Business Strategy, Structure and IT Alignment

INTRODUCTION

The structure of production during the last decade has been changed radically. The importance of design, flexibility, quality, and dependability increased. The main motive behind that restructuring seems to be the qualitative and quantitative diversification of demand (regulatory, technology, and other issues can be mentioned as well). The diversification of demand forced production to be more flexible in order to accommodate the environment’s variations. Information systems (IS) proved to be a perfect ‘partner’ for the enterprise who wants to move along at this pace: to increase competitive advantage and retain its competitive position in the market. The capabilities of information technology (IT) for increasing competitive advantage forced management to consider IT in the strategic planning process and to consider IT not as a mere tool of bolts and nuts, but as a strategic partner. The key for the successful IT-IS adoption is the strategic IT alignment model. According to this, IT should be aligned with organizations’ structure and employees’ culture in order to avoid resistance and increase core competence at the strategic level. But the strategic options offered by advanced IT investments are not appraised by using the usual hard financial criteria. Instead, Black and Scholes developed a financial formula to valuate derivative financial products and open the road to valuate options offered by real investments. Thus, the application of Black and Scholes’ formula offers an opportunity to valuate financially strategic IT investment.
The importance of alignment among IT-business structure and strategy-environment is increased strategically, but the relationship among all those variables is complicated. Generally, in the classical strategy school, strategy is determined by environmental uncertainty. Structure (as well as technology) should follow the needs of strategy, and advanced information technology must be aligned with business strategy and structure. This alignment is a prerequisite for the creation of competitive advantage. Information technology is a key element of structure to bypass environmental uncertainty. In this model, other contingencies like size, age of organization, political forces, regulatory framework, and so forth must be taken into account as the interaction among all those factors forms the alignment model.


BACKGROUND

The concept of alignment has been widely examined in strategy and organizations’ theory literature, underlying the contingency theories and constituting the groundwork of management of technology and strategy of information systems. Strategic alignment and strategic fit have been among the top concerns of business executives (Rodgers, 1997; Brancheay, Janz & Wetherbe, 1996) and the core concept in the normative models. Alignment literally means an arrangement of groups or forces in relation to one another. The determination of those forces is an important aspect of strategic alignment research. The following aggregate variables are commonly found in many alignment models: environment uncertainty, business structure, information technology (IT), and business strategy. Among those variables, Miles and Snow (1984) determine strategy as the basic alignment mechanism, and organizational structure and management processes as the internal arrangements. In the classical school of strategy, environment has the most important role as a determinant of strategy. Structure follows the alterations of strategy, while the role of IT is collateral. Strategy follows environmental variations and determines the structural form. IT as a part of structure follows strategy as well. In contrary to this view, Mintzberg and Quinn (1996) proposed a bottom-up approach that is free of the ‘environmental biased’ (Theodorou, 1997). Practical experience shows that variables which should be aligned are interrelated in a multidimensional way; but for the sake of simplicity, a simple bivariate approach is usually used among: environment strategy, structure strategy, IT strategy and IT structure.
Moreover, it should be mentioned that the concept of alignment in business strategy has two dimensions (Horovits, 1984; Reich & Benbasat, 1999)-the intellectual (interrelated IT and business plans) and the social dimension (understanding and commitment of participants). Furthermore, alignment is more an ongoing process and not a stable state, thus sustainability can be gained only by continuous efforts. No strategy is universally superior, irrespective of the environmental or organizational context (Venkatraman, 1989). A flexible structure that follows demand capable to produce in low volume, low cost, and high quality needs long-term investment. Strategic alignment enables enterprises to avoid over-simplicity while targeting competitive and distinctive advantage assisting to dominate in competition (Drago, 1999). According to that concept, business strategy should evolve while taking into account the impact of IT. On the other hand, if information technology is applied without taking into account the strategic targets of cost, design, quality, flexibility, and dependability, then only operational benefits will be created without any impact on competitive advantage.
Generally the strategic alignment problem has multiple dimensions, but the main determinants are the following: environmental uncertainty, business structure, IT and business strategy. Except for the previously mentioned variables, we could refer business culture, managerial knowledge/processes and individual roles, the regulatory issues, political forces, and so forth. The alignment model should consider among other contingencies the impact of industry and competitive change (particularly under the influence of IT and the generic strategies in the strategy portfolio), the strategic changes induced by IT that affect the reengineering of internal and external value chain, the IT capabilities that shift or expand the business scope and domain, and finally, the size and the age of the firm. In the “management in ’90s” research framework, Morton (1991) illustrates some of the various aspects of the firm that must be considered in the alignment process. In this model, strategic fit is defined by looking at the IT potential to shape and support business strategy; alignment at the organizational level is defined by looking at organizational infrastructures and processes. Thus, four perspectives of alignment arise: the strategy execution, the technology, the competitive potential, and the service level. Moreover, four alignment mechanisms are identified: value management, governance, technological, and organizational capability. Misfit and misalignment is responsible for why many IT applications are not meeting expectations and do not cover the needs of the company.

