What Is Gap Analysis?

What Is Gap Analysis, and How Do You Do It?

A gap analysis is the practice of measuring where you want your business to go in relation to where it currently stands and is a crucial component of strategic planning. It is called a “gap analysis” because it enables executives to identify “gaps” in their processes and actual performance— inefficiencies that prevent the organization from reaching its full potential.

There are many reasons for businesses to conduct a gap analysis, as well as proper steps and frameworks for doing so effectively. This article will provide all the information you need to understand the purpose of a gap analysis and the process for conducting one.

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Why Do Businesses Conduct Gap Analysis?

There are a variety of reasons that business owners might decide to conduct a gap analysis. These include:

  • Improving an Organization’s Overall Efficiency: A gap analysis process can reveal inefficiencies on an organizational, departmental, or individual basis. With this knowledge, decisionmakers in a business can modify and improve their organizational structure, staff, or technology. For example, a business with inefficient inventory practices — leading to frequent stockouts — may discover the need for the forecasting capabilities of inventory management software.
  • Determining Customer Pain Points: Unknown or unaddressed customer pain points can lead to a loss of sales and poor customer service. A gap analysis can highlight these, enabling the business to more directly address the needs of their target demographic. A common problem many businesses face is a poor supply chain, which can greatly affect customer service; a gap analysis can shed light on the particulars of your supply chain that may be causing headaches.
  • Ideating New Products or Services: If a pain point is not being properly addressed by a business’s products or services, an analysis may reveal new potential offerings to generate increased profits and customer satisfaction. If a restaurant owner notices that customers are pining for more convenient dining options, for instance, she might consider offering delivery services.

When properly conducted, a gap analysis can help organizations reap each of these benefits, in addition to many others. It can streamline operations and help businesses achieve greater levels of profitability and success than they ever could otherwise.

How to Conduct a Gap Analysis

Ready to begin addressing inefficiencies in your business? Follow the steps below to conduct a gap analysis of your organization. If you need additional guidance, it may be helpful to consult a gap analysis template throughout this process. This will give you an organized format to track and evaluate data.

1. Identify the Current State of Your Company

A gap analysis can be done on a broad level to evaluate executive decisions or on an operational level to determine the efficiency of day-to-day operations. Before doing either, however, you must first have a solid understanding of the current state of your company.

To glean this, you’ll need robust external and internal data on your industry and business. This includes industry benchmarks, statistics regarding past performance, and much more. Remember that the specific data you’ll need will depend entirely on the department or aspect of your organization you’re analyzing.

You can gather data to analyze your business on either a concrete or conceptual level. In the former, you’ll examine your organization as it currently exists, so you can evaluate its current performance. In the latter, you’ll use industry data to examine hypothetical scenarios.

2. Identify Where You Want Your Company to Go

What is the future state the company is aiming for? Without direction, a business cannot make meaningful strides toward progress. You wouldn't even be able to make the right decisions in its current situation. To begin making improvements, you must first know where you want your company to go. This requires creating a strategic business plan. You’ll need to align the objectives of your company with the needs of your target audience. Once you have a plan, you’re ready to determine what you’re working for — the desired state of your company and future performance targets.

3. Identify the Gap

Once you’ve established where you are and where you want to be, you can clearly identify the gap between the two. Actionable business strategies require a refined analysis, so you need to get specific when identifying this gap and make it your focus area for improvement. What caused the gap? There may be many contributing factors, so it’s important to identify what they are, as well as how much each has contributed to the identified gap. You can also make an action plan to resolve to improve the company's actual performance.

This means performing a qualitative and quantitative analysis; in short, you must accurately describe the nature of the gap and gather data that backs your assessment up. These relevant data points will become key performance indicators — a measurement of success — allowing you to track your progress going forward.

4. Close the Gap

Now that you’ve identified the gap, you can begin taking action to change it and turn it into an ideal situation. While the specifics of this will be uniquely designed to tackle the contributing factors, there are four common strategies for closing gaps: While the specifics of this will be uniquely designed to tackle the contributing factors, there are four common strategies for closing gaps:

  • Adhere to a Clearly Defined Set of Business Practices and Ethics. These are a core part of your business’s identity, so it’s important to get them right. If your practices aren’t helping you meet your objectives, it may be time to consider assessing the fundamentals of your organization.
  • Look at the Established Best Practices in Your Industry. If there is a notable gap in your business, it may be due to not following vital practices in your niche. Instead of reinventing the wheel, seek out information or a mentor to gradually reshape your business for the better.
  • Assess Your Workplace Culture. Poor productivity resulting from high employee turnover or a lack of employee engagement is a common byproduct of a poor workplace culture. Remember that a good workplace culture does not occur naturally — it must be cultivated. Make efforts to improve your workplace in this regard.
  • Make the Most of Your Resources. Cut excess expenditures where possible and find more cost-effective ways to do business. For instance, using an inventory management system can cut costs (and headaches) related to inventory. In addition to bringing a wide variety of benefits, this can be a much wiser allocation of resources than wasting money on warehousing excess inventory.

Frameworks for Gap Analysis

The basic steps discussed above are essential to any gap analysis, but there are several different approaches to performing this task. Below, you’ll find a brief description of the most common frameworks for gap analysis.

Fishbone Framework

This involves creating a simple graphic representation of the possible causes of a problem in an organization. This can make analyzing complex situations — involving a large number of potential stakeholders — easy to understand. This is a great way to identify unknown problem areas.

McKinsey 7-S Framework

When analyzing how various components of your organization work together, it can help to do so by analyzing the key aspects of a business that can make it successful. These aspects are identified in the McKinsey 7-S framework as:

  • Structure
  • Strategy
  • Systems
  • Shared values
  • Skills
  • Style
  • Staff

This framework excels at helping business owners determine the strengths and challenges of their organization — a vital part of gap analysis.

Nadler-Tushman Congruence Model

This model allows you to determine how well various elements within an organization work together. The Nadler-Tushman Congruence model involves the use of both internal and external data related to work, people, structure, and culture to determine problem areas. It also involves a step-by-step process for addressing gaps:

  • Pinpoints identified gap
  • Note input and output for an organization
  • Identify existing gap
  • Describe the elements of the company
  • Determine if these elements are congruent
  • Formulate a strategy with the above information in mind

PESTEL Framework

The PESTEL framework examines specific aspects of external factors that can impact a business in order to discover potential gaps within it. PESTEL is an acronym for the aspects that it examines:

  • Political
  • Economic
  • Social
  • Technological
  • Environmental
  • Legal

SWOT Analysis

A SWOT analysis involves examining both business aspects and external factors in order to address potential business gaps. Similar to the last framework, the name of this framework is an acronym pertaining to the relevant business aspects and external factors at hand:

  • Strengths
  • Weaknesses
  • Opportunities
  • Threats

Whichever gap analysis tool you pick, the good news is they're just as useful for small businesses.

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