Organ leader and decision making

REPRINTED FROM IBM SYSTEMS JOURNAL, VOL32, NO 1, 1993; © 1993,1999

Strategic alignment: Leveraging information technology for transforming organizations

by J. C. Henderson N. Venkatraman

It is clear that even though information technology (lIT) has evolved from Its traditional orientation ofadministrative support toward a more strategic role within an organization, there is still a glaring lack of fundamental frameworks within which to understand the potential of1fT for tomorrow's organizations. In this paper, we develop a model for conceptualizing and directing the emerging area ofstrategic management of information technology. This model, termed the Strategic Alignment Model, Is defined In terms of four fundamental domains of strategic choice: business strategy, information technology strategy, organizational infrastructure andprocesses, and Information technology Infrastructure andprocesses-each with Its own underlying dimensions. We illustrate the power of this model in terms of two fundamental characteristics ofstrategicmanagement: strategic fit (the interrelationships between extemaland Intemal components) and functional Integration (integration between business and functional domains). More specifically, we derive fourperspectives ofalignmentwith specific implications for guidingmanagementpractice in this Importantarea.

I t is perhaps a truism that the role and impact ofinformation technology (Iff) on today's orga- nizations has significantly changed over the last decade. Across a wide spectrum of markets and countries, Iff is transcending its traditional "back office" role and is evolving toward a "strategic"

role with the potential not only to support chosen business strategies, but also to shape new busi- ness strategies. l -4 Yet, there is increasing con- cern that the anticipated value of the investment in Iff is not being achieved. 5 How do we reconcile the dramatic increase in the role of Iff in organi- zations and markets with the evidence of minimal productivity gains at an aggregate level of the economy?

We argue that the inability to realize value from Iff investments is, in part, due to the lack of align- ment between the business and Iff strategies of organizations. We view strategy as involving both formulation (decisions pertaining to competitive, product-market choices) and implementation (choices that pertain to the structure and capa- bilities of the firm to execute its product-market choices). Our concept of strategic alignment is based on two fundamental assumptions: One, economic performance is directly related to the ability of management to create a strategic fit be- tween the position of an organization in the com-

IilCopyright 1993 by International Business Machines Corpo- ration. Copying in printed fOmI for private use is pemIitted without payment of royalty provided that (1) each reproduc- tion is done without alteration and (2) the Journal reference and IBM copyright notice are included on the first page. The title and abstract, but no other portions, of this paper may be copied or distributed royalty free without further pemIission by computer-based and other infomIation-service systems. Permission to republish any other portion of this paper must be obtained from the Editor.

472 HENDERSON AND VENKATRAMAN 0018-8670/99/$5.00 © 1999 IBM IBM SYSTEMS JOURNAL, VOL38, NOS 2&3,1999

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petitive product-market arena and the design of an appropriat~ admin.istrative s~ru~ure to. sup- port its executIon. Th1S assumpt10n 1S cons1stent with the generally accepted axi.om that strate~ic choices in the external and mternal domams should be consistent. 6,7 Two, we contend that this strategic fit is inherently dyn~c. The c~oices made by one business e~terpnse,.or firm (1f ~~­ damentally strategic), wdl over time evoke im1- tative actions, which necessitate subsequent re- sponses. Thus, strategic alignment is not an event but a process of continuous adaptation and change.

In this context a critical lever for attaining this dynamic capability is not a specific set of sophis- ticated technological functionality but the orga- nizational capabilities to leverage techn?logy to differentiate its operations from compet1tors. In other words, no single IIf appli~ation-however sophisticated and state of the art 1t may be-could deliver a sustained competitive advantage. Rather, advantage is obtained through the capability of an organization to exploit IIf functionality on a con- tinuous basis. This requires a fundamental change in managerial thinking about the role of IIf in orga- nizational transformation, as well as an understand- ing of the criti~ component~of IIf s~ategy and its role in supporting and shapmg busmess strategy decisions.

Although there may be some consensus on the changing role of IIf with~ org~ization~, manag- ers are still confronted Wlth bas1c quest10ns such as:

• What are the implications of IIf in my business operations? Today? In the future?

• What are the alternative perspectives for lever- aging information technology capabilities for business operations?

• Is the locus of IIf competence "inside" or "out- side" the operation?

• What is the executive role of senior manage- ment for leveraging IIf capabilities?

• How should the Iff function be organized, and what is the role of IIf outsourcing?

• What are the appropriate criteria for assessing IIf-based benefits?

We attempt to answer these and related questions by developing a model that defines the range of strategic choices facing managers and by explor- ing how they interrelate. As a prelude to the de-

velopment of such a mod~l, let us consi.~e~ how organizations are leveragmg IIf capabihtIes to shape and support their business strategies through the following four examples:

• Eastman Kodak Company and IBM announced an "unusual agreement under which IBM will take over the work done by four data centers, and 300 Kodak workers will become IBM em- ployees" (Wall Street Journal, July 26, 1989). Kodak expects to cut their operating costs by as much as 50 percent. In addition, Kodak turned over the management of its telecommunications network to Digital Equipment Corp. and· the maintenance of its personal computers to Com- puterland Corp.

• Baxter Healthcare Corp. has launched a new business program, ValueLink* *, whereby it takes over the materials management function of its customers-hospitals on a partnership ba- sis with stringent performance clauses; the crit- ical business competence for offering this pro- gram is rooted in their superior information processing capabilities derived from their now- famous Analytic System/Automated Purchas- ing (ASAP) information systems.

