RESEARCH ARTICLE

HOW DOES STRATEGIC ALIGNMENT AFFECT FIRM

PERFORMANCE? THE ROLES OF INFORMATION
TECHNOLOGY INVESTMENT AND
ENVIRONMENTAL UNCERTAINTY1
Rajiv Sabherwal
Walton College of Business, University of Arkansas,
Fayetteville, AR 72701 U.S.A. {rsabherwal@walton.uark.edu}

Sanjiv Sabherwal
College of Business, University of Texas–Arlington,
Arlington, TX 76019 U.S.A. {sabherwal@uta.edu}

Taha Havakhor
Fox School of Business, Temple University, 210 Speakman Hall,
Philadelphia, PA 19122 U.S.A. {taha.havakhor@tahahavakhor.com}

Zach Steelman
Walton College of Business, University of Arkansas,
Fayetteville, AR 72701 U.S.A. {zsteelman@walton.uark.edu}

The alignment between a firm’s business and information technology (IT) strategies continues to be important
for research and practice. Prior research investigating the performance consequences of strategic IT align-
ment (SITA) has produced inconsistent results. This paper distinguishes between two roles of SITA: (1) as a
state of congruence between business and IT, which is the primary focus of empirical studies, and (2) as
reflecting a capability that may enable or inhibit the leveraging of IT investments, as has been discussed theo-
retically but not examined empirically. Based on the resource-based view (RBV), IT investment (ITI) is
explicitly included as the resource that SITA as a capability can inherently help leverage. Also based on RBV,
we argue that environmental uncertainty, which is examined in terms of dynamism, complexity, and munifi-
cence, moderates the effect of SITA on the relationship between ITI and firm performance. The research model
is tested through panel-data analyses of data from 1999–2008, including 758 firm-year observations from 242
firms. This study is the first to find that SITA as a state directly improves firm performance even when con-
sidering ITI and its interaction with SITA. Moreover, the effect of the interaction between SITA and ITI on firm
performance increases with an increase in environmental dynamism or complexity and with a decrease in envi-
ronmental munificence. We also find that the effect of the interaction between SITA and ITI can be negative
under some environments. Specifically, the results suggest that (1) in dynamic, complex, and hostile environ-
ments, SITA does reflect a capability that enhances the positive effect of ITI on firm performance, but (2) in
stable, simple, and munificent environments, SITA reflects a rigidity that reduces the positive effect of ITI on
firm performance. The results are robust under a variety of statistical specifications and estimations.
1

Keywords: Strategic alignment, information technology investment, firm performance, environmental uncer-
tainty, strategic planning, information technology strategy, panel data

1
T. Ravichandran was the accepting senior editor for this paper. Sunil Wattal served as the associate editor.
The appendices for this paper are located in the “Online Supplements” section of MIS Quarterly’s website (https://misq.org).

DOI: 10.25300/MISQ/2019/13626 MIS Quarterly Vol. 43 No. 2, pp. 453-474/June 2019 453
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
Introduction
“I see my main role as linking IT and business
strategy,” Marcy Klevorn, Ford CIO (Qualtrough
2016).
Klevorn is not alone in recognizing the importance of stra-
tegic alignment between business and information technology
(IT). Annual surveys of chief information officers (CIOs) and
other senior executives consistently find strategic IT
alignment (SITA) to be among the top three most important
IT management issues (Kappelman et al. 2014). Extensive
literature over the past four decades (e.g., King 1978; Wu et
al. 2015), including a recent meta-analysis (Gerow et al.
2014) and a bibliometric study (Renaud et al. 2016), also
highlights its importance.
Although most studies find positive returns from increasing
SITA (e.g., Bergeron et al. 2004; Chan et al. 1997; Gerow et
al. 2014; Sabherwal and Kirs 1994), some authors suggest
that SITA may lead to stagnation, inflexibility, and competi-
tive disadvantage (e.g., Chen et al. 2010; Sabherwal et al.
2001; Tallon and Pinsonneault 2011), and a decline in perfor-
mance (e.g., Palmer and Markus 2000; Tallon 2008; Tallon
and Kraemer 2003). Thus, despite the continuing importance
of SITA, there is a lack of a clear understanding regarding
whether SITA is always value enhancing, and whether firms
should pursue SITA under different contexts.
This paper develops the argument that the variation in the
performance consequences of SITA may be related to two
distinct, albeit interrelated, ways in which SITA can create
value. First, as in an overwhelming body of literature, SITA
may be viewed as a state of congruence (e.g., the degree to
which a firm’s IS strategies conform to business strategies)
that directly affects firm performance (e.g., Bergeron et al.
2004; Chan et al. 1997; Sabherwal and Kirs 1994). Second,
SITA may reflect a capability (e.g., Byrd et al. 2006; Preston
and Karahanna 2009) to leverage the firm’s IT investments
(ITI). The following quote illustrates the second view: “IS
strategic alignment is necessary to allow organizations to
capitalize on their IS investments” (Preston and Karahanna
2009, p. 159, emphasis added).
Despite occasional hints that SITA reflects a capability to
leverage ITI (e.g., Croteau and Raymond 2004; Sabherwal
and Chan 2001), this role is rarely empirically examined. The
only empirical study that we could find on this role of SITA
(Byrd et al. 2006)2 supports the leveraging (i.e., moderating)
2
Lee and Mithas (2014) also include ITI and SITA, but they measure SITA
using a dummy variable and exclude it, as well as its interaction with ITI,
from the analyses.
454 MIS Quarterly Vol. 43 No. 2/June 2019
effect of SITA on the relationship between ITI and firm per-
formance, but not the direct effect of SITA. Considering
SITA as reflecting a capability to leverage ITI, along with
considering SITA as a state of congruence, can shed more
light on the inconsistent findings of previous studies regarding
the value of SITA for firms. So, this paper addresses the
following first research question: Does SITA3 directly affect
firm performance, or play a role in leveraging ITI to improve
firm performance, or both? We argue that both direct and
leveraging (i.e., moderating) effects of SITA are important,
and test them simultaneously.
In order to develop a richer understanding of the relationship
between SITA and ITI in affecting firm performance, we
focus on one contextual factor—environmental uncertainty—
that has received considerable attention in the literature on
SITA. However, empirical results have been inconsistent
both when uncertainty is viewed as an antecedent of SITA
(e.g., Chan et al. 1997) and when it is viewed as a moderator
of the effect of SITA on firm performance (e.g., Yayla and Hu
2012). The exclusion of ITI from such research has precluded
empirical investigation of whether the influence of environ-
mental uncertainty is because it affects the extent to which
SITA helps generate value for the firm. SITA as a capability
reflects an on-going process (Chen et al. 2010) that requires
developing procedures, routines, and communication channels
(e.g., Preston and Karahanna 2009) but changes in the envi-
ronment may influence how SITA and these underlying
aspects are leveraged over time (Sabherwal et al. 2001). So,
and consistent with prior recommendations for simultaneously
considering capabilities, ITI, and uncertainty (El Sawy et al.
2010), we argue that viewing SITA as reflecting a capability,
rather than only as a state of congruence, may help understand
the effects of SITA in different environments.
In order to better understand the effect of environmental
uncertainty on the role of SITA in leveraging ITI, we recog-
nize that uncertainty poses both obstacles and opportunities to
firms. Moreover, it is not clear whether SITA plays a greater
role in generating value through ITI in uncertain environ-
ments, where achieving it may be difficult (e.g., Chen et al.
2010) but more beneficial (e.g., Tallon and Pinsonneault
2011), or in more certain environments, where achieving it
may be easier but less beneficial. To investigate these alter-
native possibilities, we build on the resource-based view
(RBV) of IT, which suggests that environmental conditions
influence the value of capabilities (e.g., Nevo and Wade
2010). Thus, this paper addresses the following second
research question: Does environmental uncertainty influence
the role of SITA in leveraging ITI to improve firm perfor-
3
This paper focuses on SITA at the firm level, as in much of the prior
literature.

mance? Addressing this research question also enables us to
examine whether SITA, instead of reflecting a capability as
argued above, may sometimes reflect a rigidity, as implicit in
prior arguments associating it with “tunnel vision” (Tallon
and Pinsonneault 2011), “complacency and inertia” (Sabher-
wal et al. 2001), and a “rigidity trap” (Chen et al. 2010;
Tallon 2008). Moreover, by considering the joint role of ITI
and environmental uncertainty in examining the leveraging
effect of SITA, this paper extends prior studies that include
SITA and ITI but not uncertainty (Byrd et al. 2006; Lee and
Mithas 2014).
We address the above research questions using longitudinal
data from InformationWeek, COMPUSTAT, and CRSP over
a 10-year period, allowing SITA, ITI, and firm performance
to change over time. The sample consists of 758 firm-year
observations from 242 firms. We use panel-data analyses and
extensive data from public announcements to validate the
results. We believe that this is the first paper to use objective
measures and panel data to examine the effects of SITA on
firm performance and address the previously acknowledged
limitations of cross-sectional surveys (Byrd et al. 2006; Lee
and Mithas 2014; Tallon and Pinsonneault 2011).
The results support our expectation that, in terms of its direct
effect, SITA as a state of congruence is value enhancing in
both uncertain and certain environments even when con-
sidering the direct effect of ITI. Although prior research has
generally found SITA to be value enhancing, the effect has
not been found when also considering ITI (Byrd et al. 2006).
Second, the paper finds that the leveraging role of SITA
differs across environments; whereas SITA is a capability in
uncertain environments, increasing the effect of ITI on firm
performance, it is a rigidity in more certain environments,
reducing the effect of ITI on firm performance.
The rest of the paper is organized as follows. The next sec-
tion develops the theoretical model for the paper. The subse-
quent section describes the data, including the sample and the
measures. A description of the analyses and results follows.
The paper concludes with a discussion of the emergent
findings and their implications for future research and
practice.
Theoretical Development
The Dual Role of Strategic IT Alignment
The predominant view of SITA is as a state of congruence
between IT strategy and business strategy (e.g., Sabherwal
and Chan 2001; Tallon and Pinsonneault 2011; Wu et al.
2015). By contrast, some authors view SITA as reflecting a
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
capability to leverage IT (e.g., Baker et al. 2011; Schwarz et
al. 2010). When SITA is viewed as a state of congruence
between business and IT, the focus is on its direct effect on
firm performance; but when SITA reflects a capability, its
role is in leveraging ITI to influence firm performance.
Moreover, the view of SITA as reflecting a capability comple-
ments, rather than contradicts, the view of SITA as a state of
congruence. Summarizing prior studies on SITA, Table 1
illustrates how studies that conceptualize and measure SITA
as a state of congruence also often describe SITA as reflecting
a capability. The view of SITA as also reflecting a capability
is also consistent with the prior strategy literature, wherein
alignment is conceptualized as reflecting a capability that can
generate business value (e.g., Newbert 2008; Powell 1992).
Thus, based on prior literature, we consider SITA to have a
dual nature, as both (1) a state of congruence between busi-
ness and IT strategies, which has a direct effect on firm per-
formance; and (2) reflecting a capability that helps integrate
IT more effectively with organizational resources, and thereby
helps leverage ITI to improve firm performance. We draw
upon arguments from the resource-based view (RBV) of the
firm (Barney 1991) that a firm creates value by using its capa-
bilities to leverage its resources (Amit and Shoemaker 1993),
and the firm’s environmental conditions affect its ability to do
so (Wade and Hulland 2004).
Prior literature (Aral and Weill 2007; Mithas and Rust 2016)
generally agrees that IT as a resource improves firm perfor-
mance. Considering this, as well as the RBV arguments that
capabilities enhance the value obtained from resources (Amit
and Shoemaker 1993), we propose that the capability reflected
by SITA enables the firm to leverage the resource represented
by ITI. It is therefore important to consider SITA’s joint
effect with ITI to explain performance gains.
Consistent with RBV’s argument regarding the importance of
the environment, and specifically uncertainty (Wade and Hul-
land 2004), we examine how uncertainty affects the nature of
the capability that SITA reflects and thereby influences the
role SITA plays in leveraging ITI. Two prior studies on SITA
(Tallon and Pinsonneault 2011; Yayla and Hu 2012) view the
environment as a moderator but find inconsistent results, as
shown in Table 2. These inconsistent results may be because
the environment affects how SITA helps leverage ITI, which
has not been tested due to ITI being excluded in these studies.
We build upon the prior literature to examine how uncertainty
moderates the effect of the interaction between SITA and ITI
on firm performance. Specifically, we focus on three dimen-
sions of uncertainty: dynamism (or the speed of change),
complexity (or heterogeneity), and munificence (or the lack
of hostility) in the firm’s industry environment (Newkirk and
Lederer 2006; Yayla and Hu 2012).
MIS Quarterly Vol. 43 No. 2/June 2019 455
Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Table 1. Illustrative Studies Viewing Strategic IT Alignment as a State of Congruence and as Reflecting
a Capability
SITA as a State of Congruence
Hirschheim and “Greater alignment or ‘fit’ between an organization’s
Sabherwal (2001) business strategy and IS strategy implies that the infor-
mation systems are targeted on areas that are critical to
successful business performance” (p. 88).
Chung et al. “Strategic IT-business alignment refers to the extent to
(2003) which the IT mission, objectives, and plans support, and
are supported by, the organization’s mission, objectives,
and plans” (p. 195).
Croteau and “The present research aims to empirically test a contin-
Raymond (2004) gency approach to the fit between the strategic and IT
competencies of an organization and determine how
their co-alignment enhances perceived business perfor-
mance” (p. 179).
Byrd et al. (2006) “The alignment of information systems strategy with busi-
ness strategy (referred to as strategic alignment here)”
(p. 308).
Preston and “Strategic alignment: The congruence of the business
Karahanna (2009) strategy and IS strategy” (p. 176).
Yayla and Hu “IT-business strategic alignment is defined as the fit be-
(2012) tween IT strategy and business strategy in organizations”
(p. 212).
SITA as Reflecting a Capability
“Alignment between business and IS strategies heightens
managers’ awareness and use of information systems, and
it enables a firm to better use IS to help realize its goals and
objectives or obtain a competitive advantage” (p. 88).
“Alignment creates an integrated organization in which every
function, unit, and person are focused on the organization's
competitiveness” (p. 195).
“Thus, strategic alignment or ‘fit’ is a notion that is deemed
crucial to understanding how organizations can translate
their development of IT competencies into actual increases
in performance” (p. 181).
“Closer alignment should indicate a closer working relation-
ship between IT and business managers, which should lead
to the development of more effective systems, especially
long-term strategic systems” (p. 309).
“IS strategic alignment is necessary to allow organizations to
capitalize on their IS investments” (p. 159).
“Strategic alignment helps organizations use their IT
resources effectively to support their business strategies,
thus enables them to maximize the impact of their IT invest-
ments, integrate IT and business processes, and increase
competitiveness, revenue growth, and profitability” (p. 373).

