Internal Case Analysis:

The GAP Inc.

Industry: Family Clothing

Wei Shiuan Chen (500597934)

Raymond Fan (500451737)
Shalini Krishnarajah (500268811)
Anderson Lau (500450946)
Cherie Wong (500453725)

How Well is the Current Strategy Working?

Vision: Initial vision was to make it simple to find a pair of jeans

Mission: Develop latest fashion trends and then quickly bring them to the market
Objectives: Corporate Citizenship Maintaining social responsibility
Improving factory conditions and standards for suppliers
Charity involvement
Diversity enrichment programs for employees
Social Responsibility policies
o Turn around strategies, to achieve success experienced in the 90s.
o Improvement of quality, styling, and overall brand image
o Revamped website and online presence making it more user friendly
o Strengthen Balance Sheet
Competitive Approach: Many turn around strategies implemented to achieve success experienced in the 90s
o Increase profitability and dividend payments by reducing/eliminating debt
o Profitability improving even though revenues declining
Best Indicators of a Good Strategy
The best indicators of a well-conceived and well executed strategy include a firms ability to achieve stated
goals
GAP was unsuccessful in achieving overall goal of improving balance sheet figures as a whole
o Simply reducing overall debt, the company suffered in other areas
o Firm was seen profitable but the revenues were starting to decline
Benchmarking figures of industry competitors show that GAP is doing well in keeping costs at a minimum
compared to their counterparts
In summary, GAP was losing focus on their vision and mission and as a result, the company has suffered a decline in
sales over the years as the quality of their products decrease. They were laagering in fashion trends as their products
were not often late to market. In order to mitigate this, GAP implemented a turnaround strategy to refocus the brand
back to its core vision and mission.
GAP Financials

2010

2009

2008

2007

2006

Cost of Goods Sold

59.7

62.5

63.9

64.5

63.4

Improvement in costs of goods available for sale, decreasing slightly each year. Still relatively high, room for improvements
Gross Profit

40.3

37.5

36.1

35.5

36.6

27.7

25.7

Gradual improvement, related to decrease in cost of goods. Not very strong margin, relatively low
Operating Expense

27.5

26.8

27.7

Appears to be steady, however after examining dollar figures, expenses actually declined

Earnings Before Income Taxes

12.8

10.7

8.3

7.7

10.9

Taxes

5.0

4.2

3.4

3.2

4.2

Net Income

7.8

6.7

5.3

4.9

6.8

Company still making a reasonable profit. Good ratio given that sales have continued to decline.
2010

2009

2008

2007

2006

Current Ratio(Liquidity)

2.19

1.86

1.68

Good improvement of ratio, company appearing more reliable in meeting obligations as they become due. Attractive to potential future creditors
should company choose to take on more debt
Leverage Ratio(Leverage/Debt)

16%

5.68

7.8%

6.7%

9.84

5.3%

4.9%

6.9%

6.66

5.28

6.95

Good upward trend, shows operational efficiency

Return on Assets

14.17

12.56

Not enough data to analyze trend, but appears that company is using assets efficiently to generate income

Return on Invested Capital

31.04

29.31

26.28

Seems to be a slight upward trend showing that company is using its money to generate income

Return on Equity

23

INDUSTRY COSTS (%)

2010

2009

TJX

74

76

ROSS

74

76

A&F

6.39

Shares were repurchased increasing profitability

Return on Sales

36

American Eagle

5.89

Ratio is decent but downward trend, could become an issue if it were to continue

Net Profit Margin (Profitability)

21%

Constant improvement, however there is room for further improvement

Inventory Turnover (Operating)

19%

61

22

19

2008

33

61

The analysis of financial figures indicates that GAP is performing relatively well as their figures are
constantly improving by reducing the cost of inputs, the gross profit margin will also be improved. Inventory
turnover ratio raising some concerns as the 3 years of financial data that was made available indicates a
downward trend and low turnover indicating poor sales and excessive inventory. Compared to its major
competitors, GAP has managed to keep its costs to a minimum and improves upon these figures each year
which is a strength.

What are the Firms Competitively Important Resources and Capabilities (VRIN Analysis)?

