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Gap analysis is a management technique that measures why a company did not reach its estimated goals. It can be used in several industries and by large and small companies. Gap analysis also helps management decide if a new product or service will help its company successfully enter a new market.

Definition

Gap analysis is a process companies use to determine where shortfalls may be occurring in their operations when attempting to achieve predetermined goals. Gap analysis can be used by several departments in a business, including marketing, production and accounting. While the basic principles of gap analysis remain, each department will customize the process to fit its specific needs. Businesses will use gap analysis to ensure that they are maintaining their competitive edge in an industry; departments will measure how well they are staying on budget for their operations.

Forecasting Errors

One reason companies use gap analysis is to determine if any forecasting errors were made regarding market demand. Estimating market demand, market potential and sales are crucial steps when companies decide to invest in a new product or service. Determining why the forecasted estimates were not met is critical in order for management to understand why estimates were incorrect.

Production Estimates

Production estimates versus actual goods produced is an important use of gap analysis. Actual production can vary from estimates for many reasons, including low-grade raw materials, improper conversion processes or faulty manufacturing equipment. Gap analysis shows management where failures occurred in the production process by breaking down and reviewing each step in the process.

Budget Analysis

Gap analysis is one technique for measuring budget overruns in a company. Overruns can be broken down by department and by the managing supervisor, giving executive management the ability to review financial variances quickly and accurately. Specific problems can then be solved individually and corrective measures put in place to prevent these overruns in the future. Executive management may also review prices of services and goods if they see that overall sales are not on par with their industry standard.

Competitive Edge

Companies can also use gap analysis to measure their effectiveness in an industry. Using standard business ratios for their industry, companies can measure their financial strength against their competitors and discover their own weaknesses. This type of gap analysis usually starts at the corporate level and gets broken down further to find why gaps exist. Corporate gap analysis will also help management find ways to increase their market share and improve overall company sales.

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