Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

Survey of Strategic Alignment Impacts on Organizational Performance in International European Companies

Hajer KEFI Associate Professor CREPA, University of Paris-Dauphine Place du Marchal-De-Lattre-DeTassigny 75016 Paris France hajer.kefi@u-picardie.fr Michel Kalika Professor CREPA, University of Paris Dauphine Place du Marchal-De-Lattre-DeTassigny 75016 Paris France Michel.kalika@dauphine.fr

Abstract The strategic use of technology based information systems (IS/IT) is a fundamental issue for every business. This is particularly true in the case of firms that engage in international business activities. The present paper is part of an empirically oriented project to investigate the impacts of strategic alignment on organizational performance, especially in the case of European International Companies. We use Structural Equation Modeling to apprehend the strategic alignment concept as an emergent variable derived from the co variation of two components : (1) business strategy; and (2) the IS/IT strategy. Then, we explore the role of this emergent concept as a determinant of organizational performance. We use data from a large database constructed due to survey instruments to assess the usage of IS/IT among European firms. 505 questionnaires have been exploited in this study. The results obtained will be presented and discussed in this paper. Key-words: Strategic alignment, organizational performance, co variation approach, structural equation modeling.

1. Introduction
The globalization of business reflects the view that most companies have to compete in a borderless environment. Challenges and opportunities are tremendous especially in the European Community, where profound changes have been experienced (common currency, restructuring of Eastern Europe, etc.). The European companies have to compete in an increasingly competitive global market. They have to undergo the continuous threats of new entrants and substitute products and the strengthening bargaining power of all their business partners, within or beyond the European frontiers (Kalika, et al., 2003). In this context, the achievement of sustainable competitive advantage requires dramatic business process changes, moving toward more flexible and agile structures. Strategic alliances and partnering can support and enable these transformations, via joint ventures, knowledge exchange, outsourcing, etc. Such arrangements can help companies (the small ones, as well as the giants) to target customers once beyond their grasp. Historically, the role of IT in the organization has evolved. It has been treated for a long time as a cost center or an expense rather than a strategic weapon (Alter, 1995). Since the 1980s, this role has been recognized as strategic (Porter and Millar, 1985). It has been considered as an enabler to achieve competitive advantage. For some 20 years now, the assumption that technology based information systems (IS/IT) provide a crucial support to operational and strategic business processes has been widely accepted (Luftman, 1996; Ward and Griffiths, 1997). However, empirical evidence that provides a good correlation between IS/IT alignment with business strategy and organizational performance is still needed. As stated by Sabherwal and Chan (2001): empirical research on the performance implications of this alignment has been sparse and fragmented.

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Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

Building upon the strategic alignment model (Henderson and Venkatraman, 1993) and a co variation perspective of the alignment mechanism (Van de Ven and Drazins and Venkatraman, 1989), we will try to examine whether the alignment between business strategy and IS/IT strategy correlates positively with organizational performance. A sample of 505 international companies mainly headquartered in the European Community and engaged in partnership and alliances will be used.

tellectual and social dimensions. According to them, intellectual linkage is achieved when the contents of IS/IT and business plans are internally consistent and externally valid. Whereas, social linkage occurs when IS/IT and business executives understand each others mission, objectives and plans. We consider the definition given by Henderson and Venkatraman (1993) as the most suitable for this study. These authors provide a comprehensive framework to approach the alignment concept and state it as the Strategic Alignment Model. In this framework, two distinct relationships are described: strategic fit and functional integration. Strategic fit is the external relationship concerned with the harmonization of business strategy choices (e.g. business scope, partnerships, alliances) and strategic choices concerning IS/IT deployment. Functional integration is the corresponding internal relationship concerned with organizational infrastructure and processes and IS/IT infrastructure and processes (Henderson and Venkatraman, 1993; Luftman, 1996). From this analysis, the authors identified four perspectives on business IS/IT interaction, termed: (1) business execution; (2) competitive potential; (3) IT potential; and (4) service level. Although the strategic alignment model introduces an original reasoning in the IS field, it provides mainly a descriptive view and does not help firms deciding what perspective to adopt in what circumstances. To address this issue, Luftman, Lewis and Oldach (1993) propose to identify the firm strengths and weaknesses to identify what are the components of the strategic alignment model that can be considered as: (1) the strongest domain or anchor, which is the driver of change ;(2) the weakest domain or pivot, which is the area that has to be addressed; and (3) the impacted domain, where the changes driven by the anchor occur in order to find solutions to the pivot. Some research studies have attempted to go forward this analysis. Papp, Luftman and Brier (1995) propose to consider independently (nonfusion) and simultaneously (fusion) the four perspectives; and identified 12 perspectives. More recently, Reich and Benbasat (2000) define two types of strategic alignment : (1) short term (business and IT executives understand and are committed to each others short-term plans and objectives); and (2) long term (business and IT executives share a common vision of the ways in which IT will contribute to the success of the business unit). We can also notice that a consensus appears among the body of research concerned with the

