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Lenovo IBM Merger

POST GRADUATE PROGRAMME IN MANAGEMENT (EXECUTIVE)-IIM SHILLONG & OCEAN UNIVERSITY OF CHINA

November 30, 2012 Submitted to: Prof. Dawn Liu Submitted by: Prateek Gupta Roll Number: 2012PGX119

TABLE OF CONTENTS
1.
1.1 1.2 1.3 1.4

Background. 2
Background of the Company . 4 The Strategic Alliance with IBM .. 6 The Necessity to Form the Strategic Alliance 7 Motives of Lenovo & IBMs Strategic Alliance .. 8

2.

Analysis of the Strategic Alliance 12


2.1 2.1.1 2.1.2 2.2 Analysis . 12 Problems in early stages of alliance . 12 Measures taken and their Evaluation 21 Measures to Be Taken and Limitations . 24

3. Discussion........................................................................................ 29
3.1 3.2 Theoretical Insights . 29 Managerial Insights . 30

4. Conclusion....................................................................................... 32

2012PGX119

Lenovo-IBM Merger

Prateek Gupta

CHAPTER 1: BACKGROUND

Before analyzing the strategic alliance between these two companies, it is necessary to understand the changing competitive environment for Chinese firms, like Lenovo, in a global context.

As for the liberalization of the world trade and investment environment, many international markets are becoming extremely competitive. In almost every industry, capable competitors no longer confront each other within the national boundary, but more around the globe (Hill, 2005). China is an emerging economy developed at a rapid pace, and it has been experiencing tremendous changes after many economic reforms, which make it become a heated target market for many foreign companies. In the past two decades, China had undergone significant changes from a centrally planned economy to a more market-oriented one, though the benefits derived from being a WTO membership to Chinese economy far outweigh its costs, especially in the long run, reductions of government protection and loss of monopolistic position imply greater challenges to Chinese firms in a global competitive context (Liu et al., 2000). In addition, Chinese government has pushed a Go Out policy in recent years, with the intension to encourage the local companies to develop overseas markets and to acquire the advanced technology and distribution networks, thus, the government holds a very supportive attitude towards the firms that intend to go globally (Dickie and Lau, 2004a). However, the inherent common problem of Chinese company is that they are too rush to go global. The handicap of TCL, Chinas large consumer electronics company, gives a good lesson to learn from. As a pioneer under this Go Out policy to expand its business globally by buying well-known

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international brands, in less than three years the firm has experienced a disorderly treat, and has been forced to shut and sell most of its operations in Europe, which are largely due to its unrealistic objectives, lack of local market knowledge and poor execution (Jonquieres, 2006). As Jonquieres (2006) comments that much of Chinese industrys foreign expansion to date has been for defensive reasons inspired by the fierce competition that drives down prices and margins at home. He further says that as Chinese firms cannot easily respond by innovating and moving up-market, geographic expansion therefore becomes a survival issue. The general aim of the foreign partnership has been to seek access to technology, brands, marketing and distribution networks.

Under these circumstances, many firms in China are compelled to undergo more radical changes and tend to adopt these measures more vigorously as a result of the more turbulent environment and keener incoming competition (Liu et al., 2000). In order to maintain its competitive advantages and profits compared to its rivalries, a firm must make a clear and viable strategic choice with regard to its position at the frontier, and take actions at the operational and strategic level to support this position. This is especially significant and urgent for Chinese firms that are not in monopolistic status and struggling for the global presence as multinational companies. Under this tidal wave of global stretch, Lenovo, like TCL, becomes one of the pioneers in China. Moreover, it is said by Joseph Ho, analyst at Daiwa Institute of Research, that, Lenovo was a lot more ready than TCL when it did the IBM deal. Its management is more open-minded and determined (Lau and Dickie, 2006).

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1.1 Background of the Company


Lenovo Group is one of the leading IT companies in China, and it has now become the 3rd PC provider in the world market after the acquisition of IBMs Personal Computing Division. As a global company after the alliance with IBM, it has a number of more than 19,000 employees worldwide; and with executive offices in Raleigh, North Carolina, USA; Beijing, China; and Singapore (Lenovo.com, 2007a). The companys main operations are in Beijing, China; and Raleigh, North Carolina, USA, with an enterprise sales organization worldwide (Lenovo.com, 2007a). As the largest PC producer in China, it took 27 per cent of Chinas PC market share in 2003 and Lenovo PCs ranked No.1 in the Asia Pacific (excluding Japan) with a market share of 12.6 per cent in that year (Peoples Daily, 2004). Since the year 1996, Lenovo has maintained its leadership position in China for ten consecutive years with over 25 per cent market share till 2006. The following is a brief development history of the company:

The company was first founded in 1984 by 11 computer scientists in Beijing, China, as the New Technology Developer Inc. (the predecessor of the Legend Group), which thereafter opened the new era of consumer PCs in China (Lenovo.com, 2007b). In 1989, Beijing Legend Computer Group Co. was established and launched its first PC in the market in the following year, since then, the name Legend became a household name in China (Lenovo.com, 2007b). By 1994, Legend was trading on the Hong Kong Stock Exchange, becoming one of the few Chinese companies that listed there (Lenovo.com, 2007b). In 1996, Legend became the market share leader in China for the first time and kept with the line thereafter and three years later, it became the top PC vendor in the Asia-Pacific region and headed the Chinese national Top 100 Electronic Enterprise ranking; furthermore, the company ranked in the Top 10 of the worlds

