Gateway Aims for Success After Transition

By eweek  |  Posted 2005-06-17

Gateway Aims for Success After Transition

Since taking over the CEO post at Gateway Inc. in March 2004—after the companys $289 million acquisition of eMachines Inc.—Wayne Inouye has remade the computer maker into a lean, financially viable company. He slashed the payroll, trimmed the management ranks, shuttered Gateways stores, outsourced manufacturing and streamlined the product portfolio.

After 13 losing quarters, Gateway has turned in three consecutive profitable quarters. The companys professional business will be a key to continuing that success, Inouye said in an interview with Senior Editor Jeffrey Burt.

eWEEK: When you look back at your first 15 months at Gateway, what were your goals, and have you met them?

Inouye: With a makeover, do-over, however you like to describe it, there are really there basic steps that you have to pay attention to.

The first step is really about getting your cost structure in line.

So the reorganization, the consolidation, the [re]location [of the companys headquarters from Poway, Calif., to Irvine, Calif.], the closing down stores, was really all about getting our cost structure in a position to compete.

Theres been some discussion about PC companies being around by 2007, and I think the only way you can be around is if you have a cost structure that allows you to compete with the very best.

If you look at our cost structure now, we are competing at a level at or below Dell [Inc.], and I expect our cost structure to go down even further than that in the ensuing years.

So the first 15 months has widely been around focusing on getting our cost structure [and] organization at the appropriate size so we can compete.

I think weve done a pretty good job at doing that. In fact, Gateway has achieved three state quarters of operating profit. Previous to that there were 13 quarters of losses.

What moves are you eyeing in the upcoming quarters to continue this profitability?

The second step to recovery, or turnaround, is really to figure out how to sell more and increase your revenue. Our focus right now is the professional [business]. It comprises two-thirds of the PC business as we know it, and its largely controlled by one competitor, and that would be Dell. So were really focused on growing our market share. Its very low now. We feel that were building some momentum there.

That is not to say that were taking our eye off the ball in the area we do best in, and that is retail.

What plans do you have in place to get that larger share of the market?

I believe its controlled by our customers. I think the way that you get business in any marketplace is to address your customer needs. Clearly were taking a different approach than [Hewlett-Packard Co.] or Dell when it comes to addressing the professional market.

Now we have a more targeted approach to the marketplace. Its focused on education, government and business to an extent. Theres also a small business initiative that were kicking off shortly and thats going to be the focus of our direct business, which is Web- and phone-based.

Can you talk a bit more about how you differentiate yourself from Dell and HP in the professional space?

There are basically four areas that you compete in, and generally you have to be at parity in three of the areas, and one you have to own, if you have any ambitions of winning in the marketplace.

In our case, its about creating customer intimacy. Simply put, that means that customers have greater access to us based on a hierarchy we create within the company. Were also taking what I would call an "honest broker" approach in dealing with our customers at large.

Next Page: Solving problems.

Solving Problems

If you can visualize a pyramid, and you place your very best customers at the top of the pyramid—whether theyre the biggest or the smallest, it doesnt matter, however you define your best customers—and you ask them all what is the most important thing to them, other than price and your ability to deliver product, theyll say, "Access to your company. I want to be able to reach in and solve my problems, either on a reactive basis or a proactive basis, and I want to be able to do that with you. I cant do that with your competition."

In the broadest sense, it would mean that we become the consummate experts in the PC space using the Web as our primary platform to deliver honest and straightforward content.

If you ask why cant our competition do this, I would answer they dont have to, and, two, the way they approach the marketplace is inconsistent with that approach.

They would have to change their operating approach, and they wont because they dont have to. We have to.

Effectively, we have to be nicer, more approachable, more responsive to our customers, and in many respects we have to be proactive. We have to go out and meet needs they may not even identify as needs.

You mentioned that direct and the Web are really the vehicles for creating that intimacy. Can you elaborate on that?

