Amsterdam Business School
The role of management control systems and organizational
culture in innovative business units
Name: B.N. de Viet
Student number: 10666966
Supervisor: mw. dr. ir. B.A.C. Groen
Date: 6/21/15
Word count: 13,692
MSc Accountancy & Control, specialization Control
Statement of Originality
This document is written by student B.N. de Viet who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
This paper investigates the effect of the organizational structure and organizational culture on two types of organizational innovation, namely explorative and exploitative innovation. Further, this paper investigates the possible moderating relationship of a flexible culture on the organizational structure and organizational innovation. The organizational structure is the result of the trade-off between differentiation and integration. By studying the survey results from 112 operational managers the effect of the organizational structure and culture on innovation is analyzed. Results from the regression analysis reveal that a higher differentation leads to a higher level of explorative innovative performance. Further, a flexible culture leads to higher levels of explorative innovative performance. However, no evidence is found in the sample that leads to assume any moderating effect of the flexibility dominant culture occurs over the organizational structure and organizational innovation. These results contribute to the body of literature studying the effect of both the organizational structure and the organizational culture on innovative performance.
Keywords: Explorative innovation; exploitative innovation; differentiation; integration;
Table of Contents
1 Introduction ... 6
2 Theory ... 10
Organizational innovation ... 10
2.1 Management Control Systems ... 11
2.2 2.2.1 Differentiation ... 13
2.2.2 Integration ... 15
The organizational culture ... 16
2.3 2.3.1 Rational culture ... 17
2.3.2 Hierarchical culture ... 17
2.3.3 Developmental culture ... 17
2.3.4 Group culture ... 18
2.3.5 The flexibility dominant culture ... 18
2.3.6 The moderating effect of the flexibility dominant culture ... 20
Control Variables ... 21 2.4 2.4.1 Competitive strategy ... 22 2.4.2 Growth opportunities ... 22 2.4.3 Manager innovativeness ... 23 3 Research Method ... 24 Sample descriptives ... 25 3.1 Survey constructs ... 25 3.2 3.2.1 Differentiation ... 25 3.2.2 Integration ... 26 3.2.3 Organizational culture ... 26 3.2.4 Organizational innovation ... 27 Research model ... 28 3.3
4 Results ... 30
Summary descriptives ... 30
4.1 Pearson correlations between all variables ... 31
4.2 Main findings ... 34
4.3 4.3.1 Explorative innovative performance ... 34
4.3.2 Exploitative innovative performance ... 35
4.3.3 The moderating effect of flexibility dominant culture ... 36
5 Discussion... 38
Theoretical implications ... 38
5.1 Limitations ... 40
5.2 Suggestions for future research ... 41
5.3 Practical implications ... 42
5.4 References ... 44
1 Introduction
Abernathy (1978) suggested a firm’s ability to compete over time is rooted in the ability to improve efficiency and the ability to innovate simultaneously. Benner and Tushman (2003) describe the ability to improve efficiency as exploitative innovative performance and the ability to innovate as explorative innovative performance. Research has often stressed the need for organizations to function in an ambidextrous nature to improve firm value and adapt to rapidly changing environments (Benner & Tushman, 2003). This means organizations need to be able to cope with both explorative innovations on the one hand, but have procedures and rules in practice to guide exploitative innovative performance on the other hand (Benner & Tushman, 2003). Explorative innovative performance is described by Jansen, van den Bosch and Volberda (2006) as the process of exploring new ideas, products and activities. Jansen et al. (2006) describe exploitative innovative performance as improving efficiency in products, procedures and current activities.
The important role of the Management Control System to support both organizational abilities has often been highlighted in previous research (Jansen, van den Bosch & Volberda, 2006; Henri, 2006; Simons, 1995; Benner & Tushman, 2003). A well known definition of the Management Control Systems (hereafter: MCS) is described by Simons (1995): “Management Control Systems are the formal, information-based routines and procedures
managers use to maintain or alter patterns in organizational activities (p. 5).”
Information-based routines and procedures are described as coordination mechanisms managers can use to alter patterns within the organization. The purpose of these coordination mechanisms is to manage the degree of control and flexibility in the organizations (Simons, 1995). The MCS was traditionally considered to focus solely on planning and controlling to ensure the accomplishment of the organizations’ objectives (Hofstede, 1978). Modern management control systems are also concerned with the fostering of flexibility, ensuring organizational learning and stimulating innovative performance (Henri, 2006).
The management control system determines the responsibilities and accountabilities for managers and employees set by corporate management (Ferreira & Otley, 2009, p. 269). It sets boundaries for employees and provides guidance to which activities participants should and should not follow up on. By providing these boundaries corporate management is able to influence the degree of control and flexibility and to guide organizational innovation (Jansen, van den Bosch & Volberda, 2006). Two important coordination mechanisms that alter the
degree of flexibility and control are differentiation and integration (Jansen, van den Bosch & Volberda, 2006). Together, these are referred to as the organizational structure (Jansen, van den Bosch & Volberda, 2006).
Differentiation is concerned with the process of delegating decision-making authority to lower-level employees (Abernethy, Bouwens & van Lent, 2004). Abernethy, Bouwens and van Lent (2004) suggest that higher differentiation is achieved by delegating decision-making to subordinate managers and can guide business units towards certain performance. Further, Abernethy et al. (2004) advocate that differentiation has a positive effect on the problem-solving behavior of employees. Integration on the other hand involves rules, operating procedures and more formalized ways of working to ensure alignment with the corporate objectives. Integration is a coordination mechanism by which corporate management can influence the way subordinate managers act in accordance with the organizations’ guidelines (Chenhall, 2003). Benner and Tushman (2003) suggest a positive relationship between differentiation and explorative innovation on the one hand, and a positive relationship between integration and exploitative innovation on the other hand.
Henri (2006) advocates that the organizational culture has a moderating effect between the organizational structure and organizational innovation. Culture is operationalized by shared values and beliefs within the organization (Uttal & Fierman, 1983). Their study (Uttal & Fierman, 1983) suggests that shared beliefs and values interact with the design and use of control systems. However, research examining the relationship between the organizational structure and the culture is scarce (Henri, 2006). The purpose of the MCS is to manage the tension between flexibility and control (Simons, 1995). By studying the organizational culture on a continuous competing values model, the degree of flexibility and control embedded in the organizational culture is used to test the relationship with organizational innovation. Burns and Stalker (as cited by Henri, 2006, p. 80) advocate cultural types associated with flexibility cultures value loose and informal controls, organizational change and a free flow of communication throughout the organization.
