Innovation in MarketsA2 Micro Revision – May 2011

Innovation and InventionInnovation is “making changes to

something established” (Nissan Innovation Video)

Invention is the act of “coming upon or finding: discovery”

Creative destruction:◦A process by which new business

models, products and services replace outdated approaches - Dyson Films – You Tube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 innovationA source of synergy demandSustaining innovations

◦Extending product life cycles◦Reinforcing brand loyalty

Disruptive innovations◦Disruptive technologies◦Disruptive business models

Contestability – threatening power of incumbents

Often independent of the scale of production First mover advantage (e.g. eBay, Coca Cola)

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

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 workers / diversity of popInvestment 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

NESTA website