Risk management (RM) is an expanding area of research but most of the studies focus solely on the negative side of risk.  Hence, they look at possibilities for risk mitigation, avoidance, or acceptance^[1], and that can turn into an expensive overlook. So we focus our efforts on the accurate risk assessment for competitive advantage. We extend existing research and practice by integrating the application of risk management within the context of IT, specifically the value and risk of IT projects and initiatives. Doing so provides a unique, cohesive list of factors that defines how IT-centric management of risk has a significant impact on explaining competitive advantage of an IT-enabled business strategy.

We evaluate IT-enabled Competitive Advantage as the dependent variable of the Structural Equation Model (SEM) that includes the core factors of Value & Risk, Leadership, Skill, and IT Infrastructure. This technique is used to better assess the impact and relationship between these factors and IT competitiveness. A conceptual model is shown in Figure 1.

Figure 1. Structural Equation Model of IT-Enabled Competitive Advantage

Previous research provides the foundation for utilizing IT Leadership, IT Skill, and IT Infrastructure as indicators of competitive advantage^[1]. However, in addition to these well-established factors, we propose to use IT Value & Risk as a fourth indicator of competitive advantage. Also, instead of generalizing IT-enabled strategy, we are on a constant quest to isolate specific technical activities as constructs that contribute to competitive advantage. To that end, we use the term IT to refer to all activities where IT is leveraged in an organization, from day-to-day operations to decision support systems.

The following dimensions are examined in this study.

IT Leadership. IT leadership motivates and coordinates the organization in achieving its IT strategy aligned with its business strategy. Previous research has identified IT leadership to be a foundation for the successful use of IT for competitive advantage. Effective IT leaders evolve over time thanks to continuous learning and establishing a successful network of IT resources as well as the rest of the company.

IT Skill. IT skill refers to the ability of an IT team to innovate, evaluate, select, develop, implement, and maintain an IT environment for competitive advantage. The construct includes hardware, software, communications, and critical information repositories. A highly trained and educated IT team increases performance and results^[1] . Therefore, an organization’s commitment to education and the number of people trained are proxy examples for IT skill.

IT Infrastructure. IT infrastructure is potentially difficult for competitors to emulate and therefore, is a barrier for competitors and a source of competitive advantage^[2] . This construct includes all hardware, software, and communications equipment necessary for a competitive IT environment as well as critical data stores and information repositories.

IT Value and Risk. IT value and risk refers to the level of effectiveness an organization exhibits in accurately valuing IT investments and assessing their risk in uncertainty^[3] . This construct attempts to measure not only the accuracy of valuation, but also the level of flexibility that allows management to determine the type, timing, and scale of an investment. For this study, we rely on Real Options Analysis (ROA) that considers upside potential of uncertainty and allows the highest level of managerial flexibility in assessing value and risk. Unlike more common but less effective Net Present Value (NPV) that undervalues investments and Decision Tree Analysis (DTA) that provides no means of addressing flexibility. ROA looks at the uncertainty with optimism investigating the ways to reduce losses and to augment gains given updated information. Exemplifying managerial flexibility provided by ROA is the ability to embed various types of investment stages, including:  Deferment, Stage, Explore, Alter Operating Scale, Abandon, Lease, Outsource, and Growth.

Thanks to the research that examines the level of IT investment for potential benefits for an organization in uncertainty, we know real options analysis is uniquely qualified to be incorporated in IT factors of competitive advantage. Correctly assessing business value of IT investments is not only important to competitive advantage but also in justifying the investment itself. Also recent advances in strategy and finance have suggested that real options theory potentially offers a powerful valuation tool and a means to evaluate more accurately IT investments in an uncertain environment.

This article is Part 2 of a 5 part series. The next article will focus specifically on risk types, positive and negative. Each subsequent part of this series offers deeper examination of key topics for defining and explicitly applying risk management solutions to IT initiatives.

^[1] F. Caldwell, and R. Mogull, Risk Management and Business Performance Are Compatible, Gartner, 2006

² G.D. Bhatt, and V. Grover, “Types of Information Technology Capabilities and Their Role in Competitive Advantage: An Empirical Study,” Journal of Management Information Systems, 22, 2, 2005.

A.S. Bharadwaj, “A Resource-based Perspective on Information Technology Capability and Firm Performance: An Empirical Investigation,” MIS Quarterly, 24, 1, 2000.

B. Dehning, and T. Stratopoulos, “Determinants of a Sustainable Competitive Advantage Due to an IT-Enabled Strategy,” Journal of Strategic Information Systems, 12, 1, 2003.

³ J. Johannessen, and B. Olsen, “Knowledge Management and Sustainable Competitive Advantages: The Impact of Dynamic Contextual Training,” International Journal of Information and Management, 23, 2003

⁴ W. Oh, and A. Pinsonneault, “On the Assessment of the Strategic Value of Information Technologies: Conceptual and Analytic Approaches,” MIS Quarterly, 31, 3, June 2007.

⁵ Tony W. Tong, and J. Jeffery, “Real Options in Strategic Management,” Advances in Strategic Management, 24, 2007.