GATEWAY: MOVING BEYOND THE BOX

By: Shashank Chauhan

(S6052)

BACKGROUND

• In 1985 TED WAITT was able to sell a $3,000 computer in a 20 minute phone call.

• Telephone based computer retail business.• Eliminated retail distribution cost, finished goods inventory & showrooms.• Fellow sales man MICHAEL HAMMOND signed to help TED WAITT.• 1987 renamed GATEWAY 2000 earned revenue $1.5 million.• 1988 revenue grows to $12 million.

“Establish GATEWAY 2000 as a trustworthy company that offered built to order company, high end quality at low end price”

TED WAITT

• How to increase the sell as they were competiting with IBM?

“Marketing campaign”

• Solution works.

• 1991 Inc. magazine named Gateway 2000 the fastest growing private company in nation with $626 million annual sales & 1,300 employees.

• Core idea “great service & a great marketing strategy”

1994 1995 1996 1997 1998 19990

1,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

2,7013,676

5,035

6,294

7,703

8,965

SALES($)

SALES($)

DIRECT & INDIRECT CHANNELS

• The Telephone Channel:• GOAL:

“How do we build the right system for you”

• 1999 Gateway automated its voice response system to save money and increase channel efficiency.

• Sales representative helps customer assemble customize computer.

• Sales representative were expected to sell $150,000 to $160,000 in company 24 annual sales cycle.

• Profit margin shrank due to competition they begin to sell the add-ons (peripherals, extended warranties, software)

• Gateway.com

• GOAL

“Intact customer through phone or website instead of loosing it to Dell or Compaq”

• Employed 100 online support personnel in Kanas city to provide:

- sales processing

- follow up

- technical support &

- answer e-mail.

PROBLEMS

• Competition had driven prices & profits down.• Trouble in attracting top executives & engineering talent to its Sioux

city, Iowa headquarters.• Y2K problem.

• What to do?

“A complete makeover of just about everything of Gateway’s operations”

TED WAITT

STRATEGIES• A New Corporate Image:• 1998 Gateway dropped the “2000” from its name & trademark Holstein

cow from TV.• Print adds in order to attract more customers.

• A New Location:• 1998 shifted into new administrative headquarters in San Diego, California

from Sioux City.• There they can attract engineers & executives.

• New Top Management:• Company went through a complete organizational change in 1998.

• A NEW DISTRIBUTION CHANNEL

Gateways Country Stores• Goal :

“To have 80% of US population within 30 min. drive of Gateway country store.”

Gateway’s second major initiatives

Trade in two or four year old Gateway computers

Strategies for trade off

• Software and/or peripheral bundles• Finance facility• Internet access through gateway.net • Service warranties

Reasons for failure

• Gateway ware unable to find out actual buyer who visited the site.

• Uncertainty of ROI for Fixed investment approx $400 -$500 for a 2000 computer

• Customers lack of knowledge for understanding the price fluctuation.

• Company had no idea what it would do with the returned computers.

Strategies for beyond the box

• 50% non systems income was recurring from financing, service warranties, training, and Gateway’s ISP deal.

• In 1999 Gateway secured a 20% stake in NECX direct-Gateway’s stake in NECX was real in terms of revenue, but virtual in terms of inventory

• Gateway alliance with AOL-For internet access• Final deal was known for joint development of

internet and home networking appliences

Real problems with moving ahead with service strategy

• Leveraging the Gateways distribution channels in order to market the various pieces of hexagon-Priority of channels

• They should grow at which speed because competitors were-Dell, Compaq, IBM,HP,Apple and the success and failure depend upon core competencies

Gateways System product breakdown

Desktops Q1 Q2 Q3 Q4 1999 Total

Revenue($in millions)

$1,724 $1,437 $ 1,586 1,760 $6,507

Gross margin

20.6% 20.0% 20.4% 20.6% 20.4%

Operating margin

6.6% 5.8% 6.1% 7.4% 6.5%

Units sold(000’s)

987 883 1099 1225 4194

Average desktop price

$1,746 $1,626 $1,444 $1,437 NA

Gateways System product breakdownPortables Q1 Q2 Q3 Q4 1999 Total

Revenue($in millions)

$254 $277 $300 $317 $1,148

Gross margin

20.8% 20.9% 20.9% 21.2% 21.0%

Operating margin

6.8% 6.0% 6.9% 7.4% 6.8%

Units sold(000’s)

87 110 123 123 443

Average desktop price

$2,931 $2,512 $2,430 $2,588 NA

Gateways System product breakdown

Servers Q1 Q2 Q3 Q4 1999 Total

Revenue($in millions)

$61 $64 $75 $80 $280

Gross margin

24.3% 24% 23.6% 23.8% 23.9%

Operating margin

10.3% 9.5% 9.3% 10.0% 9.8%

Units sold(000’s)

11 10 12 14 47

Average desktop price

$5,584 $6,377 $6,034 $5864 NA

Gateway Non-System product Breakout

Other Hard Ware(Peripherals.etc)

Q1 Q2 Q3 Q4 1999 Total

Revenue($in millions)

35 70 111 147 363

Gross margin

21.5% 21.5% 21.5% 21.5% 21.5%

Operating margin

4.5% 4.5% 4.5% 4.5% 4.5%

Gateway Non-System product Breakout

Software Q1 Q2 Q3 Q4 1999 Total

Revenue($in millions)

20 43 68 88 219

Gross margin

45.0% 45.0% 45.0% 45.0% 45.0%

Operating margin

28.5% 28.5% 28.5% 28.5% 28.5%

Gateway Non-System product Breakout

Service warranties and financing

Q1 Q2 Q3 Q4 1999 Total

Revenue($in millions)

6 13 22 29 70

Gross margin

67.5% 67.5% 67.5% 67.5% 67.5%

Operating margin

44.5% 44.5% 44.5% 44.5% 44.5%

Gateway Non-System product Breakout

Training Q1 Q2 Q3 Q4 1999 Total

Revenue($in millions)

3 7 11 15 36

Gross margin

45.0% 45.0% 45.5% 45.5% 45.5%

Operating margin

8.0% 8.0% 8.0% 8.0% 8.4%

Number of sales

1,400 1,900 2,400 4,000 2,425

Gateway Non-System product Breakout

ISP/Portal/Other

Q1 Q2 Q3 Q4 1999 Total

Revenue($in millions)

0 1 7 15 23

Gross margin

55.0% 55.0% 57.0% 60.0% 56.8%

Operating margin

Na 30.0% 32.0% 35.0% 35.7%

Number of subscribers(000’s)

200 400 600 1,000 ----

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