Inouye has a great deal of experience dealing with customers and finding out what they want due to his past retailing experience. He is also familiar with heading a company that is failing and pulling it up to become successful, which he did with eMachines and hopes to do with Gateway (Gateway website). Therefore, Inouye should be sufficiently able to handle the current and future challenges associated with heading Gateway.
Dell just recently turned its CEO position from founder Michael Dell to Kevin Rollins in July 2004, who was Dell’s former COO. However, we will concentrate on Michael Dell. Looking at Michael Dell, age 39, there are not many similarities between him and Inouye in past experience, besides the fact that they both dropped out of college, Michael from the University of Texas and Inouye from University of California at Berkeley. Michael has no other previous history working for another company. He founded Dell in 1984 and made it one of the biggest computer companies in the world. However, both men are similar in their goal to provide customers with the products and features they want out of a PC at reasonable prices, and to make their companies a success (Dell website).
Gateway’s stated vision is to improve the quality of life through technology. Inouye is following in line with this vision. In an interview Inouye was asked “What is your vision for Gateway?” he responded, “I would like Gateway to be recognized as a global brand and certainly as a provider of very high-quality, affordable products. The near term is centered around PC products-desktops, notebooks, servers and, in the intermediate term, convergence products” (Spooner). Dell is similar in that he also makes decisions that are in line with Dell’s vision, which is to be the most successful computer company in the world at delivering the best customer experience in the market they serve. Michael Dell is quoted as stating that he started Dell with an unprecedented idea….”to build relationships directly with customers.” Now Dell is a lead provider of computer products and services to customers around the world (http://www1.us.dell.com/content/topics/global.aspx/corp/biographies).
Inouye and Dell’s decision-making style is quite different. Inouye has a top-down decision-making style. Inouye has took control of making decisions for Gateway and has brought a lot of his eMachines tactics with him such as, making cuts on excess costs, refocusing the company’s business on meeting customer wants, and allowing research and development to be left to their key component suppliers (Spooner). Michael Dell does not run Dell the same way, because global regions divide Dell and each region has a president and CEO who makes the decisions for their area. However, they all try to fall in line with Michael Dell’s main decisions to focus on cutting costs and focusing on fulfilling consumer expectations.
Looking at both Inouye’s and Dell’s ownership of their companies, it’s seen that Inouye owns .02 %, totaling 968,339 shares of Gateway’s common stock, while Michael Dell owns 9.9%, or 245,338,088 shares of Dell’s common stock (Yahoo! Finance). While Inouye’s ownership is at a low level, Michael’s is fairly high. However, both men will most likely take measures to ensure the maximization of shareholder wealth and make sure their strategies are in line with the companies and shareholders best interest.
Organizational Structure
The current structure of Gateway is that of one that is one that is very structured and focuses on specialization by tasks and activities. There are many Senior Vice Presidents that specialize in various areas to help run the company. The table below shows all the executives and a brief description of their responsibilities (http://www.gateway.com/about/news_info/executive_bios.shtml).
Table 1: Gateway Executives
(Source: Gateway.com)
Gateway’s Board of Directors and their three committees make the external decision making groups for Gateway. The Compensation Committee reviews and approves the CEO’s and each executive officer’s annual base salary, incentive bonus targets and amounts, any employment/severance/change-in-control agreements, and any stock options given to employees. The Audit Committee insures the integrity of the financial statements and the compliance with legal and regulatory requirements. The Corporate Governance & Nominating Committee develops and recommends a set of Corporate Governance principles to be applied to the company, nominate board and committee members, and evaluate the Board’s performance (http://www.gateway.com/about/corp_responsibility/Board_committess.shtml).
The PC industry has a great deal of autonomy, therefore so does Gateway; because they have the authority to make decisions within their company without having to comply with any governmental regulations. Gateway has a medium level of empowerment, because the current CEO makes decides on what strategies the company is going to pursue and allows fellow executives to put strategies in place to accomplish this. <These sentences contradict each other. Below is a table comparing the organizational structure of Gateway to that of Dell.
Table 2: Gateway Vs. Dell Organizational Structure
(Source: Gateway.com and Dell.com)
From looking at Table 2, it is evident that the organizational structure of Gateway has a substantially less people in all aspects in that compared to Dell. However, both companies seem to have a lot of specialization within the company either by tasks (Gateway) or by global divisions (Dell). The PC industry requires organizations to be innovative and quick to adapt to changes in technology in order to survive. Currently Dell has created an organizational structure that allows it to do just that and it has begun to dominate the market. Gateway has not, and Inouye is now implementing strategies that hopefully will.