Previous research provided mixed results with regard to organizational structure and the effect on explorative and exploitative innovative performance (Jansen, van den Bosch & Volberda, 2006). Benner and Tushman (2003) suggest that explorative innovative business units rely on differentiated business units with loose cultures. They (Benner & Tushman, 2003) further suggest exploitative innovative units have integrated structures, aimed to
improve efficiency by formalized ways of working. In constrast, empirical results of Cardinal (2001) suggest that a high degree of integration and formalization co-existed with radical innovative performance. The study from Cardinal (2001) was based on questionnaires sent out to executives in R&D-related business unit and thus similiar may provide different results across different industries. In the financial services industry, Jansen van den Bosch and Volberda (2006) found a positive relationship between integration and exploitative innovative performance. The study from Jansen et al. (2006) empirically reveal a positive relationship between differentiation and explorative innovative performance. Complementing to current research, this study examines the effects of differentiation and integration on both explorative and exploitative innovative performance from operational managers across several industries. Further, this study also examines the direct and the interacting relationship of the organizational culture. Adopting a competing-values perspective, the organizational culture is analyzed along the continuum of flexbility and control. By studying the culture on this continuum, certain patterns may emerge with regard to control or flexibility dominant cultures and organizational innovation.
Drawing on prior literature, this paper predicts differentiation has a positive association with explorative innovation. Integration is predicted to have a positive association with exploitative innovation. Further, a flexibility dominant culture is predicted to have a positive association with explorative innovation, and a negative association with exploitative innovation, respectively. Next, the level of control and flexibility in the organizational culture is tested as a moderating variable. The prediction is that a positive moderating role for a flexibility dominant culture on differentiation and explorative innovation. The moderating role is expected to negatively moderate the relation of integration and exploitative innovation.
This paper aims to contribute to current management control research by empircally examining the relationship between the organizational structure and explorative and exploitative innovative performing business units. The research questions in this paper are therefore defined as follows: (i) What is the role of the organizational structure in different type of innovative business units? (ii) To what extent is this relationship moderated by the organizational culture?
Survey data from 112 business unit managers, ranging over a variety of industries, is used to examine the research question empirically. These results from operational managers provide insight in the perceived use and effect of the organizational structure. Results reveal a positive relationship between differentiation and explorative innovation. However, the relationship between integration and exploitative innovations was not significant. Further, the role of a flexibility dominant culture was only marginally significant. In this sample, there is no evidence of a moderating relationship of the organizational culture on the organizational structure and organizational innovation. This research empirically recognized some presence of the relation between organizational structure and organizational innovation and builds to the understanding of innovative performing business units.
The first contribution of this paper is the moderating role of the organizational culture. To the the best of my knowledge, the moderating role of flexibility and control, embedded in the organizational culture, has not been taken into account in innovative performance research. Although no significant moderating relationship occured in this sample, the role of the organizational culture in innovative performance remains an interesting research topic.
The second contribution of this paper regards to building of systematic and generalizable evidence of the effect of the organizational structure on innovative performance. Although previous research has provided mixed results, this paper to hopes to help build a solid base for both future theoretical implications and the practical organizational MCS design by studying results across several industries.
In the next sections the relevant theory will be discussed, starting with a framework to provide the theoretical background. Chapter three will discuss the sample descriptives, the instruments and the chosen research method. In chapter 4, results from the linear regression are presented. The last chapter (chapter 5) provides the theoretical implications and the answer to the research question. Further, this chapter also includes limitations and suggestions for future research.
2 Theory
In this chapter, building on prior literature, the theoretical background is provided. Figure 1 reflects the relevant theoretical framework, which will be described in detail in the following sections. Both forms of organizational innovation are described in section Error!
Reference source not found.. The role of the management control system is described in 2.2.
Section 2.3 discusses a flexibility dominant culture. The direct relation of organizational culture on organizational innovation is discussed in section 2.3.5 and the moderating effect is discussed in section 2.3.6. The model is further complemented by several control variables, which in turn are discussed in section 2.4.
Figure 1 Theoretical framework
Organizational Structure Organizational Culture Organizational Innovation
Organizational innovation 2.1
Innovative performance can be classified along two domains: (i) exploratory and (ii) exploitative innovations (Jansen, van den Bosch & Volberda, 2006). In order to improve firm performance, various authors argue the need for an organization to engage in both exploratory and exploitative innovation simultaneously (Benner & Tushman, 2003; Cardinal, 2001; Subramaniam & Youndt, 2005). When firm performance is aimed towards both explorative and exploitative innovative performance, this is described as ambidextrous.
Exploratory innovations are characterized by radical innovations aimed towards new markets and emerging customers (Jansen, van den Bosch & Volberda, 2006). By exploring new possibilities business units can successfully respond to new customers and or new markets. Responding to new customers and markets requires knowledge to shift away from currently existing patterns (Benner & Tushman, 2003).
Conversely, exploitative innovation has a main focus on current markets and existing customers (Jansen, van den Bosch & Volberda, 2006). By incrementally improving current standards, products or procedures to improve efficiency organizations try to gain a competitive advantage (Jansen, Bosch, van den, & Volberda, 2006). Exploitative innovation is concerned with deepening the current knowledge and improving efficiency within supply chains or customer demands. Both type of innovations focus on different elements within business units. Hence, pursuing explorative, exploitative or ambidextrous innovative performance has consequences for the design of the organizational structure, as measured by the level of differentiation and integration. The definition, role and design of the organizational structure and the management control system are discussed in the next section.
Management Control Systems 2.2
Management Control Systems as a term is used commonly to cover the practices of management accounting systems (MAS), management control systems (MCS) and organizational controls (OC) (Chenhall, 2003). Zimmerman (as cited by Malmi & Brown, 2008, p. 290) advocate a wider distinction towards control and decision-making provides useful insight in what the MCS entails. The use of management accounting practices for control and decision-making purposes are referred to as coordination mechanisms. When organizations use coordination mechanisms solely for decision-making purposes, these systems should be referred to as MAS (Malmi & Brown, 2008). The term MCS should be used when coordination mechanisms are used by an individual to monitor and guide subordinate employee behavior (Malmi & Brown, 2008). The need for a control system stems from the agency theory, where as control systems are implemented to limit types of unwanted behavior within the organization (Malmi & Brown, 2008, p. 289). Thus, the purpose of these control systems is to control subordinate behavior and manage the tension between creative innovation and predictive goal achievement (Simons, 1995).