• Since the advent of electronic filing of individual income taxes in the United States, many tax-re- turn preparers (for example, H & R Block, Inc.) have created new electronic linkages with retail financial institutions that enable interested tax- payers, for a fee, to receive refunds at the ~ime of electronically filing their return. Electromc con- nection between the filers and the Internal Rev- enue Service, combined with superior ~apability to check for errors, has become an important competency in this fast-changing marketplace.

• Procter & Gamble Co. and Wal-Mart Stores, Inc., have built upon new, integrated informa- tion systems to redesign key business processes that affect their ability to manage the movement of products through their North American distribution channels. As a result, both firms achieve significant improvements in operating costs and, more importantly, increased ~b!lity to respond quickly to local market cond1tIons and requirements.

These examples highlight different facets of align- ing IIf strategy and bu~ine~s strategy. In th~ ~ol­ lowing sections, we bnefly mtroduce the buddmg blocks of our proposed Strategic Alignment Model.

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Strategic alignment: The emerging concept

Our concept of strategic alignment is based on two building blocks: strategic fit and functional integration. The former recognizes the need for any strategy to address both external and internal domains. The extemal domain is the business

lIT strategy should be articulated in terms of an external domain

and an internal domain.

arena in which the firm competes and is con- cerned with decisions such as product-market of- fering and the distinctive strategy attributes that differentiate the firm from its competitors, as well as the range of "make-versus-buy" decisions, in- cluding partnerships and alliances. In contrast, the intemal domain is concerned with choices pertaining to the logic of the administrative struc- ture (functional or divisional or matrix organiza- tion) and the specific rationale for the design and redesign of critical business processes (product delivery, product development, customer ser- vice, total quality), as well as the acquisition and development of the human resource skills neces- sary for achieving the required organizational competencies.

Within the business domain, the fit between ex- ternal positioning and internal arrangement has been argued to be critical for maximizing eco- nomic performance. 8 We adopt this logic to argue that the fit between external positioning and in- ternal arrangement is equally relevant within the I!I' domain. 1,9 More specifically, we contend that Iff strategy should be articulated in terms of an external domain-how the firm is positioned in the Iff marketplace-and an internal domain- how the liS (information systems) infrastructure should be configured and managed. However, our research suggests that managers are more often comfortable with their capability to understand positioning choices in the business marketplace (where their products are sold) than with their understanding of how to be strategically posi- tioned in the I!I' marketplace (where they obtain

critical technological functionality that supports and shapes their business strategies). This is partly due to the fact that strategy-as a manage- ment concept-has historically been applied to the output market rather than input markets and that liS strategy has often been viewed as a func-

. tional, internal response to the business strategy.

Thus, we propose that the position of the orga- nization in the Iff marketplace involves three sets of choices:

1. Information technology scope-those specific information technologies (for example, elec- tronic imaging, local- and wide-area networks, expert systems, and robotics) that support cur- rent business strategy initiatives or could shape new business strategy initiatives for the firm. This is analogous to business scope, which deals with choices pertaining to prod- uct-market offerings in the output market.

2. Systemic competencies-those attributes of I!I' strategy (for example, system reliability, cost-performance levels, interconnectivity, flexibility) that could contribute positively to the creation of new business strategies or bet- ter support of existing business strategy. This is analogous to the concept of business dis- tinctive competencies, which deal with those attributes of strategy (pricing, quality, value- added service, superior distribution channels) that contribute to a distinctive, comparative advantage to a firm over its competitors.

3. Iff governance-selection and use of mecha- nisms (for example, joint ventures with ven- dors, strategic alliances, joint research and development for new Iff capabilities) for ob- taining the required Iff competencies. This is analogous to business governance, which involves make-versus-buy choices in business strategy. Such choices cover a complex array of interfirm relationships such as strategic al- liances, joint ventures, marketing exchange, and technology licensing.

In a similar vein, the internal liS domain must address at least three components, namely:

1. liS architecture-choices that define the port- folio of applications, the configuration of hard- ware, software, and communication, and the data architecture that collectively define the technical infrastructure. This is analogous to the choices within the internal business

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strategy arena to articulate the administrative structure of the firm dealing with roles, respon- sibilities, and authority structures.

2. liS processes-choices that define the work processes central to the operations of the liS infrastructure such as systems development, maintenance, and monitoring and control sys- tems. This is analogous to the need for design- ing the business processes that support and shape the ability of the firm to execute busi- ness strategies.

3. liS skills-choices pertaining to the acquisi- tion, training, and development of the knowl- edge and capabilities of the individuals re- quired to effectively manage and operate the liS infrastructure within the organization. This is analogous to the skills required within the business domain to execute a given strategy.

Why is the distinction important? Traditionally, managers think of IfI' strategy in terms of the latter three components that reflect an internal orien- tation. It is understandable, since the historical view is that Iff is a support function not essential to the business of the firm. In the words of one frustrated manager, "1fI' in our organization is viewed as the technical core of the MIS [manage- ment information systems] function. The wide- spread feeling is that it has very little to do with our business strategy. Unfortunately, we could not be farther from the truth." This statement is applicable to those executives who view Iff as a "cost of doing business."

