New Product Adoption in Industrial Markets: A Framework for Analysis

FREDERICK E. WEBSTER, JR. sumer" (i.e., individual and household) behavior. While a handful of first-rate studies of industrial buyer behavior have been reported by Cardozo, Levitt, and Wind, among others, the total available theory and empirical knowledge is meager and disjointed.' But the need is great. Whether one's motivation is that of the practitioner or the researcher, each new venture into industrial markets seems to pose the same dangers and to be hindered by the same blind spots. Nowhere can the need for a more complete understanding of industrial buying be better seen than in the decision to introduce a new product or service. New products and new markets pose a real test for the depth of the marketer's understanding of those buying processes he is trying to influence. The Need for Theory There is little doubt that consumer marketing has been aided by the body of knowledge and theory available from the behavioral sciences. Likewise, industrial marketing could benefit from more attention to the development of a theoretical structure that permits organization of what is known and identification of what is not known about industrial buyer behavior. Consumer behavior theory, drawn mostly from psychology and sociology (and less from economics), permits reasonable explanations of some aspects of consumer behavior, some predictions about the outcomes of marketing actions, and the identification of needs for particular kinds of information to be gathered through marketing research. The above observations regarding consumer behavior do not apply equally well to industrial buyer behavior. This reflects, in part, the fact that industrial buying decisions are more complex, involve more people, take longer, require the evaluation of more factors, and are less easily observable. Whether industrial buying decisions are more "rational" than consumer decisions is a moot question. Influences on industrial buying decisions appear to be more varied, and a richer variety of information sources may be involved. Most significantly, however, the available theory from the behavioral sciRichard N. Cardozo, "Segmenting the Industrial Market," paper presented at the Conference of the American Marketing Association, Denver, August 1968; Theodore Levitt, Industrial Purchasing Behavior: A Study of Comm.unications Effects (Boston, Division of Research, Graduate School of Business Administration, Harvard University, 1965); Yoram Wind, "Industrial Buying Behavior: Source Loyalty in the Purchase of Industrial Components," unpublished PhD dissertation. Graduate School of Business, Stanford University, 1966.

progress in body of knowledge R ECENT behavior" has developing a weighted in favor of about "buyer been heavily "con-

For marketing managers in firms whose customers are other firms, and for researchers interested in industrial huying hehavior, it would he helpful to understand the process hy which firms decide to adopt new products, processes, or practices. This paper develops a framework within which characteristics of the innovating firm, the nature of the innovation, and sources of information can he analyzed as an aid to that understanding.

Journal of Marketino. 1969). pp. 36-39.

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enees is not as easily transferable to industrial buyer behavior as was true for consumer behavior. The lack of a theoretical structure means that predictions of the outcomes of marketing decisions in industrial markets are likely to be less accurate. Conversely, the frequency of poor decisions attests both to the need for a better theory of industrial buyer behavior and suggests what the minimum requirements for a useful theory might be. Anatomy of Industrial Product Failures Analysis of several new product introductions in industrial markets that failed to meet manangement's expectations reveals a set of conditions which tend to be characteristic. These conditions reflect a rather basic lack of understanding of buyer behavior in industrial markets. When sales revenues fail to meet expectations, the explanation often lies in one or more of the following areas: 1) Failure to define precisely that segment of the total market where the product is likely to have greatest value for users. 2) Underestimation of the amount of marketing effort required to generate the expected revenue level. 3) Underestimation of the amount of new investment required on the part of customers and the extent to which present production technology is made obsolete. 4) Failure to anticipate the demands which the new products make on customers' technical and applications skills. 5) Inadequate understanding of the buying process and influence patterns within customer organizations leading to underestimation of the amount of time required for evaluation and trial by each customer. 6) Lack of awareness of existing relationships and influence patterns between prospective customers and their present vendors as well as relationships and influence patterns among members of the customer's industry. The body of theory and empirical knowledge applicable to industrial buyer behavior is not as meager, however, as review of the marketing literature would indicate. The economist and the sociologist in particular have an important contribution to make.- The remainder of this article is concerned with drawing together several research findings from economics, sociology, and marketing in a framework that permits a useful analysis of industrial buying behavior. The discussion focuses on neiv product adoption decisions because these involve, by definition, nonrepetitive and nonroutine behavior which is more im2 Frederick E. Webster, Jr., "On the Applicability of Communication Theory to Industrial Markets," Journal of Marketing Research, Vol. V (November 1968), pp. 426-428.