Opening in 1969, GAP has established a long line of brand loyalty

GAP contained 15% of the market share in 2009, placing second in the industry market
To create more value and to accommodate their consumers, they developed three brands Old Navy, The
Gap, and Banana Republic That cater to different segments (Income levels)
Offers extensive collection of classically styled, high quality casual apparel at moderate price ranges.
Under Paul Presslers leadership, company focused on reducing debt, creating new ways to manage
inventory and finances. Eliminated outstanding long-term indebtedness to $513 million in 2007. Eliminated
all long-term debt by 2007, but by cutting expenditure costs

Glenn Murphy took over in 2007. He focused on improving GAPs product lines and overall supply chains.
Murphy greatly diversified GAPs product offerings. Reused many financial strategies from Pressler, while
allocating more resources to product offerings and brand
o Patrick Robinson was brought in as GAPs design chief. Strived to go back to the classics What
made GAP so popular back then
o Several collaborations with famous designers and other companies to develop new product/product
lines
Value

Rarity

Inimitable

Non-Sub.

Supplier Relations

Yes

No

Yes

Yes

Customer Relations

Yes

No

Yes

Yes

Store Experience

Yes

No

Yes

No

E-Commerce Experience

Yes

No

Yes

No

Brand Name

Yes

No

No

No

Develop New Product Lines

Yes

No

Yes

Yes

Production Quality

Yes

No

Yes

Yes

Production Efficiency

Yes

No

Yes

Yes

Cost of Quality

Yes

No

Yes

Yes

Financial and Inventory Man.

Yes

No

Yes

No

Over the years GAPs competitive advantage has fluctuated and with its fluctuation came the change of their
corporate strategy. They experienced a long-term decline in sales and suffered long-term debt. Sales eventually
increased with the introduction of intuitive e-commerce platform. Long-term debt was also eventually eliminated,
but at the cost of product quality and efficiency. With the decline in product quality, brand image became an issue.
GAPs business model had to be changed once again to improve product quality, production, and overall brand
image. Evidence suggests that GAP has suffered through a lot of internal conflict, but through it all GAP has
established a firm foundation of competitive advantages by running through different corporate strategies.
Is the company able to seize market opportunities? SWOT Analysis
External
Internal

Key Strengths
1. Strong brand
equity
2. Expanded to
many geographic
regions
3. Cost advantage
over rivals
Key Weaknesses

Key Opportunities
1. Economy slowly recovering from recession
2. Emerging segments equivalates to new product lines
3. Falling trade barriers in foreign markets

Strengths/Opportunities
GAP owns Banana Republic and Old Navy which
targets prices from levels from high to low which allows
consumers to decide

Weaknesses/Opportunities

Key Threats
1. A shift in the demands for the products
from consumers
2. Increasing intensity of competition
3. Slowdown in market growth

Strengths/Threats
GAP has a strong brand equity
with their subsidiaries, allowing them
to accommodate the shifting consumer
demands. In addition, although the
market is saturated, GAP is able to
cover all segments in terms of their
pricing strategy
Weaknesses/Threats

1. Poor
managerial
decisions
2. No product
differentiation
3. Lack of
knowledge in
understanding
market trends

Since the economy is recovering on recession, it is an

opportunity for GAP to create new products to start a trend
instead of following trends. This will give them product
differentiation as well as first to market product launch. In
addition, the plus size is a growing segment which GAP
failed to address that segment. It is a great opportunity for
GAP to target this segment

Two factors in the slow growth

market that can shift the demands in a
consumer is if the Management team
are not focusses on what consumers
are looking for and the lack of product
differentiation

In conclusion, GAP has a lot of key strengths that they are able to utilize to mitigate the threats and weaknesses.
As a result of increase in competitors, the market is saturated and many consumers are shifting their demands
for the products they are looking for, GAP is standing in a good position as they have a strong brand equity and
are internationally recognized, thus making them the second largest apparel brand in the world. In addition, they
have cost advantage over their competitors because they have stores addressing pricing in all platforms. On the
other hand, they have failed to understand the market trends and through many internal conflicts, it has lead to
many poor managerial decisions. However, this can be mitigated by investing in some research and
development to create a new product line targeting the plus-sized segment as it is becoming a big segment in the
United States. This will give GAP more product differentiation which will in turn encourage consumers to shift
their focus back to GAP and drive sales forward.
Is the companys cost structure and value proposition competitive?
Cost Structures:

