ORGANIZATIONAL DYNAMICS,
LEARNING FROM PRACTICE
Strategic Action at Lenovo*
Jerry Biediger
Tracy DeCicco
Timothy Green
Greg 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 Slocum
Cox School of Business
Southern Methodist University
Dallas, TX 75275-0333
jslocum@mail.cox.smu.edu.
214-768-3157
1
Executive Summary
Lenovo Group Limited is the largest information technology (IT) corporation in the
People’s 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.
2
Introduction
Business strategies must be based on some source of competitive advantage to
ensure the firm’s success. Distinction is a key driver of any organization’s 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 firm’s 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 organization’s
initiatives. It also serves as the basis for enhancing and renewing the firm’s 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
3
of China, the firm must be willing to implement new actions that will promote enduring
sources of competitive advantage on a global basis.
Early History
Based 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 China’s
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 country’s 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, Lenovo’s 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.
4
Strategic Action
Hambrick and Fredrickson’s 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.
Arenas
Arenas 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). Lenovo’s 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 Lenovo’s 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, Lenovo’s ability to compete in the Greater China/AsiaPacific market will begin to face the prospect of new, indigenous competitors in many of
5
these markets, as upstart firms in these countries begin to climb the high-technology
industry food chain.
Vehicles
Beyond 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
China’s computer market.
Lenovo learned the most from Hewlett-Packard. It was
through Hewlett-Packard’s 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 PC’s. 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
6
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
Lenovo’s 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
Lenovo’s 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 Features
Distinguishing 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
7
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 Lenovo’s 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 Lenovo’s 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
8
markets. Lenovo’s 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 Seiko’s 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.
Lenovo’s PC brand has surpassed Hewlett-Packard’s sales in China, and Lenovo’s printer
is on its way to becoming the leading printer in China. Until recently, most multinational
PC and electronics firms viewed China as a powerful outsourcing and manufacturing
platform, rather than as a major consumer of high-technology products.
Foreign
company research and development has been focused towards the more developed
international markets. This has allowed Lenovo to concentrate on R&D resources for the
Chinese market. Liu Chuanzhi takes the stance that “The biggest challenge is that the
industry changes so much. We can’t be like US companies that are in a position of
leading the trends; the main thing for us is to keep up with the trends.”
People are a core driver of knowledge and innovation in technology-driven
businesses like PCs and IT Services. Lenovo motivates people using a non-traditional
Chinese reward system, including stock options to increase performance and reduce
management turnover. This helps them attract highly talented professionals in the
competitive technology environment in China. All white collar employees who have been
in the company for more than two years receive stock options and, says Liu, “[w]hen they
9
reach upper management, they get a lot more.” In addition, every employee gets
extensive training through Lenovo University. A combination of opportunities for
continuous learning and growth along with motivational tools helps Lenovo utilize their
key assets (human) effectively. As a people-oriented enterprise, it has created a unique
corporate culture. Chairmen Liu believes that providing staff with an excellent living and
working environment helps their creativity. He believes that the perpetual motion that
drives Lenovo’s success is its invaluable human resources.
Staging
Choices of arenas, vehicles, and differentiators constitute what might be called the
substance of a strategy, or what we plan to do. This substance mandates decisions on the
fourth element in Hambrick’s and Fredrickson’s model. Staging refers to the speed and
sequence of strategic moves to be taken in order to heighten the likelihood of success.
Lenovo created a leveraged IT consulting/services business from its core product
business. However, the company is still finding it difficult to achieve competitive
advantage in consulting. IT-related service may still be quite new in China. Consulting
and training, although more profitable, may not yet be understood as value added to the
business in China. Therefore, on one hand, there is great opportunity; on the other hand,
Lenovo will have to convince its customers to initially accept a lower return on
investment (ROI) to pay for these services. This will be a great challenge because it will
require a paradigm shift in order for the Chinese to accept and understand such services.
