Sample Business Paper

Title: Strategic Audit

Summary

This strategic audit focuses on Gap Inc., a US-based retail fashion company that was founded in 1969. The audit is divided into six sections: Current Situation; Corporate Governance; External Environment: Opportunities and Threats (SWOT); Internal Environment: Strengths and Weaknesses (SWOT); Analysis of Strategic Factors; and Alternatives and Recommendations. Some of the issues have stood out in this analysis include lack of a clear strategic direction among top leadership, lack of a strong corporate culture, major imbalances in Gap’s portfolio of products and divisions, and stigma associated with the Gap brand. Failure by the company to rely on consumer research has led to confusion among loyal customers, who have ultimately shifted to competitors’ products.

This strategic audit recommends that centralization of corporate, functional, and business strategies is critical to the formation of a solid, clear strategic direction and corporate culture. This move may ideally entail a spin-off that sets the pace for an elaborate process or reorienting the company’s product offering, brand positioning and efforts to venture into the international and online retail markets. By selling non-performing divisions, Gap will be able to focus on a narrower range of products while at the same time realigning its supply chain, logistics, and product life-cycle with a view to fit into Indian and Chinese markets. This strategic direction will go a long way in easing off the current situation where the company heavily relies on the North American market for revenues.

 

Contents

Summary. 2

  1. Current Situation. 3
  2. Past Corporate Performance Indexes. 3
  3. Strategic Posture. 3

Current Mission. 3

Current Objectives. 4

Current Strategies. 4

Current Policies. 4

  1. Corporate Governance. 5
  2. Board of Directors. 5
  3. Top Management 5

III. External Environment (EFAS): Opportunities and Threats (SWOT) 6

  1. Natural Environment 6
  2. Societal Environment 7
  3. Task Environment (Industry Analysis) 7
  4. Internal Environment (IFAS): Strengths and Weaknesses (SWOT) 8
  5. Corporate Structure. 8
  6. Corporate Culture. 8
  7. Corporate Resources. 9
  8. Marketing. 9
  9. Finance. 9
  10. Research and Development 9
  11. Operations and Logistics. 10
  12. Human Resources. 10
  13. Information Technology. 10
  14. Analysis of Strategic Factors (SFAS) 11
  15. Key Internal and External Strategic Factors (SWOT) 11
  16. Review of Mission and Objectives. 11
  17. Alternatives and Recommendations. 11
  18. Strategic Alternatives. 11
  19. Recommended Strategy. 12

References. 12

 

I. Current Situation

A. Past Corporate Performance Indexes

Gap Inc. started performing well in the market soon after it was founded in 1969. The company’s performance continued to improve throughout the 1970s, 1980s, and early 1990s. Towards the late 1990s, its performance started declining. For instance, between 2005 and 2006, its revenues and operating profit decreased by 1.5 and 4.2 percent respectively (Wheelen & Hunger, 2012). However, during this period, each of the divisions of the company reported different financial results. For instance, Old Navy, one of the divisions, reported a revenue increase of 1.6 percent while the Gap division’s revenues decreased by 5.6 percent between 2005 and 2006 (Wheelen & Hunger, 2012). This drop in corporate performance unfolded at a time when a new CEO (Paul Pressler) had been hired by the companies with a view to give it a new strategic direction. The main positive factor for this performance is that the company has an opportunity to rejuvenate, innovate, and chart a new strategic direction. The downside is that its current corporate strategy creates the impression that the company somewhat continues to attempt to replicate the successes of the yesteryears instead of moving forward.

B. Strategic Posture

Current Mission

Gap’s current mission is to be the leading global specialty retailer focusing on clothing, personal care products, and accessories for men women, and children. The company seeks to establish emotional connections with all its customers across the world through unique product design and compelling marketing. The day-to-day actions of Gap’s employees are guided by the stated purpose of making it easier for customers to express their personal styles throughout their lives. The key values identified by the company include integrity, open-mindedness, balance, and quality. This mission explicitly outlines what the company hopes to achieve but fails to draw any attention to the turbulent nature of its business environment particularly in respect of fast-changing fashion trends.

