Management Control Systems for Innovation Strategy- Valutrics

Management Control Systems (MCS) is a system which gathers and uses information to evaluate the performance of different organizational resources like human, physical, financial and also the organization as a whole considering the organizational strategies.

The role of MCS to implement strategy has long been accepted. As part of the structural context, they support the translation of deliberate strategy into actions. Their relevance comes from their ability to execute efficiently and with speed—an important aspect when competitive advantage depends on timely delivery. They simplify the application of knowledge and leverage resources. Their strength—and, at the same time, their weakness—is their effectiveness in translating deliberate strategies into action plans, monitoring their execution, and identifying deviations for correction. In the process of enhancing efficiency, they potentially sacrifice the organization’s ability to innovate.

In certain environments innovation is unwanted and MCS that focus
on delivering value do not give up much by forgoing flexibility. At the
extreme,they specify every action in every contingent state.These standard
operating procedures are required in high-risk environments—such
as day-to-day operations of power generating plants where these systems
integrate vast amount of knowledge and small deviations may have
devastating consequences. Chip fabrication plants and their procedures
are copied to the smallest detail from one site to another because the
science is so complex that even small changes in the design may have
large effects on productivity. MCS deliver the consistency and reliability
to avoid costly mistakes.They specify how to execute procedures,how to
identify significant deviations, and how to react to them.
Detailed standard operating procedures are at one extreme of the
efficiency criterion—where innovation is ruled out in favor of safety.
Efficiency also plays an important part in action controls (Merchant
1985)—systems that influence organizational actors by prescribing
the actions they should take. These systems limit the action space and
code certain behaviors with the objective of reducing risk (and the
associated experimentation) and waste. Certain boundary systems—
statements that define and communicate specific risks to be avoided,
mostly business conduct boundaries—also block innovation in certain
directions to reduce risk exposure .
MCS also assist efficiency by facilitating delegation. They are the
foundation of management by exception. Supervisors delegate execution
to subordinates knowing that MCS will monitor and capture any
deviation from expectations. These systems leverage resources because
they permit supervisors to reduce the attention that they devote to
activities managed by exception. Anthony’s original formulation best
describes these systems: systems for strategy implementation first
translate strategic plans into operational targets, then monitor whether
these targets are achieved, and finally take actions to correct deviations
from targets.
Another aspect of MCS that rely on preset goals to deliver value is
accountability. Goals have a motivational rather than a monitoring
purpose and managers are held accountable to these goals. In contrast
to standard operating procedures, here innovation is not such a block as
it is disregarded. Managers can be innovative in achieving their goals,
but these systems do not capture these innovations. They only create the motivational setting for managers to deliver performance. Diagnostic systems can also play this role to ‘motivate, monitor, and reward
achievement of specified goals’. Sales targets exemplify
this argument; these targets are intended to motivate salespeople to
deliver regardless of how they do it (other than conduct boundaries),
thus ignoring any learning that may accrue to the individual sales-
people. Budgets, the most common MCS to implement strategy, also
use targets against which performance is compared. They do not specify
actions but focus on the financial consequences of these actions. Be-
cause these systems typically track process outcomes, they have also
been defined as results controls—systems that influence organizational
actors by measuring the result of their actions.
The purpose of these MCS is to transform the current strategy into a
set of actions that deliver the expected value. Accordingly, these systems
are valued in terms of efficiency (ability to leverage existing resources)
and speed (ability to quickly execute; at the expense of innovation and
experiential learning). Because they forgo the latter two aspects, they are
only effective in stable, mechanistic environments where the thermostat
metaphor is most robust. Relying exclusively on these systems when
these rather unique environmental conditions do not hold leads to
coercive systems—systems that impose work procedures when granting
voice (repair capability), context (transparency), and decision rights
(flexibility) to the user are more appropriate .
The unsuitability of MCS to innovation, discussed in previous sections,
comes from limiting these systems to their role in executing the deliberate
strategy. When only this role is contemplated and innovation is
needed (as most environments require), MCS become coercive and
dysfunctional, sacrificing the long term for the sake of short-term
performance. But when the organization has MCS to guide the emergent
strategy, to craft radically new strategies, and to build strategic innov-
ations, the role discussed in this section—executing the current strat-
egy—is crucial to translate innovation into value.