GAP Inc

161
GAP Inc. Strategic Audit 1 GAP’s Inc. Strategic Audit Presented To: Dr. Saneya AL Galaly Presented By: Nevine Roushdy: (External Environment & Internal Environment Analysis) Rania Habib: (Analysis of Strategic Factors & Strategic alternatives)

Transcript of GAP Inc

Page 1: GAP Inc

GAP Inc. Strategic Audit 1

GAP’s Inc. Strategic Audit

Presented To:

Dr. Saneya AL Galaly

Presented By:

Nevine Roushdy: (External Environment & Internal

Environment Analysis)

Rania Habib: (Analysis of Strategic Factors &

Strategic alternatives)

Dina Sameh: (Implementation and Evaluation &

Control)

Amr Negeda: (Current Situation & Corporate

Governance)

Page 2: GAP Inc

GAP Inc. Strategic Audit 2

Abstract

This paper is a strategic audit of Gap, Incorporated and its portfolio members. It

describes the birth of the company and goes on to describe its current position. As

part of the d e s c r i p ti o n p r o c e s s , i t i n c l u d e s t h e f o u r m a j o r b r a n d s t h a t a r e

p a r t o f G a p , I n c . T h e s e brands include Gap, Banana Republic, Old Navy and

Piperlime. A Managerial Analysis is included herewith that gives an insight into

SWOT analysis and Porter’s Five Forces Analysis of the company, and also included

is the Strategic Distinction of the company. As per the Financial Analysis part, financial

tools such as ratio analysis, consolidated financial statement comparison, and stock trend are

analyzed to assess the company’s progress. The paper also keeps close track of company’s

social, ethical, environmental and managerial aspects in day to day operations.

F u t u r e e x p e c t a ti o n s a n d p o s s i b l e d i v e r s i fi c a ti o n o r a n ti - d i v e r s i fi c a ti o n

p r o c e s s t h a t t h e corporation can practice are also part of the paper. As a

conclusion, the paper sums up ideas from a group of four undergraduate students and

incorporates them to breakdown the strategic and financial aspect of Gap, Inc.

Page 3: GAP Inc

GAP Inc. Strategic Audit 3

Contents

1. Current Situation..............................................................................................................3

A. Current Performance (ROI. MS, Profitability)....................................................................3

B. Strategic Posture. (Mission. Obj., Strategies, Policies).......................................................6

2. Corporate Governance....................................................................................................11

A. Board of Directors..........................................................................................................11

B. Top Management...........................................................................................................14

3.External Environment: Opportunities and Threats (SWOT).................................................18

A. Sustainability Issues……………………………………………………………………………………………………….

B. Societal Environment……………………………………………………………………………………………..……..

1.Economical Analysis ……………………………………………………………………………………………………

2. Political Analysis …………………………………………………………………………………………………………

3. Technological Analysis...............................................................................................18

4. Socioculturall Analysis...............................................................................................19

C. Task Environment …………………………………………………………………………………………………………..

1. Threat of new entrance……………………………………………………………………………………….…….

2. Bargaining power of buyers………………………………………………………………………………………..

3. Threat of Substitute products…………………………………………………………………………………….

4. Bargaining power of supplier……………………………………………………………………………………..

5. Rivalry among competing firms………………………………………………………………………………….

C. External Factors Analysis Summary (EFAS)......................................................................20

4. Internal Environment: Strengths and Weaknesses (SWOT).............................................21

A. Corporate Structure........................................................................................................21

B. Corporate Culture...........................................................................................................21

C. Corporate resources........................................................................................................23

D. Internal Factors Analysis Summary (IFAS).....................................................................32

5. Analysis of strategic Factors (SWOT)...............................................................................33

A. Situational Analysis.........................................................................................................34

B. Review of Mission and Objectives...................................................................................34

Page 4: GAP Inc

GAP Inc. Strategic Audit 4

6. Strategic Alternatives and Recommended Strategy.........................................................35

A. Strategic Alternatives......................................................................................................35

B. Recommended Strategy..................................................................................................37

7. Implementation..............................................................................................................38

8. Evaluation and Control...................................................................................................38

A. Output controls...............................................................................................................38

B. Input controls.................................................................................................................39

C. Behavior controls............................................................................................................39

D. Risk Management...........................................................................................................39

List of Figures:

Figure 1 Organization Chart for GAP Inc......................................................................................14

Figure 4 Organization Chart for GAP International......................................................................16

Figure 5: SWOT Analysis for GAP Inc............................................................................................33

List of Tables:

Table 1: Comprehensive Income Statements ….............................................................................3

Table 2: Balance Sheets ................................................................................................................ 4

Table 3: Cash Flows…………………………………………………..……………………………………………………………….5

Table 4: Financial Analysis Ratios...................................................................................................5

Table 5 EFAS table for Gap Inc. ………………………………………………………………………………………………20

Table 6: IFAS table for GAP Inc. ……………………………………………………………………………………………..32

Table 7: SFAS Matrix for GAP Inc.................................................................................................34

Table 8: TOWS Matrix for GAP Inc...............................................................................................35

Page 5: GAP Inc

GAP Inc. Strategic Audit 5

Introduction

Gap Inc. is a leading international clothing retailer offering attire, accessories and personal care

products for men, women, children and babies. The company represented one of the most

impressive success stories in the history of the U.S. retail business. It is an American clothing

and accessories retailer based in San Francisco, California, and founded in 1969 by Donald G.

Fisher and Doris F. Fisher. The company has five primary brands: the namesake Gap banner,

Banana Republic, Old Navy, Piperlime and Athleta. As of September 2011, Gap, Inc. has

approximately 135,000 employees and operates 3,076 stores worldwide, of which 2,551 are in

the United States. Gap, Inc. remains the largest specialty apparel retailer in the U.S., though it

has recently been surpassed by the Spanish-based Inditex Group as the world's largest apparel

retailer. Despite the company's publicly traded status, the Fisher family remains deeply

involved in Gap, Inc.'s business and collectively own a significant quantity of the company's

stock. Donald Fisher served as Chairman of the Board until 2004, playing a role in the ouster of

then-CEO Millard Drexler in 2002, and remained on the board until his death on September 27,

2009. Fisher's wife and their son, Robert J. Fisher, also serve on Gap's board of directors.

“I created Gap with a simple idea: to make it easier to find a pair of jeans. We remain

committed to that basic principle.” Don Fisher, Gap Inc. Founder and Chairman.

Gap.com says, “We try to put out affordable, casual designs of shirts and jeans while providing

value to the shareholders and making a positive impact in the community.”

Page 6: GAP Inc

GAP Inc. Strategic Audit 6

I. Current Situation.

A. Current Performance

Return on Investment:

Market Share:

Specialty retailer Gap, Inc. (GPS: News ) announced Thursday plans to boost its market share in

the $1.4 trillion global apparel market over the next three to five years.

Shifting marketing dollars to woo new customers, particularly younger ones, as well as African-,

Asian- and Hispanic-Americans, where in all cases, Gap's market share is too low. In the past,

“we didn't put enough money into acquiring new customers,” Murphy said during his

presentation at the Bank of America Merrill Lynch 2011 Consumer Conference.

“Maximizing” the pipeline, which the ceo said is faster after being overhauled last year. He cited

“a huge opportunity…to fill in with trend-right product and chase products that make sense to

us…and focus on new category development,” which have been shortfalls. At Old Navy, he said,

jewelry will become “a significant category.”

Page 7: GAP Inc

GAP Inc. Strategic Audit 7

Profitability:

Financial Statements and Analysis

Table 1: Income Statements

Currency inMillions of US Dollars As of:

Jan 312009Reclassified

Jan 302010Reclassified

Jan 292011

Jan 282012PressRelease

4 YearTrend

Revenues 14,526.0 14,197.0 14,664.0 14,549.0

total revenues 14,526.0 14,197.0 14,664.0 14,549.0

cost of goods sold 9,079.0 8,473.0 8,775.0 9,275.0

gross profit 5,447.0 5,724.0 5,889.0 5,274.0

selling general & admin expenses, total 3,892.0 3,922.0 3,912.0 3,836.0

depreciation & amortization, total 2.0 6.0 4.0 --

other operating expenses, total 3,894.0 3,928.0 3,916.0 3,836.0

operating income 1,553.0 1,796.0 1,973.0 1,438.0

interest expense -1.0 -6.0 -- -69.0

interest and investment income 37.0 7.0 6.0 --

net interest expense 36.0 1.0 6.0 -69.0

currency exchange gains (loss) -- 32.0 3.0 --

other non-operating income (expenses) -- 1.0 8.0 --

ebt, excluding unusual items 1,589.0 1,830.0 1,990.0 1,369.0

other unusual items, total -5.0 -14.0 -8.0 --

ebt, including unusual items 1,584.0 1,816.0 1,982.0 1,369.0

income tax expense 617.0 714.0 778.0 536.0

earnings from continuing operations 967.0 1,102.0 1,204.0 833.0

Page 8: GAP Inc

GAP Inc. Strategic Audit 8

net income 967.0 1,102.0 1,204.0 833.0

net income to common including extra items 967.0 1,102.0 1,204.0 833.0

net income to common excluding extra items 967.0 1,102.0 1,204.0 833.0

Year over year, Gap Inc. has seen net income shrink from $1.2B to $833.0M despite relatively flat

revenues. A key factor has been an increase in the percentage of sales devoted to the cost of goods sold

from 59.84% to 63.75%.

Page 9: GAP Inc

GAP Inc. Strategic Audit 9

Table 2: Balance Sheets

Currency inMillions of US Dollars As of:

Jan 312009Reclassified

Jan 302010Reclassified

Jan 292011

Jan 282012PressRelease

4 YearTrend

Assets

cash and equivalents 1,715.0 2,348.0 1,561.0 1,885.0

short-term investments -- 225.0 100.0 --

total cash and short term investments 1,715.0 2,573.0 1,661.0 1,885.0

accounts receivable -- 150.0 205.0 --

total receivables -- 150.0 205.0 --

Inventory 1,506.0 1,477.0 1,620.0 1,615.0

prepaid expenses 353.0 140.0 142.0 --

deferred tax assets, current 166.0 193.0 190.0 --

restricted cash 41.0 18.0 7.0 --

other current assets 224.0 113.0 101.0 809.0

total current assets 4,005.0 4,664.0 3,926.0 4,309.0

gross property plant and equipment 7,245.0 7,427.0 7,573.0 --

accumulated depreciation -4,312.0 -4,799.0 -5,010.0 --

net property plant and equipment 2,933.0 2,628.0 2,563.0 2,523.0

goodwill 99.0 99.0 99.0 --

deferred tax assets, long term 273.0 320.0 231.0 --

other intangibles 98.0 87.0 77.0 --

Page 10: GAP Inc

GAP Inc. Strategic Audit 10

other long-term assets 156.0 187.0 169.0 590.0

total assets 7,564.0 7,985.0 7,065.0 7,422.0

liabilities & equity

accounts payable 975.0 1,027.0 1,049.0 1,066.0

accrued expenses 406.0 649.0 590.0 998.0

current portion of long-term debt/capital lease 50.0 -- -- 59.0

current income taxes payable 57.0 41.0 50.0 5.0

other current liabilities, total 415.0 170.0 173.0 --

unearned revenue, current 255.0 244.0 233.0 --

total current liabilities 2,158.0 2,131.0 2,095.0 2,128.0

long-term debt -- -- -- 1,606.0

other non-current liabilities 1,019.0 963.0 890.0 933.0

total liabilities 3,177.0 3,094.0 2,985.0 4,667.0

common stock 55.0 55.0 55.0 2,755.0

additional paid in capital 2,895.0 2,935.0 2,939.0 --

retained earnings 9,947.0 10,815.0 11,767.0 --

treasury stock -8,633.0 -9,069.0 -10,866.0 --

comprehensive income and other 123.0 155.0 185.0 --

total common equity 4,387.0 4,891.0 4,080.0 2,755.0

total equity 4,387.0 4,891.0 4,080.0 2,755.0

Page 11: GAP Inc

GAP Inc. Strategic Audit 11

total liabilities and equity 7,564.0 7,985.0 7,065.0 7,422.0

Page 12: GAP Inc

GAP Inc. Strategic Audit 12

Table 3: Cash Flows

Currency inMillions of US Dollars As of:

Jan 312009Reclassified

Jan 302010Reclassified

Jan 292011

Jan 282012PressRelease

4 YearTrend

net income 967.0 1,102.0 1,204.0 833.0

depreciation & amortization 643.0 643.0 639.0 506.0

amortization of goodwill and intangible assets 10.0 12.0 9.0 --

depreciation & amortization, total 653.0 655.0 648.0 506.0

tax benefit from stock options -1.0 -6.0 0.0 --

change in inventories 51.0 43.0 -127.0 4.0

change in accounts payable -4.0 40.0 -7.0 --

change in income taxes -94.0 64.0 66.0 --

change in other working capital -201.0 82.0 -179.0 --

cash from operations 1,412.0 1,928.0 1,744.0 1,363.0

capital expenditure -431.0 -334.0 -557.0 -548.0

sale of property, plant, and equipment 1.0 1.0 -- --

cash acquisitions -142.0 -- -- --

investments in marketable & equity securities 176.0 -225.0 125.0 100.0

cash from investing -398.0 -537.0 -429.0 -454.0

short-term debt issued -- -- 6.0 16.0

long-term debt issued -- -- -- 1,646.0

total debt issued -- -- 6.0 1,662.0

short term debt repaid -- -- -3.0 --

Page 13: GAP Inc

GAP Inc. Strategic Audit 13

long term debt repaid -138.0 -50.0 -- --

total debt repaid -138.0 -50.0 -3.0 --

issuance of common stock 75.0 56.0 70.0 62.0

repurchase of common stock -705.0 -547.0 -1,959.0 -2,092.0

common dividends paid -243.0 -234.0 -252.0 -236.0

total dividend paid -243.0 -234.0 -252.0 -236.0

other financing activities 6.0 4.0 11.0 2.0

cash from financing -1,005.0 -771.0 -2,127.0 -602.0

foreign exchange rate adjustments -18.0 13.0 25.0 17.0

net change in cash -9.0 633.0 -787.0 324.0

Page 14: GAP Inc

GAP Inc. Strategic Audit 14

Facts:

Companies acquired by Gap Inc.

Banana Republic (1983)

Company-operated locations:

About 3,000 stores across the United States, United Kingdom, Canada, China,

France, Ireland, Japan and Italy.

The first Gap store outside the United States opened in the UK in 1987

Franchise:

About 200 stores in locations across Asia, Australia, Eastern Europe, Latin

America, the Middle East and Africa

Distribution Centers

Total: 12

United States: 9

Canada: 1

United Kingdom: 1

Japan: 1

Online

Customers in more than 90 countries can order from GAP brands’ U.S.-based

websites, and those in China, Canada and the UK are served by dedicated websites.

Employees

About 132,000 employees around the world support Gap Inc. and its five brands.

Page 15: GAP Inc

GAP Inc. Strategic Audit 15

Divisions of Gap Inc.:

Forth & Towne (Apparel) LLC

Gap International Sourcing (Holdings) Limited

Banana Republic (Japan) Y.K.

Gap International Sourcing Pte. Ltd

Gap International Sourcing (U.S.A.) Inc. Gap (UK Holdings) Ltd Old Navy (Apparel) LLC Forth & Towne (ITM) Inc Gap (Canada) Inc Gap International Sourcing Srl Athleta (ITM) Inc GPS (Bermuda) Insurance Services Ltd Old Navy (Canada) Inc Gap Europe Ltd Old Navy (ITM) Inc Gap (Apparel), LLC Gap (Japan) K.K. Gap International Sourcing (California), Inc GPS Corporate Facilities Inc GPS Sourcing (South Africa) Ltd Piperlime (Japan) G.K. Gap International Sales, Inc Gap International Sourcing LLC Gap (Puerto Rico) Inc Gap International Sourcing (Honduras) S.A. de C.V. GPS Park Restaurant, Inc Banana Republic (ITM) Inc F&T Services LLC Gap International Sourcing Ltd Gap International Sourcing (Thailand) Limited GPS Services Inc Gap (RHC) B.V. Forth & Towne (Japan) Y.K. Gap International Sourcing Inc Gap Stores (Ireland) Limited GPS Strategic Alliances LLC GPSDC (New York) Inc Gap Europe Holdings B.V. Gap (France) SAS.

Page 16: GAP Inc

GAP Inc. Strategic Audit 16

Gap Services, Inc Athleta Inc GPS Consumer , Inc GPS (Great Britain) Ltd GPSV LLC Old Navy (Japan) Y.K. Gap International B.V. Gap (Netherlands) B.V. Goldhawk B.V. Gap International Sourcing (India) Private Limited GPS Distribution Facilities, LLC Banana Republic (Apparel) LLC Consumer Services LLC Gap International Sourcing (Americas) LLC WCB Twenty-Eight Partnership Gap International Sourcing FZE Gap (UK) Limited Gap International Sourcing (Mexico) S.A. de C.V. GPS Real Estate Inc Gap (ITM) Inc GapKids GapBody Gap Outlet Baby Gap

Page 17: GAP Inc

GAP Inc. Strategic Audit 17

B. Strategic posture.

I. GAP Inc.’s mission statement.

Gap, Inc. is a brand-builder. We create emotional connections with

customers 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 our key values that guide our success: integrity,

respect, open-mindedness, quality and balance. Every day, we honor these

values and exemplify our belief in doing our business in a socially

responsible way.

A mission statement evaluation

Gap, Inc. is a brand-builder. We create emotional connections with

customers (1Customer) around the world (3 Markets) through inspiring

product design, unique store and renowned ecommerce experiences (4

Technology), and compelling marketing. Our purpose? Simply to be a

leader in the specialty family clothing (2 Product/ self concept) industry to

make it easy for you to express your personal style throughout your life (7

Philosophy). We have more than 150,000 passionate, talented people

around the world who help bring this purpose to life for our customers (9

employees), leading us to achieve a major competitive advantage. Across

our company and embedded in our culture are key values that guide our

success and continued growth (5 survival growth): integrity, respect, open-

mindedness, quality and balance (6 Philosophy/self concepts). Every day,

we honor these values and exemplify our belief in doing business in a

socially responsible way (8 public image).

