6.1. Stocks and Flows in New Product Adoption– A Conceptual Diffusion Model

To transform this feedback view of diffusion into a simulation model we go straight to a stock and flow representation. The reason for this direct approach is that product adoption can be conceived very naturally in terms of a stock and flow network that moves consumers from one state (not owning the product) to another state (owning the product). However bear in mind that to achieve S-shaped growth two interacting feedback loops, a reinforcing growth engine and limiting effect, are also needed. Figure 6.2 shows a simple stock and flow network involving two stock accumulations linked by a single flow rate. Potential adopters on the left are converted to adopters on the right by the adoption rate.

Figure 6.2. Stock and flow network and possible feedback loops in the adoption of a new product

To discover plausible feedback loops we need to think about the adoption process and the factors that influence it. Suppose we start with a dynamic hunch that a growth engine lies in the interaction between the innovating firm and the market. This is a reasonable assumption and leads to a feedback process of the kind depicted on the lower right of Figure 6.2. The innovating firm informs the market of its new product and persuades customers to adopt, so creating a link (an information link in this case) from the firm into the adoption process. What about the reverse link? One possibility is that as more and more adopters accumulate they enable the firm to become even more persuasive in winning-over the remaining potential adopters. For now we don't need to know exactly how this link would work in practice. Rather, we simply note that if the link exists it creates the reinforcing loop we are looking for, shown as growth engine 1 in Figure 6.2.

Another entirely different growth engine could exist in parallel. Curiously, this loop need not pass through the firm at all. It represents an adoption process driven by social pressure and/or network effects. Here, the more adopters who already own the product the more attractive it is to the remaining potential adopters, independently of the actions of the firm. After a kick-start, the market converts itself with little need for persuasion from suppliers. Children's toys provide some good examples. The Tamagochi electronic pet and Rubik's cube puzzle were both popular toys that sold themselves through peer pressure and word-of-mouth. In this kind of selling there is a direct link from the number of adopters into the adoption process. The link is hardwired because it represents human social behaviour (the desire to mimic and be part of a social trend) rather than a cue for decision making. A powerful reinforcing loop, labelled growth engine 2, is formed as the adoption rate accumulates into adopters. In practice, product sales are likely to be driven by a combination of the two different growth engines with different weighting according to the relative importance of social pressures and firm-persuasion.

The limiting process is often tangible and can be inferred on logical grounds. The basic idea is that, as the number of potential adopters falls and becomes very low (in relation to total market size), then the adoption rate must decline. In the extreme, when every single customer has adopted and the market is saturated, then the adoption rate is zero. This common-sense argument means there is a link from the number of potential adopters into the adoption process. It is a hardwired link that represents a physical/social constraint from the finite number of customers willing to purchase the product. As the market matures, only a few diehard potential customers remain and they are difficult to convert. The diehard link is woven into the stock and flow network to form a balancing loop of just the kind we are looking for. The loop runs from the stock of potential adopters into the adoption process and then backwards through the adoption rate into potential adopters. It is easier to see the loop in the causal loop diagram on the left. Here, potential adopters influence the adoption rate through a positive link exactly the same as before, but the adoption rate in turn influences potential adopters through a negative link to form the balancing loop. The negative link corresponds to the depletion flow in the stock and flow network (i.e. the adoption rate reduces potential adopters).