Gap Analysis

Updated on March 21, 2024
Article byPriya Choubey
Edited byPriya Choubey
Reviewed byDheeraj Vaidya, CFA, FRM

Gap Analysis Meaning

In Gap Analysis, the actual performance of a company is compared to the desired goals. It determines the deviation between the current state and the expected future state. In response, an effective action plan is strategized to straighten the deviation.

A company lags behind competitors when assets, materials, human resources, capital, and technology is not employed efficiently. In such scenarios, a Gap Analysis offers companies detailed feedback, highlighting potential causes of deviation.

Gap Analysis

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Key Takeaways

  • Gap analysis is an approach used to recognize the difference between a company’s current position and its desired future state.
  • It studies the efficient utilization of capital, assets, human resource, material, and technology.
  • The Four popular tools used for such studies include PESTLE analysis, SWOT analysis, McKinsey 7s Framework, and Nadler-Tushman Congruence Model.
  • The steps in gap analysis involve analyzing the focus area, deciding future goals, interpreting the current state, comparing the current state with the future state, enforcing corrective measures, formulating an action plan and preparing the final report.

How to do a Gap Analysis?

Such a study contributes significantly to business growth and goal achievement in various aspects. As a result, most start-ups adopt this practice to set performance benchmarks. The Gap Analysis process involves the following steps.

Gap Analysis Process

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  1. First, companies recognize the problems. They ascertain whether the issue is related to profit, product, performance, or human resources.
  2. Then, they ascertain a realistic and attainable future target.
  3. Additionally, companies comprehend the current situation in terms of performance, resources, and process.
  4. Using that data, companies evaluate the gap or difference between the desired future position and the present situation. This includes calculating the gap density, reasons, and shortcomings.
  5. At this stage, analysts propose imperative measures to eliminate the identified difference. Additionally, they set the key performance indicatorsKey Performance IndicatorsKPI stands for key performance indicators to measure the efficiency of an organization concerning the way it has been achieving all its long-term and short-term goals. Companies use this performance indicator to evaluate the effectiveness of all their decisions in business more (KPIs) for periodical analysis of subsequent progress.
  6. To apply the corrective measures, companies strategize a course of action.
  7. Finally, a report incorporating the findings and suggestions is presented to the company’s management.

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Types of Gap Analysis

Evaluation is applied from different perspectives. The four possible scopes of improvement in any company are as follows.

#1 – Profit Evaluation

It determines the reasons behind low profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's more. It is ascertaining whether it is due to internal factors or the external environment. For example, the negative impact of the pandemic on business sales and profit are analyzed.

#2 – Product/Market Evaluation

A product’s incompetency is evaluated through this technique. Problems could be potentially caused by outdated features, change in consumer preference, or emerging competitors.

#3 – Performance Evaluation

This method reviews the company’s strategic objectives and highlights the factors causing the lag in performance.

#4 – Manpower Evaluation

This method discovers human resource insufficiency and highlights a lack of skills among the personnel if any.

Gap Analysis Examples

XYZ Pvt Ltd is a detergent manufacturing company. It conducted an evaluation intending to increase its profits by 30%. Following is an example of a gap analysis report.

Gap Analysis examples

It is evident that to increase the profit by 30%, the company has to ramp upRamp UpRamp Up in economics refers to the boosting of a company’s more sales by 30%. Also, it needs to set up new depots to reach more retailers.

The IT industry carried out a Supply-Demand Gap Analysis to discover the reasons behind the global chip shortage. There was a boost in demand during the pandemic. The analysis also studied the impact on the automotive industry, which has a great need for the chips. According to CNBC, the chip shortage will continue till 2023.

Gap Analysis Uses

Companies use such a study for realizing short-term business goals both at strategic and operational levels. The various use of such analysis is as follows.

  • Sales: The study reviews sales targets and highlights the reasons for inadequate profitability.
  • Productivity: Companies use this technique to check whether they can meet the target production levels. If not, the method discovers the reasons behind low productivity.
  • Quality Control: Companies pay significant attention to product quality and identify any non-adherence through this study.
  • Product Performance: It determines the market acceptability, demand for a product, and the need for product improvisation. 
  • Supply Chain Management: Companies study delays in the supply cycle, raw materialRaw MaterialRaw materials refer to unfinished substances or unrefined natural resources used to manufacture finished more acquisition, and product delivery.
  • Asset Management: This study ascertains the risk associated with rate-sensitive assets and liabilities.
  • Human Resource: Companies diagnose workforce shortages, skill gaps, and talent gaps hindering human resource efficiency. Based on such analysis, companies plan relevant training and employee development strategies.
  • Employee Satisfaction: Companies can use this study to gather essential input from employee feedback about job satisfaction. Based on the conclusions, companies incorporate changes.
  • Individual Assessment: Employees can also make use of such a study for self-analysis and personal development.

Gap Analysis Tools

To find out why they are lagging behind the target, a company adopts one or more of the following techniques.

#1 – SWOT Analysis

The SWOT AnalysisSWOT AnalysisSWOT Analysis is an analytical tool to identify and evaluate an entity’s strengths, weaknesses, opportunities, and more lists out strengths, weaknesses, opportunities, and threats. Being aware of strengths and weaknesses gives companies an edge over their competitors.

#2 – McKinsey 7s Framework

The McKinsey 7s model emphasizes the impact of internal factors on business performance. These seven factors are as follows.

  1. Strategy
  2. Structure
  3. System
  4. Style
  5. Staff
  6. Skills
  7. Shared Values

#3 – PESTLE Analysis

PESTLE analysis focuses on the external factors, namely political, economic, social, technological, legal, and environmental causes. These are potential causes for the performance gap.

#4 – Nadler-Tushman Congruence Model

Under this tool, the structure, people, work, and culture are studied to understand how they impact business performance. The two prominent factors contributing to a company’s success are finding the inputs and transforming inputs into desired outputs.

Frequently Asked Questions (FAQs)

What is the role of a gap analysis?

Such a study points out the shortcomings of the current performance in terms of process, human resource, material, capital, and technology. In addition, the study discovers problems by comparing current performance with organizational aims.

What is a skill gap analysis?

Skill gap analysis ascertains the deficit in employee knowledge, employee competencies and employee expertise. The study identifies the deficit by comparing the current skill level to the required skill level. The study supports human resource recruitment and training.

Why is a gap analysis important?

Such a study helps companies assess where they stand. Gap analysis gives feedback regarding if a company is lagging behind targets and by how much. Beyond the gap, such a study highlights potential factors causing the lag. Without knowing the problems, a company cannot plug the lag. So a gap analysis is very important for a company’s improvement.

This has been a Guide to Gap Analysis and its Meaning. Here we discuss its types, uses, and how to do Gap Analysis analysis using tools and examples. You may also have a look at the following articles to learn more –

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