Business and Information Technology Strategies and Their Impact on. Organizational Performance. Fuat Gunes', A. Nuri Basoglu', Hande Kimiloglu'. ' Yeditepe ...
Business and Information Technology Strategies and Their Impact on Organizational Performance Fuat Gunes’, A. Nuri Basoglu’, Hande Kimiloglu’
’ Yeditepe University, Dept of Systems Engineering, 81120 Kayisdagi, Istanbul, Turkey
* Bogazici University, Dept of Management Information Systems, 80815 Bebek, Istanbul, Turkcy Implementing of IT Successfully (IT Project Management), Quality of Information provided by IT Impact of IT on individuals intellectual capacity
Abstract- Measuring the impact of Information Technology
0 on organizatioual performance is a complicated task Since organizational performance cannot be shaped only by IT applications, other factors such as business strategies and organizational culture should also be taken into consideration wbile measuring the impact of IT on overall performance. For measuring organizational performance, a long list of tangible and intangible factors can be found in the literature. Following a survey of the literature study, a conceptual model and a measurement instrument were developed. The questionnaire was distributed to top 500 companies in Turkey and some public organizations. The results of 105 questionnaires were included in the analyses. The relationship between independent variables and organizational performance was analyzed. One of the major findings is that in organizations adopting an innovative and supportive culture, the impact of IT on overall performance is stronger. IS departments scanning IT continuously in various ways make better use of technology and implement applications that reduce operational costs. Most respondents admit that IT enables them to show better individual performance.
Each has several sub-factors which are either found in the literature or supplemented by us. In analyses, organizational performance is used as the dependent variable. The above bulleted factors are our independent variables. A questionnaire was used as a measurement instrument. The target population consists of employees at both managerial and non-managerial positions and IS and non-IS functions. The questionnaires were distributed to and collected from organizations both through tbe lntemet and in print manually. The responses were analyzed by using several techniques in Answer Tree, SPSS and spreadsheet software. Consequently, we tried to exhibit the essence of information technologies and the way IT influences organizations.
1. INTRODUCTlON
11. THE RELATIONSHIP BETWEEN IT AND
We are observing both the rapid evolution of information technology and increasing amounts of investment in IT by organizations concemed about their market competitiveness and organizational performance, Increasingly, organizations demand and expect future growth and profitability to be attained from productivity gains achieved through continuous investment in IT and similar innovations. Measuring the benefits of IT and its impact on organizational performance is a complicated task. Various factors that are related to both better organizational performance and more successful IT implementations can be found in the literature. The aim of this study is to examine the relationship between the adoption of Information Technology and organizational performance. In this study, firstly, a survey of the literature was conducted about IT investments and implementations and their impact on organizational performance. We tried to explore and summarize the most commonly used factors for measuring the impact of IT on organizations. Organizational performance is affected by many internal and external factors. The factor groups that were used in our research model are as follows: Business strategy, Organizational Culture, Information Technology strategy, Technological Deployment,
ORGANIZATIONS Increasingly, researchers realize that the relationship between IT investment and firm performance is complex and multifaceted [17]. Each study has made different predictions about the effects of IT organizational performance [Z]. Although it has been shown that announcements of innovative IT investments do have positive effects on the announcing firm’s stock price [IO], several authors have suggested that actual retums to organizations from investment in IT are not sufficient to back up claims of their performance-enhancing advantages. Experts have made broad claims that the performance gains-from both efficiency and innovation--stemming from IT are one major cause of record firm-profits in the 1990s. On the other hand, others suggest that there is little evidence that investments in new IT applications have a positive impact on internal measures of firm performance such as market share or profitability [l I]. The results of Dewett and Jones’s [9] literature survey indicates that the handful of studies that have examined the relationship between IT and firm performance have provided findings that tend to be either mixed or inconclusive. For example, one study empirically demonstrated that increases in productivity do not necessarily translate into increases in profitability, as measured by ROI and ROA. Similarly, another found no overall connection between ATM adoption and performance among banks, with a negative correlation
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between performance and process IT, and a positive correlation between performance and product IT.
results indicate that top management commitment to the strategic use of IT, IS managers' knowledge about business, and top management confidence in the IT department are the top three critical success factors.
