Strategic Analysis Of Lenovo Computing Company Commerce Essay

Lenovo, the Chinese name means “association” or “connected thinking” but can also imply creativity. As per the reports of date, Lenovo is the fourth largest word’s PC makers. Lenovo Group is engaged in the manufacturing of personal computers (PCs) related IT products, and services. The group also provides a range of notebook computers, desktop computers and mobile handsets, computer accessories and upgrades, computer software and services, which includes services for small, medium and large businesses. The Company is building exceptionally engineered personal computers. The business model of the Company is built on innovation, operational efficiency and customer satisfaction as well as a focus on investment in emerging markets. The company established through Group’s acquisition of the former IBM Personal Computing Division. The company has strategy that develops, manufactures and markets reliable, high-quality, secure and easy-to-use technology products and services worldwide. The business model is: Innovation, Customer satisfaction, Sustainability and operational efficiency.

The group recorded revenues of $14,590.2 million during the fiscal year ended March 2007, an increase of 9.9% over 2006. The group’s performance was driven by strong growth in the notebook computers in consumer and small enterprise segments. The operating profit of the company was $194.7 million during fiscal year 2007, an increase of 74.3% over 2006. The net profit was $161.1 million in fiscal year 2007 compared with $22 million in fiscal 2006. Lenovo is targeting a bigger bite into the consumer and small & medium business (SMB) segments to tide over slowdown in commercial PC sales in the last fiscal year.

The Chinese company, which acquired IBM’s PC division in 2005, has predominantly been positioned as an enterprise-level player. The Company is making new ‘protect and attack’ approach to drive profitability and growth. The company is protecting market share in China and bolstering profitability in enterprise business will also be attacking new growth segments such as consumers and SMBs.

LENOVO – STRATEGIC ANALYSIS

Chronologically, Lenovo history can be described as follows:

During the year 2005 Lenovo completes the acquisition of IBM’s Personal Computing Division, making it a new international IT competitor and the third-largest personal computer company in the world. Lenovo establishes a new Innovation Center in Research Triangle Park, N.C., to enable customers, business partners, solution providers and independent software vendors to collaborate on new personal computing solutions.  Lenovo introduces the industry’s thinnest, lightest and most secure Tablet PC, the ThinkPad X41 Tablet.  

During the year 2006 Lenovo introduces the first dual-core ThinkPad notebook PCs, improving productivity and extending battery life for up to 11 hours. Lenovo technology flawlessly supports the 2006 Olympic Winter Games in Torino and Italy.  The first Lenovo-branded products outside of China debut worldwide. Lenovo has used the services of the Researchers, scientists and product design teams from around the world combine Lenovo’s heritage in enterprise and consumer PC technology to  design the Lenovo 3000 product line, which features new desktop and notebook models specifically designed to provide worry-free computing to the small business market segment.

To survive and succeed in the global business environment, Lenovo has no choice but to become an international firm in the PC business. With China joined the WTO, Lenovo surely would lose its advantage of government intervention (tariff or other restriction of other PC companies, ex. HP, IBM) to ensure its market share and profitability in Chinese Market. Lenovo’s market share of 30% in 2001 was number one in the Chinese market, but Dell computer, upstarts, as well as PC clones also posted strong challenges to its leading market share. Lenovo needs to expand to the worldwide market that it didn’t have. With the acquisition of IBM PC division announced in December 2004 gave Lenovo a great opportunity to expand its territory outside Asia. To leverage this great acquisition, Lenovo needed to establish itself as an international company that could convert itself from a PC brand was little known globally to a company that not only can succeed in innovation to carry the legendary Thinkpad brand but also reinforce its strengths of an innovative PC brand that’s highly efficient.

IBM allowed Lenovo to use its logo for its PC products (Laptop and Desktop) for 5 years, but Lenovo only used IBM logo on its Thinkpad series. The only association between Lenovo and IBM was the IBM logo on its Thinkpad brand names. It is very clear that Lenovo was trying to build its own master brand using synergy approach. Its strategy was to secure the loyalty from Thinkpad current owners and potential buyers by contracting IBM for service and attached an IBM logo to ensure customers that Thinkpad would be in good care event with changing of the ownership. As per their strategy, Lenovo distanced itself from IBM for the purpose of establishing its own master brand with the help from Thinkpad sub-brand. This is a good decision for Lenovo to act and move quickly part with IBM. There were several reasons for this separation,

1) Lenovo needed to develop itself as an innovative company. One example cited by the paper was the announcement Thinkpad Z60, that was viewed as the innovation by IBM not Lenovo in April 2005.

