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GAP Inc.

Strategic Audit

GAPs 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 &
Amr Negeda: (Current Situation & Corporate
GAP Inc. Strategic Audit

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 des cr i pt i on pr oces s , i t i ncl udes t he f our maj or br ands t hat ar e
par t of Gap, I nc. Thes e brands include Gap, Banana Republic, Old Navy and
Piperlime. A Managerial Anal ysi s is included herewith that gives an insight into
SWOT analysis and Porters Fi ve Forces Analysi s 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 companys progress. The paper also keeps close track of
companys social, ethical, environmental and managerial aspects in day to day
operations. Fut ur e expect at i ons and pos s i b l e di ver s i f i cat i on or ant i -
di ver s i f i cat i on pr oces s t hat t he 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.

GAP Inc. Strategic Audit

1. Current Situation. ........................................................................................................... 5
A. Current Performance (ROI. MS, Profitability) .................................................................. 6
B. Strategic Posture. (Mission. Obj., Strategies, Policies) ................................................... 16
2. Corporate Governance. ................................................................................................. 22
A. Board of Directors. ....................................................................................................... 22
B. Top Management. ........................................................................................................ 34
3.External Environment: Opportunities and Threats (SWOT) ................................................ 38
A. Sustainability Issues.
B. Societal Environment....
1.Economical Analysis
2. Political Analysis
3. Technological Analysis. ............................................................................................ 44
4. Socioculturall Analysis. ............................................................................................ 46
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). ................................................................... 65
4. Internal Environment: Strengths and Weaknesses (SWOT) ............................................ 67
A. Corporate Structure. ..................................................................................................... 67
B. Corporate Culture. ........................................................................................................ 68
C. Corporate resources...................................................................................................... 71
D. Internal Factors Analysis Summary (IFAS). ................................................................... 92
5. Analysis of strategic Factors (SWOT). ............................................................................ 93
A. Situational Analysis. ...................................................................................................... 98
B. Review of Mission and Objectives. ................................................................................ 99
GAP Inc. Strategic Audit

6. Strategic Alternatives and Recommended Strategy. .................................................... 103
A. Strategic Alternatives .................................................................................................. 103
B. Recommended Strategy .............................................................................................. 106
7. Implementation .......................................................................................................... 107
8. Evaluation and Control ............................................................................................... 107
A. Output controls .......................................................................................................... 107
B. Input controls ............................................................................................................. 107
C. Behavior controls ........................................................................................................ 107
D. Risk Management ....................................................................................................... 107

List of Figures:
Figure 1 Organization Chart for GAP Inc .......................................... Error! Bookmark not defined.
Figure 4 Organization Chart for GAP International ......................... Error! Bookmark not defined.
Figure 5: SWOT Analysis for GAP Inc ............................................... Error! Bookmark not defined.

List of Tables:
Table 1: Comprehensive Income Statements .. ........................................................................... 7
Table 2: Balance Sheets . ................................................................................................................ 9
Table 3: Cash Flows...5
Table 4: Financial Analysis Ratios ................................................................................................. 79
Table 5 EFAS table for Gap Inc. 65
Table 6: IFAS table for GAP Inc. ..32
Table 7: SFAS Matrix for GAP Inc .................................................................................................. 98
Table 8: TOWS Matrix for GAP Inc .............................................................................................. 103

GAP Inc. Strategic Audit

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. 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.

GAP Inc. Strategic Audit

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 opportunityto fill in with trend-right product and chase products that make sense to
usand focus on new category development, which have been shortfalls. At Old Navy, he said,
jewelry will become a significant category.

GAP Inc. Strategic Audit

Financial Statements and Analysis
Table 1: Income Statements
Currency in
Millions of US Dollars
As of:
Jan 31
Jan 30
Jan 29
Jan 28
4 Year
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

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

GAP Inc. Strategic Audit

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%.