111. ALIGNMENT BETWEEN BUSINESS STRATEGY
AND IT STRATEGY The complexities of achieving business success through increased efficiency, effectiveness, and competitiveness, combined with innovative applications of IT, has heightened the awareness of both IT and business managers towards more strategically oriented approaches for planning and management. In particular, the need to align business and IT planning bas been emphasized as both critically important and increasingly problematic [6]. In addition, because Information Technology (IT) has evolved from traditional orientation of administrative support toward a more strategic role within an organization, Henderson and Venkatraman [I41 developed a model for conceptualizing and directing the emerging area of strategic management of IT. It is important that IT should be aligned with business strategy. Despite the difficulties in explaining the contribution of information technology to organizational performance, a few studies have concluded on the weight of alignment among business strategy, information technology and organizational performance [8, 141. Teo and Ang [20] concluded from an empirical study that the alignment of IS plans with business plans is not an easy task and knowing which are the critical areas to manage will certainly enhance the success of such efforts. In their paper, they present the results of an empirical study of IT executives on the relative importance of various critical success factors for aligning IT plans with business plans. The
Sales Growth PmfitabiliN
.
..
Long-Nn
DnfitabiliN Growth of-sales Financial resources (liquidity and investment capability)
..
IV. MEASUREMENT OF OVERALL ORGANIZATIONAL PERFORMANCE The concept and measurement of organizational performance bas long been a subject of debate in business research, since there is no universally recognized measure of this concept. Organizational performance can be assessed using either objective or subjective data. The objective approach refers to the financial data, such as retum on investment (ROI) and retum on assets (ROA) or volume measures such as revenue and sales growth, provided by the organization; whereas the subjective measurement, based on subjective measures of organizational performance, calls upon the perception of the respondent [5, 81. The results obtained from their study indicate that neither approach is preferable to the other, each producing similar results. In a study on organizational performance, they used both an objective (return on assets) and a subjective measurement; in each case, the results obtained were comparable and significant [ 5 , 8 ) . Cragg et al [7] also say that researchers have offered a variety of measures of organizational performance. Subjective measures were used rather than objective ones as they have been revealed to capture a broad concept like business performance. Some organizational performance measures used in the literature are shown in Table 4.1,
* Long term profitability saleserowth Financial resources Image and client loyalty Reducecost Improve image 9 Timesaving Quality of decisions 9 Bener internal integration Cometitive advantage
-
-
. .
V. RESEARCH METHODOLOGY
A. Data Collection and Preparation While forming the questionnaire items, we made use of the common variables encountered in the literature and expanded that list by the factors we developed. Seven-point scale was used with the following response options: 1Strongly Disagree, 2-Moderately Disagree, 3-Partially Disagree, 4-Neutra1, 5-Partially Agree, 6-Moderately Agree, 7-Strongly Agree.
.. . -
Internal efficiency of
overations dustamer satisfaction R e m on Investment (ROU Marketshareof products1 sewices Annual sales rs"e""e
.. .
Re" an Investment (ROI) Marketshareof productalservices lntemal efficiency of operations Annual sales revenue * Customer satisfaction Alignment of IT with business needs
-
After developing the questionnaire, two pilot studies were conducted. First pilot study was applied to five managers in public sector. Second pilot study was applied to managers of two different companies among top 500 in Turkey. Finally, the questionnaires were delivered to both public and private organizations. In many cases, we had to visit and submit the questionnaires in print. Besides, the questionnaires were sent in Excel formats via lntemet. Out of 120 collected questionnaires, 105 of them were accepted as valid.
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Figure 5.1: The ~0ncepNa1model
B. Research Model A conceptual research model was developed (Fig 5.1). In this model better organizational performance i s , a consequence of the interactions of all other factors. Even if not equally or completely, but at least partially, the whole factors have an effect on organizational performance. Somehow, these factors have several interactions between each other at the same time. ~
'
. .
1. Dependent Variable In this study, organizational performance is the dependent variable and is affected by many intemal and extemal factors. Gradually, more researchers realize that the relationship between Information Technology and firm performance is a multifaceted and complicated task [2]. In addition, each study has made both different and similar
predictions about the effects of IT on &ganizational performance [3, 4, I,,13, 171. In fact, many performance measures can be found in literature, which may be~tangible or intangible. Measures used in this study are: Service/product variety, service/product quality, annual budget, operational cost, sales growth, market share, organizational image, and customer satisfaction. Measurement items used for organizational performance and some descriptive values are shown in Table 5.1. Based on the analysis of our sample, the contribution of IT to the~increasein customer satisfaction and improvement of organizational image has the highest mean values. The contribution of IT to market share gains relative to principal competitors has the lowest value.
