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At the roulette table, you have to make choices. You can put a little money on different numbers to increase your chances of a moderate payback. Or you can put everything on one or two numbers and hope for the really big win. Managing innovation might look just like roulette – with one crucial difference: You cannot choose not to play at all.

Every firm needs to make its bets, too, when it comes to develop the products, services, processes and business models that will ensure tomorrow’s cash flow. One finds that firms are placing their bets in two ways, depending on the level of innovation that is pursued. In modern innovation management theory, the terms “incremental” and “radical” (the latter also called “breakthrough”) are frequently used to describe the degree of innovativeness of a product, service, process or business model.

Commonly, incremental innovation is defined as the refinement, improvement, and exploitation of existing technology, offerings and business models. Incremental innovations build on and reinforce the applicability of existing knowledge and subsequently strengthen the capabilities of incumbent firms and their dominant business design. The management of incremental innovation is characterized by reliability, predictability, and low risk. Examples of incremental innovations include the video iPod, whitening toothpaste, and Microsoft’s Vista operating system.

On the other hand, radical innovations are generally defined as innovations with features offering dramatic improvements in performance or cost, which result in transformation of existing markets or creation of new ones. Typically, they are described via “New to the world performance features”, “Significant (5-10x) improvement in known features” and/or “Significant (30-50%) reduction in cost”. Radical innovations build on fundamental technological discoveries and thus are new to the firm and/or industry and offer substantially new benefits and higher performance to customers. In many cases, radical innovations entail the creation of a new business model. Examples include the original iPhone, magnetic resonance imaging (MRI) and the telephone.

Whichever type of Innovation you follow make sure you define the Problem first and act upon validated market results.