Case 11 – Gap
Chris Ganzon
Background Information
Gap is among one of the top four performers in the U.S. family clothing store industry.
Currently holding 15% of the current market share, Gap has been able to attain this high level of
performance and customer appeal from its major brands consisting of Gap, Old Navy, Banana
Republic, Athleta, and Piperlime. Gap was founded in San Francisco as a blue jeans retailer in
1969. The company’s business plan was simple, stock a wide variety of sizes and styles of blue
jeans that appealed to their target market located in the San Francisco area. Looking to broaden
its product line, the company went public in 1976 and began to expand under its leadership of
CEO Millard Drexler. The company focused on acquisitions and new product ventures to grow
the company from 450 stores in 1983 to over 2000 stores in 2002. However after a decline in
brand loyalty in store sales, Gap fired CEO Drexler and hired Paul Pressler as a replacement to
rebuild Gaps appearance and sales. Gaps main goal under the new CEO, Pressler was to expand
its product offering as well as expand its operations to foreign countries and increase its online
internet retailing presence. After resigning in 2007 Glen Murphy replaced Pressler as the new
CEO and continued some of Presslers goals as well as rebuilding Gap’s financial aspects of the
company.
From having multiple leadership changes within just a few years, Gap’s market share and
consumer attraction had declined and gone through a rollercoaster of events. From issues such
as a decrease in product quality, and frequent changes in the consumer style, Gap fell behind and
was in need of drastic leadership and change. In rebuilding the Gap brand, strategies such as a
redeveloped online presence, a broadened store operation and location growth, increased
information technology systems, a better brand and product development, and increased
marketing and corporate social responsibilities allowed Gap to regain its market strength even
through the economic downturn from 2007 to 2009. Though still on the rise, Gap is returning to
its original business and operations plans and focusing primarily on an older target market as
opposed to trying to compete with other retailers with a primary focus on younger teens and mid
20’s consumers. Additionally, with Gaps brand diversification of product offering from each of
its brands, Gap has been able to outcompete competitors on price, value, and quality.
Discussion of Strategy
As Gap entered its decline in the early 2000’s and after the firing of CEO Millard Drexler
and the hiring of Paul Pressler, Gap underwent many transformations to rebuild their market
presence and performance as well as focus to regain and build a competitive advantage. In
addition to reincorporating higher quality products and hiring well renowned fashion designers to
allow the company to compete in the family clothing store industry, Gap aimed to revise its
strategies internally with its business support functions and foreign expansion. Beginning with
its product offering, Gap had noticed its style and fashion of its clothing to decrease and loose
appeal from consumers. Due to a goal to decrease costs and debt obligations, Gap began to
lower its quality and development of its clothing lines. However, under CEO Glen Murphy,
restoring the brands reputation for style and quality was at the top of his list. Additionally, the
company revised its target market as well as bring back the classical style that established Gap
originally. With regard to Gap revamping its internal support functions, Gap contracted with
IBM to restore and build a fully functional information systems platform which allowed gap to
monitor financial forecasts, have more dependable store operations and systems, build a
customer service support system as well as allow IBM to monitor its networks, servers and data
centers. By analyzing the current business model and building a sustainable information
technology basis, Gap was able to initiate new applications which allowed them to move forward
and implement newer strategies. Gap diminished the weakness of inconsistency and a lack of
synergy amongst its brands and product lines with the implementation of a new IT platform.
Lastly, as a strategy to diversify across borders into new foreign territories, Gap expanded its
product offering to stores in countries such as the UK, Canada, the Philippines, Saudi Arabia,
and more as well as provided franchising agreements and licensing agreements to broaden the
company’s global footprint in the family clothing industry. In conclusion, Gap created a
strategic vision and focused on a few various goals in which to achieve. By turning weaknesses
into strengths and further into core competencies Gap is currently in the stages of regaining its
industry presence it once had.
Five Forces Model
In applying Porters five forces model to Gap, you can analyze how the company reacted
to industry forces as well as, while relating to the gap case, see what it actually is that the
company did in response to the many industry pressures that Gap encountered.
