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									             Gateway, Inc.
            By Adam Amantea

Strategic Management in Global Environments
              Dr. Ofer Meilich
                6 May 2004
Gateway, Inc                                       2

                    Table of Contents


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


Point of Interest…………………………………………………………………………………..22

Gateway, Inc                                                                                       3


Gateway Inc (GTW)
Location: 14303 Gateway Place
           Poway, CA, 92064
        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

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.

        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

        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,
Gateway, Inc                                                                                            4

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.
Gateway, Inc                                                                                      5

        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                                                                                  6

Product Value Chain
        Gateway’s Product Value Chain is unique because while the focal industry is PC
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.

Gateway, Inc                                                                                           7

Strategic Group Map

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
Gateway, Inc                                                                                       8

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.

       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                                                                                          9


Economic Forces
       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.
Gateway, Inc                                                                                         10

Ch. 3

Competitive Advantage: 4 Building Blocks

        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.

        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%.

        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
Gateway, Inc                                                                                          11

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

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.
Gateway, Inc                                                                                        12

       Rivals Dell and HP built market share by being able to better utilize their resources and
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
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.


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,
Gateway, Inc                                                                                       13

computer manufacturers have been offering once high priced computer hardware and much
lower cost to the consumer.
       Because of this the industry environment appears as a mature market, despite the
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, Inc                                                                                        14

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.

Ch. 7

        The PC industry is comprised 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
Gateway, Inc                                                                                      15

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
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
Gateway, Inc                                                                                       16

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
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
Gateway, Inc                                                                                       17

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
       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
Gateway, Inc                                                                                         18

strategic decision. And market forces have shown that the direct distribution system of Dell is far
superior to their own effort.

Ch. 10

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.

       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.
Gateway, Inc                                                                                         19

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.

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 Vice Presidents who oversaw the different departments. With Inouye
taking over as CEO, there may be changes to occur, because there will now be a necessity for
more coordination between the two companies. This transition may cause the organization to
gain more levels, becoming a tall structure. If this occurs, then we can expect to see many
difficulties that Gateway will have to overcome, including less flexibility and slower response
times, communication problems, particularly between the two companies, distortion of
commands, and an increased level of expense.
       Another area that may cause many problems for the combining companies will be the
organizational culture. It is assumed that Gateway performed extensive research before acquiring
eMachines, but as we’ve seen before with so many company such as TimeWarner, and AT&T
and Lucent Technologies, companies that appear to share competencies on the surface do not
mesh because their organizational culture was overlooked. The first problem facing the company
is a lack of motivation as employees continue to be cut from the company. This will not only
affect Gateway, but eMachines as well as duplicate roles are cut down to streamline efforts.
Another problem will be the ability for different employees to adapt to changing work
Gateway, Inc                                                                                       20

environments. No two work environments are the same, and it will take effort from both sides to
adapt to the new environment in which the employees must coexist.
        One way that they can help ease the transition would be to group employees by
functional structures. This would place employees with similar expertise together, and would
help management to look for overlapping roles. Another way to help the transition will be to
constantly communicate the vision of the company, and continually convey to the employees the
reasons why the acquisition and downsizing is necessary. If the employees do not understand
why the company is changing, they will be resistant. Another way will be for Gateway to
streamline their product offerings, and narrow their product line. By doing this they can attempt
to return to their core competencies that have been successful for them. In doing so, they will
need to continue with their cost-leadership strategy, but ensure that they do not hurt the
eMachines sales. One way that would be effective would be for Gateway to step away from the
direct distribution strategy that they have held onto, and branch into the retail market. This would
help to build relations with the retailers, and possibly help increase their inventory turnover.
They could then inform their loyal customers that they are putting more products out on the
shelves within the customer’s reach. This will not only help to retain the existing Gateway
Country customers, but would allow them to target new segments of the market.


Timex: Gateway reminds me of Timex because Gateway entered into a niche that was not held
by any competitor. Like Timex, they entered into a low-cost niche in which they provided mass
distribution, but unlike Timex, they have not been able to hold onto success. As time goes by,
their niche becomes more undesirable and may soon be abandoned.

