Pulse of Innovation: Driving H2 and H3 Innovations

March 28, 2023

Every so often we ask our community to sound off on popular topics in innovation and share their best tips, tricks, and advice in hopes that their answers may inspire others in the field. We’ve gathered these insights by email, over phone calls, at events and roundtables, and by catching up with clients and colleagues.

It’s been over two decades since Mckinsey released the Three Horizons model, which remains the most popular framework for assessing the risk/reward balance of an innovation portfolio. Specifics may vary by industry, but there is a general consensus that the three horizons break down roughly like this: 

  • Horizon 1 (within the next 1-2 years): Short-term continuous innovation efforts for existing business models and core capabilities within the current business.
  • Horizon 2 (within the next 3-5 years): Extending beyond short-term goals to find new customers, markets, or targets adjacent to the current business.
  • Horizon 3 (within the next 5-10+ years): Creating entirely new capabilities and/or business models that address disruptive threats or opportunities beyond the current business. 

Technology has created a new narrative around attacking disruptors, the timeline for disruptive innovation to evolve, and the need to invest resources beyond existing products in order to have a competitive advantage and stay ahead of an ever-evolving market. While prevailing wisdom has long contended that 70% of an innovation team’s efforts should be devoted to Horizon 1, there is a growing argument for greater parity across the three horizons (roughly 33% effort devoted to each) – a notion supported by Wellspring’s own research data.

We gathered together leaders from a wide variety of industries to discuss how they are currently driving H2 and H3 innovation practices. In this Pulse of Innovation we’ve asked: What are the best practices and lessons learned for driving H2 and H3 innovation? Where are we today and where are we going tomorrow? Here’s what we heard:

  1. Align innovation goals with long-term strategy: Almost every company knows how to prioritize H1 projects, in which the impact on short-term business goals is clear. But without a well-crafted and thoughtfully articulated plan for long-term value creation, H2 and H3 projects tend to be swept aside in favor of quick fixes and short-term performance boosts. Senior leadership needs to establish the support of future investment, long-term strategies, and disruptive innovation throughout the company. Creating an environment that looks beyond the current obstacles and current fiscal year-end shifts from a risk-averse to a risk-empowering culture. This is a critical enabler of a company’s ability to drive long-term innovation forward because it creates room for innovation teams to embrace and explore future opportunities before the ROI is crisply definable.
  2. Reset innovation culture: A strategic approach to H2 or H3 innovation often requires a hybrid team consisting of scientists, engineers, program managers, business development personnel, and others. The combination and collaboration of these diverse skill sets and thought processes is critical to the success of exploratory efforts. But it is a potent mix, which requires a strong culture of experimentation and open-mindedness to thrive. The notion of structured risk and problem-solving skills must be embraced to recognize the full benefit of H2 and H3 innovation efforts.
  3. Re-balance your innovation portfolio: For years, the “three horizons” model has been the rule of thumb for allocating innovation resources – 70% devoted to H1; 20% devote to H2; and 10% devoted to H3. Today, the balance and importance of strategizing for the future is shifting to a more equal portfolio –  roughly 33% in each. Adopting a future-oriented market lens enables companies to create separate teams for the problems of today and the potential of tomorrow. By creating an equilateral innovation approach, it’s easier for teams to be flexible in pursuing the development paths that work best in each situation – whether that means partnering with startups, incubating technologies in-house, working with academic researchers, or some combination. It also ensures that the innovation strategy is in line with the business’s long-term corporate strategy.
  4. Define the difference between H2 and H3: Due to the heavy “now” timeline of H1, the other two horizons are often paired together when bucketing projects in a business’s innovation pipeline. Yet in practice, the skills, mindsets, and KPIs required for H2 vs H3 innovation are very different. Whereas H2 efforts usually start with reasonably clear aiming points in terms of market opportunity or technology domain, H3 requires ongoing exploratory investigation into which opportunities are worth pursuing with any scale in the first place. H2 is much closer to the current business’s corporate strategy, making it easier to align with the organization; whereas H3  necessarily investigates unknown territories and will be best approached with a small team that must operate with little up-front clarity and a large amount of freedom.
  5. Restructure your innovation team: Too many organizations attempt to pursue H2 and H3 innovations from within the structures and skill sets of the mainstream R&D or New Product Development function. This is usually a mistake because the prevailing group dynamic will already be strongly geared toward reinforcing H1-style behaviors, norms, and work processes. Strategic innovations require different structures with different metrics, processes, governance, and outcomes. There also needs to be a defined understanding of the type of people who will thrive on H2 and H3-focused teams – those who not only have the skill set but the vision and passion for long-term projects with a higher risk/reward ratio.
  6. Create new evaluation metrics for H2 and H3: Just as in any other part of the business, KPIs are a critical tool for assessing H2/H3 innovation progress and incentivizing the right workplace priorities and behaviors. However, whereas typical H1 metrics apply methods such as ROI, IRR, and NPV, exploratory innovation efforts cannot be effectively measured in the same way. Using classic stage gates or strict incubation periods for H2 and H3 initiatives kill ideas and often makes a case for abandoning the project before any real value can be gained. Instead of looking to traditional success indicators, place value on the knowledge each team gains from their successes, their failures, and their ability to identify emerging opportunities. Applying lessons learned will make the research and development process more efficient, accelerating the team's ability to decide when to move to greener pastures versus when to investigate further. 

Did we miss anything? Let us know in the comments below. For more tips, check out our growing collection of Pulse of Innovation posts!



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