Strategic management and strategic planning are often distinguished from operational issues by the length of time concerned, called the horizon.
Most managers have the need to deliver short-term results which can take priority over longer term strategic development of the business.
The pressure for shorter term results and shorter planning horizons can come from the ownership of the organization, its capital structure, the industry it is in, its environment and the nature of its management.
Short, medium and long term planning
There terms are often used but remain ill-defined. A rule of thumb is:
Short term: Horizon of 1 – 3 years
Medium term: Horizon of 3 – 10 years
Long term: 10 + years
Short run/long run trade off
Managers and businesses are frequently evaluated on short term successes such as profits. Strategic thinking requires that managers consider the long term growth and survival of the business. Therefore management is required to balance short and long term considerations.
Factors Influences on planning horizons
- Nature of ownership : Firms with shareholders are obliged to ensure some financial return each year to their shareholders. Making sufficient profits each year will normally be needed in order to promote shareholder value. State-owned organizations do not have this obligation (but they will have different ownership issues to contend with, e.g. the changing nature of political agendas, different governments’ attitudes to funding, state control etc.).
2. Capital structure: Some investors, such as banks or private equity investors (sometimes called venture capitalists) do not require short term profits. Banks will continue to lend providing assets cover the loans and interest is paid. Private equity investors require profits and share values to grow over a 5 – 10 year period to give them a substantial capital gain when they sell their holding.
3. Nature of industry: Industries such as aircraft development, satellite communications and oil pipelines require large capital investments that take a long time to build and to pay back. Long-term plans are essential to justify these.
4. Nature of business environment: In rapidly changing environments it is likely that long-term planning may be futile. For example, industries such as bio-technology, home entertainment and mobile communications where effects of technology and legislation are hard to predict, will tend to avoid plans and instead adopt a strategic management approach within a series of short-term plans.
5. Nature of management: Long-term planning is a skill and it is time consuming. Some entrepreneurial managers will avoid it , for example because they lack the time or skill, or because they are unwilling to become ‘tied down by red tape’. Others, for example the management of family firms, are reluctant to consider changing the ‘way it has always been done’.