What is a gap analysis? Definition & guide

Understanding gap analysis

Gap analysis involves comparing a company's present performance to its anticipated or desired performance levels. This evaluation aids in assessing whether the company is meeting objectives efficiently and utilizing its resources optimally. Through measuring factors such as time, finances, and manpower, gap analysis helps identify the disparity between the current and desired states of the company. This insight enables the management team to devise strategies and action plans aimed at bridging these performance gaps and propelling the organization towards its goals.

When organizations fail to optimize their resources, capital, and technology, they may fall short of achieving their maximum potential. In such scenarios, a gap analysis, also known as a needs analysis, becomes invaluable.

Essential for assessing organizational performance, a gap analysis enables companies to gauge their current position and envision their future trajectory. By scrutinizing their objectives, companies can use gap analysis to ascertain whether they are progressing effectively towards their goals.

While predominantly utilized alongside duration analyses in the 1980s, gap analysis remains pertinent today. Although perceived as more complex and less commonly applied compared to duration analysis, it still offers insights into assessing exposure to various shifts in the term structure.

Categories of gap analysis

Financial efficiency analysis: Identifying profitability discrepancies

A company may opt to conduct a focused examination of its financial performance relative to competitors, specifically scrutinizing financial metrics. This analysis encompasses comparisons of pricing structures, margin percentages, overhead costs, revenue per labor, and the distinction between fixed and variable components. The primary objective of a profit efficiency analysis is to pinpoint areas where competitors demonstrate greater financial efficiency. Subsequently, this information can be integrated into broader gap analyses for comprehensive strategic planning.

Strategic gap analysis: Evaluating company performance

Strategic gap analysis, also referred to as performance gap analysis, involves an in-depth internal assessment of a company's performance. This analysis typically entails comparing the company's actual performance against long-term benchmarks, such as a five-year plan or a strategic plan.

Additionally, strategic gap analysis may be conducted to assess the company's performance relative to its competitors. This type of analysis can uncover insights into how competitors are leveraging their personnel or capital more strategically and efficiently. Accessing such information may pose challenges, especially if former employees are bound by nondisclosure agreements, and the company maintains limited public disclosure about its processes.

Regulatory compliance analysis: Ensuring adherence to external standards

Utilizing internal audit functions, a compliance gap analysis scrutinizes a company's adherence to external regulations dictating operational standards. For instance, a company may internally assess its accounting and reporting processes before engaging an external auditor to review its financial statements.

Unlike more strategic gap analyses aimed at market expansion, compliance gap analysis tends to be precautionary and defensive in nature. Its primary objectives include meeting regulatory standards, averting penalties, fulfilling reporting obligations, and ensuring timely compliance with external deadlines.

Market Gap Analysis: Assessing unmet customer needs

Market gap analysis, also known as product gap analysis, involves evaluating market dynamics to identify areas where consumer needs are not adequately met. By recognizing instances where product supply falls short of consumer demand, companies can take proactive steps to address these market gaps. This analysis may be conducted by external consultants with specialized expertise in business areas where the company lacks proficiency or presence.

Skill set analysis: Assessing workforce competencies

Instead of focusing solely on financial metrics, businesses may opt to evaluate the human component through skill gap analysis. This process aims to identify any deficiencies in knowledge and expertise among current personnel. A skill gap analysis necessitates a clear delineation of the company's objectives, followed by an assessment of how existing employees align with those objectives. Based on the analysis, recommendations may include providing training to existing staff to acquire new skills or recruiting external expertise.

This type of analysis holds particular significance for innovative companies reliant on specific skill sets to maintain competitiveness or leadership in their industry. Moreover, skill gap analysis is crucial for small businesses operating with limited staff, where individuals often require diverse, adaptable talents that can contribute to various facets of the business.

Product development gap analysis: Assessing market alignment and internal resources

In tandem with the creation of new products, gap analysis can be conducted to scrutinize the alignment between product functionalities and market demand, as well as to identify potential shortcomings. This form of gap analysis is commonly associated with the development of software products or items requiring lengthy development cycles, where market demand may fluctuate during the process.

During product development gap analysis, the company assesses which aspects of the product or service have been successfully implemented, delayed, intentionally omitted, or are still in progress. By integrating elements from various types of gap analysis, the company can continuously evaluate changes in its product plan and ascertain whether it possesses the internal resources necessary to address the internal gaps crucial for completing product development.

