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CASE

ANALYSIS - SYNOPSIS

Ruiqi Feng
Tingting Li
Shanshan Wu
Yang Xu
Junjie Zhu

BUS 478 D600


Professor: Jerry Sheppard
March 14, 2014

FIRM HISTORY
The predecessor of the legend group is the New Technology Development Company, which was
founded by eleven computer scientists with the leader Liu Chuanzhi in 1984 (Ingram, 2007). The initial
start-up capital of US$25,000 was funded by the Chinese Academy of Sciences. In the second year, a
breakthrough invention of circuit boards by the Legend group enabled IBM computers to process Chinese
characters (Ingram, 2007). The technology also won the highest National Science-Technology Progress
Award in China (Lenovo, n.d.).
In late 1990s, the Legend was forced to go abroad because they did not have a PC manufacturing
license from the Chinese government. It chose to enter Hong Kong in 1988 (Lenovo, n.d.). Since then, the
Legend started to manufacture and build PC under its own brand (Ingram, 2007). With a healthy
management, strong brand recognition and growth potential, the legend group decided to go public in
Hong Kong to raise capital in 1994(Ingram, 2007). In 1995, the first server under legends name was
introduced. In 1996, The Legend possesses the biggest market share in China for the first time and
became the top PC vendor in the Asia-Pacific region three years later.
In order to match the competition with major global players like Dell, legend decided to go
internationally through powerful investments in 2000. Meanwhile, Legend changed its name to Lenovo
and designed a new logo to build its brand awareness while expanding into the oversea markets (Lenovo,
n.d.).
In 2005, Lenovos acquisition of IBM's Personal Computing Division made its revenue almost
quadrupled in that year and became the third largest PC maker in the world. By taking advantage of the
Thinkpad brand, Lenovo successfully established its foothold in the global PC market. After that, Lenovo
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started its aggressive international expansion in the PC market. Lenovo also improved its brand awareness
by supporting global events such as the Olympic Games and Shanghai Expo (Lenovo, n.d.).
To better satisfy customers need, Lenovo launched the Idea brand in 2008, optimized for
entertainment and multimedia. Mobile Internet Digital Home (MIDH) business unit was formed in 2011
to capture the growing demand in consumer devices such as smartphones, tablets and smart TV. Well
balanced product portfolio and low price advantage contributed to Lenovos success in global expansion
(Lenovo, n.d.). In 2013, it surpassed HP and became the worlds largest PC maker (Montlake, 2013).

ENVIRONMENT
General
Demographic
Asia consists 60% of the world population, however, its showing a slower growth rate due to
China and Indias low fertility rate. In North America, fertility rate declines during the economic
recession and immigration is the major source for population growth in this region (PRB, 2013).
Expectations for growth will be found in Africa. Due to the one-child policy, population aging is
raising concerns in China.
Political
Although Chinese export tariff of IT industry has decreased since it joined WTO. Most IT
products will still have to pass customs verification before enjoying lower tariff rates (China Briefing,
2011).

Due to the possibility of dual usage of IT products, various complex import restrictions are also placed on
this industry by different countries. Environmental laws require firms to comply with the energy
consumption standards. Regulations on data protection, copyright, patent and intellectual property also
adds the complexity to the business.
Economical
Emerging markets are showing double-digit growth. International Data Corporation (IDC)
predicts that the worldwide IT spending will increase by 5% in 2014. IT spending will be marginally up
while the US and Japan spending marginally down (Columbus, 2013). Increasing labor costs in China,
where Lenovos manufacturing factories are based, made it to be less favorable to manufactures (The
Economist, 2012). Disposable income increased over the past few years, notably, it was up by 10% in
Beijing in 2013 (Global Times, 2013).
Social-cultural
As the education level and living standards advanced, demand for high-tech products keeps
growing for both working and entertaining purposes (Communist Party Learning, 2009). The customer
base of the PC market is no longer dominated by business people. College students represent a
considerable portion of the total demand. Schools are being more heavily equipped with high-tech
facilities. On the other hand, schools are increasing their emphasis on computer skills education to young
children (Mehra, 2008). Shift in consumers preferences towards tablets lead analysts to project tablets to
make up 50% of the PC market in 2014 (Canalys, 2013).

