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Chia- An Chao. Introduction


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Information  Technology,  Learning,  and  Performance  Journal,  Vol.  25,  No.  2   42 Chia-­‐An  Chao  is  Professor,  Management,   Information  Systems  and  Business  

Education,  Indiana  State  University,  Terre   Haute,  Indiana.    

Services  and  Small  Manufacturing  Businesses:  

Organizational  Characteristics  of  Aligned  and  

Unaligned  Businesses  












Chia-­‐An  Chao  


Small  businesses  are  often  characterized  as  lacking  in  strategic  planning  and  lagging  

behind   large   businesses   in   information   technology   (IT)   adoption.   In   this   study,   business–IT   strategic   alignment   (the   fit   between   the   business   and   IT   strategy)   and   relatively  sophisticated  IT  use  were  found  in  some  small  businesses.  Two  homogeneous   groups  resulted  from  a  cluster  analysis  of  217  small  businesses  in  the  financial  services   and  manufacturing  industries:  strategically  aligned  and  unaligned.  An  examination  of   characteristics   of   these   two   groups   such   as   industry   sector,   business   planning   practices,  and  levels  of  IT  sophistication  revealed  a  higher  concentration  of  financial   services   small   businesses   in   the   aligned   group,   indicating   the   influence   of   external   environmental  factors  on  strategic  alignment.  Small  businesses  committed  to  business   planning   were   also   more   likely   to   be   strategically   aligned.   Additionally,   strategically   aligned   small   businesses   used   IT   to   support   operational   as   well   as   some   strategic   functions  such  as  market  analysis  and  planning.  The  rate  of  IT  adoption  was  generally   low,  however,  indicating  small  businesses  were  indeed  lagging  behind  in  IT  adoption.      



Information  technology  has  become  an   integral  part  of  organizational  operations.   With  the  adoption  of  information  and   communication  technology  hardware  and   software,  organizations  have  reported   numerous  benefits  such  as  increased  

productivity,  improved  decision  making,  and   more  effective  supply  chain  management   (Beheshti,  2004;  Cline  &  Guynes,  2001;   Davenport,  2005;  Green,  2003;  O’Marah,   2005).  IT  adoption  in  itself,  however,  does  not   guarantee  a  positive  outcome;  to  maximize  IT   investment  and  achieve  a  positive  impact  on   business  performance,  there  must  be  a  high   degree  of  alignment  between  business  and  IT   strategies  (Bergeron,  Raymond,  &  Rivard,   2004;  Chan,  Huff,  Barclay,  &  Copeland,  1997;   Henderson  &  Venkatraman,  1993;  Luftman  &   Brier,  1999;  Marchand,  2005).


This  study  explores  the  issue  of  business– IT  strategic  alignment  in  small  and  medium-­‐ sized  enterprises  (SMEs)  and  the  

organizational  characteristics  of  SMEs  with   varying  degrees  of  alignment.  Small  

businesses  constitute  an  important  economic   force  in  the  US.  According  to  the  Small  

Business  Administration  [SBA]  (2004),  about   half  of  the  country’s  private  sector  employees   work  in  small  businesses,  and  SMEs  

contribute  to  about  half  of  the  private  sector’s   output.  While  SMEs  have  been  credited  with   driving  employment  growth,  they  are  also   known  for  their  fragility.  In  the  2004  SBA   report,  about  66%  of  new  businesses   survived  for  two  or  more  years.  The   percentage  of  companies  still  in  business   after  six  years  dropped  to  40%.  Small   businesses  are  plagued  by  a  variety  of   problems;  among  their  growth  impediments   and  reasons  for  failure  are  liquidity  and  other   financial  issues,  lack  of  market  knowledge,  


innovation,  and  management  expertise,   technology  constraints,  and  a  lackadaisical   approach  towards  business  planning  (Sims,   Breen,  &  Ali,  2002;  SBA,  2000;  Toftoy  &   Chatterjee,  2004;  Wu  &  Young,  2003).    

Given  the  importance  of  information   technology  in  improving  business  

performance  and  helping  SMEs  compete  with   larger  businesses,  SMEs  that  take  advantage   of  IT,  particularly  if  they  adopt  a  strategic   approach  to  IT  adoption  and  implementation,   are  at  an  advantage  (Bergeron  et  al.,  2004;   Lin,  Vassar,  &  Clark,  1993;  Schaefer,  1995).   Information  technologies  have  been  credited   with  helping  small  businesses  enhance  their   operational  efficiency  (Neeley,  1996;  

Penhune,  1998),  drive  business  growth   (Eckhouse,  1998),  and  integrate  marketing   operations  with  marketing  strategies  (Roge  &   Chakrabarty,  2002).  In  addition  to  the  

operational  and  strategic  importance  of  IT,   given  small  businesses’  limited  financial   resources  (SBA,  2000),  SMEs  must  invest   wisely  by  making  sure  that  their  IT  resource   allocation  properly  reflects  their  business   priorities.  The  central  research  question  to  be   addressed  in  this  study  is:  Are  there  

differences  in  organizational  characteristics   and  in  the  level  of  IT  use  between  

strategically  aligned  and  misaligned  small   businesses?  The  following  section  reviews  the   literature  on  business–IT  strategic  alignment,   IT  use  in  small  businesses,  and  factors  

affecting  strategic  alignment.      

