A modified McKinsey Three-Horizon framework as a tool for developing and assessing COVID-19 economic impacts

COVID-19 has had the most earth-girdling, negative impact that any of us have experienced in our lifetimes. The financial crisis of 2018 was a large problem but it was contained within the financial/economic sphere. Nine/Eleven was a terrorist act which affected New York City residents directly (and the US psyche as a whole) and had a short-term economic impact on the world, and political ramifications for the Middle East which continue to reverberate within the region until today.

COVID-19, however, is a worldwide health crisis that has sickened millions around the world, killed tens of thousands, and, as a result of efforts to stop its spread, visited massive financial and economic dislocation upon us, with the potential to significantly affect and alter the way we live and conduct business in the mid- and long-term. I have summarized the pathogen and its impacts in the chart below.

Mario Albani has proposed the use of a modified McKinsey Three-Horizon Model to assess the impact of COVID-19 over time. I intend to use his framework for that purpose but will first illustrate the original model and then its modification.

The McKinsey framework, according to Albani, posits that businesses that sustain growth over time manage initiatives across three strategic horizons. Those horizons, and their requirements of the businesses, are illustrated in the chart below.

Albani concludes that COVID-19 has turned these horizons on their heads in that, almost overnight, Horizon 3 has become Horizon 1. For example, we see fashion houses scramble to make surgical masks, automobile companies seeking to provide ventilators, and brewers and perfume houses making hand sanitizers. These initiatives, obviously, fall outside the core competencies of these companies.

Further, the former Horizon 1 now becomes the most distant:

• Where people can leave their homes to go to cafes and movie theaters
• Where people can go shopping and purchase non-essential goods
• Where toilet paper is available once again on our store shelves
• Where we can travel domestically and internationally freely.

Albani's modification of the McKinsey Model as a tool to assess the evolving COVID-19 environment is summarized in the chart below.

This tool is intended to be used by businesses to build initiatives but business plans need to be adapted to a situation of disruption and uncertainty (Albani):

• Horizon 1 in a crisis is more tumultuous and fast-moving than in normal times and requires much more attention from top leadership
• Clear foresight on Horizon 3 becomes more complex in times of disruption
• It is particularly challenging to effectively build and support an effective portfolio of initiatives for Horizon 2 which might
• mature faster than in "normal" times
• be harder to predict due to the rapidly changing regulatory environment.

My goal is to use this framework to develop "most-likely" environments for the three horizons and assess the economic impact of these vis a vis the baseline. Most of the scenario development will focus on the U.S. but, where data are available, the analysis will be expanded to accommodate same. My next post then, will cover the Horizon 1 environment.


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