Current Objectives

Gap Inc’s main objective is to embrace corporate governance practices that will enhance shareholder value. The company’s board of directors is the main overseer of the company’s operations and strategic direction. The company started by selling Jeans before venturing into other product lines. Similarly, it seeks to spread beyond the North American market where most of its operations are concentrated to the rest of the world. The objective of increased international presence should be lauded although it seems to be inconsistent with the current practice of primarily focusing on the North American market. Gap might need to rethink its objectives to bring them in line with the challenging demands of supply-chain reorientation, which is an essential undertaking if international ventures are to be successful.

Current Strategies

The main strategies involve cost-cutting, establishment of greater distinctions among its divisions, targeted marketing focusing primarily on the company’s three main brands: Gap, Banana Republic, and Old Navy. The objective is to address the problem of loss of market share by fighting the stigma associated with the company’s products. Marketing campaigns that focus on these areas might generate the much-needed growth in revenues. However, for long-term survival, a more aggressive strategy that demonstrates the company’s readiness to take risks should be taken. Fashion trends change frequently, hence the need to look for a long-term strategy that facilitates timely response to these changes.

 

Current Policies

The laid-back approach to fashion adopted by Gap Inc. is legendary. However, today, this approach is under threat from numerous private label retailers who have crowded the fashion market. Moreover, Gap Inc. has traditionally adhered strictly to company-driven sales. However, following the decline in performance during the mid 2000s, the company is keen to try out on franchising particularly in the international market. This approach can bring about the much-needed growth because it can leverage on the competitive advantages of franchisees to tap into new markets.

II. Corporate Governance

A. Board of Directors

The most critical aspects for the company’s board of directors include board independence, engagement, and quality. The board may not be said to fully independent in its decision making because of the tremendous influence of the company’s founding family, which controls 30 percent of Gap’s stock (Wheelen & Hunger, 2012). Nevertheless, Gap has promoted independence by hiring people from outside who do not own any stocks in the company. The outsiders bring in management experience although a trade-off is sometimes inevitable because of lack of skills in the retail sector. The board also seems not to be fully engaged in the decisions of the CEO. The downside of this approach is that it might lead to a situation whereby the CEO leads the company in the wrong direction. Its main advantage is that it enables him to fully implement his vision and to be innovative.

B. Top Management

Gap Inc.’s top management has greatly contributed to its success. Similarly, it should be blamed for many of the mistakes that have led to the recent decline in revenues. Paul Pressler has made numerous efforts to revamp the company’s operations but has not quite succeeded despite initial signs of growth that was triggered by financial discipline achieved through cost-cutting strategies. Pressler failed to satisfy customers’ tastes and preferences. He failed to improve the strength of the Gap brand, continued depending on the North American market, and was unable to reverse a trend in which cash flows continued to decline.

When Millard Drexler took over as CEO of Gap, manufacturers had been banned from setting retail prices, leading to a decline in the company’s profit margins. Therefore, Drexler faced the challenge of giving the company a new strategic direction. He was successful in his efforts to embrace Gap-controlled marketing primarily through discount stores and to convert Gap into a clothing brand. On the positive side, it is evident that the top management has ample independence to implement their strategies. The negative aspect is that a poor selection of top management might make the company move off-course in terms of strategic direction. This means that the top management has not succeeded in establishing a strategic approach to the critical task of strategic management.

III. External Environment (EFAS): Opportunities and Threats (SWOT)

A. Natural Environment

Gap Inc. has not encountered any major sustainability issues as far as the natural operational environment is concerned. However, like everyone else in the corporate world, Gap has been affected, albeit directly, by changes in the physical environment. For example, climate change has negatively affected the availability of raw materials for clothing such as cotton, thereby leading to an increase in prices. Such changes have varying effects in different parts of the world. Moreover, droughts occasioned by climate change often weakens consumers’ purchasing power, thereby leading to a decline in consumer spending, which constitutes a major threat for the company.