GAP
Jan 30,2010

Net sales

14,197

TJX
% of Net Sales

Jan 30,2010

% of Net Sales

100%

20,288

100%

14,968

74%

COGS + Occupancy

8,473

60%

Gross Profit

5,724

40%

5,320

26%

Operating Expenses

3,909

28%

3,329

16%

Operating Income

1,815

13%

1,991

10%

0%

1,816

13%

Net Interest Expense

Income from Operations

40
1,951

0%
10%

*all amounts in millions

From a comparison of the costs, we can see that GAP is very proficient at managing their costs
When comparing GAP to their biggest competitor, we can see that GAP clearly outperforms TJX in
terms of cost management
A higher income from operations relative to their net sales (3% more of their net sales are retained)
GAP is one of the industry leaders in terms of COGS outperforming the industry average of 68.9% of
industry sales
Operating expenses (which include wages, rent, advertising and other expenses) of GAP seem to be
significantly higher than TJX, but operating expenses are around the same percentage as the industry
standard (28.1% of net sales)
Significantly lower than operating costs of 60% of net sales from Abercrombie

Profit margin before taxes is also higher for both companies then the 3% average for the clothing store
industry in 2009.
With a profit margin that is 9% higher than the industry average, we can conclude that GAP is effective in
deriving economic benefits through costs, mainly from their low cost of goods sold (purchased from outsourced
manufacturers). GAPs operating expenses, which are significantly higher than TJX can be attributed to their
newfound investments into brand development through celebrity designers, and their pursuit for corporate social
responsibilities.
Value Chain and Key Success Factors
Primary Activities:
Product Design: used primarily to differentiate GAPs product from competitors and to develop their
own identity which is vital for success. The value of products in the industry comes primarily from its
design since they are functionally the same (Innovative Product Line)
o Historically this has been one of the biggest reasons for GAPs success, however in the past 2
decades; a combination of foreign competitors entering the market along with GAPs inability to
follow fashion trends has resulted in negative growth for the companys annual sales.
Improvements have been made with the appointment of a celebrity designer as the chief designer
of GAP
Purchases and 3 party support: In order to provide products at low costs, most of the production of
the textiles are outsourced to manufacturers in developing countries to take advantage of lower wages.
To ensure the quality of the products as well as the ethical business practices of the manufacturers, GAP
inspects the factory, manufacturing processes and work environment regularly. (Inventory Management
and Financial Management)
o The biggest factor that attributes to GAPs continued success to this day, their ability to keep
product costs low, while maintaining product quality.
Logistics and Distribution: In the family clothing industry, the ability to deliver products in a timely
manner is directly correlated to the business success (deliver clothing while it is fashionable, or to have
enough in stock during high seasons). (Prime Retail Locations and Inventory management)
o GAP has many prime retail location to sell their goods, and historically their logistics and
inventory management has been quite desirable in the eyes of competitors. It is one of the
reasons they can keep product costs low (lowering the inventory carrying costs), while also
satisfying customer demands in a timely manner
Marketing and Sales: Any perceived values of the companys products come from the brand image
developed through marketing. (Brand image)
o Until recently when Glen Murphy took over, GAPs investment into advertising has been
insignificant. As a result, the brands reputation entered into a decline. New advertising
campaigns have been started, but this is still one of the areas where GAP has the least success in,
second only to product design.
Customer Service: One of the few ways the retail sector adds value to its products is by providing a
remarkable customer experience that will make the customers want to return to store. This includes
providing great service as well as an hassle-free return and exchange policy. This is one of the few ways
a retail business can differentiate itself and add value to the customers experience at a GAP retail store.
(Brand Image)
o Has never been a strength or weakness for GAP, it fulfills its intended purpose but it doesnt
differentiate it from competitors such as American Eagle or TJX.
rd

Secondary Activities:

Information Systems: a sound information system can provide value to a company by improving the
efficiency of its inventory, logistics, sales and customer service all of which are factors that could
differentiate GAP from its competitors and help establish a competitive edge
Research and Development: Evaluating and researching new fashion trends can help GAP come up
with innovative new designs well suited for current consumer tastes
Social Responsibility: Contributes to the development of a positive brand image.

GAP has had problems in many areas of their value chain in the past, which not only affected their cost
competitiveness but also their business success. Under Glen Murphys management and the implementation of
his changes, GAP has improved their performance in adding values to areas which had been a major problem
for GAP before. We could safely say that if GAPs current trends continue, it will be likely that they will
become industry leaders in areas of the value chain that had been their weakness in the early 21st century.