IT  Strategic  Alignment


Information  technology  strategic  alignment  is   the  fit  between  business  strategy  and  IT   strategy  (Chan  et  al.,  1997;  Hussin,  King,  &   Cragg,  2002).  Henderson  and  Venkatraman’s   (1993)  Strategic  Alignment  Model  identified   four  fundamental  domains  of  strategic   choices:  (a)  business  strategy,  (b)  IT  strategy,   (c)  organizational  infrastructure  and  

processes,  and  (d)  IT  infrastructure  and   processes.  They  contend  that  strategic   alignment  requires  more  than  congruent   business  and  IT  strategies.    It  requires  a  close   examination  and  alignment  of  an  

organization’s  external  environment  and  its   internal  infrastructure,  process  and  

functional  integration.  According  to   Henderson  and  Venkatraman  (1993),   strategic  alignment  involves  strategic  fit,  the   interrelationships  between  the  external  and   the  internal  components  of  business  and  IT   strategies  and  organizational  infrastructure,   as  well  as  functional  integration,  the  strategic   and  operational  integration  of  business  and   IT  domains.  

The  multitude  of  interrelated  domains  in   Henderson  and  Venkatraman’s  Strategic   Alignment  Model  illustrates  the  complexity  of   strategic  alignment.  This  may  explain  why   companies  find  strategic  alignment  a  

challenging  task  (Chan  et  al.,  1997;  Luftman  &   Brier,  1999).  To  elucidate  the  strategic  

alignment  construct  and  to  develop  

instruments  to  measure  it,  Chan  et  al.  (1997)   studied  IT  strategic  alignment  and  its  impact   on  business  performance,  measured  by   market  growth,  profitability,  product-­‐service   innovation,  and  company  reputation,  and   perceived  IT  effectiveness.  They  defined  IT   effectiveness  as  user  information  satisfaction   and  organizational  impact,  and  they  

hypothesized  that  IT  strategic  alignment  was   directly  related  to  IT  effectiveness  and   business  performance.  Their  findings   supported  both  hypotheses,  and  they  found   that  IT  strategic  alignment  was  a  better   predictor  of  business  performance  and  IT   effectiveness  than  either  business  strategic   orientation  or  IT  strategic  orientation.    

In  the  small  business  context,  Bergeron  et   al.  (2004)  used  cluster  analysis  to  group  110   small  businesses  into  four  homogenous   groups  based  on  the  coalignment  of  the  firms’   business  strategy,  business  structure,  IT   strategy,  and  IT  structure.  They  found   businesses  belonging  to  clusters  that   demonstrated  conflicting  coalignment   patterns  reported  lower  growth  and  

profitability  rates  compared  to  businesses  in   the  coaligned  clusters.  In  addition,  strategic   alignment  has  been  found  to  moderate  the   impact  of  IT  investment  on  business  

performance.  Byrd,  Lewis,  and  Bryan  (2006)   found  a  statistically  significant  interaction  


effect  of  IT  investment  and  strategic  

alignment  on  business  performance  beyond   those  of  the  two  main  effects  individually.  The   study  showed  that  better  business  

performance  can  be  achieved  through   strategic  alignment  without  increasing  IT   investment.    

While  the  content,  approach,  process,  and   impact  of  alignment  have  been  the  focus  of   some  researchers  (Bergeron  et  al.,  2004;  Byrd   et  al.,  2006;  Chan  et  al.,  1997;  Henderson  &   Venkatraman,  1993;  Peak  &  Guynes,  2003;   Rathnam,  Johnsen,  &  Wen,  2004),  others   focused  on  the  social  dimensions,  enablers,   and  inhibitors  of  strategic  planning.  Reich  and   Benbasat  (2000)  studied  the  social  dimension   of  alignment  and  found  several  factors  

influencing  alignment:  shared  domain   knowledge  and  communication  between   business  and  IT  executives,  and  coupled   business  and  IT  planning  processes.  Weill  and   Broadbent  (1998)  asserted  the  importance  of   collaboration  between  the  heads  of  business   lines  and  IT  professionals  in  determining  the   IT  infrastructures  appropriate  for  the  

business,  and  they  identified  various  benefits   of  appropriate  IT  infrastructures,  including   faster  times  to  market,  higher  growth  rates,   and  more  sales  from  new  products.  The   importance  of  mutual  understanding  through   communication  and  collaboration  between   business  and  IT  is  supported  by  Luftman  and   Brier  (1999),  who  identified  important   enablers  of  alignment,  including  IT   involvement  in  strategy  development  and   business-­‐IT  partnership.  Other  enablers   include  senior  executive  support  for  IT  and   the  IT  organization’s  proven  track  record   based  on  well-­‐prioritized  IT  projects,  strong   IT  leadership,  and  business  knowledge.  


IT  Use  and  Factors  Affecting  Strategic  

Alignment  in  Small  Businesses  


While  existing  strategic  alignment  research  is   extremely  informative,  most  of  these  studies   were  conducted  in  large  corporations.  It  is   not  clear  whether  these  findings  are   applicable  to  smaller  organizations.  For   example,  Luftman  and  Brier  (1999)  identified  

several  IT  alignment  enablers,  including   strong  IT  leadership  and  involvement  of  IT   personnel  in  strategy  development.  Planning   in  small  businesses,  however,  is  often  not  as   formalized  as  in  larger  corporations,  and   many  SMEs  do  not  have  a  dedicated  IT  

department.  Given  that  small  businesses  have   unique  characteristics  and  challenges  (Lin  et   al.,  1993;  O’Toole,  2003),  what,  then,  are  the   factors  affecting  business  and  IT  strategic   alignment  in  small  businesses?  

