Underlying factors affecting company profitability

Gap’s Strategic Management Report

The primary goal of every company is to maximize profits while providing the best customer experience. This is no different in the fashion industry, which is characterized by high competition and market demand. Gap Inc. is a global retailer that specializes in clothing and accessories, and most of its retail stores are established in the United States (Gap Inc., 2020). The fashion giant has a vast international presence in more than forty countries and product shipping in over ninety countries (Gap Inc., 2020). However, regardless of the company’s competitive stability, it is adversely affected by environmental factors and external threats. Performing PEST and SWOT analysis helps to identify the strategic position of the company regarding the environment in which it operates. Porter’s five forces model also analyses the underlying factors affecting company profitability.

PESTEL analysis of Gap, Inc. identifies political, economic, social, technological, environmental, and legal factors that impact business activities in the competitive industry. By identifying issues affecting business performance, Gap can develop contingency plans to deal with problems as they arise effectively. Politically, the apparel industry is currently faced by globalization as a current trend affecting most businesses aiming to expand into global markets (Shatskaya, Samarina, & Nekhorosheva, 2016). Gap must consider political policies and environments in potential markets that may present opportunities or threats to its business operations. Consequently, trade activities are governed by different regulations in different countries, and Gap must analyze the most favorable markets to penetrate. For instance, China presents an attractive potential market given its trade agreement with the United States; however, given its strict market entry regulations, Gap’s penetration into the market is limited (Dudovskiy, 2016). By establishing partnerships or franchises with local retailers, the company will avoid unnecessary tension and cut shipping costs. Gap Inc. must also consider taxes and tariff costs before setting its business globally.

Economic factors can be analyzed through inflation and interest rates within the rate of economic growth. Governments employ different fiscal and monetary policies to control inflation levels and interest rates to boost the economy (Shatskaya, Samarina, & Nekhorosheva, 2016). In the United States, expansionary policies are often applied to reduce unemployment rates and improve business and individual performance (Amadeo, 2019). Moreover, the relatively low inflation rates increase consumer’s buying power, which is favorable for companies such as Gap. Global companies must carefully study economic conditions in different countries to determine the most profitable.

The social environment directly impacts the company’s marketing strategy, given that population structures are different in most markets. Customers and employees also have diverse cultures, lifestyles, and educational backgrounds that influence the decision of how best a particular product is sold. Gap also has to analyze which target markets match with its brands. For instance, Athleta sells athletic wear for young athletic women, while Janie and Jack specialize in baby clothes (Gap Inc., 2020). Moreover, it is essential to address the current issue of high retiree rates at the company that could impose negatively on human resources in the long run. Hiring diversity is also critical to building more effective marketing teams, especially in the overseas market.

Technological advancements have continuously affected business operations in the areas of product production and marketing strategies. The apparel industry must remain updated with the latest technological tools to avoid obsolescence in the future (Dudovskiy, 2016). The influence of social media has contributed significantly to the sales of denim wear, in particular, given its global popularity among young adults (Gap Inc., 2020). Gap needs to improve its online presence to reach more potential customers in different locations and to provide home delivery services through its website and other distribution channels.

Every industry has a responsibility to protect the environment regardless of the products it manufactures. Oil companies may lead to more pollution compared to textile industries, but both are required to control production techniques to minimize environmental degradation (Shatskaya, Samarina, & Nekhorosheva, 2016). Consequently, Gap must adhere to the various ecological regulations presented in different countries to avoid negative press and criticism regarding its corporate responsibility. The fashion giant must analyze weather concerns to improve marketing specific products and avoid transportation drawbacks.

Gap must effectively meet legal requirements to operate effectively both at home and in overseas markets. Legal factors are often influenced by the political environment and may vary considerably. For instance, labor laws ensure different wage allocations depending on job descriptions. Gap has been working to improve wage rates among its employees, who are a central focus in its retail success (Gap Inc., 2020).

Porter’s Five Forces Model is a vital management tool used by companies to analyze underlying factors that impact profitability. It explains five primary factors that directly influence the long term sustainability of business while developing a strategy to effectively maintain a company’s competitive position (Dobbs, 2014).

The first force involves the significant rivalry that exists between Gap and existing apparel and multi-brand stores such as Penney, Williams-Sonoma, Walmart, and Target, among others (Dudovskiy, 2016). Although Gap maintains an immense competitive advantage, it also holds a minimum market share in the retail industry. Given the dramatic increase in rivalry among industry players, Gap’s product prices have been affected, and profitability margins have reduced. To effectively operate in the intensely competitive market, Gap must consider performing sustainable differentiation to meet current consumer demand. By collaborating with key market players such as Amazon, Gap will progressively increase its market share and attract a full pool of potential clients (Dudovskiy, 2016).