This is in the broadest sense. Right now, if you look on the Internet, can you name the consummate site, the expert, the one expert on all computing needs? Where would you go? There is not one site.

When weve done our research, there are a number of sites that you can go to get feedback. … Theres not one site you can go to and say, "You know what? I can get almost all my questions answered from this particular Web site or through interaction with this company."

So were going to use the Web in this manner to provide fairly focused but concise information, delivered in a very straightforward manner, with as little bias as possible.

Theres always room for interpretation, but clearly one of our major competitors method of operation is to advertise items that they have no intention of selling, that they try not to sell.

Theyre typically under-configured, very low-priced products and they take you through an exhaustive process of stepping you up, and by the time youre done, youve spent twice as much.

I call that dishonest. I worked out of retail for a long period of time, and typically the retailers who use that process were, in fact, sued by the state attorney general. That is not an honest-broker position.

We want to be in a position to tell our customers what we believe they should buy based on their needs.

So the goal is two-fold: to become a destination and to have honest information to build a relationship with your customers?

That is exactly right. What happens is you spend less marketing dollars. If I look at the most trafficked Web sites in the world, they are really sites for content and information, not sites for commerce. So I think by offering both, a site to conduct commerce, but first and foremost a place to come and get information, well be able to reinforce our brand for being honest, friendly, smart, sociable.

Next Page: Lacking a strong message.

Lacking a Strong Message

Industry observers say that, on the retail and consumer side, Gateway is in terrific shape. However, on the professional side, the company is lacking a strong, coherent message. Can you talk about your messaging on the professional side of the business?

I think our message is being fairly well-received. I dont have as much air cover as Id like in terms of impact, but I think if you talk with customers or talk with consumers on the professional side about their hierarchy of needs, their first … is to have a great product, [and] especially as we become a more mobile society, a great notebook product.

We have a great notebook product with our M460, the one we just announced. Well be upgrading our Tablet [PC] in August, so in the area thats the highest growth in the industry, weve got leading-edge products. Thats step one of our message.

Step two is very simple: Your brand is built on the after-purchase experience. How good is your service? How reliable a provider are you?

We have made continuous strides and improvements over the past year in terms of providing better value and service for our customers.

Step three goes back to the first step of our overarching strategy, which is, youve got to have competitive price points. We provide great value because weve driven a lot of cost out of our business. We pass those savings on to our customers.

So with great products and greater service at a great price, youve got a compelling value proposition.

Once you have that, you get to the fourth point, which is that affordable customer intimacy. Youve got to know your customer needs.

The good news for Gateway is that we have a significant number of sales associates who have been managing and working with the same clients [for] five, six, seven, eight, 10, 12 years.

They understand the client needs. They understand what clients are looking for, even before they know what they want.

So were in a position to create value there. Its probably our biggest differentiator in terms of that customer intimacy—that knowledge and customer intimacy that our sales reps have been able to build over time.

That message gets out pretty consistently, and frankly theres a vast number of Gateway customers who are tremendously loyal to us, that really want to see us win.

Theyve bought from us for 10 years or more and are very happy with our products. In fact, as they look at our future products, they go, "Wow, this is better than anything weve ever seen."

How close are you to Dell in the area of cost structure?

Overall, we are already under Dell. But if you break apart our businesses, we still operate on a higher cost structure on the professional side, which means we still have to get down a little bit, so we should be able to compete head-to-head with them.

Overall, we leverage all the shared services within the company, and it allows us to take lower margins in the area of professional to remain competitive.

Regarding services, can you talk about their importance to your professional business, and what your plans are in this area?

Services are absolutely critical. Hardware margins will continue to erode in this business, so the question is, where do you find your profit pools? There really predominantly are two areas. One is services. The other is software peripherals.

Next Page: "The Box and Beyond."

The Box and Beyond

Weve got a strategy called "The Box and Beyond," where fundamentally we believe the way were going to be successful in this marketplace is to surround our products with value-add.

