Free Business Essays - Lenovo Chinese Industry
Abstract
Lenovo is the number one PC maker in Chinese PC industry which gained 35.8 percent of market share in 2007. In recent year, it started to operate businesses out of greater China such as Asia Pacific, Americas, Europe, Middle East and Africa.
Lenovo’s current pillar strategy is that strive to grow faster and more profitably than the industry by delivering best-engineered PCs and unequaled ownership experience in the global PC market.
Since the Lenovo decided to go international, the Europe becomes as part of battle for Lenovo to explore. In this paper, the market of Lenovo in Europe will be focused on the UK.
The growth of in UK was achieved through improve sales to large firms and growth in the mid-market segment through a strengthening of the Group’s sales resources. Europe is a key strategic market and battleground for Lenovo.
1. Introduction
Lenovo was set up in 1984 as a reseller in China and Hong Kong for the members of the Chinese Academy of Sciences like IBM and Hewlett-Packard. By 1989, now known as Hong Kong Legend has branded out into motherboard manufacturer and it has changed its name to Lenovo and launched itself on the Hong Kong Stock Exchange in 1994 (Malone, [n.d]) . Since 1996, it beat the foreign giants to be the best-selling PC brand and outsell many foreign brands (not just PCs) in the Chinese market.
Since Lenovo decided to go abroad and diversify its products and try to produce high tech products, the market share in China were approximately 30 percent in 2003. “Lenovo is the number one PC firm in the Asia Pacific market (excluding Japan) with 12.4 percent of market share” (Biediger et al.., 2005, p 408). “In a surprising comeback in December 2004, Lenovo concluded to purchase IBM’ PC division for $1.75 billion in cash, stock and assumed liabilities.
Lenovo’s share in the global PC market currently stands at 2.2%. The combined company has an 8.6% PC market share, which is in the third position after Dell (16.8%) and HP (15%)” (Fan, 2006, p 15-16). Today, Lenovo holds 35.8% of the market share in the second quarter 2007 in China (Technology…, 2007). In 2008, “Lenovo becomes the China’s first non-monopoly private company to be ranked among Fortune top 500 enterprises” (Lenovo leaps…, 2008).
In 2003, Lenovo defined globalization as company goal for the following year company development. There were two reasons for Lenovo go global. One was Lenovo has 30% share of Chinese market. It has nearly 20% share ahead of HP. Lenovo therefore realized that their opportunity for further domestic expansion was quite limited.
The second one was that the global PC market was estimated at around $200 billion, it could be an immense potential for Lenovo (Shenzhen Daily, 2004 as cited in Liu, 2007). There were two ways for Lenovo to globalize. One was to grow organically. Another way was expand through mergers and acquisition. For the first way, Lenovo was aware. Thus, they decided to go global with second approach (Liu, 2007).
There were two events which could stand for Lenovo decided to go abroad. First, due to Lenovo was lacking of brand recognition, “it adopted a new brand name, Lenovo. The first two characters, ‘Le’, were taken from ‘Legend’, to reflect its heritage, and ‘novo’ (‘new’ in Latin) to signify the ‘spirit of innovation’ that is central to the company’s mission” (Liu, 2007, p 573).
The second event can be described as a milestone of Lenovo in its history. It acquired IBM’ PC business for $1.75 billion in 2004. Although the creator of world’s largest PC company, Michael Dell commented simply: “it won’t work” (Johnson, et al.. 2008), the result is that “Lenovo’s sales grew 17 percent year-on-year to approximately $16,352 million during the 2007/08 fiscal year especially Lenovo’s sales in the Americas grew 9 percent driven by strong growth in the transaction business” (Lenovo, 2008, p 16-17). Besides, Lenovo adopts five pillar strategies in order to implement globalization. They are Pursue operational excellence, Enhance customer intimacy, Win in priority businesses, Gain scale profitably, and Build the brand (Lenovo, 2008).
