History
Don and Doris Fisher founded and then transformed a single store in San Francisco stocked with Levi’s, records and tapes into a thriving, nearly $15 billion global business with more than 134,000 employees, more than 3,400 stores and a permanent place in pop cultural history. They have been credited with inventing the specialty retail category, though they were equally known for their commitment to philanthropy and civic work.
Don had been working with his father until the mid-sixties, when he decided to branch out and start his own business refurbishing old hotels. He bought the Capitol Park Hotel in Sacramento
One day, Don decided to buy a handful of jeans and slacks from the salesman. The product arrived from a distribution center; but when he tried on the pants, none fit. So Don asked the salesman if he could exchange the pants for the correct side, but he said that a lot of paperwork would be needed for that and suggested Don to instead exchange the pants at a city department store. Don asked Doris to pay a visit to Macy’s, in San Francisco
“What if,” Don had mused, “someone put together all the styles, colors and sizes Levi Strauss had to offer in one store?”
That led to the creation of the first Gap store, which at first was going to be called ‘Pants and Discs’. Shortly before opening the store, the couple attended a party where a discussion ensued on the new concept of the generation gap. Doris Fisher, who was not completely happy with the ‘Pants and Discs’ name, thought perhaps that Generation Gap might be an appropriate name for a jeans store. The name seemed too long though, so it was shortened to ‘The Gap’.
GAP’S Milestones
1969 Founders Doris and Don Fisher open their first Gap store in San Francisco , California
1976 Gap goes public, offering 1.2 million shares of stock on the New York
Exchanges
Exchanges
1977 Gap Foundation — Gap Inc.'s nonprofit charitable arm — is established.
1983 Millard ("Mickey") Drexler joins the company as President and COO of the Gap division.
Gap Inc. acquires Banana Republic.
Gap Inc. acquires Banana Republic.
1986 The first GapKids store opens in San Mateo , California
1987 The first Gap store outside the US opens in London , England
1990 The babyGap line is born
1992 Gap becomes the second-largest selling apparel brand in the world.
1994 Old Navy opens its first store in Colma , California
1995 Millard Drexler is named President and CEO of Gap Inc., succeeding founder and
Chairman Donald Fisher.
Chairman Donald Fisher.
1998 Gap Inc. launches its formal ethics code, the Code of Business Conduct.
2002 Paul Pressler is named Gap Inc. President and CEO. Millard Drexler retires after 19 years
of service.
of service.
2004 Bob Fisher is named Gap Inc. Chairman of the Board.
Gap Inc. issues its first Social Responsibility Report.
Gap Inc. issues its first Social Responsibility Report.
2006 Gap Inc. launches its first online-only brand, Piperlime.
2007 Paul Pressler steps down and Bob Fisher assumes the role of Interim Chief Executive
Officer.Glenn Murphy joins the company as Board of Directors Chairman and Chief
Executive Officer.
Officer.Glenn Murphy joins the company as Board of Directors Chairman and Chief
Executive Officer.
2009 Gap Inc. Co-founder, Chairman Emeritus, and Board Member Donald Fisher dies at 81
The Institutional Structure
GAP’S STAKEHOLDERS
The main stakeholders of Gap Inc. are:
Stakeholders | Core stakeholders |
Governments | Customers |
Non- governmental organizations | Stockholders-Shareholders |
Trade unions | Suppliers |
Community | Employees |
Stakeholders in this company are integrated and they cooperate not only to ensure the endurance of the company but also to achieve some environmental and social goals that Gap alone could never reach.
These goals focus on four main areas of intervention which are:
- supply chain – interest towards people who work along the journey of the products from the factory to the stores, learn about them and ensure they are well treated
- environment – reduce waste, save energy, incorporate sustainable design
- employees – try to create a work environment that allows people to thrive personally and professionally
- community investments – support volunteering and work
A good partnership within the various agents allows the company to accomplish tangible results on key issues more quickly.
They in fact lend their expertise in areas where the company lacks a similar depth of experience. They also serve as eyes and ears in communities where Gap may not have direct visibility into sensitive issues.
