TSINGHUA SCIENCE AND TECHNOLOGY

ISSN 1007-0214 15/26 pp348-354

  

Volume 13, Number 3, June 2008

Business Performance, Business Strategy, and Information System

Strategic Alignment: An Empirical Study on Chinese Firms*

DONG Xiaoying (Ռ໌࿧)**, LIU Qianqian (ঞሯሯ), YIN Dezhi (࿣ԃᄝ)

Department of Information Systems and Logistics,

Guanghua School of Management, Peking University, Beijing 100871, China

Abstract: The alignment between information systems (IS) and business strategy along with its implications
for perceived IS effectiveness and business performance is an important question, which is rarely studied in
China. Based on an empirical study, this paper summarized the significance of IS strategic alignment and its
impact on business performance. This study also measured business strategy, information system strategy,
and information system strategic alignment, built a conceptual model to describe the relationship between
these factors, and investigated their implications for information system performance and business perform-
ance. A structural equation model was employed to test the conceptual model. Analyses of data gathered in
a survey indicate that information system strategic alignment is a better predictor of business performance
than business strategy or information system strategy alone, although business strategy can significantly in-
fluence business performance.

Key words: business strategy; information system strategy; information system strategic alignment; informa-
tion system performance; business performance

Beath[2] pointed out the significant role of IS managers’

Introduction support to IT champions; Janz and Prasarnphanich[3]
described the importance of organizational learning.
Information systems (IS) and technologies are used to
Alignment between business and information system
leverage unique business competence, merge compa-
strategy is crucial among these factors[4].
nies, restructure industries, and facilitate global com-
The relation of IS to company strategy and the at-
petition. Numerous case studies on Chinese firms have
tainment of competitive advantage has been the focus
shown that information systems could support sustain-
of many discussions during the past decade, and the
able development of companies. The application of in-
importance of alignment between business strategy and
formation systems could optimize existing business
IS strategy is well recognized. From a contingency
processes and break through traditional business mod-
perspective, the change of environmental factors will
els[1]. In addition, the research in western countries has
impact business strategy and the alignment of IS strat-
shown that a great number of critical success factors
egy to business strategy will determine IS effectiveness
significantly affect the contributions of information
and business performance. Previous empirical studies
systems on business performance. For example,
have shown that the alignment of IS to business strat-
egy and activities increases with the superior perform-
Received: 2007-06-06; revised: 2007-12-20 ance of the company. For example, Chan and Huff[5]
γSupported by the National Natural Science Foundation of China
(No. 70671001) concluded that the organizations should provide IS to
γγTo whom correspondence should be addressed. support their particular business strategic orientation.
E-mail: dongxy@gsm.pku.edu.cn; Tel: 86-10-62757290
 DONG Xiaoying (Ռ໌࿧) et alġBusiness Performance, Business Strategy, and Information … 349

