L701: Strategic Competitive Analysis
Group Project: Final Report
Gateway, Inc.
Brett Bartlett, Dan Fink, Tina Neal
August 17, 2003
Partnering for Success
Primary Recommendation
Gateway is a technology solutions provider which has experienced a significant decline
in personal computer (PC) sales over the past three years (see appendix XX). This
report will demonstrate how forging a set of partnerships, starting with the retailer
OfficeMax, will help Gateway recapture its lost market share.
Currently, neither Gateway, nor Dell - its biggest competitor – distributes computers
through traditional retail chains (see appendix XX). Like Dell, Gateway offers
computers mainly through direct online and phone sales. Unlike Dell, Gateway also
sells through physical Gateway store locations. The Gateway store offers consumers a
chance to touch and feel the PCs, but carries no inventory - consumers order
customized PCs in while in the store and wait for home delivery from the standard
distribution system. While Gateway stores have proven to be an effective method of
expanding Gateway’s market and increasing sales, they carry very large fixed costs. As
well, it is a slow method of expansion due to the logistics involved with growing a retail
chain.
Our primary recommendation is that Gateway forges a series of physical retailer
partnerships - starting with OfficeMax - in order to gain massive quantities of retail
space in a short period of time. For example, OfficeMax would provide space in the
display area of their retail stores for Gateway PCs, but like the Gateway stores,
OfficeMax would maintain no inventory of the Gateway brand. Customers would then
have the choice of purchasing a prefabricated PC that they can take home, or ordering
a customized Gateway PC that gets delivered. Either way, they would do it directly from
the OfficeMax sales floor. As part of the agreement OfficeMax sales representatives
will happily assist either sale. Obviously, Gateway will provide a commission to the
OfficeMax branch that is comparable to the retailer mark-up.
OfficeMax would also provide post-sale repair service for Gateway computers in their
stores.(Not sure if we want to delve into the service issue??? Let’s see how the report
is shaping up and if we need it)
Why Use Partnerships?
Gateway has three main avenues of expansion in the PC sales sector: (1) partnerships,
(2) internally propelled growth, or (3) acquisition of a competitor. The reasons for
choosing partnerships over the other options are listed below. Please note that the
product quality issues Gateway is facing are outside the scope of this report, however,
would impact all of these options.
Partnerships
This format would drastically decrease the costs of acquiring physical retail space that
were associated with the growth of the Gateway store chain. As well, it will afford
customers the same dual benefits of being able to touch the merchandise prior to the
purchase, and the ability to order a customized PC built specifically for them. As
mentioned, it will also provide very quick penetration into the physical retail market while
leaving their centralized build and ship business model intact.
Internally propelled growth
This would be mainly be fueled by marketing efforts in the U.S. and abroad aimed at
introducing the Gateway brand name in new geographies and positioning it as the best
PC provider in all geographies. This requires a bigger initial outlay of funds than our
proposal for partnership (see appendix xx), maintains competition with physical
electronics retailers, and forces Gateway to enter new markets while its primary market
is unstable. As well, it is the opinion of this consulting group that the marketing
approach would likely take longer to start producing revenue and is less likely to as
effective.
Acquisition of a competitor
This option is clearly not viable for Gateway for a few reasons. First, with severely
declining sales, Gateway is not in a credit or cash position to make a large acquisition
(see an appendix if we have one). Second, Gateway’s direct/customized business
operation doesn’t mesh with most available targets. Lastly, dragging in new players into
a drowning operation is less desirable than fixing the operation directly.
Additional Ass-Kicking Reasons
Since 2000, Gateway has been getting its ass kicked by just about every PC
manufacturer on the face of the earth. It couldn’t even gain ground on Dell when that
annoying, pot-smoking dickhead, Steven, was selling Dell PCs with his moronic line,
“Dude, you’re getting a MOTHER FUCKING Dell!” Gateway countered with a lower
price and an ad which asked, “Dude, you still getting a GOD DAMN Dell?” Judging from
the comparative financial performance, the obvious answer was a resounding yes.
Reasons for choosing Office Max as the retailer of choice
OfficeMax is the correct retailer for Gateway because of blah, blah blah. <Wants to
grow to be a player w/ Staples & Office Depot, has sizable number of stores across the
US (971).> All of these things mean that Gateway could most easily make a deal with
OfficeMax because the partnership would create mutual benefits.