Are they competitively stronger or weaker than important rivals?

Key Success Factor

Importance
Weight

Gap
Inc.

TJX
Companies

Ross
Stores

Abercrombie and
Fitch

American
Eagle

Innovative Product
Line

0.25

5
= 1.25

6
= 1.5

6
= 1.5

8
=2

8
=2

Prime retail locations

0.15

9
= 1.35

8
= 1.2

6
= 0.9

6
= 0.9

5
= 0.75

Brand loyalty

0.2

5
=1

7
= 1.4

6
= 1.2

9
= 1.8

8
1.6

Inventory management

0.25

7
= 1.75

7
= 1.75

7
= 1.75

7
= 1.75

7
= 1.75

Financial management

0.15

7
= 1.05

4
= 0.6

5
= 0.75

8
= 1.2

6
= 0.9

Total Score

1.00

6.4

6.45

6.1

7.65

Innovative product line:

o Abercrombie and Fitch and American Eagle are far more superior in this category because of the
large variety of product lines tailored to different segments such as kids, young professionals,
with focus on the Southern Californian culture
o On the other hand, TJX companies and Ross stores are off-price retailers who focus on purchasing
high-end designer items from previous seasons. While high-end designer items are attractive on
their own, it means that it is difficult for these companies to keep up with trends.
Prime retail locations:
o Most of these retailers operate in more than one country other than the United States such as
Canada, Europe, etc.
o GAP operates 3,100 stores, TJX has 2,026 stores in the U.S. market alone, Ross stores has 1,005
stores in the United States, Abercrombie and Fitch has 1,096 stores and American Eagle has 983
stores
Brand Loyalty
o Abercrombie and Fitch and American Eagle take this category again due to the vast amount of
marketing they use in order to create brand loyalty. They have high brand building capabilities
based on the image they portray to the public

o That is not to say that the other companies are not interested in brand loyalty. Each company has
their strategic marketing activities in place in order to create brand loyalty.
Inventory Management
o Inventory management is seen across the board consistent with no major problems at any of the
retailers.
o In order to create a competitive advantage for these retailers, they must develop unique inventory
management systems to help increase efficiency.
Financial Management
o A key factor to increase their profitability is the ability to maintain low cost of goods.
o GAP had sales of $14,197,000 and cost of goods sold were $8,473,000. (40.32% margin)
o In 2010, TJX stores had sales of $20,288,444 of which $14,968,429 were cost of goods sold
(26.22% margin)
o For Ross stores, they made $7,184,213 in sales and $5,327,278 were cost of goods sold (28.57%
margin)
o Abercrombie made $2,928,626 in sales and $1,045,028 were cost of goods sold (64% margin)
o American Eagle made $2,990,520 and gross profit was $1,158,049 (cost of goods sold were
$1,832,471. (38.75% margin)
o Ross stores and TJXs low margin may be contributed to the high cost of goods sold they have
from purchasing high-end designer items.
GAPs major net competitive from its competitors is its high reach due to the number of retail locations they
have.In addition, they have a generally high margin at 40.32% in comparison to their competitors. While GAP
working hard in recent years in their product line by producing trendier clothing with designer collaborations,
they still fall short in this aspect in comparison to their competitors.
What strategic issues and problems merit front-burner managerial attention?
The key strategic issue that is pressing for managerial attention is what to do about internal conflict.
What does GAP need to do in order to overcome the internal conflicts?
All Relevant Facts
Disagreements between research and design personnel
o led to delayed decision making and unwise compromise merely to get something on store shelves
o led to declining revenues and earnings after peaking in 2004
o Key Executives were lost due to the frustration with Presslers approach
Constant switching of CEO leaders of GAP, which led to reformatting of corporate strategies.
Internal conflict is a key issue that GAP must pay close attention to in order to remain competitive in the U.S.
family clothing industry. In order for a company to function smoothly and ensure all other aspects of the
business are working effectively, GAP needs to have a clear vision of what direction the company wants to go.
Throughout the years, there has been inconsistent approaches from various CEOs that have led to an unfocused
strategy for GAP. As a result, it has led to disagreements between research and design which ultimately caused
delays in new products reaching to the consumers. Consequently, GAP was falling behind on new trends which
negatively resulted in revenues and sales because it greatly impacted on consumers buying decisions. As a
result, many of the key executives in the company were becoming frustrated with the companys inconsistency.