Journal of Management Studies 38:1 January 2001

0022-2380

THE DYNAMICS OF THE ADOPTION OF PRODUCT AND PROCESS

INNOVATIONS IN ORGANIZATIONS
F D
Rutgers University
S G
New Jersey Institute of Technology

While many researchers have fruitfully explored the patterns of adoption of

product and process innovations across industries, few have studied these same
patterns within individual firms. In this study we address this issue, examining the
dynamics that govern the adoption of product and process innovations at the firm
level over time. We examine questions such as: Which type of innovation is more
readily adopted? Does the adoption of one type of innovation lead or lag the adoption of the other type? And, would the pattern of adoption of innovation types
have an effect on organizational performance? Using data on the innovations
introduced between 1982 and 1993 by a sample of 101 commercial banks in the
United States, we find that: (1) product innovations are adopted at a greater rate
and speed than process innovations; (2) a productprocess pattern of adoption is
more likely than a processproduct pattern; (3) the adoption of product innovations is positively associated with the adoption of process innovations; and (4) highperformance banks adopt product and process innovations more evenly than
low-performance banks.

In 1978 Abernathy and Utterback proposed a three-stage model to explain the

rate of product and process innovations during the development of a product class
or an industry. According to this model, the type of innovation adopted corresponds to the developmental stage of the industry; for instance, product innovations occur more frequently than process innovations in an industrys early life.
Over the years, the AbernathyUtterback model has helped explain the dynamic
of productprocess innovations as a factor of industrial competition (Utterback,
1994) and has been instrumental in relating technological innovations to corporate strategy (Butler, 1988). However, past empirical studies have not examined the
dynamic of adopting product and process innovations at the firm level despite the
Address for reprints: Fariborz Damanpour, Rutgers University, Faculty of Management, Department of
Organization Management, 111 Washington Street, Newark, NJ 07102-3027, USA.
Blackwell Publishers Ltd 2001. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK
and 350 Main Street, Malden, MA 02148, USA.

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fact that a firms competitiveness over time depends on its ability to adopt both
types of innovation. Moreover, while the service sector plays a prominent role in
the economy of industrial countries, studies of product and process innovations
have primarily focused on the manufacturing sector (Ettlie et al., 1984; Pisano and
Wheelwright, 1995; Utterback and Abernathy, 1975). Similar studies are crucial
in the service sector because innovation is equally important to success of firms in
this sector and its adoption may or may not be similar to the adoption of innovations in manufacturing firms (Quinn and Guile, 1988).
This study intends to fill these gaps by examining: (1) the dynamics of the adoption of product and process innovations at the firm level; and (2) implications of
the patterns of adoption of product and process innovations for firm performance.
We empirically test these relationships by studying a sample of 101 commercial
banks in the United States between 1982 and 1993. Data were collected from
documentary sources, as well as from the individual banks through a questionnaire. Results indicate that banks generally adopt product innovations at a greater
rate and speed than process innovations, and that the congruent adoption of
product and process innovations is positively associated with bank performance.

