Ch 15 Innovations

Front 1

Innovation
Many definitions of innovation:

Back 1

“The act of introducing something new”
“The ability to deliver new value to a customer”
“Change that creates a new dimension of performance”

Two dimensions:
Product innovation: The introduction of a new product or a product of improved quality.
Fe: Flat screens.
Process innovation: The introduction of a new method of production.
Fe: From unit to mass production.

Front 2

How to characterise innovation?
incremental, radical, organisational innovation

Back 2

Incremental innovation: Relatively small improvements of an existing product or process.
Fe: Improved microprocessor in your laptop.

Radical innovation: The development of new products or production processes that are based on new operational or scientific principles.
Fe: Internet.

Organisational innovation: The introduction of a new way to assemble existing components.
Fe: Introduction of an electronic order system.

Front 3

How does innovation arise?

Back 3

information:Explicit (codified or formalised).
Implicit (experience).

knowledge:Absorptive capacity = capacity to absorb information and turn this information into knowledge.


innovation: The capacity to turn knowledge into a new product or process.

Front 4

Effect of innovation:

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Innovation can be considered a shock (fundamental change that leads to shifts in competitive positions in a market).

Competitive advantage?
Arises from a firm’s ability to exploit market shocks  bring innovative products to the market.

Front 5

Creative destruction?

Back 5

New sources of competitive advantage displace established ones.
Innovation enlarges consumer surplus:
Lower product costs.
Quality improvement of a product.
Fe: MP3 player displaces Discman.

Front 6

Effect of innovation on the market?

Back 6

Markets have periods of comparative quiet punctuated by shocks and discontinuities.
Shocks  radical innovations.
Discontinuities  small shocks due to incremental innovations.

Front 7

Disruptive technologies:

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Market is cleared and less efficient products, processes and organisational forms are displaced.
Isolating mechanisms are not permanent (FedEx).
Life expectancy of competitive advantage shrinks as technology and tastes change rapidly.

Front 8

When profit?

Back 8

During periods of comparative quiet, firms that possess superior products and technology earn economic profits.

Front 9

Hypercompetition:

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In particular industries competitive advantages can only be sustained for very short periods.
Firms in these industries continually seek new sources of competitive advantage.
Strategy: try to stay innovative continuously.

Front 10

Effect of innovation on the economy (according to Schumpter)?

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Technological improvement and long term economic growth is more important than optimal allocation of resources at a given point in time.
Dynamic versus Static efficiency.
Society benefits more from competition between new products, new technologies and new forms of organisation than from price competition.

Result:
Arguments to defend monopolies.

Front 11

Why (not) innovate?

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Not innovate? Established firms face certain incentives to refrain from innovation:
Sunk cost effect: Profit maximising firm sticks with its current technology even though the profit maximising decision for a firm starting from scratch would be to choose a different technology.
Replacement effect: Despite equal innovative capabilities, an entrant is more willing to spend more to develop an innovation  entrant can potentially replace the monopolist, but the monopolist can only replace itself.

Front 12

Efficiency effect:

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A monopolist usually has more to lose from another firm’s entry than that firm has to gain from entering the market.
Monopolist has larger incentive to innovate than entrant!

Front 13

why not innovate?

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All three effects (sunk cost, replacement and efficiency) will work simultaneously to determine if the incumbent will innovate or not.

If: The probability of innovation by entrants is low, replacement and sunk cost effects may dominate.

If: The potential entrants are likely to capitalise on the incumbents failure to innovate, the efficiency effect will dominate.

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However: Ideas and technology can also be bought!

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Innovator:
Has bargaining power and can realise the full value of the innovation whenever:
The technology is protected by patents.
The necessary knowledge to market the product (production, marketing, sales) is not scarce.

Otherwise:
The balance of bargaining power shifts away from the innovator to the established firm that possesses this scarce expertise.

Front 15

Winner takes it all?

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Possible! Staying ahead of rivals will produce disproportionate benefits through:
Patent protection.
Early mover advantages.
 Result: Patent races.

Front 16

innovation competition:
Often different methodologies available for innovation that affect the probability of success, take into account:

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Different methodologies may differ in risk.
Fe: The uncertainty about the completion date.
There may be correlation between the methodologies.
Fe: Many similar methodologies  small probability of success.

Front 17

Sustainable Innovation?

Back 17

So:
Innovation may lead to competitive advantage.
Long term (patents or early mover advantages).
Short term.

Short term: Still possible to reach sustainable competitiveness? Yes, through sustainable innovation.

Sustainable innovation capacity depends on:
Dynamic capabilities: Ability of a firm to maintain and adapt the capabilities that are the basis of its competitive advantage  Exploitation and exploration.
Exploitation: optimal exploitation of existing production capacity.
Exploration: exploring new markets, technologies and products etc.

Front 18

Conclusion innovation!

Back 18

Innovation is the capacity of the firm to turn knowledge into a new product or process.
 Constitutes an essential source of competitive advantage.

The process of creative destruction implies that new sources of competitive advantage displace established ones.

Firmscomposition of the market.

Google versus Yahoo implement different innovation strategies based on the : A high level of innovation does not necessarily result in market dominance.