Journal o/ Marketing, July, 1969 portant from the point of view of increased marketing efficiency. The Firm as Decision Maker For present purposes, it is useful to consider the firm as a decision-making unit. Industrial marketing strategies are aimed at specific buying organizations and typically involve more than one individual decision maker or influencer within the organization. To consider only individuals in the buying organization is to overlook such critical factors as information flows and authority structures within the buying process. Furthermore, to consider the firm as a decision-making unit is consistent with the assumption, discussed below, that firms have characteristics systematically related to differences in their speed of adopting innovations. There can be no doubt that the nature of the organization and internal communication can significantly influence speed of adoption. Such factors as the extent to which purchasing is a centralized responsibility, procedures for coordinating purchasing and using departments, and the existence of buying committees may all have an impact.^ However, for the purpose of analyzing response to new product offerings, these can be thought of as "neutral" factors, which operate consistently over all of the variables to be examined and are not systematically related to any of them. The argument to be developed also assumes that the superordinate goal of the firm is long-run profit maximization. This is not to deny the validity of other formulations such as the "satisficing" postulate or, one of its corollaries, sales maximization. While uncertainty is considered in the proposed framework, it is still assumed that the firm tries more or less systematically to evaluate alternative courses of action in terms of the streams of revenues and costs which are likely outcomes from these actions. A Description of the Adoption Decision The following comments are intended to be an informal but reasonably complete set of assertions about the decision by a firm to adopt an innovation. Each assertion can generally be supported by at least
3 Frederick E. Webster, Jr., "Modeling the Industrial Buying Process," Jownal of Marketing Research, Vol. II (November 1965), pp. 370-376.
ABOUT THE AUTHOR. Frederick E. Webster. Jr. is associate professor of business administration at the Amos Tuck School of Business Administration, Dartmouth College. He is a frequent contributor to the JOURNAL OF MARKETING and the Journal of Maiketing Research with articles on industrial marketing, buyer behavior, sales force management, and communication theory.

New Product Adoption in Industrial Markets: A Framework for Analysis one published research result or earlier theorizing, or both. They are based on a review of over 70 research studies on industrial marketing, buying behavior, and diffusion of innovations.* The framework (or "model") to be suggested for analyzing industrial markets as targets for new products considers (1) buying motivation, (2) amount of perceived risk, and (3) information handling by the buying firm. The model also examines the extent to which these processes are influenced by the characteristics of the firm and the innovation. Motivation: Search for Relative Advantage For industrial buyers, the decision to adopt an innovation is motivated by a search for relative advantage.-' Relative advantage can be defined as the incremental profit that will be realized from the innovation, compared to the available alternatives. Incremental profit can be realized either from an increase in revenues or a decrease in costs. At least three events, or any combination of them, can lead to a positive incremental profit from the adoption of an innovation : 1) The innovation leads to a reduction in average total cost per unit. 2) The innovation leads to an increase in total revenue, due to increased demand for the finished product because of improved product quality or differentiation. 3) The innovation leads to an increase in average revenue per unit, because the innovation permits an increase in price. Of course, the reverse is also true. An innovation is "risky" because it may also increase costs and decrease revenues. A decision to adopt an innovation requires an estimate as to which combination of events is most likely. The decision is then based on expected incremental profit, a measure of the "relative advantage" offered by the innovation. The phrase "relative advantage" implies competition. A firm's motivation to search for relative advantage may be related to (1) its market share relative to its competitors, (2) the recent trend of changes in its market share, (3) its absolute size, and (4) its profit trend. These relationships are not clear, however. One study found that size of firm and relative advantage of the innovation together explained about half of the variation in time of adoption among firms." The notion that a firm is motivated by such vari< Frederick E. Webster, Jr., "Diffusion of Innovations: A Literature Review with Special Reference to Industrial Markets," unpublished working paper, Amos Tuck School of Business Administration, Dartmouth College, September 1967. 'Jacob Schmookler, Invention and Economic Growth (Cambridge, Mass.: Harvard University Press, 1966), p. 199. See also Yale Brozen, "Invention, Innovation, and Imitation," American Economic Review, Vol. XLI (May 1951), pp. 239-257.