In developed markets, training and consulting are used extensively, but not in China. This
is evident from Lenovo’s low market share (2 percent). The dominance of major
consulting firms such as IBM Global Services, Accenture and the presence in China of
services companies from India like Infosys and Wipro have made Lenovo a minor
competitor in this market. With its current competencies on developing integrated
software solutions for its hardware products (value additions to PCs) and support services,
we believe that Lenovo will have to go through a steep learning curve to gain
competencies that can turn into competitive advantage in the services business. Likewise,
the infrastructure requirements to develop a sustainable IT consulting business are
enormous. This particular industry segment demands state-of-the-art knowledge about a
variety of software platforms, middleware, and applications that corporate customers
10
demand in a one-stop-solution format. For Lenovo to become a serious contender in this
arena, it must also learn and further refine its software and applications businesses to
provide customers with the kind of intimate knowledge that is required for solving
enterprise-wide challenges and issues.
When talking about software development, what is salient is the open-source
movement or a partnership. This also might require a paradigm shift in the minds of
Chinese business people. That is, there can be a win-win where all parties share profits,
and competitors can be allies. The logic of traditional Chinese thinking is “If Zang makes
the money, then Li must be losing money.”
The final step in the sequence of evolution is Lenovo’s foray into hand-held
devices. Lenovo’s dominance in this market (evidenced by its 20 percent share in a
fragmented, growing Chinese market) can be explained by the company learning how to
leverage its core capabilities in contract manufacturing and final assembly of PC’s into
hand-helds. It also had the existing infrastructure to deliver products in the marketplace.
This move reflects an important strategic inflection point for Lenovo. The top leadership
must now decide if they want to further refine Lenovo’s PC-based competencies (and
thus become more like Dell or Hewlett-Packard), or further diversify into new types of
electronics (and thus follow a similar path taken by Samsung and Toshiba). If Lenovo
develops a broad range of hand-held gadgets and other consumer electronic devices, it
must begin to develop a strategy to compete with the likes of Nokia AB oyj, Motorola
Inc., and Siemens AG – all of which have important market shares in China itself.
Economic Logic
Economic logic refers to how the firm will generate profits above its cost of capital. A
business strategy must clearly state how profits will be generated. Unless there is a
compelling basis for generating business, customers and competitors won't let that
happen. The most successful business strategies have a central "economic logic" which
serves as the fulcrum for profit creation. In some cases, the economic key may be to
obtain premium prices by offering customers a difficult-to-match product, such as
Toyota’s Lexus brand. Currently Lenovo allocates about 80 percent of its resources to
make corporate information technology (IT) and consumer PCs. This is supported by the
fact that 85 percent of its 2003 revenues come from these two business segments, which
11
provide a 17 percent combined margin (corporate being more profitable than consumer).
Using profits from this base, Lenovo has expanded into arenas such as hand-helds and IT
Services and has built a broad portfolio of businesses. As it faces more competition from
other vendors, Lenovo will need to focus more resources on its fledgling IT services
business, where there is potential for attractive margins upwards of 40 percent. However,
this move into new businesses will present a series of important economic decisions for
Lenovo. Can Lenovo become even more distinctive than Nokia or Samsung (in handhelds) and IBM or Accenture (in IT consulting) – firms which have similar ambitions in
the Chinese market?
Even if Lenovo can successfully compete with these long-
established rivals, will Lenovo earn a compelling high rate of return?
Leveraging Critical Success Factors Unique to Lenovo
Over the past two decades, Lenovo has grown tremendously in its domestic market. With
a stated goal of becoming a Fortune 500 company by 2010, Lenovo has to look at
expanding into the global marketplace. To identify opportunities and to neutralize threats
from competitors in the Chinese market, Lenovo has found activities that have allowed it
to perform in ways that competitors cannot do as well. Even though numerous rivals may
compete in the same industry, Lenovo has been able to perform five activities better than
its rivals. However, the transition from competing solely in the domestic Chinese market
to the wider (and more intense) global market will be an important test of Lenovo’s
capabilities and management. In the following section, we identify these factors that
have been critical to Lenovo’s success in the Chinese market, which still accounts for 96
percent of its business. Some of the strengths they have developed may be leveraged into
international success.
