Gap analysis is a structured way of comparing actual performance with potential performance. Informed by the information gathered through SWOT and benchmarking analyses, a company can develop a strong sense of the difference between the actual and the potential. It can use that gap to focus planning and development.
In a highly competitive economy, no company can afford to be operating below its potential. This goal of gap analysis is to identify the difference between the way in which a company’s inputs and resources are currently allocated, and the optimal allocation of those inputs and resources. In doing so, gap analysis can provide insight into areas where there is room for improvement.
Gap analysis naturally flows from benchmarking. Once a company understands the level of performance that is general in its industry, it can compare that to its own performance. Such analysis can be applied to the internal organization (and the deployment of human resources), business direction (strategy), internal processes, and the use of technology (especially information technology).
Through gap analysis, a company can determine what additional investment of time, money and human resources it needs to make to achieve a particular outcome.
To take an example, if a company notices through benchmarking that most of the companies in the industry are now using EDI, it can use systematic gap analysis to determine what it would take to move its own operations from a paper based to and electronic format.
Gap analysis is useful in new product development. A company with established products may find that consumer needs and preferences are changing. As the gap between consumer expectations and the company’s products opens up, the company can use gap analysis to help in the development process.
It can cost what it would take to bridge the gap between existing and new product features, determine the gap between existing sales and expanded sales of the redesigned offering, and test the gaps between current profitability and potential profitability of the new products.
In terms of gap analysis as a planning tool, there are four areas in particular where it is applied.
This is the gap between the total potential in a market and the actual current usage by the consumers in that market. It is difficult to estimate total market potential, including all segments covered by all competitive brands. It is usually done by determining maximum potential individual usage, and extrapolating this by the maximum number of potential consumers, though this depends to a larger degree on judgment rather than strict scientific analysis.
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. The maximum potential individual usage, or at least the maximum attainable average usage, can be derived from market research. The existing usage by consumers can be derived from panel-based market research such as that undertaken by The Nielsen Company (formerly A.C. Nielsen).
Most marketers accept the ‘existing’ market size, projected over the timescale of their forecast, as the boundary for their expansion plans. Although this is often the most realistic assumption, it may sometimes impose an unnecessary limit. For example, the original market for computers or video-recorders was limited to the professional users who could afford the high initial prices involved. It was only after some time that the technology evolved sufficiently to penetrate the mass market.
The usage gap is critical for brand leaders who may already hold a significant share of the existing market. Their best strategy is to expand the size of the total market rather than to try to get a few more points in the existing market. Smaller players, however, will generally be limited to finding profitable niches where they can extend their offerings.
The product gap represents that part of the market that a company is excluded from because of the characteristics of its existing products or services. This may be because the market is 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 addressing some potential consumers because others are doing a better job of serving them.
Some segmentation may be the result of deliberate choice on the part of a company that has set priorities for what it wants to focus on. In other cases, it has come about by default and the product gap analysis can be used to improve its positioning in the market.
There is also a gap resulting from the competitive performance. This competitive gap is represented by the difference between the company’s performance and the share of business achieved by similar products, sold in the same market segment, and with similar distribution patterns. The competitive gap represents the effects of factors such as price and promotion.
There is another perspective that takes the ”product gap“ to its logical conclusion by looking for gaps in the “market.” These are basically market segments that have not been identified or are not served by anyone. Identifying such gaps may open up entirely new opportunities for product and service development, regardless of what a company is currently doing.