Two questions guide our research to identify the pattern of adoption of product
and process innovations at the firm level: (1) what are the relative rate and speed
of the adoption of product and process innovations in organizations; and (2) does
the adoption of these innovations occur in observable patterns across organizations? These questions have not been studied at the firm level; however, similar
questions have been examined at the industry level, which we briefly review.
Patterns of Product and Process Innovations at the Industry Level
Product cycle model. Abernathy and Utterback (1978) developed the widely cited
product cycle model at the industry level. Their model describes the changing
rates of product and process innovations over three phases of the development of
a product class. In the first phase, the fluid phase, the rate of product innovations is greater than the rate of process innovations. In the second phase, the transitional phase, the rate of product innovations decreases and the rate of process
innovations becomes greater than the rate of product innovations. Finally, in the
third phase, the specific phase, the rates of both types of innovations slow down
and become more balanced (Abernathy and Utterback, 1978). The first two phases
are periods of radical change, where major product innovations and major process
innovations are introduced respectively; the third phase is a period of incremental change, where less fundamental product and process innovations are introduced
at more congruent rates (Abernathy and Utterback, 1978).
The AbernathyUtterback model focuses on a single cycle of technological
change. More recent studies of the history of industries suggest that technological change is cyclical; i.e., dematurity can return an industry from the specific
phase to the fluid phase (Anderson and Tushman, 1991). A discontinuous change
(Tushman and Anderson, 1986) or an environmental jolt (Meyer, 1982) can lead
to a new series of product and process innovations in an industry. For example,
the US banking industry experienced an environmental jolt when several major
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legislative Acts were introduced between 1978 and 1982. These Acts deregulated
the industry creating more competition.
Reverse product cycle model. Barras (1986, 1990) developed a model of product and
process innovations for service industries. He argues that the product cycle model
applies to the production of goods embodying a new technology in the goods
industries. In the user industries, which usually adopt the technology developed in
goods industries, the cycle, which he terms the reverse product cycle, operates
in the opposite direction. That is, in the first phase, the technology is used to
increase the efficiency of existing services; in the second phase, it is applied to
improving the quality and effectiveness of services; and in the third phase, it assists
in generating wholly transformed or new services (Barras, 1986). According to this
model, therefore, innovations emphasized by the adopting organization in the
service industries are, respectively: incremental process innovations to increase
efficiency; radical process innovations to improve effectiveness; and radical product
innovations to generate new services (Barras, 1986).
Barrass theory suggests a different pattern of adoption of product and process
innovations than Abernathy and Utterbacks theory. After defining innovation in
the organizational context, we will draw from these patterns developed at the
industry level to present our theory of the pattern of adoption of product and
process innovations at the firm level.
Adoption of Innovations in Organizations
At the firm level, innovation is usually defined as the adoption of an idea or behaviour, pertaining to a product, service, device, system, policy, or programme,
that is new to the adopting organization (Daft, 1982; Damanpour and Evan, 1984;
Zaltman et al., 1973). We view innovation adoption as an organizations means to
adapt to the environment, or to preempt a change in the environment, in order
to increase or sustain its effectiveness and competitiveness. Managers may emphasize the rate or the speed of adoption, or both, to close an actual or perceived
performance gap.
The rate and speed are two common ways of measuring organizational innovation (Gopalakrishnan and Damanpour, 2000; Subramanian and Nilakanta,
1996). Some researchers have assessed organizational innovativeness based on the
number of innovations an organization adopts from an available pool of innovations within a given period of time. We use the rate of adoption to reflect this view
of organizational innovation. Organizations with a high adoption rate adopt innovations more frequently and more consistently. The speed of adoption relates to the
timing of innovation; i.e., the speed with which the organization adopts an innovation after its first introduction elsewhere, often in the industry. It reflects an
organizations readiness and propensity to innovate (Subramanian and Nilakanta,
1996) and its ability to adopt innovations quickly and capitalize on progressions
in technology (Clark, 1987). In this study, we examine the relative rate and the
speed of the adoption of product and process innovations in organizations.
Product and Process Innovations
A product is a good or service offered to the customer or client and a process
is the mode of production and delivery of the good or service (Barras, 1986).
Thus, product innovation is defined as new products or services introduced to meet
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an external user or market need, and process innovation is defined as new elements
introduced into an organizations production or service operations (e.g., input
materials, task specifications, work and information flow mechanisms, and equipment) to produce a product or render a service (Ettlie and Reza, 1992; Knight,
1967; Utterback and Abernathy, 1975). Product innovations have a market focus
and are primarily customer driven, while process innovations have an internal
focus and are primarily efficiency driven (Utterback and Abernathy, 1975).
The distinction between product and process innovations is important because
their adoption requires different organizational skills: product innovations require
that firms assimilate customer need patterns, design, and manufacture the product;
process innovations require firms to apply technology to improve the efficiency of
product development and commercialization (Ettlie et al., 1984). Different factors
influence both the adoption of product and process innovations and the extent to
which these innovations impact the adopting organization (Tornatzky and Fleischer,
1990). While it has been established that product and process innovations affect each
other, their pattern of interaction at the firm level is unclear. On the one hand, one
may drive the other, and consequently, they may occur sequentially; on the other
hand, they may complement each other and can occur simultaneously (Tornatzky
and Fleischer, 1990). Yet earlier empirical studies typically have examined these
innovations separately (Hambrick et al., 1983; Schroeder, 1990). In this study we
examine the relationship between them.[1]
Relative Adoption of Product and Process Innovations
Organizational factors and attributes of the innovation influence the adoptions of
product and process innovations. On the one hand, an organizations interest in
quality control and re-engineering may motivate the organization to improve efficiencies and therefore emphasize the adoption of process innovations over product
innovations at a point of time. On the other hand, an organization may be motivated by increasing market share, winning customer loyalty, and staying ahead of
competition, and therefore may focus product innovation over process innovations.
Innovation attributes also influence an organizations adoption pattern of product
and process innovations.
Rogers (1995) integrated the studies of innovation attributes and concluded that
four attributes of an innovation relative advantage, compatibility, trialability, and
observability are positively associated with its rate of adoption, while another
attribute, complexity, is negatively related to the rate of adoption. In a study of
the adoption of administrative and technical innovations, Damanpour and Evan
(1984) argued that the relative adoption of different types of innovations reflects
their perceived attributes. The following hypotheses on the rate and speed of adoption of product and process innovations are primarily based on perceived attributes of these innovations in organizations.
We propose that the rate of adoption of product innovations tends to be higher
than the rate of adoption of process innovations because product innovations are
more observable and are perceived to be relatively more advantageous than
process innovations. Several arguments can be offered in support of this assertion.
First, while process innovations are merely related to the production and delivery
of the outcome, product innovations are more observable because they are themselves the outcome. Second, product innovations are seen as more significant
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because successful products command significant price premiums and because