Management – Aggressive Learning of Cutting-Edge Practices
When China began to ease its governmental stranglehold on business and Lenovo began
as a distributor for foreign companies in the early 1980s, Liu discovered that management
was something he and his team had to learn. So they learned from foreign companies
with which they collaborated while gaining an understanding of China’s computer market.
Liu and his team learned the most from Hewlett-Packard, as this U.S. giant has been a
paragon of how best to manage large distribution channels and networks of value-added
resellers in the PC and printer industries. Lenovo’s management is also studying other
12
corporate models to further build on its business model. For example, Liu says he
learned corporate governance from General Electric Co. through reading books on GE
while spending time at the company’s management-training center at Crotonville, New
York. Liu and his management team constantly read foreign management journals
(although they do so with a mindset to apply the theories to the realities of China) and
best-selling management books to learn new ideas. This commitment to learn and copy
successful techniques is a potential strength as they venture into other geographic and
cultural settings.
Participation in Capital Markets – Greater Shareholder Awareness
Lenovo was one of the first Chinese companies to be listed on the Hong Kong stock
exchange. Liu believes that this has had two major effects on Lenovo. The first was the
ability to obtain capital from financial markets. The other is dealing with shareholder
pressure. Shareholders inherently put pressure on firms to be more transparent and
manage more systematically. Liu regards this type of pressure as a form of motivation,
since its most fundamental objective is to serve the interests of its shareholders. An
example of Lenovo’s transparency is that, while the Hong Kong stock exchange requires
only semi-annual performance reporting according to Hong Kong generally accepted
accounting practices (GAAP), Lenovo reports quarterly as is customary in the US.
Lenovo also creates two kinds of reports; one according to Chinese standards and other
according to Hong Kong GAAP standards, as required by the Hong Kong Stock
exchange.
Lenovo does not make or sell PCs in the U.S., and therefore, does not report
financials using U.S. GAAP standards. It also does not conform to all of the provisions of
the Sarbanes-Oxley Act. Lenovo has a head start on most other Chinese companies, but
there still need to be major changes in its accounting practices to meet international
standards. Should Lenovo decide to become a publicly traded company in the U.S., it
will have to make significant adjustments to its financial reporting and accounting
systems to bring about the kind of transparency that is demanded by U.S. and other
foreign investors.
13
Manufacturing – Moving Towards Greater Agility
Lenovo’s ability to manufacture PCs according to customer needs and orders is another
critical success factor. This is important because in the future their next biggest
challenger is Dell. The costs of build-to-order are higher for Lenovo than for Dell, but so
are the per-unit profits. Lenovo has built channel relationships in China with more than
200 home-PC specialty shops (consumer IT) and more than 3000 dealers. These dealers
do not want to abandon Lenovo by shifting to Dell’s direct model manufacturing strategy
because of guanxi that they have established with Lenovo. Because of their channels,
Lenovo has to carry higher inventory levels, which add to its inventory carrying cost and
operating expenses. This is unlike Dell’s direct model, where there is no channel
inventory and lower operating expenses. Currently, Lenovo takes direct orders only from
businesses. It doesn’t take orders directly from consumers, largely because of China’s
underdeveloped electronic bank payments system and transportation infrastructure, which
make business-to-business e-commerce almost impossible.
Lenovo is preparing to
compete with Dell in the global market by copying their direct selling methods in
developed countries where e-commerce is easy. At the same time, Lenovo may be able
to successfully transplant its existing channel-dependent model in less developed
countries with similar infrastructure limitations to China, particularly in the Greater
China/Asia Pacific region where PC demand is beginning to take off.
In 2004, Dell opened its first manufacturing plant in Xiamen, China, to serve both
the Chinese and Japanese markets. Dell’s global supplier networks give them a 10
percent cost advantage over Lenovo. Dell now can offer its computers through
distributors, who act as purchasing agents for government agencies. Dell’s legendary
manufacturing competencies are challenging Lenovo’s core manufacturing competencies.
