Innovation in markets


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A2 microeconomics revision presentation on innovation in markets

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Innovation in markets

  1. 1. Innovation inMarketsA2 Micro Revision – May 2012
  2. 2. Innovation is about putting a new idea or approach into action. Innovation is commonly described asthe commercially successful exploitation of ideas Invention Innovation Formulation of new Practical application of ideas for products or inventions into marketable processes products or services
  3. 3. Innovation and Invention Innovation - ―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or finding: discovery‖ Creative destruction: ◦ A process by which new business models, products and services replace outdated approaches – e.g. Dyson Films – You Tube Innovation drives economic growth - it has accounted for 63 per cent of annual labour productivity growth in the UK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
  4. 4. Product and processinnovation Product 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
  5. 5. Main types of innovation Product Process• Launching new or improved • Finding better or more efficient products (or services) on to the ways of producing existing market products, or delivering existing• Advantages services • ‗First mover advantage‘ • Advantages • Higher prices and profitability • Reduced costs • Added value • Improved quality • Opportunity to build early • More responsive customer customer loyalty service • Enhanced reputation as an • Greater flexibility innovative company • Higher profits • Increased market share
  6. 6. Business benefits of innovation (1)Benefit ExamplesImproved A lot of process innovation is about reducingproductivity & unit costs. This might be achieved by improvingreduced costs the production capacity and/or flexibility of the business – to enable it to exploit economies of scaleBetter 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 profitsBuilding a product A business with a single product or limitedrange 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
  7. 7. Business benefits of innovation (2)Benefit ExamplesTo handle legal Innovation might enable the business to reduceand it carbon emissions or produce less waste.environmental Changes in laws often force business toissues innovate when they might not otherwise do soMore 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 competitorsImproved staff Not an obvious benefit, but often significant.retention, Potential good quality recruits are often drawn tomotivation and a business with a reputation for innovationeasier recruitment
  8. 8. 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.‖ Entrepreneurial Schumpeter: innovations are a key driver of economic growth
  9. 9. 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.‖
  10. 10. 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
  11. 11. Research & Development (R&D) process Idea generation Idea screening Concept development & testing Beta testing & market testing Technical implementation Commercial launch
  12. 12. So what drives innovation? Google‘s self-driving cars
  13. 13. Prizes: Proctor and Gamble P&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
  14. 14. Drivers of innovation Recession (necessity the mother of invention?) Tax credits for R&D and lower corporation tax Entrepreneurship – an ―agent of innovation‖ Creative clusters / external scale economies Open Global Trade and Investment Migration of skilled workers Investment in science & tech (human capital) Decentralised management / willingness to take risks and survive failures Protection of Intellectual Property so that returns from innovation can be commercialised Horizontal co-operation between firms
  15. 15. External economies of scale
  16. 16. Keep up-to-date witheconomics, resources, quizzes and worksheets for your economics course.