2. Theoretical Background
2.1 Defining strategic alignment
Numerous alternative terms have been proposed to refer to the phenomenon of IS/IT and business strategy alignment in the current IS and management literature. First, concerning the term strategy, many variations exist, some authors talk about objectives (Reich and Benbasat, 1996), others find more accurate the term plan or planning (Lederer and Mendelow, 1989; Teo and King, 1996, 1997). In this paper, we will refer to the IS/IT strategy as the major choices concerning the implementation and usage of technology based information systems within the firm (McFarlan, McKenney and Pyburn, 1983; Knight and Silk, 1990; Das et al., 1991). In a similar vein, Business strategy is defined here as the major choices that determine the firm positioning in the business arena (Porter, 1980). Regarding the term alignment, there is no consensus between researchers. Lederer and Mendelow (1989) define it in terms of co-ordination which can be achieved when the information systems strategy is derived from the organization strategy (p.6). They propose three domains of linkage : (1) content linkage, concerned with the consistency between business plans and IS/IT plans; (2) timing linkage, concerned with whether IS/IT plans are developed after, simultaneously or before business plans; and (3) personnel linkage, concerned with the degree of involvement of the different participants in the two planning domains, business and IS/IT. King and Teo (1997) explicit four types of integration that describe evolving strengths of the relationship between business and IS/IT strategy (administrative integration, sequential integration, reciprocal integration and full integration). Reich and Benbasat (1996) view this relationship in terms of linkage: the degree to which the IT mission, objectives and plans supported and are supported by business mission, objectives and plans (p.56). They define linkage in terms of in-

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Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

strategic alignment phenomenon: the alignment between business strategy and IS/IT strategy is recognized as a necessary prerequisite for companies to realize benefits form there IS/IT investments. Even though, empirical evidence that confirms this proposition is still needed. Only, a few studies propose to operationalize the strategic alignment concept and to demonstrate that a positive linkage exists between alignment and performance. Before examining this relationship empirically, we argue that contingency theory provides a good lens to view: first the relationship between the variables that define strategic alignment; and second the implications of this strategic alignment on performance.

studies, a positive relationship exists between the two variables. Fit as gestalt is related to a systems perspective, in which fit is understood as an internal congruence of many contingencies and performance criteria. It represented in an interpretive rather than a functional approach (Shin, 2003). Fit as gestalt is not commonly used in cross-sectional empirical studies. Fit as co variation represents internal consistency among related variables. According to Venkatraman (1989), co variation indicates the linkage (alignment) among considered independent variables. This author suggests that first-or secondorder factors from both exploratory and confirmatory factor analyses could be utilized to identify the unobservable state of linkage (alignment). This perspective has been used by Croteau et al. (2001) who have found that higher level of alignment implies higher level of performance. Fit as profile deviation assumes the viability of profile specification for variable associated to a criterion variable. Fit represents the degree of adherence to a specified profile and the level of fit is expected to affect performance (Shin, 2003). Sabherwal and Chan (2001) have used the profile deviation perspective and have concluded that alignment affects perceived business strategies, but only in certain organizations (p. 11).

2.2 Implications on Performance: A Contingency Approach

We use Venkatramans (1989) and Van de Vens and Drazins (1985) work on the concept of fit to discuss the implications of strategic alignment on organizational performance at a theoretical and an operational level. Venkatraman (1989) defines fit from six different perspectives: matching, moderation, mediation, gestalts, co variation and profile deviation. Fit as matching is a theoretically defined match between two related variables (Venkatraman, 1989). It is also related to Van de Vens and Drazins (1985) selection that considers fit as the result of managerial choice to achieve congruence to organizational context. Using this perspective, Chan et al. (1997) found that strategic alignment contributes to achieve higher levels of performance. To the contrary, another study (Palmer and Markus, 2000) using also the matching perspective has concluded that there is no linkage between the two variables. Fit as moderation (or interaction) refers to conformance to a linear relationship of context and design (Van de Ven and Drazin, 1985). Here, the impact of a predictor variable (design variable) on a dependent variable (performance) is moderated by a third variable (context variable). Alignment or fit is the interaction between the moderator and the predictor (Shin, 2003). Fit as mediation considers the perspective of the intervention between an antecedent variable (business strategy or IS/IT strategy) and a consequent variable (performance). The mediation perspective has been adopted in multiple empirical studies that assess the strategic alignment implications on performance, as in Bergeron and Raymond (1995) and Teo and King (1996). According to these two