For the global market, Lenovo focuses on five segments all over the world in order to adopt international expansion. They are Greater China, Asia Pacific, Americas, Europe, Middle East and Africa. Lenovo PCs would be directed at consumer market and the majority of small and medium-sized business.
That is the target market of Lenovo. For the European market, Lenovo saw a huge potential of PC sales in the UK because it has largest PC market in the Europe which generated 21.4% of regional market’s revenue especially the desktop PC (PCs…, 2006). Therefore, this paper aims to analyze the potential of the UK’s PC market which can provide an opportunity for Lenovo to gain the largest market share in the UK.
Five aspects will be issued
- Identify Lenovo’s strategic capabilities within UK
- To analyze Lenovo’s remote and operating environment
- Identify Lenovo’s future strategic direction
- Evaluate strategic options
- Design an implementation plan for the proposed strategy
To achieve the objectives above, some analytical tools and theoretical frameworks will be used to evaluate Lenovo’s strategic capability which including resource audit, value chain analysis, and corporate brand strategy.
For the external business environment, it includes PESTEL, Porter’s Five Forces and strategic analysis. And then Lenovo’s strategic direction will be evaluated through SWOT analysis, market option matrix, expansion method matrix, and generic strategies. Finally, the strategic choice, strategic evaluation and strategy implementation will be indicated.
2. Internal Analysis
2.1 Resource audit
Internal analysis is to criticise the company’s resource in order to make a deep understanding for management to know the company’s advantage and thus compete with other competitors in the same industry. The resource of organization can be criticised by assets and capabilities. Johnson at al.. (2008, p 95) stated that “strategic capability can be defined as the resource and competences of an organization needed for it to survive and prosper”. Lynch (2006, p 216) indicated the Resource-Based view (RBV) that “stresses the importance of the individual resources of the organization in delivering the competitive advantage of the organization and represent a substantial shift in emphasis away from the market-based view”.
The asset resource can be separated into tangible and intangible. The tangible resource includes Physical resource, Financial resources, and Human resources (Hooley et al.., 2004). Since the Lenovo went abroad, Lenovo implemented a strategy named ‘World-sourcing’ that refers to “utilizing resources at the most suitable place and in the most appropriate way” (Liu, B.J, 2007).
Hooley et al.. (2004, p 145) argued that “RBV of the firm are worth consideration as a further source of insight into assessing corporate capabilities as a basis for competitive positioning”.
2.1.1 Physical resource
These are such as the machine, buildings, or the production capacity of the organization. In 2008, the property, plant and equipment were accounted as worth $ 0.364 billion for Lenovo Group and $ 0.617 million for Lenovo Company.
By comparing to 2007, Lenovo’s physical resource was increased relatively (Lenovo, 2008). Lenovo allocate physical resource globally. Lenovo relocated headquarter to USA after it acquired the IBM’s PC division. And then set global market centre in India and also keep manufacturer and R&D base in China (Chen, 2007). Recently, Lenovo will set up a new plant in Poland in order to distribute and ship computers for customer in Europe.
2.1.2 Financial resource
Hooley et al.. (2004) defined the financial resource (such as capital, cash, debtors and creditors) as a second important resource of the organization. It will affect the scope of organization for action and ability to put its strategies into operation. Besides, the good management of money and the way can be a key determinant of strategic success (Johnson et al.., 2002).
For financial audit, Lenovo expanded the value of company from $ 3 billion to $ 17 billion and it returned the acquired business to profitability. In recent years, Lenovo performed very well on its finance. For instance, Lenovo increased its worldwide PC shipments by nearly 22 percent and its sales grew 17 percent year-on-year. The gross profit margin improved from 13.5 to 15.0 percent(Lenovo, 2008).
According to Aaker (2001, p 112) stated that sales level can be strategically important. Increased sales can mean that the customer base has grown. And profits are important indicator of business performance. The sales in Europe delivered a strong growth and profits. The net income reached at $ 110.5 million (Lenovo profit…, 2008). The following figure is Lenovo’s financial highlight.