Technological
According to the "2009 China Internet Conference", China has built the world's largest Internet
infrastructure. All cities and 95.6% towns are connected to broadband (Peoples Daily, 2009). Cloud
computing is expected to grow rapidly in the next few years. Spending on cloud services and the
technologies will enable these services to surge by 25% in 2014, reaching over $100B (Columbus, 2013).

Industry
Threats from New Entrants- Moderate
The large capital investment presents a considerable barrier for new entrants. Difficulties of
achieving economies of scale from large production and broad product offerings restrict new entrants
ability to cut cost, hence placed them in a disadvantage in the price competition. Late comers can grab
customers attentions by differentiating their products. However, finding a competitive edge is a great
challenge for all firms.
Threats from Substitutes- High
Smartphones, game consoles and tablets are incorporating features that are traditionally limited to
PCs (Global PC, 2013). They have become a big threat to the PC industry. Besides the specializations
they each possess, portability and accessibility also add advantages to these substitutes.
Threats from Buyers- Moderate
The buyers group ranges from individual consumers to large-scale corporations. Though their
demand varies, the reliance on technology is very strong. For corporations who demand specialized
computers, the market is limited, thus consumers power is constrained. For the mass consumer market,
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most buyers have little knowledge about high technology; therefore, they are easily induced by other
non-technical attributes. This gives companies a broader field to find their competitive advantages.
Threats from Suppliers- Moderate
In PC manufacturing, companys threats from suppliers are different. For components that are
specialized and are dominated by few suppliers, those suppliers have a bigger bargaining power over the
manufacturers. For standardized components that can be easily acquired from multiple suppliers, the
manufacturers have more power than suppliers.
Competitive Rivalry- High
In this rapidly changing industry, companies have to differentiate themselves from competitors
and constantly innovate due to the short product life cycle. In addition, brand equity is one of the
important factors for large corporations to compete with each other. Those small organizations can only
compete through prices and features since they do not have high brand recognition to attract consumers.
The large organizations compete on their brand equities because of the difficulty in product
differentiation.

CURRENT SITUATION
Mission
The companys stated mission is:
Our mission is to become one of the worlds great personal technology companies
(Jurevicius,2013).

In the 2013 mission statement, Lenovo wants to become the global technology giant and this
objective clearly guides the employees and executives to operate within the company. In order to
become a global technology giant, customer satisfaction and quality of products are the most critical areas
Lenovo needs to work on. Therefore, guiding by this mission statement, employees will be encouraged to
satisfy consumers and improve the quality of products.
Financial Performance
Based on Lenovos annual report from the past five years, it is discovered that the net margin
increased continually from 2009 to 2013. The 2013 net margin was the highest compare to previous years
net margin. However, the net margin in the industry of computer services was 6.85% in 2013 (Damodaran,
2014). Therefore, even though the net margin has increased within the previous five years, Lenovos net
margin is still very low compared to that of the industry. The following table includes net profit and
revenue that retrieved from Lenovos annual reports.
Table: Net Margin of Lenovo from 2009 to 2013 (US dollars)
Year of Annual Report

Net Profit

Revenue

Net Margin (Net Profit/Revenue)

2013

631,592

33,873,401

1.865%

2012

475,416

29,574,438

1.608%

2011

273,236

21,594,371

1.265%

2010

129,368

16,604,815

0.779%

2009

(226,389)

