TABLE OF CONTENTS

1.0 Introduction...................................................................................................................1

1.1 Purpose and Value of Gap Inc.....................................................................................1

2.0 Situational Analysis.....................................................................................................1

2.1 SWOT.............................................................................................................................2

2.2 Five Forces Analysis....................................................................................................3

3.0 Current Strategies........................................................................................................4

3.0 Strategic Options..........................................................................................................5

3.1 Overall Price (Cost) Leadership..................................................................................6

3.2 Differentiation...............................................................................................................7

3.3 Best Cost Provider.......................................................................................................7

4.0 Suitability......................................................................................................................8

4.1 Acceptability...............................................................................................................10

4.2 Feasibility....................................................................................................................13

5.0 Strategic Option for Implementation........................................................................14

6.0 Challenges with Implementation...............................................................................16

7.0 Conclusion..................................................................................................................18

BIBLIOGRAPHY....................................................................................................................19

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1.0 Introduction

Gap Inc. is a leading American speciality apparel retailer based in San Francisco,

California. It sells casual apparels, accessories, and other personal care products for

men, women and children currently the company boasts approximately 150,000

employees and 3,139 stores all around the world.

Gap Inc. sustains a large number of brands, namely Gap, Old Navy, Banana

Republic, Piperline, Athleta and others. These different companies have been

bought by the parent company at different times over the years. Started as a general

jeans retailing store, Gap Inc. today has a market value of US $ 13.32 billion.

1.1 Purpose and Value of Gap Inc.

“Gap Inc. is a brand builder. We create emotional connections with customers and

around the world through inspiring product design, unique store experiences and

compelling marketing. Our purpose? Simply, to make it easier for you to express

your personal style throughout your life. We have more than 150,000 passionate,

talented people around the world who help bring this purpose to life for our

customers. Across our company and embedded in our culture are key values that

guide our success.” – www.gapinc.com/public/about

2.0 Situational Analysis

Gap Inc. operates within the specialty retail apparel market, a market which contains

several large direct competitors, such as American Eagle Outfitters, Abercrombie

and Fitch, J. Crew and Aeropostale. Because of the nature of the fashion industry,

independent specialty stores and boutiques can compete with these larger brands on

a localized level. Additionally, a variety of larger retailers also compete with Gap.

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Department stores such as Sears, J.C Penney, T.J. Maxx, Marshalls and Macy’s sell

significant amounts of clothing.

The specialty apparel market is one of which has generally shown slow, but steady

growth. As a result, in order for firms to gain market share and grow, they must take

away market share from their competitors. One of the more interesting thing aspects

about the specialty apparel market is that it is a market where buyers face essentially

zero switching costs.

2.1 SWOT

SWOT ANALYSIS OF GAP INC. Table 2.0

Strengths

Brand recognition

Strong online presence

Large network of physical stores

Reduced long-term debt

Weaknesses

Loss of fashion identity

Geographically concentrated

operations

Seasonal pattern of business

Fluctuating sales per sq. foot

Geographically fragmented

manufacturing

Narrow niche

Opportunities

Launch of Athleta ( brand)

Elimination of textile quotas

Customer database and smart

cards

Fast Fashion

Threats

Industry consolidation

Reduction in consumer spending

Threat from counterfeit products

Increasing segmentation of apparel

market by brand

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2.2 Five Forces Analysis

The specialty apparel industry is facing increasing competition and market

segmentation, while costs to expand remain high.

Five Forces Analysis Table

2.1

3.0 Current Strategies

Gap claims that its different brands have a common purpose of making it easy for

people to express their personal styles. Although these brand names are distinctive

in themselves, they do not work as autonomous business. When Gap Inc. starts a

new business, they buy an existing struggling company such as Banana Republic™.

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Barriers to Entry

Threat of Substitutes

Supplier Power

Rivalry Buyer Power

High Capital expense to establish strong retail presence

None Large number of suppliers leads to low prices

Discount retailers also sell clothing, reducing margins of specialty apparel retailers

Rapidly changing fashion desires for core demographics leads buyers to trendy brands

Entrenched brand identity

Difficulty of training Eastern suppliers leads to exclusive relationships and a reduced volume of good suppliers

Move to mimic high fashion in short time over staple clothing

Switching costs away from brand identity

Competition over brand images instead of prices

Access to good suppliers

For example banana republic was an existing company which grew with the

resources that Gap had.