GAP Inc. Strategic Audit

Table 2: Balance Sheets
Currency in
Millions of US Dollars
As of:
Jan 31
Jan 30
Jan 29
Jan 28
4 Year

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 --

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

GAP Inc. Strategic Audit

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

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

GAP Inc. Strategic Audit

Table 3: Cash Flows
Currency in
Millions of US Dollars
As of:
Jan 31
Jan 30
Jan 29
Jan 28
4 Year
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 --

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

total debt repaid -138.0 -50.0 -3.0 --

GAP Inc. Strategic Audit

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

GAP Inc. Strategic Audit

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

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.
Gap Services, Inc
GAP Inc. Strategic Audit

Athleta Inc
GPS Consumer , Inc
GPS (Great Britain) Ltd
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
Gap Outlet
Baby Gap

GAP Inc. Strategic Audit

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).
GAP Inc. Strategic Audit

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 organizations 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
companys 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.

GAP Inc. Strategic Audit

III. GAP Inc.s Current Strategies:
A. Corporate Strategy

1. Diversified brands give Gap an edge: Old Navys value-priced products
enable The Gap, Inc to strive during economic downturn. Banana Republics
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
Chinas 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 companys 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
customers in 90 countries, an increase from 25 countries since the beginning
GAP Inc. Strategic Audit

of 2010. One consumer trend that continues to gain momentum is
conveniencecustomers 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
customers 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 womans 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 Worlds 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.
Our Code of Business Conduct has been the foundation of our corporate
compliance program since 1998. Some highlights:
GAP Inc. Strategic Audit

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
All employees are regularly reminded of the Code and are encouraged to report
any suspected violations through the company's Open Door process, the 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 &
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.
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
GAP Inc. Strategic Audit

education, to monitor and audit Code compliance, and to investigate and
respond to all suspected Code violations.
The department may be contacted at
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.
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.
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.

GAP Inc. Strategic Audit

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
A. Board of Directors:
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
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.

GAP Inc. Strategic Audit

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 19942002 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
GAP Inc. Strategic Audit

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 companys mission, long-term strategy and objectives, and oversight of the
companys risks while evaluating and directing implementation of company controls and
The board may delegate some of its responsibilities to the committees of the board of
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 boards 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
GAP Inc. Strategic Audit

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 companys 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 boards
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
GAP Inc. Strategic Audit

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 boards
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 companys 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 companys 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
GAP Inc. Strategic Audit

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 directors 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 companys 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.
GAP Inc. Strategic Audit

(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
(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 companys equity or debt or 5% of a
directors net worth (including a right to acquire that percentage) should be brought to the
attention of the companys Chief Compliance Officer to determine if the investment or
potential investment could be considered an improper financial interest under the
companys 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
GAP Inc. Strategic Audit

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 companys 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 Communications will be received
by the Chairman and Lead Independent Director, as well as the companys Corporate
Secretarys 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
GAP Inc. Strategic Audit

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.
GAP Inc. Strategic Audit

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 accountants 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
(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
GAP Inc. Strategic Audit

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.
GAP Inc. Strategic Audit

(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
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
GAP Inc. Strategic Audit

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 Companys
operations and the leadership of the Board. In particular, having Mr. Murphy act in
both these roles increases the timeliness and effectiveness of the Boards
deliberations, increases the Boards visibility into the day-to-day operations of the
Company, and ensures the consistent implementation of the Companys 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 NBAs 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.
GAP Inc. Strategic Audit

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 Areas 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 worlds 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.
GAP Inc. Strategic Audit

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:,,, and 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.

GAP Inc. Strategic Audit

GAP Inc. senior managers and executives pose diversified experiences including sales,
marketing, merchandising, distribution, strategic planning, and finance acquired through years
of experience in
GAPs Inc.

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
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 factorys 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 industrys 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.
GAPs Inc.

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.
GAPs 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.
GAPs Inc.

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

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.
GAPs Inc.

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 Whats
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 companys
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.
GAPs Inc.

- 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, theyre
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
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 companys 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.
GAPs Inc.

