What’s a gap analysis?
Companies use a gap analysis to evaluate their existing performance against their intended and expected performance. This examination determines if a corporation is meeting expectations and using resources efficiently.
By evaluating time, money, and effort, a gap analysis helps a corporation compare its current condition to its intended state. The management team may develop an action plan to advance the organization by identifying and evaluating performance gaps.
Understanding Gap Analysis
Inefficient use of resources, cash, and technology can hinder companies from reaching their full potential. This is where gap analysis helps.
A gap analysis, or needs analysis, is crucial for organizational effectiveness. It helps firms establish their current and future goals. Gap analyses can help companies assess their progress toward their goals.
In the 1980s, gap and duration analyses were standard. Gap analyses are more complex to apply and less popular than length analyses, but they can still quantify term structure movement exposure.
Gap analyses include four phases and culminate with a report highlighting improvement areas and a plan to boost organizational performance.
The “gap” in a gap analysis is the disparity’s current and desired future.
Guide to Gap Analysis
Different gap analysis models divide the following phases into four processes: Some elaborate and add processes to the analysis. A gap analysis involves evaluating your existing location, defining your intended destination, and planning how to get there.
Step 1: Identify Your Current State
A gap analysis begins with your company’s existing state. This involves researching its goods, consumers, locations, and employee perks. This information might be quantitative (e.g., financial records necessary for filings) or qualitative (e.g., surveys or stakeholder input).
A corporation often performs a gap analysis because it knows of a problem. A corporation wants to evaluate and fix unsatisfactory customer feedback survey findings. Before it can imagine what it wants to be, it must understand why these errors are happening, when challenges arise, and who the change management leaders are.
Step 2: Determine Future State
This phase is crucial to gap analysis, where a corporation must define its goals. This stage is the company’s identity, which will determine its strategic measures to achieve its goals.
To succeed long-term, a corporation must set quantifiable targets in gap analysis. For instance, instead of setting a goal to improve customer service, the organization could focus on measurable measures, such as achieving 90% customer satisfaction within 12 months.
Analyzing rivals or other market participants might help determine the intended outcome. It may be simpler to recognize and mimic a successful organization.
Step 3: Find Gaps
After defining the present and fit states, it’s time to bridge them and identify the most critical differences. In our running example, a corporation learns it may be understaffed, undertrained, or unable to handle client requests.
Step 4: Assess Solutions
After identifying its weaknesses, a corporation must determine how to improve. Sometimes, there is only one answer, but sometimes, the gap analysis requires numerous simultaneous modifications.
A remedy must be quantified using change measures to determine its efficacy. Customer satisfaction may be a simple statistic for improving customer service. Other gap analysis results, such as brand recognition problems, may demand innovative, careful solutions for evaluation.
Step 5: Change
After selecting the top Step 4 ideas, implement them. The corporation strives to close the analytical gap at this step. The company implements solutions to improve a particular business sector or overcome shortcomings.
This implementation step frequently requires precise cadence and comprehensive protocols. The gap analysis gives the firm a goal, and it must be careful not to create further damage. Employees may feel overwhelmed and discouraged by tedious training. Making staff more efficient may reduce output or morale.
Step 6: Track changes
Thus, the organization needs to monitor changes to complete its gap analysis. Sometimes, the corporation did everything perfectly. Sometimes, the disparity was more significant than expected, or the firm failed to appraise its situation correctly. Gap analysis may be a cyclical process in which the firm reassesses its existing position and compares it to future states after making adjustments.
Comdon’ts generally don’t release their gap analysis methodology since it contains sensitive information. Additionally, the research would inform companies of the company’s orientation.
Types of Gap Analysis
Market gap analysis
Market gap analysis—product gap analysis—considers the market and unmet consumer demands. Identifying locations where product supply falls short of consumer demand allows companies to fill the gap independently. External experts with experience in various business sectors where the corporation may not operate may undertake this study.
Strategic Gap Analysis
Strategic gap analysis, often known as performance gap analysis, is a rigorous internal firm performance evaluation. Analysis of a company’s performance to long-term standards, like a five-year or strategic company’s performance against its competitors via a strategic gap study. This investigation may reveal how other organizations use workers or cash more strategically and resourcefully. This information may be challenging to find if departing workers have signed nondisclosure agreements and the firm does not publicly publish process details.
Financial/Profit Gap Analysis
Financial measurements may help a corporation identify performance gaps relative to competitors. Possible comparisons include price, margin percentages, overhead expenditures, labor revenue, and fixed vs. variable components. Profit gap analysis seeks to identify areas where a rival is more financially efficient. Later, gap analysis types can use this data.
