| 1. Foundations and challenges of business
Facing Business Challenges at Gateway 2000
From Farm Boy to Billionaire
Computers. The odds are slim you will survive, much less thrive, in this industry. You have to guess what customers will want more than a year in advance, even though technology is changing at an incredibly fast pace. It's hardly a business for cowboys-unless you're Ted Waitt.
Son of a fourth-generation cattle broker , Waitt (currently 34 and worth an estimated $1.7 billion) rides herd over Gateway 2000 . They tell stories about Waitt, and not just in Sioux City, South Dakota -Gateway's homeland. They talk about how he built a fortune by trusting his instincts and making gutsy calls that led the industry. How he borrowed $10,000 from his grandmother to start a mail-order computer business , and how he turned a two-man, farmhouse operation into a global giant-in only ten years. And they talk about the pony-tailed farm boy clad in deck shoes and a polo shirt who knew that someday he was going to run his own company.
It all began while Waitt was working for a local computer store; he was amazed by how easy it was to sell computer equipment to acknowledgeable computer users over the phone. So in 1985 Waitt (the marketer ) teamed up with his buddy Mike Hammond (the technical whiz), and the two started a small mail-order computer business of their own. Waitt and Hammond worked long hours-from their upstairs office in Waitt's family farmhouse.
Their big break came in 1987, when Texas Instruments (TI) decided to stop manufacturing its own computers and instead sell only industry-standard IBM-compatible personal computers (PCs). Of course, owners of TI computers could trade in their equipment for newer IBM-compatible computers, but first they would have to cough up $3,500. Waitt and Hammond knew they could provide the same computer equipment TI was offering-and at a much cheaper price ($1,955). They did this by finding the best deals on cutting-edge computer components, and assembling the components to build top quality custom PCs . Because all sales were made-to-order and transacted over the phone , Gateway could afford to give customers more computer for their money-a strategy from which the company has never veered .
Within three short years, the company was shipping 225 PCs a day (each one in a black-and-white cow-spotted box), and sales reached $70 million. By 1993 sales topped $1.7 billion, and the company sold its stock to the investing public. In spite of Gateway's speedy trip to the top, the company was at a treacherous intersection . Gateway was run essentially by one guy-Ted Waitt-who relied on his instincts. And the company was getting too big to depend on only one man's judgment. In order to survive in this competitive industry, Gateway would have to find ways to expand its customer base and manage the company's growth.
If you were Ted Waitt, what steps would you take to beef up business ? Would you compete on price, speed, quality, or innovation? Would you consider other sales approaches besides telephone selling?
Meeting Business Challenges at Gateway 2000
Relying on his instincts, Ted Waitt made a number of critical calls that put Gateway in the lead. Of course, Waitt was no longer a one-man show. Beginning in 1991, he brought in experienced executives (from top companies like Digital Equipment, Texas Instruments, and IBM) to help manage the company's growth. Together they brought Gateway to new heights while sticking with its efficient, bare-bones assembly operation-no showroom, little inventory, and no retail outlets. In fact, Gateway's simple direct-sales operation allows the company to compete on speed, quality, and price.
Speed and quality in manufacturing give Gateway the biggest advantage. Not only can speed and quality win customers, but they win the right kind of customers-those who are willing to pay a bit more for computer equipment. Gateway moves like lightning: It gets new computers out the door in a hurry. They include all the latest technology-like top-quality color monitors, the latest operating system and software, and the most powerful computer chip.
Of course, buying a computer over the telephone and not seeing the equipment until the truck delivers the cow-spotted boxes to your doorstep is not for everyone. Gateway attracts computer-savvy buyers who need a lot less hand-holding and are comfortable purchasing from a catalog or an advertisement. Here's how it works: The customer calls in and, over the phone (or Internet), designs a custom-configured computer system using cutting-edge technology. In about five days, the custom system is built and shipped. Because there is no inventory to speak of (computers are made-to-order), as technology gets cheaper, Gateway can compete on price by changing prices daily and passing the savings on to customers.
Relying on word of mouth and a strong advertising campaign (about $90 million a year), Gateway rode a wave of success fueled by computer buyers hunting for good equipment at bargain prices. Gateway's success, however, did not come without its share of growing pains. Gateway's first portable laptop computer was a disaster. Failing to recognize that customers had to see and touch the product to appreciate its smaller size and capabilities, Gateway ran into a wall because the company's computers were not sold in retail stores where customers could experience the product's features. This lesson would not be forgotten. Other mishaps included sending out machines that did not work and busy phone lines that kept customers waiting-sometimes for hours. Fortunately, Waitt corrected these problems early on by instituting various quality-control measures to increase customer satisfaction. And his efforts paid off. By 1996 Gateway was shipping 5,000 to 6,000 computers daily and sales skyrocketed to roughly $5 billion.
That same year Gateway launched a product that was way ahead of its time. Called Destination, it was a combo PC and 31-inch television set with a wireless keyboard, a mouse, and a home-theater sound system. Learning from past mistakes, Waitt knew he would have to get the product in front of consumers so that they could see its features. This time Gateway cut deals with retail stores. None had ever carried Gateway's stuff before.
But Waitt's biggest challenge has been trying to crack the corporate market. Whereas Gateway sold most of its computers to individual users and small businesses, rival Dell set its sights on the lucrative Fortune 1000 corporate accounts and made some expensive investments-like $22 million in research and development (Gateway spent practically zip). Despite doubling its sales force, Gateway discovered that selling computers to corporate customers was not an easy task. First of all, competitors like IBM and Hewlett-Packard (HP) have large, well-trained sales and service staffs who have been doing business with big companies for years. Furthermore, IBM and HP products can be purchased at traditional retail stores.
Still, relying on a cost-efficient, bare-bones, direct-sale operation is Gateway's stronghold in this cutthroat industry. The company has no plans to alter its fundamental selling strategy. "If you come see us in the next century, we'll be bigger, better, and smarter, but fundamentally we'll be the same," notes Waitt. That is, Gateway will stick to what it does best: churning out huge volumes of PCs that are equipped with the latest technology at affordable-but not rock bottom-prices and selling them to customers over the phone.
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