Understanding Growth

Part 1: Understanding Growth


In “Part 1: Understanding Growth” Section 1 - The Horizons - the Authors begin by indicating that the fact that what it is that distinguishes the exceptional company that manages to sustain growth when its core business matures is that it has mastered the art of managing its pipeline of ideas so that fading sources of growth are replenished at exactly the right moment.


More importantly, they indicate that what makes this task hard is that the risks and management challenges involved change as a project progresses down the pipeline. To see how they broke down the business creation process into three stages. The idea of three stages is that it allows you to distinguish between the embryonic emergent and mature phases of a business’s life cycle. They refer to these stages as the three horizons.



What is Horizon 1? Horizon 1 encompasses the businesses that are at the heart of an organization – those that customers and stock analysts most readily identify with your corporate name.  In successful companies these businesses usually account for the lion’s share of profits and cash flows. Without the support of a successful Horizon 1, initiatives in Horizons 2 and 3 are likely to stagnate and die.  Management’s primary challenge in Horizon 1 is to shore up competitive positions and capture what potential remains in the core business.


What is Horizon 2? Horizon 2 comprises businesses on the rise: fast-moving, entrepreneurial ventures in which a concept is taking root or growth is accelerating. The emerging stars of the company, these businesses are attracting investors attention. They could transform the company, but not without considerable investment. In a few years, Horizon 2 initiatives should complement or replace a company’s current core businesses.


What is Horizon 3? Horizon 3 contains the seeds of tomorrow’s businesses – options on future opportunities. They are research projects, test-market pilots, alliances, minority stakes and memorandum of understanding that mark the first steps toward actual businesses, even though they may not produce profits for a decade, if ever. Building successful businesses means seeding numerous options in Horizon 3.


Initiatives in three horizons pay off over different time frames. The goal of managing the three horizons, is to develop many businesses in parallel without regard to maturity. The three horizons must be managed concurrently, not sequentially. Neglecting any horizon at any time will weaken a firm’s prospects of long-term growth.


If a pipeline of business creation is to succeed the Authors indicate that management attention is required to:


1Extend and deft today’s profit generators in Horizon 1. 


2. While simultaneously building Horizon 2 businesses that will become drivers of medium-term revenue growth.


3. While also pursuing options in Horizon 3 that will secure the company’s longer-term future.


To create robust pipelines, the most successful growers identify three horizons for each of their businesses. The corporation as a whole has three horizons of business creation, and so does each of its  divisions or business units. The value of the three horizons approach increases exponentially when it is pushed beyond the top executive team and into the hands of managers at lower levels.


In summary, in Part 1 - The Horizons - the Authors indicated that the three horizons can be used to promote growth in three ways.


First, as a diagnostic tool, the three horizons can help managers assess the prospects of growth at any level in an organization and reveal possible gaps in the volume and consistency of any new profit sources.


Second, as a language, the three horizons approach offers a coherent way to communicate with employees and investors.


Third, as a management philosophy, the framework forces managers and organizations to consider the future, as well as this quarter’s results.


In Section 2 – Looking in the Mirror - of Part 1 Understanding Growth the Authors focus on looking at how healthy are your company’s horizons.


To look in the mirror, they recommend a business leader should begin with the current engines of profitability in Horizon 1, and ask these questions:


1. Are your core businesses generating sufficient earnings to allow you to invest in growth?


2. Do you have a strong performance orientation to push profits higher in the next few years?


3. Is your cost structure competitive with that of the rest of your industry?


4. Has operating performance been stable?


5. Has market share grown or been stable?


6. Are you reasonably well-protected from new competition, technologies or regulations that could change the rules of the game?


Next it recommends moving on to questioning the condition of emerging businesses in Horizon 2 by asking these questions:


1. Do you have any new businesses capable of creating as much economic value as the current core businesses?


2. Are these new businesses gaining momentum in the marketplace?


3. Are you prepared to make substantial investments to accelerate their growth?


4. Is their mounting investor confidence in these businesses?


5. Are the new businesses attracting entrepreneurial talent to your organization?


Finally, it suggests reflecting on the options for future businesses by asking the following questions regarding your Horizon 3 efforts:


1. Does your leadership team set aside time to think about growth opportunities and creating new ones?


2. Have you developed a rich portfolio of options for reinventing existing businesses and creating new ones?


3. Are these ideas very different from the list from last year? Three years ago? Five years ago?


4. Are you developing effective ways to turn these ideas into new businesses?


5. Have the ideas been made tangible in concrete, measurable first steps?


Based upon the answers from these questions the Authors provide guidance for the condition your company’s horizons are in and examples from leading growth companies like Disney to illustrate these conditions. Then, they define the balance that should exist between all three horizons and how to measure it.


In summary, the Authors emphasize that an objective assessment of the health of the three horizons in your company is the first step to recovery and growth. Achieving this state of balance can take years. But, as they suggest, companies now have a point to begin from in order to fill the holes in their horizons.