Information systems environmental alignment and business performance: A case study

Garg, A. K.; Joubert, R. J.O.; Pellissier, R. Article Information systems environmental alignment and business performance: A case study South African Journal of Business Management Provided in Cooperation with: University of Stellenbosch Business School (USB), Bellville, South Africa Suggested Citation: Garg, A. K.; Joubert, R. J.O.; Pellissier, R. (2005) : Information systems environmental alignment and business performance: A case study, South African Journal of Business Management, ISSN 2078-5976, African Online Scientific Information Systems (AOSIS), Cape Town, Vol. 36, Iss. 4, pp. 33-53, https://doi.org/10.4102/sajbm.v36i4.642 This Version is available at: https://hdl.handle.net/10419/218344 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ S.Afr.J.Bus.Manage.2005,36(4) 33 Information systems environmental alignment and business performance: A case study A.K. Garg* Principal Engineer (Economy and Finance), Department of Mines, Private Bag 0049, Gaborone, Botswana [email protected] R.J.O. Joubert Graduate School of Business Leadership, Midrand, University of South Africa, Republic of South Africa [email protected] R. Pellissier Dean of Faculty, CIDA City Campus, 54 Commissioner Street, Johannesburg, Republic of South Africa [email protected] Received February 2005 The studies to establish the relationship between the external environment and business performance have not produced any conclusive results. Moreover, the field combining environmental uncertainty, information systems (IS) strategy and business performance has not been well explored. Considering the gap in current research, this study conceptualises an information systems environmental alignment model. The model analysed the extent of support provided by IS strategy in the assessment of environmental uncertainty and also examined the impact of IS environmental alignment on business performance. Based on empirical data collected by means of a questionnaire from 22 commercial banks in South Africa (covering more than 90% of the commercial banking sector) and using the Partial Least Squares (PLS) technique, the study validated the IS environmental alignment model and found that banks were using IS support to assess the external environment of business. The results suggest that it is not the IS support or investment in information technology (IT) that impacts on business performance, but rather the effective use of IS support in meeting the information needs of the organisation. The study also found that profitability still remains the key measure of business performance in the banking sector in South Africa. These findings have major implications for IT investment by banks, and for the implementation of IS strategy and general investment in the banking sector. IS environmental alignment is becoming extremely important for business because of the substantial investment in IT and the uncertainty of the business environment. *To whom all correspondence should be addressed. Introduction The potential of information systems (IS) in supporting organisational activities and helping them to gain competitive advantage has been widely recognised by researchers and the business community (Peters, Heng & Vet, 2002), and advances in information technology (IT) over the last decade have made it possible to exploit the potential of IS/IT (Ward & Peppard, 2002). IT applications used to help organisations to gain competitive advantage, reduce competitive disadvantage, or meet other strategic enterprise objectives. Applications such as these are referred to as the strategic management of information technology and continue to be key issues in exploiting IT/IS capabilities to achieve higher business performance (Croteau & Bergeron, 2001; Kearns & Lederer, 2000; Zhang & Lado, 2001). In this context, aligning business and IT strategies was an important issue for researchers during the 1990s (Henderson & Venkatraman, 1990 & 1993; Luftman, Papp & Brier, 1999; Luftman, 2000). Most of the research was of a conceptual nature, however. Empirical studies of alignment by Chan, Huff, Barclay and Copeland (1997) and Luftman (2000) mostly examine US and Canadian firms. Kanungo, Sadavarti and Sriniwas (2001) examined public sector units in India. The theories in alignment models emphasise the effective use of IT/IS in meeting the needs of organisations, which is achieved by aligning organisational needs with IT/IS facilities. The focus, however, is to achieve competitive advantage in the marketplace by leveraging IT facilities and realising value from IT investment. Factors such as globalisation, advances in IT/IS, global political turmoil, acts of terrorism, and war against terrorism have made the external environment of business more complex and affected the task environment. For example the attack of 11 September resulted in the collapse of many airlines as a result of a loss of confidence among customers, a phenomenon that affected business from the task 34 S.Afr.J.Bus.Manage.2005,36(4) environment. A country such as South Africa has an open economy (with imports and exports accounting for more than 50% of economic activities). The money and financial markets are volatile (with respect to the rand/dollar exchange rate), which indicates a turbulent and uncertain business environment in South Africa. These factors suggest that organisations will have to consider managing their external environments more seriously and rigorously than was the case in the last two decades. Accordingly, the role of IT/IS investment in organisations should address the current needs of organisations to realise returns from their investments. Numerous studies have linked business performance with different aspects of the organisation, for example: strategic planning and business performance (Anderson, 2000); organisation communication capacity using IT and business performance (Anderson, 2001); and strategic success and business performance (Ansoff & Sullivan, 1993). The studies to establish the relationship between the external environment and business performance have not produced