Revenue from every product will decline some day – encroached by competitors, eclipsed by newer technologies, and disrupted by changes in the market environment. The Three Horizons Framework – initially espoused in The Alchemy of Growth by Baghi, Coley and White provides a simple way of thinking about balancing a company’s attention to, and investment in, the near, mid- and long term cycles of a business. Since its publication a decade ago, their framework has become a popular tool for strategy development at the corporate level.
However, we’re finding that product managers are also applying it to product line management, helping them sustain growth by balancing the pressing needs of current products against the need to make the most of emerging product opportunities and maximize their potential for future growth.
Here’s How it Works.
The central idea of the Three Horizons Framework is that for a company to sustain consistent growth, it must maintain a continuous pipeline of growth initiatives. Keeping the pipeline full permits new sources of growth to be ready as existing sources decline.
In the chart above, we’ve applied the original to product line management. The chart illustrates the cumulative growth of a product line’s value as business from individual products in each horizon rise and fall over time.
Horizon One includes the core products and markets which provide the majority of your product line’s current revenue. There, the focus is on extending and defending the business through a variety of means including enhancing the product, creating new models and versions, and penetrating the market further through greater distribution, promotion, and market segmentation. This horizon is all about execution of the business plan. Key metrics used are profit margin, market share and/or revenue.
Horizon Two covers products that are relatively new and emerging in the product line, or existing products newly aimed at an unfamiliar market. They often have higher growth rates than older products in the line and may someday become a substantial source of product line revenue. Here, the strategies involve placing large investments now in sales/distribution, marketing and product development so that they are positioned to achieve substantial profits later. Typical metrics include profits, Compound Annual Growth Rate, and/or share of market segment.
Horizon Three contains potential new product opportunities that could generate profit and growth in the longer-term future. The current forms of these opportunities could be anything from early ideas, to R&D projects, to pilot programs with customers. Strategies in this horizon include developing and communicating a vision – usually built upon new technology innovation – and demonstrating a compelling value proposition for the product. Key metrics of success could include one or two successful projects with early adopter customers and citation by industry analysts.
Product ideas in Horizon Three (“create viable product opportunities”) will move, over time, to Horizon Two (“drive emerging products”), or from Horizon Two to Horizon One (“extend and defend product line’s business.”)
If a product manager is not managing the three horizons for their product line concurrently, they will not be able to sustain consistent growth later, leading to other business problems. For example, if you’re not working on products now that will produce business in horizon two, you will eventually face decline in revenue and market share for your product line. Horizon Two products need to account for the additional revenue growth and the decline in revenue from Horizon One products. Product line managers should allocate resources along all three horizons to achieve sustained growth in their product line’s business.
Actions for Product Managers:
- Identify the products you have in each horizon. For Horizon Three, identify the projects that may lead to new products or have early adopter customers.
- Identify a business goal such as revenue, market share, profit, etc., for each horizon. Many product managers have annual business goals for the full product line and its individual products. But to manage the growth pipeline, those goals need to be identified by their growth horizon.
- Estimate the resources you’re currently spending on products or projects per horizon. These can include specific individuals, full-time equivalents, costs, or a percentage of resources being used.
- Evaluate your resources and product/projects against your goals. Are you building momentum from horizon to horizon? Do you have credible products/projects in each horizon? Are resources allocated appropriately to achieve the goal of each horizon? If you answered ‘No’ to any of these questions, your pipeline is not likely to yield consistent growth over time.
- Revise your resource allocations and set targets for resource allocation by horizon.
- Choose appropriate metrics for each horizon. See the explanations of each Horizon above for commonly used metrics.
- Track and manage performance per horizon. Stop diverting resources from one horizon to another unless you’ve concluded that one really is over-resourced.
If you’re short of new product opportunities in horizon three, read how managers at Google, Vocollect, Bayer, Medrad and Thomson Reuters explained their approach. Discover Product Opportunities (PDF)