It starts with something as simple as a warranty. It goes on from there.

For customers who buy our tablet PCs, we now have an add-on for learning software.

How do you learn how to use a Tablet? How many people know how to use a Tablet PC? For that functionality, we bring the software to bear. Over four out of five people who buy that tablet buy that software. And theres high margin there.

We have other programs, like "Keep Your Hard Drive." When people have a problem with their PC, they dont want to give up their hard drive. They want to hold on to their hard drive while they change PCs.

Battery service plans. The biggest issue from an institutional perspective is, "Im going to buy 100 laptops today, and Im going to buy 100 batteries for them. But I know four, five, six, eight months from now, Im going to need more batteries."

So weve built up into a situation where every six months or every four months, based on what the customer wants, we send them battery refreshes.

Things like this are critical to our success, and we track every month how we are doing with what we call attach rates. What percent of the boxes that go out, the units that go out, do we attach some service [or] some software peripheral. Thats where the profit pool is.

How is your attach rate?

Our attach rate is improved by 100 percent over the past year. I think we have an industry-leading attach rate on services, and we continue to put more and more emphasis on the software peripherals. Were doing better there as well.

Are there any services that you dont offer now that you plan to in the future?

No. I think frankly there is enough here in terms of doing more of the same, but doing it more efficiently and more effectively, that will keep Gateway very engaged for the next 12 to 18 months.

There is significant upside potential for us in terms of how we can better serve our long-term customers.

One of the things were really focusing on is not only attach at the point of sale, but attach three months, six months later. What else does this customer want? What else can we sell them? Now were having follow-up call campaigns and things like that that have been pretty successful with customers.

Earlier you mentioned SMBs [small and midsize businesses], and an initiative targeting them. Can you elaborate on the importance of the SMB customer to Gateway and the details of this initiative?

Its really a reset for our direct business. Gateway was founded primarily by selling configure-to-order products for the consumer. Over the last 10 years, retailers are becoming a more significant part of the consumer business. In fact, you could argue that in terms of units, they sell the most units in the consumer sector.

Theres also been a lot of price compression thats happened over the past 10 years, and its become increasingly more difficult for the direct players like Gateway or Dell to compete with the retailers. It also places additional margin pressures on us.

Next Page: An underserved market.

An Underserved Market

So what weve done is looked at what largely is an underserved market, which is the small business market. Its underserved by all accounts … so we look at it as a real opportunity for us to address the general needs of the small business customer as well as verticals.

Were looking at vertical markets within the small business area that we believe we can serve very nicely. Its a work in progress for us and well be launching it within the next 30 days.

Theres really two parts of the small business market, one where the customer is very technically adept and will make a decision just on the value they receive from a particular provider.

The other customer is a vertical customer that is currently being underserved. They have to go out and seek an integrator or a small VAR [value-added reseller] to help them create a complete solution. Yet most of them are very well-heeled.

Some of them would be personal financial advisers, independent insurance agents, the whole independent medical industry. … All these verticals have told us that if there was some way that a company could address their needs by putting together hardware and these VARs and/or integrators, it would be of tremendous service to them.

They really dont have the wherewithal to figure out how to screen and how to go through the selection of these service providers.

Thats kind of the core of our strategy in the small business area when it comes to addressing verticals. Its creating these relationships for our vertical base.

In this changing PC landscape, where does Gateway fit in, and how do recent changes—in particular, Lenovo [Group Ltd.] buying IBMs PC business—impact Gateway?

In the PC landscape, there currently is only one company that can efficiently address the professional, commercial, business market. At this point, that is Dell.

I believe well be the other company able to serve this market efficiently. I believe well put ourselves into a position where our business model and our ability to execute, without excuses, will be a business model or organization that will be very, very attractive [compared] to any other PC brand in the world.

So youre not particularly concerned with Lenovo?