TABLE 5.1: MEASUREMENT ITEMS USED FOR ORGANIZATIONAL PERFORMANCE
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trategy rospector
Item A 1 A-4
Mean
4,924 4,476
I '
StDev !Expression in Questionnaire 1,492 DUIfirms leads in innovations in its industly 1,520 UT firm believes that being 'first in' in the industry is attained through the development afnew roductdsewices
efinder
Reactor
A 5 A 10 A-13
4,562 3,343 5,000
barket domain 1,531 bur firm does not take many risks. 1,657 pur firm respands to areas in which its envimnment puts pressure on it 1,448 ompared to i s competitors in thc industry, our firm is not aggnssive in maintaining its roducsirewiees domain.
TABLE 5.3: MEASUREMENT ITEMS USED FOR ORGANIZATIONAL CULTURES
cl IT Stratevy For IT strategies, Kanungo et al [15,19] describes six strategies in terms of general frameworks which guide the opportunities for IT, which are identified, the IT resources which are developed, the rate at which new technologies are
adopted, the level of impact of IT within the firm,etc. Measurement items used for IT strategies are shown in Table 5.4. Specifically, 'centrally planned' strategy has the highest mean value whereas mean value of 'necessary evil' strategy is the lowest.
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tratew cntrally planned
1
I
Ilem 8-14
TABLE 5.4: MEASUREMENT ITEMS USED FOR IT STRATEGIES bxpression in Questionnaire 5,330 1,498 bn our firm. planning, controlling or other related activities about IS functions are performed
1 Mean I StDev
I
I
d) TechnologicalDeulovment Technological deployment is described in such a way that it corresponds to the way companies plan and manage
information technology to benefit from its potential and effectiveness [a]. Seven components used to measure technological deployment are in Table 5.5.
TABLE 5.5: MEASUREMENT ITEMS USED FOR TECHNOLOGICAL DEPLOYMENT
The highest mean value is of a technological architecture factor: IS department improves information security and control. The lowest mean value is of IS performance evaluation factor. el Successful IT Imblementations(IT Project Manaeement) The degree of success in implementing information technology in organizations has vital importance for overall organizational performance. A lot of studies have been conducted about the need for improved implementation of information technology. The following components used to measure bow successful IT implementations are: implementation extent (as planned), resources needed for the implementation, user involvement during the implementation,
analysis of the organization, anticipated changes in the extemal environment, solutions to potential resistance during the implementation, Information Technology to be implemented, projects’ relevance to the business plan, determination of responsibility, management support for the implementation, presentation of implementation issues, relevance of implementation to organizational needs [12]. Items used to measure these components are in Table 5.6. The factors with the highest mean values are ‘relevance of implementations to organizational needs’ and ‘management support’. The factors with the lowest mean values are ‘anticipated changes in the extemal environment’ and ‘solutions to potential resistance’.
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fl Oualitv of Information provided bv IT Information has become a critical resource, just like energy, both of which are vital to the well being of individuals and organizations in the modem world [l]. So the
quality of information provided by IT to individuals is very important. Adjectives in Table 5.7 were used as qualifiers for the information provided by IT. 'Consistency' has the highest mean value whereas 'level of detail' has the lowest impact.
g) Impact of IT on individuals'decisionmaking capacity
distinguished that all the mean values of item responses are high. Most respondents consider that the contribution of IT to their decision making capacity is satisfactory.
The last factor for performance measurement of IT is its impact on individual's decision making capacity. The items used for this are presented in Table 5.8. It can be easily
uohr) o/Derrs,onr
Communication nnd coordination Individual5 meeting of ppPeeIOti0"S
t 47
1 5,1156 I I 5.Y81 I
E-48
5,894
1,140 With the help of IT, I can communicate and coordinate with others better
E-49
5,952
1.1 18 With the help of IT, I CM meet my f i r "expectationsfrom me better
E 46
I , I I8 p~th the hclp of IT, I can makc more rapid decisions 1.075 biththe help of IT. I can make more accurate dccwonr
VI. RESULTS A . Data Analysis It was claimed that the external variables in the conceptual model have some interactions among themselves. But, only the relationship between organizational performance and other external and demographic factors were analyzed. The term H-ALL4 was used for overall organizational performance in analyses. It comprises of the total mean values of four organizational performance items (H-82, H-84, H-87, H-88). Descriptive statistics were tabulated in Excel and SPSS. Decision trees were developed
Risk Estimate
SE of Risk Est.