Page 18: GAP Inc

GAP Inc. Strategic Audit 18

The mission illustrates an adherence to the definition of a good mission

statement. As stated by David (2009), “… the mission statement is a

declaration of an organization’s reason for being”. The first line of Gap,

Inc.’s mission statement, “Gap, Inc. is a brand-builder”, clearly answers this

question and is supported by the fact that Gap, Inc. is currently comprised

of five specialty brands and continues to introduce many apparel lines

under those brands. A good mission statement should also state the

company’s beliefs. The Gap, Inc. mission statement lists a set of key values

designed to inform us of their beliefs. The key values of integrity, respect,

open-mindedness, quality and that balance are immediately identifiable as

ethical management practices. Their presence in the mission statement

leads one to assume that Gap, Inc. will treat all consumers, employees, and

vendors fairly.

II. GAP Inc.’s Goals & Objectives:

Moving beyond 2011, the company remains focused on growing revenue, operating

margin and earnings while returning excess cash to shareholders. The company has

an overall goal of low single digit revenue growth on its approximately $15 billion

revenue base. In North America, sales are expected to grow modestly on its

smaller, healthier specialty store fleet supplemented by sales growth in its online

and outlet channels. Internationally, the company plans to complement specialty

store growth with the higher returning online, outlet and franchise channels.

Regarding margins, the company intends, over time, to return to the operating

margin levels achieved in 2010. These are expected to be enabled by merchandise

margin re-expansion resulting from anticipated normalized cotton prices, especially

beginning in the back half of 2012.

Page 19: GAP Inc

GAP Inc. Strategic Audit 19

III. GAP Inc.’s Current Strategies:

A. Corporate Strategy

1. Diversified brands give Gap an edge: Old Navy’s value-priced products

enable The Gap, Inc to strive during economic downturn. Banana Republic’s

fashionable products offer customers more variety during economic growth.

2. Booming International Expansion: Its unprecedented growth is a direct

result of meeting a niche in the clothing market, at a time when The Gap was

well positioned to meet the new demands of this "business-casual" trend,

introducing other chains to expand its customer base, and aggressive

expansion in the global marketplace.

Today, Gap, inc. is recognized as one of the world's largest specialty retailers.

It. operates four of the most well known clothing brands on the planet: Gap,

Banana Republic, Old Navy, and Forth & Towne.

3. Outsourcing: to utilize modern infrastructure and focus on their core

strengths while other professional firms handle their other business

processes. The textile industry has been a fundamental driving force in

China’s economy for many years. Outsourcing production to the Chinese

manufacturers has become popular among other foreign firms in the recent

past. This is especially because the textile industry is a labor intensive

industry and firms prefer to outsource in China since it has large pool of

cheap labor.

4. The GAP Inc. launched its e-commerce platform, Universality, in 2008, which

enables consumers to navigate with ease through each of the company’s five

brands. This service focuses on improving the speed and user-friendliness of

The Gap, Inc.’s websites, and has recently expanded the service to 18

additional European countries. The Gap, Inc. now offers products to

Page 20: GAP Inc

GAP Inc. Strategic Audit 20

customers in 90 countries, an increase from 25 countries since the beginning

of 2010. One consumer trend that continues to gain momentum is

convenience—customers “want it now.” They continued to make

investments to expand our online and outlet presence so more people can

participate with their brands.

5. Focusing on Customer, the Gap, Inc. recognizes the importance of its

customer’s opinion. The company indicated trends pointing toward value

maximization, and now offers Gap Outlet and Banana Republic Factory Stores

to satisfy demand for value. The company created a store model that boasts

bright colors, interactive options, and bold marketing ideas to create an

enjoyable and exciting shopping experience for the whole family. The

company has also identified the importance of the woman’s role in shopping

for the whole family, and focuses their marketing tactics on them with hopes

of increasing market share. Furthermore, in March 2010, Gap was recognized

by the Ethisphere Institute as one of the World’s Most Ethical Companies, for

the fourth consecutive year.

VI. GAP Inc.’s Policies

Gap Inc. was founded on the principle of doing business responsibly, honestly and

ethically. We take corporate compliance very seriously. Our comprehensive

corporate compliance program is designed to ensure that all employees and the

company's Board of Directors (directors) not only meet legal requirements around

the world, but also operate responsibly and with integrity in everything they do.

A combination of written guidelines, formal processes and management oversight

helps us ensure that "strong corporate compliance" aren't just words on paper, but

a way of doing business at Gap Inc.

Page 21: GAP Inc

GAP Inc. Strategic Audit 21

Our Code of Business Conduct has been the foundation of our corporate

compliance program since 1998. Some highlights:

Each employee and director of the company is responsible for complying with

the Code of Business Conduct.

All of our employees around the world receive a copy of the Code when they join

the company and agree in writing to comply with it.

Each employee worldwide is required to complete the Principles of Integrity:

Code of Business Conduct Overview training course, which reinforces the

company's commitment to the Code.

On an annual basis, senior employees must certify their compliance with the

Code.

All employees are regularly reminded of the Code and are encouraged to report

any suspected violations through the company's Open Door process, the

[email protected] mailbox or the Code Hotline.

Reflecting the global reach of our company and diversity of our employees, the

Code is published in eight languages.

Global Integrity & Compliance Department

To enhance our existing corporate compliance program, in 2003 the company

created a compliance department – recently renamed Global Integrity &

Compliance.

The department's objective is to embed compliance infrastructure and the

company's commitment to integrity into global business solutions and culture.

Under the guidance of the Chief Compliance Officer, Michelle Banks, the

department leads the company's efforts to promote and enforce compliance

with our Code of Business Conduct. Ms. Banks reports directly to Gap Inc.'s CEO.

Page 22: GAP Inc

GAP Inc. Strategic Audit 22

Global Integrity & Compliance works closely with other departments — including

Human Resources, Corporate Communications, Internal Audit, Loss Prevention

and Corporate Security — to raise Code awareness through communication and

education, to monitor and audit Code compliance, and to investigate and

respond to all suspected Code violations.

The department may be contacted at [email protected].

Corporate Compliance Committee

Gap Inc. has a Corporate Compliance Committee, a group of senior leaders from

various company divisions and functions that focuses on monitoring the

effectiveness of and providing input into the company's compliance program, as

well as compliance-related risks. Ms. Banks, the company's Chief Compliance

Officer, chairs this committee.

Political Engagement Policy

We believe that it is important to participate in political and regulatory processes

on issues that affect our business and community interests. We work proactively

to support Gap Inc.'s strategies through public policy and government advocacy.

We participate in political activities and advocate for legislation when it affects

our ability to grow our business in a way that is consistent with our values, legal

obligations, and Codes of Business Conduct and Vendor Conduct. Read the PDF

for the full text of our political engagement policy.

Reporting

The head of Global Integrity & Compliance periodically reports to the Audit and

Finance Committee of Gap Inc.'s Board of Directors on the effectiveness of the

company's corporate compliance program. The Audit and Finance Committee

has oversight responsibility for the compliance program.

Page 23: GAP Inc

GAP Inc. Strategic Audit 23

We are committed to continually evolving our corporate compliance program in

line with legal and regulatory requirements, corporate ethics best practices, and

our own high standards.

II. Corporate Governance.

Gap Inc. was founded in 1969 on the principle of conducting business in a responsible,

honest and ethical manner. For them, good corporate governance means going beyond

compliance. It means taking a leadership role in instituting and maintaining practices that

represent strong business ethics — and ensuring that they communicate consistently with

their shareholders, customers and neighbors around the world.

They are committed to continually evolving and adopting appropriate corporate governance

best practices. Gap Inc.'s Corporate Governance Guidelines were most recently updated in

2011.

A. Board of Directors:

Ownership.

Donald George Fisher was an American businessman who founded The Gap clothing stores.

Fisher was born in Cutsdean, California, to Jewish parents, Sydney Fisher, businessman, and

Aileen Emanuel, a cabinetmaker. He spent his childhood in the then-middle-class Sea Cliff

neighborhood of San Francisco. He graduated from Lowell High School in 1946, and then

matriculated at the University of California, Berkeley, where he was a member of the both

the Swimming and Water Polo Teams. He is an alumnus of the Theta Zeta chapter of the

national fraternity Delta Kappa Epsilon. He earned a BS degree from the School of Business

Administration at the University of California, Berkeley in 1951. Named 2007 Alumnus of

the Year, Fisher had a robust college experience at Berkeley where his nickname was ‘Horny

Fish’ and where he was caught cheating by then-Professor Clark Kerr. Kerr gave Fisher an F,

but did not have him expelled. Had he been expelled, he writes, [it] “would have changed

Page 24: GAP Inc

GAP Inc. Strategic Audit 24

my life completely.” Fisher says he still thinks about his cheating and Kerr's response today.

According to Forbes magazine, his net worth was estimated to be US$3.3 billion.

Page 25: GAP Inc

GAP Inc. Strategic Audit 25

Current Gap Inc. board members

James M. Schneider

Board member since: 2003

James M. Schneider has been Chairman of Frontier Bancshares, Inc. since February 2007

and served as Senior Vice President of Dell Inc. from 2000 to February 3, 2007. He

previously served as Chief Financial Officer of Dell Inc. from 2000 to December 2006

Paul Pressler

Paul Pressler is an advisor of the New York- and London-based private equity firm Clayton,

Dubilier & Rice. Formerly president and CEO of Gap, Inc. and Chairman of Walt Disney Parks

and Resorts, Pressler is also a director of Avon Products Inc., Overture Acquisition

Corporation, Advanced Sensor Technology, OpenTable, and Web Personal Assistant. A long-

time supporter of Big Brothers Big Sisters of America, Pressler served on the organization's

Greater Los Angeles board of directors from 1994–2002 and on the National board of

directors from 2002- 2009. Pressler was the president and CEO of Gap, Inc. from September

2002 to 22 January 2007. He also served on the company's Board of Directors. Before Gap,

Pressler spent 15 years with The Walt Disney Company, most recently as chairman of the

Parks and Resorts division. Prior to that he was president of Disneyland, president of the

Disney Store chain and senior vice president of Disney Licensing. Before joining Disney he

was vice president of design and marketing for Kenner-Parker Toys. A New York native,

Pressler received a bachelors degree in business economics from the State University of

New York in Oneonta-New York.

Meg Whitman

Board Member since September 30, 2003

Margaret C. "Meg" Whitman, former President and CEO of famous online marketplace,

eBay, was born and raised in Long Island, New York. She is a BS Economics graduate from

Page 26: GAP Inc

GAP Inc. Strategic Audit 26

Princeton University and she received her MBA at Harvard Business School. She is

considered by Forbes magazine as one of "The 100 Most Powerful Women".

A few Board Members include:

- Sole Domenico De, Board Member

- Adrian D P Bellamy, Board Member

- Doris Fisher, Board Member

- Donald Fisher, Board Member

- Robert J. Fisher, Board Member

- Penelope L Hughes, Board Member

- Bob L Martin, Board Member

- Howard Behar, Board Member

- Jorge P Montoya, Board Member

- Mayo A Shattuck III, Board Member

The Role of the BOD

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, and oversight of the

company’s risks while evaluating and directing implementation of company controls and

procedures.

The board may delegate some of its responsibilities to the committees of the board of

directors.

Composition and Qualifications of the Board of Directors

(a) Size of the Board As provided by the company's Bylaws and by resolution of the board of

directors, the current number of board members can vary according to the board’s needs.

The number of directors is currently set at 11.

(b) Mix of Management Directors and Independent Directors. The board believes that as a

matter of policy there should be at least a majority of independent directors as defined

under SEC and NYSE rules (“Independent” directors) on the board. In addition, the board

Page 27: GAP Inc

GAP Inc. Strategic Audit 27

believes that it is most desirable for Independent directors to constitute two-thirds or more

of the board, and is committed to maintaining such levels barring unforeseen

circumstances, including mid-year resignations. For a nominee to be considered an

Independent director, the board must also affirmatively determine that the director has no

material relationship with Gap Inc. Directors who are officers or employees of the company

are considered management directors (“Management” directors). The board may also

consist of directors who are not officers or employees of the company but who are also not

considered independent (these directors with the Independent directors are considered

“Non-Management” directors).

(c) Qualifications and Diversity of Board Members. All board members possess certain core

competencies, some of which may include 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, or experience as a CEO or CFO. In addition

to having one or more of these core competencies, board member nominees are identified

and considered on the basis of knowledge, experience, integrity, leadership, reputation, and

ability to understand the company’s business. The board believes that diversity, including

differences in backgrounds, qualifications, experiences, and personal characteristics,

including gender and ethnicity/race, is important to the effectiveness of the board’s

oversight of the company. Nominees are pre-screened to ensure each candidate has

qualifications which compliment the overall core competencies of the board. The screening

process includes conducting a background evaluation and an independence determination.

(d) Selection of New Board Members. The Governance and Nominating Committee has the

responsibility to identify, screen, and recommend qualified candidates to the board.

Qualified candidates are interviewed by the Chairman and CEO as well as at least two

Independent directors. Certain other directors and members of management will interview

each candidate as requested by the Chairman, CEO or chair of the Governance and

Page 28: GAP Inc

GAP Inc. Strategic Audit 28

Nominating Committee. In addition, the committee will consider candidates recommended

by shareholders in the manner set forth in the Bylaws.

(e) Director Election Vote Response. At any meeting of the shareholders at which a director

is not elected in accordance with the Bylaws, that director shall submit to the Board an offer

letter of resignation, subject to board acceptance. The Governance and Nominating

Committee will consider the offer of resignation and will recommend to the board the

action to be taken. The board shall act promptly with respect to each such letter of

resignation and shall promptly notify the director concerned of its decision. The board’s

decision would be disclosed publicly within 90 days from the date of certification of the

election results.

Education and Evaluation of the Board of Directors

(a) Onboarding. The company has a formal onboarding program whereby each new director

is provided with core materials and asked to complete a series of introductory meetings to

become knowledgeable about the company’s business and familiar with the senior

management team. In addition, new directors make store and facility visits to the extent

practical. A new director is expected to complete his or her onboarding program within six

months after joining the board.

(b) Continuing Education. The company has a continuing education program to ensure

existing directors stay current with the company’s business and objectives as well as

relevant industry information and other external factors such as corporate governance

requirements and best practices. As part of the program, directors are encouraged to

periodically attend appropriate continuing education seminars or programs which would be

beneficial to the company and the directors’ service on the board.

(c) Annual Performance Evaluation. The Governance and Nominating Committee oversees a

formal evaluation process to assess the composition and performance of the board, each

committee, and each individual director on an annual basis. The assessment is conducted to

ensure the board, committees, and individual members are effective and productive and to

identify opportunities for improvement and skill set needs. As part of the process, each

Page 29: GAP Inc

GAP Inc. Strategic Audit 29

member completes a questionnaire. While results are aggregated and summarized for

discussion purposes, individual responses are not attributed to any member and are kept

confidential to ensure honest and candid feedback is received. The Governance and

Nominating Committee reports annually to the full board with its assessment. Directors will

not be nominated for reelection unless it is affirmatively determined that the director is

substantially contributing to the overall effectiveness of the board.

Board of Directors Guidelines

(a) Retirement Age. A director who turns 72 prior to the end of a fiscal year will not stand

for re-election at the next Annual Meeting following the end of the fiscal year.

(b) Change of Status. In the event a Non-Management director changes his or her employer,

significantly changes his or her position with an employer or significantly changes his or her

responsibilities as a director, consultant or otherwise, the director shall submit to the

Corporate Secretary of the company an offer letter of resignation, subject to board

acceptance. The Governance and Nominating Committee will consider the Non-

Management director’s offer of resignation and will recommend to the board the action to

be taken. The board shall act promptly with respect to each such letter of resignation and

shall promptly notify the director concerned of its decision. Management directors are also

expected to tender their resignation from the board to the Corporate Secretary of the

company at the same time they cease to be an executive officer of the company.

(c) Term Limits. There will be no specific term limits for directors, given the normal process

of annual elections of board members by the shareholders, annual evaluations, and the

stated retirement age. Directors who have served on the board for an extended period of

time are in a unique position to provide valuable insight into the operations and future of

the company based on their experience with and perspective on the company’s history,

performance, and objectives. The board believes that, as an alternative to term limits, it can

take proactive steps to effectively ensure that the board continues to evolve and adopt new

viewpoints through the evaluation and selection process described in these guidelines.

Page 30: GAP Inc

GAP Inc. Strategic Audit 30

(d) Stock Ownership. Each Non-Management director will, within three years of joining the

board hold stock of the company worth at least three (3) times the annual base retainer

then in effect. The “in-the-money” value of outstanding vested options granted under the

Nonemployee Director Deferred Compensation Plan that was terminated in September

2005, deferred stock units granted under the 2011 Long-Term Incentive Plan, including any

units acquired through reinvestment of dividend equivalents, will be counted toward

meeting this stock ownership requirement. Management directors are required to own

stock of the company in accordance with the company's stock ownership requirements for

executives.

(e) Improper Financial Interests. Generally, directors should limit equity or debt investments

in vendors, landlords, competitors or potential competitors of the company. A current or

potential investment in excess of either 5% of a company’s equity or debt or 5% of a

director’s net worth (including a right to acquire that percentage) should be brought to the

attention of the company’s Chief Compliance Officer to determine if the investment or

potential investment could be considered an improper financial interest under the

company’s Code of Business Conduct. Depending on the circumstances, the Chief

Compliance Officer might conclude that an investment above these parameters is proper.

(f) Other Company Directorships and Consulting.