3. Research study
3.1 Research Model

With this background, we now present a research model to examine the main research hypothesis in this study: The alignment considered as a co variation mechanism between business strategy and IS/IT strategy is positively correlated to organizational performance. This model is derived from the external component of Henderson and Venkatramans strategic alignment model (1993) called strategic fit. It proposes to link strategic alignment with organizational performance and considers fundamentally this alignment as the product -at a certain point of time- of the co variation between two independent variables: business strategy and IS/IT strategy. This major argument in our study is the basis for our choices of how the variables will be depicted and linked.

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Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

Business strategy Outsourcing / Partnership

Strategic Alignment

Performance

IS/IT strategy

Figure 1: the research model Business strategy is the first independent variable of the model. According to Henderson and Venkatraman (1993): this construct is concerned with decisions such as product-market offering and the distinctive strategy attributes that differentiate the firm from its competitors, as well as the range of make-versus-buy decisions, including partnerships and alliances. Many researchers have adopted the classical Miles and Snow (1978) typology of business strategy including Defenders, Analyzers and Prospectors, and have examined for each strategic type the linkage between alignment and performance (Croteau et al., 2000; Sabherwal and Chan, 2001). From a more pragmatic point of view, we will focus on a specific achieved business strategy based on partnerships and alliances. For instance, we argue that: (1) the deployment of business beyond the physical organizational borders, through outsourcing, externalization, delocalization and other modalities of partnership and alliances strategies are considered now as unavoidable for companies engaged in international business (Faulkner, 1995; Bartlett and Goshal, 1998); (2) IS/IT are recognized as a very useful support to these strategic choices because they create electronic linkages intra and inter-firms (Ives and Jarvenpaa, 1991; Reix, 2002, Kalika et al. 2003). IS/IT strategy is the second independent variable of our model. Henderson and Venkatraman (1993) argued that IS/IT strategy should be elevated from its traditional internal focus to address external issues of how the firm is positioned in the IT market place. These authors propose to consider both the external and the internal domains of IT. The external IS/IT domain involves at least three sets of choices: (1) Information technology scope (including local and wide-area networks, expert systems, etc.); (2) Systemic competencies required to take fully advantage of IT; and (3) IT governance, including the selection and use of mechanisms to obtain IT competencies. The internal domain of IT addresses at least three components: (1) IS/IT architecture; (2) IS/IT processes; and (3) IS/IT skills. In this study, we argue that the IS/IT strategy construct can be addressed through four major choices: (1) IS/IT perceived strategic role; (2) IS/IT systemic competencies: those attributes of IS/IT strategy that contribute to the creation of new business strategies or better support competitive advantage; (3) IS/IT architecture choices: the technical deployment of these information technologies; and (4) IS/IT processes choices: the work processes central to the operation of IS/IT infrastructure (Kalika et al. 2003) Strategic alignment is considered as an emergent concept resulting from the co-variation at a specific point of time between: (1) the attributes of business strategy: partnerships and/or alliances strategic choices; (2) and those of IS/IT strategy: IS/IT strategic role; IS/IT systemic competencies; IS/IT architecture choices; IS/IT processes choices. This approach is globally consistent with the original model of Henderson and Venkatraman (1993) who have explicitly termed: strategic alignment: the emergent concept. It is also applied in respect of the co variation alignment mechanism defined by Van de Ven and Drazin (1985) and Venkatraman (1989). Furthermore, a number of recent empirical works have adopted this approach (Croteau et al. 2001). Organizational performance is the ultimate dependent variable of the model. As noted by Bruce (1998, p. 17): if alignment is needed to facilitate optimum business benefit, how do we know when we have it? It is important to look at the impact IT is having on business results. Evaluating performance related to IS/IT in the organizations is certainly one of the major issues in the IS field (Delone & McLean, 1992; Brynjolfsson, 1993). Concerning the studies related to IS/IT alignment, the analysis unit being measured