“Every day, we look for new ways to connect with customers around the world, provide value to our shareholders and make a positive contribution in the communities where we do business.”
INNER STRUCTURE – OWNERSHIP –
The company is led by an Executive leadership team, composed by 14 people, that is focused on executing Gap Inc.'s vision and driving shareholder returns :
- Glenn Murphy: Chairman and CEO of Gap, Inc.
He is focusing on restoring the health of the brands and pursuing growth opportunities through the company’s online division, international expansion and franchise partnerships.
- Michelle Banks: SVP, General Counsel, Corporate Secretary, Chief Compliance Officer
She is responsible for oversight of the global archives, records and privacy; equity administration; governance; integrity and compliance; legal; and regulatory compliance functions.
- Tom Keiser: EVP, Chief Information Officer
He is responsible for the entire technology platform for Gap Inc., both within the U.S.
- Toby Lenk: President, Gap Inc direct
He is responsible for the direction and management of Gap Inc.'s popular retail websites: Gap.com, BananaRepublic.com, OldNavy.com, Piperlime.com and Athleta.com. He also oversees Gap Inc.'s private label credit card program.
- Art Peck: President, The Gap,Inc Outlet; EVP, Strategy and Operations
As president he is responsible for Gap Outlet and Banana Republic Factory Stores.
As Gap Inc.’s Executive Vice President of Strategy & Operations he is responsible for corporate strategy and global business development.
- Stan Raggio: EVP, Global Supply Chain
He is responsible for managing Gap Inc.’s global supply chain and quality control.
- Eva Sage-Gavin: EVP, Global Human Resources and Corporate Affairs
She sets the strategy for the company's communications, government and public affairs, as well as human resources operations worldwide. Her responsibilities include staffing, diversity, rewards, recognition, employee benefits, learning and development, strategic change, social responsibility, government relations, public affairs and internal and external communications.
- Sabrina Simmons: Chief Financial Officer
She oversees all global financial departments, including controllership, corporate financial planning and analysis, investor relations, treasury, tax, risk management, internal audit and the corporate shared service center. She also has accountability for brand finance along with the company’s brand presidents.
- Stephen Sunnucks: President, Europe and International Strategic Alliances
He is responsible for all aspects of Gap's product development and retail operations, as well as exploring new growth opportunities.
- David Zoba: SVP, Global Real Estate
He works closely with Gap Inc.'s brand presidents and International business leaders in developing and delivering on the company's strategies to optimize its global real estate fleet.
- John Ermatinger: President Asia Pacific Region
In this role, he is responsible for all aspects of product development and retail operations in Japan and China
- Marka Hansen: President, Gap North America
She leads all aspects of the business, including Gap, GapKids, babyGap, GapMaternity and gapbody.
- Jack Calhoun: President, Banana Republic
In this capacity, he oversees all aspects of running a $2 billion business, including all brand, product and employee experiences for over 600 stores in North America .
- Tom Wyatt: President Old Navy
He oversees all aspects of the brand and supports more than 1,000 stores in North America .
BOARD OF DIRECTORS
The board is responsible for
- oversight of the business
- affairs and integrity of the company
- determination of the company’s mission, long-term strategy and objectives
- oversight of the company’s risks (while evaluating and directing implementation of company controls and procedures)
Some of these responsibilities are delegated to the committees of the board of directors in order to put into evidence some peculiar aspects and to reach a higher level of efficiency.
The Board of directors is constituted by a mix of independent directors, which do not hold a management position in the company, management directors, which are officers or employees of the company, and “Non-management” directors, who are not officers or employees but who are not considered independent.
Independent directors constitute two-thirds of the board.
This division is considered optimal to avoid unforeseen circumstances such a mid-year resignation.
All Board members possess several core competencies:
- experience in retail
- consumer products
- international business/markets
- real estate
- store operations
- logistics
- product design
- merchandising
- marketing
- general operations
- strategy
- human resources
- technology
- media or public relations
- finance or accounting
- experience as a CEO or CFO
New members are identified screen and recommended to the board by the Governance and Nominating Committee. Qualified candidates are interviewed by Chairman, CEO and two independent directors and then their nominee is subjected to the vote of the board.