When the Communist Party invited bids for replacing hundreds of its computers in 2004,
Ren Jinhua, chief information officer (CIO) for the Party, chose Dells because Lenovo’s
main circuit boards had constantly burned out, and Dell’s price was lower than Lenovo’s
by $2.50 per unit.
Organizational Design Attributes – Inducing Professional Practices
Lenovo has created two levels of management. On one level there are the nuts and
bolts of management, such as logistics management, marketing and promotions, etc. On a
14
second level there is what Lenovo calls “culture,” but what might also be described as
motivation and ethics. Liu feels that this is more problematic than developing the nuts
and bolts of management. He has attempted to instill a different culture at Lenovo,
hoping that the highest managers at Lenovo will come to work with a desire to “serve the
company.” A Lenovo manager must first think of Lenovo as a career. Many employees
in China take two days off per week to rest. At Lenovo, most employees take only one
day off so that they can study. If Lenovo aspires to be a major global company, it needs
to carefully evaluate its governance structure, and communicate it clearly through names
and titles for others to read.
Another aspect of Lenovo’s organization and its enabling strategic objectives is
its ability to execute in a rule-based system. A rule-based system is characterized by a
reliance on rules to govern people/system interests (and information is largely public) as
compared with a clan-based system, which is characterized by a reliance on personal
relations (and information is largely local and private).
Lenovo is a rule-based
organization. As a publicly held firm, it relies on public information vis-à-vis the market
to help guide its transactions, determine demand for its PCs, and set firm direction. This
is an important step in Lenovo’s evolution, since the use of a rule-based system enables
the firm to quickly institute new types of management programs and initiatives across the
entire firm.
It also represents an important step in the direction of “professional”
management – an important reform that has been lacking in most Chinese enterprises that
still have strong nepotistic traditions, as well as influences of state-run administrative
constraints.
To compete more effectively as a manufacturer and distributor, Liu decided to
separate the branded products from third-party distribution. Lenovo Computer (about 60
percent of Lenovo’s total sales) is focused on branded products while Digital China
(about 34 percent of Lenovo sales) was spun off as a company that focuses exclusively
on the distribution of third-party products. This helped Lenovo maintain its JV
relationships with Hewlett-Packard for distribution, and at the same time, compete with
them in the branded products.
15
The Role of the Government –Transitioning to Private Ownership
The Chinese economy was planned and controlled by the central government in the
1950s and 1960s, and therefore, corporate leadership was not critical. The reform that
began in 1978 brought revolutionary changes to previous management practices.
Managers in state-owned enterprises (SOEs) found themselves having to lead and be
accountable for decisions they made. Privately-owned enterprises (POEs) were regarded
as illegal in the pre-reform era, but the reform has provided unprecedented opportunities
for Chinese people to start their own companies. POEs are not typically allowed to enjoy
support from the central government, as the SOEs do. However, they are free from the
extensive government regulations that often hinder SOEs from moving quickly.
Chairman Liu structured Lenovo like a private company POE from the beginning.
Liu had to raise capital from banks and outsiders to get the company going. In addition,
when he discussed terms and conditions for Lenovo with the government, he requested
the authority to make decisions himself. He also had financial decision-making power,
so he could determine the wages and bonuses of his employees and was not required to
perform strictly according to the government’s whims.
Liu wanted Lenovo to make its own PCs because he and his staff were technology
experts. At the time, China’s government wouldn’t permit Lenovo to produce computers,
because Lenovo had to have a license from the government. The Chinese government felt
that the country already had too many factories and had difficulty rationalizing their
support of another one and the issuance of a license to Lenovo. Accordingly, Liu crafted
a strategy to go to Hong Kong, which did not require a license. He began the company in
Hong Kong to trade in the PC market, but quickly established a factory for production as
well. Consequently, China’s central planning unit realized that Lenovo indeed had the
capability to operate a factory and gave the company a license to manufacture in the PRC.