The results of these studies provide suggestions for performance, we should find reliable and reasonable
practitioners in IS field that the direction, priority of methods to measure alignment between business and
projects, staffing, and the use of IS function should be information system strategy and business performance
adjusted according to business requirements. The plan- and should put forward rational hypotheses on the rela-
ning and investments of IS portfolios of systems tionship between these factors.
should fit for the change of dynamic environment.
As part of business strategy, information system 1 Theoretical Development
strategy helps firms implement strategic plans, achieve
Henderson and Venkatraman[8] developed a model for
operational objectives, and gain competitive advan-
conceptualizing and directing strategic management of
tages in the end[6]. Compared to information system
information technology. This strategic alignment
development in developed countries, the dynamic
model is defined in terms of four fundamental domains
alignment of business strategy with information system
of strategic choice: business strategy, information
strategy in China is in a more difficult situation. First
technology strategy, organizational infrastructure and
of all, China’s transitional and emerging economy has
processes, and information technology infrastructure
experienced the reform and rapid development during
and processes. Two fundamental characteristics of the
the past two decades. In this period, state-owned com-
strategic management are illustrated: strategic fit and
panies are experiencing painful transformation of their
functional integration. Sabherwal et al.[9] studied stra-
business strategy and organizational structure. Private
tegic information systems management and described
companies, relatively young and small, are looking for
the evolution of information system alignment with
opportunities to survive and grow, and their strategies
business strategy and structure. They dynamically in-
are generally ambiguous. Secondly, rapid changes of
corporated the dimensions of alignment and the rela-
internal and external environments in China require
tionship between them and examined the alignment
that companies are equipped with capabilities of re-
from a holistic perspective.
sponding to the changes quickly and accommodating
This study brings strategic management theories into
new and flexible components and applications. Thirdly,
the field of IS and puts forward a model as shown in
many firms have the opportunity to expand existing
Fig. 1, which explores the relationship between IS stra-
business or enter new markets. This special environ-
tegic alignment and business performance.
ment contributes to the low stability of business strat-
egy. The dynamic process of alignment between busi-
ness and IS strategy is like “a moving target”. Com-
pared to the firms in western countries, it is more diffi-
cult for Chinese companies to make IS strategy based
on their business strategy. It is meaningful both in the-
ory and in practice to investigate the alignment be-
tween business strategy and information system strat-
egy for Chinese firms.
However, limited research was found on the influ- Fig. 1 Theoretical model of information system stra-
tegic alignment and business performance
ence of information system strategic alignment on
business performance. One reason is that business According to Venkatraman’s empirical study[10],
strategy is too abstract to measure quantitatively, while business strategy is not an organizational process for-
descriptive analysis of the strategy could not be per- ever in motion, but imposes continuously on business
suasive in the rigorous framework of empirical studies. performance[11,12]. Similarly, this conclusion could be
The other reason is that the alignment of information extended into the field of information systems, exam-
system strategy and business strategy is so complex ining the relationship between strategy and perform-
that it is hard to understand and measure quantitatively ance at the information systems level[13-15]. Therefore,
in spite of case studies in this area[7]. To empirically we propose the following hypotheses in the model:
study the influence of information systems on business
 350 Tsinghua Science and Technology, June 2008, 13(3): 348-354

H1 Business strategy is directly related to business 2 Measurements

performance.
H2 Information system strategy is directly related to
information system performance.
The business strategy and IS literature also repeat-
edly investigate the importance of strategic alignment
for successfully functional and business unit opera-
tions[12,16-19]. Meanwhile, the role of IS strategic align-
ment has been identified in the informationization of
Chinese companies. Thus, we hypothesize that the fit
between business strategy and information system
strategy is directly related to business performance and
information system performance.
H3 Alignment between business strategy and infor-
mation system strategy is positively related to business
performance.
H4 Alignment between business strategy and infor-
mation system strategy is positively related to informa-
tion system performance.
Finally, because previous studies have examined the
relationship between business performance and informa-
tion system effectiveness[20,21], we further propose that:
H5 Information system performance is related to
business performance.
These hypotheses have been verified in western IS
literatures, e.g., Chan and Huff [5]. However, whether
they are also applicable in the context of China still
needs quantitative evidence. Furthermore, we operate
the constructs in a different way, thereby making the
model more parsimonious.
2.1 Business strategy
Business strategy can be examined using different ty-
pologies for the corporate-level strategy and the busi-
ness-level strategy[11]. We assess business strategy us-
ing the Miles and Snow’s popular typology[22,23] of
prospectors, defenders, and analyzers, which has also
been used in previous IS researches[9,24-28]. A prospec-
tor is an organization with an aggressive competitive
strategy that attempts to pioneer in the product/market
development. A defender is an organization with a con-
servative competitive strategy and engages in little or
no new product development. An analyzer, as an in-
termediate type, is an organization with a moderate
competitive strategy that makes fewer and slower
product/market changes than a prospector and is less
stable than a defender. This typology combines ele-
ments of both corporate and business level strategies.
In addition, it is parsimonious but appears to account
for significant variations across organizations. Table 1
lists the adopted items for measuring the three types of
business strategy.
2.2 Information system strategy
To accommodate IS strategic alignment computations,
information system strategy was designed around the
same three dimensions as business strategy (Table 1).

