Gap analysis is a business assessment tool enabling a company to compare its actual performance with its potential performance. This provides the company with insight to areas which have room for improvement. The process involves determining, documenting and approving the variance between business requirements and current capabilities. Gap analysis naturally flows from benchmarking or other assessments. Once the general expectation of performance in the industry is understood then it is possible to compare that expectation with the level of performance at which the company currently functions. 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:
Organization (e.g. human resources)
Business direction
Business processes
Information technology
Gap analysis provides a foundation for how much effort, in terms of time, money and human resources, is required to have a particular aim achieved (e.g. to turn the salary payment process from paper based to paperless with the use of a system).
The need for totally new products or for additions to existing lines may have emerged from the portfolio analyses, in particular from the use of the Boston Growth Share Matrix. More probably, 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 locate such a gap in the market the technique of gap analysis can be used. Thus an examination of what profits are forecast to be 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.
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
The most difficult estimate to make will probably be that of the total potential available to the whole market, including all segments covered by all competitive brands. It is often achieved by determining the maximum potential individual usage, and extrapolating this by the maximum number of potential consumers. This is inevitably a judgement rather than a scientific extrapolation, but some of the macro-forecasting techniques may assist in making this `guesstimate' more soundly based.
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. It is often suggested that Europe follows patterns set in the USA, but after a time-lag of a decade or so. The increased affluence of all the major Western economies means that such a lag can now be much shorter.
The maximum potential individual usage, or 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 A. C. Nielsen 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.
The second level of `gap' is that posed by the limits on the distribution of the product or service. If it is limited to certain geographical regions, as some draught beers are, it cannot expect to make sales in other regions. At the other end of the spectrum, the multinationals may take this to the extremes of globalization. Equally, if the product is limited to certain outlets, just as some categories of widely advertised drugs are limited by law to pharmacies, then other outlets will not be able to sell them. A more likely outcome is that, not being the market leader, a brand will find its overall percentage of distribution limited. The remedy for this is simply to maximize distribution.
Unfortunately, maximizing distribution is not quite as easy as it sounds, except for the obvious market leaders. It is true that additional salesforce effort, backed by suitable sales promotional activities, should be able to increase distribution somewhat, although there will still have to be some balance between the benefits to be gained and the costs to be incurred. But the prime barrier to distribution will probably be the resistance of the distribution chains to stock anything other than the bestsellers. This can partially be overcome in the short term by offering better terms and higher margins, so that the distributors make more on each sale. But the distributors have long since learned that their biggest profits come from concentrating on the main brands. They, above all, live by the 80:20 Rule.
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 correct positioning.
What is left represents the gap resulting from the competitive performance. This competitive gap is the share of business achieved among similar products, sold in the same market segment, and with similar distribution patterns - or at least, in any comparison, after such effects have been discounted. Needless to say, it is not a factor in the case of the monopoly provision of services by the public sector.
The competitive gap represents the effects of factors such as price and promotion, both the absolute level and the effectiveness of its messages. It is what marketing is popularly supposed to be about.
In the type of analysis described above, gaps in the product range are looked for. Another 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 its current products stand.
Many marketers would, indeed, question the worth of the theoretical gap analysis described earlier. Instead, they would immediately start proactively to pursue a search for a competitive advantage.
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