any conclusive results, however. For example, Bergeron, Raymond and Rivard’s (1999) study on environmental uncertainty and business performance failed to establish conclusive results. Moreover, the field combining environmental uncertainty, IS strategy and business performance has not been well explored. Salmela, Lederer and Reponen (2000) examined information system planning in a turbulent environment; Sambamurthy, Zmud and Byrd (1994) investigated the comprehensiveness of IT planning from a contingency approach, while Lederer and Mendelow (1990) studied the impact of the environment of the management of information systems. None of these three studies links its models to business performance. Given the gaps in current research, the following broad objectives were considered in this study: • To establish the relationship between business performance and business uncertainty due to the external environment of business • To study the IS support provided by organisations for assessing environmental uncertainty • To establish the impact of IS environmental alignment on business performance. The synergy between IS support and the organisation’s requirement to asses environmental uncertainty is termed ‘IS environmental alignment’ in the study. These objectives revolve around three management issues, namely: the management of environmental uncertainty, the role of IS in the organisation, and aligning IT investment with the needs of the organisation. As a strategy to manage the external environment of business, this study deliberates on IS strategy support in assessing the uncertainty in the external business environment of an organisation. It should be noted that this study uses building blocks for strategy as presented by writers such as Badri, Davis and Davis (2000), Galbraith (1977), Grant (1991), Porter (1980) and Pfeffer and Salancik (1978). Essentially, the theoretical scope of this study is the extension of the strategic management role of IS as a result of the enhanced capabilities of information systems in organisations to exploit the full potential of IS. The study uses the banking sector in South Africa as its sample, and the management of the external environment of the business represents the area of IS application. Information management and role of information in managing the environment The terms, IS and IT strategy, are used interchangeably in the literature. Information management (IM) has emerged as the most common brief name for the management of the use of IT in organisations (Frishammar, 2002). According to Earl (1989), the IM strategy is concerned with the role and structure of IT activities in the organisation, focusing on relationships between what we do with technology (IS strategy) and how we do it (IT strategy). Based on the research of Henderson and Venkatraman (1990 & 1993), Chan, Huff, Barclay and Copeland (1998) identify three dimensions of IS strategy as: the type and capabilities of IS, the IS support provided for business strategy, and IS governance issues. Zhang and Lado (2001) identify IS as an effective and efficient tool for gathering and processing strategically important information from external sources. According to Davies (2002) an IS strategy consists of a specification of the information systems needed to support organisational activity in the area of collection, storage, dissemination and use of information and should include details of the current and future IS portfolio. This study uses a definition that is consistent with Broadbent (1996) to differentiate between IT and IS. IT includes computers and communication technology such as hardware, software, telecommunication and communication networks (Broadbent, 1996). Broadbent further explains that information systems are formal organisational systems that rely on IT and that organisations must have IS to facilitate the management and control of IT resources. This study proposes an overall framework for IM, as shown in Figure 1. According to this framework, the objectives of IM are the management of an organisation’s demand for information, while IT/IS constitute the supply side of demand, and IT is at the core of any information systems. While this framework provides interlinks between IM, IT and IS, the focus in this study is on IS. Any reference to IS in this study refers to the model proposed in Figure 1 (that is, IS with IT at its core, unless otherwise stated). This further refers to investments made in IT (hardware, software and communication networks) that in turn impact the IS processing and predicting capabilities of an organisation. In other words, information systems are systems that essentially rely on IT, and investments in IT facilities would enhance IS capabilities. These IS capabilities can provide IS support for the needs of organisations. Information is regarded as valuable, but the IS function is not regarded as equally valuable (Avison, Cuthbertson & Powell, 1999). Organisations have made substantial investments in IT (hardware, software, communication networks), which have impacted the IS capabilities. To exploit the full potential of IS capabilities, this investment must be aligned with organisational needs, which could also S.Afr.J.Bus.Manage.2005,36(4) 35 provide competitive advantage. IS cannot run businesses per se, but it can provide support to businesses in meeting their needs and improving their performance. Accordingly, a conceptual framework is proposed for the effective use of IS in organisations (see Figure 2). This framework is an extension of the strategic information systems era in the framework of Ward and Peppard (2002). Figure 2 shows an information tower, at the centre of which is the information. This information core is an additional core to the framework suggested in Figure 1, which depicts IT surrounded by IS. This framework suggests that the potential of IS can be exploited organisation wide. Corporate strategy alignment in Figure 2 refers to the alignment of corporate functions (such as external environment scanning and the selection of a business portfolio) with the functions of IS. The purpose of such alignment is the effective use of the