in Answer Tree Software. Correlation analysis, Regression analysis, ANOVA and other analyses were executed in SPSS. B. Results ofDecision Trees Decision trees were developed with three different data mining algorithms. As depicted in Table 6.1 the risk estimate of CHAID (Chi-squared Automatic Interaction Detector) algorithm is the lowest of all. CHAID results indicate that innovative characteristics of an organization have considerable value for overall performance. IT project implementations in innovative crganizations will probably be more flourishing.
TABLE 6.1: RISK ESTIMATES OF TREE ALGORITHMS I CHAID I ExCHAID I I . 0.3276 0.6303 I 0.0712 I 0.1073 I
There are other factors that add-up to the relationship between innovation capacity and performance. The organizations that have innovative characteristics to a higher degree and implement cost reducing applications reveal better performance. Moreover, the effective pursuit of technological developments by IS department employees will also have an augmenting effect on this positive relationship. Reading technological publications on a regular basis and attending the technological meetings of IS associations will have extensive return. Continuous learning about methods to integrate new technologies should be encouraged by the organizations. Meanwhile we observe that defender strategies have a shrinking effect on IT investments.
C&RT 0.4808
0.0612
1
According to the results of other algorithm?., being creative and the presence of cost-reducing applications seems to be central factors for a thriving performance. Additionally, ExCHAID (extention of Chi-squared Automatic Interaction Detector) and C&RT (Classification and Regression Trees), both algorithms assert that adequately detailed infonnation provided by IT is very effective to attain better performance. A notable finding of C&RT algorithm is that lack of creativity may be partially compensated by a supportive approach in business. The decision-making process will also influence this relationship commensurately with its quality, rapidity and accuracy.
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Figure 6.1: Decision Trec Algorithm for Overall Perfamnee
C. Results of Cowelation Analysis
Organizations with innovative cultures have the' highest correlation with overall performance. Among innovative characteristics, creativity is in the most .important place. Supportive cultures come secondly. Among supportive characteristics, for an organization, encouraging its employees is more worthy than the other Characteristics. IS department employees should design and implement applications that allow the organization to differentiate itself from competitors and reduce operational costs. Development of technological architecture in an organization has also a relatively high correlation with performance. Especially, improving information security and
I
control, and launching effective and flexible communication networks are valuable to achieve company goals. Organizations with defender and reactor strategies have a negative correlation with performance and those with prospector and analyzer strategies have a positive correlation with overall performance to some degree.
D.Results of Regression Analysis Related with overall organizational performance, seven regression models were generated. The adjusted R2 coefficient of the best model is 0.624 (F-test is significant at 0.01 level). Painvise method was used in regression analysis and missing values were excluded painvise.
TABLE 6.2: COEFFICIENTS OF BEST REGRESSION MODEL
Regression results display similarities and dissimilarities with decision tree analyses. Being creative and developing cost-reducing applications seem to he important here, too. But in well-structured organizations, the impact of IT on overall performance will also become positive. Additionally, accuracy of decision making and implementing monopoly IT strategy appears to influence overall performance.
Significant differences were found between IT and nonIT employee perceptions. IT department employees consider that creativity and risk-tak.ing, innovative characteristics are very important to overall performance. Besides, they think that they can make more rapid and accurate decisions with the contribution of IT. In contrast, non-IT department employees consider well-structured- characteristics, bureaucratic culture, challenging characteristics, and
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innovative culture to be very important to overall performance. Moreover, they think that having supportive characteristics generally is also vital.
agree that necessary solutions to potential resistance were found and user involvement was obtained during IT implementations. Top managers feel that their organizations prefer an analyzer strategy when compared to their subordinates.
