Iowa was home to cowboys, not whiz-kids, until Gateway 2000's founder launched his PC business on the world. Anita van de Vliet.
'Computers from Iowa?' asked one of Gateway 2000's early ads. And indeed, it does sound unlikely. Iowa is corn and cattle country, after all, home of the cowboy, not of high-tech whiz-kids; Bible Belt not Silicon Valley. Or so you might think, until you hear the story of Gateway 2000.
Gateway 2000 was set up in September 1985, in a farmhouse just outside Sioux City, by Ted Waitt, now chairman and CEO, and Mike Hammond, now vice-president. Waitt today is still only 32; a lean figure, intent, assured, unassuming. When he and Hammond set up their tiny company (they were the sole employees), using $10,000 from Waitt's grandmother as guarantee to the bank, Waitt was not long out of college, where he had majored in business studies. 'I didn't have the patience to wait to take a degree before starting work,' he says, 'because I wanted to run my own business.'
Fascinated by the computer industry, Waitt immediately spent nine months as a salesman in a computer retail store, an experience which showed him how much computer business could be (and inevitably was) done by telephone in the back office, rather than in the showroom itself. His months as a salesman also convinced him that he 'could not do much worse' than the average computer retail store, with its high mark-ups in price, limited range, and a level of technical support which effectively means abandoning customers to their own devices.
The Gateway 2000 solution, when it came, was to advertise in computer magazines and catalogues - to sell directly to the end user. Waitt and Hammond began by offering add-ons and upgrades to people in possession of Texas Instruments (TI) personal computers, the orphans of the computer industry, since their technical superiority to IBM machines did not compensate for their lack of compatibility. 'This taught us the importance of industry standards early on,' says Waitt. Installing peripherals and upgrades for TI-PC owners, meanwhile, gave the company a small market, which it knew would not last long, but which it could dominate by high levels of service and drastic undercutting in price ($341 for one product normally selling at $700-$800, for example). Within four months, Gateway 2000 had generated $100,000 in revenue.
The real break came in 1987, when Waitt spied another relatively untapped market in the technically sophisticated customers who would buy completely configured PCs sight unseen if they were given a good price. 'In 1988 we started to advertise nationally.
We had just one product (the Gateway 2000 fully configured PC-compatible system), and it was probably the highest priced in the magazine, but it had so much in it, it was tremendous value.'
Gateway 2000 had found its touchstone: not low price, but the good, old-fashioned value for money philosophy which is part of the Mid-West ethic.
It had found its advertising style: whacky narratives, in eye-catching insert form, featuring members of the Gateway team in various guises.
It had come up with its startling visual motif of black-and-white cowspots.
It had devised its slogan ('You've got a friend in the business'). And it had demonstrated its technological expertise as a systems integrator and, to some extent, systems developer.
The company hasn't looked back since. Turnover of $1.5 million in 1987 shot up to $12 million the next year, to $275 million by 1990, topping the billion-dollar mark in 1992, and reaching a $3.7 billion (£2.5 billion) high in 1995. Net income in 1995 was $173 million or $2.19 per share, a gain of 80% over 1994 earnings of $1.22 per share. In 1991 Gateway 2000 was named America's fastest growing private company by Inc. magazine.
In December 1993, the firm obtained a listing on NASDAQ. Today, the company employs 9,000 people worldwide, and the number keeps growing. It is now the largest direct PC manufacturer in the world, and the fifth largest supplier of PCs.
And all this from Iowa. Well, not quite all, since in September 1993, the company opened its pan-European manufacturing and selling operation in Clonshaugh, Dublin. The choice of Ireland was based on a number of factors, explains managing director Ian Pluthero, not least the linguistic skills available, the incentives and fiscal benefits on offer, and the presence of major suppliers such as Intel, Microsoft and Digital. After launching into the UK and Irish markets in late 1993, the European company went next into France where its Paris showroom has now attracted a cult following, drawing in some 400 enthusiasts from as far afield as Marseilles each Saturday morning to experiment with the latest Gateway 2000 computers and indolently quaff coffee. From France, the company moved into Germany, Switzerland, Austria and the Benelux countries. According to Pluthero, turnover from Europe in 1996 will be $400 million - 'nearly half a billion in just two and a half years' - and double that in the 'not unforeseeable future'. Employees in Europe number 1,250.
So the Dublin operation has been expanding even faster than the parent company did. And as a replica of the Sioux City headquarters, the way it works is instructive. First, all activities take place on the same, rapidly expanding site: selling (all done over the telephone, of course, by country teams, fluent in relevant languages and clued up on all aspects of all the Gateway PC systems); finance; assembly (carried out by cross-trained teams whose members are all au fait with every process so they can check each other's work); and delivery. Customer services are based there too, along with technical support which is available to clients, free, for the entire life of the product.
