The Nexus Between Information Technology And Competitive Strategy: A Conceptual

The Nexus between Information Technology and Competitive Strategy: A Conceptual Framework and Its Hypotheses Leelien Ken Huang, Y. J. Lin, T. T. Lin Feng Chia University, Taichung, Taiwan Curtin University of Technology, Perth, Australia Lingnan University, Tuen Mun, Hong Kong Corresponding Author: [email protected]

Abstract This research is to empirically examine the strategic alignment between IT management strategy and business strategy (i.e., competitive strategy) in Taiwan organizations for achieving sustained competitive advantage. Three streams of theory: contingency theory, resource-based theory, and general strategic management theory are used to construct the research model to examine the causal relationships between variables affecting such alignment, using a structural equation modeling approach. The objective is to establish the organizational impact of strategic alignment, given the environmental uncertainty and the importance of IT to the organization. This research would contribute by indicating some of the implications, for both decision makers and scholars, of an extended IT capabilities perspective on alignment mechanisms. This paper mainly presents conceptual part, the development of research constructs, research hypotheses, and data collection status since empirical work is in progress.

1. Introduction Today, concerns about the real business value of information technology (IT) still exist globally. Alignment between IT and business strategy is perennially at the top of top-ten lists of IT issues [13], [32]. Many organizations have invested heavily in IT in order to improve their outcomes [20]. Yet, this investment pays off for some organizations but not others (e.g., the productivity paradox [31] or the IT payoff paradox [13]). The research question below addresses the strategic planning process that helps align IT investment with business value in response to a particular environment. How does strategic alignment between IT management strategy and business strategy

affect the use of IT to create competitive advantage, given environmental uncertainty and the importance of IT to the organization? The research objective is to investigate the nexuses between factors influencing strategic alignment, and between strategic alignment and its impact on organizational performance (e.g., the use of IT to sustain competitive advantage) and to validate the model. Taiwan’s accession to the World Trade Organization (WTO) in January 2002 has dramatically increased competitive pressures on organizations as a result of intense rivalry from global markets. The aggressive nature of such competition has added complexity to the business environment. The level of uncertainty in this turbulent environment has increased [3]; giving rise to the need for more and better information [12] to allow Taiwanese top management to make the best decisions. The business value of more and better information provided by IT can be determined from the impact of decisions on an organization’s objectives [17]. In other words, IT plays a strategic role [37], [30] and is fundamental to the survival and growth of an organization [31]. Wiseman and MacMillan [56] stressed that organizations can use IT to create competitive advantage by adding value to present products and services. Porter and Miller [41] and King [29] argued that IT is used to gain competitive advantage by integrating IT and organizational structure. Raghunathan and Raghunathan [43] further posited that IT alters the organization’s strategic direction through information-based strategies. IT has become inextricably intertwined with business. Despite this, disputes regarding the effective application of IT are on-going [6], [54]. For example, from the practitioner’s perspective, IT exists to deliver business value to the organization. Yet, that value is elusive for decision makers because of issues such as

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the business value of IT, and the real effect of IT investment on the organization. From the academic perspective, evidence in the literature shows that some organizations using IT have seized competitive advantage [24], [45], while others have ended up playing this difficult and expensive game without deriving any benefits from IT [36]. Therefore, aligning IT investment strategies with business objectives becomes a key factor for sustaining competitive advantage. In addition, IT capabilities may play a moderating role that affects strategic alignment, and are viewed as organizational capabilities [6].

2. The Foundation Although the literature on IT strategic planning processes has been growing, only few empirical studies associating strategic alignment with competitive advantage exist. Since available theories on which to base our research model are limited, the major theoretical perspectives selected are drawn from contingency theory, resource-based theory, and strategic management theory.

2.1. Contingency Theory Two current perspectives of contingency theory (CT), derived from Thompson's [51] concept of uncertainty are: effectiveness [53] and resourcedependency [40]. Organization effectiveness can be achieved in more than one way, and depends on appropriate matching (or fit) of contextual factors with internal organizational designs [53]. Resource dependency further emphasizes environmental adaptation in the face of dependency on external organizations [40]. It has been more explicit about a manager’s exercise of strategic choice within these external constraints [25]. Within these two perspectives, four relevant CT–IT concepts are briefly summarized as follows. 2.1.1. Strategy Formulation. Strategy formulation reflects an organization’s response to its particular environment and mediates the effective organizationenvironment relationship [1]. Hence, CT helps organization strategy formulators (e.g., top management) identify alternative strategic options to match various internal and external characteristics of the organization [10], [16], [26], [35]. Many scholars have considered the IT–business alignment process as strategy formulation [28].

