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models, products and services replace outdated approaches – e.g. Dyson Films – You Tube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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