A STUDY OF THE ROLE OF BUSINESS-IT STRATEGY IN IT ALIGNMENT AND FIRM PERFORMANCE IN IRAN MANUFACTURING FIRMS

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1 A Peer Reviewed International Journal of Asian Research Consortium AJRBEM: ASIAN JOURNAL OF RESEARCH IN BUSINESS ECONOMICS AND MANAGEMENT A STUDY OF THE ROLE OF BUSINESS-IT STRATEGY IN IT ALIGNMENT AND FIRM PERFORMANCE IN IRAN MANUFACTURING FIRMS DR. MORTEZAMALEKI*; SEYED MEHDI MOUSAVIDAVOUDI**; ESMAEILSHABAANI*** Journal of Asian Research Consortium 322 ABSTRACT *Assistant professor, Faculty of Management and Economics, Semnan University, Semnan, Iran. **Student of Executive MBA, Faculty of Management and Economics, Semnan University, Semnan, Iran. ***M.A. in Public Management, Faculty of Management, Tehran University, Tehran, Iran. The present study was conducted in Mazandaran, a province in north of Iran and aimed to analyze the effect of business-it strategy on ITalignment and firm performance. According to the registrar Office of Industrial Township in Mazandaran Province, 2000 companies have been selected as the survey population. A total of 380 questionnaires were distributed among the respondents and 329usable questionnaires were returned. The factor analysis and the findings show that business strategy and IT strategyhave a significant positive influence on IT alignment (hypotheses1 and 2);IT alignment has a significant positive influence on firms marketing and financial performance (hypotheses3 and 4). The results also show that all indirect relationships between research variables are supported. KEYWORDS: Business Strategy, IT Strategy, IT Alignment, Firm Performance, Iran.

2 1. INTRODUCTION Today s organizations are increasingly depending on the Information Technology (IT) applications in enhancing their performance. Information Technology and its use havegained an incredible attention recently in business world (Maleki et al., 2011). But, the question is whether investment in IT per se will yield to any positive results over the organizations performance or organizations should have other traits to be successful after implementing information technology.moreover, we observe continuous investment on Information Technology, so that it has become the largest item of capital expenditure in the most organization. All of these are due to the fact that business organizations are facing a more complex and competitive environment than ever before (Chen & Lin, 2009; Ellram, 1991) and their success is no longer a matter of analyzing only the individual firm, but rather the chain of delivering and supplying organizations, because the individual firm is only a single part of the supply chain (Maleki et al., 2011). Thus, firm s IT should be compatible with that of its channel partners.it alignment is among the important factors that lead to the effectiveness of organizations. It seems that IT alignment gets crucial importance in today s business. The businesses should follow the new changes in their sector and adapt themselves to the environmental improvements in order to survive in the market;and IT alignment is the key concept that helps organizations to do so. Journal of Asian Research Consortium 323 Furthermore, it seems that the way a firm aligns its IT with its partners depends on its IT strategy and business strategy. As can be found in the past literature, IT strategy and business strategy has received considerable attention during the last ten years because many argue that, to be successful, organizations need anappropriate IT strategy and business strategy. It can be inferred that business-it strategy may help us understand that how organizations align their IT with their partners and how this alignment leads to better financial and marketing performance.all firms who want to be in a good level in comparison with their competitors need a predictive business-it strategy and also they should align themselves with their partners. As a result, by improving business-it strategy firms align their IT in a better way and will reach their main goals which are efficiency, effectiveness, market share and survival in today s competitive environment. The research method used for this article is descriptive-correlation. This study used secondary data sources (library and other recorded observations) and case studies. First the literature of Business strategy, IT strategy, IT alignment, marketing and financial performance and SEM were studied. Following the literature review, criteria were extracted, the questionnaires were distributed among the managers of selected firms and a total of 329 filled questionnaires were gathered. Finally the analysis was carried out utilizing Structural Equation Modeling (SEM) methodology and the analysis output was published. 2. REVIEW OF LITERATURE 2.1. BUSINESS STRATEGY Business strategy has been studied in both large and small businesses. There have been some researcheswhich studied business strategy in large organizations, with much of it based on typologies (E.g. Porter, 1980; Miles and Snow, 1978). Porter (1980)identifiedone of the best known typology: cost leadership, differentiation, and focus. Miles and Snow (1978) identified