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best managed PC venders (Lenovo.com, 2007b). In the year 2003, with an aim to expand its business globally with a more global-like brand, the company changed its former brand name Legend to the name used today as Lenovo, taking the Le from Legend, a nod to the heritage, and adding novo, the Latin word for new, to reflect the spirit of innovation at the core of the company (Lenovo.com, 2007b). The change of the brand name from Legend to Lenovo was perceived as the first move under the firms global stretch. At the end of the year 2004, Lenovo and IBM announced the agreement of Lenovos acquisition of IBMs Personal Computer Division, which was IBMs global PC (desktop and notebook computer) business (Lenovo.com, 2007b). In May 2005, Lenovos acquisition of IBMs Personal Computing Division was completed, making it a new international IT competitor and the third-largest personal computer company worldwide (Lenovo.com, 2007b). After the acquisition and the strategic alliance with IBM, Lenovo-branded products were introduced to the world outside of China at the first time (Lenovo.com, 2007b).

Lenovo and its employees are committed to four company values that are the foundation for all that they do (From Lenovo.com, 2007a): Customer service: We are dedicated to the satisfaction and success of every customer; Innovative and entrepreneurial spirit: Innovation that matters to our customers, and our company, created and delivered with speed and efficiency; Accuracy and truth-seeking: We manage our business and make decisions based on carefully understood facts; Trustworthiness and integrity: Trust and personal responsibility in all relationships.

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With an aim to provide market cutting-edge, reliable, high-quality products and professional services for the satisfaction of the customers, the company is dedicated to research and talent development (Lenovo.com, 2007a). The company owns research teams who have won hundreds of technology and design awards, which includes more than 2,000 patents, and has also introduced many industry firsts (Lenovo.com, 2007a). The goal of Lenovos R&D team is ultimately to improve the overall experience of PC ownership while driving down total costs of ownership.

Apart from being a prosperous business entity, Lenovo is also committed to being a responsible and active corporate citizen, which makes it a reputable company in the home market. Moreover, as one of the major marketing strategy, Lenovo also actively takes a hand with sports games to help introduce the Lenovo brand around the world. In 2004, Lenovo became the first Chinese company to join the Olympic Partner Program and a sponsor of the 2006 winter games in Turin, Italy, and it will also be a major supplier of computing equipment and funding in support of the 2008 summer games in Beijing, China (Lenovo.com, 2007).

1.2 The Strategic Alliance with IBM


According to Lenovos 2004/2005 Annual Report, Lenovo has always aspired to become a global company. Since the year 2003, Lenovo began to lay the groundwork for its global stretch. It firstly changed its former name Legend to Lenovo Group Limited that could be used without restriction around the world. Then, its wide and active participation in the Olympic events have accelerated Lenovos pace into the international market. On December 8th, 2004, Lenovo announced that it would acquire IBMs global PC business for US$ 1.25 billion.

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According to the terms of the agreement, the acquisition included IBMs desktop and notebook computer business, as well as its PC-related R&D centers, manufacturing plants, global marketing networks, and service centers (Lenovos 2004/2005 Annual Report). In addition to that, Lenovo also has the right to use the IBM brand for a period of five years and the permanent ownership of the renowned Think family trademarks. As part of the transaction, Lenovo and IBM also entered a broad-based, strategic alliance of warranty and maintenance services and preferred supplier of customer leasing and channel financing services to Lenovo (Lenovos 2004/2005 Annual Report). On April 30th, 2005, Lenovo completed the landmark acquisition with IBM and entered a new era of globalization, making the new Lenovo a PC leader in the global market, with approximately 8 per cent of the worldwide PC market by shipments, followed after Dell (16.4%) and HP (13.9%) (Buetow, 2005; Ling, 2006).

1.3 The Necessity to Form the Strategic Alliance


Lenovo was known as one of Chinas most promising companies in the early 1990s, with its sales more than tripled between the year 1994 and 1998, and Asias leading PC vendor outside Japan at the end of the 1990s (Lau, 2004a). However, before the declaration of the alliance with IBM, the company had encountered with obstacles for its further expansion and development. Though Lenovo is the largest PC maker in China with more than a quarter of the market share, it does little business outside the country. The increasing fierce competition from aggressive foreign rivals such as Dell and HP in the past few years in Chinese market has put further pressures on Lenovos margins. According to Citigroup Smith Barney, although Lenovo still accounted for 27 per cent of Chinas PC market, the growth rate in 2003 far lagged behind the market growth rate; by contrast, Dells shipment in China grew 48 per cent (Lau, 2004a). Apart

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from that, the company also suffered financial problems, earlier in the year 2004; Lenovo confessed that its performance over the past three years had fallen short of internal targets (Lau, 2004a). In addition to that, shares of the company dropped nearly 60 per cent in the year 2004, and analysts at investment banks including ABN Amro and Citigroups Smith Barney, downgraded the company (Lau, 2004b). As one analyst said in June 2004 that The company is in crisis, it has lost direction and does not know how to move forward (Lau, 2004a). Therefore, rather than just continue to concentrate on the domestic Chinese market, the decision to go global is a necessity for Lenovo at that critical time.

