Strategic action at Lenovo.doc

ORGANIZATIONAL DYNAMICS, LEARNING FROM PRACTICEStrategic Action at Lenovo* Jerry BiedigerTracy DeCiccoTimothy GreenGreg Hoffman David Lei Karthik Mahadevan Jane Ojeda John Slocum Kyle Ward* This research was sponsored by a grant from the OxyChem Corporation made to the Management and Organizations Department, Cox School of Business, Southern Methodist University. Portions of this paper were discussed at the 21st Pan-Pacific Conference, Anchorage, Alaska, May, 2004. The authors would like to thank Anita Bhappu, Billie Boyd, Mel Fugate, Don Hellriegel, Peter Heslin, JoAnn Lan, and Ellen Jackofsky for their constructive comments on an early draft of this manuscript.Please address all correspondence to:Professor John SlocumCox School of BusinessSouthern Methodist UniversityDallas, TX 75275-0333.214-768-3157 Executive SummaryLenovo Group Limited is the largest information technology (IT) corporation in the Peoples Republic of China (PRC). It has long dominated its home market in the manufacture of personal computers (PCs), and now harbors ambitions to enter other related electronics businesses on a global basis. Using the diamond business strategy model proposed by Hambrick and Fredrickson, we highlight how Lenovo crafted its business strategy to build and sustain its competitive advantage in PCs in Asia. Furthermore, we highlight some of the critical success factors that have enabled Lenovo to attain its competitive advantage over the past two decades in the Chinese market. In addition, we consider some actions that Lenovo may undertake in the next few years to build more enduring sources of competitive advantage as it strives to become a global powerhouse. The lessons that apply to Lenovo may also be instrumental to other Chinese companies seeking to design and produce name-branded products for the global marketplace.IntroductionBusiness strategies must be based on some source of competitive advantage to ensure the firms success. Distinction is a key driver of any organizations effective strategy. A firm is only as profitable over the long term as it is distinctive. Recently, Hambrick and Fredrickson have provided us with an analytical model to examine the strategy of a firm. They propose that in order for a firm to have a viable business strategy, senior managers must be able address five key pillars of strategy by answering these questions: Arenas: In what markets will the firm compete? which product categories? which geographical areas? which core technologies? Vehicles: How will the firm get there? by internal development? joint ventures? acquisitions? licensing? Distinguishing features: How will the firm win in the marketplace? Is it through image? styling? customization? price? Staging: What is the sequence and speed of moves? Economic logic: How will the firm obtain its economic returns? Will these be achieved through lowest costs through scale advantages? premium prices due to service? premium prices due to proprietary product features?Hambrick and Fredrickson argue that a successful business strategy addresses all five questions. These questions must be addressed for the following reasons. First, senior managers need to make decisions. All five questions require investments that cannot be generated simultaneously. The focus is on using the firms core competencies in specific market segments. Second, the answers to all five questions must be aligned and coexist with each other. That is, there needs to be an internal consistency among the elements of a business strategy. Internal consistency provides coherence to an organizations initiatives. It also serves as the basis for enhancing and renewing the firms source of distinction vis-a-vis its rivals. As Lenovo seeks to enter new businesses and markets outside of China, we use this firm to illustrate the answers to these questions. Moreover, we also address the critical success factors that Lenovo must nurture to sustain its competitive advantage. Equally important, as Lenovo seeks to enter new markets outside of China, the firm must be willing to implement new actions that will promote enduring sources of competitive advantage on a global basis. Early HistoryBased in Beijing, Lenovo Group Limited is the largest manufacturer of personal computers (PCs) in China with annual sales of more than $24 billion in U.S. dollars (USD) in 2004, and a market share of 30 percent. Its sales for first quarter of fiscal year 2004-2005 have risen by more than twenty-one percent. It remains one of Chinas powerhouses in its bourgeoning and fast growing high-technology industries. Yet, Lenovo today is confronted with numerous strategic challenges as the firm considers its future not only in newer generations of PCs, but also in other electronic gadgets and information technology services. In some ways, how well Lenovo manages its own growth and strategic direction may be a bellwether for the transition and integration of the entire Chinese economy into the global economy. Lenovo (originally known as Legend Group) began as a spin-off of the Chinese Academy of Sciences (CAS) new technology unit in 1984. Initially, Lenovo was a reseller/distributor for AST computers in China and Hong Kong and then expanded to resell other foreign brands like Hewlett-Packard and IBM. Lenovo started making its own brand PC in 1990. Lenovo became the first Chinese brand to outsell any foreign brand (not just PCs) in China in 1996. By 1997, it had become the countrys best-selling PC. In 2003, it had a market share in China of approximately 30 percent, according to International Data Corporation. Lenovo is the number-one PC brand in the Asia Pacific market (excluding Japan) with a market share of 12.4 percent. Besides the manufacturing and sale of PCs, Lenovo has recently begun manufacturing motherboards in Hong Kong, mobile handsets, and hand-held