IS facilities of the organisation and/or achieving competitive advantage from the alignment. The framework of IS structural alignment, proposed by Brown and Magill (1994), which aligns IS functions with the enterprise, with special reference to IS structure in organisation, is an example in this category. The IS environmental alignment proposed in this study explores aligning the assessment of environmental uncertainty (a function of corporate strategy) with IS support. Business strategy alignment in Figure 2 refers to the alignment of business unit functions with the functions of IS for the effective use of IS facilities deployed by organisations and/or achieving competitive advantage from the alignment. The strategic alignment model proposed by Henderson and Venkatraman (1990), Chan et al. (1997) and Luftman (2000) are examples in this category. Operational strategy alignment in Figure 2 refers to the alignment of the operational functions of an organisation with the functions of IS for the effective use of IS facilities deployed by the organisation. Examples include office automation systems and transaction-processing systems. According to Galbraith (1977: 36), uncertainty is the difference between the amount of information required to perform the task and the amount of information that the organisation already possesses. Moreover, the difference between these two amounts is the relative uncertainty that the organisation faces, and represents the amount of information that must be acquired and processed by decision makers. Figure 3 shows the determinants of information and task uncertainty. Research demonstrates that top executives who invest more in information-seeking activities related to environmental scanning generally enhance the firm’s financial performance (Boyd & Fulk, 1996). The correct assessment of the environment is related to organisational effectiveness, and organisations that perceive the objective environment incorrectly will be less effective (Galbraith, 1973). This lack of understanding of the environment can waste a firm’s resources for years (Badri et al., 2000). The basic theme of the Pfeffer and Salancik’s (1978) resource dependence theory is to understand organisational behaviour and how the organisation relates to other social actors in its environment. The essence of formulating competitive strategy is relating a company to its environment (Porter 1980). The business environment is dynamic, and the organisation needs to gauge that environment in order to manage the aspects of uncertainty. The role of information becomes critical in the management of the environment. Source: Garg (2003) Figure 1: Objectives in information management IM The objectives: Management of demands for information. IT/IS SUPPLY SIDE. How the information is collected, stored manipulated and supplied. IT is at the core of IS. DEMAND SIDE. Requirements for information. IT IS 36 S.Afr.J.Bus.Manage.2005,36(4) Figure 2: The tower of alignment for the effective use of IS in organisations (Garg 2003) Source: Galbraith (1977) Figure 3: Determinants of information and task uncertainty IT IS Information I N F O R M A T I O N T O W E R Amount of information required for task performance Determined by goal diversity, level of goal performance and division o f l abou rUncertainty or information to be acquired and processed Amount of information possessed by organisation S.Afr.J.Bus.Manage.2005,36(4) 37 Theoretical foundation of IS environmental alignment model The research on environmental uncertainty converges on three key issues (Garg, Joubert & Pellissier, 2003): a. The task environment is the primary force to which organisations must respond (Sawyerr, 1993; Ebrahimini, 2000). b. It is the unpredictability of change that is associated with environmental uncertainty (Milliken, 1987). c. The measurement of environmental uncertainty is a subjective phenomenon (Duncan, 1972; Miles & Snow, 1978; Milliken, 1987; Sawyerr, 1993; Ansoff & Sullivan, 1993; Ebrahimini, 2000). Uncertainty arises as a result of imperfect and incomplete knowledge of the objective environment (Duncan, 1972; Milliken, 1987). Uncertainty in this context simply means the absence of information (Galbraith, 1977:36). Organisations have made substantial investments in IT (hardware, software and communication) to enhance the information processing and predicting capabilities of their IS. (The investment in IT is at the core of IS; in other words, IS essentially relies on IT – see Figure 1). Zhang and Lado (2001) explain that IS may serve as an effective and efficient tool for gathering and processing information of strategic importance from external sources (such as customers, suppliers and dealers). They further explain that with online access to various external databases, executive information systems enable managers to search and to retrieve more external information about topics such as their suppliers, customers, competitors, financial organisations, stakeholders, regulatory bodies and interest groups in a timely manner. As a basic rule, organisation’s information processing capacity should be at least equal to or greater than the information processing needs (in other words, the supply of information should exceed the demand for information). IS strategy could thus play a significant role in minimising the gap between perceived environmental uncertainty and the objective/realised environmental conditions, by providing support to strategists in assessing environmental conditions. Figure 4 shows the perceived and realised conditions and the gap. It shows that perceived uncertainty is the area where there is no information, referred to as AB. Theoretically, an organisation can realise all of AB, part of AB and hypothetically even more than AB, if it possesses information processing and predicting capabilities that are able to predict with 100% accuracy. Practically, however, it is impossible to realise the whole of AB. For the purposes of elaboration, however, a simple case is shown in Figure 4. This shows that an organisation may realise BC, which is equal to the additional information collected and processed as a result