A gap analysis is 

a method of assessing the performance of a business unit to

determine whether business requirements or objectives are being met and, if
not, what steps should be taken to meet them. A gap analysis may also be
referred to as a needs analysis, needs assessment or need-gap analysis.

What Is a Gap Analysis?

By 

ADAM HAYES

Updated October 01, 2022

Reviewed by 
DAVID KINDNESS

What Is a Gap Analysis?

A gap analysis is the process companies use to compare their current
performance with their desired, expected performance. This analysis is
used to determine whether a company is meeting expectations and using
its resources effectively.

A gap analysis is the means by which a company can recognize its current
state—by measuring time, money, and labor—and compare it to its target
state. By defining and analyzing these gaps, the management team
can create an action plan to move the organization forward and fill in the
performance gaps.
KEY TAKEAWAYS

 Through gap analysis an organization examines its current

performance with its target performance.
 A gap analysis can be useful when companies aren't using their
resources, capital, or technology to their full potential.
 By defining the gap, a firm's management team can create a plan of
action to move the organization forward and fill in the performance
gaps.
 There are four steps to a gap analysis, which are defining
organizational goals, benchmarking the current state, analyzing the
gap data, and compiling a gap report.
 Gap analysis can also be used to assess the difference between
rate-sensitive assets and liabilities.

Understanding Gap Analysis

When organizations aren't making the best use of their resources, capital,
and technology, they may not be able to reach their full potential. This is
where a gap analysis can help.

A gap analysis, which is also referred to as a needs analysis, is important

for any type of organizational performance. It allows companies to
determine where they are today and where they want to be in the future.
Companies can reexamine their goals through a gap analysis to figure out
whether they are on the right track to accomplishing them.

Gap analyses were widely used in the 1980s, typically in tandem with
duration analyses. A gap analysis is considered harder to use and less
widely implemented than duration analysis, but it can still be used to
assess exposure to a variety of term structure movements.

There are four steps in a gap analysis, ending in a compilation report that
identifies areas of improvement and outlines an action plan to achieve
increased company performance.

The "gap" in a gap analysis is the space between where an organization is

and where it wants to be in the future.

How to Conduct a Gap Analysis

Some gap analysis models break the following steps into four processes.
Others are a little more elaborate and expand the analysis into a few
additional steps. In either case, a gap analysis entails understanding your
current position, determining where you want to end up, and devising a
plan on how to arrive at the desired endpoint.

Step 1: Identify Your Current State

A gap analysis starts by focusing on where your organization is currently
operating at. This includes researching the products it offers, customers it
serves, geographical locations it reaches, and benefits it offers to its
employees. This information can be quantitative (i.e. financial records as
part
of required filings) or qualitative (i.e. surveys or feedback from key
stakeholders). 

Often, a company will perform a gap analysis because it is already aware

of an issue. For example, customer feedback surveys have generated
poor results, and a company wants to investigate why and implement
remedies. Before it can dream of what it wants to become, it must
understand why these errors are happenings, when issues are arising, and
who the change management leaders must be.

Step 2: Identify Your Future State

The crux of gap analysis resides in this step, where a company must
identify what is wants to become. This stage must be done with great care
as the identity that a company wants to have will dictate the strategic steps
it must make to obtain those goals.

In gap analysis, a company must make specific, measurable goals to yield

the greatest long-term success. For example, in the situation above, it
would do the company little good to set the goal of “becoming better at
customer service”. Instead, the company must identify more
trackable metrics such as “achieve customer satisfaction of 90% within 12
months”.

Another way of identifying the desired outcome is to analyze what

competitors or other market participants are doing. It may be easier to
identify when another company is doing something well and attempt to
emulate that.

Step 3: Identify the Gaps

With the current state and future state defined, it’s time to bridge the two
and understand where the most critical differences lie. In our running
example, it’s in this stage that a company realizes they may be woefully
understaffed, have not provided enough staff training, or do not have the
technical capability to keep up with customer inquiries.
Step 4: Evaluate Solutions
Now that a company has defined its deficiencies, it’s time to come up with
plans on how it will reach its target state. Sometimes, there may only be
one solution; other times, the gap analysis may call for several
simultaneous changes that must work in tandem.