Lenovo ultimately relocated to Beijing. Lenovo’s experience also shows the difficulty
that entrepreneurial firms face when dealing with a Chinese legal system that is still in its
infancy when considering such issues as contracts and private property rights. For
example, in 2004, Huawei Technologies, a leading Chinese networking firm, had to stop
production and revise new products because of intellectual property right infringements
of Cisco routers.
16
Actions to Create an Enduring Global Competitive Advantage
If Lenovo wants to be a global company, it will have to make a conscious choice on
whether to expand sales to other regions, like Europe and North America, and sell
branded products or leverage its lower cost structure and make products for other OEMs
and grow through large volumes. This means that Lenovo must now take important
actions to reconfigure itself to compete on a global basis. However, this transition is not
easy for a number of key reasons, many of which are applicable to other Chinese
companies with similar global ambitions.
One of the problems that Liu is wrestling with is the lack of brand recognition
outside of the Asia Pacific region. For firms in the world’s industrialized countries, a
critical aspect of business strategy includes global expansion. Businesses in China are
not exempt from this trend. As Sony Corp. of Japan and Samsung of Korea have
achieved, and Haier of China is accomplishing, Lenovo Group of China keenly desires to
be another success story for an Asian brand that began as a low cost product and
developed into a premium global brand.
For China’s businesses in the world’s
industrialized countries, the big hurdles are brand recognition, marketing skills, perceived
quality problems, and innovation. The biggest obstacle for Chinese manufacturers is the
lack of vital marketing acumen. For example, Lenovo has not invested in China’s
educational market, which enrolls millions of students. U.S. companies and educational
institutions have signed multiyear contracts with Chinese institutions that guarantee low
prices and services. In 2004, Lenovo launched two computer models in Italy, but the
campaign failed for lack of an effective advertising strategy. Chinese businesses have
mastered the feat of scale production and consequently manufacture goods at very low
cost. But with this accomplishment comes the dubious perception that being “Made in
China” also translates to “made cheap” to the rest of the world. China is very good at
being a “me-too” producer, but must make efforts to innovate products through research
and development as well. Regardless of R&D efforts, Chinese companies must begin to
build their brands internationally, requiring both large capital expenditures and “five to
ten years before Chinese brands become truly global.”
Brand building is critical to global viability because it is a distinguishing feature
attribute in Hambrick’s and Fredrickson’s model. The current distinguishing feature of
17
low-cost can eventually be defeated by other low-cost wage countries, such as India and
Malaysia. In late 2000, Wu Bangguo, chairman of the National People’s Congress of the
People’s Republic of China, gave notice that the development of brands was essential for
the nation’s continued growth. This sentiment is echoed at a panel discussion on branding
where Fiona Gilmore of London consultancy Acanchi comments, “They recognize that in
the future they need to have brands, they don’t just want to have to manufacture the
products for everyone else.” Branding is an important concern for many Chinese firms in
other industries, such as Haier in refrigerators and appliances; Ningbo Bird in cell phones;
TCL in consumer electronics and television sets.
Lenovo initially existed as a government-influenced Chinese company doing
business in China. It built its position on retail support to domestic customers and
customized software to make computing easier in the Chinese language. Lenovo began
to move away from this insular business strategy by partnering with Hewlett-Packard as
its Chinese distributor of Hewlett-Packard printers. Not satisfied with simply functioning
as an OEM or a distributor to other global companies, Lenovo has embarked upon a quest
for international importance. Since 2001, Lenovo has adopted a business strategy of
focusing on high technology, service, global marketing, and diversification of products
and services. With the expansion into the overseas markets in addition to its home base
of China, Lenovo plans to gain 25 to 30 percent of its sales from overseas markets in
three or five years.