3 defenders, reactors, prospectors, and analyzers as viable strategic orientations of organizations. Business strategy has also received attention among small business researches. Storey (1994) identified strategy as one of the three main components that contribute to growth of small firms in their industry. He also observed that rapidly growing firms often occupied niche markets. Reid (1993) found that the focus strategy emphasized by small firms was based more on differentiation than cost leadership. Typically, small firms sought relatively low cost forms of product differentiation, emphasizing rapid response, service quality and personal treatment of customers. According tolefebvre and Lefebvre (1992), small firms were not as strategically oriented as larger organizations, which makes the identification of strategy more difficult. Furthermore, Chell et al. (1992) recognized the lack of strategic awareness in many small firms. Horne et al. (1992) and Kim and Choi (1994) have identified types of small firms based on strategy. However, Kim and Choi (1994) stated that not all types are necessarily present in all industries. Although these researches suggest that results from some strategy studies in larger organizations can be applied to small organizations, they couldn t provide a consensus model of strategy for small firms (Cragg et al., 2002). For example, they have introducedsome different typologies: competitive edge, scope constrained, management constrained, local/craftsmen, and local/opportunists (Horne et al., 1992); innovative, efficient, versatile, marginal, and reactive (Kim and Choi, 1994). As a result of a lack of consensus in the literature, it is difficult to study strategy in small firms. Journal of Asian Research Consortium 324 Business strategies in small firms may not be formalized or planned, but emerge into specific organizational commitments (Cragg et al., 2002). Various studies were used to develop a measure for this study in the absence of an existing instrument to measure business strategy in small firms (Pratten, 1991; SBRC, 1992; Reid et al., 1993; Hall, 1995; Barkham et al., 1996; Gunasekaran et al., 1996; Julien et al., 1997; Namiki, 1988; Hewitt-Dundas and Roper, 1999; Cragg et al., 2002; Chang et al., 2003; Ritter and Gemunden, 2004; Jermias and Gani, 2004; Chang and Chuang, 2011). Most of these researchestried to identify key factors that contributed to small firms competitiveness. Eventually, nine business strategy items were collected from these studies, as showed in Table 1.

4 TABLE 1. LITERATURE USED FOR BUSINESS STRATEGY ITEMS Journal of Asian Research Consortium 325 Business Strategy items 1. Pricing Strategy 2. Quality Product Strategy 3. Product Different iation Strategy 4. Product Diversifi cation Strategy 5. New Product Strategy 6. New Market Strategy 7. Quality Service Strategy 8. Intensive Marketin g Strategy 9. Producti on Efficienc y Strategy Pratten, 1991 SBRC, 1992 Reid et al., 1993 Hall, 1995 Gunasekaran et al., 1996 Barkham et al., 1996 Julien et al., 1997 Hewitt-Dundas and Roper 1999 Namiki, 1988 Cragg et al., 2002 C hang and Chuang, 2011 Jermias and Gani, 2004 Ritter and Gemunden 2004 Chang et al., 2003 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

