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) Leade rship ................................ ................................ ............... 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

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. St arted 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.

Department stores such as Sears, J.C Penney, T.J. Maxx, Marshalls and Macys 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.

2.1SWOT

SWOT ANALYSIS OF GAP INC.

Table 2.0

Strengths

Weaknesses
     
Loss of fashion identity Geographically concentrated operations Seasonal pattern of business Fluctuating sales per sq. foot Geographically fragmented manufacturing Narrow niche

   

Brand recognition Strong online presence Large network of physical stores Reduced long-term debt

Opportunities

Threats

   

Launch of Athleta ( brand) Elimination of textile quotas Customer database and smart cards Fast Fashion

   

Industry consolidation Reduction in consumer spending Threat from counterfeit products Increasing segmentation of apparel

market by brand

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

Barriers to Entry High Capital expense to establish strong retail presence

Threat of Substitutes None

Supplier Power Large number of suppliers leads to low prices

Rivalry

Buyer Power

Discount retailers also sell clothing, reducing margins of specialty apparel retailers Move to mimic high fashion in short time over staple clothing

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

Switching costs away from brand identity Access to good suppliers

Competition over brand images instead of prices

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. 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 doesnt 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

Differentiat ors

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

Brand identity Custom IT solution by Oracle and Retek.

Create brands

new to

expand into new demographics Increase presence online Establishing stronger supplier relationships Customer tracking system

fragmentation

The figure 3.0below (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 segment. However, this strategy has limited the companys ability to grow for two reasons:
y y

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

Using Porters 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.

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 industrys product (clothing) is much the same f rom seller to seller The market is dominated by price competition, with highly price -sensitive buyers( especially in a recession )
y

y y

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.

y y y

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 WalMart 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

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:
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Gap Inc. has strong brand recognition. Some consumers are willing to pay premium price for their products.

The domestic market is saturated, Gaps 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 Nordstromare just to name a few.

3.3 Best Cost Provider

Although not one of Porters 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. Though this strategy may seem to be a viable option only during a time of rec ession 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. in stead; 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 anal ysis, and how it would sustain or improve the competitive position of the organisation. The following questions need to be asked about the statedstrategic 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 organisations purposes?

The following table shows a ranking of the options as they are assessed again st key strategic factors determined from the SWOT analysis in Section 2.0 .

Suitability Ranking

Table 4.0

Strategic Option

Key Factors

Exploits Overcomes Overcome Improve Fit with Companys companys external Competitive organisations Strengths weaknesses threats Standing purposeand culture (Rank) 1-5 low to high Low Cost Leadership Differentiation Best Cost Provider D- favourable U- unfavourable U U D D
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Ranking (least suitable, 1, most3)

1

D U

D D

D D

D D

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 perce ived value for money for products and overall improves the companys competitiveness.

4.1 Acceptability

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

y y y

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
Strategic Options Low Cost Leadership Differentiation Best Cost Provider ROCE (%) Payback Period ( year)
5
Table 4.1

NPV( US$ mil)

Position

10

214.6

8 6

6 7

211

210

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

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additional funding from external lenders and thus increase the level of risk in using this strategy. Debt = Ratio Equity Currently Gap Inc. has a debt to equity ratio of 0.00 % 0.05
1

with a five year average of

There will need to be a comprehensive search for cheaper suppliers and heavy investment in technology in order to reduce production costs in the lo ng 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 traditiona l 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.

www.finapp.forbes.com

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Best Cost Provider Implementing this strategy means that there would be possible increases in production costs in the search for suppliers, shifting production to countri es 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. Shareholder s 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 fi nancial restructuring to source the funds via issuing new shares. This will result in opposition from current shareholders as this would reduce their voting power.

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Best Cost Leadership 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 c ore 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) Strategic Options

Estimation of Cash Outflows($US)

Estimation of funding of cash shortfall($US)

Position

Low Cost Leadership

30m

25m

5m

Differentiation

35m

32m

3m

Best Cost Provider

30m

28m

2m

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Resource Deployment

Strategic Options

Uses

Current Uses

Core Needs Additional Resources

Can

Unique be

Capabilities

Competencies

Resources developed

Low Cost D Leadership D U V

Differentiation

D

D

D

D

Best Cost Provider

D

D

U

D

D- yes U- no V- 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 a nd 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 tends to last a long time, even if the basis for a firm's reputation no longer exists.

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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, p otential entrants, substitutes.
Threats of potential entrants

Product differentiation helps reduce the threat of new entry by forcing potential entrants to an industry to ab sorb 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 alsoreduces 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. These types of customers are more likely to accept increased prices due to the company passing on increased costs caused by a powerful supplier .

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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 m ay 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 companys 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 implementatio n 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, cultur e determines the extent of cooperation, degree of dedication, and depth of strategic thinking within the company. 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

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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 lowe rlevel 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 decisionflow 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 int egrate 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 i s 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 a nd 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 continual development of a company's vital asset --human resources--is a very high priority.

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7.0 Conclusion

Established in 1969 as a small retailer of jeans, Gap Inc. has been able to surpass various hurdles to reach todays 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 y

Johnson, G., Scholes K., Whittington, R (2005), Exploring Corporate Strategy, seventh edition, Pearson UK.

y y

Ritson, Neil (2008), Strategic Management, Ventus Publishing, Denmark. Hill, Charles W.L., Jones, Gareth R. (2008), StrategicManagement: 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

Mankins, Michael C. & Steele, Richard, Turning Great Strategy into Great Performance, Harvard Business Review, July- August 2005.
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Websites www.gapinc.com www.finapp.forbes.com www.quickmba.com

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