For Lenovo, global competition requires new strategies. Lenovo differs from
China’s prototypical top-down, price-cutting, grow-at-any-cost monolithic organization
because it focuses on profits, and not simply volume. Unlike other SOEs, management at
Lenovo understands that the company’s success is not guaranteed by the Chinese
government. Instead, the company rallies behind the philosophy of providing users with
the best services. Foreign competitors, such as Dell, Hewlett-Packard, and IBM have
made inroads into Lenovo’s territory. Dell, in particular, has been rapidly gaining market
share in China (about seven percent), Japan and other countries by applying the same
formula that made it so successful in the U.S.: managing lean supply and distribution
chains to assemble reliable, competitively priced computers on order and delivering them
quickly. Lenovo’s predicament highlights the growing pains facing other Chinese
18
companies (e.g. Haier, China National Tobacco Corporation) as they strive to become
global players while defending their market share from foreign rivals.
Management has already taken some of these lessons to heart. In its effort to
expand globally, Lenovo realized that it must re-brand itself. The company’s original
name, Legend, had many conflicts with products already established under the name
“Legend.” In April 2003, Legend changed the name of its computers to Lenovo. In
March 2004, Legend changed the name of the company to Lenovo Group Limited. The
change has not been easy; the company invested 20 percent more on advertising to build
a unique and popular English brand name.
Hoping to mimic Samsung’s overwhelming success in global brand recognition
(Samsung saw a rise of 311 percent in sales in the U.S. after the Seoul games), Lenovo
has signed an agreement to be the exclusive computing technology equipment and service
provider for the 2006 Turin Winter Olympics and the Beijing Summer Olympics in 2008.
Lenovo’s president Yang Yuanqing predicts that the investment in brand and
international image will have a reasonable return. The sponsorship will include supplying
desktop computers, laptops, servers, desktop printers as well as funding and technical
service. To illustrate the scale of this commitment, Lenovo will install 4,500 computers,
500 servers and 500 portable PCs for the 2006 Turin Olympics. To sponsor both Olympic
Games will cost the company approximately USD $65 million to USD $ 80 million.
In August 2004, Yang Yuanqing, Lenovo’s CEO, indicated that Lenovo was
changing its strategy to actively pursue initiatives focusing on its core businesses and
building a more customer focused sales organization. Lenovo’s corporate IT group and
new PC products targeted for educational and government markets have penetrated their
markets. The sales organization has been restructured to permit Lenovo to develop
stronger ties with local townships across China.
Conclusions
The strategies and management initiatives that apply to Lenovo are clearly important
models for other Chinese firms as well. Though most PRC firms strive to make a profit,
they also are driven by longstanding government initiatives: providing jobs, producing at
high volumes, and protecting the existing status quo. Using the Hambrick and
Fredrickson model, we have been able to illustrate how Lenovo’s top management team
19
must focus their business strategy to remain a competitor in the PC marketplace. More
important, this strategic model points out some critical strengths and weaknesses of
Chinese companies in general. Other Chinese companies aspiring to sell brandedproducts on a global basis face many of the same issues that confront Lenovo. Yet, they
may have an even tougher time as foreign companies begin to produce and sell in China
in earnest. Even Lenovo now faces the prospect of intensified competition on its home
base. Dell, IBM, and Hewlett-Packard are aggressively marketing their products in
China and establishing manufacturing facilities to achieve low cost. Lenovo’s guanxi
initially generated business connections that foreign competitors could not match. Guanxi
is grounded in trust, mutual obligations and shared experiences. The concept traces itself
back to ancient Chinese social customs wherein reciprocity and mutual obligations were
used to build and maintain interpersonal relationships throughout society. Other
companies are increasingly adept at applying guanxi to build their own relationships,
many with Chinese companies that are looking for current OEM relationships to bridge
into future global ambitions. While guanxi is still an important part of China’s cultural
heritage, Lenovo must focus on its manufacturing and marketing competencies if it is to
remain competitive.
20
SELECTED BIBLIOGRAPHY
For a good explanation of the importance of Confucianism and the role of the Chinese
government in business, see W. Mobley, “Special Issue on Leadership Challenges in
Asia,” Organizational Dynamics (2004): 1-109, and M. Chen, Inside Chinese Business: A
Guide for Managers Worldwide (Boston, MA: Harvard Business School Press, 2001); J.
