IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 44, NO. 4, NOVEMBER 1997 399

Alignment of a Firm’s CompetitiveStrategy and Information Technology

Management Sophistication: The Missing LinkYash P. Gupta, Jahangir Karimi, and Toni M. Somers

Abstract—The need for establishing a link between informationtechnology (IT) management strategies and a firm’s competitivestrategy has been identified and discussed in the literature. Inthis paper, factors for measuring IT management sophisticationare identified first. Then the effects of the competitive strategy onIT management sophistication are tested empirically. Accordingto a survey of 213 managers, this study finds that competitivestrategy has a direct impact on IT management sophistication.This paper concludes with implications for both researchers andpractitioners.

Index Terms—Alignment of competitive strategy and informa-tion technology management sophistication, competitive strategy,information technology management sophistication.

I. INTRODUCTION

TODAY, information technology (IT) is a critical organi-zational resource that must support a firm’s competitive

strategy [57]. The alignment of IT management strategies witha firm’s competitive strategy has been cited as a critical man-agement issue for both information systems (IS) executivesand general managers [8]–[10], [49], [76]. In spite of this, theextent to which IT management strategies are aligned with afirm’s business strategies varies widely among firms. This isoften due to the lack of a clear plan [8], [49].

Previous research has suggested that there are significantvariations among firms in the degree to which IT has beenaligned with their business strategies [38]. These differencesare reflected in three evolutionary roles that IT plays in firms:1) the traditional role, i.e., IT supports operations but is notstrategy related, 2) the evolving role, i.e., IT supports strategy,and 3) the integrated role, i.e., IT is integral to strategy [38],[46]. The firms’ competitive strategies are also linked to thisevolution [71]. The evolutionary role of IT and the extentto which IT management strategy can be pursued dependsgreatly on a firm’s IT management sophistication [38], [40],[62], [71]. Higher levels of IT management sophistication or ITmaturity1 represent the evolution of a firm’s IS function from

Manuscript received August 16, 1995; revised May 10, 1996. Review ofthis manuscript was arranged by Department Editor E. Geisler.

Y. P. Gupta and J. Karimi are with the College of Business Administration,University of Colorado, Denver, CO 80217-3364 USA.

T. M. Somers is with the School of Business Administration, Wayne StateUniversity, Detroit, MI 48202 USA.

Publisher Item Identifier S 0018-9391(97)07865-3.1In this paper, we use “IT management sophistication” and “IT maturity”

synonymously [12], [64].

the traditional role of supporting data-processing operations tothat of being strategic to the firm [74].

Benbasatet al. [5], using Nolan’s stage hypothesis model[51], [52] and a number of other independent research studies,developed a nine-item instrument for measuring IT maturityand classifying firms into “more mature” and “less mature”groups.2 In a critique of the stage hypothesis model, Benbasatet al. [6] found problems associated with measuring “maturity”and suggested that “more work needs to be done to addressthe obvious measurement problems thus far encountered” [6,p. 485]. Their observation was in consonance with commonlydocumented measurement problems associated with single-item factors and factors with a small number of items [25],[44]. In spite of the existing problems with the IT management-sophistication instrument, it has recently been used in a numberof other studies [62]–[64],3 and no new alternative has beenproposed. The objectives of this study are to address the issueof measuring IT management sophistication and to examinewhether certain IT management strategies are more importantfor certain competitive strategies than for others.

In this paper, we have first defined the factors for measuringIT management sophistication and competitive strategy. Next,a research hypothesis is provided. This is followed by a dis-cussion of the results obtained through our study of responsesof 213 IT executives. We conclude with implications for bothpractitioners and researchers.

2The nine items used were 1) the number of functions dependent onIS, scaled from 1= very few to 7=all of them; 2) the extent to whichtechnology has penetrated the firm in impact/performance; 3) the extent towhich mainframes, micros, and process-control devices are installed in thefirm; 4) the basis for evaluating performance of IS, ranging from 1= costsavings only to 7= contribution to firm’s overall objectives; 5) IT managers’knowledge of the firm’s business plans, scaled ranging from 1=uninformedto 7=well informed; 6) top management’s knowledge about informationtechnology, similarly scaled from 1=uninformed to 7=well informed; 7)the extent of formalization in IS planning; 8) the extent to which the IS plantakes the business plan into account; and 9) the extent to which the IS planinvolves top management.

3For example, in the recent studies for developing a taxonomy and acontingency approach for the decision-making processes concerning strategicapplications of IS [62], [63], the nine-item measure based on [5] was usedfor measuring IS maturity. In a study of alignment between organizationalcritical success factors and IT capabilities in academic institutions [64], theIT management sophistication was measured using five items. These werethe extent to which 1) the IS planning takes the institution’s future plan intoaccount, 2) the institution’s top management is involved in the IS planningprocess, 3) the institution’s top management is informed about the informationtechnology, 4) the IS managers are informed about the institution’s long-termplans, and 5) the bases for the institution’s performance evaluation of IS.

