# Three Horizons | Three Horizons of Growth Strategy

**Creator/Source**: McKinsey & Company
**Core Value**: Balance short-term performance with long-term growth, systematically planning the enterprise's three growth curves
**One-liner**: Companies must simultaneously manage growth across three time dimensions — today's core business, tomorrow's growth business, and the day after's seed business

---

> **Case Boundary**: Company/industry cases in this file are illustrative examples for framework structure and reasoning, not current factual claims by Alpha Insights. Before reusing any numbers, shares, dates, or conclusions in a live study, re-check sources and record them in the Evidence Claim Ledger.

## Overview

The Three Horizons of Growth framework was developed by McKinsey & Company for managing multi-time-horizon growth portfolios.

**Core Design Principles**:
- **Time Dimension**: Categorizes growth opportunities into three horizons by time
- **Portfolio Thinking**: Simultaneously manage short-, medium-, and long-term growth engines
- **Dynamic Balance**: Avoid over-focusing on short-term at the expense of long-term

**Best Use Cases**:
- Multi-time-horizon growth planning
- Innovation portfolio management
- Balancing short-term performance with long-term positioning
- Strategic tempo design

**Output Value**:
- Three-horizon opportunity inventory (H1/H2/H3)
- Resource allocation recommendations per horizon
- Growth relay roadmap
- Key milestone design

---

## I. Framework Overview

### 1.1 Three Horizons Growth Model

```
Revenue/Profit
   ↑
   │
   │    H3: Future Business
   │    (5-10 years)
   │     ╱
   │    ╱      H2: Growth Business
   │   ╱       (2-5 years)
   │  ╱       ╱
   │ ╱   H1: Core Business
   │╱    (1-2 years)
   └──────────────────────────→ Time

   H1: Core Business - Cash flow source
   H2: Growth Business - Growth engine
   H3: Seed Business - Future opportunities
```

### 1.2 Three Horizon Characteristic Comparison

| Dimension | H1 Core Business | H2 Growth Business | H3 Seed Business |
|-----------|-----------------|-------------------|-----------------|
| Time span | 1-2 years | 2-5 years | 5-10 years |
| Revenue contribution | Primary source | Rapid growth | Exploration phase |
| Growth model | Efficiency-driven | Scale expansion | Innovation-driven |
| Certainty | High | Medium | Low |
| Resource input | Optimize investment | Expansion investment | Exploration investment |
| Management focus | Operational efficiency | Market expansion | Model validation |
| KPI | Profit, cash flow | Growth rate, market share | Learning, validation |

### 1.3 Why Three Horizons?

**Typical Growth Dilemmas**:
```
┌─────────────────────────────────────────────────────┐
│  Dilemma 1: Only focusing on H1                     │
│  ───────────────────────────                         │
│  • Short-term performance good, but growth plateaus  │
│  • Can't find the second curve                       │
│  • Examples: Kodak, Nokia mobile                     │
├─────────────────────────────────────────────────────┤
│  Dilemma 2: Insufficient H2 investment               │
│  ───────────────────────────                         │
│  • Core business declining, growth business not formed│
│  • Growth gap emerges                                │
│  • Examples: Traditional retail slow to transform    │
├─────────────────────────────────────────────────────┤
│  Dilemma 3: Excessive H3 investment                  │
│  ───────────────────────────                         │
│  • Long-term exploration consumes too many resources │
│  • Short-term performance under pressure             │
│  • Examples: LeEco ecosystem                         │
└─────────────────────────────────────────────────────┘
```

---

## II. Three Horizons Detailed Analysis

### 2.1 H1 Core Business

**Definition**: Current primary revenue and profit source.

**Core Objective**: **Maximize cash flow** to fund H2/H3.

**Key Strategies**:
| Strategy Type | Specific Measures | Objective |
|--------------|------------------|-----------|
| Efficiency improvement | Process optimization, automation | Reduce costs |
| Market deepening | Increase penetration, repurchase rates | Extend lifecycle |
| Product iteration | Sustaining innovation | Maintain competitiveness |
| Customer operations | Increase LTV, reduce churn | Maximize customer value |

**H1 Health Indicators**:
```
┌────────────────────────────────────────┐
│           H1 Health Diagnostic         │
├────────────────────────────────────────┤
│ • Revenue growth rate vs industry avg  │
│ • Profit margin trend                  │
│ • Market share changes                 │
│ • Customer satisfaction / NPS          │
│ • Cash flow status                     │
└────────────────────────────────────────┘
```

