2.1.3 Research and development (R&D) and innovation

R&D

Investment in research to improve existing goods and services, introduce new products, or enhance production methods.

Competitive advantage through innovation

Firms gain advantage when their products are deemed better than competitors’ by customers; can be achieved through price, quality, cost, or niche markets.

Cost competitive advantage

Lowering average costs and providing maximum value to consumers through skilled workforce, cheap raw materials, or effective technology; may also require brand loyalty or exceptional service to maintain.

Incentive to increase market power

R&D differentiates products → creates unique selling points, increases brand loyalty, boosts revenue, and can increase market power.

Product and process innovation

Technological change improves efficiency and productivity → lowers costs, increases output and quality; may create new products, markets, or destroy existing ones (e.g., VHS → DVD → Blu-ray → downloads).

Small and Medium Sized Enterprises (SMEs)

Promote competition, create jobs, stimulate innovation and investment, enhance market dynamism.

Creative destruction

Concept by Schumpeter: innovative entrepreneurs challenge existing firms → productive firms grow, less productive exit → economy’s productive potential expands.

Product innovation

Small changes to product performance or features.

Process innovation

Improvements in production methods to increase efficiency and reduce costs.

Role of state funding in R&D

Encourages R&D by reducing costs for firms, especially for merit goods; can increase GDP, incomes, and reduce unemployment.

Disadvantages of state funding

Opportunity cost to government, potential higher taxes, risk of inefficiency if firms rely on subsidies, possibility of government failure if inefficient industries are supported.

Product life cycle (PLC)

Stages in a product’s life: development, introduction, growth, maturity, decline.

Development stage

Product being researched and prepared for launch; no sales revenue yet.

Growth stage

Sales increase, revenue rises, firm may invest in production capacity and marketing.

Maturity stage

Sales peak and stabilise; competition may increase.

Decline stage

Sales fall; firm must decide to remove product or use extension strategies.

Extension strategies

Techniques to lengthen a product’s life: marketing, rebranding, changing packaging, adjusting price, adding value.

Brand loyalty example

Microsoft maintains strong brand loyalty through continuous product improvement.