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Strategic Alliance

—Case Study of Lenovo and IBM

By

Lili Jiang

Dissertation submitted to the University of Nottingham Business


School, in partial fulfillment of the requirements for the degree of
Master of Science in International Business

September 2007
ACKNOWLEDGEMENTS

First of all, I would like to thank my supervisor Bernard Leca for his support and very help

advices throughout this research. Then I would like to thank my family for giving me this

opportunity to study abroad, and always believing in me and caring about me. And also, I am

enormously grateful to the people work in Lenovo who were willing to participate in the

electronic interview, without this, I cannot get the precious primary data to support my research.

Last but not least, I would like to take this opportunity to express my gratitude to all my good

friends, especially to Yanqi and Jingren, for their help and encouragement during this period.

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ABSTRACT

Strategic alliance gains high popularity in recent decades and has become an increasingly

favorable choice for the company that intends to attain a competitive edge over other rivals so

as to make a stand in the global market. Facing with the rapid globalization trend and dramatic

economic development, it is almost impossible for any companies to develop individually, just

as Doz and Hamel (1998) argue that in this new world, networks, coalitions, alliances, and

strategic partnerships are not an option but a necessity for companies to achieve competitive

success.

Till now, several economists and strategists have examined the strategic alliance in a deep and

extensive way, establishing a solid theoretical foundation for later research. These various

theories and principles identify motivations to the formation of alliances, how to make the

alliance work, classifying the benefits brought with successful alliances, and etc. However, as

stated by these authors that the failure rate of strategic alliance is quite high especially in the

early stage, the research on how to make the alliance work during this unstable period is

relatively little.

Hence, the objective of this paper is to evaluate the alliance between Lenovo and IBM, a

cross-boarder alliance between a Chinese and a U.S. company, and to analyze how to make the

alliance work in the early stage of the relationship.

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TABLE OF CONTENTS

Acknowledgements 1

Abstract 2

Table of Contents 3

List of Tables and Figures 6

Chapter 1: Introduction…………………………………………………………..7

Chapter 2: Literature Review on Strategic Alliances……………………………10

2.1 Definitions of Strategic Alliances………………………………………………….10

2.2 Motives toward Strategic Alliances………………………………………………..14

2.3 Failure Rate of Strategic Alliances…………………………………………………15

2.4 Managing Partnership in the Early Stage of Strategic Alliances…………………..18

2.4.1 The Necessity of Early Stage Alliance Management……………………...18

2.4.2 Trust-Building……………………………………………………………...20

2.4.3 Cultural Compatibility……………………………………………………..22

2.5 Learning Ability during the Strategic Alliance……………………………………..24

2.6 Brand Management under the Strategic Alliance…………………………………...26

3
Chapter 3: Methodology……………………………………………………………30

3.1 Research Approach…………………………………………………………………30

3.2 Data Collection……………………………………………………………………..35

3.3 Data Analysis………………………………………………………………………36

3.4 Limitation of the Research………………………………………………………....37

Chapter 4: Research Setting……………………………………………………….39

4.1 Background of the Company………………………………………………………41

4.2 The Strategic Alliance with IBM…………………………………………………..43

4.3 The Necessity to Form the Strategic Alliance……………………………………...44

4.4 Motives toward Lenovo & IBM’s Strategic Alliance………………………………45

Chapter 5: Analysis on the Strategic Alliance…………………………………….49

5.1 Analysis—Secondary Date………………………………………………………...49

5.1.1 Problems Occurred in the Early Stage of the Alliance……………………49

5.2.2 Measures Have Been Taken and the Evaluation………………………….58

5.2 Analysis—Electronic Interviews………………………………………………….61

5.2.1 The Main Questions Raised in the Electronic Interview…………………61

5.2.2 Findings from the Electronic Interview………………………………….62

5.2.3 Measures to Be Taken and Limitations…………………………………..65

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Chapter 6: Discussion……………………………………………………………..70

6.1 Theoretical Insights…………………………………………………………….....70

6.2 Managerial Insights……………………………………………………………….71

6.3 Methodological Insights…………………………………………………………..72

Chapter 7: Conclusion……………………………………………………………..75

Appendix A—Questionnaire of the Strategic Alliance between Lenovo and IBM………..77

References…………………………………………………………………………..79

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LIST OF TABLES AND FIGURES

Tables:

Table 1: Different types of strategic alliance………………………………………………….12

Table 2: Five forms of complex alliances……………………………………………………..13

Table 3: Comparison between analysis from secondary data and electronic interview ……73-74

Figures:

Figure 1: Phases of Alliance Development and the Evolution of Trust………………………21

Figure 2: Lenovo Share Price…………………………………………………………………52

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CHAPTER 1: INTRODUCTION

Globalization is a trend of the world nowadays; it can also be a very expensive process, as it

requires the firm to own a well-developed R&D capabilities, financial support, production,

distribution network, sales & marketing skills so as to make an outstanding over its rivals

internationally. However, a firm may discover that it lacks at least some of the necessary

internal resources to effectively extend its global reach. Therefore, in most occasions, a firm

may seek for partners to share the cost as well as the risk in this process.

As Doz and Hamel (1998) indicate that the races for the world and the future require the

development of insights, capabilities, and infrastructures at an ever-faster pace that few

companies can master, and yet they must be swifter if strategic advantage is to be obtained. If a

company cannot position itself quickly and correctly, it will miss important opportunities and

be far lagged behind the tidal wave, therefore the strategic alliance between different firms have

emerged as the vehicle of choice for many companies in both the race for the world and the race

for the future (Doz and Hamel, 1998). Strategic alliance has become a favorable choice for

many multinational companies as a strategy responding to rapid economic development and

increasingly fierce competition in the global market (Gulroy, 1993). Compared with other

widely adopted strategies, such as mergers and acquisitions, major companies prefer to choose

the ‘bond’ option rather than the ‘buy’ or ‘build’ option to stimulate growth and increase

corporate wealth (Pekar and Margulis, 2003, p.50). With the prevalence of the strategic alliance

in recent decades especially in the last years of the 20th century, Cyrus and Freidham (1999)

believe that it will become the primary way of global consolidation in the near future, and it

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may also become the most powerful tool to maintain a firm’s sustainable competitive edge.

China, as one of the biggest and most prosperous markets in the world, cannot be exclusive in

this overwhelming trend. Facing with the opportunities and challenges brought with the

opening-up policy and entry of WTO, many big corporations in China, like TCL and Lenovo,

are intending to go outside as a multinational firm and create a globally recognized brand

through co-operation and competition with their rivals, thus, strategic alliance becomes one of

the popular business strategies in the globalization process. Besides that, as Doz and Hamel

(1998) argue that in this new world, networks, coalitions, alliances, and strategic partnerships

are not an option but a necessity for companies to achieve competitive success.

However, the failure rate of the strategic alliance is quite high, especially for the cross-boarder

alliance, which is most often confronting with very different cultures. Therefore, the aim of the

research is to evaluate the strategic alliance between Lenovo and IBM—a cross-border alliance

between a typical young Chinese company and a well-recognized western multinational

corporation, and to analyze how to make the alliance work in the early stage of the relationship

to ensure the success of the marriage.

The paper is organized as follows. Chapter one is a brief introduction of the case study on the

alliance between Lenovo and IBM. Chapter two reviews the theoretical foundation of strategic

alliances, mainly focuses on issues like motivations to alliances, as well as the issues that

closely related to the success of an alliance in the initial stage. Chapter three describes the

methodology that is applied in this research. Chapter four gives the context of this research that

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the company has encountered both from outside and inside. Chapter five then examines the case

in deeper insights from the analysis based on both the primary and secondary data towards this

alliance. Chapter six is the discussion part that induces the insights from theoretical, managerial

and methodological level respectively. The last chapter draws lessons from the strategic

alliance between Lenovo and IBM and summarizes the extensive research.

