Inc.
By Gateway, Adam Amantea
Strategic Management in Global Environments Dr. Ofer Meilich 6 May 2004
Gateway, Inc Table of Contents
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Introduction.....................................................................................................3 Ch. 1.............................................................................................................3 Ch. 2.............................................................................................................5 Ch. 3............................................................................................................10 Ch. 5............................................................................................................11 Ch. 6............................................................................................................12 Ch. 7............................................................................................................14 Ch. 8............................................................................................................15 Ch. 9............................................................................................................16 Ch. 10..........................................................................................................18 Ch. 12..........................................................................................................19 IRME............................................................................................................20 Point of Interest...............................................................................................22 Bibliography..................................................................................................23
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Introduction
Company Gateway Inc (GTW) Location: 14303 Gateway Place Poway, CA, 92064 Overview Gateway Inc is a computer manufacturer which was located in Poway, Ca. up until April of 2004. The company currently sells computer hardware and has recently made a move into other consumer electronics, including digital cameras, mp3 players, and high definition plasma televisions. Gateway is currently traded on the New York Stock Exchange under the ticker GTW. Selection Process I have selected Gateway Inc because of the amount of press that they have been receiving lately. Currently the company is fighting to stay alive in the electronics industry and each day the company receives extensive press concerning their current state of affairs. Relevance Gateway Inc is a highly relevant company to examine because of their current situation. The company will provide a direct look at strategy in the business world and by following their movements it will be possible to see the process of strategic planning on through the implementation stage.
Ch. 1
CEO/History/Mission/Culture Ted Waitt is the Founder/Chairman/CEO of Gateway, Inc. Waitt strives for excellence with his company, both in the products they sell and in their local communities. He has been a very effective leader over his 19 years of operations, and watched the company face near extinction during the only period that he stepped away from the helm. The idea behind Gateway,
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Inc. was to have a company that was totally unique in American business. Gateway, Inc. is based on the principles of honesty and fairness, which shows up in their core culture: Leadership, Honesty, Innovation, Caring, Discipline and Focus. Their Mission Statement is very short and to the point, "to be the leading integrator of personalized technology solutions," with a vision that strives "to improve the quality of life through technology." Gateway, Inc. began with a similar story to Dell Computers, a college dropout with a passion for computers. In 1985, Waitt borrowed $10,000 to start up his computer business in a barn that his father owned. His brother Norm and his friend Mike Hammond helped him develop the business which originally began as an add-on parts distributor for Texas Instruments' PCs. During this time Waitt and Hammond worked on developing a computer package to compete against other systems on the market. The young company watched as their PC sales shot through the roof with the introduction of their system in 1987, and decided to change the company name to Gateway 2000 in 1988. Waitt began a strong advertising campaign and took the company public in 1993. They began manufacturing computers in Ireland, and distributed them across Europe and Australia before finally opening their first retail stores in the U.S. in 1996. Eager to take Gateway's market share, Compaq offered $7 billion for the company, but had the offer rejected due to Waitt's concerns over the wellbeing of his employees. In 1999, Waitt turned over his position as CEO to former AT&T executive Jeff Weitzen. During Weitzen's reign, Gateway lost more than 10% of its workforce and watched its sales sink. Waitt returned as CEO in 2001, and has been working diligently since that time to regain stability in the company. Current Press April of 2004 has brought about many changes for the company. With the acquisition of eMachines complete, Waitt has opted to step down as CEO of Gateway, and has turned power over to eMacines CEO Wayne Inouye. In a move to redirect the company, Gateway will be closing all of their retail locations on April 9, 2004. All 188 remaining retail locations will close with a last minute liquidation sale of product, and afterwards Gateway plans to let go the 2,500 employees employed at these locations, a 40% reduction in workforce. They are also in the process of relocating their headquarters to Orange County in order to place the executive staff of eMachines closer to Gateway.
