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How to think about your next digital transformation initiative


Business innovation, specifically Horizon 2 within the McKinsey Model, involves investing in emerging opportunities less predictable than core initiatives but safer than radical innovations, crucial for sustainable growth and competitive advantage in mid-market businesses by tapping into new markets and technologies.

What is business innovation?

As experts in business innovation consulting, we often define business innovation within the context of the McKinsey Three Horizons Model, specifically focusing on Horizon 2. This model helps us strategize and identify growth opportunities for our clients by categorizing innovations into three distinct horizons.

Horizon 1 represents the core business and its current offerings that provide the main revenue stream. It's about optimizing and extending the life of these current products, services, and markets. Horizon 3, on the other hand, is about creating future opportunities through radical innovations that may change the industry or create new ones.

Our focus, Horizon 2, involves emerging opportunities that have the potential to become significant growth areas but require substantial investment and development. These are not as stable or predictable as Horizon 1 initiatives but are less risky than the speculative bets of Horizon 3. They often involve leveraging new technologies or developing new business models to capture value in ways the core business has not yet explored.

Understanding and distinguishing between these horizons allows us to guide mid-market businesses in strategic planning and investment, ensuring they can innovate effectively without jeopardizing their current operations. This balanced approach is crucial for sustainable growth and maintaining a competitive edge in today's fast-paced business environment.

The importance of horizon 2 for mid-market businesses

Strategic value

Horizon 2 innovations represent a critical growth vector for mid-market businesses. By focusing on these emerging opportunities, companies can bridge the gap between their core, revenue-generating activities (Horizon 1) and long-term, transformative innovations (Horizon 3). This focus enables organizations to allocate resources to projects that, while not contributing to the bottom line immediately, have the potential for significant growth and profitability in the medium term. It's about finding and nurturing the seeds that will grow into tomorrow's core business activities, ensuring sustained growth and relevance in a rapidly changing market landscape.

Investing in Horizon 2 innovations allows businesses to explore new technologies, markets, and business models without the higher risks associated with Horizon 3 initiatives. It offers a strategic pathway to evolve the business steadily, ensuring that today's investments become tomorrow's core income streams. This forward-looking approach is crucial for mid-market companies aiming to solidify their market position and secure their long-term success.

Leveraging horizon 2 for competitive advantage

Horizon 2 innovations offer mid-market businesses a competitive edge by allowing them to tap into unexplored markets or leverage emerging technologies before they become mainstream. This proactive approach to innovation helps companies stay ahead of industry trends and meet evolving customer expectations more effectively than competitors focusing solely on short-term gains or too far-off future bets.

Moreover, by investing in Horizon 2, businesses can demonstrate their commitment to innovation, attracting talent, partners, and investors interested in forward-thinking companies. It also builds resilience against market disruptions, as these companies are better prepared to adapt to changes with a portfolio that includes near-future growth initiatives.

In essence, Horizon 2 innovations provide a balanced approach to strategic planning, combining the stability of Horizon 1 with the visionary aspirations of Horizon 3. This balance is crucial for mid-market businesses aiming to navigate the complexities of modern markets, ensuring they not only survive but thrive by continuously evolving and capturing new opportunities.

Where can mid-market businesses look to innovate?

In the dynamic realm of mid-market businesses, we have seen and developed innovation across three major categories: Go-to-Market (GTM) innovation, Product/Service innovation, and Capability innovation, each offering distinct pathways to elevate a company's market position and operational prowess.

Go-to-Market Innovation

At the core of GTM innovation is the deployment of novel strategies aimed at captivating customers and carving out a competitive niche. This involves an inventive approach to customer engagement, pricing models, and sales strategies, enabling businesses to swiftly respond to market trends and customer preferences.

Take the case of Vuclip, a mobile video streaming service, which meticulously crafted its GTM strategy to address the pervasive issue of video buffering in emerging markets. By prioritizing a "must-have" service over a "nice-to-have" one and choosing a web-based platform for its simplicity, Vuclip succeeded in distinguishing itself in a competitive landscape​​. Similarly, Upscope's integration with live chat services to provide instant co-browsing capabilities exemplifies how GTM innovation can address specific customer pain points, thereby positioning a company uniquely in the market​

Product/Service Innovation

Innovation in products and services is about reimagining or significantly enhancing offerings to meet the evolving needs of customers. This could involve embracing state-of-the-art technologies, integrating customer insights into product design, or venturing into new product lines. Such innovation not only differentiates a company's offerings but also opens up new avenues for growth.