0018–9391/97$10.00 1997 IEEE

400 IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 44, NO. 4, NOVEMBER 1997

II. THEORY

A. IT Management Sophistication

IT management sophistication, or IT maturity, has beenused in the literature to characterize the evolution of a firm’s1) data-processing expenditures, 2) IS function,4 3) IT use,4) experience with IT, and 5) IT management strategiesrelated to IT planning, organization, and control [45], [46],[51], [52], [63], [64]. Greater IT management sophisticationis characterized by IT managers’ being aware of the firm’slong-term strategic plans [41], [64], [74], the firm’s futurestrategic plans’ being explicitly considered during IS planning[12], [24], and IS performance’s being evaluated based on itscontribution to the overall firm’s objectives, and not on costsavings alone [12], [74]. In addition, in firms with a high levelof IT management sophistication, the top management may beexpected to have greater knowledge about IT [38], [41] andparticipation in IS planning [41], [63].

Furthermore, based on the technology-assimilation model,IT management strategies evolve as firms move toward ITmaturity [45], [60]. Considering this model, the IT diffu-sion process is segmented into four phases: 1) technologyidentification and investment; 2) technology learning andadaptation; 3) rationalization/management control; and 4) ma-turity/widespread technology transfer. In the maturity phase:

1) benefits and experience with new technology are dis-seminated to other units within the firm;

2) learning is relatively complete;

3) long-term analysis and planning are emphasized;

4) the technology base is installed and integrated.

Other research has shown that:

1) firms vary substantially in the extent to which IT hasbeen integrated into their business strategies;

2) integrated firms display more proactive orientation to-ward IT;

3) tight integration between business strategy and IT iscited as a key to success of firms [38].

IT management sophistication or maturity is used here tocharacterize firms in terms of their evolution in the planning,organization, control, and integration aspects of their IS func-tion. Higher levels of IT management sophistication wouldimply a significant formalization of the planning, control,organization, and integration of IT activities. This, in turn,would suggest that the IS function in a firm with higherlevels of IT maturity would have evolved from the data-processing orientation into the strategic IS orientation [45],[63], [74]. Research on IT management sophistication andthe technology-assimilation model suggests using managerialpractices concerning IT planning, control, organization, andintegration as benchmark variables for measuring the progres-sion of firms toward IT management sophistication.

4Although various parts of a firm may differ in the extent to which IShas matured in them, IS maturity is viewed at an aggregate level rather thanindividual subunits involved.

B. Competitive Strategy

Competitive strategy is the match between the opportuni-ties and risks inherent in the environment and the internalcompetencies (resources and skills) possessed by the firm.Research in much of the strategy and organizational behaviorliterature has highlighted that 1) strategy alone can contributeto good performance if it maintains alignment with a firm’senvironment [22], [31] and 2) more than one strategy can besuccessful in a given environment, provided that the firm actsconsistently in that strategy [29], [30], [32], [33], [68].

There are several frameworks for defining competitive strat-egy in the strategic management and organizational behaviorliterature [2], [13], [48], [55], [65]. Porter [54], for example,proposed three generic strategies a firm can adopt: differentia-tion, cost leadership, and focus. Subsequent research, however,suggested that 1) Porter’s generic strategies of differentiationand cost are not mutually exclusive [22], [35] and 2) businessunits within a firm may have very different competitivepositions in their sector, and thus may have quite differentgeneric competitive strategies [12].

Miles and Snow [48] viewed a firm as a complete andintegrated system in dynamic interaction with its environment.They suggested that 1) more than one strategy type can besuccessful in a given environment and 2) it is important for afirm to be organized appropriately and to plan and implementrelevant strategies for a particular strategic type.

The Miles and Snow framework is especially appropriate forthis study because it is useful for analyzing the ways in whichfirms interact with their environment, it focuses on a firm’sbehavior at the total system level rather than subunit levels,and it builds around the “distinctive competence.” Distinctivecompetence refers to those things that a firm does especiallywell in comparison to its competitors. It is an aggregate ofnumerous specific activities that the firm tends to performbetter than other firms within a similar environment. Miles andSnow [48] posited that top managers in firms with differentbusiness strategies develop different distinctive competence intheir firms to support the desired strategy. A firm may havedistinctive competence in IT, and that competence therefore isreferred to the degree to which IT supports the firm’s businessstrategy.

Miles and Snow [48] further postulated that competing firmswithin an industry exhibit patterns of behavior representativeof four basic strategic types: 1) Defenders, 2) Prospectors, 3)Analyzers, and 4) Reactors (see Appendix B for the descrip-tions of the four strategy types originally developed by Milesand Snow [48]). The key dimension underlying this typologyis the rate at which a firm changes its products or marketsto maintain alignment with its environment. Miles and Snow[48] argued that any strategy (except the Reactors) can be suc-cessful in any given environment if the firm acts consistentlyin all areas of its operation.5 For example, a firm following a

5Since reactors lack a consistent strategy and simply respond to environ-mental pressures when forced to do so, this is not considered a viable strategyin the long run. Miles and Snow [48] further suggested that organizationswere often forced into this strategy when their top managers were unable (orunwilling) to develop any distinctive competence, organizational structures,and management processes required by a particular strategy.

GUPTA et al.: COMPETITIVE STRATEGY 401

TABLE ISTRATEGIC MANAGEMENT, ADMINISTRATIVE, AND TECHNOLOGICAL CONCERNS FOR EACHCOMPETITIVE STRATEGY

Defender strategy can be just as successful as Prospector andAnalyzer firms carrying out their respective strategies.