Walsh, E. Wang, and K. R. Xin, “Same Bed, Different Dreams: Working Relationships in
Sino-American Joint Ventures,” Journal of World Business 34 (1999): 69-93; J. Child.
Management in China during the Age of Reform (Cambridge: Cambridge University
Press, 1996); and P.Williamson and M. Zeng, “Strategies for Competing in a Changed
China. MIT Sloan Management Review (summer 2004): 85-91.
For work on business strategy, see D. Hambrick and J. Fredrickson, “Are You Sure You
Have a Strategy?” Academy of Management Executive 15, no. 4 (2001): 48-59. Also see
D. Lei and J. Slocum, “Strategic and Organizational Requirements for Competitive
Advantage, Academy of Management Executive, in press.
To read about Lenovo, see A. R. Gold, G. Leibowitz, and A. Perkins, “A Computer
Legend in the Making,” McKinsey Quarterly, no. 3 (2001): 73-83; P. Coombes and M.
Watson, “Corporate Reform in the Developing World,” McKinsey Quarterly no. 4 (2001):
89-92; P. Gao, J. R. Woetzel, and Y. Wu, “Can Chinese brands Make it Abroad?”
McKinsey Quarterly, Special Edition (2003): 3-13; T. Hout and J. Hemerling, “China’s
Next Great Thing, Fast Company, March 2004, 15-24; C. Hutzler. ”Computer Maker’s
Woes Reflect the Heat Felt by Chinese Manufacturers,” Wall Street Journal, 28 June
2004, http://online.wsj.com/ar; and the SinoCast China Daily News, a newspaper that
prints stories about Chinese manufacturers.
21
Biographies
Jerry Biediger is vice president of finance for Transport Industries, L.P., a provider of
transportation and warehousing services. Biediger is a C.P.A. and holds a B.B.A. from
the University of Texas, Austin and an Executive M.B.A. from the Cox School of
Business, Southern Methodist University.
Tracy De Cicco is a sales operations manager for IBM. She has been with IBM for more
than seven years. She finished her Executive M.B.A. in the Cox School of Business at
Southern Methodist University in 2004, majoring in management.
Timothy Green is a consultant for Attentus Solutions and holds a B.A. from Wright
State University and an Executive M.B.A. from the Cox School of Business at Southern
Methodist University.
Greg Hoffman holds a B.A. from the University of New Hampshire, a J.D. from the
University of Louisville, and an Executive M.B.A. from the Cox School of Business at
Southern Methodist University. He is a regional sales manager with Thomson West, a
global integrator of legal information and technology solutions.
David Lei is an associate professor of business policy in the Cox School of Business,
Southern Methodist University. He is author of Strategic Management and more than 40
journal articles in the area of business strategy and technological change.
Karthik Mahadevan is a senior consultant in the supply chain operations practice at
IBM. He has consulted with companies in the semiconductor, telecommunications,
electronic and aerospace industries in the areas of business process improvements and
strategic initiatives. He holds a B.S. in mechanical engineering from PSG College of
Technology in India, an M.S. in industrial engineering from Arizona State University and
an Executive M.B.A. from the Cox School of Business at Southern Methodist University.
22
Jane Ojeda is executive vice president and chief financial officer (CFO) of Fritz-Pak
Corporation, a global manufacturer of concrete admixtures. She holds a B.S. from
Oregon State University, a Ph.D. from Texas A&M University, and is completing her
Executive M.B.A. from the Cox School of Business at Southern Methodist University.
John W. Slocum is the O. Paul Corley Professor of Organizational Behavior at the Cox
School of Business, Southern Methodist University. He is the author of more than 25
books and more than 130 journal articles. He consults with organizations in the areas of
human resource management.
Kyle Ward is currently working through the Officer Development Program at Southwest
Bank of Texas in Houston. He has worked at Trammell Crow Company, Grubb & Ellis,
and CB Richard Ellis in corporate real estate before accepting his latest assignment. He
has an Executive M.B.A. from the Cox School of Business, Southern Methodist
University.
23
24