Once new directors are nominee they have to attend and complete in six months a formal onboarding program.
Each new director is provided with core materials and he/she has to complete introductory meetings to become knowledgeable about the company’s business and familiar with the senior management team.
The high level of efficiency of the entire board of directors is insured by
- continuing education programs
- annual performance evaluations
In fact in order to stay current with the company’s business as well as new relevant industry information each member is encouraged to attend periodically education seminars or programs which would be beneficial to the company and the director’ service on the board.
Moreover the annual evaluation of the board of each committee and each individual director performed by the Governance and Nominating Committee is a way to assess the efficiency and the productivity of these bodies as well as new opportunities for improvement.
COMPENSATIONS
Non-Management directors
Annual base retainer | $70,000 |
Attendance fee for each regularly scheduled committee meeting | $1,500 |
Attendance fee for each board and/or committee meeting requiring travel to the | $2,000 |
Surplus - additional retainer
Governance and Nominating Committee Chair | $10,000 $10,000 |
Audit and Finance Committee Chair | $20,000 |
Management Development Committee Chair | $20,000 |
Lead Independent director | $20,000 |
Stock unit awards
According to pre-determined formula each Non-Management director
is awarded for appointment | $125,000 |
is awarded annually | $125,000 |
BOARD COMMITTEES
They are bodies with specific functions.
Each independent director is expected to serve on at least one committee.
- Audit and Finance,
- Compensation and Management Development,
- Governance and Nominating
AUDIT AND FINANCE
It assists the board in fulfilling its responsibilities relating to :
- integrity of the financial statements
- compliance with legal and regulatory requirements
- the independent accountant’s qualifications and independence
- the performance of the internal audit function
- the performance of the independent accountant
The committee will consist of at least three members of the board of directors. Committee members and the committee chair serve at the direction of the board of directors.
COMPENSATION AND MANAGEMENT DEVELOPMENT
Its functions are :
- to evaluate and determine compensation policies, including level and form, for all corporate and divisional officers and certain employees
- to recommend compensation for Non-Management directors
- to advise senior management on policy and strategy regarding succession planning and the development and retention of senior executives and management teams
GOVERNANCE AND NOMINATING COMMITEE
It makes recommendations to the board on all matters concerning corporate governance and directorship practice, including development of corporate governance guidelines, evaluation of the board, committees and individual directors, and identification and selection of new board nominees.
Corporate Strategy
HORIZONTAL DIVERSIFICATION
The company sells its products under five different brands.
Gap. The main target of this brand is consumers between 18 and 25. It offers a selection of classically styled,high quality,casual apparel at a moderate price. With the introduction of GapKids and babyGap, the company entered the market also for what concerns the children's apparelmarket. These stores offer casual apparel and accessories in the tradition of Gap style and quality for children, from newborn to pre-teen. The company launched also GapBody by offering women's underwear,sleepwear, loungewear, sports and active apparel. They operate also in Gap Outlet stores, where you can find similar categories of products at a lower price.
Old Navy. This brand was launched on the market for value-priced family apparel. It offers broad selections of apparel, shoes, and accessories for adults, children, and infants, as well as other items, including a maternity line, consumables, and personal care products.
Banana Republic. The target of this brand is to capture customers who love fashion and quality in their products,belonging usually to the 25-35 age group. It offers sophisticated, fashionable collections of casual and tailored apparel, shoes, accessories, and personal care products for men and women at a higher price than Gap. You can also buy this type of products at a lower price in the Banana Republic Factory Stores.
Online stores
For the three previous stores, the company introduced also an online store. They offer products comparable to those carried in these stores, as well as extendend sizes that cannot be found in the regular ones.
There are also two additional only-online stores, which are Athleta and Piperlime.
Piperlime. It offers customers an assortment of the leading brands in footwear, handbags, apparel, and jewelry for women and footwear for men and kids, as well as tips, trends, and advice from leading style authorities.
Athleta. It offers customers high quality and performance-driven women’s sports and active apparel and footwear that is stylish and functional for a variety of activities, including golf, running, skiing and snowboarding, tennis, and yoga. Customers can purchase Athleta product, as well as an assortment of products from leading brands in women’s active wear, online or through the catalog.