2.1.2. Organizational Strategy. Within CT, organizational strategy is a generic view that postulates the existence of commonalities among organizations by adapting to the environment and sustaining competitive advantage [41]. In many strategic option studies, the well-known business-level strategy implication framework of Miles and Snow [34] is used, because it focuses on strategy formulation at the total system level rather than at the subunit level. More importantly, it builds upon “distinctive competence” [17]. Each of Miles and Snow’s [34] four strategic types (e.g., defender, prospector, analyser, and reactor) has its own particular configuration of technical and administrative processes consistent with each strategy. Empirical testing has shown their strong correlation with the extent of ITΩbusiness strategy alignment [17], [19], [52]. 2.1.3. IT Management Strategy. The extent to which IT management strategy is pursued depends on the IT management sophistication of an organization [17]. IT management sophistication is defined as the progression towards increasingly formalized management of the Information Systems (IS) function [25]. A higher level of IT management sophistication indicates a significant formalization of planning [42], control [8], organization [7], and integration [21] of IT activities. In past IS studies, contextual factors such as the IS function and IT investment are characterized by IT management sophistication in exploring the strategy formulation practices associated with strategic IT [5], [24], [26], [45]. IT management sophistication should be linked to business strategy [17]. 2.1.4. Managerial Perceptions. Although CT emphasizes how external environmental constraints affect internal organization dynamics, Reich [44] argues that the extent of mutual understanding between chief information officers (CIOs) and chief executive officers (CEOs) would affect the fit between business and IT objectives [40]. In a sense, the perceived external environmental uncertainty is a key determinant of the type of IT [12], and affects the strategic deployment of IT [38]. To meet environmental demands, internal adjustment can be explained in terms of the perceived need to change strategic properties such as distinctive competence, capabilities and other internal resources [1].

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2.2. Resource-based Theory Embodying distinctive competence, heterogeneity, and internal resource constraint perspectives [4], [39], [55], the resource-based view (RBV) examines differences in accumulation of assets and asset specificity to determine why some organizations enjoy long-term success that cannot be attributed to external contextual factors (e.g., industry structure, entry barriers, powers of suppliers, and powers of buyers [41]. Further, success depends on an organization’s power to acquire and utilize resources, its capacity to innovate, and the ability of management to deploy resources effectively [47]. Two relevant RBV–IT concepts are briefly summarized as follows. 2.2.1. Sustained Competitive Advantage. For the sustained competitive advantage of an organization, its resources must be valuable, rare, inimitable, nonsubstitutable [14], and not easily duplicated by competing rivals [4], according to assertions of heterogeneity and immobility underling RBV. Despite few and immature empirical and theoretical studies on the relation between IT and sustained competitive advantage [23], the use of the former is treated as a possible source of the latter [11]. This is because IT is deeply embedded in formal and informal planning practices that may be rare, and which create socially complex systems (e.g., highly experienced IT management teams), which are costly to imitate [33], [4]. 2.2.2. IT Capabilities. Given that capabilities refer to an organization's ability to combine, integrate, and deploy valued resources [50], IT capabilities indicate the organization’s ability to mobilize and deploy ITbased resources through combination or co-presence with other resources and capabilities [6]. Successful IT capabilities are organization-specific. They create invisible assets through causal ambiguity and they leverage socially complex resources evolved over time [26]. Such invisible assets include IT management practices enabling the use of IT for sustained competitive advantage through strategic alignment processes [4].

2.3. Strategic Management Theory

external threats and opportunities, and creation and exploitation of unique organization capabilities [26]. In a sense, SMT defines achievement of sustained competitive advantage as the appropriate match of internal organizational capabilities and external environmental uncertainty [2]. Two relevant SMT–IT concepts are briefly summarized as follows. 2.3.1. Planning Process. The planning process is a complex activity periodically examining corporate vision/mission statements, strategies, and committed resources. Such a process needs the participation of all key managers (e.g., CIOs and CEOs) [18]. Contextual factors, such as internal organizational attributes, and external environmental uncertainty, are also examined in the decision-making process and help advance IT development [26]. Therefore, IT research has relied on insights from SMT into the influence of contextual factors and opportunities exploited for competitive advantage [24]. 2.3.2. Strategic Alignment. The planning process may involve perceived internal need for change [1], including strategic alignment. Despite many challenges to the direct relation between IT and organization performance, a particular relationship between IT and business strategy can be accurately described by alignment [19]. Researchers have argued that the inability to realize value from IT investment is, in part, due to mismatch between IT and business strategy [32]. In this sense, properly exploiting IT as a strategic resource has been viewed as important for sustained competitive advantage [41].