2) US PC market/Global PC market were dominated by Dell, HP, IBM was not the key player in this PC market.

3) IBM was moving into service sectors, the PC sector was not as favourable as a profitable business.

4) The reason for Lenovo’s acquisition of IBM PC division was not only for the IBM brand but for the global PC channels as well as its flagship Thinkpad notebook computer.

These reasons explained why the use of IBM logo was on the Thinkpad. This is the right move since IBM’s brand in PC was not the dominated factors besides Thinkpad. Though without using IBM’s logo or brand name more, Lenovo lost the opportunities to keep IBM’s current customers and potential buyers in the short term trends and wanted to compete with a perceived better brand that is more efficiency and innovative in Lenovo if established. Lenovo took a short term risk for a long term gain. It was thought use the combination of marketing/branding efforts to create a position impression of a better new master brand of both efficiency and innovation with the help of Thinkpad sub-brand.

Lenovo brand is used to target a specific customer sector. This product as Lenovo defined was the product that would for small business owners. With the computer technologies changing so fast, and missing step would create disaster for a PC product. The use of different names, Lenovo would have the options to create differentiated product lines with their own characteristics. This approach would preserve the brand power of Lenovo and can meet diversified customers with a broad expectation if needed. In its first launching of new product besides ThinkPad, Lenovo should have use “names” instead of numbers.

To improve the market share, to cover up the previous year down fall and to improve the brand image the Company has made strategies for different countries. For example for India the CEO has directed to follow a four-pronged strategy to make inroads into the consumer market. It has created a new leadership team to handle the market; would build a “commitment and ownership culture” among the leadership, create the right product portfolio and put together a sophisticated channel strategy to increase Lenovo’s share of volume with channel partners. The company has a presence in 350 Indian cities now and is aggressively targeting to expand its footprint to 580 districts. The Company has plans to increase the number of stores to 250 this year. The top management is of the view that they can replicate the China model in India for success. Under this plan the company will undertake dual business model where they will serve enterprises and government customers as well as SMB. The company has planned to adopt a differentiated manufacturing, sales and marketing, besides services approach, which will be different from the peer group and competitors.

COMPANY’S BUSINESS IN UNITED KINGDOM

The Company is operating in more than 60 countries and are dedicated to serving the needs of customers, investors, employees and local communities. The company’s performance in United Kingdom was also affected during the previous year. It is pertinent to mention that SOHO is an area of the City of Westminster, and the central business district of the West End of London, England. It was established as an entertainment district, for night life and film industry. Since the early 1980s, the area has undergone considerable transformation. It now is predominantly a fashionable district of upmarket restaurants and media offices. To improve the market share the company made strategy to promote the product using Voluntary Service Belfast (VSB) and SOHO. In addition to the above the consumers in the UK can now buy direct from their website (www.lenovo.com/shop/uk). This strategy of the company has enabled the Company and marketed for new customer segment for Lenovo product in UK. The company found it additional method of marketing to complement its traditional indirect route to market. Using the new web shop, Lenovo customers can configure a maximum of five PCs which are built to order and delivered within 10 working days. Customers will be able to select from latest IdeaPad S10 Netbooks, as well as a range of ThinkPad and ThinkCentre PCs and accessories. Visitors who register for special offers will also receive extra discounts on future orders. As per media reports 16 percent of UK PC sales to homes and SOHO are direct. This is one of the methodologies used by the Company in UK which has resulted Lenovo web shop expands horizons beyond the traditional SMB customer base into the homes and offices of the SOHO, VSB and consumers. This direction has enabled the Company to add to the existing indirect sales through channel business partners. This move is not considered as contradiction to the indirect route to market, it is used to offer customers more choice and expanding the customer base. The Channel sales strategy getting the same importance for the company. The Company estimates higher demand for both direct and indirect marketing channel. The customers are benefitted with more discounts through business partners for the Customers making indent to purchase more than five PCs & support services. In UK the customer service was not appreciated during the previous year. The same could have impact on the sales. There was negative news about PC’s in UK regarding the usage of toxic chemicals. As per media report in UK: Greenpeace has accused three of the world’s biggest PC manufacturers of failing to live up to their promises to make more environmentally friendly computers. The media reports adds that though Hewlett-Packard, Dell and Lenovo claimed that they have failed to deliver new machines that do not depend so heavily on toxic chemicals. Though HP, Lenovo and Dell had promised to eliminate vinyl plastic (PVC) and brominates flame retardants (BFRs) from their products by the end of 2009 but they were unable to fulfil their commitment during 2009.