Table 1 Indicators of measuring business strategy and IS system strategy

Type of strategy Items of measurement
P1: Constantly seeking new opportunities related to the present operations
Prospector P2: Seeking market share position at the expense of cash flow and profitability
P3: Cutting prices to increase the market share
D1: Using cost control systems for monitoring performance
Business
Defender D2: Using production management techniques
strategy
D3: Emphasizing on product quality through the use of quality circles
A1: Information systems provide support for decision making.
Analyzer A2: When making a major decision, we usually try to develop thorough analysis.
A3: Using planning techniques and using the outputs of management information and control systems
IS_P1: Using competitive intelligence systems
Prospector IS_P2: Using IS for product marketing and promotion
IS_P3: Using IS for obtaining customer feedback and providing service
IS_D1: Using IS in business processes
IS strategy Defender IS_D2: Using IS to support research and development
IS_D3: Using IS to support manufacturing
IS_A1: Using IS to support strategic planning and decision-making
Analyzer IS_A2: Using IS in risk analysis of processes
IS_A3: Using IS in human resource management (performance evaluation)
 DONG Xiaoying (Ռ໌࿧) et alġBusiness Performance, Business Strategy, and Information … 351

The frequencies of the strategic activities in firms were
measured using 1=least; 2=less; 3=medium; 4=more;
5=most. Because information system strategy provides
support for business strategy, adopting the same di-
mensions could guarantee consistency. Additionally,
the same classification makes it easier to explore in-
formation system strategy alignment.
2.3 Business performance
and gestalts. Moderation is the most important per-
spective because IS strategic alignment is an interac-
tive factor between business strategy and information
system strategy. We employ the dimensions of Miles
and Snow’s[22,23] typology to measure information sys-
tem strategic alignment and to multiply the corre-
sponding value of each dimension in business strategy
and information system strategy.

Business performance is a complex, multi-faceted con-

cept. We used Venkatraman’s[10] two dimensions of
business performance: market growth and profitability.
Market growth means market share gains related to
competition and profitability stands for financial con-
ditions relative to competition. Table 2 shows the items
to measure business performance. The performance re-
lated to competition was measured using 1=more than
worse; 2 = worse; 3 = equivalent; 4 = better; 5 = more
than better.
2.4 Information system performance
Previous research on information system effectiveness
has identified three aspects: evaluation and prediction
of profitability, evaluation of IS quality, and compre-
hensive evaluation of IS through multiple indicators. In
this study, we employed Chan and Huff’s[5] instrument
that was composed of two key categories: user satis-
faction and organizational impact. User satisfaction
measures the satisfactory extent of employees and
managers, and organizational impact is the influences
that information system imposes on organizational op-
erations.
2.5 Information system strategic alignment
As to alignment, different approaches have been used
to conceptualize IS strategic alignment. Venkatraman[29]
summarized six perspectives of alignment: moderation,
mediation, matching, covariation, profile deviation,
3 Data Analyses and Results
3.1 Sample
This study collected data from a survey, and the re-
spondents came from MBA and EDP students in
Guanghua School of Management in Peking University.
Because these students came from different industries
and firms with rich management experience, this sam-
ple has good representativeness. We sent out 126 ques-
tionnaires and received 100% completed responses.
The final sample represents multiple types of corpora-
tions, including private enterprises (40%), stock com-
panies (20%), state-owned enterprises (17%), wholly-
owned enterprises (17%), and joint ventures companies
(6%). The respondents include CEOs and other top
managers (44%), principals in functional departments
(22%), middle-layer managers (44%), technical staff
(7%), and marketing staff (3%).
3.2 Validity and reliability
We use the average variance extracted (AVE) to test
the convergent validity of the model. Average variance
extracted indicates how much variance of each latent
variable is captured compared to metrical error. Gener-
ally, if AVE is larger than 0.05, the items of the con-
struct are considered to cover most variances of the la-
tent variables. In addition, items in the questionnaires
should pass inter-item consistency test through com-
posite reliability. If composite reliability is more than