Organizational Culture
On Gateway’s website there is a page dedicated just to define what the culture at Gateway is like (http://www.gateway.com/about/careers/our_culture.shtml). On this page it is stated that Gateway’s culture is comprised of an innovative atmosphere, being value-driven, having a business casual dress code, being a national brand leader, being a technology industry leader, rewarding pay/recognition/benefits, having technology discounts, pursuing company/career growth, having financial stability, having ethical business practices, and having community commitment. Gateway also mentions on this page their dedication to ensure diversity. They strive for diversity of ideas, of customers, of products, and work force. Gateway also has a page dedicated to define their mission, vision, and values (http://www.gateway.com/about/careers/values.shtml). The mission and vision have been stated earlier in the paper, but the values are leadership, innovation, caring, honesty, discipline, and focus.
After viewing these it is clear to see a link between their culture and mission, vision, and values. They are basically comprised of the same things. To ensure that they achieve their desired culture at Gateway, management has placed several policies into action. There is their training program that was created to generate continuous leaders and help employees advance in their careers. To do this Gateway helps keep their employees up on current industry and economic trends by offering many training programs and offers them Continuing Education Assistance. Also Gateway offers a very extensive and competitive range of benefits to their employees. Gateway is also involved in a number of community and environmental programs. They contribute to United Way, are Olympic sponsors, sponsors blood drives in partnership with the American Red Cross, and many more community activities. To help the environment Gateway has established a program called the “end-of-life management option” which is a way to provide customers with sound avenues to responsible dispose of Gateway and eMachines products that have reached the end of their useful life. All these programs help Gateway take the steps necessary to achieve their mission of becoming a lead integrator of personalized technology solutions (Gateway website).
Conclusion
The purpose of management is to guarantee the long life and survival of the firm within its competitive environment. In the case of Gateway, the Board of Directors along with top management has not been accomplishing this task. For several years and currently Gateway has struggled to compete with competitors within its industry, and has been facing declining demand for their PC products and has lost market share and incurred net losses. Perhaps with the merger with eMachines and a new CEO, Gateway will begin to fix their problems and start to flourish.
Marketing
Gateway competes with Dell, Hewlett-Packard, and IBM in the personal computer industry (Hoover’s). In the year 2003 Gateway held 3.8% market share (Gateway Annual Report p.3). Table 3 shows the top PC firms of 2002.
Table 3: Top PC Firms of 2002
(Market Share Reporter 2004)
The information in Table 3 shows the market share that Gateway holds in comparison to other companies in the industry. Not only does Gateway have a lower market share than Dell, but also the units shipped are also considerably lower. These numbers are a direct reflection of the troubles that Gateway has been dealing with. In addition to the loss in market share, Gateway has also seen an incredible decline in sales over the years. Table 4 depicts this decline over the years 1999 through 2003.
Table 4: Gateway & Dell Sales
(S&P Research Insight: Annual Income Stmt)
Not only does Table 4 reflect the loss in sales for Gateway over the five year period, but viewing these numbers as a percentage of sales shows just how far behind Gateway truly is from Dell. While Gateway has been experiencing an almost steady decline in sales Dell has been rapidly increasing, especially from 2002 to 2003 where Dell gained almost 30 percent more of the industry sales. The concern for Gateway lies in the difference between these percentages compared to Dell. In 1999 Gateway was behind Dell in sales, but instead of increasing along with Dell, Gateway began to decrease in sales, which is a problem. Dell was able to dominate the market while Gateway has continued to lose customers not only to Dell but to other companies as well.
Products
In order to judge overall performance, the company’s products, pricing, placement, and promotion must be evaluated. Gateway and Dell offer many of the same products including PCs, laptops, digital cameras, portable digital music players, servers, and third party peripherals and software. Gateway used to produce the popular and lucrative flat-screen televisions, but has sense stopped production and sales despite promising numbers. However, Dell continues to produce flat-screen televisions (Dell homepage). Table 5 below shows a comparative list of Gateway and Dell’s core product lines.
Table 5: Gateway & Dell Products and Prices
(Source: Gateway.com and Dell.com as of 11/18/04)
Overall, Gateway offers the products necessary to remain competitive in this industry. This is a strength for Gateway in the industry.