In order to gauge whether a solution will work, it must often be quantifiable

with ways to measure change. Our example of improving customer service
may have an easy metric such as customer satisfaction percentage. Other
gap analysis findings such as deficiencies in brand recognition may require
more creative, thoughtful solutions that can still be evaluated.

Step 5: Implement Change

Once the best ideas from Step 4 are chosen, it’s time to put them into
action. It’s in this stage that the company attempts to close the gap
identified in the analysis. By putting the solutions in place, the company
attempts to become better at a targeted area of business or overcome a
deficiency.

This implementation stage often entails following a detailed set of

processes at a specific cadence. As part of the gap analysis, the company
has a defined outcome, and careful steps must be taken to ensure more
damage isn’t caused instead of cured. For example, consider employees
feeling overwhelmed and discouraged from laborious training. An effort of
making workers more proficient may lead to loss or productivity or
decreased morale. 

Step 6: Monitor Changes

For this reason, the company must also conclude its gap analysis by
monitoring any changes. Sometimes, the company took exactly the right
steps. Other times, the gap might’ve been wider than they thought or they
failed to adequately assess the company’s current position. In any case,
gap analysis can be a circular process where after changes have been
made, the company can re-evaluate its current position and where it
compares against regarding other future states.

A gap analysis often contains sensitive information; therefore, companies

will often not disclose their gap analysis model. In addition, the analysis
would tip off competitors about the direction of the company.

Types of Gap Analysis

Market Gap Analysis
Also called product gap analysis, market gap analysis entails making
considerations about the market and how customer needs may be going
unmet. If company is able to identify areas where product supply is not
meeting consumer demand, the company can take measures to personally
fill that market gap. This type of analysis may be performed by external
consultants who have more expertise in these areas of business that the
company may not currently be operating in.

Strategic Gap Analysis

Also called performance gap analysis, strategic gap analysis is a more
formal internal review of how a company is performing. The analysis often
entails comparing how a company has done against long-term
benchmarks such as a five-year plan or strategic plan.

A strategic gap analysis may also be performed to compare how a

company is faring against its competitors. This type of analysis may
unearth ways other companies are utilizing personnel or capital in more
strategic, resourceful ways. This type of information may be hard to come
by, especially if departed employees have signed non-disclosure
agreements and the company does not publicly disclose much information
about processes. 

Financial/Profit Gap Analysis

A company may choose to directly analyze where its company may be
falling short compared to other competitors specifically looking at financial
metrics. This may include pricing comparisons, margin percentages,
overhead costs, revenue per labor, or fixed vs. variable components. The
ultimate goal of a profit gap analysis is to determine areas in which a
competitor is being more financially efficient. This information can then be
used in further, more broad gap analysis types.

Skill Gap Analysis

Instead of looking at the financial aspects of a company, a business may
choose to look at the human element instead. A skill gap analysis helps
determine if there is a shortfall in knowledge and expertise with the
personnel currently on staff. A skill gap analysis must clearly define the
goals of the company, then map how current laborers may fit into that
design. A skill gap analysis may lead to the recommendation of simply
training existing staff to incur new skills or seeking outside expertise to
bring in new personnel. 

This type of analysis is especially important for innovative companies who

must rely on having a set of direct skill sets to continue to be competitors
(or leaders) in their industry. In addition, skill gap analysis is critical for
small companies that must rely on a smaller staff to operate the company.
In this case, individuals must often have diverse, flexible talents that can
be useful in many different aspects of the business.

Compliance Gap Analysis

Often leveraging internal audit functions, a compliance gap analysis
evaluates how a company is faring against a set of external regulations
that dictate how something should be getting done. For example, a
company may internally evaluate its accounting and reporting functions in
advance of seeking an external auditor to provide an opinion on its
financial statements.