3. The Conceptual Model and Research Hypotheses Many studies have recognized the influence of external environmental and internal organizational attributes on alignment of IT–business strategy. In contrast to Reich [44] and Jang’s [22] models, which do not include the relationship between strategic alignment and organizational impact, and Chan [9] and Kearns’ [26] models, which do not include the role of IT capabilities and their importance to the organization, this research is based on the model below and on the hypotheses formulated to clarify the relationships between the components.

According to the literature on CT and RBV, strategic management theory (SMT) provides three conditions essential to an organization's success: formulation and implementation of business goals, identification of internal strengths and weaknesses with

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Perceived Environmental uncertainty

IT Capabilities

H1,H2, H3 IT Importance H4, H5, H6, H7, H8

H10

IT Management Sophistication

H12

H11

H9

H13 Alignment Impact on Org. Performance

Business Strategy

Stage 1:

Strategic Alignment

Stage 2:

Stage 3:

Perceived External Factors Strategy Formulation Perceived Internal Change Figure 1: The Conceptual Model Note: solid line indicates path between constructs; dotted line indicates alignment process

3.1. The Conceptual Model Based on the three reference theories, Figure One presents the integrative conceptual model that contains factors affecting the alignment of IT and business strategy and their relationship with the hypotheses. In the model, the perception of the relation between IT and business strategy under conditions of environmental uncertainty, which, in turn, affects the importance of IT, is the key to top management using IT strategically toward achieving sustained competitive advantage. The model consists of three stages: perceived external factors, strategy formulation, and perceived internal need for change. The three stages represent the strategic planning process used by a Taiwan organization to respond to its environment. During the process, the perceived environmental uncertainty affects the importance of IT to the organization, where top management values IT as a strategic asset. The importance of IT to the organization then influences the extent of strategic application of IT and the evolution of key IT planning practices, referred to as IT management sophistication. The extent of IT management sophistication that results in increased understanding, between CIOs and CEOs, of the strategic value of IT can be a determinant of a unique

asset to distinguish business strategy. Different types of IT capabilities are needed with respect to the extent of IT management sophistication under various business strategies. IT capabilities may moderate the alignment of ITΩbusiness strategy, which assures a mapping of IT applications to business strategies that sustains competitive advantage. The constructs, each with its theory base and major measurable dimensions, are described as follows. 3.1.1. Antecedents: Factors Affecting the Alignment Mechanism. The Perceived Environmental uncertainty and IT importance to the organization constructs rely on both CT and SMT. Three dimensions define the environmental uncertainty construct: dynamism, hostility, and heterogeneity [27]. Four dimensions indicate the IT importance to the organization construct: top management’s perception of the IT role, strategic grid position, information intensity of products and services, and information intensity of the value chain [26]. 3.1.2. IT Ω Business Strategy Alignment Process. The IT management sophistication and business strategy constructs rely on both CT and SMT, while the IT capabilities construct relies on RBV. The IT management sophistication construct is indicated by

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the extent of strategic formalization of planning, control, organization, and integration of IT activities [17]. The business strategy construct comprises four strategic types: defenders, prospectors, analysers, and reactors [34]. The IT capabilities construct comprises IT infrastructure, human IT resources, and IT-enabled intangibles [6]. 3.1.3. Posteriors: Strategic Alignment and its Impact on Organizational Performance. The strategic alignment and its impact on organizational performance constructs rely on CT, RBV, and SMT. The strategic alignment construct is indicated by the alignment of the IT plan with the business plan [26]. The impact on organizational performance construct is defined by the use of IT to sustain competitive advantage [26].

3.2. Research Hypotheses To answer our research question, several research hypotheses are proposed. Due to the limit of page length, we only list key arguments in support of our hypotheses in the following paragraphs.