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Inouye has posted 9 straight profitable quarters as CEO of eMachines, turning around the low-price manufacturer into a successful company. He hopes to utilize the strength of Gateway's brand name to continue distribution of the computers in nontraditional channels of distribution for Gateway. This move comes at a cost, as major retail chains such as Best Buy question the link of eMachines to Gateway, who has long been a competitor in the computer market. Inouye is still quiet about the new direction of Gateway, but is showing confidence it the future.
Ch. 2
5 Forces Industry Definition For our purposes, the industry will be comprised of fully configured computer systems (FCCS), which are preassembled for the consumer. This industry includes desktop PCs, laptop PCs, servers, and network PCs. The 5 forces analysis will focus on those manufacturers producing FCCS's: Gateway, Dell, HP/Compaq, E-Machines, Apple, Best Buy, Toshiba, IBM, Sony, and Sun Microsystems.
Gateway, Inc Product Value Chain Gateway's Product Value Chain is unique because while the focal industry is PC
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Manufacturers, Gateway is both a manufacturer and distributor. They have similar online and phone sales to Dell, but they also operate their own retail stores.
Scope
Gateway, Inc Strategic Group Map
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Threat of New Entrants Economies of scale are very high in the PC industry. Despite the large numbers of products on the market, many manufacturers use similar components, keeping their differentiation at a moderate level. In order to maintain a foothold in the industry, high levels of capital investment are needed to maintain R&D and manufacturing plants. This creates problems because the switching costs for buyers is relatively low between Windows compatible PCs, so buyers are more apt to hunt for low prices than hold to brand loyalty. Incumbents control the major channels of distribution and have the working capital to maintain economies of scale, making entrance into the industry difficult. Intensity of Rivalry There are a moderate amount of rivals in the industry, approximately 10, which maintain significant market share. Their size and power is highly unbalanced, and due to the flattening of the market as it reaches maturity with current technology, rivals have turned to price wars to combat one another. This is creating favorable buying conditions for the customer, but new computer sales still continue to level off, and manufacturers are stuck storing computers with
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inferior technology. Because of their investments, many manufacturers are unable to move out of the PC markets and have instead looked to other areas of the PC industry such as PDA's and digital audio, as well as outside the industry in areas such as home entertainment systems. Power of Buyer Groups The overall volume of buyer's purchases in the markets is relatively low though the profits they gain from PCs is very high. FCCS's have become an everyday part of life and an integral part of running business in every industry. Because of this many buyers perform backward integration as their proprietary knowledge of PCs increases. Many buyers now purchase straight from parts manufacturers in order to build their own machines, which has in turn aided in the declining sales found in the PC Market. Power of Suppliers The power of suppliers is steadily increasing as they integrate forward and offer their products directly to the end users. They do not control the market though because of the vast number of suppliers available, which drives down the costs for parts. Power of Substitutes There are currently no viable substitutes for the industry. Implications Many PC manufacturers are outsourcing their work across seas to India and many Asian countries. The cost of production is far below that in the U.S, and as outsourcing grows, many companies are beginning to send their services such as customer service to India. In order for Gateway to remain competitive with Dell and hold onto their #2 direct marketing position, they will require continued growth into foreign markets in order to remain competitive. This will be a major challenge because of the overall unattractiveness of the industry. Slim profits make this industry very difficult to operate in, and while Gateway continues to focus on individuals over institutions, they miss out on the majority of the market, while fighting to maintain business with customers who can very easily build their own PC, and bypass Gateway's product all together.