The company is acting with the so called “portfolio strategies”, which means, strategies that aim at a diversification on the product offered to the customer. The key in order to become a leading brand in this industry is to try to reach the most number of customers as possible. The strategy was not to create one huge store that would sell everything that the company is producing. In this case, the customer would probably feel lost, because he/she would have to search all over the store and lose time in order to find the type of product he/she needed. In the way the company is operating, the customer goes to a certain store because he/she has already chosen, more or less, what to buy. Infact, it can vary from a casual apparel at a moderate price in Gap, to a more sophisticated and luxurious one in Banana Republic. The company tried also to differentiate respect to the customer: stores for baby products, families, women and men.
Another aspect that has to be underlined is the fact that these stores mentioned above were not created all at the same time. Infact, by combining different strategic business areas in different periods, a gradual and continual growth of the company is in action. Furthermore, by operating in a certain strategic business area, this enables the company to operate more efficiently in other business areas, in order to develop new technologies and know-how to use in other products. Another important aspect that has to be taken into account is everything that concerns the technological issues of the company. Infact, Gap has made very innovative and efficient decisions about the use of Internet as a mean of selling products and, therefore, make profit out of it. It is quite clear that the use of Internet is becoming worldwide, and more and more people are using it as a fast purchasing method. Infact, those people that have multiple roles in society and those who are very busy, do not have the time to go shopping. There are others that simply prefer shopping and doing business from the comfort of their own home, rather than going to the actual store, wait in line and, in some situations, not be able to make the best decisions because of the hustle and bustle of the stores. Therefore, the company understood that something had to be done in this direction. The website is very efficient: the websites are very similar in appearance and layout related to each brand site; this makes it easier for customers to shop each of their brands,by keeping them quite similar. The template is very attractive, there are a lot of information about every single product and there are also vast assortments and sizes that cannot be found in the regular stores. Other than this, there are also a lot of feedbacks by the customers, so that a person new to this type of style can compare the different ideas and make a decision. In summary, Gap has made a great effort on this type of problem, and has understood right away the main issue of the customers. This is surely one of the keys for the success of the company.
VERTICAL INTEGRATION
The ability to develop and evolve existing brands is one of the keys to the company’s success. With the exception of Piperlime,which does not offer only Gap products, virtually all aspects of brand development, from product design and distribution to marketing, merchandising and shopping environments, are controlled by the company itself. With respect to Piperlime, all the aspects of brand development are controlled, except for product design. The company continues to invest in the brands and enhance the customer experience through the remodeling of existing stores, the opening of new stores, the closure of under-performing stores, the enhancement of the online shopping sites, additional investments in marketing, and a focus on customer service.
How Clothes Are Made
Phase I: Design and Merchandising
The designers and merchants of the company visit the world’s fashion and cultural capitals. They translate then their ideas into drawings, patterns, swatches and color palettes. They work closely together to translate inspiration into product assortments that the company believes their customers will want to wear. From the drawings, samples are created and carefully edited into focused product assortments for the brands and customers.
Phase 2: Planning and Sourcing
Planning and distribution specialists help merchandisers decide how many units of each new style to order and to which stores those units should be sent. A plan is created for each style. Buyers work with factory owners to understand every detail of production, from materials, quantity and price to packaging and delivery.
Phase 3: Production and Marketing
The factory makes product samples and, using mannequins and models, the company confirms the fit. Once approved, the factory begins production.At this point, the Marketing team steps in to meet with the merchants and look at factory samples. Based on this preview, the team develops an appropriate marketing plan to communicate the assortment and key products to the customers. Meanwhile, the factory puts the finishing touches on the merchandise, it's tested to ensure it meets regulatory standards and they conduct final quality assurance.
Phase 4: Distribution
All merchandise, samples, plans, fixtures, props and in-store displays are packed, inspected and ready for shipment to the distribution centers. Once the product arrives at the distribution centers, every single box gets checked in. Cartons are counted, quantities are confirmed and random audits are performed. As merchandise is added to inventory, it's designated for delivery to a specific store according to size, color and quantity. The distribution centers then move the merchandise to the appropriate stores.
