What is a Gap analysis?

Gap analysis helps businesses compare current performance with desired goals, identifying inefficiencies. This method aids in developing action plans to bridge performance gaps.

By Brad Nakase, Attorney

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What is meant by Gap Analysis?

Businesses employ a method called the gap analysis to assess how well they are performing now compared to their expected or planned performance. This kind of study is done to find out if a business is operating efficiently and fulfilling its obligations.

An organization can measure money, labor, and time to determine its present situation and then contrast it to its intended state using a gap analysis. The leadership team may plug in the efficiency gaps and take the business forward by analyzing and defining these gaps and developing an action strategy.

Important Points

  • An organization looks at the difference between its intended performance and present performance using gap analysis.
  • When businesses aren’t utilizing most of the resources—including funds and technology—a gap analysis may be helpful.
  • A company’s management staff can address performance gaps and move the business forward by recognizing the gap and developing an action plan.
  • Defining company objectives, benchmarking the existing position, evaluating the gap information, and creating a gap analysis are the four processes in a gap analysis process.
  • Analysis of the gap between assets & liabilities that are rate-sensitive is another use of gap analysis.

Comprehending Gap Analysis

An organization might not be capable of realizing its full potential if its capital, resources, and technology aren’t being used to its fullest advantage. A gap analysis could prove useful in this situation.

Every kind of organizational effectiveness requires a gap analysis, also known as the requirements analysis. Companies are able to ascertain their current position and desired future state thanks to it. Businesses can use the gap analysis to review their objectives and determine whether or not they are well on course to meet them.

The 1980s saw the widespread use of gap analysis, usually in conjunction with duration analysis. A gap analysis can be utilized to evaluate sensitivity to a range of term-based movements, however, it is thought to be more difficult to perform and less common than the duration analysis.

A gap analysis is a four-step process that culminates in an aggregate report that highlights areas for development and provides a framework for a plan of action to improve business performance.

Quick Fact: In the gap analysis, the distance between an organization’s current state and its desired future state is referred to as the “gap.”

Method for Carrying Out a Gap Analysis

These steps can be divided into four phases by certain gap analysis methods. Some go into further detail and involve several extra phases in the analysis. Either way, doing a gap analysis means figuring out where you are now, where you would like to go, and how to get there based on your goal.

First Step: Determine Your Present Condition

The first step in a gap analysis is to concentrate on the present state of operations inside your company. Researching the goods it sells, the clients it serves, the regions it covers, and the perks it provides for staff members are all part of this. This data may come from questionnaires or input from important stakeholders, or it may come from quantitative sources like financial records that are part of legally required filings.

A gap analysis is typically carried out by a corporation once it has become aware of a problem. For instance, a business wants to look into the reasons behind the poor results of consumer polls and put corrective measures in place. It must comprehend the reasons behind these mistakes, the times at which problems are occurring, and the identities of the change managers before it has a vision of who it would like to be.

Second Step: Determine Your Future Condition

In this phase, a business must define its desired future state. This is where the magic happens in gap analysis. An organization’s desired identity will determine the strategic actions it needs to take in order to achieve its objectives, so this stage needs to be completed very carefully.

To achieve the best long-term results from gap analysis, a business needs to set clear, quantifiable goals. Setting the objective of “becoming more effective in serving customers” in the aforementioned scenario, for instance, would not be beneficial to the business. The business needs to come up with more measurable goals, like “achieve a client approval rating of ninety percent within Twelve months,” instead.

Examining the actions of rivals or competitors can also help determine the intended result. It might be simpler to recognize when a business is succeeding and make an effort to imitate that.

Third Step: Find the Gaps

Now that the present and future states have been established, it’s time to connect both of them and identify the key distinctions. In our ongoing example, this is the point at which a business realizes it might not possess the technological capacity to handle customer requests, may be grossly understaffed, or hasn’t provided staff adequate training.