5 2.2. IT STRATEGY It seems that many studies in this field have reported the operational use of IT in small firms but relatively few researches have examined use from a strategic perspective (Cragg et al., 2002). Levy et al. (1998) identified small firms where IT was being used strategically, but such firms were a minority. They also identified that in 'efficiency' firms, "there is no recognition of the role of information in supporting the achievement of business strategy" (p. 5). While in 'innovation' firms, "IS are an integral and tightly woven part of the business strategy" (p. 6). Bergeron and Raymond (1992) stated that IT can be used as a strategic weapon by small firms to maintain their competitiveness and attain a favorable position within their sector of activity. Thus, there is evidence of the strategic use of IT in small firms (Cragg et al., 2002). In addition, many studies have mentioned inappropriate conditions for IT to be used strategically in small firms. For example, Cragg and King (1993) comment on the limited resources in small firms. Furthermore, according to Lees and Lees (1987), small firms do not perform adequate planning of the use and operation of IT. In addition, Palvia et al. (1994) stated that the computing environment in small firms was fundamentally different from medium-sized firms, where there was often a formal MIS department and a community of end- users. Journal of Asian Research Consortium 326 There has been little research of IT strategy in small firms;thusin this study we adopted a same approach to Chan et al. (1997) and Cragg et al.(2002) where the instrument was developed to mirror the same items as were used to measure business strategy of the firms. Thus, the instrument was devised to assess the level of IT support provided for business strategy. As a result, this study measured IT strategy using nine items similar to the nine used to measure business strategy which are shown in table 1, but with different questions. For example, for the business strategy item we attempt to be ahead of our competitors in producing products with higher quality, the IT strategy item was our current systems enable us to produce products with higher qualitythan our competitors IT ALIGNMENT According to Maleki et al. (2011) when a firm s IT is compatible with that of its channel partners, we can claim there is IT alignment. IT alignment is the extent of embeddedness of IT across the supply chain, requiring channel partners to coordinate and align their business processes with each other to achieve efficiency (Powell, 1992). Since many SCM software packages are developed by different vendors, built using a wide range of technologies (Philip & Booth, 2001), the integration between trading partners has become one of the biggest challenges (Frohlich, 2002; Taylor, 2003), leading to a situation where failure to achieve system integration across the transaction between partners becoming one of major growing problems in today s organizations. Channel partners can achieve higher system compatibility and integration by investing in advanced IT (Philip & Booth, 2001). Moreover, firms partners share the costs and responsibilities in adopting of a new technology due to the need for IT alignment (Bowersox et al., 1999; Taylor, 2003). The pressures from the entire transaction network and the potential synergistic benefits through an integrated system will be as an impetus for the adoption of advanced technologies to enhance IT alignment for those firmshavingyet to adopt a new system (Maleki et al., 2011).

6 2.4. FIRM PERFORMANCE Researchers have offered a variety of measures of organizational performance. In this study we follow Wu et al. (2006) and Maleki et al. (2011) by considering financial performance and marketing performance for measuring firm performance. In those mentioned studies, researchers measures firm profitability, ROI and cash flow for determining financial performance of firms. In addition, sales growth, market share, market development and product development were used to determine marketing performance of firms. Taking into account the above literature, the following figureshows the conceptual framework which involved the relationship between business strategy and IT strategy as independent variables, IT alignment as mediating variable and marketing performance and financial performance as dependent variables. FIGURE 1. RESEARCH PROPOSED MODEL Then, according to the above-mentioned figure research hypotheses are: H1: Business strategy has a significant positive influence on IT alignment. Journal of Asian Research Consortium 327 H2: IT strategy has a significant positive influence on IT alignment. H3: IT alignment has a significant positive influence on marketing performance H4: IT alignment has a significant positive influence on financial performance. H5: Business strategy has a significant positive influence on financial performance indirectly through IT alignment. H6: IT strategy has a significant positive influence on marketing performance indirectly through IT alignment. H7: Business strategy has a significant positive influence on financial performance indirectly through IT alignment. H8: IT strategy has a significant positive influence on marketing performance indirectly through IT alignment.