MAIN THRUST OF THE ARTICLE

As previously mentioned, the concept of strategic alignment has various dimensions. The most important according to the bivariate approach are business strategy, business structure, information technology, and business environment. Thus, the interrelation among those variables captures the purpose of the alignment model. The external environment is characterized as dynamic, if the firm experiences often exogenous changes, such as: product design by competitors, variability in time of deliveries (by suppliers), high growth in market share, changes in relative market share, changes and innovation in information technologies adapted by competitors or offered in the marketplace, and so forth. Every source of uncertainty which the firm realizes from the external environment (capable to affect competitive advantage) is a main drive to reconsider the alignment mechanism. Through strategic analysis the firm realizes (if possible) the changes in the external environment to take action realigning the business structure in order to reply to competition. Information technology in this context offers the flexibility needed for quick and efficient response. Thus, the relation of information technology and business strategy and structure is ofvital importance. Following, we will present the strategy-IT and structure-IT alignment.

Strategic Alignment of Advanced IT

An important aspect of strategy and IT alignment was to correspond the strategic content with IT capabilities, in other words, IT to strategic objectives, and examine how they are affected. That topic is basically investigated in strategic information system literature where matrix models developed in order to determine strategic alignment. Porter’s work comprised the basis for the development of strategic information systems even though his model is more familiar in strategic management literature. Neumann (1994), in his topic about strategic information systems, denotes that Porter’s model of ’5-forces’ is the framework of frameworks. Specifically, regarding the strategic objectives, Porter attempted a generalization of specific strategic targets, the so-called generic strategies, which are: cost, differentiation, and focus (niche) strategy. Furthermore, Wiseman (1998) extended that logic by adding the strategic targets of alliance, growth, and innovation. Generally, business strategy should take into account IT in order to generate strengths and attain opportunities that increase competitive advantage. Competitive advantage from IT can be derived by taking into account the opportunities that can be exploited from the 5-forces model; for example, how can the firm: build barriers to entry, build switching costs, change the basis of competition, change the balance of power in suppliers relationship, and generate new products? Moreover, the sustainability issue raised the importance of business strategy and IT integration. Strategic information systems literature tried to explain alignment among strategy and IT with the use of matrix models. Synnot made a composition of the Boston Consulting Group’s matrix and Porter’s generic strategies in order to identify IT strategic options and achieve strategic alignment. A well-known model for the attainment of strategic opportunities criticized for over-simplicity is the Strategic Grid Matrix developed by McFarlan (1984). The empirical research of Hirschheim (1982) indicates that regardless ofthe ‘simplicity problem’, an important benefit that arises is that the model forms the basis for a dialogue among management. Thus this model is helpful for consensus and agreement, which is a significant part of social alignment. An important upgrade of strategic grid was made by Ward (1987), who extended the hermeneutic capability of the model by incorporating IS/IT planning (for a composition of strategic grid and Ward matrix, see Theodorou, 2003). Based on this matrix, Parson (1983; also see Ward, Griffiths & Whitmore, 1994, p. 251) discussed alignment among generic and IT strategies. Parson’s generic IS/IT strategies include: centrally planned, leading edge, free market, monopoly, scarce resource, and necessary evil. The conclusion is that an organization will need to adopt a full range of generic strategies if it is to manage an extensive portfolio (Ward et al., 1994). Parson attempted a classification of IT applications according to the organization’s functions and Porter’s generic strategies. An important set of generic strategies is also found in manufacturing strategy literature. Based on the distinction made by Skinner (1985, pp. 78, 80, 88), Swamidass and Newell (1987), Adam and Swamidass (1989), and Swink and Way (1995), strategy is determined by priorities, and priorities determine the strategic direction. As can be seen from this literature, the generic business and IT strategies have been split up to more than five competitive priorities, and those priorities can be further split up to many tactics (for a more detailed analysis, see Theodorou, 1996b). The basic priorities are: design, cost, quality, flexibility, dependability, and innovation (Theodorou, 1997). Theodorou used a Likert scale to estimate the priorities of a firm, and further to detect the impact of IT using VACOR algorithm and based on the ROIC criterion. It was observed that higher performing firms follow the target of flexibility as a first-order priority, and late in the list was cost. That doesn’t mean that cost was not of interest, but on the contrary, that the cost target for those firms was achieved (Theodorou, 2001). Kathuria and Igbaria create a matrix in order to correlate organizations’ structure (from a functional view) with strategic priorities and IT, bypassing the limits of a two-dimensional approach. In this approach IT technologies and priorities are aligned according to the business functions (Kathuria & Igbaria, 1997).