Phase 5: Sales and Analysis
Every seasonal delivery requires a brand new floor setup in the stores. Merchandise is placed following the guidelines of the Visual Merchandising team.
As each unit is sold, the transaction is registered for analysis by the planners and distribution analysts. These analysts monitor weekly sales trend reports and determine which stores need to be replenished with which products. At the end of each season, the company assesses the performance, gather customers’ feedbacks, look for improvements and begin the cycle all over again.
One of the key success of the company is no doubt due to the fact of the vertical integration. The company, therefore, is responsible for the whole production line, from the transporting of raw materials to the distribution of finished products to the customers.
One of the biggest advantages of vertical integration is that it often creates economies of scale and lowers production costs because it eliminates many of the price markups in each production step. Being a vertically integrated company allows the achievement of cost efficiencies by controlling quality at each step, which reduces repair costs, returns, and downtime. The company must have expertise in each step of the production and distribution process in order to maximize the advantages of vertical integration. That’s why it has been mentioned in each step that different people take part to this kind of processes: from the designers and merchants who have the inspiration to create a new apparel, to the Visual Merchandising team that monitors how the sales of each apparel are behaving.
GEOGRAPHIC DISTRIBUTION
The company's main purpose is to become a leading international brand. Therefore, the company has operated towards an international expansion of its brands. The Gap's international operations are split between The Gap and Banana Republic; Old Navy, infact, does not have stores outside of North America .
The information gathered for the number of stores are updated to the 30th of October 2010 and there are 3082 company owned stores located in the United States , Canada , Ireland , Japan , UK and France
Franchising
The company has franchise agreements with unaffiliated franchisees to operate Gap and/or Banana Republic stores in Australia , Bahrain , Bulgaria , Croatia , Cyprus , Egypt , Greece , Indonesia , Israel , Jordan , Kuwait , Malaysia , Mexico , Oman , Philippines , Qatar , Romania , Russia , Saudi Arabia , Singapore , South Korea , Thailand , Turkey , and United Arab Emirates
Organizational structure
After an accurate analysis of the leadership of the company, we can assume that GAP Inc. has used a variety mix in building its base of structure for the firm. For example, it divides its structure based on its products, Human Resource and Finance. We see that they separated the HR and the finance sector out as a separate department. In this way, departments can be compared easily by the statistics. Additionally, the company divided its subordinates as product base with brands that are under GAP (such as Banana Republic, Old Navy, Gap, Piperlime and Athleta ) and GAP itself (North America, Europe,
Organizational culture
These are the main points that define Gap Inc.’s Culture:
‘‘Wearing your passion’’
• Think: customers first
•We make decisions with our customers in mind. We connect with our stores and create the quality our customers value and expect.
• Inspire: creativity
•We think big, take risks and solve problems. We challenge the status quo and always look for new ideas and ways of working.
• Do: what’s right
•We believe that how we do business is as important as what we do. We act with integrity, and we give back to the communities in which we do business.
• Deliver: results
•We deliver the best result possible – we're committed to taking responsibility, setting priorities and meeting our goals.
Even though Gap Inc. works very hard to create a solid and strong culture, it is very difficult for all the people involved to have a feeling of belonging to such a big corporation, where a lot of people are being employed and fired every day.
From different sources we have deduced that many employees don’t feel identified with the company, specially those in low positions who complain a lot about having to report to many managers, who are said to be well paid without having that much responsibility.
When refering to artifacts we can see that all stores follow the same pattern, they all are very tidy and organized, spacious, with big images, great illumination, variety in every sense and very good client treatment. One interesting fact is that Gap Inc. owns near 1100 pieces of modern and contemporary art, which are displayed along the different stores worldwide.
