Posted: May 25th, 2022

Operations Management Strategy of Lenovo

Operations Management Strategy of Lenovo

Many observers have suggested that the 21st century will be the “Century of Asia,” with China leading the way. The recent economic performance of China appears to be fulfilling this observation, with companies such as Lenovo being among the major success stories. Having been transformed from a minor player as Legend Group. Ltd., Lenovo has emerged as a frontrunner in the computer manufacturing industry in recent years, fueled in large part by their acquisition of IBM’s personal computer division in 2004. Other factors driving the company’s growth have included the Chinese government’s emphasis on developing markets for Chinese-branded products domestically as well as abroad, as well as the same forces that are driving globalization. This paper provides a review of the relevant literature to evaluate the current international operations management strategy of Lenovo and the extent to which the organization’s international operations management strategy likely to be appropriate in the future. A summary of the research and salient findings are presented in the conclusion

Review and Discussion

What is the current international operations management strategy of Lenovo?

The internationalization of Lenovo’s operations management. The drivers of globalization in operations are: (a) technological; (b) political; (c) economic; and (d) socio-cultural (Lecture 2, slide 5). Each of these drivers is apparent in the internationalization of Lenovo’s operations management strategy to varying degrees. For example, the operations management strategy that is currently in place at Lenovo has been developed through a series of joint ventures, acquisitions and strategic partnerships that have been designed to increase its access to technology in a political sphere that has hampered growth for others in ways that actually helped the company grow its business in its domestic market as well as overseas. Likewise, the socio-cultural aspect are apparent when the company entered the personal computer (PC) market as early as 1988 by being the only firm offering Acer computer Chinese word processor add-on cards and quickly began marketing its own brand through a joint venture with a Hong Kong company that had the financial resources and international experience to help Lenovo during this start-up period (Yusuf & Nabeshima, 2006). Finally, the economic aspects are apparent in that this strategy proved highly effective, and sales quickly grew supported by a nationwide distribution system as well as service centers located throughout China. In 1990, the company sold just 2,000 PCs in China but by 1995, their sales had increased to more than 100,000 PCs a year (Yufus & Nabeshima, 2006).

Other aspects of the company’s internationalization can be viewed from the perspective of Vernon’s product cycle theory which is highly applicable to Lenovo in this area. For instance, according to Saxon, “The Chinese are now taking steps to gain world recognition for Chinese-branded products. For example, Lenovo (formerly Legend Group, Ltd.), the Chinese computer company that bought IBM’s personal computer business, is now selling computers under its own brand in the United States” (2007, pp. 37-38). Likewise, Anchordoguy (2008) points out that IBM’s divestiture of its PC division was based on its foundering performance whereas Lenovo’s management recognized the profit potential available in its acquisition. This point is also made by Xiang and Teng (2007) as well as Junarsin (2009) who note that Lenovo used the IBM acquisition specifically to facilitate its entry into global markets.

Likewise, the generic international operations strategy is apparent in Lenovo’s drive to increase its market share at home and abroad as well as through the internationalization of its management. The generic international operations strategy consists of two basic elements which can be used simultaneously:

1. Market access strategy — operations are internationalized in order to access attractive markets outside the home country; and,

2. Resource seeking strategy – operations are internationalized in order to access specific resources (e.g. low cost, scarce, superior) outside the home country (Lecture 2, slide 29).

Both of these elements can be found in Lenovo’s international operations management strategy. For instance, Liu (2007) reports that in 2002, pursuant to the Chinese government’s “go global” policy that encouraged Chinese companies to take their core competencies and expertise to a global level, Lenovo did just that. As a forerunner in the Chinese it sector, Lonovo revamped its image and in 2003, changed its brand name from New Technology Development Company (Yusuf & Nabeshima 2006; Bhattacharya 2008) and subsequently Legend Group to its current incarnation. The company, though, did not remain in mainland China but rather established branches in Hong Kong and used these to make investments in China as a way of avoiding the bureaucratic entanglements that characterize the Chinese government (Huang 2006). In this regard, Huang reports that, “At the time of its founding, Lenovo was denied a license in PC manufacturing because it was not a traditional state firm. It ventured into PC manufacturing only under the legal cover of a Hong Kong firm, QDI, which Lenovo acquired” (2006, p. 288).

Facilities.

