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CASE EXAMPLE

Lenovo computers: East meets West

Introduction
In May 2005, the world’s thirteenth largest personal
computer company, Lenovo, took over the world’s third
largest personal computer business, IBM’s PC division.
Lenovo, at that time based wholly in China, was paying
$1.75bn (A1.4bn, £1bn) to control a business that

Photo: Kim Cheung/AP/PA Photos

operated all over the world and had effectively invented
the personal computer industry back in 1981. Michael
Dell, the creator of the world’s largest PC company,
commented simply: ‘it won’t work’.
Lenovo had been founded back in 1984 by
Liu Chuanzhi, a 40-year-old researcher working
for the Computer Institute of the Chinese Academy of
Sciences. His early career had included disassembling
captured American radar systems during the Vietnam
War and planting rice during the Chinese Cultural
Revolution. Liu Chuanzhi had started with $25,000
capital from the Computer Institute and promised his
boss that he would build a business with revenues of
$250,000. Working in the Computer Institute’s old
guardhouse, and borrowing its office facilities, one of
Liu’s first initiatives was reselling colour televisions. But
real success started to come in 1987, when Lenovo was
one of the first to package Chinese-character software
with imported PCs.
Lenovo began to take off, with Liu using the
support of his father, well placed in the Chinese
government, to help import PCs cheaply through
Hong Kong. During 1988, Lenovo placed its first job
advertisement, and recruited 58 young people to join
the company. Whilst the founding generation of Lenovo
staff were in their forties, the new recruits were all in
their twenties, as the Cultural Revolution had prevented
any university graduates for a period of 10 years in
China. Amongst the new recruits was Yang Yuanqing,
who would be running Lenovo’s PC business before
he was 30, and later become Chairman of the new
Lenovo–IBM venture at the age of 41. It was this new
team which helped launch the production of the first
Lenovo’s Chairman, Yang Yuanqing
Lenovo PC in 1990, and drove the company to a 30 per
cent market share within China by 2005. The company
had partially floated on the Hong Kong Stock Exchange
in 1994.
The deal
Work on the IBM PC deal had begun in 2004, with
Lenovo assisted by management consultancy McKinsey
& Co. and investment banker Goldman Sachs. IBM
wanted to dispose of its PC business, which had only
4 per cent market share in the USA and suffered low
margins in a competitive market dominated by Dell
and Hewlett Packard. Higher margin services and
mainframe computers would be IBM’s future. As well
as Lenovo, IBM had private equity firm Texas Pacific
Group in the bidding. Lenovo offered the best price,
but Texas Pacific was persuaded enough to take a stake
in the new group, while IBM took 13 per cent ownership.
The government-owned Chinese Academy of Sciences
still owned 27 per cent of the stock, the largest single
shareholder.
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The new Chairman,Yang Yuanqing, had a clear vision
of what the company was to achieve, while recognising
some of the challenges:
In five years, I want this (Lenovo) to be a very famous
PC brand, with maybe double the growth of the industry.
I want to have a very healthy profit margin, and maybe
some other businesses beyond PCs, worldwide. We are at
the beginnings of this new company, so we can define
some fundamentals about the culture. The three words
I use to describe this are trust, respect, compromise.
He continued:
As a global company maybe we have to sacrifice some
speed, especially during our first phase. We need more
communication. We need to take time to understand each
other. But speed was in the genes of the old Lenovo.
I hope it will be in the genes of the new Lenovo.
IBM was not leaving its old business to sink or swim
entirely on its own. Lenovo had the right to use the IBM
brand for PCs for five years, including the valuable
ThinkPad name. IBM’s salesforce would be offered
incentives to sell Lenovo PCs, just as they had with
IBM’s own-brand machines. IBM Global Services was
contracted to provide maintenance and support. IBM
would have two non-voting observers on the Lenovo
board. Moreover, Stephen Ward, the 51-year-old former
head of IBM’s PC division, was to become Lenovo’s
Chief Executive Officer.
Managing the new giant
Having an IBM CEO was not entirely a surprise. After all,
the $13bn business was nearly 80 per cent ex-IBM and
customers and employees had to be reassured of
continuity. But there were some significant challenges
for the new company to manage none the less.
Things had not started well. When the Chinese team
first flew to New York to meet the IBM team, they had
not been met at the airport as they had expected and
was normal polite practice in China. Yang and Ward had
disagreed about the location of the new headquarters,
Yang wishing it to be shared between Beijing and near
New York. Ward had prevailed, and Yang moved his
