Henderson and Venkatraman (1993) state that the concept of strategic alignment is based on two fundamental assumptions firstly that economic performance is directly related to the ability of management to create a strategic fit between the position of the organisation in the competitive product-market arena and the design of appropriate administrative structure to support it's execution and secondly that this strategic fit is inherently dynamic. Henderson and Venkatraman (1993) argue that the inability to realize value from IT investments is, in part due to lack of alignment between business and IT strategies of organisations. Strategy is viewed as involving both strategy formulation (decisions pertaining to competitive, product market choices) and strategy implementation (choices that pertain to the structure and capabilities of the firm to execute it's product market choices) and there needs to be alignment between formulation and implementation Henderson and Venkatraman (1993).
Importantly Henderson and Venkatraman (1993) assert that no single IT application can deliver a sustained competitive advantage and that this competitive advantage is obtained through the capability of an organisation to exploit IT functionality on a continuous basis.
Henderson and Venkatraman (1993) contend that IT strategy should be articulated in terms of an external domain and internal domain and that the internal domain of IT strategy has dominated and the external domain of IT strategy has hardly been explored. As IT emerges as a critical enabler (and just not a cost centre) of business transformation with capabilities to deliver firm level advantages, it is imperative to pay attention the external domain of IT strategy Henderson and Venkatraman (1993). Their field research clearly indicates that the inadequate fit between external and internal domains of IT is a major reason for the failure to derive benefits from IT investments.
This is the need to integrate the IT strategy and the business strategy. Two types of integration are identified, strategic integration the link between business and IT strategies reflecting the external components and operational integration linking internal domains (IT and organisation infrastructure and processes)Henderson and Venkatraman (1993)
Four alignment perspectives
The SAM model identifies four alignment perspectives. These are now described
Business Strategy as the driver, the first two cross domain relationships arise when business strategy serves as the driving force
In this domain business strategy has been articulated and is the driver of both organisational design choices and the design of IT infrastructure see table 3. This is the most common and widely understood perspective.
Table 3 Business Strategy as driver - adapted from Henderson and Venkatraman (1993)
Role of top management
Role of IS management
As shown in table 3.1 this alignment perspective involves the assessment of implementing the chosen business strategy through appropriate IT strategy and the articulation of the required I/S infrastructure and processes.
I/S infrastructure and
Table 3.1 Technology perspective adapted from Henderson and Venkatraman (1993)
Role of top management
Role of IS management
IT Strategy as an enabler, the next two cross domain relationships arise when management explores how IT might enable new or enhanced business strategies with corresponding organisational implications
As shown in figure 3.2 this alignment perspective is concerned with exploitation of emerging IT capabilities to impact new product and services (business scope), influence key attributes of strategy (distinctive competencies), and develop new forms of relationships (business governance)
Table 3.2 Competitive potential perspective adapted from Henderson and Venkatraman (1993)
Role of top management
Role of IS management
As shown in table 3.3 this alignment perspective focuses on how to build a world class I/S service organisation. This requires an understanding of the external dimensions od IT strategy with corresponding internal design of the I/S infrastructure and processes. This Strategic fit for IT creates the capacity to meet the needs of I/S customers
Table 3.3 Service Level perspective adapted from Henderson and Venkatraman (1993)
Role of top management
Role of IS management
The enablers and inhibitors of business/it alignment
Luftman and Brier (1999) modified the SAM model. by identifying twelve alignment components from the SAM model. The relationship between these twelve alignment components defines Business/IT alignment Luftman and Brier (1999). An assessment tool was developed to address the alignment of business and IT in firms by identifying the strengths and weaknesses related to the business/IT alignment by utilising the relationships between the twelve alignment components from the SAM model. These twelve alignment components are
Business Scope includes the markets, products, services, groups of customers/clients, and locations where an enterprise competes as well as the competitors and potential competitors that affect the business environment.
Distinctive Competencies the critical success factors and core competencies that differentiate a firm from it's competitors to provide it with a potential competitive edge. This includes the chosen strategy, marketing the brand, internal and external research, manufacturing and product development, cost and pricing structure, and sales and distribution channels.