The company maintains a high bargaining power concerning suppliers, which helps to boost sales and overall profits. Moreover, the company is not dependent on a particular supplier and holds the ability to substitute suppliers under minimum costs (Gap Inc., 2020). Most suppliers also compete intensely to contract business with Gap, given its high volume of orders.

However, the fashion industry is characterized by high buyer bargaining power, given that customers often demand the best quality products with the lowest prices. Gap is facing considerable pressure from the robust customer base causing a strain on sales and profits (Dudovskiy, 2016). By increasing its customer base, Gap will lower the customers negotiating power for discounts and lower prices, which will help to streamline the company’s production process. Consequently, the company should focus on inventing and innovating new products that will progressively limit buyer bargaining power. Differentiated products will also significantly improve the company’s competitive advantage.

The fourth industrial force is represented in the threat of new entrants into the market. The fashion and apparel industry generally faces the moderate threat of new entrants given the limited access to distribution channels that poses a barrier for newcomers. Moreover, current market players such as Gap enjoy massive economies of scale that enable it to perform effectively in the competitive industry (Dobbs, 2014). Such benefits are often absent in the first years of operation for new entrants. Moreover, the apparel industry requires large capital requirements to establish business effectively, and expected retaliation from established players poses significant challenges for new entrants. Gap should continuously invest in market research to improve operating standards that eventually discourage new players in the industry.

In the same vein, Gap faces threats from substitute products or services that affect profitability rates. When competitive products meet customer needs differently, the competitive advantage is significantly affected (Dobbs, 2014). Consequently, Gap can improve its profitability margins by focusing on service orientation and sustaining customer relations relative to Walmart (Dudovskiy, 2016). Increasing buyer switching costs will also assist in boosting sales in the apparel industry.

Gap is known for providing stylish and fashionable wear that is cost-effective. The core business strategy administered by the fashion giant lies mainly cost leadership to maintain its competitive advantage (Gap Inc., 2020). The company also offers a wide choice variety for its diverse customers while focusing on producing innovative casual designs. Moreover, senior management is diverting its attention to availing the company’s core product, which lies in the denim segment and assorting it with trendy silhouettes and fabrications (Gap Inc., 2020). The recent move to sell and market on Amazon has improved the company’s online retail presence matching with current technological advancements. Consequently, the plan to establish stores in Japan and China will increase the company’s international presence hence improving sales and profits (Gap Inc., 2020).

The fashion giant can explore different opportunities by employing its core competencies to produce other products in the accessories and cosmetic market. Gap can take advantage of low shipping costs to reduce transportation costs when distributing products in new overseas markets (Dobbs, 2014). Moreover, the relatively low inflation rates signify stable economic growth, and businesses should maximize the high customer purchasing power to increase sales. Gap Inc. should also perform extensive market research to identify new clothing trends to meet high customer demand. By taking advantage of current technology tools, the fashion giant can effectively control online sales channels and provide the best customer experience

Performing SWOT analysis is essential to identify the strategies required by a company to help exploit opportunities and mitigate external threats. It also identifies the major strengths that the company should build on and the risks it should eliminate (Phadermrod, Crowder, & Wills, 2019). Gap has a strong brand portfolio that has been established over the decades to enable the invention of new product categories. The company has also established mergers and acquisitions to improve technology operations and build reliable supply chains (Gap Inc., 2020). By ensuring high-quality consistency across its brands, the company can level its product prices depending on market demand. Gap employs an effective go to market strategy that has assisted in its new market penetration plans.

However, Gap must eliminate its weaknesses to maintain its threatened competitive position and boost profits. The company has poor demand forecasting techniques that increase the level of missed opportunities regarding inventory management (Dudovskiy, 2016). The asset and liquid ratios also portray low efficiency regarding financial planning. Moreover, there is a need to invest in new technologies to expand sufficiently into global markets.

GAP, Inc. must recognize the need to perform the PEST, SWOT, and Porter’s Model analysis to improve its competitive advantage and brand experience. By identifying factors in the external environment that pose a threat to business performance, the company can strategize on how to mitigate apparent risks. Building on its strengths and eliminating its weaknesses will ascertain the fashion giant’s enviable position in the thoroughly competitive industry.

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