Rivalry among Competing Sellers: Often considered the strongest of the five
competitive forces, rivalry can surface from many different forms such as marketing tactics,
sales promotions, heavy advertising, as well as price cutting. These different pressures lead
companies to act and react in an effort to build and sustain a competitive advantage within an
industry. With regard to Gap, their 15% market share began to decline as other rivals in the
family clothing store industry such as T.J. Maxx, Ross stores, Abercrombie and Fitch, and
American Eagle initiated various strategies to pull attention away from Gap. T.J. Maxx and Ross
Stores focused on undercutting Gap by providing name brand clothing at lower costs. With
discounts from 20-60% off, Gap reacted by also trying to cut prices but negatively impacted the
company by also cutting quality and value. As Abercrombie and Fitch and American Eagle
focused on selling premium priced casual clothing and operating their sales both in store as well
as online, Gap was pressured to revamp its current internet presence and consult IBM to build a
new and improved internet and information technology platform to allow them to also compete
in the online retaining aspect of the industry.
Threat of New Entrants: The threat of new entrants in an industry is vital to be aware
of because they can dilute the industry and pull a share of the market away from you. In hopes
to defend your share of the market and maintain your presence it is important to make it difficult
to the possibility of new entrants in the industry. By carrying a strong customer loyalty, and
product differentiation, as well as being competent in distribution channels, this creates difficulty
for businesses to enter the industry. Gap falling short on keeping up with product differentiation
and loosing brand loyalty from consumers created an opportunity for new clothing retailers to
take market share away from gap decreasing its sales and customer attractiveness. As companies
such as H&M, Zara, and Uniqlo who were foreign newcomers emphasizing fast fashion and
rapid fire mini trends, entered into the industry Gap was forced to re-establish and rebuild its
product quality and value by bringing back the classic style that got Gap to where it is and re
focusing its demographic and target market to rebuild its consumer and brand loyalty.
Threat of Substitute Products: Companies can find themselves under intense pressure
from companies in a closely related industry. When a consumer can view two products of the
varying industries as substitutes a threat exists in the industry and must be considered. As the
U.S economy began to fall into a recession in 2007, competition from other clothing sector
industries made rise. Gap offering specialty up-scale clothing under all of its brands also came
with an up-scale premium price. As consumers lacked disposable income during the economic
recession, there was an accompanying lack of consumer purchase power in buying higher priced
clothing. This made rise to alternative big box clothing stores such as Wal-Mart and JCPenny to
enter into the consumers appeal. By providing low cost low value family clothing, consumers
who did not need the upscale or higher quality clothing turned to these alternative mass
merchandisers to cope with the decrease in disposable income.
Threat of Supplier Bargaining power: Whether the suppliers of industry members
represent a weak or strong competitive force depends on the degree to which suppliers have
sufficient bargaining power to influence the terms and conditions of supply in their favor.
Having a strong bargaining power with suppliers can allow you to negotiate lower costs and
increase profitability or the option to pass on savings to your customers. Gap primarily
purchased its clothing from contract manufacturers offshore. This offshore sourcing led to
negative consequences from the increased bargaining power and leverage from the low cost
clothing manufacturers. A rise in minimum wage and labor restrictions led to higher costs that in
turn increased the supplier’s purchasing power while also increasing pricing from these
manufacturing countries. As a response to the higher costs passed on to Gap, they began to
diversify and spread their manufacturing across multiple countries. This approach called
portfolio approach to sourcing allowed companies to decrease risk associated with conducting
business with only few suppliers and spreading it amongst multiple suppliers.
Threat of Bargaining Power from Buyers: Buyers are able to obtain strong
competitive pressures on industry members depending on the degree to which buyers have
bargaining power and the extent to which buyers are price sensitive. High buyer bargaining
power can increase business costs and decrease profitability. This threat can be dependent on the
price sensitivity of the buyers. Buyer bargaining power can be weak if the supply of an
industries product is insufficient to satisfy buyer demand. As with Gap, having overseas
factories provided a risk from potential shortages of apparel or materials for its products. Since
much of Gaps production and materials was contracted to foreign countries, there was a
likelihood that they would not be able to meet demand for their stores due to a potential shortage.
This creates a lower buyer bargaining power to Gaps customer because of the possibility of a
limited amount of product or material.
Driving Forces
In order for a company to continue to be sustainable, they must be able to identify
drivers of change, or driving forces within the industry they compete in. This is vitally important
because these changes can affect how the company operates, it also can provide guidance to
how a company should progress in the future in order to continue being efficient and effective.