The Strategy Diamond reveals that Gap Inc. is primarily continuing to turn a profit

through its strong brand image; it doesn’t have any substantial differentiators that

allow it to challenge discount retailers or increasingly niche-targeted brands.

Strategy Diamond – Gap Inc. Table 3.0

Economic

Logic

Arenas Vehicles Differenti

ators

Staging

Consistent

sales with

reliable

inventory and

strong brand

identity

Discrete stores

locations selling

apparels,

segmented by

brand identity.

Strong online

presence selling

directly to

consumer.

Target

demographic

varies by brand.

Domestic

dependence,

international

growth in Japan,

UK.

Construction

of new stores

Establishment

of new brands

Reducing

supply chain

fragmentation

Brand

identity

Custom IT

solution by

Oracle and

Retek.

Create new

brands to

expand into

new

demographics

Increase

presence

online

Establishing

stronger

supplier

relationships

Customer

tracking

system

The figure 3.0 below (price versus fashion) shows Gap Inc.’s position in the apparel

industry as compared to its competitors. For some time now, the company has used

a focused differentiation strategy, concentrating on a particular narrow market

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segment. However, this strategy has limited the company’s ability to grow for two

reasons:

The market niche is too narrow.

The company has lost its fashion identity.

Price vs. Fashion Figure 3.0

+ Price

Gap

- Fashion + Fashion

Zara

Stradivarius

-Price

3.0 Strategic Options

The essence of strategy lies in creating tomorrow’s competitive advantages faster

than competitors mimic the ones you possess today (Hamel and Prahalad, 1990).

Using Porter’s Four Generic Competitive Strategies, one will identify three options

that Gap Inc. should pursue based on the threats and opportunities identified in the

specialty apparel retail industry.

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3.1 Overall Price (Cost) Leadership

This is appealing to a broad cross-section of the market by providing products or

services at the lowest price. Some conditions in the fashion retail industry that makes

this strategy an attractive choice for Gap are:

The industry’s product (clothing) is much the same from seller to seller

The market is dominated by price competition, with highly price-sensitive

buyers( especially in a recession )

There are few ways to achieve product differentiation that have much value to

buyers

Consumers use apparel in the same ways – common user requirements

No switching costs

Consumers have large bargaining power.

This strategy is in keeping with Gap Inc.’s mission to “to make it easier for you to

express your personal style throughout your life.”

In a time of global recession, consumers are searching for the best bargain. The

retail apparel industry is highly competitive, with large outlets such as Target or Wal-

Mart offering private labels at affordable prices. Retailers such as Target have shown

that quality products and lower prices are not mutually exclusive.

Fashion retail companies such as Matalan and Primark in the UK have used this

strategy to great levels of success.

3.2 Differentiation

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This is appealing to a broad cross section of the market through offering different

features that make customer willing to pay premium prices. It is based on the

perception the product offered is unique. Some conditions in the current fashion

retail industry and at Gap that tend to favour differentiation strategies are:

Gap Inc. has strong brand recognition. Some consumers are willing to pay

premium price for their products.

The domestic market is saturated, Gap’s over dependence on the US market

has been identified as a weakness, and this strategy aims to counter that

effect.

Creating a product line which distinguishes itself from other apparel companies is

very consistent with the purpose and value of Gap Inc. as stated on their website.

“We create emotional connections with customers and around the world through

inspiring product design…...”

This strategy is also the most popular used by fashion retail companies, in their

understanding that the fashion industry is ever changing either by variation in

consumers’ tastes or seasonal changes. Brioni, Giorgio Armani and Nordstrom are

just to name a few.

3.3 Best Cost Provider

Although not one of Porter’s basic four strategies, this strategy is mentioned by a

number of other writers. This is a strategy of trying to give customers the best

cost/value combination, by incorporating key good-or better product characteristics

at a lower price than competitors. This strategy is a mix of low price and

differentiation, and targets the value-conscious buyers that are usually larger than a

market niche, but smaller than a broad market.