Organizations can also deploy coordination mechanisms in order to link and integrate different parts within the organizations (van de Ven, 1986). Further, van de Ven (1986) advocates that coordination mechanisms can guide the development of innovation by grouping together key resources. The management control system consists of several coordination mechanisms, which act simultaneously. A major focus of MCS theory is how to design the MCS (and deployment of coordination mechanisms) to balance this tension (Malmi & Brown, 2008).
The intensity of control and flexibility affect exploratory and exploitative innovative performance in organizations (Jansen, van den Bosch & Volberda, 2006). This means the level and type of innovative performance is dependent on the use of several coordination mechanisms. A further classification of coordination mechanisms, as defined by Ghoshal, Korine and Szulanski (1994), are the organizations’ organizational structure and the organizational culture. The organizational structure is one of the most important mechanisms to guide employees and to alter the desired patterns organizations set out (Jansen, van den Bosch & Volberda, 2006). The organizational structure is described as the trade-off between differentiation and integration. Benner and Tushman (2003) suggest organizational structure has an impact on the level of organizational innovation. This study empirically investigates the impact of corporate coordination mechanisms on both explorative and exploitative innovation.
In current literature, much attention has been paid to innovative performance and key drivers of innovations have been studied extensively (Jansen, van den Bosch, & Volberda, 2006). To date, innovative performance has been studied in many settings, from management practices as activity-based costing (ABC), value based management (VBM) to newer forms of management practices as Beyond Budgeting (BB). Innovation can take many forms, ranging from product innovation to organizational innovation. Product innovation represents the development of new products and services to meet customer demands (Pierce & Delbecq, 1977, p. 28). Organizational innovation is described by Mohr (as cited by Pierce & Delbecq, 1977) as the successful introduction of means or ends that are new to that situation. The ability for organizations to survive over time is rooted in not only efficiency improving means (exploitative innovation), but also to be able to successfully explore new opportunities simultaneously (Benner & Tushman, 2003). Thus, the need for organizations to be able to function ambidextrous requires the management control systems to manage the tension
between flexibility and control. Both forms of innovation, explorative and exploitative, have different characteristics and intensity of flexibility and control.
In research, the association between the control system and organizational innovation has been frequently posited (Pierce & Delbecq, 1977; Benner & Tushman, 2003; Jansen, van den Bosch, & Volberda, 2006). As indicated in Figure 2.1, this study examines the control system by analyzing the level of differentiation and integration. The following sections discuss the organizational structure, as measured by differentiation and integration, subsequently. Furthermore, the relevant hypotheses are described building on prior literature.
2.2.1 Differentiation
Delegating decision-making authority (to lower-level employees) exists to some extent in all organizations. By granting decision-making authority to lower-level employees, subordinate business units are allowed to act, to some extent, autonomously. This process is described as differentiation (Jansen, van den Bosch & Volberda, 2006). The benefit of differentiation is to align (specific) knowledge with the decision-making authority. In order to controllably delegate decision rights, corporate management must ensure subordinate management interests’ are aligned to maximize firm value (Jansen, van den Bosch & Volberda).
Result controls are a common measure put to practice by corporate management to overcome the information asymmetry problem and align subordinates interests with the company’s objectives (Simons, 1995). A high level of differentiation at the organizational level implies lower-level decision-making authority. Previous research has suggested differentiation is supportive of exploratory innovation as subordinates can behave and assess new opportunities rather autonomously. By differentiating, corporate management, aligns decision-making authority with business units so they they can act in a more isolated matter.
Jansen, van den Bosch and Volberda (2006) suggest exploratory innovation requires non-routine problem-solving behaviour and freedom of movement for business units. Furthermore, Jansen et al. (2006) advocate that behavioral freedom for employees is implied to create an increased innovative performance amongst business units. Thus, higher levels of differentiation suggests a higher level of flexibility for business units. In this study decentralization is used as a proxy to capture the level of differentiation.
Differentiation has characteristics that impact the degree of flexibility within an organizations’ unit. Differentiation is concerned with the way sub-unit managers get the opportunity to act as quasi-entrepreneurs (Chenhall, 2003, p. 145). The mechanism to achieve differentiation is the delegation of decision-making authority (Chenhall, 2003). By differentiating, corporate management gives subordinate employees more room for freedom of movement to support opportunity-taking behavior. By allowing subunit managers to function as (quasi-) entrepreneurs, managers can follow up on risk-taking behavior and are able to explore new ideas. By means of empowerment subordinate management can decide for themselves what (new) activities to follow up on and to explore activities they deem right to improve firm value (Jansen, van den Bosch & Volberda, 2006).
In order for new ideas and opportunities to be seized, employees will need to build on their problem-solving capabilities and shift away from existing knowledge (Jansen, Bosch, van den, & Volberda, 2006). An increased amount of flexibility, measured by the decision-making authority of business units is seen to be positively associated with explorative innovation. Benner and Tushman (2003) suggest that openness, free flows of communication and freedom of movement of subunits are necessary conditions to successfully explore new activities and ideas. When corporate management leaves more room for subunits to explore new possibilities and to make autonomous decisions, this exploration leads to increased levels of explorative innovations (Benner & Tushman, 2003). Building on prior literature, the level of differentiation has an impact on the freedom of movement for subunits.
A higher level of differentiation implies a higher level of decision-making authority on decisions relating strategic, investment, marketing, internal procedures and human resource fields. Thus, this leaves room for business units to pursue certain innovational performance. As higher levels of decentralization allows business units to allocate resources on activities they deem right, subunits are able to respond to new customers and new markets. Thus, higher levels of differentiation indicate that operational managers can follow up on investing resources in new ideas, products, services and activities. Building on these assumptions, higher levels of differentiation would lead to higher levels of explorative innovation. Put formally, according to the above theory, I propose the following hypothesis:
2.2.2 Integration
Integration is concerned with the way subordinate management acts in a way aligned with organizational objectives (Chenhall, 2003). Integration involves rules, operating procedures and more formalized ways of working to ensure alignment with the corporate objectives. Control tightness is a control device by which corporate management can influence the way subordinate managers act in accordance with the company’s guidelines (Chenhall, 2003). By allowing little deviation from predefined objectives corporate management can achieve higher levels of integration (Chenhall, 2003, p. 145). Hence, integration has implications for the freedom of movement for subordinate managers; these behavioral constraints form a first barrier to explore new ideas and opportunities. As much attention is paid to routines and procedures, problem-solving behavior is directed towards the improvement of current practices and activities.
