Channel ManagementGateway: Moving Beyond the Box
...percent growth. Already lagging behind Dell, Gateway had to respond with a strategy to capture this trend. However, this move would pose two potential coordination problems within the company: - Unlike all other competitors, Gateway did more than 50 percent of its consumer business through its own retail stores. Supporting internet channel would inevitably risk cannibalizing and free-riding its backbone retail channels. - The company has set its foot to move “beyond the box” with the new “hexagon” strategy aimed at higher margin non-PC business. Experience revealed that the richer store environment, as opposed to internet setting, achieved a much higher “attach” rate of non-PC businesses to the base systems. To tackle the coordination problems, we will step back to examine the strategic resources of Gateway’s business. The company had limited resources to allocate among the three channels. As mentioned earlier, the enormous price erosion in the consumer PC market dictated the huge cost pressure on every player. Amazingly, revenue of this segment in 1999 declined as compared with 1998. Gateway needed to keep optimizing its resource allocation with the tightened belt. Contrary to Dell and HP, 45.6% of Gateway’s revenue came from education, government and retail consumers. A large percentage of Gateway’s consumers tended to use multiple channels before their purchase decision. This tendency legitimized the multi-channel strategy. Emerging from Iowa, Gateway’s early success could be credited to its deep-rooted Midwestern values, “real care” about the consumer, and asking “How do we build the right system for you?” The major driving force behind was the “direct relationships” created with its customers, which set Gateway apart from many other competitors. Gateway achieved a better understanding of its end customers by exploiting distribution models that enabled the company to better interact with them. Although the existing three channels all put Gateway into customer interaction, the interaction level from high to low was probably retail stores, telephone and internet. While customers were presented with the real product by the sales rep on the spot in the retail stores, internet was merely a cold interface between the customers and the company. High interaction level in the retail stores help to achieve the much higher “attach” rate. Some of the non-PC businesses had never been Gateway’s strength ever since its inception, and hence, they were brand new to the company. A typical example was ISP services. It would be more efficient to partner with ISP giant like AOL to lower the cost by pool the customer base together. By recognizing the tradeoff, Gateway linked its ISP services to the big brand name, yet faced with the potential commitment risk by allying with AOL. The different resources existed in the three different channels determined the incentives of the three sales organizations that led to the potential coordination problems. A potential customer who visited one channel might very well end up with a transaction in another channel. This phenomenon would make sales team in each channel only focusing on customers who planned to make the purchase right now while forgoing many customers who had the purchase plan in another channel in the future. An appropriate incentive plan must be in place to encourage collaboration among the channel on each potential customer – To increase the size of the pie rather than divide up the existing pie. The relatively-low-interaction feature was likely to make the emerging internet channel sufficing with the low-margin core system sales given its cost structure about half those of the other channels. The company needed to develop measures to overcome the “sufficing” that ran counter to the “beyond the box” strategy. To avoid the vertical market failure, Gateway opened its own 260 retail stores by early 2000. Precluding the potential moral hazard problem and high inventory cost, this controversial move internalized the coordination problem with an expensive bill. How to reduce the high operating cost while maintaining its higher contribution through “attach” rate would be the challenge facing Gateway’s management. The following re...