Existing  research  on  small  businesses   helped  identify  several  factors  that  could   affect  strategic  use  of  IT  and  strategic   alignment.  Before  exploring  these  factors,   though,  the  following  section  reviews  the   current  state  of  IT  use  in  SMEs  as  essential   contextual  information  for  this  study.      


IT  Use  in  Small  Businesses  


Some  have  described  IT  use  in  small   businesses  as  tactical  (Bridge  &  Peel,  1999;   Hassan  &  Tibbits,  2000;  Lin  &  Wu,  2004),   fragmented  (Foong,  1999;  Poon  &  Swatman,   1999),  short-­‐term  oriented  (Temtime,   Chinyoka,  &  Shunda,  2003),  and  lacking  in   strategic  foresight  (Levy  &  Powell,  1998).  Lin   and  Wu  (2004)  and  Temtime  et  al.  (2003)   found  that  small  businesses  more  frequently   used  microcomputers  for  routine,  operational   tasks  such  as  accounting,  payroll,  and  stock   control  activities  than  for  managerial   activities  such  as  strategic  analysis,  

investment  appraisal,  market  research,  and   profit  forecasting.  Levy  and  Powell  (1998)   also  found  small  businesses  were  more  likely   to  use  IT  to  improve  efficiency  and  reduce   cost  by  automating  existing  business  

processes  instead  of  using  IT  to  improve  their   products,  services,  and  business  processes.   Foong’s  study  (1999)  provides  a  clear  

illustration  of  the  fragmented  nature  of  IT  use   in  small  businesses.  Many  small  businesses’   Web  sites  were  not  linked  to  their  back-­‐office   transaction  processing  systems,  making  their   Web  sites  more  akin  to  a  “shop  window”  than   a  “sales  channel.”  With  the  adoption  of  the   Internet  and  other  communication  


percentage  of  SMEs  used  e-­‐mail,  but  many   were  unwilling  to  develop  e-­‐commerce   systems  or  change  their  current  business   model  to  take  full  advantage  of  the  new   technologies.  These  studies  indicated  a   relatively  low  IT  sophistication  level  in  small   businesses  compared  to  large  businesses   where  a  larger  number  of  information   technologies  were  implemented  throughout   the  enterprise  to  support  mission  critical   business  processes  and  gain  competitive   advantage.  

SMEs’  tendency  to  use  IT  for  operational   support  instead  of  strategic-­‐level  functions  is   likely  due  to  their  limited  resources  and   technological  competencies.  Firm  size  has   been  found  to  be  the  most  important   determinant  of  IT  adoption  (Foong,  1999;   Igbaria,  Zinatelli,  Cragg,  &  Cavaye,  1997;   Thong  &  Yap,  1995),  given  that  larger  

businesses  have  more  financial  resources  and   IT  talent;  conversely,  the  lack  of  resources   and  in-­‐house  IT  skills  limits  IT  adoption.   Levenburg  (2005)  found  differences  among   SMEs  in  Internet  use:  Micro  and  small  

businesses  tend  to  use  the  Internet  in  limited   ways,  such  as  finding  new  supply  sources  and   e-­‐mailing  prospective  customers.  On  the   other  hand,  Internet  use  was  more  

sophisticated  in  midsized  businesses  where   Internet  technologies  were  assimilated  into   activities  such  as  directly  selling  products   online.  Environmental  factors,  such  as  intense   competition  and  pressure  from  customers,   have  also  been  found  to  have  a  positive   relationship  to  IT  adoption  rates  (Levy,   Powell,  &  Yetton,  2001;  Looi,  2005).    

Organizational  Characteristics  


Organizational  factors  such  as  firm  size,   industry  affiliation,  and  business  planning   practice  affect  not  only  IT  use  but  strategic   alignment  as  well.  With  few  exceptions  (e.g.,   Lesjak  &  Lynn,  2001),  most  of  the  existing   literature  on  strategic  use  of  IT  and  alignment   issues  focuses  on  small  businesses  in  a  single   industry.  Examples  of  such  research  include   the  impact  of  the  rank  and  role  of  IT  leaders   on  strategic  alignment  (Karimi,  Gupta,  &  

Somers,  1996)  and  reasons  for  misalignment   (Rathnam  et  al.,  2004)  in  financial  services   businesses,  an  IT  alignment  planning  model   based  on  the  study  of  an  energy  services   organization  (Peak  &  Guynes,  2003),  and  IT   strategic  planning  at  different  stages  of  the   life  cycle  in  high-­‐tech  businesses  (Berry  &   Taggart,  1998).  To  expand  our  understanding   of  strategic  alignment  in  different  industries,   this  study  compares  IT  alignment  in  two   information  intensive  industries:  financial   services  and  manufacturing.    

Another  factor  affecting  business–IT   strategic  alignment  is  the  practice  of  business   planning  and  performance  measurement  in   small  businesses.  Research  indicates  SMEs   often  lack  business  planning  and  focus  more   on  short-­‐term  operational  planning  than   strategic  planning  (Carson  &  Cromie,  1990;   Toftoy  &  Chatterjee,  2004).  However,  other   studies  have  shown  that  SMEs  do  carry  out   mid-­‐  to  long-­‐term  business  planning.  For   example,  Upton,  Teal,  and  Felan  (2001)   studied  65  fast-­‐growth,  family-­‐owned  SMEs   and  found  that  these  businesses  had  detailed   business  plans  and  measurable  business   objectives.  In  addition,  these  SMEs  monitored   their  business  performance  and  compared   actual  business  results  to  planned  objectives.    