Price
The pricing of Gateway’s products compared to the main competitor, Dell, are similar for some products. Pricing is very competitive in the PC industry because as the products reach the decline of the lifecycle the prices must also begin to fall. Table 5, shown above, shows the prices of competing Gateway and Dell products. These prices are the lowest price available for a product in that category to show how each company prices competitively.
For many of the products offered, Dell is the lower-price option. This is a weakness for Gateway because Dell is able to price its products lower because of superior inventory and production methods.
Placement
The placement, or distribution, of Gateway’s products is handled in different ways. Gateway products are sold in retail stores, or can be ordered online at Gateway.com, or by telephone at 1-800-GATEWAY. Products can also be purchased at any of the remaining Gateway stores (Gateway Annual Report p.3). In the past year Gateway has closed 82 of its retail stores with 190 remaining (p.5). Gateway offers consumers more ways to purchase products than Dell does. Dell computers are only offered by telephone at 1-800-WWW-DELL or at Dell.com (Dell homepage).
The difference in the availability to customers is a strength for Gateway. Gateway customers can access these products from more outlets than Dell customers. There is still the same convenience of online and telephone shopping for customers who are definitive in their purchase choice, or the option of working with a salesperson face to face at a store such as Best Buy.
Promotion
In the year 2003 Gateway spent about 3% of sales on advertising. Gateway uses different media to reach the desired target audiences. Gateway advertises on television, radio, print advertisements, Internet, trade shows, and in-store promotions (Gateway Annual Report p.4). Gateway achieves brand awareness through these media outlets and also the trademark cow design used in the packages of the products.
Gateway has recently appointed two new marketing executives as an attempt to boost business. David Turner was appointed to the position of Vice President of sales and marketing for business to business markets. T. Scott Edwards, former marketing executive for Sony, is now the Vice President of consumer business for Gateway (Advertising Age). These two new figures have been hired to assist and to help redirect the marketing efforts of Gateway and hopefully drive new business, especially in the business to business markets.
The promotion strategy of Gateway up to this point has been a weakness. Dell’s advertising includes commercials, internet ads, and catchy slogans. Gateway has not had any promotional campaigns that have been as successful or memorable as those of Dell. How about comparative numbers for Dell?
Conclusion
Marketing in the PC industry is difficult due to computers being in the mature phase of the product lifecycle. Gateway has been having trouble and in return has simplified product lines, closed stores, and slashed jobs (Kessler). The attempt at aggressive pricing also failed and resulted in a loss. Overall, the marketing efforts of Gateway have not been effective. The following decision matrix calculates the overall effect of Gateway’s strengths and weaknesses. The rating of 5.45 indicates that Gateway has much room for improvement in their marketing efforts. Good
Operations/Production
Start with measure of productivity
Capital Spending
According to Chandler’s Logic of the Managerial Enterprise, reinvesting in a firm is an important part of the managerial enterprise. It is clear that Gateway has not been following Chandler’s Logic. As shown in the graph below, in 2000 Gateway had capital expenses as a percentage of sales of 3.52% but this has since fallen to 2.31% in 2003 after a spike in 2001 of 5.3%. These percentages show that Gateway has been scaling back their investments over the past few years and not reinvesting in the firm by putting capital back into the organization. On the other hand, Dell consistently spends a much lower percentage of sales on reinvestment. In fact, the company has slightly scaled back capital expenses in the past 2 years even further than before, operating at less than 1% of sales, but this is probably due to the economic regression and capital expenses will likely come back up as economic conditions improve.
Graph 1
(Source: S&P Research Insight)
Productivity
When comparing Dell to Gateway in terms of productivity, it is apparent in Table 1 below that Gateway has a much lower cost of goods sold per employee than Dell. This is an indicator that Gateway has much lower productivity than Dell. Over the past five years, Gateway has remained relatively constant in cost of goods sold per employee, but this is due mainly to their number of employees being constantly decreased each year. On the other hand, Dell has been able to increase their productivity when compared to number of employees as they have kept approximately the same number of employees and their cost of goods sold per employee has been steadily increasing each year with the exception of 2001. The fact that both Dell and Gateway are able to increase cost of goods sold per employee and are decreasing capital spending is an indication that the PC industry has not yet achieved economies of scale.