Through the progression of Gap from its start to its current standing there have been many
industry driving forces that have had a significant role and effect on its growth and
sustainability within the family clothing store industry. Gap has been able to cope with the
many changes through trial and error from its two main leaders since the firing of their original
CEO in 2002. As Gap was stagnant in growth and declining in its sales and market share there
was a need to analyze the industry driving forces and adapt to the changes in order to make
Gap profitable and regain market share. Under new leadership, in 2010 Gap sought a
turnaround strategy with 6 components that dealt with industry driving forces that would have
the most effect on the company’s future. First, Gap analyzed it’s in store operations, by
managing seasonal demand and keeping up with inventory in stores and throughout the many
distribution centers Gap was able to identify profitable or slow moving items and adjust pricing
accordingly. This allowed Gap to quickly adjust to inventory demands and increase sales by
offering popular items and removing and discounting non popular items. Secondly, Gap
revamped its Information technology platform to allow the company to compete through
online internet sales as well as maintain and analyze important company information and data
all under one IT remodel which was accompanied by the support of IBM. Thirdly, as the
consumer appeal decreased, Gap understood that it was imperative to revamp the brand and
product development. By initiating collaborations with well-known designers and celebrities, as
well as re branding the company’s target market as an upscale and high quality product the Gap
and its accompanying brands have been successful in regaining consumer appeal and attention.
The fourth is Gaps initiative to build a successful corporate citizenship and social responsibility
recognition from its consumers as well as its employees. Since today’s consumer is more
interested in connecting with a company it is important to create a positive message along with
your brand by supporting nonprofit organizations and being recognized for the positive actions
the company does. While creating a brand image does not only focus on the product itself
anymore Gap has been able to appeal to customer looking for a brand it can connect with. The
fifth driving force that Gap has put its attention toward is its marketing. In addition to
marketing with traditional methods such as TV, magazine, and billboard, Gap has turned its
attention to marketing through online social media outlets as well to broaden its consumer
appeal and awareness. Implementing Facebook pages, video clips and online virtual
simulations and IPhone apps, Gap has been able to adjust to the changing marketing outlets
and market its products through new and alternative platforms. Lastly, Gap has explored
international operations by operating stores in multiple foreign countries and entering into
franchising agreements in order to broaden the companies selling channels. From expansion
into other countries in store and online, Gap has had significant sales and a broader consumer
recognition. In all these driving forces that have effected Gap have been both internal and
external to the family clothing store industry. However Gap and its ability to turn these driving
forces into competitive advantages and adapt to growing and changing business activities will
allow the company to continue its successful growth into the future.
Key Success Factors
An industries key success factors are those competitive factors that affect industry
member’s ability to survive in the marketplace. In particular, factors such as product attributes,
operational approaches and resources allow a company to derive key success factors in
allowing them to be effective in their respective industry. In the case of Gap a key success
factor they have is their diversification of product offerings through their various brands. Many
of the rivals within the family clothing store industry do not have the broad product lines that
the Gap has. This important key success factor of operational approach allows Gap to compete
in many different areas to obtain a greater share of the industry. With regard to Banana
Republic as their top of the line and high quality and superior fashion to Gap a mid-level price
product still with a high quality and finally to Old Navy a quality product with a lower price tag,
Gap can serve any part of the clothing industry in terms of price, quality, and style. Gap has
been able to attain this key success factor throughout the years from various acquisitions.
Another key success factor that Gap has built upon from the strategic turnaround is its ability to
compete successfully in the online retailing aspect of the market. The revamped E commerce
allows Gap to process orders faster with greater accuracy. The reconfiguring of Gap.com allows
customers to shop for each of the Gap brands using a single shopping cart all in one place.
These two Key success factors are what differentiates Gap from the competing rivals in the
industry.
SWOT Analysis
The SWOT analysis allows companies to analyze the strengths, weaknesses,
opportunities, and threats affecting their company. The ability to draw conclusions and
translate them into strategic action allows companies to be proactive to the operation of the
company. In analyzing the four components of the SWOT analysis to Gap, you can view the
internal and external implications of the company’s actions.
Strengths: Online retailing, globalization to foreign markets, high standing in the industry
market share, Broad product offering,
Weaknesses: Decreasing brand awareness, multiple changes in leadership, disconnection to
target market, inability to respond quickly to industry styles and trends
Opportunities: New product lines, Accessories and shoes, seasonal styles, new global markets,
increased ability to share brand ideas from globalization,
Threats: low cost providers, economic situation, natural disaster impacting offshore
manufacturing, new trends,
In concluding upon and analyzing the various strengths, weaknesses, opportunities, and
threats, Gap can more productively focus its efforts to competing in the market efficiently and
effectively. By continuing to perform well in regard to their strengths and focusing more on
their weaknesses Gap can be more productive in sustaining their market share and putting its
resources in the correct spot. In terms of their opportunities and threats which are external to
the business Gap can be more aware of the direct and most impactful threats in order to
mitigate risk and lessen the impact of those threats. While looking at opportunities Gap can
now focus its attention on the things that can help the business grow and increase profits.