Additional traffic in OfficeMax stores would create more revenue from incremental
selling, while Gateway could extend its domestic scale and proximity to the customer
without a huge increase in its fixed cost base. In fact, we recommend that Gateway
close the remainder of its stores to lower its cost base and enable itself to become more
able to compete on price.
Gateway’s place in the PC industry
The SWOT analysis depicted in exhibit 2 and the GE business screen shown in exhibit
3 provide a good idea of how Gateway fits into the PC industry. Gateway has many
strengths, but ultimately is a medium strength business in an industry which is above
average in attractiveness.
The Porter’s Five Forces model in exhibit 4 demonstrates how each force affects the PC
industry from Gateway’s perspective. One notable area of this example is the
substitutability of products, as the PC market has evolved into being largely a
commodity market. This means all substitution forces are negative from Gateway’s
perspective, so finding a way to differentiate Gateway’s PC offering would help protect
them from these forces.
Exhibit 5 shows the Gateway, Inc. value chain. Gateway’s infrastructure gives them a
strong physical presence in the US, due to it 192 stores.1 Its e-commerce and order
processing systems provide value to customers by allowing them to custom-build PCs
tailored to the customer’s needs. Key partnerships with suppliers provide Gateway lowcost sources of inputs, while the outbound logistics are handled largely by Federal
Express. Marketing has built a strong brand for Gateway, as everyone knows the cow
stands for Gateway. Unfortunately for Gateway, a weak point of the value chain, as
noted in the SWOT analysis, is substandard technical support. This weakness is
amplified by the fact that Gateway PCs require more repairs than its competition.2
Gateway’s core competencies are marketing, direct sales and manufacturing of
customized PCs.
Competitor Analysis
Exhibit 6 shows the competitive analysis of Gateway and its main competitors in the PC
industry.
Dell:3
Founded in 1984, Dell’s marketing strategy is based around its “Direct” to consumers
model. Dell PCs are not available in physical retail locations, but only by phone or
Internet order. However, this model hasn’t held them back from being the leading PC
retailer worldwide with approximately 40,000 employees around the globe and revenue
of nearly $37 billion for the last four quarters. Their focus on capturing and utilizing
consumer information has allowed them to react quickly to market trends and better
compete in a highly competitive industry. Dell provides desktop and notebook
computers, as well as accessories and peripherals to consumers and businesses. Dell
is also known for providing top-notch service.
IBM:4
Formed over 100 years ago, IBM has a long-standing reputation for producing the most
innovative business tools in the market. IBM was one of the first movers in the
computer industry and uses its reputation to its advantage by commanding higher
prices. They offer a full array of computing and networking machinery to the business
and consumer markets. With a focus on R&D and innovation, IBM has been able to
1
Gateway, Inc. 2002 Annual Report, p. 5.
http://abclocal.go.com/wls/news/consumerreports/120502_cr_computers.html
3 http://www.dell.com
4 http://www.ibm.com
2
maintain a diversified global revenue base by meeting the needs of many different
markets.
Sony:5
Sony was a late entrant into the PC market, but it has proved to be a sleeping giant.
Their untarnished reputation for quality electronic products has helped them crack a
highly competitive market with high speed. Moreover, Sony’s high-quality reputation
has allowed them to do this while commanding a premium price. Sony is a Japanese
company, but operates on a global scale and offers a wider array of electronic products
than all of its competitors. However, Sony’s products are mostly based in the consumer
markets, rather than the business markets.
HP / Compaq:6
The recent merger of HP and Compaq has created a computer and technology giant
with 140,000 employees in 160 countries. Revenues for the combined companies were
$72 billion for the fiscal year that ended October 31, 2002. Similar to IBM, HP has
always stood for innovation in business machinery. HP and Compaq are priced in the
middle of the pack of major PC brands. As well, HP & Compaq computers are available
with both Intel and AMD processors, giving them a larger product line and more price
points than most of the competitors in the PC market.
eMachines:7
eMachines is the low cost leader of the market. They use less expensive AMD chips to
help reduce costs and they focus almost entirely on the consumer market over the
business market. They operate on an international basis, but they are a U.S. based
company.