As IfI' emerges as a critical enabler of business transformation with capabilities to deliver firm- level advantages, it is imperative that firms also pay attention to the three external components of IfI' strategy. Hence, we argue that Iff strategy should be elevated from its traditional internal focus to address external issues of how well the firm is positioned in the fast-changing IfI' market- place.

Consider the example of McGraw-Hill, Inc.'s custom publishing offering, Primis**, in the text- book marketplace. Primis reflects a strategy of offering custom textbooks as an alternative to standard textbooks via its sophisticated elec- tronic imaging technology infrastructure (a three- way joint venture with Eastman Kodak and R. R. Donnelley & Sons Co.). In this business strategy, McGraw-Hill determines the needs of an individ- ual instructor and, from a set of modules, con-

structs or assembles a custom textbook that sat- isfies the market need. The IfI' strategy for this initiative must address and define a critical IfI' scope (electronic imaging technology), systemic competence (superior level of clarity of imaging to guarantee high-quality printing and flexible binding capability), as well as IfI' governance Goint ventures and long-term agreements for ob- taining the requisite competencies). Choices in these three areas determine the position of Mc- Graw-Hill in the IfI' and business marketplaces and have the potential to both shape and support the business strategy. Specifically, these choices can be directly related to choices pertaining to business scope and business competencies. More importantly, the technology attributes playa very important role in shaping these new business strategy initiatives. Such a view of IfI' strategy has a clear external positioning focus that is to be distinguished from its internal liS infrastructure.

Need to align external and internal domains ofIff. Our call for articulating IfI' strategy in terms of an external domain does not in any way imply that the internal domain is unimportant or secondary. Indeed, our field research over the last few years clearly indicates that the inadequate fit between external and internal domains of IfI' is a major reason for failure to derive benefits from Iff in- vestments. One has only to scan the current bus- iness periodicals to recognize the possibility of an Iff strategy failing due to the poor supporting liS infrastructure. A vivid example is provided by Citibank N.A.'s strategy for point-of-sale (pos) information services. It launched its POS Infor- mation Services** in 1985 with the explicit idea of linking store purchase with electronic couponing, payment, and frequent-shopper points, as well as the electronic capture of important information on purchase patterns. Although the general idea of combining information and financial transac- tions is still considered worthwhile, Citibank has reportedly faced several significant technical problems in the implementation of the concept that have resulted in its inability to establish a clear leadership position. Several similar initia- tives undertaken by competitors, although smaller in scale, are reportedly doing well, and still others are attempting to establish an important compe- tency in this arena.

Need to integrate business and Iff domains. The second dimension of the Strategic Alignment Model is functional integration. The need to in-

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Figure 1 Strategic Alignment Model

BUSINESS STRATEGY liT STRATEGY

--' <{ Z II: W

~ W

BUSINESS SCOPE

TECHNOLOGY SCOPE

, , STRATEGIC FIT AUTOMATION )( LINKAGE, ,

~====±=======;;;f ~=====±=====~

ORGANIZATIONAL INFRASTRUCTURE liS INFRASTRUCTURE AND PROCESSES AND PROCESSES

BUSINESS INFORMATION TECHNOLOGY

FUNCTIONAL INTEGRATION

tegrate the Iff strategy and the business strategy has long been advocated by both researchers and practitioners. 10-12 This dimension specifically considers how choices made in the Iff domain impact (enhance or threaten) those made in the business domain and vice versa. However, much of current research has focused only on issues of integrating the internal JJS strategies (JJS infra- structure and processes) with internal organiza- tional requirements as a response to business strategies. 13

The Strategic Alignment Model (see Figure 1) identifies the need to specify two types of inte-

gration between business and Iff domains. The first, termed strategic integration, is the link be- tween business strategy and Iff strategy reflecting the external components. More specifically, it deals with the capability of Iff functionality to both shape and support business strategy. This capability is particularly important as Iff has emerged as an important source of strategic ad- vantage to firms. The second type, termed oper- ational integration, deals with the corresponding internal domains, namely, the link between orga- nizational infrastructure and processes and JJS in- frastructure and processes. This type highlights the criticality of ensuring internal coherence be-

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tween the organizational requirements and ex- pectations and the delivery capability within the lIS function.

The logic of strategic alignment. A third premise of the Strategic Alignment Model (see Figure 1) is that effective management of Iff requires a bal- ance among the choices made across all four do- mains. The question, then, is how do we concep- tualize and achieve this type of alignment?

The simplest approach calls for considering all combinations of any two domains, a bivariate-fit perspective. If, for instance, the organizational and liS infrastructures can be reconfigured easily, then a strategic perspective that focused only on strategic integration, bivariate fit between busi- ness and Iff strategies, could suffice. That is, if the firm could easily adapt their internal process (both business and Iff) to support any possible market positioning strategy, the executives could delegate this issue and spend their time under- standing only the dynamics of markets. Unfortu- nately, there exists a significant possibility that internal inconsistencies (mutually conflicting di- rections) will occur. For instance, a bivariate per- spective that considered only external issues (business and Iff strategies without any regard for the internal, organizational domains) could seri- ously underestimate the difficulty (risks) of rede- signing key business processes. Alternatively, a bivariate fit that considered issues of business and Iff strategic fit separately has been argued to be dysfunctional. ll,1f,14

In contrast, the Strategic Alignment Model calls for the recognition of multivariate relationships, or more precisely, cross-domain relationships. Four types of cross-domain relationships are dis- cussed in the next section.

