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Introduction -Introduction, cont’d.“Fisherisms” -Industrial Organization -Vertical Integration -Vertical Integration, cont’d -Mergers and Acquisitions -Strategies and Conduct -Growth / Shrinkage -Critical Milestones -Critical Milestones, cont’d. -Sweatshops…?Don ChelemedosEEP 142Spring, 2005Introduction Introduction --• Gap Inc. was founded in 1969 by Donald and Doris Fisher in San Francisco, California, with a single store and a handful of employees.• They originally began operations by selling Levi’s, records and tapes (eight-track). • Today, the Gap is one of the world's largest specialty retailerswith three of the most recognized brands in the apparel industry — Gap, Banana Republic and Old Navy. • Gap Inc. has more than 150,000 employees supporting about 3,000 stores in the United States, United Kingdom, Canada, France and Japan. • In 2004, the Gap boasted fiscal revenues of $16.3 billion.• World headquarters are located in San Francisco, product development offices in New York City and distribution operations and offices coordinating outsourcing activities are located throughout the globe.• One of the original mottos of the company was “Levi’s for Guys and Gals." The Gap began creating its own private label clothing in 1982 and had stopped carrying other labels altogether by 1991.• The name came from the growing differences between children and adults, called "the generation gap", which reached its peak with the hippie movement.Introduction,Introduction,cont’d.cont’d.““FisherismsFisherisms” ” --• Fisher says in his self- published book that he came to see the entire planet as "a world full of potential Gap customers" and himself as a man with the rare entrepreneurial prowess to clothe them.• "I just wanted to take the nightmare out of buying Levi's, to offer an easy and well-organized shopping experience that would appeal to a guy like me." • "I viewed things with the eyes of a real estate man, not a retailer. I always looked for ways to get the most out of square footage, to go beyond the floor space. So I created a honeycomb of cubicles on the walls. . .. I had never seen this done before, but it seemed so logical, I wondered, why not?"Industrial Organization Industrial Organization --••Contestable Markets Contestable Markets --Gap began dominating the apparel market as Gap began dominating the apparel market as a result of it’s ability to fill what it perceived as “gaps” befa result of it’s ability to fill what it perceived as “gaps” before anyone ore anyone else could enter.else could enter.••Economies of Scale Economies of Scale --As an early entrant, Gap was able to take As an early entrant, Gap was able to take advantage of economies of scale within the industry.advantage of economies of scale within the industry.••Economies of Scope Economies of Scope --By expanding its market within the apparel By expanding its market within the apparel industry, Gap was able to reduce its manufacturing costs.industry, Gap was able to reduce its manufacturing costs.••Product Differentiation Product Differentiation --Increased sales have resulted primarily Increased sales have resulted primarily from the Gap’s ability to expand into specialty markets, i.e., Bfrom the Gap’s ability to expand into specialty markets, i.e., Banana anana Republic, Old Navy, Republic, Old Navy, babyGapbabyGap, etc. , etc. ••Vertical Integration Vertical Integration --Although the Gap began by selling Levi’s Although the Gap began by selling Levi’s exclusively, its ultimate growth and dominance began once it staexclusively, its ultimate growth and dominance began once it started rted to manufacture products under its own label. Vertical integratito manufacture products under its own label. Vertical integration on also allowed Gap to lower transaction costs and reduce supply also allowed Gap to lower transaction costs and reduce supply threats created by Levi’s.threats created by Levi’s.••Branding Branding --The Gap’s multiple brands have become some of the most The Gap’s multiple brands have become some of the most recognizable labels within the apparel industry.recognizable labels within the apparel industry.Vertical Integration Vertical Integration --• Levi Strauss & Co.'s jeans gave birth to Gap, but that relationship grew rocky. In 1978, Fisher and Robert Haas traded unfriendly words in an argument focused on Levi's trademark. • By that time, Gap had opened more than 300 stores and was selling its own, increasingly popular brand with the Gap label.• Gap stopped selling Levi's in 1991, according to press accounts,though Fisher puts the year at 1992. These days, Gap Inc. has roughly four times the sales of Levi's. Gap has more than 3,000 store locations among its Gap, Old Navy and Banana Republic brands. • Fisher portrayed Haas as saying: " 'We don't want to sell you product anymore. We're not making any deliveries after the first of December.' "Vertical Integration, Vertical Integration, cont’dcont’d--• "I had a suspicion that something big was up," Fisher recounts of the meeting. "(Haas) continued for about an hour, complementing (sic) our stores, and how we're the best at what we do. Then his tone suddenly changed." • At the time, both companies said publicly that they agreed to the termination of their relationship, which to many industry observers seemed inevitable. Gap, with about $2 billion in sales compared with Levi's $5 billion at the time, had weaned itself gradually off Levi's sales in favor of its own Gap label. • "I don't know if Bob realized what a great compliment he had paid us by cutting us off. We represented a lot of money to his company," Fisher writes. "Yet, he wanted to take away any advantage we might gain by our association with the number one brand in our category. I clearly understood how much he feared the Gap label as serious competition to the Levi brand."Mergers and Acquisitions Mergers and Acquisitions --• Banana Republic - known for casual luxury, with high-quality apparel for men and women and sophisticated seasonal collections of accessories, shoes, personal care products, intimate apparel andgifts for the home.• Old Navy - famous for the best in denim, graphic tees, cargos, Performance Fleece, plus the Old Navy Item of the Week — each and every week, a special item at a special price.• Forth & Towne - a unique shopping experience and


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Berkeley ENVECON 142 - Gap

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