Sharpe and Hodgson 3H presentation


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Sharpe and Hodgson 3H presentation

  1. 1. Three Horizons by Bill Sharpe Three Horizons: the patterning of hope and Tony Hodgson Decision Integrity Ltd
  2. 2. Three Horizons Some rights reserved:
  3. 3. How to Read the Three Horizons Model The three horizon model gives us a deeper understanding of the significance of what we usually call short, medium and long term futures. The model is based on the observation that businesses, technologies, political policies and even whole civilizations exhibit life-cycles of initiation, growth, peak performance, decline and even death. These cycles can be viewed as waves of change in which a dominant form is eventually overtaken and displaced by another. These displacements may be gradual but, in times of rapid change, they can be quite abrupt. For example, we speak of disruptive technologies that suddenly reach a tipping point and take over the technological ecosystem. However, a closer look reveals that these waves are also going on simultaneously on different scales, changing their place in the foreground or background over time. Yet this is not easy to see unless we appreciate the qualitative differences between the waves. Understanding is further helped by recognising the value of thinking in terms of three waves at a time. A good way to picture this is to switch from the analogy of waves and think instead in terms of horizons. Imagine you are looking at a view from the plains near the coast towards inland mountains. The first horizon is where the plains end and the foothills of the second horizon rise. Yet behind them are the high mountains of the third horizon. The plains may be agricultural, the foothills wooded and the mountains without trees and with glaciers. Each horizon is qualitatively different. The analogy here is that we need to be able to see different qualities that distinguish the short, medium and long term as more significant than the amount of time. In some industries, the three horizons may cover a span of ten years; in others they may span half a century. In other words qualitative or structural change is more significant for strategy than span of time.
  4. 4. Prevalence Three Horizons in the Present 2nd HORIZON 3rd HORIZON 1st HORIZON Pockets of future in the present Time
  5. 5. The Three Horizons We usually label the vertical axis as ‘Prevalence’, which captures the idea of the shift in the most dominant, or prevalent, pattern shifting between the horizons over time. The prevalence is a reflection of the strategic fit to emerging conditions, and so this is an alternative labelling. The first horizon - H1 - is the dominant system at present. It represents ‘business as usual’. As the world changes, so aspects of business as usual begin to feel out of place or no longer fit for purpose. In the end ‘business as usual’ is superseded by new ways of doing things. Innovation has started already in light of the apparent short-comings of the first horizon system. This forms a second horizon - H2. At some point the innovations become more effective than the original system – this is a point of disruption. Clayton Christensen called it the ‘innovator’s dilemma’ – should you protect your core business that is on the wane or invest in the innovation that looks as if it might replace it? Meanwhile, there are other innovations already happening that today look way off beam. This is fringe activity – pockets of the future in the present. It feels like it is a long way from H1, based on fundamentally different premises. This is the third horizon - H3. It is the long term successor to business as usual – the radical innovation that introduces a completely new way of doing things. The effectiveness of Three Horizons comes from recognising that the three horizons are not just abstract representations of change, but characterise three qualitatively different orientations to the future in the present – they describe ways people are behaving to maintain the first horizon or seeking to change it.
  6. 6. Horizon One Managerial View Changing conditions Strategic fit eroding Diminishing returns • How we get things done today – ‘locked in’ • Incremental innovation framed by familiar approaches and dominant actors • Quantitative sense of time as limited resource
  7. 7. Horizon Three Visionary View Pockets of the future in the present • Transformative shifts from the present, questioning assumptions, new actors • Emerging patterns of value, many alternatives • Qualitative sense of time as defining moment
  8. 8. Horizon Two Entrepreneurial view ? Transition zone • Looks both ways • Zone of innovation and turbulence • Sense of time as opportunity cost – need for trade-offs +
  9. 9. Three Horizons Normative Version: Challenge and Transformation STRATEGIC FIT Defined as strategic fit or harmony with the environment. TIME Horizon 1 is a current strategy that works well until changes in the environment plus its own diminishing returns put it on a curve of decline. Meanwhile Horizon 2 , aware of this in diverse ways is innovating more effective approaches which eventually overtake. In the background, a completely new paradigm is emerging as Horizon 3. It appears for a long time to be marginal and ineffective but since it matches better the new environment it eventually takes over. The Horizon 2 innovations have served as enabling to the transformation
  10. 10. Variations on Normative Model The previous normative model assumes a number of enabling conditions that make for a relatively smooth transition. Even so, each crossover point is a disruption in the sense of a structural change, but if anticipated and managed, the displacement is lower in cost and better in performance. This is why it is called Challenge and Transformation. The Transformation is from the initially dominant paradigm (H1) to a structurally different paradigm (H3) through an innovative phase where the old is being phased out and the new is being phased in (H2). Horizon 2 is essentially an innovative phase which is endeavouring to restore or transcend the performance of Horizon 1. This can only happen if (a) the innovation is relevant and strong (referred to as H2 plus) and (b) the first horizon constructively gives way to the improvements. If this doesn’t happen we get two additional variants: Variant 1 – Collapse and Slow Recovery In this variant, Horizon 1 becomes the victim of its own success and over-confidence, believing that innovation is only for efficiency and failing to pick up signals of environmental change and the tendency for diminishing returns. Equally the innovative culture is weak and fails to address the environmental changes, inventing “more of the same” (referred to as H2 zero) The result is an accelerated expansion followed by a sudden collapse. The better fit of Horizon 3 has been languishing in the background and with the failure of the innovative phase takes much longer to emerge as the next pattern of viability. Variant 2 – Capture and Extension In this variant, Horizon 1 recognises the “writing on the wall” but motivated to retain domination it looks for innovations from H2 that it can use to bolster its performance and extend its life. This is called capture and the situation of Horizon 2 is referred to as H2 minus. Eventually the changed environment prevails and the background Horizon 3 has its chance to come through with a better strategic fit.