Table 6: COGS Comparison
(Sources: S&P Research Insight, Gateway 2003 AR and Dell 2003 AR )
Table 7: Employee Comparison
(Source: Gateway 2003 AR and Dell 2003 AR)
Inventory turnover is an indication of how quickly products are being sold. A high turnover ratio implies strong sales and a low turnover ratio implies poor sales and therefore excess inventory. This excess inventory is bad because it is an investment that is not getting a return and can cause problems when prices fall. Carrying excess inventory in the computer industry is also bad because technology improves at such a rapid rate and excess inventory often cannot be used later than intended because it is already out of date. As Graph 2 indicates, Dell also has had a consistently better inventory turnover than Gateway. In 2002, Dell and Gateway were very close in turnover, however by 2003 that gap had widened again. Dell operates at such a high turnover rate because they do not carry extra inventory because they operate with a JIT philosophy. This in turn lowers their fixed costs as they do not pay for storage costs. On the other hand, in the past 5 years Gateway has had significantly lower inventory turnover, which indicates that Gateway does not receive any fixed cost benefits because they tend to carry excess inventory that they are unable to sell.
Graph 2
(Source: S&P Research Insight)
Operating Leverage
Operating leverage occurs when machines replace employees. This can be measured by looking at if the firm is making capital investments to improve productivity.
As Table 4 indicates, Dell has been able to keep very high sales per employee over the last five years. The only dip occurred in 2000 and 2001, but that is probably due to the economic downturn for that year. Dell has been steadily increasing the ratio for the past 3 years. In comparison, Gateway has considerably lower sales per employee. Sales per employee has remained constant for Gateway, but they have been in the process of reducing their workforce each year as sales have been decreasing, which has helped to keep sales per employee constant.
Table 8: Sales Per Employee Comparison
(Sources: S&P Research Insight, Gateway 2003 AR, and Dell 2003 AR)
Another approach to looking at operating leverage is to look at the degree of operating leverage a company has. The degree of operating level (DOL) is a numerical measure of a firm’s operating leverage. If the DOL is greater than 1, operating leverage exists. When looking at Table 5, you can see that Dell has had a DOL above 1 for the past 4 years, indicating that they have consistently maintained operating leverage. As of 2003, Gateway’s DOL has fallen below 1 to .01, which is an indication that Gateway is not using operating leverage.
Table 9: Operating Leverage Comparison
(Source: MSN Money)
Growth
In terms of overall corporate growth, the revenue comparison in Table 3 shows that Dell has been able to continuously grow while Gateway has not. Dell has seen almost constant revenue growth over the past five years with the exception of 2001 where revenues dipped slightly by 2% due to the downturn in the economy. In contrast, Gateway’s revenues have declined for the past 3 years straight by over 15% each year.
Table 10: Revenue Comparison
(Source: S&P Research Insight)
Research &Development
According to the logic of the managerial enterprise, “Growth is critical, but how growth is achieved is equally important. The preferred way is through product development” (Chandler). This is done through reinvesting capital in the research and development of new products. Both Gateway and Dell do not spend most of their R&D on product development, rather they spend more on process developments that can help them manufacture personal computers more efficiently. According to Gateway’s annual report, they have been relying on relationships with third-party suppliers for product development. This is in direct contrast to Chandler’s logic and is one reason Gateway has not been able to grow revenues in the past 4 years. As the table below indicates, Gateway has seen a decrease in sales in the past 4 years and has not invested in R&D. In fact, less than 1% of total sales each year are put towards research and development for Gateway. (Gateway annual report).
Table 11: R&D Comparison
(Source: S&P Research Insight, Gateway 2003 AR and Dell 2003 AR)
In contrast, Dell spends millions on product research and development, even though the majority is on process developments. In 2003 alone, Dell spent a total of 455 million on research and development efforts (Park). After peaking at 1.78% in 2000, it can be seen that Dell has slowly been decreasing their total amount of investment in R&D. When looking at other firms in the industry, it can be seen that the amount Dell puts into R&D of products is still very low. Nevertheless, Dell puts much more into R&D than Gateway. Though this is still low when compared to the entire industry, this drive towards R&D spending directly supports Chandler’s Logic and is one driver of Dell’s constant revenue growth.