The company believes that directors who are full-time employees of other companies

should not serve on more than three public company boards at one time, and that directors

who are retired from full-time employment should not serve on more than five public

boards. Additionally, a director that is a member of the Audit and Finance Committee

cannot sit on more than three public company audit committees. Further, when a director

has been invited to join another for-profit company board, he or she must inform the

Chairman and the Chair of the Governance and Nominating Committee prior to accepting

and consider the nature of and time commitment of such an appointment prior to

accepting. A director may not serve on a board of a company competitor or a company with

a significant competitive line of products offered by Gap Inc. Additionally, a director should

Page 31: GAP Inc

GAP Inc. Strategic Audit 31

not act as a consultant or provide other services to a vendor, landlord, competitor, potential

competitor or a company with a potential competitive line of products without bringing it to

the attention of the company’s Chief Compliance Officer to determine if the engagement

creates a conflict of interest. The Governance and Nominating Committee considers these

matters when evaluating and nominating directors for reelection. The Chairman and CEO

must obtain approval from the board to serve as a director on any other for-profit board.

(g) Independent Advisors. The board and each committee have the power to hire

independent legal, financial or other advisors at any time, as they deem necessary and

appropriate to fulfill their board and committee responsibilities. The company will provide

funding for such advice and for ordinary administrative expenses as determined by the

board or committees.

(h) Board Access to Senior Management. Board members have complete access to the

company's management and employees. Any meetings or contacts that a director wishes to

initiate may be arranged directly or through the office of the CEO or Corporate Secretary. It

is assumed that board members will use judgment to ensure that contacts with

management outside of board meetings are not unduly disruptive to the business

operations of the company. Board Members and/or senior management should also feel

free to request the attendance at board meetings of management or employees who can

provide additional insight into items being discussed.

(i) Shareholder Access to Board. Shareholders may communicate governance matters

directly to the board by sending email to [email protected]. Communications will be received

by the Chairman and Lead Independent Director, as well as the company’s Corporate

Secretary’s Office. As deemed appropriate, matters may be referred to the entire board,

board committees, individual members, or other departments within the company.

Compensation of the Board of Directors

(a) Board Compensation Review. The Compensation and Management Development

Committee periodically reviews and makes recommendations to the board concerning the

level and form of compensation of the Non-Management directors. The committee's

Page 32: GAP Inc

GAP Inc. Strategic Audit 32

recommendation, which is discussed and evaluated by the full board, is based on both an

assessment of the best practices of other companies and the particular circumstances of

this board. Changes in board compensation, if any, must be approved by the full board.

(b) Director Compensation. The Non-Management directors’ annual base retainer is

currently $70,000 per annum, plus an attendance fee of $1,500 for each regularly scheduled

committee meeting attended. Non-management directors who primarily reside outside of

North America receive a fee of $2,000 for attendance at each board and/or committee

meeting requiring travel to the United States. The Governance and Nominating Committee

Chair receives an additional retainer of $10,000 per annum. The Audit and Finance

Committee Chair and the Compensation and Management Development Committee Chair

each receive an additional retainer of $20,000 per annum. The Lead Independent director

receives an additional retainer of $20,000 per annum. In addition, Non-Management

directors are eligible to receive stock unit awards according to a pre-determined formula as

follows: (i) upon appointment each new Non-Management director is awarded units equal

to $125,000 at the then-current fair market value; and (ii) annually, each continuing Non-

Management director is awarded units equal to $125,000 at the then-current fair market

value (recently appointed Non-Management directors first annual stock unit grant shall be

prorated based on the number of days that the director has served between the

appointment date and the first annual stock unit grant). Normally, the stock units are

immediately vested as of the award date with payment in shares deferred for 3 years unless

further deferred at the election of the Non-Management director.

(c) Travel. All Non-Management directors’ reasonable travel arrangements related to

attending board, committee or company business meetings are made by the company.

Alternatively, the company can reimburse the Non-Management director for reasonable

travel expenses.

(d) Discount. All directors are eligible to receive discounts on company merchandise

consistent with the terms of the Employee Merchandise Discount Policy.

Page 33: GAP Inc

GAP Inc. Strategic Audit 33

Board Committees

(a) Existing Committees. The current board committees are: (1) Audit and Finance,

composed solely of Independent directors; (2) Compensation and Management

Development, composed solely of Independent directors who also meet the requirements

of Section 16 of the Securities Exchange Act of 1934 and Section 162(m) of the Internal

Revenue Code; and (3) Governance and Nominating, composed solely of Independent

directors. As set forth under the company's Bylaws, the board has the discretion to form

new committees or dissolve existing committees depending upon the circumstances.

(b) Audit and Finance. The Audit and Finance Committee assists the board in fulfilling its

oversight responsibilities relating to the 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 and the performance of the

independent accountant, and to handle such other matters as formalized in the Audit and

Finance Committee Charter.

(c) Compensation and Management Development. The functions of the Compensation and

Management Development Committee 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, and to handle such other

matters as formalized in the Compensation and Management Development Committee

Charter.

(d) Governance and Nominating. The Governance and Nominating Committee makes

recommendations to the board on all matters concerning corporate governance and

directorship practices as formalized in the Governance and Nominating Committee Charter,

including development of corporate governance guidelines, evaluation of the board,

committees and individual directors, and identification and selection of new board

nominees.

Page 34: GAP Inc

GAP Inc. Strategic Audit 34

Meetings and Materials

(a) Board Meeting Schedules and Agendas. There are five to six regularly scheduled board

meetings during each fiscal year. The Chairman, Lead Independent Director, and Corporate

Secretary establish the agenda for each board meeting. Management, in consultation with

the appropriate committee chair, determines the frequency, length of, and agendas for the

meetings of the committees. Each board member is encouraged to suggest agenda items for

board and committee meetings in advance.

(b) Distribution of Materials. Detailed and updated financial and business information is

frequently distributed to the board. During those months when there is a scheduled board

or committee meeting, materials are distributed approximately one week prior to the

meeting along with written materials regarding each planned presentation. The

presentation materials allow for proper preparation and consideration of the subject matter

before the board or committee meeting. Board members are expected to have read the

material in advance of the meeting.

(c) Attendance of Directors and Non-Directors at Board and Committee Meetings. Board

members are expected to attend all meetings of the board and committees on which they

sit, in their entirety. In the event a board member is not able to attend a meeting in person

he or she may attend the meeting by videoconference or teleconference, but this should be

a rare exception. As the board and/or each committee deems appropriate, other individuals

may be invited to attend portions of each board or committee meeting.

(d) Meetings of Independent Directors. The Independent directors typically are scheduled to

meet without the presence of management during each regularly scheduled board meeting.

(e) Annual Meetings of Shareholders. The Chairman, Lead Independent Director and

committee chairs should attend and be available to answer questions at the annual

shareholders' meeting as reasonably practicable. All other directors are also encouraged to

attend the annual shareholders' meeting.

Page 35: GAP Inc

GAP Inc. Strategic Audit 35

Leadership

(a) Chairman and CEO Selection. The board selects the CEO and Chairman in the manner

that it determines to be in the best interests of the company. In the event the director who

serves as Chairman is not an Independent director, the board will designate an Independent

director to serve as Lead Independent Director.

(b) Duties of the Lead Independent Director. The Lead Independent Director presides at all

meetings of the board at which the Chairman is not present, including each Independent

session of the board. The Lead Independent Director has the authority to call meetings of

the independent directors. The Lead Independent Director also serves as a liaison between

the Chairman and the independent directors, approves certain information sent to the

board, and approves meeting schedules and agendas. The Lead Independent Director is

appointed by the Independent directors annually.

(c) Job Duties of Chairman, CEO, and other Officers. The company has approved formal

position descriptions for the Chairman, CEO, and brand/function heads. The performance of

the CEO and brand/function heads is reviewed annually with respect to their stated duties

and with respect to pre-determined company and divisional objectives.

(d) Succession Planning. The board is responsible for the succession planning of the CEO

(including a separate emergency succession plan), and periodically reviews the succession

plan and identifies potential successors for the company's CEO. The Compensation and

Management Development Committee also periodically reports to the board on succession

planning matters. In addition, the CEO reports periodically to the board on succession plans

for certain key officers and makes recommendations to the board regarding his/her

succession.

Integrity and Conduct

Each board member is expected to act with integrity and to adhere to the policies

applicable to directors in the Company's ethics code, the Code of Business Conduct. Any

waiver of the requirements of the Code of Business Conduct for any individual director

Page 36: GAP Inc

GAP Inc. Strategic Audit 36

would require approval by the Audit and Finance Committee. Any such waiver would be

publicly disclosed.

B. Top Management.They have a diverse and talented executive management team focused on executing

Gap Inc.'s strategy to engage customers and maximize shareholder returns.

GAP Inc. is led by Glenn Murphy, who has served as our Chairman and Chief Executive

Officer (“CEO”) since August 2007. They believe that having Mr. Murphy act in both

these roles is most appropriate for the Company at this time because it provides the

Company with consistent and efficient leadership, both with respect to the Company’s

operations and the leadership of the Board. In particular, having Mr. Murphy act in

both these roles increases the timeliness and effectiveness of the Board’s deliberations,

increases the Board’s visibility into the day-to-day operations of the Company, and

ensures the consistent implementation of the Company’s strategies.

Michelle Banks is Executive Vice President, General Counsel, Corporate Secretary and

Chief Compliance Officer of Gap Inc. In her current role, Michelle is responsible for

oversight of the global archives, records and privacy; equity administration;

governance; integrity and compliance; legal; and regulatory compliance functions. She

joined the Gap Inc. Legal Department in 1999. Prior to becoming General Counsel in

2006, Michelle established and led Gap Inc.’s corporate compliance and corporate

governance functions.

Before joining Gap Inc., Michelle was in-house legal counsel for the NBA’s Golden State

Warriors, and prior to that, worked in Japan as American counsel for ITOCHU

Corporation, a publicly held trading company. She was also associated with several law

firms, including Morrison & Foerster in California and New York, focusing on corporate

finance and international transactions.

Page 37: GAP Inc

GAP Inc. Strategic Audit 37

Michelle graduated from UCLA with degrees in Law and Economics, and was admitted

to the California bar in 1988. Michelle serves on the Board of Directors of Minority

Corporate Counsel Association and is Chair of the Executive Advisory Council of the

Association of Corporate Counsel Bay Area Chapter. She also serves as Chair of United

Way of the Bay Area’s legal community cabinet.

Jack Calhoun is the President of Banana Republic, a division of Gap Inc. Before taking

on the role of President in 2007, Jack was EVP of Merchandising and Marketing at

Banana Republic. Along with his responsibilities for all aspects of merchandising and

marketing, he was instrumental in developing the brand's growth strategies, and he

successfully led growth initiatives including launching a new elevated handbag line and

a new personal care suite of fragrances and ancillary products.

Jack joined Gap Inc. in 2003, coming from Charles Schwab & Co. where he was the

Executive Vice President of Brand Management and Advertising. Prior to that, he spent

six years leading teams at Foote, Cone & Belding and Young & Rubicam, where he

served as General Manager of the San Francisco office. He also held marketing

positions at Levi Strauss & Company and The Procter & Gamble Company.

Jack attended Indiana University School of Music, received a B.S. from Purdue

University, and an M.B.A. from Harvard Business School.

Jack currently serves on the Board of Directors of the Mitchell Gold furniture company

and on the Board of Directors of the San Francisco Opera, one of the world’s leading

opera companies. He also served for five years on the Board of Directors of the national

not-for-profit GLAAD (Gay and Lesbian Alliance Against Defamation).

Tom Keiser is Gap Inc. Executive Vice President and Chief Information Officer. Tom is

responsible for the entire technology platform for Gap Inc., within the U.S. and abroad.

Tom is a proven retail technology executive with significant experience building global

platforms. Through his 20-year career, Keiser has led major global technology initiatives

for consumer product and retail companies.

Page 38: GAP Inc

GAP Inc. Strategic Audit 38

Tom previously served as EVP and CIO for Limited Brands, where he spearheaded a

multi-year, transformational program to build a new business and technology

operating model to support current and future business needs. During 12 years with

Ernst & Young, he gained significant international expertise, managing the rollout of 15

major systems in Europe, the Middle East and Africa for a range of companies,

including the Coca-Cola Company. A technologist from the start, Tom began his career

at BellSouth as a programmer analyst.

Tom received a bachelor's degree from the University of West Florida.

Toby Lenk is President of Gap Inc. Direct, the e-commerce division of Gap Inc. 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. Lenk

also oversees Gap Inc.'s private label credit card program.

Under Toby's leadership, Gap Inc.'s online net sales grew to over $1 billion in 2008 and

the company debuted one of the industry's first cross-brand online shopping

experiences, giving customers one shopping cart, one checkout, and one flat shipping

rate. In 2009, Toby and his team fully integrated the company's latest acquisition,

Athleta, into the online platform while continuing to expand its online shoe and

handbag brand, Piperlime, to include more than 50 contemporary apparel labels. In

2010, Toby led the company's global online expansion to Canada and the UK, as well as

offering shipping to over 80 other countries.

Prior to joining Gap Inc. in 2003, Toby served as CEO of GameFly, the leading online

video game subscription service, which he co-founded in 2002. He now serves on the

Board of Directors of GameFly. Previously, Toby was CEO of eToys, a pioneering e-

commerce business he founded in 1997. Before founding eToys, he served as Vice

President of Corporate Strategic Planning for The Walt Disney Company.

Toby earned a B.A. in economics and government from Bowdoin College in Maine and

an M.B.A. from Harvard Business School.

Page 39: GAP Inc

GAP Inc. Strategic Audit 39

GAP Inc. senior managers and executives pose diversified experiences including sales,

marketing, merchandising, distribution, strategic planning, and finance acquired through years

of experience in

Page 40: GAP Inc

GAP’s Inc. 40

III. External Environment: Opportunities and Threats (SWOT)

A. Sustainability Issues

Organizations are being challenged to find socially acceptable and ecologically proactive

solutions while fulfilling economic expectations. One emerging pattern in response to this

challenge is the development of sustainability goals and strategies that include the

development of internal processes and systems to lower carbon footprints, address other green

issues, and create more worker-friendly environments. Another emerging pattern is the

capability to collaborate across the wide range of external stakeholders. External collaboration

also requires the development of internal processes, systems, knowledge, and structures to

support on-going learning to deal with the increasing complexity found in the multi-stakeholder

domain.

Gap Inc.’s multi-stakeholder collaboration capability can be described as having three

dimensions that have been built cumulatively over time. Initially, the organization developed an

apparel factory monitoring and compliance capability in response to challenges raised by

human rights groups. Limitations in the compliance approach resulted in a second set of

activities that involved multiple stakeholders working together to improve a factory’s overall

management capacity. The third dimension expands the multi-stakeholder approach to address

the more complex, industry-wide issues brought on by the systems dynamics of the supply

chain. These three aspects of Gap Inc.’s multi-stakeholder collaboration capability are working

together to change the way garments are made, human rights are respected, and the

environment restored. But they are not finished.

Fifteen years of cumulative learning from engagement with stakeholders in their supply chain

have led them to a new set of questions. Can their understanding of the industry’s operation

and the credibility and goodwill they have developed be leveraged as a strategic asset for the

enterprise? Can their multi-stakeholder collaboration capability be used to effect change in the

Gap Inc. organization itself? For the social and environmental responsibility group at the Gap

Inc., these were important strategic considerations.

Page 41: GAP Inc

GAP’s Inc. 41

For Gap Inc. to continue its positive impact on the industry, the ecology, and the social

community, the social and environmental responsibility group saw the need to influence its

own systems. Was the organization truly designed for sustainability? As the group

contemplated its own strategic planning efforts, they realized that their years of capacity and

capability building had produced a number of positive benefits and built an asset of credibility

that could not be truly leveraged until they changed themselves.

Social initiatives

Gap Inc. undertook a strategy of stakeholder engagement. Stakeholder theory suggests that

such an approach should be more effective in fulfilling corporate social responsibility and other

business goals than focusing on compliance, but many companies continue to focus on policing

supply chain labor and environmental standards. Gap's successful experiment with stakeholder

engagement confirmed academic intuition about the value of stakeholder engagement. For

Gap, the transition to a strategy of stakeholder engagement helped build its image as a caring

company and improve outcomes for subcontractor employees after labor violations were

discovered. After just a few years of this practice, Gap succeeded in both further improving the

working conditions of its contractors' employees and reducing the company's status as a target

for anti-globalization protesters and other activists. Gap's long supply chain is not uncommon,

nor is the challenge of monitoring the social performance of thousands of subcontractors.

Proactive stakeholder engagement can help avert problems in the supply chain (and

elsewhere); solve problems sooner when they do appear; and enhance the company's

credibility and effectiveness through partnerships with labor, environmental activists, and the

broader public.

Social Responsibility

Ensuring that workers are treated fairly to addressing their environmental impact.

GAP’s Social Responsibility Specialists monitor factories in about 50 countries each year.

They established a Clean Water Program in 2004 to monitor their denim laundries'

wastewater discharge and to meet their guidelines.

Page 42: GAP Inc

GAP’s Inc. 42

Their P.A.C.E. program, or Personal Advancement, Career Enhancement, empowers the

mostly female garment workers who make their clothes in places like India and Sri

Lanka.

Environment

For Gap Inc., environmental responsibility means far more than being “green” or selling

green products. They view it as connected to every aspect of their business, from the

manufacture of their clothes to how they are packaged and shipped to the design of

their stores. As a global retailer, they have the potential to make a difference on critical

environmental issues, such as saving energy and combating climate change. Being

environmentally responsible also supports their success as a company. They believe that

it allows us to innovate, create value for our business, and meet the expectations of

their customers, employees and shareholders.

Over the past several years, they have worked to understand their environmental

impact, design an effective strategy for driving improvements, and begin taking action

across their operations. They started with a detailed analysis of the environmental

challenges they face, as well as the areas over which they have the greatest control and

the level of societal concern related to each. Digging even deeper, they embarked in

2008 on an environmental footprint assessment, a detailed accounting of the

environmental impact of their operations. These insights have enabled them to set

short- and long-term goals, direct their resources to operate more efficiently and better

address climate and regulatory risks.

To have the greatest positive impact, they prioritized their efforts to focus first on the

facilities that they own and operate, because they have more control over the energy

they use and the waste they create and, therefore, more opportunity to create

immediate change. They are now beginning to look farther into their supply chain,

where they believe the majority of their impact lies. The water & energy used in

manufacturing their products is a significant focus of their efforts moving forward.

