Product differentiation as strategy

Reading time: 3-4 minutes. In today’s business context characterized by extensive competition and technological change, organizations can gain competitive advantages by maintaining high innovation rates. How does product differentiation then affect the ability of organizations to drive innovation? And what is the relationship between strategy, management control systems and innovation? A group of researchers examined these questions.

MCS is described in the study in terms of control packages with three different controls. These controls are social networks, organic innovation culture, and formal controls. The researchers developed a model investigating whether product differentiation is associated with more extensive innovation through the three means of control.

Data was collected through a professional agency as a managed survey via questionnaires. Response was received from 100 executive directors in Russian industrial companies in the St. Petersburg region, which is a response rate of 21 percent. See survey model below.

Product differentiation

(Source: Chenhall et al., 2011., p. 101)


Product differentiation and management control systems

The researchers found that product diversification is actually related to innovation. In addition, product differentiation seems to encourage organizations to engage more in social networks and to implement organic innovative cultures as well as formal governance. This supports the arguments for the crucial role that strategy has in the formulation of controls. The result also supports the idea that innovation is more likely when organizations face ongoing challenges to develop a variety of products to meet customer needs. Organic innovation culture and formal MCS are directly linked to innovation, while social networks have an impact on innovation by acting indirectly through its association with organic innovation culture.


Practical implications

The result of the study has some practical implications for managers and decision makers:

  • Focus on product differentiation as strategy. Product differentiation drives higher levels of innovation.
  • Innovation is enhanced by social networks, organic innovation culture, and formal controls.



Chenhall, R. H., J.-P. Kallunki, and H. Silvola. 2011. Exploring the relationships between strategy, innovation and management control systems: The roles of social networking, organic innovative culture and formal controls. Journal of Management Accounting Research 23 (1): 99–128.

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