of enhancements made in IS capabilities. The gap AC thus created cannot be reduced to zero but can be minimised. The perceived uncertainty is measured in terms of unpredictability of change, or is simply called unpredictability. It is logical that unpredictability of an environmental factor would be related to the gap in perceived and realised environmental conditions. This would mean that higher unpredictability of an environmental factor would result in bigger gaps than in the case of an easily predictable factor, or that unpredictability is directly proportional to the gap. This is illustrated in Figure 5. According to Smircich and Stubbart (1985:726) strategists must minimise the gap between their flawed perceptions and the objective environment and use the analysis to identify perceived opportunities and threats (Langford & Hunsicker, 1996). Two aspects are pertinent in this regard: (i) to minimise the gap between perceived and objective environment/realised environment conditions, and (ii) to identify opportunities and threats and act upon them. The issue of identifying opportunities and threats and acting accordingly is the area of business strategy. In this context, Henderson and Venkatraman (1990) refer to aligning business strategy and IT strategy to leverage IT for competitive advantage as ‘strategic alignment for strategic management of IT’. To realise maximum benefits from IS strategy, it is essential to align IS strategy (its support dimension) with the assessment of perceived environment uncertainty. This alignment is referred to in this study as IS environmental alignment. The strategic alignment (Henderson & Venkatraman, 1990) and structural alignment (Chan, 1997) are basically business unit level issues, while IS environmental alignment is primarily a corporate level issue and represents corporate strategy alignment in terms of the tower of alignment (see Figure 2). The IS environmental alignment becomes extremely important for business because of the substantial investment in IT and the uncertainty of the business environment. However, studies dealing with the impact of environmental uncertainty and moderating the effect of uncertainty on business performance are not well established. For example: • Lumpkin and Dess (2001) studied the moderating role of the environment and industry lifecycle and found that environmental dynamism moderates the relationship between proactiveness and firm performance. Their results do not support the moderating role of environmental hostility between proactiveness and firm performance. • Matching flexibility to the level of environmental uncertainty does not lead to a performance advantage (Pagell & Krause, 1999). The findings of Pagell and Krause suggest that many companies respond to changes in their competitive environment by focusing on priorities other than flexibility. 38 S.Afr.J.Bus.Manage.2005,36(4) Source: Adapted from Galbraith (1977) Figure 4: Gap between perceived and realised conditions Figure 5: Relationship between perceived uncertainty and gap between perceived and realised conditions • Bergeron et al. (1999) report that the environmentaltechnology fit does not appear to predict or explain business performance, whatever approach is taken. • Successful organisations (high performers) adopt competitive priorities that best fit the conditions of the environment, notably stability and dynamism. Most firms accept their environment as given and install mechanism to react to its forces. High performers match the complexity of their external environment by utilising environmental variables as sources of effective controls within their organisations (Badri et al., 2000). The foregoing discussion indicates how IS complements business with specific reference to the relationship between the external environment of business, IT/IS application and business performance. On the basis of previous research, the present study proposes that the alignment of business functions with IS support is necessary all over the organisations, and not in a scattered manner, as proposed by various researchers (Henderson & Venkatraman, 1990; Chan et al., 1997). Figure 2 (tower of alignment) captures this concept, as discussed earlier. In this respect, strategic alignment emerges as a critical issue, and a brief literature review is reported in the next section. Brief literature review on strategic alignment ‘Strategic alignment’ (Henderson & Venkatraman, 1993; Luftman & Oldach, 1996; Chan & Huff, 1993a; Papp, 1995), ‘linkage’ (Reich & Benbasat, 1996) and ‘harmony’ (Woolfe, 1993) are the various terms that describe the concept of business and IT strategy alignment. The alignment models developed during the last decade focused on various dimensions and domains of alignment. For example, the Strategic Alignment Model developed by Henderson and Venkatraman (1990 & 1993) focuses on four domains: business strategy, IT strategy, organisational infrastructure and processes, and IT infrastructure and processes. Chan and Huff (1993a & 1993b) focus on business and IS strategic orientation. Pankratz (1991) Perceived uncertainty of an environmental factor (as measured by un p redictabilit y of chan g e ) Gap between perceived and realised conditions Amount of information required for task performance Perceived uncertainty or No information Amount of information possessed by organisation Realised condition, additional information collected and processed as a result of enhancements made in IS capabilities. Gap between perceived and realised conditions, no information A B B C A S.Afr.J.Bus.Manage.2005,36(4) 39 highlights four main areas: business strategy, IT strategy, organisational strategy and culture, and finance strategy. Kanungo et al. (2001), analyse the relationship between selected aspects of organisational culture and IT strategy in public sector units. Sun and Hong (2002) identify the contribution of manufacturing performance to business performance. Brown and Magill (1994) examine the alignment of the IS function with the enterprise. Researchers, for example Chan et al. (1997), Henderson and Venkatraman (1993) and Luftman (2000), have studied the