Gateway, Inc Macro-Environment Economic Forces
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Many people in the U.S. are tight on money. With a wide range of technology available to appease all income levels, there is an increased necessity for price wars in order to remain competitive. Consumers look for value when shopping for electronics, and will purchase the best quality at the best price in order to conserve money. Technological Forces The lifecycle of standard computer technology is extremely short, requiring constant innovation. Fiber-optic wiring is being developed to replace traditional copper wiring, which will allow for much faster data transfer. New processors are being designed, which double in speed every two years. Wireless computing is growing in demand, which will create an increased necessity for security programs and higher quality hardware in the near future. Demographic Forces Generation X and Y highly tech savvy and have been quick to adopt any new technology that is released. Many other generations utilize technology in their daily lives for many different activities, ranging from ATMs to many home appliances. Technology has become an important tool utilized by all generations in every demographic. Social Forces Many people use for personal and business uses, and rely on technology in order to get through their day. Political-Legal Forces There are many patents, copyrights, and licensing agreements which regulate the software and hardware of technological components. Most of these are enforced very strictly by regulatory agencies such as the government. Any violation often comes with a very strict penalty due to the high level of intellectual rights that go along with the technology.
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Ch. 3
Competitive Advantage: 4 Building Blocks Efficiency Gateway has not been able to create proper efficiency with their outputs in order to maintain growth. Despite a 10% workforce layoff, company profitability has gone from $9.6 billion in sales in 2000 down to $3.4 billion in 2003, in a failed effort to counteract the steady losses that Gateway has had over the last 3 years. There major contributing factor to loss has been their inability to turnover their inventory as quickly as their major rivals Dell and HP. Quality Gateway's computers continue to rank as one of the leaders in quality PCs in the U.S. They currently maintain a market share of approximately 3.8%. Innovation Gateway hired Ted Waitt back on as CEO after it began to plummet. Despite his directive to branch into other markets, and growing channels of distribution such as sales at Costco Wholesale, Gateway continues to lose sales. Customer Responsiveness Waitt built Gateway with a foundation of customer service. Gateway has a vast number of services, including phone, internet, and home service to take care of their customers. They have retail stores located around the country to meet the customer's needs, but as sales fall, Gateway has been forced to close the doors on many of their retail outlets and scale back customer service activities. Distinctive Competencies Gateway has had the unique ability to utilize their knowledge of electronics to branch out into other areas of consumer electronics. They have introduced lines of cameras, personal digital music players, software, and plasma televisions. While their line of high definition plasma
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televisions has been a top selling television in the U.S, it does not make up for the lost sales in the computer market. It has been able to help keep Gateway afloat despite declining sales, but disappointing sales in their other lines of consumer electronics has not helped boost sales in the numbers that had been anticipated. More recently, Gateway has turned their resources to the acquisition of eMachines, a rival in their core market. Gateway put up 50 million shares of common stock and approximately $30 million in cash for the takeover. This deal will not only expand their distribution channels into the major electronic retailers, but it will position the company as the third largest PC company in the U.S. with over 7% market share. This move is an attempt to return to their original focus on PCs, but will give them a new distinctive competency. So far Gateway has been ineffective at adapting to stabilizing industry sales, and the eMachines acquisition may be their final sink or swim move.
Ch. 5
Business Level Strategy Gateway has attempted multiple strategies in order to gain a competitive advantage in the market. Differentiator vs Cost Leadership Gateway began as a cost leader in the market. In 1987, when their PCs first hit the market, their computers were designed for the general PC consumer. What drove them in the market was their ability to pack high quality components and software into their fully configured computer systems at costs that their competitors could not match. They were able to maintain low costs by producing their machines in Ireland and primarily distributing in Europe. As time progressed, Gateway was unable to maintain profits by being the cost leader because of their inability to cover their own fixed costs for production. Even as they rode down the learning curve, they were unable to streamline their operations in order to turn their low cost niche into a profitable market. Rivals Dell and HP built market share by being able to better utilize their resources and
Gateway, Inc turn a profit in the market via increased sales and higher inventory turnover. As Gateway watched their sales dissipate they turned their strategy to differentiation. They attempted to
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differentiate themselves in the market as a PC manufacturer who could provide their customers with a broad range of consumer electronics, including personal audio and home video equipment. Their plasma televisions helped to build a new wave of customer loyalty, and they were able to maintain prices because no other competitor in the industry was offering the same products. Their success was short-lived as many electronics retailers began adjusting plasma prices to compete with the $3,000 Gateway plasma, and the PC manufacturers began their own lines of consumer electronics. Dell and HP launched entire lines of MP3 players, PDA's, and digital cameras to compete with Gateway. Because of Dell's efficiency in inventory turnover and HP's vast channels of distribution, Gateway was unable to compete, and quickly lost their differentiation in the market. Their response was to return to a low cost strategy, and during the holiday season of 2003, Gateway launched a low cost campaign, offering 5.0 Megapixel digital cameras at $250. This move was designed to generate traffic at Gateway's website and in their retail stores, but despite the campaign, Gateway still posted disappointing losses for the close of 2003. Their current acquisition of eMachines, a low cost leader in the electronic retail stores, will help to increase their channels of distribution and will also help support their low cost leadership strategy as they transition back to focusing on their core product.