Under these circumstances, Lenovo decided to form the deal with IBM to acquire its low profitability PC business with US$1.75bn. According to the terms of the agreement, Lenovo pays US$650m in cash and up to US$600m in shares (which later changed to US$800m and US$450m share value), giving IBM an 18.9 per cent stake as well as shouldering US$500m in debt; and IBM will become the Chinese PC makers preferred supplier of support services and customer financing. For Lenovos part, the acquisition quadruples its sales to more than US$12bn and expands its sales market globally; besides being given the ownership of the Think family trademarks, Lenovo also gains the right to produce IBM-branded PCs under a five-year licencing agreement (FT reporters, 2004; Simon, 2004).

1.4 Motives of Lenovo & IBMs Strategic Alliance


Lenovos takeover of IBMs PC division has been described as snake ate the elephant, and the deal pulls Lenovo from the eighth-largest PC maker in the world to the third-largest just behind Dell and HP (Buetow, 2005; Ling, 2006; London, 2004). As the news released by China Daily

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(2004), the two computer firms have formed a strategic alliance in PC business worldwide, in which IBM positioned as the second largest shareholder with a share of 18.9 per cent. The motivations that drive the formation of the strategic alliance between Lenovo and IBM can be analyzed from two perspectives.

For Lenovos aspect, though Lenovo is the largest IT company in China, its products are mainly within China. Michele Mak, an analyst at ABN Amro, once commented that Lenovos distribution network is its biggest problem, and it is not well adapted to serving the small and medium-sized companies who usually buy directly (Lau, 2004a). Thus, in the first place, with an intention to expand its business globally, the firm needs a well-developed worldwide distribution network, which happens to be the advantage of IBM. As what has been announced by Lenovo, the agreement between the two firms includes broad-based strategic alliance under which Lenovos products will be integrated into IBMs global service offerings, which also became the impetus to the deal (Lenovo.com, 2007c). As Stephen Ward, former head of IBMs PC division said that IBM promised to push Lenovos PCs and offer financing to its customers and business partners by its sales teams (Dickie & Lau, 2004b).

Secondly, as a world-leading company like IBM, it has specialized and advanced skills in sales and marketing functions, for Lenovo, the sales and marketing support, as well as the R&D support are significant and of a necessity in its way to a multinational enterprise, which is also part of the agreement (Lenovo.com, 2007c). As Dickie and Lau (2004) point out that Lenovo could get access to some of the worlds most popular laptop designs, access to the U.S. market, and technological centers as advanced as any of its rivals after the establishing the alliance with

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IBM. Just as what has been indicated by Doz and Hamel (1998), strategic alliance comes along with the learning from its partners and the internalization of the new knowledge, thereby benefits the firm. In this case, IBM provides such model and as an iconic enterprise for Lenovo, who is heading its way globally.

Thirdly, the use of IBMs globally recognized brand is an impetus to accelerate the alliance, and also perceived as a sweet victory for Lenovo. The local brand Lenovo, formerly known as Legend, will become more valuable in the market after its association with the ThinkPad series of laptops. And also, Lenovos right to use the IBM brand on the computers for five years adds more value and trustworthiness to the brand, as despite the fact that Lenovo is the largest PC maker in China and Asia, it is little known elsewhere in the world, even with the ownership of ThinkPad family trademarks, it can hardly divert the loyal customers from IBM to Lenovo (London, 2004). Furthermore, analysts said that the deal could enable Lenovo to cut procurement costs (Guerrera and Dickie, 2004).

Just as Yang Yuanqing, the chairman of Lenovo, said that Through acquiring IBMs global PC business and forming a strategic alliance with IBM, Lenovo would absorb and integrate the skills from both sides and acquire global brand recognition, an international and diversified customer base, a world-class distribution network with global reach, more diversified product offerings, enhanced operational excellence and leading-edge technology (Peoples Daily English 2004). He also added that, the alliance with IBM would also help establish Lenovos international recognition by leveraging IBMs powerful global brand through a five-year brand licensing agreement as well through the ownership of the globally recognized Think family

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trademark (Peoples Daily English, 2004).

For IBMs aspect, it expects that the deal with Lenovo, Chinas largest PC maker will further consolidate its presence in the worlds fastest growing IT market (Peoples Daily English, 2004). The strategic alliance with Lenovo might become a move towards the shifting of demographics (Musthaler, 2005). On the one hand, IBMs largest markets for its PCs are in North America and Europe, which are saturated, might partially explain its losses in the past two years. On the other hand, China, as the second largest PC market except the U.S. has become the most important market in the world with its large population and growing per capita income. However, as a market, China is a tough nut to crack especially for outsiders. Much of the competition comes from Lenovo, which is far and away the market leader in China with nearly 25 per cent market share, in order to expand Chinese market and enjoy a slice of Lenovo ownership, IBM chooses Lenovo as its strategic partner (Musthaler, 2005).

Therefore, the driving forces behind the alliance reflect the two companies desires of seeking for co-option, co-specialization during its globalizing process, with an attempt to learn and internalize within its own organization, which are also the main three motivations for strategic alliances.

