GAP Analysis

In business and economics, gap analysis is a tool that helps a company to compare its actual
performance with its potential performance. At its core are two questions: "Where are we?" and
"Where do we want to be?" If a company or organization is not making the best use of its current
resources 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.

The goal of gap analysis is to identify the gap between the optimized allocation and integration
of the inputs (resources) and the current level of allocation. This helps provide the company with
insight into areas which could be improved. 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 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:

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 (Office
of Government Commerce).

The need for new products or additions to existing lines may have emerged from portfolio
analyses, in particular from the use of the Boston Consulting Group 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 a gap in the market, the technique of gap analysis can be used. Thus an examination
of what profits are forecasted 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 three main elements:

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
 Current industrial potential

Market potential

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. The increased affluence of all the major Western economies means that such a lag can
now be much shorter.

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

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 the Nielsen Company 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.

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 corrects positioning.

Market gap analysis

In the type of analysis described above, gaps in the product range are looked for. Other
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 the current
products stand.

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