As opposed to other forms of gap analysis, compliance gap analysis tends

to be preventative and defensive as opposed to more strategic forms of
gap analysis. For example, instead of performing a gap analysis to attempt
to gain a greater percentage of market share, compliance gap analysis
often has the intention of meeting regulations, avoiding fines, meeting
reporting requirements, and ensuring external deadlines can be met
successfully.

Product Development Gap Analysis

As a company builds new products, gap analysis can also be performed to
analyze which functions of the products will meet market demand and
where the product will fall short. This type of gap analysis is often
associated with the development of software products or items that take a
long time to develop (in which the market demand may have shifted).

During product development gap analysis, a company may also evaluate

which aspects of the product or service have been successfully
implemented, delayed, intentionally eliminated, or still in progress. With a
blend of multiple types of gap analysis above, the company can then
perpetually evaluate how its product plan is changing and whether it has
internal resources to meet the internal gaps needed for product
development completion. 

Gap Analysis Tools

To assist with the gap analysis process, companies have an assortment of
tools at their disposal. The tools listed below have an intended use that is
best suited for a specific aspect of a gap analysis.

SWOT Analysis
One of the more recognizable analysis tools, SWOT analysis determines a
company’s strengths, weaknesses, opportunities, and threats. As a gap
analysis tool, a company can evaluate both internal and external factors
that it can improve upon or realize its lead on.

In a SWOT analysis, a company evaluates its strengths and weaknesses

as part of internal analysis. During a gap analysis, a company may choose
to divert resources from its strengths, especially if it feels comfortable with
its current market lead. On the other hand, companies may be more
interested in what its weaknesses are and “how far behind” they may be
from outside parties. In some cases, companies may decide its
weaknesses cannot be overcome due to barriers of entry, massive capital
investment requirements, or consumer preferences.

The other half of a SWOT analysis relates to external forces often outside
of the control of a company. The opportunities and threats a company
faces are often the uncontrollable forces that pose risk of the findings of a
gap analysis not materializing. For example, a company may outline the
plan to capture greater market share by releasing a new product. Should
the threat of a government tariff on the product increase the per-unit cost,
the company’s gap may be more difficult to close. 

Fishbone Diagram
Also called a cause-and-effect diagram or an Ishikawa diagram, a fishbone
diagram is useful to identify what might be causing problems. It is also
helpful to encourage creative thinking when sleuthing through a business
constraint.

A fishbone diagram is created by determining the problem at hand and

writing that at the center of an area. Then, major categories are written on
branches that expand away from the main problem. Eventually, additional
branches are added to these branches that identify why problems within
each category exist. In the end, the fishbone diagram attempts to break a
large, complex problem into various aspects that can be more easily
approached and solved.

McKinsey 7S
The McKinsey 7S framework identifies seven elements that are key to
determining how well a company performs and what impacts how it
operates. The model contains three "hard elements" of strategy, structure,
and systems along with four "soft elements" including shared values, skills,
style, and staff.

Using the McKinsey 7S model, a company can identify how each area fits
into prevailing gaps and how the company can influence each aspect to
better conform to long-term objectives. As adjustments are made, it's often
recommended to iteratively monitor and review company performance.
Nadler-Tushman Model
The Nadler-Tushman model is used specifically to identify problems,
understand how a company may be underperforming, and determining a
way to address that performance. The core of the Nadler-Tushman model
is based around the concept that aspects within a company should be
aligned and work together; otherwise, the company will not be as
successful.

The model is centered around different components including culture,

work, structure, and people. These four core principles receive data that is
input (a company's strategy) as well as its output (the company's
performance). The end goal is to determine how each of the four
components are working together.

PEST Analysis
A PEST analysis entails gauging external factors and how they may
impact the profitability of a company. PEST stands for political, economic,
social, and technological. A common variation of PEST analysis is
PESTLE analysis which also incorporates legal and environmental
concerns.