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CHAPTER 2: ANALYSIS OF THE STRATEGIC ALLIANCE

2.1 Analysis
2.1.1 Problems in the Early Stage of the Alliance The failure rate of strategic alliance is quite high, and the figure is even higher in the cross-border alliance due to cultural clashes, different management structure, trust issues or other factors. The deal between Lenovo and IBM, an alliance between an eastern company and a western one, has caused great market concern and doubts over the feasibility and Lenovos ability to turnaround IBMs PC business into a profitable one. UBS said in a report that, we believe that the acquisition will boost Lenovos long-term profitability, as the two parties offer complementarities and IBMs PC division offers a turnaround opportunity, however, the biggest challenge for the new Lenovo is the weak sector outlook (Dickie, 2005a). Once the agreement is announced, one immediate occurring problem is investors low confidence over this deal; Lau (2004c) indicated that upon the declaration of the acquisition, many investors sold shares of Lenovo due to the doubt over the companys prospect. Besides that, Lenovos Hong Kong share price also drop as much as 7.5 per cent to HK$2.475 after the announcement, which was worsen by its decision to issue new stocks to IBM as part of the payment (FT reporters, 2004; Lau, 2004c). Upon the unpleasant results publicized initially (i.e., Lenovos shares falling), IBMs competitors were quick to predict that the deal would fail. Duane Zitzner, the head of HPs PC division, predicted that the deal would create a lot of turmoil within IBM accounts; and Michael, the chairman of Dell, also said that it could not turn out to be successful (London, 2004). In addition, analysts also have warned the difficulties and risks that Lenovo may encounter with in managing a big foreign business without losing IBMs customers and

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employees, they indicated that the deal might help Lenovo to fulfill its international ambitions, but it could also face serious execution problems as it has to manage a business that is three times its own size (FT reports, 2004; Lau, 2004c). Thus, it is not hard to tell that the strategic alliance between the two companies is under great doubts and even denial, and it does bring with many problems that could lead to a divorce of the alliance at the initial stage. It will be analyzed from three main aspects based on released financial statistics of the company and reviews from other analysts as followed:

(a) Financial Aspects Since Lenovo revealed its plan to acquire IBMs struggling PC business unit, investors have been held a skeptical view towards the deal, the low confidence of the shareholders also led to the falling of Lenovos share value. Although Lenovos global PC shipments and the market share increased since the acquisition in December, the shares fell 7.2 per cent in Hong Kong in their biggest drop in just under a year after the company reported weaker-than-expected quarterly results and falling margin (Lau, 2005c). In the first quarter of the year 2005, the net margin fell sharply to 1.82 per cent from 5.73 per cent, notwithstanding the steep increase of the revenue from HK$5.88bn to HK$19.6bn (Lau, 2005a). The situation didnt improved in the second quarter of that year. As Lau (2005c) indicated that the gross profit margin fell from 15.33 per cent to 14 per cent that quarter, and the net margin further fell from 1,82 per cent to 1.2 per cent. Kevin Rollins, the chief executive of Dell, said that after Lenovo bought IBMs PC business, Dell had been winning customers from Lenovo both in China and globally. Dell grew rapidly in China through its direct-selling model and also claimed 8.4 per cent of the market in the first quarter of 2005 as the third-largest PC seller in the country (Lau, 2005b). By

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the end of the year 2005, the problem of the declining profitability didnt change. Although sales jumped almost 400 per cent as a result of the acquisition, the companys net profit failed again to match analysts expectations, and the gross profit margin for the quarter to December 2005 fell to 13.2 per cent, so does the operating margin (Allison, 2006; Lau, 2006a). In addition, Lenovos global PC shipment grew 12 per cent year-on-year, lower than the industrys average rate (Lau, 2006a). The financial situation is not promising in the year 2005, the full-year net profit fell 85 per cent to HK$ 173m, and the weaker-than-expected results also sent its shares in Hong Kong down 3.9 per cent to HK$ 2.45 (Lau, 2006b).

In the year 2006, the financial performance of Lenovo didnt make any progress. The company reported a larger-than-expected drop in earnings for the second fiscal quarter, its net profit declined 16.6 per cent to $38m, compared with $45m in the year 2005 and analysts forecast of about $42m. The operating margin also fell to 1.6 per cent from 2.9 per cent a year ago (Lau, 2006c). Apart from its own unpleasant financial performance, the strong global price competition from its aggressive foreign competitors also deteriorated Lenovos situation. All these negative financial indexes imposed burden and pressure to Lenovo, as well as threatening the alliance with IBM.

The reasons that cause the financial problems can be analyzed as follows. Firstly, the pressure from the market leader Hewlett-Packard and Dell led to fierce cost competition, which made the firm even harder to raise its margin (Lex, 2007). Secondly, Lenovo was struggling to cut costs and return its U.S. operations to profitability in the face of fierce price competition from HP and Dell, which leads to the organizational restructuring and two rounds job cuts so as to

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improve the efficiency in the key markets (Taylor, 2007).

The unpleasant situation started to change in the year 2007; this is largely due to Lenovos restructuring processes and cost-cutting measures. As Lex (2007) reported that the first quarter of 2007 is the best quarter since the IBM purchase, as the pre-tax profits, excluding restructuring costs, rose by 2.6 times year on year, the operating margins in the US was 3.4 per cent, reaching the highest since the deal, and its worldwide PC shipments increased by 22 per cent, well above the industrys average rate. Referring to the change of Lenovos share prices from 2004, it was now reaching HK$ 5.20, compared to HK$ 2.75 in late 2004, and its market capitalization reached $ 5.7bn now (Figure 2).

Figure 2:

Source: Thomson DataStream, cited in Lex, 2007

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As Yang Yuanqing, Lenovos chairman commented that, Given the results of the past two quarters (of the year 2007), this merger has successfully completed its integration phase and he said that the largest overseas acquisition by a Chinese company had transformed Lenovo from a $3bn a year domestic business into a true multinational with annual revenues of $15bn (Mitchell, 2007).

(b) Cultural Clashes Cultural differences between the two companies must also be taken into account, as it can be tricky especially between a western and eastern company. The differences can be caused from the different corporate cultures or national cultures.

