Gap is a leading retailer of cloths and other body care accessories in North America. Gap has been operating under four brand names, banana, Gap, Fourth and Towne and Old navy. This case study is an illustration of strategic issues faced by this company, and consequently which led to a lot of managerial and financial problems in the company.
These issues were a threat to the company’s market share since they led to a compromise in quality and uniqueness. Pressler became the company’s chief executive officer in 2002 and before then, the companies operating under Gap were considered the best in the region in terms of style (Wee, 2002).
Despite the fact that his strategies led to the reduction of a lot of costs, it also placed the companies at stake of losing its customers and reputation. One of the cost-cutting strategies used by Pressler was closing many stores and cutting down on the inventory in the stores.
This led to the creation of lower quality products which were simply copied by other retailers hence competition stepped up. He also separated the three brands such that each operated independently.
These strategies worked at first, but in the long run, they started to backfire and the company started losing a great deal in terms of sales, productivity and profitability. The results of this included an increase in the rate of employee turnover, production of low quality out fits and a reduction in the market share to rival retailers such as J. crew and urban outfitters (Lee, 2004).
Long term and immediate problems in the case
The immediate problems in this case are a drop in profits as experienced between the fiscal years 2005 and 2006. During this period, “the revenue went down by 1.5%, operating profits decreased by 4.2% while the net profit decreased by 3.2%.
This company lost its status as indicated by its decline in rank from position 40 in 2005 to position 52 in 2006” (Wee, 2004). This is an indication that twelve more companies performed better than Gaps between 2005 and 2006. The attempt to solve this problem by introducing discounts on the goods meant compromised quality.
Gap, for example, was targeting the high-income earners by stocking high quality attires at high prices, and the nature of its market design required nothing less of unique owing to the prices.
This is the store that was affected most since after showing signs of deterioration it was not easy for them to assure their customers that they were coming up again. They were dealing with a very sensitive group in the market and retailers such as Wal-Mart came up and replaced Gap.
The other stores were not performing well, but they were still not performing at their optimum level. Old navy, for example, resorted to stocking ordinary clothes found in other stores hence their customers discredited them.
Earlier on this store stocked fashionable attires at affordable prices that were an attracting to the middle-class community. They had a milestone from the other retailers owing to their sense of style which was eroded with the quest to cut on costs.
Banana, on the other hand, which earlier on dealt with smart office wear, resorted to casual as they perceived that they would make more profit on this (Wheelen & Hunger, 2000). The greatest danger, therefore, that this company was faced with in the short circuit was losing the customers gradually from all directions.
In the long term, the company seemed to be facing more serious problems such as the prospect of going out of the market. This owe to the fact that despite them losing their customers, they were losing their employees. The people who had made Gap what it was before the changes were made begun leaving one by one.
The first person to head for the exit was the vice president of the company. Other employees followed the suit while others were retrenched as part of reducing the cost. The long- term threat faced by the company as a result of this exodus was the prospect of employing other people beginning with the top executives.
It would be difficult for them to replace the people who were there before and even harder for them to take the company to the extent that it had attained before the decline.
By the time the new personnel managed to bring the company back together, they would be faced with another task of coming up with strategies that would allow them win the trust of their customers (Bhesdadiya, 2010). Therefore, In the long run, the company is at risk of closing up most of its stores due to under performance.
In order to preserve the remains of the company, there are some strategies that need to be put in place. The first step towards this is to evaluate the extent of their losses and come up with ways of recovering from these losses.
There are three possible strategic alternatives that when applied skillfully can lead the company back on its feet. The first one of these strategies is referred to as the turnaround strategy which involves altering the operations of the company completely.
The second one is referred to as divestiture strategy, which involves, selling off a part, or a subsidiary of the company. The third strategy is that of diversification in the product line, and this involves discovering other products to replace the ones that have already lost their values because of counterfeits (Wheelen & Hunger, 2000).
Under the first strategy, the actions that were taken included cutting on costs, closing of stores, and laying off workers. The main idea behind shutting down many stores was so that they could be in a position to concentrate their resources on the few hence maximizing their operations.
This did not work for their good owing to the fact that customers in the affected areas were disappointed. This also led to a reduction in the credibility of the company since closing of the stores seemed to be a sign that they were not doing so well. The other action under this strategy was lay off of workers.
This to them seemed like an opportunity to cut down costs by reducing the amount of salaries and wages paid to the workers. Some of the employees especially the ones on top managerial positions left the company at their own choice, owing to the falling reputation of the company (Lee, 2004).
This strategy as well worked against the company since it lost the best of its work force most of which joined their competitors such as J. Crew as indicated in annex VIII.
The second strategy that was resorted to in attempts to raise the company’s reputation and profitability was divestiture. This involves selling one or more divisions or even selling an entire division to other companies that are performing well.
The idea of selling one or more divisions seemed a good one considering the division to be sold was the one that was not bringing in enough profits. They would then concentrate on the remaining division.