Despite the inherent complexity involved, Lenovo uses a process focus for its facilities management. For instance, the company has built on its success by developing a multicultural leadership team that does not have a single international headquarters but is rather able to meet wherever and whenever they believe it is most appropriate; moreover, the company is committed to developing the “next big thing” but only provided that it can be brought to market within 2 years (About Lenovo, 2011). The company has also plowed its profits into expanding its research and development facilities to improve its competitiveness by establishing centers in Beijing, Hong Kong, Shenzhen and California’s “Silicon Valley” (Yusuf & Nabeshima, 2006). “[Lenovo’s’] subsequent success,” Yusuf and Nabeshima emphasize, “can be traced to the skillful integration of hardware and efficient services. With the creation of the Legend Chinese Word-Processing System Users’ Association, the company turned its users into advocates for its products and valuable sources of feedback for further product development” (2006, p. 280). Taken together, this track record of international operations success suggests that the company is doing a great many things right with respect to its operations facilities compared to their competitors.

Quality Management.

Despite their successful track record in recent years, the company did experience some quality management problems during the early years of the 21st century that had some mixed results. On the one hand, the company lost a domestic computer contract to its rival Dell to a Chinese government agency because the agency viewed quality as having slipped at Lenovo (Saxon 2007). Although Saxon does not specify what the quality management problems were or how they were resolved, the net impact was to lose the potentially lucrative contract. On the other hand, Saxon notes that, “This was one of the motivations for Lenovo to buy IBM’s PC business” (2007, p. 38).

The Supply Network.

With respect to the company’s supply network, Dunning’s eclectic model reflects Lenovo’s approach to some extent. For example, the company took special pains to identify the most cost effective approach to procurement and assembly with respect to location-specific factors, and emphasized the internalization of its resources to achieve its corporate goals. Some glaring owner-specific advantages included the acquisition of IBM’s personal computer division, of course, but there were some location-specific factors that appear to have contributed to the company’s success as well. For instance, Huang notes that, “The arrival of firms such as Lenovo is a sign that China has a supportive entrepreneurial environment. Many Western analysts herald its acquisition of IBM’s PC business as a harbinger of the rising world-class domestic Chinese companies. Using the success of firms like Lenovo as evidence, a McKinsey Quarterly article has gone so far as to claim that China has the ‘best of all possible models’” (2006, p. 288). With respect to location-specific issues, this is only applicable to some aspects of the company’s operations. For instance, “All of the manufacturing, service, and R&D operations of Lenovo in China are legally organized as subsidiaries of its Hong Kong firm and as such they are subject to laws and regulations pertaining to FDI, rather than those far more restrictive laws pertaining to domestic private businesses” (Huang, 2006, p. 288).

Some components of stage theory could also be said to be applicable to Lenovo’s supply network as well, with the company’s strategic approach to business growth being reflective of Lenovo’s situation (Lin & Lin, 2008). According to Lin and Lin, “Probably the most successful merger to date for China has been the purchase of IBM’s PC division by Lenovo. Mostly unknown outside of the PRC, Lenovo was launched into the foreground when it announced its intentions to acquire the PC division of IBM” (2008, p. 32). Just 2 years later, Lenovo began retailing computers in the United States (Silk & Malish 2006) and established headquarters in New York, with major operations continuing in Raleigh, North Carolina as well as Beijing (Dowling 2005), with a number of components being outsourced to other developed nations (Krugman 2008). The net effects of this acquisition and its subsequent supply network arrangements are congruent with Stages 3 and 4 of the Stage Theory model as well as the Configurations for International Operations which is concerned with (a) what products/services to produce at each location and (b) what markets to serve from each location (Lecture 2, Slide 36). In this regard, Lin and Lin add that, “The Chinese personal computer manufacturer wanted to increase its share in Western markets. The acquisition hoisted the manufacturer from 9th place to 3rd place in terms of PCs sold. These acquisitions illustrate China’s desire to spend low-cost money to acquire existing brands and distribution access, as well as securing additional outlets for other Chinese produced goods” (2008, p. 32).

Planning and control.

