How to design your Sustainability Strategy – The three types of initiatives you should have

Introduction

Moving businesses to Net Zero or a Circular Economy is going to take some time and therefore businesses need to take a long term view of their sustainability strategies.  But it is also important to get quick wins to maintain support for the work you are doing.  This results in a constant struggle to balance short-term and long-term priorities.  This struggle leads to frustration and without the right framework often results in sustainability initiatives failing.

Having a clear process to manage short-term and long-term priorities is critical.  Fortunately there is a framework you can borrow from strategic management that helps you to focus your efforts around three types of initiatives you should have in your Sustainability, Net Zero, or Circular Economy Strategy.

The Three Horizons

The Three Horizons Model is a framework for business strategy that helps organisations navigate the constantly changing business landscape. It was developed by McKinsey & Company and is based on the idea that businesses operate in three distinct time horizons: Horizon 1, Horizon 2, and Horizon 3.

Horizon 1 represents the core business, the activities and products that generate the majority of an organisation’s revenue today. This is the “bread and butter” of the business, and it is critical to maintain and grow these activities to ensure the ongoing success of the organisation.

Horizon 2 represents the “adjacent” or “emerging” opportunities. These are new products, services, or markets that are closely related to the organisation’s core business, but are not yet generating significant revenue. Investing in these opportunities can help an organisation grow and diversify its revenue streams, but it also requires significant resources and carries a higher level of risk.

Horizon 3 represents the “future” opportunities, which are more speculative and less certain. These are the activities or products that are not yet proven, but have the potential to generate significant revenue in the future. Investing in these opportunities can help an organisation stay ahead of the curve and position itself for long-term success, but it also requires significant resources and carries a high level of risk.

One of the key benefits of the Three Horizons Model is that it helps organisations balance short-term and long-term priorities. By focusing on Horizon 1, organisations can ensure that they continue to generate revenue and remain financially stable. By investing in Horizon 2 and Horizon 3, organisations can position themselves for future growth and success.

APPLYING THE THREE HORIZONS MODEL TO SUSTAINABILITY

The Three Horizons concept can also be adapted for use in your sustainability strategy.

We refer to Horizon 1 initiatives as efficiency innovations and are efficiency strategies (energy efficiency, waste reduction) designed to provide quick wins in direct support of the core business by reducing operating costs and risks.

Horizon 2 initiatives, which we refer to as sustaining innovations, are about exploring opportunities to create a competitive advantage, extend the businesses business model, to strengthen the business (e.g. reduce supply chain risks) and deliver additional value to customers. This can include new sustainable products and services, sustainable adjustments to the supply chain and are designed to generate new profit streams, reduce supply chain risks, and increase resilience.

Finally, Horizon 3 initiatives are what we refer to as transformative innovations. These are initiatives that are transformative and position businesses for the long term and protect them from disruption. These can include transformative business models or reimagine new products and services that deliver net zero or sustainable outcomes.

EXAMPLE

Let’s consider a hypothetical example for ABC Developments.

ABC Developments is a property development company that specialises in the design, construction, and management of sustainable and energy-efficient buildings. The company’s core business, Horizon 1, is the development of buildings that meet the highest environmental standards. These buildings generate the majority of the company’s revenue and are critical to its ongoing success. They have a range of energy and waste reduction initiatives that support the profitability of the business.

In order to ensure that the company continues to innovate and stay ahead of the curve, ABC Developments has also invested in Horizon 2 opportunities. These include the development of new building materials and technologies, such as cross-laminated timber and low emissions concrete, which can help to reduce the environmental impact of their buildings. Additionally, the company has also invested in research and development of new building design concepts, such as renewable-energy-as-a-service (REaaS) to their customers, which has the potential to generate significant revenue in the future.

ABC Developments has also invested in Horizon 3 opportunities, such as investing in the development of new sustainable building concepts like 3D printed buildings and exploring new business models like circular economy in construction. These activities are more speculative and less certain, but have the potential to generate significant revenue in the future and contribute to the company’s sustainability goals.

Innovation Portfolio

It’s important to note that the Three Horizons Model is not a one-size-fits-all approach, and organisations should tailor it to their specific needs and goals. Some organisations may prioritise Horizon 2 or Horizon 3 activities over Horizon 1, while others may focus more on maintaining and growing their core business.

Another important consideration is that the Three Horizons Model is not a static framework, but rather a dynamic one. As an organisation’s sustainability strategy evolves, so too will its priorities and focus. As new opportunities arise, organisations may shift their focus from one horizon to another.

The diagram below represents a sustainability innovation portfolio across the three horizons. A business should have a number of Efficiency Innovations representing low risk continuous improvement. Sustaining Innovations require more effort and resources (the larger the circle the greater the investment) and should be selectively piloted to develop the best ideas. Transformative Innovations have the greatest uncertainty but the greatest potential impact and involve lots of small bets that are validated and de-risked through prototyping and pilots.

In order to effectively implement the Three Horizons Model, organisations should establish a clear process for identifying and evaluating sustainability opportunities in each horizon. This should include a structured process for evaluating potential opportunities, assessing their potential impact on the business, and also retiring ideas that don’t support the business.

In addition, organisations should also establish a clear governance structure to ensure that the right resources are allocated to the right opportunities. This could include creating dedicated teams or setting up cross-functional task forces to focus on specific opportunities in each horizon.

Conclusion

Overall, the Three Horizons concept is a powerful framework for business sustainability strategy that can help organisations navigate the constantly changing business landscape. By balancing short-term and long-term priorities, organisations can ensure that they continue to generate revenue and position themselves for future growth and success that is both good for the business and good for the planet.

Our innovation framework is designed to help organisations manage a portfolio of projects across all three horizons.  Get in touch to discuss how we can support you in your sustainability journey.