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

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.

An extensive literature studies 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 in which 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 an 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; competition mitigation; and uncertainty-driven, cost-based differentiation effects, 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 an 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 the 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.

History: Kai-Lung Hui, Senior Editor; Sameer Hasija, Associate Editor.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/isre.2022.1115.