Table 2. Studies on Strategic IT Alignment That Also Include Environment or IT Investmenta

Firm Time
Study SITA ITI Environment Performance Horizon Data Findings
Studies on Strategic IT Alignment That Also Include Environment
Tallon and Product of IT and Excluded Volatility Net margin; Cross- Objective Environmental turbulence
Pinsonneault business dimen- Ratio of oper- sectional (performance, does not moderate the
(2011) sions, from ating income to volatility) and direct effect of SITA on
matched surveys assets; return survey (other performance, but it does
on assets constructs) moderate the effect of
agility on performance
Yayla and Hu Single-respondent Excluded Dynamism, Net revenue; Cross- Survey Environmental uncertainty
(2012) survey measure Hostility, Financial sectional measures of moderates the effect of
Heterogeneity performance; all constructs SITA on firm performance:
Return on high uncertainty enhances
investment the positive effect while
low uncertainty weakens it
Studies on Strategic IT Alignment That Also Include IT Investment
Byrd et al. Product and differ- Ratio of Excluded Profit and Cross- Survey mea- SITA does not have a
(2006) ence of IT and total IT ex- revenue, both sectional sures of all direct effect on firm perfor-
business dimen- penditure divided by constructs mance but it does moder-
sions, from to total number of ate the relationship be-
matched surveys number of employees tween IT investment and
employees firm performance
Lee and Single-respondent, Total IT Excluded Firm revenue Cross- Survey mea- No conclusions relevant to
Mithas single-item survey spending sectional sures of all this study because the
(2014) measures of three across all constructs measure of SITA (a dum-
aspects of sites my variable), as well as its
alignment interaction with ITI, is ex-
cluded from the analyses
a
To the best of our knowledge, no prior empirical study includes both environment and IT investment along with SITA and firm performance.

456 MIS Quarterly Vol. 43 No. 2/June 2019


Figure 1. Overall Research Model
The dual role of SITA as both a state of congruence and
reflecting a capability, along with the consideration of the
moderating effect of environmental uncertainty, provides
insights into the tension between the overall positive effect of
SITA and the occasional concerns about its effects. Figure 1
depicts the overall research model, including these aspects
and the study’s research questions. The next subsection
further discusses SITA as a state of congruence.
Strategic IT Alignment as a
State of Congruence
Strategic alignment between IT and business is generally
viewed as a desirable state of congruence that affects firm
performance. Empirical studies adopt this view of SITA as a
desired state and focus on its effects on the performance of
the IT function and the organization (e.g., Chan et al. 1997;
Parthasarathy and Sethi 1993; Sabherwal and Kirs 1994).
Moreover, alignment, as a state of congruence, may be
viewed in terms of either intended strategies, usually exam-
ined through surveys, or realized strategies, usually examined
through objective data (Mintzberg and Waters 1985; Wu et al.
2015). Prior literature generally examines SITA in terms of
intended business and IT strategies. The few prior studies
that view SITA in terms of realized strategies (Chan et al.
2006; Sabherwal and Chan 2001; Wu et al. 2015) do so using
surveys to measure business and IT strategies; for example,
measuring IT strategy in terms of how the firm’s IT helps in
distinguishing its products from those of its competitors (Wu
et al. 2015).
This paper recognizes the importance of viewing actual
resource commitments rather than intentions (Mintzberg and
Waters 1985) and examines SITA as the fit between realized
business and IT strategies. This is consistent with Wu et al.
(2015, p. 503), who define SITA as “how well the content of
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
the realized business strategy matches the content of the
realized IT strategy.” Based on such prior conceptualizations
(Lee and Mithas 2014; Oh and Pinsonneault 2007; Weill and
Aral 2006), we define SITA as the extent to which a firm’s
relative investments in different areas of IT are consistent
with the firm’s business strategy.
Several prior studies find SITA to improve perceived organi-
zational performance (Wu et al. 2015), perceived IT effective-
ness (Chan et al. 1997), use of IT for competitive advantage
(Kearns and Sabherwal 2007), and sales, profits, and costs
(Oh and Pinsonneault 2007). Some studies find mixed results
with SITA affecting only some aspects of performance (Cro-
teau and Bergeron 2001; Parthasarathy and Sethi 1993),
affecting performance only in some contexts (Sabherwal and
Chan 2001; Tallon 2008), or affecting performance indirectly
(Tallon and Pinsonneault 2011). A study in the retail industry
finds SITA to not affect firm performance (Palmer and Mar-
kus 2000). More recently, a meta-analysis of the literature on
SITA (Gerow et al. 2014) finds SITA to positively affect firm
performance. In light of the considerable prior support
(Table 2), we expect a direct positive effect of SITA on firm
performance.
Strategic IT Alignment as Also
Reflecting a Capability
RBV has been used frequently in the IS literature, which con-
siders interdependencies among IT resources (Wade and
Hulland 2004) and the complementarity between IT and other
resources (Bardhan et al. 2013; Ravichandran and Lertwong-
satien 2005). RBV argues that firms compete based on capa-
bilities and resources and distinguishes between capabilities
and resources (Barney 1991; Nevo and Wade 2010). For
example, Amit and Schoemaker (1993, p. 35) remark “Capa-
bilities, in contrast, refer to a firm’s capacity to deploy
MIS Quarterly Vol. 43 No. 2/June 2019 457
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
Resources, usually in combination, using organizational pro-
cesses, to effect a desired end.” Thus, capabilities enhance
the value resources provide to the firm (Bharadwaj 2000;
Ravichandran and Lertwongsatien 2005).
As shown in Table 1, prior empirical literature views SITA as
a desirable state, but SITA is often conceptually viewed as
also reflecting a capability to leverage an underlying resource
(i.e., ITI). However, that underlying resource is not explicitly
considered in most prior research on SITA. By contrast, to
remain consistent with RBV, we explicitly incorporate ITI.
RBV also offers a theoretical lens for using capabilities to
explain how firms obtain different performance benefits from
a similar increase in ITI (Melville et al. 2004; Nevo and Wade
2010). We build on this literature and propose that a firm’s
SITA reflects a capability, specifically the ability to leverage
ITs within the business (Mitchell 2006). Some authors view
SITA directly in terms of such capabilities (e.g., Baker et al.
2011; Schwartz et al. 2010).
The view of SITA as a capability is consistent with consider-
able prior literature on SITA suggesting that organizations do
not achieve high SITA through luck (e.g., Baker et al. 2011).
Instead, for organizations to achieve SITA, social and struc-
tural integration between business and IT are considered
essential. The social aspects that have been found to enable
SITA include shared understanding (Chan et al. 2006; Preston
and Karahanna 2009) and mutual trust (e.g., Reich and Ben-
basat 2000) between IT and business; and common interests
between senior IS and business executives (e.g., Nelson and
Cooprider 1996). The structural aspects that have been found
to enable SITA include open channels of communication
between business and IT (e.g., Ravichandran and Liu 2011);
business managers’ participation in IT planning (Kearns and
Sabherwal 2007); the inclusion of senior IS executives in the
board of directors (Kuruzovich et al. 2012); and IT managers’
participation in business planning (Kearns and Sabherwal
2007).
The social and structural integration underlying SITA pro-
vides the firm with a capability, consistent with the notion
that organizational capabilities are created through processes
and routines (Teece et al. 1997). Thus, SITA is not merely a
state of congruence between a firm’s business strategy and
ITI, but it may also reflect a capability in terms of social and
structural integration between business and IT. But SITA is
not the same as the capability. Instead, there could be some
situations, albeit rare and short-term as discussed in Appendix
A,4 of low SITA with high social/structural integration or high
4
In a more uncertain environment, a state of either low SITA–high social/
structural integration or high SITA–low integration would quickly lead to a
state where SITA is consistent with integration, i.e., either high SITA–high
458 MIS Quarterly Vol. 43 No. 2/June 2019
SITA with low social/structural integration
According to RBV, organizational capabilities help leverage
resources to improve firm performance (Eisenhardt and
Martin 2000; Nevo and Wade 2010; Ray et al. 2004). Simi-
larly, SITA, as reflecting a capability (Baker et al. 2011), has
been argued to help leverage ITI to improve firm performance
(Byrd et al. 2006; Preston and Karahanna 2009). Indeed, as
discussed earlier, the conceptual arguments about how SITA
affects firm performance largely focus on how it reflects a
capability to leverage ITI (Gupta et al. 1997; Peppard and
Ward 2004). Prior studies provide several reasons for
expecting SITA to help leverage ITI to improve firm perfor-
mance. Greater SITA reflects a closer working relationship
between IT and business executives, which should lead to the
development of more effective and high-potential systems
(Byrd et al. 2006; Chan 2002). By contrast, in organizations
with a low level of SITA, IT executives may find it difficult
to target investments to the most important aspects in the firm
and may make decisions that lead to redundant and disjointed
systems (Chan 2002).
The primary task of senior IT executives is to leverage ITI to
improve firm performance. A high level of ITI increases both
the stakes and visibility associated with IT, enhancing the
expectation that ITI would be leveraged to improve firm
performance, whereas a high level of SITA improves the
ability of the firm’s executives to do so. If ITI is high, a high
level of SITA would improve performance to a greater extent
than if ITI is low. So, we expect SITA to have a positive
moderating effect on the relationship between ITI and firm
performance. Thus, we argue that SITA has both a main
effect (H1a) as a state of congruence, and a leveraging effect
(H1b) as reflecting a capability, on firm performance. Each
effect is supported in different studies, but not together (Byrd
et al. 2006). We propose that both these effects occur
together.
H1a: SITA in year t-1 has a positive direct effect on firm
performance in year t.
H1b: SITA in year t-1 has a positive moderating effect on
the relationship between IT investment in year t-1
and firm performance in year t.
integration or low SITA–low integration. But in a less uncertain environ-
ment, a state of high SITA–low integration could exist due to SITA
remaining high through organizational inertia. This is discussed further in
Appendix A and later in the paper.