3.2.1. Stage 1 and 2: Antecedents. Dynamic environment increases the organization’s need for information resources that enable inter-organizational linkage [24], [46]. Heterogeneity affects IT importance because it creates the need for more extensive analysis, greater innovation, and differentiation in products/services [45], [46]. Strategic IT application is more likely to exist in organizations with a hostile environment and consequently be more important to top management [45], [46]. Hence, this leads to: Hypothesis (H1): Perceived environment dynamism positively influences the importance of IT to the organization. Hypothesis 2 (H2): Perceived environment heterogeneity positively influences the importance of IT to the organization. Hypothesis 3 (H3): Perceived environment hostility positively influences the importance of IT to the organization. To exploit IT strategically, the CEO must view IT as a means of gaining sustained competitive advantage [23], [37]. The strategic grid guides a CEO in evaluating how critical IT is to realizing organizational goals, thus assisting the CIO in determining the IT function [43]. Organizations with products and services characterized by high

information intensity are in a better position to exploit IT strategically [24]. In organizations where the information component of value-adding activity is significant, the CIO is more likely to participate in business planning, the CEO is more likely to participate in IT planning, and the IT function is more likely to engage in strategic planning practices [41]. Hence, this leads to: Hypothesis 4 (H4): Top management’s perception of the strategic role of IT positively influences IT management sophistication. Hypothesis 5 (H5): The importance of existing strategic IT application positively influences IT management sophistication. Hypothesis 6 (H6): The importance of future strategic IT application positively influences IT management sophistication. Hypothesis 7 (H7): The information intensity of products and services positively influences IT management sophistication. Hypothesis 8 (H8): The information intensity of the value chain positively influences IT management sophistication.

3.2.2. Stage 2 and 3: Alignment Process. Depending on competitive strategy, an organization may have distinctive competence in different aspects of IT management sophistication [17], [25], [26]. Hence, this leads to: Hypothesis 9 (H9): Business strategic type differs with the extent of IT management sophistication. Hypothesis 10 (H10): The extent of IT management sophistication differs with IT capabilities.

3.2.3. Stage 3: Posteriors. Competitive advantage can be sustained from key IT management practices evolving over time to use internal processes to create a unique IT-based and enabled asset, adjustable for threats and opportunities posed by external environment uncertainty, to leverage distinctive core resources [4], [17]. Hence, this leads to: Hypothesis 11 (H11): IT management sophistication positively influences the alignment of the IT plan and business plan. Hypothesis 12 (H12): IT capabilities positively influence the alignment of the IT plan and business plan.

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Hypothesis 13 (H13): The alignment of the IT plan and business plan positively influences the use of IT to sustain competitive advantage.

4. Research Methodology The population is concentrated in a single industry sector: the Taiwanese information-intensive industry. The participating organizations include ROCSIC codes 51-55 (Wholesale and Retail Trade), 57 (International Trade), 61 (Transport), 63 (Communication), 65-67 (Finance and Insurance), 68 (Property Services), 71-79 (Business Services), 82 (Educational, Social and Health Services), 83-85 (Publishing, Radio and Television Services) and 88 (Hotels). To ensure sufficient sample size and generalizability, a stratified sample of 1000 organizations is randomly selected from China Credit Information Service, Ltd (ROC). The expected response rate is about 20% to 25%, a typical response rate for studies of this kind [52]. A survey questionnaire with seven-point Likert-type scales is used. The design of the questionnaire is guided by the studies of Benbasat, Dexter and Mantha [5], Gupta, Karimi, and Somers [17], and Kearns [26], for testing research hypotheses. The questionnaire focuses on variables for antecedents, IT Ω business strategy alignment processes, and posteriors. In addition, a self-typing approach [49] is used to assess business strategies using the Miles and Snow framework [34]. The reliability and validity for the self-typing approach are excellent [48]. CEOs and CIOs are selected as the respondents because they are perceived as the most knowledgeable [15] about the organization with regard to strategic positioning, internal organizational processes, and IT resources and activities. This research is currently at the stage of pilot testing. To ensure content validity and reliability of survey items, this research invites IS doctoral students and professors to review the preliminary English version of the questionnaire. Two professors from IS departments have reviewed the Chinese translation of the questionnaire to ensure that the meaning of the questions is not altered, that the terminologies and technical terms are translated accurately, and that the participants understand the instrument. The Chinese version of the questionnaire has been tested with 50 sets of participants for further confirmation of the presentation of the questions. In each set, participants include both CIOs and CEOs. The result shows that the survey items are meaningful.

5.

Significance of the Study

In terms of theory, this research has considerable implications for the validation of a mid-range theory (e.g., CT) of the IT-business strategy linkage. Emerging empirical evidence has shown that IT does not necessarily create a competitive advantage, and that there may not be a direct relationship between IT and performance. So, we use RBV to view how IT capabilities are related to the organization’s strategic posture and overall organizational performance. In terms of practice, this research has the potential to generate meaningful business implications for Taiwan managers seeking to align IT and business as a means of increasing business value and performance. Moreover, the empirical study on the implication of IT capabilities is at present limited and fragmented. We will specify IT capabilities for supporting IT management strategy.

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