The Promise of Management Control Systems for Innovation and Strategic Change

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The Promise of Management Control Systems for Innovation and Strategic Change TONY DAVILA


anagement control systems (MCS) have traditionally been viewed as tools to reduce variety and implement standardization (Anthony 1965). They are associated with extrinsic motivation, command and control management styles, and hierarchical structures. Because their objective is to minimize deviations from pre-established objectives, they are designed to block change for the sake of efficiency. Learning comes from planning ahead of time, not from adapting to surprises. The functioning of a thermostat, in which a control mechanism intervenes when the temperature deviates from the preset standard, has been a frequent metaphor for this model (see Figure 10.1). Not surprisingly, MCS are frequently perceived as stifling innovation. Therefore, their relevance to innovation—where uncertainty, experimentation, flexibility, intrinsic motivation, and freedom are paramount—appears to be limited. Innovation is to be managed through informal processes such as culture, communication patterns, or leadership. Uniformity and predictability—the hallmarks of traditional systems—are at odds with the need for the rich informational environment required for ideas to spark, grow, and create value. Coordination and control based on shared values substitute the ‘‘rules and procedures’’ of MCS (Walton 1985). Over the last decade, increasing evidence has questioned the validity of these views. Intense use of MCS has been found in complex and uncertain settings (Chapman 1998). Budgets are key elements during episodes of strategic change ‘‘as a dialogue, learning and idea creation machine’’ (Abernethy 181



FIGURE 10.1. Feedback Mechanism Underlying Traditional Models of Management Control Systems

and Brownell 1997). The concept of enabling bureaucracy (Adler and Borys 1996) ‘‘enhances the users’ capabilities and leverages their skills and intelligence’’ rather than with ‘‘a fool-proofing and deskilling rationale’’ typical of a traditional view. Companies exploit knowledge through flexible, user-friendly systems that facilitate the learning associated with innovation. Formal systems need not be coercive tools that suppress variation; rather, they support the learning that is derived from exploring this variation. Interactive systems (Simons 1995) have similar learning properties. They provide the information-based infrastructure to engage people in the communication required to address strategic uncertainties. This chapter describes how MCS support different types of innovation and provides a framework to analyze their design. In developing this framework, it first examines how the concept of strategic process has evolved over time.

STRATEGIC PROCESS AND INNOVATION The evolution of our knowledge of MCS is grounded on the progress that has been made in our understanding of the strategic process. Figure 10.2 summarizes this evolution and shows how innovation interacts with the strategic process along two dimensions. The first dimension is the origin of the innovation—whether it happens at the top management level or throughout the company. The second dimension is the type of innovation—whether it incrementally modifies the current strategy (incremental innovation) or radically redefines the future strategy (radical innovation). Early concepts of strategy only considered the deliberate strategy (upper left quadrant), with formulation being followed by implementation (Andrews 1971). Top management formulated a strategy (deliberate strategy), which the company then implemented. In this view of strategy, MCS came in at the

The Promise of Management Control Systems


implementation stage to control deviations, much in the way in which the thermostat brings room temperature to its preset target. Over time, researchers noticed that formulation and implementation happened at the same time and that deliberate...
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