Table 2 Indicators of business performance and information system performance

Type of performance Items for measurement
Growth G1: Market share gains related to competition in the past 3 years
Business performance
Profitability B1: Financial conditions related to competition in the past 3 years
S1: Satisfaction with IS staff and services
Satisfaction S2: Satisfaction with the information product
S3: Satisfaction with users’ participation in systems projects
System performance
I1: IS improves decision-making, and contributes to management effectiveness.
Impact I2: IS contributes to the establishment of market linkages.
I3: IS increases the efficiency of our business operations.
 352 Tsinghua Science and Technology, June 2008, 13(3): 348-354

0.7, the model is satisfactory. Table 3 summarizes AVE

and composite reliability of all the variables. Obviously,
the composite reliability and AVE of all the variables
meet the general criterion. Therefore, measurements of
the model had a good convergent validity and reliability.
Table 3 Composite reliability and AVE of model
variables
Composite Fig. 2 Analysis results
Variable AVE
reliability
business strategy has no direct influence on business
Prospector 0.875 0.701
Constructs of performance.
Defender 0.870 0.693
business strategy (2) Information system strategy is significantly posi-
Analyzer 0.972 0.897 tively related to IS performance (ȕ=0.49, t=5.47). H2 is
Prospector 0.911 0.774 supported, which reveals the importance of IS strategy
Constructs of IS
Defender 0.951 0.866 for business performance.
strategy
Analyzer 0.943 0.847 (3) Information system strategic alignment signifi-
Constructs of Growth 1.000 1.000
cantly influences business performance (ȕ=0.30,
business t=4.19) and IS performance (ȕ=0.29, t=3.32). H3 and
performance Profitability 1.000 1.000 H4 are supported, which empirically proves the sig-
Constructs of IS Satisfaction 0.971 0.918 nificance of IS strategic alignment for business per-
performance formance. IS strategic alignment is more obviously re-
Impact 0.985 0.957
lated with business performance than with business
To ensure that the constructs in the model are differ- strategy. Informationization in firms cannot only rely
ent from each other, we must test the discriminant va- on the information system itself. The combinations
lidity by comparing loadings of all items on different with business strategy could better support success in
variables. To represent a variable, an item should have IS construction and bring benefits to firms.
a loading greater than the loadings of other variables. (4) IS performance does not significantly influence
Meanwhile, the square root (SQR) of AVE of each business performance (ȕ=0.18, t=1.19), and H5 is not
variable should be greater than the loadings of this supported, which suggests that not all information sys-
variable. Table 4 is a summary of the loadings and tems in companies could contribute to business
AVE of different variables. Table 4 shows that the dis- performance.
criminate validity is good, but the loadings of different
dimensions in a single group of variables are not dra- 4 Conclusions
matically different. These items come from western re-
The model in this study has practical implications for
search and need to be improved for China.
the IS construction in Chinese firms. Firstly, planning
3.3 Theoretical model analysis of business strategy and information strategy is only
the first step for achieving “alignment”, while it is
This study used structural equation model to test the more important to carry out planned strategies. The
theoretical model. The results are shown in Fig. 2. The theoretical model shows that IS strategic alignment
Chi-square value of the model is 337.82, while root improves business performance, but the data used in
mean square error of approximation (RMSEA) is 0.199, the analysis was historical. In other words, the model
indicating a good fit. reflects conditions of the firm in the past. More pre-
From the paths in Fig. 2, we came to the following cisely, the alignment of achieved business strategy and
conclusions: IS strategy could improve business performance. Sec-
(1) Business strategy is negatively related to busi- ond, the model reveals the relationship between busi-
ness performance (ȕ=0.13, t=1.32), but not significant. ness strategy and IS performance. There is no signifi-
Therefore, H1 is not supported, which indicates that cant causal relationship between IS strategy and
 DONG Xiaoying (Ռ໌࿧) et alġBusiness Performance, Business Strategy, and Information … 353