Appraisal of financial performance
Gaps financial performance has increased since the leadership of the current CEO
Murphy. Under Drexlers leadership gaps same store sales began a long term decline which lead
to his removal and replacement of Paul Pressler. Reducing the company’s debt from $2.9 billion
to $513 million was a successful reduction of the company’s debt. This elimination of debt
allowed Gap to increase dividend payments and allowed the company to repurchase some of its
shares outstanding. However, in reducing the outstanding debt it is believed that Pressler cut
costs that were once the company’s competitive advantages which lead to the decline in product
quality, fashion and consumer appeal. Upon hiring current CEO Murphy, he has enacted a plan
to continue to reduce the company debt however by also restoring the company’s brand within
the industry. Murphy has embarked on profit increasing action rather than cost cutting actions.
In doing so Gap has seen a 5% increase in same store sales from 2009 to 2010. In addition
Murphy has been able to rebuild the Gap brands even through the financial downturn. With the
thought of the brand quality and loyalty in mind Gap executives continue to deliver their goals of
driving sales growth.
Key managerial issues (Managerial worry list)
Zeroing in on the strategic issues a company faces and compiling a worry list of
problems and roadblocks creates a strategic agenda of problems that merit prompt managerial
attention. After deciding the list, coming up with actions to take to devise a solution to the
front burner management attention areas. With regard to Gap, Paul Pressler, the replacement
CEO for Gap had analyzed the company’s shortfalls and focused his attention on those main
areas that were keeping the company from growth and increased profits. The decline of store
sales, expanding Gaps brand offerings, and increased online retail presence were top on his
worry list when taking over the company in 2002. In dealing with the decline of store sales,
Pressler focused on reducing debt which had reached $2.9 billion in 2002 by analyzing the
average cost profit structure of retailers in the U.S. family clothing store industry. The value
adding activities was comprised of the purchasing of clothing and materials, Industry wages for
retailers, other expenses such as rent, advertising and depreciation, all leading to before tax
profits after all expenses which was estimated by IBISWORLD at a profit margin of 3.4%.
Pressler and the company’s financial managers were able to successfully reduce the company’s
debt to $513 million by the end of 2005. In focusing on the expansion of Gaps brand offerings
Pressler created a new brand that was targeted to women over the age of 35, Fourth and
Towne. Opening in 2005 in New York and Chicago, the brand was lived due to mixed reviews of
attractiveness and fit of the clothes. Third on Presslers worry list was to increase the online e
commerce presence of Gap. By redesigning the company’s website and online presence a
completely new platform was developed to incorporate all of the Gap brands within a
convenient shopping website. All three websites of the respective brands were redesigned to
provide greater functionality and better shopping experience. This action by Pressler gave note
from the New York Times in reporting that gaps redesigned website was among the best ecommerce sites in retail. These three focuses were atop Presslers worry list in re directing the
company from its past shortfalls under the previous CEO Drexler. In creating a managerial
worry list Gap was able to understand the direction and the goals to which the company should
direct itself in rebuilding its market appeal within the industry.
Recommendations
Since the actions of the new leader Glenn Murphy in 2007, Gap has continued to increase
its profitability and appeal to customers. This growth is to the fact that Murphy has focused his
attention on the driving forces of the industry and enacted a strategy to incorporate Gap as the
leader and the follower of the various industry changes. However, in offering my personal
recommendations I feel as though Gap can also focus its attention on bringing back a portion of
the manufacturing and production of its products to the U.S. to increase its customer attention
domestically. By offering Made in America Products Gap can not only maintain or increase its
prices but they can be noticed by the consumer market as a U.S. based company which is a
growing consumer concern. Also by in shoring a portion of their business activities they could
mitigate some of the risks that arise from offshoring such as delays in shipping, increased
shipping costs, and natural disasters effecting offshore manufacturers. A second
recommendation for Gap is to continue to build its customer loyalty by giving the idea of their
clothing as a boutique or high quality fashionable products. Many larger retail stores such as
Gap are losing their demand from smaller boutique style clothing retailers. Since Gap has a
larger bargaining and purchase power compared to smaller boutiques they can increase profits by
re negotiated prices from suppliers but providing similar product offerings as the smaller
boutique style retailers. These two recommendations I feel are considerable ideas that could help
to increase Gap’s market share and profitability. In addition to the current turnaround strategies
that Gap is pursuing, My two recommendations will allow Gap to increase their profitability and
quality and consumer appeal which will help to decrease the company’s debt and increase
revenue.