Case 16 Box Strategy Successful The Beyond The Box

Case #16

“Gateway: Moving Beyond the Box,”

Harvard Business School Case #9-601-038 (Rev. May 9, 2002)

Academic instructors who are registered with the publisher’s

website (http://www.hbsp.harvard.edu) may download the Teaching

Note #5-602-130 (May 9, 2002) for this case free of charge.

ABSTRACT

Gateway manufactures computers to customer specifications and

sells directly to end-users. In response to changing market

conditions, Gateway initiates a set of new strategies with

innovative features: (1) they have broadened the offering to

include PCs, peripheral support (service warranty), Internet

access, software, financing and computer training to realize

additional revenue from its existing customers; (2) they have

TEACHING OBJECTIVES

The teaching objective of this case is to expose students to

the complex issues related to marketing technology products in a

highly competitive market, considering the bundles of benefits

offered to end-users, distribution strategy, customer

SUGGESTED QUESTIONS FOR CLASSROOM DISCUSSION

1. Explain the risks associated with the Country Stores and

Your:)Ware program.

2. What were the core competencies of the “old” Gateway?

2

3. What are the core competencies needed for the “new” Gateway

to succeed?

ANALYSIS

1. Explain the risks associated with the Country Stores and

Your :) Ware program.

There are several risks associated with the program. They

are:

A. It is uncertain how many customers will use the Country

2. What were the core competencies of the “old” Gateway?

The “old” Gateway was good at selling computers via phone

3. What are the core competencies needed for the “new” Gateway

to succeed?

The “new” Gateway needs to be good at implementing several

new strategies concurrently.

3

B. “Beyond the Box” strategy – The need to broaden the offerings

to include peripherals, Internet access, financing, software, and

warranty services, all of which have higher gross margins than

4. What makes Gateway think it will succeed in being a “service”

provider where its competitors have failed?

Expanding from products to services is a well-known strategy

followed by numerous other competitors of Gateway such as IBM and

5. Do you agree with Gateway’s strategy? Why or why not?

The hexagon strategy is based on the concepts that it is less

costly to retain customers than to acquire new ones, and that

computer customers spend about $20000 for PCs but another $4000

4

6. How profitable do PC sales have to be in order for the

“Beyond the Box” strategy to be successful?

The “Beyond the Box” strategy is closely linked to the PC

sales, without which few customers would want to buy the

TABLE C16-1. 1999 COMPANY PERFORMANCE

REVENUE ($M) OPERATING MARGIN (%) PROFIT ($M)

Desktop 6507 6.5 423

Portable 1148 6.8 78.1

Servers 280 9.8 27.4

A. One way of figuring out the required PC system profitability

is to use the information in Table C16-2.

5

TABLE C16-2. PROJECTION OF COMPANY PERFORMANCE IN 2001

1999 2001

Annual Sales Growth Rate (%) 16 i

PC Sales ($M) 7935 A

For the items in Table C18-2, the following relationships

exist:

(1) C = 8646 (1+i)^2 – (Total sales in year 2001)

(2) C = A + B (Sum of PC and non-PC sales)

By substitution, these equations reduce to the following set

of four:

(1) A + B = 8646 (1+i)^2

6

(a) i = 0.12. We assume that Gateway will achieve an annual

sales growth of 12 percent per year for the period of 1999 to

2001. Other numbers may also be introduced such as 0.1 or 0.16.

Guidance may be obtained by studying the past sales growth rates

of Gateway (see Figure C18-1).

FIGURE C16-1. GATEWAY SALES GROWTH RATE

(b) j = 0.0666. We assume for now that the profitability of PC

systems could remain at 6.6 percent in 2001. This assumption

could be modified later.

(c) k = 0.1704. We assume that the profitability of non-PC

systems could remain at 17.03 percent in year 2001.

With these three assumptions, the above equations yield the

following results:

A = 8603.7 (PC sales in 2001)

7

year period. However, the realistically achievable PC

profitability could be much lower due to a combination of the

following three factors:

(a) Country Stores are costly to operate. These operational

expenses will diminish the profitability of PC sales.

With these assumptions, the new results for A, B, D and E are as

follows:

A = 9378

B = 1467.8

Note that while the total sales are at the high level of

$10,845 million, the profit in 2001 has been diminished to $625

million, below the level of $649 million achieved in 1999.

Having a total profit below the 1999 level is of course not good

enough to call the “Beyond the Box” strategy a success. In fact,

8

TABLE C16-3. MINIMUM PC-PROFITABILITY

Therefore, the answer to this question (Question #6) is that

the PC profitability must be at least 4.18 percent to 4.36

7. What are lessons you learned in this case?

The following lessons are apparent from this case:

A. Companies must be willing to change if needed. Gateway has

undergone a major transformation of strategy and organization in