14,900,931

-1.519%

Products and Markets


Lenovo develops, manufactures, and markets technology products and services. It is one of the
leading providers of PCs. Enterprises and consumers are the two markets that Lenovo serves. Lenovo has
its operations in four geographic regions: China (43%), APAL (Asia Pacific and Latin America, 20%),
EMEA (Europe, Middle East and Africa, 22%) and North America (15%) (Lenovo annual report, 2013).
The product segments of Lenovo include notebook computer, desktop computer, mobile Internet
and digital home (MIDH), and other personal technology products and services. Specifically, the
notebook computer product segment mainly offers laptops and notebooks. The three lines of laptops and
notebooks are ThinkPad, IdeaPad, and Essential. The desktop computer product segment offers desktops,
all-in-ones PCs, and workstations. Lenovos PC segment offers the same three lines as notebook segment.
Moreover, the MIDH group creates mobile internet-focused devices, such as smartphone and tablet
(Global PCs, 2013).
PC+ Evolution
As the PC market has changed, including the decrease of profits from PC market, and the changes
of consumers lifestyles, Lenovo has also transformed itself for the PC+ era, which includes PCs,
smartphones and tablets. In 2013, Lenovo was number three worldwide in PC+ and will continue to
invest. The MIDH group grows rapidly and accounted for 9% of Lenovos overall revenue for only two
years operation. In order to continue growth in the PC+ market, Lenovo completed several key M&A
activities: CCE in Brazil, for consumer technology products; EMC in the U.S. in servers and storage; and
Stoneware in the U.S in cloud computing (Lenovo annual report, 2013).

Acquisition of IBMs Low-end Server Business


On January 23, 2014, Lenovo and IBM entered an agreement that Lenovo acquire IBMs x86
server business. The purchase price is approximately US$2.3 billion, approximately two billion of which
will be paid in cash and the remaining in Lenovo stock (Lenovo plans to acquire IBM's x86 server
business, 2014). This acquisition would increase Lenovos share in the server market to 14% from 2%,
and ultimately help Lenovo extend its PC+ strategy. Before 2005, Lenovo was a domestic PC brand in
China. Everything changed after Lenovos purchase of IBMs PC business in 2005. This acquisition
became the springboard for Lenovo leap to the top of global PC maker rankings (Carsten & Chatterjee,
2014). In 2013, Lenovo became the leading player in the global PCs market with a 17.7% share (Global
PCs, 2013). According to this, the market estimates that Lenovo will enjoy similar success with its latest
acquisition.
Acquisition of Motorola Mobility
Just a few days after announcing an acquisition of IBMs low-end server, Lenovo announced that
it has signed an agreement to buy Motorola from Google for US$2.91 billion (Lenovo to acquire
Motorola mobility from Google, 2014). This agreement will significantly strengthen Lenovos position in
the smartphone market. In addition, the biggest benefit of Motorola for Lenovo is the footprint in the US
market. Ultimately, Lenovo complements its strong, fast-growing smartphone business in emerging
markets around the world and achieves its PC+ evolution.

