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Management Control Systems and Innovation

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Presentation on theme: "Management Control Systems and Innovation"— Presentation transcript:

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

2 Strategic process management
Andrews’ model: Business strategy 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

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

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 O’Reilly (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: Deliberate strategy Stage 1 Formulation Stage 2 Implementation Emergent strategy Realized business strategy

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

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-radical innovation Radical innovation Ignorance management New Incremental innovation Semi-radical innovation Technology change Close to existing Knowldege management Close to existing New Business model change

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

14 Innovation sources Type of innovation Locus of innovation
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

15 Innovation as a process
How You Innovate Determines What You Innovate. Innovation Process Create value Intelligence-Gathering Idea-Generation and Screening Innovation Platforms Product Platforms Corporate Entrepreneurship 5 4 3 2 1 Stage Gate Commercialization and Rollout Value Capture Capture value * Making Innovation Work, Davila, Epstein, Shelton: Wharton School Publishing 2005.

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

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 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

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

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 knowledge—moving 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
Management Control Systems as Strategic Context Autonomous Strategic Actions Craft Concept of Corporate Strategy Management Control Systems as Structural Context Induced Strategic Actions Refine Execute Deliberate Strategy

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
Management Control Systems as Strategic Context Autonomous Strategic Actions Craft Build Strategic Innovation Concept of Corporate Strategy Management Control Systems as Structural Context Induced Strategic Actions Refine Execute Deliberate Strategy

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 Model Management Control Systems as Strategic Context Autonomous
Strategic Actions Craft Build Strategic Innovation Concept of Corporate Strategy Management Control Systems as Structural Context Induced Strategic Actions Refine Execute Deliberate Strategy

25 It’s always about the people Experiment and accept failure
Lessons learned It’s 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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