The Effect of Environmental Uncertainty
Environmental uncertainty has been emphasized in the RBV-
based IS literature (El Sawy 1985; Havakhor et al. 2019;
Pavlou and El Sawy 2010). Consistent with the prior literature
(Miller and Friesen 1980; Yayla and Hu 2012), we view
uncertainty in terms of dynamism (or turbulence), complexity
(or heterogeneity), and munificence (considered the opposite
of hostility5). Prior studies on the effects of environmental
uncertainty on both SITA and the relationship between SITA
and firm performance offer inconsistent results. A survey-
based study (Yayla and Hu 2012) finds uncertainty to
moderate the effect of SITA on firm performance, such that
this effect increases with an increase in uncertainty. Another
survey (Tallon and Pinsonneault 2011) and case studies
(Chang et al. 2008) do not find uncertainty to moderate the
effect of SITA. Also, some studies (Choe 2003; Kearns and
Lederer 2001) find uncertainty to increase SITA, but others
(Sabherwal and Kirs 1994; Newkirk and Lederer 2006) do
not. In the light of these inconsistent effects of uncertainty on
the direct effect of SITA on firm performance, we argue that
uncertainty moderates the leveraging effect of SITA on the
relationship between ITI and firm performance. Specifically,
we expect this leveraging role of SITA to increase with an
increase in uncertainty (i.e., with an increase in dynamism and
complexity and a decrease in munificence). Three broad
reasons lead us to these expectations, which we later state as
Hypotheses 2a–2c.
First, an increase in environmental uncertainty makes it diffi-
cult to make decisions regarding where to target IT invest-
ments and how to appropriately leverage them (Havakhor et
al. 2019; Qualtrough 2016). To effectively deal with these
difficulties, a greater level of the capability reflected by SITA
is needed. In the presence of social and structural aspects
underlying SITA, IT executives can identify specific areas of
the business where ITI can contribute. Due to business
executives’ greater proximity to the business environment, IT
executives with more frequent interactions with business
executives will have more knowledge of the opportunities and
challenges in the environment (Ravichandran and Liu 2011).
They will therefore be better positioned to leverage ITI to
address organizational problems.
Second, environmental uncertainty inhibits the development
of shared understanding between business and IT, and without
the structures needed to facilitate such an understanding,
valuable time and resources would be directed at building
them. Executives at a firm that has been able to achieve a
high level of SITA in an uncertain environment would be in
5 explanation.
We are grateful to an anonymous reviewer for suggesting the inclusion of
munificence and to the associate editor for suggesting we consider various
environmental attributes.
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
a better position to address the challenges posed by the uncer-
tainty. They would therefore be more likely to direct the
firm’s scarce resources to improve how ITI is used to address
organizational problems. By contrast, firms with low SITA,
and in an environment where establishing shared under-
standing is hard, would need to first find scarce resources to
establish a shared understanding, thereby finding it more
difficult to effectively leverage ITI.
Third, in more uncertain environments, business strategies are
“better” due to necessity, because poor business strategies are
likely to be severely punished. Consequently, IT strategies
that are aligned to better business strategies are better able to
obtain value from ITI. In less uncertain environments, busi-
ness or IT strategy can be “inappropriate” with minor conse-
quences, and therefore less SITA is needed to leverage ITI to
improve firm performance.6
The above arguments about environmental uncertainty in
general apply to each of its three dimensions. We first con-
sider environmental dynamism, which is viewed as “the rate
and unpredictability of environmental change” (Newkirk and
Lederer 2006, p, 394). It represents the environment’s insta-
bility, which challenges managers to quickly and frequently
adopt new strategies and tactics (Yayla and Hu 2012). In a
stable environment, any advantage attained by a firm is likely
to be sustained over an extended period (Miller and Shamsie
1996); whereas in a dynamic environment, competitive advan-
tage may be short term (Foss 1998).
As dynamism in a firm’s environment increases, the firm may
need to make frequent changes to its activity systems (Sull et
al. 2015) and focus on exploration of new opportunities for
ITI7 (De Haes et al. 2011). Rapid changes in the environment
reduce the time available to absorb new knowledge and
refocus IT resources to leverage transient opportunities (Van
den Bosch et al. 1999). The capability reflected by SITA
includes aspects such as close ties and frequent interactions
between business and IT executives, which enhance IT execu-
tives’ knowledge of the upcoming business opportunities.
This would enable quick innovations with additional ITI, as
needed with increasing dynamism (e.g., Lawrence and Lorsch
1967; Sull et al. 2015). Thus, consistent with the above argu-
ments regarding environmental uncertainty, we posit:
H2a: Greater environmental dynamism at time t-1
increases the moderating effect of SITA on the
relationship between a firm’s ITI at time t-1 and its
performance at time t.
6
We are grateful to an anonymous reviewer and the associate editor for this
7
We are grateful to the senior editor for suggesting this potential explanation.
MIS Quarterly Vol. 43 No. 2/June 2019 459
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
Environmental complexity refers to “the heterogeneity and
range of an industry and/or an organization’s activities”
(Wade and Hulland 2004, p. 127). Environmental complexity
makes it difficult for managers to comprehend the drivers of
performance (Newkirk and Lederer 2006). Also, in complex
environments, firms need to simultaneously adjust several
aspects of their business and IT strategies in order to maintain
SITA (Sabherwal et al. 2001).
When complexity is high, the firm needs to absorb the hetero-
geneous information from diverse sources in order to synch-
ronize its actions (Wade and Hulland 2004). A firm with a
high level of SITA would be able to more effectively respond
to such complexity than a firm with a lower level of SITA,
due to their IT executives’ better knowledge of the intricacies
of the business environment, resulting from their regular
interactions with business managers. Thus, and in light of the
above arguments regarding environmental uncertainty, we
posit:
H2b: Greater environmental complexity at time t-1
increases the moderating effect of SITA on the rela-
tionship between a firm’s ITI at time t-1 and its
performance at time t.
Environmental munificence refers to the extent to which a
firm’s environment supports sustained growth (Dess and
Beard 1984; Wade and Hulland 2004). Mature or shrinking
environments generally have a low level of munificence,
whereas rapidly growing markets are usually associated with
a high level of munificence.
In hostile, or less munificent, environments, stiff competition
is usually present and adversely affects the accomplishment
of organizational goals (Miller and Friesen 1980). In such an
environment, a firm with close ties between business and IT
executives, associated with a high level of SITA, would be
able to better leverage ITI than a firm with internal ineffi-
ciencies of coordination and integration of business and IS, as
in the case of a firm with a low level of SITA. By contrast,
munificent environments are more forgiving and support firm
performance despite inappropriate business and IT strategies
(Wade and Hulland 2004). As a result, in a munificent envi-
ronment, a firm with a low level of SITA might not be much
worse off than a firm with a high level of SITA in terms of its
ability to leverage ITI. Therefore, and based on the three
arguments advanced earlier about environmental uncertainty
in general, we posit H2c, and depict it along with the other
hypotheses in the detailed research model in Figure 2:
H2c: Greater environmental munificence at time t-1
reduces the moderating effect of SITA on the rela-
tionship between a firm’s ITI at time t-1 and its
performance at time t.
460 MIS Quarterly Vol. 43 No. 2/June 2019
Data
Sample
This study is based on secondary data from InformationWeek,
COMPUSTAT, and CRSP. Each year, InformationWeek pro-
vides a ranking of the 500 most innovative corporate users of
IT. We were able to obtain from InformationWeek the com-
plete data from the 1999–2007 surveys. We supplement it
with COMPUSTAT and CRSP data, including firm perfor-
mance for 2008.
We exclude financial firms (firms with SIC codes between
6000–6999) from the firms in the InformationWeek surveys
because the nature of some explanatory variables in the
regressions differs between financial and nonfinancial firms
(Fama and French 2001; Von Eije and Megginson 2008). We
also exclude firms for which business segment data is not
available to compute market share. Moreover, we exclude
private firms, foreign firms,8 and subsidiaries and divisions,
because their required stock market information is not avail-
able. This results in a sample of 657 firms spread over one or
more years, for a total of 2,224 firm-year observations.9
As discussed below, we perform panel data analyses with
lagged variables to test the hypotheses. So, for a firm to be
included in the analysis, data on two or more consecutive
years is needed. Moreover, we exclude observations for
which any variable had missing values. This reduces the
sample for panel data analyses to 758 firm-year observations,
based on 242 firms.10
Measures
We measure firm performance using Tobin’s q ratio, which
has been used to measure firm performance in studies on IT
impacts (Bharadwaj et al. 1999; Chari et al. 2008). Tobin’s
q incorporates a market-based measure of firm value, which
is forward looking, risk adjusted, and less vulnerable to
changes in accounting practices, and is considered suitable for
8
The InformationWeek 500 lists include some foreign firms with U.S. opera-
tions. We exclude all foreign firms, including firms whose stock is not traded
in the U.S., or is traded in the U.S. as common stock (typically Canadian
firms) or American Depositary Receipts (ADRs).
9
The frequencies of firms for different numbers of consecutive years in the
InformationWeek survey during the study period are as follows: no consecu-
tive year: 389 firms; two consecutive years: 95; three consecutive years: 79;
four consecutive years: 24; five consecutive years: 15; six consecutive
years: 19; seven consecutive years: 27; and all eight years: 9.
10
We also test multiple imputation methods for missing values and find con-
sistent results.

Figure 2. Detailed Research Model
measuring the performance impact of ITI (Chari et al. 2008).
A Tobin’s q value above one indicates that the long-run
equilibrium market value of the firm is greater than the
replacement value of its assets signifying an unmeasured
source of value (Bharadwaj et al. 1999). We use the well-
known Chung and Pruitt (1994) measure of the Tobin’s q
ratio.11
IT investment (ITI) is measured as the firm’s annual IT
budget as a proportion of the firm’s annual sales revenue. We
do this using the InformationWeek survey response to a
question such as the following: “What percentage of your
company’s worldwide projected 2007 annual sales revenue
does your total 2007 worldwide IT budget represent? (The
budget should include the same elements as above. May be
rounded to nearest ½%).” For example, if Firm A spent 1 per-
cent of its annual sales revenue on IT, ITI would be 1 percent
(i.e., 0.01). We measure each variable in the study, including
ITI, for each year for each firm in the sample.
As indicated earlier, strategic IT alignment (SITA) is defined
as the extent to which a firm’s relative investments in differ-
ent IT areas are consistent with the firm’s business strategy.
Accordingly, we measure SITA in terms of the alignment
between the firm’s business strategy and the relative emphasis
of its IT investments. Also, since capabilities evolve over
time, SITA, both as a state of congruence and as reflecting a
capability, is dynamic, making it appropriate to measure it
each year for each firm. We compute SITA based on the
widely used profile-deviation approach (e.g., Sabherwal and
Chan 2001; Sabherwal and Sabherwal 2007; Tallon 2008;
Tallon and Pinsonneault 2011). Appendix B provides the
details of its computation.
11
This ratio is computed as q = (Market value of equity + book value of
inventories + liquidating value of preferred stock + long-term debt + net
short-term debt)/Total assets.
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
We compute and analyze ITI and SITA as independent con-
structs. Specifically, we compute ITI as the ratio of the firm’s
annual IT budget to annual sales revenue, and SITA using the
ITI profile (i.e., how ITI is distributed across R&D,
insourcing, outsourcing, hardware, application, and mainten-
ance) as the starting point. For example, if Firms A and B
spent 1 and 10 percent, respectively, of their annual sales
revenue on IT, their ITI would be 0.01 (i.e., 1%) and 0.10
(i.e., 10%), respectively. If both distribute IT budgets equally
across R&D, insourcing, outsourcing, hardware, application,
and maintenance, the ITI profiles for both firms would be
identical with proportions of 0.166 for each area for both
firms. Thus, the starting point for computing SITA (i.e.,
proportion of ITI spent on each area) is independent of ITI.
Accordingly, the correlations of ITI with R&D (0.04),
insourcing (0.01), outsourcing (0.03), hardware (0.03), appli-
cation (0.01), and maintenance (0.03) are all nonsignificant
(p-value > 0.05).
We measure the three dimensions of environmental uncer-
tainty using prior measures and COMPUSTAT data. Fol-
lowing prior literature (Keats and Hitt 1988; Xue et al. 2011),
we measure environmental dynamism by quantifying the
volatility of industry sales.12 For each firm, we regress the
natural log of total sales of the four-digit SIC industry code to
which a firm belongs against an index variable of years, for a
period of five years (t, t-4). We then use the antilog of the
standard error of the regression coefficient to measure sales
volatility as a proxy for a firm’s environmental dynamism.
We measure environmental complexity as the reciprocal of
industry concentration. This is consistent with the logic that
in an industry with fewer competitors (i.e., more concentra-
tion), the competitors and their likely actions are well known.
12
We use volatility of industry operating income as an alternative in Model
R2 in Appendix C.
MIS Quarterly Vol. 43 No. 2/June 2019 461
Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Table 3. Summary Statistics and Correlations

Variables Mean S.D. 1 2 3 4 5
1. Dynamism (t-1) 1.21 0.23
2. Complexity (t-1) 0.25 0.20 0.10**
3. Munificence (t-1) 0.83 0.31 -0.03 -0.05
4. IT investment (t-1) 3.67 7.37 -0.03 -0.04 0.03
5. Strategic IT alignment (t-1) 0.04 0.42 -0.06* -0.03 0.09** -0.09**
6. Firm Performance (q ratio, t) 1.45 1.14 -0.02 -0.04 0.04 0.10*** 0.03
***p < 0.001; **p < 0.01; *p < 0.05

Specifically, following Xue et al. (2011), we use the log value
of the reciprocal of the industry Herfindahl index (i.e., the
sum of the squares of the market shares of the four firms with
the highest sales in the industry) to measure complexity.13 We
measure environmental munificence based on the growth in
industry’s sales14 (Keats and Hitt 1988; Xue et al. 2011). To
do so, we regress the natural log of total sales of the four-digit
SIC industry code to which the firm belongs against an index
variable of years, for a period of five years [t, t-4]. We then
use the antilog of the regression coefficient to measure
munificence.
We control for year and industry using dummies. We define
industry at the primary four-digit SIC code level to control for
several industry-level variables (performance, capital inten-
sity, and regulation). We also control for several firm-level
variables (related diversification, size, business strategy, and
organizational slack15). These yearly controls help rule out
alternative explanations and enhance the fidelity of hypothe-
ses testing (Chari et al. 2008). We compute industry per-
formance as the median of the q ratios of the firms in that
industry, industry capital intensity as the median of the
capital intensities of the firms in that industry, and regulation
as a binary variable, set at one for regulated industries and
zero otherwise.16 We measure related diversification using
the entropy measure (Robins and Wiersema 1995) used in
13
We use the log value of the reciprocal of the Herfindahl index of the market
shares of all firms in the industry as an alternative measure in Model R3 in
Appendix C.
14
We use growth of industry operating income as an alternative in Model R4
in Appendix C.
15
We are grateful to the senior editor for recommending the control for
organizational slack.
prior literature (e.g., Bharadwaj 2000). We measure firm size
as the natural log of the number of employees in millions. We
represent business strategy17 using two binary dummy vari-
ables for Defender and Prospector strategies, indicating
whether the firm pursues a Defender, Analyzer, or Prospector
strategy (measured as discussed in Appendix B). Finally, we
measure organizational slack as the firm’s liquidity (i.e., the
ratio of current assets to current liabilities; Iyer and Miller
2008).
Table 3 presents the means, standard deviations, and corre-
lations. Most significant correlations (e.g., between environ-
mental dynamism and complexity, and between ITI and firm
performance) are as expected. However, SITA and firm per-
formance are not significantly correlated. The correlation
between ITI and SITA is significant but negative, which could
be due to two potential reasons. First, firms with higher SITA
might be able to focus their ITI on aspects directly connected
to business strategy, and hence achieve similar performance
with lower levels of ITI than firms with low SITA. Also,
firms with lower SITA might spend IT resources on more
diverse areas, including ones unrelated to business strategy,
and so have greater ITI.
Analyses and Results
Estimation Procedures
We reduce the potential threat of artificial multicollinearity by
first standardizing all the variables in the model and then
creating the interaction terms (Aiken and West 1991; Cohen
et al. 2003). Due to the cross-sectional time-series data, we
test for heteroskedasticity and autocorrelation. We anticipate
some panel-specific heteroskedasticity, as the variance of the

16
Following Ciccone and Rocco (2005), we consider the following as regu-
lated industries (SIC codes in parentheses): communications (4810–4899);
gas and electric (4910–4924 and 4930–4939); and water (4940–4941). We
also exclude financial firms, as mentioned earlier.
17
The full sample of 2,224 firm-year observations includes 804 Defenders,
931 Analyzers, and 489 Prospectors. The sample of 758 used for panel data
analyses includes 257 Defenders, 317 Analyzers, and 184 Prospectors.

