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Study notes

Innovation - Benefits and Risks

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

The benefits to business of innovation can be significant, but so too can be the risks!


BENEFITS OF INNOVATION

Improved productivity & reduced costs

A lot of process innovation is about reducing unit costs. This might be achieved by improving the production capacity and/or flexibility of the business – to enable it to exploit economies of scale

Better quality

By definition, better quality products and services are more likely to meet customer needs. Assuming that they are effectively marketed, that should result in higher sales and profits

Building a product range

A business with a single product or limited product range would almost certainly benefit from innovation. A broader product range provides an opportunity for higher sales and profits and also reduces the risk for shareholders

To handle legal and environmental issues

Innovation might enable the business to reduce it carbon emissions, produce less waste or perhaps comply with changing product legislation. Changes in laws often force business to innovate when they might not otherwise do so

More added value

Effective innovation is a great way to establish a unique selling proposition ("USP") for a product – something which the customer is prepared to pay more for and which helps a business differentiate itself from competitors

Improved staff retention, motivation and easier recruitment

Not an obvious benefit, but often significant. Potential good quality recruits are often drawn to a business with a reputation for innovation. Innovative businesses have a reputation for being inspiring places in which to work.


RISKS OF INNOVATION

A strategy of investing in R&D and innovation can bring significant rewards, but it is not without risk. Amongst the potential pitfalls are:

Competition

An innovation only confers a competitive advantage if competitors are not able to replicate it in their own businesses. Whilst patents provide some legal protection, the reality is that many innovative products and processes are hard to protect. One danger is that one research-driven, innovative company makes the initial investment and takes all the risk – only to find it is competing with many me-too competitors riding on the coat-tails of the innovation.

Uncertain commercial returns

Much research is speculative and there is no guarantee of future revenues and profits. The longer the development timescale the greater the risk that research is overtaken by competitors too.

Availability of finance

Like other business activities, R&D has to compete for scarce cash. Given the risks involved, R&D demands a high required rate of return. That means that for businesses that have limited cash resources, the opportunity cost of investing in R&D can be very high.

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