Impacts of Interactive and Diagnostic Control System Use on the Innovation Process.

AutorFrezatti, Fabio
CargoReport

Introduction

The path to success in innovation involves a number of factors, and organizations must be constantly aware of the external environment and the search for new opportunities in order to develop a culture of innovation (Simons, 1995). When structured in this manner, organizations are able to plan processes that serve as the basis for systematically and collaboratively finding untapped opportunities, which is a feature that is considered as being fundamental to successful innovation (Teece, 2010).

Innovation has been studied by many researchers, such as Schumpeter (1997), Freeman (1995) and Damanpour (1991). Although much research has been developed, results regarding how the organizational structure inhibits or facilitates it are still not sufficient. For several reasons, the lack of success in the way that researchers have tried to examine the organizational structure, whether in terms of process or outcome, for example, has made it difficult to reconcile the results and improvements (Damanpour & Gopalakrishnan, 1998).

Successful innovation, therefore, requires companies to plan innovation, and such planning must be supported by structured methods, tools, and frameworks that allow integration between multidisciplinary teams and areas of multiple specificities. This is a very important motivation for the research: to capture the relevance of the Management Control System (MCS) to the innovation process. However, it has been noted that the role of MCSs with respect to their contribution to organizational innovation has rarely been demonstrated and has even been ignored altogether (Arjalies & Mundy, 2013; Bisbe & Otley, 2004). Although recognized, variables that are external to the organization are not included in the studies even though they produce internal turbulences that impact the organization. A broader model is thus required to capture these elements. There is an impact of not including the external variables, resulting from the fact that the models are extremely rigid and cannot capture changing needs, which is a very important part of reality. This is the first gap.

The second gap involves the lack of research beyond the Anglo-Saxon world. This is important in order to better address social activity, which is very far from regulated and normalized actions. Academics have been required to reassess and extend their theories in order to examine the strategic challenges businesses face in emerging economy contexts (Hoskisson, Eden, Lau, & Wright, 2000; Meyer, Estrin, Bhaumik, & Peng, 2009). It must be considered that there are different cultural contexts that reflect upon organizations (Cliff & Jennings, 2005; Coviello & Jones, 2004; Gupta, Levenburg, Moore, Motwani, & Schawarz, 2011; Holt, Rutherford, & Kurato, 2010) although research has indicated the benefit of MCSs to the innovation process (Bedford, 2015).

The approach of the traditional literature is to discuss diagnostic and interactive control systems (Ferreira & Otley, 2009; Henri, 2006; Simons, 1995; Su, Baird, & Schoch, 2015, Tessier & Otley, 2012); however, the main focus of this analysis really involves the diagnostic and interactive uses of these control systems (Abernethy & Brownell, 1999; Simons, 1991, 1994). This research approach provides an analysis that enables the same tool to be used in different ways and captures planning and monitoring actions for innovation projects. Consequently, this investigation leads to the following research question: what kind of association can the use of MCSs have with the intensity of the innovation process?

This article begins with an introduction that outlines the motivation behind the development of the study, the research question, and the difficult demands that certain organizations have faced when addressing innovation. Second section provides a literature review on the research topic, and third section presents the theoretical model explored in this study and the hypotheses developed. The methodological framework adopted is described in fourth section. Fifth section presents the results of the study, re-examining each of the tested hypotheses, and the last section presents the discussion and conclusions drawn from the study.

Literature Review

For the development of this research, literature was reviewed and related to the following themes that compound the conceptual model: (a) external stimuli, (b) innovation strategy, (c) MCSs, (d) diagnostic use of control systems, (e) interactive use of control systems, (f) dynamic tension, and (g) innovation intensity.

External stimuli

The approach of Groot and Lukka (2000) is used to include elements that are external to the organization in the analysis because these elements can explain occurrences and dynamics within the management model. This is consistent with the proposal from Simons (1995), in that when recognizing external elements, the model is geared toward a perspective that is not static but is instead oriented towards change and the effect of external stimuli.