As Schneider and Barsoux (2003) state that countries that ranked high on power distance would be expected to be more hierarchic and centralized in the organization. In China, the business is more often characterized by centralized power and personalized relationship, which is quite different from that of the West. For example, for the decision-making process of the firm in China, as the power is more centralized in the company, the decision-making process will be more centralized to the top management, and employees would prefer the boss to make decisions for them, thus, the decision might be less likely to be challenged and denied by the subordinates, to some extent, it would be more easily and smoothly to the implementation of a decision in the company. However, on the other hand, it also hinders the participation of subordinates, as the employees fear of disagreeing with their superiors will block the communication between the leading and the led. Besides that, it also weakens the initiatives of the employee in the company. While in the U.S., employees are eager to have their voice heard

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on the company decisions without being afraid of offending the authority and are more expressive in the discussion. They are recognized as part of the decision-making and are deeply involved along with the process.

Just as Qian Jian, Lenovos vice-president of human resources in Beijing said that Americans like to talk, Chinese people like to listen. At first we wondered why they kept talking when they had nothing to say, but we have learnt to be more direct when we have a problem and the Americans are learning to listen. Both sides are learning (London, 2005).

From this comments, it is not hard to tell that employees from both organizations have encountered with cultural clashes, which are derived deep from its national or corporate cultures, different assumptions or values. The employees can learn along the way of the progress, however, without any doubtfulness that proper measures need to be taken in order to ease the fraction or problems coming up.

The culture issue has also been considered as a tricky ring to the successful alliance circle, the cultural and communication challenges are even greater when the partnership is between a western company and one from an emerging market in the east. When being asked about the hardest part of taking the Chinese routes and the American part of the company, Bill Amelio, currently the chief executive of Lenovo, said that different business cultures was the tough nut to crack. He cited the example to that happened between the two design teams to illustrate this point. When the two teams working on to figure out how to have a commercial design language and a consumer design language, the word common stopped the discussion, as in different

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cultures, it conveys different meanings, sometimes even in the opposite way(Freeland, 2007). In the West, it has an interesting meaning; while when it is translated into Chinese, it means uninteresting and boring (Freeland, 2007). Another example quoted by Lau (2006d) is the employees confusion to adopt English names. It happened that when a Hong Kong-based analyst recently called Lenovos Beijing office and asked for an employee by the English first name on her business card, he got a puzzling response that the operator told him that the person did not exist. However, when he called back again and asked for the same person in her Chinese name, he was put through to her office immediately (Lau, 2006d). As the analyst said that the employees have encountered confusion under the transformation of a corporate culture. Lau (2006d) further suggested that the spontaneous move by staff to adopt English names may be causing slight confusion, but it underlines broader changes in the companys culture, which analysts perceive as key to its success in managing the alliance with IBM.

Another concern over the cultural issue is how to merge Asians companys management styles with those of the westerns, and how Chinese managers and former IBM employees from the U.S. would get along. Mary Ma, the chief financial officer of Lenovo said that the national gulf is actually less of an issue than the difference in culture between a youthful Chinese venture only in its second generation of leaders and a global giant with a long history (Dickie, 2005b). She further indicated that the real difference is between an entrepreneur company and a well-established multinational company (Dickie, 2005b). As Marsh (2005) warned that the path to successful cross-cultural management between Lenovo and IBM is strewn with pitfalls. This view is also consistent with expectations from other analysts, who said that the combination of the two very different management teams would be a huge challenge for Lenovo, which had

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little international experience before the acquisition (London & Dickie, 2005).

(c) Branding Before the alliance with IBM, Lenovo has no presence in the world with very low brand awareness. Therefore, as discussed previously, one main motive for Lenovo to form the alliance with IBM is to gain the chance to build its brand globally by sales through the IBM sales force and using its well-known brand. As London (2005) suggests that because the Lenovo name is almost unknown outside of China, it is hard for marketers to build an international brand from scratch; in order to succeed, they not only need to decide what Lenovo stands for but also come up with products that support the claim.

However, it is not exactly the brand reputation that matters; it is the actual effect it exerts in the integration process after the alliance. Though IBM has a world-known brand as well as the Think family trademarks, it is not a separate entity that can be combined to any other organization randomly, it has become part of the corporate, an integrated part of its culture and values. As Temporal (2002) indicates that co-branding could cause brand problems, such as consumer confusion or inconsistent brand image in the market, it is not necessary a win-win situation. Lenovo also faces with the problems regarding to the brand management after the strategic alliance with IBM. Kevin Rollins, the chief executive of Dell said that, [Though] IBM had a very, very good brand globally, when it stepped out of the industry, the name dropped out (Lau, 2005b). Despite that Lenovo gains the well-known IBM brand and the ownership of ThinkPad family, it has not been well perceived in the market to be as good as the other PC market leaders like Dell and HP. It has been under the doubt that marketing ThinkPad laptop as

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made by Lenovo might put off buyers since the announcement of the deal (Dickie, 2005c). After the alliance, Kevin said that Dell had been winning customers from Lenovo, both in China and globally (Lau, 2005b). Moreover, Lau (2006c) also argues that Lenovo lost share in the U.S. due to its limited presence in the consumer market and low brand awareness. The impact of negative reactions in Lenovos home market, where it accounts for over a quarter of the market share cannot be ignored. Ma Liyuan, a government worker in Shanghai said that, I didnt think much of the Lenovo PC I used to have and I feel IBM has now suddenly lost a lot of its cachet. And one previously loyal IBM user and network engineer Song Yingqiao is even blunt, saying that he will not buy IBM again, Its a gut feeling, it feels uncomfortable that international IBM has become domestic Lenovo (Dickie and Lau, 2004b).