Each of these strategy types is richly described as a uniqueconfiguration of contextual, structural, and strategic factors.Miles and Snow posited that at least three of these idealtypes—the Prospector, Analyzer, and Defender—are effectiveforms of organization, and that the relative effectiveness ofthe types varies with the context. Snow and Hrebiniak [71],for example, found that in most environments, firms classifiedas Analyzers generally were the most effective, and that inhighly regulated environments, Reactors were more effectivethan Prospectors and Defenders. As shown in Table I, firmspursuing different competitive strategies have different setsof strategic management, administrative, and technologicalconcerns [47], [48], [71].

Both Defenders and Reactors are concerned about cost re-duction and efficiency. Defenders, however, have a clear strat-egy to control cost by depending on their internal resources.Like Prospectors, Analyzers must also engage in environmen-tal scanning. Since both Prospector and Analyzer firms engageheavily in environmental scanning, IT may play a more strate-gic role in these firms compared to Defenders and Reactors.

III. RESEARCH HYPOTHESIS

Competitive strategy is an important factor in predicting afirm’s IT use, structure, IT strategic orientation, IT manage-

ment decision-making strategies, and ultimately the level of ITmanagement sophistication. Alignment is the proximity of thefirm’s IT capability to the ideal IT capability for its competitivestrategy [64]. Previous research on the impact of competitivestrategy on IT management strategies has shown that

1) a firm’s competitive strategy is strongly related to thedegree of centralization of IT structure [7], [70];

2) multiple competitive strategies can cause multiple formsof IT adoption [16], [37], [39], [40], [56];

3) competitive strategy has a significant impact on the cor-relation between IT adoption and business performance[27].

A misalignment between competitive strategy and IT man-agement strategy could result in situations where IT becomesa “competitive burden” [75] and may result in decreasedbusiness performance [27], [64].

A firm’s competitive strategy can be distinguished by aparticular set of distinctive competencies [43], [48], [68].Therefore, we suggest that depending on competitive strategy,a firm may have distinctive competence in different aspects ofIT management sophistication.

Prospectors tend to pursue an aggressive competitive strat-egy pioneering products and markets. They operate in anenvironment characterized by rapid and unpredictable changes.Understanding the changes and innovation in the industry andthe uncertainty of the actions of competitors and customers

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will require firms’ leaders to spend more time scanning theirfirm’s environment [19], [20]. Prospectors are therefore ex-pected to focus their scanning activities toward opportunitiesfor differentiation of products, markets, and services. Thefirms’ IT should be designed to facilitate the acquisitionand distribution of such information. Because of the firms’continuous dependence on new and multiple technologies forproduct and market development, IT leaders are expected tobe more involved in IT planning and IT integration activities.

Analyzers are a “unique combination of Prospector andDefender types” [48, p. 68]. Analyzers adopt some charac-teristics of Prospectors and some characteristics of Defenders,seeking effectiveness through both efficiency and new productsand markets. Analyzers are expected to make choices typicalof Prospectors in their newer and more dynamic endeavors(such as spending more time in IT planning) while adopting astrategy typical to Defenders in their traditional and stablelines of business [72]. Analyzers need to keep a balancein locating new market opportunities and maintaining theirexisting customer base. The IT leaders in these firms, inturn, need to engage more in IT planning and IT organizationactivities in order to keep an equilibrium between conflictingdemands for technological flexibility and stability.

A Defender is a less dynamic form of firm operatingin an environment that is more stable and predictable thanthat of the Prospector. This more stable environment allowsDefenders to engage in less environmental scanning. De-fenders are expected to depend on single-core technologyfor cost reduction, favor IT developed internally, form alimited alliance with external sources for their technology,and overlook new market development in IT [72]. Hence,IT leaders in these firms are expected to engage more in ITplanning and control activities for cost-reduction purposes andmore in IT organization activities for continuously improvingexisting technology to maintain efficiency.

Reactors are firms with no distinct competitive strategicorientation. In the absence of a clear strategy in a Reactorfirm, decisions are made in a reactive rather than proactivemode. The need for environmental scanning, long-range fore-casting, and planning is minimal because the environment willfavorably support almost anything the firm does or does notdo [21]. As a result, there is no reason to believe that Reactorswill follow a specific strategy to secure IT resources. In suchfirms, IT leaders are more likely to spend more time in ITorganization activities (to run efficient data centers) than tospend more time impacting the firm’s business strategy.

Therefore, a hypothesis relating competitive strategy and ITmanagement sophistication can be formulated as follows.

Hypothesis 1:Firms in the four strategic types differ withrespect to the degree of their IT management sophistication.

This hypothesis relates the four basic strategic types with ITmanagement sophistication. The hypothesis is of fundamentalimportance to an understanding of the issues that affect therelationship between competitive strategy and IT managementsophistication.

IV. THE STUDY

A field study using a questionnaire was deemed appropriateto collect the necessary data from senior IT executives. The

limitations of using a single source to represent a firm’sposition are well recognized. This problem was resolved, inpart, by establishing an “expert” within the firms as the singlesource—the senior IT executive. Therefore, in most firmssurveyed, the individual who completed the survey was theperson most knowledgeable about the firm with regard tothe variables of interest. In the questionnaire, the senior ITexecutives were asked about IT planning mode, IT controlmode, IT organization, and the extent of IT integration intheir firms. Second, in addition to the questions on the five-point Likert-type scale, IT executives were asked to assessthe competitive strategy of their firms. Last, demographic dataabout the respondents and their firms were obtained.