Innovation strategy

Innovation is a process that includes technical activity, design, development, and management that results in the commercialization of new (or improved) products or the first use of new (or improved) processes (Freeman, 1995).

Although some authors characterize the different innovation focuses by type (Gopalakrishnan & Damanpour, 1994), they are generally characterized by strategy because strategy will indicate the way that innovation will be implemented and how the efforts will be allocated. Abernathy and Utterback (1978) studied innovation strategy in two groups: product and process. As for this study, the types researched were: product, process, technology, organization, and manner that product/service is offered.

Management control system (MCS)

Despite the existence of several different approaches to the concept of MCSs (Anthony, 1976; Anthony & Govindarajan, 2008; Berry, Broadbent, & Otley, 2005; Ferreira & Otley, 2009; Malmi & Brown, 2008; Simons, 1995), we based this study on Simons (1995). His definition states that MCSs: "are the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities" (p. 5).

Diagnostic and interactive control systems are the parts of the mechanisms that provide support in the implementation of strategies or in adapting to competitive environments (Simons, 1995). The power of MCSs is not related to one of the specific levers but instead to the combination that produces the dynamic tension (Hofmann, Wald, & Gleich, 2012; Simons, 1995). The intra-relationship between the uses of diagnostic and interactive systems is important and must be researched because of the need to understand the learning process (Ferreira & Otley, 2009).

Diagnostic use of control systems

The diagnostic control system seeks to ensure that decisions align with the goals of the organization (Simons, 1995). Frequently, when authors refer to MCS, they typically only refer to the diagnostic information system. The diagnostic control system is the formal system of organizational information that monitors results and corrects deviations from expected performance standards (Chenhall, 2007).

Interactive use of control systems

Simons (1995) reinforces the importance of the interactive system, which circumvents these problems and aims to provide answers to management elements that were not considered in the previously developed strategic planning process. Thus, the interactive control concerns the system that involves managers in the decisions of subordinates; this system's focus of attention is on the aspects of control that do not routinely appear in information systems (Abernethy & Brownell, 1999). This provides the complementarity of both systems (Ferreira & Otley, 2009; Hofmann et al., 2012).

Dynamic tension

Dynamic tension is an expression used by Simons (1995) to characterize antagonistic situations that must be defined (e.g., old vs. new, maintenance vs. change, freedom vs. restriction, and empowerment vs. accountability) and are, in a way, part of organizational life and management. Tensions are considered dynamic due to the continuous and varied strategic forces acting both internally and externally (Mundy, 2010). They are created by the ability to use diagnostic and interactive control systems, which must provide conditions for reconciliation of tensions between innovation and efficiency.

Innovation intensity

Intensity is another word to define what Damanpour and Gopalakrishnan (1998) treated as radicalness, and consists of a division between what is routine innovation and non-routine innovation and what produces a minor or major innovation. With regard to intensity, innovation may be incremental or radical (Gersick, 1991; Tushman & Romanelli, 1985). Incremental innovation that encourages the status quo (Koberg, Detienne, & Heppard, 2003) involves a lower level of impact and change than radical innovation (Un, Cuervo-Cazurra, & Asakawa, 2010), and the process of reorientation produces fundamental changes in the activities of organizations, representing a clear departure from existing practices (Damanpour & Gopalakrishnan, 1998).

Theoretical Model and Hypotheses

The theoretical model (Figure 1) takes into account the antecedents of managerial control (external stimuli and innovation strategies), the MCS itself (diagnostic and interactive control systems and dynamic tensions), and the innovation intensity.

External stimuli and innovation strategy

Organizations exist in a given environment and constantly interact with the external environment. Thus, in the hypothetical model in this study, it is assumed that there are antecedents to the use of control systems that correspond to external stimuli and innovation strategies. The organization formalizes the innovation strategies in its plans and the environment in which it exists is changing all the time. The relationship between external...

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