Management Control Systems and Innovation 

 

Management Accounting SectionAmerican Accounting Association

January, 2009   

Tony Davila

Strategic process management

Andrews’ model:

Stage 1Formulation

Stage 2Implementation

Top managers analyzeand design the strategyof the organization

The organization implementsthe strategy defined in the formulation stage

Businessstrategy

The traditional control model

This approach to control is currently defined as diagnostic control systems where intervention is exception based

ProcessInputs Output

Standard

Feedback

The failure of management control systems

The cybernetic model led to:

“with work requirements becoming more complex, uncertain, and changing, control systems cannot be static and formal. Rather, control must come in the form of social control systems that allow directed autonomy and rely on the judgment of employees informed by clarity about vision and objectives of the business.”

Tushman and O’Reilly (1997)

The failure of MCS for innovation

A narrow view of MCS has discarded them as anything but disruptive to innovation: Minimize deviations from plan Standardization Corrections to deviations

Have led to the conclusion that innovation requires: No formal systems Social control Culture Communication patterns Leadership

The promise of MCS for innovation

However empirical evidence suggests otherwise: Formalization is positively associated with satisfaction (Stevens, Philipsen

and Diedricks, 1992) Environmental uncertainty is associated with MCS (Simons, 1987) Budgets as “dialogue, learning and idea creation machine” (Abernethy

and Brownell, 1997) Association between control systems and incremental and radical

innovation in the pharmaceutical industry (Cardinal, 2001) Planning and well-coordinated projects associated with product

development performance (Cooper, 1995)

To indicate that the right organization that is: “neither so structured that change cannot occur nor so unstructured that chaos ensues.”

Strategic process management (II)

Mintzberg model:

Stage 1Formulation

Stage 2Implementation

Deliberate strategy

Emergent strategy

Realizedbusiness strategy

Simons’ management control systems’ model

BusinessStrategy

CoreValues

StrategicUncertainties

Risks tobe avoided

BeliefSystems

BoundarySystems

CriticalPerformance

VariablesInteractiveSystems

DiagnosticSystems

Strategy as“Perspective”

Obtaining Commitmentto the Grand Purpose

Strategy as“Position”Staking Out the Territory

Strategy as“Patterns in Action”Position for Tomorrow

Strategy as“Plan”

Getting the Job DoneInternal Control and

Risk ManagementSystems

Additional theoretical concepts

Greiner (1972)

Enabling and coercive bureaucracies (Adler and Boris, 1996)

Adaptive routines (Weick, 1999) (Gavetti and Levinthal, 2000)

Dynamic capabilities (Zollo and Winter, 2002)

Evolutionary organizational theory (Aldrich, 1999)

Various advances in creativity research (Bechky and Hargadon, 2006) (Csikszentmihalyi, 1996) (Ford, 1996)

Empirical literature

Evolutionary perspective on the emergence of MCS in growth firms Cardinal (2004) Granlund and Taipaleenmaki (2005) Sandino (2007) Davila and Foster (2007)

The role of MCS on innovation processes Abernethy and Brownell (1999) Bisbe and Otley (2004) Ditillo (2004) Henri (2006) Marginson (2002) Ahrens and Chapman (2004) Mouritsen (2009) Vaivio (2004)

Incremental and radical innovation

Incremental innovation

Existing technology and business model trajectory

Competence enhancing

Generational

Evolutionary

Few organizational changes

Non-disruptive

Maintains current industry structure

Radical innovation

Changes technology or business model trajectory

Competency destroying

Architectural

Revolutionary

Significant organizational changes

Disruptive

Redefines the industry

Or in “managerial terms”

Semi-radicalSemi-radicalinnovationinnovation

Semi-radicalSemi-radicalinnovationinnovation

Close to existing

New

Business model change

Close to existing

New

IncrementalIncrementalinnovationinnovation

IncrementalIncrementalinnovationinnovation

RadicalRadicalinnovationinnovation

RadicalRadicalinnovationinnovation

Semi-radicalSemi-radicalinnovationinnovation

Semi-radicalSemi-radicalinnovationinnovation

Technology change

Knowldegemanagement

Ignorancemanagement

Strategic process management (III)