Table 4 Loadings and average variance extracted on different variables

Business per- Information system
Item Business strategy Information system strategy
formance performance
 Prospector Defender Analyzer Prospector Defender Analyzer Performance Satisfaction Impact
P1 0.809 0.686 0.576 0.476 0.534 0.549 0.577 0.421 0.405
P2 0.794 0.746 0.797 0.424 0.431 0.434 0.453 0.328 0.316
P3 0.905 0.854 0.813 0.298 0.352 0.361 0.390 0.267 0.263
D1 0.909 0.869 0.823 0.334 0.382 0.385 0.409 0.284 0.277
D2 0.813 0.922 0.981 0.478 0.537 0.546 0.571 0.428 0.411
D3 0.511 0.688 0.514 0.406 0.393 0.460 0.432 0.302 0.287
A1 0.809 0.919 0.984 0.472 0.533 0.539 0.557 0.423 0.409
A2 0.810 0.918 0.983 0.470 0.532 0.539 0.568 0.416 0.405
A3 0.910 0.867 0.827 0.342 0.381 0.386 0.413 0.293 0.285
A4 0.810 0.920 0.984 0.464 0.526 0.531 0.558 0.412 0.400
IS_P1 0.365 0.382 0.325 0.844 0.634 0.706 0.364 0.608 0.611
IS_P2 0.468 0.481 0.477 0.929 0.846 0.901 0.560 0.756 0.691
IS_P3 0.393 0.403 0.409 0.863 0.661 0.665 0.592 0.528 0.470
IS_D1 0.548 0.559 0.549 0.787 0.945 0.961 0.647 0.749 0.731
IS_D2 0.417 0.427 0.430 0.763 0.904 0.799 0.495 0.554 0.570
IS_D3 0.466 0.479 0.475 0.735 0.942 0.858 0.553 0.631 0.615
IS_A1 0.394 0.404 0.400 0.866 0.780 0.861 0.465 0.629 0.570
IS_A2 0.548 0.559 0.549 0.787 0.945 0.961 0.647 0.749 0.731
IS_A3 0.502 0.556 0.507 0.753 0.866 0.937 0.591 0.675 0.657
B1 0.555 0.565 0.556 0.570 0.608 0.617 1.000 0.481 0.463
G1 0.514 0.525 0.518 0.657 0.600 0.607 0.932 0.437 0.457
S1 0.402 0.412 0.414 0.725 0.703 0.754 0.488 0.989 0.890
S2 0.402 0.412 0.414 0.724 0.705 0.755 0.486 0.989 0.889
S3 0.359 0.372 0.375 0.677 0.635 0.679 0.437 0.957 0.931
I1 0.380 0.391 0.394 0.599 0.672 0.681 0.459 0.900 0.946
I2 0.380 0.385 0.390 0.601 0.670 0.682 0.458 0.868 0.978
I3 0.345 0.352 0.359 0.748 0.639 0.682 0.419 0.886 0.950
AVE 0.701 0.693 0.897 0.774 0.866 0.847 0.934 0.957 0.918
SQR of AVE 0.837 0.832 0.947 0.880 0.931 0.920 0.966 0.978 0.958

business performance in the results. This demonstrates

“labor dilemma” from a micro perspective. Investment
in information systems does not guarantee high return
and benefits for the company. A firm’s evaluation of
information technologies should not focus on the in-
formation technologies themselves, while a combina-
tion with business strategy is more meaningful.
The drawback of this study is that we did not con-
duct a pilot study before delivery of the large scale
survey because it is generally not easy to access the
subjects many times in this organizational level re-
search. Although the items for business strategy and
performance came from research conducted in western
countries, which proved to be reliable and valid, trans-
lation of the questionnaires may cause some misunder-
standings of the items. Therefore, further studies need
to use pilot studies before the survey delivery and to
improve measures of different variables.
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