This article discusses the role of Gap analysis as a strategy tool for use by businesses and organizations. It provides a tool with which companies can identify the gaps in critical areas of their operations, thus making it very valuable. Read on and learn how to apply the Gap analysis strategy to your business.
What is it?
Gap analysis is a strategy tool used to determine the gap between the actual performance and the projected performance of a business.
It can help you to identify the underperforming areas of your operation and the factors responsible for their underperformance. It does this by comparing what is on the ground against what is expected, using key measurement parameters. When carried out properly, it can pick out deficits in your business's human and material resources and plug holes in its processes, performance, and profitability.
Some of the most common examples of gaps in business operations include:
Performance Gap: It is a measure of the gap between the expected performance and the actual performance of your business.
Profit Gap: It is a measure of the gap between the projected profit and the actual profit your business records.
Skill/Manpower Gap: A measure of the gap between the available human resources, personnel, staff, and the actual number required to execute a specific task
Product/Market Gap: A measure of the difference between the expected product sales and the actual product sales.
When do we use it?
We use the gap analysis in any of the following instances:
When your business fails to meet its projected performance or yield the expected profit.
When you see an underperforming area of your business or look to find the cause of its underperformance.
When you need to develop a crucial operational strategy or adjust a previous one.
When developing key details of your plans about production, recruitment, resource management, marketing, etc.
When customer feedback points to a recurring theme of complaints and objections or products fail quality control tests.
What business questions is it helping us to answer?
A gap analysis provides answers to the following business questions
What expectations, targets, and goals do my business seek to meet? How high is the bar, and what standards do I seek to establish for the company?
What is the current state of my business? What is its present reality when measured against key industry performance metrics and standards?
Is my business meeting up with its targets and expectations? Does it measure up to key industry standards or our vision and aspirations?
What areas need improvements, and what skills, resources, and inputs are required to make them perform better?
What can be done to ensure that it starts to measure up to standards and meet our expectations regarding performance and profit?
How do we use it?
You can go through the steps discussed below to use the gap analysis tool.
Step 1
Establish the ideal or expected state of your business according to industry projections or your business's set goals and objectives. For example, it could be a projected production output of 200 units per day, a 150-unit daily sales target, or a monthly net profit of $20,000.
Step 2
Analyze the current state of your business. Identify its current production output, profit margins, available human and material resources, technologies, skills, and practices.
Compare the present performance in key areas against the projected performance and quantify the differences. For example, you'll have a 20% profit gap if you can only post a $16,000 net profit against a projected $20,000 net profit.
Step 3
Identify the drivers of the gaps in the business and estimate their contribution to the overall profit gap. For example, you could find a staffing shortfall that, in turn, contributes to a 10% production shortfall, ultimately leading to a 5% profit gap.
Do this until you find all the drivers that cause the 20% profit gap.
Step 4
Now that you've fully identified all the existing gaps, you can make plans to bridge the gap by making the necessary adjustments and arrangements. Take good recommendations, and make the required provisions available to execute them.
Practical Example
A printing paper manufacturing company intends to conduct a performance/production gap analysis. This is so that it can account for the recurring shortfall in its monthly yield output. Below is a brief description of the steps to execute the gap analysis:
Its projected product yield is set at a minimum yield output of 500 jumbo rolls per month, a production benchmark set against standard operational conditions.
Its current monthly production count is estimated to be around 450 jumbo rolls, accounting for a monthly production gap of 50 jumbo rolls. This production deficit translates to a 10% production gap.
Next, the factory supervisor investigates the cause of this production gap and discovers a lack of skilled personnel to operate two extruding machines. This skill gap is duly noted as the chief contributor to the performance and production gaps.
The company devises a plan to bridge this workforce gap by training its existing staff on the use of the machines or by hiring new hands to operate them. This helps ramp up production in the factory yard, leading to the company meeting and even exceeding its projected yield output.
Advantages
It provides insight into underperforming areas of your business's operations and helps you identify the causative factors.
It helps to assess the progress of your operations and to check if your targets are being met.
It helps you to pinpoint focus areas to channel your resources and effort.
When executed correctly, the findings from a gap analysis are easy to analyze and understand.
It can be carried out without recourse to external or expert input as you mostly rely on data from in-house persons.
Disadvantages
The effectiveness of the gap analysis can be linked to the knowledge and capacity of those involved in carrying it out.
In a dynamic business environment, the parameters used to execute the gap analysis may change, causing its results to be inconsistent with the current realities.
There is the risk of missing out on the most complex challenges if the gap analysis is not thoroughly done.
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