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Management Control Systems and Innovation Management Accounting Section American Accounting Association January, 2009 Tony Davila.

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Presentation on theme: "Management Control Systems and Innovation Management Accounting Section American Accounting Association January, 2009 Tony Davila."— Presentation transcript:

1 Management Control Systems and Innovation Management Accounting Section American Accounting Association January, 2009 Tony Davila

2 Strategic process management Andrews model: Stage 1 Formulation Stage 2 Implementation Top managers analyze and design the strategy of the organization The organization implements the strategy defined in the formulation stage Business strategy

3 The traditional control model This approach to control is currently defined as diagnostic control systems where intervention is exception based Process Inputs Output Standard Feedback

4 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 OReilly (1997)

5 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

6 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.

7 Strategic process management (II) Mintzberg model: Stage 1 Formulation Stage 2 Implementation Deliberate strategy Emergent strategy Realized business strategy

8 Simons management control systems model Business Strategy Core Values Strategic Uncertainties Risks to be avoided Belief Systems Boundary Systems Critical Performance Variables Interactive Systems Diagnostic Systems Strategy as Perspective Obtaining Commitment to the Grand Purpose Strategy as Position Staking Out the Territory Strategy as Patterns in Action Position for Tomorrow Strategy as Plan Getting the Job Done Internal Control and Risk Management Systems

9 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)

10 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)

11 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

12 Or in managerial terms Semi-radicalinnovationSemi-radicalinnovation Close to existingNew Business model change Close to existing New IncrementalinnovationIncrementalinnovation RadicalinnovationRadicalinnovation Semi-radicalinnovationSemi-radicalinnovation Technology change Knowldege management Ignorance management

13 Strategic process management (III) Autonomous strategic action Burgelmans model Induced strategic action Strategic context Structural context Concept of corporate strategy Deliberate strategy Emergent strategy

14 Innovation sources Incremental innovation Radical innovation Top management formulation Day-to-day actions Deliberate strategy Strategic innovation Emergent strategy / Emergent strategy / Intended strategic Autonomous strategic actions actions Locus of innovation Type of innovation

15 Innovation as a process * Making Innovation Work, Davila, Epstein, Shelton: Wharton School Publishing Commercialization and Rollout Value Capture Intelligence-Gathering Idea-Generation and Screening Innovation Platforms Innovation Platforms Product Platforms Innovation Process Corporate Entrepreneurship Corporate Entrepreneurship Stage Gate How You Innovate Determines What You Innovate. Create value Capture value

16 Systems to deliver value Concept of Corporate Strategy Deliberate Strategy Management Control Systems as Structural Context Execute

17 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 systemswhen they act as reference points and ignore any learning that happens to achieve performance Management by exception May become coercive if applied in isolation

18 Systems to refine the current model Concept of Corporate Strategy Deliberate Strategy Induced Strategic Actions Management Control Systems as Structural Context ExecuteRefine

19 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 knowledgemoving from tacit to explicit knowledge Enabling bureaucracy, adaptive routines bring incremental innovation to operational processes Interactive systems bring incremental innovation to strategy

20 Systems to craft new strategies Concept of Corporate Strategy Deliberate Strategy Induced Strategic Actions Management Control Systems as Structural Context ExecuteRefine Autonomous Strategic Actions Management Control Systems as Strategic Context Craft

21 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

22 Systems to build strategic innovation Concept of Corporate Strategy Deliberate Strategy Induced Strategic Actions Management Control Systems as Structural Context ExecuteRefine Strategic Innovation Autonomous Strategic Actions Management Control Systems as Strategic Context BuildCraft

23 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

24 Concept of Corporate Strategy Deliberate Strategy Induced Strategic Actions Management Control Systems as Structural Context ExecuteRefine Strategic Innovation Autonomous Strategic Actions Management Control Systems as Strategic Context BuildCraft Model

25 Lessons learned Its always about the people The 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


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