Ch.6
Industry Environment Gateway, Inc. is currently facing shakeout as their industry heads towards maturity. While the industry as a whole is constantly facing new innovation and increased sales, up 15.2% in 2003, Gateway's shipments of computers fell 24% to 2.1 million units. The surge in sales, which tapered off in 2000, has been accredited to the high demand for laptop computers and low prices. While there is no fierce price wars that are traditionally found in maturing markets, computer manufacturers have been offering once high priced computer hardware and much lower cost to the consumer.
Gateway, Inc Because of this the industry environment appears as a mature market, despite the
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numbers reflecting high growth. What has been the distinguishing factor between manufacturers has been their ability to successfully branch out into other areas of the PC industry with product such as printers, scanners, and other hardware. Due to Gateway's inability to create a foothold in other consumer electronics they have been unable to compete in the market. Competitive Strategy With the acquisition of eMachines, Gateway will continue with their low cost business strategy. Inouye has a very difficult task ahead of him in developing a new competitive strategy for Gateway. For the last few years Gateway has focused the bulk of their business on PCs, but has been ineffective at conveying to the consumer relative advantage. Gateway primarily focused on their level of customer service and customer care as their relative advantage in the market. They marketed their PCs to consumers who did not have the knowledge to piece together and troubleshoot a computer as would be expected of much of Dell's consumer base. They also attempted to meet customer needs through complementary products such as new technology in consumer electronics with their line of Plasma TVs, digital cameras, and mp3 players, but failed to generate sales. Now that Waitt has stepped down as CEO, Gateway will face a new competitive strategy. In order to maintain any type of standing in the market, Gateway will need to tap into the growing consumer sales. They have begun this process by closing down their retail stores, which is the first step in their new strategy, but they will need to reconnect with consumers and begin to offer products which they can put into the hands of potential opinion leaders. Future Effectiveness For Gateway to remain a contender in the market, they will have to redesign their image. Inouye already plans on returning Gateway's focus to phone and internet sales, while driving the eMachine line in the retail stores such as Best Buy and Circuit City. There is also talk of stepping back as a direct distributor and releasing the Gateway line in retail centers. Inouye feels that Gateway has enough name recognition to be a powerful product on the shelf, and this may be the necessary move in order to increase the distribution of their computers.