This strategy is attractive in the fashion retail industry because this market has both

a variety in buyer needs that makes differentiation common and there are a large

number of buyers who are sensitive to both price and value.

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Though this strategy may seem to be a viable option only during a time of recession

and there is a cut in consumer spending, it has been pursued successfully by fashion

retail giant Zara, making it the largest retail chain in the world, surpassing Gap.

This strategy does not at all take away from the underlying goals of Gap Inc. instead;

it is quite consistent as it offers consumers the ability to be fashionable at a

reasonable price.

4.0 Suitability

Suitability is a criterion for assessing the extent to which a proposed strategy fits the

situation identified in the strategic analysis, and how it would sustain or improve the

competitive position of the organisation.

The following questions need to be asked about the stated strategic options for Gap:

i. Does the strategy exploit the company strengths -- helping to

establish the company in new growth sectors of the market?

ii. How far does the strategy overcome the difficulties identified in

the strategic analysis

iii. Does it fit in with the organisation’s purposes?

The following table shows a ranking of the options as they are assessed against key

strategic factors determined from the SWOT analysis in Section 2.0.

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Suitability Ranking Table 4.0

Strategic Option

Key Factors

Exploits Company’s Strengths

Overcomes company’s weaknesses

Overcome external threats

Improve Competitive Standing

Fit with organisation’s purpose and culture (Rank) 1-5 low to high

Ranking

(least suitable, 1, most-3)

Low Cost Leadership

2 1

Differentiation

3 2

Best Cost Provider

3 3

- favourable

- unfavourable

As seen in the table, Low Cost Leadership Strategy does not exploit Gap Inc.’s

strengths in its brand recognition and an online presence. Low prices appeal to a

cross section of consumers who may not necessarily care about brand identity.

A differentiation strategy maximises the strong brand recognition that Gap currently

possess and dispels the weakness of its fashion identity. It gives Gap Inc. the

opportunity to expand on the products it currently provides and to gain once again its

place in the market as a trend setter in the fashion world. However, it does not

eliminate the threat of counterfeit products.

The Hybrid Strategy or Best Cost Provider is favourable in most aspects and

although it utilizes the strength of the brand, it also provides a perceived value for

money for products and overall improves the company’s competitiveness.

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4.1 Acceptability

There are three criteria for determining acceptability of a strategic option.

Return Risk Stakeholder Reaction.

Return

Return on Capital Employed (ROCE) is used in finance as a measure of the returns

that a company is realising from its capital employed.

Return on investment from Strategic Options Table 4.1

Strategic Options

ROCE (%) Payback Period ( year)

NPV( US$ mil)

Position

Low Cost Leadership

10 5 214.6 1

Differentiation

8 6 211 2

Best Cost Provider

6 7 210 3

Risk

Low Cost Leadership

This is a strategy which takes has a payback period of about five years. This makes

it an option with a very high risk ratio. Gap Inc. will most likely need to source

additional funding from external lenders and thus increase the level of risk in using

this strategy.

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Debt = Ratio

Equity

Currently Gap Inc. has a debt to equity ratio of 0.00 % 1 with a five year average of

0.05

There will need to be a comprehensive search for cheaper suppliers and heavy

investment in technology in order to reduce production costs in the long run- CAD

systems for design and automated cutting systems.

Differentiation

This strategy requires the hiring of fresh, new designers who can capture the

imagination of the market niche in which Gap wishes to capitalize on. There would

need to be investment in new marketing personnel who would identify new

strategies. The new products created as a result of this strategy will be marketed

differently from the traditional Gap, Old Navy products offered by the company.

This strategy depends heavily on the fickleness of the consumers in the apparel

industry. It follows traditional belief in the fashion world, that customers will pay any

price for a product deemed ‘fashionable’. The pressure will be on the designers to

keep dreaming up new, innovative ideas.

Heavy investment in advertising will be needed, as research has shown that brands

worn by celebrities see increased sales. The risk involved in this strategy, like above,

will depend on where Gap Inc. sources the funds to start up.