Conclusion
After analyzing the operations and production factors for Gateway Inc, a decision matrix was created to measure overall effectiveness. Though Gateway does spend more on capital spending than some other companies, Gateway has consistently not shown growth, has no operating leverage as of 2003 and does not invest heavily in research and development. Thus overall the company is considered mildly inefficient in terms of operations.
This is a good section. However, a main point here is that spending on R&D is mostly for process improvements. Products come from other vendors and are not produced by firms in this industry.
Finance
Total Returns to Investors
The returns of Gateway have varied from the returns of the industry while the returns of Dell have followed the industry closely. As depicted in Graph 3, it appears that Gateway has taken longer to overcome the downturn of the market in 1999/2000 than Dell, or the industry as a whole. Gateway had substantially lower returns for 2001 and 2003 than Dell or the entire industry. While Gateway did earn higher returns than the industry for 2003 it is not a large enough difference to make up for the huge losses that occurred in 2000-2002. It appears that Gateway is not achieving the objective of maximizing shareholder wealth (MorningStar).
Graph 3
(Source: MorningStar.com)
Return on Equity
Graph 4 depicts the return on equity for Gateway. Return on equity shows how much profit a firm generates on the money shareholders have invested in the firm. The mission of any firm is to earn a high return on equity. Return on equity may also hint to investors how efficiently the firm’s operations are and how well the firm is being managed. From looking at the graph you can see that Dell earned at least 35% more per dollar of equity than Gateway over this six year span. This may be an indication that Gateway has a problem with operations or management. With return on equity varying by as much as 96% in 2001 it appears that Gateway may be in serious trouble. To make matters worse it seems that Gateway’s return on equity has turned for the worse while Dell’s return on equity is increasing (MorningStar).
Graph 4
(Source: MorningStar.com)
Return on Assets
The return on assets measures the overall effectiveness of management in producing profits with available assets. The better the company, the more profit it generates as a percentage of its assets. Over the six year period Dell earned at least 10% more per dollar of assets held than Gateway. The large difference in Return on Assets between Dell and Gateway indicates an inefficient use of Gateway’s assets. The return on assets of both companies declined the majority of the six year span but Dell’s return on assets seems to be on the rise while Gateway’s return on assets is still falling (MorningStar). Graph 5, below, shows this change in return on assets for Gateway.
Graph 5
(Source: MorningStar.com)
Gross Profit Margin
Gross profit margin shows the average amount of profit considering only sales and the cost of the goods sold. Gross profit margin is the percentage of sales dollars left after subtracting the cost of goods sold from net sales. As such, it indicates the efficiency of operations as well as how products are priced. Gross profit margin tells how much profit the product or service is making without overhead considerations. As see in Graph 7, Gateway’s gross profit margin has been consistently lower than Dell for 2000-2003, which shows Gateway has a problem in operations or with how the products are priced (MorningStar).
Graph 7
(Source: MorningStar.com)
Operating Profit Margin
Operating profit margin is similar to gross profit margin but it goes one step further by subtracting operating expenses as well as the cost of goods sold from sales. The operating profit ignores any financial or tax charges and measures only the profits earned on operations. The operating profit margin is an indicator of management skill and operating efficiency. Gateway’s operating profit margin was less than Dell’s for the entire six year span shown in Graph 8, which indicates that Gateway has a problem with management skill or operations (MorningStar).
Graph 8
(Source: MorningStar.com)
Current Ratio
The current ratio is a measure of the ability of a firm to meet its short-term obligations. It is perhaps the best known measure of financial strength at a given point in time. From closer examination of the Graph 10 it is clear that something changed at Dell and Gateway in 2000 which caused the current ratios of the two firms to go in different directions. Gateway’s short term investments increased dramatically in 2001-2003 which caused its current ratio to increase. Dell’s current ratio decreased because accounts payable increased while accounts receivable decreased (MorningStar).
Graph 10
(Source: MorningStar.com)
Quick Ratio
The quick ratio is very similar to the current ratio except that inventory is subtracted from current assets. The quick ratio for Gateway and Dell is show in Graph 11 below. After comparing the current ratio to the quick ratio it is clear that the level of inventory held by the two firms did not cause the difference in the ratios between 2001 and 2003 (MorningStar).
