Types of Innovation

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From the course by Ludwig-Maximilians-Universität München (LMU)

Competitive Strategy

1740 ratings

Ludwig-Maximilians-Universität München (LMU)

Competitive Strategy

1740 ratings

Course 1 of 4 in the Specialization Competitive Strategy and Organization Design

In this six-module course, you will learn how businesses and organizations behave in situations in which strategic decisions are interdependent, i.e. where my actions affect my competitors' profits and vice versa. Using the basic tools of game theory, we will analyse how businesses choose strategies to attain competitive advantage. This course is also available in Chinese. Please go to our course catalog to access the Chinese version of Competitive Strategy.

From the lesson

Why Worry About Research and Development

In the context of R&D, a number of important strategic questions arise consistently; in this module, we take a closer look at these questions. Though many innovations are created by a stroke of luck, it seems that the majority of innovations are created because their inventors actively strive towards this specific innovation and differentiation strategy.

Stages of R&D4:20

Types of Innovation4:58

Meet the Instructors

Tobias Kretschmer
Professor
Institute for Strategy, Technology and Organization

So in the last video, we talked about different stages of R & D.

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.

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.

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.

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.

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.

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.

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