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ables as profitability and market share, and by changes in these variables over time, is analogous to the concept of level of aspiration in individual motivation. A specific mechanism can be hypothesized that operates to revise the firm's goals upward or downward in response to its recent success and failure experience, as measured by changes in sales volume, profitability, and market share. Firms with a more successful recent history are likely to be more aggressive and more innovative.'^ Risk: The Possibility of Negative Outcomes The adoption of an innovation is risky, by definition, since it involves uncertainty about the outcome of the innovative act, and some of the outcomes may be negative. There may be opportunity losses compared with other alternatives that were foregone (other products that could have been purchased) or with the status quo. The decision maker will act on the basis of perceived risk, his subjective estimate of the probability of a negative outcome, and of the loss attached to that outcome. Firms differ in their ability to tolerate risk according to the size of the firm, its financial wellbeing, and the extent of diversification. These factors influence its ability to absorb the negative consequences of a wrong decision. Ability to tolerate risk may also be related to such "subjective" factors as management aggressiveness, optimism, and desire for growth." The probability of a large negative payoff, however small that probability, may preclude the adoption of an innovation by the firm. There is some maximum risk which the firm can tolerate. The amount of new investment required is not only innovation decreases over time. As other firms adopt the innovation, additional information becomes available, reducing uncertainty about various outcomes. The range of outcomes becomes more clearly specified, as do the probabilities associated with various outcomes. Risk is also a function of the net amount of new investment required for adoption. One of the possible outcomes of adoption is that the investment will prove to be valueless. Clearly, the larger the required investment, the larger the risk involved. The amount of new investment required is not only a function of the price of the innovation, but is also influenced bv fl) the need for other investments to 6 Edwin Mansfield, "The Speed of Response of Firms
to New Techniques," Quarterly Journal of Economics, Vol. LXXVII (May 1963), pp. 290-312. See also by Mansfield, "Technical Change and the Rate of Imitation," Econometrica, Vol. XXIX (October 1961), pp. 741-766, and "Size of Firm, Market Structure, and Innovation," Joumal of Political Economy, Vol. LXXI (December 1963), pp. 556-576. ' C. F. Carter and B. R. Williams, "The Characteristics of Technically Progressive Firms," Joumal of Industrial Economics, Vol. VII (March 1959), pp. 87-104. * Alister Sutherland, "The Diffusion of an Innovation in Cotton Spinning," Joumal of Industrial Economics, Vol. VII (March 1959), pp. 118-135.

38 facilitate the use of the innovation and (2) the amount of additional investment that may be required if the innovation is not adopted. For example, a company may have to decide between investing in new equipment of the type being used (due to obsolescence or the need for additional capacity) or investing in a new type of equipment. The larger the net investment required for adoption, the more resistance there will be for adoption and diffusion. As the amount of required investment increases, the influence of the size of the firm as a determinant of time of adoption becomes greater. Information: Amount, Quality, and Use Whether a firm adopts, and when it adopts, are determined, in part, by its awareness of the innovation and its advantages, and by its attitudes toward that innovation. Adoption can be thought of as a five-step process: (1) awareness, (2) interest, (3) evaluation, (4) trial, and (5) adoption.^ Progress through these five stages is partly determined by the potential adopter's information processing activities. The probability that an individual firm will adopt an innovation during a given period of time is influenced by the amount, quality, and value of the information available. Stated differently, these characteristics of the information available to the firm influence the speed with which it moves from awareness through interest, evaluation, and trial to full-scale adoption. The amount of information available to a prospective adopter will increase over time as additional firms u.se the innovation and "word gets around." Amount of information is also directly related to what the selling firm is doinghow much effort it is putting into promotion, and how precisely that effort is directed at particular market targets. Information quality is a subjective concept. It is the capacity of the information to reduce the uncertainty in the mind of the potential customer. It is measured by the reduction in perceived risk. The capacity of the information to reduce perceived risk is related to its completeness and its accuracy, as well as to the credibility which the source of the information is perceived to have in the mind of the receiver. Credibility is a combination of competence, or expertise, and trustworthiness. For industrial marketers, credibility is a function of company reputation and the salesman's presentation.i" Both influence the extent to which a potential customer is willing to believe what he hears about a new product. A factor of special significance in industrial markets is the relative advantage to be gained from the information provided by potential vendors. Customer firms differ significantly in their ability and willingness to use information provided by potential vendors. Information may take the form of labora9 Everett M. Rogers, Diffusion of Innovations (New York: The Free Press of Glencoe, 1962), pp. 81-86. 1" Same reference as footnote 2.

