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

Abstract

Information technology (IT) investment often faces the risk of implementation failure. Such risk has important and intriguing impacts on firms’ investment and competitive strategies. We investigate these effects in a context in which two firms, a leader and a follower, invest in a cost-reducing IT sequentially, and IT implementation may fail. We show that the risk of IT implementation failure benefits the follower and can benefit or hurt the leader. It impacts the firms’ investment and profits through three distinct effects: mitigating competition, weakening the leader’s first mover advantage, and creating differentiation opportunities. The follower may have information about the leader’s IT investment before making its investment. The leader gains a first mover advantage when the follower makes its investment after knowing the leader’s IT investment level or implementation outcome. So pioneering IT adopters should announce their investment early to influence followers. In some cases, the follower can benefit from knowing the leader’s implementation outcome. The leader expects a higher profit than the follower, and early investment is beneficial unless implementation risk declines significantly with time. Finally, a sequential IT investment schedule in which the follower makes its investment after the leader’s investment level and outcome are known produces the highest social surplus.