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Balancing Core Product Improvements with Bold Bets: A Three Horizons Approach to Product Prioritization

Discover how the Three Horizons framework can help product teams prioritize initiatives effectively, balance short-term and long-term goals, and drive sustainable growth.

March 22, 2024
Rahul Mallapur

As product managers, one of our most critical responsibilities is prioritizing initiatives and features to ensure that our products remain competitive, meet customer needs, and drive business growth. However, balancing short-term demands with long-term strategic goals can be a daunting challenge. This is where the Three Horizons framework comes in.

Developed by McKinsey & Co., the Three Horizons framework is a powerful tool for product prioritization that helps teams allocate resources effectively, balance risk and reward, and maintain a steady pipeline of growth opportunities. By categorizing initiatives into three distinct horizons based on their maturity and potential impact, product managers can make informed decisions about where to invest their time and resources.

In this blog post, we'll dive deep into the Three Horizons framework, exploring its origins, breaking down each horizon, and discussing how product teams can apply this model to their prioritization efforts.

โ€The Three Horizons Framework Explained

The Three Horizons framework is a strategic planning tool that helps organizations manage current performance while maximizing future opportunities for growth. The framework divides a company's efforts into three distinct horizons based on maturity and time to impact.

Horizon 1 (H1): Extend and defend the core business

H1 focuses on the company's core businesses, aiming to improve performance, increase profitability, and defend market share from competitors. These initiatives often involve optimizing existing products, services, or processes and are typically low-risk with a short-term focus. Examples include improving operational efficiency, incremental product updates, or marketing campaigns to boost sales of current offerings.

Horizon 2 (H2): Build emerging businesses

H2 concentrates on developing new businesses or products that will drive medium-term growth. These initiatives often stem from the core business but target new markets, customers, or product categories. H2 projects are generally higher risk than H1 and may require substantial investment, but they also have the potential for significant returns. Examples include launching a new product line, entering an adjacent market, or forming strategic partnerships.

Horizon 3 (H3): Create viable future options

H3 focuses on long-term growth and exploring high-risk, high-reward opportunities that could potentially transform the company or industry. These initiatives often involve research and development, innovation, or venturing into entirely new business areas. The goal is to place small bets on disruptive ideas that may take years to materialize but could lead to exponential growth if successful. Examples include investing in cutting-edge technologies, exploring new business models, or acquiring startups in emerging industries.

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Visualizing the Three Horizons Framework. Image link.

Now that we've covered the basics of the Three Horizons framework, let's explore how product teams can apply this model to their prioritization efforts. We'll discuss the importance of balancing initiatives across all three horizons and share practical tips for breaking down ambitious Horizon 3 projects into manageable steps.

To gain further insights, we'll turn to Mike Cherry, Chief Product Officer at Gusto, who shared his experiences with using the Three Horizons framework during an interview on the In Depth podcast. Cherry's examples will help illustrate how this framework can be applied in real-world product development scenarios.

โ€Balancing the Horizons

The key to successful product prioritization is maintaining a balanced portfolio across all Three Horizons. As Mike Cherry points out, "We talk a lot about horizons - how much are we investing sort of in the core versus investing in bold bets and things that might be either something we realize success on multiple years out, or is a bigger risk, we might never realize success on." (edited lightly).

This balance ensures that the product team is continuously improving the core offering while simultaneously exploring new growth opportunities. However, achieving this equilibrium is more art than science. "There's no science in that a lot of it's art" Cherry.

โ€Chunking Down Horizon 3 Bets

One of the challenges with Horizon 3 initiatives is that they often feel far removed from the company's current reality. To make these bets more manageable, Cherry suggests breaking them down into smaller, more actionable steps.

"When I think about the first step, it's not that far from where we are today to start on the path to something that could be really big in a horizon 3," he explains. "That's usually where sort of the start would be, and if there's a big fail on step one, then we might have to look at, okay, do we still believe in step four?"

By chunking down these ambitious projects into smaller, more manageable phases, product teams can systematically validate their assumptions and adjust course as needed.

โ€Example: Square's Invoicing Product

Cherry provides a concrete example of how Square successfully leveraged the Three Horizons framework with its invoicing product. What began as a small-scale experiment by a few engineers quickly gained traction, proving the demand for an invoicing solution.

"There was a group of just a couple engineers that were like, we got this payment platform, and, we know how to build a website, what if we just let people send an invoice and then type in their credit card, and they did that as a hack week project," Cherry recounts.