462 MIS Quarterly Vol. 43 No. 2/June 2019


Figure 3. A Summary of Analyses
error terms for each industry is likely to fluctuate over time
and across industries. Our likelihood ratio test (p < 0.001)
indicates the presence of panel-specific heteroskedasticity.
The Wooldridge test (2010) to evaluate autocorrelation shows
the presence of AR(1) autocorrelation in our dataset (p <
0.001). The autocorrelation may also differ in magnitude
across firms presenting panel specific AR(1) (PSAR1). Our
likelihood ratio test for PSAR1 (p < 0.001) indicates the exis-
tence of PSAR1. Based on these results of diagnostics tests,
we estimate the models using feasible GLS with corrections
for PSAR1 autocorrelation and panel-specific heteroske-
dasticity.
IS economics literature (e.g., Bardhan et al. 2013; Mithas et
al. 2012) cautions about a potential reverse causality between
the firm’s financial performance and ITI. This reverse causal
relationship can violate the exogeneity assumption regarding
residuals of GLS estimation, and make the coefficients biased
(Greene 2011). This potential endogeneity can be addressed
in two ways. First, we can find instrumental variables to run
two-stage or three-stage least square estimates. However,
consistent with the previous research (Bardhan et al. 2013)
using data similar to ours, we are unable to find strong exoge-
nous instruments. The second alternative is to utilize the
Arellano-Bover/Blundell-Bond system of generalized method
of moments (AB-GMM) estimator (Arellano and Bover 1995;
Blundell and Bond 1998), which utilizes the lagged values of
endogenous variables’ first-difference as instruments.
We follow suggestions by Aral et al. (2012) in running the
AB-GMM model. We treat both ITI and SITA as endoge-
nous, consistent with prior studies (e.g., Bardhan et al. 2013).
Our two-step system GMM estimates are robust to hetero-
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
skedasticity and autocorrelation. We estimate robust standard
errors to correct for potential bias in standard errors due to
heteroskedasticity. We use the second lag of first-differences
as instruments. Post-estimation results of the GMM model
(Arellano-Bond test) fail to reject the null hypothesis that
there is no autocorrelation of order 2 (z = –0.97, p = 0.33).
Hansen’s test of over-identification also fails to reject the null
hypothesis that the instruments are exogenous (χ2 (5) = 3.12,
p = 0.68). Finally, the results of the Difference-in-Hansen test
of exogeneity fail to reject the null hypothesis that the subset
of instruments used in the levels equations is exogenous
(χ2 (5) = 2.88, p = 0.72). Based on these results, we estimate
the models using feasible GLS with corrections for PSAR1
auto-correlation and panel-specific heteroskedasticity, with
AB-GMM as an additional robustness check.
Preliminary Analyses
Figure 3 provides an overall roadmap of the various analyses
used in the paper.18 The paper begins with some preliminary
analyses (including correlations, reported in Table 3 earlier).
We discuss some other preliminary analyses below before
moving on to the main analyses.
To compute SITA, we classify each firm in the sample as
Defender, Analyzer, or Prospector each year. Of all the 758
situations in which a firm is in the sample during consecutive
years, the business strategy changed from year t to year t+1 in
83 cases (i.e., 10.95%). We conduct a logistic regression with
18
We are grateful to the senior editor for recommending the inclusion of a
roadmap of analyses.
MIS Quarterly Vol. 43 No. 2/June 2019 463
Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Table 4. Results of the Main Regressions

Three-Way Three-Way
Direct (GLS)a Two-Way (GLS) (GLS) (AB-GMM)
DV= Tobin’s q Model 1 Model 2 Model 3 Model 3R
Dynamism -0.121*** -0.211*** -0.163*** -0.217**
Munificence 0.161*** 0.147*** 0.158*** 0.214*
Complexity -0.319*** -0.129*** -0.032* -0.088*
ITI 0.141*** 0.120*** 0.135*** 0.243**
SITA (H1a) 0.163*** 0.117*** 0.044*** 0.081*
ITI*SITA (H1b) 0.101*** 0.065* 0.111*
Dynamism*ITI 0.062* -0.071* -0.093
Dynamism*SITA 0.077** -0.021 -0.016
Dynamism*ITI*SITA (H2a) 0.172*** 0.312*
Complexity*ITI 0.068** -0.034* -0.014
Complexity*SITA 0.080** -0.006 -0.001
Complexity*ITI*SITA (H2b) 0.077*** 0.309**
Munificence*ITI -0.042* 0.033 0.084
Munificence*SITA -0.038* 0.016 0.002
Munificence*ITI*SITA (H2c) -0.145*** -0.226**
Constant 0.021 -0.033 -0.026** -0.128*
N 758 758 758 758
χ² 5915.5 39861.3 60287.1 4512.4
***p < 0.001; **p < 0.01; *p < 0.05. All tests are one-tailed.
a
Industry and year dummies, organizational slack, industry q, industry capital intensity, regulation, related diversification, dummies for prospectors
and analyzers, and size (employees) are used as controls but excluded from the table due to space considerations. The cells related to the
hypotheses are highlighted for all models.

change in business strategy from year t to year t+1 as the
dependent variable, and the firm’s strategy (binary variables
representing Defender and Analyzer strategies), environ-
mental dynamism, environmental complexity, and environ-
mental munificence for year t as the independent variables.
The results indicate that none of the environmental variables
significantly affect the likelihood of a change in business
strategy.19 However, if a firm pursues a Prospector strategy
in year t, it has a significantly (p < 0.01) greater likelihood
(19.02%) of pursuing a different strategy in year t+1 than
firms pursuing Defender or Analyzer (7.8% for Defenders,
8.8% for Analyzers, and 8.4% for the two combined), which
is consistent with the more innovative nature of Prospectors.
Also, additional regressions indicate that none of the three
environmental variables affect either SITA or ITI, which is
19
We also conduct three regressions including quadratic effects of dynamism,
complexity, and munificence, and two others including quadratic effects of
SITA (one adding only the main effects of the quadratic term and the other
also including all the interactions with the quadratic term). No quadratic term
is significant in these regressions. Results for the logistic regression and the
regressions with these quadratic effects are excluded due to space con-
siderations.
consistent with our use of a moderation model rather than a
mediation model.20
Hypothesis Tests
IT involves investment in the short term but provides benefits
later (Weill and Broadbent 1998), which suggests a time lag
in obtaining benefits from ITI (e.g., Brynjolfsson and Hitt
1998; Mithas et al. 2012). Consistent with Aral and Weill
(2007), who include one-year lags in examining the effects of
ITI, we incorporate one-year lagged effects of both ITI and
SITA.
Table 4 presents the results of the main tests of the research
hypotheses. We run multiple regressions with firm perfor-
20
Specifically, we conduct two regressions each (with and without including
a binary variable indicating whether (1) or not (0) a senior IS executive
serves on the firm’s board of directors) to examine whether the dimensions
of environmental uncertainty are antecedents for ITI and for SITA. The
results are excluded due to space considerations.

464 MIS Quarterly Vol. 43 No. 2/June 2019


mance (Tobin’s q) as the dependent variable and use either
GLS (Models 1–3) or AB-GMM (Model 3R) while ac-
counting for the fixed effects of time and industry through
year and industry dummies. We first enter the controls and
the main effects of the three uncertainty dimensions (dyna-
mism, complexity, and munificence), ITI, and SITA (Model
1). Next, we add the non-hypothesized two-way interactions
of each uncertainty dimension with both ITI and SITA (Aiken
and West 1991) (Model 2). We then add the three 3-way
interactions involving ITI, SITA, and each uncertainty dimen-
sion (Model 3). We use AB-GMM to test the robustness of
the GLS results in Model 3R.
SITA (supporting H1a) and ITI (as expected but not hypothe-
sized) have a positive and significant effect on firm perfor-
mance in all four models. The two-way interaction between
ITI and SITA is positive and significant in all three models (2,
3, and 3R) in which it is included, thereby supporting H1b.
Both Models 3 and 3R also support the hypotheses con-
cerning the positive effect of the three-way interaction
between SITA, ITI, and dynamism (H2a); the positive effect
of the three-way interaction between SITA, ITI, and com-
plexity (H2b); and the negative effect of the three-way
interaction between SITA, ITI, and munificence (H2c). For
example, the positive coefficients of the three-way interaction
between SITA, ITI, and dynamism in Models 3 and 3R
indicate that at higher levels of environmental dynamism (at
time t-1) the moderating effect of SITA on the relationship
between a firm’s ITI (at time t-1) and its performance (at time
t) would be higher, thus supporting H2a. Thus, all five
hypotheses are supported.
Supplemental Analyses
We conduct a series of supplemental analyses, as summarized
in Table 5. The supplemental analyses include 17 robustness
tests to address potential concerns regarding our estimation
and inclusion of variables within the main model. Appendix
C provides the details and results of these robustness tests.
As Tables C1 and C2 in Appendix C and their summary in
Table 5 show, all 17 robustness tests provide results consis-
tent with the main results.
To address potential concerns regarding the main measure of
SITA, which computes business strategy using COMPUSTAT
data and assesses IT strategy based on data from the Informa-
tionWeek surveys on the allocation of IT budget to specific
categories, we also conduct three tests using alternative data
sources to measure SITA. We assess whether the results are
robust to alternative data collection methods by collecting
data on both business and IT strategies from public announce-
ments by each firm in the sample over time. Figure 4 pro-
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
vides the resulting four potential combinations, with the
bottom-left cell having the measure used for the main
analyses (i.e., Table 4) and robustness tests (i.e., Table 5 and
Appendix C).
The additional data collection enables us to test the main
model (Model 3 in Table 4) using three alternative measures
(i.e., measures 1–3 in Figure 4). Appendix D provides the
details of this additional data collection and the associated
results. Table 5 summarizes, and Table D1 in Appendix D
presents in detail, the results using these alternative measures.
The results of all 17 robustness tests (i.e., Tables C1 and C2
in Appendix C) and the three alternative SITA measures (i.e.,
alternative measures 1–3 in Figure 4 and Table D1 in Appen-
dix D) are consistent with the main results. These extensive
tests provide further confidence in the main results.
Interaction Plots and Split-Sample Analyses
A positive three-way interaction, such as between environ-
mental dynamism, SITA, and ITI (e.g., in Model 3, Table 4),
could imply any one of the following situations: (1) the
moderating effect of SITA on the relationship between ITI
and firm performance is positive in a low-dynamism environ-
ment but becomes more positive in a high-dynamism environ-
ment; (2) the moderating effect of SITA on the relationship
between ITI and firm performance is negative in a low-dyna-
mism environment but becomes positive in a high-dynamism
environment; or (3) the moderating effect of SITA on the
relationship between ITI and firm performance is negative in
a low-dynamism environment but becomes less negative in a
high-dynamism environment. Which of these situations actu-
ally exists along with the three-way interaction can be under-
stood through single-slope plots and split-sample analyses
(Hayes and Matthes 2009).
Table 6 presents the interaction plots based on the main
analysis (i.e., Model 3, Table 4). In environments with high
dynamism (Panel B), high complexity (Panel D) and low
munificence (Panel E), an increase in ITI leads to perfor-
mance gains when SITA is high but to performance declines
when SITA is low. But in environments with low dynamism
(Panel A), low complexity (Panel C), and high munificence
(Panel F), an increase in ITI leads to greater performance
gains when SITA is low than when SITA is high. These
results are consistent with those for the three-way interactions
(i.e., Table 4), and the split-sample analyses, discussed next.
We further examine the significant three-way interactions by
mean-splitting (one standard deviation above and below the
mean) the sample based on each of the three environmental
factors, thus producing six subsamples. The split-sample
analysis across high and low levels of environmental dyna-
MIS Quarterly Vol. 43 No. 2/June 2019 465
Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Table 5. A Summary of Supplemental Analyses

Results
Potential Biases and Compared to
Model Alternative Arguments Supplemental Analysis Main Model
Robustness Tests
Are the results generalizable
R1 to alternative dependent Return on Assets is used as the dependent variable. Consistent
variables?
Are the results contingent on Industry’s operational income volatility is used as
R2 Consistent
the estimation of Dynamism? environmental dynamism.
The log value of the reciprocal of the Herfindahl index of
Are the results contingent on
R3 the market shares of all firms in the industry is used as Consistent
the estimation of Complexity?
complexity.
Are the results contingent on
Industry’s operational income growth is used as
R4 the estimation of Consistent
environmental munificence.
Munificence?
Estimation of SITA that excludes both hardware and
R5 Consistent
application development.
R6 Estimation of SITA that excludes hardware. Consistent
Are the results contingent on
Estimation of SITA that excludes application
R7 the estimation of IT Strategy Consistent
development.
and SITA?
R8 Estimation of SITA that excludes outsourcing. Consistent
Estimation of SITA that excludes miscellaneous
R9 Consistent
(including maintenance) IT investments.
R10 Are the results contingent on GLS estimation using firm fixed-effects models. Consistent
the estimation method due to
R11 unobserved heterogeneity? GLS estimation using firm random-effects models. Consistent
Are the results robust to Firm age and industry clockspeed added as control
R12 Consistent
additional control variables variables.
Are the results robust to lag Three non-lagged models (R13-R15) and four models
R13-R17 Consistent
and sample size with imputed data (R14-R17).
Alternative Measures of SITA
Public announcements instead of InformationWeek to
AM1 Consistent
measure IT strategy.
Are the results contingent on
Public announcements instead of COMPUSTAT to
AM2 the specific data sources for Consistent
measure business strategy.
business and IT strategies?
Public announcements to measure IT and business
AM3 Consistent
strategies.
Note: Appendices C and D provide the details and results of the 17 robustness tests (R1–R17) and alternative measures (AM1–
AM3), respectively.

mism, complexity, and munificence facilitates comparison
between the sub-samples by removing the need for three-way
interactions. We then conduct analyses similar to Model 2
(Table 4) for each subsample to examine the differences
across various environmental conditions. Table 7 presents the
results in six parts based on uncertainty dimensions, as deline-
ated by double borders. Each part includes the results of two
regressions, both with firm performance as the dependent
variable: (1) a direct effects model with dynamism, com-
plexity, munificence, ITI, and SITA as independent variables;
and (2) a full model with ITI*SITA added.
The results reveal a distinct difference in the leveraging
nature of SITA in certain and uncertain environments. The
top-left part of Table 7 provides the results for a stable envi-
ronment. Interestingly, the negative and significant inter-
action between SITA and ITI suggests that in stable environ-
ments, an increase in SITA seems to reduce the performance

466 MIS Quarterly Vol. 43 No. 2/June 2019

 Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Figure 4. Alternative Measures of Robustness and IT Strategies and SITA

Table 6. Interaction Plotsa

Panel A. Low Dynamism Panel B. High Dynamism

Panel C. Low Complexity Panel D. High Complexity

Panel E. Low Munificence Panel F. High-Munificence

a
The first two letters in each line’s legend denotes the situation to which it belongs (e.g., DL denotes “Dynamism Low”), while the third letter,
following the dash, indicates high (H) or low (L) value of SITA for that line. The t-values for slope differences are as follow: DL-H and DL-L: 1.812*;
DL-L and DL-H: 2.283*; CL-H and CL-L: 0.744 (NS); CH-L and CH-H: 2.427**; ML-H and ML-L: 1.822*; MH-H and MH-L: 1.693*.

