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Case Study
Gateway: Moving Beyond the Box
TECH 6031: Overview of Technical Operations
Feb 21, 2021...

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Case Study Gateway: Moving Beyond the Box TECH 6031: Overview of Technical Operations Feb 21, 2021

Executive Summary Background information Gateway was an American-based computer company that manufactures, promotes, and sells computers and computer hardware. Gateway was founded in the 80s of the 20th century. It was a remarkable company among competitors since it chose to change the usual sales channels and operate new innovative

selling channels as sales using the phone and the internet channels. Gateway identified five revenue streams in the company’s hexagon, they are: 1. 2. 3. 4. 5.

Software and peripherals Service and training Internet access Portal/content Financing

The key issue · Gateway's fundamental problem was choosing the company's path regarding sales channels. · Gateway needed to decide whether to stay on its followed strategy that combines more than one distribution channel or change the plan. · Gateway needed a rapid change in its strategy to stay strong and leading in the computer hardware strategy since it experienced a decline in statistics. Analysis’s highlights · Gateway was thinking and working out of the box; Gateway invested in internet sales channels and telephone sales adjacently to country retail shops. · Telephone sales was a brilliant channel to use · Dell was more successful than Gateway, and Gateway should think of its strategies and plans in that critical time (1999). · Gateway's highest traffic was gained from the internet. · Gateway's customers are not businesses in their majority, but they were individuals, schools, and governmental places. Solution alternatives · Alternative 1: investing in phone channel and internet channel and closing country stores · Alternative 2: investing in the three channels and giving them equal attention · Alternative 3: investing in country stores more than other channels · Alternative 4: not making any changes in Gateway’s Strategy Managerial recommendations · Investing in country shops more than other channels is the best alternative for this case. · Gateway would be recommended to change their strategy by investing in their country shops, increasing the number of markets, and improving customer service in shops.

1.0 Introduction Gateway was an American-based computer company that manufactures, promotes, and sells computers and computer hardware. The company was founded in the 80s of the 20th century. It was a remarkable company among competitors since it chose to change the usual sales

channels and operate new innovative selling channels as sales using the phone and the internet channels. Gateway focused its innovation strategy on customer loyalty and person to person relationships. The company passed through debates where core decisions must be made, and these decisions would change the whole structure of sales for Gateway. As an example, Gateway had many alternatives, including using a particular sales channel only or using more than one channel simultaneously. Another suggested channel was the traditional country stores. Gateway thought once to apply this strategy vastly and to have 80% of the American population only 30 minutes away from a store (Frei, Moon, & Rodriguez-Farrar, 2002). Innovation in Gateway's business is not only in the distribution channels; it is also in the revenue streams. According to Frei, Moon, & Rodriguez-Farrar (2002), Gateway developed a strategy called "Gateway's Hexagon," this strategy identified five innovatively, or out of the box, revenue streams. According to Frei, Moon, & Rodriguez-Farrar (2002), the five revenue streams are: ·

Software and peripherals

·

Service and training

·

Internet access

·

Portal/content

·

Financing

This report will comprehensively analyze Gateway's innovation, options in marketing channels, the decisions they have made, and recommendations that could foster the revenues, market share, and profit. Moreover, this report will state adaptable alternatives for Gateway to solve the fundamental problem they are facing. This report aims to link knowledge, managerial expertise, and case facts to build the best-fitting decision for Gateway, which was having the problem of being lost between sales channels decision. Besides, this analysis will show how vital innovation in the technology business is and how Gateway was a leader in innovation, which lead it to the best places among competitors. Business History Gateway, an American computer hardware company, operates three distribution channels, Direct, Internet, and bricks and mortar. Direct is the original channel, focused on telephone sales with direct customer contact. Indirect focuses on the internet as a distribution channel through Gateway.com, and finally Bricks and Mortar which focus on retail outlets.

Founded in 1985 based on the notion of a telephone-based computer retail business, eliminating the need for inventory and showroom overhead. Gateway found early success with revenues of $1.5 million and 1987, followed by revenues of $12 million a year later (Frey, F., Moon, Y., 2002). Despite a growing company several key perspectives were always kept in mind including retaining customer confidence, being price sensitive, and focus and quality and support with the goal of being a trustworthy company providing high end quality at low end prices. By 1991 Gateway was named the fastest growing private company in the nation with $626 million in annual sales and 1300 employees. Gateway went public in 1993 having shipped 1.5 million PCs and revenues topping 1.7 billion while retaining homespun image distinguishing itself from larger mail-order companies. By 1999 Gateway was the fifth largest PC manufacturer in the world (Frey, F., Moon, Y., 2002). While Gateway had built its business on phone sale operations, and subsequently online sales through Gateway.com, they faced shrinking profit margin in a highly competitive and rapidly growing industry. In response to this reality, Gateway established what was termed the “Hexagon Strategy” expanding into PC solutions and retail stores.