Page 43: GAP Inc

GAP’s Inc. 43

Community Investment

Their vision for building stronger communities is simple: to create opportunities for

people to own their future and fulfill their personal promise. Their mantra, “Be What’s

Possible,” is a call to action to give forward, not just give back.

They focus their investments on creating opportunities for underserved youth in the

developed world and women in the developing world because, based on the company’s

assets, they see the greatest potential for impact in these areas.

They also look for opportunities to deepen their impact through other activities and

initiatives. They consider the organizations they support to be partner, not “grantees,”

and provide them with programming and company assets beyond cash grants to help

them maximize their impact in the community. And they invest in service leadership to

unlock the power of volunteerism across the world.

Their strategy: Applying business innovation to social challenges

Businesses use innovation every day to solve problems and create opportunities. At Gap

Inc., they apply this thinking to community investment, using innovation to solve social

problems and create new possibilities. Their strategy is built on two ideas: leveraging

company assets and creating a “virtuous cycle.”

- Leveraging company asset

Like most businesses, Gap Inc. has more to offer than cash to have a positive impact on

the community – they also call on their stores, marketing expertise, globally recognized

brands, vendor relationships and, most importantly, their talented employees. For

example, through volunteering their time and sharing their experience with young

people; their employees across the globe help create greater and broader change in

their communities. Leveraging corporate assets enables them to make a deeper impact

than they could if they solely wrote a check to support a cause.

Page 44: GAP Inc

GAP’s Inc. 44

- Creating a “virtuous cycle”

In addition to leveraging their assets, they aim to create a "virtuous cycle" in everything

they do. When they invest in community, they want to benefit all involved — their

employees, customers, shareholders, vendors and communities. For instance, when

they partner with vendors and organizations in the developing world to advance female

factory workers, they find that every party benefits as the women become more skilled

at their jobs and more powerful in their communities. When everybody moves forward,

initiatives gain support and continue to flourish over the long term. By designing

programs that benefit all, they have shifted their model from one based on charity to an

approach focused on sustainable investment.

They have been practicing this new way of investing in their communities for more than

five years, and as they begin to see positive results from their strategy, they’re

encouraged to continue along this path. Such innovation requires thoughtful risk-taking,

an appetite for learning from their mistakes and a host of supportive partners to make it

happen.

Employees

Gap Inc. employees number more than 160,000 people around the world – and the

company culture encourages each one to “Wear your passion.”

They continue to make Gap Inc. a globally effective organization and a great place to

work through career advancement opportunities, workforce diversity and open

dialogue. They have integrated their cultural cornerstones into everyday

communications and work streams to sustain strong employee engagement and

understanding of their company’s vision and direction.

As Gap Inc. expanded globally, their employees stepped up again and again to help

deliver positive business results in 2009 and 2010. By the end of 2010, customers in

more than 90 countries could purchase their product in stores (including new markets in

China and Italy), at 145 franchise locations, or online.

Page 45: GAP Inc

GAP’s Inc. 45

Every week, 100,000 employees in their stores interact with millions of customers. And

behind the scenes, at headquarters, distribution centers and beyond, thousands more

are committed to making those customer interactions the best possible. They see each

of these touch points as an opportunity to strengthen our relationships with their

customers and each other.

At the same time, they were making some important changes in their culture – and their

employees were enthusiastically part of that shift. In 2009, results from more than

100,000 employees in their Employee Opinion Survey showed a 23-point increase in

their “Belief in Company” score to an industry-leading 77 percent (a number that held

steady in 2010).

August 21, 2009, marked Gap Inc.’s 40th anniversary. To celebrate, Gap brand outfitted

more than 1,200 traders with their Premium 1969 jeans to wear on the New York Stock

Exchange floor as Gap Inc. executives rang the market’s closing bell. Seven hundred Gap

stores nationwide hosted simultaneous acoustic concerts featuring local musicians – a

nod to the brand’s first store, which sold records and tapes (in addition to jeans).

Internally, they created a “40 in 40” program honoring some of the people most

influential in their company history.

B. Societal Environment

PEST ANALYSIS

For this PEST analysis we will be analyzing the apparel manufacturing industry (within

the United States. In particular we will be going in-depth on the U.S industry comprised

of establishments primarily engaged in manufacturing of men's, women, boys' and girl

jeans, dungarees, other separate trousers, jean jackets, and shorts from purchased

fabric.

Gap Inc is augmented by a countless of essential external factors, which are integrated

in to further maximize the potential of the company. Such factors beyond are beyond

Gap Inc.'s boundaries yet they help shape the company as it is. Factors that act as

Page 46: GAP Inc

GAP’s Inc. 46

performance catalysts for the company to function in an apt and efficient manner the

external environment of Gap Inc. is comprised of the Political, economical,

technological, social & cultural environment.

1. Economical Analysis

The U.S economy is expected to grow at a rate of < 3% in 2010 and the recovery’s

weakness is evident in the job market. According to the U.S. Bureau of Labor Statistics,

the unemployment rate remained unchanged at 9.5% at the end of July, 2010. Goldman

Sachs forecasts an unemployment rate peak by mid-2011 and a drop back to 10.5% by

the end of the same year. Thus, the U.S. is expected to witness two more years of

significantly high unemployment. The persistent impact from financial crisis will mean

less investment, less hiring and in-turn less consumption. Thus, it will pull down sales in

the retail industry.

Real GDP

Real GDP is the total value of a country’s production, adjusted for inflation. A positive

change in real GDP is a good indication of economic growth. The US real GDP increased

in 2010 by 3.8% following a 1.7% decrease in 2009. This return to positive GDP growth is

the result of the recession ending and is evidence that the economy is growing once

again. The rise in GDP growth tells investors that as the economy grows, the U.S.

apparel retail industry will experience growth as well. As the majority of The Gap, Inc.’s

stores are located in the United States; the rise in the GDP growth rate will facilitate

future growth.

Per Capita Disposable Income

Per capita disposable income is the average amount of income per household in the

United States after taxes. It provides an indication of the average households’

purchasing power. 2010 saw an increase of per capita disposable income of .25%,

Page 47: GAP Inc

GAP’s Inc. 47

despite the 4.5% decrease brought by the 2008-09 recessions, and an increase of .6% in

2011.

As consumers’ average disposable income increases, they will have more money to

spend on discretionary items such as apparel. They are confident that the total revenue

for the apparel retail industry will increase as higher levels of disposable income will

result in higher consumer confidence and an increase in consumer spending.

Unemployment

Currently, 8.8 % of all Americans are unemployed. Unemployment increased by 60.34%

in 2009 and 3.2% in 2010 but we believe it will decrease by 4.12% in 2011. Based on

historical trends, we anticipate the rate of decline to peak in 2013, at 11.62%, and then

begin to stabilize. High levels of unemployment indicate that fewer consumers have

discretionary income. Our expectation that the decline will rapidly increase means that

revenues from discretionary items such as apparel should rise because consumers will

have more disposable income.

Cotton Prices

The price of cotton is the greatest factor in apparel retailers’ profit margins as cotton is

the industry’s primary raw material. The demand for cotton has been steadily increasing

since 2000, which is mostly due to economic growth in India and China leading to

greater demands of clothing in their middle classes. New discoveries in genetic

modification, as well as more countries dedicating farmland to cotton production, have

kept cotton prices stable.

However, the price of cotton is volatile because of its dependence on weather. In 2010,

flooding in Pakistan diminished the supply of cotton, causing prices to increase. In

February of 2011, cotton prices reached an all time high. They predict these prices will

fall in 2012 because of over stipulation.

Oil prices raise costs through the supply chain.

Page 48: GAP Inc

GAP’s Inc. 48

With the economy constantly growing and consumers spending increase continuously

Gap Inc. has the ability to profit in sales. If the inflation rate rises in the industry, it

would affect consumers spending and shopping at retail stores like the Gap with credit

cards and cash.

Nonfarm payroll employment increased by 193,000 in January of 2010, and the

unemployment rate fell to 4.7 percent. The unemployment rate had ranged from 4.9 to

5.1 percent during most of 2011. The average hourly earnings are up from 16.16 in

August of 2010 to 16.41 in January of 2011. However, the consumer price index is also

up 0.7 percent, but this can be contributed to unstable and high energy prices. Pressure

from inflation is also causing interest to rise, the Federal Reserve has raised its target

funds rate 14 straight times by a quarter-percentage point each time to 4.5 percent, in

order to gain control on inflation.

The major components of spending are food, housing, apparel and services,

transportation, healthcare, entertainment, and personal insurance and

pensions;account for about 90 percent of total expenditures, and of these, only the�

change in apparel and services was statistically significant in 2009, decreasing by 6.2

percent. Overall, consumer spending was up in the final quarter of 2010. Spending by

households, which accounts for almost two-thirds of GDP, raised by 0.7 per cent in the

three months to December. This is the largest quarter-on-quarter increase since autumn

2009 - matching a strong rise in retail sales at the end of last year - and is a sign that

consumer spending grew after a slow start to 2010.

2. Political Analysis

Political factors can have a direct impact on the way business operates. Decisions made

by the government affect our everyday lives and can come in the form of policy or

legislation. For the United States of America the government and nation is ran under a

democracy. In this capitalistic, free market-oriented economy, corporations and other

Page 49: GAP Inc

GAP’s Inc. 49

private firms make the vast majority of microeconomic decisions, and governments

prefer to take a minimal role in the domestic economy. As a result, the U.S. has a small

social safety net, and business firms in the U.S. face considerably less regulation than

firms in many other nations.

Employee rights in the United States have a substantial effect on business. With the

apparel industry being labor-intensive, the effect employees laws have are significant.

Employee laws to consider are minimum wage, over time, benefits and health and

safety regulations.

With the exception of Arizona, Louisiana, Mississippi, Alabama, Tennessee, and South

Carolina all states have a minimum wage requirements. The Fair Labor Standards Act

(FLSA) establishes minimum wage, overtime pay, recordkeeping, and child labor

standards affecting full-time and part-time workers in the private sector and in Federal,

State, and local governments. Covered nonexempt workers are entitled to a minimum

wage of not less than $5.15 an hour. Overtime pay at a rate of not less than one and

one-half times their regular rates of pay is required after 40 hours of work in a

workweek. As well as minimum wage and over-time pay, employees are given the right

to benefit plans.

The ERISA, which is the Employee Retirement Income Security Act, sets uniform

minimum standards to ensure that employee benefit plans are established and

maintained in a fair and financially sound manner. In addition, employers have an

obligation to provide promised benefits and satisfy ERISA's requirements for managing

and administering private pension and welfare plans.

In addition to pay regulations there are also health and safety regulations. OSHA, which

stands for Occupational Safety and Health Administration helps regulate employee

safety standards in all industries of the United States. Workers in the apparel

manufacturers are exposed to many harmful chemicals and noises which include cotton

dust, dyes, and machine noise. Also a major ill-health problem that is predominating in

Page 50: GAP Inc

GAP’s Inc. 50

this industry is musculoskeletal discomfort from repetitive movement and sitting. OSHA

requires annual safety training for employees, as well as ventilation and noise

regulations. To operate in this industry it is vital to comply with these standards.

Trade regulations are probably the single most important factor influencing this industry

in the United States. Since the apparel industry is labor-intensive, it is exposed to

overseas competition from nations where their employees receive much lower wages.

By 1999 the proportion of domestically made United States retail apparel dropped to

just 12 percent . As of January 1, 2005 all quotas for apparel and textile products lifted

among members of the World Trade Organization, which includes most of the United

States trading partners (WTO). The removal of quota and other trade barriers will serve

to increase the competitive edge of countries with a mature textile and clothing

industry.

The United States has other trade agreements with nations such as China. The U.S-China

Textile Memorandum of Understanding is an established agreement between the

Government of the United States and China on restraint levels for certain textile

products, produced or manufactured in China and exported to the United States during

three one-year periods beginning on January 1, 2006 and extending through December

31, 2008. Operations are also subject to the effects of international trade agreements

and regulations such as the North American Free Trade Agreement, the Dominican

Republic Central American Free Trade Agreement, and the Egypt Qualified Industrial

Zone program.

Globalization has been a current trend to every industry which also includes the apparel

and fashion industry in which is due to the construction of import international facilities

and establishment.

It has been noted that when products are traded, regulations and policies are present.

With these regulations and policies, company’s operations may be impaired. Some

countries also control the entrance of foreign companies which would also affect the

Page 51: GAP Inc

GAP’s Inc. 51

process of operation of these companies. Large tax implementation is one of the

controls that government usually pursues. With such government control many

companies are impaired and usually cannot operate on those countries.

In the case of the regulations in the retail industry it has negative impacts because the

regulations in the retail industry could easily be changed beyond the established limit

and will affect the business adversely, in addition companies such as target will obtain

higher costs in expenses due to the changes.

Furthermore, changes and transformation in overtime regulations and the share of the

retail stores in the healthcare bill. It has a huge effect on GAP negatively or positively. In

the case of the regulations in the retail industry it has negative impacts because the

regulations in the retail industry could easily be changed beyond the established limit

and will affect the business adversely, in addition companies such as target will obtain

higher costs in expenses due to the changes. The healthcare bill, on the other hand, will

have positive effects on GAP because the bill will aid in controlling the prices of the

medicines in the market which in return will help the consumers, as well as the

company.

Gap Inc. has a set of political and legal forces to operate and manufacture products in

the industry. The manufactures Gap Inc. outsources must abide by laws such as: labor

laws, health and safety laws, and respect employee’s right to form unions and working

conditions.

3. Technological Analysis

Internet shopping has changed the retail business by making it easy to navigate

between many brands, categories, and products quickly. Consumers can also quickly

determine whether a desired product is being sold by a competitor for a lower price.

When a consumer is confident they are receiving a product for the lowest price, the

decision to purchase will be easier. We expect that the trend of consumers shifting to

Page 52: GAP Inc

GAP’s Inc. 52

purchasing online will continue and online retail sales will grow by 10% in 2011 and

maintain this growth through 2014.

Gap Inc. technology forces involve Gap enhancing the company’s distribution centers

allowing them to operate more efficiently in the industry. Gap Inc. uses products such

as bar coding, e-tailing, interactive kiosks, and electronic data interchange systems to

provide efficiency.

For GAP Inc.:

- Increasing use of technology lowers supply chain costs.

- Everywhere internet access implies new avenue for direct sales.

- Internet access allows greater price comparison by consumers.

- Increase in communication and celebrity gazing decreases fashion shelf life, increases

demand for cutting edge fashion.

4. Socio-cultural

With the increasing globalization of business, society has also been more concern with

the degradation of the environment and a continuous concern for the benefit of the

employees. The society has call for attention to industries for social responsibility. This

includes human right protection of corporate employees, consideration for the health

and safety of consumers, and contribution to local communities.

And with the increasing global environmental issues that arise with the globalization,

people are now increasingly aware of the effects of the continuous industrialization.

Another factor is , companies such as GAP wherein it has numerous employees will have

a hard time obtaining more employees, the retirement of employees is rapidly getting

higher while the replacement does not increase.

Demographics are essentially population characteristics. It is the statistics on individuals

in a region in terms of age, sex, marital status, income, ethnicity, and other personal

Page 53: GAP Inc

GAP’s Inc. 53

attributes that may determine buying patterns. Understanding this basic information

about a population can help a firm determine whether or not its products or service will

appeal to customers and how many potential customers for these products or services

might have

Demographics

Apparel retail sales are driven by demographic trends. Changing fashion trends among

women and teens result in short product life cycles. Age distribution, ethnicity, gender,

and priorities force retailers to establish a narrow target market, stressing the

importance of brand recognition.

The population increased by 13 percent in the United States. 75.1 percent of the

nation’s 284.1 million people are White compared to 12.5 percent Hispanic or Latino,

and 12.3 percent Black or African American. Educational attainment of the population

25 years and over for the United States is up. 75 percent had earned a high school

diploma or more, and 20.3 percent had earned a bachelors degree or more. Of the

284.1 million people, 143.4 million were female and 138.1 million male

Gap Inc. does not discriminate on individuals, the company carters to women and men

of all ages and all types of different nationalities. Gap Inc. targets individuals all income

brackets throughout the United States and internationally. Another, one of Gap’s

strategies is to divide their customers and potential consumers into age categories.

Gap and GapBody target their products to the baby boomer generation that make up 77

million Americans. The baby boomers consist of people born between 1946 through

1964. Gap, GapBody and Gap Maternity target their products to generation x that make

up 45 million people born between 1965 through 1976. Gap, GapBody and GapKids

target their products to generation y that make up 25% of the population born between

1997 through 1994. GapKids and BabyGap target their products to children younger

than five years of age.

For GAP Inc.:

Page 54: GAP Inc

GAP’s Inc. 54

- Gap Inc. operates throughout the United States and in foreign countries, which helps

them gain a competitive advantage in the industry in the specialty retail industry.

- Increase in individual fashion raises required product diversity.

- Ongoing aging of Baby Boomer population implies new, older and affluent market.

- Trend towards professional appearing garb

C- Task Environment

Forces drive industry competition (Porter’s 5 forces)

Industry Overview

The U.S retail industry has been through challenging times during the past two years due

to the financial crisis. As per the U.S. Census Bureau annual report, the total amount of

sales for the U.S. retail industry was $14.3 trillion in 2009. It was the second consecutive

(annual) dip in retail sales, which are both the cause and effect of the U.S. economic

recession. U.S. retailers (and other industries) have stayed afloat for the time being via

cost-cutting measures and layoffs. Thus, when demand improved marginally, profits

rebounded. In 2009, holiday-season sales rose by 1.1% beating the forecasted -1.0% by

the National Retail Federation, compared to a dismal 2008 when sales declined by 3.4%.

Major multi-store organizations witnessed a decrease in their sales in the first half of

2009, but marginal improvements were observed during the latter half of the year, which

extended into early 2010. However, consumers are expected to spend frugally, with the

focus on value (for the money).

