External Funding

Controlling Innovation in Complex Organizations

The Independent Research Fund Denmark (DFF/FSE), 2017-2022

Many firms have delegated innovation: rather than tasking only a central research and development center, firms seek to harness the creative capacity of the entire organization. When delegating innovation to lower organizational levels, however, corporate managers must coordinate a complex system: multiple units that innovate within their individual purview, but which are interdependent in various ways and thus collectively shape the organization’s behavior.

But how can managers then ensure that the units engage in the “right” innovation efforts – those that are best for the organization as a whole and that balance incremental refinements of existing competencies with the discovery of novel and radically different ones?

One lever through which managers direct the collective actions of such complex organizations is through firms’ control systems: managers design goals and strategic plans for lower-level units, provide performance feedback, and adjust goals and plans accordingly. Our understanding of how to control innovation, however, is limited by two gaps in extant theory:

  1. an aggregation problem: how lower-level innovation efforts in response to a control system translate to organization-level outcomes
  2. and an adaptation problem: how the control system itself should adapt, given that innovation is often triggered by a changing environment

Combining work in organization science with insights from management accounting and control theory allows addressing these questions.