Management Control Systems as Dynamic Capability Levers

Dynamic capabilities provide a concept and language for considering why over time, some firms are more successful than others. As a consequence, there have been a significant number of articles that consider the concept of dynamic capabilities (e.g.

Teece and Pisano 1994, Teece et al. 1997, Eisenhardt and Martin 200, Winter 2003) and their influence on firm performance (e.g. Adner and Helfat 2003, Helfat and Raubitschek, 2000, Klepper 2002). However, despite these contributions, we know relatively little about how managers actually coordinate, integrate and reconfigure existing competencies in accord with changes in the environment (see Eisenhardt and Martin 2000, Helfat 2000, Zott 2003). In this article we argue that contingent

management control systems provide levers or mechanisms that managers can use to enable dynamic capabilities.

Management control systems are the planning, budgeting, measuring and communication systems that managers use for decision-making and evaluation (Langfield-Smith 1997, Marginson 2002). Research concerned with these systems originated from accounting approaches to control (Anthony 1965), but has since developed with inputs from the fields of organizational design and information management (Galbraith 1973), cybernetic control (Hofstede 1978, Edwards 1992), contingency theory (Waterhouse and Tiessen 1978, Otley 1980, Chenhall 2003) and strategic management (Ouchi 1979, Langfield-Smith 1997, Marginson 2002).

This broad view and development of management control has produced a number of insights, two of which we focus on. The first is that firms possess several control components or systems that work together, rather than separately, to influence a range of behaviors and outcomes (Otley 1980, Simons 1995). The second is that contingent management control systems provide information for planning and decision-making that fits the conditions of a firm‟s life-cycle and strategic and environmental context (Waterhouse and Tiessen 1978, Otley 1980, Chenhall 2003). Together these notions of control contingency and complementarity, support our view that management control systems provide levers which managers can use to maintain or alter patterns in organizational activities (Simons 1994). They are the measuring, comparing and

intervention mechanisms that direct how firms explore and exploit the intangible (Shuen 1994) or invisible assets (Itami and Roehl 1987) that define their dynamic capabilities.

Such control is also central to the learning needed for overcoming structural inertia (Hannan and Freeman 1977, 1984) and replacing or adjusting the „sticky‟ resource endowments (Cyert and March 1963, Teece et al. 1997) that restrict the generation of new competences.

To explain the relationships between management control, capability processes and competence change, we use Simons (1995) „levers of control‟ framework with its four types of control system: beliefs systems for core values, boundary systems for behavioral restrictions, diagnostic systems for monitoring and measurement, and interactive systems for consultation and proactiveness (see table 1). Together, these systems provide procedures and activities for exercising „adequate control in

organizations that demand flexibility, innovation and creativity‟ (Simons 1995: 80). They are complementary levers that combine to create dynamic tensions or forces that alter and enhance organizational capabilities (Henri 2006). These forces produce what Winter (2000) calls „aspiration levels‟ that influence how far a firm intends to explore and create new competences, as opposed to the exploitation and refinement of existing competences. This in turn affects the type and level of coordination, integration, learning and reconfiguration.

Table 1. The Relationships Between Control System Foci and Capability Forces and Emphasis (Adapted from Simons 1995)

In table 1 the beliefs and interactive systems combine to produce behaviors that are central to the exploration and innovation needed to ensure the future survival of firms. The beliefs systems establish the purpose of the firm, by setting the domain of relevant strategic opportunities and providing an overarching framework for

organizational identity and action. This involves determining the „explicit set of organizational definitions that senior managers communicate formally and reinforce systematically to provide basic values, purpose, and direction for the organization‟

(Simons 1995: 34). Such control helps create the shared expectation and necessary unity to search for the opportunities that realize strategies (Pearce 1982, Widener 2007).

The interactive systems work in tandem with the beliefs systems to promote communication, learning and the emergence of new ideas and strategies. They help build an understanding of the strategic uncertainties facing the firm at any particular juncture in its history. This generates a form of organizational outwardness that enables the firm to search and understand its information climate, shorten the feedback cycles and influence its environment. It is a form of control that promotes sensemaking (Weick 1988) and helps reduce the negative consequences of limited, infrequent and degraded feedback by detecting and warning managers of any significant perturbations (Aguilar 1967, Daft and Weick 1984).

The diagnostic systems and boundary systems coalesce to help firms focus on competences that ensure efficiency and survival in the short-term. The diagnostic systems motivate, measure and reward progress towards specified goals. They also identify nonconformance and adjust organizational behaviors accordingly. This makes them important instruments for supporting the execution of intended strategies

(Merchant 1990) and ensuring that firms perform the right activities well. However, this focus on efficiency can constrain innovation and opportunity seeking, hence why Simons (1995) argued that firms also need appropriate interactive and belief systems to

encourage search and learning.

Boundary systems „are like an organization‟s brakes‟ (Simons 1995: 84), they help restrain and focus employees to ensure that the firm does not constantly wander off course. They use rules, policies, codes of conduct and operating directives, to explicitly delimit what portions of the strategic opportunity space will not be sought by the firm and what is the acceptable domain of activity (Simons 1994). This helps prevent firms from over exploring and becoming stretched and unfocused; as well as helping prevent the occurrence of institutionalized and systematic rule breaking that can sometimes occur as firms strive to consistently achieve ever-increasing performance goals.