Business units can improve current practices, which in turn become incorporated into routines and procedures. Higher levels of integration can be achieved by the use of budgetary tightness. These tight controls minimize the freedom of movement for subunits. As a result, these business units cannot follow up on new activities, but instead remain focus on current activities and products. Prior research implies a relationship between integration and exploitative innovation. Having tight controls to minimize variance with predefined objectives enables the possibility to meet or beat these targets. Business units can improve current practices by improving efficiency in their activities. This relationship is tested in this study by measuring budgetary tightness to capture the level of integration. Integration and control tightness reflect the degree of formality embedded in rules and routines. Further, the level of integration indicates the strictness of following routines and procedures and meeting predefined objectives. Hence, an increased degree of integration is an example of an increased amount of control over business unit and (operational) processes (Simons, 1995). Previous research suggests a higher level of integration positively affect exploitative innovative performance (Benner & Tushman, 2003). Attention is directed towards following current standards and reducing variance between actual and predefined performance. Firms can further reduce variance by incrementally innovating in their current activities.
According to March and Simon (as cited by Jansen, van den Bosch & Volberda, 2006), the reliance on rules and procedures is seen to impact employee behavior and negatively affect the degree of problem-solving capability. Van der Stede (2001) advocates
that the degree of budgetary tightness reflects the tolerance towards deviations from objectives. Budgets are an example of formal hierarchical information-based systems, which can be put to practice by managers to direct employee behavior. Hence, budgetary tightness is an important measure to capture the level of integration within business units (van der Stede, 2001, p. 120). As performance is primarily measured by the achievement of meeting budgetary objectives, this focus would direct attention to staying on target instead of exploring new opportunities. Innovations are primarily exploited to improve efficiency in current practices (Jansen, Bosch, van den, & Volberda, 2006). Building on the theory cited above, I propose the following hypothesis with regard to integration and control tightness:
Hypothesis II Integration is positively associated with exploitative innovation.
The organizational culture 2.3
The importance of the organizational culture in the design and effect of the MCS has often been highlighted in prior literature (Henri, 2006). However, there has not been much empirical research examining these relationships. The organizational culture can be operationalized as the shared beliefs and values and their interaction with the organizational structure to produce the relevant organizational norms and boundaries (Uttal & Fierman, 1983). Chenhall (2003, p. 148) advocates that in order for innovative performance to succeed in organizations, employee commitment is a key driver. Furthermore, Uttal and Fierman (1983) advocate that an organizations’ shared values reflect deep social structures and interact with the control system to produce behavioral norms. The important role of intellectual capital in innovative performance has been widely accepted in the literature (Subramaniam & Youndt, 2005). Further, Subramaniam and Youndt (2005) advocate that the type of knowledge has an effect on the type of innovation. Explorative innovation requires new knowledge and deviation from current ways of working, routines and activities (Subramaniam & Youndt, 2005). They (Subramaniam & Youndt, 2005) describe innovative as a collective achievement within business units. Thus, research implies a relationship between the organizational culture, the organizational structure and innovative performance in business units.
Based on the Competing Values Model, proposed by Quinn and Rohrbaugh (1983), a distinction can be made to classify different cultural types along the continuum of flexibility and control. Four types of cultures are defined in this model, namely the rational, hierarchical, developmental and group culture (Henri, 2006). The rational and hierarchical culture reflect control dominant cultures. The developmental and group culture reflects flexibility values, a flexibility dominant culture. The aforementioned culture types will be discussed in the next sections. These culture types will provide the base to determine the organizations’ position on the competing values model.
2.3.1 Rational culture
The rational culture emphasizes productivity, performance, goal fulfillment and achievement (Denison & Spreitzer, 1991). Furthermore, this culture acts in the pursuit of well-defined objectives and following a structural path to encourage productivity. Denison and Spreitzer (1991) find competition and the achievement of predetermined ends as motivating factors within this culture.
2.3.2 Hierarchical culture
The hierarchical culture is characterized by a strong focus upon the logic of the internal business processes. Many regulations are set in place to ensure agents act in accordance with the principal’s best interests. The emphasis of the hierarchical culture is on stability, uniformity, coordination and evaluation (Denison & Spreitzer, 1991). In this culture, leadership tends to be conservative and cautious, where stability and continuity is operations is of key importance (Denison & Spreitzer, 1991)
2.3.3 Developmental culture
The developmental culture emphasizes flexibility and change with a primarily external focus. In order to adapt to the rapidly changing environment, this orientation is on growth, attracting resources and creativity. In order for innovative performance to prevail within organizations, leadership strategies include (to a greater extent) risk taking and providing guidance on strategic visions (Denison & Spreitzer, 1991).
2.3.4 Group culture
The group culture has a primary concern with human relations. Teamwork is of great importance within these cultures in order to maximize benefits from employee competencies (Denison & Spreitzer, 1991). Furthermore, a high level of trust, participation and empowerment characterize this culture. Leadership styles tend to focus on participation, consideration and support for team members (Denison & Spreitzer, 1991).
2.3.5 The flexibility dominant culture
Most studies follow a contingency-based approach towards several parameters of an organizations’ management control system (Chenhall, 2003, p. 128). A major focus of MCS theory is concerned with the design of an MCS and how coordination mechanisms can produce desired organizational outcomes. In the research literature, there has been a widespread consensus of the importance of people as a contextual variable (Henri, 2006).
Having a positive culture allows organizations to effectively stimulate innovative behavior (Ahmed, 1998). Ahmed (1998) advocates that a group feeling, employee commitment and improved forms of participation positively affect (explorative) innovative behavior. Henri (2006) advocates that flexibility dominant cultures highlight flexibility values as openness, innovation, creativity, change and adaptability. Conversely, control values are concerned with tight control, formalization and the desire for stability (Henri, 2006, p. 87). Thus, where the organizational structure sets practical boundaries as to how people can act within an organization, division or business unit, employees will always act according to their cultural assumptions (on doing what they believe is right) (Henri, 2006).