Business Governance how companies set the relationship between management, stockholders, and the board of directors. Also included are how the company is affected by government regulations, and how the firm manages its relationships and alliances with strategic partners.
Organisational Infrastructure and processes
Administrative Structure the way the firm organizes its businesses. Examples include central, decentralise, matrix, horizontal, vertical, geographic, federal, and functional.
Processes how the firm's business activities (the work performed by employees) operate or flow. Major issues include value added activities and process improvement.
Skills H/R considerations such as how to hire/fire, motivate, train/educate, and culture.
Technology Scope the important information software, applications and technologies used.
Systemic Competencies those capabilities (e.g., access to information that is important to the creation/achievement of a company's strategies) that distinguishes the IT services.
IT Governance how the authority for resources, risk, conflict resolution, and responsibility for IT is shared among business partners, IT management, and service providers. Project selection and prioritization issues are included here.
IT infrastructure and Processes
Architecture the blueprint for describing the enterprise architecture for the business includes business, information and technology priorities.
Processes those practices and activities carried out to develop and maintain applications and manage IT infrastructure.
Skills IT human resource considerations such as how to hire/fire, motivate, train/educate, and culture.
From these twelve components of alignment Luftman and Brier (1999) carried out a survey to identify the enablers and inhibitors that hinder alignment. Based on this survey they identified the six most important enablers and inhibitors in rank order these are shown in Table 3.4
Table 3.4 Comparison of Enablers and Inhibitors adapted from Luftman,Papp and Brier (1999)
Senior executive support for IT
IT/business lack close relationships
IT involved in strategy development
IT does not prioritize well
IT understands the business
IT fails to meet commitments
Business - IT partnership
IT does not understand business
Well-prioritized IT projects
Senior executives do not support IT
IT demonstrates leadership
IT management lacks leadership
As can be seen in the table 3.4 the same set of topics (executive support, understanding the business, IT business relations and leadership) show up as both an enabler and an inhibitor.
From the survey results Luftman and Brier (1999) produced a six step approach to make alignment work in any organisation namely, set the goals and establish the team, understand the business IT linkage, analyse and prioritise gaps, specify the actions (project management), choose and evaluate success criteria and sustain alignment
The strategic alignmment maturity model (SAMM)
Luftman (2001) developed the SAMM model methodology for assessing a company's alignment.
The model is based on the Capability Maturity Model developed by Carnegie Mellon's Software Engineering Institute, but focuses on a more strategic set of business practices.
Six interrelated components together with criteria for assessing alignment maturity are identified Luftman and Kempaiah (2007).
Communications measures the effectiveness of the exchange of ideas, knowledge, and information between IT and business organisations, enabling both to clearly understand the companies strategies, plans business and IT environments, risks, priorities, and how to achieve them. The alignment criteria for communications are understanding the business by IT, understanding of IT by business, inter/intra organisational learning, protocol rigidity and knowledge sharing and liaison effectiveness
Value uses balanced measures to demonstrate the contributions of information technology and the IT organisation in terms that both the business and IT understand and accept. The alignment criteria for value are IT Metrics, business metrics, balanced metrics, service level agreements, benchmarking, formal assessment/reviews and continuous improvements
Governance defines who has the authority to make IT decisions and what processes IT and business managers use at strategic, tactical and operational levels to set priorities to allocate IT resources The alignment criteria for governance are business strategic planning, IT strategic planning, organisational structure, budgetary control, IT investment management, steering committees and prioritisation process
Partnership gauges the relationship between a business and IT organisation, including IT's role in defining the business's strategies, the degree of trust between the two organisations, and how each perceives the other's contribution. The alignment criteria for partnership are business perception of IT value, role of IT in strategic business planning, shared goals, risk, rewards/penalties, IT program management, relationship/trust style and business sponsor/champion
Scope and Architecture measures IT's provision of a flexible infrastructure, it's evaluation and application of emerging technologies, it's enabling or driving of business process changes and it's delivery of valuable customised solutions to internal business units and external customers and partners. The alignment criteria for communications are traditional enabler/driver external ,standards articulation, architectural integration (functional organisation and enterprise), architectural transparency, flexibility and managing emerging technology.
