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Information Systems Strategic Alignment in Small Firms - INTRODUCTION, STRATEGIC ALIGNMENT, FUTURE TRENDS, CONCLUSION

business strategy example research

Paul B. Cragg
University of Canterbury, New Zealand

Nelly Todorova
University of Canterbury, New Zealand

INTRODUCTION

The concept of “alignment” or “fit” expresses an idea that the object of design—for example, an organization’s structure or its information systems (IS)—must match its context to be effective (Iivari, 1992). More recently, Luftman (2004) has taken this argument one step further and argued that a lack of alignment within an organization will limit the effectiveness of the organization’s business strategies.

The concept of alignment has become particularly important in the field of IS, as Luftman (2004) and others have argued that firms need to align their IS strategies with the other strategies of the business. For example, if a firm’s business strategy is to be a “cost leader” in its industry, then its IS strategies should support and enable “cost leadership;” for example, through effective supply chain management.

Much of the research on IT alignment builds on the work of Henderson and Venkatraman (1989), who identified four types of alignment within organizations. They developed a strategic alignment model that defined the range of strategic choices facing managers and how they interrelate. Their model is summarized in Figure 1, with four domains of strategic choice: business strategy, IT strategy, organizational infrastructure and IT infrastructure. They argue that alignment requires organizations to manage the fit between strategy and structure, as well as the fit between the business and IT. They named the four aspects of alignment as:

  • Strategic integration – the alignment between business and IT strategies
  • Operational integration –the alignment between business infrastructure and IT infrastructure
  • Business fit –the alignment between business strategy and business infrastructure
  • IT fit –the alignment between IT strategy and IT infrastructure

Typically, different researchers have focused on parts of the Henderson & Venkatraman (1993) model. For example, Chan, Huff, Barclay and Copeland (1997) focused on the link between business strategy and IT strategy, while Raymond et al. (1995) focused on the link between organizational structure and IT structure. Most of the recent research has focused on Henderson & Venkatraman’s (1989) “strategic integration”; that is, alignment at the strategy level. This type of alignment is now typically referred to as “strategic alignment.” This article focuses on strategic alignment, partly because there has been significant research in recent years that has focused on strategic alignment, but also because recent research indicates that alignment at the strategic level is important for all organizations that use IT.

STRATEGIC ALIGNMENT

Despite the wide recognition of the importance of IT alignment, studies have indicated that firms struggle to achieve alignment (Chan et al., 1997; Luftman 2004). For example, Luftman (2004) places most large firms that he has studied at an IT alignment maturity level of 2, on his scale from 1 to 5, where 1 is least mature/not aligned and 5 indicates mature/fully aligned. As a result, some researchers have examined factors that influence IT alignment in an attempt to understand how firms can best achieve alignment. In particular, Reich and Benbasat (2000) concentrated on the antecedents that influence alignment. In their study, they used the duality of strategy creation: an intellectual and a social dimension. The intellectual dimension refers to methods and techniques, while the social dimension refers to people involved and their role. Reich and Benbasat defined the social dimension of IT alignment as, “the state in which business and IT executives within an organizational unit understand and are committed to the business and IT mission and objectives.” Reich and Benbasat (2000) identified five major factors that influenced the social dimension of IT alignment: shared domain knowledge between business and IT executives, IT implementation success, communication between business and IT executives, connections between business and IT planning processes, and strategic business plans.

Luftman (2004) is another who has focused on enablers of alignment in firms, resulting in the following six enablers of IT alignment: communications between IT and the business, IT/business value measurements, IT governance, IT partnerships, IT scope and architecture and IT skills. Luftman (2004) outlines the content of each enabler. For example, “communication” includes six aspects, including communication by IS staff with the rest of the business and communication by the rest of the business with IS. He argues that all six enablers contribute to “alignment maturity,” and he encourages firms to evaluate all six enablers, then create project plans to improve the organization’s level of alignment.

The studies by Reich and Benbasat (2000) and Luftman (2004) show that alignment is influenced by a broad range of factors and that we have yet to reach a consensus on these factors. Importantly, both IT and non-IT managers and staff can influence alignment. They all make important contributions, so they must work as a partnership.

Although IT alignment has been discussed by many, there have been relatively few attempts to measure IT alignment. Chan et al. (1997) conducted one of the most comprehensive attempts to quantify alignment and its effect on organizational performance. Chan et al. (1997) developed four survey instruments to measure each of the following constructs: business strategy, IS strategy, IS effectiveness and business performance. Venkatraman’s (1989b) STROBE instrument was adapted for the business strategy instrument. A similar instrument was developed by Chan to assess IS strategy. As both instruments used the same eight dimensions of strategy, the two instruments were used to compute strategic fit. Chan found that alignment was a better predictor of performance than the individual measures of strategy, and thereby demonstrated a positive relationship between strategic alignment and business performance.

There is also some debate about how data should be analyzed when attempting to measure alignment. Matching and moderation are two of the many ways of measuring alignment (Hofacker, 1992). The matching perspective is commonly based on the difference between two measures. For example, if “cost reduction” was rated by a firm as having an importance of 10, and the IT support for “cost reduction” had a rating of 2, then the matching approach would use the absolute difference of 8 (i.e., 10–2), as an indication of the alignment of IT with the “cost reduction” strategy. Using the matching approach, alignment is thus the level of similarity between the measures.

Another common perspective is “moderation,” which assumes that alignment reflects synergy; for example, between IS and business strategy. Alignment is thus calculated as the interaction between the two measures. For example, if “cost reduction” was rated by a firm as having an importance of 10, and the IT support for “cost reduction” had a rating of 2, then the moderation approach would give this a score of 20 (i.e., 10 * 2), as an indication of the alignment of IT with the “cost reduction” strategy. The moderation perspective gives greater weight to, for example, a firm’s most important business strategies.