Subordinate opportunity-seeking behavior can be controlled by the beliefs systems and boundary systems (Simons, 1995, p. 33). These systems are embedded in the organizational culture within the organizations. An organizational beliefs system is created to inspire employees (Henri, 2006). The boundary system sets limitations to the opportunity-seeking behavior by putting routines and procedures in place to guide employee behavior. Both systems can be defined as a broad concept and are reflected in the organizational culture (Ahmed, 1998). The aforementioned cultural types reflect a degree of control and flexibility present in the organizational culture (Henri, 2006, p. 79). In practice, organizations do not fall into one type of culture (Quinn, 1988). Quinn (1988, p. 42) advocates that in every organization, multiple culture types coexist.
Thus, instead of treating the organizational culture as a categorical variable, the four culture types all possess characteristics with regard to control and flexibility values. The combination of these cultures enables further classification on a continuum of flexibility and control dominant cultures.
The control dominant culture on the one hand reflects a main focus towards efficiency and profits. This means an increased focus on controlled communication channels, giving goal clarity and providing a transparent working environment for subordinate employees (Henri, 2006). Conversely, Henri advocates that organizations with a flexibility dominant culture have a more open and spontaneous working environment where individuals have room for creative behavior. Furthermore, Burns and Stalker (as cited by Henri, 2006) describe that this environment is characterized by a free flow of information throughout the organization. In contrast, control dominant cultures have a main focus on being efficient and solely improving profits, and employees do not get many opportunities to explore new ideas and activities (Henri, 2006). Thus, it would that higher control dominant cultures would negatively affect the level of explorative innovation. Conversely, the improved focus on improving efficiency would be expected to positively affect exploitative innovative performance, improving current practices and activities.
The flexibility dominant culture is expected to show more room for risk-taking behavior, building on cognitive problem-solving behavior of subordinate employees (Henri, 2006). Further, flexibility values as the group learning process are expected to positively influence the deployment of intellectual capital and the effect on innovative behavior of the organization. Thus, it would be expected that a flexibility dominant culture has a direct positive association with the level of explorative innovation within the firm. Put formally, I propose the following hypotheses:
Hypothesis III A A flexibility dominant culture is positively associated with explorative innovation.
Hypothesis III B A flexibility dominant culture is negatively associated with exploitative innovation.
2.3.6 The moderating effect of the flexibility dominant culture
Underpinning the important role of the organizational culture in innovative performance, Henri (2006) advocates the level and type of innovative performance interact with the organizational structure. Henri (2006, p. 87) suggests the dominant culture has an association with tight control and a formal working environment. These are seen to negatively impact problem-solving behavior of subordinate employees. Langfield-Smith (1997) suggests that higher flexibility dominant cultures, with lower levels of conservatism, reflect a ‘risk-taking’ attitude and encourage organizational innovation. Henri (2006) advocates that in flexibility dominant cultures top management values the process of organizational change.
Flexibility values focus less on a formal culture and more on organizational learning. By leaving room for curiosity and experimentation management can guide attention to organizational innovation. A higher value on the competing values model of flexibility and control higher score on the flexibility dominant culture. Thus, even though corporate management has designed the organizational structure to have a high level of differentiation, a flexibility dominant culture would positively moderate the effect on explorative innovative performance (Henri, 2006). Even though managers have the opportunity for risk-taking behavior and to explore new ideas and activities, a control dominant culture can stop business units from doing so. Control dominant cultures prevent the exploration of new activities as people value stability, conservatism and the ‘business as usual’ principle (Henri, 2006).
For exploitative innovative behavior, a conservative culture will direct attention towards current practices and would, to some extent, prevent subunits from entering new markets (Henri, 2006). A flexibility dominant culture, in this case, would be expected to negatively moderate the relationship between integration and exploitative innovative performance. Management guides attention towards the creation of new ideas, with less attention towards current rules, procedures and activities. A control dominant culture is associated with tight controls and top managements desire for conformity and stability (Henri, 2006, p. 87). These are seen as counterproductive in explorative innovation (Adler & Borys, 1996). As advocated by Langfield-Smith (1997), flexibility dominant cultures encourage the process of innovation and change. Thus, building on prior literature, when business units’ have a higher flexibility dominant culture, the effect of differentiation on explorative innovation is positively moderated. Given an average level of differentiation, a flexibility dominant culture positively affects the level of explorative innovation. Due to the
fact that business units’ intrinsic culture is to strive for new customers, markets and activities, delegating decision-making authority as a consequence leaves freedom to explore these new activities and ideas.
Contrary to a flexibility dominant culture, in control dominant cultures conventional measures as financial metrics are still most commonly used and prevail within the organization (Henri, 2006). Hence, activities are aimed towards meeting and beating predefined targets. Current practices, where possible, are made more efficient to improve current profits (Henri, 2006). A flexible culture has an increased level of organizational learning and supports the sharing of knowledge throughout the organization (Langfield-Smith, 1997). This culture values risk-taking behavior and change instead of meeting and beating targets set by corporate management. Thus, even though higher levels of integration are expected to positively affect exploitative innovation, this relation is expected to be negatively moderated by a flexibility dominant culture. This would be expected as flexibility dominant cultures value change, openness and free flows of communication instead of formalization, tight cultures and managements desire for conformity (Henri, 2006). Put formally, the moderating hypotheses are formulated as follows:
Hypothesis IV A A flexibility dominant culture positively moderates the relationship between differentiation and explorative innovation.
Hypothesis IV B A flexibility dominant culture negatively moderates the relationship between integration and exploitative innovation.
Control Variables 2.4
To control for other organizational antecedents, several control variables are defined based on previous research. Jansen et al. (2006) describe several potential variables that are implied to influence the degree of innovative performance. Furthermore, as this research takes place cross-industry, contextual factors are implied to play an important role. The control variables used in this study are discussed next.