Structural Alignment of Advanced IT

The theme of fit and alignment is central to any contingency model developed by organization theorists. Structure should be aligned with environment, taking advantage of IT capabilities. The target is to shape new forms of structure flexible enough to respond quickly to environmental threats and opportunities (Morton, 1995). Flexibility enables structure to interface with environmental uncertainty while taking advantage of IT potential. Venkatraman’s (1989) statistical conceptualization ‘opened’ the field of empirical research in testing strategic alignment, introducing the concepts of moderation, mediation, matching, covariation, profile deviation, and gestalt. Ivary (1992) references that the mediation perspective dominates in research, but omits the criterion of performance. Fiedler, Grover, and Teng (1996) attempted a taxonomy of IT in relation to structure without a performance criterion. Brown and Magill (1994) refer to the gestalts approach for the identification of the form of centralization. Furthermore, Bergeron, Raymond, and Rivard (2001) found that moderation and matching perspective confirm the performance implications for the structure-IT pair under the strategic IT management approach. Generally, it can be seen that the prevailing concepts in structure-IT fit are: the matching, mediation, and moderation perspective. Those concepts, according to Raymond, Pare, and Bergeron (1995), can be presented as follows:
Matching: ((structure IT) Performance) Mediation: (IT structure Performance) Moderation: (IT (structure Performance)) Theodorou (1997) used performance as a criterion variable for structural variable analysis and determined IT-structure fit, using the moderate perspective for certain contingencies. In this model ’21′ (structural) variables try to grasp elements of structure in order to determine the structural design (organizational form) of the enterprise. Structural clusters were determined using VACOR algorithm. The impact of IT was estimated using the Newton Raphson algorithm and neural networks. It was concluded that the matching approach confirmed that high-performing organizational subunits matched a decentralized and differentiated structure with non-routine (flexible) technology (Theodorou, 1997; Theodorou & Dranidis, 2001). Once the firm makes strategic choices on IT, matching structures must be defined if the resulting performance is to be high (Raymond et al., 1995). If structure is to be defined in a more detailed mode, then the main structural variables and parameters should be determined (Theodorou & Dranidis, 2001).


FUTURE TRENDS: ALIGNMENT A REAL OPTION

Generic options are embedded in business strategy and business structure choice. As presented previously, the generic options regarding the strategic priorities can be conceptualized in cost, quality, dependability, and flexibility (for an extended discussion, see Theodorou, 2003). Additionally, business structure can take various forms (Mintzberg & Quinn, 1996). Theodorou and Dranidis (2001) developed a neural network system to determine business structure according to a set of structural variables, where different combinations provide different structural forms. Thus, options are embedded in structural design as well as in strategic priorities. Information technology must be aligned with business strategy and structure according to the demands of the external environment. Theodorou (2004) developed a DSS to determine the alignment mechanism for the above-mentioned variables. Strategic and structural options must be aligned within the external environment, taking advantage of information technology capabilities. Balasubramanian, Kulatilaka, and Storck (2000) noticed the importance of the relation among the real options and the alignment. They developed an approach using business capabilities from operating drivers and real options. According to this capability-based approach, valuation is contingent on market conditions and the degree of success in attaining the capabilities set as target (Balasubramanian et al., 2000).
But even if this framework can work well, in cases of IT applications with certain impact on sales (like e-commerce), it is not clear how it can be applied in IT applications with only operational benefits, where sales impact is superficial and only cost benefits can be encountered. In the case of the alignment model, a performance criterion (like ROIC or better a factor describing many performance estimates) can be employed in order to test if business structure, strategy, and information technology are aligned. Then the real options approach can be used on this criterion in place of exercise and spot price. Usually, analytical methods are used in a real options approach and are based upon the Black and Scholes formula, to estimate the options of abandonment, growth, and postponement (Kim & Sanders, 2002). In the classical approach the price of the asset (spot and exercise) is replaced with the NPV of the project. A basic step in that estimation is to derive the standard deviation from shocks in exogenous factors. In the case of the alignment model, standard deviation is estimated from shocks in strategic priorities and structural variables.
Reversibly, in the case of Black and Scholes, variance is derived from shocks on the financial variables (like prices, interest rates, etc.). The variability of choice in strategic priorities and structural variables produce variance in the strategic alignment model, and this is transferred in the criterion of performance which is applied in the option formula, in order to estimate the options of abandonment, growth, and postponement. The alignment model estimates the various strategic and structural options that can be found in the real context of an enterprise (Theodorou, 2004). The difficulty in IT valuation (and mainly in systems that automate operations such as CAM and MRPI) is that we can not estimate the currency inflows of the system. Alternatively, in the case where operational benefits, through cost reduction, can be encountered (like a database), two things can be done: a) discount the free cash flows, or b) estimate the strategic impact of efficiency on market share and estimate the MIRR on the differential revenues.
Generally, despite those two solutions, the mechanism of the alignment model with a performance factor can be proven more efficient and appropriate for implementation and valuation, as it takes into account all the available options in relation to business strategy and structure. Only under that concept can the benefits of information technology be fully valuated.