devices. It provides IT (information technology) consulting services. Overall, Lenovo is the largest computer company and the second largest electronics manufacturer in China. The major shareholder of Lenovo is the Chinese Academy of Sciences, providing Lenovo with strong technological support and broad connections (guanxi) in the PRC. This is strategically important because Liu Chuanzhi, Lenovos founder and chairman, is able to maintain close working relationships with the Chinese Institute of Technology, where he has established strong relationships with the government.Strategic ActionHambrick and Fredricksons innovative model of strategy can be used to guide managers in thinking through five key pillars that lay the foundation for a sustainable, distinctive business strategy. We will discuss and apply each of these pillars as they relate to Lenovo.ArenasArenas indicate where the business will be active, and how much emphasis will be placed on each area. Lenovo is engaged in the manufacture and sale of Lenovo brand personal computers (PCs), hand-held devices and mobile handsets for the Chinese market, and has begun providing advanced IT services. Lenovo also contract manufactures motherboards, mobile handsets and hand-held devices for other original equipment manufacturers (OEMs). Lenovos geographic scope encompasses the Greater China and Asia Pacific markets. Lenovo manufactures its PCs in Beijing, Huiyang and Shanghai, with a total annual production capacity of about 4.5 million PCs (desktops & laptops). The company places major emphasis on delivering solutions to the corporate IT segment (56 percent of revenue), and consumer IT (30 percent of revenue). There is a relatively low revenue mix from hand-held devices (8 percent of revenue), contract manufacturing (4 percent) and IT services (3 percent of revenue) at this time. These revenue figures are from 2003 financial statements. It is clear that the combined corporate and consumer IT segment is centrally important to Lenovos strategy, whereas hand-held devices and IT services simply broaden the line of offerings for its customers. The growth of these newer, non-PC-related arenas is becoming important to Lenovo in several ways. First, the PC industry is beginning to feel the heat of growing foreign competition in China. U.S. companies such as Hewlett-Packard Co. and Dell Computer Corp. are beginning to make serious inroads into the Chinese market, with the latter company even capturing some important contracts from the Chinese government. More important, the PC industry is beginning to mature, particularly as newer technologies enable Chinese consumers to communicate with each other over the Internet through non-PC devices. Also, Lenovos ability to compete in the Greater China/Asia-Pacific market will begin to face the prospect of new, indigenous competitors in many of these markets, as upstart firms in these countries begin to climb the high-technology industry food chain.VehiclesBeyond deciding on the arenas in which the business will be active, the executive also must decide on how to get there. Vehicles are the means (e.g. internal product development, joint ventures and licensing) for attaining the needed presence in a particular product category, market segment, geographic area, or value creation stage. They are the result of deliberate strategic choice. Initially, Lenovo achieved its competency in PC distribution through joint ventures (JVs) with PC original equipment manufacturers like AST, Hewlett-Packard, and IBM Corp. Lenovo began its existence primarily as a manufacturing/outsourcing platform to build keyboards and other simple devices for larger, well-heeled multinational firms. However, the company quickly learned how to build an entire personal computer system. Of course, Lenovo needed more than manufacturing alone to succeed. Through these joint ventures, Lenovo increased its competence in PC distribution, and gained an understanding of the needs of Chinas computer market. Lenovo learned the most from Hewlett-Packard. It was through Hewlett-Packards distribution system that the Lenovo executive team learned how to organize sales channels and how to market PCs. As Lenovo developed capabilities to assemble PCs, the company began to backward integrate to manufacture motherboards and other key subassemblies, to increase their value to their joint venture partners as low-cost producers with guanxi. This gave Lenovo a growing depth and breadth of competencies needed to assemble, manufacture and market PCs. Once those competencies were mastered, they developed their own “Lenovo” PC brand. Because of the first-hand experience gained in building PCs and the willingness to learn from JVs, Lenovo developed a strong domestic base of technological know-how that enabled the company to capture a growing share of the Chinese domestic PC business. This experience helped Lenovo reduce the normal uncertainty and risks caused by poor market planning and product development delays typical of upstart companies. Unlike other businesses where it entered into joint ventures, Lenovo started its IT services business through its own internal development. Its first service business was a PC customer support unit. Then Lenovo extended its service to provide some integrated software services, including basic networking of all PCs for small businesses in China. Lenovo is still working its way up the services value chain. They see it as a growth engine in the future because there are 10 million small (less than 200 employees) companies in China that Lenovo can service. However, this field also represents an important challenge for Lenovo, since building a service-based infrastructure in a vast country requires significant investment in new kinds of service centers, deeper understanding of networking technology, infrastructure, and training of customer service