As  previously  stated,  most  business–IT   strategic  alignment  studies  examined  large   corporations,  and  with  few  exceptions,   alignment  issues  in  SMEs  have  received  little   attention  (e.g.,  Hussin  et  al.,  2002).  The   purpose  of  this  study  is  to  explore  the  

organizational  characteristics  of  strategically   aligned  and  misaligned  small  businesses  by   comparing  the  industry  affiliation,  business   planning,  and  IT  use  in  SMEs  with  different   degrees  of  strategic  alignment.    Hypotheses   include:  


H1:  Small  businesses’  industry  sector  and   strategic  alignment  are  related.     H2:  Business  planning  differs  between  


H3:  IT  sophistication  differs  between  aligned   and  unaligned  small  businesses.  


Testing  of  these  hypotheses  provides  useful   insight  into  business–IT  strategic  alignment   and  alignment-­‐related  factors  in  small   businesses.  

In  this  study,  strategic  alignment  was   measured  by  assessing  the  fit  between   implemented  business  strategy  and  IT   strategy.  While  some  strategic  alignment   studies  included  measurements  such  as   business  structure  and  IT  structure  

(Bergeron  et  al.,  2004),  communication  and   shared  knowledge  (Reich  &  Benbasat,  2000),   and  IT  governance  (Weill  &  Ross,  2005),   others  only  measured  the  fit  between   implemented  or  realized  business  strategy   and  IT  strategy  (e.g.,  Byrd  et  al.,  2006;  Chan  et   al.,  1997;  Hussin  et  al.,  2002).  This  study   focused  only  on  the  fit  between  IT  and   business  strategy,  or  the  extent  to  which  IT   adopted  by  small  businesses  supported   business  strategies  implemented  in  those   small  businesses.  It  did  not  examine  the   alignment  of  business  and  IT  organizational   structures  or  communication  between   business  and  IT  executives,  given  that  

organizational  structures  in  small  businesses   are  more  informal  and  less  likely  to  have  the   separate  IT  organization  often  found  in  large   businesses.  


Survey  Sample  and  Instrument  


A  survey  was  used  to  collect  input  from  small   business  owners  in  three  states  in  the  

Midwest.  The  sample  was  selected  from  the   ReferenceUSA  database.  Two  selection   criteria  were  used:  firm  size  and  industry   classification.  Size-­‐based  classifications  of   small  businesses  differ.  In  Europe,  businesses   that  have  fewer  than  250  employees  are   classified  as  medium-­‐sized,  small  businesses   are  those  with  fewer  than  50  employees,  and   micro  businesses  have  fewer  than  10  

employees  (“Commission  adopts,”  2003).  This   study  adopted  the  U.S.  Small  Business  

Administration’s  definition  of  a  small  and  

medium-­‐sized  business  (SBA,  n.d.):  an   independent  business  having  fewer  than  500   employees.  Two  information-­‐intensive   industries,  manufacturing  and  financial   services,  were  selected  given  their  use  of   information  and  communication  technologies   for  processing  relatively  high  volumes  of   information  (Chan  et  al.,  1997;  King  &  Pollalis,   2000).  Small  businesses  with  North  American   Industry  Classification  System  codes  having   the  following  first  two  digits  were  randomly   selected:  manufacturing,  codes  32  and  33,   and  financial  services,  code  52.  Monetary   authorities,  code  521,  were  omitted.  


Owners  or  managers  of  the  randomly   selected  businesses  received  by  mail  a  two-­‐ page  questionnaire  containing  questions   pertaining  to  the  company’s  business  

strategies,  business  planning  activities,  types   of  IT  used,  and  the  extent  to  which  IT  

supported  each  business  strategy.  A  

personalized  cover  letter  explaining  the  study   purpose  and  the  voluntary  and  anonymous   nature  of  the  survey  was  attached  to  each   questionnaire.    

Each  questionnaire  measured  business   strategy  using  a  10-­‐item  scale  adapted  from   Hussin  et  al.  (2002).  The  business  strategies   included  pertained  to  pricing,  operational   efficiency,  quality  (product/service  and   customer  service),  product  distinction  and   differentiation,  innovation,  and  marketing   strategies.  Using  a  five-­‐point  Likert-­‐type   scale,  survey  respondents  indicated  strategies   their  businesses  employed  to  compete  in  the   market.  In  addition,  they  indicated  the  extent   to  which  IT  supported  their  business  

strategies,  also  using  a  five-­‐point  Likert-­‐type   scale.  Respondents  also  answered  questions   about  whether  they  have  a  written,  orally   communicated,  or  no  business  plan,  and  types   of  IT  they  used,  such  as  accounting  

applications,  document  management,  and   marketing  or  customer  relationship   management  (CRM).  The  last  section  of  the   survey  included  questions  on  the  business   profile:  industry  affiliation,  annual  sales   revenue,  number  of  years  in  business,  and   number  of  employees.  An  extensive  review  of   the  literature  and  feedback  from  colleagues  


