1. MCS And Innovation Mike, Robert, Noel, Kefen July 13, 2009

2. AGENDA What is Innovation? Literature Review Types and effects of MCS on Innovation Strategy and MCS Conclusion

3. WHAT IS INNOVATION? Innovation: the practical implementation of an idea into a new device or process Radical Innovation: an innovation that is very new and different from prior solutions Incremental Innovation: an innovation that makes a relatively minor change from existing practices Innovation is essential for maintaining competitive advantage Do management control systems stifle innovation?

4. What the literature says.. It depends on who you ask Relationship is irrelevant MCS and innovation are incompatible Informal systems foster innovation and formal systems block innovation excesses Intensive use of MCS focuses and improves innovation Objective: develop an understanding of the effects of various MCS on innovation Literature is contradictory and inconsistent

5. ACTION CONTROLS Reduce individual and procedural autonomy Discourage creativity, innovation and adaptation Individual action controls hamper innovation But too much freedom leads to lack of focus or discipline Apply action controls to clearly set overall goals Allow procedural autonomy

6. STAGE-GATE REVIEW PROCESS Each step is programmed to ensure energy is focused

7. GOOGLE 20% of technical staff time devoted to self interest projects Estimated 50% of new product launches in 2005 came from 20% free time

8. RESULTS CONTROLS Typically reward repeated tasks Creates core rigidities Need to look for ways to reward creative behaviour Need a fair evaluation of work Examples Dual-ladder approach for employee progression Group rewards to encourage idea sharing Employee suggestion systems based on expectancy theory

9. CULTURAL CONTROLS Senior managers must adhere to detailed processes and customs of an innovation culture MCS must encourage open communication and continual development Elements of innovation culture Trust and openness Conflict and debate Challenge and involvement Risk taking

10. ORGANIZING FOR INNOVATION Large Firms Better ability to obtain R&D financing Higher sales to spread out fixed R&D costs R&D economies of scale and learning curve advantage Less responsive to change Small Firms More flexible and entrepreneurial Funding spent more carefully Shorter product development cycles Generally outperform larger companies in innovation Both large and small companies are innovative

11. R&D FINANCIAL RESPONSIBILITY CENTERS Centralized R&D Maximize economies of scale and learning curve Better manage technological deployment Better able to manage bold changes in direction Decentralized R&D Innovations meet division and customer specific needs Redundant R&D activities More agile, but also resistant to directed change Ambidextrous Organization Utilizes different structures and control systems across firm Non-programmed decision making requires a loose and flexible structure

12. BUDGETING AND PLANNING Lead beyond current market requirements Choose investments to develop strategic technologies Learning perspective of balanced scorecard Short and long term, capital and operational budgeting Usually use capital rationing to fix R&D budget Quantitative methods (NPV, IRR, real options) Qualitative methods (screening, frameworks, Q-sort) Combined approaches (conjoint, data envelopment)

13. SIMONS’ LEVERS OF CONTROL Internal controls Belief systems Boundary systems Diagnostic control systems Interactive control systems Tracking new ideas Triggering new learning Positioning the organization for new opportunities Innovative companies use interactive control systems

14. STRATEGY AND MCS Choice of interactive MCS depends on strategy Use diagnostic systems for current strategy critical success factors Well understood within the organization Use interactive controls to organize attention towards future direction of the firm Sense when conditions are right for new directions Systems should be adaptive and generative

15. CONCLUSIONS MCS are important for innovative organizations Action controls should be used to clearly set project goals and maintain procedural autonomy Results controls must encourage creativity Use cultural controls to maintain a balanced environment Use loose and flexible structures Innovative companies use interactive controls

16. QUESTIONS / FEEDBACK