In early 2010, the NRF forecasted U.S. retail sales to rise 2.5% in 2010 based on the fact

that the recovering housing industry and reviving job market would bolster consumer

confidence. This appears to be an optimistic forecast in our opinion. The forecast looked

reasonable early on as U.S. consumer confidence ticked up in Q4 and Q1, rising to its

highest level since September, 2008.

Page 55: GAP Inc

GAP’s Inc. 55

Even if the 2.5% figure is reached, it would (excluding 2008- 2009) be the lowest since

1995. As many economists and analysts have stated in recent months, the return to pre-

recession levels will be slow. The International Council of Shopping Centers (ICSC) expects

a gain in shopping-center-related sales of 1.2% in 2010 following a decline of 2.4% in

2009.

The apparel retail industry leaders have developed diversified products and offer a variety

of options to consumers to respond to the changing and unpredictable fashion trends.

The current trend toward value-line clothing is shifting to more expensive lines as the

economy recovers from the previous recession. There is also a shift toward “greener”

initiatives. Companies are finding ways to reduce waste and manage sustainable energy

consumption, exemplifying corporate social responsibility to add value to products. Health

and wellness are another demographic trend, which is a driver behind athletic apparel.

Page 56: GAP Inc

GAP’s Inc. 56

1. Threat of New Entrance

The clothing retail industry is very competitive with a high number of competitors. This

large number of competitors creates strong earnings potential compared to other

industries. The industry is characterized by emphasizing differentiation and not cost

leadership, which results in the firms not having to have a price war. Along with

differentiation, most of the competitors within this industry tend to rely on their brand

image.

The threat of new competitors is relatively low due to the high start up costs of entering

the market. Since Gap Inc. and other firms in this industry tend to have a high quality

brand image, most firms have power over their suppliers, due to manufacturers

competing for business.

2. Bargaining power of Buyers

The specialty retail industry bargaining power of buyers is high because consumers have the

option of either spending money at lower price discount retailers or high price discount

retailers.

Consumer Price Index

The Consumer Price Index measures the changes in the prices of goods and services over

time and is the primary measure of inflation. The CPI has grown annually since 1955;

however, the CPI decreased by .32% as a result of the recession. This deflationary period was

short lived and the CPI rose by 2.2% in 2010. Now that the recession is over, consumers can

expect to see prices continue to rise, which will increase revenues for many companies.

Many apparel retail companies diversify their product mix by providing cheaper alternatives

for individuals whose purchasing power will be affected by rising prices.

Consumer Sentiment Index

Page 57: GAP Inc

GAP’s Inc. 57

The consumer sentiment index is a measure the consumers’ confidence about the general

state of the economy. It is also an important indicator of a household’s general expenditures.

When the consumer sentiment index is low, consumers are cautious to spend disposable

income on discretionary goods and will focus more on maximizing value. When the

consumer sentiment index is high, consumers are more willing to spend money on

discretionary items such as higher-end clothing and accessories. We predict the consumer

sentiment index to increase during the next 2 years. This is a positive indicator for the

apparel retail industry and as consumer sentiment recovers, demand for discretionary items

will return, fueling modest growth.

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

The buyer power is very strong in the casual clothing industry. Their buyer power is crucial,

and has a deliberate impact on the industry itself.

Gap Inc. and its consumers have a discreet mutual arrangement regarding the aspect of

buyer power. The company itself empowers its consumers to augment their buyer power

due to the fact that Gap Inc makes its products suitably priced and affordable for all classes

of people. The casual apparel industry has a market condition, in which the buyer

(consumers) has a say on the price. This is relative as well for a company like Gap Inc.

3. Bargaining power of Suppliers

The specialty retail industry bargaining power of suppliers is high in the specialty retail

industry because many companies like Gap outsource their producers from foreign countries

to save on manufacturing cost.

The apparel retail industry consists of all men’s wear, women’s wear, and children’s wear.

The key suppliers for the industry are clothing manufacturers and wholesalers. The

fluctuations in the cost of power, dyes, chemicals, and cotton have strengthened supplier

power in an industry that relies heavily on the availability of raw materials. Companies in

the industry produce apparel in domestic and foreign factories, with more than 80% of

industry inputs sourced from international suppliers

Page 58: GAP Inc

GAP’s Inc. 58

Purchasing cost of materials is the largest expense of the industry, accounting for 65.8% of

industry revenue. Clothes sourced from low-cost overseas manufacturers account for 83-

92% of the industry’s domestic demand.

4. Threat of Substitute products

The specialty retail industry threat of substitute is high because there is always new trend

causing the average American to shift to other brands or the imitated cloth. This would cost

less than the designers clothing that you will find in the stores, saving the consumer a lot of

money and differentiate them from others. Consumers are willing to spend on fashionable

items and higher priced clothing during times of prosperity but cut back on spending during a

recession. Many apparel retailers had increasing inventory from the recession and were

forced to discount and sell their inventories because consumers were reluctant to spend on

discretionary items like clothing.

The apparent threat of alternative or substitute products is a common adversity for Gap Inc.

A number of casual apparel companies have always attempted to overwhelm Gap Inc.'s

market share through attempts in cheaper price movements in for consumers to consider

other brands aside from Gap Inc. The subject of price elasticity emerges whenever the price

change of an alternative product affects as the demand for such product. The industry where

Gap thrives is saturated by a bevy of substitute products, which to tend to constrained the

ability of these companies to make an increase in prices. The casual apparel industry is

always sporadic and innovative in terms of manufacturing products, which can entice

consumers to patronize their products. This results to a letdown in sales for Gap Inc.

5. Rivalry among competing firms

The apparel retail industry is a mature industry with a cyclical business cycle. The industry is

saturated with competitors and established brands. While mature companies’ revenue

should grow at the same rate as GDP, this growth did not occur in 2008-2009. Falling profits

and wages due to the recession caused slow growth. GDP is forecasted to increase during

Page 59: GAP Inc

GAP’s Inc. 59

the next few years, which will increase profit margins for companies operating in the apparel

retail industry.

The Gap, Inc.’s large product line and distribution exposes Gap to intense competition. Gap

competes with local and national department stores, specialty and discount store chains,

independent retail stores, and online businesses that market similar lines of merchandise. To

be successful, brand recognition is vital. The closest competitors relative to The Gap, Inc.

include Levi Strauss & Co., TJX Companies Inc., Urban Outfitters Inc., and J. Crew Group, Inc.

Gap’s competitors for apparel, accessories, and personal care products are such famous

American brands as DKNY, Polo Ralph Lauren, and Tommy Hilfiger. Those companies are

manufacturing similar products, although they are targeting a slightly different customer

market. These industries differ slightly because these fashion companies sell their clothing to

department stores like Dillard’s, while Gap Inc. operates their own stores. They compete

with these companies because switching costs are so low. Gap however has to take a lot of

effort to stay aloof among them with pricing policies, quality and design in order to retain

their customers and try to gain new ones. The external threat from the new entries is a

minor one because of number of reasons. The clothing/accessories market is quite difficult

to enter, and it takes time to establish a brand name and gain customer loyalty and trust, so

in this instance Gap is almost safe at least for some time.

Abercrombie and Fitch, American Eagle, and Buckle are some of Gap’s competitors within

the industry. They all aim to design their clothing around the younger crowds, ages 18-35.

Gap Inc. has separated itself from its competitors in the industry by claiming a huge portion

of the market share. This can be seen by the huge Net Income compared to industry

competitors. Gap aims to sell to the whole family with a cost-leading attitude.

2- Key Success FactorsEvery firm in America has to decide, when it first starts, how it wants to position itself in the

industry. Our firm, Gap Inc., is no different. Gap had to make the decision of how it wanted to

gain a competitive advantage over other firms in its field. There are two strategies a firm can

Page 60: GAP Inc

GAP’s Inc. 60

follow. It can either choose a cost leadership plan or a differentiation plan. Cost leadership is

essentially just competing with other firms only on cost. A cost leader can offer the same

product as a competitor, only at a lower price. Differentiation on the other hand is competing

by offering a product that is different in some way. These plans are important because a firm

can gain an advantage over its competitors based on either of these strategies. It is also

important that a firm choose one or the other and not get stuck in the middle. Not taking one

side or the other can cause a firm to earn low profits. The objective of product differentiation is

to develop a position that potential customers will understand to be unique. There are two

mechanisms for which differentiation affects performance. First, differentiation will reduce

price sensitivity. This means that consumers might be willing to pay a higher price for the

differentiating factor(s). Second, differentiation should reduce directness of competition. This

can be defined by stating that the more your product differs from the industry’s products,

categorization becomes more difficult thus your product draws fewer comparisons to

competition.

At the market level, differentiation can be defined as improving the quality of goods over time

due to innovation. In an evolutionary sense, differentiation is more of a strategy that is

important in adapting to a moving environment and its social groups. Since almost all the firms

in our industry have name recognition, success in this market must be achieved by adapting to

a moving environment that is obsessed with the latest trends, while producing comfortable and

casual styles of dress.

Opportunities

Expanding presence in key growth markets

The company has been expanding its international presence in various developing nations. In

August 2011, the company signed a franchise agreement with Komax, for the exclusive rights to

operate Gap brand stores in Chile. According to industry estimates, retail sales grew by 15.9% in

2010 in Chile amidst robust macroeconomic growth and strong demand. The sector continued

to perform well in the first quarter of 2011. High consumer spending power, well developed

Page 61: GAP Inc

GAP’s Inc. 61

physical infrastructure and a business-friendly regulatory environment are key factors behind

the growing Chilean retail sales.

Gap also opened its first four wholly owned contemporarily designed Gap stores in China in

August 2011. Each of these four stores will offer all Gap collections including Gap, GapKids,

babyGap and GapBody. An online retail store, www.gap.cn, was also launched in China in the

same month. The fast pace economic development in China (Gross Domestic Product or ‘GDP’

growth of 10.3% in fiscal year 2010 and 9.2% in fiscal year 2009) coupled with the rise of the

middle class income group and their increasing disposable income have further pushed up the

demand for several consumer goods. According to the National Bureau of Statistics, the retail

sales in China increased by 18.4% year-on-year in 2010 to CNY15.4 trillion (approximately $2.3

trillion). The country’s retail sales are expected to increase by 15% and exceed CHY17 trillion

(approximately $2.6 trillion) in 2011.

The positive trends and robust growth rates in the developing countries would lend pace to

Gap’s revenue growth as China and Chile contribute a higher proportion to the company’s

overall sales in the coming years.

Growing market for plus size apparel for women in the US and the UK

The market for women’s plus size apparel (women’s wear of size 14 or more in the US and 16

and above in the UK) has grown substantially in the past few years. According to the industry

estimates, the plus size apparel market in the US (worth $26 billion) accounted for 27% of the

entire clothing market in 2000. This market grew to $42 billion in 2009 and accounted for 54%

of the total clothing market in the US. The growing proportion of customers falling in the plus

size category is expected to further drive the market. It is estimated that 12 million women in

the age group 18–34, 20 million in the age group of 35–54, and 21 million aged 55 and older

buy plus-size clothes in the US. According to the National Center for Health Statistics, 60% of

the women and over two-third of the adult population in the US is overweight. The overall

apparel market in the US is expected to grow by 3.4% in 2012.

Page 62: GAP Inc

GAP’s Inc. 62

In the UK, the plus size market represents 23.2% of the women’s wear market, up from 18.7%

in 2006, according to Verdict. Obesity levels have fuelled market growth with more retailers

offering a wider range of sizes and fit. This trend is expected to continue as obesity levels rise

further and retailers improve on their plus size product offers. The plus size sub sector is

estimated to grow by 6% in 2011, outperforming the UK women’s wear market by 1.4

percentage points.

Though the demand for plus size apparel is growing, the market remains underserved with few

retailers offering plus size clothing. Gap offers a variety of apparel in the plus size category

under its brand Old Navy. Thus, by leveraging its offerings in the plus size apparel category, Gap

can tap the growing plus size market in the US and UK and strengthen its customer base.

Positive trends in the online channel

The e-commerce platform has been rising at a fast pace globally. Online channel has been

growing in popularity as the most preferred channel for several customers. Internet as a retail

channel kept its popularity even during the economic recession as it offers several counter

recessionary characteristics such as low operational costs which can be passed on to the

consumers. As the economy improves and broadband connectivity increases, consumers across

Europe and the US would continue to look to the web for purchasing because of the benefits

they find in using this channel. According to the industry experts, online sales in Europe grew by

19% in 2010 and reached E172 billion (approximately $228 billion). Online sales accounted for

nearly 6% of Europe’s overall retail trade in 2010.The online retail market in Europe is expected

to reach E203 billion (approximately $270 billion) by the end of 2011, representing an increase

of 18% over 2010; it is estimated to account for nearly 7% of the total European retail spending

in 2011.

Online retail sales in US will grow at a 10% average annual growth rate from 2010 to 2015 in the

US to reach $278.9 billion in 2015, according to industry estimates. Online retail sales are

estimated to reach $197.3 billion in 2011, an increase of 11.9% over 2010. The online shopping

activity is increasing becoming popular in China. According to industry estimates, the online

Page 63: GAP Inc

GAP’s Inc. 63

retail sales in China increased 22% in 2010 with the consumers increasingly turning to low cost

products and convenience shopping. The number of online shoppers increased to 158 million in

2010 compared with 121 million in 2009, and consumer online spending almost doubled to

CNY513.1 billion in 2010 compared to the previous year. Internet sales in the country touched

CNY4.5 trillion (approximately $684 billion) in 2010. With the consumer online spending

accounting for about 3% of total retail sales in the country, there is a huge room for growth in

online retailing.

Besides the brick and mortar format, Gap also has presence in various countries through its

online retail websites. The company operates online business through its sites gap.com,

oldnavy.com, bananarepublic.com, piperlime.com, and athleta.com. Gap offers international

shipping on its e-commerce site to 90 countries, including Australia, Brazil and Mexico. In 2008,

the company launched an online shopping feature, Universality. The tool Universality allows

customers to shop all four Gap brands namely, Gap, Banana Republic, Old Navy and Piperlime

at one time, at flat shipping charge of $7. Though orders from Piperlime are shipped separately,

customers are not required to pay extra charge for it. These value added services in addition to

wide spread online reach would enable Gap to attract increasing number of customers who

seek convenience in their shopping experience.

Threats

Weak consumer spending in Europe and the US

Europe and the US are Gap‘s two key markets. In FY2010, the company derived 84.3% of its

revenue from these markets. The weak economic conditions in these markets can adversely

affect the company’s top line growth. According to Eurostat, the volume of retail trade

decreased by 0.1% in the Euro Area (Euro Area or ‘EA’ includes Belgium, Germany, Estonia,

Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, the Netherlands, Austria,

Portugal, Slovenia, Slovakia and Finland) in February 2011 compared to the previous month.

Additionally, the volume of retail trade for textiles, clothing and footwear in EA decreased by

0.7% in January 2011 compared to January 2010 figures. High rate of unemployment in the EA

Page 64: GAP Inc

GAP’s Inc. 64

has been one of the key reasons for low retail spending by customers. The seasonally-adjusted

unemployment rate in the European area was 9.9 % in February 2011, compared with 10% in

the previous month and 10% in February 2009.

High unemployment rate across EA and likely muted wage growth is expected to adversely

affect consumer demand.

The US market is also registering subdued consumer spending. Weak employment scenario

coupled with tight financial market has considerably reduced the consumption expenditure in

the country.

The unemployment rate in the US remained high at 9.4% towards the end of 2010. Though the

unemployment rate reduced to 9% in January 2011 and 8.9% in February 2011, it still is

significantly high. High unemployment affects consumer spending as the consumers feel

unsecured about the future income prospects. Personal consumption expenditure which

accounts for over 70% of the US gross domestic product (GDP) grew by only 1.7% in 2010 over

2009. The average personal savings rate increased to 5.8% in 2010 compared to 4.3% in 2009.

Further, in January 2011, the personal consumption expenditure grew by only 0.2% over the

previous month. The decrease in consumer spending came even when the personal income

increased by 1% in January 2011 (it is the largest gain in income since May 2009) driven by

extended income tax cuts. Further, the savings rate increased to 5.8% in January 2011, from

5.4% in December 2010.

Thus, high unemployment rate, sluggish wage gains and credit crunch are all expected to keep

consumers relatively cautious in both Europe as well as the US. This trend is anticipated to

continue through 2011 due to the inclination of people to save most of their income to

reconstruct savings and wealth. Shoppers are expected to remain value-oriented in the near

future. Thus, high unemployment rate and low consumer spending can negatively impact the

sales revenue of company’s upscale brands such as Gap, Banana Republic and Piperlime.

High input cost can pressurize Gap’s margins

Page 65: GAP Inc

GAP’s Inc. 65

Gap’s profit margins and top line growth may be adversely affected due to the rising prices of

cotton, one of the key raw materials used by the company. Increasing cotton prices are adding

to the cost of apparel manufacturing thus rendering the end product more expensive. The New

York futures contract for cotton for March 2011 delivery increased to 169 cents per pound in

January 2011 from 77 cents per pound in August 2010. Additionally, the cotton futures for May

2011 opened at $2.1 per pound in February 2011. Rising cotton prices have been pressurizing

the clothing manufacturers and retailers to raise prices in a scenario where the consumers are

tightening their purse strings.

The shortfall in the supply of cotton has been a key reason for the rising global cotton prices.

The consumption of cotton decreased significantly in 2008 and 2009. This was primarily due to

financial crisis wherein many customers reduced their consumption expenditure. Following low

demand for the commodity, many cotton producers reduced their planted areas for the

following season. According to the industry estimates, China's planted cotton acreage

decreased by 14% year-on-year and reached 5 million hectares during 2009–10. The country’s

cotton output decreased by 15% to 6.4 million tons. Thus, as the sales of textiles and related

finished goods started to recover, producers were unable to meet demand on time.

Additionally, unfavorable weather conditions also contributed to low output in some of the key

cotton growing countries. In 2010, China's main cotton planting areas namely, Xinjiang,

provinces of Gansu, Shandong, Hebei and Henan, suffered from heavy snow and frost which in

turn resulted in low yields. Furthermore, the output of cotton from Pakistan and Australia, two

other key cotton producing nations, was severely affected due to floods that both the nations

suffered in 2010.

