innovation in markets
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A2 microeconomics revision presentation on innovation in marketsTRANSCRIPT
Innovation in MarketsA2 Micro Revision – May 2012
Innovation is about putting a new idea or approach into action. Innovation is
commonly described as 'the commercially successful exploitation of ideas'
Formulation of new ideas for products or
processes
InventionPractical application
of inventions into marketable products
or services
Innovation
Innovation and InventionInnovation - “making changes to
something established” (Nissan Innovation Video)
Invention - the act of “coming upon or finding: discovery”
Creative destruction:◦A process by which new business
models, products and services replace outdated approaches – e.g. Dyson Films – You Tube
Innovation drives economic growth - it has accounted for 63 per cent of annual labour productivity growth in the UK since 2000
Product and process innovationProduct innovation
◦Small-scale, subtle changes to the characteristics and performance of a particular product
Process innovation◦Changes to the way in which
production takes place or organised◦Change in cost structures especially
for products where marginal costs are low
Product
• Launching new or improved products (or services) on to the market
• Advantages• ‘First mover advantage’• Higher prices and
profitability • Added value • Opportunity to build early
customer loyalty • Enhanced reputation as an
innovative company • Increased market share
Process
• Finding better or more efficient ways of producing existing products, or delivering existing services
• Advantages• Reduced costs • Improved quality • More responsive customer
service • Greater flexibility• Higher profits
Main types of innovation
Benefit Examples
Improved productivity & reduced costs
A lot of process innovation is about reducing unit costs. This might be achieved by improving the production capacity and/or flexibility of the business – to enable it to exploit economies of scale
Better quality By definition, better quality products and services are more likely to meet customer needs. Assuming that they are effectively marketed, that should result in higher sales and profits
Building a product range
A business with a single product or limited product range would almost certainly benefit from innovation. A broader product range provides an opportunity for higher sales and profits and also reduces the risk for shareholders
Business benefits of innovation (1)
Business benefits of innovation (2)
Benefit Examples
To handle legal and environmental issues
Innovation might enable the business to reduce it carbon emissions or produce less waste. Changes in laws often force business to innovate when they might not otherwise do so
More added value
Effective innovation can establish a unique selling proposition (“USP”) for a product – something which the customer is prepared to pay more for and which helps a business differentiate itself from competitors
Improved staff retention, motivation and easier recruitment
Not an obvious benefit, but often significant. Potential good quality recruits are often drawn to a business with a reputation for innovation
Joseph Schumpeter“the opening up of
new markets, foreign or domestic, and the organizational development [...] illustrate the same process of industrial mutation, that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
Schumpeter: Entrepreneurial innovations are a key driver of
economic growth
Innovation and Imitation“Competition drives
innovation, but it also begets imitators, “swarms” of which copy their rival’s innovation, attracting investment, and leading to a boom. When the original innovator’s profit advantage is eliminated, investment moves elsewhere, and the sector may even shrink, until the next disruptive innovation, which restarts the cycle.”
William Baumol“As soon as quality
competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position…..
"“innovative activity—which in other types of economy is fortuitous and optional—becomes mandatory, a life-and-death matter for the firm.”
Baumol: Contestable oligopolies might provide a fertile market
structure for innovation
Idea generation
Idea screening
Concept development & testing
Beta testing & market testing
Technical implementation
Commercial launch
Research & Development (R&D) process
So what drives innovation?
Google’s self-driving cars
Prizes: Proctor and GambleP&G developed a radical open model of
innovation.The business set a goal to acquire half of its
innovations from outside the business.It estimated that for every P&G researcher
there were 200 scientists or engineers elsewhere in the world who were just as good – a total of 1.5 million people whose talents it could potentially use to develop new products.
Following this approach, P&G’s Connect + Develop strategy has already resulted in more than 1,000 agreements between the company and external collaborators
Drivers of innovationRecession (necessity the mother of invention?)Tax credits for R&D and lower corporation taxEntrepreneurship – an “agent of innovation”Creative clusters / external scale economiesOpen Global Trade and InvestmentMigration of skilled workersInvestment in science & tech (human capital)Decentralised management / willingness to
take risks and survive failuresProtection of Intellectual Property so that
returns from innovation can be commercialisedHorizontal co-operation between firmsInnovation and invention prizes
External economies of scale
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