manufacturing costs, which can be reduced by introducing process innovations,
are small relative to revenues generated from successful products (Pisano and
Wheelwright, 1995). Third, product innovation champions enjoy organizational
attention and are often more centrally situated in the communication networks in
the organization and can use this centrality to procure resources and promote their
innovations (Frost and Egri, 1991). Overall, these factors help create more effective communication channels and information filters for product innovations
(Henderson and Clark, 1990), facilitating their adoption.
The perceived relative advantage of product over process innovations is
affirmed by the surveys of the actual rate of adoption of these innovations at the
firm level. For example, Myers and Marquis (1969) reported that industrial firms
adopt approximately three times more product than process innovations, and in a
survey of executives, Strebel (1987) supported Myers and Marquiss results and
reported that firms adopt more product than process innovations in every stage of
their life cycle.[2] Further, in a meta-analytic review of the studies of innovation
attributes, Tornatzky and Klein (1982) found that relative advantage has a positive relationship to innovation adoption. Therefore,
Hypothesis 1: The rate of adoption of product innovations would be higher than
the rate of adoption of process innovations.
We also propose that the speed of adoption of product innovations would be faster
than the speed of adoption of process innovations.[3] Product innovations tend to
be relatively autonomous (Gopalakrishnan et al., 1999), can proceed less obtrusively through the development stage, and there tends to be less resistance to their
implementation (Frost and Egri, 1991). Process innovations, on the other hand,
tend to be more systemic in their impact and their adoption is often more disruptive than product innovations because they usually involve larger aggregate of
tools, machines, people, and social systems (Tornatzky and Fleischer, 1990). In
their meta-analytic review, Tornatzky and Klein (1982) reported that innovation
complexity has a negative relationship to innovation adoption. Successful
applications of process innovations depend upon more widespread changes in
organizational structure and administrative systems (Ettlie and Reza, 1992), while
product innovations are more specific to the industry and less specific to the adopting organization; thus, competitors can reverse engineer product innovations more
quickly than process innovations. Therefore,
Hypothesis 2: The speed of adoption of product innovations would be faster than
the speed of adoption of process innovations.
Patterns of Adoption of Product and Process Innovations
Both Abernathy and Utterbacks (1978) and Barrass (1986) models at the industry level suggest a pattern of adoption of innovation where the adoption of one
type of innovation lag (or lead) the adoption of another type. We refer to this
pattern of innovation adoption as the lag pattern. At the organizational level, this
pattern has been examined for the adoption of administrative and technical innovations, but not for product and process innovations. For instance, Damanpour
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and Evan (1984) found that the adoption of administrative innovations in one time
period precipitated the adoption of technical innovations in a subsequent
period more than the reverse. For the adoption of product and process innovations, we examine two possible lag patterns: (1) a productprocess pattern, in which
organizations adopt product innovations first, process innovations later; and (2) a
processproduct pattern, in which organizations adopt process innovations first,
product innovations later.
The productprocess pattern posits that product innovations are introduced
first to respond to a market need, while process innovations follow to support and
facilitate the implementation of the product innovations and to enhance their contributions. According to this pattern, in response to an environmental jolt affecting their industry, banks primarily introduce product innovations to gain or
maintain their competitiveness, and then introduce process innovations to gain the
full benefit of the new products. For example, after introducing new accounts or
credit and debit cards, banks will introduce new processes such as high speed image
processing of documents or new risk management systems to process additional
transactions and better track their financial exposure. This pattern resembles the
conditions for product and process innovations in the first two stages of the product
cycle model (Abernathy and Utterback, 1978).
The processproduct pattern, on the other hand, resembles the stages of the
reverse product cycle model (Barras, 1986). According to this pattern, for instance,
to compete after an environmental jolt, banks primarily introduce process innovations to improve the mode of production and delivery of existing products in
order to increase efficiency and achieve significant cost saving. Only after quantitative and qualitative improvements from the existing products are achieved, will
banks introduce wholly new products to enhance their competitiveness (Barras,
1986). This pattern was reported in a study of the New York Stock Exchange
(Keith and Grody, 1988): process innovations were primarily introduced in
response to pressures for more capacity, followed by the introduction of product
innovations, which in turn created more demand (Quinn and Guile, 1988).
However, contrary to the reverse product cycle model, Buzzacchi et al. (1995,
p. 152) state that technological change in the banking industry follows nonevolutionary characteristics.
At the firm level, we suggest that a productprocess pattern is more likely than
a processproduct pattern in response to an environmental jolt. Major environmental changes were introduced in the US banking industry during 19781982
(see the Methods section below for detail). These changes created new environmental conditions for competition in the industry. We assume that banks, like organizations in other industries, would respond to the new environmental conditions
by first introducing product innovations to differentiate themselves from the
competitors in order to gain competitive advantage, and then introduce process
innovations for additional improvements in the operation and delivery of the products.[4] Product innovations are emphasized because, as suggested earlier, they are
perceived to offer more advantages. That is, while organizations emphasize process
innovations to facilitate continuous adaptation to environmental changes, they
emphasize product innovations to transform the organization and to realign it
more quickly to new environmental conditions. In banks, we assume that major
legislative changes represent conditions more conducive to transformation than to
adaptation. Therefore,
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Hypothesis 3: A productprocess pattern of adoption of innovations would be

more likely than a processproduct pattern of adoption.
Implications for Organizational Performance
Past studies of organizational innovation have related the pattern of adoption of
administrative and technological innovations to firm performance (Damanpour
and Evan, 1984; Ettlie, 1988; Evan, 1966); however, studies that relate the
dynamics of adopting product and process innovations to firm performance are
scarce. As stated earlier, we view innovation adoption as a means of changing
the organization to improve performance. Thus, a supplementary hypothesis to
Hypothesis 3 is proposed:
Hypothesis 3a: High-performance organizations would follow a productprocess
pattern of adoption more than a processproduct pattern.

Sample
The data for this study were collected from commercial banks in four north-eastern
states (New York, New Jersey, Connecticut, and Massachusetts) of the United
States. Commercial banks were selected for several reasons. First, most studies of
product and process innovations have thus far been conducted in the manufacturing sector. In light of the growing importance of the service sector, we intend
to develop a corresponding productprocess innovation model that is applicable
to the service sector. Second, deregulations in the US banking industry have
resulted in increased competition and a motivation to introduce new products to
gain competitive advantage. Also, advances in information and communication
technologies have enabled banks to introduce process technologies to gain internal efficiency and increase productivity. Facing these changes, banks need information on patterns of innovation adoption to help them decide where to allocate
their resources. Finally, the regulatory environment of banks facilitates access to
uniform data from secondary sources, while the large number of banks allows the
collection of innovation data from primary sources. The unit of analysis for this
study was the independent bank (not the bank holding company) on the assumption that decisions about innovation adoption were made at the level of the
independent bank.[5]
The data on financial measures of performance were collected from OnesourceTM, a database complied by Sheshunoff Information Services for all federally
insured commercial banks in the United States. A mail questionnaire was used to
collect information on innovations from individual banks. The questionnaire was
sent to top executives of the 365 banks that were the entire population of commercial banks in the four states in January 1994. We received responses from 110
banks, 101 of which were complete and usable. Telephone calls to approximately
50 banks verified the direct participation of senior executives. The respondent banks
were compared with non-respondents on variables like organizational size, dollar
value of retail and commercial loans, and bank performance (return on assets). No
statistically significant differences were found between the means of these variables
at the 0.05 level in the two groups, suggesting no response bias.
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Product and Process Innovations