The questionnaire was pretested, and several recommendedchanges were incorporated into the final instrument. Usinginformation in a directory, we were able to determine that thelargest concentrations of financial-services firms were locatedin approximately 11 states. The total number of financial-services firms residing in these states was identified usinga mailing-list directory. The questionnaire (and explanatorycover letters) was sent to approximately 1035 randomly se-lected financial-services firms in the following states: NewYork, New Jersey, Ohio, Michigan, Pennsylvania, Florida,California, Wisconsin, Minnesota, Illinois, and Texas. Of thosemailed, 34 questionnaires were postmarked undeliverable and213 were completed and returned, yielding a response rateof 21.30%. This is a typical response rate for studies ofthis kind [42], [60], [73]. We performed two tests to checkfor nonrespondent bias. No statistically significant differenceswere found between responding and nonresponding firmsusing the categorical variables of firm type and number ofemployees (chi square 10.77 and 9.21, respectively,.05). There was little reason to suspect that IT executiveswho did not respond to the questionnaire perceived their firmsmuch differently from the managers who did respond, sincethe mix of the respondents included all the sectors within thefinancial-services industry.

The financial-services industry was selected primarily be-cause it is an information-intensive industry in which IT isplaying a strategic role [4], [17], [34]. It has been undergoingdramatic changes that have affected its entire structure; theindustry is now faced with market conditions completelydifferent from those prevailing less than a decade ago [61].Since the Miles and Snow typology focuses on the innovativebehavior of firms in product and market development, it isappropriate for studying the effects of competitive strategyon IT management sophistication in the financial-servicesindustry.6 In the financial-services industry, IT is the meansof delivering the goods and services, the infrastructure of thebusiness is often IT itself, and each firm’s IT infrastructure isa major component of its asset base [22].

6In a recent study, to test the usefulness of the Miles and Snow strategictypology in the field of marketing strategy, the financial-services industrywas also selected as a representative of an industry responding to recentenvironmental changes [43].

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V. MEASUREMENT OFRESEARCH VARIABLES

A. IT Management Sophistication

Based on the feedback received from IS managers in thepretesting of the instrument, it was clear that factors affectingIT management sophistication include more than the nineitems [6], [62] or the five items [64] used before. To measureIT management sophistication, we used four criteria, e.g., ITplanning mode, IT control mode, IT organization, and ITintegration, represented by a total of 20 items. Respondentswere asked to indicate the level of IT planning, control,organization, and integration in their firms. The response op-tions, anchored on a five-point Likert-type scale, ranged from1 strongly disagree to 5 strongly agree. The followingparagraphs provide the theoretical reasons for the four criteriaidentified for measuring IT management sophistication. (Ap-pendix A contains the items used to measure IT managementsophistication.)

1) IT Planning Mode: IS planning has been a key man-agement issue for practitioners as well as researchers sincethe mid-1980’s [49]. The need to integrate IS planning withbusiness planning so that information systems provide supportfor the business strategies of the firm has been the focus of ISplanning research. Firms’ characteristics and the role playedby IS within them have been shown to have a significantinfluence on the quality of the planning process and planningeffectiveness [58], [59], [69].

As a firm’s IT continues to mature, the nature of theplanning mode changes from a computing plan oriented towardtechnology management to a long-range strategic plan involv-ing data resource management [23], [52]. Researchers haveidentified appropriate planning characteristics for the stagesof Nolan’s model [23], [28]. The primary objectives of ITplanning in the maturity stage are to align the IT plans witha firm’s business plans [77] and to extend the infusion anddiffusion of IT within a firm [69]. As a firm moves toward ITmanagement sophistication, new concerns are:

• What information systems do the firm’s competitivestrategies demand?

• What strategic opportunities are presented by IT?

• How should IT project priorities be set?

2) IT Control Mode: Control of IT activities has changeddrastically during the past two decades, from beingloose/informal, project based, and technical based to beingmore tight/refined and managerial based [11], [12], [24].7 Newmethods of control are based on benefits, priorities (selectivecharge-out), technical standards [3], and the organizationalgoals rather than cost [5], [12]. As firms progress toward ITmanagement sophistication, they are as confident in managingcomputing as they are in managing other resources, the

7An explained in [12], many potential IT financial-control procedures (suchas unallocated cost center, allocated cost center and charge-out, profit center,and transfer pricing) are possible. The challenge is to pick the one thatbest fits the company’s general management control culture, present user-IT relationships, and current state of IT sophistication. The typical firm hasapproached the control issues in an evolutionary fashion rather than havingselected the right procedure the first time.

application’s development pursues economic benefit, and ITmanagers seek to manage the balance between short-termdelivery and investment for the future [24].8 This oftenrequires new mechanisms for line influence in IT, in additionto new reporting relationships [38]. Firms with a high levelof IT management sophistication can derive a significantbenefit from strategic use of IT by establishing mechanisms topermit key line managers to exercise control over budgeting,priority setting, and resource planning for the IS function.New concerns are:

• How much should they spend on IT?

• How should IT proposals be evaluated?

• How should the responsibility and authority for IT direc-tion, development, and operations be set?

3) IT Organization: Organizing IT is a key managementissue [11], [49]. Previous research reported that

1) IT organization has a significant impact on overall ITeffectiveness [7], [58];

2) not every IT organization is an effective choice for everyfirm [11];

3) the changes in overall IT organization can be triggeredby changes in overall organizational variables (e.g.,corporate strategy, business strategy, and overall firmstructure) [11].

