CASE  ANALYSIS  -­‐  SYNOPSIS  

   

                           

Ruiqi Feng Tingting Li Shanshan Wu Yang Xu Junjie Zhu

               

BUS 478 – D600 Professor: Jerry Sheppard March 14, 2014

FIRM HISTORY The predecessor of the legend group is the New Technology Development Company, which was founded by eleven computer scientists with the leader Liu Chuanzhi in 1984 (Ingram, 2007). The initial start-up capital of US$25,000 was funded by the Chinese Academy of Sciences. In the second year, a breakthrough invention of circuit boards by the Legend group enabled IBM computers to process Chinese characters (Ingram, 2007). The technology also won the highest National Science-Technology Progress Award in China (Lenovo, n.d.). In late 1990s, the Legend was forced to go abroad because they did not have a PC manufacturing license from the Chinese government. It chose to enter Hong Kong in 1988 (Lenovo, n.d.). Since then, the Legend started to manufacture and build PC under its own brand (Ingram, 2007). With a healthy management, strong brand recognition and growth potential, the legend group decided to go public in Hong Kong to raise capital in 1994(Ingram, 2007). In 1995, the first server under legend’s name was introduced. In 1996, The Legend possesses the biggest market share in China for the first time and became the top PC vendor in the Asia-Pacific region three years later. In order to match the competition with major global players like Dell, legend decided to go internationally through powerful investments in 2000. Meanwhile, Legend changed its name to Lenovo and designed a new logo to build its brand awareness while expanding into the oversea markets (Lenovo, n.d.). In 2005, Lenovo’s acquisition of IBM's Personal Computing Division made its revenue almost quadrupled in that year and became the third largest PC maker in the world. By taking advantage of the Thinkpad brand, Lenovo successfully established its foothold in the global PC market. After that, Lenovo 2    

started its aggressive international expansion in the PC market. Lenovo also improved its brand awareness by supporting global events such as the Olympic Games and Shanghai Expo (Lenovo, n.d.). To better satisfy customers’ need, Lenovo launched the Idea brand in 2008, optimized for entertainment and multimedia. Mobile Internet Digital Home (MIDH) business unit was formed in 2011 to capture the growing demand in consumer devices such as smartphones, tablets and smart TV. Well balanced product portfolio and low price advantage contributed to Lenovo’s success in global expansion (Lenovo, n.d.). In 2013, it surpassed HP and became the world’s largest PC maker (Montlake, 2013).

ENVIRONMENT General Demographic Asia consists 60% of the world population, however, it’s showing a slower growth rate due to China and India’s low fertility rate. In North America, fertility rate declines during the economic recession and immigration is the major source for population growth in this region (PRB, 2013). Expectations for growth will be found in Africa. Due to the “one-child” policy, population aging is raising concerns in China. Political Although Chinese export tariff of IT industry has decreased since it joined WTO. Most IT products will still have to pass customs verification before enjoying lower tariff rates (China Briefing, 2011).

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Due to the possibility of dual usage of IT products, various complex import restrictions are also placed on this industry by different countries. Environmental laws require firms to comply with the energy consumption standards. Regulations on data protection, copyright, patent and intellectual property also adds the complexity to the business. Economical Emerging markets are showing double-digit growth. International Data Corporation (IDC) predicts that the worldwide IT spending will increase by 5% in 2014. IT spending will be marginally up while the US and Japan spending marginally down (Columbus, 2013). Increasing labor costs in China, where Lenovo’s manufacturing factories are based, made it to be less favorable to manufactures (The Economist, 2012). Disposable income increased over the past few years, notably, it was up by 10% in Beijing in 2013 (Global Times, 2013). Social-cultural As the education level and living standards advanced, demand for high-tech products keeps growing for both working and entertaining purposes (Communist Party Learning, 2009). The customer base of the PC market is no longer dominated by business people. College students represent a considerable portion of the total demand. Schools are being more heavily equipped with high-tech facilities. On the other hand, schools are increasing their emphasis on computer skills education to young children (Mehra, 2008). Shift in consumers’ preferences towards tablets lead analysts to project tablets to make up 50% of the PC market in 2014 (Canalys, 2013).

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Technological According to the "2009 China Internet Conference", China has built the world's largest Internet infrastructure. All cities and 95.6% towns are connected to broadband (People’s Daily, 2009). Cloud computing is expected to grow rapidly in the next few years. Spending on cloud services and the technologies will enable these services to surge by 25% in 2014, reaching over $100B (Columbus, 2013).