MIS Quarterly Vol. 43 No. 2/June 2019 467

Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Table 7. Split-Sample Analysesa

Independent Variables Direct Effects Model Full Model Direct Effects Model Full Model
Low Dynamism = Stable High Dynamism = Turbulent
Dynamism 0.074** -0.093** -0.144*** -0.108***
Complexity -0.131*** -0.0071* -0.141*** -0.086*
Munificence 0.066* 0.074*** 0.096*** 0.057*
ITI 0.129*** 0.132*** 0.187*** 0.166***
SITA 0.091*** 0.058** 0.107** 0.110**
ITI*SITA -0.199*** 0.204***
N 348 348 410 410
χ² 7315.8 10979.1 8475.3 13893.5
Low Complexity = Simple High Complexity = Complex
Dynamism -0.128*** -0.093*** -0.103** -0.081**
Complexity -0.055** -0.064** -0.133*** -0.102**
Munificence 0.138*** 0.182*** 0.074** 0.062*
ITI 0.076** 0.084** 0.123*** 0.149***
SITA 0.131*** 0.102** 0.152*** 0.094**
ITI*SITA -0.184*** 0.152***
N 405 405 353 353
χ² 8417.8 11123.4 7325.6 8762.6
High Munificence = Munificent Low Munificence = Hostile
Dynamism -0.075** -0.098*** -0.119*** -0.083**
Complexity -0.043* -0.082** -0.162*** -0.148**
Munificence 0.052* 0.058* 0.083** 0.096***
ITI 0.048* 0.069** 0.074* 0.172***
SITA 0.061* 0.074** 0.112*** 0.086**
ITI*SITA -0.101*** 0.183***
N 387 387 371 371
χ² 2237.7 4562.8 8234.9 15812.3
***p < 0.001; **p < 0.01; *p < 0.05. Tobin’s q is the dependent variable in all the regressions. All tests are one-tailed.
Industry and year dummies, organizational slack, industry q, industry capital intensity, regulation, related diversification, dummies for prospector
and analyzer strategies, and size (employees) are used as controls but excluded from the table due to space considerations. Cells for the high
environmental uncertainty situations are shaded.

gains from ITI. However, as expected, the results for
turbulent environments (the top-right part of Table 7) show
the opposite; an increase in SITA helps leverage ITI better.
A similar pattern is observed with SITA shifting from having
a negative effect in leveraging ITI to having a positive effect
in leveraging ITI when moving from a simple environment
(middle left) to a complex environment (middle right), and
when moving from a munificent environment (bottom left) to
a hostile environment (bottom right). Moreover, in all six
subsamples, the direct effects of both ITI and SITA remain
positive and significant.
reflect a rigidity in these conditions. Appendix E reports
further tests of this possibility along with the associated
results.21 The results consistently support the notion that in
environments with low levels of uncertainty, SITA reflects a
rigidity, in contrast to reflecting a capability in environments
with high levels of uncertainty. The implications and inter-
pretation of this effect of SITA in stable, simple, and muni-
ficent environments, as well as the other results, are discussed
further in the next section.

The above surprisingly negative effect of SITA in stable,

simple, and munificent environments suggests that SITA may 21
We are grateful to the associate editor for recommending this analysis.

468 MIS Quarterly Vol. 43 No. 2/June 2019


Discussion
SITA has generally been regarded as an organizational state
of congruence that leads to performance gains. This paper
seeks to provide richer insights into the performance effects
of SITA by departing from the prior literature in three main
ways. First, we highlight the dual nature of SITA that may
reflect a capability to leverage ITI in addition to its traditional
view as a state of congruence between business and IT stra-
tegies. We argue that SITA as a state of congruence directly
affects firm performance, while SITA as reflecting a capa-
bility moderates the impact of ITI. Second, by being the first
to simultaneously examine the effects of environmental
uncertainty, SITA, and ITI in influencing firm performance,
this paper is able to examine whether uncertainty plays a
different role than previously examined. Specifically, this
study considers a three-way link between SITA, ITI, and
environmental uncertainty, which have previously been con-
sidered separately or in two-way combinations, as a way to
further the existing insights about how SITA generates value
for firms. Third, by using panel data from a variety of sources
to examine SITA over time, in contrast to the use of either
cross-sectional surveys or longitudinal cases in the prior
literature, we are able to identify each firm’s business stra-
tegy, ITI, SITA, and performance each year and examine
lagged effects.
The results of the study support the presence of a three-way
link between SITA, ITI, and environmental uncertainty in
explaining firm value, indicating the importance of simul-
taneously considering ITI and environmental uncertainty
along with SITA. Specifically, the results suggest that envi-
ronmental uncertainty enhances the positive impact SITA has
on firm performance through enhancing the value of ITI.
Moreover, further analysis of interactions between SITA and
ITI in environments with high and low uncertainty (as
evidenced in our split-sample analysis) hints at the marked
difference between what SITA reflects, a capability or a
rigidity to utilize ITI. The results show that SITA and ITI
interact positively to affect firm value in more uncertain
environments, consistent with characterizing SITA as reflec-
tive of a capability to leverage IT. However, in less uncertain
environments, the interaction between SITA and ITI turns
negative, indicating that SITA in less uncertain environments
does not reflect a capability, but instead reflects a rigidity.
Figure 5 depicts the emergent model.
We offer three somewhat interrelated explanations for the
negative effect of SITA in stable, simple, and munificent
environments. First, although the social and structural aspects
that enable SITA (e.g., shared understanding and interaction
between business and IT) are generally viewed favorably (Wu
et al. 2015), they may also have dysfunctional consequences.
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
When business and IT executives have strong ties, they may
not question each other due to the fear of hurting their rela-
tionship (Miller 1991). Similarly, shared knowledge could
lead to the exclusion of differing perspectives (Starbuck and
Milliken 1988) and lead to “groupthink” (Janis 1982). In
stable, simple, and munificent environments, where decisions
do not need to be made quickly or may be easier, the social
and structural aspects underlying SITA may increase the
likelihood that IS executives focus additional ITI on the same
areas as past investments, and thereby become a rigidity that
limits the benefits from ITI. Thus, SITA may reflect a rigidity
in less uncertain environments, which finds some support in
the prior literature suggesting that a high level of SITA might
imply that the organization has fallen into a rigidity trap
(Coltman et al. 2015, p. 91) or has a constricted outlook
(Baker et al. 2011).
Second, firms in less uncertain environments do not need to
make frequent changes to their organizational systems and
may instead seek to reap the benefits of the established
systems (Sull et al. 2015). They may focus on the adminis-
tration and exploitation of prior IT investments (De Haes et al.
2011). Thus, SITA might inhibit decisions on how to use
additional ITI to enhance the value from prior systems or
create innovative opportunities, and thereby represent a
rigidity.
Both the above explanations for the negative moderating
effect of SITA on the relationship between ITI and firm per-
formance in less uncertain environments are based on the
possibility of SITA being a rigidity in such environments,
which finds support in the empirical results in Appendix E.
The third possible explanation, which we are unable to test, is
that although a high level of SITA does not usually result
from luck alone, in less uncertain environments, it could
simply result from “complacency and inertia”22 (Sabherwal et
al. 2001, p. 182). The business strategy could be inappro-
priate in such an environment with minor consequences; and
the aligned IS strategy would be inappropriate as well. But the
inappropriate IT strategy would imply that additional ITI has
adverse performance effects, explaining the negative lever-
aging effect of SITA in such environments.
Limitations
Before discussing the implications of the study’s results, we
note its limitations. First, the sample for the study is based on
firms from InformationWeek 500 surveys. Since the firms in
the InformationWeek 500 list may be viewed as being better
22
We are grateful to an anonymous reviewer for pointing us in this direction.
MIS Quarterly Vol. 43 No. 2/June 2019 469
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
Figure 5. The Emergent Model
at using IT, further research using other samples of firms is
needed to examine the generalizability of the results.
Second, our conclusions are based on viewing SITA as both
a state and as reflecting either a capability or a rigidity.
However, while SITA is measured as a state, the capability
(or rigidity) reflected by it is not directly measured due to the
longitudinal and retrospective nature of the data. But we are
encouraged by the fact that the results of the supplementary
analyses are consistent with the notion of SITA reflecting
aspects that may comprise either a capability23 or a rigidity.24
Future research might provide further insights by measuring
both SITA as a state and the capability or rigidity it reflects,
but it would be difficult to measure them over time and in
conjunction with firm performance, ITI, and environmental
turbulence. Such future research might benefit from longi-
tudinal studies based on cases or periodic surveys.
Finally, we are not able to account for time-variant hetero-
geneity at the firm level, although we do control for unob-
served heterogeneity at the level of industry and year and
account for the unobserved heterogeneity at the firm level
(i.e., the time-invariant heterogeneity) using fixed- and
random-effect models as suggested by Greene (2011) and
reported in Appendix C.
23
Supplementary analyses (excluded due to space considerations) indicate
that SITA is higher when senior IS executives serve on the firm’s board of
directors. This is consistent with a structural aspect that has been argued to
enable SITA and may comprise a capability.
24
Additional analyses in Appendix E indicate that SITA reflects a rigidity in
less uncertain environments.
470 MIS Quarterly Vol. 43 No. 2/June 2019
Implications for Research
Despite the above limitations, the paper has several potential
implications for research. First, it has sought to address the
previous inconsistencies regarding the direct effect of SITA
on firm performance. Although most prior empirical studies
find SITA to positively affect firm performance, no study has
hitherto found this positive effect when also explicitly
including ITI. Our results indicate that SITA, as a state, con-
sistently has a positive main effect on firm performance, when
also including a variety of other factors, including ITI,
environmental dynamism, complexity, and munificence,
organizational slack, and other control variables.
Second, while the existing literature on SITA regards it as a
state with expected positive effects on firm performance, this
paper extends this view and suggests that SITA also reflects
a capability. Specifically, this paper indicates that SITA
operates to enhance or erode the value of ITI depending on
environmental uncertainty. This view complements the
existing theories of SITA and suggests that a joint considera-
tion of the extent of SITA, ITI, and environmental uncertainty
dimensions (i.e., dynamism, complexity, and munificence),
instead of considering the extent of SITA in isolation, pro-
vides a better explanation of how SITA contributes to the
performance of a firm. Specifically, considering environ-
mental uncertainty while examining the role of SITA’s
reflected capability in leveraging ITI provides theoretical
clarity about the conditions in which SITA may erode value
from ITI. Moreover, this paper’s results offer a more nuanced
view of the effects of environmental uncertainty, where it
affects the way in which SITA, as reflecting either a capa-
bility or a rigidity, helps or hurts the leveraging of ITI to
improve firm performance. Thus, the findings from the emer-
gent model indicate a significant shift in understanding of the
role of the environment in conjunction with SITA and ITI.

Figure 6. Implications
Third, this paper extends the current empirical evidence on
the performance effects of SITA by (1) considering a market-
oriented and forward-looking measure of firm performance
(i.e., Tobin’s q), and (2) examining the lagged effects of
SITA. Prior literature on SITA has mainly focused on percep-
tual or accounting measures of firm performance. This
study’s use of Tobin’s q to measure firm performance pro-
vides empirical evidence that the performance value of SITA
extends beyond perceptual and backward-looking measures.
Also, the longitudinal nature of our data offers evidence
regarding the effects of SITA on firm performance in the
following year, indicating the temporal precedence of SITA
over firm performance.
Implications for Practice
The paper also has some potentially important implications
for practice, which are summarized in Figure 6. The results
indicate that even when the effects of ITI and environmental
uncertainty are explicitly included, SITA as a state does have
a direct positive effect on firm performance. This direct effect
of SITA is found in all types of environments.
The results indicate that senior executives of firms in dyna-
mic, complex, and hostile environments should unequivocally
try to align ITI with their business strategy. They should
actively seek IT knowledge, participate in IT planning, and
involve senior IT executives in strategic planning. If they do
so, the firm’s performance would improve not only due to the
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
direct effect of SITA, but also because SITA would help
leverage ITI to improve firm performance.
By contrast, senior executives of firms in stable, simple, and
munificent environments should pursue SITA with caution.
In such environments, SITA as a state directly helps improve
firm performance but it seems to reflect a potential rigidity
that reduces the positive effect of ITI on performance. Thus,
senior executives of firms in such environments should pursue
SITA but be careful in establishing ties, such as IT partici-
pation in strategic business planning or senior business
executives’ participation in strategic IT planning, that could
lead to rigidity or myopia.
Conclusion
This paper finds strong empirical support for both the direct
effect of SITA on firm performance and its moderating effect
on the relationship between ITI and firm performance. It
provides new insights into the effects of SITA on firm per-
formance by recognizing its dual nature as a state and as
reflecting a capability or rigidity, depending on the environ-
ment. Based on panel data analysis of secondary data while
using several control variables, it finds that (1) as a state,
SITA enhances firm performance under all environments; and
(2) in a dynamic, complex, or hostile environment, SITA
reflects a capability that enhances the positive effect of ITI on
firm performance; but (3) in a stable, simple, or munificent
environment, SITA, surprisingly, reflects a rigidity that
reduces the positive effect of ITI on firm performance.
MIS Quarterly Vol. 43 No. 2/June 2019 471
Sabherwal et al./Effect of Strategic Alignment on Firm Performance
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About the Authors
Rajiv Sabherwal is Edwin & Karlee Bradberry Chair and Depart-
ment Chair of Information Systems in the Walton College of
Business at the University of Arkansas. He has published on the
management, utilization, and impacts of IT and knowledge in
journals including Information Systems Research, MIS Quarterly,
Management Science, Organization Science, and Journal of MIS.
He has served as editor-in-chief for IEEE Transactions on Engi-
neering Management and senior editor or guest editor for MIS
Quarterly, Journal of AIS, and Information Systems Research. He
is a Fellow of both the IEEE and the Association for Information
Systems, with a Ph.D. from University of Pittsburgh.
Sanjiv Sabherwal is a Distinguished Teaching Professor and
department chair of Finance and Real Estate at the University of
Texas at Arlington. His research examines issues in corporate
finance, international finance, and IT investments. His research has
been published in finance and IS journals such as Journal of
Finance, Journal of Financial and Quantitative Analysis, Journal of
Banking and Finance, Financial Management, Information Systems
Research, Decision Sciences, and IEEE Transactions on Engi-
neering Management. He received his Ph.D. from Georgia Institute
of Technology.
Taha Havakhor is an assistant professor of Management Informa-
tion Systems in the Fox School of Business at Temple University.
His research focuses on IS strategy both in established and entre-
preneurial firms. His scholarly work has been published, or is forth-
coming, in outlets such as Information Systems Research and
Journal of Management Information Systems. He received his Ph.D.
from the University of Arkansas in 2016.
Zach Steelman is an Assistant Professor of Information Systems in
the Walton College of Business at the University of Arkansas. He
has published in prominent IS journals such as Information Systems
Research, MIS Quarterly, MIS Quarterly Executive, Information
Systems Journal, and the Communications of the AIS. His research
and teaching interests focus on the development, implementation,
management, and impact of organizational IT systems, applications,
and architectures. He received his Ph.D. from the University of
Arkansas.
 RESEARCH ARTICLE

