Keeping your Leading Edge: Mind the Gap

Posted on January 10, 2006

A leading source of CEO insomnia:  the performance gap. Best practices should include nourishing and widening this gap, a key component often ignored by top teams.

In London the “gap” on the Underground is dangerous. But for the gap I’m thinking about, bigger is better. Order me up a moat, or a chasm, please. I’m talking about the performance gap between your company’s superior product or service and your competitors’.

This month, I’ve seen no less than seven leaders (six CEOs and one CFO) for whom the size of the gap was at the heart of their insomnia. For one company, the gap is so wonderfully huge that he’s staying awake at night figuring out how to keep up, and is presently holding back new customers from signing on until he’s ready. For now, his would-be customers are not going anywhere because they don’t have any good alternatives.

For two of the seven companies, they’ve created brand new, innovative offerings (one is a product, and one’s a service), they are just in the process of telling the world. The customers should come running any time now. Not that these CEOs are on pins and needles or anything….

The other four companies have been minding their business, but they see their gap—their lead—is closing between what they offer and their competitors offer. One said, “We’ve had a huge lead for eight years now, but this year, a team of three unemployed engineers in Los Angeles have built a new system that does pretty much what ours does. It has been pointed out to us by several prospects”. Another, whose business has been growing steadily (even in 2009) said, “We solved a key problem 15 years ago that was a big leap forward. We’re protecting our patents aggressively, but advances in related technologies are allowing our competitors to solve that same problem in new ways. We’re fine for the next few years, but I’m worried about 2013 and beyond.”

Every chief executive I know is keenly aware that the gap between them and their competition is closing all the time. Key differentiators are almost never permanent, so even you’re the “lucky” chief executive I mentioned at the start of this article, you know it won’t last forever. Minding and expanding the gap is an ongoing duty.

Gap-Minding Best Practices

Spend money and time on minding the gap, and project manage that effort. This means a team (including the chief executive) will meet regularly, have written tasks and be held accountable for them. This will result in a steady stream of failures and successes over time. Read a CEO case study on someone who did this well. Just thinking about the gap while on planes and stuck in traffic won’t cut it.

Know that a lot of money and time will be wasted in this process. Innovating and developing new services/products is not like running a production line. No exact bottom line can be calculated from the start. This also means that you should not bet the farm on any one idea or initiative. Some of the free cash flow from operations should be allocated to this effort each month. Read this related article.

Get out of your office. Talk to people. These innovations have to solve other people’s problems. Too many of us get isolated inside our own companies, or inside our own heads. Click here to read my article on just this point.

Test early, and test quickly. In the product world it’s called fast prototyping. With new ideas, get them out of the “lab” quickly, and let customers try them on, see if they’ll buy. Spend as little as you can to get this early read on customers. Much of the time, the “great” idea will fail, and you’ll save a bunch of development money and time. On those occasions when it succeeds, you’ll have to do some re-work on your prototype, but that’s much cheaper than building your failures perfectly. Read this case study on my client, who does this really well.

Work on incremental moves, where you’ll widen the gap a little, as well as big, bold moves that will create a new chasm. The small moves will help keep you ahead just enough to give you more time to figure out how to leap forward.

Remind your teams that I’m not talking about a technological gap, or an intellectual gap. I’m talking about your company’s ability to solve your customer’s worst headache, versus your competitor’s ability to do so. Don’t build great things that have no use.

Vision and passion are great, but hallucinations are not. Yet vision and hallucination are close kin. Don’t believe your own BS. Your customers either love what you’ve developed/delivered and pay you nicely for it, or they don’t. They are your judge. They are not wrong. I’ll admit that sometimes it takes a few tries, and that the marketing and sales effort must be on target. But too many companies limp along, getting into debt with products or services that just don’t cut it. What a waste. When you have a big competitive advantage, you’ll know it. Your numbers will show it. You’ll be scrambling to keep up with the sales.

When your gap is large, charge enough and earn enough profit to build a war-chest for minding the gap in the future. This is innovation fund, or an acquisition fund, or a new ventures fund. Call it what you want. But if you distribute too much of the spoils when the going is good, you are impairing your ability to maintain your competitive advantage.

But it is also true that some companies are one-trick ponies. The likelihood of another big innovation is low. Maybe it’s because of a consolidating industry, or because ownership isn’t willing to take any risk. Acknowledging that the company won’t have a big new innovation will mean they can avoid wasting cash and profits on an effort that is likely to fail. Instead, either fatten up the profits and sell it while the future still appears bright, or run the business lean and profitable, churning out free cash flow, even as it shrinks. Sell your business, or ride it down profitably.

The “Mind the Gap” warning isn’t just for Brits riding the underground. It’s for every chief executive too. Keep an eye on the competition as they gain ground, and continually look for and test ways to maintain or widen the gap. That’ll keep the profits and growth coming – for your company.