In the early stages of data processing, firms could organizeIT activities autonomously because early applications werelimited to transaction-oriented functions requiring only limiteduser awareness and involvement. In the IT era, however, end-user computing continues to grow and spread rapidly, andusers’ ideas need to be given special attention in the planningand implementation of applications [1], [14]. New concerns inIT management-sophistication eras include:

• How will IT affect a firm’s organizational structure?

• Should IT have a director?

• If so, what are his roles and responsibilities?

4) IT Integration: Traditional management strategy for au-tomation has been a bottom-up approach, in which vari-ous functional areas were automated on an application-by-application basis, without consideration for integration andoptimization at the firm level.9 As a firm moves toward ITmanagement sophistication:

1) there is a top-down planning process for linking ISstrategy to business needs;

2) the technology is transferred to a wider spectrum ofapplications;

8Earl [24] suggests that the control arrangements for IT tend to be a mixsolution as firms move toward IT maturity. Accordingly, firms will realize theadvantages and disadvantages of each of the IT financial-control proceduresand tend to adopt a hybrid approach. The hybrid approach states that in thesame firm, some activities should be managed as cost center, some as servicecenter, and some as profit or investment center, and these may change overtime.

9As a result, organizations discovered that these application systems werebecoming increasingly interdependent, incompatible, redundant, and, in manycases, incomprehensible [36].

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3) there is a high degree of technology integration, leadingto an effective exploitation of IT within the firm [12],[58].10

Integrated firms use IT to create new products and services,alter linkages with suppliers and customers, and establish newstandards of performance in their industries. They also displaya more proactive orientation toward IT [38].11 Integration oftenis achieved by employing processes to identify and exploit ITopportunities. This often requires basic changes in businesspractices and culture [38]. The challenges to firms with a highdegree of IT management sophistication are adaptation to andadoption of new technologies [12], [24].

B. Competitive Strategy

To measure competitive strategy, Snow and Hambrick [66]suggested at least four alternative approaches: 1) investiga-tor inference, 2) self-typing, 3) external assessment, and 4)objective indicators. In this study, we use the self-typingapproach, where IT executives assessed their firms’ strategiesusing descriptions of the four strategies in the Miles and Snowframework. The descriptions (see Appendix B) originallydeveloped by Miles and Snow [48] have been used in anumber of other studies in this area [43], [68], [70]. Theterms “Defender,” “Prospector,” “Analyzer,” and “Reactor”were not used in this questionnaire. Rather, each descriptionwas prefaced by a categorization of “Type 1,” “Type 2,” “Type3,” or “Type 4,” each corresponding to the appropriate strategictype. Recently, extensive reliability and validity studies wereconducted by Shortell and Zajac [67] on the Miles and Snowstrategy typologies, with excellent results.

C. Reliability and Construct Validity Assignments

Each of the constructs was represented by multiitem mea-sures of that construct. Since multiitem measures were used forall of the constructs, for further analyses, each construct wascomputed by averaging the items used to measure it. Constructvalidity refers to whether the measures truly describe whatthey are intended to describe. One can purify the construct byeliminating the suspect items prior to factor analysis of theitems [15].

The first step in the development of items that measure aconstruct should be to examine the item-to-total correlationsto identify items that may display measurement error or do notshare the core of the construct [15], [53]. Thus, the extent towhich the item correlates with the total score is indicative of

10Integration has been identified as a key factor influencing the success ofstrategic planning for information systems [45].

11A recent study in [26] found eight characteristics that distinguished firmswith high integration from those with low integration. All these factors werepresent where integration was high; none was present where integration waslow. 1) Business unit management perceived that future exploitation of ITwas of strategic importance. 2) An IT executive was established as partof the executive team. 3) There was ongoing education for business unitmanagement in IT capability. 4) There was a top-down planning process forlinking IS strategy to business needs. 5) The business mandate for IT wascentrally planned. 6) Some IT development resource was positioned withinthe business unit. 7) The introduction of new technologies took place at thebusiness unit level under business unit control. 8) There was a cost-centerrather than profit-center orientation in controlling IT activities, with relativelyunsophisticated charge-out procedures.

construct validity for the item. On examination of the item-to-total correlations for IT management-sophistication variables,items from each of the scales were deleted if the correlationswith the corrected item total were below 0.50. After droppingthese items, the item-to-total correlations were recalculatedand alpha coefficients were computed. For internal validity,reliability for each measure was evaluated using Cronbach’scoefficient alpha [15], [18]. The coefficient alpha values for theIT management-sophistication variables, shown in Appendix Afor items measuring each construct, comfortably exceeded thelower limits of acceptability (generally suggested by Nunnally[53] to be around 0.50–0.60). This confirmed the internalconsistency of homogeneity of the measures.

Factor analysis was used to determine if the 20 itemsmeasuring each of the four constructs of IT managementsophistication cluster together and load onto the correct con-struct. A four-factor solution was obtained for IT managementsophistication using the “eigenvalue greater than one” criterion[53]. The varimax rotation of the solution suggested that fourfactors, represented by high factor loadings, confirmed thatthe set of indicators measuring the underlying four constructsinitially envisaged for IT management sophistication was es-tablished. The factors, which explained 66.7% of the variance,empirically corresponded to the expected factors. (AppendixA contains the factors used for IT management sophistication,the items for each factor and their loadings, the eigenvalue,and the variance explained by each of the four factors.)