Industry Threats from New Entrants- Moderate The large capital investment presents a considerable barrier for new entrants. Difficulties of achieving economies of scale from large production and broad product offerings restrict new entrants’ ability to cut cost, hence placed them in a disadvantage in the price competition. Late comers can grab customers’ attentions by differentiating their products. However, finding a competitive edge is a great challenge for all firms. Threats from Substitutes- High Smartphones, game consoles and tablets are incorporating features that are traditionally limited to PCs (Global PC, 2013). They have become a big threat to the PC industry. Besides the specializations they each possess, portability and accessibility also add advantages to these substitutes. Threats from Buyers- Moderate The buyers’ group ranges from individual consumers to large-scale corporations. Though their demand varies, the reliance on technology is very strong. For corporations who demand specialized computers, the market is limited, thus consumers’ power is constrained. For the mass consumer market, 5    

most buyers have little knowledge about high technology; therefore, they are easily induced by other non-technical attributes. This gives companies a broader field to find their competitive advantages. Threats from Suppliers- Moderate In PC manufacturing, company’s threats from suppliers are different. For components that are specialized and are dominated by few suppliers, those suppliers have a bigger bargaining power over the manufacturers. For standardized components that can be easily acquired from multiple suppliers, the manufacturers have more power than suppliers. Competitive Rivalry- High In this rapidly changing industry, companies have to differentiate themselves from competitors and constantly innovate due to the short product life cycle. In addition, brand equity is one of the important factors for large corporations to compete with each other. Those small organizations can only compete through prices and features since they do not have high brand recognition to attract consumers. The large organizations compete on their brand equities because of the difficulty in product differentiation.

CURRENT SITUATION Mission The company’s stated mission is: “Our mission is to become one of the world’s great personal technology companies (Jurevicius,2013).

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In the 2013 mission statement, Lenovo wants to become the global technology giant and this objective clearly guides the employees and executives to operate within the company. In order to become a global technology giant, customer satisfaction and quality of products are the most critical areas Lenovo needs to work on. Therefore, guiding by this mission statement, employees will be encouraged to satisfy consumers and improve the quality of products. Financial Performance Based on Lenovo’s annual report from the past five years, it is discovered that the net margin increased continually from 2009 to 2013. The 2013 net margin was the highest compare to previous years’ net margin. However, the net margin in the industry of computer services was 6.85% in 2013 (Damodaran, 2014). Therefore, even though the net margin has increased within the previous five years, Lenovo’s net margin is still very low compared to that of the industry. The following table includes net profit and revenue that retrieved from Lenovo’s annual reports. Table: Net Margin of Lenovo from 2009 to 2013 (US dollars) Year of Annual Report

Net Profit

Revenue

Net Margin (Net Profit/Revenue)

2013

631,592

33,873,401

1.865%

2012

475,416

29,574,438

1.608%

2011

273,236

21,594,371

1.265%

2010

129,368

16,604,815

0.779%

2009

(226,389)

14,900,931

-1.519%

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Products and Markets Lenovo develops, manufactures, and markets technology products and services. It is one of the leading providers of PCs. Enterprises and consumers are the two markets that Lenovo serves. Lenovo has its operations in four geographic regions: China (43%), APAL (Asia Pacific and Latin America, 20%), EMEA (Europe, Middle East and Africa, 22%) and North America (15%) (Lenovo annual report, 2013). The product segments of Lenovo include notebook computer, desktop computer, mobile Internet and digital home (MIDH), and other personal technology products and services. Specifically, the notebook computer product segment mainly offers laptops and notebooks. The three lines of laptops and notebooks are ThinkPad, IdeaPad, and Essential. The desktop computer product segment offers desktops, all-in-ones PCs, and workstations. Lenovo’s PC segment offers the same three lines as notebook segment. Moreover, the MIDH group creates mobile internet-focused devices, such as smartphone and tablet (Global PCs, 2013). PC+ Evolution As the PC market has changed, including the decrease of profits from PC market, and the changes of consumers’ lifestyles, Lenovo has also transformed itself for the PC+ era, which includes PCs, smartphones and tablets. In 2013, Lenovo was number three worldwide in PC+ and will continue to invest. The MIDH group grows rapidly and accounted for 9% of Lenovo’s overall revenue for only two years’ operation. In order to continue growth in the PC+ market, “Lenovo completed several key M&A activities: CCE in Brazil, for consumer technology products; EMC in the U.S. in servers and storage; and Stoneware in the U.S in cloud computing” (Lenovo annual report, 2013).

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Acquisition of IBM’s Low-end Server Business On January 23, 2014, Lenovo and IBM entered an agreement that Lenovo acquire IBM’s x86 server business. The purchase price is approximately US$2.3 billion, approximately two billion of which will be paid in cash and the remaining in Lenovo stock (Lenovo plans to acquire IBM's x86 server business, 2014). This acquisition would increase Lenovo’s share in the server market to 14% from 2%, and ultimately help Lenovo extend its PC+ strategy. Before 2005, Lenovo was a domestic PC brand in China. Everything changed after Lenovo’s purchase of IBM’s PC business in 2005. This acquisition became the springboard for Lenovo leap to the top of global PC maker rankings (Carsten & Chatterjee, 2014). In 2013, Lenovo became the leading player in the global PCs market with a 17.7% share (Global PCs, 2013). According to this, the market estimates that Lenovo will enjoy similar success with its latest acquisition. Acquisition of Motorola Mobility Just a few days after announcing an acquisition of IBM’s low-end server, Lenovo announced that it has signed an agreement to buy Motorola from Google for US$2.91 billion (Lenovo to acquire Motorola mobility from Google, 2014). This agreement will significantly strengthen Lenovo’s position in the smartphone market. In addition, the biggest benefit of Motorola for Lenovo is the footprint in the US market. Ultimately, Lenovo complements its strong, fast-growing smartphone business in emerging markets around the world and achieves its PC+ evolution.

