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What is Gap Analysis? The Secret to Growing Your Retail Biz

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Stitch Labs is a retail operations management platform for high-growth brands. Learn more here.

What is gap analysis?

The gap analysis definition is when a business compares what it’s actually doing to what it has the potential to do. These are commonly referred to as the business’s current state and potential or goal state.

Essentially, the gap analysis helps companies realize and achieve their full potential. It allows companies to make the best use of their resources, improve overall performance, maintain inventory control, and more easily reach goals.

Retailers use gap analyses for a number of reasons, across different areas of the business, including operations, information technology (IT), staff, customer experience, and even the product itself. It’s best to choose one area and focus the gap analysis on that.

To define gap analysis for your retail business, you’ll need to consider both a qualitative and quantitative assessment of these states.

Other terms for gap analysis include retail leakage, needs analysis, needs assessment, need-gap analysis, and gap assessment. There are also specific types of gap:

    1. Performance gap: A more broad type of gap, this focuses on the company’s performance. This may be focused on overall business goals.
    2. Product/market gap: The difference between actual sales and anticipated sales.

 

  • Manpower gap: Typically used by human resources (HR), this compares the existing team and skills to the forecasted staffing needs.
  • Profit gap: Specifically focuses on the company’s overall profits, comparing actual to planned.

 

Now that you understand what a gap analysis is, let’s look at how you can conduct one.

How to do a gap analysis

Before you begin the gap analysis process, you’ll want to identify which area of your business you want to conduct the analysis on.

From there, you’ll want to create a gap analysis template, using four columns for each of the following:

  1. Current state
  2. Potential state
  3. Gap
  4. How to bridge the gap

 

These columns also coincide with the four steps you’ll take to conduct the gap analysis:

1. Define your current state

Establishing your current state requires both internal and external data. The data you use depends on which area of the business you’re doing the analysis for.

Quantitatively speaking, you’ll want to consider this area’s most important key performance indicators (KPIs). If you’re focusing on operations, for example, these 10 inventory-related KPIs may fall under this column.

Related: 5 inventory management KPIs for scalable growth >

You’ll also want to include your own historical benchmarks, external industry benchmarks, and any other data about the competitive landscape you can get your hands on.

Qualitative internal data inputs might include employee and/or customer feedback, documented processes and workflows, a list of your tech stack, and more.

2. Define your potential state

Your potential state (or future state) is the next column on your template. This is the goal, what you’re working towards.

Go through each of the rows from column 1, your current state, and list the ideal metrics or descriptions for your business. You may consider retail reporting and  demand forecasting metrics here.

3. Identify the gap

Now that you’ve defined both current and potential state, it’s time to analyze the difference — the gap.

For any rows that are strictly quantitative, this is more straightforward. Simply subtract the value in column 2 from the value in column 1. This number then goes in the third column, which is where you’ll be defining the gaps. For qualitative factors, you’ll want to describe what the difference is between the current and potential states.

4. Bridge the gap

Now that you’ve defined the gaps, you’ll want to go through and look for actionable ways to decrease the gap across the board. First, you have to understand WHY the gap exists in the first place. Sometimes, this answer is more straightforward. Other times, it requires more critical thinking and possibly input from members of your team.

Once you’ve identified why there are gaps, you’ll want to understand how to reduce or eliminate them. Go through each line on your gap analysis template and list ALL of the possible solutions to each problem in column 4. Don’t worry about bad ideas here; it’s good to get as much as you can on paper so you can come back and refine later.

Now that you have your solutions, you’ll want to prioritize the gaps, focusing first on the most impactful gaps and the gaps that require the least amount of resources to fix. Associate deadlines for each gap resolution to stay accountable and on track.

Gap analysis methodology

When it comes to gap analysis tools and methodology, there are a few different models you can use:

  1. McKinsey 7-S framework
  2. SWOT analysis
  3. Nadler-Tushman Congruence Model
  4. Fishbone diagram
  5. Burke-Litwin causal model

 

McKinsey 7-S framework

The McKinsey 7-S framework is a high-level view of a company which can help narrow down which areas of the business are meeting expectations, and which ones aren’t. It starts by analyzing the business from seven different groupings (the 7 S’s):

  1. Strategy
  2. Structure
  3. Systems
  4. Staff
  5. Style
  6. Skills
  7. Shared values

 

You’d use your four-column gap analysis template and fill it out for each of these areas. From there, you can see where there are crossovers from one area to the next and develop comprehensive solutions that address multiple problems simultaneously.

SWOT analysis

The SWOT analysis is a common method, and it’s often used by marketing teams and professionals. SWOT stands for:

  • Strengths
  • Weaknesses
  • Opportunities
  • Threats

 

The format for this type of gap analysis report may be slightly different; typically, it’s a 2×2 matrix. Once you’ve chosen which area of your business to analyze, you’ll go through the categories and come up with a comprehensive list for each.

The SWOT approach allows companies to more readily see their strengths, and also threats to avoid when implementing solutions. It also clearly outlines where your company stands compared to the competition.

Nadler-Tushman Congruence Model

This gap analysis tool divides business processes into three groups:

  • Input
  • Transformation
  • Output

 

The inputs include any resources, such as staff, raw materials, and operational tools to manufacture products. The transformation is what happens with those inputs — think things like team structures and workflows. And finally, output is the resulting product that you plan to sell to customers.

Focusing on these processes, the Nadler-Tushman Congruence Model helps identify how different pieces of your business and steps in processes work together.

Fishbone diagram

The Fishbone diagram, also known as the cause and effect or Ishikawa diagram, is focused on finding the causation of events. It’s a straightforward way to conduct a gap analysis. You start by identifying your challenges or problems.

Once those are listed, go through each and add all the possible causes. It’s important to dig deep here — simply saying that your inventory turnover ratio is too low because because customers don’t want your products, for example, won’t help you get to the root cause and find a solution. Rather, you’ll want to ask why customers don’t want your products?

This practice is also known as the five whys and should be a part of your gap analysis, regardless of the method you choose. Keep asking yourself “why?” — at least five times — until you get down to the bottom of the issue.

Burke-Litwin causal model

The Burke-Litwin causal model is based on the idea that gaps could be caused by both internal and external factors. This model uses 12 categories:

  • External environment
  • Mission and strategy
  • Leadership
  • Organizational culture
  • Structure
  • Management practices
  • Systems
  • Work unit climate
  • Task and individual skills
  • Individual needs and values
  • Motivation
  • Individual and organizational performance

 

This helps you identify the source of the need for change, as well as how each of these areas are related.

Moving forward with gap analysis

Conducting a gap analysis is a great way to bring your rapidly growing retail business to the next level. Often, you already possess the key to growth — you just need to know how to allocate your resources to unleash it.

Learn more about how Stitch Labs’ operations management system can help your growing business >

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