VI. A NALYSIS AND RESULTS

The level of data collection and analysis for all three compo-nents of our research model is that of the firm level, becausethe IT management strategies implemented by corporate ISgroups address organization-wide concerns rather than thoseof specific subunits within a firm. Table II contains generalinformation about the firms and personal information about therespondents. To ensure that the questionnaires were answeredby the intended informants, that is, by a top-level executive,the respondents were asked to indicate their job title at the endof the questionnaire. Table II also shows the tabulation andclassification based on those titles. Thus, it appears that therespondents are top-level IT executives and can be expectedto provide adequate answers to questions on IT management-sophistication variables as well as on their firms’ competitivestrategy.

From the 213 financial institutions responding to the survey,the self-typing approach yielded the following breakdown ofstrategic types: 60 Defenders, 30 Prospectors, 100 Analyzers,16 Reactors, and seven unclassified. The sample characteristicsby strategy and firm type are shown in Table III. Table III(a)and (b) supports our expectations that all four strategies werepursued in the financial-services industry, with Defenders,Prospectors, and Analyzers far outnumbering Reactors. Thedata also support the basic assumptions regarding the existenceof (significant) linkages between a firm’s competitive strategy,size (number of employees), and type. In general, sinceReactors do not use IT strategically, they not only have smallerIT departments but also a lower mean number of years that

GUPTA et al.: COMPETITIVE STRATEGY 405

TABLE IIGENERAL INFORMATION ABOUT FIRMS AND PERSONAL INFORMATION ABOUT RESPONDENTS, n = 213

strategic planning has been carried out compared to firms usingother competitive strategies.

The summary data show the wide diversity of firm char-acteristics. We performed two tests to determine the dif-ferences between small and large firms and between bankand nonbank firms with respect to the competitive strategyand IT management-sophistication variables. Table IV(a) and(b) shows that there are no significant differences betweensmall and large firms and between bank and nonbank firmswith respect to competitive strategy and IT management-sophistication variables. Therefore, in the remaining analysis,firms are not distinguished based on size and type.

A. Competitive Strategy and IT Management Sophistication

Our research hypothesis suggests that the four strategictypes would differ with respect to the degree of IT managementsophistication. This was tested by performing a series of F-tests to compare the means of the strategic types on each of the

IT management-sophistication variables. One IT management-sophistication variable served as the dependent variable foreach analysis. The four strategic types determined the levelsfor the independent variable.

Several interesting and significant findings can be discernedfrom the results summarized in Table V(a). For each of theIT management-sophistication variables, there were significantdifferences ( .05) across the four strategic types, implyingthat the firms differ in their emphasis on the dimensions of ITmanagement sophistication depending on strategic orientation.The level of IT management sophistication was consistentlyhigher for Analyzers and lowest for Reactors. These resultsindicate that our research hypothesis was supported by thedata.

Scheffe’s range test was used to conduct follow-up analysesto determine which group means were different. The Schefferesults are displayed in Table V(b). Defenders differed sig-nificantly from Prospectors and Reactors on IT control mode

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TABLE III(a) SAMPLE CHARACTERISTICS BY STRATEGY TYPE. (b) SAMPLE CHARACTERISTICS BY FIRM TYPE

(a)

(b)

and organization. Defenders are known to have a centralizedcontrol and vertical IS. On the operational side, dependen-cies on single-core technology and continuous improvementsin technology are the key characteristics of a Defender’s

competitive strategy. Prospectors, however, have decentralizedcontrol and distributed IS [48]. They typically rely on multiple,flexible, and prototypical technologies to enable their firms torespond to a changing business environment rapidly.

GUPTA et al.: COMPETITIVE STRATEGY 407

TABLE IV(a) DIFFERENCESBETWEEN SMALL AND LARGE FIRMS WITH RESPECT TOCOMPETITIVE STRATEGY AND IT M ANAGEMENT SOPHISTICATION

(a)

The results also show that the means of Prospectors andReactors are not significantly different for any of the ITmanagement-sophistication variables. Although this was anunexpected result, this similarity can be explained by com-petitive strategy. Previous research reported that Prospectorfirms:

1) typically avoid long-term commitments to a single typeof technological process;

2) usually create multiple, prototypical technologies, whichhave a low degree of routinization and mechanization;

3) have a level of technological adoption contingent uponboth the firm’s current and future product mix;

4) do not select or develop appropriate technologies untillate in the process of product development [48], [68].

Prospectors and Analyzers, however, differed on IT planningand control. In addition, as expected, Analyzers and Reactorsdiffered on IT organization and control.

Defenders usually choose to grow through market penetra-tion and perhaps some limited product development. Typically,

Defenders are able to do so by developing a single coretechnology that is highly cost efficient and by intensive plan-ning oriented toward cost and other efficiency issues. ForDefenders, this competitive strategy is associated with a higherlevel of IT organization and control.

As mentioned, Prospectors were known to have decentral-ized control and multiple technologies, and the major admin-istrative problem for these firms seems to be how to facilitateand coordinate numerous and diverse operations. Therefore,because of continuous exploration of rapidly changing technol-ogy, and also because of reliance on technological flexibility,a higher level of IT integration, planning, and organization isessential for the Prospector firms. For Prospectors, however,complete integration may not be possible because of thepresence of multiple technologies.