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CHAPTER 2: LITERATURE REVIEW ON STRATEGIC ALLIANCES

2.1 Definitions of Strategic Alliances

For a long time, economists and business strategists have viewed alliances from a much

narrower perspective, as anomalies worthy only of a footnote (Gomes-Casseres, 1996, p3).

With the explosion in the use of alliances in high-technology fields in the 1980s and 1990s, the

importance of strategic alliances has been recognized, and the attitude among theorists is

changing (Gomes-Casseres, 1996, p3). The alliance revolution itself has been gaining

momentum for the past two decades, more than 20% of all revenue earned by the Fortune 1000

is derived from alliance activity compared with less than 5% only 15 years ago (Cyrus and

Freidheim, 1999, p.47). Moreover, in the last years of the 20th century, there occurs a rapid rise

in popularity of all types of alliances between firms, which was referred to as the era of alliance

capitalism (Koza and Lewin, 2000). Chief executives are increasingly turning to alliances as a

tool to develop their business so as to maximize the shareholder value. From the result of survey

done by the Economist Intelligence Unit in 2003, the rate of companies’ dependence on

external relationships would see a “significant increase” (Anslinger and Jenk, 2004). More

importantly, the nature and life span of alliances have changed dramatically, it used to be

perceived as having only a single purpose and being incremental to the main business, but now

it becomes a cornerstone of their strategy (Cyrus and Freidheim, 1999, p.47). Just as Gilroy

(1993) stated that the strategic alliance has become a favour for many multinational companies

as a strategy responding to the rapid economic and technological development, globalization

and dynamic nature of the market.

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There is no concise definition of strategic alliances; different versions have been put forward by

many economists and strategists. Here given several of the definitions. Among which, one is

described as that international alliances are “…cooperative arrangements, involving

cross-border flows and linkages that utilize resources and/or governance structures from

autonomous organizations headquartered in two or more countries” (Parkhe, 1991, p.581).

Strategic alliance was also perceived as long-term co-operative partnerships involving vendor,

customer, competitor, or industry-related firms and was used to achieve some competitive

advantage (Stafford, 1994, p.64). Arino et al. (2001) define alliance as a formal agreement

between two or more business organizations to pursue a set of private and common goals

through the sharing of resources (e.g., intellectual property, people, capital, organizational

capabilities, and physical assets) in contexts involving contested markets and uncertainty over

outcomes. According to Hill (2005), strategic alliance is referred as the cooperative agreements

between potential or actual competitors; it is a relationship between firms to create more value

than they can on their own. However, his definition narrowed the partner selection to

competitors.

To combine the elements of different perspectives, in general, the strategic alliance can be

defined as a cooperative agreement between two or more companies for the aim of accessing

complementary resources and skills that the company lacks under globalization process, and is

used as a flexible way to achieve sustainable competitive edge.

According to the nature and life span of alliances, it can also be classified into three different

forms of strategic alliances: horizontal, vertical and diagonal alliance. Specifically, horizontal

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strategic alliances are formed with competitors within the same industry; this kind of alliance is

often formed for R&D purposes. Vertical strategic alliances can be formed with suppliers or

customers in several value chain activities. While diagonal strategic alliances are formed with

partners from other industries (Bronder and Pritzi, 1992, p416). To put the strategy in a more

concrete form, Arino et al.’s (2001) state that alliance’s forms can be varied in a number of

ways, it could be performed under the forms like equity joint ventures, non-equity collaborative

arrangements, licensing or franchising agreements, management contracts, and long-term

supply contracts. They may end up in two kinds of firms: a consortium of firms or networks of

organization. Firms are increasingly co-operating through non-equity ventures; the strategic

alliance goes far beyond the more familiar joint ventures and includes a myriad of non-equity

arrangements (see Table 1). In addition to that, other less visible alliances include co-operative

staff or facilities sharing (Pekar and Allie, 1994, p.55-56).

Table 1:

Source: Pekar and Allie, 1994, p.56

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Developed from the relatively simple classification of the alliance’s forms, there comes up five

forms of complex alliances by Anslinger and Jenk (2004), namely invasive, multi-function,

multi-project, coopetition and networks form (see Table 2). Here the case falls into the category

of coopetition form, which means that a firm chooses to cooperate with its competitors driven

by the decided benefits of sharing developing costs, accessing to cross-pipeline expertise and

reducing transaction costs, although it comes along with several disadvantages, such as a failure

to cooperate (Anslinger & Jenk, 2004, p.20).

Table 2:

Source: Anslinger and Jenk, 2004, p.20

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2.2 Motives toward Strategic Alliances

Most important reason for the surge in strategic alliance has been under the recognition of the

fact that no corporation has enough capital to acquire all of the companies and assets needed to

compete everywhere in the world. While with alliances, companies can access global markets

and contribute to economic development without steep exposure to market and political turmoil

(Cyrus and Freidheim, 1999, p.48). The motivations for the formation of an alliance can range

from purely economic reasons (e.g., search for scale, efficiency, or risk sharing) to more

complex strategic ones (e.g., learning new technologies, seeking political advantage) (Arino, et

al., 2001).

Generally speaking, forces that drive the formation of strategic alliances can be categorized into

three aspects. Firstly, companies are seeking for co-option during its globalizing process.

Co-option turns potential competitors into allies and providers the complementary goods and

services that allow new business to develop and usually multinational companies seek partners

with similar products who have a good knowledge of local market and channels of distribution

in order to share the risk during the expansion of the global market (Bronder and Pritzi, 1992;

Doz and Hamel, 1998; Cullen and Parboteeach, 2005). The privileged market access of some

countries sometimes can be a reason for MNC to search for alliance under the globalization

movement (Bleeke and Ernst, 1991; Bronder and Pritzi, 1992; Doz and Hamel, 1998).

Secondly, co-specialization has become a more and more attractive force behind the strategic

alliance. It is the synergistic value creation that results from the combination of previously

separate resources, positions, skills and knowledge sources. By bringing the resources of two or

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more companies together, strategic alliances often provide the most efficient size to conduct a

particular business (Bronder and Pritzi, 1992; Cullen and Parboteeach, 2005). Through the way

of alliances, partners can contribute their unique and differentiated resources to the success of

their allies, i.e. skills, R&D, brands, networks, as well as tangible and intangible assets

(Bronder and Pritzi, 1992; Doz and Hamel, 1998).

Last but not least, alliance may also be an avenue for learning and internalizing new skills from

its partners, in particular those that are tacit, collective and embedded (Bronder and Pritzi, 1992;

Doz and Hamel, 1998). Therefore, it is self-evident that strategic alliance is central to the

corporate strategy and it is significant and unavoidable for the global reaching step in the world

economy.

To a nutshell, when confronting with the newly opening markets, intensified competition, and

the need for increased scale, many CEOs have put the formation of cross-border alliances on

their agendas since 1990s (Bleeke and Ernst, 1991). To international managers, the strategic

benefits are compelling under the synergy effects among partners; and it is a flexible and

efficient channel to crack new markets, to gain skills, know-how, or products, and to share risks

or resources (Bleeke and Ernst, 1991).