Journal of Marketing, July, 1969 tory evaluation results, pilot test runs, technical assistance in the plant, training of personnel, and other services which result in an increase in the competence of the customer organization. For example, a company selling plastic resins for use in paper coating may also provide information on coating formulations and application techniques. This information is likely to have the greatest value for smaller firms that do not have the necessary resources to generate the information themselves. It may lead the smaller firm to adopt earlier in the product life cycle than the larger firm. Smaller firms can make a decision faster because the organization is less complex and because they are willing to rely upon what the vendor tells them. This consideration of the relationship between value of information and size of firm suggests some reasons why previous research findings on the relationship between size of firm and innovativeness have been inconclusive. Four separate arguments about size of firm and time of adoption have been presented above: 1) Larger firms are more likely to be able to afford the net new investment required for adoption, and will therefore tend to adopt earlier. 2) Larger firms are more likely to be able to tolerate the risk of innovation, and will therefore tend to adopt earlier. 3) Smaller firms are more likely to value technical information provided by the selling firm, and will therefore tend to adopt earlier. 4) Smaller firms have less complex decision-making structures and may therefore be able to adopt earlier. Consequently, one cannot specify the influence of size without also specifying the investment required, the ability of the adopting firms to tolerate risk, the value of information that the seller can provide to potential buyers, and the complexity of the organization. The sources of information which potential adopters rely upon change as the market shifts from earlier to Jater adopters, and as the individual adopter moves through the stages of the decision process. It was noted earlier that source credibility is an important consideration. Decision makers will resist information sources that they regard as biased, untrustworthy, or incompetent. The extent of this resistance will also increase as one gets closer to a final decision. For these reasons, commercial sources of information such as advertising, salesmen, and direct mail, are likely to be most valuable for creating simple awareness of the product. Advertising especially is likely to be significant at the awareness stage because it can deliver a simple message to many receivers much more economically than personal selling. However, noncommercial sources of information are

New Product Adoption in Industrial Markets: A Framework for Analysis likely to be more convincing, and thus assume greater significance as the prospective adopter moves closer to a final decision.'^ In industrial markets, however, word-of-mouth advertising and conversations about new products with "friends and neighbors" such as purchasing agents and engineers in other companies appear to have little significance. Field study has failed to identify any significant amount of wordof-mouth activity in industrial markets.^- On the other hand, it does appear that the seller can influence his prospective customer's decision about a new product by citing successful applications by other companies to somewhat similar problems. The ability to confirm the validity of these assertions probably contributes to the high credibility of such information. Summary It has been argued that those firms which are first to adopt an innovation are those: 1) for whom the innovation offers the largest reUvtive advantage, as measured by expected incremental profit. 2) that can best tolerate the risk involved in adoption, as measured by the amount of investment required and the maximum possible loss. Ability to tolerate risk is a function of size, liquidity, and management's "self-confidence." 3) that have the highest level of aspiration, as indicated by recent trends in profitability, market share, and gross sales. 4) for whom information relating to the innovation, and provided by the firm selling the innovation, has the greatest value, as measured by a) its influence on the adopter's relative advantage from innovating, and 11 E. A. Wilkening, "The Communication of Ideas on Innovation in Agriculture," in Studies of Innovation and of Communication to the Public (Stanford, Calif.: Stanford University Institute for Communication Research, 1962), pp. 39-60; Everett M. Rogers and George M. Beal, "The Importance of Personal Influence in the Adoption of Technological Change," Social Forces, Vol. XXXVI (May 1958), pp. 329-335 at p. 333. 12 Frederick E. Webster, Jr., Word-of-Mouth Communication and Opinion Leadership in Industrial Markets, paper presented at the National Conference of the American Marketing Association (Denver, August 1968).

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b) its ability to enable the adopter to reduce perceived risk. For the industrial marketing manager considering the likelihood of market acceptance for a new product and trying to identify firms most likely to be receptive to the innovation, this framework suggests the factors that should be considered in his analysis. These factors which are said to influence the adoption decision by the firm can be restated as assertions about the diffusion process among firms if one considers "time of adoption" or "probability of adopting at time t, t+1 t+n." Viewed in this manner, these observations lead logically to the following conclusions about industrial markets' response to new products : 1) For innovations requiring some net new investment or commitment of resources and involving some risk of negative outcomes, earliness of adoption is positively related to size of firm, liquidity, and the trend of profit rate, sales growth, and market share of buying firms. 2) For innovations requiring little or no investment, little risk of negative outcomes, and no sigrnificant commitment of resources, earliness of adoption is positively related to the trend of profit rate, sales growth, and market share. 3) Earliness of adoption is positively related to the relative advantage (profitability) of the innovation for the firm. 4) Earliness and speed of adoption are negatively related to size of firm where the selling firm also provides information of value to the adopter. These conclusions are not all susceptible to empirical verification, and together they do not constitute a complete "theory" of adoption by industrial firms. They do suggest, however, a way of looking at the buying behavior of industrial firms that provides some insight into their response to marketing efforts and, specifically, to innovations. Viewing the market in this light may help to reduce the number of new product offerings that fail to meet management's expectations. In addition, this approach may yield a more precise definition of market segments where relative advantage and value of information are likely to be greatest, and it may provide a more realistic estimate of the amount of time and effort required to develop an industrial market.