Information on innovation adoption was collected in three phases. In the first
phase, a literature search was conducted to generate a list of innovations introduced in the banking industry between 1982 and 1993. We selected 1982 as the
starting point of our data collection because three major pieces of legislation were
enacted in the banking industry in the United States between 1978 and 1982:
the Financial Institutions Regulatory and Interest Rate Act of 1978; the Deposit
Institutions Deregulation and Monetary Control Act of 1980; and the Depository
Institutions Act (GarnSt Germain Act) of 1982. Each of these Acts increased
competition and created a need for banks to differentiate themselves through the
adoption of product and process innovations. The search was conducted under
six headings: new technology; new products; electronic banking; electronic fund
transfer; banking systems; and new financial services. Both popular banking and
academic journals were included in the search. This search resulted in a list of 40
innovations. We compared this list with lists generated by other studies of innovation in the banking industry (Bantel and Jackson, 1989; Steiner and Texeira,
1990) and found no major omissions.
In the second phase, 11 experts from bank consulting firms, state banking
associations, bank research magazines, and commercial banks reviewed the list of
innovations and categorized them into product and process types. The experts
evaluated the 40 innovations, based on each innovations overall importance to
the industry and the extent of its diffusion, on a five-point scale (low = 1;
high = 5). We computed inter-rater reliability using the SpearmanBrown
reliability coefficient (Rosenthal and Rosnow, 1984). The reliability coefficient was
0.84 for innovation importance and 0.88 for innovation diffusion. Eight innovations that had an average rating of less than 3.00 on both importance and diffusion were dropped from the list to ensure that the selected innovations are among
those that are more widely diffused and important to the industry.[6] Three more
innovations were also dropped because the experts indicated that they were duplications, and two new innovations were added because the experts listed them as
significant developments in the industry. The remaining 31 innovations were categorized by the experts into 17 product and 14 process innovations (the experts
were provided with the definitions of product and process innovations presented
above). For the reliability of the productprocess categorization, we used modal
scores from the expert responses. On average 85% of the experts agreed on the
categorization of product innovations and 83% of the experts agreed on the categorization of process innovations. Telephone interviews were conducted to
resolve the disagreements (which primarily came from two experts). The list of
product and process innovations finally agreed upon by the experts is shown
in Table I.
In the third phase, a survey questionnaire was developed and pre-tested among
ten individuals with banking experience. Modifications were made in the questionnaire to improve clarity. In the spring of 1994, two copies of the questionnaire
were mailed to the CEOs of small and medium-sized banks (340 banks) and three
copies to the heads of retail banking, commercial banking, and technology divisions of large banks (25 banks). Large banks were treated differently on the
assumption that heads of specialized units would be able to provide more accurate data on the adoption of innovations in their respective units. About six weeks
later, a second set of questionnaires was sent out to banks that had not responded.
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Table I. List of product and process innovations

Product innovations

Process innovations

ATMs (on bank premises)

ATMs linked to statewide networks
Debit cards
Credit cards
NOW/Super NOW accounts
Zero balance disbursement account
Sweep (asset management) account
Self-directed IRA account
Linked certificates of deposit
Money market deposit
Adjustable rate mortgage
Mortgage equity account
Discount brokerage services
Mutual funds
Direct payroll deposit
Lock box
Personal banker

Truncation of check handling process

Automated mortgage generation
Computerized loan document generation
On-line teller terminals
Derivatives (swaps, options futures/forwards)
Lobby automation (video banking)
Automated voice response systems
High speed image processing of checks
High speed image processing of office documents
Automated check reconciliation systems
Loan tracking system (retail)
Risk management systems (tracking a banks financial
exposure)
Customer information file
Treasurer work station

A total of 101 usable responses (14 large and 87 small and medium) were received,
a 27.7% response rate. We received two responses each from 35 banks for these
questionnaires and computed inter-rater reliability by calculating the percentage
of agreements between the two respondents (Bolton, 1992). This method of reliability computation was employed because our questionnaire used nominal scales
( James et al., 1984). The batch of two respondents yielded: (1) 88% and 70.2%
agreement on the adoption rate of product and process innovations respectively;
(2) 67.7% and 79.9% agreement on the adoption speed of product and process
innovations respectively; and (3) 84% agreement on the executive rating of bank
performance.
To examine the pattern of adoption of product and process innovations over
time, innovations were measured between 1982 and 1993. In pre-testing the survey
questionnaire, it became evident that the exact year of adoption could not be accurately identified. Hence, in the questionnaire, we used four three-year intervals to
identify the date of adoption. However, a preliminary analysis of the collected data
indicated that within the three-year periods, on average, nearly 30% of the banks
in our sample had not adopted any product innovations and nearly 50% had not
adopted any process innovations. This low adoption rate could be due to the small
number of innovations as well as the large number of small and medium-sized
banks in our sample. Therefore, we collapsed the four three-year periods into
two six-year periods and analysed the data during 19821987 and 19881993
(within the six-year periods, on average, 10% of banks had no product adoptions
and 20% had no process adoptions). The six-year periods are sufficiently long to
allow for variability in the product and process innovation adoption scores and to
see the potential impact of the adoption of innovations on firm performance
(Damanpour and Evan, 1984; Venkatraman and Prescott, 1990). An additional
period, pre-1982, was also used in the analysis to allow us to examine the effect
of early adoption of innovations.
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Measures of adoption rate. Two measures of adoption rate were used: (1) an absolute
measure, based on the number of innovations adopted by each bank (product
and process innovations were counted separately); and (2) a relative measure, that
took into account the unequal number of product and process innovations. The
relative measure is the percentage of innovations adopted from the total innovations available for adoption during a specific period (Damanpour and Evan, 1984).
For example, the relative score of product innovations in the 19881993
period for bank A is the number of product innovations it adopted during
19881993 divided by the total number of product innovations in our list (i.e., 17)
minus those it had adopted before 1988, multiplied by 100. The relative measures
of the rate of adoption of product and process innovations were developed to test
Hypothesis 1.
Measures of adoption speed. The adoption speed (of an innovation or a strategy)
has been measured in the respective fields (Chen and Hambrick, 1995; Ettlie and
Vellenga, 1979; Subramanian and Nilakanta, 1996). We measured the speed of
adoption as the mean value of the difference between the year a bank adopts
an innovation and the last year of adoption of that innovation by any bank in
the sample plus one (Subramanian and Nilakanta, 1996). That is, the speed of
adoption of product (or process) innovations for bank A would be equal to