Four dominant alignment perspectives

Business strategy' as the driver. The first two cross- domain relationships given here arise when bus- iness strategy serves as the driving force.

Perspective One: Strategy execution. As depict- ed in Figure 2, this perspective is anchored on the notion that a business strategy has been articu- lated and is the driver of both organizational de- sign choices and the design of liS infrastructure.

Figure 2 Strategy execuUon alignment perspective

DRIVER: BUSINESS STRATEGY ROLE OF TOP MANAGEMENT STRATEGY FORMULATOR ROLE OF liS MANAGEMENT STRATEGY IMPLEMENTOR PERFORMANCE CRITERIA. COST/SERVICE CENTER

This alignment perspective is, perhaps, the most common and widely understood perspective as it corresponds to the classic, hierarchical view of strategic management. Thus, it is not surprising that several different analytical methodologies are available to make this perspective operation- al: critical success factors,1S business systems planning,16 and enterprise modeling. 17

It is important to identify the specific role of man- agement to make this perspective succeed. Spe- cifically, we contend that top management should play the role of the strategy formulator to artic- ulate the logic and choices pertaining to business strategy, whereas the role of the liS manager should be that of the strategy implementor, one who efficiently and effectively designs and imple- ments the required lIS infrastructure and pro- cesses that support the chosen business strategy. The performance criteria for assessing the liS function within this perspective are based on fi- nancial parameters reflecting a cost center focus.

Perspective Two: Technology transformation. As shown in Figure 3, this alignment perspective in- volves the assessment of implementing the cho- sen business strategy through appropriate Iff strategy and the articulation of the required liS infrastructure and processes. In contrast to the strategy execution logic, this perspective is not

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Figure 3 Technology transformation alignment perspective

DRIVER BUSINESS STRATEGY ROLE OF TOP MANAGEMENT TECHNOLOGY VISIONARY ROLE OF I S MANAGEMENT: TECHNOLOGY ARCHITECT PERFORMANCE CRITERIA TECHNOLOGY LEADERSHIP

constrained by the current organization design, but instead seeks to identify the best possible Iff competencies through appropriate positioning in the Iff marketplace, as well as identifying the cor- responding internal liS architecture. For example, United Services Automobile Association (USAA), a leading U.s. insurance company, decided that their business strategy of low-cost insurance de- livery via telemarketing required the develop- ment of a superior document-handling system based on state-of-the-art electronic imaging tech- nology. Since such technology was not available, they pursued a joint development venture with mM. Their Iff strategy involved defining this key technology scope and the associated critical com- petencies and committing to a technology alli- ance. Equally important, however, the strategic management process also defined the changes in the liS infrastructure that were necessary to ex- ecute this technology strategy. Thus, they under- stood the issues in migrating their technology ar- chitecture, including the need to invest in the development of a data architecture.

Another example is American Express Travel Re- lated Services Co., Inc., whose business strategy is anchored on two technology-based competen- cies: providing quick approval of purchases made by charge card and providing copies of receipts to the cardholders. The approval process on a

charge card (without any preset spending limit) typically has a longer lead time than a corre- sponding transaction involving their competitors' credit cards (with a preset spending limit). It was imperative that American Express match the re- sponse time of the leading competitors to reduce the possibility of the cardholder switching to an alternative, faster-transacting card. This business strategy required a systemic competence involv- ing expert systems (Authorizer's Assistant**) as well as corresponding changes in the internal liS organization for developing, maintaining, and controlling the systems. The second component, called ECCB (Enhanced Country Club Billing**), refers to their business practice of providing cop- ies of all charge slips with the monthly statement. Although cardholders expressed satisfaction with this service, the cost of maintaining and distrib- uting the slips was becoming prohIbitive in the traditional mode. Their investment in an optical- scanning, storage, and laser-printing system al- lowed the delivery of the same level of service more efficiently.

These examples highlight the impact of business strategy (especially, distinctive competence) on Iff strategy (Iff governance and systemic compe- tencies, respectively) and the corresponding im- plications for lIS infrastructure and processes. Techniques used to aid executives in the devel- opment of this strategy include technology fore- casting and a variety of architectural planning ap- proaches. The role of executive management in this perspective is to provide technology vision that would best support the chosen business strat- egy. The role of the liS manager should be that of the technology architect, who efficiently and ef- fectively designs and implements the required lIS infrastructure that is consistent with the Iff vision (scope, competencies, and governance). The per- formance criteria in this perspective are based on technology leadership, often utilizing a bench- marking approach to assess the position of the firm in the Iff marketplace.

Iff strategy as the enabler. The following two cross-domain relationships arise when manage- ment explores how Iff might enable new or en- hanced business strategies with corresponding organizational implications.

Perspective Three: Competitive potentiaL As shown in Figure 4, this alignment perspective is concerned with the exploitation of emerging Iff

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Figure 5 service level alignment perspective

Figure 4 Competitive potential alignment perspective

I T STRATEGY BUSINESS VISIONARY CATALYST BUSINESS LEADERSHIP

DRIVER I T STRATEGY ROLE OF TOP MANAGEMENT PRIORITIZER ROLE OF I S MANAGEMENT EXECUTIVE LEADERSHIP PERFORMANCE CRITERIA CUSTOMER SATISFACTION

DRIVER ROLE OF TOP MANAGEMENT ROLE OF LS MANAGEMENT PERFORMANCE CRITERIA

tative measurements pertaining to product lead- ership such as market share, growth, or new prod- uct introduction.