Executing a gap analysis

Certain gap analysis frameworks simplify the steps into four processes, while others are more intricate, incorporating additional stages. Nonetheless, the essence of a gap analysis remains consistent: comprehending your present state, defining your desired destination, and formulating a strategy to reach the intended outcome.

Trade 1: Define your current situation

The initial phase of a gap analysis involves precisely pinpointing the current operational status of your organization. This entails examining the range of products or services offered, the customer demographics served, the geographic reach, and the perks provided to employees. Both quantitative data, such as financial records mandated for filings, and qualitative data, like surveys or feedback from key stakeholders, contribute to this assessment.

Often, a company embarks on a gap analysis when it recognizes existing issues. For instance, if customer feedback surveys reveal unsatisfactory results, the company seeks to delve into the root causes and implement corrective measures. Before envisioning future aspirations, it is imperative to grasp the reasons behind these shortcomings, identify when they occur, and determine the pivotal figures in facilitating change management.

Trade 2: Define your desired future state

The pivotal stage of gap analysis lies in defining the envisioned destination of the company. This phase demands careful consideration, as the desired identity of the company will determine the strategic maneuvers necessary to attain those objectives.

In gap analysis, it is imperative for a company to establish specific, measurable goals to ensure enduring success. For instance, in the scenario mentioned earlier, setting the goal of merely "enhancing customer service" would offer limited benefit. Instead, the company should pinpoint more tangible metrics, such as "achieving a customer satisfaction rate of 90% within 12 months."

Alternatively, analyzing the practices of competitors or other industry players can aid in identifying the desired outcome. Emulating successful strategies implemented by other entities can offer valuable insights into effective approaches.

Trade 3: Analyze the discrepancies

After delineating the current and desired states, the focus shifts to reconciling the two and pinpointing the significant variances. In our ongoing illustration, this stage reveals critical disparities, such as potential understaffing, inadequate staff training, or insufficient technical capabilities to address customer inquiries.

Trade 4: Assess remedial measures

Having identified its shortcomings, the company now proceeds to devise strategies to attain its envisioned state. At times, there might be a single solution, while in other instances, the gap analysis may necessitate several concurrent modifications that must synchronize effectively.

To determine the efficacy of a solution, it typically must be quantifiable, allowing for the measurement of change. For instance, in our customer service improvement example, a straightforward metric like customer satisfaction percentage serves as a viable measure. However, for findings such as deficiencies in brand recognition, solutions may demand more innovative and thoughtful approaches, yet they should still be evaluable.

Trade 5: Execute changes

Following the selection of optimal strategies from Step 4, the company proceeds to enact them. During this phase, efforts are directed towards closing the identified gaps highlighted in the analysis. By implementing the chosen solutions, the company endeavors to enhance specific areas of its operations or rectify deficiencies.

This implementation process typically adheres to a structured series of procedures at a defined pace. As an integral part of the gap analysis, the company aims for a predetermined outcome, necessitating careful execution to prevent exacerbating issues instead of resolving them. For instance, in the scenario of employees feeling overwhelmed by extensive training, an initiative to enhance their proficiency might inadvertently result in reduced productivity or diminished morale.

Trade 6: Monitor progress

As a critical final step, the company must vigilantly monitor any alterations resulting from the implemented changes. Occasionally, the company may have taken precisely the right measures, yielding desired outcomes. However, there are instances where the gap might have been wider than anticipated, or the company may have inadequately assessed its current standing. 

Gap analysis often evolves into a cyclical process, wherein post-implementation, the company reassesses its current position and evaluates its alignment with envisioned future states. This ongoing evaluation enables the company to refine strategies, address any lingering discrepancies, and continually strive for improvement.

Tools for conducting gap analysis

Companies have access to a range of tools to aid in the gap analysis process. The following tools are designed for specific aspects of gap analysis, offering tailored support for various functions.

Fishbone diagram

A fishbone diagram, also known as a cause-and-effect or Ishikawa diagram, serves as a valuable tool for identifying potential causes of problems and fostering innovative thinking when addressing business constraints.

To create a fishbone diagram, the problem in question is first placed at the center of the diagram. Major categories are then identified and written on branches extending from the central problem. Subsequently, additional branches are added to these major categories, pinpointing the underlying reasons for problems within each category. Ultimately, the fishbone diagram aims to break down a complex problem into manageable aspects, facilitating a structured approach to resolution.