Best Cost Provider

1 www.finapp.forbes.com

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Implementing this strategy means that there would be possible increases in

production costs in the search for suppliers, shifting production to countries where

labour costs are lower, and overheads.

With a five year average debt to equity ratio of 0.05 and a return on invested capital

of 19.2 % over the last five years, the risk involved in implementing this strategy is

quite low.

The greatest expense comes from the investment needed in Research and

development needed to use this strategy. Currently, Gap Inc. uses 0.00% of its

profits on R & D.

Stakeholder Reactions

Low Cost Leadership

Stakeholders at Gap Inc. (shareholders, management and employees) may be less

supportive of a low cost strategy. Shareholders will fear that the value of their shares

will diminish. Management will object to the perception that Gap Inc. has

‘cheapened’ its brand.

Though the strategy is generally consistent with the values and purpose of the

company; there will be some objection from shareholders that it undermines the

‘spirit’ of the company.

Differentiation

The heavy investment needed to pursue this strategy will be the main concern to

stakeholders at Gap Inc. There will be a need for financial restructuring to source the

funds via issuing new shares. This will result in opposition from current shareholders

as this would reduce their voting power.

Best Cost Leadership

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This strategy will entail changes to the organisational structure and the management

policies currently in place at Gap Inc. There would be changes to the value chain to

create value in certain areas. The manner in which resources and core

competencies of the company are utilized will be changed. This would meet with

questioning the stability of this option in terms of employee satisfaction and support.

4.2 Feasibility

This is concerned with whether Gap Inc. has the resources and competences to

deliver a strategy.

Financial feasibility

Estimation of Cash Inflows($ US)

Estimation of Cash Outflows($US)

Estimation of funding of cash shortfall($US)

Position

Strategic

Options

Low Cost

Leadership30m 25m 5m 3

Differentiatio

n35m 32m 3m 2

Best Cost

Provider30m 28m 2m 1

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Resource Deployment

Strategic

Options

Uses

Current

Capabilities

Uses Core

Competenci

es

Needs

Additional

Resources

Can Unique

Resources

be

developed

Low Cost

Leadership

Differentiatio

n

Best Cost

Provider

- yes

- no

- not applicable

5.0 Strategic Option for Implementation

Based on the results of the assessment criteria cited previously, it is concluded that

the differentiation strategy should be given implementation priority. Though the

highest NVP value is seen using the low cost strategy, from the analysis of

acceptability, this strategy will face the most criticism from stakeholders and is the

furthest away from the vision and mission of the company.

One of the most powerful bases of differentiation is the reputation of a firm and of its

products. Reputation is often very difficult to develop. However, once developed, it

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tends to last a long time, even if the basis for a firm's reputation no longer exists.

Gap Inc. has very strong brand recognition and differentiation uses this strength to

its advantage.

A successful differentiation strategy creates a defence for Gap Inc. against the five

competitive forces identified by Porter: rival competitors, buyers, suppliers, potential

entrants, substitutes.

Threats of potential entrants

Product differentiation helps reduce the threat of new entry by forcing potential

entrants to an industry to absorb not only the costs of beginning business but also

the additional costs associated with overcoming Gap Inc.’s product differentiation

advantages.

Threat of rivalry

Product differentiation reduces the threat of rivalry, because each firm in the apparel

industry attempts to carve out its own unique product niche. Rivalry is not reduced to

zero, for these products still compete with one another for a common set of

customers, but it is somewhat attenuated, because the customers each firm seeks

are different.

Threat of substitutes

Product differentiation helps Gap Inc. reduce the threat of substitutes by making its

products appear more attractive than substitutes.

Threat of suppliers

Product differentiation also reduces the threat of suppliers. Powerful suppliers can

raise the prices of the products or services they provide. Often, these increased

supply costs must be passed on to a firm's customers in the form of higher prices.

With a highly differentiated product, Gap Inc. may have loyal customers or

customers who are unable to purchase similar products or services from other firms.

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These types of customers are more likely to accept increased prices due to the

company passing on increased costs caused by a powerful supplier.