intellectual dimension of strategic alignment extensively, while Reich and Benbasat (1996) studied its social dimension. Tan (1999) attempted to explore the nature of the social dimension of alignment and its relationship with the intellectual dimension. Important studies on alignment (Garg, Joubert & Pellissier, 2002) are summarised in Table 1. Researchers have consistently argued (Henderson & Venkatraman, 1993) that failure to obtain returns from IT investment is partly due to lack of alignment between the IT strategy and business needs (that is, the business strategy), but empirical evidence is available only for some Western countries. Empirical studies of alignment by Chan and Huff (1997) and Luftman (2000) mostly examine US and Canadian firms. Kanungo et al. (2001) examine public sector units in India. The Strategic Alignment Model provides a theoretical framework for aligning business and IT strategy. The South African business landscape is not necessarily comparable and analogous to that in the countries tested by the conceptual model of Henderson and Venkatraman (1993) and other researchers. Chan et al. (1997) were unable to show any positive effects of IS strategic alignment on the financial performance of a firm. Other studies indicate the importance of the subject for both organisations and researchers. However, none of the models discussed consider the environmental uncertainty that could impact business performance. The impact of IT/IS on organisational financial performance is an important concept for further study. These conclusions form the background to the study of strategic alignment in the South African context. Models of alignment and information systems environmental alignment model Researchers have conceptualised various models of alignment, and have essentially considered aligning business strategy and IT strategy to gain competitive advantage in the marketplace (for example, the Strategic Alignment Model of Henderson and Venkatraman [1990]). These models were conceptual, and the advancements in the structural equation modelling (SEM) techniques using second generation data analysis techniques (namely, LISREL and PLS) have allowed researchers to validate these models using empirical data – for example, Chan et al. (1997), Papke-Shields and Malhotra (2001), Sun and Hong (2002). The various basic alignment models are summarised in Table 2. All the models of alignment (referred to in Table 2) consider the effective use of IT/IS in business, or the extent to which IT/IS complements business. The theory in the models can be explained by using the example of a fresh fruit or meat hawker, who would almost certainly make more profits if he or she were to invest in and use a calculator and an electronic weighing machine. This is because of the nature of the product he/she is selling. He/she would do even better by further investing in an electronic organiser and feeding in data such as daily sales and using this information to estimate sales for the next day and the collection of debt. Similarly, in any other business, business performance would improve if IT/IS investments were made and effectively used or aligned with organisational needs in the framework of tower of alignment (Figure 2). Based on moderation fit, in a model of alignment, business performance would be predicted better by the effective use of IT/IS, compared with directly related factors of alignment. Organisations need to manage the external environment of business and devise strategies to deal with it. Improving information processing and predicting capabilities as a strategy for managing the external environment is effective only when the investments made in IT/IS are aligned with the requirements of the organisation. However, to realise maximum benefits from IS strategy, it is essential to align IS strategy (its support dimension) with the assessment of perceived environment uncertainty, which is referred to as ‘IS environmental alignment’. IS environmental alignment becomes extremely important for business because of the substantial investment in IT/IS and the uncertainty of the business environment. As discussed earlier, the ‘unpredictability’ of an environmental factor refers to ‘the unpredictability of change’ of the factor and is the measure of uncertainty associated with the factor. It is logical that the unpredictability of an environmental factor would be related to the gap in the perceived and realised environmental condition. This would mean that higher unpredictability of an environmental factor would result in bigger gaps than in the case of an easily predictable factor or, in other words, unpredictability is proportional to the gap (Figure 5). This gap cannot be reduced to zero in practical situations, but IS support in assessing the uncertainty would help in reducing the gap (Figure 4 ). Higher IS support would be required for a higher gap situation in perceived and realised conditions. The implications are explained in Table 3. Referring to Figure 5 the following equality is derived: Perceived uncertainty (PNV) α Gap [α refers to directly proportional] … (1) => PNV= Constant X Gap … (2) =>PNV ≈ Gap, assuming the value of constant =1 … (3) 40 S.Afr.J.Bus.Manage.2005,36(4) Table1: Studies on alignment Author(s) Topic Focus Brown & Magill (1994) Alignment of the IS functions with the enterprise The concepts and patterns of centralised, decentralised and hybrid design structures of IS and the reason for choosing an IS system Chan 1997 Business unit structure and structure of IS functions The appropriateness/ inappropriateness of the IS function’s position within the enterprise, IS reporting relationships, and centralisation/ decentralisation of IS services and infrastructure Croteau & Bergeron (2001) Business strategy, IT strategy (in the framework of technological deployment) and business performance Various profiles of technology deployment specific to various types of business strategy that best support organisational performance Cragg, King & Hussain (2002) Business and IT strategy Focused on small manufacturing firm and investigated the link between alignment and performance