Strategic Audit of the Gap, Inc.

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Strategic Audit
of
The Gap, Inc.

Submitted by: Chris Bess, Teddy Ormsbee, Tiffany Sayers, and Jeremey Williams

Submitted to: Professor Ditmore

13 April 2010

Table of Contents
I. Current Situation: The Gap in 20023
A. Past Corporate Performance3
B. Strategic Posture4
II. Corporate Governance5
A. Board of Directors6
B. Top Management7
III. External Environment: Opportunities and Threats8
A.) Societal Environment8
B.) Task Environment10
IV. Internal Environment: Strengths and Weaknesses11
A. Corporate Structure11
B. Corporate Culture12
C. Corporate Resources (Value Chain Analysis)12
V. Analysis of Strategic Factors15
A. Key Internal and External Strategic Factors15
B. Review of Mission and Objectives16
VI. Alternatives and Recommendations16
A. Strategic Alternatives16
1. Growth16
2. Stability18
3. Retrenchment18
B. Recommended Strategy19
VII. Implementation19
VIII. Evaluation and Control21
References22
Appendices……………………………………………………………………………………….23

I. Current Situation: The Gap in 2002
Gap, Inc’s existence began in 1969 as a small single store. Over the years it has expanded to a multi-national corporation and has undergone numerous transformations that have earned it the recognition of a leading specialty retailer. The Gap division of Gap Inc., which consists of Gap, GapKids, BodyGap, and babyGap offers an extensive array of product lines that include clothing, accessories and personal care products for men, women, children, and babies (gapinc.com). Despite the company’s great feats, however, by 2002 Gap Inc. was suffering from significant losses and deteriorating credit scores that were only exasperating its financial woes. This in depth strategic audit will draw a complete picture of Gap’s situation in 2002 and offer strategic recommendations for the suffering company based on this analysis.

A. Past Corporate Performance
Gap has reported losses in its gross profit margin over the past three years. It had small positive growth in overall revenue from 2001 to 2002, yet experienced declines in comparable store sales in the same years. Specifically, Gap Domestic had a twelve percent decrease in comparable store sale in 2001 compared with a decrease of only one percent in 2000; Gap International’s comparable store sales decreased by eleven percent in 2001 and only one percent in 2000. These declines are marked by poor product acceptance that resulted in a significant percentage of merchandise sold at marked-down prices. The marked-down prices, as well as a $52 million charge for cancelled product orders can be blamed for two notable issues on the company’s financial statement that influenced the company’s losses: cost of goods sold and cost of goods sold as a percentage of net sales. Over the years from 1999 to 2001, the cost of goods sold as a percentage of net sales has climbed steadily and reached an all-time high of 64.3% in the last year. Since revenue grew at a slower rate than cost of goods sold, the marked-down prices caused merchandise margins to decrease by almost five percentage points and profitability suffered. These figures and comparisons are all evidenced on Gap’s 10-K form filed with the U.S. Securities and Exchange Commission in 2002.

When compared to the overall industry, Gap has not performed as well as its competitors. It is still at the top of the retail industry in terms of sales, nevertheless it experienced lower growth rates than its competitors. In other words, Gap lost valuable sales to its competitors. It also had lower than average inventory turnover, which is to be expected given its aforementioned issues with inventory management. To view a complete picture of Gaps performance, please refer to the financial statements in the appendices of this paper beginning on page 22.

B. Strategic Posture
The company’s current mission is stated as, “Gap, Inc. is a brand-builder....
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