7 3. RESEARCHMETHODOLOGY 3.1. STATISTICAL POPULATION According to the Registrar Office of Industrial Township in Mazandaran Province, which provided us with the database of member companies, 2500 companies have been introduced in a list as active firms. We excluded consultants, freight forwarders, and third-party logistics companies, and 2000 companies have been selected as the survey population. Supply chain managers, logistics managers, procurement/purchasing managers and senior managers considered as appropriate respondents for this study. Referring to the Krejcie and Morgan (1970) table, the minimum number of sample size was determined which was about 322 companies and the authors used random sampling for this research. After the distribution of 380 questionnaires, 329 filled questionnaires were gathered from the firms and the rest of them were not usable due to incompleteness and other factors. Table 2 illustrates the Descriptive statistics of the respondents. TABLE 2. DESCRIPTION OF THE RESPONDENTS Journal of Asian Research Consortium INSTRUMENT In order to collect the necessary data, a questionnaire was used to test the hypotheses of the study. To design the questionnaire for measuring research variables and scale development, we used Churchill (1979) scale development method. First, we defined the domain of each construct, deciding what would be included and excluded. Then, an extensive review of literature has been done in order to identify questions measuring each variable and relevant scale. To that end, it has been tried to adopt or adapt the most repetitive questions in the literature for increasing the questionnaire validity.

8 We used five-point Likert type scale for all the items. Response categories range from 1 (strongly disagree) to 5 (strongly agree). After finalizing the questionnaire, 25 of them have been sent to respondents, resulted in changing and in some cases, eliminating some of the questions; this last version of the questionnaire has been used for data collection. The questionnaire consists of two parts; first part consisted of four questions which related to demographic information of the respondents and number of firms employees. and the second part consisted of 78 questions measured the research variables; 33 questions used for measuring business strategy, 33 questions for measuring IT strategy, 5 questions for measuring IT alignment, 3 questions for measuring financial performance and 4 questions for measuring marketing performance RELIABILITY The summary statistics of formal survey are shown in Table 3. For reliability evaluation we utilized Cronbach's alpha. The Cronbach's alpha reliability of all variables are more than 0.7 (α>0.7), which indicates all scales demonstrate good reliability. TABLE 3. THE SUMMARY STATISTICS OF FORMAL SURVEY Journal of Asian Research Consortium 329 Instrument N Mean SD α Production efficiency Intensive Marketing Quality Service New Product Product Differentiation Quality Product Product Diversification Pricing/Cost Reduction New Market Business strategy Production efficiency Intensive Marketing Quality Service New Product Product Differentiation Quality Product Product Diversification Pricing/Cost Reduction New Market IT strategy IT alignment Financial performance Marketing performance N = Number of questions (items), SD=standard deviation; α= Cronbach's alpha coefficient.

9 3.4. VALIDITY For evaluating the validity of the questionnaires, we used content validity and construct validity.content validity deals with how representative and comprehensive the items were in creating the scale. It is assessed by examining the process by which scale items are generated (Moon & Kim, 2001). Content validity assured us that all aspects and parameters that impact on main content were evaluated. In order to test the content validity after devising a framework for the questionnaire, we asked 12 experts to modify it if needed. These experts evaluated all the implemented criteria in the questionnaire and modified it. Construct validity determines the extent to which a scale measures a variable of interest (Moon & Kim, 2001). In this research we used factor analysis for considering the structure of research. Confirmatory factor analysis was used to investigate the construction of the questionnaire. Factor analysis depicted that all the mentioned criteria are measured in these questionnaires MEASUREMENT MODEL OF BUSINESS STRATEGY In the initial step, we applied confirmatory factor analysis and eventually conducted path diagram of X model as per Figure 2. We have tested relationship between business strategy latent and its indicators. Fitness's indices in Table 4 show good fitness of our X model, proving selected indicator are good representative for each dimension of business strategy.based on Joreskong & Sorbom (1989), Chi-Square/df 3, RMSEA 0.10, GFI and AGFI > 0.9, show that the measurement model provides a reasonable fit to the data. TABLE 4. BUSINESS STRATEGY MODEL FITNESS INDICES Journal of Asian Research Consortium 330 fitness indices Chi-Square/df P-value Root Mean Square Error of Approximation (RMSEA) Goodness of Fit Index (GFI) Adjusted Goodness of Fit Index (AGFI) Measure of Index

10 FIGURE 2. STANDARDIZED SOLUTIONS MODEL FOR BUSINESS STRATEGY Journal of Asian Research Consortium 331 Figure 2 shows the extent each variable describes business strategy. The ranking of the variables is as follows: 1. Quality Product, 2. Production efficiency and Product Differentiation, 3. Intensive Marketing, 4. Product Diversification, and 5. New Product, Quality Product, Pricing/Cost Reduction and New Market.

