Lenovo Inc. Analysis
By Arindam Bhattacharya, Jacob Catalano, Colton Lutterloh, William
Sickler, Sharaf Tamimi, Kyle Turner
Company Overview
Legend Holdings Inc., which eventually became known as Lenovo in 2004, was founded
in 1984 by a group of 11 Chinese engineers, and later became incorporated in Hong Kong in
1988. In 1990, after a number of different business ventures, Lenovo broke into the personal
computer market by introducing its own branded computer. In 1999, after competing in the
personal computer market for a number of years, Lenovo became the leading PC seller in the
Asia-Pacific region, solidifying its strong position into the 21st century.1
In 2005, Lenovo made a significant acquisition with the purchase of IBM’s Personal
Computing Division, thrusting the company to third among the world’s leading personal
computer providers. More recently, in 2014, Lenovo acquired the Motorola handset division
from Google at a price of $2.91 billion in an effort to grow its smartphone business, labeling this
deal as China’s largest tech deal. Additionally, Lenovo has agreed to purchase IBM’s low end
server business.2
Lenovo is currently led by CEO Yang Yuanqing, and offers a variety of products such as
desktops, laptops, smartphones, smart TV’s, tablets, and servers. Rapid growth was seen from
2010 to 2013 as sales doubled from $17 billion to $34 billion; profits during that same time
period increased 500%.3 The company is the primary supplier of computers in China, with
36.7% market share4, and recently overtook Hewlett-Packard as the largest supplier of PC’s
worldwide with 16.9% global market share.5
1
Lenovo, http://www.lenovo.com/lenovo/us/en/our-company.shtml
Nadia Damouni, Nicola Leske, and Gerry Shih, Reuters, http://www.reuters.com/article/2014/01/29/us-google-lenovoidUSBREA0S1YN20140129,
2
3
Yahoo, http://finance.yahoo.com/news/long-lenovos-strategy-last-144300759.html,
Lenovo, https://www.lenovo.com/ww/lenovo/pdf/Lenovo_Q3%20FY13_PPT_Eng_FINAL.pdf
5 Gartner, http://www.gartner.com/newsroom/id/2647517
4
Recently, Lenovo has broadened their horizons and entered the smartphone market.
Lenovo sold its first smartphone, called the LePhone, in its home country of China in 2010.
Since then, Lenovo has grown in its massive domestic market, taking thirteen percent of the
Chinese smartphone industry, behind only Samsung.6 In 2012 Lenovo took its smartphone
business international, expanding mainly in Southeast Asia.7 Currently, Over ninety-five percent
of its smartphone sales are still coming from China.
Guiding Question
"How can Lenovo effectively leverage its recent acquisition of Motorola Mobility from Google
to compete against Apple, Samsung, and other established companies in the U.S. smartphone
market?”
Case Description
The Chinese smartphone market is expected decelerate after 2014, meaning that Lenovo
must expand its international reach, according to Anshul Gupta, a research analyst at Gartner8.
Lenovo’s January acquisition of Motorola from Google is a clear first step into the fierce US
smartphone market, where Lenovo lacks a foothold.
The US smartphone market is currently dominated by Apple and Samsung, which, as of
the end of January 2014, held forty-two percent and twenty-seven percent of the share of total
US smartphone subscribers, respectively. LG lags far behind at seven percent, followed by
6
Michael Kan, PCWorld, http://www.pcworld.com/article/2093020/lenovo-faces-chance-to-become-rare-pc-maker-successfulin-phones.html
7
Yun-Hee Kim, The Wall Street Journal, http://blogs.wsj.com/digits/2013/11/14/lenovo-vaults-to-third-in-smartphone-race/
8
Yun-Hee Kim, The Wall Street Journal, http://blogs.wsj.com/digits/2013/11/14/lenovo-vaults-to-third-in-smartphone-race/
Motorola at six percent9. Although Motorola has fallen far since its heyday with the Razr, its
name is synonymous with mobile handsets, unlike Lenovo, which is known for PCs. Although
smartphones are really just small computers, there seems to be a distinction in the minds of
consumers, considering the experiences of Dell and HP’s failed attempts to enter the market10. In
addition to providing a well-known brand identity to American consumers, the purchase of
Motorola was a steal at only $2.9 billion11.
