When leading a company, a comprehensive understanding of your operations is vital. Whether you’re planning for the future or reviewing current operational conditions, it’s imperative to identify:
- Where your company is
- Where you want your company to be
The space between is called a gap.
“A gap occurs when there’s a difference between your strategy and your actual results,” says Harvard Business School Professor Mike Tushman, who co-teaches the online course Leading Change and Organizational Renewal with Stanford Graduate School of Business Professor Charles O’Reilly.
By properly analyzing gaps, you can perfect processes, surpass goals, and overcome common organizational barriers. While there are several factors to consider when conducting a gap analysis, each brings you closer to closing that gap and achieving your objectives.
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DOWNLOAD NOWWhat Is Gap Analysis?
Gap analysis is the process of measuring the difference between a company’s present operations (current state) and its ideal performance (desired state).
Performing a gap analysis provides increased visibility into your organization, making it a useful tool for strategic planning, performance assessments, and establishing growth targets. It can improve your decision-making capabilities, align management through properly defined goals, and streamline processes that were previously stumbling blocks.
Types of Business Gaps
Before conducting a gap analysis, you must first understand what you want to identify. There are two types of gaps: performance gaps and opportunity gaps.
Performance Gaps
Performance gaps exist when your company is underperforming compared to its goals, strategy, and measurable market results, such as sales, profits, and stakeholder expectations.
One of the best performance gap examples is when an organization isn’t making enough money to keep its operations running, signaling major and measurable underperformance.
Opportunity Gaps
Opportunity gaps exist when your company needs to shift its strategy in an effort to pursue emerging markets, adopt new technologies, or grow into a space it wasn’t operating in.
For example, a well-established business in a specific industry might have the opportunity to expand into other markets but doesn’t have the necessary infrastructure. That would be considered an opportunity gap.
Opportunity gaps can become performance gaps if left unaddressed. For instance, if your company fails to embrace a technology your main competitor uses, a proactive opportunity gap could become a more pressing performance gap as your sales underperform. Despite that, it doesn’t mean you should address opportunity gaps first.
“Your organization must effectively exploit its current strategy before you can explore a new, forward-looking strategy,” Tushman says in Leading Change and Organizational Renewal. “To do this, you must prioritize performance gaps over opportunity gaps.”
5 Key Components of a Gap Analysis
When conducting a gap analysis, you’ll analyze your company’s strengths, weaknesses, limits, and potential. But before you do, you must first start with your status quo.
1. Define Your Current and Desired States
Identify how your business currently operates and your future goals. To make your desired state more concrete, establish success benchmarks in relation to industry standards and internal objectives.
For example, in Leading Change and Organizational Renewal, CEO of athletic apparel brand Lululemon Christine Day shares how, in 2005, each store had a different aesthetic. Her desired state was to have a cohesive brand image across all locations. She approached this challenge by conducting a gap analysis.
2. Identify the Gap
After defining your current and desired states, the gap becomes more visible. Ask yourself: Is this a performance gap or an opportunity gap? Is this an underperformance or organizational inefficiencies issue?
“There are a few things to think about when looking at your gap and determining where the misalignments might be in the system,” Tushman says in Leading Change and Organizational Renewal.
He prioritizes investigating your company’s:
- Purpose: The value it’s bringing to the world
- Strategy: How it’s bringing that value to the world
- Objectives: Its goals for bringing that value to the world
When identifying and attempting to close your gap, your purpose, strategy, or organizational objectives might be out of sync. To better determine this, you should conduct a root cause analysis (step four).
When an underperformance is measurable, this is a performance gap. In the case of Lululemon, Day identified the stores’ inconsistent design as a performance gap because its brand equity was underperforming.
3. Collect Data
Now that you’ve identified the gap, it’s time to gather data to understand its root causes—or what’s at the heart of the problem. It could be related to your company’s systems and structures, including talent management and product development, your employees’ skills or attitudes, or the company culture, which includes intangible factors such as values, beliefs, and practices.
Collecting as many diagnostic observations as possible can give you a clearer picture of your circumstances and possible friction points. In Leading Change and Organizational Renewal, Day notes that she performed an extensive diagnostic with Lululemon’s corporate leadership, retail managers, and employees to conduct a root cause analysis.
4. Conduct Root Cause Analysis
Once you’ve collected a comprehensive data set, it’s time to ask, “Why?” By first determining the “why” behind a data set and then the why behind that one, you’ll eventually arrive at the root cause.
In Leading Change and Organizational Renewal, Tushman discusses Day’s root cause analysis of Lululemon’s design issues: “[Day] noticed inconsistent practices across stores—displays and layouts varied widely. Why? Because each store didn’t have guidance on decorating or organizing. Why? Because stores were meant to be autonomous. Why? Because [previous leadership] wanted store managers to have entrepreneurial skills to manage their own stores that best serve their local communities.”
There are many methods to map out the path from a performance or opportunity gap to its root cause. Tushman explores one he co-created with O’Reilly called the congruence model, which helps leaders organize their data to better identify root causes.
When conducting a root cause analysis, it’s important to avoid jumping to conclusions—and solutions.
“This notion of diagnosis before action is difficult for leaders to do,” Tushman says in Leading Change and Organizational Renewal. “The purpose of this exercise is to discover the root causes of your gap, which will then lead to an intervention.”
While Lululemon’s desire to provide store managers with entrepreneurial freedom was a laudable goal, it didn’t achieve the desired outcome. Through her analysis, Day discovered the root cause wasn’t the individual stores but rather an issue with leadership directives, which they struggled to scale with the company’s explosive growth.
Related: Understanding the Congruence Model: Aligning Strategy, Structure, & People
5. Develop an Action Plan
Now that you’ve determined your root cause, you can begin to bridge the gap. Action plans often include resource and training allocation, timeline-setting, and reassigning team responsibilities.
Whatever shape your action plan takes, it should directly address the root cause and make meaningful progress toward your desired state through clear, achievable steps.
To bring a cohesive visual execution across all Lululemon stores, Day notes in Leading Change and Organizational Renewal that she reworked leadership priorities and directives to store management to be less entrepreneurial and more consistent for scaling the brand.
Increase Your Organization’s Potential
A good leader is capable of bridging the gap between what their company is and what their company is capable of being. But before a gap can be bridged, it must first be identified and analyzed.
Through the rigorous process of gap analysis, you can determine the best path forward for your organization while gaining a deeper understanding of how it operates. While you can conduct gap analyses with challenges large and small, the exercise will help you define business objectives and achieve growth regardless of the problem’s size.
You can learn more about these concepts by taking an online leadership and management course, such as Leading Change and Organizational Renewal. Through interactive learning exercises and in-depth case studies featuring top global companies like Lululemon, you can gain the practical knowledge to take your career to the next level.
Are you interested in enhancing your leadership skills to drive organizational change? Explore Leading Change and Organizational Renewal—one of our online leadership and management courses—and download our e-book on becoming a more effective leader.