**H1 Warning Signals**:
- Growth slowing for 2 consecutive periods
- Profit margins consistently declining
- Core customer churn rate rising
- Disruptive competitor emerging

### 2.2 H2 Growth Business

**Definition**: Business with validated business model, in rapid expansion phase.

**Core Objective**: **Scale expansion**, building the second growth curve.

**Key Strategies**:
| Strategy Type | Specific Measures | Objective |
|--------------|------------------|-----------|
| Market expansion | New regions, new channels | Expand coverage |
| User growth | Acquisition, conversion | Increase scale |
| Product extension | Category expansion, scenario broadening | Increase ARPU |
| Capability building | Team, supply chain, technology | Support growth |

**H2 Health Indicators**:
```
┌────────────────────────────────────────┐
│           H2 Health Diagnostic         │
├────────────────────────────────────────┤
│ • Revenue growth rate (target >50%)    │
│ • Market share changes                 │
│ • Unit Economics (LTV/CAC)             │
│ • Growth flywheel effects              │
│ • Cash flow breakeven point            │
└────────────────────────────────────────┘
```

**H2 Key Decision Points**:
- **When to increase investment**: Model validated, Unit Economics turns positive
- **When to scale back**: Growth slowing with no new growth levers found
- **When to divest**: Low strategic synergy with core

### 2.3 H3 Seed Business

**Definition**: Exploratory business with business model yet to be validated.

**Core Objective**: **Rapid experimentation and learning**, finding future direction.

**Key Strategies**:
| Strategy Type | Specific Measures | Objective |
|--------------|------------------|-----------|
| Small steps, fast iteration | MVP validation, rapid iteration | Reduce experimentation cost |
| Diversified exploration | Multiple directions in parallel | Diversify risk |
| Open innovation | Investment, acquisition, partnerships | Leverage external resources |
| Talent reserves | Attract innovative talent | Build capabilities |

**H3 Health Indicators**:
```
┌────────────────────────────────────────┐
│           H3 Health Diagnostic         │
├────────────────────────────────────────┤
│ • Number of exploration projects       │
│ • Validation speed (hypothesis→test)   │
│ • Learning output (knowledge accum.)   │
│ • Projects promoted to H2              │
│ • Strategic option value               │
└────────────────────────────────────────┘
```

**H3 Management Principles**:
- **Tolerate failure**: Failure rate <70% means not aggressive enough
- **Cut losses fast**: Pivot immediately upon validation failure
- **Small teams**: Stay agile, avoid bureaucracy
- **Independent metrics**: Don't evaluate H3 with H1 KPIs

---

## III. Three Horizons Execution Steps

### Step 1: Business Classification Inventory

**Goal**: Classify existing businesses into H1/H2/H3.

**Classification Criteria**:
```
Classification Decision Tree:

Is the business profitable?
├─ Yes → Is it a primary revenue source?
│      ├─ Yes → H1 Core Business
│      └─ No → Is it high-growth?
│             ├─ Yes → H2 Growth Business
│             └─ No → H1 Peripheral (consider divesting)
│
└─ No → Does it have revenue?
       ├─ Yes → H2 Early Stage
       └─ No → H3 Seed Business
```

**Inventory Output**:
| Business Name | Classification | Revenue | Growth Rate | Profit | Strategic Importance |
|--------------|---------------|---------|------------|--------|---------------------|
| Business A | H1 | ... | ...% | ... | High/Medium/Low |
| Business B | H2 | ... | ...% | ... | High/Medium/Low |
| Business C | H3 | ... | ...% | ... | High/Medium/Low |

### Step 2: Three-Horizon Health Diagnostic

**Goal**: Assess whether the current three-horizon structure is healthy.

**Diagnostic Dimensions**:
```
┌─────────────────────────────────────────────────────┐
│        Three-Horizon Health Diagnostic Framework    │
├─────────────────────────────────────────────────────┤
│                                                     │
│  1. H1 Health:                                      │
│     • Is cash flow sufficient?                      │
│     • Has growth plateaued?                         │
│     • Is the moat solid?                            │
│                                                     │
│  2. H2 Readiness:                                   │
│     • Is there a clear H2 business?                 │
│     • Is the business model validated?              │
│     • Are expansion conditions met?                 │
│                                                     │
│  3. H3 Pipeline:                                    │
│     • Are there enough exploration projects?        │
│     • Are exploration directions diverse?           │
│     • Is the learning mechanism effective?          │
│                                                     │
└─────────────────────────────────────────────────────┘
```