B. Societal Environment

The main economic strength in North America and Europe is the ability by consumers to spend heavily on fashion brands. This strength is lacking in many international markets especially in the developing world. In such countries, a decline in consumer spending is a threat to the company. Technologically, Gap has an opportunity to leverage on the latest analytical tools for undertaking market research with a view to chart a new strategic direction. However, Gap’s international expansion efforts continue to be hindered by political-legal and socio-cultural factors that greatly hinder the acceptability of its brand.

C. Task Environment (Industry Analysis)

In this industry, companies are able to operate with low long-term debt, which constitutes a major strength. Gap’s strengths have been boosted by its success in establishing an extensive network of physical retail stores. However, frequent declines in operating cash flows constitute a weakness for Gap. The emergence of numerous private fashion labels poses a threat to the company. In this industry, the threat of new entrants is high, buyers have a high bargaining power, and there is a medium threat of substitute products. The level of threat is also low in terms of rivalry among competing firms and the bargaining power of suppliers. In this industry, the power of governments, and unions remains high. Currently, Gap is being affected by shareholders, who continue to keep a jittery vigil over its future strategic direction. In summary, the main threats, going forward, are posed by counterfeit products, proliferation of private fashion labels, and a decline in consumer spending. On the other hand, the main opportunities exist in the form of new expansive markets in India and China and increased online retail spending.

IV. Internal Environment (IFAS): Strengths and Weaknesses (SWOT)

A. Corporate Structure

There is no centralization of decision-making at Gap Inc. each division is responsible for handling its own functions. The main divisions include Gap, Banana Republic, and Old Navy. The corporation is organized based on some combination of projects and functions. For instance, Old Navy has traditionally been targeting cost-conscious consumers. In contrast, the Gap focuses on classical styling of casual apparel at moderate prices. The Banana Republic focuses on more sophisticated, casual apparel, accessories, and shoes for adults. It seems that not everyone understands this distinction. Pressler’s unsuccessful turnaround strategy may be blamed for his lack of understanding of this distinction. Instead, he has been focusing too much on numbers, thereby operating in a manner that is inconsistent with Gap Inc.’s corporate strategies, objectives, and policies.

B. Corporate Culture

Gap’s founders seem unenthusiastic about preserving the company’s corporate culture. This is perhaps because no such culture was entrenched in the first place. Initially, Gap started as an only-jeans outlet. During the mid 1980s, Drexler’s widened the product offering through the so-called “dress-down revolution”, thereby initiating a culture that was driven by emerging trends such as the classic “casual-dress” look (Wheelen & Hunger, 2012). In 1994, Old Navy was founded, thereby bringing into perspective a price-conscious approach to sales growth. In this process, the company lost rapport with the consumers who had greatly contributed to its earlier prosperity. During the early 2000s, high employee turnover indicates that the corporate culture has become incompatible with employee’s needs.

C. Corporate Resources

1. Marketing

Gap’s current marketing objective entails cutting costs, venturing into the international markets, and selling clothes at near-full price. The main strategy entails shutting down non-performing stores, consolidating production, reducing inventory per square foot, and relying on consumer research to drive marketing actions. In many instances, these objectives and strategies are implied rather than being explicitly stated in the company’s strategic roadmap. By cutting costs and shutting down some of its retail outlets Gap might be acting in a manner that contradicts its stated mission of establishing lasting emotional connection with all its existing customers. Moreover, between 2002 and 2004, this approach failed to bring about the desired revenue growth. Failure by Drexler and Pressler to use accepted marketing techniques (such as a clear identification of market segments, product portfolios, and product life cycle) to improve product performance might have been the main cause of this failure.

2. Finance

Gap Inc. aspires to return to the trend of hefty margins of around 50 percent, which it used to generate during its pioneering years (Wheelen & Hunger, 2012). However, since the enactment of a directive by the Federal Trade Commission in which manufacturers were banned from setting retail prices, it has become nearly impossible for the company to achieve such a feat. Gap’s portfolio of products and divisions continues to face a major imbalance in terms of cash flow. This trend has been contributed to greatly by unpredictability and turbulence that characterizes the fashion industry. As the company gears up for entry into the international market, the ability to adapt to global financial issues will be critical to its overall success.