Table  1.  Business  Strategy,  IT  Strategy,  and  Strategic  Alignment  Mean  Scores       Business  Strategy   (BS)   IT  Support   for  Bus.   Strategies   (ITS)   Strategic   Alignment   (BS*ITS)   Strategies   Mean   Std.   Dev.   Mea n   Std.   Dev.       Mean   Std.   Dev.   1. Superior  customer  service   4.64   0.71   3.85   1.06   17.94   5.89   2. High  quality  

products/services   4.60   0.73   3.72   1.15   17.35   6.42   3. Higher  efficiency  to  reduce  

cost   3.98   0.92   3.82   1.04   15.38   5.64   4. Greater  product/service   variety   3.80   1.09   3.19   1.25   12.58   6.72   5. Effective  cross-­‐selling   3.58   1.13   3.12   1.34   11.99   7.23   6. Distinctive   products/services   3.47   1.14   3.08   1.22   11.15   6.39   7. Continual  market  expansion   3.21   1.08   2.88   1.21   9.86   6.01   8. New  products/services   3.13   1.18   3.06   1.20   10.23   6.37   9. Lower  product/service  

prices   3.08   1.17   2.94   1.19   9.42   5.82  

10.Aggressive  marketing   2.59   1.25   3.17   1.32   9.00   6.41    

established  the  content  validity  of  the  survey   instrument.  Cronbach’s  α,  which  yielded  an  α   of  0.894,  verified  the  internal  consistency  of   the  instrument.  

Two  months  after  the  initial  mailing  of  the   questionnaires,  the  selected  businesses   received  a  reminder  postcard.  A  total  of  217   usable  responses  resulted.  The  response  rate   was  11  percent.  


Profiles  of  Small  Businesses  


Answers  to  the  business  profile  questions   indicated  that  most  of  the  businesses  in  this   study  were  very  small  and  relatively  well-­‐ established,  generating  $5  million  or  less  in   annual  sales.  The  majority  of  the  businesses   (69.1%)  had  fewer  than  10  employees.   Businesses  with  10  to  50  employees  made  up   28.6%  of  the  respondents,  and  those  with   over  51  employees  accounted  for  less  than   3%.  As  to  firm  age,  about  one  third  (33.6%)   had  been  in  business  for  over  30  years,  23%   for  20  to  30  years,  and  20.7%  for  10  to  19   years.  Those  established  for  5  to  9  years   represented  13.4%  of  the  respondents,  and   less  than  10%  had  been  in  business  for  fewer   than  5  years.  Another  

business  profile  question   addressed  annual  sales   revenue.  Approximately  half   of  the  small  businesses   (47%)  generated  less  than   $1  million  in  sales,  37.8%   had  sales  between  $1  and  $5   million,  and  7.8%  between   $5  and  $10  million.  Of  the   217  small  businesses  in  the   survey,  59.4%  were  in  the   financial  services  industry   and  40.6%  were  in  the   manufacturing  sector.     The  age  of  the  small   businesses  in  this  study,   with  77%  more  than  10   years  old,  was  similar  to   that  reported  by  Hussin,   King,  and  Cragg  (2002),  in   which  83%  were  more  than   10  years.  The  businesses  in  

this  study  were  larger  though,  given  that  58%   of  the  businesses  had  between  50  and  100   employees,  as  compared  to  about  3%  in  this   study.  




The  moderation  method,  the  interaction  or   product  of  business  strategy  and  IT  support   for  business  strategy,  measured  strategic   alignment  in  this  study,  rather  than  the   matching  method  or  difference  score.  The   former  method  is  more  effective  in  detecting   IT  support  for  business  strategies  that  are   important  to  the  business  versus  support  for   less  important  business  strategies,  whereas   the  matching  model  focuses  on  the  difference   between  business  strategy  and  IT  strategy   and  does  not  differentiate  between  high   business  strategy  and  high  IT  strategy  versus   low  business  strategy  and  low  IT  strategy   (Chan  et  al.,  1997).    

           Table  1  shows  the  mean  scores  and   standard  deviations  of  all  10  business   strategies,  IT  strategies,  and  strategic  

alignment.  Small  businesses  most  frequently   adopted  customer  service,  quality  products  


Table  2.  Comparison  of  Strategic  Alignment  in   Clusters  1  and  2  


  N   Mean   Dev.  Std.   t   Sig.   Cluster  1   107   9.09   3.18   -­‐16.37   .000   Cluster  2   110   15.79   2.85  


Table  3.  Business  Profiles  and  Alignment  Groups    

Business  Profiles   Unaligned  Group   (N=107)   Aligned   Group   (N=110)   Chi-­‐square     Test      Years  in  Business        

     χ2  =  3.85                  df  =  4      Sig.  =  .413     Under  5  Years   10   10     5  –  9  Years   13   16     10  –  19  Years   28   17     20  –  30  Years   23   27     Over  30  Years   33   40   Number  of   Employees        χ2    =  2.383                df  =  3   Sig.  =  .497     Under  10   74   76     10  –  50   30   32     51  –  100   1   2     251  –  500   2   0   Annual  Sales   Revenue           χ2  =  10.80                df  =  5   Sig.  =  .055     Under  1  Million   59   43     1  –  5  Million   37   45     5  –  10  Million    5   12     10  –  20  Million    2   6     20  –  50  Million    4      2     Over  50  Million    0      2   and  services,  operational  efficiency,  and  

product  diversification  strategies.  This   finding  is  consistent  with  prior  research.   Small  businesses  often  compete  by  offering   quality  products  and  personal  customer   service  (Hussin  et  al.,  2002).  The  mean  scores   of  the  same  four  strategies  under  “IT  Support   for  Business  Strategies”  were  not  as  high  as   those  of  the  business  strategies;  however,   they  were  the  four  highest  IT  strategies.  High   business  and  IT  strategy  scores  resulted  in   high  alignment  scores  (BS  x  ITS),  indicating   high  adoption  and  high  congruency.  The   remainder  of  the  business  and  IT  strategies   adopted  by  small  businesses  and  congruency   between  business  and  IT  strategies  showed   higher  levels  of  variability.