2.3 Failure Rate of Strategic Alliances

Inter-firm cooperation has reached a feverish pace over the past decade, especially for the

technology companies, for which alliances have moved to the forefront of the competitive

strategy (Brown, 1999; Duyster et al., 1999; Kelly et al., 2002). However, despite the growing

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popularity of strategic alliances, the success rate remains low, and also a number of recent

studies have noted that the failure rate of alliances is in the range of 50-60% (Spekman et al.,

1996; Dacin et al., 1997; Kok and Wildeman, 1998; Frerichs, 1999; Andersen Consulting, 1999;

Duysters et al., 1999; Kelly et al., 2002). This is about the same rate identified in studies done

by McKinsey and Company and Coopers and Lybrand at the beginning of 1990s (Stafford,

1994, Kelly et al., 2002). Especially in the early stage of alliances, as Kelly et al., (2002) state

that the initial stage of an alliance is a critical shakeout period fraught with uncertainties and

ambiguities, managers need to find ways to tackle the early shown or potential problems to laid

the foundation for a good relationship later. Studies have shown that two thirds of all alliances

experience severe leadership and financing problems during the first two years (Bronder and

Pritzi, 1992, p.419). Evidence showing that even those ventures that finally succeed must

frequently overcome serious problems in their early years (Kelly et al., 2002). For instance,

Bleeke and Ernst (1993) found out that 66% of cross-border alliances they studied confronted

with serious managerial problems in their first two years of the alliance. The other study done

by a Bain and Co. also indicated that in every ten alliance relationships, five would fail to meet

the partners’ expectations and of the other half, only two would last for more than four years

(Rigby and Buchanan, 1994).

There are many reasons for the high rate alliance failures. Draulans et al. (2003) find that an

inadequate capability to manage the alliance is the main reason. As Robert E. Spekman state

that leadership played a key role to the success of alliances. Drawing specially trained strategic

alliance leaders from outside the organization, as many companies do, can be problematic;

strategic alliance managers need the knowledge, relationship and credibility that only an insider

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can bring to the table (Ellis, 1995). Another frequently cited reason is poor selection of alliance

partners; due to competitive pressures, many firms rush into alliances without adequate

preparation or understanding of their needs, the incompatibility of partners will lead to

insurmountable problems (Medcof, 1997; Dacin et al. 1997). Other reasons that are often cited

for the alliances failure include lack of trust between partners, cultural conflicts, incompatible

chemistry, unique risks inherent in strategic alliances, and lastly focusing on alliance formation

rather than sustaining the alliance (Gomes-Casseres, 1998; Kelley et al., 2002).

International alliances are increasingly central to the corporate success; however, they often end

up in divorce. As Fedor and Werther (1996, p.39) point out that in many cross-boarder alliances,

the failure stems from the deal maker’s concentration on strategies, financial, and legal

complexities, while largely ignoring issues of “cultural compatibility” among the alliance

partners. Therefore, cultural differences could become a barrier to success, especially at the

initial stage. Besides that, the failure to build trust between partners in the early stage of the

alliance could be detrimental to further development to the next stage. Trust building is also

closely linked to the cultural compatibility between partners. Stafford (1994, p.70) indicates

that if partners lack compatible cultures and expectations, the trust between partner employees

may not materialized, which will lead to inter-partner employee conflicts.

The next section in this chapter explores literature to identify the importance of trust-building

and cultural compatibility in managing the partnership in the early stages of strategic alliance.

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2.4 Managing Partnership in the Early Stage of Strategic Alliances

2.4.1The Necessity of Early Stage Alliance Management

Researchers as Yoshino and Rangan (1995), Child and Faulkner (1998), and Parkhe (1998a) (as

cited in Kelly et al., 2002) suggest that the real challenge of strategic alliance management is to

transform collaborative agreement into productive and effective relationships. It requires the

close attention to the people aspects of alliances especially in the early stage of the

collaboration. However, as Kelly et al. (2002) point out that there are few studies that have

examined how the process of cooperation between individuals and organizations actually takes

place in alliances, and how these problems could affect the sustaining of the collaboration. Doz

and Hamel (1998) note that the initial context of an alliance seldom encourages cooperation, as

the managers and staff will most likely find themselves under unfamiliar circumstances, in

which they may have different assumptions, attitudes and expectations about the alliances as

well as private fears about their role in it. As Kelly et al. (2002) note that this situation will

probably be further complicated due to cultural differences, communication barriers, lingering

suspicions about partner motives and latent opposition in the partner companies. If these early

uncertainties, conflicts and tensions are not handled carefully and deliberately, they can cause

mistrust and reinforce an “us versus them” mindset in the partners, thereby undermining the

foundation of the alliance (Doz and Hamel, 1998; Kelly et al., 2002).

Arino et al. (2001) indicate the importance of managing cultural conflicts from the very start of

the alliance, as they can be obstacles to keep partners from effective communication, especially

in cross-border alliances. As it is further explained that as employees at all levels are the ones

that make the alliance work on a day-to-day basis, management must ensure that they can work

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harmoniously under diverse circumstances, which is the same to the senior management

personnel. Therefore, it is top of the priority at the initial stage to avoid the “us and them”

syndrome at all costs and be ruthless in eradicating stereotyping, as it breeds distrust and

contempt (Arino et al., 2001). Doz and Hamel (1998) suggest that the early process of

collaboration is at least as important as the strength of the strategic premise on which it is based.

In their viewpoint, the decisions made and particularly the nature of the interaction that take

place during the initial stages of the alliance will more likely to play a determining role in its

future development and even the final success (Kelly et al., 2002, p12). This argument is also

supported by other authors. More and McGrath (1996) note that the success of strategic

alliances largely attribute to the ability of companies to effectively manage relationship issues;

and Wildeman et al. (1996) found out that relationship problems were the cause of the

premature termination of 70 % of alliances. Therefore, a lack of attention to issues like trust,

chemistry and culture could become the trigger for the failure of most alliances especially

during the premature stage of the collaboration, which in turn, become the key to achieving

mutually rewarding successful alliance (Kok and Wildeman, 1998; Kelly et al., 2002).

Therefore, due to the uncertainties and ambiguities that typically pervade at the initial stage of

an alliance, it is necessary view the early stage of cooperation as a period of mutual discovery,

sense making and trust building for the partners and is a key stage to the success of alliances

(Kelly et al., 2002).

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2.4.2 Trust-Building

To make the alliance successful, managers need to make their main focus on bridge building; it

is significant for them to create an environment that is trustful for partners (Ellis, 1995).

However, some academics have claimed that the lack of study in this aspect and called for more

systematic research into the role of trust in business relations, observing that: “It is clear that

research on trust needs to advance beyond a catch-all residual in the unexplained random error.”

(Koza and Lewin, 1998; Arino et al., 2001).

There are several interpretations of the meaning of trust, one of which is defined by Arino, et al.

(2002) that trust is “the belief that the other party will subordinate their own selfish interests to

the interests of the alliance (i.e., the partner relationship) without most expected situations.”

According to Faulkner (1995), trust means having sufficient confidence in a partner to commit

valuable know-how and other resources to the venture despite the risk of the partner taking

advantage of this commitment (cited in Kelly et al., 2001, p.12). Sabel (1993) defines it as the

mutual confidence that no party to an exchange will exploit the other’s vulnerability (cited in

Kelly et al., 2001, p.13). According to the viewpoint of Child and Faulkner (1998), calculation,

mutual understanding and bonding are the foundations on which trust develops. Figure 1

shows phases of alliance development and the evolution of trust.