The strategy included

expanding their offerings into software and peripherals, service and training, Internet access, portal/content, and financing. This strategy moved beyond their established phone/online service to secure greater share of the home consumers while also establishing themselves in the business market segment, which was largely dominated by their competition. A critical decision for Gateway is how to lead the Company into the future and which distribution channel to allocate their resources, arguments for each channel are valid and are of growing importance. On one hand, focusing on their traditional methods could result in a failure to expand in new markets, spreading their resources too thin across all channels could result in losing their foothold in existing markets. While a majority of Gateways' customer base was made up of home consumers, Dell, a major competitor, primarily focused on the large

corporate accounts (Frey, F., Moon, Y., 2002). Gateway was facing a crucial decision at a time of fierce competition in the PC world, endeavoring to ensure a strong market presence while establishing a foothold in new markets, if the right decision is made.

Problem Identification Gateway's fundamental problem was choosing the company's path. There were many paths regarding sales innovations, mainly phone ales, internet sales, and traditional home sales. Gateway's innovation in the 90s was introducing a whole new and non-traditional channel for sales, and it was successful. But after that, Gateway was facing a debatable decision about the company's futuristic strategy that will lead to the highest success and least harm, especially that competition was rising. According to Frei, Moon, & Rodriguez-Farrar (2002), Gateway was working on three channels that are the telephone channel, the internet channel (gateway.com), and country stores. The problem was about choosing what channel to focus on, invest at, and which not. In other words, Gateway needed to decide whether to stay on its followed strategy that combines more than one distribution channel or change the plan by adopting different strategies. The problem was raised after serious threats faced Gateway. For example, the innovation (phone sales, country shops, and internet sales) leads the market composition of Gateway to be home and families. On the other hand, competitors as Dell built a strong market composition that contains corporations and large firms. In this point, and aligning with the fact the Gateway is prone to financial losses based on data (will be presented in this report), Gateway needed a rapid change in its strategy to stay strong and leading in the computer hardware industry.

2.0 Data Collection

The company planned to achieve nearly $250 billion in the ”PC solution market” and create 40% profit from non-computer sales in 2001. The goal of the company was to establish a long term relationship with clients and provide them excellent customer service. Ninety percent of Gateway’s income was generated from the built-to-order PC network. There were some companies that could not generate profit when using less expensive products in the high-end market, Todd Bradley, Gateways Executive Vice President, was afraid that Gateway had changed the business strategy too fast and may face similar consequences. The annual income was $1.5 million in 1987, then it soared to $12 million the next year. The computer customers became sensitive to the price and more concerned about the technical capabilities, qualities and services, one of the key factors for the company to succeed was maintaining midwestern values. The company built its image as a reliable “plain folk” company by providing high quality products at low prices. Inc. Magazine promoted Gateway 2000 as a quick developing private firm, which has 1300 workers and revenue of more than $600 million in 1991. In 1993, the company went public and Gateway 2000’s value was $800 million. Gateway 2000 had delivered over 1.5 million computers and gained an income of about $1.7 billion and had a market value of $1.4 billion. In 1999, Gateway ranked second in the PC industry and had more than $8 billion annual income with 20 million clients.

Gateway and Dell connected with customers using different channels, using direct (telephone) and indirect (website) to sell products. Gateways sales people provided customers with a customized system through the direct channel. They plan to sell the value around $155,000 products in every sales cycle, sales representatives spend more time on “beyond the box” products such as software, warranties services and loans. Gateway also used Gateway.com to provide product information and sell the customized PC systems, there were 100 support workers to give customers technical solutions and respond to questions. A majority of customers used phone and gateway.com at the same time, however, the company preferred them through the website. The Box It cost Gateway more than $100 to attain each customer, the average unit price of a PC was less than $2000, even though it was expected that buyers would pay $6000 in the following years for other products and services. Gateway's revenue increased from $5 billion in 1996 to $7.5 billion in 1998 while the numbers of Dell increased from $5 billion to $12.3 billion. The price competition pushed Gateway to lower its selling prices, which resulted in lower profits. It provided discounts and strengthened the trade group to target corporate customers. It also faced a Y2K challenge as its name was out of date. The company made some swift changes to improve its image. Firstly, Gateway 2000 changed its name to Gateway to gain more customers in 1998. Secondly, the

company hired a new management team in order to shift to a business model that has diversified product offerings, and opened a large number of retail branches that only illustrate products and had no stock. Gateway tended to reduce the risks which come from retail by establishing supply chains, this resulted in more expenditure. The cost of operating a store was between $750,000 and $1.5 million a year, however, the operating margin fell below average in the history time frame. It planned to build 1,000 stores across the country so 80% of Americans could drive to a Gateway country store in half an hour in 2000. According to the company research, 60% customers prefer to use different platforms to purchase an item. The selling price of a computer was near $2000 higher than that of the direct channels. They had 4,000 training spaces by 1999 and the cost of a course was $75, the company also owned 200 storcenters where its competitors did not have these offerings. Through these strategies, the company tried to promote local value added resellers’ orders, including by offering discounts. Gateway began its second move aimed at the household market and developed your:) Ware program. This program allowed clients to resell 2 to 4 year old Gateway PC if the new product was bought. Customers needed to register one of the projects: 1) software: purchased specific third party software and hardware. 2) financing: offered fixed interest loans as low as $19 per month and 3) internet access: provide preload software for buyers who sign in the option. It was financially successful as it attracted more than one million users and made Gateway.com become one of the quickest growing ISPs.

