Innovation is the successful exploitation of new ideas. This is predominantly achieved through research and development (R&D). R&D is the necessary investigations in order to discover new products or manufacturing processes.
Improved quality: Innovation develops higher quality products that become more attractive to customers leading to increased sales and better reputation
EXAMPLE: A new iPhone model is an example of innovation. Each model that is released includes new features that enhance the user’s experience. This can include higher quality graphics, faster processers, higher pixel camera etc.
Enter new markets: Innovation can allow a firm to enter new markets
EXAMPLE: Apple innovated and create the Apple Watch. This allowed Apple to enter the watch market that penetrate the growing Smartwatch market segment.
Increase value added: Innovation encourages the development of highly differentiated products, creating a unique selling point (USP). The lack of similar products upon the market means that demand for this differentiated products is inelastic. Inelastic demand means that firms can increase the price (without losing many customers) and make a higher profit margin. Similarly, the lack of similar products to a differentiated one creates an opportunity to patent a product and ensure long term success of this product.
EXAMPLE: Apple innovated with the original iPhone model, creating a highly differentiated mobile phone that at the time, no other companies offered anything similar (the market was still fixed on Motorola flip phones). Apple charged in excess of £400 for the iPhone (because of the inelastic demand present) and made a high profit margin on the iPhone. EVALUATION: The combination of high profit margins and Apple purchasing numerous patents over the years helps to ensure the longevity of success. High profit margins generate more profit that can lead to greater budget on R&D. A greater budget on R&D increases the opportunity for innovation, which is secured through the use of patents. This means that Apple can innovate regularly without fear of losing their monopoly upon the smartphone market.
Increase product range: Innovation encourages the development of a new products and a wider product range.
EXAMPLE: Apple innovation created the iPhone, iPad, Macbook, iMac, and Apple Watch.
Reduces costs: Innovation can improve processes and make them more efficient. If I innovate a process and make the process quicker I can use company resources less and save money.
EXAMPLE: Many big banks use the innovation of computer software to improve processes. Various technology departments within these banks enhance company softwares that help to speed up processes.