The whole co-branding thing not only arouses the negative reaction from the local customers, but also caused the brand confusion. As Burt (2005) suggests that the new Lenovo has a strong IBM presence during its global process, which might cause brand confusion in the market. Besides its own brand change from Legend to Lenovo, the firm also has the IBM brand under the five-year licencing agreement. In China, the brand names like IBM, ThinkPad and Lenovo will all be used; while in the U.S., Lenovo will continue to use the IBM brand, this messed up situation might cause confusion in brand identities for consumers in the global market, and make it even harder for the firm to market itself using a single brand name (Ritson, 2005). In addition to that, though Lenovo acquired the ThinkPad brand as part of its $ 1.75bn acquisition of IBMs PC division, it is hard to make any change that could link to Lenovos branding image. After receiving the unpleasant feedback upon the first try of launching a non-black model in the range, Bill Amelio, the chief executive of Lenovo, indicated that the

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companys efforts to update the look and the feel of the iconic IBM ThinkPad brand of notebooks had not been well received by customers, and were likely to be abandoned. He further told the Financial Times that corporate IT managers, who form the core of the ThinkPad customer base, had not reacted well to changes to the classic design (Palmer, 2006). It is also suggested by the chief information officers that it is better to keep the system the way it is, any change like putting different colours or models in can create some angst among the customer (Palmer, 2006). Therefore, to innovate or update the existing brands owned from IBM could be tough, as it may arouse negative reaction from both the customers and some of the employees within the corporate (i.e., corporate IT managers, former IBMers).

Facing with these problems, it is essential for Lenovo to take strategic measures to manage the brand effectively if the firm wants to successfully realize the goal as a global company. Just as Lenovos chairman, Mr Yang said that an extremely clear approach to branding was essential to guide the integration of Lenovo and IBM business unit after the alliance (Dickie, 2005c). Besides that, in order to be successful on the way of this alliance, Lenovo needs to acquire the brand loyalty commanded by IBM along with the U.S. companys laptop production lines, product developers, and distribution networks (Dickie & Lau, 2004b).

2.1.2 Measures taken and their Evaluation


Facing with the financial problems that mainly caused by fierce cost competition from HP and Dell, and the unprofitable performance of the acquired IBM PC business, the first measure that Lenovo took was to lay off workers, though it was against its initial will. The first time job cuts occurred in March 2006, when the company cut 1,000 workers. The second round of job cuts

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was carried out in the early 2007, when Lenovo Group laid off 650 people, mostly in the U.S. and Europe, and moved another 750 jobs offshore (Taylor, 2007). By cutting down the number of abundant employees, the company saved $250m annually in labour costs (Allison, 2006). As Mr. Amelio commented that the restructuring was needed to help the Chinese PC maker improve the efficiency and boost its growth in key markets, as he said that Lenovos expenses to revenues were still too high compared with its competitors (Taylor, 2007). With the savings from the workforce, Lenovo launched a $100m program to revamp the IBM PC unit and invested heavily in sales and distribution channels in the U.S. in 2006, which greatly turnaround the U.S. operations into profitability (Lau and Dickie, 2006). Besides that, Lenovo quickly establish strategic relationship with U.S. private equity groups to access to international industry expertise so that it could challenge industry leaders Dell and HP, and also attracts U.S.$ 350m strategic investments from the three leading U.S. private equity firmsTexas Pacific Group, General Atlantic and Newbridge Captical (Dickie, 2005d; Lau and Dickie, 2006). Through this deal, Lenovo not only gains the access to new funding, but also gains back the confidence from its investors and shareholders. After taking these measures, Lenovos financial status has been improved greatly; there is an almost twenty-fold increase over the share value now since the deal, and also the operating margin reaches its highest rates. From the statistics and analysis released till now, financially the company is still heading forward to a more promising direction.

To ease the culture clashes, Lenovo decided to move its headquarters to Raleigh, North Carolina, and to give foreign managers high-profile roles in the new Lenovo, such as the appointment of an American chief executive (Lex, 2007). Besides that, shortly after the deal,

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Lenovo changed the official company language from Chinese to English to create a straight-talking culture inside the firm, just as Randy Zhou, analyst at Bank of China International, said that in order to become a true global company, the first step is to drop some of the old habits (Lau, 2006d). The power of leadership is important especially in a cross-cultural management. The new appointment of Mr. Amelio as the CEO in replacement of Stephen Ward is considered as an necessary move in order to better melding different cultures, as well as better managing the new business of Lenovo. Mr. Amelio once has worked in Dell both in emerging markets and business with very direct contact with consumer areas that were relatively neglected by IBM and which Lenovo must better develop if it wants to make the alliance work. As Joe Wu, analyst at BOC international in Shanghai said that, The appointment will help Lenovo compete with Dell in the U.S. consumer market, where they have to expand their presence. And Mr. Amelios time in Asia should also help him handle the cross-cultural complications that come with what is an unprecedented melding of the management teams of a Chinese company and a U.S. multinational (Dickie and Waters, 2005). However, though these measures do work to some extent, they are far from enough as the two companies are with vastly different business models and corporate cultures.