FINANCIAL PERFORMANCE

Before we discuss about the decline in financial performance of the Company there is need for awareness of the reasons causing the same as it provides better understanding of the Company. The impact of the global economic crisis in 2008 did not spare anything and has shown its impact in all countries. PC market was equally affected as most of the projects were delayed and the establishments delayed purchase decisions and reduced IT budgets. The second biggest impact was the pricing. As per the universal trend the prices were dramatically reduced which caused low sales turnover and worse impact on profitability. Based on the market reports and trend in purchases it was noticed by the analysts that during FY 2008-09 the PC market shipments decelerated to approximately 4 percent universally. Lenovo being based and established in China it also showed worse impact as PC market in China was slowed down to large extent. The reason was economic crisis, as the volumes of sales of all type of PC’s were impacted during this period. The Levono was not the only company to show the deteriorating trend. Third main reason for the decline in financial performance of the Company was their inadequately worldwide transactions segment outside China, in particular the consumer market. It was a fact that Lenovo reported lower-than-market growth in the worldwide PC shipments, which only increased by approximately 2 percent year-on-year. The reasons are the same as reported above in the paragraph.

In view of the above mentioned facts the market share of the Company decreased slightly to 7.6 percent, ranking No. 4 worldwide during the fiscal year (earlier it was reported to be third). In value terms, the Company’s overall sales for the FY 2009 decreased by 9 percent year-on-year to approximately US$14.901 million. In value terms, gross margin performance was severely affected due to decline in pricing. The gross margin (excluding one-off items) for the FY 2009 declined to 11.9 percent from 15.0 percent while gross profit (excluding one-off items) decreased 27 percent year-on-year to approximately US$1,779 million. Taking into consideration all these factors the Company has undertaken a global resource restructuring plan in January 2009 to reduce costs and enhance operational efficiency. The Company was compelled to take decision to reduce the staff strength. These actions of the company were undertaken in anticipation of annual savings of approximately US$300 million. Despite Lenovo’s efforts to control expenses during FY 2008-09, the decline in sales and pressure on gross margin resulted in 95 percent year-on-year decline in our profit before taxation (excluding the cost of restructuring actions and one-off charges) to approximately US$29 million for the year.

The company’s worse financial performance caused loss to shareholders of approximately US$226 million. The company had to incur cost of 116 million dollars in the fourth fiscal quarter and a one-off items charge of 71 million dollars for undertaking restructuring. The above results are in comparison to profit attributable to shareholders (including US$20 million net profit from discontinued operations) of US$484 million in the previous fiscal year. There was change in top management in the Company after decline in financial performance. The shake-up follows its first quarterly loss since 2006.

As mentioned above the Company operates in large number of countries. The impact of slowdown was different in each country due the conditions prevailing therein.

China accounted for approximately 43 percent of our overall sales in FY 2008-09, continuing to be the largest sales contributor. The growth of the China PC market was negatively impacted by earthquake, floods, softer consumer demand and, later in the fiscal year, the global economic slowdown.

In FY 2008-09, the Americas contributed approximately 25 percent of Lenovo’s overall sales. The PC market in the United States was sluggish, and in particular the commercial segment was hard hit by the economic crisis. The commercial market conditions in the Americas deteriorated significantly in FY 2008-09 as many large enterprise customers delayed their purchase decisions and cut IT spending to reduce costs.

