Wednesday, October 19, 2011

STRATEGIC AND OPERATIONAL CONTROLS

Strategic and Operational Controls

John KYRIAZOGLOU, M.S., B.A (Hon.), Management Consultant
Author of ‘IT STRATEGIC & OPERATIONAL CONTROLS’ (www.itgovernance.co.uk),
And co-author of ‘CORPORATE CONTROLS’, to be published by www.theiic.org, by 12/2011

A question was recently put in a discussion group about the distinction between strategic and operational controls and how they interact in a corporate environment.

My comments follow:

Control is one of the managerial functions like planning, organizing, staffing and directing. It is an important function because it helps to check the errors and to take the corrective action so that deviation from standards are minimized and stated goals of the organization are achieved in desired manner. Control in management means setting standards, measuring actual performance and taking corrective action.
Management control in a corporate environment can be defined as a systematic effort by business management to compare performance to predetermined standards, plans, or objectives in order to determine whether performance is in line with these standards and presumably in order to take any remedial action required to see that human and other corporate resources are being used in the most effective and efficient way possible in achieving corporate objectives.
Planning is a process by which an organization's objectives and the methods to achieve the objectives are established, and controlling is a process which measures and directs the actual performance against the planned objectives of the organization. Thus, planning and control are often referred to as Siamese twins of management.

The direction for overall management control comes from the general strategic goals and strategic plans of the organization. General strategic plans are translated into specific performance measures such as share of the market, earnings, return on investment, budgets, customer satisfaction, etc. 
The process of strategic and operational control is to review and evaluate the performance of the system against these established norms. Rewards for meeting or exceeding standards may range from special recognition to salary increases or promotions. On the other hand, a failure to meet expectations may signal the need to reorganize (organizational control), change strategic direction or redesign (strategic control).

In contrast to strategic control, operational control serves to regulate the day-to-day output relative to schedules, specifications, and costs, by the formulation of policies and execution of corresponding procedures. Is the output of product or service the proper quality and is it available as scheduled? Are inventories of raw materials, goods-in-process, and finished products being purchased and produced in the desired quantities? Are the costs associated with the transformation process in line with cost estimates? Is the information needed in the transformation process available in the right form and at the right time? Is the energy resource being utilized efficiently?

The purpose of strategic control is to see that the specified function is achieved. The objective of operational control is to ensure that variations in daily output are maintained within prescribed limits. It is one thing to design a system that contains all of the elements of control, and quite another to make it operate true to the best objectives of design. Operating "in control" or "with plan" does not guarantee optimum performance.
Operational control systems are designed to ensure that day-to-day actions are consistent with established plans and objectives. It focuses on events in a recent period. Operational control systems are derived from the requirements of the management control system.

The differences between strategic and operational control are highlighted by reference to a set of main fundamental differences between strategic and operational management, as depicted next.
Strategic Management is very ambiguous, most complex, organization-wide, most critical to survival and has long-term implications. Operational Management on the contrary, is less ambiguous, les complex, specific to functions, less critical to survival and has short-term implications.

Strategic and operational controls are usually expressed by strategic and operational performance measures and by compliance measures.
Strategic and operational performance measures are designed and implemented by models such as the BSC. Compliance measures are designed and implemented by internal control frameworks, such as: COSO Framework, Sarbanes-Oxley Act, BIS Framework, etc.

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