Therefore, as the cotton prices rise, Gap could be required to raise the prices of its merchandise

or slim down its profit margins. An increase in price could draw away the customers who have

already cut their spending amidst weak employment scenario and credit crunch.

Growing market for imitated products

Page 66: GAP Inc

GAP’s Inc. 66

Existence of counterfeit goods and accessories has proliferated in the US. Some of the major

factors that led to an increased trade in counterfeit products include growing internet usage,

extension of international supply chains and more recently, the global economic downturn that

led customers to look for low cost alternatives. Designer sunglasses, footwear, watches,

handbags and branded T-shirts are some of the most counterfeited goods present in the

market. Local flea markets have also become popular destinations to buy counterfeit products

as they offer recession strapped consumers, counterfeit products of popular brands at

discounted prices. According to the industry estimates, the US economy suffers a minimum loss

of $200 billion in revenue and 750,000 jobs annually from the sale of counterfeit goods. In

Europe, the market for counterfeit products is estimated to be worth $8.2 billion. Rampant

existence of counterfeit products poses a major problem to manufacturers as well as retailers

of branded goods. Widespread counterfeiting reduces the exclusivity of the company’s

products. Counterfeits not only deprive Gap of revenues, but also dilute its exclusivity and

brand image.

Conclusions

The specialty apparel industry is facing increasing competition and market segmentation, while

costs to expand remain high.

Page 67: GAP Inc

GAP’s Inc. 67

D- External Factors Analysis Summary (EFAS).

Table 3 EFAS table

External Factors Weight Rating Weighted score Comments

Opportunities

Growth in online retail spending 0.11 4 0.44 11.3% average annual growth rate during

Franchising agreements 0.09 4 0.36

Global new market in Europe and China 0.09 4 0.36

Growing market for plus size apparel for women in the US and the UK 0.06 3 0.18

Anticipation of fashion trends and changing consumer preferences 0.04 3 0.12 Many companies have experienced

to misjudge the market.

The market for prime real estate is competitive 0.03 2 0.06

The location of GAP stores is a key factor of its strategy.

Threats

Economic downturn directly affect apparel retail business 0.04 3 0.12

Global specialty apparel retail industry is highly competitive 0.05 3 0.15 J. crew, Abercrombie & Fitch,

Urban Outfitters, etc

Emerging fast fashion retailers 0.08 2 0.16 H&M, Forever21, Inditex(Zara), Primark, Zara

Industry consolidation 0.03 2 0.06

Labor costs in China are estimated to increase 0.09 4 0.36 10 – 20% increase based on

researches

High input cost can pressurize Gap’s margin 0.09 4 0.36

Economic problems in Europe 0.05 1 0.05

Unemployment; will hinder the European’s consumer spending and have a negative impact on apparel sales.

Growing market for imitated 0.06 3 0.18

Page 68: GAP Inc

GAP’s Inc. 68

products

Concerns about inflation in China. 0.09 4 0.36On April 17th, 2011, China’s central bank- China’s rapid economic growth.

Total Scores 1.00 3.32

Page 69: GAP Inc

GAP’s Inc. 69

4. Internal Environment: Strengths and Weaknesses (SWOT)

A. Corporate Structure.

Gap Inc. is more of a flat structure than a tall structure. This is because Gap Inc. only features

two levels of management. Since it is a flat structure organization, it has a wide span of control

for the top level management, Glenn Murphy. This would also benefit the firm since this way

communications are easier in between employers and employees.

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 product, HR and Finance. We see that they separated the HR

and the finance sector out as a separate department. I think that this would be a good decision

for GAP Inc. since finance and its accounts would be more organized by grouping them all

together in a group to calculate and departments can be compared easily by the statistics. But I

would suggest that the firm should put the Human Resource department into each subordinate

department like the marketing, below the CEO. This is because each department may have

different styles of staff and it is best for the HR department to truly understand the employees

when making HR decisions. Therefore, it would benefit the company if the HR went into the

other product-based departments. Additionally, the company divided its subordinates as

product base with brands that are under GAP (Banana Republic and Old Navy etc.) and GAP

itself (North America). These product based departments resemble somewhat of a matrix

structure of a firm because the multi-skilled people from different knowledge backgrounds get

together to create the final product for the brand.

GAP Inc. is a decentralized company. Although we could only see a few members in the

organizational structure, we know that the ones at the second level of managements are all

head of a department of brand. Therefore, it is obvious to do not have daily decision making

often put on in the highest levels of hierarchy.

Supporting activities includes the following components: company infrastructure, information

systems, materials management, and human resource.

Page 70: GAP Inc

GAP’s Inc. 70

Gap’s internal structure was organized to support the company's goal of specific identities for

each of the clothing-brand lines (Gap, Banana Republic and Old Navy). Each brand was

established as a subsidiary/division of Gap Inc., and was charged with maintaining complete

control of its product through a highly vertically-integrated corporate structure. In 1991, Gap

established an International unit. While the division was treated as a profit center, it was a

channel-based division, rather than a brand division.

B. Corporate Culture.

Adopts Results-Only Work Environment Strategy

Art Peck, president of Gap Outlet, a division of Gap Inc., in San Francisco, no longer hears about

employees’ doctors’ appointments or parent-teacher conferences. And he couldn’t be happier.

For the past year, Gap Outlet has piloted a Results-Only Work Environment (ROWE), the first

major company to do so since Best Buy pioneered the practice six years ago. The pilot program

included 137 headquarters employees and executives in merchandising, design, production,

finance, HR and IT. Retail store employees are not eligible to participate.

ROWE is a corporate culture initiative designed to significantly improve employee productivity,

accountability and engagement. Under a ROWE, employees are empowered to work whenever

and wherever they want as long as the work gets done.

Rationale for Initiative

Eric Severson, vice president of HR, believed the culture and the demographics at Gap Outlet

were primed for a solution like ROWE. “We are in one of the worst commute cities and in one

of the most expensive places to live,” he explained. “We have a 76 percent female workforce

with an average age of 34.”

The organizational structure at Gap Outlet is flat and lean, and the culture is entrepreneurial

even after 14 years. Jobs are large in scope, and people have a lot of autonomy and

empowerment, he said.

Page 71: GAP Inc

GAP’s Inc. 71

“The downside to all this entrepreneurial [spirit] and empowerment is burnout,” said Severson.

“So work is fun and challenging, but work/life balance was terrible and turnover was high.

People in exit interviews would say to us, ‘I love my job, but it’s just not worth it anymore.’ We

were spending years investing in female leaders only to lose them after maternity leave

because they couldn’t figure out how to swing both work and family.”

That’s bad news for a retail organization with intense global competition and a weakened

economy. “In our business, merchandisers spend years developing expertise and the gut

instinct to predict fashion trends,” added Severson. “To see that knowledge and talent walk out

the door is devastating.”

Leap of Faith

In 2004, Gap Outlet engaged in a multiyear strategy to remedy its work/life balance issues. HR

started with no-meeting Friday afternoons, seminars on conducting meetings effectively,

work/life balance tools and distributed laptops so people could work from home. Work/life

balance scores inched up year by year to 72 percent—still lower than other divisions in Gap Inc.

Severson believed that to reach the next level of an innovative work culture he would have to

do something more radical. He had heard about the Best Buy experiment, which also excludes

retail store workers, and its results and believed it was time to test it out on a team at Gap

Outlet

Much of what shaped the company at its founding in 1969 remains deep in their DNA today:

customer focus, community involvement and integrity.

Their vision for how they work is built on four pillars:

Think: customers first – They consider the needs and value the diversity of thought,

experience and perspectives among their customers.

Inspire: creativity – they open themselves to new ideas, tapping into their diversity of

perspectives.

Do: what’s right – they treat every customer, supplier and employee with respect.

Page 72: GAP Inc

GAP’s Inc. 72

Deliver: results – they strive to create an inclusive environment where employees thrive

and generate top performance.

These cultural cornerstones are the filter for their decisions and behaviors. And they sum it

all up in three words: “Wear your passion.”

Wear Your Passion is the cultural foundation that links all of their brands, divisions and

functions. It encompasses their goal of fostering a culture that retains the essence of what

makes them special and focuses on how they need to evolve to succeed.

Recent Employee Opinion Survey results showed 88 percent of their 100,000-plus

respondents agreed with the statement, “I understand and believe in our Wear Your

Passion cultural values.”

Checking in, all over the world

Their employees bring their culture to life – so each of the last five years, they have reached

out to nearly all of them and asked them to share their thoughts via their anonymous

Employee Opinion Survey. The survey is translated into seven languages, and it’s clearly

reaching far and wide. In 2009 and 2010, participation rates were 87 and 83 percent,

respectively.

The 2010 survey results demonstrated the impact of employees’ belief in the company and

their engagement. Scores indicate that employees firmly believe in Gap Inc.’s vision and

values.

Culture without borders

Their culture was front and center as they celebrated a historic moment and amazing

milestone in 2010: the opening of their first stores in China. Located in Shanghai and Beijing,

the stores are company-owned and operated, which allowed them to share their culture

and heritage with the China employees and customers. All recruiting materials included

Wear Your Passion, the content for the country’s all-employee meeting was structured

Page 73: GAP Inc

GAP’s Inc. 73

around the four pillars of their culture, and employees received T-shirts and bracelets with

Wear Your Passion translated in English and Chinese.

Honoring our principles

As part of a continued effort to recognize the importance of their culture, they created the

Fisher Awards in 2010 to highlight the four core principles founders Doris and Don Fisher

built the company around: innovation, integrity, and community & store excellence. The

Fisher Award honors employees worldwide who carry on those traditions and truly wear

their passion for their values and their company.

C. Corporate resources.

Marketing and Sales

The marketing and sales component in a company involves promoting the product or

service effectively and setting the selling price. Gap Inc. uses all types of marketing

strategies to promote and inform people of their products. Gap Inc. method of advertising

their products is through TV and printed ads. Gap has all types of commercials for different

seasons, holidays and activities that they use to attract customers. Another marketing

strategy Gap use is ads like: magazines, newspapers, and billboards. Gap marketing team

works with top magazine companies to run ads in major magazines ads like Vogue, ESPN,

and Rolling Stone. Gap also works with major newspaper companies worldwide to run ads

to attract customers. They also use billboards, walls, and posters to promote the company

products throughout the United States, Canada, Europe and Japan. Gap Inc. other

marketing strategy is using internet pop-ups on popular sites to promote their company on

the internet.

Maintaining favorable brand recognition and effectively marketing products to consumers

in several diverse market segments an established brand is critical to success in an industry

that is mature and saturated like the apparel retail industry. Furthermore, the key to

success in this industry is a diversified product mix, allowing consumers to remain brand

loyal regardless of the current economic state.

Page 74: GAP Inc

GAP’s Inc. 74

The Gap, Inc. operates through two business divisions: stores and direct. The company has

five different divisions that offer a variety of selection for its consumers. Gap offers its

consumers apparel at moderate price points: including wardrobe basics, accessories, and

personal care products for men, women, and children. Old Navy addresses the market for

value-priced family apparel. Banana Republic offers fashionable apparel at higher prices

than Gap. Athleta offers performance-driven apparel and footwear for women, with

Piperlime addressing stylistic fashions that include accessories, handbags, and other

specialty items for men, women, and children. The direct segments are the online catalogs

of each retail company, offering a wider selection often at lower prices.

Marketing Mix

Featuring a broad selection of low-priced blue jeans and records, Fisher's store was the first

of what would become a massive chain of stores. After fine-tuning his concept, Fisher

expanded remarkably quickly, creating a $100 million, 200-store chain spread across more

than 20 states by the mid-1970s. By the end of the decade, the publicly traded chain, which

was growing by as many as 80 stores each year, was generating more than $300 million in

sales.

Product

In the beginning Gap was selling only Levi’s products where they have to depend on that

particular brand by and large. Later on when they realized depending too much on a

particular product may harm the business in the future, they have changed their course of

depending on a single particular product .Gradually they have came up with their own

product name and different supplier in order to reduce risks.

The Gap was bound for success early on because the utility of its product mix was perfect

for a specific market segment. The Gap offered a classic line of khaki pants and cotton

button-down shirts, perfect for the new "business-casual" look, and gained great brand

recognition as a result.

Page 75: GAP Inc

GAP’s Inc. 75

Not long after, in 1976, The Gap went public. With the new wealth the company was

enjoying, it further strengthened its share in the market by continuing to expand its product

mix and add new stores across the world.

Old Navy led the way for us in sales growth. The team kept a keen focus on its target

customers, whom we refer to as Jennie, Mike and the kids. Across every department, Old

Navy worked hard to make sure that decisions were made with this target family clearly in

mind. As a result, Old Navy was able to deliver fashion at a great value for the entire family.

The strategy is paying off; the business delivered six months of positive comps in the back

half of 2009.

As a result of our commitment to constant consumer research, Gap reinvented one of the

product categories linked to our heritage: denim. This led to the brand’s successful 1969

Premium Jeans collection. Our customers responded positively because of our perfect

combination of style, fit, quality and price. We’re now expanding the 1969 product line to

kids and baby, and will continue to work this formula in refreshing other key product

categories.

Banana Republic heard from consumers that versatility was paramount and responded by

adjusting its product and marketing in the second half of the year to showcase that it can be

worn seven days a week—for work, weekend or going out.

Page 76: GAP Inc

GAP’s Inc. 76

Life Cycle

Gap Inc. is currently operating in the shakeout stage of the life cycle. Gap’s growth rate is

beginning to slow down and the company’s products are beginning to become saturated.

Place

Gap's main opportunity to reach its customer is through its stores. Gap operates stores in

the United States, Canada, the United Kingdom, France, Ireland, Korea, Japan and China.

The Gap, Inc. also has franchise agreements with unaffiliated franchisees to operate Gap or

Banana Republic stores in Philippine, Singapore, Malaysia, United Arab Emirates, Korea,

Kuwait, Qatar, Bahrain, Oman, Saudi Arabia, Cambodia, Indonesia and Mexico. As of

February 3, 2007, The Gap, Inc. operates a total of 3,131 store locations. [36] In January 2008,

Gap signed a deal with Marinopoulos Group to open Gap and Banana Republic stores in

Greece, Romania, Bulgaria, Cyprus and Croatia. In February 2009, Elbit Imaging, Ltd. secured

a franchise to open and operate Gap and Banana Republic stores in Israel. In August 2010

GAP opened its first store in Melbourne, Australia at Chadstone Shopping Centre. In

Page 77: GAP Inc

GAP’s Inc. 77

September 2011, Komax opened the first GAP store in Chile, due to a franchise. In October

2011, the first GAP store opened in Warsaw, Poland.

Total: Over 3,200 stores worldwide.

Company-operated locations: About 3,000 stores across the United States, United

Kingdom, Canada, China, France, Ireland, Japan and Italy.

The first Gap store outside the United States opened in the UK in 1987

Franchise: About 200 stores in locations across Asia, Australia, Eastern Europe, Latin

America, the Middle East and Africa.

Gap has about 10 miles of storefront windows around the world.

The company just reported that it would close 60 underperforming stores this year and up

to 50 more next year. The Gap expects to close 110 stores in 2010 alone, opening another

65 in total – 15 and 10 of those stores being Old Navy and Gap stores respectively and 35 of

those stores opening internationally.

Distribution Centers

Total: 12

United States: 9

Canada: 1

United Kingdom: 1

Japan: 1

Online

Customers in more than 90 countries can order from our brands’ U.S.-based websites, and

those in China, Canada and the UK are served by dedicated websites.

The domain www.gap.com attracts over 18 million visitors annually.

Promotion

Page 78: GAP Inc

GAP’s Inc. 78

Public figures in ad campaigns

Gap frequently features public figures in its print and television advertisements. They have

featured over 308 celebrities of various statures in their campaigns. Their commercials

featuring songs such as "Lovely Day" remain some of the most successful and memorable

usages of television advertising in history.

Attempt to introduce a new logo

The new logo lasted for a week

On October 6, 2010, Gap debuted a new logo in an attempt to create a more contemporary

presence in the retail market. The new logo was made with Helvetica typeface and did away

with the blue box that had become iconic with the brand. There was a public outcry against

the new logo, especially in the graphic design community. The company returned to its

previous "blue box" logo on October 12, only a week after the new logo's debut. [52][53] Marka

Hansen, the executive who oversaw the logo change, resigned February 1, 2011.[54]

Price

Rising costs and a thriftier consumer together form a solid foundation for difficult times in

the retail apparel industry. Management teams at these companies are pressing into the

holiday season with caution in pricing, all too aware of the delicate balance they must keep

between maintaining profit growth and attracting and retaining customers.

The Gap, Inc. has also upheld that it has not been experiencing any cost pressures. As a

whole, the company plans to continue promotional activity it has put in place over the past

Page 79: GAP Inc

GAP’s Inc. 79

few quarters with more aggressive pricing coming during regular sales seasons or alongside

steep competitor price cuts.

From the end of 2007 through 2009, low-priced apparel stores outperformed higher-priced

stores. The Gap Inc.’s Old Navy saw greater growth in net sales per square foot than stores

like Abercrombie & Fitch and Banana Republic which experienced severe declines.

Finance

The consolidated financial statement comparison shows that Gap, Inc. is financially and

economically sound; although the company faced a decrement in net income between 2009

and 2012.

Glenn: Gap Inc. has a solid financial framework. Maintaining cost discipline allowed us to

invest in growth vehicles while still delivering on the bottom line. Going forward, we’re

determined to achieve our goal of growing top line revenue. It’s a top priority for the

management team and paramount to our success.

Sabrina Simmons, CFO: Our economic model remains strong, and we were disciplined in

meeting our financial commitments. Earnings per share for 2010 improved by 19 percent,

and we grew net sales by 3 percent. This year, while we invested more in the infrastructure

for growth, we still achieved the highest operating margin in a decade: 13.4 percent. And

we’re also pleased with our commitment to return cash to shareholders through share

repurchases and dividends. In total, we distributed $2.2 billion in 2010. The strength and

diversity of our portfolio of brands makes these results possible, and also allows us to

successfully navigate changes in the marketplace.