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STRATEGIC CHALLENGES Relatively Low Profit Margin Lenovo surpassed Hewlett-Packard to become the world’s biggest supplier of personal computers and was the only one among the world’s top five suppliers of PCs that increased shipments for the whole of last year (Bien Perez, 2014). Even so, Lenovo still has lower profit margin compare with its main competitors. In 2013, Lenovo’s profit margin was 2.36%, meanwhile, HP was 5.8% and Dell was 4.99%. There are two main reasons that lead to the low profit margin for Lenovo. Firstly, PC industry is a declining industry because the profit is decreasing over the time. Profits per PC for those big companies, though, have dropped from US$15.71 in the beginning of 2010, or 2.6% of the selling price, to US$14.87 in the autumn of 2013 (Charles Arthur, 2014). A more surprising fact is that Apple only owned 5% of the worldwide PC market, but they made 45% of the profit in the 2012 while Lenovo was 6% (Horace Dediu, 2013). Although Lenovo gains the most market shares now, the profit margin is low. Secondly, Lenovo focuses on emerging market and employs low price strategy to occupy the market shares because of the relative lower purchase power in those areas. Low price has a significant influence on Lenovo’s profit since the profit space is reduced. Weak Global Brand Awareness Lenovo is the number one computer maker in the world. However, when it comes to overall brand awareness and consumer affinity, it trails rivals. Lenovo has yet to crack Interbrand's annual Top 100 global brand list, while some of its chief competitors, such as HP and Dell, have been on the list for years (Beth Snyder Bulik, 2012). There are three causes of this situation. Firstly, foreign consumers may have a stereotypical notion that Chinese brands are cheap and have low quality. This impression may 10    

negatively affect Lenovo, especially when the competitive strategy of Lenovo is relatively low price. Secondly, Lenovo became a global brand after acquiring IBM’s personal computer business and it was only 10 years ago. The acquisition strategy truly accelerates the speed of Lenovo to become a global player. Lenovo quickly raised its brand awareness, customers’ confidence and market penetration in the world. However, in this highly competitive market that is dominated by innovative players like Apply and Samsung, Lenovo’s cost leadership strategy leads to a less effort spared on product differentiation. Lenovo lacks reputation of being innovative. The relatively low brand awareness will be a big challenge for Lenovo to establish a solid foothold and expand other business segments in newly entered markets, such as the U.S. Margin Pressure in PC + Market Lenovo employed “PC+” strategy in 2012 to the profit margin in PC industry is scarce. Instead of a post-PC era, Lenovo believes there will be a PC+ era in which PC is no longer the only Internet-access device, but is still critical (Rik Kirkland, 2013). In order to clear its plan to attack PC+ market, Lenovo will soon divide its business into four groups—PCs, mobile, the cloud and enterprise in April 1, 2014. Moreover, after acquiring Motorola from Google, Lenovo combined with Motorola would have 6% share in the smartphone market and become the number three smartphone player in the world (Josh Ong, 2014). However, Lenovo still suffers margin pressure in smartphone segments. In 2013, Apple claimed 87.4% of phone earnings in the fourth quarter, while Samsung took 32.2% of industry profits (Matthew Yglesias, 2014). The numbers add up to more than 100% because Apple and Samsung combined generated more profits than other competitors’ losses. The same condition also occurs in the tablet market. Apple, Samsung, and Amazon are at the top of tablet market. Apple had 33.8% of the tablet market share last 11    

quarter in 2013, while Samsung had 18.8% and Amazon had 7.6 %( Dara Kerr, 2014). Apple dominates the premium product in the market which has the most profit space. Lenovo can only struggle in the low-end tablet to generate low profits. Stable but Conservative Strategy Lenovo’s conservative strategy ensures a stable operation of the company, but restricts its growth potential. The strategy of Lenovo is generally considered as “Buy a big name brand. Move it to China. Drop the costs and export. Repeat” (Dana Blankenhorn, 2014). This can be exemplified by Lenovo’s recent US$2.3 billion purchase of IBM’s low-end server business. Standardized products in the server market push companies to compete on price, therefore negatively affects the overall profitability (Alex Barinka, 2014). For IBM, who profits from offering cutting edge technologies, this is a good deal because the x86 servers are no longer differentiated. From Lenovo’s perspective, adding the server unit to its portfolio presents a greater market share. Lenovo can utilize its strength in cost control and process management to find a fortune in the standardized server market. Since the server is still in the growing stage of its life cycle in China, Lenovo can bring x86 back to its home country and take advantage of its well-established distribution channel and efficient supply chain management to profit from it. Lenovo always enters into a mature market as a second mover and gains market share using its cost control strategy. Although Lenovo can gain the market share gradually, the profit margin is still low as can be seen from its 2013’s financial report. Not every company can be Apple, but at least, Lenovo can be inspired by how Samsung went from a manufacture to a leader in technological innovation.

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