Product and process innovation Flashcards
(42 cards)
what are adam smiths view on invention?
division of labour drives invention an in turn leads to wealth creation
What is schumpeters view on innovation?
creative destruction - innovator creates something whilst destroying something that already exists
What is schumpeters definition of innovation?
innovation is introducing new commodities or better versions of existing ones, finding new markets and methods of production and introducing new forms of economic organisation.
What is arrows view on innovation in the free market?
Underinvested as can only be appropriated to a limited extent
What is the difference between innovation and invention?
Innovation is the successful exploitation of new ideas whereas invention is just the creatioin of new ideas . So innovation is the commercial application of invention.
What are the misconceptions of technological change and innovation?
Technological change is a subset of innovation but innovation is not always concerned with technological change e.g innovation could be concerned with change in design or packaging. E.g Sonys various ‘Walkmans’ didnt use different tech it was just presented in different ways.
What is;a) pure process innovationb) pure product innovation
a) changing the way the product is made without changing the product itselfb) creates a new or improved product without changing the production process
How do product and process innovation often overlap?
improving the process often leads to incidental improvements in the product and making improvements to the product will require innovations in the production process.
Give examples of process innovation and the effect?
Technological innovations - improve equipmentProduction Management innovation - lean production, JITe.g GPS tracking for transport services, AIEffect; increase efficiency and productivity = lowers costs
Give example of Ford Motors process innovation of the assembly line?
Moving assembly lines which meant vehicles could be taken to the workers as opposed to workers moving to and around the vehicle. Vehicle could be built step by step.
What type of innovation reduces fixed costs without changing marginal costs? Give example.
Capital saving innovation - reduces cost of capital equipment. E.g computers, Moores law says that the cost of computers are declining whilst the quality improves.
What is the effect on total cost when fixed costs are reduced?
FIxed cost curve shifts down, so TC curve shifts down as TC= FC+VC. Slope of the curve is determined by VC and as this doesnt change the slope of TC remains.
What is the effect on average cost when fixed costs are reduced?
AC = AFC+AVC. No change in MC (AVC). AC curve shifts down (U shape but particulary at lower levels of output) as decrease in AFC. Minimum efficient scale decreases (point at which MC crosses the bottom of AC)
What type of innovation reduces marginal cost but has no effect on fixed cost?
Input saving innovation e.g division of labour
What effect does decrease in marginal cost have on total cost?
Variable cost curve pivots down so TC curve pivots down at a shallower slope.
What effect does a decrease in marginal cost have on average costs?
MC curve pivots down, consequently pivoting the AC down (especially at higher levels of production). New equilibrium where unit costs are lower but quantity produced is higher. Cost efficient with a higher MES.
What type of innovation increases fixed costs but decreases marginal costs? What type of innovation might struggle with this?
Capital intensive process (introduce machines to replace labour). e.g chatbotsSmall organisations might struggle due to the high initial upfront cost.
Draw and explain the diagram that shows fixed costs increasing and marginal costs decreasing due to capital intensive production?
With labour intensive production there are 0 fixed costs (intercepts origin), MC is high however so steep slope of the curve. Capital intensive production has high initial fixed costs so intercepts Y axis at a higher point, has a less steep slope however as MC is lower. At a lower quantity of production should be labour intensive (left of vertical line) but at higher output economies of scale are introduced and lowers average cost.
Give an example of an innovation that reduced marginal cost of producing other models/brands but increased fixed costs?
Toyotas flexible manufacturing system (which allows them to produce multitude of products under one roof) - in covid they devoted their efforts to producing ventillators. Allows for economies of scope
Draw and explain the graph that shows increased fixed costs but lower MC of producing other models?
Metrics: total costs/number of modelsInflexible process = make product through same process at a higher MC (FC initially 0 but steep curve). Flexible process = making new models requires upfront investment so FC high but MC lower due to economies of scope. If want to produce fewer models then should use inflexible process but if want to produce more models should use flexible as it brings total costs down. There is a minimum break even level here but after this is acheived the an unlimited variety can be acheived.
Define;a) economies of scaleb) economies of scope
a) unit costs decrease with increased outputb) unit costs decrease as scale of production increases (new brands and models including).
Define;a) radical innovation - give example
a) improvements that fundamentally alter the character of the product or process - can completely undermine the competence of the market leader. E.g PC was a radical innovation that undermined IBM’s dominance in the computer industry. It adopts the combinatorial view that reorganises existing knowledge e.g a phone was combined with a laptops features to form a smart phone.
define incremental innovation? - give example
Steady stream of improvements that dont change the character of the product or process in a fundamental way. E.g the personal computer has seen constant improvements in processor speed and memory capacity. Adopts the specialisation view that with division of labour, increase expertise = increase efficiency,
define architectural innovation
changes in the way that components are pieced together to make a system (partly incremental as doesnt undermine firms knowledge of components but partly radical as does undermine firms knowledge of product architecture.