11 MEASUREMENT MODEL OFIT STRATEGY In the next step, we applied confirmatory factor analysis and eventually conducted path diagram of X model as per Figure 3. We have tested relationship between IT strategy latent and its indicators. Fitness's indices in Table 5 show good fitness of our X model, proving selected indicator are good representative for each dimension of IT strategy. TABLE 5.IT STRATEGY MODEL FITNESS INDICES fitness indices Chi-Square/df P-value Root Mean Square Error of Approximation (RMSEA) Goodness of Fit Index (GFI) Adjusted Goodness of Fit Index (AGFI) Measure of Index Journal of Asian Research Consortium 332

12 FIGURE 3. STANDARDIZED SOLUTIONS MODEL FOR IT STRATEGY Journal of Asian Research Consortium 333 Figure 3 shows the extent each variable describes IT strategy. The ranking of the variables is as follows: 1. New Market, 2. Quality Product, 3. Quality Service and New Product, 4. Pricing/Cost Reduction, 5. Product Diversification, 6. Intensive Marketing and 7. Production efficiency MEASUREMENT MODEL OFITALIGNMENT

13 In next step, we adopted confirmatory factor analysis for IT alignment and eventually conducted path diagram of Y model as per Figure 4. We have tested Relationship between IT alignment and its indicators. Fitness's indices in Table 6 show good fitness of our Y model. TABLE 6.IT ALIGNMENT MODEL FITNESS INDICES fitness indices Chi-Square/df P-value RMSEA GFI AGFI Measure of Index FIGURE 4. STANDARDIZED SOLUTIONS MODEL FOR IT ALIGNMENT Journal of Asian Research Consortium MEASUREMENT MODEL OFFINANCIAL PERFORMANCE

14 In next step, we adopted confirmatory factor analysis for financial performance and eventually conducted path diagram of Y model as per Figure 5. We have tested Relationship between financial performance and its indicators. Fitness's indices in Table 7 show good fitness of our Y model. TABLE 7. FINANCIAL PERFORMANCE MODEL FITNESS INDICES fitness indices Chi-Square/df P-value RMSEA GFI AGFI Measure of Index FIGURE 5. STANDARDIZED SOLUTIONS MODEL FOR FINANCIAL PERFORMANCE Journal of Asian Research Consortium MEASUREMENT MODEL OFMARKETING PERFORMANCE

15 At the end, we adopted confirmatory factor analysis for marketing performance and eventually conducted path diagram of Y model as per Figure 6. We have tested Relationship between marketing performance and its indicators. Fitness's indices in Table 8 show good fitness of our Y model. TABLE 8. MARKETING PERFORMANCE MODEL FITNESS INDICES fitness indices Chi-Square/df P-value RMSEA GFI AGFI Measure of Index FIGURE 6. STANDARDIZED SOLUTIONS MODEL FOR MARKETING PERFORMANCE Journal of Asian Research Consortium RESULTS

16 This study tends to investigate the relationship among business strategy, IT strategy, IT alignment, firms financial performance and marketing performance. The patterns of correlations were generally in favor of some of the proposed hypotheses 1 to 8. Direct and indirect influences of business strategy, IT strategy and IT alignment on financial performance and marketing performance were tested using the SEM technique that is explained below. Figure 7 shows the results of the SEM analysis. Fitness's indices in Table 9 also show good fitness of the Structural model. FIGURE 7. STRUCTURAL EQUATION MODEL FOR CORE COMPETENCIES Journal of Asian Research Consortium 337 Figure 7 shows the direct relationship of business strategy to IT alignment, IT strategy to IT alignment, IT alignment to marketing performance and IT alignment to financial performance.based on the results of SEM analysis, Hypotheses 1, 2, 3 and4 are supported. TABLE 9. THE STRUCTURAL MODEL FITNESS INDICES