Although many observers suggest that Lenovo represents a true Horatio Alger success story having begun with a very modest start-up capital of just $24,000, Huang argues that the facts involved in the company’s success are much more complex and relate to the company’s ability to implement management functions in ways that established planning goals and its ability to control the company’s resources to achieve these goals. For instance, Huang notes that, “Its subsequent rounds of financing, including an IPO in Hong Kong, were all quite substantial and they all came from Hong Kong. China’s massive financial system had little to do with Lenovo’s success. Nor could the informal finance have propelled Lenovo to its current prominence” (Huang 2006, p. 288). Vernon’s product cycle theory conforms to the path taken by Lenovo following this name change and the steps the company took to grow its business at home and abroad. In fact, Liu (2007) suggests that it was not so much an issue as to whether the company could succeed in rescuing the struggling IBM personal computer division and turn in into a profitable enterprise, but rather a matter of just how profitable it would become. “In the final analysis,” Liu advises, ‘we concluded that it was not a question of whether we could turn the PCD around so that it become profitable, but rather a question of how profitable it could be” (2007, p. 575).

Moreover, based on his empirical observations with the company, Liu notes that, “We discovered that IBM PC’s gross profit margin was around 24%. This was, in fact, much higher than that of Lenovo’s, which was about 14%. However, the latter has a 5% net income whereas the former was not profitable. The reason was quite simple: costs and expenses were higher, some of which were unavoidable as long as the business was still part of IBM” (2007, p. 575). Consequently, the fundamentally different planning and control approach taken by Lenovo’s was based on eliminating waste at every opportunity and adding value wherever possible, including the company’s procurement practices. According to Liu, in some cases, these planning initiatives were merely common business sense: “Profits could also be greatly improved by merely controlling overall costs and expenses. For example, the assembly cost per unit in the U.S. was U.S.$24 compared with U.S.$4 in China” (2007, p. 575).

An interview with a Lenovo executive conducted by Sweeney is also illustrative of how the planning and control function has been used to help Lenovo grow its business. “We had to build the entire global organization,” the executive noted, and adds that “we did it in geographic centers of excellence. So we’ve got an Americas team and an Asia-Pacific team and a European team” (quoted in Sweeney 2008, p. 36). The Lenovo executive also describes the company’s ongoing plans for expanding its business model into new international markets thusly: “We started out with our system deploying into China. We went China, India, Canada. Now we have just finished a complete deployment in Asia-Pacific. Next, we’ll be doing Mexico and Poland, our last two manufacturing countries. Then we’ve got to deploy to the rest of the world where we do business” (quoted in Sweeney 2008, p. 37).

To what extent is the organization’s international operations management strategy likely to be appropriate over the next years?

It remains unclear whether Lenovo will be able to sustain its spectacular growth in the coming years following the same pattern of acquisition and internalization that has fueled its success to date. Nevertheless, the company’s proven track record of developing innovations solutions and retailing will likely serve it well as it seeks to grow its market share in the Americas, Europe and Asia. Lenovo’s business model of acquisition and diversification may end up causing it the same types of problems that have plagued other companies in the past (such as Dell) that have expanded beyond their core competencies and grown faster than their business models can accommodate. Despite these reservations, the company’s track record is proof positive that it has been doing something right. For instance, by 2003, seven of Lenovo’s Hong Kong subsidiaries were among China’s 500 largest foreign operations (Huang, 2007). In May 2007, though, Lenovo also acquired a biochemical enterprise, SPG, for about $120 million, together with a commitment to provide the company with additional financial resources of about RMB5 billion (Liu 2007). According to Liu, “The acquisition by Lenovo will not interfere with the existing commitment by SPG with Unigene because Lenovo pledged that the current management of SPG will remain intact and all its previous commitments shall be honored” (2007, p. 98).

Although Lenovo has enjoyed a high degree of success in the information technology sector, it may be stretching its corporate boundaries to the limit with such acquisitions. As Liu points out, “In addition, it has already announced that SPG shall gradually shift its focus from its traditional antibiotics business to more value-added lines. Biotech pharmaceutical is a clear direction for SPG to decisively move into” (2007, p. 98). SPG may be in a good position to move into biotech pharmaceuticals, but Lenovo’s core competencies are clearly not in this field and it may be biting off more than it can easily chew in the process.

