0:08
And in this video, we're going to learn more about innovations and how we can
distinguish different types of innovations.
And what do we mean by types of innovations?
It's basically just two other ways of distinguishing between different
innovations. So the first and I guess most obvious
innovation type distinction would be between product and process innovations.
A product innovation as the name suggests is about the improvement of an existing
product, or the development of an entirely new product.
0:39
It leads to, in economic terms, an increase in the willingness to pay of
existing or potential buyers. A process innovation is about finding new
ways of producing an existing product. This typically leads to a reduction in
production costs, right, either through direction production of one particular
product or through the reduction of waste or insufficient quality for products.
1:06
Now, let's have a look at a concrete example, namely car
tires. So, with car tires a product innovation
would be simply a new mixture of rubber that keeps this car stable at high
speeds. Of course this leads to an increase in
the willingness to pay of existing consumers.
You can demand a higher price. And possibly also increase your profits
or increase your market share. A process innovation would be about
finding a new way of curing the tire which decreases the production costs by
25%. So recall, this is exactly the same product, it's the same tire, but it's
done, it's produced at a lower price. Alright? So that is going to lead to an
decrease in the overall price charge, possibly also to an increase in profits,
and to an increase in market share. So product and process innovation is one
important distinction. Another distinction which is perhaps a
bit more tricky, is about drastic versus incremental innovations.
2:07
A drastic innovation is when an innovator, whoever comes up with a
drastic innovation, can behave as a monopolist in the market.
So despite the fact that there are substitute products, these substitute
products are so much worse or so much less efficient that in the end the
innovator can behave as a monopolist. In the incremental innovation again it's
an innovation, but the innovator will increase his profits but not necessarily
as an unthreatened unaffected monopoly. So he'll still have to take the behavior
of other firms, of other non-innovating firms, into account.
2:49
So again, let's take an example. Here, the example of the electric car.
Simply developing the electric car would be a drastic innovation.
Why? Because if electric cars take off, this
could potentially replace the entire market for fuel-powered cars,
petrol-powered cars. Right?
So potentially this has huge implications for the market for cars.
Incremental innovation here would be the improvement of a battery unit that
increases the range of the electric car. So again we would expect higher profits
from that, we would expect higher market shares from that, but not necessarily
complete replacement of the existing product with a new innovation
with the new battery unit. Okay so again drastic versus incremental
innovations are important if we think about what they mean for the dynamics of
the market. In drastic innovations we expected a completely new
shape of the market, structure of the market, incremental innovations will lead
to slight shifts. So in these last two videos we set the
fundamentals, the fundamental principles and definitions for all that follows in
the next couple of videos. We first learned that there are 3 stages of
R & D. Specifically, basic research and applied
research and product development. Basic research is difficult to protect
through patents, and it's mainly, therefore, undertaken by universities,
public laboratories and networks of firms.
4:21
The outcomes of applied research and product development are more concrete,
and therefore also easier to protect through intellectual property like
patents, copyrights, or trademarks. Later on, we discussed the difference
between product and process innovations. And what distinguishes a drastic from an
incremental innovation. So with all these distinctions and
concepts in mind, let's now proceed to more exciting aspects of research and
development. In particular, the competitive strategy
aspects of it. So for now please stay on, and I'll see
you back in the next video.
Tobias KretschmerProfessor