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Figure 1: Phases of Alliance Development and the Evolution of Trust

Phase of Alliance
Formation Implementation Evolution
Development over
time

Key Elements Mutual


Calculation Bonding
in Trust Understandin
g

‘Being prepared to ‘Getting to know ‘Coming to identify


work with you’ about you’ you as a partner’

Source: Child & Faulkner, 1998, p.56

Arino et al. (2001), and Zaheer and Venkatraman (1995) note that the importance of

trust-building lies in the function that it may serve as a substitute for, or a complement to more

formal governance structures, as this kind of intangible mechanism implies an expectation that

one’s partner will subordinate its selfish interests to the “joint interest” of the alliance under

most, but not all, conceivable circumstances. As Ring and Ven de Ven (1992), and Parkhe

(1998b) indicate that the existence of trust in a corporation reduces coordination costs and

opportunistic behaviours, and facilitates conflict resolution and can help alliances adapt to

changing environments (cited in Kelly et al., 2001, p.13). Trust building is most likely to take a

long time, and reliance on trust is a complex probabilistic decision for the management, but it is

a critical determinant to the alliance success (Williamson, 1993). Parkhe (1998b) believes that

it is vital to focus attention on avoiding surprises, being trustworthy and being know to be

trustworthy, as he indicates that trust is brittle and if damaged in the early stages of an alliance it

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could be extremely difficult to re-establish (cited in Kelly et al., 2001, p.13).

To sum up, creating and sustaining trust in collaboration is hard, and international alliances

make it even harder as it involves with cultural differences and clashes in attitudes and

assumptions. Without trust between partners, it is most likely that in the alliance, sharing

information, making investments and commitments will become impossible or difficult (Kelly

et al., 2001, p.13). The authors further state that in the absence of trust, an atmosphere of

suspicion is likely to prevail, which will lead to the divorce of the alliance.

2.4.3 Cultural Compatibility

In the international alliance formation process, there is a key element of operational success

apart from the consideration of the aspect of strategy, finance and law, that is the cultural

dimension (Fedor and Werther, 1996). It is also suggested by Pekar and Allie (1994) that

successful alliance management places great emphasis on human and cultural aspects of the

process. Geert Hofstede (1980, p.25) is a respected authority in the field of the global culture;

he defined culture as “the collective programming of the mind which distinguishes the

members of one human group from another.” Hofstede’s (2005) four cultural dimensions (i.e.,

power distance, collectivism & individualism, femininity & masculinity, and uncertainty

avoidance) help to explain the difference between various countries, and also provide a scale to

explain various work values and attitudes under different national cultures. Each country’s

distinct culture may accelerate or hinder the development of multinational corporations,

especially during cross-border alliances when different cultures meet. As the differences in

national culture result in the formation of differing managerial ideologies which, in turn, have

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the potential to affect strategic decision processes in firms (Hitt et al.,1997; Dacin et al., 1997,

p.6).

Corporate culture is defined as the set of values that establish employee norms and expectations,

in reality the cultures of the prospective partners are often overlooked. More often, cultural

clashes resulting from the myth that once an alliance is established, the alliance will form its

own hybrid culture can derail the prospect for synergistic benefit of the alliance (Stafford, 1994,

p.70). International alliances are often characterized by differing, if not conflicting cultural

values, beliefs and assumptions that transferred from the parent company, it requires the time,

energy, and management talent to reconcile these differences (Fedor and Werther, 1996, p42).

They suggest that cultural compatibility or a good cultural match is important; it may play a

larger role in successful cross-boarder alliances than any other particular strategic or financial

synergy. It is because that when a company finds a partner that shares its values and beliefs, the

resulting clarity and strength enhance and accelerate the alliance, besides that, the compatibility

allows partners of the international alliance to focus their time, energies and talents on the

external business environment, thereby raising the chances of success in the international

alliance (Fedor and Werther, 1996, p.43). However, if the partner lacks compatible culture, or

even worse with conflicting cultures, the trust among employees may not realized and conflicts

will occur. As Mishler (1965) and Child and Faulkner (1998) point out that the greater the

cultural differences, the greater the likelihood that barriers to communication will occur and so

will the misunderstandings.

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Despite the differences in corporate cultures, creative and effective management of cultural

differences can lead to a greater variance in ideas and enhanced innovation and dynamism,

which will lead to a better group performance (Cox, 1993; Jackson et al., 1995). A variety of

mechanisms provided by Barnes and Stafford (1993) may be useful for adopting partner

corporate cultures within strategic alliances (cited in Stafford, 1994, p.71). It is summarized as

follows:

a) Potential cultural differences can be brought out into the open so that co-operative

activities can be designed with these differences in mind.

b) Education and training among partnering personnel can facilitate adaptation and

understanding as well.

c) A mutually respected and unbiased consultant can propose recommendations for new

inter-partner programmes to mediate and defuse conflicts.

d) The use of joint ‘rituals’ and ‘ceremonies’ can force each partner’s employees to

become involved in the change process and support a mutual culture.

e) The hiring of new personnel can diffuse and mix the partner cultures.

2.5 Learning Ability during the Strategic Alliance

Doz and Hamel (1998) note that strategic alliance comes along with the learning process from

its partners, and the internalization of the new knowledge; thereby benefits the firm. As has

been described above, alliance has many advantages; it can serve as channels for the transfer of

technology and enable other kinds of organizational learning (Gomes-Casseres, 1996, p.45). As

Neil et al. (2001) indicate that learning from its partners by accessing their critical information,

know-how or capabilities is one of the most important motivating factors for forming an

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alliance in the first place. Moreover, for the success of an alliance and the materialization of the

maximized benefits for the partners involved, it is essential for companies to develop an

alliance learning capacity to maximize learning, sharing and absorbing knowledge and skills;

otherwise, it will be hard for a company to gain added value from a partnership (Praise and

Henderson, 2001; Duysters et al., 1999, p.349). Child and Faulkner (1998) indicate that a

partner’s capacity to learn is determined by a combination of the following factors (cited in

Aliyu, 2004, p.32):

a) Knowledge transferability;

b) Receptiveness of members to new knowledge;

c) Possession of necessary competences to understand and absorb the knowledge; and

d) The extent to which the partner has incorporated the lessons of experience into the way

it approaches the process of learning.

Companies benefit a lot from competitive collaboration if adhere to a set of simple but powerful

principles, one of which is being learning-oriented, as Hamel et al., (1989, p.134) suggest that

learning from partners is paramount, they also state that successful companies are always those

that view each alliance as a bridge and access to their partner’s broad capabilities. For them,

alliances bring with it “synergy” effect, and they use the relationship to acquire skills and

know-how in areas outside the formal agreement and systematically diffuse the new knowledge

throughout their organization. For this aspect, most Japanese companies are the good example

for being learning-oriented in the alliance relationship with U.S. companies, which partly

contributed to Japan’s fast economic and high-tech development. For Japanese firms, it is

self-evident and prevalent across the organization when forming an alliance that the purpose of

25
the alliance is to learn. This idea is enhanced by Hamel et al., (1989, p.138) that the company

must enhance the capacity to learn, the purpose of the alliance that employees perceived is a

determining element of whether collaboration leads to competitive surrender or revitalization.

However, the learning process also accompanies with risks, as what has been pointed out by Lei

and Slocum (1992, p.98) that “…without clearly understanding and identifying the risks

inherent in alliances, collaborations may unintentionally open up a firm’s entire spectrum of

core competencies, technologies, and skills to encroachment and learning by its partners.” This

is perceived by Fedor and Werther (1996, p.41) as the alliance dilemmas—‘weigh the promise

of competitive advantage [by learning from its partners] against the threat of giving away

proprietary knowledge, technology, or market access to the alliance partner, who is either a

potential or actual competitor.’ Besides the risks of core knowledge leakage, the partner may

‘out-learn’ an organization, become independent and leave the organization redundant (Hamel,

1991; cited in Aliyu, 2004, p.33). Nevertheless, Garai (1999), from both the legal and strategic

perspectives, suggests some ways (i.e., due diligence, shared values, dedicated agreements and

document with care and trust-building) to get the most out of every alliance while minimizing

the risks of intangible resources being ‘stolen’ and preventing from opportunism between

partners (cited in Aliyu, 2004, p.33).

