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Building of Global Brand: Lenovo Case Analysis

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Building of Global Brand: Lenovo Case Analysis

Background

Characteristically, the Personal Computing (PC) industry is full of numerous producers, both big and small. However, only less than five of them control about 50 percent of the entire global market. For instance, as of 2004, Dell Inc. led the sector with a 17.9 percent share, followed by Hewlett-Packard (HP) at 15.9 percent. In the same year, the number three producer was the Lenovo-IBM (International Business Machines) annex that had a stake of 8 percent, while Acer of Taiwan and Fujitsu-Siemens each accounted for an approximate 3.5 percent share (Knoop and Quelch 3).

At the turn of the 21st century, most of the companies in this industry were realizing the benefits of consolidation in reducing expenses and in joining forces to produce revolutionary products. As a result, some of them were undertaking acquisitions or mergers to realize the perceived benefits. The first major example of the former is the 2001 HP acquisition of Compaq, one of its bitterest domestic rivals. Similarly, in 2004 Gateway claimed 7 percent of the U.S. market by acquiring eMachines. Besides assuming new business models, many multinationals in the industry spent millions of dollars on innovation, advertising, and other marketing activities to improve their brand. For instance, in 2005 Dell spent $460 million on marketing in the U.S. alone, compared to Lenovo’s $250 million in the entire world.

The Lenovo-IBM Acquisition

As observed from companies that annexed or united, in spite of the many professed advantages accrued to such endeavors, translating into an actual single cohesive unit is usually a tedious exercise.  An archetype of this circumstance is the 2004 acquisition of IBM PC line by Lenovo. The latter agreed to officiate this transaction so that it could expand its global reach, ostensibly after realizing that the domestic market in China and Asia was getting more competitive. Interestingly, it had earlier turned down a similar offer because it hoped to concentrate on the Chinese market where it thought it had a viable advantage.

Many insiders to the new venture that cost the acquirer $1.75 billion claimed that theirs was a match made in heaven. It was a unique but convenient marriage of the West and the East. Indeed, from the onset, their product and client functions seemed to complement each other. Table 1 clearly illustrates the commercial footprints of both players. As a result, Lenovo saw IBM networks as the best avenue to enable it to make inroads into the international market. Additionally, the latter had already made built a reputation in the corporate world where leading PC producers such as HP and Dell Inc. were reaping most of their profits. Therefore, the union promised to g

Table 1

  Lenovo (% sales) IBM (% sales)
Product type 85% desktop 60% desktop
Client base 80 % small businesses and consumers 57% large enterprise/mid-market
Coverage Predominantly China Strong across the world, but weak in China.

 

Key Issues

Integration

After the completion of the deal, the main worry of the new outfit was to search for the best integration formula. Unluckily, the two of them came from two diverse cultures, something that naturally derailed their unity talks. Whereas Lenovo was Pro-Asian, IBM was Pro-West. Consequently, the first task of the management was to find a rapport between the two systems. Finally, they settled to have the headquarters in New York and to use English as their official language. Also, to reflect on the new global image, the management team was restructured and reconstituted to comprise of American, Indian, Australian, and European executives. Most important, though, they all accepted to trust each other and work towards success.

Branding

Companies attach a lot of significance to a brand because they understand that it is a means of cultivating recognition in the dynamic global marketplace. Normally, there are three branding alternatives, namely: master brand, a house of brands, and synergy approach. There is also a fourth strategy that features the integration of luxury and mass market products. At first, there was a dilemma in determining the best alternative to use in the case of Lenovo-IBM. Finally, its directors settled on a Lenovo master brand because of their prominence as visible in the HP and Dell brands. What is more, the other options had idiosyncratic weaknesses that discouraged their use. For instance, the house of brands proved too expensive for the company to implement because its thin profits could not allow it to build and advertise numerous brands.

The Turin Winter Olympics scheduled to take place in 2006 appeared as the best forum where Lenovo could showcase the significance of its brand to the world. In the meantime, it engaged in smaller brand promotional initiatives, such as giving branded computers to needy students via non-profit organizations. In so doing, Deepak Advani, the company’s Chief Marketing Officer (CMO), wanted it to claim the award for a company doing clever things. It also sold product messages through advertisements carried on televisions and in print media. However, the use of the IBM logo in the Olympics worried the administrators because they only had a right to engrave it within products that were of IBM origin.