Honda: Like Honda, Gateway utilized low costs in order to entice customers to buy the product.
Because their product was also high quality it increased the brand image, which in turn generated
more sales, allowing for increased market share. Because of their increased market share, they
were able to increase their production scale, which in turn created more sales and lowered the
Gateway, Inc                                                                                      21

Cigarette Industry: Like the cigarette industry, Gateway was vertically integrated. They not
only manufactured their own product, but their direct distribution made them the distributor of
their product.

Cola Wars: Like the Cola Wars, Gateway had a first-mover advantage in their niche. While they
benefited from nearly 15 years of soaring profits, they eventually expanded beyond their core
product. Unlike we see in the Cola Wars, Gateway may have expanded beyond their means.

Coors: Like Coors, Gateway has been met with a changing industry. During their early years,
Gateway offered a limited product line, but as customer demands changed, Gateway was forced
to adjust their business. Because they were vertically integrated, they were met with higher costs
for distributing their product, which has in turn created a lock-out in the retail market.

Airborne Express: Like AE, Gateway entrenched themselves with a niche customer base.
Because of the lack of differentiation and low switching costs, there was very little to distinguish
them within the market, aside from their reputable customer service. As the giants such as Dell
and HP continue to grow, Gateway is slowly being pushed aside.

Southwest Airlines: Like Southwest, Gateway is highly reliant on their corporate culture. Waitt
has acted as the glue to hold the company together. He created the vision and culture of the
organization, and under different leadership, the culture fell apart.

Harley Davidson: Like Harley, Gateway has attempted to build up a brand image that is highly
recognized in the market. Because of their inability to offer a differentiated product, they hoped
to brand themselves with a strong name.

Wal-Mart: Like Wal-Mart, Gateway attempted to utilize volume of sales to make up for low
margin. Gateway was unable though to generate enough sales to make up for their low margin on
their products.
Gateway, Inc                                                                                      22

Dell: Both Dell and Gateway are direct distributors, with Dell #1 in the market, and Gateway a
distant second. Dell’s advantage has been their ability to turn over their inventory, cut down on
inventory they hold, and target a larger customer segment with greater buying power.

BIC: Just as BIC expanded into other areas of products, Gateway attempted to compete in other
industries. Though they enjoyed a first mover advantage, their competition has been able to
overtake them in sales of consumer electronics.

Marks and Spencer: Like Marks and Spencer, Gateway attempted to offer their customers a
wide variety of products. All of their products were sold under their own brand name, until
Gateway began to extend their line of consumer electronics. Like M&S, Gateway greatly
miscalculated customer response which led to low sales for an otherwise profitable company.

Interesting Points
       The new challenge is integrating the two companies into one single entity. While much of
their strategic planning has been very hushed, eMachines recently released their first laptop
computer under $1000, and it appears that the Gateway/eMachines company is moving once
again to reclaim the low-cost leadership in the market. The problem with this horizontal
integration is that the two corporate cultures must mesh in order for there to be consistency
between the competencies of the organizations.
       Another challenge that Gateway is currently facing is their branding. While people
recognize the eMachine name as a low-cost leader in the retail market, many feel that the
Gateway name will either help or hinder the sales of eMachines, as well as Gateway. Because
Gateway has made considerable efforts in recent years to separate themselves as a differentiator,
they must now attempt to shift their corporate image back to low-cost leadership.
       Along with image, their distribution channels are also threatened with this merger.
Because Gateway has not been sold in retail distribution channels such as Best Buy, Circuit City,
and other electronics retails, many retail companies feel that Gateway will threaten the
distribution network set up between retailers and eMachines. Likewise, they feel that the sales
efforts and focus of Gateway will take away from the retail sales of eMachines.
Gateway, Inc                                                                  23


eMachines Website:
Gateway, Inc. Website:
Hoovers Company Capsules, Gateway. Hoovers Inc. 2004.
Hoover Company Profiles, Gateway. Hoovers Inc. 2004.
Nelson's Public Company Profiles, Gateway. 2004 Thomson Financial Nelson's.
Standard & Poor's Corporate Descriptions plus News, Gateway. March 6, 2004.

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