Graph 11
(Source: MorningStar.com)
Debt/Equity
The Debt/Equity ratio tells the extent to which long-term financing has been provided by creditors. A higher debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. Gateway has very little debt which can be good or bad. It is good because it will decrease the interest payments made which should increase the value of the firm. Too little debt can be bad because debt is a way of controlling managers. Without debt managers may lose focus on what is best for the firm such as declining projects that will increase the wealth of the share holders. Graph 12 reveals that Gateway does not use enough debt financing, which may contribute to the poor management of the firm (MorningStar). Agree
Graph 12
(Source: MorningStar.com)
Inventory Turnover
The inventory turnover ratio reveals how well inventory is being managed. It is important because the more times inventory can be turned in a given operating cycle, the greater the profit. From Graph 13, it appears that Dell is far superior to gateway when it comes to turning over inventory. Gateway has failed to achieve an inventory turnover ratio of over 30 for the past six years. Dell’s inventory turnover ratio has increased dramatically over the six year span. The inventory turnover ratio backs up the previous theory that Gateway is not achieving the primary objective of maximizing shareholder wealth (MorningStar).
Graph 13
(Source: MorningStar.com)
Fixed Asset Turnover
The fixed assets turnover is a measure of how efficiently a company uses its fixed assets to generate sales. Generally speaking, the higher the ratio, the better because a high ratio indicates the firm has less money tied up in fixed assets for each dollar of sales revenue. As evident from Graph 14, Dell is far superior to Gateway when the two are compared. The declining ratio of Gateway may indicate that they over-invested in plant, equipment, or other fixed assets. The fixed asset turnover ratio backs up the previous theory that Gateway is not achieving the primary objective of maximizing shareholder wealth (MorningStar).
Graph 14
(Source: MorningStar.com)
Accounts Receivable Turnover
The accounts receivable turnover ratio indicates how well accounts receivable are being collected. If receivables are not collected reasonably in accordance with their terms, management should rethink its collection policy. If receivables are excessively slow in being converted to cash, liquidity could be severely impaired. A lower accounts receivable turnover could also indicate that one firm uses a different credit policy which may allow customers more time to pay for goods. If the credit policy increases sales the resulting lower accounts receivable turnover ratio is not a problem. It appears from Graph 15 that Gateway collects receivables faster than Dell which is generally a good sign. We must investigate the credit policies of the two firms to fully understand the impact of the accounts receivable turnover ratio. The accounts receivable turnover ratio does not back up the previous theory that Gateway is not achieving the primary objective of maximizing shareholder wealth (MorningStar).
Graph 15
(Source: MorningStar.com)
Capital Asset Pricing Model
The required return on investment for Gateway is 18.78%. The required return was calculated using the Capital Asset Pricing Model. A risk free rate of 4.89 % based on the 30-year T-Bond rate on Nov 2004 was used in the model (Yahoo! Finance). The required market return of 10.11% was calculated by averaging the returns of Dell, IBM, HP, and Sun over a five year period and then averaging those five returns (MorningStar). A beta of 2.66 for Gateway was obtained from Morningstar.com. The calculations are shown below.
(ki = RF + bi(kM - RF)
RF = 4.89%
bi = 2.66
kM = (4.96+11+29.36+5.24)/5 = 10.11%
18.78% = 4.89 + 2.66(10.11 – 4.89)
The difference between Ki and Km does adequately reflect the additional risk of investing in Gateway. Investors require an additional 8.67 % (18.78-10.11) return for the additional risk of Gateway when compared to the better performing firms. Gateway can achieve a return of 18.78% which means that they would invest in themselves. How? Almost all of their performance measures are below this number.
Conclusion
The decision matrix below assigns weights to each portion of the financial analysis based on the importance to the long term survival of the firm. Attractiveness for each portion was determined by the comparison of Gateway to Dell and the industry. After evaluation of the decision matrix it becomes clear that Gateway is not attractive and will not survive unless measures are taken to improve the firm.
Good section overall
- Critical Success Factors
- Having low selling costs.
- Having low manufacturing costs along with high productivity.
- Being quick with innovation and creativity as new technology is developed.
The first critical success factor is having a low selling cost. It is clear that Gateway has not been the low cost provider when looking in the marketing section on pricing in Table 5. Just about every product that Gateway produces has a higher a selling price in comparison to Dell. To be able to reduce their prices Gateway needs to finds ways to cut costs in manufacturing.
The second critical success factor is to continuously try to lower manufacturing costs while having high productivity. The information provided in the operations and finance sections shows why Gateway cannot currently lower manufacture costs and increase productivity. When comparing Dell to Gateway in terms of productivity, it is apparent in that Gateway at $366,429 has a much lower cost of goods sold per employee than Dell at $860,077 and indicates that the company has lower productivity.