17 Fitness indices Measure of Index χ 2 /df P-value Root mean square error of approximation [RMSEA] Goodness of fit index [GFI] 0.92 Adjusted goodness of fit index [AGFI] 0.90 Comparative fit index [CFI] 0.91 Incremental fit index [IFI] 0.94 Table 10 summarizes the hypothesis test results in terms of path coefficients (standardized) and t -value in significance level TABLE 10. THE RESULTS OF THE HYPOTHESIS TEST Journal of Asian Research Consortium 338 Path t - No Hypotheses coefficients value Results H1 Business strategy IT alignment * Accept H2 IT strategy IT alignment * Accept H3 IT alignment financial performance * Accept H4 IT alignment marketing performance * Accept Business strategy financial performance through IT H5 alignment (indirectly) Business strategy marketing performance through IT H6 alignment (indirectly) IT strategy financial performance through IT alignment H7 (indirectly) IT strategy marketing performance through IT alignment H8 (indirectly) * P < DISCUSSION AND CONCLUSION * Accept * Accept * Accept * Accept Present research focused on IT alignment in small firms. Importantly, the findings indicated that a large proportion of our sample of small manufacturers had achieved a high degree of alignment between their firms ITand that of their partners. Much past researches on IT and small firms suggests that small firms lack strategic planning. Blili and Raymond (1993) highlighted the contrast between the empiricism of small business management methods on the one hand, with the systematization required by methodologies for planning, designing and implementing IT. The current study provided empirical evidence that a large proportion of small manufacturing firms have appropriate strategy for their IT and business which leads to

18 align their IT with that of their partners. Furthermore, the study identified a positive association between IT alignment and organizational performance (financial performance and marketing performance). While causal links cannot be deduced from this study, the results show that IT alignment is related to financial performance and marketing performance which confirms the findings of the previous studies carried out in larger organizations (E.g. Chan et al., 1993; Burn, 1996). The findings suggest that the positive relationship applies to small business as well as large business. This research demonstrated that appropriate and predictive business-it strategy was clearly linked to organizational performance. This evidence supports prior research findings in large firms and implies that either high performing firms are good at their strategy setting(business- IT strategy setting), or that IT alignment influences organizational performance. The latter possibility, i.e., that IT alignment influences performance, suggests that small firms can benefit from IT alignment. Thus, managers of small firms should give high priority to IT projects that support their business strategy.in addition, this study found that it was useful to view firm performance as the match between business strategy, IT strategy and IT alignment. This suggests that firms should aim to support their major strategies with IT. For example, if quality and customer service are significant strategies, then managers should make sure that their IT is highly aligned to quality and customer service. According to Cragg et al. (2002), the need for a strategic perspective implies the involvement of senior managers. This probably requires the owner-manager or CEO to take an active role in seeking IT alignment. 6. LIMITATIONS Present study was based on a survey, showing some shortcomings as it captures a situation or an event at a point in time. For example, the impact of IT alignment on firm performance may not have been fully measured unless the IT had been implemented well before the study. Future research could employ a more qualitative approach, such as longitudinal study. Journal of Asian Research Consortium 339 Furthermore, another limitation of this study is that the IT strategy items used in this study were developed in parallel to the business strategy items. Future researches could explore other dimensionsto measure firms IT strategy more precisely. Another limitation of our study is about cause and effect relationship between IT alignment and firms financial performance and marketing performance. There are potentially other factors that could influence firms financial performance and marketing performance. A cross- sectional study such as this cannot prove cause and effect relationships. Future researchers may choose different approaches to examine the cause and effect relationship between research variables. 7. REFERENCES

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