This small Horizon 3 bet eventually evolved into a significant product line for Square, highlighting the potential impact of these explorative initiatives.

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Square's Invoice Product.

โ€Example Googleโ€™s Innovation Efforts

Google uses the Three Horizons framework to manage its innovation efforts and ensure a balanced portfolio of projects. The company allocates resources across all Three Horizons, with Horizon 1 focusing on core products like Search and AdWords, Horizon 2 exploring new opportunities like Google Cloud and Waymo, and Horizon 3 investing in moonshot projects like self-driving cars and quantum computing.

โ€Conclusion

The Three Horizons framework is a powerful tool for product prioritization, enabling teams to balance short-term improvements with long-term growth opportunities. By categorizing initiatives into three distinct horizons based on their maturity and potential impact, product managers can make informed decisions about resource allocation and maintain a steady pipeline of innovation.

As we've seen from the examples of companies like Square and Google, applying the Three Horizons framework can lead to significant breakthroughs and drive sustainable growth. By breaking down ambitious Horizon 3 projects into manageable steps, product teams can systematically validate their assumptions, adjust course as needed, and maximize the potential impact of their efforts.

Ultimately, the success of the Three Horizons framework relies on a combination of strategic thinking, adaptability, and a willingness to take calculated risks. By embracing this approach and continuously refining their prioritization skills, product managers can position their teams and organizations for long-term success in an ever-evolving market landscape.

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Common Questions

โ€1. What would the Three Horizons framework look like for a tech company?

In the context of tech companies, the Three Horizons could be applied as follows:

  • Horizon 1: Initiatives focused on improving and optimizing the core product offering, such as enhancing the user experience, fixing bugs, and addressing customer feedback. For example, Gusto might focus on streamlining its payroll processing features or Square on improving its point-of-sale software's performance.
  • Horizon 2: Projects aimed at expanding the product ecosystem and capturing new market opportunities. This could involve developing complementary products, integrating with third-party services, or targeting new customer segments. For instance, Gusto could explore offering HR services or benefits administration, while Square might consider launching inventory management tools or e-commerce integrations.
  • Horizon 3: Exploratory efforts focused on identifying and capitalizing on disruptive trends and technologies that could reshape the industry. These initiatives often involve research, experimentation, and strategic partnerships. Examples might include Gusto investigating the potential of blockchain technology for secure employee data management or Square exploring the use of AI and machine learning for advanced fraud detection and financial risk assessment.

2. How can one get started? What are some questions to introspect?

To get started with implementing the Three Horizons framework, consider the following steps and questions:

  1. Assess your current product portfolio and categorize existing initiatives into the Three Horizons based on their maturity, risk, and potential impact.
  2. Evaluate your resource allocation across the Three Horizons. Are you striking the right balance between short-term improvements and long-term growth?ย 
  3. Identify gaps and opportunities in your product roadmap. Are there any unexplored areas that could drive significant growth or disrupt your industry?
  4. Engage stakeholders from various departments to gather insights and ideas for potential Horizon 2 and Horizon 3 initiatives.
  5. Establish clear metrics and success criteria for each Horizon to track progress and make data-driven decisions.

Questions to introspect:

  1. Are we adequately investing in our core product (Horizon 1) to maintain competitiveness and customer satisfaction?
  2. What adjacent markets, customer segments, or product categories could we explore to drive growth (Horizon 2)?
  3. How can we foster a culture of innovation and experimentation to identify and capitalize on disruptive opportunities (Horizon 3)?
  4. What partnerships, technologies, or business models could reshape our industry, and how can we position ourselves to benefit from these changes?

3. How does the Three Horizons framework relate to other prioritization techniques, such as the Eisenhower Matrix or RICE scoring?

The Three Horizons framework is a strategic tool for long-term product planning and innovation, while techniques like the Eisenhower Matrix and RICE scoring are primarily used for short-term prioritization and resource allocation.

The Eisenhower Matrix helps prioritize tasks based on urgency and importance, focusing on short-term execution. It can be applied within each Horizon to determine which initiatives should be tackled first.

RICE scoring (Reach, Impact, Confidence, Effort) is a quantitative method for prioritizing features or initiatives based on their potential value and the effort required to implement them. It can be used to rank and compare initiatives within each Horizon.

In essence, the Three Horizons framework provides a high-level, strategic view of product innovation and growth, while the Eisenhower Matrix and RICE scoring are tactical tools for day-to-day prioritization and decision-making. Used together, these frameworks can help product teams maintain a balanced focus on short-term execution and long-term vision.