Gap analysis is a tool that measures potential against actual performance. The analysis identifies areas that could be strengthened for greater efficiency. Companies need to understand where they fit in the marketplace and where they would eventually like to arrive. Investment in technology or capital equipment might offer positive growth opportunities and should be considered. Gap analysis helps owners determine current capabilities, what is needed for change, and where the changes might take the company strategically.
Another effective tool for investigation is ratio comparisons. Ratios allow entrepreneurs to determine how the company is performing in key areas. Bank loan officers, investment firms, and savvy businessmen use ratios to determine a company's financial health and potential. Ratios are simple and can come from information already contained on balance sheets. Owners and managers can use the information to compare companies' operations against competitors or against specific periods of time to assess growth in sales or profitability. Common ratios for analyzing a firm's health include common size, liquidity, efficiency and solvency.
Impact analysis determines vulnerabilities. Strategies must be in place to minimize risk. Risks can come from suppliers, employees who are critical for success, competitors, natural disasters, accidents, new technology, theft, technology failure, and many other sources. Impact studies help identify all the things that could go wrong and develop counter moves to deal with the situation. Failures can create universal consequences, but some areas are much more critical than others, so contingency plans should allocate greater resources to counter those contingencies. An IT technology failure could be devastating; an increase in the price of materials would probably be overcome easily.
Recovery plans take into account as many variables as possible. Cash flow problems might result from a temporary loss of revenue. Uninsured equipment might need to be replaced, or overtime work might be required to fill backlogged orders. An efficient impact study will quantify potential risks by their effect and suggest the appropriate measures to prepare for operating problems. An increase in the marketing budget might be required to rebuild consumer confidence.
Decision trees are an effective way to make significant decisions by identifying possible outcomes. The suggested results might involve further decisions that branch off from the original proposal. All potential outcomes are studied, and this helps owners or managers make key decisions based on mathematical probabilities. Survival requires organizations to meet all challenges, make informed decisions, set priorities, and monitor progress. Once a firm grows too large for one manager or supervisor to oversee, the company must implement systems for control and performance measurement to replace hands-on supervision. Many firms provide systems and software to leverage the latest advances in technology, reports, artificial intelligence, and corporate examination. Successful businesses utilize all available tools to for self-analysis to uncover problems, make decisions, and plan strategically for the future.
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