SWOT analysis

One of the most widely recognized analysis tools, SWOT analysis assesses a company's strengths, weaknesses, opportunities, and threats. When employed as a gap analysis tool, it enables a company to scrutinize both internal and external factors that could either be enhanced or leveraged to maintain a competitive edge.

In a SWOT analysis, a company conducts an internal assessment of its strengths and weaknesses. During a gap analysis, the company may opt to reallocate resources from its strengths, particularly if it perceives itself as already having a strong market position. Conversely, it may focus on identifying weaknesses and gauging how far behind it stands compared to external counterparts. In some instances, companies may determine that certain weaknesses are insurmountable due to barriers to entry, substantial capital requirements, or shifting consumer preferences.

The other facet of SWOT analysis pertains to external factors typically beyond a company's control. These encompass the opportunities and threats that may impact the company's ability to bridge identified gaps. For instance, while outlining plans to capture a larger market share through a new product release, a company may face the threat of increased per-unit costs due to government tariffs, making it more challenging to close the identified gap.

PEST analysis

PEST analysis involves evaluating external factors and their potential impact on a company's profitability. PEST represents political, economic, social, and technological aspects. An expanded version, known as PESTLE analysis, includes legal and environmental considerations as well.

In the context of gap analysis, PEST analysis proves valuable as it sheds light on external factors that may contribute to, exacerbate, or mitigate existing gaps within a company. For instance, changes in government legislation could significantly increase the costs of exporting a company's product, potentially leading to a gap if not adequately addressed. Thus, PEST analysis enables companies to anticipate and respond effectively to external forces that could influence their operations and performance.

Nadler-Tushman model

The Nadler-Tushman model serves as a targeted framework for pinpointing issues, understanding potential underperformance within a company, and devising strategies to address such shortcomings. At its essence, this model revolves around the notion that various elements within a company must be harmonized and interlinked for optimal success.

The model comprises distinct components, encompassing culture, work processes, organizational structure, and human resources. These four fundamental pillars receive inputs, such as the company's strategy, and outputs, such as its performance metrics. The ultimate objective is to evaluate the interplay and alignment among these components to ascertain how effectively they are operating in concert.

Advantages of gap analysis

Due to its versatile applicability, gap analysis offers a diverse array of advantages. Although each benefit outlined below may correspond to a specific type of gap analysis, companies engaging in this process can generally expect to experience:

Enhanced employee and customer satisfaction

Rather than merely reacting to employee or customer concerns, companies conducting gap analysis can proactively address potential issues before they strain relationships or prompt individuals to seek alternatives.

Improved operational effectiveness

Through a comprehensive understanding of areas where operations may be suboptimal, companies can implement changes to enhance day-to-day functioning.

Reduced risk in long-term initiatives

By identifying resource requirements and potential deficiencies, companies can anticipate and mitigate gaps, enabling them to preemptively address problems before they materialize, thus minimizing risks associated with long-term endeavors.

Enhanced profitability

Companies that conduct gap analysis and proactively identify shortcomings can optimize spending, maintain readily available resources, and operate more efficiently, thereby boosting profitability.

Streamlined manufacturing processes

Identifying and mitigating gaps in the manufacturing process results in smoother production operations, improved delivery logistics, timely availability of raw materials at designated locations, and avoidance of bottlenecks caused by any deficiencies along the process.

Expanded market share

Leveraging the benefits of improved profitability and optimized manufacturing processes, companies can strengthen their market presence by increasing sales, revenue, customer base, and ultimately, market share.

Determining when to employ gap analysis

Companies should consistently assess their product offerings, customer base, market demand, and operational efficiency. Nevertheless, specific circumstances may call for a more structured approach to gap analysis. These instances include:

Strategic planning

Whether devising long-term budgets, considering corporate restructurings, or evaluating potential acquisitions, gap analysis proves invaluable in informing strategic decision-making. This guarantees that resources are allocated appropriately to ensure sustained success over time. For instance, expanding into a new geographical region may entail political, geographical, currency, and cultural risks. Conducting gap analysis allows a company to assess the severity of these risks and determine the requisite additional resources, if any, needed to address each area effectively.