Skill Gap Analysis
Instead of focusing on finances, a corporation may focus on people. A skill gap study assesses whether the staff lacks sufficient knowledge and experience. To effectively address the skill gap, it is crucial that a comprehensive study delineates the organizational goals and demonstrates how the current workforce aligns with and contributes to that strategic plan. A skill gap study may suggest training current workers and hiring fresh talent.
Innovative firms that need direct skill sets to compete (or lead) in their field need this sort of study. Small organizations with a small staff also need skill gap analysis. In this instance, people need various adaptable skills that can be used across the organization.
Compliance Gap Analysis
A compliance gap company assesses a company’s compliance with external requirements, sometimes using internal audit functions. A corporation may internally analyze its accounting and reporting functions before hiring an auditor to review its financial statements.
Compliance gap analysis is preventative and defensive, unlike strategic gap analysis. Compliance gap analysis frequently aims to comply with rules, avoid penalties, meet reporting obligations, and meet external deadlines rather than increase market share.
Product Development Gap Analysis
A corporation may use gap analysis to determine which product features will fulfill market demand and which will not when it produces new goods. Software goods or items that take a long time to build (where market demand may have changed) generally require this gap research.
A corporation may also assess whether product or service features have been deployed, delayed, purposely deleted, or are still in development during product development gap analysis. Using a mix of gap analysis methods, the organization may constantly assess how its product strategy is developing and if it has the resources to fill internal gaps for product development.
Companies have several tools for gap analysis. The following tools are ideal for specific gap analysis tasks:
A SWOT analysis
SWOT analysis is a famous way of assessing a company’s strengths, weaknesses, opportunities, and threats. Gap analysis lets a corporation assess internal and external aspects to improve or lead on.
Internal SW companies assess a company’s strengths and weaknesses. A corporation may divert resources from its strengths during a gap study if it is confident in its market lead. However, firms may be more interested in its flaws and how far behind it is from competitors. Companies may determine that entry hurdles, large financial expenditures, or customer preferences prevent them from overcoming deficiencies.
The other half of a SWOT analysis involves the company’s control. A company’s opportunities and dangers are typically uncontrollable elements that might prevent gap analysis results from materializing. A corporation may intend to increase market share by producing a new product. A government levy on the goods might raise per-unit costs, making it harder for the corporation to narrow the difference.
A fishbone diagram, also known as a cause-and-effect diagram or Ishikawa diagram, helps detect potential issues. Promoting innovative thinking while solving a business limitation helps.
Writing the problem in the middle creates a fishbone diagram. Next, key categories are written on branches of the core problem. These branches eventually add branches that explain why each category has concerns. The fishbone diagram breaks a huge, difficult problem into smaller, easier-to-solve parts.
The McKinsey 7S framework emphasizes seven crucial variables affecting corporate performance and operations. Strategy, structure, and model “esses are the model’s “hard elements”; shared values, talents, style,” and personnel” are its “soft elements.”
A corporation may use the McKinsey 7S model to see how each area fits into gaps and how it can change each element to meet long-term goals. Monitor and assess firm performance iteratively after modifications.
The Nadler-Tushman approach determines difficulties, why a firm is underperforming, and how to improve performance. The Nadler-Tush company holds that a company’s components must work together to succeed.
The approach emphasizes culture, labor, structure, and people. These four key concepts get input (business strategy) and output (performance). The objective is to identify how the four components interact.
A PEST study evaluates external variacompany that may affect a company’s profitability. Politics, economics, society, and technology (PEST) PESTLE analysis, which includes legal and environmental issues, is prevalent.
PEST analysis can aid with gap analysis since a corporation may overlook external variables that produce, worsen, or fix gaps. Government regulations make exporting a company’s goods more expensive. If external pressures change negatively, a corporation may have a gap.
Companies typically utilize tools since one tool might inform another.
Gap Analysis: When to Use
Companies should constantly assess their goods, consumers, market demand, and processes. Some situations require a more rigorous gap analysis. Periods include:
During project management, From conception to completion, a corporation may assess if it has enough resources, expertise, talent, and information to accomplish a project. A long-term project is ideal for gap analysis since certain goods with multiyear development cycles suffer external changes.
Strategic planning. Gap analysis aids strategic decision-making in long-term budgeting, company restructuring, and acquisitions. This ensures long-term success by allocating resources appropriately. Expansion into a new region may bring political, geographical, currency, and cultural risks. A corporation should undertake a gap analysis to determine how serious these risks are and what extra resources are needed (if any).
To understand performance issues. Gap analysis may enhance short-term, daily operations as well as strategic ones. Although reactive, firms might preemptively try to understand operations. A cost center may come in significantly over budget, and the organization may want to learn why and how to improve.
Marketing to other parties. Gap analysis is mainly helpful to internal parties; however, investment firms can use it to convey plans. Private enterprises can discover their weaknesses. In a capital investment request or startup fundraising round, you can share your internal plan with outside stakeholders. A corporation may attract investors and partners by being honest, transparent, and strategic about its shortcomings.