Toby Lenk, president of Gap Inc. Direct: Our division has benefited from some of the new

investments mentioned above, and we understand the central role online plays in the

company’s business model. We continued to gain market share this year, through our large

global online expansion and the encouraging results for Athleta and Piperlime. We’re given

the freedom to make investments for the long term, and it’s paying off. We’re on track to

double our revenue – from about $1 billion in 2009 to $2 billion in 2014.

Page 80: GAP Inc

GAP’s Inc. 80

Robust Margins; Strong Liquidity -- The liquidity position of the company is very strong.

As of July 31, 2010, cash & cash equivalents including short term investments at GPS

amounted to $1.7 billion. The company can conveniently cover the year-to-date capital

expenditures of $250 mln. On July 31, 2010, GPS was debt-free without any long-term debt

obligations, further strengthening the liquidity position of the company. Management has

repurchased 38,000,000 shares for $800 mln during the second quarter of 2010, and has

further authorized repurchase worth $750 mln, thus relieving the company of its obligation

to return excess cash to the shareholders. The size of these repurchases is quite significant

relative to the GPS market capitalization. However, we expect the operational cash-flow to

gradually trend down in the near- to medium-term, from $1.9 billion in FY09 to $1.6 billion

in FY-12. Despite its struggle with managing top-line growth, GPS has managed its margins

reasonably well, thanks to its tight expense controls. We expect GPS to maintain its gross

margin at the current 40% level in the near- to medium-term. The EBITDA margin however

may see a gradual decline from 17.4% in FY09 to 15% in FY-12.

Reuters Consensus Estimates – The mean consensus estimate for revenue is $14.49 billion

and for EPS it is $1.80 for FY10. For FY11, the revenue estimate is $14.83 billion and EPS is

$1.89. The shares are now trading at < 9X estimates for 2011.

Stock and Market Trend Analysis

G a p h a s b e e n a b l e t o m e e t t h e i n v e s t o r s ’ e x p e c t a ti o n m o s t o f

t h e ti m e s s i n c e i t s i n c o r p o r a ti o n . I t h a s b e e n p a y i n g o u t r e g u l a r

d i v i d e n d s a n d t h e s t o c k t r e n d s h o w s t h a t t h e company’s value has been

volatile. During the .com boom of 1998 and 1999, the stock reached as high as

$68 but with the problems in stock market, it went down. More recently, although the

company has been able to buffer the real estate and credit crunch, it has not

been able to grow properly. But as per the analysts, the company’s ability to buffer the

‘so called’ recession is a sign of company’s stability.

Page 81: GAP Inc

GAP’s Inc. 81

Table 4: Financial Analysis Ratios

Ratio data TTM as of 01/28/2012

Profitability - gap inc/the (GPS)

Return on AssetsIndustry Comparison 12.41%

Return on EquityIndustry Comparison 24.37%

Return on CapitalIndustry Comparison 21.15%

Margin Analysis - gap inc/the (GPS)

Gross MarginIndustry Comparison 36.25%

Levered Free Cash Flow MarginIndustry Comparison 4.32%

EBITDA MarginIndustry Comparison 13.36%

SG&A MarginIndustry Comparison 26.37%

Asset Turnover - gap inc/the (GPS)

Total Assets TurnoverIndustry Comparison 2.0x

Accounts Receivables TurnoverIndustry Comparison No data available

Fixed Assets TurnoverIndustry Comparison 5.7x

Inventory TurnoverIndustry Comparison 5.7x

Credit Ratios - gap inc/the (GPS)

Current RatioIndustry Comparison

2.0x

Quick RatioIndustry Comparison

0.9x

Long-Term Solvency - gap inc/the (GPS)

Total Debt/EquityIndustry Comparison 60.4x

Total Liabilities/Total AssetsIndustry Comparison 62.9x

Growth Over Prior Year - gap inc/the (GPS)

Page 82: GAP Inc

GAP’s Inc. 82

Total RevenueIndustry Comparison -0.78%

Tangible Book ValueIndustry Comparison -29.43%

EBITDAIndustry Comparison -25.83%

Gross ProfitIndustry Comparison -10.44%

ReceivablesIndustry Comparison No data available

InventoryIndustry Comparison -0.31%

Diluted EPS Before ExtraIndustry Comparison -17.02%

Capital ExpendituresIndustry Comparison -1.62%

Cash From Ops.Industry Comparison -21.85%

Levered Free Cash FlowIndustry Comparison -47.22%

Page 83: GAP Inc

GAP’s Inc. 83

Quarterly Earnings & Estimates - GAP INC/THE (GPS)

EPS - Earnings Per Share Pre Exceptional

Gap Inc.'s Quarterly EarningsGap Inc. reported 4th quarter 2012 earnings of $0.44 per share on 02/23/2012.

Annual Earnings & Estimates - GAP INC/THE (GPS)

EPS - Earnings Per Share Pre Exceptional

Gap Inc.'s Annual EarningsGap Inc. reported annual 2012 earnings of $1.56 per share on 02/23/2012.

Quarterly Revenues - GAP INC/THE (GPS)

Gap Inc.'s Quarterly Revenues

Page 84: GAP Inc

GAP’s Inc. 84

Gap Inc. had 4th quarter 2012 revenues of $4.3B. This bettered the $4.3B consensus of the 28 analysts covering the company. This was 19.3% above the prior year's 4th quarter results.

Annual Revenues - GAP INC/THE (GPS)

Gap Inc.'s Annual RevenuesGap Inc. had revenues for the full year 2012 of $14.5B. This was -0.8% below the prior year's results.

gap inc/the (GPS) Snapshot

Open $24.89 Previous Close $25.00

Day High $25.15 Day Low $24.82

52 Week High 03/1/12 - $26.00 52 Week Low 09/6/11 - $15.08

Market Cap 12.3B Average Volume 10 Days 8.9M

EPS TTM $1.57 Shares Outstanding 488.3M

EX-Date 04/3/12 P/E TM 16.0x

Page 85: GAP Inc

GAP’s Inc. 85

Dividend $0.50 Dividend Yield 1.79%

GPS:US Historical Stock QuoteGPS:US Advanced Stock Chart

Page 86: GAP Inc

GAP’s Inc. 86

Stock Ownership Guidelines for Directors

We have adopted minimum stock ownership guidelines for our Directors. Each non-

management director should, within three years of joining the Board of Directors, hold stock of

the Company worth at least three times the annual base retainer then in effect. Management

directors are required to own stock of the Company in accordance with our stock ownership

requirements for executives, described on page 45. Our insider trading policy prohibits

speculation in Gap Inc. stock, including prohibiting short sales, and prohibits directors from

entering into transactions intended to hedge their ownership interest in the Company’s stock.

The stock symbol and stock exchange for Gap Inc.:

- The ticker symbol is "GPS" listed on the NYSE stock exchange. The company competes in

Retail and Family Clothing Stores.

Page 87: GAP Inc

GAP’s Inc. 87

The company recorded revenues of $14,664 million during the financial year ended January

2011 (FY2011), an increase of 3.3% over FY2010.The operating profit of the company was

$1,968 million in FY2011, an increase of 8.4% over FY2010. The net profit was $1,204 million

in FY2011, an increase of 9.3% over FY2010.

Sales for Gap have been steady over the last few years. However, their Net Sales/ Cash from

Sales ratio has declined, meaning they have been getting less cash from sales. Net sales to

accounts receivables were N/A due to the fact that the accounts receivable amounts for

Gap Inc. were reported as immaterial.

After analyzing Gap’s accounting practices and policies were found to be fairly aggressive.

However, their disclosure and reporting of relevant material is seemingly very transparent.

Gap discloses all accounting methods concerning everything from leases and pension plans

to inventory and tax methods. They also outline all accounting statements and opinions

affecting their business. No distortions or discrepancies in their accounting.

After computing the firm’s core ratios, Gap’s overall performance as compared to its

competitors within the industry became clearer. Inventory turnover tended to be lower

while gross profit was lower throughout the industry. This is most likely due to the fact that

most firms in the industry compete with differentiation and brand name.

The Gap’s key success factors are attributed to their strict accounting policies which

coordinate with each other to create the present and future financial performance of the

company. The financial statements are consolidated to include the accounts of the company

and all its subsidiaries. All inter-company transactions and balances have been eliminated.

Translation adjustments result from translating foreign subsidiaries’ financial statements

into U.S. dollars. Balance sheet accounts are translated at exchange rates in effect at the

balance sheet date. Income statement accounts are translated at average exchange rates

during the year. The resulting translation adjustments are included in accumulated other

comprehensive earnings in the Consolidated Statements of Shareholders’ Equity.

Page 88: GAP Inc

GAP’s Inc. 88

Continuing to struggle with poor sales, Gap reported that net income for the first quarter

ended April 30 fell 22.8 percent off a 3 percent decline in comparable-store sales.

Quarterly profits declined to $233 million, or 40 cents a share, 1 cent above analysts'

estimates, compared with $302 million, or 45 cents, for the year-ago quarter, and net sales

declined 1 percent to $3.3 billion from $3.33 billion. Gap cited impact from the March

earthquake and tsunami in Japan.

“We are disappointed in our quarterly performance, however remain invigorated by the

opportunities ahead,” said Glenn Murphy, Gap's chairman and chief executive officer.

“We're focused on making the necessary adjustments across the business to deliver the

kind of sales we should expect from our brands.”

On the company call, Gap chief financial officer, Sabrina Simmons, acknowledged a

miscalculation on the company's part. “We had made the assumption [in February] that our

fall buys would be the most expensive, and that we'd get some easing in our holiday buys,”

she said. “And it turns out we were just absolutely wrong on that assumption. Holiday got

worse, and that costing came in much higher than we expected, and higher than fall.”

Across the industry, retailers are getting increasingly worried about sharp inflation from

rising raw material, fuel and shipping costs, how to adjust their own prices on the selling

floors and how consumers will react. The recovery from the recession that many have

witnessed in recent months appears to be in jeopardy.

By division, comparable-store sales, including online revenues, for the first quarter were

down 3 percent at Gap North America, down 1 percent at Banana Republic North America

and down 2 percent at Old Navy North America. International sales were down 6 percent.

Results were reported after the close of the equity markets Thursday. Gap shares closed up

0.9 percent at $23.29 but fell more than 15 percent in the first 90 minutes of afterhours

trading.

Page 89: GAP Inc

GAP’s Inc. 89

Research and Development

Differentiation companies require heavy investments in research and development. At GAP

Inc., each item is sold and then registered for analysis by planners and distribution analysts.

These analysts monitor weekly sales trend reports and determine which stores need to be

stocked with what products. These “replenishment shipments” usually occur one to three

times per week. This process continues until the season ends. At this point, all customer

feedback, performance notes, and suggested improvements are analyzed so GAP is ready to

being this cycle again.

The research and development in a company involves the product or service along with the

actual development. Gap Incorporated preformed a study on the retail industry, to obtain

the ability to provide their customer with a variety of clothing items, accessories and body

care products.

Operations & Logistics

Production

The production in a company involves the creating the product or service within. Gap

Incorporated uses the outsourcing strategy to produce their products. Gap hires a

specialize company to manufacture their products.

The apparel industry’s value chain consists of designing apparel, manufacturing and

distributing garments, and marketing and merchandising them. Designing apparel involves

creating clothes and accessories that are fashionable, trendy, and attractive before the

definitions of those dimensions are known; it is a highly creative and uncertain process.

Apparel firms take large risks when the chosen designs are converted into patterns, and the

fabrics, colors, and accessories are itemized for ordering. These specifications help the

designer or organization to develop and retain the required manufacturing capacity to

deliver on the expected demand.

Page 90: GAP Inc

GAP’s Inc. 90

The patterns and specifications are handed over to the factories who work with the

upstream members of the supply chain to receive the fabrics and other materials. The

garments are sewn according to the specifications and transported to a distribution center

that ships it to the retail outlets or holds it for shipping if the garments are ordered on line.

Sales are monitored to assure sufficient store inventories or in cases where demand

exceeds the forecast, signal the need to produce additional garments. At the end of each

season, the brands assess their performance, gather customer feedback, look for

improvements, and begin the cycle all over again.

Material Management

The company material management component involves the moving of materials through

the value chain. With Gap Inc. outsourcing their products, the company does not have to

deal with moving their product through the value chain. Gap Inc. has the responsibility of

making sure the distribution centers are equipped and have the capability to keep

operational cost down.

Customer Service

The customer service component in a company involves providing assistance during and

after the transaction. Gap Inc. provides their customer with a 1-800 number on each and

every receipt from a transaction in order to assist customers with questions. Gap Inc. also

offers their customers with a return option if the customer is unsatisfied with the item.

Human Resource

The human resource component involves the hiring of qualified and skilled employees to

carry out the company mission and goals. Gap Inc. human resource department hires

individuals who are focused on the Gap’s wellbeing and aspirations for the future.

All director nominees must possess certain core competencies, some of which may include

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, or

Page 91: GAP Inc

GAP’s Inc. 91

experience as a CEO or CFO. In addition to having one or more of these core competencies,

Board member nominees are identified and considered on the basis of knowledge,

experience, integrity, leadership, reputation, and ability to understand the Company’s

business. The Board believes that this diversity, including differences in backgrounds,

qualifications, experiences, and personal characteristics, including gender and

ethnicity/race, is important to the effectiveness of the Board’s oversight of the company.

Accordingly, this diversity is a factor that is considered in the identification and

recommendation of potential director candidates. All director nominees are pre-screened

to ensure that each candidate has qualifications that complement the overall core

competencies of the Board. The screening process also includes conducting a background

evaluation and an independence determination.

The Governance and Nominating Committee is also responsible for overseeing a formal

evaluation process to assess the composition and performance of the Board, each

committee, and each individual director on an annual basis. The assessment is conducted to

identify opportunities for improvement and skill set needs, as well as to ensure that the

Board, committees, and individual members have the appropriate blend of diverse

experiences and backgrounds, and are effective and productive. As part of the process, each

member completes a questionnaire that includes Board, committee and individual

assessments. While results are aggregated and summarized for discussion purposes,

individual responses are not attributed to any member and are kept confidential to ensure

honest and candid feedback is received. The Committee discusses opportunities and agrees

upon plans for improvement as appropriate and reports the results annually to the Board. A

director will not be nominated for reelection unless it is affirmatively determined that he or

she is substantially contributing to the overall effectiveness of the Board.

Information Systems

Page 92: GAP Inc

GAP’s Inc. 92

The company information system component involves handling, tracking and maintaining

company sales. Gap Inc. incorporated using bar codes and electronic interchange system.

Gap uses theses systems to guarantee the company is operating efficiently and their

products are being disturbed properly. The bar code systems provide the retailers with

important information like: items sold sizes, and colors and the company manufacturers.

The electronic interchange system helps managers manage inventories and allow suppliers

and distributors to communicate electronically.

The Gap is implementing technology into its stores which contain certain intrinsic

competitive advantages which give the corporation a head up on the competition. Not only

does this new technology allow for more cost effective distribution, but it also offers a more

time-efficient experience for both the consumer and the employee. Instead of spending

large amounts of money yearly by manually taking inventory, The GAP will now be able to

access inventory data quickly and easily through a handheld device. If there is a situation

where merchandise is out of stock at a particular location, it can be dealt with quickly and

effectively, by communicating with other GAP stores to replenish the missing units.

These measures taken to provide technological advantages over other companies will pay

off, simply because it is a more convenient way of shopping. It literally bridges inventories

from multiple stores in a region, giving the customer a larger selection of sizes and styles.

This allows for customers to try on clothing at the store, as well as offer the large inventory

the internet has been able to offer for many years. These new ways of business improves

The GAP with an entirely different shopping experience. This experience in time will

increase customer retention and rapport, generating profits.

Distinctive Competencies

Gap Inc. achieved distinctive competencies by the company’s brand recognition and name,

good financial performance and website usage, to achieve a competitive advantage over the

company rivals in the industry. Gap is known for producing high quality products, with

fashionable colors that appeal to customer.

Page 93: GAP Inc

GAP’s Inc. 93

Page 94: GAP Inc

GAP’s Inc. 94

Internal Factors Analysis Summary (IFAS).

Table 4: IFAS table for GAP Inc.

Internal Factors Weight Rating Weighted score Comments

Strengths

Large network of physical stores 0.10 5 0.50

Building financial strength 0.06 4 0.24 Strong margins compared to competitors

Global brand recognition 0.07 4 0.28

Multiple brands and brand extensions for a wide range of segments 0.05 4 0.20

Franchising system easily to expand Gap store internationally 0.05 4 0.20

Huge customer and vendor base 0.03 3 0.09Well balanced portfolio of value as well as Low productivity of company’s storesupscale brands

0.05 3 0.15

Weaknesses

Low productivity of company’s stores 0.10 3 0.30 Decline in revenues

Geographic concentration 0.09 4 0.36 remains heavily dependent on the US (over 83.6% of its revenues)

Bargaining power of Suppliers 0.10 4 0.40

1000 vendors in 60 countries. 27 percent is produced in China.( product’s shortage, shipment delay and increased costs).

Less attractive in trendy clothing 0.06 3 0.18product lines are less attractive clothing to consumers than competitors

Uncontrollable production processes 0.08 4 0.32Control of production processes is a key factor among fast fashion retailers…China

High input cost 0.10 3 0.30 can pressurize Gap’s margins

cannibalization of sales between Brands 0.06 2 0.12

Old Navy and Banana Republic over Gap; indicate potential problems with the companies operating structures.

Total Scores 1.00 3.64

Page 95: GAP Inc

GAP’s Inc. 95

Analysis of strategic Factors (SWOT).

SWOT Analysis

Strengths

Global presence catalyzed by franchise and company-owned stores and online presence.