Competitive strategy
COMPETITION ANALYSIS
The textile industry is a highly competitive industry due to its size and the amount of close substitutes there are for each product a company produces. Due to development in technology and design and in innovation in general we are able to buy any kind of clothing we desire at a large range of prices. The market is full of large competitors such as for example Zara, H&M, and United Colours of Benetton. All these companies share similar characteristics which make them very successful but also close substitutes and thus competitors. All of these firms sell one or few brands which produce a large quantity of products which are all relatively basic but also highly influenced by consumer tastes. They sell products of relatively good quality under appropriate prices.
One of the main competitors of GAP is Zara. Zara is a part of an industrial group called Inditex; it was created by Amancio Ortega in 1975. Other brands of the group are also Massimo Dutti, Pull and Bear, Oysho, Uterqüe, Stradivarius and Bershka. However, as much as 75% of the group’s annual turnover comes from Zara alone. A surprising fact and possibly the key of Zara’s success is that it claims that Zara needs just two weeks to develop a new product and get it to stores, while the industries average is six months. Another very important characteristic is their “zero advertising policy”. Instead of investing in advertising Zara prefers to invest in expanding and opening new stores, which in turn advertise themselves. Thus today Zara has over 1000 stores in 73 counties.
H&M, another giant in the textile and clothing industry which specializes in relatively lower budget clothing. H&M has almost 2,200 stores in 37 countries and employs around 76,000 people. H&M is a Swedish brand created in 1947 by Erling Persson. H&M describes its mission as “Fashion and quality at the best price”. As a difference to Zara, H&M does invest a lot in advertising however not without returns; in the last 5 years the revenues rose by 73% and the earnings per share increased by 139%.
GAPs American competitor is Abercrombie & Fitch. A&F focuses on casual wear for consumer’s ages of 18 through 22. It has over 300 stores throughout the United States Milan
Zara, H&M and Abercrombie & Fitch are GAP’s main competitors, although it seems that each brand has found each own niche, their products are still very closely related thus making the companies in competition with each other. GAP is in fact, after Inditex which owns Zara, the largest clothing retailer worldwide, and the largest in America
INDUSTRY STRUCTURE AND THE FIVE FORCES
There are some of the opinion that the retail industry has become over saturated with the large amounts of firms and enormous amounts of both real and online stores. On the other hand although there are many firms it’s the truly large companies like Gap and its competitors which make the greatest amount of sales. Not only is this industry very large it is also highly competitive, this is mainly due to a very large demand for the goods. A good way to analyze the industry is to use Porters Five forces model.
Supplier power
In this industry the bargaining power of suppliers is very low. This is due to the fact that companies like Gap are very large and very influential in the world market, they buy extremely large amount of materials so it would be very undesirable for the suppliers to lose contracts from firms like Gap. Such firms integrate vertically which leaves the suppliers with almost no autonomy. They are forced to match with the firm’s quality standards and other requirements. The suppliers and their materials are not highly differentiated and therefore competition between them is very high allowing firms like Gap to choose the lowest priced suppliers. As the good the suppliers produce are very basic the threat of forward integration is very low because the investment required is too high.
Buyer power
Buyers are individuals and families which compared to the industry are very small, therefore they have a relatively low bargaining power. Their individual purchases are too low to have any real effect on thh industry. Switching costs are null and the buyers are fully informed about the goods before they make their purchase. Also brand names such as Gap have an advantage because customers prefer to buy products of well know firms and are prepared to pay a higher price for them. However the firms need to invest a lot in research of the market and its trends because although individuals may not have a great effect on the industry all of them as a group do. Therefore if a firm misjudges a trend they can make great losses.
Rivalry among Competitors
The retail industry is a constantly growing one and there are many competitors within the industry. However because both the industry and the markets are very large the industry is fragmented according to prices, volumes and target groups. Therefore some firms may not be in competition because their price ranges or their customer demographic is different. Competition becomes higher the more similar products the firms produce; this can be a problem for some because switching costs for customer are zero so although there is some brand loyalty it is not very strong.
Threat of Substitutes
The threat of substitutes is really low because there is not really a product which can substitute clothes. However there can be a threat of substitutes from luxury clothing industry.