2.6 Brand Management under the Strategic Alliance

As Wreden (2005, p7) indicates that brands are “valuable corporate assets that can increase

profitability, sales and even share value”, and as other investments, branding is a “strategic

investment” for the firm. Brand equity has become one of the most significant marketing

26
concepts since 1980s, and it represents the “added value” endowed to a product as a result of

past investments in the marketing for the brand (Keller, 1998, p.44). As Temporal (2002, p.37)

states that positioning process is vital to brand management and this process helps one firm to

make the strategic leap from being perceived as an ordinary brand to being seen as world-class,

with all the rewards this brings. He notes that whatever strategy or combination of strategies

one adopts; the position must be capable of being communicated simply and carefully, to make

the audience get the real message. Most positioning is a repositioning process, it can be caused

by several factors, i.e., a firm’s change in strategic direction, new or revitalized corporate

identity, or change in competitor positioning, some companies find it worthwhile to change

their identity completely, not just with a new logo, but possibly with a name change, a new

personality in order to overcome the problems of the past or to take the advantage of new

opportunities, and in the present day, repositioning is becoming more frequent as companies

seek to keep up with the pace of change and innovation (Temporal, 2002).

Strategic alliance is an effective and flexible way for different companies to share or contribute

their unique and differentiated resources, among which, branding is one of the important

intangible assets (Doz & Hamel, 1998). As marketers try to capitalize on the complementary

features of different brands, brand alliances are becoming more and more frequent.

Co-branding is a brand alliance strategy and it is defined as ‘two or more brands are

simultaneously presented to customers’ and it has now become a strategic tool for many

companies to attain higher market shares (Swaminathan, 2006; Geylani et al., 2006, p.44).

Brand alliances or co-branded strategies bring with both opportunities and challenges for

corporate brand management (Swaminathan, 2006; He & Balmer, 2005). As Swaninathan

27
(2006, p.43) indicates that co-branding can result in enhanced brand recognition, increased

product differentiation and greater market share for the focal product, a successful co-branding

can improve the perception towards the partner’s brand and enhance their brand equity (i.e.,

brand image reinforcement); but a negative one can also backfire and dilute the partner’s brand

equity. A successful example is Virgin Atlantic joining up with Singapore Telecom’s mobile

company-SinTel Mobil, to form Virgin Mobile for the Asian market. SinTel has a good

knowledge of Asian market but itself is not a really acceptable and well-known regional brand

name; whereas, Virgin enjoys a reputable brand name but with little knowledge in the Asian

markets. Therefore, it turns out to be an ideal marriage with the combination of SinTel’s local

and technological knowledge and Virgin’s brand values (Temporal, 2002, p.90).

However, as Temporal (2002) further argues that the extension and combination of brands can

be tricky, sometimes, alliances, mergers and acquisitions (M&As) cause serious brands

problems, and the frequently occurring problem is consumer confusion. The inconsistent

images of the partner brands may result in confusion about the co-branded products and cause

high uncertainty (Geylani, et al., 2006, p.44). In order to maintain the strength and favorability

of brand associations in the market, it is critical for the firm to stick to the brand consistency

along with its corporate strategic plan. However, brand consistency does not mean that the firm

should not make any changes to the brand. On the contrary, being consistent in managing brand

equity requires many tactical shifts and changes in order to maintain the strategic thrust and

direction of the brand along with the corporate development (Keller, 1998). Whatever the

multi-brand portfolio contains, it must be clearly established that there is no overlap between

brand territories, and the failure to achieve this will result in consumer confusion and

28
sub-optimization of sales (Temporal, 2002, p.84). Besides that, Geylani, et al., (2006, p.44)

suggest that ‘it is not necessarily in a brand’s interest to choose the best performing partner on

the attribute of interest, rather, it is optimal to collaborate with a brand that is perceived to be of

only moderately higher performance’. In addition to that, a dual-branding arrangement through

which both brands are described by the same set of attributes can be a useful mechanism to

reduce or eliminate the contrast effects between two brands, it is also perceived as an

assimilation process (Wyer and Srull, 1989; Levin and Levin, 2000).

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CHAPTER 3: METHODOLOGY

3.1 Research Approach

The research aims to figure out how to make the strategic alliance work in the early stage

between Lenovo and IBM, and to apply principles into reality. The literature part in the

previous section lays the theoretical foundation for the analysis and expatiates on various

factors that contribute to the success of an alliance. The researcher attempts to analyze the case

from the primary data collecting from the interviews, and the secondary data.

Research design is the general plan about how to get answers to the research question(s), it is

the argument for the logical steps which will be taken to link the research question(s) and issues

to data collection, analysis, and interpretation in a coherent way (Saunders, et al., 2007; Hartley,

2004, p.326). Selltiz et al. (1981, p.50) define design as the deliberately planned ‘arrangement

of conditions for analysis and collection of data in a manner that aims to combine relevance to

the research purpose with economy of procedure’.

Case studies are widely used in organizational studies and across the social sciences; they are

normally studied to provide insights into an issue, a management situation or a new theory in

business studies (Hartley, 2004; Ghauri, 2004). They are beneficial because it provides rich

understanding of the context of the research and the process being enacted (Morris and Wood,

1999, cited in Saunders et al., 2000). Robson (2002, p.178) defines case study as ‘a strategy for

doing research which involves an empirical investigation of a particular contemporary

phenomenon within its real life context using multiple sources of evidence’ and it is both the

30
process of learning about the case and also the product of our learning (Ghauri, 2004, p.109).

Yin (2003) also highlights the importance of context, figuring out that within a case study the

boundaries between the phenomenon being studied and the context within which it is being

studied are not clearly evident (cited in Saunders, et al. 2007, p.139). As Hartley (2004, p.323)

states that a case study is a research strategy that consists of a detailed investigation, often with

data collected over a period of time and of phenomena studied within the specific context. And

he further points out that the aim of a case study is to provide an analysis of the context and

processes that illuminate the theoretical issues being studied.

Case studies are a preferred approach when ‘how’ or ‘why’ questions are to be answered, when

researcher has little control over the events and when the focus is on a current phenomenon in a

real-life context (Yin, 1994, as cited in Ghauri, 2004, p.110). Ghauri and Gronhaug (2002)

argue that when such types of questions are asked, a case study method as a research strategy is

recommended. Hence it applies to the Lenovo-IBM case study in this research.

A case study can be either quantitative or qualitative; it can also use both (Ghauri, 2004; Hartley,

2004). As for the nature of the case in this research, it was decided that the research be

qualitative. In addition, qualitative research goes beyond the measurement of observable

behaviour (the ‘what’ questions) and seeks to understand the meaning and beliefs underlying

the action (the ‘why’ and ‘how’ question) (Buckley and Chapman, 1996; cited in

Marschan-Pirkkari and Welch, 2004).

