Assessing the Operations Innovation Bandwagon Effect: A Market Perspective on the Returns

Abstract

The innovation adoption research dealing with the causes of adoption have addressed factors that stimulate innovation and the pro-innovation bias assumption called a bandwagon pressure. Bandwagon pressures are caused by the fear of non-adopters appearing different from adopters and possibly performing at a below-average level if competitors substantially benefit from innovation. Bandwagons are stated to be diffusion processes that innovative organizations go through. This is because organizations are pressured to adopt innovation by the sheer number of adopting organizations in the market even when individual assessments of the merits of innovation adoption are not complete. Top management of publicly-held corporations adopts operations innovation, such as just-in-time (JIT) and total quality management (TQM), based on the belief that the adoption will enhance the market perception of the value of the organization even when it knows the innovation adoption might not produce tangible economic benefits. In the presence of strong bandwagon pressures, innovation adoptions by firms would not produce higher firm value since there are no real economic benefits to the adopting firms. Thus, a test of innovation adoption, involving JIT and TQM, would allow us to examine whether top management adopts innovation based on the promised enhancement of the organization's value in the market. In this view, we empirically test the relationship between innovation adoption and the market's (capital market's) perception of the value of the adopting organization. Assuming top management makes a rational choice, it will decide to adopt operational innovation if it expects the stock price effect to be positive, ex ante. We test the hypothesis that innovation adoption will produce a positive change in innovation adopters' stock prices, ex post. INNOVATION ADOPTION AND BANDWAGON CLAIM Innovation adoption decisions have long been the concern of innovation researchers (Drucker, 1985; Lewis and Siebold, 1993; Lind and Zmud, 1991; Tornatzky et al., 1983). Precedents and correlates to formal adoption decisions were the initial focus of innovation adoption research. The research has also seen theoretical advances in understanding the dynamics of intraorganizational adoption processes (Meyer and Goes, 1988; Pelz, 1983; Rogers, 1988) and the changes in interrelationships among key factors of organizational innovation (Van de Ven and Poole, 1990). Further developments have also been made in the way the outcomes of the innovation process are conceptualized. Moving beyond the traditional diffusion literature, innovation adoption researchers have found a lack of uniformity in technological innovation adoption (Child et al., 1987; Leonard-Barton, 1988). The innovation adoption research dealing with the causes of adoption have addressed factors that stimulate innovation (Brophy and Shulman, 1993) and bandwagon pressures, both institutional and competitive (Abrahamson, 1991; Kimberly, 1981; Van de Ven, 1986). Bandwagon pressures are caused by the fear of non-adopters appearing different from adopters and possibly performing at a below-average level if competitors substantially benefit from innovation. Bandwagons are stated to be diffusion processes that innovative organizations go through. This is because organizations are pressured to adopt innovation by the sheer number of adopting organizations in the market even when individual assessments of the merits of innovation adoption are not complete (Abrahamson and Rosenkopf, 1990; Tolbert and Zucker, 1983). In this article, we examine bandwagon pressure from a different perspective. Based on the bandwagon pressure argument, top management of publicly-held corporations adopts innovation based on the belief that the adoption will enhance the market perception of the value of the organization even when it knows the innovation adoption might not produce real tangible economic benefits. …

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