PEST analysis can help with a gap analysis as a company may not be
considering external factors that may cause, exacerbate, or solve current
gaps. For example, government legislation may cause a company's
product to become much more expensive to export. In this case, a
company may have a potential gap should external forces shift in a way
that adversely impacts the company.

Companies often use a combination of these tools, as findings from one

tool may contribute to the analysis in another.

When to Use a Gap Analysis

Companies should perpetually evaluate the products it offers, the
customers it serves, the market need it fills, and the efficiency of its
operations. However, there may be certain times where a more formal gap
analysis is warranted. These times include:

 During project management. As a company moves from the

starting phase to the ending phase of a project, it may continually
evaluate that it has sufficient resources, knowledge, talent, and
information to be completed successfully. Because some products
with multi-year development cycles face risk of changing external
 situations, company are well-suited to perform gap analysis during
the course of a long-term project.
 Planning for strategic endeavors. Whether forming long-term
budgets, contemplating corporate restructurings, or lining up a
potential acquisition, gap analysis is informative when attempting to
make strategic decisions. This ensures that proper resources are
allocated to the right areas to ensure long-term success. For
example, expansion into a new geographical area may pose political
risk, geographical risk, currency risk, and culture risk. A company
should perform gap analysis to understand how severe these risks
are and what additional resources (if any) are needed to handle
each area.
 Wanting to understand performance deficiencies. In addition to
strategic benefits, gap analysis can unearth areas of operations
where shorter-term, day-to-day functions can improve. Although this
type of use is more reactionary, companies can choose to
preemptively attempt to better understand areas of operation. For
example, a specific cost center may come in substantially over
budget; the company may simply want to better understand what
happened and what steps need to be taken to become more
successful.
 Marketing to external parties. Though gap analysis holds most
benefit to internal parties, it may also be used to communicate plans
to external investors. For example, private companies can identify
where its shortfalls occur. After forging an internal plan, this plan can
then be revealed to outside parties as part of a capital investment
request or seed funding round. By being open, transparent, and
strategic about its shortfalls, a company may find outside parties
more willing to partner and invest in their growth. 

Benefits of Gap Analysis

Because gap analysis can be used in an assortment of ways, it carries
with it a wide variety of benefits. Each benefit listed below may pertain to
only one specific type of gap analysis. Still, companies can perform gap
analysis may experience:

 Improved profitability. Companies that assess gaps and

preemptively determine shortfalls can be better prepared to incur
spending at optimal times, have resources on hand (instead of
having to pay extra capital to secure later), and run more efficiently.
 Better manufacturing processes. Realizing and preventing gaps
from building in the manufacturing process leads to stronger
production, more efficient delivery logistics, raw materials being on-
 site at the correct location when they are needed, and the avoidance
of bottlenecks due to any shortfall along the process.
 Increased market share. By combining the first two benefits, a
company can have an improved presence in the market by having
increased sales, increased revenue dollars, more customers, and a
higher market share.
 Happier employees and customers. Instead of being reactionary
to employee or customer needs, companies that perform gap
analysis can address these potential issues before they strain
relationships or cause individuals to turn to competitors.
 Operational efficiency. By better understanding where it may not
be operating well, a company can make changes to improve day-to-
day functions. 
 Decreased risk for long-term endeavors. By identifying the
resources needed and potential shortfalls, companies can plan for
gaps and identify problems before they occur.

Gap Analysis in Finance/Asset Management

Gap analysis is also a method of asset-liability management that can be
used to assess interest rate risk (IRR) or liquidity risk, excluding credit risk.
It is a simple IRR measurement method that conveys the difference
between rate-sensitive assets and rate-sensitive liabilities over a given
period of time. This type of analysis works well if assets and liabilities are
composed of fixed cash flows. Because of this, a significant shortcoming of
gap analysis is that it cannot handle options, as options have uncertain
cash flows.

Consider a situation where a company wants to make an investment but

wants to ensure it has enough capital on hand to cover contingent
situations. The company can review cash flows, determine risks, and
assess where potential cashflow shortfalls may occur. This is especially
prevalent in long-term projects, high-risk projects, or projects sensitive to
macroeconomic or external forces.