2.4.1 Competitive strategy
An important determinant to initiate certain types of innovation is driven by competition within industries. As competition intensifies, the level of innovative performance is positively affected as organizations try to differentiate themselves from other organizations’. Building on the construct from Chenhall and Langfield-Smith (1998) and using confirmatory factor analysis, three components emerge (see appendix G). Chenhall and Langfield-Smith (1998) indicate that these components rely on different items. The three competitive strategies derived from this instrument are the flexibility, customer service and low-cost-orientation. The flexibility orientation loads strong on items related to innovations, short introduction times and hence reflecting future needs of customers/markets (Chenhall & Langfield-Smith, 1998). Conversely, the customer service orientation loads high on items as accurate and fast delivery, adequate after sales and high quality products/services. Hence, Chenhall and Langfield-Smith classify these items based on their main concern to meet current customer demands. Cronbach Alpha for flexible, customer-service and low-cost orientation is 0.71, 0.77 and 0.73 respectively. The competitive strategy is measured using a 5-point Likert-scale, where a low score indicates a low level of competitiveness in the strategy. Higher values reflect more competitive focus in the strategy of the organization.
The expectation is that when firms place more emphasis on following a competitive orientation, the level of innovative performance is positively affected. Organizations’ become more aware of the environment and follow up on both improving efficiency in current practices, and enter risk-taking behavior to explore new ideas, products and activities.
2.4.2 Growth opportunities
The contextual factors for business unit may play an important role in order to alter patterns of the level of innovative performance and the formal hierarchical structure. For instance, growth opportunities are expected to influence the level of explorative innovative performance. Thus, to alter these patterns the variable growth opportunities is used to control for business unit contextual factors. Growth opportunities are measured using the construct of Abernethy, Bouwens and van Lent (2004), the results indicate a reliable measure (Cronbach Alpha: 0.72). The survey questions and the factor analysis are presented in Appendix H.
Building on prior literature, the role of growth opportunities on organizational innovation would be expected to be positive for explorative innovation (Abernathy, Bouwens & van Lent, 2004). This association is expected to be negative for exploitative innovation. When organizations’ have more growth opportunities, units have a higher chance of intrinsically improving firm value by exploring new ideas and activities. As a result of more opportunities, units explore with new ideas to grow and gain competitive advantages from organizational change. Conversely, when organizations have higher growth opportunities, attention is expected to be towards gaining (more) market share. As a result, refining current activities would not get as much attention, as would be expected in stable external environments.
2.4.3 Manager innovativeness
The level of employee innovative behavior is to some extent driven by managerial preferences. Intuitively, managerial innovative preferences would bound to impact the level of business unit innovative performance, as the manager is in place to guide subordinate employee behavior. The managerial innovativeness is based from the Jackson Personality Index (1994) instrument. An adjusted version is used, as designed by Mueller and Thomas (2001). The instrument consists of several Likert-scale items with regard to personal characteristics in the field of innovativeness. Of the 8 items, 4 have been reverse-coded in order for high scores to represent more innovative managerial characteristics. The relevant survey questions, the recoded questions and the factor analysis are presented in Appendix I. Cronbach Alpha measures indicate a reliable measure (α = 0.81).
Intuitively appealing, when the operational manager of a unit has a higher focus on innovation, it is expected that units direct more attention towards organizational innovation. Where a higher level of manager innovativeness indicates a higher level of managerial preference for change, explorative innovation is expected to positively benefit from these preferences. Further, exploitative innovation is expected to positively benefit as well, as managers would be more open to changing current practices and ways of working.
3 Research Method
In this section the research method applied will be further discussed. Starting with sample descriptives, followed by the research instruments and the research model. The results from the survey come from managers of operational business units who are responsible for more than 20 full-time equivalents (FTE). The managers are deemed to have substantial responsibility regarding the operational activities within their organization. Furthermore, these respondents are subject to the management control system of an organization. Due to the fact that different cultural and different structural settings may exist within the organization, corporate management may choose to apply various coordination mechanisms throughout the organization. Thus, by examining the survey results the subjects of the management control system provide an insight in the use and effects of (corporate) coordination mechanisms.
Further, as the survey results are derived from different industries and different competitive environments the use of (cross-sectional) surveys may indicate the presence of generalizable patterns in the use of different coordination mechanisms. Due to the fact that the organizational culture can be interpreted subjectively, survey-based research can provide insights in managers’ perception on organizational culture and innovative performance.
Furthermore, by analyzing innovative performance as a holistic concept instead of a management practice, survey-based research can broaden the understanding of the configuration of the MCS. Chenhall (2003) indicates that survey-based research is a suitable research method to study different elements of a control system and a dependent variable. In the following section, the relevant constructs will be discussed. The discriminant validity is assessed (see appendix A) using the rotated component matrix of the constructs for differentiation, integration and innovative performance.
Sample descriptives 3.1
The sample consists of 112 respondents currently in a managerial position. The average age of the respondents is 47 years (MEAN = 47.78, SD = 8.88). Respondents, on average, are working for 9 years in their current department and are working, on average, in their current (managing) position for 6 years. On average, respondents are responsible for 73.95 full time equivalents. From the 112 respondents, 11 were subtracted due to invalid survey (as described in section 3.3. Overall, from the 101 respondents, 44 respondents work in the non-profit industry. Further, 24 managers work in the professional services the professional services industry, and 15 in the commercial services industry. Manufacturing and financial intermediation have 14 and 4, respectively. Further details on the industries are provided in appendix B.
Survey constructs 3.2
In this section the used constructs will be discussed. Missing values have been excluded list-wise from the analysis. Values are treated as invalid and excluded if they fall out of the range of one to five (1-5) for differentiation, integration and innovative performance. For the control dominant culture, data was excluded from the analysis if the total score across the four quadrants of cultures did not equal the score of 400. From the sample, data of 11 respondents was removed from the accordingly. The research method adopts existing instruments from similar research fields for the analysis of organizational innovation. These are described in detail in the following sections.