Supply Chain Management (SCM)

The third major issue that troubled the new upstart was how to streamline its supply chain. Traditionally, Lenovo had got used to dealing with the local Chinese and Asian markets. In fact, efficiency relied heavily on working together in the same workstation. Hence, the new milestone requiring it to operate in over 138 countries concurrently stretched its initial ability to unanticipated volumes. To handle the pressure, the international facilities of IBM acted as an immediate reprieve. Nevertheless, the exact manner of supply chain management (SCM) remained a mirage. After the administrative integration, people working at the various workstations were required to communicate with each other via conference calls. However, this module was very ineffective, especially because of the time distance separating the two parent countries.

Customer Anxiety

Because they came from two different business environments, the two companies had a complete set of loyal customers. Unlike the original Lenovo customers who were less disgruntled by the new development, IBM’s loyal buyers, especially those in the U.S, were very anxious about the future state of the products they cherished. In particular, they were worried about the future of the ThinkPad, a product that had for long lured their allegiance. To stem the possibility of massive exit, the company promised to use innovative ways to improve the product in a way that IBM could not have done. Notably, it released a new design widescreen ThinkPad Z60 with a titanium cover. The new risky move to appeal to customers caused a frenzy that made some of those disgruntled to rethink about the commitment of Lenovo to innovation and quality.

Alternative Courses of Action

  1. Use Lenovo’s original headquarters to gain more dominance on existing tangible customers.
  2. Use the Lenovo master brand exclusively, including on the leading IBM PC products.
  3. Prioritize corporate relationships.

Evaluation of Alternative Courses of Action

Use Lenovo’s original Chinese headquarters

In essence, the Asian markets are the bedrock of Lenovo, largely because it has no comparative advantage in other regions. Therefore, it erred when it decided to relocate its headquarters from China to New York. After spending close to 20 years establishing itself as a leading Asian PC maker, with a 30 percent share of the Chinese market alone as of 2003, it should have used the acquisition of IBM to reinvigorate its dominance in the regional consumer market first. By so doing, most of its activities would have had minimal disruption in terms of trying to coordinate many activities via teleconferencing. Also, it would have been cheaper for it because it was at that time returning a marginal profit of 5 percent on its expenditure. Instead, it should have used the money spent on establishing the new headquarters on a worldwide campaign to popularize itself.

Use Lenovo Masterbrand Exclusively on all Products

Typically, when big companies buy smaller companies, as is the case in HP and Compaq, it is the acquirer who takes it all. Likewise, Lenovo should have swallowed IBM fully. It should have also renamed all the items it gained from the latter, including the ThinkPad, with its own generic names. However, from the case, it is clear that it was fearful of undertaking such a drastic measure. In contrast, it opted for a novice cautious approach that gave it the right to continue including an IBM logo in the acquired products. The repercussions of this irresolute approach came out clear soon after the release of the ThinkPad Z60. Interestingly, some analysts referred to it as an IBM product, when it was in the real sense a product of Lenovo. As a result, the inclusion of the logo was promoting the acquired organization, rather than the acquirer.

Prioritize Corporate Relationships

It is also evident that for the company to succeed in the global retail market, it should prioritize corporate relationships over working with partners. Dell and HP have successfully used the former to gain market leadership, and there is no reason as to why Lenovo should not try it. Even after obtaining the facilities of IBM that relatively increased its access to corporate entities, Lenovo was still skeptic about engaging them. Unlike business partners who rely on shifting transactional trends to determine demand, corporate organizations generate their orders in bulk, and they can be loyal to one provider as long as all the set requirements are met. Besides, at the turn of the millennium, many businesses were embracing globalization that required the installation of computerized networks. As a result, this was the best field to row in the global PC market.

Recommendations

The situation of Lenovo required it to conduct a systematic switch from the Asian market to the global market by first of all strengthening its regional market. However, after purchasing IBM, it seemingly rushed into the global market, leaving the regional market up for grabs. Unfortunately, in the global market it faced two established unequal players: Dell and HP, who were not easy to dislodge. For this reason, in 2005 the company’s market share shrank continuously by a margin of 5 percent and 8.6 percent in the first and second quarters respectively. That is the reason why this paper postulates that the Lenovo should have used the pristine products of IBM to consolidate the Asian market where it had a comparative advantage. If it had done so, it would have actually increased its market share by recovering sections it had lost to small domestic PC producers.

Only after strengthening its regional market share, and improving its profitability beyond the 5 percent mark, should have Lenovo entered the complex global market. Definitely, it is not practical for any entity to operate in 138 countries with such a lean profit. Foremost, it will limit its ability to conduct meaningful advertising, or promotional activities. For example, in 2005, Dell’s expenditure on advertising in the U.S. was nearly 20 times more that of Lenovo. Hence, there is no practical way the latter expected to compete fairly in the same market.

References

Knoop, Carin-Isabel and John Quelch. Lenovo: Building a global brand. Harvard Business School, 2006: 1-28.

 

 

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