**Health Scores**:
| Dimension | Score (1-10) | Description |
|-----------|-------------|-------------|
| H1 Health | ... | Cash flow, growth, moat |
| H2 Readiness | ... | Business clarity, model validation |
| H3 Pipeline | ... | Project count, directional diversity |
| **Overall Score** | **...** | **Three-horizon balance** |

### Step 3: Resource Allocation Design

**Goal**: Design H1/H2/H3 resource allocation ratios.

**Allocation Principles**:
```
Typical Resource Allocation (by company stage):

Mature company:
H1: 70%  (defend core)
H2: 20%  (expand growth)
H3: 10%  (explore future)

Growth company:
H1: 50%
H2: 35%
H3: 15%

Startup:
H1: 30%
H2: 40%
H3: 30%
```

**Resource Types**:
| Resource Type | H1 Allocation | H2 Allocation | H3 Allocation |
|--------------|--------------|--------------|--------------|
| Capital | Optimization investment | Expansion investment | Exploration investment |
| Talent | Elite operations | Elite expansion | Innovation talent |
| Management attention | 30% | 50% | 20% |
| Tech resources | Maintenance & optimization | Rapid replication | Frontier exploration |

### Step 4: Cross-Horizon Synergy Design

**Goal**: Design synergy mechanisms between the three horizons.

**Synergy Types**:
| Synergy Type | Description | Example |
|-------------|-----------|---------|
| H1→H2 funding | H1 cash flow supports H2 | Tencent gaming supports WeChat |
| H1→H2 enablement | H1 capabilities support H2 | Alibaba e-commerce supports Cainiao |
| H2→H1 reinforcement | H2 growth pulls H1 | Douyin drives advertising |
| H3→H2 promotion | H3 graduates to H2 after validation | Alibaba Cloud from H3 to H2 |

**Synergy Mechanism Design**:
```
┌─────────────────────────────────────────────┐
│       Cross-Horizon Synergy Mechanisms      │
├─────────────────────────────────────────────┤
│                                             │
│  H1 ←───→ H2:                               │
│  • Customer resource sharing                │
│  • Technology capability reuse              │
│  • Brand synergy                            │
│                                             │
│  H2 ←───→ H3:                               │
│  • Exploration direction guidance           │
│  • Validated success promotion path         │
│  • Failed project talent reflow             │
│                                             │
│  H1 ←───→ H3:                               │
│  • Strategic direction alignment            │
│  • Indirect resource support                │
│                                             │
└─────────────────────────────────────────────┘
```

### Step 5: Dynamic Adjustment Mechanism

**Goal**: Establish dynamic management for the three horizons.

**Adjustment Trigger Conditions**:
```
┌─────────────────────────────────────────────┐
│     Horizon Level Adjustment Triggers       │
├─────────────────────────────────────────────┤
│                                             │
│  H3 → H2 (Promotion):                      │
│  • Business model validated successfully    │
│  • Unit Economics turns positive            │
│  • Clear growth signals present             │
│                                             │
│  H2 → H1 (Maturation):                     │
│  • Growth slows to industry average         │
│  • Becomes a primary revenue source         │
│  • Profit margin stabilizes                 │
│                                             │
│  H2/H3 → Divest (Exit):                    │
│  • Validation failed                        │
│  • Low strategic synergy                    │
│  • Low resource efficiency                  │
│                                             │
│  H1 → H2 (Reinvention):                    │
│  • Technology disruption creates options    │
│  • Second curve discovered                  │
│                                             │
└─────────────────────────────────────────────┘
```

---

## IV. Output Format

### 4.1 Three-Horizon Strategic Plan

```markdown
## Three Horizons Strategic Plan - [Company Name]

### Current Business Inventory
| Business | Horizon | Revenue | Growth Rate | Profit | Strategic Importance |
|----------|---------|---------|------------|--------|---------------------|
| ... | H1/H2/H3 | ... | ...% | ... | High/Medium/Low |

### Three-Horizon Health
| Dimension | Score (1-10) | Key Issues |
|-----------|-------------|-----------|
| H1 Health | ... | ... |
| H2 Readiness | ... | ... |
| H3 Pipeline | ... | ... |

### Resource Allocation
| Horizon | Capital % | Talent % | Mgmt Attention % |
|---------|----------|---------|-----------------|
| H1 | ...% | ...% | ...% |
| H2 | ...% | ...% | ...% |
| H3 | ...% | ...% | ...% |

### Cross-Horizon Synergy
- **H1→H2**: [Synergy approach]
- **H2→H3**: [Synergy approach]
- **Synergy mechanism**: [Specific measures]

### Dynamic Adjustment
- **H3 promotion to H2 criteria**: [...]
- **H2 maturation to H1 criteria**: [...]
- **Exit mechanism**: [...]
```

