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  1. 1. Management Control Systems and Innovation     Management Accounting Section American Accounting Association January, 2009       Tony Davila
  2. 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. 3. The traditional control model <ul><li>This approach to control is currently defined as diagnostic control systems where intervention is exception based </li></ul>Process Inputs Output Standard Feedback
  4. 4. The failure of management control systems <ul><li>The cybernetic model led to: </li></ul><ul><li>“ 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 .” </li></ul><ul><li>Tushman and O’Reilly (1997) </li></ul>
  5. 5. The failure of MCS for innovation <ul><li>A narrow view of MCS has discarded them as anything but disruptive to innovation: </li></ul><ul><ul><li>Minimize deviations from plan </li></ul></ul><ul><ul><li>Standardization </li></ul></ul><ul><ul><li>Corrections to deviations </li></ul></ul><ul><li>Have led to the conclusion that innovation requires: </li></ul><ul><ul><li>No formal systems </li></ul></ul><ul><ul><li>Social control </li></ul></ul><ul><ul><li>Culture </li></ul></ul><ul><ul><li>Communication patterns </li></ul></ul><ul><ul><li>Leadership </li></ul></ul>
  6. 6. The promise of MCS for innovation <ul><li>However empirical evidence suggests otherwise: </li></ul><ul><ul><li>Formalization is positively associated with satisfaction (Stevens, Philipsen and Diedricks, 1992) </li></ul></ul><ul><ul><li>Environmental uncertainty is associated with MCS (Simons, 1987) </li></ul></ul><ul><ul><li>Budgets as “dialogue, learning and idea creation machine” (Abernethy and Brownell, 1997) </li></ul></ul><ul><ul><li>Association between control systems and incremental and radical innovation in the pharmaceutical industry (Cardinal, 2001) </li></ul></ul><ul><ul><li>Planning and well-coordinated projects associated with product development performance (Cooper, 1995) </li></ul></ul><ul><li>To indicate that the right organization that is: “neither so structured that change cannot occur nor so unstructured that chaos ensues.” </li></ul>
  7. 7. Strategic process management (II) Mintzberg model: Stage 1 Formulation Stage 2 Implementation Deliberate strategy Emergent strategy Realized business strategy
  8. 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. 9. Additional theoretical concepts <ul><li>Greiner (1972) </li></ul><ul><li>Enabling and coercive bureaucracies (Adler and Boris, 1996) </li></ul><ul><li>Adaptive routines (Weick, 1999) (Gavetti and Levinthal, 2000) </li></ul><ul><li>Dynamic capabilities (Zollo and Winter, 2002) </li></ul><ul><li>Evolutionary organizational theory (Aldrich, 1999) </li></ul><ul><li>Various advances in creativity research (Bechky and Hargadon, 2006) (Csikszentmihalyi, 1996) (Ford, 1996) </li></ul>
  10. 10. Empirical literature <ul><li>Evolutionary perspective on the emergence of MCS in growth firms </li></ul><ul><ul><li>Cardinal (2004) </li></ul></ul><ul><ul><li>Granlund and Taipaleenmaki (2005) </li></ul></ul><ul><ul><li>Sandino (2007) </li></ul></ul><ul><ul><li>Davila and Foster (2007) </li></ul></ul><ul><li>The role of MCS on innovation processes </li></ul><ul><ul><li>Abernethy and Brownell (1999) </li></ul></ul><ul><ul><li>Bisbe and Otley (2004) </li></ul></ul><ul><ul><li>Ditillo (2004) </li></ul></ul><ul><ul><li>Henri (2006) </li></ul></ul><ul><ul><li>Marginson (2002) </li></ul></ul><ul><ul><li>Ahrens and Chapman (2004) </li></ul></ul><ul><ul><li>Mouritsen (2009) </li></ul></ul><ul><ul><li>Vaivio (2004) </li></ul></ul>
  11. 11. Incremental and radical innovation <ul><li>Incremental innovation </li></ul><ul><li>Existing technology and business model trajectory </li></ul><ul><li>Competence enhancing </li></ul><ul><li>Generational </li></ul><ul><li>Evolutionary </li></ul><ul><li>Few organizational changes </li></ul><ul><li>Non-disruptive </li></ul><ul><li>Maintains current industry structure </li></ul><ul><li>Radical innovation </li></ul><ul><li>Changes technology or business model trajectory </li></ul><ul><li>Competency destroying </li></ul><ul><li>Architectural </li></ul><ul><li>Revolutionary </li></ul><ul><li>Significant organizational changes </li></ul><ul><li>Disruptive </li></ul><ul><li>Redefines the industry </li></ul>
  12. 12. Or in “managerial terms” Semi-radical innovation Close to existing New Business model change Close to existing New Incremental innovation Radical innovation Semi-radical innovation Technology change Knowldege management Ignorance management
  13. 13. Strategic process management (III) Autonomous strategic action Burgelman’s model Induced strategic action Strategic context Structural context Concept of corporate strategy Deliberate strategy Emergent strategy