Although Lenovo has spent time in the smartphone market, the experience and expertise of
Motorola coupled with Lenovo’s strong hardware knowledge will certainly help propel their
brand. Executives said they hope to sell more than 100 million smartphone a year soon, which is
a lofty goal; it’s unclear what percentage of that is projected to be in the US market12. Lenovo
plans to take on Samsung and Apple by bringing “low-cost manufacturing, lean operations, and a
broader product line” to Motorola. The low-cost model has worked for Lenovo before13. In 2005
Lenovo bought IBM’s PC division, moved production to China, and sold in America cheaper
than the competition. Lean operations and slim margins on a quality product led Lenovo to take
the market share lead in this industry14. What’s to stop them from doing that again?
One important factor for Lenovo is the US smartphone industry’s growth. How mature is
the market? The PC market is dwindling, but smartphones still have room to expand (Figure 1).
9
ComScore,https://www.comscore.com/Insights/Press_Releases/2014/3/comScore_Reports_January_2014_US_Smartphone_Sub
scriber_Market_Share
10 Michael Kan, PC World, http://www.pcworld.com/article/2093020/lenovo-faces-chance-to-become-rare-pc-maker-successfulin-phones.html
11 Charles Riley, CNN Money, http://money.cnn.com/2014/01/30/technology/lenovo-motorola/
12 Charles Riley, CNN Money, http://money.cnn.com/2014/01/30/technology/lenovo-motorola/
13 Dallas News, http://www.dallasnews.com/business/technology/headlines/20140205-lenovo-takes-on-a-fixer-upper-withmotorola-acquisition.ece
14 Yahoo, http://finance.yahoo.com/news/long-lenovos-strategy-last-144300759.html
Data indicates that US mobile subscribers are increasingly turning to smartphones and the
market is not yet at a point of mature stagnation.
Almost 160 million Americans currently own smartphones and that number is expected
to increase. Statistica estimates that there will be over 200 million smartphone users in America
by 2017 (Figure 2). There is room for Lenovo’s Motorola in the US smartphone market; they just
need to jump in and carve their place.
Lenovo has had immense success in its home country of China, but as those smartphone
sales begin to cap off, they must find a way to mingle into the international realm of the
smartphone business. By acquiring a name like Motorola at a discounted price, Lenovo appears
to be on the right track to entering the U.S. smartphone market where Apple and Samsung are in
control. Lenovo has many characteristics of a successful enterprise going for them, such as their
expertise in hardware, their low-cost strategies, and their potential partnership with Google that
will allow them to set optimistic goals going forward. Some may argue that Lenovo has bit off
more than it can chew, but Lenovo has the capabilities to become a successful organization in the
smartphone market and ruffle Apple and Samsung’s feathers in the years to come.
Analysis/Recommendations
Competition Analysis
A large part about Lenovo making its way into the American smartphone market would
depend on the leading competitors in regards to smartphones in America. The two top
smartphone companies in the United States currently are Apple and Samsung who deal in a low
cost manufacturing overseas to create high cost devices that are high quality as well. Also
because of the way the brand has grown most people in America want the smartphone because of
the brand. For Lenovo to compete with its competition of Apple and Samsung would be to
analyze the manufacturing of Lenovo-Motorola’s competitors and compare this to what Lenovo
will keep of Motorola as well as change.
Apple has been and will be known as the top smartphone provider in America for its
simple design and powerful features. Taking a look at the aspects that make Apple the multibillion dollar company it is, it can be seen that it would be because Apple uses manufacturing
companies overseas to produce and supply their iPhone devices at low costs. Hon Hai Precision
Industry Co., also known as FoxConn, has been the leading manufactured for Apple iPhone
smartphones and in this manufacturing line Apple does sacrifice its ability for a high quality
device so that a much larger quantity device is able to be produced as well as lower cost product
is able to be produced. The only two known companies that have the ability to make iPhones and
iPads would be FoxConn and Pegaton Corp. Recently because of the increasing rate of defective
iPhone 5 model devices Apple and FoxConn have had differences. The iPhone5S has been in
short supply for the last 4 months due to the Foxconn not wanting to cut pricing for a large
amount of iPhone5S devices to be produced. 15 It would not be unforeseen for Apple to start
reaching out to Pegaton Corp with the recent tensions between FoxConn and Apple. For
Lenovoo be able to compete with Apple, the best thing for now would be to keep with the same
Manufacturing process’ that Motorola has set in place to avoid so much of a change in the
Motorola production process as well as to avoid the costs of changing and starting new overseas
manufacturing so early on in the purchase of Motorola, which is what Lenovo is currently doing.