((Y +1) - X )
i

where:
Yi = last year of adoption of product (or process) innovation i by any bank in
the sample
Xi = year of adoption of product (or process) innovation i by bank A
N = number of product (or process) innovations adopted by bank A.
For reasons mentioned earlier, exact data for the year of adoption of each innovation in each bank could not be collected; hence, we used the three-year periods
to represent the year of adoption of the innovation in the above formula.
According to this measure of adoption speed, early adopters (more innovative
banks) would have a higher score than late adopters (less innovative banks), and the
last adopter would have a score of one, different from non-adopters that were given
a score of zero. This measure changes in the same direction as the measure of the
adoption rate (both are higher for more innovative banks), thereby simplifying the
comparison of the results for the rate and speed of innovations. This measure has
been used in the banking industry (Subramanian and Nilakanta, 1996), and by Chen
and Hambrick (1995), who have used a similar measure to operationalize firms
response speed to competitive actions initiated by other firms.
Organizational Performance
Three measures of bank performance were used: two objective, financial measures
and one subjective, executive rating measure.
Financial measures. Return on assets (ROA) and return on equity (ROE) were collected from OnesourceTM database for commercial banks between 1988 and 1992.
ROA measures the managements effectiveness at utilizing the banks resources to
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Table II. Descriptive statistics and correlation matrix (n = 101)

Variables

Mean

Standard
deviation

1. Rate of product
innovations
2. Rate of process
innovations
3. Speed of product
innovations
4. Speed of process
innovations
5. Return on assets
6. Return on equity
7. Executive rating

8.82

3.71

1.00

3.97

2.83

0.71***

1.00

2.94

0.87

0.32***

0.20*

1.00

2.40

1.00

0.18

0.05

0.42***

1.00

0.44
4.85
3.90

1.32
10.05
0.71

0.10
0.04
0.15

0.05
-0.07
0.18

0.30**
0.30**
0.11

0.16
0.14
0.05

1.00
0.75***
0.32***

1.00
0.31***

1.00

p 0.10; * p 0.05; ** p 0.01; *** p 0.001.

generate profits and is particularly relevant when one compares operating efficiencies across banks (Fraser and Fraser, 1990). ROE is a measure of the efficiency
with which shareholders investments are managed. The means of ROA and ROE
over the period were used in the analysis.
Executive rating. The executive rating of bank performance was collected through
the survey questionnaire. Respondents were asked to rate, on a five-point Likert
scale (low = 1; high = 5), the overall effectiveness of their banks compared to rival
banks based on factors like efficiency and quality of service.
The correlation matrix and descriptive statistics of all study variables are
presented in Table II.

Relative Rate and Speed of Adoption of Product and Process Innovations

Hypotheses 1 and 2, based on the assumption that product innovations are perceived as relatively more advantageous than process innovations, suggested that
organizations adopt more product innovations and adopt them faster. We tested
Hypotheses 1 and 2 by comparing the relative rate and speed of adoption of
product and process innovation in each time period, while controlling for bank
size to ensure that the results would be valid across the size categories. The three
size categories we used are: small (total assets less than $100 million); medium (total
assets between $100 million and $1 billion); and large (total assets more than $1
billion).[7] In support of Hypothesis 1, results indicated that, in every time period
and for every size category, banks adopted product innovations at a higher rate
than process innovations (Table III). In support of Hypothesis 2, we found that,
for every size category, banks adopted product innovations faster than they adopted
process innovations (Table III). t-Tests of difference between the means of product
and process innovations for both rate and speed of adoption across the three time
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Table III. The rate and speed of adoption of product and process innovations in a sample of
commercial banksa
Innovation type
and bank sizeb

Relative rate of adoption (%)c

All adopted
innovations

Pre-1982

19821987

19881993

Rate

Speed d

Product innovations
Small (n = 42)
Medium (n = 45)
Large (n = 14)
Total (n = 101)

7.56
10.96
28.05
12.46

22.15
25.87
49.34
28.43

23.40
28.23
40.16
27.87

41.04
53.46
79.41
51.89

2.56
3.00
3.32
2.86

Process innovations
Small (n = 42)
Medium (n = 45)
Large (n = 14)
Total (n = 101)

2.81
4.22
7.69
4.29

7.76
5.98
22.11
9.20

12.54
19.00
38.49
19.01

20.92
27.46
53.57
28.36

2.20
2.45
2.70
2.38

Notes:
a
t-Tests of difference between the means of both the rate and speed of product and process innovations for each
time period, size category, and the totals of rate and speed were statistically significant at the 0.05 level or better
with one exception (the difference between rates of product and process innovations for large banks in the
19881993 period).
b
Bank size represents the number of banks for which the innovation data were available in the 19881993 period.
c
Relative rate of adoption in a given period equals the percentage of innovations adopted by a bank from the
total innovations not adopted in the earlier periods.
d
High-speed score represents early adoption of innovations.