HOW DOES STRATEGIC ALIGNMENT AFFECT FIRM

PERFORMANCE? THE ROLES OF INFORMATION
TECHNOLOGY INVESTMENT AND
ENVIRONMENTAL UNCERTAINTY
Rajiv Sabherwal
Walton College of Business, University of Arkansas,
Fayetteville, AR 72701 U.S.A. {rsabherwal@walton.uark.edu}

Sanjiv Sabherwal
College of Business, University of Texas–Arlington,
Arlington, TX 76019 U.S.A. {sabherwal@uta.edu}

Taha Havakhor
Fox School of Business, Temple University, 210 Speakman Hall,
Philadelphia, PA 19122 U.S.A. {taha.havakhor@tahahavakhor.com}

Zach Steelman
Walton College of Business, University of Arkansas,
Fayetteville, AR 72701 U.S.A. {zsteelman@walton.uark.edu}

Appendix A
States of Low SITA–High Social/Structural Integration and
High SITA–Low Social/Structural Integration

High Environmental Uncertainty

In an uncertain environment, unpredictability increases organizational entropy (or disorder) and the likelihood of divergence between IT and
business strategies. Social/structural mechanisms that enable internal order in the face of uncertainty are needed to achieve a high level of
SITA. Therefore, a state of low SITA–high social/structural integration would quickly lead to either (1) the high social/structural integration
enabling an increase in SITA (such as when a major environmental shift requires the firm to change its business and IT strategies, and
the social/structural integration enables this while achieving SITA); or (2) the low SITA causing a decrease in the social/structural integration
(because the business and IT executives may communicate less and have lower shared understanding) (Hirschheim and Sabherwal 2001;
Sabherwal et al. 2001).

Also, a firm in an uncertain environment would not be able to sustain a state of high SITA–low social/structural integration. Instead, it would
need to either develop social/structural integration or encounter a decrease in SITA. This parallels the arguments that organizations overcome
entropy arising from the environment by using “proper organization culture, structures, processes, and resources” (Tan and Tan 2005, pp. 144-
145) and that SITA “result[s] from skill rather than luck” (Baker et al. 2011, p. 303). Thus, a firm in an uncertain environment can have a state
of either low SITA–high social/structural integration or high SITA–low social/structural integration only in a transition period. From either
of these states, it would quickly move to a state consistent with the notion of SITA reflecting a capability (i.e., either high SITA–high
social/structural integration, or low SITA–low social/structural integration).

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Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Low Environmental Uncertainty

Low environmental uncertainty reduces the likelihood of both aspects that can cause divergence between IT and business strategies, that is,
organizational entropy (or disorder) and changes to organizational and IT strategies. If the level of social/structural integration was high, it
would enable the firm to enhance SITA, causing a state of low SITA–high social/structural integration to be unlikely. However, a state of high
SITA–low social/structural integration could exist in a less uncertain environment. In such an environment, the firm does not change its busi-
ness and IT strategies, and managers do not need to be socially/structural integrated to maintain SITA. Instead, SITA would be maintained
in such an environment due to organizational inertia as no significant new initiatives are pursued and neither business nor IT strategy is
changing (Sabherwal et al. 2001).

References

Baker, J., Jones, D., Cao, Q., and Song, J. 2011. “Conceptualizing the Dynamic Strategic Alignment Competency,” Journal of the Association
for Information Systems (12:4), pp. 299-322.
Hirschheim, R., and Sabherwal, R. 2001. “Detours in the Path Toward Strategic Information Systems Alignment: Paradoxical Decisions,
Excessive Transformations, and Uncertain Turnarounds,” California Management Review (44:1), pp. 87-108.
Sabherwal, R., Hirschheim, R., and Goles, T. 2001. “The Dynamics of Alignment: Insights from a Punctuated Equilibrium Model,”
Organization Science, (12:2), pp. 179-197.
Tan, J., and Tan, D. 2005. Environment–Strategy Co evolution and Co alignment: A Staged Model of Chinese SOEs Under Transition.
Strategic Management Journal, (26:2), pp. 141-157.

Appendix B
Measurement of Strategic IT Alignment
Prior studies compute strategic IT alignment (SITA) (Oh and Pinsonneault 2007; Sabherwal and Chan 2001) using three broad steps: (1) identi-
fication of the firm’s business strategy; (2) identification of the relevant aspects of the firm’s IS strategy; and (3) calculation of alignment. We
next examine how each of these steps is done in this study.

Identification of Business Strategy

We first classify each firm’s business strategy in each year into the popular typology of Defender, Analyzer, or Prospector (Doty et al. 1993;
McLaren et al. 2011; Miles and Snow 1978; Steelman et al. 2019). This typology is based on the degree of business aggressiveness, viewed
as the firm’s tendency to innovate, lead, and take risks (Ferrier 2001). Prospectors, who are at one end of the spectrum, strive to innovate and
benefit from the “first-mover” advantage while taking major risks (Miles et al. 1978). Defenders, at the other extreme, value gaining efficiency
and finding stable and secure advantages. Analyzers, who are in the middle of the aggressiveness spectrum, are not as risk-taking as
Prospectors, but are also less committed to stability (Doty et al. 1993). We classify each firm in each year into one of these three types based
on six business strategy attributes (scope, liquidity, asset efficiency, fixed-asset intensity, long-range financial liability, and research and
development (R&D) intensity). The measure of each attribute and its ideal value for each strategy are same as those Sabherwal and Sabherwal
(2007) develop using prior literature. Consistent with the profile-deviation approach, and using prior literature, we set the ideal values for each
attribute at low, medium, or high for these three strategies.

We normalize each strategic attribute using the sample mean and standard deviation for that year. The sample firms are classified into
Defenders, Analyzers, and Prospectors based on the proximity of each firm’s business strategy to the ideal profiles for these strategies. We
operationalize high, medium, and low values for ideal business strategy attributes as 0.5, 0.0, and –0.5, respectively (Sabherwal and Chan 2001).
We use the root mean square (RMS) distances between each firm’s business strategy and the three ideal business strategies to classify each


n
firm’s strategy to the closest ideal profile. We compute RMS as d2 where di is the distance between the actual and ideal profiles in
i =1 i
terms of variable i and n is the number of variables used in the analysis (n = 6 in this study). This procedure led to 2,224 firm-year observations
in the sample classified into 804 Defenders, 931 Analyzers, and 489 Prospectors.

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 Sabherwal et al./Effect of Strategic Alignment on Firm Performance

To validate the business strategy classification, we use the Scheffé (1959) test to compare the business strategies in terms of several strategic
attributes other than those used to identify business strategies. The results indicate that firms pursuing the three business strategies differ as
expected in other aspects as well–specifically, market share, return on assets, return on sales, related diversification (measured as related
entropy), cost efficiency (measured as the ratio of cost of goods sold to net sales), and firm size (in terms of the natural log of number of
employees)–validating the strategy classification.1

Ideal IT Investment Profiles

We next identify each firm’s ideal ITI profile using the ratios of investments2 in six IT areas (R&D on IT, insourcing, outsourcing, hardware,
application software, and maintenance), which is consistent with prior alignment research (Swaminathan et al. 2008). We identify the ideal
ITI profile for a firm based on its realized business strategy described above. Table B1 describes, with justification,3 the attributes for the ideal
ITI profiles for each business strategy.4 We obtain each firm’s relative investment in each area from the InformationWeek 500 survey.

Computing Strategic Alignment

Consistent with the prior literature (Delery and Doty 1996; Govindarajan 1988; Sabherwal and Chan 2001), we use the difference between the
normalized score (based on the sample mean and standard deviation for the year) of each area of IT investment and the ideal value of that
investment for Defenders, Prospectors, and Analyzers to compute the distance between each firm’s actual ITI profile and the ideal ITI profile
based on its business strategy. As mentioned for business strategy attributes, we operationalize the ideal values as 0.5, 0, and -0.5, respectively.
Next, we compute SITA by subtracting the above distance from 1, because smaller distances imply that the actual ITI profile is closer to the
ideal profile.

For example, J. B. Hunt, a trucking and transportation company based in Arkansas, is categorized as a Defender in 2006. The ideal profile for
Defenders suggests that they should pursue a low level of investment in R&D of IT and insourcing, and a high level of expenditure in
outsourcing, purchase of hardware and software, and maintenance. J. B. Hunt’s actual IT profile shows low expenditures in R&D and
insourcing and high expenditure in hardware and software (consistent with the ideal profile), but moderate expenditures in outsourcing and
maintenance (inconsistent with the ideal profile). Thus, SITA is calculated as

( −0.5 − ( −0.5) ) + ( −0.5 − ( −0.5)) + ( 0.5 − 0)2 + ( 0.5 − 0.5)2 + ( 0.5 − 0.5)2 + ( 0.5 − 0)2
2 2
0.29 = 1 −

References

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and Configurational Performance Predictions,” Academy of Management Journal (39:4), pp. 802-835.
Doty, D. H., Glick, W. H., and Huber, G. P. 1993. “Fit, Equifinality, and Organizational Effectiveness: A Test of Two Configurational
Theories,” Academy of Management Journal (36:6), pp. 1196-1250.
Ferrier, W. J. 2001. “Navigating the Competitive Landscape: The Drivers and Consequences of Competitive Aggressiveness,” Academy of
Management Journal (44:4), pp. 858-877.

1
Detailed results are excluded due to space considerations.

2
In a few cases, the allocations across various areas do not add up to 100 percent. Therefore, we divide the proportion allocated to each area by the sum of the
allocations across areas to compute consistent proportional allocations.

3
Alternative combinations of the categories to identify IT investment profiles were analyzed and are described in our robustness analyses in Appendix C. The
results from these analyses are consistent with the main analysis.

4
Profile deviation does not involve using archetypes for ITI. But the ITI profiles for Defenders and Prospectors seem similar to IS Conservative and IS Innovator
archetypes (Chen et al. 2010), respectively. Specifically, our ideal profile for Prospectors, who follow aggressive IS action (e.g., investing highly on R&D),
matches the description of IS Innovators, while the ideal profile for Defenders, who are the least aggressive, matches IS Conservatives. We are grateful to an
anonymous reviewer for a suggestion leading to this parallel.

MIS Quarterly Vol. 43 No. 2—Appendices/June 2019 A3

Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Govindarajan, V. 1988. “A Contingency Approach to Strategy Implementation at the Business-Unit Level: Integrating Administrative
Mechanisms with Strategy,” Academy of Management Journal (31:4), pp. 828-853.
Hambrick, D. C. 1983. “Some Tests of the Effectiveness and Functional Attributes of Miles and Snow’s Strategic Types,” Academy of
Management Journal (26:1), pp. 5-26.
Hirschheim, R., and Sabherwal, R. 2001. “Detours in the Path Toward Strategic Information Systems Alignment: Paradoxical Decisions,
Excessive Transformations, and Uncertain Turnarounds,” California Management Review (44:1), pp. 87-108.
McLaren, T. S., Head, M. M., Yuan, Y., and Chan, Y. E. 2011. “A Multilevel Model for Measuring Fit between a Firm’s Competitive
Strategies and Information Systems Capabilities,” MIS Quarterly (35:4), pp. 909-929.
Miles, R., and Snow, C. C. 1978. Organizational Structure, Strategy and Process, New York: McGraw-Hill.
Miles, R. E., Snow, C. C., Meyer, A. D., and Coleman, H. J. 1978. “Organizational Strategy, Structure, and Process,” Academy of Management
Review (3:3), pp. 546-562.
Oh, W., and Pinsonneault, A. 2007. “On the Assessment of the Strategic Value of Information Technologies: Conceptual and Analytical
Approaches,” MIS Quarterly (31:2), pp. 239-265.
Sabherwal, R., and Chan, Y. E. 2001. “Alignment between Business and IS Strategies: A Study of Prospectors, Analyzers, and Defenders,”
Information Systems Research (12:1), pp. 11-33.
Sabherwal, R., and Sabherwal, S. 2007. “How do Knowledge Management Announcements Affect Firm Value? A Study of Firms Pursuing
Different Business Strategies,” IEEE Transactions on Engineering Management (54:3), pp. 409-422.
Scheffé, H. 1959. The Analysis of Variance, New York: Wiley.
Steelman, Z. R., Havakhor, T., Sabherwal, R., and Sabherwal, S. 2019. “Performance Consequences of Information Technology Investments:
Implications of Emphasizing New or Current Technologies,” Information Systems Research (30:1), pp. 291-205.
Swaminathan, V., Murshed, F., and Hulland, J. 2008. “Value Creation Following Merger and Acquisition Announcements: The Role of
Strategic Emphasis Alignment,” Journal of Marketing Research (45:1), pp. 33-47.

