A sample gap analysis shows how managers can estimate the size of strategies their organization needs.
Gap analysis comes near the end of the second stage of the planning process.
Having set the targets and the forecasts, the planning team can calculate the gaps. This shows them how powerful their new strategies need to be. It also shows them how urgent is the need for the strategies.
Usually I encourage a business to set targets for the profit. This does not exclude using other indicators such as Return on Capital Employed (ROCE) and so on. See section on Performance Indicators for more background on this.
So, in our sample gap analysis, first calculate the profit gap. This involves first setting the minimum level, or Tmin. This is the level, below which, the governing body would consider the top management had failed in their job, and may think of replacing them. Then a more acceptable or satisfactory level is set above this, Tsat. For more on the need to set a bracket of targets see Target Setting.
Now the planning team needs to estimate how their current strategies will play out in the future. This assumes no change to the current strategies. Then they make a double forecast. This time a pessimistic one for the worst-case scenario, or Fpes, and a more hopeful or optimistic one, Fopt.
Although the procedure is simple enough, the strategic planning team may find preparing the gap analysis quite challenging. The estimates may depend on anticipating interest rates, market shifts and the behavior of competitors. However, the planning team will, with the right kind of preparation and honest discussion, agree some envelope of change in corporate performance.
Here is our sample analysis, using profits as the corporate performance indicator.
For many of us the implications are not always obvious in a table of figures. It is helpful in planning discussions to work with a graphic representation, as well as the set of figures. Such charts are easy to prepare using a spreadsheet program like Microsoft Excel.
All one needs to do is to place the graph for the profit targets on top of the graph for the profit forecasts.
This case already provides the planning team with some useful insights into the company situation. The calculations show that the gaps become significant towards the end of the period. Things do not look too bad. The optimistic forecast suggests achievement of the minimum target is a near thing, but possible. Therefore, this firm is not looking at anything too dramatic in the strategies needed. There is time to think through what actions to take. Relying on current strategies entails some level of risk. Therefore, the planners should proceed with the rest of the strategy development process.
Of course there is a huge range of possible outcomes. One sample analysis does not tell us much about the possibilities for any given organization. Each situation is in a sense unique. Therefore, the planning team simply has to do the homework to describe the strategic situation of their organization. It is highly desirable to put aside preconceived ideas about what strategic path the firm should be following. Put aside current fashionable ideas among ‘strategy gurus’, and face the facts about your own enterprise squarely.
Here are some more cases to give a general flavor of a sample gap analysis.
The sample gap analysis in each of the last two cases brings to mind the possibility of the organizations moving from good to great, an idea made popular by Jim Collins in his book Good to Great: Why Some Companies Make the Leap... and Others Don't.
You can see that some of the most significant strategic issues for an organization can in these sample gap analyses.
To get a better idea of how useful gap analysis can be, you can use your data to derive a simple gap analysis for your own organization. Simply go here to access the online GAP Analysis tool. It is free with simple registration.
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