Slack's transformation of the internal communication landscape is a prime example of product/service innovation. By positioning itself as a superior alternative to traditional email, focusing on user experience, and effectively communicating its value proposition, Slack achieved rapid market penetration and significant growth, culminating in its acquisition by Salesforce for $27 billion​​. Huawei's strategic entry into the Indian market, overcoming skepticism through local R&D and alignment with the "Make in India" initiative, further illustrates the power of product/service innovation in changing consumer perceptions and capturing market share​​.

Capability Innovation

Capability innovation focuses on the enhancement or development of new business capabilities to foster future growth. This includes the adoption of emerging technologies, agile methodologies, and upskilling initiatives to bolster operational efficiency and market adaptability. Although it represents a significant investment in terms of resources and time, capability innovation is crucial for laying the groundwork for long-term success and resilience.

For mid-market companies, embracing strategies like rapid prototyping and digital modeling, prioritizing promising ideas, and extending the innovation mindset beyond product development are essential steps toward embedding innovation into the organizational fabric. Celebrating successes beyond financial metrics and fostering a culture of innovation across all functions can significantly enhance a company's innovative capacity and its ability to navigate future market changes​​.

Prioritizing innovation initiatives

Evaluation criteria

When mid-market businesses contemplate innovation initiatives, the first step is to establish a robust framework for evaluation and prioritization. This process ensures that resources are allocated effectively, aligning closely with strategic objectives and market demands. The criteria for this evaluation often encompass:

  • Strategic Alignment: Initiatives should be closely aligned with the company's strategic goals and objectives. This ensures that the innovation drives the business in the desired direction, supporting long-term growth and market positioning.
  • Market Demand: An assessment of current and future market demands is crucial. Innovations that meet unaddressed needs or anticipate emerging trends can provide a competitive edge and open new revenue streams.
  • Feasibility: The technical and operational feasibility of implementing the innovation is a key consideration. This includes evaluating the required resources, expertise, and technology.
  • ROI and Financial Impact: Projects should be evaluated based on their potential return on investment and impact on the company's financial health. This involves considering both the short-term and long-term financial implications.
  • Risk Assessment: Understanding the risks associated with each initiative, including market risks, operational risks, and financial risks, is essential. A balanced approach to risk can help identify initiatives that offer the best risk-reward ratio.

Balancing Investment and Potential Impact

Balancing the investment against the potential impact of innovation initiatives is a delicate art that requires a strategic approach. Mid-market companies, in particular, must carefully manage their resource allocation to ensure that innovation efforts do not compromise their current operations or financial stability.

  • Portfolio Approach: Adopting a portfolio approach to innovation initiatives allows companies to spread their risk across a range of projects. This approach includes investing in low-risk, incremental innovations, as well as in higher-risk, potentially disruptive innovations.
  • Incremental vs. Radical Innovation: Balancing investments between incremental innovations that improve existing products and services and radical innovations that explore new markets or technologies is crucial. This balance ensures steady growth while pursuing transformative opportunities.
  • Resource Leveraging: Efficiently leveraging existing resources, including personnel, technology, and capital, can maximize the impact of innovation initiatives. Identifying synergies between projects can also reduce costs and increase effectiveness.
  • Customer Engagement: Engaging with customers to validate and refine innovation initiatives can help prioritize projects that have a higher likelihood of market acceptance and success. This feedback loop can inform the investment strategy, ensuring that resources are focused on customer-centric innovations.
  • Agile Implementation: An agile approach to implementing innovation initiatives allows businesses to adapt quickly to feedback and changing market conditions. This flexibility can help optimize the allocation of resources and ensure that investments are focused on the most promising projects.

By applying these criteria and balancing considerations, mid-market businesses can strategically prioritize their innovation initiatives, focusing on those with the highest potential for positive impact and alignment with their strategic goals. This disciplined approach ensures that innovation efforts contribute to sustainable growth and competitive advantage.

Taking action

Throughout our exploration of Horizon 2 innovations, we've underscored the transformative potential these strategies hold for mid-market businesses aiming for growth and a competitive edge. The journey through Go-to-Market, Product/Service, and Capability innovations highlights the pivotal role that strategic alignment, market responsiveness, and investment balance play in driving successful innovation.

In navigating these complex terrains, partnering with a seasoned digital solutions provider like Torinit becomes invaluable. Torinit's expertise in digital innovation not only amplifies your strategic efforts but also ensures that your innovation initiatives are grounded in technical feasibility, market insight, and operational excellence. Such a partnership empowers your business to seamlessly integrate new technologies, methodologies,

In addition to strong partnerships, It is essential for leaders to foster a culture that values and supports innovation at every level of the organization. Encourage your teams to explore new ideas, challenge the status quo, and pursue initiatives that drive your business into its next growth phase. By methodically evaluating and prioritizing these initiatives, you can ensure that your investments in innovation yield the desired outcomes.

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