Bass Model Captures Diffusion of Innovation 190.0

Proposal for a new survey metric for innovations from emerging markets

Source: Wikipedia

Global surveys on innovation are biased for the developed world because they use proxy metrics like patents issued, R&D spending, number of PhD accepted or journal papers published that are taken from the science-oriented and citation-based innovation model that applies well to the developed world.

Even as many significant, and often disruptive, innovations are developed in the emerging markets (I see many conferences organized with the purpose of learning from EMs), the methodology of global innovation condemn emerging markets to mediocrity, at least on paper.

Global innovation survey methodology does not apply well in the technology diffusion oriented innovations or new market-specific applications of proven technologies that are more the norm for emerging markets as the proxy metrics do not account for the critical points in emerging markets realities.

(Update on March 23, 2010: You may click on emerging markets innovationat the navigation line above for a summary of my views.)

From Professor Patarapong Intarakumnerd paper at the 6th Asialics, South American and African countries are so frustrated with the situation that they have created their own surveys that are modified from the OECD-based global ones.

Unlike other innovation students, I prefer to look at this situation in a positive light and attribute the situation to the seeming objectivity of these proxy metrics that are readily countable and reported.

Still, as I noted in the link above, the innovation model that works for emerging markets is different from the developed world. I do think that emerging markets have unique modes of innovation, also in the true Schumpeterian mold of recombinations and the like, that needs additional metrics to those set in present global surveys.

Proposed new global metric. Instead of creating separate surveys, I propose to add a new metric that will count innovation types that are common in the emerging markets in addition to the four mentioned above for a modified global survey.

This new metric can be managed globally by an independent body like the Profit Impact of Market Strategy more popularly known as the PIMS database.

Bass diffusion model. I propose a new metric based on the Bass diffusion model (of which another derived version is given at right).

Frank Bass first introduced the diffusion model named after him in 1969 to describe the process of how new products get adopted as an interaction between innovators and imitators shown in the image on top. The model is widely used in product and technology forecasting.

Behind the formula is the following simple, thus powerful, concept:

“The probability of adopting by those who have not yet adopted is a linear function of those who had previously adopted.”

From 1969, the model has been proven to apply to many types of products and technologies including many new developments.

Also, variations have been developed to account for advertising and promotional activities that are designed to accelerate the process of diffusion and of commercialization.

Three variables. The Bass diffusion model has the added benefit of simplicity having just three variables at its most basic:

• The potential market, M, of the product or the technology.
• The coefficient of innovation, p.
• The coefficient of imitation, q.

The final choice of variables will depend on the level of analysis or aggregation on the basic model.

In application, rules must be carefully drawn to define the relevant innovation domain and market/

How it works. As it is, the range of p and q values are already established though it may vary from country to country at different levels of market development. 

The only variable that really needs to be established is the M for the relevant market.

My proposed metric can work as follows:

An innovation that results from diffusion is counted in the same manner as patents, journals if it meets a certain pre-agreed hurdle as to its performance on the total new adopters curve as compared to the prediction from the Bass diffusion model.

Elsewhere in SYNTHESiST, we have discussed innovations from technology diffusion in relation to Everett Rogers book below.

An illustrative example. The Philippines success in mobile banking for microfinance will never count as innovation in present surveys because:

• it yields no patents;
• no R&D spending is reported as most spending is absorbed as product development or marketing. Some have suggested counting purchase of turnkey equipment as innovation but this severely undercounts its value and asks the relevant question as to whether it is innovation globally;
• it graduates no PhDs; and,
• journals, if written, will be way after its implementation.

Still, by Schumpeter’s reckoning and Peter Drucker’s later consideration as social innovation, this achievement is surely a monumental innovation.

As mentioned, the relevant p and q are easily extrapolated from ranges experienced with similar products already studied. Here, the suggested Bass Diffusion database would be extremely helpful.

For this illustration, the value of M is more nuanced. It is possible to consider two relevant markets simultaneously and/or in sequence. M₁ can represent the narrow market of present customers with mobile phones while M₂ can be the wider market potential of all customers who may be attracted by the opportunity of mobile banking for microfinance who may or may not own cell phones.

I do not think there will be issues in counting the Philippine’s attainment of diffusion at both M’s separately; it would be analogous to develop newer versions of one innovative product.

High Proportion. I tend to believe that a very high proportion of innovations from emerging markets is of the diffusion-type at the opposite and applied end of a technology’s domain from the basic science that is where developed world’s innovations start.

Both worlds have innovation from both ends of the s-curve though the preponderance of one type depends on a countries level of development.

I do tend to think this proposal merits consideration for its capacity to advise policy globally.

Click here for the home page of the Bass Diffusion Model

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