, waiting is failure. In the face of immediate change, you must act.
Problem two: Three Horizons appear to be useful
By necessity, innovation methods should be designed for exploration, not prediction. Yet many who advocate for futures techniques are blinded by survivor bias; the victors write the case studies. Futures techniques may enable us to feel confident in our ability to achieve foresight and choose the future we want, but it is an illusion. We are significantly likelier to force premature convergence, i.e., making things rigid too quickly and thereby losing valuable variation. There are many more companies that chose the future they wanted and fell short – market failure rates typically sit above 95% – they just don’t make it into the business books that we read.
Achieving confidence in our Three Horizons means that we have limited our scanning to a narrower range of perspectives and will likely miss the opportunities and risks that lie in our immediate strategic environment. This overconfidence in the face of limited understanding is, per definition, a display of the Dunning-Kruger effect. Moving from scanning to planning robs people of the metacognitive ability needed to recognize their low level of understanding, which causes complacency.
Problem three: the Three Horizons have had their time
The Three Horizons model is based on the assumption that innovation and change follow a linear timescale. This is not true.
In his book The (mis)behaviour of markets (ed. note: on our list of recommended Christmas reads), Benoit Mandelbrot argues that in trading markets, time often appears to speed up and slow down. Rapid shifts in volumes and prices can create short periods of frantic activity that leave the market in disarray. These can be preceded or followed by long periods of apparent stasis where time seems to slow down, and traders have long lunches.
Change is nonlinear. Small things can suddenly cascade into major disruption, as artificial intelligence currently demonstrates. The new technology will disrupt many businesses – and that disruption is happening now. Taking a Three Horizons approach and trying to navigate a path towards AI adoption will most likely suppress or ignore the present risk and opportunity, with significant consequences.
The future is now.
In a rapidly changing world, Three Horizons merge into one.
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