15
Loraine Luk, The Wall Street Journal ,
http://online.wsj.com/news/articles/SB10001424052702303309504579181282222544024
Knowing that Motorola continues to use the same Manufacturing process’ that are through
Flextronics, located across the United States and one of the largest manufacturing locations in
Fort Worth, Texas, we are able to compare the costs between American manufacturing of
Motorola and Samsung overseas manufacturing
Samsung, is different from Apple and Lenovo-Motorola in regards to manufacturing
because while Apple and Lenovo-Motorola use a large manufacturing company to produce their
line of smartphone devices, Samsung have subcontractors for their factories either across China
or the United States, Samsung creates their own factories with some subcontracted help.
Samsung uses China’s low cost resources and labor for factory use and is able to increase profit
margin. Though as of the beginning of 2014, Samsung has chosen “shifting its output to Vietnam
to secure even lower wages and defend profit margins”.16 Knowing that Samsung uses many
different contractors to have the lowest wages and cost for devices, the ability to have a large
profit margin will be more likely which is why Samsung has been increasing its overall sales in
the last few years. Even though Apple iPhone sales for 2013 grew to “a record 51 million” in
sales, “Samsung's fourth quarter [for 2013] smartphone shipments” were recorded at “86
million” sales. Also “reportedly, [Samsung] shipped some 319.8 million smartphones” while
Apple reached only 153.4 million smartphones.17 Knowing that Samsung has now been
increasing in profits, sales, and production in much larger numbers than Apple, it can be inferred
that Samsung will be a larger threat to Lenovo in the American Smartphone market because of
16
Jungah Lee and Jason Folkmanis, Bloomberg, http://www.bloomberg.com/news/2013-12-11/samsung-shifts-plants-fromchina-to-protect-margins.html
17
AppleInsider Staff, Apple Insider, http://appleinsider.com/articles/14/01/27/samsung-widens-lead-in-worldwide-smartphonemarketshare-smaller-oems-rising
the ability for Samsung to create a large quantity of devices from multiple different
manufacturing.
Recommendations - Demographics
We begin our recommendations with an analysis of key demographics associated with
smartphone ownership; this data is presented in Figure 3. There are two dominant trends that this
data brings to light. The first trend is a strong correlation between income level and smartphone
ownership; naturally, wealthier Americans have more disposable income, and are more able to
afford luxuries such as smartphones, whereas poorer Americans are likely to stick with lowercost alternatives such as traditional cell phones and land lines. As a result, the market for high
end smartphones – targeted towards high income Americans – not only has much greater
competition in the form of Samsung and Apple, but is also approaching saturation much more
quickly than the market for low end smartphones. From the perspective of a company looking to
capture market share in a new market, it makes sense to target the demographic with the largest
potential for future growth, which would be lower income American citizens, as indicated by the
data above. Therefore, our first recommendation is for Lenovo to focus primarily on low-cost,
low-end smartphones targeted at lower income Americans. This strategy is consistent with
Lenovo’s historical reputation and business strategy in other electronics devices, most notably
laptops. Lenovo’s focus on providing high value, quality laptops at a low cost resulted in a
period of unprecedented growth for the company, eventually propelling them to their current #1
market share position worldwide; given the lack of a dominant low-cost, value-oriented company
in the smartphone market (unlike the virtual duopoly of Apple and Samsung in the high end
market), Lenovo can absolutely achieve a similar pattern of growth in the smartphone arena by
following a similar strategy.
Another striking trend provided by the data in Figure 3 is the inverse correlation between
age and smartphone ownership. Smartphone ownership is most common among younger and
middle aged adults, and drops off drastically among the elderly. This can be attributed to a
variety of factors, including physical barriers to using new technology, skepticism about the
benefits of new technology, and difficulty learning to use new technology due to lack of
familiarity18. Despite these barriers, the elderly demographic remains one of the largest market
segments for the potential future growth, and our next recommendation is to target older
American consumers by focusing on simple product design with an emphasis on ease of use.
Many smartphones have a fairly involved initial setup process, and numerous “bells and
whistles” that even technology savvy users may find unnecessary; by producing a “smartphone
for dummies” model with functionality right out of the box, minimal setup, and just the key
features that consumers use most frequently, Lenovo can produce a product that overcomes a key
barrier for older Americans and gain mindshare in a rapidly growing demographic in America.
Recommendations – Differentiation
Next, we examine how Lenovo can differentiate itself from its primary competitors.
Currently, there are two dominant forces in the American smartphone market, Apple and
18
Aaron Smith, Pew Research, http://www.pewinternet.org/2014/04/03/older-adults-and-technology-use/
Samsung, who combined account for nearly 70% of American market share as of April 201419.