Confronting with existing and possible branding problems, Lenovo have launched a global brand strategy, that is using the Think trademark for high-end products and its own corporate name Lenovo for mainstream offerings since the year 2005 (Dickie, 2005c). In an interview with the Financial Times, Mr. Yang, said that the Think name would be adopted around the world as Lenovos premium brand aimed in particular at major corporate customers, while the Lenovo name would be used for computers and other products competing with PC global

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market leaders Dell and HP for smaller corporate and retail consumers (Dickie, 2005c). The chairman further added that under this new strategy, Lenovos focus would be on promoting products that enhanced its image rather than on direct corporate brand-building. Therefore, this new strategy is not so effective to solve the existing problems, such as brand confusion or brand-image enhancement; it just focuses on two different product lines, but not the brand management to convey the message of a new global brand Lenovo. As Dickie (2005) argues that this decision might play down the use of IBM brand for products made by the U.S. companys former PC unit, even though Lenovo acquired the right to use the IBM name under the five-year licence.

2.2. Measures to Be Taken and Limitations


The cultural dimension is a key element to operational success

apart from other aspects such as strategy, finance and law. To ensure the success of the alliance, the company needs to emphasize more on human and cultural aspects, to realize the differences between different corporate cultures, and to create a new hybrid corporate culture infused with beneficial elements from different cultures, which works out in the new strategic relationship. IBM has long been recognized as a good choice of partner for strategic alliance, apart from technological support or using of worldwide distribution networks, it is necessary for Lenovo to learn from its partner on how to blend with a new corporate culture to make the alliance succeed.

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As Barns and Stafford recommend that hiring mutually respected and unbiased consultant to propose recommendations for new inter-partner programmes could be adopted as well by the company to ease the culture clashes. Furthermore, it is essential for the company to provide systematic education and training among partnering personnel so as to facilitate adaptation and understanding, it should not be a one-time thing, the process of creating a compatible culture could be a long lasting process, which requires time, energy and management talents. Besides that, the communication between the two companies should not only emphasizes on one side or just focuses on the senior managerial level, it should be implemented from the top to the grass roots across the organization by providing systematic formal or informal meetings, or other recreational activities of different forms.

Trust building is a critical determinant to the alliance success, it has been previously stated by Ring and Ven de Ven, and Parkhe that the existence of trust is significant to the alliance, it will help to reduce the coordination costs and opportunistic behaviour, and facilitate conflict resolution. However, it needs to take a long time to build the trust between the partners. It has been accepted widely that if the trust was ruined in the early stage of the alliance, it would be hard to re-build and to sustain the relationship in a long run; and also the untrustworthiness between the partners would hinder the cooperation in deeper and more extensive areas. Whats more, for Lenovos case, the breakup of the alliance with IBM would definitely bring more damage compared to the impact to IBM. As Viktor Ma, analyst at Morgan Stanley said that, IBM was never intended to be a long-term investor (Dickie & Lau, 2006). Therefore, it is necessary for Lenovo to find ways to cooperate with IBM in a deeper and more extensive level, such as forming joint ventures, combining R&D researches, establishing contractual safeguards,

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so as to seek for more credible commitments from the partner to avoid unexpected pitfalls along the alliance. But these measures are more likely to be defensive ones for the company; hence, apart from this, Lenovo also needs to adopt more active measures to create an atmosphere of trustworthiness. Establishing a sound inter-personal relationship through either formal or informal mechanisms could help to bridge the gap and accelerate the pace of trust building. Besides that, the good inter-personal network established through informal occasions could facilitate conflict resolution in a more formal context.

It is essential

for

the

firm

to

adopt some measures

to

improve the

current situation. As previously indicated by Neil et al. that it is essential for firms to develop the alliance learning capability to maximize the benefits and gain added value from a partnership, and it is a key element to the success of an alliance. From this aspect, it is necessary to learn from Japanese companies. In a Japanese company, it is prevalent across the organization and known to all employees from top to down, that the purpose of the alliance is to learn from its partners by accessing their core competencies, know-how, or other critical information that it is hard or costly for the firm to develop on its own. In order to be a learning-oriented firm, it is essential for Lenovo to develop its employees receptiveness to new knowledge, as well as their personal competences to understand and absorb the knowledge from the partner. This goal can be achieved by constant training or education for the employees, making the employees involve in the organizations decision-making processes more deeply and extensively. By exchanging personnel with IBM can also be a useful tool to learn the advanced technology and know-how from its partner.

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Due to Lenovos change in the strategic direction and its new identity as a global competitor, it is necessary for the firm to reposition its brand, enabling that the customers get the real message. As stated by several authors above, branding is one of the important intangible assets for the company, and co-branding has been recognized as an efficient strategy to attain high market shares and global recognition. However, it seems that the people in Lenovo are overly optimistic towards the impact IBM would exert on Lenovo. From the customers response, and the concerns and experience from the sales people, the co-use of the three brandsLenovo, ThinkPad and IBMcould bring with brand confusion in the market. It is essential for the firm to maintain the brand consistency, as previously suggested, it doesnt mean that Lenovo should not make any changes to the brand, in contrast, it needs to adopt some tactical shifts and changes so as to infuse with the Lenovos image along with the corporate development. Under the alliance, there is a strong IBM presence existing in the new Lenovo brand, hence, it is necessary for the firm to make great efforts on direct corporate brand-building rather than just focusing on promoting products. Apart from establishing clear boundaries among these three brands, the firm needs to pay more attention to its brand management to make sure that a new image of Lenovo has been conveyed to customers locally and globally.