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Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

is either IS effectiveness (Ma et al., 1998), competitive advantage (Kearns and Lederer, 2000) or IT business value (Tallon et al., 2000). In our model, we have chosen to focus on organizational performance and to measure it in a multidimensional perspective using five criteria: (1) productivity (addressed at the individual level); (2) Cost reduction; (3) Innovation capabilities; (3) reactivity capabilities toward business opportunities; (4) responsiveness to customer requirements; (5) collaborative relationships with business partners (Kalika et al., 2003).

all the questions are chosen from a 5-point Likert scale (from 1-strongly disagree, to 5-strongly agree). We have chosen the items that are the most relevant to operationalize our theoretical research model. In this model, strategic alignment is an emergent construct, resulting from the co-variation of the two constructs: business strategy and IS/IT strategy. As a latent variable considered as a secondorder factor resulting from a confirmatory factor analysis, no specific item is needed to measure this construct. Business strategy, IS/IT strategy and organizational are considered as first order factors measured with reflective constructs (observed variables: the items of the questionnaire). The table 3 depicts the four constructs of this model and their relating measurement criteria and questionnaire items.

3.2 Data collection and items identification

We have used data from a database constructed by the Cegos Dauphine e-management observatory to assess the IT diffusion (Cooper and Zmud, 1990) in the French and European companies. Data has been stored due to a survey consisting of two series of questionnaires: the first questionnaire investigates executives attitudes toward IT diffusion, usage and impacts in the firm; the second investigates how individuals experience IT implementation in their day-to-day life at the workplace. The survey is conducted once a year during a period of five years (2001- 2005). To test our research model, we have used data colleted in 2002 due to the first survey instrument (the executives attitudes). A total of 505 questionnaires were available for analysis (corresponding to 505 companies). 30% of the respondents were chief executives, 57% IT managers and 13% other business executives. 42% of the companies in the sample have multiple sites in the European Community, 22% are implemented worldwide. The manufacturing sector is strongly represented (49%), Telecommunications and IT services providers represent 6% of the firms studied. The other characteristics of the sample are presented in the tables 1 and 2.
50- 500 employees 501- 5000 employees > 5000 employees 75% 13% 12%

Table 1: The companies size

French headquartered European headquartered USA headquartered (and operating in Europe) 61% 28% 11%

Table 2: the companies origin The first survey instrument (used in our study) includes 74 questions. Number of them relate specifically to the four components of our model: business strategy, IS/IT strategy and organizational performance. This instrument has been pretested before being phone-administered by a specialized survey conducting company. Answers to

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Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

construct Business Strategy

Measurement criteria Partnership Business strategy choice Outsourcing Business strategy choice

Questionnaire items (Q8A): the business development of your firm strongly relies on partnerships (Q8B): the business development of your firm strongly relies on activities outsourcing (Q9): Top management is committed to the strategic use of IS/IT (Q12): IS/IT contribute to build distinctive comparative advantage to your firm (Q47): the Cooperative relationships with your strategic partners are supported by electronic linkages built upon IS/IT tools and architecture networks (Q29): the work processes within intra and inter-firms group projects are facilitated due to IS/IT (Q13B): IS/IT usage has increased the productivity of the members of your firm (Q13C): IS/IT usage has led to costs reduction in your firm (Q13D): IS/IT usage has increased the innovation capabilities of your firm (Q13E): IS/IT usage has increased the reactivity of your firm to environment stimuli (Q13F): due to IS/IT usage, the expectancies of the customers are more fully understood and satisfied (Q13A): due to IS/IT usage, the relationships of your firm with their partners (suppliers) have significantly shifted from rivalry to collaboration No Item

IS/IT strategy

IS/IT perceived strategic role IS/IT competencies IS/IT architecture choices

IS/IT processes choices

Organizational formance

per-

Individual productivity Costs reduction Innovation capabilities Reactivity responsiveness to customer requirements

Collaborative relationships with business partners.

