Summary Report: Strategic Alignment: Leveraging Information Technology for Transforming Organizations

Strategic Alignment: Leveraging Information Technology for transforming Organizations

Based on the paper of J.C. Henderson, N. Venkatraman (1993)

by

Philipp Maderthaner

A. Summary

Henderson and Venkatraman proposed a model for business - IT alignment; it was intended to support the integration of information technology (IT) into business strategy by advocating alignment between and within four domains (see figure 1). The inter-domain alignment is pursued along two dimensions: strategic fit (between the external and internal domain) and functional integration (between the business domain and the IT domain). The objective of this model was to provide a way to align information technology with business objectives in order to realise value from IT investments. The authors argued that the potential strategic impact of information technology requires both an understanding of the critical components of IT strategy and its role in supporting and shaping business strategy decisions and a process of continuous adaptation and change. Hence, they presented a model that defines the range of strategic choices facing managers.

Figure 1 Strategic Alignment Model

Two main imperatives for managers are pointed out by Venkatraman and Henderson: First, similar to business strategy, IT strategy has to consider both internal as well as external aspects. Second, both internal/external alignment as well as functional integration must be taken into account. Only one of them is not sufficient.

Overview about the four dominant alignment perspectives:

1. Strategy execution

This strategy assumes that an articulated business strategy is the driver of both organizational design choices and the design of IT infrastructure. The alignment is said to be the most common and widely understood perspective, as it corresponds to the classic, hierarchical view of strategic management.

Driver: Business Strategy

Role of Top Management: Strategy Formulator

Role of IT Management: Strategy Implementer

Performance Criteria: Cost/Service Center

2. Technology transformation

This alignment involves the assessment of implementing the chosen business strategy through appropriate IT strategy and the articulation of the required IT infrastructure and processes. This strategy is not constrained by the current organization design, but instead seeks to identify the best possible IT competencies through appropriate positioning in IT marketplaces.

Driver: Business Strategy

Role of Top Management: Technology Visionary

Role of IT Management: Technology Architect

Performance Criteria: Technology Leadership

3. Competitive Potential

This perspective is concerned with the exploitation of emerging IT capabilities to impact new products and services (business scope), influence the key attributes of strategy (distinctive competencies) and develop new forms of relationships (business governance).

Driver: IT Strategy

Role of Top Management: Business Visionary

Role of IT Management: Catalyst

Performance Criteria: Business Leadership

4. Service Level

The service level alignment perspective focuses - as the name shows - on how to build a world-class IT service organization. In this perspective the role of business strategy is indirect and is viewed as necessary to ensure the effective use of IT.

Driver: IT Strategy

Role of Top Management: Prioritizer

Role of IT Management: Executive Leadership

Performance Criteria: Customer Satisfaction

B. Questions

When one considers the fit between strategy and organizational structure, one talks about a fit between the external environment and internal factors. Why consider Venkatraman/Henderson IT both at the external and internal level, and not just as another internal factor like organizational structure?

Within the business domain Venkatraman/Henderson argue, that the fit between external positioning and internal arrangement is necessary for maximizing economic performance. This is not a very surprising statement if you are familiar with organizational design theories, where the so called "organizational fit" is one of the basic efficiency criteria for organizations. What Venkatraman/Henderson do, is adopting this logic to the IT domain, where this "fit" is - as they argue - equally relevant.

The motivation for the differentiation leads back to the change from IT's historical to its today's function and the associated assumptions about managerial thinking. In the historical view, IT has been more or less constrained to a support role being not really essential for business success. The consequence reflected in the opinions of executives, who implied IT to be a "cost of doing business". Since IT emerged as a critical enabler of business opportunities as well as a factor of comparative advantage it is imperative that firms also focus on the external perspective of IT strategy. So the role of IT changed - in contrast to the widespread feeling of executives, who have several problems with this new challenge. What the research of Venkatraman/Henderson showed is that managers are more often comfortable with their capability to understand positioning choices in the business marketplace than with their understanding of how to be strategically positioned in the IT marketplace.

Nevertheless IT strategy should be elevated from its traditional internal role to a more complex external issue of how well a firm is positioned in the fast changing IT marketplace. And - not to forget - managers should be able to follow this way.

The components of IT strategy and business strategy