Strategic  Alignment  Cluster  Analysis  


Cluster  analysis  identified  groups  of  small   businesses  with  similar  strategic  

alignments.  Following  suggestions  from   Ketchen  and  Shook  (1996)  and  Punj  and   Stewart  (1983),  the  analysis  involved  a   two-­‐stage  procedure.  First,  a  hierarchical   algorithm,  Ward’s  agglomerative  

clustering  procedure,  grouped   organizations  with  similar  strategic   alignments.  Ward’s  method  identified  two   homogeneous  clusters.  Then,  a  

nonhierarchical  clustering  method  tested   the  validity  of  cluster  assignments.  The   cases  in  the  two-­‐cluster  solution  were   submitted  for  an  iterative  partitioning   analysis  using  the  k-­‐means  method.   Comparison  of  the  case  assignments  from   the  hierarchical  and  nonhierarchical   procedures  revealed  197  of  the  217  cases   were  correctly  classified.  The  91%   consistency  rate  indicated  a  stable  and   valid  solution.    

A  t-­‐test  of  the  average  alignment  scores   provided  evidence  that  the  cluster  

assignment  of  the  cases  was  meaningful.   Table  2  shows  the  number  of  cases  in  each   cluster,  the  mean  alignment  scores,  and  the   result  of  the  t-­‐test.  Cluster  1  has  a  mean   alignment  score  of  9.09,  whereas  cluster  2   has  a  higher  average  alignment  score  of   15.79.  An  independent  sample  t-­‐test  showed   a  t  value  of  -­‐16.365  (df  =  215,  p  <  .01).  The   test  result  shows  that  Cluster  2,  the  aligned   group,  is  made  up  of  small  businesses  with   significantly  higher  degrees  of  alignment  than   cluster  1,  the  unaligned  group.  

Comparison  of  firm  demographic  and   sales  information  provided  a  better   understanding  of  the  nature  of  these  two   clusters.  As  shown  in  Table  3,  small   businesses  in  the  unaligned  and  aligned   groups  were  similar  in  age  and  size.  The   distributions  of  the  number  of  employees  in   each  of  the  four  categories  were  almost   identical  for  the  aligned  and  unaligned   groups.  The  χ2  tests  revealed  that  there  were  

no  significant  differences  between  these  two   groups  in  age  and  size.  When  the  “Annual   Sales  Revenue”  was  compared,  however,  a  


higher  number  of  aligned  small  businesses   were  in  the  higher  sales  categories  than  the   unaligned  businesses.  The  χ2  test  showed  a  

weak  significant  difference  between  these   two  groups  at  the  90%  confidence  level.  

Having  established  the  validity  of  the  two   cluster  solution  and  having  analyzed  their   demographic  information,  the  results  of  the   study  hypotheses  testing  follow.  

Industry  Sector    


Table  4  shows  a  cross-­‐tabulation  of  the   industry  affiliation  of  the  217  cases  and  their   cluster  assignments.  The  frequency  count   indicated  a  higher  concentration  of  financial   services  small  businesses  in  the  aligned  group   than  in  the  unaligned  group,  whereas  the   cluster  assignments  of  small  businesses  in  the   manufacturing  sector  were  the  opposite.  A  χ2  

test  determined  whether  industry  sector  and   strategic  alignment  were  independent,  and  it   proved  significant,  χ2  (1,  N  =  217)  =  7.06,  p  =  

.008.  The  result  indicated  financial  services   businesses  were  more  likely  to  have  aligned   business–IT  strategies  than  businesses  in  the   manufacturing  sector.  The  null  hypothesis   was  rejected.  Hence,  the  first  hypothesis  was   supported.    


Business  Planning  


A  χ2  test  determined  whether  business  

planning  was  different  between  the  aligned   and  unaligned  small  businesses.  As  shown  in   Table  5,  89  of  the  110  businesses  in  the   aligned  group  had  either  a  written  or  orally   communicated  business  plan.  On  the  other   hand,  only  62  of  107  businesses  in  the   unaligned  group  had  a  business  plan.  The  χ2  

test  showed  that  the  difference  between  the  

groups  was  significant.  The  null  hypothesis   was  rejected,  and  the  second  hypothesis  was   supported.  


IT  Sophistication  


The  last  hypothesis  focused  on  the  level  of  IT   used  in  aligned  and  unaligned  small  

businesses.  As  shown  in  Table  6,  four  of  the   nine  technologies  currently  used  in  the  small   businesses  showed  significant  differences   between  the  aligned  and  the  unaligned   groups.  In  addition  to  industry-­‐specific  IT,   such  as  CAD,  CAM,  and  MRP  for  the   manufacturing  industry  and  portfolio   management,  policy/premium  management,   and  claims  processing  for  the  financial   services  sector,  strategic  use  of  IT  for   marketing  or  CRM,  and  more  advanced   applications  of  the  Internet  and  e-­‐commerce   differed  significantly  between  the  groups.   Among  the  technologies  that  did  not  show   significant  differences,  accounting  system  and   basic  Web  presence  were  adopted  by  a  large   number  of  small  businesses  in  both  groups,   whereas  business  intelligence  and  electronic   data  interchange  (EDI)  were  used  

infrequently  in  both.  Document  management   systems  were  adopted  by  a  moderate  number   of  small  businesses,  but  there  were  no  

differences  between  the  two  groups.  

