How to perform a business gap analysis
If you’re looking to grow your business but not sure where to start, you need to do a gap analysis.
A business gap analysis will help you understand where you’re currently at and what you need to do to move forward - basically how to “fill the gap” between where you are and where you want to be.
Here’s what you’ll learn:
What's a gap analysis?
Why and when should you perform one?
The 4 types of gap analysis.
The benefits and limitations of gap analysis.
How to perform a gap analysis.
5 gap analysis examples.
4 common gap analysis frameworks.
Let’s dive in.
What is a business gap analysis?
A business gap analysis considers 3 key elements:
The current state or performance.
The ideal state or potential.
How to “bridge the gap” from current to ideal state.
The “gap” is the difference between your current and ideal situations. Other names for gap analysis include:
By comparing the current state with the ideal state, companies, business units or teams can determine how to improve their processes, products and performance quicker. They can also optimise how to spend time, money and human resources in a business.
A gap analysis is different from a risk assessment, which focuses on threats and uncertainties that can impact the objectives and outcomes of an organisation.
Why perform a gap analysis?
Businesses conduct a gap analysis to pinpoint what’s holding them back, and devise an improvement plan. Here are 4 ways a gap analysis can benefit your business:
1. Benchmark against external factors
Businesses may want to compare and benchmark their results against external factors such as their competitors or industry performance criteria.
2. Identify portfolio opportunities
Companies can use a gap analysis to examine their portfolio and identify new opportunities and products to sell. They can also use a gap analysis to identify products that are not selling well and decide whether to promote them more, adapt them to meet customer requirements or remove them altogether.
3. Assess profitability issues
Businesses can use a gap analysis to assess profitability and evaluate why they failed to hit their target. For instance, was it down to poor planning and execution? Did materials cost more than expected? Did they have to drop prices to beat unexpected competition, or was there another factor at play?
4. Evaluate forecasting gaps
Companies can also use a gap analysis to evaluate forecasting gaps – i.e., the difference between the forecasted and actual amount. For example, did management misread the demand for a product, or did other factors reduce expected sales?
When should businesses perform a gap analysis?
Businesses can perform a gap analysis at any time, but they usually coincide with particular events, such as strategic planning, performance reviews and audits.
Companies can use gap analysis to identify issues and adjust their strategies to fit the situation or update processes to align with the plan.
Organisations can use a gap analysis to identify where they’re falling short in performance.
Businesses can use gap analysis to show auditors which regulations they currently comply with and how they plan to comply with the rest.
How to perform a gap analysis
You can break down the gap analysis process into 5 steps:
1. Analyse your current state
The first step of a gap analysis is to choose which area of your business you want to focus on and analyse its current state using the relevant type of gap. You’ll need to know what you’re looking for and how to record all the metrics and qualitative feedback.
In other words, it’s a 3-step process:
Decide what you want to analyse.
Determine what gap analysis method to use.
Record all the variables that are currently impacting the chosen business area.
Depending on what you’re analysing, you may want to use:
Internal process documentation.
2. Determine the ideal future state
Next, you’ll want to determine where you want to be – your ideal future state.
How you define success could include:
Existing business goals and objectives.
Specific profit or revenue figures.
When considering your ideal future state, you can be as specific or generic as you want. It’s more important to understand how you can translate that ideal state into specific actions or processes in your organisation.
3. Compare the current and future state
Next, you need to determine the gap between where you are and where you want to be. Compare and match the factors from steps 1 and 2 to identify the gaps. Consider what you’re doing wrong and what you could be doing better.
As you compare the current and future state, you might discover you have a large or a small gap to bridge. On the other hand, you might be exceeding your targets. If that’s the case, consider how you achieved these results to understand what contributed to your success.
Regardless of your performance, there’s always room for improvement.
4. Quantify the gaps and solutions
Next, you’ll need to quantify the gaps and decide how to tackle them. Here are some questions to consider:
What did we do well?
What could we have done differently?
What were the key events and critical decisions that led up to this?
What do we need to modify or change?
What resources do we require to bridge the gap?
Make sure you document your observations as clearly as possible, linking current to ideal factors.
5. Create a plan to fill the gaps
After you’ve listed the possible ways to bridge the gap and decided which would be best, you’ll need to create a plan.
Define a clear strategy and set actionable objectives to help you prepare for your transition within a specified time frame. Also, consider if you have the resources to implement the changes.
Types of gap analysis
There are several types of gap analysis, including:
Performance (or strategy) gap: the difference between the actual and expected performance.
Product (or market) gap: the difference between actual and budgeted sales.
Profit gap: the difference between actual and target profit.
Workforce gap: the difference between the workforce’s actual strength and quantified performance and the required workforce.
Let’s take a look at each one:
Performance (or strategy) gap
The most common type of gap analysis is the performance gap.
It covers a high-level analysis of company goals, including how the company has reached completed goals and what it needs to do to achieve the remaining ones.
