82% of businesses fail due to cash flow problems. Let that sink in for a second. It’s not bad ideas or a lack of passion; it’s just operational inefficiencies draining their resources.
Running a successful business goes beyond offering a great product or service—it requires identifying and addressing inefficiencies before they escalate into significant challenges. This is where gap analysis plays a critical role.
A well-executed gap analysis helps you figure out exactly where your business is now, where you want it to be, and—most importantly—what’s standing in the way.
Once you see the gaps, you can fix them. That means smoother operations, happier teams, and a business that runs efficiently and precisely.
What Is a Gap Analysis?
A gap analysis is a strategic framework that helps businesses assess their current performance, define their ideal future state, and identify the obstacles preventing them from achieving their goals. It provides a structured approach to pinpointing inefficiencies, uncovering opportunities, and developing a clear roadmap for improvement.
Every business, no matter how successful, has areas for improvement. A gap analysis helps identify misalignments in processes, technology, team performance, and overall strategy.
This process is about positioning your business for long-term success. By identifying and addressing significant gaps, you create a stronger foundation for growth and ensure that your business operates at its full potential.
Types of Business Gaps
Before conducting a gap analysis, it is essential to define what you’re looking to find. Business gaps generally fall into two categories: performance gaps and opportunity gaps.
1. Performance Gaps
A performance gap occurs when a business falls short of its goals, whether in revenue, operational efficiency, customer satisfaction, or overall market performance. These gaps highlight areas where the company is underperforming relative to its strategy, industry benchmarks, or stakeholder expectations.
For example, a company struggling to maintain profitability and sustain operations signals a significant performance gap. Addressing these deficiencies is crucial for stability and long-term success.
2. Opportunity Gaps
Opportunity gaps arise when a company has the potential to expand, innovate, or adapt but lacks the necessary infrastructure, strategy, or resources to do so. These gaps often involve untapped markets, emerging technologies, or shifts in consumer behavior.
Consider a well-established business that has the chance to enter a new industry segment but lacks the operational framework to scale. That’s an opportunity gap. If left unaddressed, these gaps can convert into performance gaps—such as when a competitor utilizes new technology to gain an advantage, leaving your business at a disadvantage.
While both types of gaps are critical, prioritizing performance gaps ensures a strong foundation before exploring new opportunities. A company must optimize its current operations before expanding into uncharted territory.
5 Major Components of Conducting a Gap Analysis
A gap analysis examines your organization’s strengths, weaknesses, limitations, and potential areas for growth. However, before identifying gaps, you must clearly understand your current state.
1. Define Your Current and Desired States
Start by assessing your business’s current operations and what you aim to achieve. Setting concrete benchmarks aligned with industry standards and internal goals will help clarify the gap between where you are and where you want to be.
For instance, when Lululemon’s leadership assessed brand consistency across store locations, they identified a need for a unified aesthetic. By conducting a gap analysis, they recognized discrepancies in in-store presentation and developed a strategic plan to align all locations under a cohesive brand image.
2. Identify the Gap
The gap becomes more evident once you outline your current and future states. Consider the nature of the issue:
- Is it a performance gap, where measurable outcomes—such as revenue or efficiency—fall short?
- Is it an opportunity gap, where your company has the potential to expand but lacks the strategy or resources to do so?
Misalignment within your business might stem from unclear objectives, inconsistent strategy, or operational inefficiencies. A root cause analysis (step four) will help pinpoint the underlying reasons.
3. Collect Data
Gathering data provides insight into the factors contributing to the gap. The root cause could be internal processes, leadership structure, employee skills, or company culture.
Data collection should include qualitative and quantitative insights. Interviews with leadership, staff, stakeholders, and operational and financial metrics can reveal key friction points preventing optimal performance.
4. Conduct a Root Cause Analysis
Understanding why a gap exists is essential before attempting to close it. By continuously asking “why”—a method known as the Five Whys Technique—leaders can trace the issue back to its core cause.
For instance, Lululemon discovered inconsistent branding across its stores due to a lack of standardized brand guidelines. This allowed store managers too much autonomy in in-store design, which was initially seen as a strength. However, this flexibility ultimately hindered brand consistency as the company expanded.
Using frameworks like the Congruence Model, businesses can analyze how different organizational elements—such as leadership, strategy, and culture—align to support or hinder success.
