Digital Options Theory for IT Capability Investment

While research has shown that investments in IT capability may translate into improved firm performance, how and why they do is still a source of debate. Drawing on financial options thinking, recent research suggests that managers can support appropriate investment decisions by examining digital options. However, current research has not effectively translated the financial options construct into the IT domain, which makes it difficult to rigorously examine digital options. To address this void, we revisit general options theory and review current notions of digital options. To support understanding, we extend current theorizing by offering a rigorous conceptual foundation that defines the digital option lifecycle and relationships to neighboring constructs. To support practice, we present principles for examining digital options for a specific business process. To illustrate the detailed workings of the theory, we examine a production planning process in the dairy industry to arrive at a set of desirable and feasible IT capability investments. Our proposed theory supports managerial practice by offering a rigorous and actionable foundation for digital options thinking. It also sets an agenda for academic research by articulating theory-based constructs and principles that are subject to further empirical and theoretical investigation.