As shown in the resource based view in exhibit 7, although it has several value-creating
activities, Gateway currently has no sustainable competitive advantages.
As shown in exhibit X, only 17% of computer and electronics sales occur via ecommerce, so the market for people who want to touch and feel the merchandise is
substantial.
5
http://www.sony.com
http://www.hp.com
7 http://www.emachines.com
6
Exhibit 1. Key Issues facing Gateway, Inc. in order to remain competitive in the PC industry.
Issue/Hypothesis
Subissue/Hypothesis
What is Gateway's place the
current competitive
environment? Poor
What are Gateway's strengths,
weaknesses, opportunities & threats?
TBD
Will Gateway's current strategy
for the PC industry be
successful? No
Data Sources
End Product
Responsibility
Gateway website
& annual reports
Table &
Description
Neal & Bartlett
2-Aug
What are Gateway's core
competencies? TBD
Analyses
SWOT
Analysis, GE
Business
Screen
Value Chain
Analysis
Due Date
Gateway website
& annual reports
Table &
Description
Neal & Bartlett
2-Aug
What are the factors influencing the
profitability of the PC industry?
Marketing, low-cost producer
Porter’s 5
Forces Industry
Analysis
Company,
industry, &
government
websites
Table &
Description
Bartlett
2-Aug
Who are Gateway's primary
competitors? IBM, Dell, HP
Competitive
Analysis
Company
websites, annual
reports
Table &
Description
Fink
2-Aug
Where are the competitors'
weaknesses? Value added services
Competitive
Analysis
Company
websites, annual
reports
Table &
Description
Fink
2-Aug
How do the product attributes affect
industry profitability? Commodities,
low profitability
Competitive
Product
Analysis
Company
websites
Table &
Description
Fink
2-Aug
What are Gateway's current areas of
sustainable competitive advantage?
None
ResourcedBased Analysis
Company,
industry, &
government
websites
Table &
Description
Bartlett
9-Aug
What are the areas where Gateway
can create and capture sustainable
competitive advantage? Value added
services
Review all
analyses
Previous
analyses
Text
All
9-Aug
What changes to Gateway's strategy
are necessary? Better value-added
services
Review all
analyses
Previous
analyses
Text
All
9-Aug
Exhibit 2. SWOT Analysis for Gateway, Inc.
Gateway, Inc. SWOT Analysis
Internal Strengths
1. Direct Model of business - selling direct to
customers provides distinct advantages in the
areas of distribution costs, inventory control,
messaging, and customer care and feedback.
2. Purchasing strategy & expertise - Gateway
makes large commitments to key suppliers to
ensure a market advantage.
3. Manufacturing - Gateway's manufacturing
process is designed to provide custom-configured
products to its customers.
4. Leveraging suppliers in research and
development - Gateway is relieved of the
responsibility of developing technology.
5. Physical proximity to the customer - Gateway
stores around the country.
6. Strong brand recognition.
External Opportunities
1. Improve technical support
2. Offer proprietary technologies
3. Improve product quality
4. Offer PCs with AMD chips
5. Enter a partnership
Internal Weaknesses
1. Technical support and customer service Gateway has a reputation for poor technical
support.
2. Lack of corporate business base - Majority of
sales are to individual consumers, small
businesses, and educational institutions. Gateway
has not been successful in selling to large and midsize companies.
3. Late entry into servers and workstations Gateway has not been able to surpass its
competitor, Dell, in entering this market.
4. Poor quality product - requires more repairs
than competitors.
External Threats
1. Price wars - Gateway is disadvantaged due to
Dell's low fixed cost base (GW has stores, Dell
doesn't).
2. Economic cycle vulnerability - less
geographically diversified
3. Competitors may develop exclusive partnerships
Sources:
http://www.wgss.com/profiles/gateway.htm
http://news.com.com/2100-1040-949018.html
http://abclocal.go.com/wls/news/consumerreports/120502_cr_computers.html
Exhibit 3. GE Business screen for Gateway, Inc.
GE Business Screen - Gateway, Inc.
