Management Control Systems, Decision-Making, and Innovation Development

The CDI Model

Dawid Szutowski

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000471922
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Verwaltung

The systematic approach to innovation development today is one of the world's most prominent scientific fields, and with good reason. When applied correctly, such system produces regular outcomes, which consistently drive lasting competitive advantage. Unfortunately, as much as it is beneficial, the orchestration of an undisturbed flow of multiple complex, dynamic, and flexible innovation development processes is structurally demanding.

In this book, a recognised innovation management specialist sets the record straight, offering a comprehensive approach to the improvement of innovation efficiency with the use of management control system. Unlike other books on the subject, it proposes original representation – the CDI model – of the relationships between management control system, decision-making quality, and innovation system efficiency and explains why management control is fundamental to innovation management. In addition to that, inside the reader will find several original developments. These include: the info-deficiency (I-D) model, depicting the various parameters hindering decision-making in innovation development; the product innovation development (PID) system, offering the original function-based approach to innovation management; and the composite innovation index – specially designed tool intended to evaluate the efficiency of an innovation development system.

It will be of interest to researchers, academics, practitioners, and advanced students in the fields of management, strategy, and innovation.

Chapter 4 of this book is freely available as a downloadable Open Access PDF under a Creative Commons Attribution-Non Commercial-No Derivatives 4.0 license available at http://www.taylorfrancis.com

1 Management Control Systems

DOI: 10.4324/9781003215035-2

1.1. Introductory Remarks

Recognising the increasing role of communication and control, Norbert Wiener said in 1954:

the thought of every age is reflected in its technique…. If the seventeenth and early eighteenth centuries are the age of clocks, and the later eighteenth and nineteenth centuries constitute the age of steam engines, the present time is the age of communication and control.

(Wiener, 1954, p. 1)

Seventy years later, in the modern era of communication technologies, controlling the extremely dynamic, complex organisations generating abundant data is as challenging as ever. The age of communication and control continues.

The modern approach to the issue of control dates back to the 19th century. It derives from control systems engineering, or designing process control systems for industrial applications. In his work “On Governors”, published in the late 1860s, Maxwell laid the foundations for the establishment of control stability criteria (Maxwell, 1868). While Edward Routh and Adolf Hurwitz further developed this concept of maintaining the current operational levels in the Routh-Hurwitz theorem (Rahman & Schmeisser, 2002), it needed to evolve over time. In 1922, Nicolas Minorsky used theoretical analysis to develop a control mechanism that could not only maintain but also improve a system’s operation (Minorsky, 1922). These early works and numerous others (Bennett, 1984, 1993) prepared the ground for the development of the concept of a control system. Since their publication, the central idea consisted in understanding and controlling the way in which an input transforms into an output. Over time, control systems evolved from the open-loop ones (Bennett, 1993), through the closed-loop (feedback) ones (Bennett, 1993), and multi-loop feedback ones (Capaci, Bergquist, Kulahci, & Vanhatalo, 2017), to the multiple-input, multiple-output, non-linear, multi-loop feedback control systems (Dorf & Bishop, 2011). While these comprehensively addressed the issues commonly encountered in industrial applications, the new, managerially oriented generation of control systems again faced unprecedented challenges, as they needed to account for the most unpredictable factor of all – the human factor.

Many have expressed doubts regarding how the engineering-derived control systems propose only a limited homeostatic image of social life, which contrasts with the morphogenetic or structure-transforming imagery associated with positive feedback loops (Buckley, 1967, cited in: McClelland & Fararo, 2006); overlook the strategic use of rules in pursuit of individual interests and the improvisation essential to social interactions (Bourdieu, 1990, cited in: McClelland & Fararo, 2006); and neglect the high degree of indeterminacy, distortions in the interpersonal flow of information, limited information-processing capabilities, and the issue of interpretation of the information itself. Thus, the first purpose of this chapter is to conceptualise and define control systems in management (commonly referred to as management control systems – MCSs), with particular regard to their decision-making support function. Following the same line of thought, the second objective is to critically assess the existing management control system types, and identify and conceptualise the most appropriate approach from the point of view of decision-making quality. The third objective is to establish a conceptual link between management control systems and decision-making quality.

In order to achieve the first purpose, an extensive, chronologically led literature review was performed, which critically analysed both mainstream and peripheral publications in the field of MCSs since the late 1940s. This historical orientation made it possible to reach the roots of the idea behind management control and contributed to the development of its definition. Another systematic literature review was performed in order to achieve the second goal, as the application of this method substantially reduces the risk of omission. Consequently, a comprehensive set of typologies was built and examined, which then provided a justification for the selection of mechanistic and organic MCS types as relevant for decision-making quality support. Moreover, an extensive review of literature allowed for conceptualising these two types of MCSs and linking management control systems to decision-making quality.

In order to firmly establish the concept of management control systems, the first section presents the chronological evolution of their theoretical underpinnings, and – against this historical background – introduces a new definition developed by the author. The next section offers a systematic analysis of the numerous typologies of control systems in management from the decision-making perspective. Thethird section provides a precise description of mechanistic and organic management control systems. The chapter concludes with the first of the conceptual links providing the foundation for the control-decision-innovation (CDI) model, namely that between the employment of management control systems and decision-making.

1.2. Evolution of Approaches to Management Control Systems

The purpose of this section is to develop a definition of a management control system. In order to do so, it will present an analysis of the historical evolution of this concept, which allows for combining its original foundation with the details of more recent understanding. The section begins with a general position on the locus of management control systems in relation to complementary or alternative approaches and gradually progresses to a chronological synthesis of MCS definitions, followed by a discussion and elaboration of the author’s own definition.

The concept of a management control system has been continuously developed in management science for more than 70 years. As mentioned previously, it is usually referred to as “MCS” for short (Brenner, 2009). However, in current nomenclature, terms such as “management accounting” (MA), “management accounting systems” (MAS), “organisational controls, management control systems” (MCSs), and “controlling” are at times used interchangeably. This may or may not be correct, depending on the adopted definitions of these concepts, which may (but not necessarily do) exhibit numerous similarities. The following discussion succinctly summarises this issue, gradually progressing from the least comprehensive notion of management accounting to the most comprehensive one, namely, controlling.

Approaches to management accounting (MA) range from strongly tool-oriented ones (Gibassier, 2017) to ones emphasising its strategic importance. The former strictly focus on providing managers with information from the accounting area to support their decision-making processes (Horvath, 2019). The latter are consistent with the understanding of a management accounting system (MAS) followed in this book. In this vein, the Institute of Management Accountants has defined management accounting broadly, emphasising its strategic orientation and systematic nature, as “a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy” (Institute of Management Accountants, 2008, p. 1). In a similarly systematic way, management accounting has also been presented as “the provision and analysis of financial information on the firm’s product markets and competitors’ costs and cost structures and the monitoring of the enterprise’s strategies and those of its competitors in these markets over a number of periods” (Bromwich, 1990, cited in: Roslender & Hart, 2003, p. 257). Based on these considerations, the definition of a management accounting system involves a broader understanding of management accounting than that followed in the tool-oriented approaches. Specifically, it refers to the systematic usage of the tools offered by it, and thus resembles the strategic-oriented view presented earlier. Moreover, it is at least to some extent consistent with the concept of a management control system, except that it primarily accentuates accounting-based measures. While the management accounting system has been defined as “those parts of the formalized information system used by organizations to influence the behaviour of their managers that leads to the attainment of organizational objectives” (Horngren, Bhimani, Datar, & F...