An Empirical Study of the Influence of Formalized Management Control Systems on the Use of Open Innovation Practices

Abstract

Motivated by a shift in innovation thinking from closed to open innovation (Chesbrough, 2003b), this thesis aims to provide empirical insights into the influence of formalized management control systems (MCS) on an organization’s use of open innovation practices. This was done by analysing the organizational rules and routines of organization members in relation to an organization’s innovation practices. Using three case studies where data was collected through semi-structured interviews and document analysis, this study addresses the research question: can formalized MCS influence the use of open innovation practices in a firm? Using an extended theoretical framework that builds on the institutional framework of Burns and Scapens (2000), this study found that the influence that formalized MCS have on the use of open innovation practices in a firm is dependent on two key factors: 1. The nature of the formalized MCS. That is, whether the formalized MCS are coercive in nature, forcing the project level organization members to act as prescribed by top management through the formalized MCS; or whether the formalized MCS allow the project level organization members to act according to their own understanding of the situation. 2. Whether the perspectives of project level organization members in relation to the use of open innovation practices are consistent with the perspectives of top management. The evidence from the case studies shows that formalized MCS helped transform the routines of organization members in relation to the use of open innovation practices where the project level organization members were forced to act as prescribed by top management through the use of coercive formalized MCS. Furthermore, the evidence shows that the formalized MCS helped support the use of open innovation practices or alternatively deterred the use of these practices, where, despite having the option to act otherwise, the project level organization members’ routines encoded the formalized MCS. This was because the project level organization members’ perspectives were consistent with the top management’s perspectives which were enacted in the formalized MCS. Alternatively, where the perspectives of the two groups of organization members were inconsistent, the routines of the project level organization members tended to be decoupled (or at best loosely coupled) from the formalized MCS. This was because the project level organization members acted according to how they believed was most appropriate for the situation they were in. These decoupled routines may improve performance in the firm as seen in the Fisher & Paykel Healthcare (FPH) case study. In this situation top management decided not to change the formalized MCS as changing the formalized MCS may have destabilized the routines and created inefficiencies. On the other hand, the decoupled routines may be seen to be counter-productive as shown in the evidence from Zespri. In this case, top management was forced to coerce the project level organization members to act differently. The top management at Zespri did this through changes to some of the formalized MCS, which were coercive in nature and restricted the action choices available for the project level organization members. In addition to presenting an extended theoretical framework that builds on previous research, this thesis contributes to the MCS literature by showing how formalized MCS can help with the management of inter-firm relationships in an innovation setting. The findings in this thesis show how the formalized MCS enables the use of inter-firm relationships in a firm by creating a culture that is conducive to external collaborations. Moreover, it shows how the formalized MCS help facilitate effective communication between the organization members of the partnering firms which allows the project teams to deal with issues in a timely manner. Finally, the evidence from this study contributes to our understanding of the processual view of change, where a change to formalized MCS does not always constitute a corresponding change in the practices of other organization members as expected by those initiating the change. For instance, in Coloplast, the top management implemented formalized MCS supporting open innovation practices with the expectation that project level organization members would change their approach to external collaborations and embrace the open innovation model. However, a change in actual innovation practices was not observed except for where the organization members were coerced to carry out activities in line with the changes implemented by top management. However, the changes led to other improvements in the firm that were not initially intended. The evidence presented in this thesis is in line with the findings from previous studies (Busco, Quattrone, & Riccaboni, 2007; Mouritsen, 2005; Quattrone & Hopper, 2001) that suggests that organizational changes are non-linear. Hence, to understand the process of change requires research to look at how the formalized MCS have changed as well as how the formalized MCS change actual organizational practices.