  Since  IT  sophistication  includes  both  the   type  and  the  number  of  information  

technologies  used,  the  number  of  

technologies  each  business  used  was  tallied   and  submitted  for  a  t-­‐test.  As  shown  in  the   last  row  in  Table  6,  the  average  number  of   technologies  used  in  aligned  small  businesses   was  higher  than  in  the  unaligned  businesses.   Table  4.  Industry  Sector  and  Alignment  Groups  

    Unaligned  Group   (N=107)   Aligned   Group   (N=110)   Chi-­‐ square   Test   Financial   Services   54   75          df  =  1  χ2  =  7.06    Sig.  =  .008   Manufacturing   53   35     Unaligned  Group   (N=107)   Aligned       Group     (N=110)   Chi-­‐Square             Test    Written  Plan   28   45   χ2  =  13.9    Orally  Communicated          Plan   34   44   df  =  2  

 No  Plan   45   21   Sig.  =  .001  

Table  5.  Business  Planning  and  Alignment  Groups    


The  result  of  the  t-­‐test  indicated  a  significant   difference.  Since  mixed  results  for  the   number  and  type  of  technologies  emerged,   the  third  hypothesis  was  only  partially   supported.  




Small  and  medium-­‐sized  enterprises  are  often   characterized  as  being  short-­‐term  oriented,   lacking  in  planning,  and  lagging  behind  large   businesses  in  IT  adoption.  Findings  from  this   study  showed  that  these  descriptions  applied   to  only  some  of  the  small  businesses.  Based   on  their  strategic  alignment,  small  businesses   were  separated  into  two  homogeneous   groups:  aligned  and  unaligned.  In  addition  to   the  significant  difference  in  their  average   alignment  scores,  businesses  in  these  two   groups  demonstrated  other  dissimilarities.   First,  the  industry  affiliation  of  small   businesses  and  their  degrees  of  strategic   alignment  were  related.  In  this  study,  a   significantly  higher  number  of  businesses  in   the  financial  services  sector  were  in  the   aligned  group.  This  could  be  explained  by  the   fact  that  financial  services  businesses  are   subjected  to  numerous  compliance  and  

enforcement  rules  which  may,  in  turn,  affect   their  business  planning  and  IT  deployment.  


Similar  to  inconsistent  findings  from  prior   research  on  whether  and  to  what  extent  small   businesses  engaged  in  business  planning   (Ibrahim,  Angelidis,  &  Parsa,  2004),  this  study   found  that  business  planning  was  carried  out   in  some  small  businesses  but  not  in  others.   The  majority  of  the  businesses  (81%)  in  the   aligned  group  had  either  a  written  or  an   orally  communicated  business  plan,  as  

compared  to  58%  in  the  unaligned  group.  The   significant  difference  indicated  that  small   businesses  committed  to  business  planning   were  more  likely  to  have  a  higher  degree  of   strategic  alignment.  

Finally,  this  study  found  mixed  results  in   the  level  of  IT  sophistication  in  aligned  and   unaligned  small  businesses.  Aligned  small   businesses  differed  from  unaligned  

businesses  in  their  use  of  industry-­‐specific   technology.  This  could  be  explained  by  the   higher  concentration  of  financial  services   businesses  in  the  aligned  group,  an  industry   with  higher  standardization  of  such  

information  systems  as  loans  and  mortgage   management,  claims  processing,  agent  

sales/productivity,  and  compliance  reporting.   Another  interesting  finding  was   that  aligned  businesses  had  a   significantly  higher  adoption   rate  of  marketing  and  CRM   systems,  indicating  a  more   strategic  use  of  customer  

information.  In  addition,  aligned   small  businesses  demonstrated  a   significantly  higher  level  of   sophistication  in  other  customer   and  market  development  IT   applications.    They  were  more   likely  to  use  the  Internet  to   provide  better  customer  service   and  conduct  business.    

The  aligned  and  the  

unaligned  groups  did  not  differ   in  their  use  of  the  five  remaining   IT  applications  examined  in  this   study.  A  static  Web  site  has   become  commonplace  today,   and  the  rate  of  adoption  of  EDI   Table  6.  IT  Sophistication  and  Alignment  Groups  


  Unaligned   Aligned      

  Group   Group   χ2  (df  =  1)   Sig.  

  (N=107)   (N=110)     (2-­‐

tailed)   Industry-­‐Specific  IS   72   99   16.75   .000*  

Accounting   71   79   0.76   .384  

Marketing  &  CRM   30   54   10.13   .001**  

Data  Warehouse  &          

   Business  Intelligence    7   15   2.99   .083  

Document  Imaging,          

   Storage,  &  Retrieval   31   44   2.92   .088  

EDI   8   16   2.75   .097   Web  site   71   84   2.66   .103   Web-­‐based  Self   Service   10   31   12.56   .000**   E-­‐business   22   39   5.95   .015*               Unaligned   Aligned      

Number  of     Group   Group     Sig.  


Adopted   (mean)   (mean)   t(df=215)   (2-­‐tailed)  

  3.01   4.19   -­‐4.610   .000**  


was  so  low  in  both  groups  that  there  was  no   significant  difference.  Software  for  back-­‐office   operations—accounting  and  document   management—showed  no  significant   difference  since  the  former  has  been  very   widely  adopted  by  small  businesses  and  the   latter  was  moderately  adopted  in  both   groups.    