  11. 11. The Three Horizons Variant One: Collapse and Slow Recovery STRATEGIC FIT TIME In this variant the supremacy of the Horizon 1 paradigm creates runaway success but at the expense of some critical condition. Failure to capture coupled with weaker innovation in Horizon 2 leads to sudden collapse. Horizon 2 is unable to make up for this. In the background Horizon 3 continues to develop and after the initial upset and chaos of the collapse demonstrates its ability to match the new conditions and emerges as the next viable paradigm.
  12. 12. The Three Horizons Variant Two: Capture and Extension STRATEGIC FIT TIME Horizon 1 is challenged by changing conditions and there is strong innovation opportunity taken by Horizon 2. However, each wave of innovation is captured by Horizon 1 and applied to extend its life. This may go on for several cycles. Horizon 3 remains in the background since it is so different from Horizon 1 that there is no place for it in the mainstream. It continues to languish in the margins until a much more fundamental and long term change occurs.
  13. 13. The Three Horizons as Cultures and Mindsets The interaction between the horizons is as much culturally determined as it is economic or technologically determined. The people and groups associated with each horizon at a given point in time have very different interests, values and mindsets. This makes communication difficult and the tendency for misunderstanding and conflict very high. Indeed, there is competition between the horizon mentalities and in some cases outright war! This is why we more often than not see Variants 1 and 2 rather than the smother transition of the Normative Version. However, in managing strategic change, where we want to avoid the costs of conflict or collapse, it is necessary to develop a perspective that understands all three mindsets and takes them into account. The challenge for strategic leadership is to be able to stand back from a fourth position to be able to see the interplay between them. This is most easily studied as the kinds of attitudes and judgements that people from each of the horizons make about each other and each other’s activities and priorities. The situation when this tool is used is usually the one represented by the shaded zone in the Normative Version. In other words, a dominant Horizon 1 that is challenged; a rising wave of innovation; and largely out of sight to the mainstream some developments (like seeds) that might sprout into something quite different and more suited to the new conditions. All three mindsets are present in the situation simultaneously, either isolated or in conflict. The strategic leader then has the task of getting them to talk to each other and work towards collaborative transition for transformation. The initial stances of each mindset towards the others is caricatured in the following diagram.
  14. 14. From Strategy Dialogue to Strategy Trialogue Horizon 1 mindset H1 out to irre le v H1 lun c H2 H3 H3 g irin p ins g isin m pro H2 Horizon 2 mindset h ant risky obstructive H1 H1 H2 H2 Horizon 3 mindset H3 H3
  15. 15. Horizon Negative Mindsets Irrelevant Too H1 risky Ob stru c tive H2 Dinosaur cal ct i pra Im ro mp H3 Co ise m
  16. 16. Horizon Positive Perspectives Idea s Sup por t Hope H1 Heritage H2 H3 In lly A ion rat s pi
  17. 17. Using Three Horizons We typically introduce the horizons, and think about the way the dynamic changes between them over time, in this order: H1 – H3 – H2. This is because without a third horizon it is impossible to make the distinction between ‘sustaining innovation’ (H2-) and ‘transformative innovation’ (H2+). Starting with the first horizon brings into view why the conversation is happening, why it is felt that the current ‘business as usual’ can no longer make the changes needed. Moving to the third horizon we talk about our own visions but also all the other alternative and competing views of the future of which we are aware. This is a chance to surface underlying assumptions and different value systems, and where power to shape the future lies. Real examples populate the ‘pockets of the future’. In the second horizon we identify initiatives underway and how they relate to sustaining and transformative change. As we develop the third horizon picture more then we can also start to see the role of the first horizon in the future. Usually, once we have been able to let go of it and move to the third horizon we find there are important things that must not be lost and can be adapted to the new environment. The example map comes from IFF work on education. See:
  18. 18. 1 2 What would a future system What evidence do you see look like and what values and around you that suggests the norms would support it? What current system is under strain, long term trends are driving Fit to the a decreasing fit to the shows future towards these changes? emerging conditions, (Horizon 3) knowledge, and societal 3rd HORIZON requirements, or is even 2nd HORIZON 4 failing? (Horizon 1) What innovations do you know 1st HORIZON about (anywhere in the world) that might be growth points of 3 the future system? (Horizon 2) What examples (from anywhere in the world) do you know about 5 where elements of the future What role will today’s H1 play in systems you have described the future? already exist? (Horizon 3 in the time present)
  19. 19. Example: Three Horizons Map 2 1 H1 Present Pattern H2 Innovations In Play H3 Future Aspirations 4 3 H3 pockets of the future in the present H1 role in the future 5