Fourth Step: Analyze the solutions

Once a corporation has identified its shortcomings, it is necessary to devise strategies for achieving its desired condition. Sometimes the gap analysis will point to a single solution, while other times it will suggest multiple concurrent improvements that need to be coordinated.

A remedy frequently has to be measurable with tools to track change in order to be determined to be effective. A simple indicator, like the customer satisfaction %, might be used to quantify our case for better customer service. More imaginative, careful remedies that are still evaluable may be needed for additional gap analysis results, like limitations in brand identification.

Fifth Step: Put Change Into Action

The time has come to implement the top concepts from the fourth step after they’ve been selected. At this point, the business makes an effort to fill the analysis-identified gap. The organization aims to improve in a specific business domain or surmount a shortcoming by implementing the solutions.

This phase of implementation frequently requires adhering to a precise cadence and thorough set of procedures. The business has a specific goal for the gap analysis, so precautions need to be followed to make sure that instead of curing the problem, more harm isn’t done. Take into account, for instance, how staff may feel demoralized and overwhelmed by lengthy training. Attempts to increase employee proficiency could result in worse morale or less production.

Sixth Step: Track Changes

Because of this, the business must track any changes in order to complete the gap analysis. Occasionally, the business made the ideal decisions. In other cases, the corporation may have underestimated the gap or may not have given its current standing a thorough enough evaluation. Whatever the scenario, gap analysis might be a cyclical process in which the business reassesses its present state and compares it to possible prospective states following modifications.

Important: Companies frequently withhold the gap analysis models from public disclosure since they frequently contain confidential data. Furthermore, competitors would be informed about the business’s strategy by the gap analysis.

Gap Analysis Types

1. Market Gap Analysis

Alternatively known as the product gap study, the gap analysis of the market involves analyzing the market to discover potential unmet customer demands. When a business finds gaps in the market where the supply of products isn’t keeping up with consumer demand, it can close such gaps by itself. Outside experts with greater experience in various sectors of the economy, where the business may not yet be active, may undertake this kind of examination.

2. Strategic Gap Analysis

A more rigorous internal assessment of the performance of a business, strategic gap analysis is also known as performance gap analysis. A common practice in this kind of analysis is to compare an organization’s performance to long-term standards, like a plan for five years or a strategy.

To assess a company’s performance relative to its rivals, the strategic gap analysis can also be carried out. This kind of research might reveal methods by which other businesses are making more strategic, creative use of their workforce or financial resources. Finding this kind of information could be challenging, particularly if departing staff members are bound by confidentiality agreements or the business doesn’t make many procedure details available to the public.

3. Gap Analysis: Profit/Financial

By focusing exclusively on financial measures, a business can decide to examine where it could be lacking in comparison to competitors. This could contain fixed versus variable components, overhead expenses, margin percentages, pricing comparisons, and revenue per worker. Finding the areas where a rival is operating with more financial efficiency is the primary objective of the profit gap analysis. Then, additional, more comprehensive gap analysis kinds can make use of this data.

4. Gap Analysis: Skill

A firm may decide to focus on the human component of a corporation instead of its financial components. When there exists a competence and knowledge gap with the current staff, it can be found with the aid of the skill gap study. The business’s objectives must be spelled out in detail in a talent gap analysis before current employees’ potential roles are mapped out. An examination of talent gaps in the workforce may suggest either hiring new employees or just acquiring new skills through training for current employees.

Innovative businesses that depend on having specific expertise in order to remain challengers (or winners) in their sector should pay particular attention to this kind of examination. Furthermore, skill gap research is essential for small businesses that depend on having a smaller workforce to function. In this situation, people frequently need to possess a wide range of adaptable skills that are beneficial in numerous business contexts.

5. Gap Analysis: Compliance

A compliance gap analysis, which frequently makes use of internal audit capabilities, assesses how well a business is performing in comparison to a variety of outside regulations that specify how certain tasks must be completed. Before asking an outside auditor to offer a viewpoint on the state of its finances, a business can, for instance, conduct an internal assessment of its reporting and accounting processes.