3.0 Analysis

From Exhibit 1, sales growth was stable over time and the inventory turnover ratio increased. There was a huge jump from 1997 to 1998, which reflected the impact of the multiple-Gateway retail store openings. Dell became the leading company in the PC industry and surpassed Gateway by changing its target to the Web and this brought great success. Dell’s sales numbers soared from nearly 8000 in 1997 to more than 12000 in 1998 (see Figure 3). Gateway’s performance analysis Gateway's performance experienced many ups and downs, especially at the end of the 1990s; 1999 was the time when Gateway would take the most critical decisions. Firstly, Gateway made a huge breakthrough by introducing their hexagon strategy. The idea of the hexagon was about introducing profitable revenue streams, and this idea is remarked and noted for Gateway. It was demonstrated in the revenue gained from training courses and offering more than hardware selling. From a technology innovation analyst perspective, the idea of revenue streams in Gateway's hexagon is close to the impressive work done by Amazon recently.Amazon had introduced tens of revenue streams lately, such as trading options, e-commerce solutions, and others (Cirjevskis, 2020). So the introduction of “out of box” revenue streams is a step that made Gateway a pioneer in the 90s. Secondly, thinking and working out of the box is noted when Gateway invested in internet sales channels and telephone sales adjacently to country retail shops. In 1999, internet usage was increasing very fast, and Gateway thought in the right position. Alongside, telephone sales was a brilliant channel to use since it doesn't need high overhead costs as in-country stores. However, knowing that all three sales channels are great and innovative, the decision-making was complicated due to the tightness of competition with Dell and the nature of Gateway's customers. Alongside, dropping "2000" from Gateway's name in 1999 was a correct step since the year 2000 was approaching, and there was no futuristic sense to keep "2000" in the companies branding. Commenting on Gateway's market share in 1999, which was around 8.7%, this number was very positive for Gateway since the company was working in a fast-growing field, and there was a big change of increasing the market share if correct decisions and plans were Katemade.

Analysis of numerical data Financial performance (Gateway vs. Dell) Gateway and Dell ended 1994 with similar sales, but gateway sales at the end of 1999 were about half of Dell's, and this shows that Dell strategies, regardless of what they were, made better outcomes than Gateway. Moreover, Dell retained their sales growth around 40% in between the year 1994 and 1999 while Gateway's sales growth dropped from 56% in 1994 to 16% in 1999, and that shows that Dell was more successful than Gateway, and Gateway should think of its strategies and plans in that critical time (1999). Company Traffic Figure 1 shows that Gateway's highest traffic was gained from the internet. It is important here that Gateway had made a breakthrough using the internet as a sales channel in a time where ecommerce was growing. Gaikwad & Kate (2017) argued that the late 90s was the era when eCommerce using the internet as it had begun to grow rapidly. Moreover, it is noted from Figure 1 that company stores showed the least traffic. Opening and operating stores are costly for companies since it requires employment, rent, and other overhead costs. So, Gateway was advised to rethink its country stores strategy due to the decreased traffic gained from these stores. Figure 1: Gateway's Traffic

Gateway Market Share Figure 2 shows the comparison between each segment size in the market and Gateway’s share in it. It is understood that Gateway dominated education and government segments, while it had

a good share in the home use segment. However, the company's segment in business segments was not satisfactory. This graph tells that Gateway's customers are not businesses in their majority, but they were individuals, schools, and governmental places. So, the sales channels that can increase the company's market share in the business field must be worked on. Figure 2: Gateway Market Share in 1999

Product Breakthrough for Gateway When comparing Gateway's different product lines (desktops, portables, and servers), it is noted that the company depended vastly on desktop manufacturing and selling. However, portables were gaining fair revenues, gross margin, and units sold. However, servers that sold in very small amounts compared to desktops achieved a high gross margin. Therefore, they were important for the company. Servers could be an area for improvement, and the company could achieve high revenues if the number of units sold was higher. Figure 3: analysis of product breakthrough

SWOT Analysis

Strengths ●

Gateway is one of the largest competitors in the PC market.

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multiple channels including direct, indirect, and country stores

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Excellent customer service

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Strong management

Weakness ●

Widespread service offerings

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Diseconomies of scale

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No commitment to any one distribution channel

Opportunity ●

Emerging markets

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Innovation

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Service and product expansion

Threats ●

large capital investments

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negative impact on customer satisfaction and corporate image

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not targeting new customers or market segments.

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Competitive market

4.0 Solution Development Why did Dell perform better? How can Gateway improve?

Alternative 1: investing in phone channel and internet channel and closing country stores

Pros: · Internet commerce was growing very fast since 2000. After 1999, eCommerce from business to consumer had grown significantly (Reynolds, 2000). · Phone sales could increase customer loyalty and the company's reputation. · Less operational costs due to closing the stores. · Higher opportunity for dominating the market segments which rely on technology

Cons: · The segment of the market which buys from stores would be lost. · High employment needs for phone sales · High technical support would be needed for the internet channel development.

Alter...