Barriers to entry
Although we expect the barriers of entry to be very high to very large economies of scale, companies like Gap have thousands of stores in a large amount of countries. They are under threat form imitation by firms with low cost production and a lower quality but not so drastically lower. However large firms like Gap tend to engage in anticompetitive behaviour such as setting prices very low for a certain period of time so new firms are unable to compete. However they also have the advantage of economies of learning and high funds which enable them to buy the best locations and invest in advertising.
COMPETITIVE STRATEGY
The competitive strategy of Gap is revolved around the brand itself. Gap has become a household name, it is well known and customers relate to it. Thus Gap Inc. has decided to use that advantage to create profit. Of course this is a very general concept so Gap uses different methods to strengthen customer’s loyalty to their brand. One of these methods is the fact that Gap is very consistent with its products and though that also wise with its sales, which makes the customers trust the brand and buy there again. They also have a very reliable inventory which means that they don’t over produce and are able to sell their good at the initial price.
This is achieved through the fact that smaller stores have limited amount of inventory which is appropriate for their size, while the rest of the products are shipped off to larger stores where demand is also larger so they can be sold at the original price and not on a discount. Gap also picks a discrete store location and they take care that the stores are also consistent with the general brand image so the customers get a full “Gap experience”. Beside the stores, Gap has also been focusing a lot of its attention resources and energy into online retail. It’s a service though which they can directly reach the customer in his or her home. Each brand has its own website though which customers can look though all of the collections and order their clothes which are then directly delivered to the customer.
Gap strategy is also largely based on the fact that there are multiple brands (Banana Republic and Old Navy). This gives Gap a chance to target more and different groups of customers, create again brand loyalty and be able in the end to sell more products. That is why Gap’s future strategy is to develop more brands to expand their market share, construct new stores, increase online selling and improve their customer tracking system. Another important aspect of Gap’s strategy which is not related with the brand is the reducing of the supply chain fragmentation which reduces costs of production and also implementing custom IT solutions done by Oracle and Retek.
COMPETITIVE ADVANTAGE
Firms create competitive advantage by either having low prices which is done by reducing the firm’s own costs so they can set lower prices and thus make their products more attractive to customers; or by product differentiation. By differentiating their products from other on the market the firms are able to charge a higher price because the fact that their products are in more may unique makes the higher price worth paying. A clear example of this is the fact that customers are willing to pay a much higher price for a shirt made by a brand then more a shirt made by an unknown firm. Gap’s main source of competitive advantage is, as mentioned before, brand image. “Fall into the Gap” has become a well known slogan; Gap in general invests a lot into branding by expanding to new markets with new brands and investing in marketing. Gap is advertised through posters, billboards, celebrity endorsement, TV and radio commercials . Through research and development Gap pays very close attention to spending patterns of its consumers as well as trends. As the materials have to be ordered and designs made well in advance Gap has to be able to forecast trends in the fashion world. They also invest a lot into attracting quality designers as for example they have recently collaborated with Valentino. Another maybe minor but also very important source of competitive advantage is customer service. All employees are required to go through training before they begin working at Gap. They are required to know all the products in the store they work in as to be of best service to the customer, they have to be able to aid the customer in making his or her choice. They feel that this is a very strong component of success for their industry. Gap Inc. strives to “make it easy for people to express their personal style through convenient and engaging store experience; and by communicating with people in a way that connects to how they live, work, and play”. Tight costs control enable Gap's brands such as Old Navy to keep low costs; this is done by producing overseas where labour costs are lower and mainly producing in its own factors thus again reducing costs. Another speciality of Gap's is the low inventory mentioned earlier. Gap uses both cost reduction and product differentiation to achieve competitive advantage; this is a very good strategy because it allows them to take full advantage of the market opportunities and their own resources.
What makes it easier for Gap to this is the fact that they have multiple brands. For example Gap and Banana Republic charge higher prices by differentiating their products while Old Navy takes the cost and price reduction route. Gap Inc. takes good advantage of both its economies of scale and economies of scope. Its production takes place overseas in very large factories which are very efficient because they are able to produce very large quantities of goods for a lower price; also, since most of their factories are owned by Gap, this lowers transaction costs.