Skills measures human resources practices, such as hiring, retention, training, performance feedback, encouraging innovation and career opportunities, and developing the skills of individuals. It also measures the organisations readiness for change, capability for learning, and ability to leverage new ideas. The alignment criteria for skills are innovation, entrepreneurship, locus of power, management style, change readiness, career crossover, education, cross training and social, political, trusting environment.
The levels range from level one to level five where level five is the highest level of maturity. A higher alignment maturity correlates with higher firm performance measures Luftman (2001)
The Evolution of Balanced Scorecard:
The Balanced Scorecard (BSC) had its origins in 1990, in a one year KPMG sponsored multicompany study called, "Measuring performance in the Organisation of the future". David Norton served as the study leader and Robert Kaplan a Harvard University Professor, as an academic consultant. The study was motivated by a belief that existing performance measurement approaches, primarily relying on financial accounting measures were becoming obsolete Kaplan and Norton (1996b).
The BSC evolved from this project and was summarised by Kaplan and Norton (1992).They contend that traditional financial performances, which worked well in the industrial era, are out of step with modern company requirements. The requirements which modern organizations required were a "balanced" set of measures between financial and operational measures.
The BSC allowed managers to look at the business from four important perspectives namely
Customer perspective (How do customers see us?)
Internal perspective (What must we excel at?)
Innovation and learning perspective. (Can we continue to improve and create value?)
Financial perspective. (How do we look to shareholders?).
The name reflected the balance between
1. Short and long term objectives
2. Objective measures (e.g., financial) and Subjective measures (e.g. innovation and learning).
3. Leading indicators (outcomes desired and performance drivers) and Lagging indicators (outcomes), and
4. External (for shareholders and customers) and Internal (for critical business processes, innovation, and learning and growth),
This is depicted in Figure 1 where the four perspectives are shown with cause and effect relationships
When the BSC was first introduced it was about measurement, not strategy. The BSC evolved from an improved measurement system to a core management system Kaplan and Norton (2001b).Early adopters of the BSC achieved breakthrough results using this tool as a strategic management tool Kaplan and Norton (2001b).
To discover how this was achieved Kaplan and Norton (2001b) researched how these companies achieved breakthrough results. Their research revealed that three concepts kept arising:
Strategy : They made strategy the pivot around which the organizational agenda was developed.
Focused : Focus on the strategy was the main driver
Organisation: Employees were encouraged to act in fundamentally different ways, guided by strategy.
Five principles of successful organizations emerged from Kaplan and Norton (2001b) research on successful BSC users. These five principles describe the key elements of building an organization able to focus and align on strategy and deliver breakthrough results, through strategy execution, Kaplan and Norton (2001b).
1. Mobilize change through executive leadership - To drive change, executives must be the primary change agents. They need to develop a vision and strategy on where they want to drive the organization.Â They must ensure that the entire executive team is aligned with the strategy of the organisation. Executive sponsorship is critical to ensure transformational change is a success. Executives need to be involved in making strategy execution a core competency within the organisation. This is done by
Been actively involved in strategic planning and implementation
Visibly communicating the strategy through the communication channels used in the company.
Appoint and encourage transformation/ change agents
The case for change must be clearly articulated.
Ensuring leadership team is engaged and not operating in silo's
Vision, mission and strategy is clearly defined and implemented.
2. Translate the strategy into operational terms - Been able to translate strategy to operational terms has proved problematic. The BSC was developed to address this problem, to translate strategy into a language all can understand. The BSC provides a framework for describing and communicating the strategy in a consistent way. A strategic map is used to communicate the cause and effect relationship that show how intangible assets are converted into tangible (financial) outcomes. The BSC use of quantitative lead and lag measures allows the value creating process to be described and measured and thus be managed rather than be inferred. Setting targets that are linked to well defined and understood objectives ensures that the measures are clearly understood by all. Targets can be used to stretch the organisation (to ensure effort from employees) and to ensure that efforts are focused on the right set of measures.
