Innovation in markets


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A2 economics presentation on innovation

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Innovation in markets

  1. 1. Innovation in Markets<br />A2 Micro Revision – May 2011<br />
  2. 2. Innovation and Invention<br />Innovation is “making changes to something established” (Nissan Innovation Video)<br />Invention is the act of “coming upon or finding: discovery”<br />Creative destruction:<br />A process by which new business models, products and services replace outdated approaches - Dyson Films – You Tube<br />Innovation drives economic growth - it has accounted for 63 per cent of annual labour productivity growth in the UK since 2000<br />
  3. 3. Product and process innovation<br />Product innovation<br />Small-scale, subtle changes to the characteristics and performance of a particular product<br />Process innovation<br />Changes to the way in which production takes place or organised<br />Change in cost structures especially for products where marginal costs are low<br />
  4. 4. Product innovation<br />A source of synergy demand<br />Sustaining innovations<br />Extending product life cycles<br />Reinforcing brand loyalty<br />Disruptive innovations<br />Disruptive technologies<br />Disruptive business models<br />Contestability – threatening power of incumbents<br />Often independent of the scale of production<br />First mover advantage (e.g. eBay, Coca Cola)<br />
  5. 5. Joseph Schumpeter<br />“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.”<br />Schumpeter: Entrepreneurial innovations are a key driver of economic growth<br />
  6. 6. Innovation and Imitation<br />“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.”<br />
  7. 7. William Baumol<br />“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…..<br />"“innovative activity—which in other types of economy is fortuitous and optional—becomes mandatory, a life-and-death matter for the firm.” <br />Baumol: Contestable oligopolies might provide a fertile market structure for innovation<br />
  8. 8. So what drives innovation?<br />Google’s self-driving cars<br />
  9. 9. Prizes: Proctor and Gamble<br />P&G developed a radical open model of innovation.<br />The business set a goal to acquire half of its innovations from outside the business.<br />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. <br />Following this approach, P&G’s Connect + Develop strategy has already resulted in more than 1,000 agreements between the company and external collaborators<br />
  10. 10. Drivers of innovation<br />Recession (necessity the mother of invention?)<br />Tax credits for R&D and lower corporation tax<br />Entrepreneurship – an “agent of innovation”<br />Creative clusters / external scale economies<br />Open Global Trade and Investment<br />Migration of skilled workers / diversity of pop<br />Investment in science & tech (human capital)<br />Decentralised management / willingness to take risks and survive failures<br />Protection of Intellectual Property so that returns from innovation can be commercialised<br />Horizontal co-operation between firms<br />Innovation and invention prizes<br />
  11. 11. NESTA website<br />