### 4.2 Three-Horizon Action Plan

```markdown
## Three-Horizon Action Plan

### H1 Action Items (Next 12 months)
| Action | Goal | Owner | Timeline | Resources |
|--------|------|-------|----------|-----------|
| ... | ... | ... | ... | ... |

### H2 Action Items (Next 24 months)
| Action | Goal | Owner | Timeline | Resources |
|--------|------|-------|----------|-----------|
| ... | ... | ... | ... | ... |

### H3 Action Items (Next 36 months)
| Action | Goal | Owner | Timeline | Resources |
|--------|------|-------|----------|-----------|
| ... | ... | ... | ... | ... |
```

---

## External Research Supplement: Three Horizons Best Practices

Based on McKinsey research and practice, the key points for the Three Horizons framework are:

### 1. Three Horizons Definitions

| Horizon | Timeframe | Characteristics | Objective |
|---------|-----------|----------------|-----------|
| **H1** | 0-1 year | Core business, cash cow | Defend and extend |
| **H2** | 1-3 years | Emerging business, high growth | Scale |
| **H3** | 3-5 years+ | Option business, exploratory | Validate and incubate |

### 2. Resource Allocation Recommendations

```
Typical allocation:
H1: 60-70% resources (short-term performance)
H2: 20-30% resources (medium-term growth)
H3: 5-10% resources (long-term positioning)
```

### 3. Management Approaches by Horizon

| Horizon | KPIs | Management Approach | Team Type |
|---------|------|-------------------|-----------|
| H1 | Revenue/Profit/Share | OKR/KPI | Mature business team |
| H2 | Growth rate/Unit economics | Milestones | Entrepreneurial team |
| H3 | Learning progress/Validation | Hypothesis testing | Exploration team |

### 4. Common Errors

| Error | Manifestation | Correction |
|-------|--------------|-----------|
| H1 over-investment | Neglecting H2/H3, long-term growth stagnation | Mandatorily allocate H2/H3 resources |
| Premature H3 assessment | Evaluating H3 with H1 metrics | Use learning metrics instead of performance metrics |
| Lack of relay | No connection between horizons | Design H3→H2→H1 promotion pathway |

---

## Case Study: ByteDance Three Horizons Analysis (2024)

**Background**: ByteDance's 2024 revenue estimated to exceed $120B, one of the world's fastest-growing tech giants. Using the Three Horizons framework to deconstruct its growth engine portfolio:

### H1 Core Business: Douyin Advertising + E-commerce

| Metric | Data |
|--------|------|
| Domestic advertising + e-commerce revenue | >¥500B |
| Growth rate | ~30% YoY |
| Profit margin | High (advertising gross margin >60%) |
| Strategic role | Cash engine, providing ample ammunition for H2/H3 |

Douyin's advertising + e-commerce closed loop has entered mature harvesting phase — ByteDance's strongest H1 business. High profit, high cash flow, a textbook "cash cow."

### H2 Growth Business: TikTok + Feishu/Lark

| Business | Scale | Growth Potential | Key Risk |
|----------|-------|-----------------|----------|
| TikTok | MAU >1.5B, global first tier | Commercialization accelerating, e-commerce GMV growing rapidly | US policy risk (forced sale/ban) |
| Feishu/Lark | Enterprise collaboration market share rising | Still in loss-making phase | Fierce competition from DingTalk and WeCom |

TikTok is the most imaginative H2, but geopolitical risk has transformed it from "certain growth" to "uncertain bet." Feishu/Lark is a typical early H2 business — model under validation but not yet profitable.

### H3 Exploration Business: AI Large Models + Gaming

| Business | Progress | Validation Status |
|----------|---------|------------------|
| Doubao (AI large model) | DAU surpassed 100M, growing rapidly | Business model not validated, still burning cash |
| Gaming | Invested tens of billions, direction adjusted multiple times | No blockbuster title yet, ROI questionable |

AI large models are ByteDance's most aggressive H3 bet, using low-price strategies for rapid user acquisition, but monetization path remains unclear. Gaming is an H3 that "invested heavily but hasn't worked" — potentially facing a stop-loss decision.