family to the USA. The new organisation structure kept
the old IBM business and the original Lenovo business
as separate divisions. But still the new company needed
considerable liaison with China, a 13-hour flight away,
across 12 time zones. Teleconferencing between the
East Coast and China became a way of life, with the
LENOVO COMPUTERS: EAST MEETS WEST 229
Americans calling typically at either 6.00 in the morning
or 11.00 at night to catch their Chinese colleagues. Calls
were always in English, with many Chinese less than
fluent and body language impossible to observe.
The Chinese nature of the company was an issue for
some constituencies. IBM had had a lot of government
business, and populist members of the US Congress
whipped up a scare campaign about Chinese computers
entering sensitive domains. In Germany, labour laws
allowed a voluntary transition of IBM employees to
Lenovo, and many German workers chose not to
transfer, leaving the company short staffed. There was
some discomfort amongst former IBM employees in
Japan about Chinese ownership. Between the two
dominant cultures, American and Chinese, there were
considerable differences. Qiao Jian, Vice President for
Human Resources, commented:
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.
Cultural differences were not just national. Lenovo
was a new and relatively simple company – basically
one country, one product. Multinational giant IBM
Corporation, founded in 1924, was far more complex.
The Lenovo management team, mostly in their thirties,
were much younger than IBM’s, and the average age of
the company as a whole was just 28. IBM was famous
for its management processes and routines. Qiao Jian
commented: ‘IBM people set a time for a conference call
and stick to it every week. But why have the call if there
is nothing to report?’ On the other hand, IBM people had
a tendency for being late for meetings, something that
was strictly discouraged within Lenovo.
Some results
At first, the response to the new Lenovo was positive.
IBM customers stayed loyal and the stock price began
to climb (see Figure 1). Remaining IBM executives
recognised that at least they were part of a business
committed to PCs, rather than the Cinderella in a
much larger IBM empire. The fact that a Lenovo PC
manufactured in China had a labour cost of just $3.00
offered a lot of opportunity.
However, market leader Dell responded to the new
company with heavy price cuts, offering $100 savings
on the average machine. With market share in the crucial
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230 CHAPTER 8 INTERNATIONAL STRATEGY
Figure 1 Lenovo Group’s stock price, 2001–2006, compared with NASDAQ index
Source: www.bigcharts.com (11 October 2006). Marketwatch.Online by BigCharts.com. Copyright 2006 by Dow Jones & Company, Inc.
Reproduced with permission of Dow Jones & Company, Inc. in the format Textbook via Copyright Clearance Center.
American market beginning to slip, ex-IBM CEO
Stephen Ward was replaced in December 2005 by
William Amelio. This was a coup for Lenovo, as Amelio
had been running Dell’s Asia–Pacific region. As well as
knowing Lenovo’s competitor from the inside, Amelio,
based for several years in Singapore, had a good
understanding of Asian business:
In the five years I have been in Asia, one thing I have
learned . . . is to have a lot more patience. I have to be
someone who has a high sense of urgency and drive, but
I have also learned how to temper that in the various
cultures that I have dealt with in order to be more effective.
Amelio started by addressing costs, removing 1,000
positions, or 10 per cent, from Lenovo’s non-China
workforce. He integrated the IBM business and the
old Lenovo business into a single structure. The
company launched a new range of Lenovo-branded
PCs for small and medium-sized American business,
a market traditionally ignored by IBM. To improve its
reach in this segment, Lenovo expanded sales to big
American retailers such as Office Depot. US market
share began to recover, pushing beyond 4 per cent
again. Lenovo began to consider entry into the Indian
market.
Amelio’s actions seemed to pay off. After a
precipitous slide during the first half of 2006, the stock
price turned up. But there was no disguising that the
stock price in the autumn of 2006 was still below where
it was five years earlier, and that it continued to trail the
hi-tech American NASDAQ index.
Sources: L. Zhijun, The Lenovo Affair, Wiley, Singapore, 2006;
Business Week, 7 August (2006), 20 April (2006), 22 December (2005)
and 9 May (2005); Financial Times, 8 November (2005), 9 November
(2005) and 10 November (2005).
Questions
1 What national sources of competitive advantage
might Lenovo draw from its Chinese base? What
disadvantages derive from its Chinese base?
2 In the light of the CAGE framework and
the MacMillan et al. Competitor Retaliation
framework (Exhibit 8.5), comment on Lenovo’s
entry into the American market.
3 Now that Lenovo is international, what type
of generic international strategy should it pursue
– simple export, multidomestic, complex export
or global?