No. IBM could not make the business work, and thats why they sold it. They just couldnt make it work. I believe we can.

I also think that people, frankly, are underestimating the difficulties that IBM and Lenovo are going to have in terms of culture. … I spent four and a half years managing IBM for AT&T, so I know IBM very well.

So the [IBM] folks in North Carolina and the folks in Boca Raton [Fla.] are going to have some major culture shocks in terms of cost structure, priorities, how they are going to get things done. We should not underestimate that.

Next Page: Global ambitions.

Global Ambitions

Can you talk about Gateways global ambitions?

We will create an opportunity for us to move into international markets in the commercial area when we choose to do that.

Our first step is to do business, to create commerce, and top-of-mind awareness in any foreign market. Weve elected to do that with retail.

Well be able to establish a beachhead in markets that make sense for us internationally and when we choose—when we have the time and the capabilities—we can always move into the direct space.

Dell and HP certainly see the international market, particularly the emerging markets like eastern Europe and Asia, as keys to their future growth. Do you share that point of view?

No, not at all. If you own technology, and youre a monopoly, or close to a monopoly, like Intel [Corp.] and Microsoft [Corp.], your margins are set, so any new markets generates more volume for you, and a lot of profits.

For a PC brand in an emerging market, you definitely have limitations on being able to sell a particular mix.

In fact, in emerging markets, you typically sell in a very low-margin, low-end mix because they just dont have a lot of money.

So what youre saying is that there is sufficient business that can be grabbed in the domestic market?

Yes. We have to be able to win in our back yard before we start venturing beyond that. Theres plenty of opportunity here.

Is that opportunity growing your own base or taking form competitors? And who among your competitors is most vulnerable?

Theres a two-pronged strategy. The first is, we want to grow our base. We use the term "to spider," to kind of grow within an account.

So you get a beachhead in an account, then you reference-sell from that site to another site to another site to different decision makers in that same account.

And its cheaper to grow inside a base, or develop a base, than to acquire a new customer. That being said, our efforts are around development.

However, there are definitely selected, very targeted acquisition opportunities we go after. In a marketplace where youre seeing consolidation, especially in the government area—the consolidation of bulk buys, where individual agencies are now being forced at the state level and the federal level to buy as one—you clearly have to go after that business. So both of those are our strategies.

Then among your competitors, whos vulnerable? Who can you take business from?

This is a very tough industry. I wouldnt say that anyone is vulnerable or that anyones easy to take. We look at them on a situation-by-situation basis.

When you move into an acquisition environment, you have to create a discontinuity in the market, through either price, technology or relationships. Those are the three easiest ways to do it.

So you look at any given customer and say, "Can I create a discontinuity?"

If I cant, theyll move on to find someone else. So if we have a great relationship, or weve been building relationships, those are the situations we go after.

But nobodys easy out there, whether its Dell or HP or IBM/Lenovo, theyre all tough to beat on their home field.

Over the past 15 months, youve done a lot of streamlining of your product lines. Do you expect to continue that, or are you where you want to be?

No, I think right now youre seeing the strongest lineup that Gateways ever offered to our targeted markets.

Youre going to see additional products during this year that focus on the professional market.

Well be introducing the replacement for the M275 and our Tablet PC shortly.

Well be working on a sub-four-pound notebook that well roll out sometime next year.

Youre going to see more products targeted especially at the professional marketplace.

There also will be an upgrade to our Profile all-in-one that well be rolling out at the end of the year, and weve got a brand-new server line thats been very successful.

Looking forward, what do you see as the key challenges for Gateway over the next six to 12 months?

Its convincing more customers that they should give us an opportunity to sell them something. Thats number one.

Number two is delivering high-quality products in a timely fashion. Number three is being able to service their needs if there is an issue with the product.

Thats what were focused on. Three basic things. Real basic stuff. Were not working on anything fancy right now.

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