Sequential IT Investment: Can the Risk of IT Implementation Failure Be Your Friend?

Abstract

An extensive literature has studied the benefits for a firm to be the first to invest in innovative technologies such as Information Technologies (ITs). However, IT investment often faces the risk of implementation failure. How would such risk affect an early adopter’s incentive to invest? Do late adopters benefit from information about the early adopter’s investment? In this paper, we investigate these questions in a context where two firms, a leader and a follower, invest in a cost-reducing IT sequentially. This paper differs from prior literature in two aspects: First, IT adoption is nonexclusive and available to all client firms. Second, IT implementation can fail. In this case, the follower may have information about the leader’s IT investment level or implementation outcome before making his own investment decision. We use a Hotelling model of duopoly competition to examine how IT implementation failure risks and the follower’s knowledge about the leader’s IT investment may affect the firms’ incentive to sequentially invest in IT.
Our results show that the risk of IT implementation failure impacts the firms’ investment incentives and profits through three distinct effects: the first-mover advantage mitigation effect, competition mitigation effect, and uncertainty-driven cost-based differentiation effect, and these three effects may drive the firms’ investment and profits in opposite directions. The follower’s knowledge about the leader’s IT investment level before making his own IT investment decision gives the leader a first-mover advantage and the follower a disadvantage. In contrast, the follower’s knowledge about the leader’s IT implementation outcome can benefit both the leader and the follower. Finally, we find that a spaced-out sequential IT investment schedule, in which the follower makes his investment decision after the leader’s IT investment level and implementation outcome are both known, leads to the highest industry-wide IT investment and social surplus.

Keywords: Sequential IT Investment, Risk of Implementation Failure