Product Innovation

Conceptual Overview

In order to be successful in markets, one has to be able to quickly adapt to a rapidly changing environment. It is the nature of the new economy that change occurs at a faster pace than in traditional markets. For a firm to gain competitive advantage in a market, the core strategy is through the development of new products that companies can diversify in order to match evolving market and technological conditions, as Brown and Eisenhardt analyzed in 1995.

In the new economy, price competition is considered secondary in importance, and firms pursue profits through product innovation, which displaces the existing product by an improved one. Innovation is typically understood as an idea, practice, or object that is perceived as new by an individual or other unit of adoption. Innovation can basically be a product innovation (new or better material goods, as well as new intangible services) or a process innovation (new ways of producing goods and services). The economics literature differentiates between product and process innovation because of the economic and social impact that each might have. For instance, while the introduction of new or improved products or services is commonly assumed to have a clear, positive effect on growth of income and employment, it has been argued by Edquist and colleagues in 2001 that process innovation, improvements in the ways to [Page 1309]produce these goods and services, due to its costcutting nature, may have a more ambiguous effect. Product innovation is thus a potential source of competitive advantage for many firms.

Actually it was Schumpeter in 1942 who proposed that the most important mode of competition is based on development and innovation. For Schumpeter, technological competition was the true nature of capitalist competition, as opposed to the price competition. What distinguishes capitalism in reality is innovation in commodities, technologies, suppliers, and organization, which not only command decisive cost or quality advantages but make existing firms and techniques outmoded.

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