In contrast to more purposeful types of gap analysis, compliance gap analysis is typically defensive and preventative. Conducting a compliance gap analysis, for instance, often aims to ensure that rules are satisfied, that penalties are avoided, that disclosure requirements are completed, and that exterior timelines are successfully fulfilled, rather than attempting to increase market share.

6. Gap Analysis: Product Development

Gap analysis is a tool that companies can use when developing new products to determine which features will satisfy consumer demand and in what areas they come up short. When software products and other products take an extended period to produce, this kind of gap analysis is frequently used (where the market need may have evolved).

A business may assess which components of the service or product have been effectively applied, postponed, purposefully removed, or remain in the process of being developed during the process of conducting a gap analysis for product development. By combining several gap analysis techniques, the organization may continuously assess whether its product strategy is evolving and determine if it possesses the internal capacity needed to close any gaps that arise in order to complete product development.

Tools for Gap Analysis

Businesses can utilize a variety of tools to help in the process of gap analysis. Each of the following tools has a designated purpose and is most appropriate for a particular gap analysis feature.

1. SWOT Analysis

An organization’s strengths, weaknesses, opportunities, and threats are identified using a SWOT analysis, which is among the well-known analytical techniques. An organization can assess external and internal elements that it may utilize to enhance or establish a competitive advantage by using gap analysis as a technique.

As a component of its internal analysis, a business assesses its positive and negative aspects using a SWOT analysis. If a business is happy with its present market lead, it may decide to shift resources away from its strongest points during the gap study. On the contrary, businesses can be more curious about its shortcomings and potential distance from rivals. Sometimes businesses determine that their shortcomings are unsurmountable because of entrance hurdles, high capital investment needs, or customer preferences.

The external factors that are frequently beyond a company’s control are the subject of the second part of the SWOT evaluation. Uncontrollable factors that increase the likelihood that the results of a gap analysis won’t be realized are frequently the threats and opportunities that a business faces. A business might, for instance, lay out its strategy for launching an innovative offering in order to increase its market share. In the event that an imposed tax on the good raises its cost per piece, it might be more challenging for the business to close its deficit.

2. Fishbone Diagram

A diagram of cause and effect, sometimes known as an Ishikawa diagram or the fishbone diagram, can be utilized to determine potential issue areas. When figuring out a business’s limitations, it’s also beneficial to foster innovative thinking.

The process of creating a fishbone diagram involves identifying the existing issue and placing it in the middle of a section. Subsequently, key categories are created on branching that extend beyond the core issue. These branches eventually receive additional branches that explain the reasons behind the issues in every group. By breaking a big, complex problem down into smaller, more manageable parts, the fishbone diagram ultimately aims to make the problem easier to approach and solve.

3. McKinsey 7S

This model outlines seven components that are essential to figuring out how effectively a business functions and what influences its performance. 4 “soft elements”—shared values, talents, style, and staff—combine with 3 “hard elements”—systems, structure, and strategy.

By applying the McKinsey 7S framework, an organization may determine how each sector fits into existing gaps and the way it can modify each component to better align with long-term goals. It’s usually advised to continuously assess and analyze business performance as changes are made.

4. Nadler-Tushman Framework

The Nadler-Tushman framework is especially utilized to pinpoint issues, comprehend potential underperformance inside an organization, and decide on remediation strategies. The Nadler-Tushman system’s central tenet is that an organization’s achievement depends on its internal components working together and being in harmony with one another.

A number of elements, including work, culture, people, and structure, are at the core of the model. Both input and output data, such as an organization’s approach and performance, are fed into these four fundamental concepts. Finding out how all four of the parts interact is the ultimate objective.

5. PEST Analysis

In a PEST study, external factors are evaluated for potential effects on a company’s profitability. The acronym for PEST is political, economic, social, and technological. PESTLE study, which includes environmental and legal considerations, is a popular version of PEST analysis.