Inventory turnover is an indication of how quickly products are being sold. As of 2003, Dell had inventory turnover of 58.04 while Gateway had a turnover of 29.81. Dell operates at such a high turnover rate because they do not carry extra inventory as they operate with a JIT system. This in turn lowers their fixed costs because they do not pay for storage costs and excess inventory. Gateway on the other hand has had significantly lower inventory turnover, which indicates that Gateway does not receive any fixed cost benefits because they tend to carry excess inventory that they are unable to sell. To reduce their costs and maintain high productivity, Gateway needs to maintain their low costs of goods sold per employee and implement a successful JIT system.
The third critical success factor is to be quick with innovation. Though innovation is difficult to accurately measure, Gateway has clearly not been making an effort at using new technology as it becomes available because they spend such a little amount of money on research and development effects. The operations section explained that less than 1% of total sales each year are put towards research and development for Gateway. Gateway instead has chosen to rely on relationships with third-party suppliers for product development. Relying on these third party suppliers leaves the innovation and creativity with the third party suppliers and keeps it from Gateway. Thus, Gateway needs to make more investments into R&D and not rely so heavily on third parties if they want to increase their innovation and creativity with new technologies.
Gateway needs to address these critical success factors and integrate them into the company mission and strategy. Unless Gateway can lower their prices, lower manufacturing costs, and improve on innovation they will not be able to remain in the industry on a long-term basis.
Good
- Strategic Problem
Management has failed to ensure the long-term survival of the company because they have not provided the company with a strategy or mission to follow.
The following is a list of the problems that Gateway is experiencing due to the lack of managerial guidance:
- Slow sales
- Decreased market share
- Inability to price competitively
- Not following the logic of managerial enterprise
- Low return on assets
- Not achieving economies of scale
- No debt financing
- No reinvesting in the company
- Too much benchmarking instead of investing in R&D
The list demonstrates the lack of direction that Gateway’s management has set. The company does not have a good mission statement because it never clearly defines how they are going to achieve the goal of becoming “the leading integrator of personalized technology solutions” (Gateway website). This lack of direction and poor mission has led to several bad decisions that negatively effect profits and do not help ensure the survival of the company.
- Strategic Alternatives
Given the problems associated with Gateway it is obvious that changes need to be made in order for Gateway to stay in business. The following recommendations address the financial problems that are listed above and also would seek to improve on the other areas of the business and address the critical success factors.
Alternative 1: Low Cost Strategy
This recommendation suggests that Gateway focus on a low cost approach in order to successfully compete with Dell and other competitors. Since the PC industry is in the mature stage of industry life cycle, the best way to ensure long-term survival is to focus on low costs. Gateway should strive to be the low cost provider, which will allow Gateway to earn higher profits than any competitor at any price. In order to become the low cost provider, Gateway will have to improve inventory systems to save money, and outsource labor and some manufacturing.
Alternative 2: Global Partnership
This recommendation suggests that Gateway partner with a foreign company to combine effort and hopefully capture a greater market share and penetrate new foreign markets. Since globalization of business is constantly increasing it is very important to be able to compete in global markets. In the technology sector, the fastest growing areas in the world for technology are the Asian countries. If Gateway wants to gain a foothold in these countries, the best alliance would be a company like Toshiba and Fujitsu, who are well known Asian brand names and will be able to penetrate the Asian markets more easily than the Gateway name. The largest drawback of this alternative is the cost of setting up manufacturing in overseas markets and the difficulties encountered with the merging of different cultures.
Alternative 3: Differentiation
This recommendation would improve Gateway by implementing a differentiation strategy. Currently, Gateway is focusing on computers and other electronics but has discontinued their line of LCD televisions that were very profitable. This recommendation would bring Gateway to further differentiate their product lines by reintroducing the televisions and also branching out into other areas of home entertainment. One of the biggest areas of growth in technology is in the entertainment sector. Many consumers are buying products that connect to PCs and run their entire entertainment systems. If Gateway can bring out an entire line of entertainment items, like LCD televisions, speakers, DVD players, and more that all connect to personal computers, they will be able to sell entire sets of items to consumers.