It’s also called the “strategy gap”, as it highlights the difference between a company’s current performance and its desired performance as stated in its mission, values and strategic objectives. The "gap" represents the threat to the company's future performance indicators, growth rate and even potentially survival.
Product (or market) gap
The product gap looks at sales opportunities to identify and capitalise on underserved markets where demand is greater than supply.
A product gap analysis allows businesses to make logical, evidence-based decisions instead of just following observations and opinions.
Product (or market) gap analysis ensures you remain ahead of the market and don’t allow sudden, unexpected changes to influence your strategy.
Profit gap analysis helps you understand what went wrong when you miss profit forecasts.
For instance, profit forecasting issues may relate either to planning or execution – or perhaps even both. Various factors affect profitability, including changing market conditions, fierce competition or unexpected political events.
A profit gap analysis can help determine the root cause of the problem and the best course of action to prevent it from happening again.
Workforce (or HR) gap
Regardless of the size of the organisation, performing a workforce or HR gap analysis allows you to make more informed decisions about staffing and budgeting.
An HR gap analysis provides information on employee onboarding, offboarding, training, hiring, insourcing and outsourcing. These results can provide valuable insights into using employees’ skills to meet strategic and performance objectives.
It also provides management with a clear picture of workforce competencies and how they relate to the firm’s strategic vision.
Benefits of a gap analysis
The benefits of a gap analysis include:
Examines how your company operates currently.
Uncovers the difference between perception and reality.
Evaluates how efficiently things are running at your company.
Forces you to consider what you want your company to look like and how you can achieve it.
Maximises the use of company resources and finances.
Allows teams to diagnose problems quickly and implement changes in business practices to solve those problems.
Ensures you meet desired project outcomes.
Provides insight into areas that need improvement, such as processes, products, profitability, performance and customer satisfaction.
Determines the best places to focus energy and resources.
Provides information to make better-informed decisions and improve performance.
Limitations of a gap analysis
The limitations of a gap analysis include:
Lacks actionable steps on how to grow.
Misses competitor actions in the market.
Highlights the need for technological advances but doesn't explain how you can achieve these advancements.
Fails to acknowledge the government or legal restrictions for expansion.
Doesn’t necessarily account for seasonal fluctuations and trends.
Costs money to hire external consultants to perform the analysis.
Causes apprehension or suspicion among staff.
Takes valuable time away from employees who participate in the project and managers who assess the results.
Depends on the persistence and knowledge of the people involved.
Outcomes can be wrong because the context frequently changes, especially in larger enterprises.
Gap analysis examples
You can use gap analysis in various situations and business areas. Here are 5 examples:
You can use gap analysis when a business unit’s productivity level fails to meet expectations. It can help determine where to focus optimisation efforts and adjust existing processes and resources to improve productivity.
2. New product launch
If you’ve launched a new product, you can run a gap analysis to compare the current feature set with design goals or assess why sales weren’t as good as expected.
3. Sales performance
You can run a sales gap analysis to examine every step of the sales funnel from the sales and buyer perspective.
For example, there may be a missed opportunity to provide buyers a product demo when they’re in the consideration stage.
4. Supply management
In a fast-moving environment like supply chain management, you can conduct a gap analysis to optimise it.
For example, a gap analysis could pinpoint the underlying reasons a store runs out of supplies frequently. Maybe they’ve selected the wrong vendor, or they should have outsourced logistics.
5. Software evaluation
You can run a gap analysis to determine if all the functions and features of a software application meet your business requirements and expectations. If there’s a gap between what you need and what’s available, you can look at workarounds or potentially change your business processes to fit the software.
Common gap analysis frameworks
Here are 4 gap analysis frameworks you can use to help organise current and future states and show you how to “bridge the gap”.
1. SWOT analysis
SWOT stands for Strengths, Weaknesses, Opportunities and Threats. It’s a helpful tool for analysing your business’ current state.
Similar to a gap analysis, the idea behind a SWOT analysis is to gain insight into the current state and use that insight to improve things. It helps identify qualitative and quantitative aspects of a project or part of your business.
However, the threat section is more like a risk assessment, which is outside the scope of a gap analysis.
2. Fishbone diagram
The Fishbone diagram, also known as the cause-and-effect diagram or the Ishikawa diagram (after its creator Kaoru Ishikawa), visualises the cause and effect of potential problems.
It’s useful when analysing your current state and identifying the factors that prevent you from achieving the ideal state.
3. McKinsey 7S framework
The McKinsey framework has 7 categories:
When you examine these interconnected categories, you’ll better understand how they apply to your organisation. Every category should support the others. If you find one that doesn’t, you need to focus on improving that one.
4. Nadler-Tushman model
The Nadler-Tushman model assesses a company’s performance in 4 areas:
Similar to the SWOT analysis, the Nadler-Tushman model identifies the strengths and weaknesses of each area and compares them to the others.
The goal is to determine if the work effort is equally distributed across each area and supports the others.
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A business gap analysis helps you understand where you are and what you need to do to move forward.
By comparing the current state with the ideal state, companies, business units, or teams can determine how to improve their processes, products and performance quicker.
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