A Longitudinal Study of Market and Firm Level Factors Influencing ERP Systems Adoption and Post-Implementation System Enhancement Options

We examine whether firms‘ investments in ERPS, including the initial adoption decision and subsequent system enhancements are consistent with economic determinants and a real options perspective. We model ERPS adoption and subsequent enhancements (in the form of upgrades or add-ons) as two separate but related decisions on the exercise of real options in a continuous implementation process. We find that ERPS adopting firms are more likely to operate in highly concentrated industries, be industry leaders, and have lower investment opportunities and higher free cash flows than non-adopters. The findings are consistent with a real options lens suggesting that the adoption of ERPS spawns growth options by creating barriers of entry, enhancing competitiveness, and providing the flexibility needed to adapt to new opportunities. In contrast, subsequent system enhancement decisions are affected by how quickly companies begin to reap the benefits they sought to accomplish in the initial ERPS adoption and by the use of high-quality post-implementation activities (as posited by Nicolaou 2004a and examined in Nicolaou and Bhattacharya 2008) that relate to project planning, strategy, and process integration. These findings suggest that the implementation and use of ERPS may enable flexibility and organizational capabilities which, in turn, allow management to optimally reconfigure the investment in ERPS by exercising operational options to enhance the system in the post-implementation period. Overall, our evidence is consistent with the adopted real options theory lens and suggests that firms should embed real options value in ERPS investments.