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Committee
for
Information Technology:
A Case of
Sequential and Competitive Investment
Doctoral Student
Nirma Institute of Management
Ahmedabad
E-mail:
bhanu_bpant@hotmail.com
bhanu_bpant@yahoo.co.in
Institute Address:
Nirma Institute of Management
Sarkhej-Gandhinagar Highway,
Post: Chandlodia, Via: Gota
Ahmedabad - 382481
INDIA
Ph: 079 - 374 1911/15
Web-site:
www.nim.ac.in/website/home.asp
Residential Address:
1/8, Aanchal Apartments
B/H Satyagrah Chavni
Ahmedabad - 380015
INDIA
Ph: 079 - 687 0697
For a firm, investment in IT at a given time is one among various claims by different investment opportunities on the limited funds available with it. The investment into IT would always be at cost of other competing opportunities. So these investments should be analyzed using investment decision process, whereby the benefits and costs of investments are compared to find the extent to which benefits outstrip costs. In effect each investment project competes against other investment opportunities for the scarce funds. The management, which is the decision maker in this situation selects a set of investments within given constraints of financial resources at any given time period, that maximize the overall rate of return.
Virtually every modern industry is being significantly affected by computerization. Looking at the scope, nature and magnitude of information technologies it is natural to expect its diffusion in business and industry. Industrial investments in IT can take various forms, as IT is not a single technology but a system of technologies in combination. There are literally hundreds of commercial products, ranging from networks to supercomputers that can be used singly or, in various combinations in an information processing system. These investments it may seem are similar to traditional investments in other physical assets so adequately captured by capital budgeting techniques. But practitioners and researchers have consistently commented that traditional discounted flow methods of capital budgeting fail to effectively evaluate IT investments due to differences in nature of IT investments vis-à-vis other traditional capital investments.
Investments in IT has considerable value to the firm if the benefits discussed above, most of them intangible in nature are suitably extracted through proper deployment and use of IT. Thus the investment in IT has possible value to the firm. Following semi-weak form of market efficiency the intentions of firm for investments in IT as expressed by public announcements on the same should be viewed as signals by the investors on the future performance of the firm. If investments in IT are assumed to make substantial changes in the future performance and thus the net worth, the event of announcements of IT investments should correspond to abnormal returns in stock markets.
IT projects are characterized by uncertainty in costs and values, asymmetry between gains and loses and flexibility during project execution. Also the value of an IT investment is not primarily determined by the cash flows coming from the initial investment but by the future investment opportunities it provides (Schwartz and Gorostiza, 2000). Uncertainty and flexibility offer real option situation to the management regarding the investments in IT. Often the investments in IT are not completed in one go and there is a sequence of investment in IT. At firm level investments in IT can be viewed as sequential real option made with an intention to build long-term capabilities that effect the overall profitability.
When IT practices dominate within an industry, the IT investments tend to enhance competitiveness by improving the effectiveness of existing business processes. In certain industries IT initiatives of one firm are followed by competing firms more for staying in competition than anything else. Among the few industry leaders the phenomenon of IT investment can be viewed as dynamic competitive responses.
IT_Research@hotmail.com
Presentation
on
Information Technology
Investment
Payoffs
(Presentation in pdf)
on
Information Technology
Investment
Payoffs (in pdf format)
(References)