E. Results ofAnalysis of Variance (ANOVA) 1. Organization Types (Public, Private) Public organizations are more bureaucratic than private ones as anticipated. Whereas public organizations prefer adopting defender strategy, private organizations adopt prospector and analyzer strategies. The competitive advantage is naturally the most important factor for private Organizations. 2. Department (IT, non-IT) When compared to non-IS department employees, IS department employees believe that freemarket IT strategy is adopted and they have a strategic impact on their organizations. IS department employees are aware of the importance of technological scanning and evaluation of IS performance. So they are confident that they follow the technological changes and assess IS effectiveness and efficiency. Additionally, IS staff assume that their organizations provide an adequate environment encouraging personal freedom. 3. Management Level Some significant differences between the perceptions of top managers and those of others were observed. Top managers have a relatively stronger belief that IT has an impact on overall performance. A majority of the respondents think that top management has supported the IT implementations to some degree. Besides, top managers
4. Year in Organization Number of years in organization was classified in five categories. These are: 1) Less than one year, 2) 1-3 years, 3) 4-6 years, 4) 7-10 years, 5 ) More than ten years. Some significant differences between the perceptions of experienced employees and those of less experienced employees were observed. Experienced employees consider employees follow to a higher degree that IS dep-ent technological developments as required. Additionally, experienced employees perceive that their organizations show bureaucratic and analyzer characteristics.
F. Other Analyses Upon receiving the questionnaires from the respondents, each section of the questionnaire was subjected to reliability analysis in SPSS as a whole. All sections -except one- have an alpha value greater than 0.7, which indicates existence of reliability in the sections. Each section of the questionnaire was subjected to factor analysis separately. Factor analysis in each section revealed that SPSS found different groupings of Eigenvalue over 1 (Table 6.2).Principal Component Analysis was used as extraction method and Varimax with Kaiser Normalization was used as rotation method. The groups constructed by SPSS factor analysis were subjected to reliability analysis separately. Results of reliability tests forced some questions to be altered or deleted. AAer that correlation, regression and variance analysis were executed.
TABLE 6.3: SOME FMDINGS OF FACTOR AND RELIABILITY ANALYSIS
VU. CONCLUSION According to prior studies, we were expecting a positive correlation between performance and prospector, analyzer and defender strategies and a negative correlation between performance and reactor strategy 181. While prospector and analyzer strategies support winning organizations, defender and reactor strategies take us to inferior performance according to our study. As for types of organizational cultures, we were expecting a positive correlation between innovative cultures and organizational performance. The outcomes are exactly as
expected for innovative cultures. We were expecting a negative link between bureaucratic culture and organizational performance hut we found some positive link between them. When compared to others, supportive culture has positive but least effect on overall performance. Most organizations adopt 'centrally planned' IT strategies. Generally, designing and developing applications that reduce operational costs is crucial to overall performance. Other important factors are evaluation of IT and technology scanning. While implementing IT projects, our respondents generally feel that top management supports the projects and
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that the projects are relevant to organizational needs. They also reflect that it is not me finding so~utionsto resistance during the Project imp1ementations. Most respondents accept that information provided by IT is satisfactory. Additionally, results of research indicate that the highest contribution of IT to organizations is ahout improving customer satisfaction and then organizationalimage. For future researchers, it is recommended to realize
the Of and Even in the Same Organizations, the in the next years may be fruitful for understanding the variability of the changing characteristic of business organizational c u l m s , IT swategies, and shldies On
organizational structures. Consequently, the studies conducted in this way may shed light on this matter and give some useful explanations or references for organizations, which have both competitive and non-competitive environments. REFERENCES Adeoti-Adekeye W.B., “The importance of Management Information Systems”, MCB University Press. Libray Review. Vo1.46, NoS. pp.318-327.1997 Alshilash, A.A., “A sNdy to Measure the Use and Effnrs of Information Technology on Organizational Functions”, Unpublished Ph.D. Thesis, George Washington University, Washington, 1997 Andersen, T.J., “lnfomtion technology, strategic decision making approaches and organizational performance in diffment industrial settings”, Journal of Slrotegic Infomotion System, VoLlO, pp.101119,ZOOl Apostolopoulos, T.K., Pramataris, K.C., “Information Technology Investment Evaluation: Investments in Telecommunication InfrsshucNre”, Internotional Joumol o/ In/omrotion Monogement. Vo1.21, No.4, pp.287-296, 1997 Bergeron, F., Raymond, L., Rivard, S.. “Fit in strategic information technology management research: an empirical comparison of perspectives”, Thhe Internotional Jooumol of Management Sciences. Vo1.29, pp.lZ5-142,ZOOl Bum. J.M., S m o , C., “A comparison of the views of business and IT management on success factors far strategic alignmmt”, Infomotion & Monagement, Vo1.37, pp.197-216,2OM)
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