Henderson & Venkatraman 1990; Chan et al. 1997 Business strategy, IT/IS strategy, business infrastructure and IT infrastructure Priorities and activities of business strategy, priorities and activities of IT/IS strategy and business performance Kanungo, Sadavarti & Srinivas (2001) IT strategy and organisational culture Organisational cultures were assessed in terms of innovative, supportive and bureaucratic cultures, while IT strategies were viewed as comprising six generic strategies Papke-Shields & Malhotra (2001) Organisational, manufacturing strategies and business performance Involvement of manufacturing executives in strategic decision-making process Reich & Benbasat (1996) Short-term and long-term aspects of social dimension of linkage The levels of understanding of business and IT mission, objectives, and plans by IS and business executives Sun & Hong (2002) Business strategy, manufacturing strategy, manufacturing performance and business performance Contribution of manufacturing performance to business performance Table 2: Models of alignment Models of alignment Elements of alignment Focus Strategic alignment model (Henderson & Venkatraman 1990); IS strategic alignment model (Chan et al. 1997) Business strategy, IT/IS strategy, business infrastructure and IT infrastructure Priorities and activities of business strategy, priorities and activities of IT/IS strategy and business performance IS structural alignment (Chan 1997) Business unit structure and structure of IS functions The appropriateness/ inappropriateness of the IS function’s position within the enterprise, IS reporting relationships, and centralisation/ decentralisation of IS services and infrastructure IS environmental alignment (this study) Perceived environmental uncertainty (of task environment) and IS strategy The support provided by IS strategy to minimise the gap between perceived environmental conditions and realised/objective environmental conditions, and business performance S.Afr.J.Bus.Manage.2005,36(4) 47 Figure 9: IS environmental alignment model showing the results Note: Alignment measurement after Chan et al., 1997 γ = Path coefficient * Path statistically significant at p = 0,025, ** statistically significant at p = 0,05 The values of the path coefficients2 (γ) obtained are explained as follows: H1:γ = 0.518: It is the value of path coefficient between IS environmental alignment and business performance. A value of 0.518 indicates that IS environmental alignment has a positive effect on business performance, as hypothesised in section 4. This result validates the first part of the hypothesis, that ‘the IS environmental alignment has a positive effect on business performance (H1)’. The γ value of H1 (0.518) was found to be higher than the γ value of H11 (0.172), and the γ value of H12 (-0.162) This validates the second part of the hypothesis, that ‘the effect of alignment on business performance is more pronounced than the effect of a directly affecting factor’. H11: γ = 0.172: A path coefficient value of 0.172 between environmental uncertainty and business performance indicates a positive relationship between the two variables. This result validates the first sub-hypothesis that ‘business performance is positively related to the perceived 2The path coefficients (γ) are standardised β coefficients, or standardised regression coefficients, that allow researchers to compare directly the relative effect of each independent variable on the dependent variable. (Standardisation is the process whereby raw data are transformed into a new measurement variable with a mean of 0 and a standard deviation of 1. When data are transformed in this manner, the b0 term, or the intercept, assumes a value of 0. When using standardised data, the regression coefficients are called beta coefficients [Hair et al., 1998: 147]). uncertainty of the task environment, and mathematically H11 > 0’. H12: γ = -0.162: This value suggests that the relationship between IS support and business performance could not be established as envisaged in section 4. This finding has major implications for IT investment (IS capability) in the organisation. The γ value of H1 was found to be higher than the γ value of H11, and the values of H1 and H11 were greater than zero. This validates the hypothesis that ‘H1 is greater than zero and its value is higher than the values of H11 and H12’. However, the value of H12 was not found to be positive. The values of 0.427 and 0.803 are the path coefficients between the constructs that indicate the loading of PNV and ISS constructs on ISA. The higher loading of 0.803, as compared to 0.427, suggests that the IS support was stronger than the perceived environmental uncertainty. R2 = 0.381: A measure of the predictive power of the model is the R2 value for the endogenous construct (namely, business performance). It indicates the amount of variance in the construct that is explained by the model. The results in the model indicate that more than 38% (39% when ISS is excluded) of the variance in business performance is explained by the two dependent variables PNV and ISA. The value of 0.381 was found to be statistically significant at a significance level of 0.05 (Hair et al., 1998: 165). Business performance ( BP ) Perceived uncertainty of task environment (PNV) IS environmental alignment ( ISA ) IS strategy orientation towards perceived uncertainty (ISS) H 11: γ =0.172* H 1 : γ = 0.518** H 12 : γ = -0.162 R2=0.381** 0.427 0.803 48 S.Afr.J.Bus.Manage.2005,36(4) To assess the statistical significance of path coefficients, which are standardised β, a re-sampling (jackknife3) analysis was performed using the PLS program, which has inbuilt capacity to run jackknifing. The results of the jackknife, the paths (PNV-BP and ISA-BP), were found to be statistically significant at p=0.025 and p=0.05 respectively (see Table 6). Effectiveness of IT use or IS capability As discussed earlier, IS strategic orientation is the support provided by IS that essentially relies on IT. Table 7 shows the effectiveness of IT use (IS capability). It indicates the level of IS support provided by the respondent vis-à-vis requirements based