3.2.1 Differentiation
Adopting the construct of Abernethy, Bouwens and van Lent (2004) to measure the level of differentiation, this paper uses an adjusted instrument of Gordon and Narayan (1984) to capture the ‘real’ level of authority of decision-making (operational) managers’ experience within their business unit. By directly asking managers on outcomes of corporate coordination mechanisms certain patterns may emerge. The level of differentiation consists of a range of decision-making authorities on 5 topics. Managers are being asked to rate their decision-making authority on strategic, investment, marketing, internal procedures and human resource activities. The single items on the aforementioned activities from this construct are measured on a 5-point scale, where the score of 1 represents that the respondents’ superior has the decision-making authority and a score of 5 represents (full)
decision-making authority for the respondent. The level of differentiation is measured as the average score of the five items. Factor analysis is used to check factor loading on a component. The relevant survey questions and results from the factor analysis are presented in Appendix C. Results on the reliability (α = 0.71) indicate the adequacy of the instrument to measure the level of differentiation. Even though human resource decisions have a low factor loading (0.337), the item is still used in the analysis, based on the proven validity of the construct in previous research (Abernethy, Bouwens, van Lent, 2004).
3.2.2 Integration
In order to measure integration, the measurement instrument of van der Stede (2001) is used. Budgetary tightness is used as a proxy to capture the level of integration. The level of budgetary tightness is dependent upon the (acceptance of) budget deviations, detailed budgets and the emphasis on meeting budgetary targets. Measurement is based on a 5-point scale where the behavior of a respondents’ superior manager is analyzed from the respondents’ perspective. A score of 1 represents a tight involvement from superior managers and a score of 5 represents a lower level of direct involvement from a respondents’ superior manager. Results on the reliability (α = 0.74) indicate this is an appropriate instrument to capture the level of budgetary tightness. The value of integration is calculated as the average score of the five survey questions. Further, factor analysis is used to confirm the factor loading on the same components. Results from the factor analysis and the survey questions are presented in Appendix D.
3.2.3 Organizational culture
The organizational culture is measured from using a competing-values model. The construct of Krakower and Niwa (1985) classified organizations in a quadrant of cultures, as previously described in chapter 2.3. Respondents are asked to distribute 100 points to capture the level of flexibility and control over four topics within their business unit. The topics range from business unit characteristics, leadership characteristics to the overall business unit emphasis and cohesion. Along these 4 topics, the sentences in the survey use organization A to D (see Appendix E). Organization A represents the group culture (α = 0.74), B refers to the developmental culture (α = 0.72), C represents the hierarchical culture (α = 0.62) and organization D represents a rational culture (α = 0.66).
The sum of the scores of survey items for A and B reflect the flexibility value score (see Appendix E). The items of survey items C and D stand for the control value score. The flexibility dominant score is computed as: flexibility value score – control value score. Descriptives are provided in table 1:
Table 1 Descriptives flexibility dominant culture
Value: Mean SD Minimum Maximum
Group culture (A) 136.40 54.78 30 300
Developmental culture (B) 94.07 47.78 0 210
Hierarchical culture (C) 91.79 42.16 15 220
Rational culture (D) 79.68 41.14 0 230
Flexibility dominant culture 60.78 120.03 - 300.00 340.00
A positive score indicates a flexibility control dominant culture, a negative score indicates a control dominant control culture. Organizations may possess characteristics of both a control dominant and a flexibility dominant culture within the organization. Thus, by measuring control and flexibility on a continuum instead of categorical scale, the relative score on a competing model continuous scale is measured. The reliability of this instrument is measured using Cronbach Alpha and indicate a proper construct. Furthermore, principal component analysis (see appendix E) indicates evidence of the 4 components for the relevant cultures, as described in chapter 2.
3.2.4 Organizational innovation
Organizational innovation is measured using the construct from Jansen, van den Bosch & Volberda (2006). Organizational innovation can be split into explorative and exploitative innovative performance. Explorative innovative is described as innovations aimed towards the production of new ideas and products. Exploitative innovation on the other hand, is characterized by the (continuous) aim to improve efficiency. This can be achieved by the improvement of current procedures and rules. The survey includes questions on both types of innovative performance. Building on the survey questions from this instrument, two components can be derived from the survey based on factor analysis (see Appendix F). Innovative performance as a whole has a Cronbach Alpha of 0.80. Explorative innovation and exploitative both have a reliable Cronbach Alpa of 0.75 and 0.78, respectively.
Research model 3.3
The hypotheses are tested using a regression analysis and tested for the interaction with organizational culture. A summary of the model is presented in Table 2 (p. 29). Panel A provides the relevant model where explorative innovative performance is the independent variable. The main dependent variables for this regression analysis are differentiation and control dominant culture. To capture the moderating effect, standardized coefficient of the product of centered differentiation and control dominant culture is analyzed. The same model is applied in Panel B, where exploitative innovative performance is the independent variable. Integration and control dominant culture are the relevant dependent variables. The moderating effect is calculated as the product of (centered) integration and control dominant culture. Furthermore, the results report the adjusted coefficient of determination to determine the fit of the model.
Further, the model includes the relevant expected associations, building on chapter 2. The relevant control variables are all expected to have a positive standardized coefficient. As the organizations’ orientation is more competitive, the organizations’ attention is directed towards gaining a competitive advantage by organizational change. Thus, higher levels of explorative innovation would be expected. When the organization has more opportunities to grow, an assumption is that attention is directed to gaining market value by expanding activities, in turn having a positive effect on explorative innovation. (Benner & Tushman, 2003) Further, for both explorative and exploitative innovation intuitively is expected that when managers are more orientated towards innovating, higher levels of innovation would be revealed from the model. As growth opportunities shift attention towards acquisition and new markets, current activities would not be to expected to subject of full scrutiny. Last, the assumption that higher competitiveness in the strategy would positively affect exploitative innovation to some extent, as organizations would try to improve profitability by revising and improving efficiency in current markets, customers, and activities (Jansen, van den Bosch & Volberda).
Table 2: Research models study
Panel A: Explorative innovative performance (IV)
Predicted
sign
No. Description Model 1 Model 2 Model 3
1 Differentiation + β β
2 Control dominant culture - β β
3 Moderator1 - β 4 Integration - β β β 5 Competitive Strategy + β β β 6 Growth Opportunities + β β β 7 Manager Innovativeness + β β β R2 - - - Δ R2 - - β = Standardized coefficient.
Panel B: Exploitative innovative performance (IV)
Predicted
sign
No. Description Model 1 Model 2 Model 3
1 Integration + β β
2 Control dominant culture + β β
3 Moderator2 + β 4 Differentiation - β β β 5 Competitive Strategy + β β β 6 Growth Opportunities - β β β 7 Manager Innovativeness + β β β R2 - - - Δ R2 - - β = Standardized coefficient.