However, it is always easier said than done. Although culture clashes, trust-building problems, and learning capability are the three main and commonly existed obstacles in the initial alliance relationship, they play as the keys to the success of a long lasting alliance. All of them require a lot of time, energy and managerial talents. Due to this reason or other old traditions deep rooted in the company, they are always easily overlooked by the company. The disjointing situation between the top management and the employees in decision-making process also hinders the

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participation of the subordinates; and this kind of hierarchical and centralized management style has long commonly existed in Chinese firms and is hard to change in a short time. Furthermore, the lack of communication and involvement of employees also weakens the motivation to be learning-oriented along the alliance process.

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CHAPTER 3: DISCUSSION

3.1 Theoretical Insights


Theoretically, as the initial stage of an alliance is usually pervaded with uncertainties and ambiguities, many authors have pointed out that there are several variables that need to bury in mind when evaluate an alliance or attempt to make it work out. They are generally referred to the cultural compatibility of the alliance partners, the degree of mutual trust among partners, as well as the learning capability along with the strategic alliance, which are considered as the determining factors to the alliance success, especially in the initial stage. Besides that, especially nowadays when more cross-border alliances occur, they often come along with co-branding alliance. Hence, the effectiveness of brand management goes hand in hand with the strategic alliance.

However, as Kelly et al. (2002) state that there are few studies that have examined how to manage the alliance in the early stage so as to sustain the collaboration in a long run. Not mention the study in the cross-border alliance, especially the partnership between a western company and one from an emerging market in the west. As such kind of alliance is the generally tendency in the near future, there needs more and deeper theoretical studies in this specific area.

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3.2 Managerial Insights


After the analysis of the case, there are lessons to be learned from this unusual international alliance. The managerial personnel need to make great efforts in the following aspects when implementing the alliance:

The company needs to be well prepared before choosing to establish the alliance with another company. The most important foundations for alliance not just related to financial aspect, strategies or law, it has now lies more in the adaptive cultural atmosphere of the company and the strong learning capability across the organization, which is especially true for a local company to seek for the alliance with a foreign company in developed countries.

Enhance the capability of knowledge transfer across the organization. As Praise and Henderson (2001) note that knowledge resources range from intangible, tacit resources to tangible resources, as the intangible resources are hard to extract and evaluate, the company must have an explicit strategy to codify, internalize and disseminate the knowledge it obtains throughout the organization.

Consistent and effective brand management under the strategic alliance. Raising a companys brand awareness globally from making it attach to a well-recognized brand from another foreign company will not necessary work out. The co-branding alliance may help enhance brand recognition or increase market share, it also could bring brand confusion for the local firm. Hence, attaining a well-known brand may be a choice, but

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the most important thing is to avoid brand overlapping in the same market, and to implement the consistent brand management in order to enrich the brand equity of the firm and to enhance its brand image internally.

As this case study is typical, the problems of which is similar in crucial respects with others, therefore the findings from the research can be generalized and are likely to apply elsewhere. However, the company in this case is also with its own specific situations, hence, each company needs to take measures by taking account of its own specifics.

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CHAPTER 4: CONCLUSION

To sum up, international strategic alliance has become a favored business strategic choice for many firms during its global reach in recent years. The forces driven the alliance may be varied from one firm to another, but generally speaking, the main reasons for seeking strategic alliance can be summarized as the following ones: taking advantage of the local partners knowledge of the market, sharing risks during its expansion process and complementary technology & skills, forming the economics of scales to reduce costs (Cullen and Parboteeach, 2005). Though the strategic alliance has its drawbacks and risks like fostering potential competitors rather than allies in the market by providing easy access for its partners to the core competencies of the firm, undoubtedly, it still has become a necessity and the benefits come along with it is numerous and obvious. It is a useful tool to make an easy entry into a market through establishing a partnership with the local company; it is a channel to make use of the other firms core competencies or advantages, which could be the complementary skills and knowledge essential for a firms further development; and it could also be a precious learning process for a firm to internalize the distinct skills from its partners.

Under these assumptions and good expectation towards the strategic alliance, Lenovo forms the partnership with IBM by the takeover of its PC unit. However, as discussed above, it is difficult to maintain a long partnership and the failure rate reaches as high as 60 per cent, and it is even worse in a cross-border alliance due to culture clashes and trust issues. Besides that, as indicated by Kelly et al. earlier that the initial stage of the alliance is a critical period, and it is essential for the firm to tackle the early shown problems or potential ones to laid the foundation

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for a good relationship later. Generally speaking, Lenovo has achieved success from the financial aspect. It has turnaround the profitability of former IBM PC business after two years efforts since the completion of the alliance, its shares value keeps increasing with a good prospect, and the profit margin grows faster than ever. Notwithstanding the relatively pleasant results the company has achieved till now, the managers still need to pay much attention to the problems that have shown in the early stage of the alliance. Problems that occurred due to different corporate cultures and mutual trust in the alliance could damage the long lasting relationship of the alliance; hence, the company must find effective ways to remove these obstacles. We can see that Lenovo has taken several measures to ease the clashes and conflicts between the two companies, but it is still far from enough. To enable the success of the strategic alliance, Levono needs to enhance its learning capability so as to make great out the partnership, as well as focuses on its brand management, but not simply relying on the borrowed brand recognition from the well-known IBM. Till now, it can be commented that the alliance between Lenovo and IBM is successful, but it still has some hidden problems or ones that have shown needed to be tackled lately to make sure the smooth development on the road to success eventually.

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