on the perceived uncertainty estimates. Ideally, a higher perceived uncertainty factor would require higher IS support. An average score of 3 in the scale of 6 was considered on the higher side, as two classifications were used (namely, low and high). Figure 10 is the matrix of alignment. It shows the effectiveness of IT use (IS capability). The horizontal axis plot is the gap between perceived and realised environmental conditions, while the vertical axis plot refers to the IS support provided. As discussed in section 2, the gap is proportional to perceived uncertainty. The effectiveness of alignment is shown by the quadrants. The first and third quadrants are the quadrants of good alignment, while the second and fourth quadrants reflect bad or poor alignment. It is evident that the alignment is bad, or is superimposed on the fourth quadrant, because the IS support provided is much greater than the requirements of the organisation, while in the second quadrant, the IS support provided is lower than the requirements of the organisation, resulting in ineffective use of IT (IS capabilities) or poor alignment. The plot shows that the alignments for factor PNV3 (customers) and PNV4 (financial markets) are reasonably good. PNV2 (action by competitors) needs more IS support, while IS support could be reduced for PNV1 and PNV5. This means that organisations have made higher IT investments (or have created excessive IS capabilities) in these sectors than they require. The dotted arrows show the direction of movement of a factor for effective alignment. The matrix of alignment provides a conceptual tool to measure and correct the misalignment in organisations. 3The use of jackknifing, as opposed to the traditional t-test, allows the testing of the significance of parameter estimates from data that are not assumed to be multivariate normal. In jackknifing, a number of subsamples are created by removing one or more cases from the total data set. PLS is used to estimate the parameters of each subsample, and ‘pseudovalues’ are calculated for the parameters by applying the jackknife formula. The pseudovalues are averaged to form jackknife estimates of the parameters (P*). Since the pseudovalues are approximately independent and normally distributed, the jackknife estimates of the parameters (P*) and the standard error of the pseudovalues (e*) are used to calculate (P*/e*), a student t-value with n-1 degrees of freedom, where n is the number of sub-samples used in the jackknifing procedure’ (Barclay, Higgins & Thompson., 1995). Negative finding in the study When the full model was run using PLS analysis, the indicator BP4 (the after-tax return on asset) showed negative loading. This indicator was dropped from the final analysis, indicating that it was not a valid measure. This finding contradicts the findings of Ansoff and Sullivan (1993) and Rogers and Bamford (2002), who found return on asset to be the most commonly accepted measure of performance in the banking industry. Contrary to their findings, the current study found that profitability is the key concern, although return on asset is related to profitability. Further analysis could be done to establish the cause of this negative finding. Highly leveraged firms, in terms of capital employed, could partly explain the findings, meaning that if equity investment is very small compared to debt, owners will be less interested in return on asset than in profitability. An after-tax return equivalent to about 0.4% of total assets for 2002 (South African Reserve Bank, 2002) and similar trends (around 1%) in the past years in the banking sector in South Africa support this negative finding. Other findings The following were the study findings: • The results suggest that it is not the IS support or investment in IT that impacts on business performance, but rather the effective use of IS to support the information needs of organisations, no matter how substantial the IT investment. The path joining IS support and business performance could not be validated. The relationship between IS environmental alignment and business performance was also reasonably high and statistically significant. IS alignment was found to be a better predictor of business performance. The investment in IT is meaningless unless the IS support is aligned with the management of environmental uncertainty, which impacts on performance. • IS environmental alignment was conceptualised as the support provided by IS strategy to minimise the gap between perceived environmental uncertainty and realised environmental conditions. The responses to the part of the questionnaire that addressed information processing and predicting capabilities of IS indicates the extent of support provided by IS in the assessment of uncertainty in the external business environment in the banking sector in South Africa. The results suggest that organisations are using IS support to enhance the information processing and prediction capabilities of their information systems for the management of environment uncertainty. IS environmental alignment is a valid concept. • The study found a positive but weak relationship between perceived environmental uncertainty and business performance. This is attributed to the fact that the banks in the study sample were using IS support to assess the business environment, and this capability has helped them to manage environmental uncertainty, which has impacted business performance in a positive S.Afr.J.Bus.Manage.2005,36(4) 49 way. This finding is in line with Galbraith (1973), namely, that organisations that perceive the objective environment correctly will be more effective. The respondents perceived the highest uncertainty in financial markets, followed by competitors’ action, customers, suppliers, and government and regulatory authorities. High uncertainty in financial markets, associated with less uncertainty about the actions of government and other regulatory authorities, compared to other factors, could make South Africa a good place for long-term investment. • In the study, measurement instruments to measure business performance and environmental uncertainty in