3. Align the organization to the strategy. The whole point of an organisation is to make the whole greater than the sum of the parts, to create synergy. Whether it is about sharing resources or sharing customers creating new sources of value requires organisational alignment. These new sources of value, derived from organisational design and behaviour are referred to as synergies. The key to creating organisational synergies is to ensure that the individual units are aligned around shared goals and objectives. To do this the organisation must clearly define it's role, which helps define the synergies that it wishes to create at the lower levels. This provides a strategic architecture that guides organisational alignment by aligning corporate with support business units, ensuring support unit are aligned with each other and external partners and finally that the board of directors are aligned. For every organisation the primary source of value is the customer. They make judgements about the value of the organisations products or services and can choose to utilise/not utilise their products/services.
4. Motivate to make strategy everyone's job - This is built around Human resource management (HR) systems. This is the innovation and learning perspective of the BSC. These HR systems are used to shape the objectives, incentives, capabilities and competencies of every employee. Employees are required to understand the strategy of the organisation, if the strategy implementation is to be a success. How they conduct day-to-day business must ensure that it contributes to the strategy's success. Employees need to first understand the vision of the organisation and how the strategy is aligned with it. Without this knowledge, employees cannot adapt their work to contribute to effective strategy implementation. Communication is a major lever for organisational success. Good communication is needed to
Instil an understanding of the organisation's strategy throughout the organisation
Foster buy in to support the strategy
Educate the organisation about measurement and management system for implementing the strategy
Provide feedback about the strategy
Communication and education and aligning incentives and personal objectives are critical to executing strategy.Â Leading organizations are also developing personal scorecards to further link the personal development process to the strategic management process. Incentive compensation helps organisations move beyond creating strategic awareness to motivating people to behave strategically. It is important to thoroughly consider the design issues that can most influence performance, for example the use of quantitative or qualitative measures tied to compensation decisions, whether to reward individual or team performance.
5. Govern to make strategy a continual process- Using the BSC as a strategic management system entails strategy formulation, strategic performance reporting, strategic reviews, strategic planning, budgeting and integration.
Kaplan and Norton (2004) showed how strategy maps provided a visual framework for integrating the organisation in the four perspectives of a BSC. Strategy maps illustrated the cause and effect relationships that link desired outcomes in financial and customer perspectives to critical internal processes. The strategy maps identifies the specific capabilities in the organisations intangible assets that are required for delivering performance in the critical internal processes Kaplan and Norton (2004).
This is depicted in figure 2
Figure 2 Strategy Map depicting cause and effect method
Intangible assets have become decisive for sustainable value creation. The learning and growth perspective of the BSC highlights the role for aligning the organisations intangible assets to it's strategy. This perspective contains the objectives for three components (human capital, information capital and organisation capital) of intangible assets essential for implementing strategy Kaplan and Norton (2004). They must be aligned and integrated with the objectives of the internal processes.
As this research is about aligning Business and IT strategies further detail will be provided on the Information Capital intangible asset. Information capital consists of systems, databases, libraries and networks that make information and knowledge available to the organisation. Using this approach the focus shifts from evaluating the information capital performance by cost and reliability statistics to evaluation based on strategic alignment, measuring how information capital contributes to the organisations strategic objectives. Information capital must be managed like an asset, with it's value been measured by how it contributes to the organisation strategy for creating competitive advantage Kaplan and Norton (2004).
Strategic fit exists when the network of internal performance drivers is consistent and aligned with the desired customer and financial outcomes (the cause and effect of Strategy maps).
Kaplan and Norton (2006) looked at aligning organisational units by introducing the role for an enterprise Strategy Map and BSC. These tools are used to clarify corporate priorities, which can then be clearly communicated to each business unit, and also to the board of directors and key customers, suppliers and alliance partners. The corporate headquarters then evaluates how each business unit is performing as regards the priorities set by the corporate headquarters. In this way executives are provided with a governance framework that's helps to unlock previously unrealised value from enterprise synergies Kaplan and Norton (2006).
