Balancing Operations and Innovation: The Three Horizons Strategy in Corporate Governance
Achieving sustained success in business requires striking a balance between routine operations and fostering innovative thinking. The three horizons strategy, a model often referenced in Harvard Business School literature, provides a structured approach to manage this balance. By separating present, future, and transformative activities within an organization, this strategy enables companies to maintain operational excellence while driving innovation.
What Is the Three Horizons Strategy?
The three horizons strategy isolates creative functions from bureaucratic, routine operations. This separation allows organizations to effectively manage core business tasks while dedicating space and resources to innovation. Large companies, in particular, benefit from this model, as it ensures that daily operations do not overshadow the need for forward-thinking development.
Horizon 1: Core Business Operations
This horizon focuses on managing the organization's primary revenue-generating activities. It involves maintaining consistency, improving efficiencies, and making incremental improvements to ensure stability.
Horizon 2: Emerging Opportunities
In this phase, leaders identify and nurture new opportunities that have the potential to become significant revenue streams in the near future.
Horizon 3: Transformative Innovations
Here, the focus is on developing breakthrough innovations that could create entirely new markets or redefine industries.
Practical Examples of the Three Horizons Strategy
Though many examples can be found, the following two help demonstrate just how innovation can thrive in different businesses.
Marriott’s Operational and Creative Balance
With a workforce of over 750,000 employees, Marriott demonstrates the importance of Horizon 1. For example, the company ensures strict adherence to guidelines for routine tasks, like making over two million beds daily, to maintain efficiency and consistency. Yet Marriott also recognizes the need for innovation. By creating a separate space for creative ideas, the company ensures that innovation flourishes without being hindered by operational demands.
IBM’s 1990s Transformation
Under CEO John Thompson, IBM utilized the three horizons strategy to adapt to a rapidly changing technological landscape. Thompson ensured the company's future-focused, creative divisions were insulated from its core operational functions. This allowed IBM to simultaneously maintain efficiency in its core services (Horizon 1) and foster groundbreaking innovations (Horizons 2 and 3). This approach kept the company competitive during a pivotal time in its history.
Applying the Three Horizons in Corporate Governance
For boards and leaders, the three horizons strategy serves as a practical framework to balance immediate needs with long-term growth. To implement it effectively:
1. Define the Three Horizons: Clearly delineate between core operations, emerging opportunities, and transformative innovation.
2. Isolate Creativity: Create a dedicated space for innovation to thrive, separate from routine bureaucratic functions.
3. Allocate Resources Strategically: Ensure each horizon receives the necessary support without compromising the others.
By adopting this strategy, organizations can navigate the complexities of managing large-scale operations while ensuring they remain agile and innovative in the face of change.
Why It Matters
As industries evolve and markets grow more competitive, the ability to balance operational efficiency with innovation becomes a cornerstone of sustained success. The three horizons strategy provides a proven method to achieve this balance, as seen in the success stories of companies like Marriott and IBM.
By focusing on the present, nurturing the near future, and fostering transformative change, leaders and boards can guide their organizations toward long-term growth and competitiveness.