A corporation might not be taking into external variables that could produce, worsen, or close present gaps, hence PEST evaluation can be helpful when conducting a gap study. Government laws may, for instance, make it far more costly for a business to export its goods. In this scenario, if external factors change in a manner that negatively affects the organization, there may be a gap.

Tip: Businesses frequently utilize an array of these instruments since the results of one instrument’s study may assist the other.

When to Conduct a Gap Analysis

Businesses should always be assessing the products and services they provide, the clients they service, the market gap they close, and the effectiveness of their operations. But occasionally, it can be necessary to do an official gap study. These times consist of:

· While managing a project. A corporation may continuously assess if a project has enough resources, expertise, talent, and data to be finished successfully as it progresses from its start to its conclusion. Companies should conduct gap analysis throughout long-term projects since there is a chance that the external environment will change for certain products having multiyear development phases.

· Organizing for tactical initiatives. Gap analysis is useful for making informed judgments while trying to establish long-term finances, thinking through company reorganizations, or setting up a possible purchase. This guarantees durability by allocating the right assets to the appropriate sectors. Political, geographic, monetary, and cultural risks, for instance, may all arise from expanding into an unfamiliar region. In order to determine the extent of these risks and whether any more resources are required to address each area, a corporation should do a gap analysis.

· Seeking to comprehend reasons for performance shortcomings. Gap analysis may identify operational areas where everyday, shorter-term tasks can be improved, along with its strategic benefits. Companies can decide to proactively attempt to comprehend more about aspects of operation, even though this kind of application is more reactive. Should a particular cost center, for instance, exceed the budget significantly, the organization might just wish to have a deeper understanding of the situation and determine what has to be done to improve.

· Advertising to outside sources. Gap analysis is primarily useful for internal stakeholders, but it is additionally useful to explain plans to outside investors. Private businesses, for instance, are able to pinpoint its weaknesses. An internal strategy can be created and then shared with external stakeholders as a component of an initial funding round or capital investment proposal. A business may discover that partners and outside investors are more ready to support its expansion if it is honest, open, and smart about its shortcomings.

Gap Analysis Benefits

Gap analysis has several applications, which means that it offers a multitude of advantages. The following list of advantages might only apply to a single kind of gap analysis. Nevertheless, businesses that conduct gap analyses could encounter:

· Enhanced financial success. Businesses may become better equipped to invest at the right times, have funds on hand (rather than needing to pay additional money for backing later), and operate more effectively if they identify gaps and anticipate deficiencies.

· Improved methods of manufacturing. Strengthening production, improving delivery logistics, ensuring raw materials are at the site at the right location when needed, and avoiding bottlenecks caused by any deficit along the way are all facilitated by identifying and eliminating gaps from forming in the process of manufacturing.

· A growth in market share. Increased sales, earnings, consumers, and share of the market can be achieved by integrating both of the previous advantages to provide a company with a stronger market position.

· Happier consumers and staff. By doing gap analyses, businesses can prevent relationship strain or staff attrition by proactively addressing potential problems before they arise, rather than responding reactively to staff or client demands.

· Operational effectiveness. An organization can enhance daily operations by implementing modifications after gaining a deeper comprehension of its potential weak points.

· Reduced risk for lengthy projects. Businesses can prepare for shortfalls and spot issues before they arise by determining the resources required and any potential gaps.

Asset Management/Finance Gap Analysis

Another technique for asset liability management is gap analysis, which can be utilized to evaluate liquidity risk or interest rate risk (IRR) but not credit risk. Rate-sensitive liabilities/assets are distinguished over a certain time period using this straightforward IRR assessment approach. When liabilities and assets are made up of constant cash flows, this kind of analysis performs well. Gap analysis cannot deal with options due to this, since options involve unpredictable cash flows. This is a major limitation of the technique.