Figure 1
Source: Lenovo Group Limited • Annual Report 2007/08.
According to Gowthorpe (2005, p 94) stated a balance sheet is a financial statement that shows the position of a business at a single time at time. The balance sheet of Lenovo will be showed below.
Figure 2
Source: Lenovo Group Limited • Annual Report 2007/08
2.1.3 Human resource
The outstanding employees with good human resource management can be ‘the most valuable asset’ for the organization (Johnson et al.., 2002). Although, some researchers oppugned that Lenovo is a traditional Chinese company with closed mind after acquired American entity, the new Lenovo is fully open and global.
One of the research engineers said he had felt he was work for survive, whereas now he was working to win for the future. After the acquisition, Lenovo would have 19,000 employees and it remained 10,000 by former IBM PC division employees. It did not suffer any major loss in key personnel (Liu, 2007). Lenovo knows that the talent is met rather sought. Therefore, it implements recruitment and selection with employment policies to attract talent.
It provides the competitive salary, related pay, comfortable environment, attractiveness benefit and skill training. Furthermore, the employees in the company are treated as a member of family and the company encourages the employees work as a team. Therefore, a strong human resource can be competitive advantage for company.
2.1.4 Intangible resource
Lynch (2006, p 223) stated that intangible resource are those resource that have no physical presence but represent real benefit to the organization such as brand, service, and technology.
Since the Lenovo changed its brand name and logo, the Lenovo’s brand becomes the most valuable asset for the company. Due to lack of brand recognition, Lenovo became a sponsorship with International Olympic Committee (IOC) to support Beijing Olympic game 2008. Beside, Lenovo sponsored Formula one as well and it was allowed to use IBM logo after it acquired IBM PC business.
Moreover, Lenovo cooperated with VISA International which is the TOP program partner with IOC (Sangtani et al.., 2005). For the technology, the innovation and customized product are the strength of the company. As the aspect of service, Lenovo provides the same service as other competitors. After acquiring the IBM business, Lenovo was permitted to use IBM logo for five years.
Since most organizations consist of a range of resources, they may find they have some assets that are truly competitive and some resources are similar to competitors. Therefore, the organization should know how to make the most of it (Lynch, 2006).
2.2 Value chain analysis
Johnson et al.. (2008, p 110) stated that the value chain describes the categories of activities within and around an organization, which together create a product or service. The concept was developed by Michael porter and he has identified two kinds of activity. One is primary activities which are directly concerned with the creation or delivery of a product or service. Another is support activities.
The constitutions of primary activities for Lenovo are Inbound logistics, Operation transform, Outbound logistics, and Marketing and sales. These aspects will be analyzed in the following part.
Inbound logistics
The most of raw materials are input locally or the third party such as Electronics Industry Citizenship Coalition (EICC). Due to being a member of EICC, Lenovo and other member companies are creating a comprehensive strategy (Global…, 2008).
Operations transform
China is the largest output country. The most of Lenovo’s PC are assembled in China and few of them are assembled locally. In UK, Primary PC manufacturing and assembly facilities are located in Scotland.
Outbound logistics
Lenovo implemented world-sourcing strategy which set manufacturer and supply chain operation globally. For example, Poland will be the next manufacturing site in the Europe. Lenovo has “used the U.S. company's sales networks and third-party distributors to expand international sales. Ingram Micro, based in Santa Ana, California, and Clearwater, Florida-based Tech Data are the world's two biggest distributors of computer products” (Lee, 2008).
Besides, “Lenovo continues to optimize its global logistics program to drive additional product volumes to shipping methods that are more environmentally friendly, such as ship and rail” (Global…, 2008). The following figure shows the distribution network of Lenovo.
Figure 3 Lenovo’s distribution channel
Source: Xie et al.. (2004, p 411)
Marketing and sales
Lenovo uses sponsorship as a way to advertise its brand and it sells the product through online purchase or sales store or outlet.