Table B1. IT Strategy Attributes of Defenders, Analyzers, and Prospectors

IT Investment Theoretical
Area Ideal Values Justification
Proportion of IT D: Low Prospectors, continually seeking new opportunities, should spend the most on R&D
budget spent on A: Medium through IT, followed by Analyzers, which seek opportunities to a lesser extent, and
R&D on IT P: High then Defenders, which operate in a stable domain. This is consistent with prior
arguments and empirical results regarding R&D expenditures (Hambrick 1983;
Sabherwal and Sabherwal 2007).
Proportion of IT D: Low Based on prior literature, Hirschheim and Sabherwal (2001) argue that Defenders
budget spent on A: Medium focus on outsourcing, while Prospectors focus on insourcing, with Analyzers being
insourcing P: High in between the two (i.e., selective sourcing). Similarly, Hambrick (1983, p. 11)
(salaries) argues “prospectors find that in-house channels can be motivated, educated, and
controlled to an extent that outside channels cannot.…prospectors require superior
Proportion of IT D: High market intelligence, available only through in-house channels.” Consistent with such
budget spent on A: Medium arguments, we view Defenders, Analyzers, and Prospectors as low, medium, and
outsourcing P: Low high, respectively in insourcing, and high, medium, and low, respectively, in
outsourcing.
Proportion of IT D: High Defenders emphasize efficiency through routinization (Doty et al. 1993; Miles at al.
budget spent on A: Medium 1978). They benefit most from routines and reuse of information, which hardware
hardware P: Medium and applications enable. Therefore, Defenders benefit most from investment in
hardware and applications. The more dynamic nature of Analyzers and Prospectors
Proportion of IT D: High limits the value of hardware and applications by reducing the applicability of prior
budget spent on A: Medium knowledge due to changed circumstances. However, they also purchase hardware
applications P: Medium and develop applications, although of different kinds (Sabherwal and Chan 2001),
and are therefore viewed as “Medium.”
Proportion of IT D: High Due to the greater investments in hardware and applications, and greater continu-
budget spent on A: Medium ation of hardware and applications over time, Defenders should also spend more on
other aspects (e.g., P: Low maintenance and related activities. Prospectors should spend the least in this area
maintenance) due to their dynamic nature. Analyzers should be medium in this respect as they
deploy hardware and applications from one context in another to a greater extent
than Prospectors.
Note: Defenders’, Analyzers’, and Prospectors’ ideal values are shown after “D,” “A,” and “P,” respectively.

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 Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Appendix C
Robustness Analyses
In addition to the main analyses, we test several alternative robustness models to explore the generalizability and consistency of our findings,
the results for which are reported in Table C1. These models include a different dependent variable (Model R1); different measures of the
dimensions of environmental uncertainty (Models R2–R4); and different measures of SITA (Models R5–R9). Each model starts with the
primary research model (Model 3, Table 4), and makes one change. While Tobin’s q is a forward-looking measure of performance, the existing
literature (e.g., Oh and Pinsonneault 2007) has also examined the effects of SITA and ITI on accounting measures of performance such as return
on assets (ROA). To further examine the generalizability of our findings, Model R1 uses ROA as an alternative and more reactive measure
of firm performance (Oh and Pinsonneault 2007). Further, the existing literature (e.g., Xue et al. 2011) has used alternative measures of envi-
ronmental uncertainty that we did not utilize in our main analysis. Models R2–4 utilize these alternative measures of environmental uncertainty
to examine the robustness of our findings when other well-established measures are utilized. Model R2 uses the industry’s operational income
volatility as the measure of environmental dynamism. Model R3 uses the log value of the reciprocal of the Herfindahl index of the market
shares of all firms in the industry as the measure of complexity. Model R4 uses industry’s operational income growth as the measure of
environmental munificence. The results, presented in Table C1, are consistent with the primary results.

One could argue that the specific investment ratios used in the original measurement of the IS strategy may not clearly differentiate firm
strategies. Specifically, a big portion of a firm’s investment in hardware, software applications, outsourcing, or maintenance, may be due to
legacy costs that move from one year to another without being affected by IT strategy. Therefore, we assess the validity of our findings when
each of these aspects of IT investment is dropped from the evaluation of the IT strategy and, hence, the subsequent measurement of SITA. To
do so, we calculate SITA in five alternative models (R5–R9). We test these models by excluding specific categories of ITI. Model R5 uses
a measure of SITA that excludes both hardware and application development, Model R6 uses a measure of SITA that excludes hardware, Model
R7 uses a measure of SITA that excludes application development, Model R8 uses a measure of SITA that excludes outsourcing, and Model
R9 uses a measure of SITA that excludes miscellaneous (including maintenance) IT investments. As shown in Table C1, the results of all nine
models support all five hypotheses.

Due to the possible biasing effect of unobserved heterogeneity across firms on GLS-estimated coefficients, we use firm fixed-effects and firm
random-effects estimations. Fixed- and random-effect estimation models remove time-invariant unobserved heterogeneity that is not captured
by the study’s control variables (Greene 2011). Models R10 and R11 in Table C2 report the estimated coefficients with fixed- and random-
effects estimation, respectively. Both these models also support all five hypotheses.

Model R12 includes two additional control variables: firm age and industry clockspeed. To calculate firm age, we approximate a firm’s year
of birth as the earliest of the years (1) in which the firm is included in COMPUSTAT; (2) in which the firm appears on CRSP; and (3) in which
there is a link between CRSP and COMPUSTAT (based on COMPUSTAT data item LINKDT) (Shumway 2001). To calculate industry clock-
speed, we follow the approach used by Mendelson and Pillai (1999). Specifically, we first compute for each firm the mean and standard devia-
tion of quarterly sales over the 42 quarters. The coefficient of variation (i.e., the ratio of the standard deviation to the mean) is then used as
an indicator of total variation in sales for that firm over this period. This variation has two components: variation due to deterministic temporal
effects (cyclic seasonal uctuations and sales growth), and variation due to random effects (uncertainty and turbulence). For each rm, we per-
form a regression of log (sales) against time to evaluate the growth trend, while including independent dummy variables for quarters (binary)
to control for cyclic seasonal variations. The slope of the regression is used as the growth component of sales variability. The residual values
from the regression, which indicate the unpredictable variation in sales, are normalized by dividing by the mean value of log(sales). This ratio
is used as a measure of the random component of sales variation, which is used as a proxy for clockspeed.

Finally, we conduct five robustness tests (Models R13 to R17) for combinations without lagged independent variables and larger sample sizes
through imputation. Models R13 to R15 are without any lagged effects, with R13 having no imputed data, R14 using data imputation only
for all control variables, and R15 using data imputation for all variables. Models R16 and R17 have one-year lagged effects similar to the main
analyses, with R16 using data imputation only for all control variables and R17 using data imputation for all variables. As shown in Table C2,
the results of all eight models support all five hypotheses.

References

Greene, W. H. 2011. Econometric Analysis (7th ed.), Upper Saddle River, NJ: Prentice-Hall.

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Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Mendelson, H., and Pillai, R. R. 1999. “Industry Clockspeed: Measurement and Operational Implications,” Manufacturing & Service
Operations Management (1:1), pp. 1-20.
Oh, W., and Pinsonneault, A. 2007. “On the Assessment of the Strategic Value of Information Technologies: Conceptual and Analytical
Approaches,” MIS Quarterly (31:2), pp. 239-265.
Shumway, T. 2001. “Forecasting Bankruptcy More Accurately: A Simple Hazard Model,” Journal of Business (74:1), pp. 101-124.
Xue, L., Ray, G., and Gu, B. 2011. “Environmental Uncertainty and IT Infrastructure Governance: A Curvilinear Relationship,” Information
Systems Research (22:2), pp. 389-399.

Table C1. Robustness Tests: Alternative Measures

Model Model Model Model Model Model Model Model Model
R1 R2 R3 R4 R5 R6 R7 R8 R9
Dynamism -0.051 -0.099*** -0.147*** -0.066* -0.179*** -0.226*** -0.111*** -0.096*** -0.162***
Munificence 0.210*** 0.176*** 0.224*** 0.155*** 0.126*** 0.151*** 0.219*** 0.171*** 0.096***
Complexity -0.900** -0.084*** -0.072** -0.093** -0.092** -0.066* -0.091*** -0.123*** -0.083***
ITI 0.064* 0.063* 0.085** 0.071* 0.098*** 0.083** 0.077* 0.091** 0.109***
SITA (H1a) 0.072* 0.092** 0.074** 0.067* 0.073*** 0.069* 0.058* 0.049* 0.072*
ITI*SITA (H1b) 0.093*** 0.172*** 0.165*** 0.081* 0.085** 0.119*** 0.170*** 0.152*** 0.118***
Dynamism*ITI 0.005 0.016 0.041 0.009 0.004 0.051 0.049 0.032 0.027
Dynamism*SITA 0.017 0.009 0.016 0.018 0.028 -0.018 -0.021 -0.005 -0.004
Dynamism*ITI*SITA
0.0319*** 0.194*** 0.378*** 0.243*** 0.217*** 0.314*** 0.408*** 0.202*** 0.214***
(H2a)
Complexity*ITI 0.003 0.023 0.010 0.019 0.005 0.021 0.002 0.003 0.009
Complexity*SITA 0.018* -0.031 -0.18 -0.015 0.032 -0.005 0.004 0.008 0.011
Complexity*ITI*SITA
0.152*** 0.121*** 0.089** 0.116*** 0.114*** 0.188*** 0.272*** 0.245*** 0.318***
(H2b)
Munificence*ITI 0.014 0.019 0.005 0.029 0.012 0.018 0.012 0.028 0.008
Munificence*SITA -0.018 -0.16 0.004 0.031 -0.050 -0.064 -0.018 -0.039 0.012
Munificence*ITI*SITA
-0.195*** -0.206*** -0.112*** -0.186*** -0.319*** -0.233*** -0.221*** -0.286*** -0.166***
(H2c)
Constant 0.032 0.057** 0.042* -0.074* -0.045** -0.028** -0.018* -0.044* -0.028**
N 758 758 758 758 758 758 758 758 758
χ² 18927.4 33752.7 45629.8 28592.6 32541.2 41870.1 39876.3 24593.5 18278.4

Notes: ***p < 0.001; **p < 0.01; *p < 0.05. All tests are one-tailed. Slack, Industry q, Industry’s capital intensity, Regulation, Related diversification,
Business strategy of the firm, Size, and Industry and Year dummies are included as controls, but excluded from the table due to space
considerations. The cells related to the hypotheses are highlighted for all models. Model R1 uses ROA as the dependent variable. Model R2 uses
industry’s operating income volatility as a measure for dynamism, whereas Model R3 uses the log value of the reciprocal of the Herfindahl index
of the market shares of all firms in the industry as the measure of complexity. Model R4 uses industry’s operating income growth as a measure
for munificence. Models R5–R9 are based on five alternative measures of alignment, computed by excluding the following categories of IT
investment: both hardware and application development (Model R5), only hardware (Model R6), only application development (Model R7),
outsourcing (Model R8), and miscellaneous (including maintenance) (Model R9).

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Table C2. Further Robustness Tests

Model Model Model Model Model Model Model Model
R10 R11 R12 R13 R14 R15 R16 R17
Dynamism -0.069* -0.106** -0.042* -0.127** -0.214*** -0.283*** -0.228*** -0.195***
Munificence 0.210* 0.174* 0.144*** 0.237*** 0.228*** 0.137*** 0.067* 0.182**
Complexity -0.111 -0.014 -0.023* -0.044** -0.021* -0.020* -0.010 -0.024*
ITI 0.104* 0.114* 0.074* 0.123** 0.139*** 0.071* 0.209*** 0.185***
SITA (H1a) 0.045* 0.055* 0.033* 0.024* 0.062** 0.064* 0.035** 0.051*
ITI*SITA (H1b) 0.054* 0.068* 0.024* 0.045* 0.090** 0.111*** 0.074*** 0.046*
Dynamism*ITI 0.023 0.060 -0.018 -0.099** -0.055* -0.056* -0.007 -0.015
Dynamism*SITA -0.051 -0.025 -0.017 -0.026* -0.032** -0.017 -0.034* -0.043
Dynamism*ITI*SITA
0.073* 0.118** 0.021* 0.218*** 0.229*** 0.337*** 0.270*** 0.325***
(H2a)
Complexity*ITI -0.090 0.017 -0.018 -0.021 -0.032* -0.021 -0.038* -0.025
Complexity*SITA 0.030 -0.024 -0.002 -0.006 -0.008 -0.011* -0.002 -0.002
Complexity*ITI*SITA
0.066* 0.059* 0.097*** 0.055* 0.101*** 0.059* 0.117** 0.174***
(H2b)
Munificence*ITI -0.008 -0.021 0.038* 0.019 0.041* 0.039** 0.061* 0.070*
Munificence*SITA -0.004 -0.005 0.007 0.020* 0.016 0.011* 0.029* 0.021*
Munificence*ITI*SITA
-0.050* -0.128** -0.044* -0.218*** -0.078** -0.108** -0.172*** -0.101***
(H2c)
Constant 0.026 0.017 -0.003 -0.028* -0.016* -0.021** -0.013* -0.010*
N 758 758 758 1,124 1,319 2,224 1,858 2,224
χ² 1,043.2 2111.9 42,341.2 72716.8 82,608.3 96,058.1 97,407.2 93,175.2

Notes: ***p < 0.001; **p < 0.01; *p < 0.05. All tests are one-tailed. Slack, Industry q, Industry’s capita intensity, Regulation, Related diversification,
Business strategy of the firm, Size, and Industry and Year dummies are used as controls in all the models, but are excluded due to space
considerations. The cells related to hypotheses are highlighted for all models. Models R10 and R11 report the results with fixed-effects and
random-effects estimations of coefficients, respectively. Model R12 reports the results when two additional controls (Firm age and Industry
clockspeed) are added. Firm age is nonsignificant (p > 0.10) while Industry clockspeed has a significant (p < 0.05) negative effect; the coefficients
are excluded due to space considerations. Models R13 to R17 report results for combinations without lagged independent variables and larger
sample sizes through imputation. Models R13 to R15 are without any lagged effects, with R13 having no imputed data, R14 using data imputation
only for all control variables, and R15 using data imputation for all variables. Models R16 and R17 have one-year lagged effects similar to the main
analyses, with R16 using data imputation only for all control variables and R17 using data imputation for all variables.

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Appendix D
Firm Investment Announcement Analysis
Our main approach to evaluate strategic IT alignment (SITA) rests on assessing business strategy through COMPUSTAT data and IT strategy
through InformationWeek data based on the allocation of IT budget to specific categories of R&D on IT, insourcing, outsourcing, hardware,
application software, and maintenance. Both aspects, as with most secondary data analyses, have some limitations. Some aspects of IT expen-
ditures may be due to time-invariant legacy costs that occur irrespective of a firm’s existing IT strategy (e.g., maintenance and support costs).
Similarly, business strategy assessment based on asset and liquidity measures may be less able to detect managerial aspirations and their year-to-
year changes. In an attempt to alleviate these concerns and further assess the robustness of our results, we evaluate business and IT strategies
based on public investment announcements made by each firm in each year. Firms utilize public announcements of their strategic investments
and actions to provide details on the strategic direction for their stakeholders (McWilliams and Siegel 1997). Thus, by assessing investments
publicly announced by a firm, we use an alternative approach to measure business and IT strategies that addresses the potential limitations of
high-level budgetary measures in the primary analysis. The next section describes this alternative approach to measuring business and IT
strategies, which, to the best of our knowledge has not yet been done in IS research.