- Recommendation
The best recommendation is Alternative 1, the low cost strategy. Because the PC industry is in the mature stage of the product life cycle, it is important that Gateway focus on long-term survival because the weaker companies are going to disappear in this stage. Implementing the low cost strategy would enable to Gateway to better compete with Dell and other personal computer companies as the nature of competition drives all industries down to only two competitors: the lowest cost producer and the second lowest cost producer. If Gateway can become the company that can produce computers at the lowest cost, they can make a higher profit than any other competitor no matter what the price of the computer is. This strategy is also the best because it addresses two of the critical success factors: low selling prices and low costs. The implementation of the strategy and how these two critical success factors will be achieved is discussed below.
- Implementation
The implementation of the low cost strategy will build on the strengths of Gateway and help to improve upon the weaknesses of the company as well. The core competence of Gateway, as reflected in the strengths of the company, is their product placement. They have more distribution channels than Dell and this is to their advantage because their products are more easily accessible than Dell products. This core competence can give them a competitive advantage because if they have an inexpensive product that is easily accessible it will stand out against the competition.
Management
The first thing that needs to be done is the board of directors needs to be restructured by increasing the number of directors. Currently they only have six and that just is not enough. They need more directors so that there are more people available to help set clear goals for the company and to better oversee the strategy implementation at Gateway. Next top management needs to create a better corporate mission and develop a clear strategy to follow. The mission needs to show that Gateway has a clear direction with a quantifiable goal that they heading towards. Their mission could be to be the leading integrator of personalized technology solutions through the use of innovation and having quality cost competitive products.<how would that be measured? Lastly, management should concentrate on following a low cost strategy by adopting some of eMachines’s strategies. These strategies helped turnaround a faltering company into a functioning one, and these strategies may be able to do the same thing for Gateway.
Marketing
To implement the low cost strategy into Gateway’s marketing management would first need to define a target market. When the market has been defined, Gateway would need to implement a marketing campaign, based on the demographics of the target audience, which creates a low cost image. Creating an image, such as Dell, that projects Gateway as being a low cost but high quality alternative to other PC companies will allow Gateway to compete against Dell and set up sales goals for the defined target market. This would give Gateway a strategy to follow and another method of measuring success against Dell.
Operations
Gateway needs to continue to focus on ways to produce products more cheaply. One of the best areas for improvement is in their inventory management. It is important in technology businesses to develop just-in-time inventory management because the technology behind computers is constantly changing. Buying items a few months before they can be used is a huge waste of money because before the items can be used, a better and faster item is on the market. If Gateway can improve their JIT system, they can save money on inventory because they will not be buying inventory that they cannot use. Also, research and development of products with Gateway is next to nothing as shown in Table 11. It would greatly benefit Gateway to spend a little more on R&D instead of excess inventory. Most successful companies in the PC industry have at least a small percentage of sales going towards the research and development of new products and this R&D spending is particularly important in an ever-changing environment like the PC industry.
Finance
The year pro forma statement below shows the changes created by implementing the low cost strategy. First, the changes in the marketing department will begin by increasing the budget by 10% in 2004, 2005, and 2006. This increase in budget is to boost the new low cost brand image and marketing campaign. After creating a new brand identity, the budget was then bought down to only a 5% increase in 2007-2009 to save money in accordance with the idea diminishing returns. Sales were increased each year by 6% to simulate the growth that should occur if Gateway is able to implement this marketing campaign successfully.
With the recent merger with eMachines, Gateway can expect additional revenues of 20 million each in 2004 and 2005, and 10 million in 2006 and 2007, and approximately 5 million in 2008 and 2009. Cost of Goods sold increased at the 5% from previous years, as did assets. With successful implementation of marketing and the improvements in sales, it can be seen that by 2009 Gateway’s net operating income is becoming better. By using debt to finance, Gateway should be able to continue this trend of growth for several more years and eventually return to profitability.
Table 12: Gateway Low Cost Strategy Proforma
(Source: S&P Research Insight-for 2003 numbers)
Conclusion
The prognosis for Gateway is that the implementation of the low cost strategy will enable the company to gain market share, successfully compete with Dell and others, and overall increase profits. The management at Gateway can focus on becoming the low cost leader in the industry and thus give the company a strategy to build on. With the new marketing strategy and operations strategy, the company should be able to see results in the financial portion of the business.
I wonder at your optimism given that the pro forma does not show positive results throughout the period. Overall good paper, but much more could have been done. Grade is 90.
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