Throughout project management

As a company progresses through the various phases of a project, from initiation to completion, it may regularly assess whether the project possesses adequate resources, expertise, skills, and information to ensure successful completion. Particularly for products undergoing multi-year development cycles, where external conditions may evolve, companies are well-advised to conduct gap analysis to mitigate risks and ensure project success.

External marketing and communication

While gap analysis primarily benefits internal stakeholders, it can also serve as a valuable tool for communicating plans to external investors. For instance, private companies can identify areas of deficiency and develop internal strategies to address them. Subsequently, these plans can be shared with external parties as part of capital investment requests or seed funding rounds. By demonstrating openness, transparency, and strategic planning regarding their shortcomings, companies may find external parties more inclined to partner and invest in their growth.

Seeking to comprehend performance gaps

Beyond its strategic advantages, gap analysis can reveal operational areas where short-term, day-to-day functions can be enhanced. While this application may be more reactive, companies can opt to proactively gain insights into operational areas. For instance, if a particular cost center significantly exceeds its budget, the company may wish to gain a better understanding of the situation and determine necessary steps to improve success.

Gap analysis in financial management and asset management

Gap analysis serves as a method of asset liability management utilized to evaluate interest rate risk (IRR) or liquidity risk, while excluding credit risk. It presents a straightforward IRR measurement approach, illustrating the variance between rate-sensitive assets and rate-sensitive liabilities within a specified timeframe. This analytical technique proves effective when assets and liabilities consist of fixed cash flows. However, a notable limitation of gap analysis is its inability to accommodate options due to the uncertain nature of their cash flows.

Consider a scenario where a company intends to make an investment while ensuring it maintains sufficient capital to address potential contingencies. By examining cash flows, identifying risks, and evaluating potential cash flow deficits, the company can strategize to manage its resources effectively. This becomes particularly pertinent in the context of long-term ventures, high-risk initiatives, or projects susceptible to macroeconomic or external influences.

Why conduct a gap analysis?

A gap analysis is performed to understand where a company may be lagging against its goals or objectives. It’s a form of analysis that evaluates what it will take for a company to get from its current position to its future dream state.

Illustration of gap analysis

For an extended period, GameStop Corp. maintained its position as a contender in the video gaming sector. Patrons had the option to visit physical stores to either exchange video games from their current collection or purchase games, consoles, and gaming-related merchandise.

The company's management has disclosed limited information regarding its analytical processes or strategic maneuvers. Nonetheless, in July 2022, GameStop introduced its non-fungible token (NFT) marketplace, enabling gamers, creators, collectors, and community members to engage in buying and selling NFTs. Initially focused on artwork, this business venture is anticipated to diversify into gaming-related applications.

In making this strategic move, GameStop may have undertaken a gap analysis, which could have involved:

1. Assessed its current market position, acknowledging the impact of digital transformation on various industries. Recognizing that its traditional in-store model might not be sustainable in the long term, especially with the rising dominance of digital commerce (although the company does maintain an online presence).

2. Outlined its desired future position. It may have identified the goal of maintaining its leadership role in the video game distribution industry. This likely involved understanding that digital gaming, including the emergence of NFTs in gaming, could significantly disrupt the market.

3. Formulated a strategic roadmap. This likely included the launch of the NFT marketplace alongside other undisclosed strategic initiatives.

4. Implemented the plan. Alongside the introduction of the NFT marketplace, GameStop revealed partnerships with Ethereum Layer 2-based entities and recruited professionals experienced in digital assets and blockchain technology.

Varieties of gap analysis

Gap analysis can be performed in an assortment of business situations. Most often more strategic in nature, gap analysis can be performed to better understand market positioning, product success, labor needs, or long-term financial positioning. Gap analysis can also be used to analyze more operational aspects such as short-term budget deficiencies or current employee satisfaction. 

Differences between gap analysis and SWOT analysis

SWOT analysis, frequently integrated into gap analysis, involves assessing a company's strengths and weaknesses. Subsequently, the company evaluates whether these internal factors align with its desired objectives. Gap analysis, on the other hand, serves as the strategy to address and modify the identified strengths and weaknesses. Moreover, the opportunities and threats pinpointed in SWOT analysis represent the potential risks that the devised gap analysis plan may encounter during execution.

Comparison of static and dynamic gap analysis

These terms commonly pertain to evaluating the performance and risks of banks or financial institutions. Static gap analysis assesses the firm's susceptibility to fluctuations in interest rates, while dynamic gap analysis examines the disparity between its assets and liabilities.