The company’s recent quarterly report indicates that:

1. The China PC market slowed to levels below global growth;

2. Commercial growth slowed dramatically;

3. Growth was 3.8% in 2009 (down from 13.7%);

4. Company value was down 5.3% (down from 4.5% growth); and,

5. A lower outlook was projected through 2010.

6. Workforce reductions took place in the second and third quarters of 2010.

With respect to positive steps and results, the company reports that:

1. There has been accelerating growth and improving performance in new segments;

2. Consumer sales rise 100% outside of China;

3. Outperforming market in key emerging countries;

4. The company is continuing to gain share in China; and,

5. The company is continuing to win in commercial segment.

Despite these glowing reports, as can be seen from Figure 1 below, the company’s sales in its European, Middle Eastern, African and American markets declined, while domestic sales experienced some significant growth during the period indicated.

Figure 1. Balanced geographic mix: Lenovo sales: Third Quarter 2007-2008 through Third Quarter 2008-2009

Source: Lenovo Group Limited (2008/09) Q3 Results, February 5, 2009

Conclusion

The research showed that Lenovo parlayed $24,000 in start-up capital to become the third-largest manufacturer of personal computers and laptops in the world. This rags-to-riches story was fueled by savvy leadership that understood the business environment in which the company was competing and took advantage of every opportunity to grow its business in its domestic market as well as to expand its operations, including manufacturing and retailing, to overseas regions. Although each of the theoretical approaches reviewed could be said to apply to Lenovo’s situation in some ways, the company’s history is different in many ways as well with respect to its use of Hong Kong branches and acquisition of other companies. The research also showed that in its rush to grow as large as possible as quickly as possible, Lenovo may have reached the boundaries of its current business model, suggesting that it may not be able to sustain its current rate of growth and performance into the future.

References

‘About Lenovo.’ 2011 Lenovo. [online] available: http://www.lenovo.com/lenovo/us / en/our_company.html.

Anchordoguy, M. 2008 ‘Chandler and Business History in Japan.’ Business History Review, vol.

82, no. 2, pp. 301-303.

Bhattacharya, S. 2008 ‘Lenovo Group Limited: Losing the Competitive Edge?’ ICFAI Case

Study No. 308-101-1.

Dowling, D. 2005, January ‘PC Compatibility: IBM, Lenovo Staffs Mesh.’ Workforce

Management, vol. 84, no. 1, pp. 15-17.

Huang, Y. 2006 ‘Do Financing Biases Matter for the Chinese Economy?’ The Cato Journal, vol.

26, no. 2, pp. 287-290.

Junarsin, E. 2009 ‘Discontinuous Innovation.’ International Management Review, vol. 5, no 2,

pp. 10-11.

Krugman, P.R. 2008 ‘Trade and Wages, Reconsidered.’ Brookings Papers on Economic

Activity, pp. 103-104.

Lecture 2: The internationalization of operations management. 2011

Lecture 3: Facilities. 2011

Lenovo Group Limited. 2008/09 Q3 Results. 2009, February 5.

Lin, C.C. & Lin, J. 2008 ‘Capitalism in Contemporary China: Globalization Strategies,

Opportunities, Threats, and Cultural Issues.’ Journal of Global Business Issues, vol. 2,

no. 1, pp. 31-34.

Liu, B. 2007 ‘Entry Encounters into China Market.’ International Management Review, vol. 3,

no. 3, pp. 97-98.

Liu, C.Z. 2007 ‘Lenovo: an example of globalization of Chinese enterprises.’ Journal of International Business Studies, vol. 38, pp. 573 — 577.

Saxon, M. 2007 an American’s Guide to Doing Business in China: Negotiating Contracts and Agreements, Understanding Culture and Customs, Marketing Products and Services.

Avon, MA: Adams Media.

Silk M. & Malish R. 2006 “Are Chinese Companies Taking over the World?’ Chicago Journal

of International Law, vol. 7, no. 1, pp. 105-107.

Sweeney, J. 2008, December. ‘Mr. Finance Transformation.’ Business Finance, vol. 14, no. 12,

pp. 36-37.

Vernon, R. 1966 ‘International Investment and International Trade in the Product Cycle.’

Quarterly Journal of Economics, vol. 80, pp. 190-207.

Xiang, B. & Teng, B-S. 2007 ‘Three Generations of Chinese Entrepreneurs: Will the Third

Generation Be as Successful?’ Ivey Business Journal Online, vol. 71, no. 8, p. 37.

Yusuf, S. & Nabeshima, K. 2006 Postindustrial East Asian Cities: Innovation for Growth.

Washington, DC: World Bank.

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