associates. If successful models are developed, it might be possible for service centers, whether for product, training or consulting, to be franchised. Franchising could speed up Lenovos growth and reduce the investment on building infrastructure. Meanwhile, it reduces liability and increases market reach. The Internet boom in late 1990s and early 2000s led to consumer demand for devices other than PCs to access the Internet and perform computing. As a result, Lenovo entered the growing hand-held device market. This would not have been possible without Lenovos conscious choice to spend research and development (R&D) monies as a means to fuel expansion. The decision to enter the hand-held and other consumer electronics markets represents an important turning point for Lenovo. The firm must now begin to think about designing an entirely new line of products for different market segments. Lenovo Chairman Liu Chuanzhi recognized the company needed to spend more to develop distinctive products. If we do not achieve breakthroughs, there will be greater uniformity in PCs and other products,” Mr. Liu said. Lenovo has been spending about one percent of its annual revenue on research and development. Mr. Liu indicated that would increase to two or three percent. If necessary, it may grow further than that.” This is still relatively low when compared with IBM, which spends six percent of its $84 billion revenue on R&D. R&D investment needs to be based on the strategic direction of the firm. Where is Lenovo going with its products and services? Distinguishing FeaturesDistinguishing features refer to attributes that enable a company to distinguish itself from its rivals and gain market share. They require executives to make up-front, conscious choices about which strategic assets will be assembled, refined, and deployed to beat competitors in the fight for customers, revenues, and profits. Lenovo is focused on domestic competitive advantages to increase its market growth. The strongest distinguishing feature that Lenovo has is its ability to understand the Chinese market, its values, and preferences. By building their computers for domestic use only, Lenovo has concentrated on integrating the Chinese ideographs and symbols into their input mechanisms (for instance, keyboards and icons designed for Chinese characters and culture). As a result, it has been difficult for U.S., Japanese, and European firms to compete effectively in the Chinese PC market. Many foreign firms in other sectors, such as Lehman Brothers, DaimlerChrysler and Foxboro Company, all experienced difficulties establishing their presence in China. The reasons for failure include trade barriers, not understanding the changing role of the Chinese government, lack of negotiating acumen, and disparate communication competencies.Distinguishing features create barriers to entry for foreign competitors, such as Dell, IBM, and Hewlett-Packard. In addition to a hardware advantage, Lenovo develops software with a firm understanding of the Chinese market. For example, accounting practices in China are different from those in the United States. Lenovo has designed their software to meet Chinese standards. Due to Lenovos leveraging of these competitive advantages, foreign firms must spend enormous amounts of resources to overcome these barriers to entry. Chinese consumers place value on these distinguishing features, as evidenced by Lenovos dominant market share in the face of foreign rivals. These core features that distinguish and insulate Lenovo from intense foreign competition may not last long. Indeed, to remain competitive requires strategic acumen. Lenovo will need a deep understanding of domestic markets as well as foreign ones, the current needs of customers in terms of product and service, and their future needs. For example, how will the iPod generation use products twenty years from now? Already, Dell Computer has begun to make inroads into China by replicating its direct customer sales model in some channels that has worked so effectively in the U.S. market. Even so, the company must take steps to further build its brand equity in the Chinese market. Although Lenovo excels in manufacturing computers and components, it has not yet created the kind of premium brand loyalty that deters customers from switching to other firms. In developed markets, people understand the importance of branding. If Lenovo has a line of high-end products, it must be able to find large-scale distributors in these markets. Lenovos sponsorship of the 2008 Olympic Games, to be held in Beijing, is designed to give the brand international household exposure, in much the same way that the use of Seikos time-keeping devices in the Olympic Games during the 1960s enabled it to become a worldwide leader in watches. Perhaps this will convince businesses that Lenovo is a potent, low-cost, home-grown alternative to Dell, Hewlett-Packard and other competitors. Throughout its history, Lenovo has not been a technology leader. It has allowed international industry leaders to set trends, and has adopted a follower strategy. One of its core competencies is its ability to adapt technology to fit the needs of the Chinese consumer. Technology is in its infancy within China. Liu Chuanzhi realizes there is a benefit to the IT follower/learner strategy. For management, the long-term growth and sustainability calls for a balance between efficiency that may lead to cost savings, and creativity that may lead to trend-setting products. Following the trend is very much a part of the Chinese culture: docile and self-disciplined. It is not uncommon to see 15 managers supervise 5000 workers in China. On the other hand, a docile workforce lacks the sense of ownership and does not cultivate/reward independent thinking and creativity. Lenovos PC brand has surpassed Hewlett-Packards sales in China, an