STRATEGIC CHALLENGES
Relatively Low Profit Margin
Lenovo surpassed Hewlett-Packard to become the worlds biggest supplier of personal computers
and was the only one among the worlds top five suppliers of PCs that increased shipments for the whole
of last year (Bien Perez, 2014). Even so, Lenovo still has lower profit margin compare with its main
competitors. In 2013, Lenovos profit margin was 2.36%, meanwhile, HP was 5.8% and Dell was 4.99%.
There are two main reasons that lead to the low profit margin for Lenovo. Firstly, PC industry is a
declining industry because the profit is decreasing over the time. Profits per PC for those big companies,
though, have dropped from US$15.71 in the beginning of 2010, or 2.6% of the selling price, to US$14.87
in the autumn of 2013 (Charles Arthur, 2014). A more surprising fact is that Apple only owned 5% of the
worldwide PC market, but they made 45% of the profit in the 2012 while Lenovo was 6% (Horace Dediu,
2013). Although Lenovo gains the most market shares now, the profit margin is low. Secondly, Lenovo
focuses on emerging market and employs low price strategy to occupy the market shares because of the
relative lower purchase power in those areas. Low price has a significant influence on Lenovos profit
since the profit space is reduced.
Weak Global Brand Awareness
Lenovo is the number one computer maker in the world. However, when it comes to overall
brand awareness and consumer affinity, it trails rivals. Lenovo has yet to crack Interbrand's annual Top
100 global brand list, while some of its chief competitors, such as HP and Dell, have been on the list for
years (Beth Snyder Bulik, 2012). There are three causes of this situation. Firstly, foreign consumers may
have a stereotypical notion that Chinese brands are cheap and have low quality. This impression may
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negatively affect Lenovo, especially when the competitive strategy of Lenovo is relatively low price.
Secondly, Lenovo became a global brand after acquiring IBMs personal computer business and it was
only 10 years ago. The acquisition strategy truly accelerates the speed of Lenovo to become a global
player. Lenovo quickly raised its brand awareness, customers confidence and market penetration in the
world. However, in this highly competitive market that is dominated by innovative players like Apply and
Samsung, Lenovos cost leadership strategy leads to a less effort spared on product differentiation.
Lenovo lacks reputation of being innovative. The relatively low brand awareness will be a big challenge
for Lenovo to establish a solid foothold and expand other business segments in newly entered markets,
such as the U.S.
Margin Pressure in PC + Market
Lenovo employed PC+ strategy in 2012 to the profit margin in PC industry is scarce. Instead of
a post-PC era, Lenovo believes there will be a PC+ era in which PC is no longer the only Internet-access
device, but is still critical (Rik Kirkland, 2013). In order to clear its plan to attack PC+ market, Lenovo
will soon divide its business into four groupsPCs, mobile, the cloud and enterprise in April 1, 2014.
Moreover, after acquiring Motorola from Google, Lenovo combined with Motorola would have 6% share
in the smartphone market and become the number three smartphone player in the world (Josh Ong, 2014).
However, Lenovo still suffers margin pressure in smartphone segments. In 2013, Apple claimed 87.4% of
phone earnings in the fourth quarter, while Samsung took 32.2% of industry profits (Matthew Yglesias,
2014). The numbers add up to more than 100% because Apple and Samsung combined generated more
profits than other competitors losses. The same condition also occurs in the tablet market. Apple,
Samsung, and Amazon are at the top of tablet market. Apple had 33.8% of the tablet market share last
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quarter in 2013, while Samsung had 18.8% and Amazon had 7.6 %( Dara Kerr, 2014). Apple dominates
the premium product in the market which has the most profit space. Lenovo can only struggle in the
low-end tablet to generate low profits.
Stable but Conservative Strategy
Lenovos conservative strategy ensures a stable operation of the company, but restricts its growth
potential. The strategy of Lenovo is generally considered as Buy a big name brand. Move it to China.
Drop the costs and export. Repeat (Dana Blankenhorn, 2014). This can be exemplified by Lenovos
recent US$2.3 billion purchase of IBMs low-end server business. Standardized products in the server
market push companies to compete on price, therefore negatively affects the overall profitability (Alex
Barinka, 2014). For IBM, who profits from offering cutting edge technologies, this is a good deal because
the x86 servers are no longer differentiated. From Lenovos perspective, adding the server unit to its
portfolio presents a greater market share. Lenovo can utilize its strength in cost control and process
management to find a fortune in the standardized server market. Since the server is still in the growing
stage of its life cycle in China, Lenovo can bring x86 back to its home country and take advantage of its
well-established distribution channel and efficient supply chain management to profit from it. Lenovo
always enters into a mature market as a second mover and gains market share using its cost control
strategy. Although Lenovo can gain the market share gradually, the profit margin is still low as can be
seen from its 2013s financial report. Not every company can be Apple, but at least, Lenovo can be
inspired by how Samsung went from a manufacture to a leader in technological innovation.

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