Considering  the  usage  pattern  of  all  nine   applications,  this  study  showed  that  while   most  small  businesses  used  IT  to  support   operational  efficiency,  consistent  with  prior   research  (Cragg  &  King,  1993;  Lin  &  Wu,   2004;  Temtime  et  al.,  2003),  this  study  also   found  that  strategically  aligned  small   businesses  were  more  likely  to  use  IT  to   manage  their  marketing  and  customer  

relations  efforts  and  to  expand  their  customer   base,  as  evidenced  in  the  higher  adoption   rates  of  CRM  and  Internet  technologies.    

Another  notable  observation  regarding   the  level  of  IT  use  was  the  variety  of   technologies  businesses  used.  While  the   number  of  technologies  used  differed   significantly  between  the  aligned  and  the   unaligned  small  businesses,  overall  the   variety  of  technologies  used  in  both  groups   was  limited.  With  the  exception  of  three   technologies—industry-­‐specific  information   systems,  accounting  applications,  and  static   company  Web  sites—all  other  technologies   were  adopted  by  less  than  50%  of  the   businesses  in  both  groups.  Given  the  low   adoption  rates,  small  businesses  do  seem  to   be  lagging  behind  large  companies  in  the  use   of  IT.  This  finding  must  be  considered  in  the   context  of  the  profiles  of  these  small  

businesses,  though.  The  majority  of  the   businesses  in  this  study  were  micro  and  small   businesses;  69%  of  them  had  fewer  than  10   employees  and  29%  had  fewer  than  50   employees.  As  has  been  well  documented  in   small  business  research  (Sims  et  al.,  2002;   SBA,  2000;  Wu  &  Young,  2003),  one  of  the   growth  impediments  is  limited  resources.   Pociask  (2004)  compared  the  cost  burden  of   telecommunication  services  for  small   business  to  larger  companies  and  found  that   the  cost  of  telecommunication  services  for   very  small  businesses  was  four  times  higher  

per  employee  than  for  larger  companies.   Finally,  the  profiles  of  the  small  businesses  in   this  study  indicated  that  the  majority  of  them   (57%)  had  been  in  business  for  over  20  years,   and  the  aligned  and  unaligned  groups  did  not   differ  significantly  with  regard  to  longevity.   This  suggests,  at  best,  a  very  weak  

relationship  between  strategic  alignment,   firm  longevity,  and  IT  sophistication  among   very  small  businesses.  


Implications  for  Research  and  Practice


This  study  found  a  significant  difference  in   the  degree  of  business–IT  alignment  between   small  businesses  in  the  financial  services  and   manufacturing  industries.  The  financial   services  industry  is  highly  regulated,  and   businesses  are  subjected  to  statutory   compliance.  This  finding  suggests  that   strategic  alignment  is  influenced  by  external   circumstances.  Future  studies  of  IT  strategic   alignment  could  expand  on  this  study  by   including  additional  industry  sectors  and   other  environmental  variables  to  examine  the   impact  of  such  variables  on  strategic  


The  significant  difference  in  business   planning  between  the  aligned  and  unaligned   groups  offers  further  evidence  of  the  

importance  of  business  planning.  Future   studies  could  focus  on  the  details  of  planning   practices  in  small  businesses,  such  as  the   process  of  planning  and  planning  best   practices  to  ensure  alignment.  Findings   related  to  IT  sophistication  clearly  indicated   room  for  growth.  As  shown  in  the  study,  71%   of  the  small  businesses  reported  having  a   Web  presence,  but  only  28%  were  conducting   business  online.  Limited  resources  are  clearly   a  barrier  for  businesses  when  it  comes  to   adopting  more  advanced  technologies;   however,  limited  resources  could  also  be  an   incentive  for  innovative  use  of  IT  (Lin  et  al.,   1993).  Case  studies  on  innovative  

applications  of  IT  to  support  business  

strategies  in  small  businesses  could  shed  light   on  ways  to  overcome  the  cost  barrier.  For   example,  Software  as  a  Service  (SaaS),  a   recent  development  in  IT  usage  following  the  


widespread  use  of  the  Internet,  can  help   lower  the  cost  of  adopting  various  software   capabilities  such  as  Web  conferencing,  CRM   solutions,  desktop  sharing,  and  time  

management.  By  allowing  small  businesses  to   rent  Web-­‐based  software  hosted  at  the   provider’s  site,  the  SaaS  model,  also  known  as   the  application  service  provider  (ASP)  model,   can  help  overcome  the  challenge  of  limited  in-­‐ house  IT  expertise  and  reduce  the  burden  on   small  businesses’  IT  staff  as  they  ensure   service  availability,  and  manage  data  backup   and  security  control.  The  impact  of  this   emerging  IT  usage  model  on  small  

businesses’  IT  use  and  strategic  alignment   should  be  examined  in  future  studies  of  small   business  computing.  

Several  limitations  and  caveats  restrict   the  conclusions  of  this  study.  First,  the  survey   sample  included  a  large  percentage  of  micro   and  small  businesses  in  the  Midwest.  Since   larger  SMEs  are  likely  to  use  IT  differently   from  very  small  businesses,  findings  from  this   study  should  be  replicated  using  samples  that   include  larger  small  businesses  and  

businesses  from  various  U.S.  regions.  Second,   this  study  focused  on  characteristics  of   aligned  and  unaligned  businesses  and  their   differences,  but  it  did  not  examine  cause-­‐and-­‐ effect  relationships  among  the  observed   factors.  Finally,  important  factors  such  as  the   impact  of  strategic  alignment  on  business   performance  were  not  included  in  this  study.   Future  studies  could  use  different  research   methods  and  include  additional  factors  to   determine  causal  relationships  between   alignment  and  business  performance.    



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