The Effects of Competition Between Firms on IT Investments

by VC Choudhary


How does the intensity of competition in an industry affect the amount of IT investment? Do firms in more competitive industries invest more in IT? Does the level of competition within an industry impact the return and risk of investments in IT projects? If one firm invests before its competitor, how much should the leader invest and how should the follower respond? Consider the package delivery industry where Fedex and UPS have competed for three decades. Fedex has usually been the leader in making new IT investments while UPS has tended to follow. Should Fedex invest more in IT when the industry becomes more competitive, say due to the entry of new competitors? How should UPS respond? What is the risk and return profile for Fedex and UPS on their respective IT investments and how do these change when the level of competition intensifies?

Professor Vidyanand Choudhary (VC) is engaged in studying the effects of competition on a firm’s IT investment strategy. He examines the impact of the degree of competition on the optimal level of investment in IT, the expected return from IT investments and the impact of IT project uncertainty on the volatility of the firm’s cash flows. The answers to these questions may differ depending on a firm’s position in the industry – whether it is a leader or a follower.

One surprising finding is that under certain circumstances, the follower has a higher rate of risk and return than the leader. This is contrary to intuition, as one would predict that the leader, moving first, undertakes more risk. This surprising result is better understood in the context of the leader and follower’s optimal IT investment amounts. The leader invests more in IT relative to the follower and although it earns a slightly lower percentage return, the dollar value of return is greater than that of the follower. Also, the actions of the leader reduce the potential strategic options of the follower. Hence, the follower invests a smaller amount on IT which pays off only when the leader’s project suffers an adverse outcome, resulting in a more uncertain payoff. However, since the follower’s returns are earned on a smaller investment, the percentage return is higher than that of the leader.

Another surprising finding is that the uncertainty of success in IT projects reduces the leader’s first mover advantage. Whereas the leader has substantial advantage when there is less uncertainty about the outcome of the IT project, this advantage is reduced for IT projects where a successful outcome is substantially uncertain.

As competition increases, the leader invests more in IT while the follower invests less in IT. Further, the rate of return for both leader and follower decreases with increasing competition. This research finds that the total industry level investment in IT is higher for more competitive industries while the total return on IT is lower. It also finds that market turbulence and market concentration is higher in industries that invest more in IT.

This exciting research is still in its early stages. VC has presented his research and findings at a colloquium at the University of Michigan’s Ross School of Business and at the International Symposium on Information Systems at Hyderabad, India.