Autonomousstrategic

action

Burgelman’s model

Inducedstrategic

action

Strategiccontext

Structuralcontext

Concept ofcorporatestrategy

Deliberate strategy

Emergentstrategy

Innovation sources

Incremental innovation Radical innovation

Top managementformulation

Day-to-day actions

Deliberate strategy Strategic innovation

Emergent strategy / Emergent strategy / Intended strategic Autonomous strategic actions actions

Locus ofinnovation

Type of innovation

Innovation as a process

* Making Innovation Work, Davila, Epstein, Shelton: Wharton School Publishing 2005.

Commercialization and RolloutCommercialization and Rollout

Value CaptureValue Capture

Intelligence-GatheringIntelligence-Gathering

Idea-Generation and ScreeningIdea-Generation and Screening

Innovation Platforms

Innovation Platforms

Product PlatformsProduct

Platforms

Innovation Process

CorporateEntrepreneurship

CorporateEntrepreneurship

54321Stage GateStage Gate

How You Innovate Determines What You Innovate.

Create value

Capture value

Systems to deliver value

Concept of Corporate Strategy

Deliberate Strategy

Management ControlSystems

asStructural Context

Execute

Systems to deliver value

Translate deliberate strategy into actions

Focused on delivering value

Main objectives are efficiency and speed (at the expense of experiential learning and innovation)

Diagnostic control systems / action control systems

Results control systems—when they act as reference points and ignore any learning that happens to achieve performance

Management by exception

May become coercive if applied in isolation

Systems to refine the current model

Concept of Corporate Strategy

Deliberate Strategy

Induced Strategic Actions

Management ControlSystems

asStructural Context

ExecuteRefine

Systems to refine the current model

Systems designed to capture the learning associated with processes periodically enacted

Systems as blueprints versus systems as ways to structure knowledge—moving from tacit to explicit knowledge

Enabling bureaucracy, adaptive routines bring incremental innovation to operational processes

Interactive systems bring incremental innovation to strategy

Systems to craft new strategies

Concept of Corporate Strategy

Deliberate Strategy

Induced Strategic Actions

Management ControlSystems

asStructural Context

ExecuteRefine

Autonomous Strategic Actions

Management ControlSystems

asStrategic Context

Craft

Systems to craft new strategies (II)

The strategic context needs MCS for radical innovation

Variation Excess resources Stretch goals, strategic intent, belief systems Stable goals Interest groups, external collaborations

Selection Separate from incremental innovation funding decisions Venture capital model

Retention Redefine an existing business unit, create a new one, spin off,

trade sell, intellectual capital

Systems to build strategic innovation

Concept of Corporate Strategy

Deliberate Strategy

Induced Strategic Actions

Management ControlSystems

asStructural Context

ExecuteRefine

StrategicInnovation

Autonomous Strategic Actions

Management ControlSystems

asStrategic Context

BuildCraft

Systems to build strategic innovation (II)

Radical innovation comes from top management

Strategic context may provide Early warning signals of problems with current strategy Opportunities to explore alternative strategies

Structural context may be the source of radical innovation

Strategic control systems (monitoring the external environment)

Plan learning and experimentation in a highly uncertain process

Concept of Corporate Strategy

Deliberate Strategy

Induced Strategic Actions

Management ControlSystems

asStructural Context

ExecuteRefine

StrategicInnovation

Autonomous Strategic Actions

Management ControlSystems

asStrategic Context

BuildCraft

Model

Lessons learned

It’s always about the peopleThe right person will perform beyond your wildest expectations

Experiment and accept failure

The easiest lessons to learn come from your mistakes

Choose your playing field carefully and be the best there…What you decide not to do is as important as what you decide to do

Strategy is 10%, execution is 90%

Build a big small company not a small big one Ownership, accountability, passion

Source: Guerrino de Luca