Benefits of Gap Analysis
Gap analysis has several benefits due to its versatility. Each advantage below may apply to one gap analysis type. Still, organizations may encounter:
- Profitability improved. Gap assessments and anticipatory shortfall determinations let companies invest at appropriate times, have resources on hand (instead of paying more capital to secure later), and function more effectively.
- Improved manufacturing techniques. Identifying and avoiding manufacturing process gaps improves production, supply logistics, raw material availability, and bottleneck prevention.
- Increased market share. Combining the first two benefits can boost a firm’s sales, revenue, customers, and market share.
- Happy workers and consumers. Gap analysis allows firms to address employee and consumer demands before they strain relationships or drive customers away.
- Operational effectiveness. By knowing its weaknesses, a corporation may enhance its daily operations.
- Reduced risk for long-term projects. Companies may prepare for gaps and prevent issues by recognizing resources and deficiencies.
Finance/Asset Management Gap Analysis
Gap analysis is an asset liability management tool that evaluates interest rate risk (IRR) and liquidity risk, not credit risk. Using a basic IRR approach, it measures the difference between rate-sensitive assets and liabilities over time. This technique is effective for assets and liabilities with fixed cash flows. One limitation of gap analysis is its inability to handle options that have unpredictable cash flows.
Suppose a corporation wants to invest but wants to ensure it has adequate funds for contingencies. The firm may evaluate financial flows, risks, and deficits. This is common in long-term, high-risk, macroeconomic, or externally sensitive initiatives.
Example of Gap Analysis
For years, GameStop Corp. competed in the video game business. Customers may trade in games or buy consoles and items in person.
Companies rarely disclose their analysis or plans. However, in July 2022, the corporation launched an NFT marketplace for gamers, developers, collectors, and community members to trade NFTs.Though this commercial venture was founded primarily for art, it is projected to extend into gaming with many NFT uses.
GameStop may have done a gap analysis before making this business choice. Could have:
Assessed its market position. Realizing how the digital revolution has changed many businesses, it may have decided that its in-store business model may not be viable (although it has a website).
- It analyzed its ideal state. The corporation may have wished to preserve its video game distribution leadership. This undoubtedly led the corporation to realize that digital gaming, particularly NFTs in gaming, may be the next industry disruptor.
- They are planned for the future. This would have included the NFT marketplace launch and additional, maybe unannounced, strategic initiatives.
- Plan execution. Besides launching the NFT marketplace, GameStop has partnered with Ethereum Layer 2 organizations and hired individuals with expertise in digital assets and blockchain.
The final internal debates about the NFT marketplace are unknown, but GameStop undertook a gap analysis to realize that a digital marketplace may improve its brick-and-mortar business.
Why is gap analysis done?
A gap analysis determines where a corporation is falling short of its goals. It analyzes how a corporation may progress from its current state to its desired state.
What are the types of gap analyses?
Gap analysis, however, is constructive in many business scenarios. Gap analysis is typically strategic and can assist with market positioning, product success, labor demands, and long-term financial positioning. In addition, gap analysis may also evaluate operational issues, such as short-term budget deficits and personnel satisfaction.
Gap analyses have what core elements?
Always begin a gap analysis with a company’s existing position. A corporation can’t plan its future without knowing its existing state. Gap analysis includes evaluating where it is now and where it wants to go in the future and creating a trackable implementation plan to keep change managers responsible.
How are gap and SWOT analyses different?
Gap Company mainly uses SWOT analysis. A company’s SWOT analysis reveals its strengths and weaknesses. Then, the organization should determine if those strengths and weaknesses match its company’s analysis aims to improve a company’s strengths and flaws. SWOT analysis opportunities and threats are also dangers that a gap analysis plan would fail to address.
Static vs. dynamic gap analysis?
These words frequently apply to bank or financial business performance and firm analysis. Static gap analysis assesses the firm’s interest rate sensitivity. Dynamic companies examine the distinction between a company’s assets and liabilities.
Companies may use a gap analysis to assess their existing position, determine their ideal position, and create a plan to close it. A corporation may do a gap analysis if it suffers operationally or wants to become more strategic. SWOT analysis, PEST (LE) analysis, and fishbone diagrams can help the organization create and implement a long-term plan.
- An organization compares its existing and target performance using gap analysis.
- Companies that are underutilizing their resources, cash, and technology might benefit from a gap study.
- Management may develop a strategy to close performance gaps by identifying the gaps.
- A gap analysis involves identifying organizational goals, benchmarking the existing condition, assessing gap data, and writing a report.
- Gap analysis may compare rate-sensitive assets and liabilities.