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Ch. 7
Technology The PC industry comprised is of high-tech, highly innovative products. The lifecycle of hardware and software is extremely short, and new computer systems run twice as fast every two years, with new hardware and software required to keep up with the changing systems. Everything from semiconductors, to wiring, to laser drives are constantly being reinvented to support the changes to hardware, while software engineers often overlook preexisting bugs in software as they move to develop newer and better software packages to run the hardware. There are many available operating standards, but the prevalent standard is the WinTel system, which are computers running off of Intel processors with Windows based operating systems. The primary competition, though possessing far less market share is the Mac OS, which is designed to run Apple computers. Other operating systems that compete with the WinTel system are AMD processors, and the Linux and Lindows operating systems. Many argue that other operating systems are superior to the dominant Windows OS due to holes that are easily penetrated by worms and virus attacks found in the Windows OS. Many early adopters have moved to the Linux OS, which is based off of Unix. This shift is a primary indication of the superiority of the operating system, but such shifts are very slow moving. Many adopters of computer technology are part of the early or late majority, and do not feel the attachment to the technology that the early adopters feel. Just as Windows became the dominant OS, time may show a paradigm shift, moving the early and late majority towards a new type of operating system. In order to attach their product to the early adopters who spread the word about new technology, Gateway and eMachines should offer alternative operating systems available with their product. By doing this they may be able to brand a positive image with the early adopters, who in turn could help them spread their product to the larger groups. The technology which fuels Gateway is constantly facing a swarm of successor technologies. As technologies reach the inflection point, there is always a new successor technology ready for release. For example, as the Pentium 4 begins to have diminishing returns, AMD released the AMD 64 Athalon which is a superior processor to the Pentium 4. Likewise, Windows XP has been on the market for a couple of years now, and people are beginning to
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desire an upgrade to the system. At the end of the summer Microsoft will be releasing their XP Service Pack II, which will upgrade current XP operating systems. While Gateway does not focus on products that require high levels of intellectual property rights, they do utilize many hardware and software systems that have high intellectual property rights, such as Microsoft and Intel. Gateway does however have intellectual property rights for the design of their computer systems, as well as the designs for their consumer electronics. The intellectual property rights that Gateway has stems from their hardware system designs which are designed to be high quality at a low cost. For example, their plasma TV was selling for only $3000, when the average plasma sold for around $7000, and they recently released a home theater system designed to give Bose quality sound at half the cost.
Ch. 8
Global Strategies Gateway has seen a reduction of costs due to their manufacturing operations that they employ overseas, particularly in the Pacific Rim region. But as of late, Gateway has shifted their global resources as they move into a domestic strategy. Gateway has announced that they will close many of their Pacific Rim manufacturing plants, and they pulled their line of computers out of the European market. This restructuring shift was designed to create a domestic focus, but what it really indicates is Gateway's struggle to remain a viable competitor in the PC market. Gateway had retail locations located in the U.K, as well as a few locations throughout Canada. In these markets they attempted to exert the same "customer satisfaction" strategy that they employed in the U.S. Despite their best efforts, the foreign markets were relatively unresponsive to Gateway's Global strategy. Competitors such as HP utilize a Multidomestic strategy. They have a vast network of customer service call centers designed around the customs and cultures of any given market. These strong domestic ties have allowed companies like HP to succeed in foreign markets. For Gateway, there inability to connect with the foreign market turned into another money losing venture. Gateway also suffered from a second-mover in these markets as they attempted to compete against the established global distributors. Because of Gateway's limited global
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experience, they lacked the scale of entry necessary to become a viable competitor in the global market. Likewise, Gateway had to relearn their processes and begin their movement down the learning curve due to their lack of experience within this environment. Because Gateway does not utilize extended distribution channels such as retail stores, they were also put at a disadvantage because they had to establish their own retail locations within Europe and Canada.
