Gap Inc. in 2010: Is the Turnaround Strategy Working?

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Executive Summary
Gap Inc. is facing the problem of decreasing sales in the family clothing store industry. Included in this paper is a detailed analysis of the family clothing store industry. This external analysis has showed that the industry is extremely competitive and difficult to make a profit due to low profit margins.

The internal analysis of the company shows that although sales have decreased, Gap’s financial performance strengthens every year. Their profitability, leverage, and liquidity ratios have improved steadily every year which helps the company maintain a somewhat strong business situation.

There are several possible alternatives for Gap Inc. to help increase sales and market share including maintain status quo, create new product lines and segment their target markets, and expand company operated stores in foreign markets which is the suggested course of action. Problem Statement

The problem facing Gap Inc. is their decreasing sales and market share in the family clothing store industry due to the decreasing popularity of their clothing. Background and History
Gap Inc. has several brands including The Gap, Old Navy, Banana Republic, Athleta, and Piperlime. Gap Inc. was founded in 1969 by Doris and Don Fisher. They started out selling clothing that targeted teenagers in San Francisco and expanded their clothing line to include active wear in 1970. The company went public in 1976.

Gap Inc.’s clothing was popular in the 1990s and as their clothes were becoming popular and sales were increasing rapidly, so was their debt due to expansion. As their long-term debt increased, the quality of their clothing decreased. By 2000, their clothing style was not popular.

The company had a few CEOs including Millar Drexler who was fired due to decreasing sales, Paul Pressler who resigned due to the company’s weak performance and he was replaced by Glen Murphy. Pressler’s turnaround strategy for Gap included reducing long-term debt. Murphy’s turnaround strategy was to expand business internationally and improve on the style and design of the clothing. PESTE Analysis

Political Forces
* Foreign governments; can cause delays or stall shipments by imposing new rules. * Better labour standards in foreign countries could cause an increase in textile prices. * The World Trade Organization. Another Multi-Fiber Arrangement could be imposed in the future. Economical Forces

* Recession - consumers more cautious of prices
* Interest rates will affect a store’s ability to afford loans for expansions * Exchange rates will affect costs to those companies that are importing textiles from foreign countries.

Social Forces
* Consumer’s tastes change frequently in the fashion industry. * Aging population – as the baby boomers age, their fashion needs will be different. * Obesity rates rising, demand for plus size clothing rising * Sweat shops/poor working conditions for employees of suppliers in foreign countries can cause bad publicity Technological Factors

* The internet is becoming a popular way to sell merchandise. * New software and advancements in IT make it easier and more efficient for companies to track inventory and make the ordering process easier. Environmental Factors

* People are more environmentally conscious and want to ensure companies are committed to green practices and are being socially responsible. * Clothing manufacturers can be creating a large amount of pollution due to their operations, especially if running a large plant. Porter’s Five Forces

Threat of Rivalry
Gap Inc.’s competition includes Abercrombie & Fitch, American Eagle Outfitters, Ross Stores, and several small local companies. The threat of rivalry is high due to: * Several competitors; thousands of small local and regional retailers. * No cost to buyers to switch brands.

* Low profit margins; estimated to be only 3.4% in 2008.
Threat of New Entrants
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