Support activities
For the support activities, it includes Procurement, Technology development (such as R&D, product design), Human resource management, and Infrastructure. These aspects can help to the effectiveness or efficiency of primary activities.
Lenovo has R&D base in China in order to support Lenovo’s innovation strategy and other technology development. The innovation strategy is a key strategy when Lenovo go global. It may become competitive advantage of Lenovo.
Lenovo insists employ the right person first. Lenovo requires the supply chain staff work for global organization that should have ‘softer’ skill in addition to the normal requirement. Moreover, they need someone who has international experience and understand the cultural differences (Hannon, 2007).
2.3 Corporate brand strategy
Corporate brand strategy is the extended marketing mix so Lenovo’s corporate brand strategy can be examined through marketing mix. The traditional marketing mix includes four factors which are Product, Price, and Promotion. These factors will be discussed below.
2.3.1 Product
In 2007/2008 fiscal year, Lenovo launched a number of award-winning products for both commercial and consumer segments (Lenovo, 2008). Lenovo leads the PC industry in product innovation and it mainly focuses on PC business. Therefore, the product of Lenovo can be divided into two parts.
One is Notebook computer and another is Desktop computer. For the notebook computer, the Lenovo 3000 series and ThinkPad series gained the favourable reviews from the small-and-medium-sized business segments. Besides, Tianyi F21 was launched during Olympic Games period. The figure 4 shows 5 notebook series. As we can see, different notebook series focus on different segments in order to satisfy the customers’ demand in specific segments.
The desktop computer accounted for nearly 41 percent of Lenovo’s total sales during 2007/2008 fiscal year. The desktop computer also has many series like notebook computer. “Lenovo desktop computers continued to show strengths in both commercial and consumer segments by accurately addressing customer needs” (Lenovo, 2008, p 19). In addition to PC business, Lenovo also involves mobile handset business and other equipments.
Figure 4 Lenovo’s 5 notebook series
Source: Xie et al.. (2004, p 415)
2.3.2 Price
“For comparable products, Lenovo priced its products at about two-thirds of foreign-made PCs” (Wall street journal as cited in Xie et al.., 2004, p 412). The price of Lenovo’s products at large is low in the UK. By comparing to Dell and HP price, the same configuration of the Lenovo’s PC is usually cheaper than those producers. For example, the price of Lenovo’s notebook computer to the personal users is about 500 pound and Dell’s price is nearly 600 pound.
2.3.3 Place
As we can see in figure 3, most of PCs were purchased through retailer and the rest of them were purchased through specialty shops and direct sale. In the UK, Lenovo provides two ways for customers to purchase PC.
One is dealer and another is online sales. The online sales have significant appeal for 28% of adults. “The Advantages of Internet buying include the facility to compare products, specifications, prices and after-sales services across a wider range of sellers, as well as home delivery” (Mintel, 2007).
2.3.4 Promotion
Jobber (2004) stated that there are six major components of promotional mix which consists of advertising, personal selling, direct marketing, internet and online marketing, sales promotion and publicity. The most effective way to promote the products is advertising.
The advertising of the Lenovo is to be a sponsorship with Olympic Games and Formula one in order to build international brand. And it also promotes its products through TV and public place. Lenovo will use IBM logo together with its logo to promote the products to the customers.
3. External Analysis
3.1 Nature of the Environment
The market environment can be divided into the operating environment (microenvironment) and the remote environment (macroenvironment ). As Aaker (2001, p 96) stated that “the interest is in environmental rends and events that have the potential to affect strategy, either directly or indirectly. Environmental analysis should indentify such trends and events and estimate their likelihood and impact”.
In recent years, China’s PC market has undergone amazing development and the domestic companies had dominated the PC market for a couple of year (Zhong et al.., 2006). However, the whole environment has been changing to more open and fair. Many multinational enterprises penetrated China’s PC market such as Dell and HP. Unlike five years ago, the China’s PC market leading companies were domestic companies which were Lenovo, Founder, and Great Wall.