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 markets closing bell. Seven hundred Gap
stores nationwide hosted simultaneous acoustic concerts featuring local musicians a
nod to the brands 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
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
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
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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 recoverys
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 countrys 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%,
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despite the 4.5% decrease brought by the 2008-09 recessions, and an increase of .6% in
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.
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 industrys 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.
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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
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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
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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
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, companys operations may be impaired. Some
countries also control the entrance of foreign companies which would also affect the
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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
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 employees right to form unions and working
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
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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 companys 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
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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
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
nations 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 Gaps
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.:
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- 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 (Porters 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.
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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
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.

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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
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
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
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 households general expenditures.
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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 mens wear, womens wear, and childrens 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
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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 industrys 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
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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.
Gaps 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 Dillards, 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 Gaps 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 Factors
Every 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
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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 industrys products,
categorization becomes more difficult thus your product draws fewer comparisons to
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.

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
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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,, 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 countrys 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
Gaps revenue growth as China and Chile contribute a higher proportion to the companys
overall sales in the coming years.
Growing market for plus size apparel for women in the US and the UK
The market for womens plus size apparel (womens 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 1834, 20 million in the age group of 3554, 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.
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In the UK, the plus size market represents 23.2% of the womens 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 womens 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 Europes 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
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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,,,, and 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.
Weak consumer spending in Europe and the US
Europe and the US are Gaps 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 companys 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
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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 companys upscale brands such as Gap, Banana Republic and Piperlime.
High input cost can pressurize Gaps margins
GAPs Inc.

Gaps 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 200910. The countrys
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
GAPs Inc.

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 companys
products. Counterfeits not only deprive Gap of revenues, but also dilute its exclusivity and
brand image.

The specialty apparel industry is facing increasing competition and market segmentation, while
costs to expand remain high.
GAPs Inc.

D- External Factors Analysis Summary (EFAS).
Table 3 EFAS table
External Factors Weight Rating
Growth in online retail spending 0.11 4 0.44
11.3% average annual growth rate
Franchising agreements 0.09 4 0.36

Global new market in Europe and
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
0.03 2 0.06
The location of GAP stores is a key
factor of its strategy.

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
0.09 4 0.36
10 20% increase based on
High input cost can pressurize Gaps
0.09 4 0.36

Economic problems in Europe

0.05 1 0.05
Unemployment; will hinder the
Europeans consumer spending
and have a negative impact on
apparel sales.
GAPs Inc.

Growing market for imitated

0.06 3 0.18

Concerns about inflation in China. 0.09 4 0.36
On April 17th, 2011, Chinas central
bank- Chinas rapid economic
Total Scores 1.00 3.32

GAPs Inc.

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.
GAPs Inc.

Gaps 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 couldnt 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.
GAPs Inc.

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 its just not worth it anymore. We
were spending years investing in female leaders only to lose them after maternity leave
because they couldnt figure out how to swing both work and family.
Thats 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 percentstill 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
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
Do: whats right they treat every customer, supplier and employee with respect.
GAPs Inc.

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 its clearly
reaching far and wide. In 2009 and 2010, participation rates were 87 and 83 percent,
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
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 countrys all-employee meeting was structured
GAPs Inc.

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.
GAPs Inc.

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
In the beginning Gap was selling only Levis 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.
GAPs Inc.

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 brands successful 1969
Premium Jeans collection. Our customers responded positively because of our perfect
combination of style, fit, quality and price. Were now expanding the 1969 product line to
kids and baby, and will continue to work this formula in refreshing other key product
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 weekfor work, weekend or going out.

GAPs Inc.

Life Cycle
Gap Inc. is currently operating in the shakeout stage of the life cycle. Gaps growth rate is
beginning to slow down and the companys products are beginning to become saturated.

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.
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
GAPs Inc.

GAP opened its first store in Melbourne, Australia at Chadstone Shopping Centre. In
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
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 attracts over 18 million visitors annually.
GAPs Inc.

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.

Marka Hansen, the executive who oversaw the logo change, resigned February 1, 2011.