Business Strength
Medium
Low
Medium
Low
Industry Attractiveness
High
High
Classification
Strategic Thrust
High Overall Attractiveness
Invest / Grow
Medium Overall Attractiveness
Selectively Improve / Defend
Low Overall Attractiveness
Harvest / Divest
Industry Attractiveness Factors










Absolute market size
Market Potential
Market Growth Rate
Competitive Structure
Financial
Economic
Technological
Social
Political
Environmental
Positive
Business Strength Factors











Neutral
Size of SBU
Market Share
Positioning
Comparative Advantages
Brand Strength
Human Resources
R&D Capacity
Manufacturing Process
Quality
Marketing
Learning Capability
Negative
Exhibit 4. Porter’s Five Forces on the PC Industry and how each affects Gateway, Inc.
Porter's Five Forces on PC Industry Structure
Legend: how each force impacts Gateway, Inc.
Positive
Neutral
Negative
Entry Barriers
Rivalry Determinants
Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Proprietary learning curve
Access to necessary inputs
Proprietary low-cost product design
Government policy
Expected retaliation
Industry growth
Fixed (or storage) costs / value added
Intermittent overcapacity
Product differences
Brand identity
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate Stakes
Exit barriers
Bargaining Power
of Suppliers
New
Entrants
Threat of
New Entrants
Industry
Competitors
Suppliers
Bargaining Power
of Buyers
Buyers
Intensity of Rivalry
Determinants of Supplier Power
Differentiation of inputs
Switching costs of suppliers and firms in
the industry
Presence of substitute products
Supplier concentration
Importance of volume to supplier
Cost relative to total purchases in the
industry
Impact of inputs on cost or differentiation
Threat of forward integration relative to
threat of backward integration by firms in
the industry
Determinants of Buyer Power
Threat of
Substitutes
Substitutes
Determinants of
Substitution Threat
Relative price
performance of
substitutes
Switching costs
Buyer propensity to
substitute
Bargaining Leverage
Price Sensitivity
Buyer concentration vs
firm concentration
Buyer volume
Buyer switching costs
relative to firm
switching costs
Buyer information
Agility to backward
integrate
Substitute products
Pull-through
Price / total purchases
Product differences
Brand identity
Impact on quality/
performance
Buyer profits
Decision makers'
incentives
Exhibit 5. The Gateway, Inc. Value Chain.
Firm Infrastructure: Plant, Corporate, Gateway Stores
Margin
Human Resource Management: Recruiting, Training
Technology: e-commerce, order processing system
Purchasing
& Inbound
Logistics
Operations: PC
assembly,
finishing &
shipping
Distribution &
Outbound
Logistics
Marketing &
Sales
Service:
Tech
Support &
Repairs
Exhibit 6. Competitive Analysis of the PC market.
Gateway
Dell
Sony
IBM
HP
Compaq (HP)
eMachines
Direct to consumers
with high quality
customizable PCs &
unparalleled support
Direct to consumers
with high quality
customizable PCs &
unparalleled support
Top quality PCs
at a premium
price
Innovative high
quality PCs at a
premium price
Innovative high
quality PCs at
a good price
Quality PCs at
a good price
Low cost high
quality PCs
$869
$732
$1,009
$969
$675
$627
$499
Available at
physical
locations?
Yes / No
NO
Yes
Yes
Yes
Yes
Yes
Chip Band
Intel
Intel
Intel
Intel
Intel / AMD
Intel / AMD
AMD
Online Purchasing
Available?
Yes
Yes
Yes
Yes
Yes
Yes
Yes
PC Customization
Capabilities?
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Online & Phone
Support?
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Peripherals &
Accessories
Available?
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Country
USA
USA
Japan
USA
USA
USA
USA
Positioning
Price Comparison
(for comparable
machines)
Sources:
http://www.gateway.com
http://www.dell.com
http://www.sony.com
http://www.ibm.com
http://www.hp.com
http://www.emachine.com
Exhibit 7. Resource Based View of Gateway, Inc.
Tests 
Resource
Competitive
Superiority
Direct Sales Model
Purchasing
Expertise
Manufacturing
Outsourced R&D
Proximity to
Customer
Brand Identity
Legend:
Green = passes the test
Red = fails the test
Inimitability
Durability
Appropriability
Substitutability
Sustainable
Competitive
Advantage