Threat of buyers

Finally, differentiation can reduce the threat of buyers. If Gap Inc. sells a highly

differentiated product, it will enjoy a quasi-monopoly in that segment of the market.

Owing to the uniqueness of the fashion industry this strategy may prove more

successful than a hybrid strategy used by Zara. Gap Inc. has been able to hold

significant power in the apparel industry and as there are more companies entering

the market, Gap Inc. is losing it market share. Creating a new product synonymous

with the style and fashion for which Gap is known is critical to the company’s

survival.

6.0 Challenges with Implementation

The real success rate of implementing a strategy successfully is only 10% to 30%.

Companies obviously need to improve strategy implementation activities, but the

pace of these activities and the implementation itself has many problems.

It might seem like strategy implementation is an insurmountable obstacle for the

company. It isn't. Gap Inc. should concentrate on three key success factors: culture,

organization and people.

Culture

Gap Inc. possesses its own culture. This corporate culture creates and, in turn, is

created by the quality of the internal environment; consequently, culture determines

the extent of cooperation, degree of dedication, and depth of strategic thinking within

the company.

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Before change can occur, Gap Inc. and its cultural values have to be "unfrozen" to

understand why dramatic change is even necessary. While the need for change may

be apparent to the top executives, it isn't always obvious to the rest of the

organization. Communication with all stakeholders is the key to this process.

To implement strategy successfully, senior executives must not assume that lower-

level managers have the same perceptions of the strategic plan and its

implementation, its underlying rationale, and its urgency. Instead, the executives

must persuade employees of the validity of their ideas.

Organization

Management should consider two aspects of Gap Inc. --its structure and its decision-

flow processes. Structure deploys accountabilities so the company can achieve its

goals and objectives and, ultimately, its mission. Decision-flow processes, however,

are the vehicles companies use to integrate results into coherent patterns for

developing, implementing, and controlling decision making.

Without understanding the general course of strategy, employees can't contribute to

an effective implementation. What's necessary to help reach this goal is a higher

degree of transparency in the decision-making process. One reason strategy

implementation processes frequently result in problems or even fail is that the

assignments of responsibilities are unclear.

To avoid power struggles between departments and within hierarchies, Gap Inc.

needs to create a plan with clear assignments of responsibilities regarding detailed

implementation activities. Through this approach, responsibilities become evident,

and you can avoid potential problems before they arise.

People

Human resources represent a valuable intangible asset, and recent research

indicates that it is becoming the key success factor within strategy implementation .

Employees have to be considered part of strategy implementation in general.

Implementing strategic change requires the confidence, cooperation, and

competencies of the organization's technical and managerial people, so the

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continual development of a company's vital asset--human resources--is a very high

priority.

7.0 Conclusion

Established in 1969 as a small retailer of jeans, Gap Inc. has been able to surpass

various hurdles to reach today’s designation of top US apparel retailer. It is an expert

in the clothing retails industry with different brands maintaining their effects in

different niche market. Having faced so many different hurdles, Gap has proved its

worthiness. Since it is an established name, if strong strategies are traced out, the

company should be able to maintain its superiority in the retail industry.

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BIBLIOGRAPHY

Books

Johnson, G., Scholes K., Whittington, R (2005), “Exploring Corporate

Strategy,” seventh edition, Pearson UK.

Ritson, Neil (2008), “Strategic Management,” Ventus Publishing, Denmark.

Hill, Charles W.L., Jones, Gareth R. (2008), “Strategic Management: An

Integrated Approach,” South –Western Publishing, US.

Articles

Sull, Donald & Turconi Stefano, “Fast Fashion Lessons,” Business Strategy

Review, Summer 2008.

Taplin, Ian M., “The European Clothing Industry: meeting the competitive

challenge,” Journal of Fashion Marketing and Management, Vol.8, No. 3,

2004.

“ Specialty Retail Apparel,” Great American Group Industry Outlook,Vol. 108

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Mankins, Michael C. & Steele, Richard, “Turning Great Strategy into Great

Performance,” Harvard Business Review, July- August 2005.

Websites

www.gapinc.com

www.finapp.forbes.com

www.quickmba.com

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