Lenovo enjoyed solid growth in Europe, Middle East and Africa (EMEA) up until the economic crisis hit in the summer of 2008. The Company reported a lower-than-market PC shipments growth of 6 percent year-on-year for FY 2008-09.

The contribution of Asia Pacific (excluding Greater China) during FY 2009 was approximately 11 percent to overall sales. The growth of the PC market in this geography slowed significantly because of the negative growth of the Indian market in addition to the impact of the global economic crisis. Lenovo reported a year-on-year decline of approximately 14 percent in PC shipments for the year. It is to be noted that even though Lenovo achieved the No. 1 position in the education segment in Australia and New Zealand in FY 2008-09, PC shipments was under great pressure in the second half of the year when the market showed marked slowdown.

SWOT ANALYSIS

Strengths

The company is result of the merger of two of the most established companies in technology and business: Lenovo Group in China and IBM’s Personal Computing Division in the United States. In view of this merger the company has unique market possibilities in combining the best of East and West-joining North American and China-based technology players in the creation of a unified global PC leader with growing market positions in developed and emerging markets alike. The company’s greatest market strength is not only market geographies but also the world’s consumer and business PC markets. The sales turnover being wide spread mover so many wide spread geographical countries will not have same economic impact in normal circumstances.

The company is one of the world’s largest makers of personal computers and makes the world’s most innovative PCs. The numbers of products is not limited and with the latest industry scenario manufacture various products taking into consideration Information and Communications Technology (ICT) which is a powerful force for change in the world. The company has involved itself in interconnecting and bringing together many areas and cultures with a profound impact on all facets of the economy, society and the environment. The varieties of products include famous brands like the renowned ThinkPad notebook etc, in a business model based on a concept and strategy.

The company is amongst the top five PC manufacturers and operating in more than 60 countries and providing businesses and consumers in more than 160 countries around the world with innovative products.

The Company has well established global procurement policy. The policy takes into consideration cost, quality, technology and innovation to provide the greatest value to our customers.

The management of the company is multicultural which enables to convene business wherever and whenever it makes the most sense. The company has operations hubs in Beijing; Raleigh, N.C.; Singapore; and Paris; a marketing hub in Bangalore, India; and major research centers in Yamato, Japan; Beijing, Shanghai and Shenzhen, China; and Raleigh, N.C.

The company has 1,700 designers, scientists and engineers, representing a broad collection of nationalities and languages and has demonstrated the technical strengths in delivering a flawless performance that met the unprecedented demand of the Beijing Games. A network of 30,000 pieces of equipment, including desktop and notebook computers, touch-screen devices and printers supported by more than 600 Lenovo engineers. Building on the success of sponsorships of the Beijing Olympic Games, Lenovo has been selected to perform a similar role in providing technology and support for the Shanghai World Expo in 2010.

Weakness

The financials of the company did not improve in the first quarter of the FY 2010 as reported in the media reports. It booked a net loss of US$16.01 million in the fiscal quarter ended in June, compared to a profit of US$110 million a year ago. The company needs to improve the strategies further.

The company had undertaken restructuring in the previous year and even incurred huge expenses but the reorganization did not bring down costs and increase efficiency globally as per the estimates. The business is shrinking by 30-40% but the company retained its basic structure on higher volume and higher scale. The company had to cut down the head count to meet these new scales. Supply chain, service, among others and there is still room to improve; not only to reduce the expense to revenue but also to improve customer satisfaction and overall efficiency of management. The IT system needs further improvement, to review the inventory on a daily basis which allows to react to market competition quickly. The company has comparative weakness in this aspect as compared to other peer group and needs to improve this in the future.

The company has weakness in its channel problem. Despite some of the strongest lines the company has ever had, it is still channel bound, making it difficult for buyers to find the products in retail. The peer group Acer, Asus, HP and Dell have broad netbook lines improved but Lenovo lacks breadth here. It does have an opportunity to have one of the first enterprise-ready netbooks, but the time for that is running out. It needs to executed sharply.

Opportunities

During the FY 2008, Lenovo completed entry into the server market with the launch of the ThinkServer portfolio, which is designed to deliver a better server experience for small and medium business customers. This will improve the company’s market share in future.