Perspective Four: Service level. As shown in Fig- ure 5, this alignment perspective focuses on how to build a world-elass lIS service organization.

The specific role of top management to make this perspective succeed is that of the business vision- aly-one who articulates how the emerging Iff competencies and functionality as well as chang- ing governance patterns in the Iff marketplace would impact the business strategy. The role of the lIS manager, in contrast, is one of the cata- o/st-one who identifies and interprets the trends in the Iff environment to assist the business man- agers to understand the potential opportunities and threats from an Iff perspective. The perfor- mance criteria in this perspective are based on business leadership with qualitative and quanti-

Key examples of this perspective include the ex- ploitation by Baxter Healthcare of its Iff position (enhanced technology scope, greater systemic competencies, and governance with ffiM through the Spectrum joint venture that will provide soft- ware service to the health care marketplace) to deliver superior, value-added service to its hos- pital customers and the consequent implications for redesigning the internal organizational pro- cesses. iS Similarly, the attempt by Federal Ex- press Corp. to create a new standard for over- night delivery, through its COSMOS/PULSAR** system, with corresponding implications for re- designing its internal processes or the ability of American Express, through its IDS Financial Cor- poration, to leverage its Iff infrastructure to de- velop capabilities for electronically filing income tax returns and for customized financial products reflect how an effective Iff positioning can be used to enhance or create new business strategies. That is, in each of these cases, an important en- abler of the ability of the firm to move quickly to acquire technology or achieve the competencies necessary to embark on their strategy was their position in the Iff market.

capabilities to impact new products and services (business scope), influence the key attributes of strategy (distinctive competencies), and develop new forms of relationships (business gover- nance). Unlike the previous perspective that con- siders business strategy as given (or, a constraint for organizational transformation), this perspec- tive allows the adaptation of business strategy via emerging Iff capabilities. Beginning with the three dimensions of Iff strategy, this perspective seeks to identify the best set of strategic options for business strategy and the corresponding set of decisions pertaining to organizational infrastruc- ture and processes.

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This requires an understanding of the external di- mensions of Iff strategy with corresponding inter- nal design of the I/S infrastructure and processes. This strategic fit for Iff creates the capacity to meet the needs of I/S customers. In this perspec- tive, the role of business strategy is indirect and is viewed as providing the direction to stimu- late customer demand. This perspective is often viewed as necessary (but not sufficient) to ensure the effective use of Iff. The I/S organization must deploy resources and be responsive to the grow- ing and fast-changing demands of the end-user population. Analytical methodologies even par- tially reflecting this perspective require a system- atic analysis of both the customer needs and the products and services that currently exist, along with those under development. Examples of an- alytical methods include end-user-needs survey- ing,19 service-level contracting,2O and architec- tural planning. 21

The specific role of top management to make this perspective succeed is that of the prioritizer, the one who articulates how best to allocate the scarce resources both within the organization and in the Iff marketplace (in terms of joint ventures, licensing, minority equity investments). The role of the I/S manager, in contrast, is one of executive leadership, with the specific tasks of making the internal service business succeed within the op- erating guidelines from top management. The per- formance criteria in this perspective are based on customer satisfaction obtained with qualitative and quantitative measurements using internal and external benchmarking.

Key Issues and management challenges

DitI'erentiating strategic alignment from tradi- tionallinkage. The Strategic Alignment Model in some ways reflects and accommodates a long his- tory of research and practice concerning the most effective means of linking business and technol- ogy strategies. However, the concept of strategic alignment differs from the traditional views of linkage in four important ways (see Table 1). First, the Strategic Alignment Model calls for a fundamental shift in the focus of the lIS function from an internal orientation toward one of stra- tegic fit within the Iff domain, namely, recogni- tion of the external Iff marketplace in terms of the scope of the technologies, the desired level ?f competencies, and the locus of governance. This

shift is important if we consider that Iff has the potential to shape business competencies and ac- tions in the product-market arena.

Second, whereas the traditional management ob- jectives for the I/S function were geared toward ensuring that I/S activities are linked with the bus- iness requirements, we argue that future chal- lenges deal with the selection of appropriate align- ment perspectives (out of the four dominant ones identified in this paper) that best suit the business conditions and organizational objectives. This ar- gument requires the business leadership to con- sider a broader vision of the potential role and scope of Iff within organizations. In essence, the contextual frame of reference for understanding and making strategic choices varies. One impli- cation of this variation is the need to alternate planning processes to ensure that critical issues associated with the different perspectives are ad- dressed systematically.

Third, the model and the alternative alignment perspectives highlight the diversity of roles car- ried out by both line and I/S executives. As dis- cussed earlier, the line executives must, at times, assume traditional leadership roles associated with strategy implementation. At other times, however, alignment requires roles including those of business visionary, technology vision- ary, and prioritizer. For the I/S managers, the roles range from the traditional functional man- ager (resource optimizer) to executive leadership, technology architect, and change catalyst. Rec- ognizing the diversity of these roles and ensuring that the right role is present for the right alignment perspective is, we argue, an important enabler of achieving strategic alignment. Finally, the criteria for performance assessment expand from cost and service considerations to a larger set involv- ing multiple goals-both operational and strate- gic. The need to view organizational performance from multiple perspectives is widely recog- nized. 22 The Strategic Alignment Model helps to articulate and emphasize how the performance criteria shift across different alignment perspec- tives and argues that each set of criteria should be present across different stages in evolution.