  14. 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. 15. Innovation as a process * Making Innovation Work, Davila, Epstein, Shelton : Wharton School Publishing 2005. Commercialization and Rollout Value Capture Intelligence-Gathering Idea-Generation and Screening Innovation Platforms Product Platforms Innovation Process Corporate Entrepreneurship How You Innovate Determines What You Innovate. Create value Capture value 5 4 3 2 1 Stage Gate
  16. 16. Systems to deliver value Concept of Corporate Strategy Deliberate Strategy Management Control Systems as Structural Context Execute
  17. 17. Systems to deliver value <ul><li>Translate deliberate strategy into actions </li></ul><ul><li>Focused on delivering value </li></ul><ul><li>Main objectives are efficiency and speed (at the expense of experiential learning and innovation) </li></ul><ul><li>Diagnostic control systems / action control systems </li></ul><ul><li>Results control systems—when they act as reference points and ignore any learning that happens to achieve performance </li></ul><ul><li>Management by exception </li></ul><ul><li>May become coercive if applied in isolation </li></ul>
  18. 18. Systems to refine the current model Concept of Corporate Strategy Deliberate Strategy Induced Strategic Actions Management Control Systems as Structural Context Execute Refine
  19. 19. Systems to refine the current model <ul><li>Systems designed to capture the learning associated with processes periodically enacted </li></ul><ul><li>Systems as blueprints versus systems as ways to structure knowledge—moving from tacit to explicit knowledge </li></ul><ul><li>Enabling bureaucracy, adaptive routines bring incremental innovation to operational processes </li></ul><ul><li>Interactive systems bring incremental innovation to strategy </li></ul>
  20. 20. Systems to craft new strategies Concept of Corporate Strategy Deliberate Strategy Induced Strategic Actions Management Control Systems as Structural Context Execute Refine Autonomous Strategic Actions Management Control Systems as Strategic Context Craft
  21. 21. Systems to craft new strategies (II) <ul><li>The strategic context needs MCS for radical innovation </li></ul><ul><li>Variation </li></ul><ul><ul><li>Excess resources </li></ul></ul><ul><ul><li>Stretch goals, strategic intent, belief systems </li></ul></ul><ul><ul><li>Stable goals </li></ul></ul><ul><ul><li>Interest groups, external collaborations </li></ul></ul><ul><li>Selection </li></ul><ul><ul><li>Separate from incremental innovation funding decisions </li></ul></ul><ul><ul><li>Venture capital model </li></ul></ul><ul><li>Retention </li></ul><ul><ul><li>Redefine an existing business unit, create a new one, spin off, trade sell, intellectual capital </li></ul></ul>
  22. 22. Systems to build strategic innovation Concept of Corporate Strategy Deliberate Strategy Induced Strategic Actions Management Control Systems as Structural Context Execute Refine Strategic Innovation Autonomous Strategic Actions Management Control Systems as Strategic Context Build Craft
  23. 23. Systems to build strategic innovation (II) <ul><li>Radical innovation comes from top management </li></ul><ul><li>Strategic context may provide </li></ul><ul><ul><li>Early warning signals of problems with current strategy </li></ul></ul><ul><ul><li>Opportunities to explore alternative strategies </li></ul></ul><ul><li>Structural context may be the source of radical innovation </li></ul><ul><li>Strategic control systems (monitoring the external environment) </li></ul><ul><li>Plan learning and experimentation in a highly uncertain process </li></ul>
  24. 24. Concept of Corporate Strategy Deliberate Strategy Induced Strategic Actions Management Control Systems as Structural Context Execute Refine Strategic Innovation Autonomous Strategic Actions Management Control Systems as Strategic Context Build Craft Model
  25. 25. Lessons learned <ul><li>It’s always about the people </li></ul><ul><ul><li>The right person will perform beyond your wildest expectations </li></ul></ul><ul><li>Experiment and accept failure </li></ul><ul><ul><li>The easiest lessons to learn come from your mistakes </li></ul></ul><ul><li>Choose your playing field carefully and be the best there… </li></ul><ul><ul><li>What you decide not to do is as important as what you decide to do </li></ul></ul><ul><li>Strategy is 10%, execution is 90% </li></ul><ul><li>Build a big small company not a small big one </li></ul><ul><ul><li>Ownership, accountability, passion </li></ul></ul>Source: Guerrino de Luca

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