The problem with this strategy was that selling the entire division or a part of it would mean that the company has to trade off some of its brands (Wee, 2002). The customers who were inclined to that one particular division would end up moving with the brand hence resulting in a reduction in the market share for the company.
The competitors who were the most likely buyers would then obtain a mileage from this, and they would take advantage of the situation and lure more of customers from Gap’s stores to their stores. In other words, this would create a loophole in the competitive advantage of Gap Inc.
The third strategy that was resorted to by Gap Inc’s management was the diversification in the product line. The first step taken was the introduction of another store referred to as Forth & Towne. This was aimed at stocking accessories for women beyond 35 years of age.
The other stores were also re-branded in an attempt to give them a new look. Gap would now offer stylish outfits for the high- income earners, which means that the products thereof were quite expensive. The banana store was expected to stock clothes that were in style, but at prevailing prices while the Old navy was to maintain the affordable, trendy clothes targeting the teenagers.
The change in Old navy stores however, came about when the items were expected to be cleared off in three months instead of the initial nine. This would be useful, as it was necessary for their items to keep up with the continually changing trends. They also introduced new items such as baby clothing and maternity outfits for expectant mothers (Wee, 2002).
The main advantage of this strategy is that it would work towards capturing a large market share with the high-quality products associated with the brand names. This diversification would ensure specialization and hence production of quality products (Bhesdadiya, 2010).
Each division was expected to perform their own interpretation on the market trends and come up with suggestions that would help them improve and get to the top of the competition as they were before the decline. The disadvantage of this however, was that it required them to price most of their products very highly in order to avoid incurring losses.
The entire process of changing their strategies was an expensive one and the company needed to find ways of recovering the cost. That is their products eventually ended up being exorbitant in their respective categories. The disadvantage with this is that most of buyers in the market search for products that allow them spend less owing to the poor economic conditions. This means that they may even lose the little market share that had remained.
After these strategies were implemented, the company still had issues of stabilizing. Their problem was that of trying to change the perception of their customers so that they can establish confidence in their products once more.
The operations and organization of the company had improved more than it was in the previous management, but this was only visible to the people working inside the organization. Customers who had already changed their clients found it difficult to come back to Gap and this was mostly because of the betrayed trust.
This remained the greatest challenge to the organization and one of the strategies they used to counteract this was to develop research strategies in all the departments which would look into the current needs of the customers (Wheelen & Hunger, 2000).
They came up with extensions to the products that they offered so that they can increase the scope of their customers. They were forced to take risks such as establishing a new store, Forth and Towne.
This was considered a risk owing to the fact that it came at a time when they were not performing generally well. However, the management considered this possibility worthwhile since at that time they had nothing much to lose.
With time, the company started investing in other stores to increase their margin of operations. They created a new look in their stores as a strategy to attract new customers and as a result get the chance to market their brands a fresh.
They also organized fun activities to help them create awareness of to the public that they are back in the market with new and better stuff to offer.
By 2006, more than one thousand stores had been opened under Gap’s brand name. Some of the antique stores were being closed and replaced by new ones which were performing far much better than the old stores. Despite the increase in the level of expenditure, this company finally reached the point of sustainability (Wheelen & Hunger, 2000).
A new management team was employed in all the stores and ultimately what previously seemed like a poor strategy became the perfect solution to the company.
Updated solutions for the Gap in 2010
By the year 2006, Gap had stabilized its operations, and the only problem then was to increase their share of the market. The SWOT analysis of the company indicates that it has great opportunities for success in the long some of which include the growth prospects of the newly launched store.
Forth & Towne has the capacity to develop beyond the other brands owing to the fact that it was establish after the decline and the customers do have a poor thought of it. They also have the potential of developing their online market to support customers from all over the globe.
The creation of markets in other parts of the world will also ensure that the company captures new market besides the one in North America. This are the opportunities that will enable the company to go back on its feet and by 2010, there is a possibility that it will be performing better than it was before the decline in terms of efficiency, and profitability (Bhesdadiya, 2010).
One of the greatest challenges faced by most companies is usually the change in strategies which typically comes as a result of changes in management. New people in the management team would always want to implement their own strategies, and this has to transform the organization adversely at first.
In the case of Gap Inc., Pressler was not intending to bring the company down, but the introduction of the new strategies had to cause the company to come down first before stabilizing then rising again. Most of the employees who left did so because probably they felt like they could never be ready to adapt to the changes.
Owing to the decline, they opted to join other retailers who were using this opportunity to come up and this made things worse for Gap as the competition stiffened, their products were counterfeited, and they ended up losing a large portion of their market share.
Bhesdadiya, C. G. (2010). Business policy & strategic management: Concepts, skills & techniques. Jaipur, India: Vital Publications.
Lee, L. (2004). “Gap has reasons to dance again”, Business week, 3879, 42.
Wee, H. (2002). “The challenge in store for Gap”, Business week, 3769, 36.
Wheelen, T. L., & Hunger, J. D. (2000). Strategic management and business policy: Entering 21st century global society. Upper Saddle River, N.J: Prentice Hall.