Management implications. Several key implica- tions can be derived from the Strategic Alignment Model. First, one possible reason for the current dissatisfaction with the level of integration be-

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Table 1 Dltlerentlatlng stndeglc alignment from traditional vtewa on linkage

Characteristics

Predominant focus of information systems and technology

Management objectives

US executive roles

Dominant criteria for performance assessment

Traditional Linkage

Internal liS function and organization

Ensuring that liS activities are linked to business requirements

Line leadership and liS functional support

Cost and service considerations

Strategic Alignment

Internal liS function and organization and external Iff marketplace

Selecting appropriate alignment perspectives for achieving business objectives

Multiple executive roles for line and liS managers

Multiple criteria

tween the business and lIS domains and possibly the absence of value derived from I/T investments lies in the lack of understanding of the enabling strategic choices that bind a business strategy and lIS infrastructures. Viewed within the Strategic Alignment Model shown in Figure 1, the direct link between business strategy (top left) and lIS infrastructure (bottom right) can only derive its logic within the context of the two alignment per- spectives that have business strategy as the driv- er: strategy execution and technology transfor- mation. In the former case, the link derives its meaning by translating the implications of busi- ness strategy for the organizational infrastructure with subsequent demands for I/S products and services. In the latter case, the linkage is achieved through the effective positioning of the firm in the I/T marketplace, namely, the specification of the three components of I/T strategy and the conse- quent implications for the three internal compo- nents of the lIS infrastructure and processes.

The prescription from the Strategic Alignment Model is that both perspectives should be con- sidered for attaining the best possible link be- tween business strategy and the I/S infrastructure. More importantly, the senior line management must understand both perspectives. Too often, we believe, line management is engaged in the process of strategy execution but delegates-ex- plicitly or implicitly-the responsibility for tech- nology transformation. There appears to be one exception-in the case of 1/1' outsourcing. How- ever, even in this case, we believe that the deci- sions are viewed from a general sense of dissat- isfaction with the costs and performance of the internal I/T infrastructure and processes rather

than as a primary desire to be actively pursuing a position and stake in the I/T marketplace.

Similarly, the direct link between an I/T strategy and organizational infrastructure has no straight- forward logic. One cannot and should not simply seek to identify and adopt the best available tech- nology to restructure the organization or stream- line the business processes without due consid- eration to the two alignment perspectives that have I/T strategy as the driver: competitive po- tential and service level. The former identifies the potential impact of I/T strategy on business strat- egy with consequent implications for the organi- zational infrastructure. The latter seeks to pro- vide the best possible service to the internal client by developing the appropriate basis for the rede- sign of the I/S infrastructure. We would expect that in the absence of such understanding, there would be a significant probability of failure for investments made to transfer business processes, because of an inability to provide the information necessary to execute the processes.

Second, managers need to reconceptualize the scope and power of the I/T strategy of the firm. The Strategic Alignment Model highlights the compelling need to view the strategic choices in the I/T domain in terms of both an external and an internal orientation. Although the internal focus is traditional with a requirement to support high- er-level (corporate and business) strategies, we believe it is also important to have an external focus-in terms of the requirements of position- ing the firm in the I/T marketplace (I/T scope, sys- temic competencies, and I/T governance). This level of understanding will become more impor-

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tant as firms realize that the source of Iff com- petencies is not entirely within the firm but involves a complex array of alliances and part- nerships with a wide-ranging set of firms in the marketplace.

Third, the criteria to assess the performance of the Iff function should be reconceptualized. It is expected that the Iff manager would be evaluated using a mix of four criteria: evaluation as a cost center (to ensure that the internall/S organization has its cost levels for delivering the required level of support comparable to the external Iff vendor community actively soliciting outsourcing con- tracts), evaluation as a service center (with levels of service quality that are comparable to the best- in-industry as well as best-in-class), evaluation as a profit center (to create a sense of market refer- ent within the lIS organization), and evaluation as an investment center (through investments such as a minority equity stake in emerging technolo- gies, joint research and development invest- ments, joint ventures, technology licensing, and other means to enhance the required Iff compe- tencies). In the absence of such a fundamental shift in the criteria used to assess the performance of the Iff function, the lIS organization would not have emerged as a serious and significant member of the top management team. Indeed, we should strive to assign appropriate performance criteria for the different alignment perspectives.

Finally, the use of this model requires an under- standing of its intrinsic dynamic nature. Many of the strategic planning techniques popularized in the 1970s and 1980s have gone out of favor-not because of the weakness in their logic, but due to their failure to recognize the dynamic nature of strategy. Managers are painfully aware that the real business challenge is not static alignment among the four domains at anyone point in time (when the strategic planning exercise is carried out!), but ensuring continual assessment of the trends across these four domains to allow them to reposition the firm in the external environment and rearrange their internal infrastructure. We urge managers to recognize seriously the need to evolve from one perspective to another based on shifts in the business environment-both internal and external. This is consistent with the current emphasis on the centrality of learning and adap- tation for achieving successful organizational transformation. As one senior manager who is in the midst of adopting the Strategic Alignment

Model said: "The most important lesson to keep in mind is that strategic alignment is a journey and not an event."