Strategy Attributes

We use prior literature (Sabherwal and Chan 2001; Venkatraman 1989) to identify a different set of business strategy attributes than those used
for the main analysis (Appendix B). Specifically, we evaluate the public investment announcements in a given year for a firm based on
(1) defensiveness, (2) risk aversion, (3) aggressiveness, (4) proactiveness, (5)analysis, and (6) futurity. Defensiveness focuses on efficiency
through cost-saving. Risk aversion reflects making conservative decisions. Aggressiveness reflects a strategic approach that sacrifices short-
term profitability for gaining more market share. Proactiveness reflects the exploration of new ideas and innovations. Analysis reflects an
empirical orientation and tendency to make decisions based on factual information. Finally, futurity refers to a strategic approach that empha-
sizes long-term business effectiveness. The ideal profiles for Defenders, Prospectors, and Analyzers in terms of these attributes are based
directly on Table 1 from Sabherwal and Chan (2001).

Identifying Keywords for Strategy Attributes

We next develop a database containing words associated with each strategy attribute. To reduce the potential bias of generating associated
words from only the authors, we first identify a large set of published scholarly articles discussing alignment and the focal attributes through
a systematic literature search via Google Scholar. Scholarly articles are obtained by searching for the keyword “alignment” along with “defen-
siveness” (6,127 html articles), “risk aversion” (12,318), “aggressiveness” (8,873), “proactiveness” (11,884), “analysis” (13,529), or “futurity”
(2,814). For each strategy attribute, we combine the html text of scholarly articles using the attribute to form a grand corpus. Next, each time
a sentence within the articles mentions the attribute, we gather the nouns and verbs in the focal sentence, the prior sentence, and subsequent
sentence. For example, defensiveness is most frequently associated with efficiency, preservation, and cost reduction. The nouns and verbs
most frequently5 identified in relationship to an attribute are treated as its associated keywords and entered into the associated keyword matrix.6
Figure D1 summarizes this process.

5
Verbs and nouns appearing in at least 10% of the relevant articles are considered frequent. The results remain qualitatively unchanged when only verbs and
nouns appearing in at least 15% of the relevant articles are considered.

6
The detailed list of words for each attribute is available from the authors upon request.

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Figure D1. The Process for Identifying Associated Keywords for Strategy Attributes

Identifying Business and IT Strategies for Each Firm-Year Observation

Next, we gather the public investment announcements for each firm in each year from the Lexis/Nexis Academic database and combine them
into a firm-year corpus. We amend the firm-year corpus with the text of relative news and blog posts covering the specific public announce-
ments in each year from Factiva. We analyze this final firm-year corpus to identify a count of each of the associated words for the six strategy
attributes for each firm in each year. The value of each of the six attributes, for each firm for each year, is calculated as the ratio of words
associated with the attribute in the corpus, divided by the total number of words in the corpus. We use the same approach and the same set
of keywords for each strategy attribute for business and IT strategies, but use additional search terms related to IT investment and non-IT
investments for IT strategy and business strategy, respectively. For both sets of announcements, we exclude news or announcements involving
more than one firm. Figure D2 depicts the process of capturing and measuring business and IT strategies from this approach.

Figure D2. The Process for Identifying Business and IT Strategies

IT Strategy

We estimate each firm’s IT strategy from all the public IT-related announcements. For each year, we form a search string, including the name
of the firm; and any of the keywords: “spend,” “invest,” “investment,” or “expenditure”; and any of the key words: “information system,”
“information technology,” “computer system,” “communication technology,” or any of the ITs listed in Information Week’s trending ITs in
the given year. This provided a total of 8,617 pieces of text from 1,679 unique announcements about IT investments made by 164 firms from
1999-2008, resulting in 506 firm-year corpuses of ITI announcement text.

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Sabherwal et al./Effect of Strategic Alignment on Firm Performance

Business Strategy

To estimate the business strategy of each firm, we analyze all the public announcements, excluding any IT-related announcements. Specifically,
for each year, we form a search string that consists of the name of the firm; and any of the keywords: “spend,” “invest,” “investment,” or
“expenditure.” This produces a total of 34,148 pieces of text from 4,665 unique announcements about non-IT investments made by 183 firms
from 1999–2008, resulting in 571 firm-year corpuses of non-IT investment announcement text.

Measuring Strategic IT Alignment

We use the 571 firm-year observations for non-IT investment announcements and the 507 firm-year observations for IT announcements in three
alternative approaches for business and IT strategies, as depicted in Figure 4 of the main paper. Two of the three approaches with alternative
data (alternative measures 1 and 2) use profile deviation to compute SITA, as in our main analysis. The third measure (alternative measure
3) uses score matching, with SITA for each firm computed using business and IT strategies identified from the public announcements. Due
to the need for matched firm-year observations with corpuses of key terms related to both non-IT (571 firm-year observations) and IT
investments (507 firm-year observations), the sample for this analysis includes 388 firm-year observations. Having used the same six focal
attributes to evaluate business and IT strategies (Sabherwal and Chan 2001), we use a score-matching approach to calculate SITA. For attribute
i, we subtract the value of each attribute for IT and non-IT announcements and take the absolute value of the difference, |Di|. For example, if
a firm’s IT defensiveness is rated high (0.5) and its business defensiveness is rated low (-0.5), the absolute difference of defensiveness between
the IT and business strategies would be one (1=|0.5–(-0.5)|). We then compute SITA by averaging the value of absolute differences for all the
six attributes and subtracting it from one (1-(3i|Di|)/6).

Results

Table D1 presents the results of GLS estimations, as in the main analyses, for each of the three alternative measures. Results of Model 3 from
Table 4 are replicated in the first column of to facilitate comparison. As shown in Table D1, the findings using all three alternative measures
are consistent with the main results.

References

McWilliams, A., and D. Siegel. 1997. “Event Studies in Management Research: Theoretical and Empirical Issues,” Academy of Management
Journal (40:3), pp. 626-657.
Sabherwal, R., and Chan, Y. E. 2001. “Alignment between Business and IS Strategies: A Study of Prospectors, Analyzers, and Defenders,”
Information Systems Research (12:1), pp. 11-33.
Venkatraman, N. 1989. "Strategic Orientation of Business Enterprises: The Construct, Dimensionality, and Measurement," Management
Science (35:8), pp. 942-962.

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Table D1. Results for Alternative Measurement Approaches

Main Measure
(Same as Model 3 Alternative Alternative Alternative
from Table 4) Measure 1 (AM1) Measure 2 (AM2) Measure 3 (AM3)
DV = Tobin’s q Profile Deviation Score Matching
Slack 0.122*** 0.098** 0.058* 0.062**
Industry q -0.070*** -0.124*** -0.097*** -0.081**
Industry Capital Intensity -0.000 0.012 0.008 -0.004
Regulation -0.041*** -0.022 0.041# 0.032
Related Diversification -0.033** -0.082** -0.038*** -0.029*
Prospector 0.128*** 0.063** 0.119**
Analyzer 0.081*** 0.031# 0.071*
Size (employees) 0.002 0.054* 0.084** 0.116**
Dynamism -0.163*** -0.084*** -0.078*** -0.041#
Complexity -0.032* -0.051** -0.062*** -0.032#
Munificence 0.158*** 0.117*** 0.126*** 0.091**
ITI 0.135*** 0.094*** 0.119*** 0.108**
SITA (H1a) 0.044*** 0.082*** 0.131*** 0.013***
ITI*SITA (H1b) 0.065* 0.076*** 0.212*** 0.064*
Dynamism*ITI -0.071* -0.082** -0.051# -0.033**
Dynamism*SITA -0.021 -0.003 0.005 -0.007
Dynamism*ITI*SITA (H2a) 0.172*** 0.207*** 0.179*** 0.195***
Complexity*ITI -0.034* -0.017 0.016 -0.024
Complexity*SITA -0.006 -0.009 0.011* 0.008
Complexity*ITI*SITA (H2b) 0.077*** 0.129*** 0.122** 0.182***
Munificence*ITI 0.033 0.021 0.004 -0.009
Munificence*SITA 0.016 -0.008 -0.019 0.012
Munificence*ITI*SITA (H2c) -0.145*** -0.118** -0.113** -0.244***
Constant -0.026** -0.018* -0.090*** -0.073**
N 758 506 571 388
χ² 60287.1 5438.2 6714.3 1229.2
Notes: ***p < 0.001; **p < 0.01; *p < 0.05; # p < 0.10; ITI = IT Investment; SITA = Strategic IT Alignment. The cells related to the hypotheses are
highlighted.

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Appendix E
Analyses of SITA as a Rigidity
In order to further evaluate if SITA reflects a rigidity in less uncertain environments, we conduct three additional analyses. In these analyses,
we divide the sample into four quadrants: low uncertainty–high SITA (Q1); low uncertainty–low SITA (Q2); high uncertainty–high SITA (Q3);
and high uncertainty–low SITA (Q4).

The first analysis compares the correlation of ITI with firm performance between Q1 and Q2, and between Q1 and Q3. If SITA reflects a
rigidity in less uncertain environment, firms in Q1 should be less able to reap benefits from ITI compared to firms in Q2 and Q3.

Further, a rigidity in year t-1 should decrease the ability of a firm to change its level of SITA from year t-1 to year t. Therefore, the second
analysis creates the above four quadrants using the values of uncertainty and SITA in year t-1 and compares the mean proportional change in
the level of SITA, from year t-1 to year t between Q1 and Q2, and between Q1 and Q3.

Finally, a rigidity in year t-1 should decrease the ability of a firm to change its level of investment in different components of IT, from year
t-1 to year t. Therefore, the third analysis creates the above four quadrants using the value of uncertainty and SITA in year t-1 and compares
the mean proportional change in the levels of the six components of IT investment (i.e., R&D in IT, IT insourcing, IT outsourcing, IT hardware,
software, and IT maintenance), from year t-1 to year t between Q1 and Q2, and between Q1 and Q3.

We conducted these comparisons based on quadrants for each of the three dimensions of uncertainty. Cumulatively, these three analyses
involve 48 comparisons (six each for the first two analyses, and 36 for the third analysis). Table E1 provides the results, which consistently
indicate that SITA reflects a rigidity in less uncertain environments.

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Table E1. Results for Alternative Measurement Approaches

(1) High SITA, (2) Low SITA, (3) High SITA,
Environmental
Low Uncertainty Low Uncertainty High Uncertainty
Uncertainty
Compared Aspect Dimensionsa Mean S.D. n Mean S.D. n t (2 – 1) Mean S.D. n t (3 – 1)
Correlation be- Dynamism 0.06 0.08 138 0.09 0.07 210 3.59*** 0.13 0.08 156 7.94***
tween ITI and Firm Complexity 0.06 0.08 172 0.10 0.06 233 5.51*** 0.11 0.08 142 5.51***
Performanceb Munificence 0.05 0.08 160 0.07 0.07 211 2.51** 0.10 0.08 179 5.67***
Proportional Dynamism 0.01 0.08 138 0.04 0.12 210 2.80** 0.07 0.16 156 4.14***
change in SITA Complexity 0.01 0.11 172 0.03 0.13 233 1.67* 0.07 0.19 142 3.33***
(year t to t+1) Munificence 0.01 0.08 160 0.04 0.01 211 4.71*** 0.06 0.09 169 5.33***
Proportional change in IT Investment Components (year t to t+1)
Dynamism 0.00 0.03 138 0.02 0.02 210 6.89*** 0.06 0.02 156 19.91***
R&D on IT Complexity 0.01 0.03 172 0.03 0.02 233 7.59*** 0.07 0.03 142 17.64***
Munificence 0.02 0.02 160 0.04 0.02 211 9.54*** 0.08 0.08 179 9.44***
Dynamism 0.01 0.02 138 0.01 0.03 210 7.46*** 0.07 0.04 156 16.54***
IT insourcing Complexity 0.00 0.03 172 0.04 0.02 233 15.17*** 0.07 0.04 142 17.23***
Munificence 0.00 0.09 160 0.03 0.03 211 4.05*** 0.06 0.03 179 8.02***
Dynamism 0.01 0.04 138 0.03 0.08 210 3.08** 0.09 0.03 156 19.20***
IT outsourcing Complexity 0.02 0.05 172 0.04 0.04 233 4.32*** 0.10 0.09 142 9.46***
Munificence 0.02 0.02 160 0.03 0.07 211 1.97* 0.11 0.04 179 26.01***
Dynamism 0.03 0.04 138 0.04 0.05 210 2.06* 0.09 0.08 156 8.27***
IT hardware Complexity 0.01 0.06 172 0.03 0.04 233 3.79*** 0.09 0.09 142 9.06***
Munificence 0.03 0.06 160 0.04 0.08 211 1.37# 0.09 0.03 179 11.37
Dynamism 0.01 0.05 138 0.03 0.03 210 4.22*** 0.08 0.09 156 8.36***
Software Complexity 0.01 0.05 172 0.02 0.01 233 2.58* 0.08 0.06 142 11.08***
Munificence 0.02 0.04 160 0.03 0.07 211 1.73* 0.07 0.05 179 10.04***
Dynamism 0.00 0.04 138 0.02 0.05 210 4.13*** 0.09 0.11 156 9.53***
IT maintenance Complexity 0.01 0.03 172 0.02 0.06 233 2.19* 0.08 0.04 142 17.23***
Munificence 0.01 0.04 160 0.02 0.02 211 2.89* 0.08 0.06 179 12.51***

Notes: ***p < 0.001; **p < 0.01; * p < 0.05; # p < 0.10 (one-tailed tests); ITI = IT Investment; SITA = Strategic IT Alignment.

a
Environmental dimensions are measured in year t. Low dynamism, low complexity, and high munificence, represent low uncertainty. High
dynamism, high complexity, and low munificence, represent high uncertainty.

b
Correlations are between ITI in year t and firm performance in year t+1. Firm performance is measured using Tobin’s q, consistent with the main
analysis.

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