Most R&D leaders don’t struggle to believe in Horizon 2 and 3 innovation. They struggle to build the business case. Not because the argument is weak. It isn’t. The long-term case for investing in emerging and exploratory innovation is well established. The problem is that the argument is almost always made in the wrong language, to an audience running a different clock.
Your CFO is thinking in quarters. Your board is watching margins. Somewhere in your pipeline, you have a program that won’t generate commercial revenue for four years, if the science holds.
This is the Horizon 2/3 justification problem, and it’s one of the most consistent tensions in corporate R&D right now.
Why the standard business case falls flat
The McKinsey Three Horizons framework is widely understood. Horizon 1 is your core business — the work that drives today’s revenue. Horizon 2 is emerging growth — adjacencies in development. Horizon 3 is exploratory — the bets that might become the next Horizon 1.
The model is sound. The execution is where things break down.
One of the most common failure modes, documented clearly in strategic analysis of the framework, is applying Horizon 1 metrics to Horizon 2 and 3 initiatives. When early-stage programs are evaluated against ROI hurdles built for the core business, they lose every time. The math doesn’t work. The timelines don’t align. Without an alternative evaluation framework, the program either gets killed or kept alive as a pet project with no real funding.
The most common failure mode is applying Horizon 1 metrics to Horizon 2 and 3 initiatives. Early ventures are strangled by ROI hurdles meant for the core.
The broader industry context makes this harder. Deloitte’s 2026 chemical industry outlook documents the pressure clearly. After averaging 5.8% net profit margins between 2000 and 2020, the sector saw margins drop sharply in 2023 and remain low through the first half of 2025. Capital expenditures fell 8.4% year-on-year in 2024, with further declines expected in 2025. In that environment, the instinct is to concentrate investment where returns are visible and near-term. These are exactly the conditions under which H2/3 programs lose funding fights they should win.
Making the case for long-term R&D in this environment requires more than a good argument. It requires a different business case, one built for the audience making the decision.
Reframe the question: from ROI to cost of inaction
The standard pitch for Horizon 2/3 investment runs roughly like this: “We need to invest now so we can compete in the market as it evolves.” This is true. It’s also unmeasurable, and unmeasurable arguments lose budget fights.
A more effective frame flips the question: instead of “What do we gain from investing?”, ask “What do we lose if we don’t?”
The cost of inaction is specific and often quantifiable, even if the math takes some work. The core inputs are straightforward: what have competitors invested in this space, and over what timeframe? What do acquisition multiples in adjacent fields tell you about the premium for buying capability late versus building it early? What’s the lead time to develop a meaningful internal position, and what does it cost to compress that timeline through a late-stage partnership or acquisition?
None of these numbers are hypothetical. They exist in competitor filings, deal announcements, and industry reporting. The R&D leaders who make this case most effectively aren’t predicting the future; they’re pricing the present gap between where their portfolio is and where it needs to be and showing what it will cost to close that gap in three years versus seven.
Frameworks for R&D portfolio management
The following approaches are practical tools, not theoretical arguments. They’ve shown up in how effective R&D leaders navigate internal investment conversations.
1. Peer benchmarking on portfolio allocation. One of the most direct ways to make the case for H2/3 investment is to show where your portfolio sits relative to the competition. The 70/20/10 rule — 70% of innovation resources to the core, 20% to adjacencies, 10% to transformational bets — is often cited as a conservative benchmark. However, a 2018 survey of 270 executives at large companies by Innovation Leader and KPMG found that actual average allocation was already closer to 49/28/23 — with companies investing meaningfully more in H2/3 than the rule suggests, because competitive pressure demands it. If your peers are already there and your portfolio is concentrated well above 70% in core work, that gap has a name: strategic risk. This argument works in boardrooms because it’s both specific and comparative. It reframes the conversation from “Should we invest in long-term innovation?” to “How exposed are we relative to our competitors?”
2. Portfolio risk framing. Borrow directly from financial portfolio theory. As the Three Horizons model prescribes, a healthy innovation portfolio requires all three horizons active concurrently, governed differently, and funded deliberately. In capital allocation terms: over-concentration in Horizon 1 creates the same risk as an equity portfolio concentrated in a single sector. The R&D portfolio should be diversified across maturity stages, not optimized for near-term yield. This language translates well to finance audiences who think in risk-adjusted terms.
3. Stage-gate proof points. One reason H2/3 programs struggle for funding is that they’re evaluated in an all-or-nothing frame: either the program produces commercial revenue, or it didn’t work. The alternative is to define interim milestones that demonstrate meaningful progress without requiring full commercialization. These might include validated technical proof of concept, a qualified external partner identified, a co-development term sheet signed, or a pilot with a named customer. These are real, tangible outcomes. They give leadership something to point to. And they create a tranche-funding model — where each milestone unlocks the next round of investment — that de-risks the commitment without gutting the program.
The case gets easier when it isn’t made from scratch every budget cycle.
The portfolio review conversation
Imagine two versions of the same budget conversation.
In the first, an R&D leader presents a Horizon 3 program with a five-year commercialization timeline and asks for $2M in funding. The CFO asks what the expected return is. The R&D leader explains the science. The CFO says they’ll revisit next quarter.
In the second, the same R&D leader comes in with three things: a benchmark showing that two direct competitors have publicly announced partnerships or investment commitments in this space over the past 18 months; a portfolio map showing that 85% of the current R&D spend is in Horizon 1; and a proposal structured around two stage-gated milestones over 12 months, each with a defined decision point and exit criteria. The ask is for $400K to reach the first milestone, not $2M for the full program.
The underlying science is the same. The conversation is completely different.
The second version works because it speaks the language of the decision-maker: competitive risk, portfolio balance, and staged commitment. It also demonstrates that the R&D leader has already done the work of connecting the science to the business case, which builds credibility for the judgment calls that follow.
Don’t start from zero every time
Teams navigating this best have something in common: they build infrastructure around the Horizon 2/3 conversation so it isn’t rebuilt from scratch every budget cycle.
That infrastructure tends to include a few elements:
A shared definition of what the three horizons mean at this company. Not the generic McKinsey version — a calibrated version with agreed-upon timelines, uncertainty tolerances, and success criteria specific to the business. Without this, the same program gets classified differently by different stakeholders, and the conversation devolves into a definitional argument.
A recurring portfolio review cadence where H2/3 programs are evaluated on their own terms. Horizon 2 and 3 work requires a different governance rhythm than Horizon 1; quarterly operating reviews will always prioritize the core, and H2/3 needs its own forum.
A senior champion who has already internalized the portfolio logic. The business case for long-term innovation is harder to make for the first time. If someone at the table has already bought in — and can speak to competitive positioning rather than scientific potential — the conversation is structurally different. Part of what makes that champion effective is having a clear view of the external landscape: who is working on what, where the promising science is, what partnership options exist. Without that visibility, even a well-positioned internal advocate is arguing from conviction rather than evidence.
The underlying shift
The Horizon 2/3 justification problem isn’t going away. If anything, the pressure toward short-term returns is getting more acute as margin compression tightens across chemicals, food, and agriculture.
But the companies pulling ahead on long-term innovation aren’t doing it by making better arguments. They’re doing it by building better processes: recurring reviews, agreed-upon frameworks, staged commitments, and a view of the external landscape that makes the case with data instead of conviction alone.
The science isn’t the hard part. The business case is.
