Competitive Advantage

Competitive Advantage:

Customers may have interesting ideas for making incremental improvements to your product--but those insights aren't enough to maintain your competitive edge. What about the competing products or nascent substitute technologies that aim to solve customers' problems in new, better, cheaper ways?

A classic example: One of the companies I was involved with developed a way to route phone calls by embedding smart software into the telecommunications network, not in the automatic call distributor (ACD) or private branch exchange (PBX). But forget all the techie acronyms--the point is that the guys building PBXs and ACDs were adding new features to their existing equipment, yet only able to make small incremental improvements based on what their customers were telling them.

Meanwhile, this new company took a totally different view, resulting in a more personalized, cost-effective, easily implemented solution. While manufacturers of ACDs and PBXs were busy making small customer-inspired tweaks, they missed the onslaught of a massively disruptive new technology--and suffered the consequences.

Time and again, companies face a comeuppance because they missed some cue. They're so focused on the operational side of the business, or on pleasing customers in the here and now, that they miss the very real threats from new competitors unencumbered by traditional technologies and business models.

It happened to mainframe vendors like Unisys (nyse: UIS - news - people ), which totally missed the minicomputer marketplace. And minicomputer vendors like Digital in turn dismissed the personal computer revolution spearheaded by Dell (nasdaq: DELL - news - people ), Compaq and Hewlett Packard (nyse: HPQ - news - people ).

Surely Blockbuster's (nyse: BBI - news - people ) execs are sorry they didn't foresee the coming of Netflix (nasdaq: NFLX - news - people ) and movies-on-demand models. Talking to customers wouldn't have helped much: The new paradigm didn't emerge because of a fundamental change in customer needs, but because of an explosion of network bandwidth. Blockbuster lost because it didn't perceive the extent to which this seemingly peripheral technological advancement might invite a new breed of competitor--namely, cable companies that could stream movies to homes without interruption.

Customer feedback also won't shed much light on threatening new regulations or standards. To wit: the rapid shift from standard DVD to Blu Ray in less than two years. While prices of Blue Ray devices escalated, DVD manufacturers were severly affected.

On the flip-side, the nice thing about seismic shifts is that they help level the playing field. While entrenched players may try to hold on to the past at their peril, small, gutsy players often can adapt and capture value more quickly.

Whatever you do, don't get blindsided by only listening to your customers. Focus on the whole picture instead.

Lou Volpe is a managing general partner for Kodiak Venture Partners, a Massachusetts-based venture capital firm focused on early-stage investments.

The only thing that you cannot have is that you cannot dream.