A2 microeconomics revision presentation on innovation in markets

1. Innovation in
Markets
A2 Micro Revision – May 2012

2. Innovation is about putting a new idea or approach
into action. Innovation is commonly described as
'the 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. 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outdated approaches – e.g. Dyson Films –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. Product and process
innovation
 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. 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. Business benefits of innovation (1)
Benefit Examples
Improved A lot of process innovation is about reducing
productivity & unit costs. This might be achieved by improving
reduced costs 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 A business with a single product or limited
range 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. Business benefits of innovation (2)
Benefit Examples
To handle legal Innovation might enable the business to reduce
and it carbon emissions or produce less waste.
environmental Changes in laws often force business to
issues 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 Not an obvious benefit, but often significant.
retention, Potential good quality recruits are often drawn to
motivation and a business with a reputation for innovation
easier recruitment

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. 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. 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. Research & Development (R&D) process
Idea generation
Idea screening
Concept development & testing
Beta testing & market testing
Technical implementation
Commercial launch

12. So what drives innovation?
Google‘s self-driving cars

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. 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. External economies of scale

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