31
The methods of quantitative and qualitative are widely used in business and management

research to differentiate both the data collection techniques and data analysis procedures

(Saunders, et al., 2007, p.145). As Denzin and Lincoln (2000) argue that quantitative research

methods focus more on the measurement and analysis of causal relationships between variables

but not process. It is mainly used as a synonym for any data collection technique (i.e,

questionnaire) or data analysis procedure (i.e., graphs or statistics) that generates or uses

numerical data (Saunder, et al., 2007, p.145). However, qualitative method is used mainly as a

synonym for any data collection technique (i.e., interview), or data analysis procedure (i.e.,

categorizing data) that generates non-numerical data (Saunder, et al., 2007, p.145). Compared

with quantitative data, qualitative data provides a deeper understanding than would be obtained

purely from quantitative data, it is a useful method to access rich information and it is best to

explore the depth and complexity of phenomenon (Silverman, 2000, p.8). Qualitative research

method takes a more holistic approach to the research object and studies a phenomenon in its

context (Marschan-Pirkkari and Welch, 2004, p.8).

Qualitative methods have been defined as procedures for ‘coming to terms with the meaning

not the frequency’ of a phenomenon by studying it in its context (Van Maanen, 1983, p.9; cited

in Marschan Pirkkari and Welch, 2004, p.6). Moreover, Easton (1995) notes that qualitative

research method is often combined with interview-based case studies (hence corresponds to the

Lenovo-IBM research case) (as cited in Marschan Pirkkari and Welch, 2004, p.6). Therefore,

the qualitative research is the most appropriate in this research, as issues here cannot be

measured in quantitative terms.

32
The interview is the most commonly used method of data gathering in qualitative research, and

it can address quite focused questions about various aspects of the organizational life (King,

2004). Kvale defines the qualitative research interview as ‘an interview, whose purpose is to

gather descriptions of the life-world of the interviewee with respect to interpretation of the

meaning of the described phenomena’ (Kvale, S., 1983, p.174; cited in King, 2004, p.11). The

goal of qualitative research interviews is to see the research topic from the perspective of the

interviewee and to understand how and why they come to have this particular perspective; and

the form of interview is employed in various ways by every main theoretical and

methodological approach, i.e., face-to-face interview, by telephone or via the internet (King,

2004, P.11). As King (2002, p.17) points out that the qualitative research interview is ideally

suitable for examining topics in different levels of meaning need to be explored, which is very

difficult for quantitative methods to achieve. Daniel and Cannice (2004, p.186) further indicate

that when there is a small population of possible respondents, interview-based research may be

the optimal choice as in such case, the researchers must focus on the depth of collected data

when the breadth is simply not attainable, through this method, it can offer an opportunity for

the researcher to acquire rich information from each respondent. As for the Lenovo-IBM case,

the possible respondents are small in number and hard to access, besides that, they are also

geographically dispersed, an internet-mediated interviewing, which is also called as “electronic

interview” is adopted by the researcher.

Morgan and Symon (2004, p.23) use the term electronic interview to refer to ‘the use of open

questions and an interactive approach, moving more towards forms of research such as

face-to-face and telephone interviews’, it can be held both in real-time using the internet as well

33
as those that are undertaken off-line, in asynchronous mode, using e-mail communications.

The method of electronic interview has the potential benefit of accessing a broad range of

extremely busy people; it can be used as a substitute or complementary way to face-to-face

interview as it can overcome some access barriers (Morgan and Symon, 2004, p.24). The

authors further state that qualitative interviews themselves vary by depth, structure and time, so

does the electronic interviews, they are the new symbolic form of ‘oral-text’ exchange with

both strengths and weaknesses that should be taken into consideration to the research purposes

(Morgan and Symon, 2004, p.24). As Morgan and Symon (2004, p.23) emphasize that to

generate interview style data using e-mail requires a series of communication (one list of

questions would be more akin to an open-ended questionnaire). They indicate that in the

electronic interview, a number of e-mails need to be exchanged over an extended period of time.

The series of processes include the initial small number of questions or topic are raised to

hopefully get the reply of the participant by offering their thoughts and opinions; the

researcher’s respond to those ideas and further questions regarding to the other linked issues.

As Morgan and Symon (2004, p.23) suggest that the electronic interview can be a time

consuming process, these communications may last for some weeks until the topic is exhausted

or the participant shows signs of losing interest. Thus, time issues and maintaining interest of

the respondents are the particularly difficult aspects of electronic interview (Morgan and

Symon, 2004; Saunder et al., 2007).

In addition, secondary data also contributes to the research. Secondary data is defined as a kind

of data that has already been collected for other purposes (Hakim, 1982; cited in Saunders et al.,

2000). As Saunder et al. (2007) note that it is the most frequently used data in a case study or

34
survey research strategy. The main advantage of using the secondary data is the enormous

saving in resources, especially the time and money (Ghauri and Gronhag, 2005, as cited in

Saunder et al., 2007, p.257). Besides, the authors further argue that it could be useful to

compare the data that have collected primarily with the secondary data.

3.2 Data Collection

The data of this research were collected through two means: electronic interview and secondary

data.

(a) Electronic Interview

The interviews were conducted by e-mail with the people both from Lenovo employees and

former IBMers to gain the insider’s views about the company’s experience in the early stage of

the strategic alliance. The 18 people participated in the interview are varied in positions, from

senior managerial personnel to sales people, the aim of that is to obtain a relatively complete

and real inside views.

(b) Secondary Data

The secondary data mainly obtained from a wide range of sources, including journals,

publications, reviews from the analysts, company annual report and the Internet information.

For this study, such data were mostly from the company’s publicized documents and reports,

and the analysts’ perspectives that are supposed to have the authoritative status.

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3.3 Data Analysis

Impression management is defined by Colleen and Broadway (2007, p.343) as ‘the

goal-directed activity of controlling information about a person, object, entity, idea or event’,

and it aims to attain certain purposes and avoid the consequences of negative actions. It is the

process by which people attempt to influence the image of certain things, and used to create and

maintain specific identity (Drory and Zaidman, 2007, p.290).

As for the characteristics of the secondary data, it cannot be denial this kind of information is

biased, which is called by Saunders et al. (2007, p.267-8) as measurement bias—‘deliberate or

intentional distortion of data or changes in the way data are collected’, which are difficult to

detect. Deliberate distortion occurs ‘when data are recorded in accurately on purpose and is

most common for secondary data sources such as organizational records’, which is gathered to

target certain group of people (i.e. shareholders) or for certain purposes (i.e. establishing a

sound social recognition) (Saunders et al., 2007, p.268). The authors further point out that the

change in methods when collecting data also introduce measurement bias. However, to some

extent, it can also be a useful source to get the information as the analysts are generally more

experienced with deeper insights, and they are generally have a more objective stance. The

primary data from the electronic interview is the information from an insider’s view, which

might be complementary to the secondary data or result in unforeseen discoveries after the

comparison between the two analyses.

Therefore, when conducting this case study, the research decides to analyze the phenomenon

respectively based on the secondary data publicized by the company as well as the reviews from

36
the analysts; and the inside perspectives from the electronic interview. It is referred as

triangulation—‘the collection of data through different methods or even different kind of data

on the same phenomenon’, and it is one of the defining features of a case study (Ghauri, 2004,

p.115). And he further argues that the major benefit of this method is to provide a more

complete, holistic and contextual portrait of the project under the study after checking and

validating the information from different source and examining it from different angles (Ghauri,

2004, p.115). After making a comparison between the two analyzing results from secondary

data and interview, the researcher intends to provide a more complete and holistic view of the

case study.

3.4 Limitation of the Research

Due to the time limit and other access barriers, the electronic interview by e-mail

communication is compressed into onetime process. All questions that are related to concerned

issues are prepared in one e-mail beforehand before sending to the participant that have

contacted through personal relationship. As the number of participants is small and chosen

randomly in the organization, it may reflect some biases and subjective opinions within the

interviewee. This result of the electronic interview will be used as the primary research for the

dissertation, but the amount of the collected data, as stated earlier, might be limited. Besides

that, just as what has been mentioned above, relying on secondary data also has the

disadvantage that the data might be collected for specific purposes that probably differ from the

researcher’s question(s) or objectives (Denscombe, 1998, as cited in Aliyu, 2004, p.36).