Ch. 9
Corporate Strategy Horizontal Integration Gateway, Inc. recently purchased eMachines, one of their largest competitors within their industry. This acquisition is designed to do two things. First, the eMachines acquisition will increase Gateway's total market share to almost double. This would allow Gateway to have a more substantial grip on the market while competing against their rivals Dell and HP, but while eMachines market share is growing as they continue to report profitable quarters, Gateway is quickly losing their footing within the marketed and falling further behind the market leaders Dell and HP. Second, the acquisition will give Gateway access to the retail distribution channels currently utilized by eMachines. The access to these channels of distribution would give Gateway a connection with major retail chains such as Best Buy, where eMachines are currently carried. This creates two separate problems within the organization and the marketplace. First, Gateway's core competency is to sell primarily from their website, and their retail locations up until they closed in April. By distributing through in nontraditional channels, they may confuse their customers which in turn may hurt their business. Second, eMachines has a long standing relationship with many retail chains. These chains now feel threatened by eMachines being run by a competitive market force. Because of Gateway's focus on direct distribution, many retail chains feel that their relationship with eMachines will now be threatened. Vertical Integration
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Gateway has been a direct distributor of products since its inception. Because of this, they are vertically integrated, acting as both manufacturer and distributor. Because Gateway has branded themselves as a direct distributor, they will have difficulty if they tray to shift away from this corporate strategy. They have defined themselves as a market competitor to retail outlets, and because of this they have limited opportunity if they wish to begin retail distribution. They would have to completely deintegrate and redesign their corporate strategy in order to begin retail sales. They began testing sales in wholesale outlets such as Costco, but a major shift would require a whole new strategy. Gateway's own retail stores were designed to fix the problem of nonexistent retail sales. The Gateway Country stores were conceived to be a place where customers could come and learn about their product, build a computer to their specifications, and in a sense, have a home with Gateway. This approach was different than that of Dell, whose direct distribution relies solely on internet and catalog sales, shipped from an assembly plant. The problem that Gateway faced in vertically integrating into the retail market was their inability to develop a strong sense of customer loyalty. The idea was good, but the idea was never developed and nurtured. The Gateway Country stores became extremely cluttered and did not pull in the level of business as expected. They also had to put up the money to purchase a location for their building and stock it with inventory. But with Gateway's already low level of inventory turnover, the stores sat with large inventories quickly reducing in value. A second problem with the Gateway Country store was their inability to develop the vision and culture. While the employees were knowledgeable of the products and very friendly, they were alienated from the core business. The Gateway Country stores became a forgotten child of the business, and its demise was accredited to Gateway's inability to live up to their vision of developing a home for the Gateway user. Most sales still relied on internet purchases, and call center customer service was still their dominant interaction with customers needing help. Despite the large sums of money, Gateway was forced to admit that they had made a poor strategic decision. And market forces have shown that the direct distribution system of Dell is far superior to their own effort.
Ch. 10
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Diversification, Acquisitions, and Internal New Ventures Gateway began an internal new venture in 1996 with its creation of the PCTV, a hybrid of a big screen TV and PC. This was Gateways first attempt to diversify their business. This was a related diversification because Gateway stuck with a related product to their industry during their diversification. Gateway attempted to extend their profitability by continuing to diversify their business. With the introduction of their consumer electronics line, Gateway hoped to benefit from a first-mover advantage. This was designed help Gateway manage their rivalry through multipoint competition. Gateway leveraged their competencies by utilizing their knowledge of direct distribution in order to sell the consumer electronics as well utilizing their branding in order to convey low cost, high quality. The problem that Gateway had was that their diversification was designed to create growth to counteract declining sales. This dissipated the value of the diversification and took away from Gateway's core business. In a second attempt to expand the business, Gateway acquired eMachines, and as we have discussed, this acquisition was designed to increase Gateway's market share, as well as their channels of distribution. Some of the problems that Gateway is currently facing is difficulty with post acquisition integration, as well as possible distribution problems. While both companies have defined themselves as low-cost leaders, their difference in distribution is vastly different. Gateway and eMachines now both face image problems within the market as people try to understand where they stand in the market. This confusion is seen the most prevalent with the retail chains who now question Gateway's ability to run eMachines. Restructuring Gateway has also gone through a restructuring at both the corporate and business level. Gateway has attempted to reduce the scope of their company by closing down their retail stores. In a quick move, Gateway shut down their stores within a week of the announcement, and liquidated their inventory to local retail chains such as Best Buy and Circuit City. This was a dramatic change for the company, one in which they lost thousands of employees. Ted Waitt has also stepped down as CEO, and is allowing Inouye to step in and restructure the corporate level executive positions.
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Ch. 12
Implementing Strategies Because of the changes that are occurring due to the Gateway acquisition of eMachines, there is little information available about their current organizational setup. Currently they are attempting to restructure the corporate look of the company. If they choose to utilize Gateway's former organizational structure, then the new company should remain a relatively flat organization. As Gateway, Waitt held the position of Chairman, President, and CEO. Below Waitt were 4 executive Vic...