Concluding remarks

We have been asked on numerous occasions: "Which alignment perspective is the best?" As researchers and observers of strategic manage- ment phenomena, we do not believe that there is one universally superior mode to formulate and implement strategy. If there were, it would not be strategic because all firms would adopt it. The four dominant alignment perspectives that use the two strategies as the driver are equally useful and powerful in thinking about the role of Iff in orga- nizational transformation. Indeed, we urge man- agers not to consider Iff as a panacea and conse- quently focus only on those two perspectives with Iff strategy as the starting point (namely, com- petitive potential and service level). Nor do we want to argue that business strategy should al- ways be the starting point and adopt only the other two perspectives on strategic alignment. The potential for Iff impact is so varied and com- plex that the executive must consider these per- spectives as alternative conceptual lenses and be prepared to continuously make adaptations.

Other papers in this special issue deal with a set of themes that complement the strategic align- ment concept. Specifically, the paper by Luftman, Lewis, and Oldach23 explores in more pragmatic detail how to translate the Strategic Alignment Model into management frameworks and action plans for the transformation of the enterprise. Keen 24 develops a companion concept of a fusion map to link information technology to business op- erations; Boynton, Victor, and Pine 25 examine some of the structural transformations in the mar- ket and explore the potential role of information technology capabilities; Davidson26 provides a complementary perspective by looking at the role of organizational competencies enhanced through information technology; Konsynski 27 considers in some detail the possibility of redefining firm bound- aries through information technologies and the re- quired management strategies to compete in the changing marketplace; and Broadbent and Weill 28 discuss valuable lessons from cases in the Austra- lian banking industry on this topic.

Our hope is that the conceptual model of strategic alignment and the companion papers will go a

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long way toward providing a set of ideas, tools, and illustrations to leverage the emerging capa- bilities of I!I' for transforming organizations and markets.

"Trademark or registered trademark of Baxter Healthcare Corp., McGraw-Hill, Inc., Citibank, N.A., American Ex- press, or Federal Express Corp.

Cited references

1. P. G. W. Keen, Shaping the Future, Harvard Business School Press, Boston, MA (1991).

2. B. R. Konsynski and W. F. McFarlan, "Information Part- nerships-Shared Data, Shared Scale," Harvard Busi- ness Review 68, No.5, 114-120 (September-October 1990).

3. M. S. Scott Morton, The Corporation ofthe 1990s, Oxford University Press, Oxford (1991).

4. N. Venkatraman, "Information Technology-Induced Business Reconfiguration: The New Strategic Manage- ment Challenge," The Corporation of the 1990s, M. S. Scott Morton, Editor, Oxford University Press, Oxford (1991).

5. S. S. Roach, "Services under Siege-The Restructuring Imperative," Harvard Business Review 69, No.5, 82-91 (September-October 1991).

6. A. C. Hax and N. S. Majluf, The Strategy Concept and Process: A PragmaticApproach, Prentice-Hall, Inc., En- glewood Cliffs, NJ (1991).

7. N. Venkatraman and J. C. Camillus, "Exploring the Con- cept of 'Fit' in Strategic Management," Academy ofMan- agement Review 9, 513-525 (1984).

8. A. D. Chandler, Strategy and Structure: Chapters in the History ofAmerican Enterprise, The M.LT. Press, Cam- bridge, MA (1962).

9. M. M. Parker and R. J. Benson, with H. E. Trainor, In- formation Economics: Linking Business Performance to Information Technology, Prentice-Hall, Inc., Englewood Cliffs, NJ (1988).

10. J. C. Henderson, J. F. Rockart, and J. G. Sifonis, "In- tegrating Management Support Systems into Strategic In- formation Systems Planning," Journal of Management Information Systems 4, No.1, 5-23 (1987).

11. W. R. King, "Strategic Planning for Management Infor- mation Systems," MIS Quarterly 2, No.1, 27-37 (1978).

12. E. R. McLean and J. V. Soden, Strategic Planning for MIS, John Wiley & Sons, Inc., New York (1977).

13. A. C. Boynton and R. W. Zmud, "Information Technol- ogy Planning in the 199Os: Directions for Practice and Research," MIS Quarterly 11, 59-71 (1987).

14. P. J. Pyburn, "Linking the MIS Plan with Corporate Strat- egy: An Exploratory Study," MIS Quarterly 7, No.2, 1-14 (1983).

15. J. F. Rockart, "Chief Executives Define Their Own Data Needs," Harvard Business Review 57, No.2, 81-93 (1979).

16. Information Systems Planning Guide, Business Systems Planning, GE20-0527-2, 3rd edition, ffiM Corporation (July 1981); available through IBM branch offices.

17. J. Martin, Strategic Data Planning Methodologies, Pren- tice-Hall, Inc., Englewood Cliffs, NJ (1982).

18. N. Venkatraman and J. E. Short, "Strategies for Elec- tronic Integration: From Order-Entry Systems to Value-

Added Services at Baxter," MIT Center for Information Systems Research Working Paper, Cambridge, MA (1991).

19. R. M. Alloway and J. A. Quillard, "User Managers' Sys- tems Needs," MIS Quarterly 7, 27-41 (1983).

20. R. L. Leitheiser and J. C. Wetherbe, "Service Support Levels: An Organized Approach to End-User Comput- ing," MIS Quarterly 10, No.4, 337-349 (1986).