the South African banking sector were developed and validated. • The results also suggest that the non-financial dimensions (namely, customer loyalty and product service innovation) are not valid dimensions for measuring business performance, while the other two dimensions (namely, business growth and profitability) show a high degree of correlation. This indicates that business growth is aligned with profitability, and that growth for profitability is the concern, and profitability still remains the key measure of business performance in the banking sector in South Africa. Parameters such as customer loyalty and innovativeness are not regarded as important for business performance, although these could be pressing issues for banks. Table 6: Jackknife estimates and statistical significance for paths Path Original estimates Mean of subsample Jackknife estimates (P*) Standard error (e*) t statistics (P*/e*) Statistical significance at p= PNV-BP 0,172 0,1562 0,4882 0,2267 2,1538 p= 0,025 ISA-BP 0,518 0,5165 0,5485 0,2956 1,8557 p=0,05 ISS-BP (-) 0,162 (-) 0,1670 (-) 0,0610 0,2075 0,2942 Not significant Table7: Effectiveness of IT use (IS capability) and its implication on IS environmental alignment (results) Perceived uncertainty of an environmental factor (as measured by unpredictability of change) (Average score) Gap between perceived uncertainty and realised environmental conditions ≈ environmental factor uncertainty IS support provided in reducing the gap ≈ IS support in perceiving/assessing the factor uncertainty (Average scores) Effectiveness of IT use or IS capability IS environmental alignment PNV1 2,87 2,87 (Low) 3,47 (High) Waste Bad/superimposed PNV2 3,28 3,28 (High) 2,56 (Low) Ineffective Poor PNV3 3,13 3,13 (High) 4,05 (High) Effective Good PNV4 4,14 4,14 (High) 3,29 (High) Effective Good PNV5 2,49 2,49 (Low) 3,06 (High) Waste Bad Figure 10: Matrix of alignment showing effectiveness of IT use (IS capability) Waste Effective IT use ( Bad or superimposed (Good alignment) alignment ) PNV3 * PNV5 PNV1 PNV4 * * * Effective IT use PNV2 (Good alignment) Ineffective IT use (Poor alignment) High Gap IS Support * 1st Quadrant 2 nd Quadrant 3 rd Quadrant 4 th Quadrant Low Low 0 2345 6 1 6 5 4 3 2 1 50 S.Afr.J.Bus.Manage.2005,36(4) Discussion and conclusions The external business environment is important to business, as it impacts business performance. The study of the impact of environmental uncertainty on business performance is crucial for the successful management of the environment. Using empirical data, this study was able to establish a weak relationship between uncertainty in the task environment and business performance, which validates the importance of environmental uncertainty in business. Previous studies have not been able to establish the direct relationship between these two variables. This study concludes that the capabilities of IS facilities that essentially rely on IT can, as a result of IT investment, be extended beyond the role of gaining competitive advantage in the marketplace. These facilities can be used to enhance the information processing and predicting capabilities of the organisation. The study has validated the role of IS in supporting information processing and predictability capabilities for assessing environmental uncertainty in the banking sector in South Africa. Accordingly, the study recommends that organisations use IS facilities to enhance their information processing and predicting capabilities, not only for the purposes of managing the external environment, but for the sake of other functionalities of the organisation (for example, assessing risk management and building sophisticated tools for business data analysis and prediction). This role of IS in organisations is an extension of the existing role of the strategic management of IS. Based on the analysis of empirical data and the associated findings, this study further suggests that IT investment (in hardware, software and the communication network) alone cannot impact performance, but that the alignment of IS support (derived from such investment) with the needs of organisations affects business performance. The concept of IS environmental alignment in this study is an example of such application and can be extended to other areas of organisations, as it is empirically validated by this study. Organisations need to expand the scope of application of their investment to the needs of the organisation, but aligning the investment with the needs of the organisation is the key to getting returns from the investment. Finally, considering environmental uncertainty as an independent variable and analysing empirical data, this study has contributed towards an understanding of the relationship between environmental uncertainty, IS strategy and business performance. Figure 11 indicates the contribution to the body of theory. Figure 2 shows the tower of IS alignment for the effective use of IS in organisations. On the basis of the findings of the study, it is possible to develop an ‘environmental uncertainty dashboard’ (EUD) to measure and reflect external business environmental uncertainty. Further research could explore various types of alignment. The other five fits of Venkatraman (1989) could also be explored. Acknowledgement: We express our sincere thanks to both anonymous referees for their constructive comments. The views expressed in the paper are our own. Source: Adapted from Galbraith (1977) Figure 11: Gap between perceived and realised conditions showing contribution to body of theory Amount of information required for task performance Perceived uncertainty or no information Amount of information possessed by organisation Gap between perceived and realised conditions, no information A B B C A Contribution to body of theory Contribution to body of theory Realised condition, additional information collected and processed as a result of enhancements made in IS capabilities. S.Afr.J.Bus.Manage.2005,36(4) 51 References Anderson, T.J. 2000. ‘Strategic planning, autonomous actions and corporate performance’, Long Rang Planning, 33:184–200. 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