Gateway, Inc.

  1. Current Situation

Firm History

        Gateway is involved in the computer industry.  Gateway participates in different segments of this industry such as consumer and commercial computers.  In addition to computers, Gateway produces computer peripherals, digital cameras, and other entertainment devices.  This paper will focus on Gateway’s performance in the personal computer segment because it is the core focus of the company and profitable industry.  

        

        Gateway was started in 1985 when Ted Waitt dropped out of college to pursue a career in the PC industry.  By 1993 Gateway went public as a corporation and began manufacturing and selling products outside of the United States.  Gateway continued to grow over the years and naturally went through some changes, one of which was the resignation of Waitt in 1999 and then the reinstatement of Waitt as CEO in 2001. (Hoovers).  

        To this date, Gateway is in the process of restructuring.  Ted Waitt resigned from the CEO position again and was replaced by Wayne Inouye in 2004.  Gateway has reduced employees, closed manufacturing plants, changed product offerings, and closed Gateway retail stores (Hoovers).  Gateway has also acquired eMachines.  This move of related diversification has not yet proved to help Gateway compete in the industry.  

Strategic Posture

        Gateway has a clear mission stated on its website.   Their mission is to be the leading integrator of personalized technology solutions. This is a fairly good mission.  There is a quantifiable “point B” (to be the leader), and the segment they are targeting is personalized technology.  However, looking at the mission statement alone there is nothing that tells how Gateway plans to achieve this goal.  Right under the mission statement Gateway states its vision, which is to improve the quality of life through technology.  This now explains how Gateway plans to achieve their goal. Coupled together the mission and vision would be very good and appropriate for the competitive environment of the personal computer industry.  However, alone they are both lacking direction (Gateway website).  I agree

        Currently Gateway has no clear strategy, and this is what is causing them to perform so poorly.  Though the company is trying to be a low-cost producer, it has not been able to obtain a cost structure that is lower than other companies, such as Dell. Recently Gateway has merged with eMachines in hopes to create leverage in their pricing.  Also, they are trying to take their brand beyond that of just PCs by getting into different product segments.  They are also moving into different distribution channels, such as having Best Buy carry their PCs.  Gateway is trying all these things but with no clear direction on where to go with all these actions or how they will allow them to become a lower cost producer, it is unlikely that they will significantly be benefited from them (Gateway website).  Agree

  1. External Environment

Socio-Cultural Environment

Government regulation also extends to patents, trademarks, and copyrights.  These aspects of the industry can produce ethical questions which may affect Gateway directly.  The Association of Computing Machinery has created a code of ethics for computer companies and their employees to follow (Association of Computing Code of Ethics).

Environmental factors affecting Gateway are also related to the governmental regulations.  The government needs to protect the public because he United States accounts for 43% of Internet users worldwide (Electric Perspectives).  64 million Americans consider themselves to be regular Internet users.  With so many citizens on the Internet there needs to be protection from computer crime (Facts and Figures).

The Internet is increasing in popularity and continues to grow as many businesses, educational facilities, and increasing amounts of information are available online.  In 2000, 56 percent of U.S. companies sold products online.  The Internet’s growth is a factor in the PC industry because is it is so widely used (Facts and Figures).  Personal computers can be bought and sold over the Internet, creating opportunities for Gateway to find market share, reduce costs, and improve customer service (Graham-Hackett).  

A final environmental concern is the recycling of old personal computers.  According to the U.S Environmental Protection Agency, old computers and other forms of e-waste are the fastest growing type of waste in the United States (Mitchell).  This is a concern because of the amount of waste generated and the chemicals that are included in the waste.  “A typical CRT monitor contains three to nine pounds of lead and printed circuit boards contain beryllium, cadmium, flame retardants and other compounds that can contaminate the air and groundwater” (Mitchell).  

        Certain technological threats such as the upgrade cycle will affect Gateway now as well as in the future.  The upgrade cycle is a trend that has proven very powerful in the PC business.  The upgrade cycle assumes that users will trade up to more powerful PC’s when a new operating system is released, thus stimulating hardware sales (Computers: Hardware Industry Survey).   The survival of Gateway counts on the upgrade cycle to boost sales.  If the upgrade cycle decreases in the future it will have a tremendous impact on new computer purchases.  

Task Environment

There are many competitors in the personal computer industry such as Dell, HP/Compaq, Gateway, IBM, and Apple. These competitors control all but 37% of the U.S. PC market (Market Share Reporter 2004). This creates a very high barrier to entry in this market and thus the threat of new entrants is unlikely. This market saturation is strength for Gateway.

Rivalry is a threat to Gateway as there are several computer manufacturers in the PC market. Many of these manufacturers are the major competitors in the computer industry. These manufacturers are companies such as Dell, HP, Gateway, Apple and IBM. Dell currently holds 28% of the U.S. PC market, with HP holding 20% (Market Share Reporter 2004).

There are only two main suppliers of microprocessors used in PC manufacturing: Advanced Microsystem Devices (AMD) and Intel. Having only two sources limits the bargaining power of manufacturers such as Dell and Gateway, and thus is a threat to these manufacturers.

        Buyers include Wal-Mart, Best Buy, Circuit City, Office Depot, Office Max, and many other retailers. There are a large number of stores and this creates a very high demand. This is a huge strength for Gateway as they have a vast number of buyers to sell personal computers to.