37
Besides the data limitation, the researcher’s own biases or preferences beforehand might

impose an effect upon the research, though the author may have tried to remain as objective as

she can. Moreover, the insufficient time and resources also constrain this dissertation to some

extent.

38
CHAPTER 4: RESEARCH SETTING

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, China’s 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

39
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 industry’s 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).

40
4.1 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 IBM’s 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 company’s 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 China’s 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 (People’s 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 world’s

41
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 firm’s global stretch. At the end of the year

2004, Lenovo and IBM announced the agreement of Lenovo’s acquisition of IBM’s Personal

Computer Division, which was IBM’s global PC (desktop and notebook computer) business

(Lenovo.com, 2007b). In May 2005, Lenovo’s acquisition of IBM’s 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 Lenovo’s 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).

4.2 The Strategic Alliance with IBM

According to Lenovo’s 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 Lenovo’s pace into the international market. On December 8th, 2004,

Lenovo announced that it would acquire IBM’s global PC business for US$ 1.25 billion.

43
According to the terms of the agreement, the acquisition included IBM’s desktop and notebook

computer business, as well as its PC-related R&D centers, manufacturing plants, global

marketing networks, and service centers (Lenovo’s 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 (Lenovo’s

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).

4.3 The Necessity to Form the Strategic Alliance

Lenovo was known as one of China’s most promising companies in the early 1990s, with its

sales more than tripled between the year 1994 and 1998, and Asia’s 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 Lenovo’s margins. According to Citigroup Smith Barney, although Lenovo still

accounted for 27 per cent of China’s PC market, the growth rate in 2003 far lagged behind the

market growth rate; by contrast, Dell’s shipment in China grew 48 per cent (Lau, 2004a). Apart

44
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 Citigroup’s 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 maker’s “preferred supplier” of support services

and customer financing. For Lenovo’s 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).

4.4 Motives Toward Lenovo & IBM’s Strategic Alliance

Lenovo’s takeover of IBM’s 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

45
(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 Lenovo’s 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 “Lenovo’s

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 Lenovo’s products will be integrated into IBM’s global service offerings, which also

became the impetus to the deal (Lenovo.com, 2007c). As Stephen Ward, former head of IBM’s

PC division said that IBM promised to push Lenovo’s 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 world’s 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 IBM’s 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, Lenovo’s 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 IBM’s 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’ (People’s Daily

English 2004). He also added that, the alliance with IBM would also help establish Lenovo’s

international recognition by leveraging IBM’s 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 (People’s Daily English, 2004).

For IBM’s aspect, it expects that the deal with Lenovo, China’s largest PC maker will further

consolidate its presence in the world’s fastest growing IT market (People’s Daily English, 2004).

The strategic alliance with Lenovo might become a move towards the shifting of demographics

(Musthaler, 2005). On the one hand, IBM’s 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 5: ANALYSIS ON THIS STRATEGIC ALLIANCE

5.1 Analysis — Secondary Data

5.1.1 Problems Occurred 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 Lenovo’s

ability to turnaround IBM’s PC business into a profitable one. UBS said in a report that, “we

believe that the acquisition will boost Lenovo’s long-term profitability, as the two parties offer

complementarities and IBM’s 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 company’s prospect. Besides that, Lenovo’s

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., Lenovo’s

shares falling), IBM’s competitors were quick to predict that the deal would fail. Duane Zitzner,

the head of HP’s 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 IBM’s 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 IBM’s 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 Lenovo’s share value. Although Lenovo’s 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 didn’t 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 IBM’s

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 didn’t change. Although

sales jumped almost 400 per cent as a result of the acquisition, the company’s 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,

Lenovo’s global PC shipment grew 12 per cent year-on-year, lower than the industry’s 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 didn’t 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 Lenovo’s 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 Lenovo’s

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 industry’s average rate. Referring to the change of Lenovo’s 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, Lenovo’s 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, Lenovo’s 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 Lenovo’s 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 company’s 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 Asian’s company’s management styles

with those of the western’s, 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 Lenovo’s 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

didn’t 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, ‘It’s 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 IBM’s PC division, it is hard to make any change that could link to Lenovo’s

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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company’s 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

Lenovo’s 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. company’s laptop production lines,

product developers, and distribution networks (Dickie & Lau, 2004b).

5.1.2 Measures Have Been Taken and the 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 Lenovo’s 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 firms—Texas

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, Lenovo’s

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. Amelio’s 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 Lenovo’s 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, Lenovo’s 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.

company’s former PC unit, even though Lenovo acquired the right to use the IBM name under

the five-year licence.

5.2 Analysis — Electronic Interviews

5.2.1The Main Questions Raised in the Electronic Interview

(1) Do you think it is a necessary and beneficial move for Lenovo to set up strategic alliance

with IBM? Why?

(2) What problems do you think have been encountered during the initial stage of the

partnership?

(3) Were all the employees well informed before the strategic move?

(4) Does it make any difference to the employees before and after the alliance? In which

way?

(5) Do you have direct contact with IBM employees?

(6) Do you perceive a lot of cultural differences between Lenovo and IBM?

(7) Does the company set up a communication network to communicate the key objectives

of alliances to all employees?

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(8) Does the company provide any training or education among partnering personnel to

facilitate understanding after the alliance?

(9) Does the company organize any annual meetings or other recreational activities

between Lenovo and IBM employees?

(10) Do you have the feeling that you’ve learned under the strategic process?

(11) Do you think the alliance with IBM will exert a great positive impact on Lenovo’s

brand globally?

(12) What do you think the managerial personnel need to do to make the alliance a

success?

The aim of the interview is to find out deeper and more detailed information from people work

inside the company. The analysis from secondary data in the previous part put more focuses on

the view from outside towards the alliance between Lenovo and IBM; from this part, the

emphasis falls on the internal perspectives.

There are 18 respondents in total, each of whom has different experience and perspectives for

this strategic move at his/her position, thereby it provides a relatively comprehensive view both

from top management (i.e., General Manager) and from the grass roots (i.e., sales person).

5.2.2 Findings from the Electronic Interviews

Among the 18 respondents, 17 of them perceive that it is a necessary and beneficial move for

Lenovo to set up the strategic alliance with IBM, for the reason that establishing this kind of

partnership with a well-established multinational company like IBM will accelerate the firm’s

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further development and it is also an essential strategic move for the firm’s global reach.

As for the problems that have occurred during the initial stage of the partnership, the most

frequently encountered problems quoted from the participants are listed as follows.

 Culture clashes: As predicted above, the problem of culture clashes come first when this

cross-border alliance materializes. In the initial stage of the alliance with IBM, the two

different corporate cultures brought with many frictions and obstacles among the

employees during the work. From the interview, it turns out that among the employees

who have had direct contact with IBM employees, most of them feels that there are a lot

of cultural differences between Lenovo and IBM, such as the ways of thinking, working

styles, etc.

 Trust building: The second problem comes along with is the mutual trust from both

sides, which has been recognized as the foundation of the partnership. According to the

views of the respondents, trust has appeared to be an issue for the cooperation and

communication between the partners in the early stage.

 The gulf between management level and the grass roots in the company. The

decision-making process or strategies always only belong to the top management, but

has not been reached a consensus across the organization.

 Lack of channels that enable the communication between the two companies, which is

perceived as an essential way to facilitate the understanding and establish personal

relationship.