The alignment process of necessity, should be cyclic and have a top down bias Kaplan and Norton (2006).The alignment sequence recommended by Kaplan and Norton (2006) to create enterprise derived value starts with corporate headquarters articulating the enterprise value proposition that will create synergies among operating units, support units and external partners. In this scenario IT is taken as an internal support and service unit. By utilising the Strategy maps and BSC for the alignment sequence, allows this process to transform IT from an expense centre to a strategic partner Kaplan and Norton (2006). Alignment is then viewed as a management process. Most organisations attempt to create synergy in a fragmented uncoordinated way and when no one is responsible for overall organisation alignment, the opportunity to create value through synergy may be missed Kaplan and Norton (2006).
In aligning IT with the corporate organisation the IT must be competent at basic necessary services while developing the capabilities to collaborate with business units, offering them customised services, solutions and technologies that advance their strategies. This strategic positioning shifts the paradigm from how much to spend on IT to how much to invest in IT to advance the organisation's strategic agenda Kaplan and Norton (2006).
Criticism of the BSC
Norreklit (2003) investigates if the BSC is based on convincing theory or if it is the result of persuasive rhetoric. Norreklit (2003) comes to the conclusion that the BSC text is persuasive a trait that can be ascribed to the status of the authors. According to Norreklit (2003), the dramatic approach used in the BSC relies too much on emotional appeal (pathos), which appeals to the recipients emotions and mood and the reputation/authority of Kaplan and Harvard Business Publishing(ethos) meaning that trust is garnered by the recipients by the authority and credibility of the author, rather than on sound logical development (logos) the logical arguments gained through human reasoning.
Reilly and Reilly (2000) discuss and criticize the balance scorecard approach. The primary limitation is that it does not define appropriate balance, particularly in terms of stakeholder value and the linkages among measurements and between perspectives is not explicit Reilly and Reilly (2000).
Ittner and Larcker (2003) state that most companies have apparently adopted the BSC, but seldom establish the cause and effect linkages between the measurements and desired outcomes between non financial measures. This allows self-serving managers to chose and manipulates measurements solely to enhance their own earnings and bonuses. It appears that nonfinancial measurements are just as, if not more, susceptible to manipulation as financial accounting measurements, and perhaps even more damaging to the companies because of the opportunity costs incurred Ittner and Larcker (2003)
According to Schonberger (2008) goal setting and scorecard approaches interfere with process improvement in the following ways, most goals and targets are too highly aggregated to indicate how to respond when the goal and targets are not attained , those setting the goals and targets are not the ones who have to implement the processes, KPI management tends to cause over reaction to variations that are normal to the system,Â most KPIs are influenced by factors that are beyond the control of the workforce and by focusing on management set goals and metrics there is a reduction on the focus of the processes and process data needed for continuous improvement.
Alternative Performance Management Tools.
Activity-based costing (ABC), bridges finance and operations. On the operational level, it identifies the activities that are required by a company to deliver the goods or the services that it produces. It also defines which resources are needed to fuel these activities. On the financial level, activity-based costing provides managers with insight about the costs of business activities or processes by allocating direct and indirect costs to various steps for each activity or process, the so-called cost drivers Buytendijk (2008).
Activity-based management (ABM) aligns activities, resources, and financial results Buytendijk (2008).
Buytendijk (2008) describes Six Sigma as a rigorous and disciplined methodology that utilizes data and statistical analysis to measure and improve a company's operational performance, practices and systems.
The European Foundation for Quality Management (EFQM) Excellence Model is a strategic performance management methodology. It is a framework based on nine criteria. Four of these criteria are outcomes, with respect to one's own performance, customers, people, and society. These are achieved by managing the five enabling criteria: leadership, strategy, partnerships and resources, people, and processes. The EFQM process largely consists of self-assessment. According to EFQM, self-assessment is a comprehensive, systematic and regular review of an organization's activities and results referenced against the EFQM Excellence Model, Buytendijk (2008)