Gap analysis

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For gap analysis in wildlife conservation, see Gap analysis (conservation)

In business and economics, gap analysis is a business resource assessment tool enabling a company to compare its actual performance with its potential performance. At its core are two questions:

Where are we?
Where do we want to be?

If a company or organization is under-utilizing resources it currently owns or is forgoing investment in capital or technology then it may be producing or performing at a level below its potential. This concept is similar to the base case of being below one's production possibilities frontier.

This goal of the gap analysis is to identify the gap between the optimized allocation and integration of the inputs and the current level of allocation. This helps provide the company with insight into areas that have room for improvement. The gap analysis process involves determining, documenting and approving the variance between business requirements and current capabilities. Gap analysis naturally flows from benchmarking and other assessments. Once the general expectation of performance in the industry is understood it is possible to compare that expectation with the level of performance at which the company currently functions. This comparison becomes the gap analysis. Such analysis can be performed at the strategic or operational level of an organization.

'Gap analysis' is a formal study of what a business is doing currently and where it wants to go in the future. It can be conducted, in different perspectives, as follows:

  1. Organization (e.g., human resources)
  2. Business direction
  3. Business processes
  4. Information technology

Gap analysis provides a foundation for measuring investment of time, money and human resources required to achieve a particular outcome (e.g. to turn the salary payment process from paper based to paperless with the use of a system).

Note that 'GAP analysis' has also been used as a means for classification of how well a product or solution meets a targeted need or set of requirements. In this case, 'GAP' can be used as a ranking of 'Good', 'Average' or 'Poor'. This terminology does appear in the PRINCE2 project management publication from the OGC.

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[edit] Gap analysis and new products

The need for new products or additions to existing lines may have emerged from the portfolio analyses, in particular from the use of the Boston Growth-share matrix or the need will have emerged from the regular process of following trends in the requirements of consumers. At some point a gap will have emerged between what the existing products offer the consumer and what the consumer demands. That gap has to be filled if the organization is to survive and grow.

To identify the gap in the market, the technique of gap analysis can be used. Thus an examination of what profits are forecast to be for the organization as a whole compared with where the organization (in particular its shareholders) 'wants' those profits to be represents what is called the planning gap: this shows what is needed of new activities in general and of new products in particular.

The planning gap may be divided into four main elements:

[edit] Usage gap

This is the gap between the total potential for the market and the actual current usage by all the consumers in the market. Clearly two figures are needed for this calculation:

  • market potential
  • existing usage

[edit] Market potential

The most difficult estimate to make is that of the total potential available to the whole market, including all segments covered by all competitive brands. It is often achieved by determining the maximum potential individual usage, and extrapolating this by the maximum number of potential consumers. This is inevitably a judgment rather than a scientific extrapolation, but some of the macro-forecasting techniques may assist in making this estimate more soundly based.

The maximum number of consumers available will usually be determined by market research, but it may sometimes be calculated from demographic data or government statistics. Ultimately there will, of course, be limitations on the number of consumers. For guidance one can look to the numbers using similar products. Alternatively, one can look to what has happened in other countries. It is often suggested that Europe follows patterns set in the USA, but after a time-lag of a decade or so. The increased affluence of all the major Western economies means that such a lag can now be much shorter.

The maximum potential individual usage, or at least the maximum attainable average usage (there will always be a spread of usage across a range of customers), will usually be determined from market research figures. It is important, however, to consider what lies behind such usage.

[edit] Existing usage

The existing usage by consumers makes up the total current market, from which market shares, for example, are calculated. It is usually derived from marketing research, most accurately from panel research such as that undertaken by A.C. Nielsen but also from 'ad hoc' work. Sometimes it may be available from figures collected by government departments or industry bodies; however, these are often based on categories which may make sense in bureaucratic terms but are less helpful in marketing terms.

The 'usage gap' is thus:

usage gap = market potential – existing usage

This is an important calculation to make. Many, if not most marketers, accept the 'existing' market size, suitably projected over the timescales of their forecasts, as the boundary for their expansion plans. Although this is often the most realistic assumption, it may sometimes impose an unnecessary limitation on their horizons. The original market for video-recorders was limited to the professional users who could afford the high prices involved. It was only after some time that the technology was extended to the mass market.

In the public sector, where the service providers usually enjoy a `monopoly', the usage gap will probably be the most important factor in the development of the activities. But persuading more `consumers' to take up family benefits, for example, will probably be more important to the relevant government department than opening more local offices.

The usage gap is most important for the brand leaders. If any of these has a significant share of the whole market, say in excess of 30 per cent, it may become worthwhile for the firm to invest in expanding the total market. The same option is not generally open to the minor players, although they may still be able to target profitably specific offerings as market extensions.

All other `gaps' relate to the difference between the organization's existing sales (its market share) and the total sales of the market as a whole. This difference is the share held by competitors. These `gaps' will, therefore, relate to competitive activity.

[edit] Product gap

The product gap, which could also be described as the segment or positioning gap, represents that part of the market from which the individual organization is excluded because of product or service characteristics. This may have come about because the market has been segmented and the organization does not have offerings in some segments, or it may be because the positioning of its offering effectively excludes it from certain groups of potential consumers, because there are competitive offerings much better placed in relation to these groups.

This segmentation may well be the result of deliberate policy. Segmentation and positioning are very powerful marketing techniques; but the trade-off, to be set against the improved focus, is that some parts of the market may effectively be put beyond reach. On the other hand, it may frequently be by default; the organization has not thought about its positioning, and has simply let its offerings drift to where they now are.

The product gap is probably the main element of the planning gap in which the organization can have a productive input; hence the emphasis on the importance of correct positioning.

[edit] Competitive gap

What is left represents the gap resulting from the competitive performance. This competitive gap is the share of business achieved among similar products, sold in the same market segment, and with similar distribution patterns - or at least, in any comparison, after such effects have been discounted. Needless to say, it is not a factor in the case of the monopoly provision of services by the public sector.

The competitive gap represents the effects of factors such as price and promotion, both the absolute level and the effectiveness of its messages. It is what marketing is popularly supposed to be about.

[edit] Market gap analysis

In the type of analysis described above, gaps in the product range are looked for. Another perspective (essentially taking the `product gap' to its logical conclusion) is to look for gaps in the 'market' (in a variation on `product positioning', and using the multidimensional `mapping'), which the company could profitably address, regardless of where its current products stand.

Many marketers would, indeed, question the worth of the theoretical gap analysis described earlier. Instead, they would immediately start proactively to pursue a search for a competitive advantage.


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