Gap Pesti and SWOT Analysis Scope in essay

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Gap Pesti and SWOT Analysis

SCOPE

In this section, I am doing a PESTI and SWOT analysis of GAP Inc. The goal of a PESTI and SWOT analysis is to evaluate the performance of a firm by using their financial statements[footnoteRef:1]. In a PESTI and SWOT analysis you can determine the value of a firm by looking at its profitability and its growth. I will be using SWOT analysis and cash flow analysis to assess GAP's performance. After analyzing GAP I will forecast the next ten years based on our findings. [1: AmCham, Real Economy-Egypt. (Source: MoFT, January 2003 and Central Egyptian BankCEB, February 2002).]

I can either look at SWOT for GAP over several years to determine the success of the firm or I can compare the SWOT of GAP to other firms in the same industry. These SWOTs allow us to relate the financial numbers to the business reality. Looking at SWOTs for our firm over several years is called time series comparison. This allows us to hold some factors constant and determine the firm's strategy and how Ill they are implementing this strategy. If I compare the SWOT to other firms' PESTI I are doing a cross sectional comparison. This allows us to see how GAP compares to other firms in the same industry[footnoteRef:2]. This lets us determine in what areas they are lacking and what areas they are excelling in compared to firms in the same industry. [2: Cunningham, Michael: "ICT Skills Gap Analysis-Phase I." Partners for Competitive Egypt Project, December 2002.]

Finally after analyzing GAP's financial statements, I can forecast the future for the firm. It is important to forecast so I can determine the future of the firm and if the firm is currently undervalued or overvalued. I can use a number of methods to determine our forecasting values. You can average past performances of the firm and assume this past performance will continue. Sometimes this can provide inaccurate numbers. So values are mean-reverting, which means that over time they go back to the industry average.

Our PESTI and SWOT analysis and forecast of GAP should provide a clearer picture of the performance of GAP then just scanning their financial statement. This will allow us to determine the success that GAP has had in implementing strategies and gaining profitability and growth.

BACKGROUND

The Gap, Inc. operates as a specialty retailing company. The company offers clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, banana republic, Piperlime, and Athleta brand names. The company also franchises agreements with unaffiliated franchisees to operate Gap and banana republic stores worldwide. Gap Inc.'s net profit in 2010 was $1,102 million, an increase of 14% over 2009.

PESTI ANALYSIS

Political Factors

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.

Social Changes

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 Illness are another demographic trend, which is a driver behind athletic apparel.

Technology

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. I expect that the trend of consumers shifting to purchasing online will continue and online retail sales will grow by 10% in 2011 and maintain this growth through 2014.

International Forces

The Chinese retail market offers a large opportunity for growth. China's retail market grew at an annual rate of 17.3% during 2002-2009 and is expected to grow by 45% during 2010-2014. The industry is currently characterized by low globalization, allowing significant room to increase global market share. Additionally, as most of the raw materials for the apparel retail industry are imported, currency exchange rates also affect profit margins.

SWOT ANALYSIS

Strengths

Old Navy's position as a value-priced family apparel retailer allows Gap to sustain profit margins during economic downturn, with Old Navy having growth of 3% in comparable same store sales during the recent recession. The Gap, Inc.'s focus on maximizing value with outlet stores has increased its customer base and brand image. A globalized franchise model enables the company to expand internationally. The Gap, Inc. has strong margins relative to competitors with an operating margin of 12.8% for FY2009, compared to the industry average of 7.5%. This margin allows the company to effectively combat price competition while enabling it to adjust for fluctuating cotton costs without increasing retail prices.

Weakness

The Gap, Inc. has been experiencing low sales per gross square foot, which indicates low productivity. The company also faces cannibalization of sales between Old Navy and Gap as Ill as between banana republic and Gap. The Gap, Inc.'s comparable same store sales have been declined, on average, by 4% per year over the past 10 years. While the past 18 months have seen increases, the historical declining same store sales could indicate potential problems with the companies operating structures.

Opportunities

The internet allows The Gap, Inc.'s products to reach a higher percentage of customers. The lower prices, greater selection, and convenience provided by e-commerce all indicate an opportunity for growth[footnoteRef:3]. Gap's e-commerce platform, Universality, is targeted to capture this trend. A winter 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. This trend shows that despite the weakening of the retail markets, the children swear market offers a strong growth opportunity. The Gap, Inc. has been involved in the children's apparel market since 1986 with Gap Kids and baby Gap stores. China's GDP is increasing at a rate faster than U.S. GDP. The Gap, Inc.'s management plans to take advantage of China's growth by opening their first stores in China during 2011. [3: AmCham, Real Economy-Egypt. (Source: MoFT, January 2003 and Central Egyptian BankCEB, February 2002). Cunningham, Michael: "ICT Skills Gap Analysis-Phase I." Partners for Competitive Egypt Project, December 2002.]

Threats

The Gap, Inc. is undergoing the process of global expansion; however, it faces the threat of problems abroad. Labor costs in China are estimated to increase as Chinese provinces' wages have been increasing by 10-20%, on average, which will decrease profitability margins. Economic problems in Europe such as increasing unemployment will hinder the European's consumer spending and have a negative impact on apparel sales. China's rapid economic growth raises concern about inflation in China. On April 17th, 2011, China's central bank ordered the nations' biggest banks to set aside large cash reserves, for the fourth time this year. Chinese inflation endangers China's status as the low-cost workshop of the world. Chinese CPI rose to 5.4% in March, its sharpest increase in the past three years.

FIVE FORCES MODEL

The five forces model can help a company in a number of ways. It can determine the attractiveness of a particular market. It can also show the relationship between competitors, suppliers, and buyers within an industry. With this information, investors can develop a broad and sophisticated analysis of competitive position which can be used when creating strategy, plans, or investing decisions to use within the business world.

Rivalry among Existing Firms

Some aspects of rivalry among firms that make this model so important would be the number and size of firms, industry size and trends, product/service range, and differentiation and strategy. The clothing stores industry, which has done extremely Ill over the last 5-10 years, has a large number of competitors.

A few of the competing companies include American eagle, Abercrombie & Fitch, and TJ Maxx. This large number of competitors creates strong earnings potential compared to other industries. In the clothing store industry there is room to grow, but startup costs can be high. While Gap is definitely looking to gain a larger share of the market, switching costs for consumers is low. This is especially true with one of Gap's top competitors TJ Maxx. TJ Maxx competes solely on price. In response, Gap is looking to reestablish a larger core of consumers who are brand loyalists. To compete with all these different competitors in the market, Gap Inc. created such higher end clothing lines as banana republic, Old Navy, and Forth & Towne. In an industry where the right mix of product…[continue]

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