The company can utilize its strength of our global work force as an opportunity for future developments. The company has policy of recognition by bringing together employees with different perspectives and experiences which provides opportunities innovation and better decision making, which contribute to our long-term success. As disclosed in previous paragraph, the company has a globally dispersed, multicultural management team with broad expertise that sponsors key culture initiatives.

Threats

The company has undertaken the restructuring and incurred loss in the previous year. The financial performance has not improved during the first quarter of this fiscal year leading to poor financial ratios like return on equity etc. The strategy of the company is yet to be implemented in full for better financial performance and better customer service. If the losses continue the company will take more time to be competitive.

PESTEL ANALYSIS

This analysis is very useful for the company as the new management has made the strategy to enter new markets and use various types of marketing tools to improve the revenue. The company has always been in the system of volume sales and low margins. For example in India the company is now using the marketing methodologies used in Greater China. the assumptions are now being made based on the economic realities of the countries wherein operating. The impact of slow down in the economy is now reversing slowly and it is the best time for the company to reduce the costing and increase the revenue.

The company has made Strategy Committee which is responsible for assisting the board of directors in determining the vision, the long-term strategy and intermediate targets. It also reviews the annual targets of the Company. Being constituted by senior management, the Committee has been made responsible for the assessment of the performance of the Chairman of the Board and the Chief Executive Officer.

The company’s strategy worked in America with improved execution, establishment of an integrated business management system and expansion into the consumer segment. The trend in growth in the Americas’ transaction business space was comparatively better than peer group. It achieved 14 percent year-on-year growth in PC unit shipments during FY 2008-09 by gaining traction in consumer and SMB markets and in Latin America. In Europe, Middle East and Africa, in spite of the challenging market environment, the company stayed focused on enhancing the transaction business model which is volume based.

The company has considered the GDP growth pattern and economic conditions and government policy while estimating the sales revenue. Especially in India and other developing countries and in US the rate of interest fixed by a central banks underwent changes to improve the economy. Such moves of the government policies in China, India and Middle East countries will improve the revenue for the company.

The company has planned to diversify in the companies proposed as partner with as subcontractors. The efforts are to refine the U.S. marketplace and supplier diversity strategy. The management is of the opinion the diversity will increase access to diverse talent, increasing access to a diverse supplier base and supporting entrepreneurship in local communities.

As per the company’s statement: In spring 2009, Lenovo donated computers to Freedom Calls, a project that provides free videoconferencing to soldiers at bases in Iraq. The service enables service personnel to virtually see and speak with their families on a regular basis and participate in parent-teacher conferences. Lenovo is a key sponsor of the Girls in Engineering program and the Global Marathon, which provides education and awareness to encourage girls to consider careers in engineering and technical fields.

Under the environmental management, the company is under process of

Strive to continually improve environmental management system and performance.

Work with supply chain to improve environmental protection and promote the use of environmentally preferable technologies.

Be an environmentally responsible and act promptly and responsibly to correct conditions that may endanger health, safety or the environment.

Provide appropriate resources to fulfil these objectives.

It can be concluded from the PEST analysis that the adequate steps have been initiated by the Company and the prospects of early recovery are brighter. Brand image has been maintained and all the steps for the sustainability have been initiated by the company. The steps are expected to prove fruitful for the overall performance of the group based on the competence, human resources available and the expected improvement in overall economy of the countries which contribute significant share in the overall revenue of the company.

ANSSOF MATRIX

The company’s analysis has been done under SWOT and PEST and even if we consider the Anssof Matrix the conclusion is not different form the earlier mentioned analysis. The company has various products under their umbrella. Notebooks, desktops, workstations, servers, monitors, accessories and upgrades. The existing products are upgraded based on locations and customised as per orders specifications. This has helped the company to keep the brand image and also introduce new products with upgraded technology. The market penetration has been in more than 60 countries and through multiple marketing channels. Market share has been earlier majorly in Greater China and then it was diversified into other Asian Middle East countries. The penetration in US market, UK market using through marketing channels, big shopping malls, stores and entry into France proves that the company has strategy for the future revenue generation.