Over the years, Gap has built a wide geographic presence spread across various countries. Gap

primarily operates through company-owned stores, various franchise agreements and online

retail websites. Gap runs its company-owned stores in the US, Canada, the UK, France, Ireland,

Japan, China and Italy. At the end of FY2011, the company had 3,068 company-owned retail

stores. Gap also has various franchise agreements with unaffiliated franchisees that operate

Gap and Banana Republic stores in many countries including Australia, Bahrain, Bulgaria, Chile,

Croatia, Cyprus, Egypt, Greece, Indonesia, Israel, Jordan, Kazakhstan, Kuwait, Malaysia, Mexico,

Oman, Philippines, Qatar, Romania, Russia, Saudi Arabia, Singapore, South Korea, Thailand,

Turkey, and UAE. Under the franchise agreements, third parties operate stores that sell apparel

and related products under the company’s brand names. At the end of FY2011, Gap had 178

franchise stores. Though franchise stores are a small part of the company’s business, they play

an important role in aiding Gap’s efforts to expand internationally.

Apart from the brick and mortar format, Gap also has presence in various countries through its

online retail websites. The company’s brand Gap was established online in 1997. The online

retail websites for Banana Republic and Old Navy were launched for the US market in 1999 and

2000, respectively.

Additionally, in 2010, the online retail facility for the brands Gap, Banana Republic and Old Navy

was also made available in Canada, the UK and some other European nations. Gap also has a

line of products under the brand Piperlime, exclusively offered through online-only stores.

Beginning from 2010, Piperlime was made available in other select international countries. The

company’s products under the brand Athleta are also available for sale through online retail

platform. Gap has been growing its online presence in various European nations, North America

Page 96: GAP Inc

GAP’s Inc. 96

as well as many developing nations in the Asia-Pacific region. The company offers international

shipping on its e-commerce site to 90 countries, including Australia, Brazil and Mexico.

The company’s three pronged strategy has allowed it to expand into various geographies.

Wide spread presence broadens the company’s customer base and diversifies business risk by

decreasing dependence on the mature markets such as the US and the UK.

Well balanced portfolio of value as well as upscale brands

Gap has a well balanced portfolio of brands that helps the company to cater to separate groups

of target customers including those who seek value or upscale brands or both. The company’s

brands Gap, Banana Republic and Piperlime cater to the high end customer segment. The Gap

brand offers extensive range of classically styled, high quality, casual apparel at moderate price

points. Additionally, under the brand Gap, the company also operates Gap Outlet stores. These

stores offer similar categories of products as offered by Gap, however at lower price points. The

company’s brand Banana Republic, offers sophisticated and fashionable collection of casual and

tailored apparel, shoes, accessories, and personal care products for men and women at price

points higher than the brand Gap. The company also operates Banana Republic Factory Stores,

which offer similar categories of products as Banana Republic, however, at lower price points.

Additionally, the brand Piperlime by the company offers an assortment of the leading brands in

the category of footwear, handbags, apparel, and jewelry for women and footwear for men and

kids. The company also offers high quality women's sports and active apparel and footwear

under the brand name Athleta.

Gap’s presence in the value apparel and accessories market is represented by its offerings

under the brand name Old Navy. Old Navy is positioned as a value priced family apparel

retailer. Across every department, Old Navy ensured that merchandise decisions were made

with target family audience. As a result, the brand has been able to deliver fashion at value

prices for the entire family.

Family customers facilitate spending at multiple points and the value positioning is aiding the

sales growth in tough economic times.

Page 97: GAP Inc

GAP’s Inc. 97

Thus, with the help of various brands focused on serving separate target audience Gap has

been able to penetrate different market segments. While the company’s value brands help Gap

to effectively cater to the increasing base of price sensitive customers, its upscale brands hold

great potential as the US and European economies improve and customer spending increases.

Strong margins compared to competitors

Over the past few years, Gap has been able to maintain strong profit margins compared with its

competitors. In FY2011, the company’s operating margin was 13.4%. In comparison, the

operating margin of Gap’s key competitor AnnTaylor Stores was 6% for FY2011 (financial year

ending January 2011), and for American Eagle Outfitters the operating profit margin was 10.7%

(financial year ending January 2011).The company’s net profit margin (8.2%) for FY2011 was

nearly double when compared to the net profit margins of AnnTaylor Stores (3.7%) and

American Eagle Outfitters (4.7%). Gap has undertaken several measures to enhance the

company’s profitability. During the most challenging economic times, the company has

successfully grown margins every year since FY2007 with stringent inventory and cost control,

streamlining the supply chain, successfully repositioning Old Navy and launching new product

categories, such as denim, to spur demand. High levels of profitability provide a cushion to

sustain low revenues. Additionally, higher profits compared to competitors would enable Gap

to weather price competition effectively.

Weaknesses

Dependence on outside merchandise vendors for supply of products

Gap is completely dependent on outside merchandise vendors for sourcing its products. The

company does not own any factories. Gap procures private label and non-private label

merchandise from 1,020 vendors. Only 1% of the company’s merchandise sold in FY2011 was

produced in the US. The remaining 99% of the merchandise was produced in various other

countries, with China being one of the largest suppliers. Complete dependence on outside

vendors for merchandise procurement reduces Gap’s control on the quality of the finished

Page 98: GAP Inc

GAP’s Inc. 98

products. In the past, Gap has recalled some of its merchandise procured from China as well as

Indonesia.

In April 2010, the company recalled 6,500 swimsuits from the US market and about 480 from

the Canadian market. The swimsuits marketed for children had halter straps that were

manufactured too short causing the plastic ring located at the center of the swimsuit to press

against the child's throat and obstruct the airway. Thus, the swimsuit posed a strangulation

hazard to the child.

Previously, in 2009, Gap recalled its Children's Coats as the coats had toggle fasteners that

could break and detach from the coat, posing a choking hazard to young children. Thus,

complete dependence on outside vendors for merchandise procurement makes Gap vulnerable

to issues such as lack of quality which in turn can adversely affect the company’s brand as well

as demand for its products.

Low productivity of company’s stores

The company has not been able to harness the worth of its real estate holdings to the fullest.

Over the past few years, Gap has been witnessing low sales per average square foot, with a

marginal increase in FY2011. The company’s sales per average square foot decreased to $329 in

FY2010 compared with $412 in FY2006, representing a compound annual rate of change (CARC)

of 5% during FY2006–10. In FY2011, the company’s sales per average square foot reached $342

representing a marginal increase of 3.9% over the previous year. In spite of an increase in

FY2011, Gap’s sales per average square foot remains below its peak. Real estate is one of the

important assets for the company and low yields indicate that the company has not been able

to efficiently utilize its resources. Thus, in the long run, low productivity can adversely impact

Gap’s profitability.

Geographically concentrated operations

The company relies heavily on the North American markets for its revenue generation. In fiscal

year 2005, the North American market alone accounted for 90.7% of the company’s total

revenues. The remaining segments Europe and Asia contributed merely 5.4% and 3.6%

Page 99: GAP Inc

GAP’s Inc. 99

respectively in fiscal 2005. Such a heavy reliance on this market exposes the company to market

concentration risks. In 2011, it is 84% from the total revenue from US; which is still too high.

Page 100: GAP Inc

GAP’s Inc. 100

5. Situational Analysis.

Table 5: SFAS Matrix for GAP Inc.

Strategic factor Weight RatingWeighte

d score

Duration

CommentsShor

t

Inte

r

Lon

g

Total Scores 1

Page 101: GAP Inc

GAP’s Inc. 101

6. Review of Mission and Objectives.

Objectives:

Indeed, in 1997 Gap was named Advertising Age's Marketer of the Year, recognized for

its successful integration of marketing and merchandising strategy. It had built a brand

by returning to TV after a dozen years, added legendary Coca-Cola marketer Sergio

Zyman to its board and focused on a message of comfortable, casual clothes and easy

shopping.

Today you see a retail brand that has failed to evolve with consumers, with fashions

that have missed the mark and marketing that has veered off course. Among the

criticisms: Its target market, ranging from babies to men, pregnant women to teens, is

much too broad; designs have been schizophrenic; its TV presence has waxed and

waned; and an ill-advised logo change invoked consumer uproar.

Gap needs fresh marketing; appealing merchandising; a crystal-clear point of view and

compelling vision; a refined target consumer; energy and excitement; a more strategic

promotional cadence; and fewer stores. In short, everything.

"You can't solve Gap's problems by making better commercials," Mr. Jones continued.

"When I was leaving, my biggest concern was Gap, as a brand, being purchased at a

deal. People want Gap, just not at full price. Changing that behavior is a fundamental

marketing strategy, not advertising."

The imbalance was recognized by Gap Inc. chairman and chief executive officer Glenn

Murphy at the firm's annual meeting Tuesday, where he told shareholders: “In North

America, we have to be more of a consistent performer, quarter in, quarter out. We

haven't been consistent enough. We need new categories, new customers, and we are

changing the pipeline to be a lot faster, and to make better decisions,” in such areas as

design and inventory management.

Page 102: GAP Inc

GAP’s Inc. 102

The objective, Murphy said, is to deliver “moderate, steady growth in our North

American business” and reverse years of declining sales and traffic. Gap brand

management shakeouts were seen on both the creative and operations sides. Among

the recent departures, chief designer Patrick Robinson, who has not yet been replaced,

and Marka Hansen, who was succeeded by Art Peck as president of Gap North America.

Gap also sees downsizing stores as part of the solution. “We need to continue to evolve

our fleet,” Murphy said. “Since 2007, our square footage on existing stores is down 8

percent.”

With international and online sales on the rise, Gap executives put the emphasis on

top-line sales growth, which Simmons described as the first priority. Murphy

underscored the point, stating that international and online sales are seen growing to a

minimum of 30 percent of the company's revenues by 2013 versus 22 percent last year,

representing, as Murphy said, “a very large strategic shift in our company.…One of the

goals the company has is to be sharing American style around the world. We have a

significant runway on the global stage.” He sees Gap operating 550 company-owned

stores around the world in 2013, compared to the 354 as of last year, and taking the

expansion in China to “the next level in 2012 and beyond.”

Other objectives:

Pumping up the Piperlime Web site by adding brands.

Building up Athleta and capitalizing on the brand's “unbelievable customer affinity.”

Raising the number of franchises to 400 by 2014 or sooner. Gap has about 200

franchises in 24 countries and this week unveiled agreements for Serbia and the

Ukraine.

Page 103: GAP Inc

GAP’s Inc. 103

Strategies reviews:

The risk that changes in general economic conditions or consumer spending patterns will have a

negative impact on the company’s financial performance or strategies;

• The highly competitive nature of the company’s business in the United States and

internationally;

• The risk that the company or its franchisees will be unsuccessful in gauging fashion trends and

changing consumer preferences;

• The risk that the company’s efforts to expand internationally may not be successful and could

impair the value of its brands;

• The risk that trade matters, sourcing costs, events causing disruptions in product shipments

from China and other foreign countries, or an inability to secure sufficient manufacturing

capacity may disrupt the company’s supply chain or operations, or impact its financial results;

• The risk that the impacts of the March 2011 earthquake, tsunami and nuclear crisis in Japan,

including reduced consumer spending, will continue to have adverse effects on the company’s

business, financial position and strategies;

• The risk that the company’s franchisees will be unable to successfully open, operate, and

grow the company’s franchised stores;

• The risk that the company or its franchisees will be unsuccessful in identifying, negotiating,

and securing new store locations and renewing or modifying leases for existing store locations

effectively;

• The risk that comparable sales and margins will experience fluctuations;

• The risk that the company will be unsuccessful in implementing its strategic, operating and

people initiatives;

Page 104: GAP Inc

GAP’s Inc. 104

• The risk that changes in the company’s credit profile or deterioration in market conditions

may limit its access to the capital markets and adversely impact its financial results and its

ability to service its debt while maintaining other initiatives;

• The risk that updates or changes to the company’s information technology (“IT”) systems may

disrupt its operations;

• The risk that acts or omissions by the company’s third-party vendors, including a failure to

comply with the company’s code of vendor conduct, could have a negative impact on its

reputation or operations;

• The risk that the company does not repurchase some or all of the shares it anticipates

purchasing pursuant to its repurchase program;

• The risk that the adoption of new accounting pronouncements will impact future results;

• The risk that changes in the regulatory or administrative landscape could adversely affect the

company’s financial condition, strategies, and results of operations; and

• The risk that the company will not be successful in defending various proceedings, lawsuits,

disputes, claims, and audits.

Page 105: GAP Inc

GAP’s Inc. 105

6. Strategic Alternatives and Recommended Strategy.

Strategic Alternatives

Suggested strategies:

growth strategy through multiple brands, channels and geographies;

• sustained growth across the business;

• future revenue mix between North America, international and online;

• reducing dependency on North America stores;

• international growth, including additional company-operated stores in China, Europe

and Japan; franchise growth worldwide; Old Navy expansion internationally; and further

international online expansion;

• Athleta and Piperlime growth, including through additional Athleta stores and potential

Piperlime stores;

• pipeline speed;

• overall consistency, including in products, marketing, execution and results;

• new product categories;

Table 6: TOWS Matrix for GAP Inc.

Page 106: GAP Inc

GAP’s Inc. 106

• third party partnerships;

• growing the top line through modest positive comps and growth vehicles that deliver

solid returns;

• expanding gross margin;

• maintaining expense discipline;

• future margins, including returning operating margin to its earlier highs over time;

• distributing excess cash to shareholders through dividends and share repurchases;

• growing total North America sales through a smaller, healthier specialty store fleet

supplemented by sales growth in the online and outlet channels;

• future North America store counts and square footage;

• future costs and merchandise margins, including impact of expected normalized cotton

prices in 2012;

• rebuilding financial performance;

• future online revenue and operating income;

• online ship-from-store expansion and impact;

• mobile ecommerce initiatives and impact, including multi-channel initiatives;

• product improvements;

• future marketing initiatives and spending; and

• Store remodels.

Page 107: GAP Inc

GAP’s Inc. 107

Strategy Pros Cons

Global expansion

Labor costs in China10-20%,

Inflation in China.

Economic problems in Europe (unemployment)

Focus on the Internet market

Focus on the Children Segment

2010 survey shows that while 71% of parents are personally affected by the economic downturn, 90% say they are spending less on themselves so they can spend more on their children. (GapKids and babyGap)

China market Growth China’s GDP is increasing at a rate faster than US GDP

Downsizing the US stores (By 2013, closing 200 Gaps, bringing the fleet down to 700 units, and “skinnying down” Banana Republic to 425 units from the current 456. Old Navy will pare down to 950 units from 1,027.

Maximizing” the pipeline focus on new category development (Old Navy – Jewelry)

Page 108: GAP Inc

GAP’s Inc. 108

Recommended Strategy

We recommend the following strategies:

Page 109: GAP Inc

GAP’s Inc. 109

Implementation

Evaluation and Control

The concept is to measure the overall performance for the new business unit “GAP Inc.” and

its effect

Output controls

1. Input controls

2. Behavior controls

3. Risk Management

The Board has an active role in overseeing the management of the Company’s risks.

Annually, the Company’s Internal Audit department performs a comprehensive enterprise

risk assessment encompassing a number of significant areas of risk, including strategic,

operational, compliance, financial, and reputational risks. The assessment process is

designed to gather data regarding the most important risks that could impact the

Company’s ability to achieve its objectives and execute its strategies. Primary assessment

methods include interviews with key executives and Board members, review of critical

Company strategies and initiatives, and monitoring of emerging industry trends and issues.

The assessment is reviewed by the Company’s CEO, Chief Financial Officer (“CFO”), and

Chief Compliance Officer and presented to the Board to facilitate discussion of high risk

areas. It provides the foundation for the annual Internal Audit plan, management’s

monitoring and risk mitigation efforts, and ongoing Board oversight. In addition, on a

regular basis, management communicates with the Board, both formally and informally,

about key initiatives, strategies and industry developments, in part to assess and manage

the potential risks.

Page 110: GAP Inc

GAP’s Inc. 110

While the Board of Directors has the ultimate oversight responsibility for the risk

management process, various committees of the Board also have responsibility for risk

management. In particular, the Audit and Finance Committee focuses on financial and

compliance risks, and the Compensation and Management Development Committee sets

employee incentives with the goal of encouraging an appropriate level of risk-taking,

consistent with the Company’s business strategies.

Compensation Risk Assessment

The management conducted a comprehensive overall review of each of the Company’s

compensation policies and practices for the purpose of determining whether any of those

policies and practices are reasonably likely to have a material adverse effect on the

Company. As a part of this review, each of the Company’s compensation policies and

practices were compared to a number of specific factors that could potentially increase risk,

including the specific factors that the SEC has identified as potentially triggering disclosure.

The Company balanced these factors against a variety of mitigating factors. Examples of

some of the mitigating factors are (i) compensation policies and practices are structured

similarly across business units; (ii) the risk of declines in performance in our largest business

units is well understood and managed; (iii) incentive compensation expense is not a

significant.

percentage of any significant unit’s revenues; (iv) for executives, a significant portion of

variable pay is delivered through long-term incentives which carry vesting schedules over

multiple years; (v) a mix of compensation vehicles is used; (vi) stock ownership

requirements for executives are in place; (vii) significant incentive plans are capped at all

levels; (viii) threshold levels of performance must be achieved for the bulk of variable pay

opportunities; and (ix) a clawback policy with respect to financial restatements is in place.

Management’s assessment was also presented to the Company’s Chief Compliance Officer

and the Chair of the Board’s Compensation and Management Development Committee. As

a result of management’s review, the Company determined that its policies and practices

are not reasonably likely to have a material adverse effect on the Company.

Page 111: GAP Inc

GAP’s Inc. 111

Page 112: GAP Inc

GAP’s Inc. 112

Conclusion

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

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

expert in the clothing retailer industry with different brands maintaining their

effects in different niche market. For example, Old Navy covers price conscious

shoppers and Banana Republic is an attraction for p e o p l e w h o w o u l d p a y a

h i g h e r p r i c e f o r m o r e s o p h i s ti c a t e d d r e s s . H a v i n g f a c e d s o m a n y different

hurdles, Gap has proved its worthiness. But current problems in cash flow shows need f o r t h e

c o m p a n y ’ s c h a n g e i n m a r k e ti n g , m a n a g e m e n t , o r fi n a n c i a l s t r a t e g i e s .

S i n c e i t i s a n established name, if strong plans are traced out, the company

should be able to maintain its superiority in retail industry.