Market Dynamics and Corporate Innovation - Lecture Notes
Lecture 1
Questions: Why is it necessary to innovate, both in a start-up and large incumbent firms? Innovative
activity, one of the central manifestations of change, is also one of the key challenges faced by firms.
Pioneering technologies, leading to substitutes to firms’ older products or services; growing
sales and increasing market share; make a brand more valuable; share price can rise; more (growth) or
less (automation) employees; innovation, based on market research, in an open market, with diversified
portfolio; short- vs long-term strategies.
Firms should realise and accept that changes need to be made over time; market disruptions and
developments should be recognised; when left behind because of a lack of innovation, firms can go out
of business; refusing to execute (drastic) changes because of a strong current position and the ‘mentality
of a perfect product’ can impact a firm extremely negatively.
Changing strategy whenever leadership changes can be a good thing in certain situations, but
this is definitely not always true. A firm has to consider whether managers act in own or firm interest.
Innovation is a key driver of sustainable economic growth; it is important to grasp how firms innovate
and deal with market dynamics; time adaptation is key to firm survival and growth.
Core business; adjacent (extending) business; transformational (new) business; anticipation on new
developments; inventions / innovations, bringing new products or services to a particular market and
operating in an open market with a diversified portfolio; long-term strategic plans, based on research.
Example: Kodak vs Fuji Film; market leader Kodak had an approximate market share of 85%
and was known for its pioneering technology and innovative marketing, but at some point in time ignored
new developments and disruptions, while Fuji Film did act upon them, leading to Fuji Film taking over.
The firms had a lot in common, because both were lucrative near-monopolies of their home market and
both firms saw their traditional business rendered obsolete (but only Fuji Film decided to act upon the
disruptions in the market in time; Kodak responded later, but had to file for bankruptcy some years after).
Classical economics or the structural view of economics adhere to a static perspective, meaning that
this type of economics has been unable to deal with questions about dynamics and developments in
markets; dynamic perspective: markets are constantly evolving, changing and innovating at global,
institutional, collective and individual level; there are forces which change economic structure and
industry landscape which comes from within the system, in which the entrepreneur or innovator is
centralised (Austrian School, Schumpeter).
Paper: Christensen and Sundahl 2001
Classification, Categorisation: solid-liquid-gas plasma; incremental vs radical innovation; sustaining vs
disruptive innovation; breakthrough, modular, and architectural innovation.
Prediction: what causes what, why, and under what circumstances?; a statement about this is a theory.
Inductive vs Deductive processes.
1* Observe, describe and measure phenomena → 2* Classification → 3* Theory → 4* Paradigm.
Anomaly: revising descriptions, classifications; rearticulating causal relationships.
Old phenomenon + Anomaly: several iteration cycles.
Paradigm: simple, elegant representation of prior version of theories which have been modified to fit an
unambiguous categorisation scheme.
Course description / material covered:
Articles by economists, which tackle different theoretical perspectives on markets; application to certain
cases; disruptions in industries, new market leaders, emergence of digital platforms; distinguishing types
of innovation; firms’ life cycles; mechanisms for firm entry, growth, survival and demise; academic paper
analysis for interpretation of contributions.
Levels of analysis: firm-, entrepreneurial, industry-, and macro-environment level; links between
these levels: dynamics of innovation and agility (v. inertia).
Paper Analysis: Main contribution; applied methods; results; strengths and weaknesses.
Step 1: title / abstract / introduction / central question (surveying); Step 2: conclusion, findings; Step 3:
detailed reading; answer to central question / employed methods / credibility; Step 4: critical reading;
communicate defendable value vs criticisable flaws of the article.
, Lecture 2
Knowledge clip 1 – Basic concepts in economics of innovation (Introduction)
Concepts of innovation – innovation is all around; it is constantly used to improve day-to-day life; a clear
growth in research on innovation can be seen from data; there are different models of innovation.
Difference between creativity and invention – creativity is usually defined as the ability to produce useful
work; invention is usually defined as result of the creative process; the terms are used interchangeably.
Difference between invention and innovation – the first-time occurrence of an idea qualifies as an
invention and can be carried out anywhere; the first-time commercialisation of the idea is considered an
innovation and occurs mostly in firms (commercial exploitation); innovations depend on the market; an
invention needs numerous improvements before it can become an innovation.
Innovation is a broader term than technological change – all technological changes are
innovations, but not all innovations are technological changes.
Linear model of innovation – research and creativity lead to innovation (in a straight line); well-defined
stages of research, development, production and marketing.
Stages: 1* Research & Creativity (autonomous vs combinatorial; depends on motivation,
intellectual ability, environment, etc.) → 2* Invention (intellectual property protection) → 3* Design &
Development (types of innovation) → 4* Innovation (passive vs active consumers).
Autonomous creativity – derived from work of psychoanalytical theorist Otto Rank; exceptional creativity
requires complete authority; certain degree of isolation required, no influence from peer pressure.
Combinational theory of creativity – derived from work of Arthur Koestler and Herbert Simon; exceptional
creativity requires an ability to bring together habitually incompatible ideas and combine them to get
more novel insights (crossing disciplinary boundaries; no isolation).
Invention – first occurrence of an idea; outcome of an expensive cycle of R&D, if financial gains are
potentially there; inventions can be protected to draw economic benefits; inventions can be kept secret
through informal mechanisms, e.g. confidentiality agreements, or through formal mechanisms, like
patents, registered designs, trademarks and copyrights; open inventions, shared by firms, accelerate
processes (public good; user innovation), without the fear of being copied by others due to patents; firms
can allow others to use the ‘sole’ right to an invention.
Types of innovation – innovation can take many forms; “introducing new commodities or qualitatively
better versions of existing ones; finding new markets; new methods of production and distribution; or
new sources of production for existing firms; or introducing new form of organisation” (Schumpeter);
process and product innovation (the two types can enable each other).
Process – the way in which a product is made, without changing the product; the way in which a firm
organises its business (techniques of producing and marketing products).
Product – new product, no changes in production process.
Types of consumers – passive consumers always seek the familiar, without change; passive consumers
are not interested in product innovation, but in process innovation (familiar good, lower price); another
type is a conventional consumer, who has predetermined needs and is only interested in innovation to
the extent that it reduces prices or increases product characteristics that the consumer is looking for;
active consumers are always seeking variety and change, and are keen to explore new products.
Simplified assumption – Innovation is applied science with well-defined stages of research, development
and production; research and creativity lead to innovation, in a straight line.
But, the linear model generalises a causation which may hold true only for a minority of
innovations; firms innovate because of commercial needs, and the starting point is often reviewing and
combining existing knowledge, only in its absence will firms invest in new research.
Chain linked model of innovation – innovation is not a sequential (linear) process; innovation is a learning
process, involving multiple inputs, interactions and feedbacks in the process of knowledge creation.
Most important innovation undergo drastic changes in their lifetimes, changes which potentially
completely transform the economic significance. Subsequent improvements in an invention after its first
introduction may be vastly more important than the initial availability of the invention in the original form.