For market development the company has tried to use various strategies like distribution of used computers and computer parts to Kramden Institute and organizes employees to volunteer in US. In October, at Lenovo’s new fulfilment centre in Whitsett, N.C., more than 130 volunteers worked together to refurbish computers for kids in need. The company also supported institutions such as Opportunity International, Kiva and PlaNet Finance, which bring much needed capital in the form of microloans to entrepreneurs in Africa, Asia, Latin America and Eastern Europe. All these actions enabled the company to penetrate into the market at the grass root level.

Diversification has already been mentioned in the previous paragraphs and the company has not only diversified the products but also the marketing channels. Based on media reporting by the Company: The company formed a strategic relationship with Alibaba, the largest online Business-to-Business (B2B) marketplace, to launch a customized Lenovo eCommerce PC model for SMB in China. In view of the robust growth of notebook demand in China, Lenovo focused resources on expanding leadership in this segment. Lenovo’s alignment of our end-to-end business model, specifically tailored for high-end as well as mainstream notebook segments, resulted in outstanding sales performance of the ThinkPad brand during the year. Lenovo also saw significant improvement in customer acquisition capability via relationship business, particularly in the public sector.

ADVANTAGES OF STRATEGIC ANALYSIS

Diversification of the products as well as the geographical areas. The new markets will be explored and on the basis of the latest strategy the company will be able to improve the revenue as per estimates and avoid losses as incurred in the previous year.

New Marketing channels will be developed and the company as discussed earlier will be able to reach the grass root level. The business strategy of higher volumes will be retained and the margins will show improvement with the reduction in cost.

Brand image will reach the users as per the social programmes being launched by the company in various countries.

Quality control is being strengthened with the introduction of the suppliers policy being implemented strictly and the quality audit and periodical visits to the units of the suppliers is a policy to ensure quality of products.

The company’s strategy to ensure to meet all applicable legal requirements and voluntary safety and ergonomics practices of the countries wherever our products are sold.

Through stringent emphasis on product safety and quality, Lenovo is achieving high customer satisfaction and delivering quality products, solutions and services.

It will ensure higher revenues and profitability and the shareholders value and financial ratios will improve.

With the innovative products the chances of the company to increase the market share seems to be acceptable.

Introduction of training programmes and the establishment of the Lenovo University is the company’s personal educational development initiative designed to give employees the opportunity to acquire core competencies and skills needed for the future, while helping Lenovo retain a competitive global work force.

The strategy of energy conservation efforts will also improve the costing and the gross margins.

As per the company’s statement: Improving energy efficiency is a fundamental element of Lenovo’s strategy to meet its GHG reduction target. Proactive initiatives continue at facilities throughout the organization to reduce energy consumption. During 2008, several energy projects were completed that will provide continued energy reductions over the coming years. More projects have been implemented during 2009.

DISADVANTAGES OF STRATEGIC ANALYSIS

The disadvantage of the analysis in this case is the major contribution of sales to China, Middle East countries and US markets. There are no indications that the strategy as mentioned above has any adverse impact on the company. Moreover, the company has estimated the future revenues in pessimistic scenario and as such nothing specific needs to be mentioned.

RECOMMENDATIONS

The company should target consumer and small & medium business (SMB) segments to tide over slowdown in commercial PC sales.

The customer service needs to be further strengthened as the media reports indicate negative response to some of the complainants.

The retail segment to be strengthened in countries like India which is big market for the PC’s.

New models to be launched globally so that the upgraded technology is available to all segments at one time.

Sales to be improved by using the methodologies doing through microfinance.

The company should support institutions such as Opportunity International, Kiva and PlaNet Finance, which bring much needed capital in the form of microloans to entrepreneurs in Africa, Asia, Latin America and Eastern Europe in other countries also or should have tie up with major lenders in such cases.

CONCLUSION

The company is able to compete with the peer group by upgrading the units, reducing the cost of production and retaining the technical human resources. The company has made various strategies to add to the revenue and increase the profitability. The comparative analysis with the peer group indicates the improved system of procurement, less conservation of energy and the involvement in the social activities. Training the employees is much better than other peer group. Minimum training of eight hours per year for each employee is good standard in such industry. Lenovo also supports an active employee mentoring program. Mentoring relationships are an excellent way to grow an employee’s skills and knowledge in order to develop his or her full potential. Environmental factors and global supply chain system initiated will prove fruitful in long term.