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
GAPs Inc.

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.
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, were
determined to achieve our goal of growing top line revenue. Its 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
were 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
companys business model. We continued to gain market share this year, through our large
global online expansion and the encouraging results for Athleta and Piperlime. Were given
the freedom to make investments for the long term, and its paying off. Were on track to
double our revenue from about $1 billion in 2009 to $2 billion in 2014.
GAPs Inc.

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
Ga p h a s b e e n a b l e t o me e t t h e i n v e s t o r s e x p e c t a t i o n mo s t o f
t h e t i me s s i n c e i t s i ncor por at i on. I t has been payi ng out r egul ar
di vi dends and t he s t ock t r end s hows t hat t he companys 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 companys ability to buffer the
so called recession is a sign of companys stability.

GAPs Inc.

Table 4: Financial Analysis Ratios
Ratio data TTM as of 01/28/2012
Profitability - gap inc/the (GPS)
Return on Assets
Industry Comparison 12.41%

Return on Equity
Industry Comparison 24.37%
Return on Capital
Industry Comparison 21.15%

Margin Analysis - gap inc/the (GPS)
Gross Margin
Industry Comparison 36.25%

Levered Free Cash Flow Margin
Industry Comparison 4.32%
Industry Comparison 13.36%

SG&A Margin
Industry Comparison 26.37%
Asset Turnover - gap inc/the (GPS)
Total Assets Turnover
Industry Comparison 2.0x

Accounts Receivables Turnover
Industry Comparison No data available
Fixed Assets Turnover
Industry Comparison 5.7x

Inventory Turnover
Industry Comparison 5.7x
Credit Ratios - gap inc/the (GPS)
Current Ratio
Industry Comparison
Quick Ratio
Industry Comparison
Long-Term Solvency - gap inc/the (GPS)
Total Debt/Equity
Industry Comparison 60.4x

Total Liabilities/Total Assets
Industry Comparison 62.9x
Growth Over Prior Year - gap inc/the (GPS)
GAPs Inc.

Total Revenue
Industry Comparison -0.78%

Tangible Book Value
Industry Comparison -29.43%
Industry Comparison -25.83%

Gross Profit
Industry Comparison -10.44%
Industry Comparison No data available

Industry Comparison -0.31%
Diluted EPS Before Extra
Industry Comparison -17.02%
Capital Expenditures
Industry Comparison -1.62%
Cash From Ops.
Industry Comparison -21.85%
Levered Free Cash Flow
Industry Comparison -47.22%

GAPs Inc.

Quarterly Earnings & Estimates - GAP INC/THE (GPS)
EPS - Earnings Per Share Pre Exceptional

Gap Inc.'s Quarterly Earnings
Gap 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 Earnings
Gap 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
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.
GAPs Inc.

Annual Revenues - GAP INC/THE (GPS)

Gap Inc.'s Annual Revenues
Gap 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
Dividend $0.50

Dividend Yield 1.79%
GAPs Inc.

GPS:US Historical Stock Quote
GPS:US Advanced Stock Chart

GAPs Inc.

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 Companys 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.

GAPs Inc.

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 Gaps 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 firms core ratios, Gaps 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 Gaps 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.
GAPs Inc.

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

GAPs Inc.

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
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 industrys 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.
GAPs Inc.

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 Gaps 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
GAPs Inc.

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 Companys
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 Boards 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
GAPs Inc.

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 companys 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.
GAPs Inc.

GAPs Inc.

Internal Factors Analysis Summary (IFAS).
Table 4: IFAS table for GAP Inc.
Internal Factors Weight Rating
Large network of physical stores 0.10 5 0.50

Building financial strength 0.06 4 0.24
Strong margins compared to
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 0.09

Well balanced portfolio of value as well
as Low productivity of companys stores
upscale brands
0.05 3 0.15

Low productivity of companys 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.
( products shortage, shipment delay
and increased costs).
Less attractive in trendy clothing 0.06 3 0.18
product lines are less attractive
clothing to consumers than
Uncontrollable production processes 0.08 4 0.32
Control of production processes is a
key factor among fast fashion
High input cost 0.10 3 0.30
can pressurize Gaps 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

GAPs Inc.