1 Interaction effect differentiation and flexibility dominant culture = (X
i Differentiation - X Differentiation) × Xi Flexibility dominant culture 2
4 Results
In this chapter, the relevant results and findings from the application of the research method are presented. First, the relevant summary descriptives are presented. Section 4.2 provides the Pearson correlations for all variables. Section 4.3 provides the results from the regression and discusses the hypotheses from chapter 2.
Summary descriptives 4.1
Table 3 provides the main summary statistics of all included variables. Panel A presents the mean and standard deviation for all variables. In the sample, as measured on a five-point scale, the average level of explorative innovation is 3.26 (SD = 0.79). The average level of exploitative innovation is 3.44 (SD = 0.64). Thus, it appears that business units from this sample have a slightly higher level of exploitative innovation, indicating business units’ attention towards improving efficiency in current practices. Further, the levels of differentiation and integration have a mean of 3.29 (SD = 0.79) and 3.03 (SD = 0.75), respectively. This indicates business units’, on average, have slightly differentiated structures.
The organizational culture has a mean score of 60.78 (SD = 123.85), indicating that in this sample, on average, business units’ have a flexibility dominant culture. In the perception of the managers in the sample, competitive strategy (MEAN = 3.87, SD = 0.53), growth opportunities (MEAN = 3.47, SD = 0.71) and manager innovativeness (MEAN = 3.50, SD = 0.54) show that, on average, business units adopt a competitive strategy and operate in an environment where there are some growth opportunities. With regard to the manager innovativeness, managers see themselves, on average, as marginally innovative.
Table 3 Summary descriptives Panel A: Summary Statistics
Variable MEAN SD Minimum Maximum
1 Explorative innovation 3.26 0.79 1.00 5.00 2 Exploitative innovation 3.44 0.64 1.00 5.00 3 Differentiation 3.29 0.79 1.00 5.00 4 Integration 3.03 0.75 0.86 5.00 5 Organization Culture 60.78 123.85 300.00 - 340.00 6 Competitive Strategy 3.87 0.53 2.00 4.90 7 Growth Opportunities 3.47 0.71 1.00 5.00 8 Manager Innovativeness 3.50 0.54 1.25 4.75
Pearson correlations between all variables 4.2
Table 4 (p. 29) presents the Pearson correlations for all variables. There is an effect between explorative and exploitative innovation (r = 0.304, p < 0.01), indicating a correlation between the types of organizational innovation. Further, there is a significant effect between explorative innovation and differentiation (r = 0.323, p < 0,01). Integration does not reveal a significant effect with exploitative innovation.
These results provide some preliminary univariate evidence of a relation between differentiation and explorative innovative performance. Further, the effect between a flexibility dominant culture and explorative innovative performance is also significant (r = 0.205, p < 0,1). The other control variables included in the model are competitive strategy, growth opportunities and managerial innovativeness. There is a significant effect between competitive strategy and explorative innovative performance (r = 0.417, p < 0,01). Further, there is an effect between growth opportunities and explorative innovation (r = 0.384, p < 0.01). Last, the control variable managerial innovativeness and explorative innovation shows a significant effect of 0.338 (p < 0.01). For exploitative innovative performance one significant effect is reported. Having a more competitive strategy has a significant effect with the degree of exploitative innovative performance (r = 0.256, p < 0.01).
The coordination mechanisms, differentiation and integration, report some significant effects. There is an effect between the level of differentiation and a flexibility dominant culture (r = 0.184, p < 0.05). Last, there is also a marginally significant effect between manager innovativeness and differentiation (0.174, p < 0.1). Integration has a significant effect with competitive strategy (r = 0.173, p < 0.1). Thus, preliminary results indicate having a higher competitive strategy may coexist with higher levels of integration in this sample. Further, there appear to be some other effects between the control variables in this study. The level of competitiveness embedded in the strategy has an effect with both growth opportunities (r = 0.238, p < 0.05) and manager innovativeness (r = 0.246, p < 0.05). Further, there also is an effect between growth opportunities and manager innovativeness (r = 0.409, p < 0.01).
Table 4 Pearson Correlation between all variables
Panel B: Pearson Correlation between all variables
Description 1 2 3 4 5 6 7 8 1 Explorative innovation 1.000 2 Exploitative innovation 0.304 *** 1.000 3 Differentiation 0.323 *** 0.142 1.000 4 Integration - 0.017 0.001 0.040 1.000 5 Organization Culture 0.205 ** - 0.018 0.184 * - 0.161 1.000 6 Competitive Strategy 0.417 *** 0.256 *** 0.200 ** 0.173 * 0.069 1.000 7 Growth Opportunities 0.384 *** 0.041 0.103 0.132 0.028 0.238 ** 1.000 8 Manager Innovativeness 0.338 *** 0.137 0.174 * 0.093 0.051 0.246 ** 0.409 *** 1.000
Table 5 Regression analysis
Panel A: Explorative innovative performance
Predicted sign
No. Description Model 1 Model 2 Model 3
1 Decentralization + 0.196 ** †† 0.197 * ††
2 Flexibility dominant culture + 0.119 † 0.104
3 Moderator + 0.004 4 Integration - - 0.130 † - 0.102 0.194 ** †† 5 Competitive Strategy + 0.338 *** ††† 0.293 *** ††† 0.329 *** ††† 6 Growth Opportunities + 0.266 *** ††† 0.261 *** ††† 0.244 *** ††† 7 Manager Innovativeness + 0.124 † 0.211 0.104 R2 0.263 0.308 0.300 Δ R2 0.045 (4.5%) - 0.008 (- 0.8%)
Panel B: Exploitative innovative performance
Predicted sign
No. Description Model 1 Model 2 Model 3
1 Integration + - 0.005 0.007
2 Flexibility dominant culture - - 0.057 - 0.056
3 Moderator - - 0.039 4 Differentiation - 0.099 0.109 0.109 5 Competitive Strategy + 0.221 ** †† 0.224 ** †† 0.220 ** †† 6 Growth Opportunities - - 0.079 - 0.079 - 0.076 7 Manager Innovativeness + 0.095 0.096 0.092 R2 0.040 0.022 0.013 Δ R2 - 0.018 (-1.8%) - 0.009 (- 0.9%)
*, ** and *** denote 10%, 5% and 1% significance levels (two-tailed), respectively
