Innovation is the lifeblood of any successful business. It allows companies to create new products, services, processes, and business models that meet customers’, competitors’, and markets’ changing needs and expectations. However, innovation is not easy. It requires time, resources, talent, and a culture that supports experimentation and learning. Moreover, innovation is not a one-size-fits-all solution. Different types of innovation have different levels of risk, reward, and impact. Therefore, companies must prioritize their innovation efforts according to their strategic goals, capabilities, and constraints.
One useful framework for prioritizing innovation is the Three Horizons Model, developed by McKinsey & Company. This model divides innovation into three categories based on the time horizon and the degree of uncertainty involved:
- Horizon 1: Core innovations that improve the company’s existing products, services, and processes. These innovations are relatively low-risk and low-reward, but they are essential for maintaining the current performance and competitiveness of the company.
- Horizon 2: Adjacent innovations that extend the existing products, services, and processes of the company to new markets, customers, or segments. These innovations are moderately risky and rewarding, but they can create new sources of growth and differentiation for the company.
- Horizon 3: Transformational innovations that create entirely new products, services, and processes that disrupt the existing markets or create new ones. These innovations are highly risky and rewarding, but they can also generate breakthrough value and competitive advantage for the company.
The Three Horizons Model suggests that companies should allocate their resources and attention across all three horizons in a balanced way. However, the exact proportion of each horizon may vary depending on the industry context, the company’s vision and mission, and the external opportunities and threats. For example, a company in a mature and stable industry may invest more in Horizon 1 to optimize its core business, while a company in a dynamic and emerging industry may invest more in Horizon 3 to explore new possibilities. A company may also adjust its innovation portfolio over time as its goals and circumstances change.
To prioritize their innovation efforts effectively, companies need to consider several factors:
- The alignment of innovation with the company’s strategy and values. Innovation should support the long-term vision and objectives of the company, as well as reflect its core values and culture.
- The potential impact of innovation on the company’s performance and competitiveness. Innovation should create value for the company’s stakeholders, such as customers, employees, shareholders, partners, and society.
- The feasibility of innovation in terms of resources and capabilities. Innovation should be realistic and achievable given the available time, money, talent, technology, and infrastructure.
- The balance of innovation across different types of risk and reward. Innovation should diversify the company’s portfolio of opportunities and challenges, leverage its strengths and mitigate its weaknesses.
Prioritizing innovation is not a one-time exercise. It is an ongoing process that requires constant monitoring and evaluation. Companies need to measure their innovation efforts’ outcomes and impacts using quantitative and qualitative indicators. They must also learn from their successes and failures and adapt their innovation strategies accordingly. By prioritizing their innovation efforts wisely, companies can enhance their creativity, agility, and resilience in a fast-changing world.