Analyzing Gap Inc.: Strategies and Competitive Advantage

1. THE SPECIALTY APPAREL RETAIL INDUSTRY Don Choi Andrew Fung Pamela Ting Amy Whang Susan Yau

2. AGENDA Business Level Strategy Strategic Issues Competitive Advantage Analysis Domestic Company Analysis International Company Analysis Diversification Strategy Expansion Strategy

3. GAP INC OVERVIEW

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5. BUSINESS LEVEL STRATEGY

6. BUSINESS LEVEL STRATEGY • Dual Advantage Strategy • Banana Republic – Benefit advantage strategy • Old Navy – Cost advantage strategy • Gap – In between strategy • Difficult to achieve and sustain • Gap underperformance

7. STRATEGIC ISSUES

8. STRATEGIC ISSUES • Did Gap ever have a competitive advantage and why has it fallen behind its competitors? • Declining comparable store sales in relation to competitors • Cannibalization of sales and no set corporate strategy • Would they have been more successful following a vertical integration strategy? • Originally followed a horizontal integration strategy • Acquired Banana Republic and launched Old Navy • Why did Gap expand internationally when its domestic expansion was unsuccessful? Did international expansion offer differential value? • Unsuccessful store expansion strategy • Decreasing sales relative to store openings

9. COMPETITIVE ADVANTAGE ANALYSIS

10. COMPETITIVE COMPANY ANALYSIS • Cost Advantage • Superior performance through production, supply chain, inventory management • Innovation in logistical and distribution • Benefit Advantage • Skilled Design team • Quality of Merchandise

11. DOMESTIC COMPANY ANALYSISGAP vs AE vs A&F

12. Domestic Company Comparison: Supply Chain Management • GAP INC • Production of Merchandise is outsourced • Maintains inventory in distribution centers • California, Kentucky, Maryland, Ohio, New York, Tennessee, Canada, England • ABERCROMBIE & FITCH • Purchases merchandise from 210 factories and suppliers in 30 countries • Distribution network is relatively simple • Contract carriers • AMERICAN EAGLE OUTFITTERS • Purchases majority of merchandise from international companies • Sophisticated merchandise system

13. Domestic Company Comparison: Inventory Management • GAP INC • Markdowns to clear merchandise • Holds majority of inventory in distribution centers • 2003: Re-evaluated inventory management system • ABERCROMBIE & FITCH • Maintain sufficient quantities of inventory • Rapid Inventory turnover and markdowns • Keeps merchandise fresh and current with fashion trends • AMERICAN EAGLE OUTFITTERS • Merchandise allocated among different stores • Geographic location, customer demographics, store size • Shipped to stores 2-5 times/week • Short lead times: high inventory and asset turnover

14. Domestic Company Comparison: Design • GAP INC • Attempt into trendier apparel • ABERCROMBIE & FITCH and AMERICAN EAGLE OUTFITTERS • “American Surfer” theme • Contract carriers

15. INTERNATIONAL COMPANY ANALYSISGAP VS ZARA

16. International Competitive Advantage Analysis • Drivers of Competitive Advantage • Supply Chain • Production • Distribution • Inventory Management • Innovation and Technology • Design

17. Supply Chain • Zara • Short supply chain = Shorter lead times = Better inventory management • In house production • Centralized distribution • Gap • Long supply chain = Longer lead times = Poor inventory management • Outsourced low-cost production • De-centralized distribution centers

18. Production and Distribution • Zara • Higher turnover = Lower fashion risk = Lower inventory markdowns • 3 weeks to manufacture a new line • 10.67 inventory turnover • Production of small batches • 15% – 20% of sales generated through markdowns • Gap • Lower turnover = Higher fashion risk = More inventory markdowns • 9 months to manufacture a new line • 7.18 inventory turnover • 30% - 40% of sales generated through markdowns

19. Innovation and Technology • Zara • Tight IT integration = Better communication = Better inventory management • In house developed technology • Real time information tracking • Just in time distribution • Gap • Loose IT integration = Poor communication = Poor inventory management

20. Design • Zara • Shorter lead times = More new lines = More designs • Freedom to work • 11,000 distinct items per year • Average shopper visited store 17 times per year • Gap • Longer lead times = Less lines = Less designs • 9 month lead time

21. Design • Zara • Fashionable designs = More sales • Stress catwalk trends for mass market • Accurate trend forecasting led to 1% product failure rate • Gap • Unfashionable designs = Less sales • No clear target trend to predict • Inaccurate trend forecasting led to confusing brand image

22. DIVERSIFICATION STRATEGY

23. Diversification Strategy • Diversification Strategies • Horizontal Integration • Banana Republic • Gap • Old Navy • Vertical Integration

24. EXPANSION STRATEGY

25. Expansion Strategy • Expansion Strategy • Store Expansion Strategy • International Expansion

26. Store Expansion Strategy • Store Expansion • Saturated Market • More stores, but lower comparable sales • Increasing amount of e-commerce

27. International Expansion • International Expansion • 374 Stores internationally • 106 in Canada • 142 in the United Kingdom

28. Recommendations

29. Recommendations • Strategic Issues Revisited • Did Gap ever have a competitive advantage and why has it fallen behind its competitors? • Business Strategy Recommendations • Would they have been more successful following a vertical integration strategy? • Diversification Strategy Recommendations • Why did Gap expand internationally when its domestic expansion was unsuccessful? Did international expansion offer differential value? • International Expansion Strategy Recommendation

30. Did Gap ever have a competitive advantage and why has it fallen behind its competitors? • Business Leve

31. CONCLUSION