### Three-Horizon Health Assessment

| Dimension | Score | Basis |
|-----------|-------|-------|
| H1 Health | 9/10 | Douyin advertising + e-commerce has deep moat, extremely strong cash flow |
| H2 Readiness | 6/10 | TikTok business itself is excellent, but policy risk severely reduces certainty |
| H3 Pipeline | 7/10 | AI direction correct with strong execution, but gaming direction insufficiently validated |

### So What

- **Core advantage**: ByteDance's H1 is exceptionally strong (rich profits, still growing), providing abundant funding for H2/H3 — a luxury condition most companies don't have
- **Biggest risk**: The geopolitical risk facing H2 is a rare "non-market factor" in the Three Horizons framework — if TikTok is forced to divest, ByteDance loses its largest H2 engine, creating a growth relay gap
- **Strategic implication**: ByteDance needs to accelerate H3→H2 promotion speed (especially AI) as a hedge against TikTok risk

---

### Data Source Recommendations

| Analysis Need | Recommended Data Sources |
|---------------|------------------------|
| Industry size and growth | Securities research reports (CICC, Goldman Sachs ByteDance valuation reports), IDC/eMarketer industry reports |
| Corporate business portfolio and financials | Company filings/prospectuses (public companies), The Information/Bloomberg exclusives (private companies) |
| Emerging business validation signals | IT Juzi (funding/investment), 36Kr/LatePost (business updates), QuestMobile (product data) |
| Technology trend maturity | Gartner Hype Cycle, CB Insights technology trend reports |
| H2/H3 competitive landscape | Cross-comparison of leading company filings per track, SimilarWeb/Sensor Tower (traffic/download data) |
| Policy and geopolitical risk | Official policy documents, Reuters/Bloomberg policy tracking, law firm analysis memos |

---

## V. Common Mistakes

| Mistake Type | Manifestation | Correction |
|-------------|--------------|-----------|
| H1 over-investment | Neglecting H2/H3 building | Mandatorily allocate resources to H2/H3 |
| Insufficient H2 investment | Only funding H1 | Establish independent H2 budget |
| Excessive H3 dispersion | Too many exploration directions | Focus on 3-5 strategic directions |
| Cross-horizon isolation | Three horizons operating independently | Establish synergy mechanisms |
| Metric mismatch | Evaluating H3 with H1 KPIs | Differentiated performance metrics |
| Lacking dynamic adjustment | Set it and forget it | Regular review and adjustment |

---

## VI. Integration with Other Frameworks

| Upstream Framework | Input Content | This Framework's Output | Downstream Framework |
|-------------------|--------------|------------------------|---------------------|
| Industry research | Industry trends, opportunities | Three-horizon business plan | Flywheel |
| Competitive analysis | Competitive landscape | H2/H3 directions | Blue Ocean |
| Three-Layer Analysis | Business data | Health diagnostic | SCP |
| Business model | Business model design | Cross-horizon synergy | Platform Canvas |

**Typical Combinations**:
- **Industry research**: PESTEL → Three Horizons → Flywheel
- **Business opportunity discovery**: Disruption Theory → Three Horizons → Platform Canvas
- **Business model**: BMC → Three Horizons → Unit Economics

---

## VII. China Market Specifics

| Dimension | China Characteristics | Case |
|-----------|----------------------|------|
| Speed-first | H2/H3 progress far faster than in Western markets; a full cycle can complete in 5 years | Pinduoduo went from founding to IPO in just 3 years |
| Capital-driven | Capital accelerates H2 expansion, shortening incubation period | Meituan/Didi crossed H2 rapidly through fundraising |
| Ecosystem competition | Large ecosystem three-horizon synergy; H1 profits fund H2/H3 | Tencent gaming (H1) profits support Channels (H2) and AI (H3) |
| Policy sensitivity | Policy changes can directly terminate a Horizon | "Double Reduction" policy directly eliminated H1 education businesses |
| Tencent three horizons | H1 gaming + social, H2 Channels/WeCom, H3 metaverse/AI | Gaming cash flow supports long-term positioning |
| Alibaba three horizons | H1 e-commerce, H2 cloud intelligence, H3 DAMO Academy/T-Head | E-commerce profits fund cloud computing and frontier research |
| Meituan three horizons | H1 food delivery, H2 community group buying/grocery, H3 mobility/fintech | Food delivery profitability enabled incubating new businesses |
| ByteDance three horizons | H1 Douyin, H2 TikTok, H3 education/gaming | Douyin advertising revenue supports globalization and new tracks |