3. Research and Development

Consumer research is at the forefront in Gap’s overall corporate strategy. This is evident in the explicit manner in which Pressler acknowledged the need for the company to embrace a strategic direction that is informed by empirical findings of consumer research. The company has already hired the services of Goldman Sachs, a consulting firm, whose advice can be relied upon for strategic reasons since it is based on a comprehensive review of Gap’s business divisions. At the same time, Gap has already attempted to employ a rotating cast of fashion designers who unsuccessfully tried to reorient and recreate the Gap Brand. In general, Gap’s R&D’s efforts have been unsuccessful because of poor cross-functional coordination and inconsistency with overall strategic direction.

4. Operations and Logistics

Gap’s overall supply, purchasing, and distribution strategy remains work in progress. Pressler’s investment in metrics has failed to yield a definite trend that can be leveraged on to bring in the highest profit margins. This scenario portrays an image of a company that is still in the process of discovering its identity in terms of operations and logistics.

               5. Human Resources

A major highlight of Gap’s HR strategy is its willingness to tap into talent from external sources. Although this strategy is beneficial in terms of the entry of new sets of skills, experience, and talent, it is also a risky move because it increases employee turnover. For example, many of the company’s highly talented employees depart to join rival companies such as Abercrombie & Fitch, Nike, American Eagle Outfitters, and Chanel. Otherwise, no major issues with unionization or the fit between employees and their jobs pose a threat to the company’s long-term HR strategy.

6. Information Technology

Failure to leverage consumer- and market-research information acquired through ICT (information and communication technology) has derailed Gap’s efforts to create an identity to guide its strategic direction in a fast-changing industry. This explains why the top management has been in a state of confusion in regards to the ideal corporate culture for the company. This state of confusion has been extended to consumers, who have come to associate the Gap brand with stigma. Without information technology tools, it will be even more difficult for the company to understand and to respond to changes in the international fashion market.

V. Analysis of Strategic Factors (SFAS)

A. Key Internal and External Strategic Factors (SWOT)

The external strategic factors that will have the greatest impact on the corporation’s performance in the present and future include Markets in India and China, which accounts for more than a third of the world’s population, overdependence on North America, online retail spending, and low long-term debt. Gap Inc. will need to work towards widening the reach of its products by venturing into the international market. The existence of low long-term debt will enable the company fund this capital-intensive venture.

B. Review of Mission and Objectives

In light of key strategic factors and problems identified in this strategic audit, the current mission and objectives are not appropriate. They need to be changed in such a way that the role of R&D HR and information technology strategy in relation to the vision of international expansion and increased online retail spending is explicitly stated. The statement of mission and objectives also needs to identify the corporate culture around which all efforts to adapt to the turbulent fashion industry are modeled.

VI. Alternatives and Recommendations

A. Strategic Alternatives

An alternative to the overhaul of the mission and objectives of Gap Inc. is to fine-tune them. One viable alternative is to adopt the “jeans only” philosophy of the company’s founder. This is an operationally expensive alternative because it would entail the reorientation of all production, distribution, and branding strategies. However, it would be beneficial because it would give consumers a tag-line they can associate with, hence creating strong brand recognition. Another alternative is a spin-off of one of the company’s divisions. Such a move would enable Gap Inc. to narrow down its scope in its quest to enter the international and online retail fashion markets. The downside of this strategic alternative is that it would reduce the range of product offerings available to the company’s loyal customers.

B. Recommended Strategy

For operational efficiency, all divisions should adopt a uniform strategy at corporate, functional, and business levels. This would entail some sort of centralization of management. In this regard, a spin-off involving the sale of one of the company’s most poorly-performing divisions is the best solution. Such a move will create the impetus for the reorganization of top management, reorientation of functions and business processes to improve customer orientation and brand strength, and the embracement of a new strategic direction.

 

References

Wheelen, T. & Hunger, J. (2012). Strategic Management and Business Policy: Toward Global Sustainability, Thirteenth Edition. Boston, MA: Pearson.

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