periods, three size categories, and the totals of rate and speed specified in Table
III were statistically significant at the 0.05 level with one exception (the difference
between rates of product and process innovations for large banks in the 19881993
period (40.16 vs. 38.49) was not significant). That is, out of 20 t-tests, 19 were
statistically significant two at 0.05, nine at 0.01, and eight at 0.001. These results
demonstrate that, like the manufacturing sector (Myers and Marquis, 1969;
Strebel, 1987), service sector firms emphasize adoption of product innovations
more than adoption of process innovations.
Pattern of Adoption of Product and Process Innovations
Hypothesis 3 suggested that, over time, a productprocess pattern of adoption
would be more likely than a processproduct pattern. We tested this hypothesis
by comparing the associations between product and process innovations across
the time periods (Table IV). The association between the rate of product innovations in pre-1982 (period 1) and the rate of process innovations in 19821987
(period 2) was 0.38 (p < 0.001), while that between process innovations in pre-1982
and product innovations in 19821987 was 0.20 (Table IV). A test of difference
between these correlations (0.38 vs. 0.20) showed that they were significantly
different (t = 1.62, p < 0.05). This result supports Hypothesis 3; however, a
similar test between 19821987 and 19881993 (period 3) found no significant
difference between productprocess and processproduct patterns of adoption
(0.16 vs. 0.14, Table IV). Hypothesis 3, therefore, was only partially supported by
our data.
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Table IV. Zero-order correlations between rates of adoption of

product and process innovations over time (n = 101)a
Product
innovations

Pre-1982
19821987
19881993

Process innovations
Pre-1982

19821987

19881993

0.59***
0.20

0.38***
0.47***
0.14

0.16
0.43***

Notes:
a
The zero-order correlation for the rate of all innovations adopted was 0.71
(p < 0.001).
* p 0.05; ** p 0.01; *** p 0.001.

Patterns of Adoption and Organizational Performance

To identify low- and high-performance banks using financial measures, we divided
the sample into four quartiles based on ROA and ROE. The banks in the bottom
quartile were designated low-performance, the banks in the top quartile highperformance. To group low- and high-performance banks based on the executive
rating, we used a different approach. Most respondents had rated their bank with
a score of 4 on a five-point scale. Instead of choosing the top and the bottom
quartiles, therefore, we grouped banks with the executive rating of 5 as highperformance (n = 19) and those with the executive ratings of 1, 2, or 3 as
low-performance (n = 27).
Hypothesis 3a suggested that high-performance organizations pursue a
productprocess pattern of adoption more than a processproduct pattern. We
tested this hypothesis by comparing the association between product innovations
in 19821987 and process innovations in 19881993 (productprocess pattern)
with the association between process innovations in 19821987 and product innovations in 19881993 (processproduct pattern). The strongest positive association
between product and process innovations were found for high-performance banks
that had pursued the productprocess pattern of adoption: among these banks,
correlations between product and process innovations for ROA, ROE, and the
executive rating were, respectively, 0.14, 0.34, and 0.43; the latter two were significant at the 0.10 level (Table V). However, when we compared these correlations with the corresponding correlations among low-performance banks that
demonstrated a productprocess pattern (-0.07, 0.08, and -0.08, Table V), and
high-performance banks that demonstrated a processproduct pattern (-0.09,
0.13, and -0.00, Table V), the differences were not statistically significant at the
0.05 level. The most significant differences in the strength of associations between
product and process innovations were found between high-performance banks that
followed productprocess pattern and low-performance banks that followed
processproduct pattern: t-values for ROA (0.14 vs. -0.41), ROE (0.34 vs. -0.45),
and executive rating (0.43 vs. -0.28) were 1.50 (p < 0.10), 2.42 (p < 0.01), and 2.07
(p < 0.01), respectively. Overall, Table V results provided some support that highperformance organizations tend to follow a productprocess pattern of adoption;
however, the results are not entirely conclusive.
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Table V. Relationships between rates of adoption of product and process innovations over time in
low- and high-performance banks
Performance
measure

Low-performance

High-performance

Number
of banksc

Zero-order
correlation

Number
of banksc

Productprocess patternd
Return on assetsa
Return on equitya
Executive ratingb

13
16
20

-0.07
0.08
-0.08

24
26
17

Processproduct patterne
Return on assetsa
Return on equitya
Executive ratingb

13
16
20

-0.41
-0.45
-0.28

24
26
17

Zero-order
correlation
0.14
0.34
0.43
-0.09
0.13
-0.00

Notes:
a
Banks in the top quartile between 1988 and 1993 were considered high-performance, and banks in the bottom
quartile for the same period were considered low-performance.
b
High performance banks had a rating of 5 and low performance banks had ratings of 1, 2, or 3.
c
The differences in the number of banks of ROA and ROE in the two performance groups are due to missing
values in either product or process innovation scores in the adjacent periods.
d
Product innovations in 19821987 with process innovations in 19881993.
e
Process innovations in 19821987 with product innovations in 19881993.
p 0.10.

Neither Hypothesis 3 nor Hypothesis 3a was fully supported by the data.

However, results in Table IV show that the correlations between rates of adoption
of product and process innovations within periods 1, 2, and 3 are, respectively,
0.59, 0.47, and 0.43 (all statistically significant at the 0.001 level). For all product
and process innovations adopted through the entire period, this correlation was
0.71 (p < 0.001). These results suggest that probably a synchronous pattern of adoption, where both product and process innovations are adopted at approximately
the same time,[8] is more descriptive than a lag pattern that we proposed.
To test the performance implication of the synchronous pattern, we computed
correlations between the rates of product and process innovations in the two performance groups (Table VI). For financial measures of performance, data showed
more positive associations between product and process innovations in highperformance than in low-performance banks (0.69 vs. 0.27 for ROA, 0.57 vs. 0.16
for ROE, Table VI). For the executive rating measure of performance, however,
the more positive association between product and process innovations was found
in the low-performance group (0.37 vs. 0.55, Table VI). We tested the differences
between corresponding correlations from low- and high-performance banks
and found statistically significant differences for ROA and ROE (t values were,
respectively, 1.91 and 1.65, p < 0.05), but not for the executive rating measure
(t = -0.71).
A stronger relationship between product and process innovations within- than
between-periods (Table IV), coupled with the results on performance implications
of the patterns of adoption (Tables V and VI), suggest that probably the synchronous pattern of adoption of product and process innovations help banks
better their performance than the lag pattern. We discuss these patterns further
below.
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Table VI. Relationships between rates of adoption of product and process innovations within
periods in low- and high-performance banks
Performance
measure