Economies of scale also help with transportation of the products, so if same of the goods are not sold they are easily shipped off to other stores where there is a larger demand. Likewise since Gap is so large and spread all around the world it makes it easier and cheaper to make deliveries to online shoppers, since the clothes they ordered are in the inventories of the shops in their cities; Gap also uses economies of scope by producing all of the products to form its different brands at the same factories. Gap is also joining in on the fashion designer collaborations. Monique Péan, Patrik Ervell and Sophie Theallet are the first three fashion designers which are working with Gap to create limited edition collections. The fashion designer collections are higher end versions of Gap classics like dresses, skirts, blazers and button-down shirts. Gap has also recently started working with Valentino on a new collection which has come into stores this November. While not cheap, the prices are not outrageous, the capsule line includes a skirt, cargo pants, a parka, and a cropped jacket all featuring a large, layered ruffle motif.
Financial performance
Through the computation of some financial ratios it is possible to understand the overall financial performance of the company.
2005 | 2006 | 2007 | 2008 | 2009 | |
ROTA | 19.78 % | 13.74% | 16.77% | 20.46% | 22.73% |
Profit Margin | 10.89% | 7.36% | 8.34% | 10.65% | 12.78% |
Asset turn | 1.81 | 1.86 | 2.01 | 1.92 | 1.49 |
ROE | 20.51% | 15.03% | 19.48% | 22.04% | 22.53% |
Current ratio | 2.69 | 2.21 | 1.67 | 1.85 | 2.18 |
Quick ratio | 1.82 | 1.42 | 1.03 | 1.15 | 1.49 |
WC ratio | 0.20 | 0.17 | 0.10 | 0.12 | 0.17 |
D/E ratio | 0.62 | 0.65 | 0.83 | 0.72 | 0.63 |
Interest cover | 38.7 | 28.63 | 50.57 | 1548 | 302.5 |
Cost of debt | 1.32% | 1.21% | 0.72% | 0.03% | 0.19% |
The company has made an excellent job in becoming a very profitable company, and ROTA clearly shows all the effort that Gap spent on this purpose. During the five years considered, the lowest values of both return on total assets and return on equity have been reached in fiscal year 2006. The highest values reached by both the ratios belong to fiscal year 2009. Over the last four years, return on equity has been always higher than the return on total assets. In fiscal year 2009 though, ROTA has been slightly higher than ROE. Because in any case the two values are really high, the company has reached an institutional equilibrium, where shareholders enter the company by buying shares because the ROE attracts more and more people to invest in this company. In order to improve this situation, the company could buy long term assets and, therefore, will have long term investments. Infact, by looking at the balance sheets of the company (appendix 1), debts decreased over time and by putting more debt into the company, the return on equity will increase and become higher than ROTA. In order to counterbalance this kind of situation the company can also increase the interest income, which is earned by cash, cash equivalents and also short-term investments.
The liquidity ratios show clearly another important aspect of the company: the capability of paying the debts and not depending on the inventories, which is crucial for this type of company. The current ratio, in average, is higher than 2. By this we mean that the value of the current assets is, in average, twice as much as the current liabilities, which are the short-term debts of the company.
Because of the nature of the industry in which the company operates, there can be doubts or perplexities whether the company really depends or not on the inventories and, therefore, on the amount of clothes sold. This has to be proved through the quick ratio, which basically eliminates the influence of the inventories in the ratio. It shows clearly that the company can operate and pay its debts without them. The working capital to sales ratio is always above 0, therefore Gap has enough working capital to cover the days before the customers will pay the company.
During the five years here considered, the debt over equity ratio has been always below 1, which means that the company has had over this period of time always more equity than debt. One of the most strong and successful aspect of the company is surely the capability of having a very high interest cover and very low cost of debt. In fiscal year 2008 and 2009 the ratio is closer to 0, and therefore the company has had very little debt. In any case, even when the debt were higher the cost of debt has always been very small. The debt and equity management team of the company has surely made an excellent job while handling this type of problems. In the end, another important aspect to take into account is that, during the last 5 years, the company has always had higher interest income than interest expenses (appendix 2). Therefore, EBT is higher than EBIT, and in this way the interests due to the debtholders have no major influence in the company.
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