In business and economics, gap analysis is a tool that helps companies compare actual performance with potential performance. At its core are two questions: "Where are we?" and "Where do we want to be?" If a company or organization does not make the best use of current resources, or foregoes investment in capital or technology, it may produce or perform below its potential. This concept is similar to the base case of being below the production possibilities frontier.
Gap analysis identifies gaps between the optimized allocation and integration of the inputs (resources), and the current allocation level. This reveals areas that can be improved. Gap analysis 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 company's current level of performance. 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:
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 of classifying 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 (Office of Government Commerce).
The need for new products or additions to existing lines may emerge from portfolio analysis, in particular from the use of the Boston Consulting Group Growth-share matrix—or the need may emerge from the regular process of following trends in the requirements of consumers. At some point, a gap emerges between what existing products offer and what the consumer demands. The organization must fill that gap to survive and grow.
Gap analysis can identify gaps in the market. Thus, comparing forecast profits to desired profits reveals the planning gap. This represents a goal for new activities in general, and new products in particular. The planning gap can be divided into three main elements:
This is the gap between the total potential for the market and actual current usage by all consumers in the market. Data for this calculation includes:
Existing consumer usage makes up the total current market, from which market shares, for example, are calculated. It usually derives from marketing research, most accurately from panel research, such as conducted by the Nielsen Company, but also from ad hoc work. Sometimes it may be available from figures that governments or industries have collected. However, these are often based on categories that make bureaucratic sense but are less helpful in marketing terms. The 'usage gap' is thus:
This is an important calculation. Many, if not most, marketers accept existing market size—suitably projected their forecast timescales—as the boundary for expansion plans. Though this is often the most realistic assumption, it may impose an unnecessary limit on horizons. For example: the original market for video-recorders was limited to professional users who could afford high prices. Only after some time did the technology extend to the mass market.
In the public sector, where service providers usually enjoy a monopoly, the usage gap is probably the most important factor in activity development. However, persuading more consumers to take up family benefits, for example, is probably more important to the relevant government department than opening more local offices.
Usage gap is most important for brand leaders. If a company has a significant share of the whole market, they may find it worthwhile to invest in making the market bigger. This option is not generally open to minor players, though they may still profit by targeting specific offerings as market extensions.
All other gaps relate to the difference between existing sales (market share) and total sales of the market as a whole. The difference is the competitor share. These gaps therefore, relate to competitive activity.
The product gap—also called the segment or positioning gap—is that part of the market a particular organization is excluded from because of product or service characteristics. This may be because the market is segmented and the organization does not have offerings in some segments, or because the organization positions its offerings in a way that effectively excludes certain potential consumers—because competitive offerings are much better placed for these consumers.
This segmentation may result from deliberate policy. Segmentation and positioning are powerful marketing techniques, but the trade-off—against better focus—is that market segments may effectively be put beyond reach. On the other hand, product gap can occur by default; the organization has thought out its positioning, its offerings drifted to a particular market segment.
The product gap may be the main element of the planning gap where an organization can have productive input; hence the emphasis on the importance of correct positioning.
The gap analysis also can be used to analyse gaps in processes and the gap between the existing outcome and the desired outcome. This step process can be summarised as below:
Identify the existing process
Identify the existing outcome
Identify the desired outcome
Identify the process to achieve the desired outcome
Identify Gap, Document the gap
Develop the means to fill the gap
Develop and prioritize Requirements to bridge the gap
Gap analysis can also be used to compare existing processes to processes performed elsewhere, such as those obtained by benchmarking. In this usage, you compare each process side-by-side and step-by-step and note the differences. Then analyze each difference carefully to determine if there is any benefit obtained by incorporating the other process or portions of the other process. This analysis must be done carefully and objectively to realize any potential gains. Sometimes the gap analysis will reveal that the two processes can be combined to create a new one that is superior to either original.