Imagine that an organization wishes to invest, but it also wants to make sure it always has the cash in hand to deal with unforeseen circumstances. Reviewing cash flows, identifying risks, and estimating possible cash flow shortages are all possible for the organization. Long-term, high-risk, or initiatives susceptible to external or macroeconomic pressures are the areas where this is most common.

Gap Analysis Example

For an extended period, GameStop Corp. maintained its position as a rival in the world of video games. In-person transactions were also available for buying consoles, games, and gaming accessories, as well as trading in multimedia/video games already owned.

The analysis and plan that the organization’s management has implemented have not been widely disclosed. But the firm also launched its NFT marketplace in 2022 (July), making it possible for players, community members, and collectors to sell and buy NFTs. It is anticipated that the market will grow into gaming with an array of NFT applications, despite the fact that this business endeavor was initially related to artwork.

GameStop has the option to do a gap analysis before making this business move. It might have been able to:

1. Examined where it stands in the marketplace right now. It could have come to the realization that its current in-store operating model—despite the fact that the organization also operates a website where customers can make purchases—may not be feasible given how the digital revolution has changed many industries.

2. Examined the ideal position for it. The corporation might have decided that it intended to continue leading the multimedia game distribution sector. The corporation would have probably realized as a consequence of all this that the move to online gaming and the emergence of NFT in the gaming industry might be a major industry disruptor.

3. Decided on a strategy to move from this point forward. This would’ve meant launching an NFT marketplace together with other, maybe as-yet-undisclosed, important projects.

4. Implementation of the strategy. Apart from launching an NFT marketplace, the company also disclosed that it has partnered with other ETH Layer 2-centered organizations and hired a diverse range of personnel with expertise in digital currencies and blockchain.

While it is unknown what the final internal conversations surrounding an NFT market were, it may be assumed that GameStop conducted a gap assessment to determine how a new online marketplace could improve its current standing as a physical shop.

Why does one carry out a gap analysis?

To find out where a business might be falling short of its targets, an assessment of gaps is conducted. It’s a type of evaluation that assesses the steps required to move a business from its existing condition to its ideal future state.

Which gap analysis types exist?

A variety of business scenarios can benefit from gap analysis. Gap analysis is often used to gain a better understanding of manpower requirements, long-term monetary stance, product success, market positioning, and other topics. It is typically more tactical in nature. Additionally, gap analysis may be employed to examine more operational factors like present employee happiness or short-term deficits in budgets.

What are a gap analysis’s essential elements?

A business’s current state of affairs analysis is always the first step in any gap study. A corporation cannot create a strategy that will effectively take it wherever it wishes to go if it does not know where it stands right now. Gap analysis includes determining where it stands now and where the business intends to go in the years to come, as well as creating a strategy with measurable implementation milestones that will be monitored to keep change managers responsible.

What are the differences between SWOT and gap analysis?

One technique that is frequently included in gap assessments is a SWOT evaluation. An organization analyses its advantages and disadvantages using the SWOT method. The business should next determine whether those advantages and disadvantages align with the company’s desired direction. The strategy known as gap analysis aims to modify an organization’s advantages and disadvantages. Furthermore, the danger that the strategy presented in the gap study won’t be effectively implemented is indicated by the threats and opportunities found in the SWOT evaluation.

What distinguishes static gap analysis from dynamic gap analysis?

These 2 phrases are frequently used in relation to risk and performance analysis of banks and other financial institutions. The sensitivity of the company to fluctuations in the interest rate is examined using static gap evaluation. The difference between the liabilities and assets of a business is examined using dynamic gap assessment.

The Final Word

Businesses can assess where they are now, determine where they would like to be in the future and create a plan to close the gap by using the gap analysis methodology. For operational difficulties or just to get more strategic, a business may decide to undertake a gap analysis. A long-term strategy can be developed and implemented by the business with the use of a number of techniques, including a fishbone diagram, PEST (LE) analysis, and SWOT analysis.

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