Gateway: Moving Beyond the Box

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Executive Summary:

Gateway has undergone a major transformation of strategy and organization bringing in new corporate image and new management, developing new distribution channels, targeting new markets and developing new alliances. The company faces the challenge of changing to meet new market demands and opportunities while retaining the reputation and customer relationships that it made successful in the past.

Ted Waitt, in 1985, with the help of a fellow salesman have launched a business in a farm house in Iowa, selling add on equipment by mail, which then switched to selling built to order computers. Waitt’s goal was to establish Gateway 2000 as a trust worthy company. Waitt's marketing savvy and ads that emphasized the company's Midwestern roots had helped in increasing the revenues to the business. By 1991, it became the fastest growing private company in the nation.

The business model was similar to Dell's. The computers didn't sit on Gateway's shelves, but were built when orders were placed. In 1993, Gateway went public. It had about 3,000 employees and was valued at $1 billion, making it South Dakota's only Fortune 500 Company. It opened a factory in Ireland, and two years later, bought Australia's largest PC maker. In 1998, Gateway moved from Sioux City to suburban San Diego, one of many headquarters moves.

Company had also unveiled its hexagon strategy i.e. to become complete solution provider in PC rather than just a hardware firm. This initiative required the company to defocus from its current line of business that accounted for 90% of the revenue to try a risky opportunity, which was going to be the future of PC marketGateway.com and Bricks & Mortar play a critical role in Gateway’s new business model which helps in expanding the Gateway’s market reach while retaining the operational efficiencies of the direct sales.

The retail stores were a huge success and also provided opportunity to cater to small business customers. Company introduced its second major initiative Yourware programme to trade in two to four years old Gateway to purchase new gateway machine, in order to build a loyal customer base. But the initiative was unable to work on blue-book value, expected life of computers and the potential use of returned computers.

To summarize, e-commerce at Gateway does not replace other PC distribution channels, but complements them as Gateway continues to grow its core PC business. More importantly for the long run, the Internet provides a platform for offering services and information to both the consumer and business markets as Gateway expands its non-PC business. This transition is not easy, however, and Gateway has struggled somewhat as it tries to carry out a number of new strategies at the same time. E-commerce is clearly a work-in-progress at Gateway, and one that will evolve as the company continues its transformation and responds to external market and technology trends

Introduction:

Gateway started off selling computers with a built to order strategy where they delivered customized personal computers. The Dell inspired model seemed to yield results and with the innovative marketing strategies, Gateway has become a well known brand by 1991. The sales of the Gateway have failed to keep pace with Dell. The issue is finding the right distribution channel and change in the strategy to keep up with the changing needs and demands of the customer.

Distribution channels:

Direct(Telephone): The company has started off with this channel. In 1999 gateway automated its voice response system that could save money and increase the channel efficiency. As computer profit margins shrank, sales representatives found themselves spending increasing amounts of time selling products like add-on peripherals, financing and extended warranties.

Gateway.com: Internet was adopted as a channel of distribution during 1996 both by Gateway and Dell. Sales were not on par with the other companies like Dell and IBM. Gateway has employed 100 online support personnel in Kansas City to provide sales processing, follow up, technical support and answer e-mail.

Problems:

1. Fierce competition in the PC business had driven prices and profits down2. Lacked expanded sales team to get the corporate clients3. Trouble in attracting top executives and engineering talents to Iowa Headquarters4. Y2K problem.

What were the strategies adopted:

1. New corporate image by dropping the 2000 and the trademark Holstein cow to capture a wider market and corporate customers

2. Shifted base to San Diego, California3. New top Management to push the business model beyond simple computer assembly4. New distribution outlets to cater to the home PC users who wanted to ‘kick the tires’ before

buying a PC. They started off with new selling techniques like training new users and helped building Business solution centres.

5. Yourware programme targeted at the home market.

What are the possible alternatives:

Heavily invest and expand Gateway.com – Since the company wants to expand the customer base by catering to the corporate clients, internet would be a very good means to offer the services in a better way. The cost incurred would drastically decrease which would increase profits. The present Gateway’s sales through internet are 10% and there is a wide scope to increase on this front.

Promote the retail stores and Yourware programme – The major customer base who want to ‘kick the tires’ before buying a PC would be benefited. About 75% who were not tech-savvy needed traditional retail outlets and hence the segment can be tapped to the extent possible. But the major

setback is heavy investment that the establishment requires. Although Yourprogramme was an initiative to capture the home market, the prospects of it were unascertainable.