Return on assetsa
Return on equitya
Executive ratingb

Low-performance

High-performance

Number
of banks

Zero-order
correlation

Number
of banks

Zero-order
correlation

26
26
27

0.27
0.16
0.55**

25
26
19

0.69***
0.57**
0.37

Notes:
a
Banks in the top quartile between 1988 and 1993 were considered high-performance, and banks in the bottom
quartile for the same period were considered low-performance.
b
High performance banks had a rating of 5 and low performance banks had ratings of 1, 2, or 3.
* p 0.05; ** p 0.01; *** p 0.001.

At the industry level, models of the dynamics of product and process innovations
were developed and empirically tested (Abernathy and Utterback, 1978; Barras,
1986, 1990; Utterback, 1994; Utterback and Abernathy, 1975). At the firm level,
such models have not been developed; researchers have usually studied product
and process innovations separately, primarily in the manufacturing sector. This
study is thus unique in that it presents theories about the relationship between
product and process innovations at the organizational level, then empirically tests
them in the service sector. In this section, we discuss the studys results in relation
to past studies of the: (1) adoption of innovation types; and (2) pattern of adoption of product and process innovations over time.
Adoption of Innovation Types
This studys findings suggest that organizations in the service sector, like those in
the manufacturing sector, emphasize the adoption of product innovations over
process innovations. The emphasis on product innovations can be attributed to
these innovations perceived relative advantage over process innovations. Executives may assume that first mover advantages are more likely through adoption of
product innovations. Also, product innovations are often based on technologies
that can be protected by patents or other legal mechanisms, while patents are often
ineffective to protect process innovations because they are primarily based on technologies that are more readily available in the market place (Ettlie and Reza, 1992;
Teece, 1986). Therefore, firms may choose to invest in product innovations because
such innovations could have greater appropriability than process innovations
(Teece, 1986).
Results of this study also demonstrate that there are similarities between the
adoption of product and process innovations, on the one hand, and the adoption
of technical and administrative innovations, on the other. More research on the
similarities may be called for, but for now, a few observations can be made. Administrative innovations are primarily innovations in organizational processes related
to the administrative function. Like the process innovations in this study, they are
less observable and perceived to be relatively less advantageous than technical
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innovations. Administrative and process innovations also have an internal focus,

while product innovations have a market focus. Innovations with market focus get
more managerial attention and resources (Van de Ven, 1986). They also have a
greater chance of institutional imitation (Daft, 1992) because organizations imitate
other organizations in their institutional environment and adopt product innovations that have been adopted by lite organizations or industry leaders (Hage and
Dewar, 1973; Rogers, 1995). Thus, technical and product innovations are more
industry-specific, i.e., they are more standardized across industry, while administrative and process innovations are more organization-specific, i.e., they are generally unique to the unit of adoption. Organization-specific innovations cannot be
imitated without significant modifications to make them compatible with the structure, culture, and systems of the adopting organization; thus, they are less likely
to be replicated (Damanpour, 1996).
Patterns of Product and Process Innovations
In case studies of the adoption of NOW accounts in banks, Nord and Tucker
(1987) point to the critical role of environment in the introduction of this banking
innovation. As stated earlier, banking deregulations of 19781982, devised to
increase competition in the US banking industry, created new environmental
conditions inducible to innovation in banks. We tested the lag pattern, and
explored an alternative pattern, the synchronous pattern of the adoption of
product and process innovations. These patterns, however, were examined at the
firm level and reflect the rate and speed with which banks adopted the two types
of innovations in response to an environmental jolt. They are not reflective of the
pattern associated to the emergence of a radical new product leading to a dominant design (Abernathy and Utterback, 1978) nor the pattern associated to the
importation of a single new, radical technology from another industry (Barras,
1990). Instead, they best represent the cyclical nature of change (Anderson and
Tushman, 1991), where due to an environmental jolt, organizations introduce a
series of products and processes to adapt or transform, and thus, maintain or
enhance their competitive edge.
The results of this study provide support for the synchronous adoption of
product and process innovations, and its positive implications for bank performance. They are supported by previous research. For example, Abernathy and
Utterback (1978) stated that in the third phase in their model, innovation adoption is stimulated by simultaneous pressure to both reduce costs and improve
quality; therefore, firms adopt both product and process innovations in the hopes
of insuring improvement in both productivity and quality. Ettlie (1995) found that
integrated productprocess development practices have positive implications for
firm performance. Pisano and Wheelwright (1995), in a study of US and European pharmaceutical companies, argued that the simultaneous development of
new products and new processes is not only possible, but is necessary. They
reported that companies in a variety of high technology industries had gained
tremendous advantages by treating process development as an integral part of
product development. The congruent adoption of product and process innovations resulted in a smoother launch of new products, easier commercialization of
complex products, and more rapid penetration of markets (Pisano and Wheelwright, 1995). In service industries, more than the manufacturing ones, it is difficult to separate new products from the processes on which they rely on; thus, the
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introduction of new products requires the introduction of new processes simultaneously (Buzzacchi et al., 1995).
The congruency in the adoption of product and process innovations found here
is compatible to the congruency in the adoption of other types of innovation found
in earlier studies. For example, Ettlie (1988) studied the adoption of administrative and technological innovations in the manufacturing sector and found that: (1)
successful firms adopt the two types of innovations simultaneously; and (2) the congruency between the two types of innovations is especially important during hostile
and competitive times. Bantel and Jackson (1989), Kimberly and Evanisko (1981),
and Zahra and Covin (1994) found positive associations between administrative
and technical innovations, and Dewar and Dutton (1986), Ettlie et al. (1984), and
Germain (1996) reported positive associations between radical and incremental
innovations. Damanpour and Evan (1984), using the socio-technical systems
framework, linked the positive association between administrative and technical
innovations to the requirement for a balance between the social and technical
systems of the organization. The linkage between radical and incremental, and
product and process, innovations has also been discussed in the technology management literature. For example, Sahal (1981) discussed the importance of complementary technology and argued that product and process technologies
constitute an integrated system and that the dependence between them grows
stronger over time. Along the same lines, Rosenberg (1982) emphasized the interdependence of innovations and viewed innovations as related sets in which, for
instance, the introduction of one type could enhance the value of another type.
The positive associations we find between product and process innovations in every
time period provide additional empirical support for these views. They also suggest
that simultaneous adoption of innovation types occurs not only during hostile
and competitive times (e.g., during the late 1970s and early 1980s in the banking
industry) as Ettlie (1988) proposed, but that it occurs consistently even in less
hostile conditions.
In summary, from our findings on the pattern of adoption of product and
process innovations, we can make two suggestions. First, the synchronous pattern
of the adoption of product and process innovations is more descriptive than the
lag pattern. But it should be noted that Swanson (1994) reported three forms of
organizational lag in the evolution of information systems innovations, and
Damanpour and Evan (1984) found consistent results of lags between the adoption of administrative and technical innovations. However, because both product
and process innovations (as defined in this study) are technical innovations (as
defined in Swansons and Damanpour and Evans studies), results of the three
studies together suggest that, when innovations belong to a more specific type, the
lag pattern between innovation types would become weaker while the interdependency between innovation types would become stronger. Second, the synchronous adoption of product and process innovations has a positive implication
for organizational performance. Capon et al. (1992) found similar results in the
manufacturing sector; that is, firms that emphasized both product and process
development had the highest return on capital.
A caveat however is in order. Since our study is the first one to examine the
pattern of adoption of product and process innovations at the firm level in the
service sector, and because it is based on a single industry analysis, we should use
caution in generalizing from its findings until they are confirmed in other contexts.
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In addition to replication in other industries, an extension of this study in the future