Analysis of strategic Factors (SWOT).
SWOT Analysis
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 companys brand names. At the end of FY2011, Gap had 178
franchise stores. Though franchise stores are a small part of the companys business, they play
an important role in aiding Gaps efforts to expand internationally.
Apart from the brick and mortar format, Gap also has presence in various countries through its
online retail websites. The companys 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
companys 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
GAPs Inc.

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 companys three pronged strategy has allowed it to expand into various geographies.
Wide spread presence broadens the companys 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 companys
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
companys 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.
Gaps 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.
GAPs Inc.

Thus, with the help of various brands focused on serving separate target audience Gap has
been able to penetrate different market segments. While the companys 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 companys operating margin was 13.4%. In comparison, the
operating margin of Gaps 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 companys 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
companys 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.

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 companys 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 Gaps control on the quality of the finished
GAPs Inc.

products. In the past, Gap has recalled some of its merchandise procured from China as well as
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 companys brand as well
as demand for its products.
Low productivity of companys 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 companys 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 FY200610. In FY2011, the companys 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, Gaps 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
Gaps 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 companys total
revenues. The remaining segments Europe and Asia contributed merely 5.4% and 3.6%
GAPs Inc.

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.

GAPs Inc.

5. Situational Analysis.
Table 5: SFAS Matrix for GAP Inc.
Strategic factor Weight Rating
Short Inter Long

Total Scores 1

GAPs Inc.

6. Review of Mission and 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
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.
GAPs Inc.

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
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

GAPs Inc.

Strategies reviews:
The risk that changes in general economic conditions or consumer spending patterns will have a
negative impact on the companys financial performance or strategies;
The highly competitive nature of the companys business in the United States and
The risk that the company or its franchisees will be unsuccessful in gauging fashion trends and
changing consumer preferences;
The risk that the companys 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 companys 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 companys
business, financial position and strategies;
The risk that the companys franchisees will be unable to successfully open, operate, and
grow the companys 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
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;
GAPs Inc.

The risk that changes in the companys 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 companys information technology (IT) systems may
disrupt its operations;
The risk that acts or omissions by the companys third-party vendors, including a failure to
comply with the companys 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
companys 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.

GAPs Inc.

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.
GAPs Inc.

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.

GAPs Inc.

Strategy Pros Cons
Global expansion

Labor costs in China10-20%,
Inflation in China.
Economic problems in Europe
Focus on the Internet

Focus on the Children
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
Chinas 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

Maximizing the pipeline
focus on new category development
(Old Navy Jewelry)

GAPs Inc.

Recommended Strategy

We recommend the following strategies:

GAPs Inc.


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 Companys risks.
Annually, the Companys 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
Companys 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 Companys 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, managements
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.
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
GAPs Inc.

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 Companys business strategies.
Compensation Risk Assessment
The management conducted a comprehensive overall review of each of the Companys
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 Companys 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
percentage of any significant units 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.
Managements assessment was also presented to the Companys Chief Compliance Officer
and the Chair of the Boards Compensation and Management Development Committee. As
a result of managements review, the Company determined that its policies and practices
are not reasonably likely to have a material adverse effect on the Company.

GAPs Inc.

Established in 1969 as a small retailer of jeans, Gap has been able to surpass
various hurdles to reach todays desi gnati on of top US apparel retailer. It i s 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 peopl e who woul d pay a
hi gher pr i ce f or mor e s ophi s t i cat ed dr es s . Havi ng f aced s o many different
hurdles, Gap has proved its worthiness. But current problems in cash flow shows need f or t he
company s change i n mar ket i ng, management , or f i nanci al s t r at egi es .
Si nce i t i s an established name, if strong plans are traced out, the company
should be able to maintain its superiority in retail industry.