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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