21. J. A. Zachman, "A Framework for Information Systems Architecture," IBM Los Angeles Scientific Center Re- port, G320-2785 (March 1986). Also in IBM Systems Jour- nal 26, No.3, 276-292 (1987).

22. N. Venkatraman and V. Ramanujam, "Measurement of Business Performance in Strategy Research: A Compar- ison of Approaches," Academy ofManagement Review 11, No.4, 801-814 (1986).

23. J. N. Luftman, P. R. Lewis, and S. H. Oldach, "Trans- forming the Enterprise: The Alignment of Business and Information Technology Strategies," IBM Systems Jour- nal 32, No.1, 198-221 (1993, this issue).

24. P. G. W. Keen, "Information Technology and the Man- agement Difference: A Fusion Map," IBM Systems Jour- na132, No.1, 17-39 (1993, this issue).

25. A. C. Boynton, B. Victor, and B. J. Pine II, "New Com- petitive Strategies: Challenges to Organizations and In- formation Technology," IBM Systems Journal 32, No.1, 40--64 (1993, this issue).

26. W. H. Davidson, "Beyond Re-engineering: The Three Phases of Business Transformation," IBM Systems Jour- na132, No.1, 65-79 (1993, this issue).

27. B. R. Konsynski, "Strategic Control in the Extended En- terprise," IBM Systems Joumal32, No.1, 111-142 (1993, this issue).

28. M. Broadbent and P. Weill, "Improving Business and Information Strategy Alignment: Learning from the Banking Industry," IBM Systems Journal 32, No.1, 162-179 (1993, this issue).

General references

J. J. Cash and B. Konsynski, "liS Redraws Competitive Boundaries," Harvard Business Review 63, No.2, 134-142 (1985). A. C. Hax and N. S. Majluf, Strategic Management: An In- tegrative Perspective, Prentice-Hall, Inc., Englewood Cliffs, NJ (1984). J. C. Henderson, "Plugging into Strategic Partnerships: The Critical liS Connection," Sloan Management Review 31, No. 3, 7-18 (1990). J. C. Henderson and J. G. Sifonis, "The Value of Strategic liS Planning: Understanding Consistency, Validity, and liS Mar- kets," MIS Quarterly 12, 187-200 (1988). B. Ives and G. P. Learmonth, "The Information System as a Competitive Weapon," Communications of the ACM 27, 1193-1201 (1984). H. R. Johnston and P. Lawrence, "Beyond Vertical Integra- tion-The Rise of Value-Adding Partnerships," Harvard Bus- iness Review 66, No.4, 94-101 (July-August 1988). R. Kling, "Social Analyses of Computing: Theoretical Per- spectives in Recent Empirical Research," Computing Surveys 12, No.1, 61-110 (1980). M. L. Markus and"D. Robey, "Information Technology and Organization Change: Causal Structure in Theory and Re- search," Management Science 34, No.5, 583-598 (1988).

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F. W. McFarlan, "Information Technology Changes the Way You Compete," Harvard Business Review 62, No.3, 98--103 (1984). M. E. Porter and V. E. Millar, "How Information Technology Gives You Competitive Advantage" Harvard Business Re- view 63, No.4, 149-160 (July-August 1985). J. F. Rockart and J. E. Short, "Iff in the 1990s: Managing Organizational Interdependence," Sloan Management Re- view 30, No.2, 7-17 (1989). . P. Strassman, The Informtltion Payoff, The Free Press, New York (1985). R. W. Zmud, A. C. Boynton, and G. C. Jacobs, "The Infor- mation Economy: A New Perspective for Effective Informa- tion Systems Management," Data Base 16, No.1, 17-23 (1986). S. Zuboff, In the Age of the Smart Machine, Basic Books, New York (1988).

Accepted for publication September 8, 1992.

John C. Henderson Systems Research Center, School of Management, Boston University, 704 Commonwealth Ave- nue, Boston, Massachusetts 02215 (electronic mail: smg9j2n @buacca.bu.edu). Dr. Henderson is Professor of Management Information Systems and Director ofthe Systems Research Cen- ter at the Boston University School of Management. He earned his Ph.D., M.S., and B.S. degrees from the University otTexas at Austin. His early work focused on decision support systems and the development of prototyping as an approach to develop- ing both decision support systems and the more traditional man- agement information systems. Presently, his research is focused in three areas: the alignment of business and information tech- nology strategies, the role of information technology in building and managing strategic partnerships, and the use of information technology to support software development teams. He has held faculty appointments at Florida State University and Ohio State University and has served as staff director for the Joint Com- mittee on Electronic Data Processing at the Florida legislature. Prior to coming to Boston University, Dr. Henderson was on the faculty of the Alfred P. Sloan School of Management at the Massachusetts Institute of Technology. He is the author of a number of articles dealing with management and information technology issues.

N. Venkatreman Alfred P. Sloan School of Management, E52-537, Massachusetts Institute ofTechnology, 50 Memorial Drive, Cambridge, Massachusetts 02135. Dr. Venkatraman is an associate professor at the Sloan School of Management. He holds a Ph.D. from the University of Pittsburgh, an M.B.A. from the Indian Institute of Management, and a B.Tech. from the Indian Institute of Technology. Dr. Venkatraman has pub- lished extensively in professional and management journals and serves on the editorial boards of Sloan Management Re- view and the Academy ofManagement Review. For his Ph.D. dissertation he received the 1986 A. T. Kearney Award for Outstanding Research in General Management.