can distinguish between radical and incremental product and process innovations
for the development of a finer model of the dynamics of adopting product and
process innovations in organizations.

[1] One may argue that every product needs some adjustments in process. While this argument is true when a new product innovation is implemented, we respond by distinguishing between process adjustment and process innovation. While without process
adjustment most product innovations cannot effectively be implemented, the adoption
of process innovations, as considered in this study, is not necessarily linked to the adoption of new products; they could be adopted independently and could themselves
contribute to organizational operations or outcomes.
[2] More indirect indicators of perceived advantage of product over process innovations
are: (1) academic writings and trade journals focus mainly on product innovations and
markedly less on process innovations (Acs and Audretsch, 1990); and (2) Chakrabarti
(1989) reports more expenditure on product than on process innovations.
[3] Past studies in the manufacturing sector suggest that the speed of adoption of product
and process innovations differs in different industries. For example, in some industries
(e.g., mineral and bulk chemical) the sequence of product innovations resulting in
a dominant design may take place very quickly, and in some other industries (e.g.,
aircraft, large turbine generators) process innovations are not frequent and most
innovations are product-oriented (Berry and Taggart, 1994). Our proposed arguments,
however, apply to firms in a single industry in the service sector.
[4] Process innovations may also precede product innovations, but this pattern is less likely.
For example, Pennings and Harianto (1992) argued that investments in back office
automation and transaction-oriented technology would make the introduction of
video banking and videotext services more likely in commercial banks; that is, process
innovations would lead to product innovations. In a study of 152 commercial banks
in the USA, however, they did not find empirical support for this hypothesis.
[5] During the pilot interviews, we confirmed that the innovation adoption decisions were
made at the level of the independent bank. This fact was reconfirmed when we called
senior executives of 50 banks after the questionnaires were returned. In case of banks
that were members of holding companies (less than 30% of banks in our sample), we
checked that the respondents made the adoption decision. Further, we had multiple
responses from 35 banks and checked inter-rater reliability on the innovation adoption decision which were above required limits.
[6] We dropped innovations that were not important and were not widely diffused for the
following reasons. First, because we were examining the impact of innovation adoption on bank performance primarily during the 1980s, we included innovations that
were of similar importance levels to be able to measure differences in bank performance due to differences in the rate and speed of innovation adoption. Second,
because we were measuring differences in the speed of adoption across banks, we
removed innovations that were not widely diffused (these were primarily innovations
introduced towards the end of the time period of our study). For instance, if an innovation was introduced in the 1980s by one bank but was not adopted by other banks
by 1993, measurement of its speed of adoption difference among banks between 1982
and 1993 was not possible.
[7] In studies of banks, researchers have typically used total assets as the size variable.
However, they have shown little consensus about the range of total assets that could
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distinguish small, medium, and large banks. We selected our size categories by collapsing the six categories used by Bantel and Jackson (1989) into three. Our objective
was to select categories so that they: (1) reflect the distribution in our sample of small
and medium banks, on the one hand, and large banks, on the other; and (2) result in
an approximately equal number of small and medium banks in our analysis.
[8] We repeated the analysis reported in Table IV controlling for size. Similar to the results
in Table IV: (1) the within-period associations between the rate of adoption of product
and process innovations were statistically significant in each of the three (small,
medium, and large) size categories (the only exception was the correlation between the
adoption of product and process innovations for large banks in 19881993); and (2)
the between-period correlations did not show a consistent pattern. Therefore, the sizecontrolled analysis also supports the synchronous pattern of adoption.

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