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Before the alliance, the employees were not well informed of this big strategic move of the

company, relating to answers provided by the respondents, it can be seen that they either had no

idea of this deal or just had a rough thought of it. In their words, almost all of them said that they

only knew the news that the company would acquire IBM’s PC Business and establish

partnership with IBM, but nothing else. For this reason or others, employees found that they

were not so involved into this action as the company itself, and most of them perceived that it

made little difference to them before and after this strategic alliance. As what has been said by

the senior managerial personnel, the company did establish some channels to communicate

with employees before the alliance, but very rare, just some scattered informative propaganda

relating to the key objectives of the alliance, how to cooperate under different corporate culture,

and technical aspects. Referring to the response or experience of the employees, it is not hard to

tell that the informative channels of the company are far from enough before the alliance.

Though the people from top management said that after the alliance the company has set up a

series of communication networks in a systematic way, and also has provided some training

activities among partnering personnel to facilitate the understanding; most of the respondents

from down level have received only a few of them. Besides that, compared with the employees

in Lenovo, it turns out that the former IBM side’s employees have received more training

activities. Therefore, the problem occurs at the implementation process. It mainly matters to the

company’s focus of these activities, as well as the motivations or willingness of the employees

to participate in this strategic move. In addition to that, the company has organized the annual

meetings and some recreational activities between Lenovo and IBM employees, but as the

situation mentioned above, it has not been well received by the employees.

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Learning from the partner is one of the main driving forces of the strategic alliance, and

moreover, the degree and ability of learning is also a determining factor to the success of an

alliance. However, from the results of the interview, it revealed that most of the interviewees

responded that they have only learnt a little or nothing from the partner during the alliance

process, only a few of them said that they have learnt a lot, which were mainly related to

different corporate cultures, managerial conceptualization, sales & marketing skills.

As for the impact of the alliance with IBM over Lenovo’s brand globally, most of the

respondents, including the top management personnel perceived that it definitely would exert a

great positive impact on its global brand recognition. Only two of them concerned that it might

cause negative impact, such as brand confusion among the three co-used brands—Lenovo, IBM

and ThinkPad; one of whom is from the sales department who has direct contact with customers

and the other is related to the technical support of the product.

5.2.3 Measures to Be Taken and Limitations

As stated by Fedor and Werther that 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. What’s

more, for Lenovo’s 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,

66
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.

From the results of the interview, we can find out that the learning capacity of the company is

far from satisfaction; hence 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 organization’s 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.

67
Due to Lenovo’s 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 customer’s response, and

the concerns and experience from the sales people, the co-use of the three brands—Lenovo,

ThinkPad and IBM—could bring with brand confusion in the market. It is essential for the firm

to maintain the brand consistency, as previously suggested, it doesn’t 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 Lenovo’s 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

68
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.

69
CHAPTER 6: DISCUSSION

6.1 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.

70
6.2 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

company’s 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

71
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.

6.3 Methodological Insights

As Saunders et al. (2007, p.272) argue that most research projects require some combination

and primary data to answer the specific research question(s) and to meet the objectives. In this

study, the researcher compares the analysis from her own research findings with that of the

secondary data so as to have a complete perspective, which is shown in Table 3:

72
Table 3: Comparison between analysis from secondary data and electronic interview
Source of
Data Secondary Data Electronic Interview
Index

In the first two years after the alliance:


• Low confidence of shareholders and investors
toward the deal;
• Falling of Lenovo’s Shares’ value;
• Declining sharply of profit margin, despite the
steep increase of the revenue;
• Increasing price competition and pressure from
competitors like Dell and HP.
Financial
--------
Aspect Since the year 2007, the unpleasant situation has started
to change:
• Its worldwide PC shipments increased by 22%,
well above the industry’s average rate;
• Operating margins in the U.S. reached the
highest increase rate since the deal and
turnaround the profitability;
• Shares’ price reaches HK$5.20 compared to HK
$2.75 in late 2004.

• Different business cultures—the tough nut to • Perceive a lot of cultural


crack, i.e., “Americans like to talk, Chinese differences between Lenovo
people like to listen”; language problem and IBM, such as ways of
(discussion between two design teams & Use of thinking, working styles, etc.
Cultural Aspect English names); • Decision-making process is
• The difference between a youthful Chinese centralized to the top
venture and a global giant; management, with little
• Differences in management styles between an involvement of the
Asian company and a western one. subordinates.

73
• The problem of mutual trust
from both sides. Trust has
Trust-Building appeared to be an issue for the
--------
aspect cooperation and
communication between the
partners in the early stage.
• Though Lenovo gains the well-known IBM
brand and the ownership of ThinkPad family, it • Most of the respondents
has not been well perceived in the market to be including the senior
as good as other PC leaders like Dell and HP; managerial personnel,
• Lenovo lost share in the U.S. due to its limited perceived that it definitely
presence in the consumer market and low brand would exert a great positive
Branding
awareness; impact on its global brand
Aspect
• Negative reaction from the local customers in recognition
Lenovo’s home market; the difficulty to attract
the loyal IBM customers;
• Brand confusion in the market;
• Failure to make change to ThinkPad brand
products.
• Most of the interviewees
responded that they’ve only
Learning
• Both sides learn through the partnership learnt a little or nothing from
Capability
the partner during the alliance
process
• Lack of channels that enable
the communication between
the two companies;
• Lack of communication
Communication between the management
--------
Channels level and the subordinates in
the company;
• The implementing problem of
the existing communication
channels — not so effective.

74
CHAPTER 7: 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 partner’s 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 firm’s core

competencies or advantages, which could be the complementary skills and knowledge essential

for a firm’s 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

75
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.

76
Appendix A:

Questionnaire of the Strategic Alliance between Lenovo and IBM

Dear Sir/Madam,

I am a postgraduate student in Nottingham University, U.K., I am doing a survey for my

dissertation. The aim of the research is to evaluate the strategic alliance between Lenovo and

IBM and to analyze how to make the alliance work in the early stage of the relationship. This

research is only used for academic purpose only and any information collected will be kept

confidentially and no individual data will be reported. It would be very helpful if you could

spare some time to answer the following questions. Thank you very much.

Personal Information:

1. How long have you worked in Lenovo? _____________________

2. Title of the Position now: _____________________________________

(Please provide the position title before the alliance (Year 2005) if it is different from

now:_____________________________________)

Questions:

(1) Do you think it is a necessary and beneficial move for Lenovo to set up strategic

alliance with IBM? Why?

(2) What problems do you think have been encountered during the initial stage of the

partnership?

(3) Were all the employees well informed before the strategic move?

77
(4) Does it make any difference to the employees before and after the alliance? In which

way?

(5) Do you have direct contact with IBM employees?

(6) Do you perceive a lot of cultural differences between Lenovo and IBM?

(7) Does the company set up a communication network to communicate the key

objectives of alliances to all employees?

(8) Does the company provide any training or education among partnering personnel to

facilitate understanding after the alliance?

(9) Does the company organize any annual meetings or other recreational activities

between Lenovo and IBM employees?

(10) Do you have the feeling that you’ve learned under the strategic process?

(11) Do you think the alliance with IBM will exert a great positive impact on Lenovo’s

brand globally?

(12) What do you think the managerial personnel need to do to make the alliance a

success?

(13) Thanks a lot again for the precious opinion, and who else do you recommend that I

should contact with in the company in order to get more information for the survey.

If possible, could you please leave his/her contact details or e-mail below so that I

can get in touch with him/her.

If you have further inquiries, please feel free to contact me:

lixlj2@nottingham.ac.uk

78
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