CEO Memo for Gap

Mr. Glenn Murphy, CEO of Gap,

The retail industry was originally a specialized model operating in local markets and offering limited selection – requiring shoppers to visit the local cheese shop to purchase cheese and the butcher for meat. The industry then gravitated to mass economies of scale and standardization. This had a tremendous effect on improving operational efficiencies, but at the cost of losing the intimate relationship with the customer. Today the industry, driven by the consumer’s appeal for self-identity and differentiation, is moving back towards specialization sparking initiatives of customer involvement and customization.

Gap is suffering from an identity crisis. It has terminated its unsuccessful Forth & Towne brand only a few years after its launch. For its three core brands, including its flagship Gap brand as well as Old Navy and Banana Republic, the company is undergoing store closings after years of overexpansion. No longer can it rely on producing khaki’s and chino’s on a mass scale. There are too many competent players with superior brand equity who have entered this space forcing Gap to compete on price.

Gap added piperlime.com last year as a continuing initiative to develop its online presence. By combining all three of its brands’ websites and with the addition of piperlime.com, Gap is trying to become an Amazon.com influenced one-stop marketplace for fashion apparel, accessories and footwear. Piperlime sells shoes and handbags, a market that had been underserved by Gap. Interestingly, Piperlime does not sell its own products, but rather is simply a marketplace selling third party branded products. Gap customers can select designer brand items to complete their entire wardrobe without leaving Gap’s domain. However, it is questionable whether Piperlime will be a success as it fails to help Gap differentiate itself from other competing online stores.

To succeed, I argue the need for Gap to rebuild its relationship with its customers by taking advantage of today’s interconnectedness. Gap can inexpensively leverage its scale with suppliers to offer a personalized solution to meet the popular consumer trend for customized clothing to suite the desire of individualism. Gap needs to leverage the expertise of its customer base through several social networking initiatives, two of which will be central to this memo; auction markets and customer design.

For too long retail has been getting innovation wrong by focusing on low order innovation, such as marginally improving the process of design, manufacture, or logistics. Small revolutionary retailers such as Netflix or Threadless have challenged the status quo, leaving past leading retailers behind. These unresponsive modes of behavior and self-defeating habits lead to the failure of retailers to meet the challenge of re-invention.

As a leading retailer, Gap ought to be at the forefront of this trend by innovating in ways that will create a more sustainable model of growth. A CEO ought not to focus on the lower end/reactionary innovations, but rather innovation of a different order. Simply having a Facebook page is not enough. To leverage the network through consumer engagement within their business model can be only accomplished with the stewardship of the CEO leading the transformation of Gap from a firm centric approach of design and innovation to a more network based approach.

Empowering the customer in the design process is a critical component to improving customer loyalty. Gap should offer customers a way to design and customize their clothing, such as modifying size, color, pockets, and other specs. Utilize social networking and social retailing to involve the customer in the design process. This should help control inventory by avoiding spoilage as well as reduce the need for discounting which tarnishes the brand in the long-run. Most importantly, customer design provides the customer with the feeling of involvement with the brand. Customers are more loyal to support a brand they feel a part of and have a stake in its success.

As fashion is a fickle industry it is a challenge for any design team to accurately predict the popular trends. Gap can leverage auction markets to better forecast demand. This will result in direct benefits such as a more efficient design process and an improved optimization of shelf space with the clothes that are most likely going to sell well. Having a better assessment of what will sell reduces inventory risk. Auction markets should not only be utilized prior to the new fashion season, but should be continued throughout the season to get a sense of consumer behavior, enabling Gap the flexibility to change what it manufacturers to reflect real time shifts in consumer preference and sales patterns. Speed to market and having the dynamic capabilities to adapt to changing conditions is as important as choosing the correct fashion.

Along with the auction system, Gap should consider holding design contests to help globalize their design department. This model is similar to Threadless, but with Gap’s globally recognized name, such a model could dramatically alter their design program. Rather than rely on a couple hundred designers in one of two locations, Gap could utilize millions of aspirational designers across the world. Gap’s design team decides which designs fit the Gap brand and which are feasible for production, and then allows the market to decide which design Gap should produce for the upcoming season. This should bring more traffic to the site as more and more people will be drawn to provide their input as well as should drive traffic into the stores as consumers are more willing to support a brand they feel they have a vested interest in seeing succeed.

What is most remarkable regarding the above recommendations is that they aren’t new ideas. In fact, these technologies are currently out in the marketplace and being used by companies in multiple industries across the world. With the advances we have seen in bandwidth, Metcalfe and Moore’s laws, the network infrastructure allows companies of all sizes to revolutionize their fundamental models. The critical success factor for companies is having a leader who believes in this shift to the network and is willing to change an organization that has been accustomed to its set of ways.