Example of Gap Analysis

For years, GameStop Corporation held its place in the market as a
competitor in the video gaming industry. Patrons could enter a physical
location to trade in video games from their existing collection; alternatively,
customers could visit a store to buy physical games, consoles, or gaming
merchandise.
There is little public disclosure regarding the analysis or strategy
performed by company management. However, in July 2022, the company
release its non-fungible token (NFT) marketplace, allowing gamers,
creators, collectors and community members to buy and sell
NFTs.1 Though this business endeavor was launched primarily relating to
artwork, the marketplace is expected to expand into gaming endeavors
with a variety of NFT usages.

To have made this business decision, GameStop could have performed a

gap analysis. It could have:

1. Analyzed it's current position in the market. Realizing how digital

transformation has reshaped many industries, it may have realized
its existing business model of in-store business may not be
sustainable (although the company does have a website to buy
goods).
2. Analyzed where it would like to be. The company may have
determined it wanted to maintain its presence as industry leader in
the video game distribution industry. This likely would have resulted
in the company realizing that the shift to digital gaming, including the
rise of NFTs in a gaming context, could be the next potential market
disruptor.
3. Determined a plan to get from today to the future. This would have
entailed the release of the NFT marketplace in addition to other,
potentially not yet disclosed strategic endeavors.
4. Execution of the plan. In addition to releasing the NFT marketplace,
GameStop announced relationships with several Ethereum Layer 2-
based entities in addition to bringing on a variety of staff with
experience relating to digital assets and blockchain.2

Though the ultimate internal discussions around the NFT marketplace are
not known, one can infer that GameStop performed a gap analysis to
understand its existing position as a "brick-and-mortar" store could be
enhanced with a new, digital marketplace.1

Why Is a Gap Analysis Performed?

Gap analysis is performed to understand where a company may be
lagging against its goals or objectives. It’s a form of analysis that evaluates
what it will take for a company to get to its current position to its future
dream state.

What Are the Types of Gap Analysis?

Gap analysis can be performed in an assortment of business situations.
Most often more strategic in nature, gap analysis can be performed to
better understand market positioning, product success, labor needs, or
long-term financial positioning. Gap analysis can also be used to analyze
more operational aspects such short-term budget deficiencies or current
employee satisfaction. 

What Are the Fundamental Components of a Gap

Analysis?
Gap analysis must always start with an analysis of a company’s current
position. Without understanding where it currently is, a company can’t
adequately make a plan to get to where it wants to go. In addition to
identifying where it is today and where it wants to be in the future, gap
analysis entails crafting a plan with implementation steps that can be
tracked and measured to hold change managers accountable.

How Do Gap Analysis and SWOT Analysis Differ?

SWOT analysis is a tool that is often used as part of gap analysis. As part
of SWOT analysis, a company identifies its strengths and weaknesses.
Then, the company should understand whether those strengths and
weaknesses are suitable to where the company wants to be. Gap analysis
is the plan that attempts to change a company’s strengths and
weaknesses may be. In addition, the opportunities and threats identified as
part of a SWOT analysis are the risks that the plan outlined as part of a
gap analysis will not be successfully carried out. 

What Is Static vs. Dynamic Gap Analysis?

These two terms often refer to analyzing the performance and risks
associated with banks or financial firms. Static gap analysis looks at the
firm's sensitivity to changes in interest rates. Dynamic gap analysis looks
at the firm's discrepancy between its assets and liabilities.

The Bottom Line

A gap analysis is a technique companies can use to evaluate their current
position, decide their dream position, and formulate a plan on how to
bridge the "gap". A company may choose to perform a gap analysis if it is
struggling operationally or if it simply wants to become more strategic. In
either case, there are several tools such as SWOT analysis, PEST(LE)
analysis, or a fishbone diagram that can help the company formulate and
execute a long-term plan.