Strategic alignment

Emergent variable (latent variable) No measurement criteria

Table 3: Items identification

3.3 Data analysis and results

The research model has been tested by structural equation modelling, using AMOS 4.0. The constructs business strategy, IS/IT strategy and organizational performance are considered as nonobserved or latent variables, measured by specific observed variables (the items Q8A, Q8B, Q9, Q12, Q29, Q47, Q13A, Q13B, Q13C, Q13D, Q13E and Q13F, see table 3). First, we examine if the overall model (the measurement model and the structural model, see appendix, figure 2) presents good fit for the data. As noted by Chin and Newsted (1995), there is no one

agreed goodness of fit measure for structural equation models. Various goodness of fit measures are used to compare the estimated population covariance based on the structural equation model with the sample covariance matrix that is calculated from the sample data. As recommended by Roussel and al. (2002), we propose to use absolute, incremental and parsimonious goodness-of-fit indices to estimate the structural model. Table 4 presents the indices obtained for this model and illustrates how they compare to the recommended indices and to the saturated model (where all the latent variables are interrelated).

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Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

Goodness-of-fit measures Chi-square Ddl GFI AGFI Holfers critical N RMR RMSEA NFI CFI Chi-square adjusted AIC

Observed values Absolute indices 119.802 52 .962 .943 294 .069 .051 Incremental indices .929 .958 Parsimonious indices 2.304 171.808 (156.000 for the saturated model) .341 (.310 for the saturated model) .641 Table 4: Goodness-of-fit of the model

Recommended None > .9 > .9 > 200 The closest to 0 <.08 > .9 > .9 As low as possible As low as possible (the closest to the saturated model) As low as possible (the closest to the saturated model) As high as possible

ECVI

PGFI

The overall fit indices are good. Therefore, the research model presented in figure 2 is plausible in the population. The regression coefficients and the squared multiple correlation coefficient R2 (which is similar to the determination value in regression analysis) can now be examined. For all the variables in the model, the correlation coefficients are significant (C.R > 1.96; Chin, 1998). The path coefficients represented in figure 3 (see appendix) are standardized partial regression coefficients. The strategic alignment variable is significantly correlated with both of the two independent variables of the model: Business strategy and IS/IT strategy. The squared multiple correlation for organizational performance is .759. The path from strategic fit to organizational performance is .871 (with a C.R = 10.671). This means that higher levels of strategic alignement lead to higher levels of organizational performance. The overall fit indices, the squared multiple correlation coefficients for the constructs in the model and the path coefficients lend support to the viability of the research model presented in figure 2 (see appendix).

business/IT alignment issue. This model has been tested in the context of European international companies that engage in partnering and outsourcing activities to deploy their business strategies at an international level. We have used Structural Equation Modelling to apprehend the strategic alignment concept as an emergent latent variable derived from the co variation of the two former components and their corresponding measures, rather than an observed variable measured by perceptual items. Then, we have explored the role of this emergent concept as a determinant of organizational performance. The major finding of this study stipulates that these companies are likely to attain higher levels of performance if their IS/IT strategy presents concurrently the following characteristics: (1) Top management is committed to the strategic use of IS/IT; (2) IS/IT are recognized as a support for building distinctive comparative advantage; (3) the Cooperative relationships with the firms strategic partners are supported by electronic linkages built upon IS/IT tools and architecture networks; and (4) the work processes in intra and inter-firms group projects are supported by IS/IT. This study provides support to previous empirical works. In this issue, further efforts are still needed to deepen the theoretical developments and to enhance them by empirical validation. Other research perspectives could investigate contingency factors (management style, IT functionalities, users characteristics, environment, size, etc.); or

4. Conclusions
This study proposed a theoretical model adapted from the strategic alignment model of Henderson and Venkatraman (1993) and from previous theoretical and empirical research studies related to the

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Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

conduct process-oriented studies that take explicitly into consideration time as well as the alignment context. The use of qualitative methodologies (case studies for example), rather than quantitative methodologies (surveys in multi sector field settings) is also recommended.

References
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Appendix
.

e3 e1 e2

Q8A Q8B
Business strategy

Q13A Q13C

e9 e10 e11 e12 e13 e15

e4 e5 e6 e16

Alignment
Q9 Q12 Q47 Q29
IS/IT Strategy

Q13D

Performance
Q13E
e14

Q13F Q13B

e8

Figure 2: The structural model

e3
.38

e1 e2 .20

Q8A Q8B

.62

.30 Business Strategy

Q13A
.54 .55

.29 .48 .56

e9 e10 e11 e12 e13 e15

.51

Q13C
.69

e4

.31

Alignment
Q9
0,56

.87

.75

Q13D Q13E Q13F

Performance
.76 e14

.75 .70

.57

e5 .35 e6 .16 e16 .28

Q12 Q47 Q29

0,59 040 0,52

.95

IS/IT Strategy
.90

.49

.70

Q13B

.49

e8

Figure 3: Results of the structural equation modeling

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10