Chan et al.’s (1997) results supported the moderation approach. Bergeron et al. (2001) explored six perspectives of alignment and found support for both the matching and moderation approaches in part of their model, but concluded that more research was needed on the different perspectives.Cragg, King and Hussin (2002) found support for the moderation approach, as well as evidence that the matching approach could provide misleading results. Sometimes the matching approach could indicate high alignment when other indicators suggested that alignment was not high.

FUTURE TRENDS

As yet, we still know too little about IT alignment in small firms to offer much advice to managers of small firms. One of the most important research opportunities is to design a valid and reliable way of measuring IT alignment in small firms. A valid instrument will enable the study of many other aspects of IT alignment and provide a tool for managers of small firms. The instrument by Hussin et al. (2002) could be developed further through rigorous validation, as they reported mixed results for their nine strategy items so they used seven in their analysis. It may also be possible to adapt the instruments used by Ravarini et al. (2002) and/or Chan et al. (1997).

Other ways of measuring fit could also be developed, based on the Henderson and Venkatraman (1993) model. For example, they indicated four types of alignment. Hussin et al. (2002) focused solely on one of these; that is, the alignment between business and IT strategy. Further research could focus on other aspects of alignment in small firms. Also, even when studying alignment at the strategic level, it may be beneficial for a study to focus solely on a firm’s dominant business strategy. This focused approach could provide the opportunity to examine IT alignment with a particular business strategy; for example, service quality, to understand how service quality is best supported by IT. Some strategies may be easier to support than others. Also, some firms may be targeting IT at specific strategies.

Many small firms have achieved a high degree of alignment between their business strategy and IT (Cragg et al., 2002). However, we know very little about how this alignment was achieved. It may or may not have been planned using systematic frameworks, as argued by Blili and Raymond (1993) and Levy and Powell (2000). It seems more likely that the IT planning was informal (Lefebvre & Lefebvre, 1988). Further research could examine how small firms achieve IT alignment, and whether planning methodologies can be used to increase IT alignment in small firms.

Prior studies in large firms show that alignment is influenced by a broad range of factors (Luftman et al., 2004; Reich & Benbasat, 2000). Their findings could be examined in the context of small firms with the aim of identifying enablers of IT alignment that apply to small firms. For example, both IT and non-IT managers influence alignment in large firms. However, most small firms do not have IT managers or an IT department. Thus, small firm alignment in small firms requires further study, as it seems likely that not all of the factors identified by Luftman et al. (2004) and Reich and Benbasat (2000) are applicable to small firms. Less-formal aspects may be significant within small firms. For example, the multiple responsibilities taken on by some managers within small firms could mean that many managers are involved in strategy development. This would make it easy to share ideas about opportunities for IT, and thus foster connections between business and IT planning processes.

Cragg et al. (2002) used ANOVA to identify a positive association between IT alignment and small firm organizational performance. They used four measures of performance, including profit and sales. Performance was consistently higher in the group of firms that were most highly IT aligned. While they did not claim a causal link, the results were consistent with studies of larger organizations (Chan et al., 1997; Burn, 1996). The result also indicates that IT alignment could be a key to understanding the relationship between IT and firm performance. This is an area worthy of more research; that is, to better understand any relationship between alignment and outcomes like IT impact and firm performance. If alignment influences performance, what are the causal links? For example, does a lack of alignment lead to resources being wasted on non-productive activities; for example, more time spent seeking data? If we can understand the relationship better, then this is likely to indicate the ways that IT alignment could be improved to assist small firms.

The results of high alignment by some small firms imply that some small firms manage IT differently (Cragg et al., 2002). It seems possible that these varying levels of IT alignment are a reflection of " orientations"; that is, ways that managers and employees within firms view and treat IT, based on Venkatraman’s (1989b) “strategic orientations” of firms. The generic IS linking strategies proposed by Parsons (1983) may provide a good starting point for identifying “IT orientations.” Some of Parsons’ strategies may apply to small firms, particularly centrally planned, scarce resource and necessary evil. Also, Berry (1998) proposed a strategic planning typology for small firms. Furthermore, Joyce, Seaman and Woods (1998) identified “strategic planning styles” linked to process and product innovation in small firms. Importantly, these or other “IT orientations” may reflect IS cultures that have strong influences on IT alignment in small firms. As yet, “IT orientation” has not been researched in small firms.

CONCLUSION

The topic of IT alignment has received some attention in recent years, because studies have indicated that alignment has the potential to help improve our understanding of links between the deployment of IT and organizational effectiveness. To develop a better understanding of the concept of IT alignment and how it can be achieved, previous studies have investigated enabling factors, measures to quantify IT alignment and the development of processes to achieving alignment. Although theoretical frameworks have been proposed for IT alignment, relatively few have been discussed in relation to small firms. Previous research shows that frameworks developed for large firms cannot be applied directly to small firms. This paper suggests that some of the enabling factors may not be applicable to small firms, where managers have multiple roles and the planning process is more informal. Conversely, there could be additional factors affecting IT alignment, as previous research shows that many small firms lack the time and IT expertise for strategic application of IT, and do not develop IT strategies. Another major research opportunity is the development of an instrument that can be shown to measure IT alignment in small firms. Such an instrument would enable studies that examine the processes by which some small firms achieve IT alignment, as well as relationships between IT alignment and dependent variables like IT impact and organizational performance.

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