AbstractThis paper investigates the influence of competitive posture and strategic issue diagnosis on firms' investment in new information technology. We analyze responses to technological innovation of close to 300 tax‐return preparation businesses confronted with the introduction of electronic filing in the market for tax‐related services. Results of path analysis show that issue diagnosis indirectly provokes adoption of new technology by increasing the level of commitment to technological capabilities. Competitive posture, as reflected in firms' efficiency and quality orientations, influenced adoption of newly available technology both directly and indirectly through issue interpretation. These findings suggest that competitive postures influence investment in new technology primarily by establishing institutional rules for innovation rather than by conditioning the process of strategic issue diagno