There are no direct substitutes for the personal computer. Though devices such as typewriters can create typed documents, there is nothing else that can create the same amount of power and efficiency. This lack of substitute products can be considered another strength for Gateway. Good

  1. Internal Environment

Management

Board of Directors

             

The members of the Board of Directors at Gateway are elected by shareholders to advise and oversee management who account for the day-to-day operations and management of Gateway (http://www.gateway.com/about/corp_responsibility /guidelines/shtml). The Gateway board members also have specific duties which include:  the selection, compensation, and annual evaluation of the performance of the CEO and executive management, and oversight of the their succession plans, review of Gateway’s financial performance on a regular basis, review of the processes in place to ensure the integrity of Gateway’s financial and accounting systems, and the review and approval of Gateway’s long-term strategy.

The current Gateway board is composed of six directors.  Five of these are independent directors, and the sixth is Gateway’s CEO, Wayne Inouye.  This makes about 83% of the board external.  However, looking at other firms within the industry Dell has ten directors (8 independent and 2 not), Hewlett-Packard has nine (8 independent and 1 not), and IBM thirteen (12 independent and 1 not).    This shows that though Gateway’s external director composition is about average in the industry, it has far less directors than other firms on average within the industry.

The directors at Gateway are required to have significant experience in commercial, industrial, technology, educational, government, charitable, not-for-profit and/or other relevant sectors, in order for them to successfully oversee management at Gateway.  Directors are also required to have demonstrated integrity and honesty, reflect diversity, and express commitment to dedicate time and resources to the Board.  The Board of Directors at Gateway varies greatly and has assorted backgrounds. Of the six directors, four of them are CEOs or have been a CEO of a company.  Of the other directors, one is a partner in a law firm and the other is a partner in an accounting firm (http://www.gateway.com/about/investors /board.shtml).  Being that the majority of the directors are CEOs or have been a CEO, it can be concluded that they have the four functional areas of management covered. <not really. Since management is the problem in the firm, looking close at the skills was a challenge of the project. Looking at other firms within the industry, it can be seen that Dell, HP, and IBM all have a board made up of people with the same type of skills and experience as Gateway.  Many directors on the boards for all these companies are CEOs of other organizations and have diverse backgrounds.  

At Gateway it is believed that the directors should hold a meaningful equity ownership position in Gateway.  The directors are encouraged to acquire stock within three years of first becoming a Director, and to hold Gateway common stock equal to the lesser of $25,000 or 10,000 shares (Gateway Governance Guidelines)  However, Ted Waitt, Chairmen of the Board, owns more than this amount because of his position as former CEO of the company.  Together the board owns about 30% of their common stock.  The majority of this number is coming from Ted Wait who owns 28.8% (Gateway’s 2004 Proxy Statement).  Dell’s board in comparison owns only 10.7% of their common stock. (SEC Filing Form 10-Q FY05-Q2). In accordance with Agency Theory, excluding Ted Waitt, the directors on the board do not own a significant portion of stock and they are more likely to not act in the best interest of other shareholders but for Gateway itself.  Ted Waitt, though he owns a significantly large amount of the company, because he started the business it is more likely that he will not act in the best interest of the shareholders but for the company.  However, he could be more risk-averse than other board members.  agree

The Board of Directors at Gateway has a high involvement in the operation of Gateway.  The board is required to meet at least six times per year in regularly scheduled meeting.  Quarterly, the board meets in regularly scheduled meetings without the participation of management or other employee directors.  There are currently three board committees at Gateway: Audit, Compensation, and Corporate Governance & Nominating Committee.  Three members serve on the audit and compensation committee, while none serve on the corporate governance & nominating committee, and all of the members of these committees are independent from the company.  During the last fiscal year, 2003 the audit committee met 15 times and the compensation committee met 6 times.  Other companies, such as Dell, seem to also have a high involvement between their board and operations within the company.  Dell has the same committees that Gateway does, plus an additional one (a Finance committee), in which at least three members are on each committee.  The audit, compensation, and finance committee meets at least 4 times a year.  While the corporate governance meets at least 2 times per year, and as a whole board the directors meet at least 4 times per year (http://www1.us.dell.com/content/topics/global.aspx/corp/governance). Again, all of the members of these committees are independent from the company.  

The Gateway Board of Directors composition is different from other firms within the industry in that it has quite a few less directors.  However, the structure when it comes to experience and knowledge is quite similar to that of other firms within the industry.  Nevertheless, Gateway’s board has not managed to do a successful duty at overseeing management who account for the day-to-day operations and management of Gateway.  Gateway’s Board of Directors has not so far created a management team that has successfully accomplished the goals that was put ahead of them.  This is probably due to a lack of more directors to help oversee management.

Top Management

In March of 2004, Wayne Inouye became president and Chief Executive Officer of Gateway after the acquisition of eMachines by Gateway.  Inouye replaced Ted Waitt, who was the founder of Gateway, and remains on as chairman of the Board of Directors.  Inouye, 52, has numerous decades of senior management experience at outstanding retail companies.  Before coming to Gateway, he became the CEO of eMachines in 2001.  He is credited for turning eMachines into one of the fastest-growing and efficient PC companies in the United States (http://www.gateway.com/about/news_info/executive_bios.shtml).  Before becoming CEO at eMachines Inouye was the senior vice president of computer merchandising for Best Buy since 1995, and before that he was the vice president of merchandising for The Good Guys! for nine years.

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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 ...

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