The fact that marketing, sales and manufacturing take place in such close proximity brings an unusual closeness to the end user. Few retailers know as much about manufacturing; few operations people have the same insight into customer demands. Comments operations director Michael Dunne: 'I've been in operations all my life, and when sales go through all the usual distribution channels, your chances of finding out what the customer wants are really slim. Here, you're only 100 yards away from a headset in customer service, where you can hear for yourself.' Furthermore, the directors of the company all spend two hours a day on the customer service phone lines, so they really do get to hear firsthand.
Each machine Gateway 2000 sells is built to order, within just six days, measured from the time the customer phones to the point at which it is shipped. In fact, the actual manufacturing takes just two days, and is started only when customer credit has been checked. 'We don't pre-build machines, because around 77% of orders are for non-standard configurations,' explains Dunne. 'You almost have to assume you have infinite capacity.' Only at the beginning of December, as Christmas approaches, does the company pre-build a family-type PC which enables it to offer a 48-hour turnaround (overnight delivery to anywhere in Europe, if need be) to the last-minute shopper.
The efficiencies of direct marketing have resulted in increases in gross margins (currently 18%) over the last six quarters. The key is to keep inventory down to a minimum, explains Dunne. 'There's a simple rule in the PC sector, and that is that the prices of components are declining.
There's been an average depreciation of 16% over the last three quarters.' Price reductions from suppliers are passed on within the week to the customer; and the freedom from great warehouses piled high with stock also brings what Dunne calls 'a stupendous ability to introduce new products'. The company was shipping eight-speed CD-ROMs two months before its competitors, for example.
'The model is so simple: I buy parts, I sell parts. Gateway 2000 is almost a cost-plus company,' says Dunne, in an enthusiastic summing up. Direct-selling is efficient in other ways, too. 'Apple would kill to know who its customers are,' grins Pluthero. 'I have the complete history of every PC we have ever sold, and therefore of other configurations which might interest the customer.' The direct system also permits instantaneous market research, as well as analysis of the success of different advertising campaigns, since each ad carries a different phone number.
Gateway 2000 customers fall into three broad groups: consumers who want a computer system, probably with multimedia, for use at home; the large corporate customers or government departments, buying in volume; and the 'SoHo' (small office, home office) groups. Their requirements take some juggling. Home users want delivery and technical advice in the evenings and at weekends, but do not care who they speak to. Corporate customers expect service in working hours, but will want a single contact. SoHo customers, whose ranks might include accountants, engineers, architects and the like, will be after high specifications, high performance and the latest technology. They depend on Gateway for technical support.
The European market also presents national differences, which need to be accommodated. The Germans, for example, are demanding in their specifications and usually want to test the system in person. This is not helped by the fact that there is no tradition in Germany of direct-selling, so some 'education' has been required. The early ads accordingly encouraged phoning; and there are telephone lines in showrooms, with guidance on making free calls.
Back in Dublin, there are other challenges - not least, says Pluthero, that of managing his young (average age 27) very bright and mobile employees.
The Gateway approach is to try to make delegation real - allowing discretion when it comes to making deals with customers, for example - and to spend 'megabucks' on training. 'We try to identify the key players, not just the high-fliers, but the people we don't want to lose,' says Pluthero.
These key employees are taking part in a mentoring programme, kept deliberately informal so as not to create the impression of an elite grouping, to support their career development and to draw out ideas from them in turn.
Gateway worldwide faces other challenges. The scope for growth in Europe, where the company's market share is still tiny, is considerable while the US personal computer market, on the other hand, is nearing saturation: 65% of households earning more than $100,000 a year already have at least one PC, according to industry analysts Dataquest. Gateway has now launched a range of products taking the multimedia PC into the living room, and linking it to a large-screen television. 'We hope to be a leader in the convergence of consumer electronics and communications,' says Waitt.
Further afield, the company has now set up manufacturing in Malacca, Malaysia, to be close to the Asia Pacific market.
Back in the US, it has started the construction of a manufacturing plant in Hampton, Virginia, to be close to the East Coast. 'We are in a position to be a true global company in 10 years' time,' believes Waitt. But he also believes that the company which he founded with the aim of serving its customers better than the 'big behemoths' of this world needs to guard against falling into the 'We Are Somebody Syndrome'. 'Our biggest risk is ourselves,' he says. And, he adds, the black-and-white cowspot motif is a daily reminder to the company not to lose sight of its core values - those good old Mid-West beliefs in honest and straightforward relations with both customer and employee. Yeehar, and amen, as they say in Iowa.