CONCLUSION

Firms, nowadays, operate in an uncertain environment, due to the qualitative and quantitative diversification of demand. Firms are targeting in small niches, trying to serve specific market needs. In this circumstance, the need for a flexible structure and strategy to bypass environmental uncertainty is increased. Information technology proved to be a good ‘partner’ to attain the strategic targets of this new environment. Computer-aided design, finite element analysis, concurrent engineering, and other techniques help to decrease the time to market and the cost of the new product’s design. Computer-aided manufacturing, DNC, and CNC machines enable the decrease of setup cost and produce economically smaller lots (batches) in order to serve smaller market niches, attaining economies of scope. Materials requirement planning for the West and just-in-time systems for the East automate the orders of material, and cut cost and time to market. Most of those systems (for a classification, see Theodorou, 2003) were integrated and popularized as MRPII or ERP in intranets or through the Internet.
The integration of those systems, along with the human factor, led to the emergence of strategic alignment theory. Alignment and fit seems to be very important in decreasing resistance and increasing competitive advantage. Key elements for the alignment to be considered by any firm are external environment, business strategy, business structure, and information technology. Business strategy should be aligned with the external environment and incorporate the information technology capabilities in the strategic plan. Information technology should fit with business structure and vise versa in order to serve specific strategic targets and priorities, like cost,quality, dependability, design, and so forth. Also, from the successful IT and business structure fit, strategic advantages can be created in an emerging pattern capable of influencing environment and strategy. It should be mentioned that alignment is not a stable state since environment is continuously changing, and strategy should accommodate respectively. Other contingency factors have to be taken into account like the age of the organization, the size, the culture, the power, as well as other historical factors specific for each enterprise.
A new challenge is opened for the application of the alignment model in the financial valuation of advanced IT systems. Hard financial measures proved incapable of evaluating the strategic impact and strategic role of those systems. Based on the alignment model, a proper choice of strategic priorities and structural variables can be made in relation to environmental uncertainty in order to create competitive advantage. Structural equation modeling opens the ground for an application. Structural variables and strategic priorities are the main latent variables that offer the options to be aligned under the performance criteria. Then, the performance factor can be used to estimate the options of abandonment, growth, and postponement based on the Black and Scholes formula.

KEY TERMS

Information Technology Competitive Advantage (ITCA): The increased profitability and market share by a better positioning due to strategy and structure selection based on the alignment model.
Information Technology Fit: The best relation that can be achieved in a strategic alignment model among information technology, business structure, and business strategy.
Strategic Alignment Model: A model to help appropriate selection of strategic priorities and structural variables. Incorporates a dynamic interaction among business strategy, structure, information technology, and environment, while taking into account the most important contingencies like: the age, the size, the culture, etc.
Strategic Information Systems: Information systems that increase competitive advantage in a long-term horizon, with more than operational benefits, such as better positioning and increase in market share.
Structural Design: Forms of structure derived by optimal combinations of structural variables with information technology and business strategy in a way that increase competitive advantage.
Structural Variables: The most important elements of structure (variables) that characterize and form the structural design (span of control, levels of hierarchy, level of standardization, etc.).

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