Both companies focus primarily on high end phones, with Apple’s iPhone line and Samsung’s
Galaxy S line, although Samsung does have mid-to-low end offerings as well. Given these two
companies’ relative stranglehold on the high end market, as well as Motorola’s relative lack of
success in competing directly with them, it would not be prudent for Lenovo to use this
acquisition to try and directly compete with these two giants by focusing on Motorola’s current
high-end phone, the Moto X. Instead, we recommend pushing the much lower end Moto G line,
focusing again on the low-cost and high value aspects of the product, as suggested in the
demographics section. This avoids direct competition against entrenched, well-established firms
and allows Lenovo to carve out its own stronghold in the smartphone arena.
Another way for Lenovo to set itself apart from its competitors while entering the
American market is to take advantage of Motorola’s fairly unique “mass customization”
capabilities. Motorola has heavily marketed its ability to produce a phone to various consumer
specifications regarding the physical appearance, storage capacity, etc., a tactic that other
companies appear to have forgone. In an era where smartphone ownership is quickly becoming
commonplace, being able to offer customized products appears to be the next natural step for
maintaining a competitive advantage. An example of successful growth through customization in
a similar technology can be seen with Dell, which achieved rapid growth in the laptop market by
providing greater flexibility and control to end consumers through pre-order customization. We
recommend Lenovo maintain and expand on Motorola’s already-established mass customization
capabilities to hopefully achieve similar results.
19
Chuck Jones, Forbes, http://www.forbes.com/sites/chuckjones/2014/04/07/apples-u-s-smartphone-market-share-
holding-steady-against-every-competitor/
Recommendations – manufacturing
Finally, we consider Motorola’s current manufacturing capabilities, and how they fit into
Lenovo’s long-term plans. Motorola’s current relationship with Flextronics, an American
subcontractor running a Moto X production facility out of Fort Worth, Texas, has provided it
with a unique marketing tool. From the perspective of a VRIO framework, American
manufacturing is not just valuable and rare, but is also fairly difficult to imitate given the rate at
which manufacturing resources and capabilities have moved overseas to take advantage of lower
labor costs. In the short-term, the reputational benefit that comes with American manufacturing
could prove to be of great value in trying to enter the American market. Not only do Americans
prefer American-made products20, they often possess negative biases against overseas
manufacturing due to factors such as limited quality regulations, exploitation of cheap local
labor, etc. In addition, local manufacturing reduces turnaround time and allows consumers to
receive their “mass customized” products fairly quickly. In trying to enter a new market, these
benefits may outweigh the costs and help Lenovo establish a positive brand name for itself, and
we recommend Lenovo maintain Motorola’s American manufacturing presence for the time
being.
Long term, however, U.S. manufacturing is fundamentally at odds with Lenovo’s
primary business strategy of efficient, low-cost production. The cost of U.S. manufacturing is
estimated to be 3 times higher than that of manufacturing in China - $12-14/hr vs. $4/hr21. As
20
21
Boston Consulting Group, http://www.bcg.com/media/PressReleaseDetails.aspx?id=tcm:12-121840
Nathaniel Ahrens and Yu Zhou, China's Competitiveness: Case Study: Lenovo. Center for Strategic & International Studies,
Jan. 2013 http://csis.org/files/publication/130129_competitiveness_Lenovo_casestudy_Web.pdf
Lenovo’s market share grows in the United States and more manufacturing costs are incurred
with increased phone production, maintaining American manufacturing facilities will become
increasingly cost-inefficient. In addition, Motorola’s American factory currently only produces
the high-end Moto X, which has produced only modest sales22 and should not be Lenovo’s longterm focus. In order to have a low-cost, efficient manufacturing operation that matches Lenovo’s
overall business and product development strategy, we recommend Lenovo repurpose their
American facilities to manufacture low-end products, and/or consider moving manufacturing
overseas after establishing a foothold in the U.S market.
22
Alexei Oreskovic, Motorola now shipping 100,000 Moto X phones weekly from Texas. Reuters, Sep. 2013.
http://in.reuters.com/article/2013/09/10/us-google-motorola-idINBRE9891HY20130910
Appendix
Figure 123
Figure 2 24
23
MarketingCharts Staff, Marketing Charts, http://www.marketingcharts.com/wp/online/smartphone-penetration-now-at-twothirds-of-the-us-mobile-market-41248/
24
Statista, http://www.statista.com/statistics/201182/forecast-of-smartphone-users-in-the-us/
Figure 325
25
Mobile Technology Fact Sheet. Pew Research, Jan. 2014. http://www.pewinternet.org/files/2013/12/Smartphone-ownerdemos.jpg