Analyzer strategy is difficult to pursue, particularly infinancial-services industries (which are characterized by rapidmarket and technological change). Analyzer firms attempt tominimize the risk associated with new technologies whilemaximizing the opportunity for profit. Through a higher level

408 IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 44, NO. 4, NOVEMBER 1997

TABLE IV (Continued.)(b) DIFFERENCESBETWEEN BANK AND NONBANK FIRMS WITH RESPECT TOCOMPETITIVE STRATEGY AND IT M ANAGEMENT SOPHISTICATION

(b)

of IT planning, organization, and control, Analyzer firms areable effectively to exploit the IT opportunities.

Reactors exhibit a pattern of adjustment to their environmentthat is both inconsistent and unstable, and the management inthese firms do not fully shape the organization’s structure andprocesses to fit a chosen strategy [48].

VII. SUMMARY AND CONCLUSIONS

IT management sophistication or maturity is used here tocharacterize firms in terms of their evolution in the planning,organization, control, and integration aspects of their IS func-tion. This study proposed and validated a new instrument formeasuring IT management sophistication within firms. Fourcriteria, represented by a total of 20 items, were identified formeasuring IT management sophistication within firms. Theseare IT planning mode, IT control mode, IT organization, andIT integration. The proposed IT management-sophistication in-strument eliminates the obvious measurement problems so far

encountered in measuring IT management sophistication. Thisstudy finds that the IT management-sophistication variablesexplained 66.7% of the variance among the firms.

Alignment between a firm’s competitive strategy and ITmanagement strategies has been regarded as an importantissue for a number of years. This alignment occurs in adynamic environment, and it is one of the critical challengesfacing management today. This study shows that such analignment can be translated into a particular set of distinctivecompetencies in IT management for each competitive strategy.Moreover, none of the competitive strategies could be distin-guished on the basis of a single aspect of IT managementstrategies.

The successful introduction and implementation of IT re-quires many management processes. A key point in carefullymanaged alignment is for the top management to limit theirconcern to a few critical IT management processes, dependingon the firm’s competitive strategy. Such an alignment offersthe best opportunity for firms to identify and then implement

GUPTA et al.: COMPETITIVE STRATEGY 409

TABLE V(a) ANOVA OF COMPETITIVE STRATEGY AND IT M ANAGEMENT-SOPHISTICATION VARIABLES. (b) SCHEFFE’ S PAIR-WISE COMPARISON OFSTRATEGY TYPES

(a)

(b)

IT solutions that consistently and successfully address criticalbusiness opportunities and threats [8].

A. Implications

This study shows that the effect of competitive strategyon IT management sophistication is significant. Further, firmsdiffer in their emphasis on the dimensions of IT managementsophistication depending on strategic orientation. In respond-ing to a strategic necessity, a wide range of organizationalcapabilities may be feasible or required. Typically, however,firms choose to develop only some of them. Although firmswithin every industry may choose different competitive strate-gies and have different IT capabilities from their competitors,each competitive strategy must be aligned with appropriate ITcapabilities. For example, this study finds that for Defenderfirms, particular attention must be paid to IT control andorganization.

One of the major contributions made by this study is inthe identification of IT capabilities that must be pursued fora given competitive strategy. It provides guidelines to seniormanagers on how they should allocate their time and energyin their firms to make their IT more responsive to theirfirm’s success. For example, the executives in firms pursuing aProspector strategy should concentrate more on IT integrationthan those who are pursuing a Defender strategy. This impliesthat they should work toward:

1) improving top management understanding of planningprocesses that link information strategy to businessneeds;

2) providing IT development resources;

3) creating an environment for introduction of or experi-mentation with the information technologies.

Similarly, the firms that pursue a Defender strategy must worktoward improving IT organization variables by making theresponsibility and authority for IT direction, development, andoperation clear and explicit. In addition, they should buildconfidence among IT executives that IT proposals are properlyappraised and should continuously monitor the IT functionbased on clear performance criteria, goals, and responsibilities.

To perform such an alignment, a variety of mechanismsmay be employed.

1) The CEO and the IT executives develop a partnershipso that there is two-way communication between them.

2) The IT executive should be an individual with strongbusiness, technical, and organizational experience.

3) The CEO’s develop mentoring programs to provide abroad knowledge of the firm and to access a broadnetwork of organizational contacts to strengthen the ITexecutives’ business understanding

4) The IT executives use their firm’s competitive strat-egy in assessing the appropriateness of a particular ITmanagement strategy decision.

B. Limitations

As pointed out by Snow and Hambrick [66], the self-typingapproach is not without shortcomings. First, many executives

410 IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 44, NO. 4, NOVEMBER 1997

TABLE VIRESULTS OF FACTOR ANALYSIS OF IT M ANAGEMENT-SOPHISTICATION VARIABLES

are reluctant to classify their firms. In this study, however,the number of respondents who did not self-type their firmswas less than 4%. A second limitation of self-typing is apossible variance among executives’ perceptions of strategywithin the same firm. Snow and Hrebiniak [68], in a studyof 88 companies, found “substantial agreement on strategyamong top managers within a given organization.” Because ofthe similarity in questioning between this study and the Snowand Hrebiniak [68] studies, we believed that responses fromonly one individual within the firm, in this case the senior ITexecutive, would be sufficient.

