Listening to your customers is a double-edged sword. One one hand, customers guide the evolution of your existing products. On the other hand, as Henry Ford famously noted their desire for a faster horse, rather than an automobile, customers can lead you to a road with constant low-margin modifications of obsolete products.
Herbert M. Allison (YC '65), Chairman, President and CEO of TIAA-CREF, in his talk in the Yale Business & Management lecture series ( 3/23/06) mentions a solution to this problem. He says that listening to your customers should actually mean listening to two different groups of people: the ones that you already have as your customers and the ones the you would like to have as your future customers. He gives example of General Motors that got extremely good at building large rear-drive vehicles, and for a long time looked at its European and Japanese competitors as a distraction, rather than a sign of emerging customer preference.
Allison's point undelines the challenge of product innovation, especially for large successful companies. The are so good at "owning" their current customer base that they forget to identify emerging opportunities. Monopolies like Microsoft can easily fall into this trap. Just consider the Vista fiasco. The operating system that took thousands of programming man-years to develop could not compete Windows XP, its own previous version.
The solution to the Innovator's Dilemma ["you have to listen to your customers, and you don't have to listen to your customers"] lies in aplying the separation principles. First, separate in space, e.g. find a different set of customers; second, in time, e.g. over time develop different needs within the same customer base.
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