Terminology and Taxonomy

The notion of performance gaps is closely connected with the setting of objec-tives in the sense that it shows what has to be accomplished in order to achieve specified objectives. The gap concept is concerned with the difference between expected and desired future states. There are two steps in identifying a perform-ance gap. The first is to decide what the desired future state is at a specified time in the future; this can be expressed in terms of new products, market shares, profitability and so on. The second is to analyse the state the company is likely to be in at that time if no changes to strategy are made. The difference between the expected and the desired state is the performance gap. The salient issue here is comparison of expected future states, and not comparison of the current state with the desired future state. It may be that the current state is far removed from the desired state, but this may not result in a change in strategy simply because of the impact of the passage of time.

Present

Current position

Existing strategy New

strategy Desired

outcome

Expected outcome

Future

Performance gaps

Figure 3.1 Performance gaps

An illustration of the gap concept is shown in Figure 3.1. The gap can be determined once objectives have been set in terms of desired future states. Since the gap has to be closed in order to achieve the objective, or the future desired

state of the company, the closing of the gap could be defined as the company objective. This is not quite consistent with the definition of an objective, since the closing of the gap is a means to an end, not the end itself. It may turn out that identification of the gap results in a modification of the company objective, because it transpires that the gap cannot be closed; there is continual feedback between objective setting and gap analysis.

The problem facing planners is to make projections of total company perform-ance; this can be complicated, and is typically carried out by using the scenario approach. A scenario comprises a series of ‘what if’ projections, and should not be confused with a forecast. For example, if the desired future state involved achieving a 3 per cent higher market share in two years, a scenario could be investigated whereby marketing expenditure would be increased by 30 per cent during the next two years. The resulting scenario would include the impact on cash flow, the likely effect on market share, the reaction of competitors, and the identification of what additional measures might be required, such as a price reduction and increased productive capacity. This is clearly a difficult process, but it is of considerable value in focusing attention on the potentially most important factors determining the ability to achieve objectives.

There is more to scenario planning than meets the eye, because it is based on a premise that makes many people uncomfortable, namely, that it is impossible to foretell the future and possibly dangerous to attempt to do so. A scenario is actually a carefully argued narrative about a particular way in which the future might take shape. It is therefore a story about what could happen if particular assumptions hold true. It is not an attempt to say what will happen. Instead, the idea is to compare the scenario’s implications with the implications of rival scenarios and then examine the costs of being prepared to cope with these possible futures.

The approach is usually associated with Shell International Petroleum Com-pany. The Shell senior planners had been disturbed by the quality of their own predictions round about the time of the 1973 oil price rises, and developed the method as a means of coping with a great deal of uncertainty over oil supplies, prices and related issues. However, they encountered resistance to this approach from colleagues; this is because to most people, planning is an activity that should reduce uncertainty rather than increase awareness of it – and there is a widespread predisposition to converting alternative scenarios to single point or line estimates. This is what the Shell planners encountered, and they reckoned that it took about eight years for management to accept that scenario planning was an appropriate tool for developing strategy.

Once the gap has been identified, three questions can be tackled:

• Does the gap arise because of external or internal factors?

• Does the company have potential resources to close the gap?

• Can a strategy be developed which will close the gap?

A revealing outcome of gap analysis is that while it may appear that the difference between the current and the desired state is not large, there may well be a substantial difference between expected and desired states. Gap analysis can reveal that the company is not actually moving in the direction desired,

and closing such a gap may imply substantial redeployment of resources and changes in marketing strategy.

3.3.1 External versus Internal Gap Factors

Broadly speaking, there are two reasons for the emergence of gaps: those factors outside and those within the control of the company. If the gap is due to factors outside the control of the company, such as a predicted reduction in market size and product prices, the original company objectives may be revealed as unfeasible because the changes in the market are too great to counter. There is clearly no point in pursuing a target level of sales and revenues if market conditions will make it impossible to achieve; this would lead to a waste of resources, and could have far reaching implications for employee incentives and commitment. Other external factors might be aggressive competitor actions or government intervention, both of which it might be possible to counter by appropriate marketing policies. The fact that gaps are due to external causes does not necessarily mean that the company can do nothing about them, but those instances where they cannot be fully counteracted need to be recognised.

Internal gap constraints arise when the current allocation of resources is not consistent with achieving the future desired state. The process of resource reallocation may not be easy, and some managers may be unwilling to cut back on resources in some areas and increase them in others when there is no immediate and obvious benefit. Another internal gap factor arises when the resources available to the company are insufficient in quantity or quality to achieve the desired objective. Capital equipment may be obsolete, managers may not be sufficiently enterprising or labour might not have the necessary skills.

Internal gap factors are related to the mobilisation of resources, and as such are more likely to lie within the control of the company. However, it may well be that the restructuring of the company implied by some internal gap factors is too great to be accomplished with the skills and finance at its disposal. It may be possible to overcome this by initiating a programme of change management, but this may not be an immediate solution.

3.3.2 Gaps and Resources

It is not just the company’s ability to acquire and deploy resources which is important, but the timing involved. By combining gap analysis with the dynamic scenario approach it is possible to estimate the timing of resource acquisition and reallocation required to achieve a desired future state. By taking a view on the future course of events it is possible to identify those actions which are essential for implementation; these are known as critical success factors. Once these have been identified steps can be taken to arrange finance, recruit personnel, increase productive capacity and ensure that the various service functions are in place in advance of requirements. This helps to avoid the emergence of production bottle-necks, skill shortages and financial headaches which typically beset companies during the process of change. Often managers point to the cause of failure as

‘We could have done it, but we started too late. All that we needed was a little bit of foresight’.

Another potential advantage of scenario projection is somewhat less obvious.

For example, it may be found that significant redeployment of resources is required only towards the end of the scenario period, despite the fact that a substantial gap has been identified. This can make it possible to identify when commitment to a course of action can be delayed; the chance to hedge positions can have significant implications for success and failure.

3.3.3 Gaps and Incentives

One reason for the existence of a gap is that the current incentive system is consistent with what is expected to happen as opposed to what is desired. Given the issues of timing discussed above, it is necessary to ensure that the workforce is given the appropriate motivation to change objectives and behaviour at the required times. It is necessary to initiate a system of incentives which converts the gap closing objective, which is conceptual in nature, into a series of attainable objectives. This can be difficult to achieve, and it may be somewhat difficult for a strategist to convince managers that they need to alter their behaviour at a time when the company is performing well, and when there may not appear to be a great deal of difference between current and desired positions.