A third limitation of self-typing noted by Snow and Ham-brick [66] is that executives may tend to report their firms’intended rather than emergent or realized strategies. If thereis no intended strategy, an executive may even create onefor the benefit of the researcher. As noted by Nisbett andWilson [50], this tendency is a common problem in the socialsciences. A fourth limitation of the self-typing approach isthe lack of external confirmation of the respondent’s answers.The notion of response bias resulting from employing the self-typing approach was minimized by employing some generalguidelines. For example, to the extent to which anonymityof responses was ensured by us in the cover letter, the self-

typing approach should not be strongly influenced by lackof frankness on the part of the respondents. While that istrue, the use of the self-typing and key informant’s methodenabled us to collect data from a large number of financialinstitutions. Because of the size and nature of our sample,however, we could not obtain external confirmation of theself-typing done by the IT executives. The results shouldbe interpreted with these limitations in mind. Ideally, futureresearch into the effect of a firm’s competitive strategy onIT management sophistication should attempt to avoid thislimitation by pragmatically obtaining multiple sources withinsingle firm.

Last, in this study, we did not control for the industry. Thefinancial-services industry is a very “information-intensive”industry, in which IT is considered to have a high degree ofstrategic relevance [45]. Banks have very information-enrichedproduct lines that focus considerable corporate attention oneffective IT management. The findings of this study may notapply to firms in less information-intensive industries, in whichIT plays a more supportive role. The statistical significance ofthese results, however, provides us with a reasonable levelof protection against spurious and unreliable findings. Futureresearch needs to test the generalizability of our findings and

GUPTA et al.: COMPETITIVE STRATEGY 411

seek better understanding of the mechanisms governing theeffects of the competitive strategy on information managementsophistication.

APPENDIX A

See Table VI.

APPENDIX BSTRATEGY TYPES

Now we would like to assess the Competitive Strategy ofyour organization. Please circle one of the following types ofcompetitive strategies that best describes your organization.

1) Defender: An organization with this type of strategyattempts to locate and maintain a secure niche in arelatively stable product or service area. The organiza-tion tends to offer a more limited range of products orservices than its competitors, and it tries to protect its do-main by offering higher quality, superior service, lowerprices, and so forth. Often an organization with this typeof strategy is not at the forefront of developments in theindustry—it tends to ignore industry changes that haveno direct influence on current areas of operations andconcentrates instead on doing the best job possible in alimited area.

2) Prospector:An organization with this type of strategytypically operates within a broad product-market domainthat undergoes periodic redefinition. The organizationvalues “first in” in new-product and market areas evenif some of these efforts prove not to be highly prof-itable. The organization responds rapidly to early signalsconcerning areas of productivity, and these responsesoften leads to a new round of competitive actions.However, an organization with this type of strategy maynot maintain market strength in all areas it enters.

3) Analyzer: An organization with this type of strategyattempts to maintain a stable, limited line of productsor services, while at the same time moving out quicklyto follow a carefully selected set of the more promisingnew developments in the industry. The organization isseldom a major competitor in areas compatible withits stable product-market base; the organization canfrequently be “second in” with a more cost-efficientproduct or service.

4) Reactor: An organization with this type of strategydoes not appear to have a consistent product-marketorientation. The organization is usually not as aggressivein maintaining established products and markets as someof its competitors, nor is it willing to take as many risksas other competitors. Rather, the organization respondsin those areas where it is forced to by environmentalpressures.

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Yash P. Gupta received the Ph.D. degree from theUniversity of Bradford, England.

He has held teaching positions at the Universityof Louisville, KY, and the University of Manitoba.He currently is Dean of the College of Business,University of Colorado, Denver. He has publishedin numerous journals, includingInternational Jour-nal of Production Research, European Journal ofOperational Research, Computers and OperationsResearch, Decision Sciences, International Journalof the Production and Operations Management Soci-

ety, IEEE TRANSACTIONS ON RELIABILITY , Information Systems Research,andJournal of Manufacturing Systems.

In a recent study, Dr. Gupta was ranked the number one scholar inthe country in terms of contributions made to the field of production andoperations management.

GUPTA et al.: COMPETITIVE STRATEGY 413

Jahangir Karimi received the Ph.D. degree in man-agement information systems from the University ofArizona, Tucson, in 1983.

He is Professor of Information Systems at theCollege of Business, University of Colorado, Den-ver. During 1993–1994, he was on sabbatical leaveat the Department of Computer Science, Universityof Hong Kong. His research interests include infor-mation technology management in national and in-ternational environments, information systems mod-eling, analysis, and design, software engineering,

and telecommuting. He has published in IEEE TRANSACTIONS ON SOFTWARE

ENGINEERING, IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, Manage-ment Information Systems Quarterly, Communications of the ACM, Journalof Management Information Systems, Journal of Systems and Software,and anumber of conference proceedings.

Dr. Karimi is a member of the Association for Computing Machinery, theComputing Society, and the Society for Information Management.

Toni M. Somers received the M.B.A. degree fromBowling Green State University, OH, and the Ph.D.degree from the University of Toledo, OH.

She is Associate Professor and Interim Chairof Finance and Business Economics at WayneState University, Detroit, MI. She has publishedin many journals, including IEEE TRANSACTIONS

ON RELIABILITY , European Journal of OperationalResearch, and INFOR. Her current researchinterests include manufacturing strategy, TQM,and management information systems.

Dr. Somers is a member of the Decisions Sciences Institute, the Productionand Operations Management Society, and the Institute for Operations Researchand the Management Sciences.