5. Develop an Action Plan
Once the root cause is identified, create a structured plan to bridge the gap. A well-defined action plan should include:
- Resource and training allocation
- Clear timelines and milestones
- Adjustments in leadership directives or team responsibilities
In Lululemon’s case, leadership refined store management guidelines, shifting from an entrepreneurial approach to a standardized framework reinforcing brand cohesion across all locations.
Gap Analysis in Action
A gap analysis can provide valuable insights into why a company isn’t meeting its goals. Let’s walk through an example to see how this process unfolds.
Scenario: Company X’s Sales Performance Gap
Company X has launched a new product, Widget, but sales numbers aren’t meeting expectations. To determine the issue and make improvements, they conduct a gap analysis.
Step 1: Collect Market Data
The company gathers insights through customer surveys, sales reports, and industry trends. They need to understand what’s preventing Widget from reaching its projected sales targets.
Step 2: Analyze the Current State
By examining the data, Company X pinpoints key sales obstacles. This could include low market awareness, pricing concerns, or distribution challenges.
Step 3: Define the Desired State
The company sets a clear goal—how many units it should be selling. This creates a measurable target for improvement.
Step 4: Calculate the Gap
With the current and desired states mapped, Company X determines the percentage gap between actual and projected sales.
Step 5: Develop an Action Plan
To bridge the gap, the company implements strategies such as:
- Expanding its sales force
- Increasing marketing efforts
- Refining pricing or product features
Step 6: Implement and Monitor
Once the plan is in place, Company X tracks performance to ensure it’s closing the gap. Adjustments are made as needed.
Frameworks for Gap Analysis
A structured approach can make a gap analysis more effective. Frameworks like McKinsey’s 7S Model, the Nadler-Tushman Congruence Framework, and SWOT analysis help categorize findings and guide strategic decision-making. Below are some widely used frameworks that can help you analyze causes and craft solutions.
McKinsey 7S Framework
This model evaluates a business through seven interconnected elements:
- Strategy (business approach)
- Structure (organizational hierarchy)
- Systems (processes and workflows)
- Shared Values (company culture)
- Skills (employee capabilities)
- Style (leadership approach)
- Staff (workforce availability)
The first three—strategy, structure, and systems—are considered “hard” elements, while the remaining four focus on people and culture.
For example, if a manufacturing plant requires 20 workers per shift but a night shift runs with only 15, there’s a misalignment between systems and staff. Addressing this gap might involve better workforce planning or automation solutions.
Nadler-Tushman Congruence Framework
This model breaks down an organization into four main areas:
- Work (tasks and responsibilities)
- People (employees and their skills)
- Structure (organizational design)
- Culture (values and work environment)
Each area should support the others. If a company’s compliance team identifies regulatory gaps but lacks a system to enforce policy changes, there’s a misalignment between people and structure. Closing this gap may involve restructuring responsibilities or investing in compliance training.
SWOT Framework
A SWOT analysis—strengths, weaknesses, opportunities, and threats—is commonly used in strategic planning but also works as a gap analysis tool.
- Strengths and weaknesses focus on internal performance gaps.
- Opportunities highlight areas for growth and innovation.
- Threats touch on external challenges but lean toward risk assessment, which differs from gap analysis.
Using SWOT, businesses can pinpoint weaknesses and develop targeted solutions to bridge performance or opportunity gaps.
PESTEL Framework
This model assesses political, economic, social, technological, environmental, and legal factors. It’s beneficial for businesses navigating external market changes.
For example, a company may face a compliance gap if new environmental laws require stricter waste management. Adapting to these changes might involve new sustainability initiatives or supply chain modifications.
Fishbone (Ishikawa) Diagram
Developed by quality control expert Kaoru Ishikawa, this method categorizes factors to help identify the root causes of business problems. It’s often used in manufacturing but can be adapted for any industry.
Common categories include:
- The 8 Ps of Product Marketing: Product, Price, Promotion, Place, Process, People, Physical Evidence, Performance
- The 4 Ss of Service: Surroundings, Suppliers, Systems, Skills
A fishbone diagram visually maps cause-and-effect relationships, making it easier to diagnose operational inefficiencies.
Each framework serves a different purpose. A PESTEL analysis may be ideal for market-driven companies, while McKinsey’s 7S works best for internal realignment. The priority is selecting a model that aligns with your specific business challenges and objectives.
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