The rapid environment changed will bring more competitions to China’s PC market and give an opportunity to domestic companies to become more competitive. In order to enhance the position in China’s PC market, the domestic PC companies have to reconsider its strategies such as Lenovo.
3.2 PESTEL Analysis
Dobson, et al..(2004) stated that a general environment will influence the organization and the environmental forces are currently or in the future going to be more or less important to the organization. And Johnson et al.. (2002, p 102) identified which categorizes environmental influences into six main types: Political, Economic, Sociocultural, Technological, Environmental, and Legal.
3.2.1 Political
In this section, some factors will be considered such as taxation policy, government spending, and industrial policy (Dobson, et al.., 2004). This element can show how organizations try to influence government and how governments influence them (Hitt et al.., 2005).
China reformed its national science and technology system in 1978 (Perkins, [n.d]). The Chinese government published many policies and programs such as open-door policy and five-year national development plan. Chinese PC industrial policy toward foreign PC enterprises to enter Chinese PC market, they hope them to help develop local PC industry. (Lu, 2000 as cited in Kraemer et al.., 2001).
Therefore, the Chinese government encourages the foreign PC makers enter China’s PC market through foreign direct investment (FDI) or joint venture. In the late 1970s, China attracted over $560billion in foreign direct investment for technology (Bian, 2005). The Torch program provided building facilities to attract foreign hi-tech companies and encouraged the establishment of indigenous hi-tech companies in special zones throughout China (Zhong et al.., 2006). And China is a member of WTO which can obtain preferential custom.
Therefore, Chinese PC industry can invite other foreign PC maker set up in China with preferential custom.
Although China is high Power distance country, Chinese PC industrial policy toward domestic PC enterprises was strongly indirectly and it promoted domestic enterprises, they did not intervene or manage these enterprises (Kraemer et al.., 2001). However, only Lenovo gained the first place of market share and the rest of them are HP, Founder, and Dell in 2007.
Li (2007, p 4, p 15) stated that “Tax policy has been an important instrument for the Chinese government. Industry was completely controlled by publicly owned enterprises. State-owned enterprises delivered all their profits to the government and turnover taxes were generally used to facilitate the transfer of funds from enterprises to the government's coffer”. Some regulatory taxes are being a part of industry policy in order to control scale of investment and direction of investment.
In recent years, the Chinese government encourages the domestic company go global. This event may cause the domestic company loss the market share in China. The rivals will catch the chance with a huge potential for foreign company to make profit.
3.2.2 Economic
According to Dobson, et al.. (2004), the economic factors can be identified by such exchanges rates, inflation rates, and GDP.
China has rapidly economic growth in the recent years. “Economic reform in China has been accompanied by a similar shift in technology policies away from the nationalistic strategy of self-reliance which prevailed until the 1980s.
The government has moved to a more pragmatic strategy of importing advanced technology and directing domestic technology development toward commercial purposes” (Kraemer et al.., 1994, p 2). Furthermore, “China’s computer industry developed within the context of the country’s transformation from a centrally planned economy to a mixed or market socialist economy” (Kraemer et al.., 2002, p 30).
Foreign exchange rates control set up to protect, among other things, Chinese PC industry, have been a major factor in this pattern (Doar et al.., 1984). China’s exchange rate policy itself is seriously flawed given its current macroeconomic circumstances and its longer-term policy objectives (Goldstein, [n.d]).
Figure 5: Renminbi real trade weighted exchange rate index 1994-2004
(2000=100, data monthly averages)
Source: J.P morgan as cited in Goldstein, M (2004) Adjusting China’s Exchange Rate Policies <http://www.iie.com/publications/wp/wp04-1.pdf>
In recent years, Chinese GDP grew fleetly. As we can see in figure 6, the GDP of China during 2005 and 2007 increases year by year. It seems to me that GDP growth rapidly has been fueled by growing consumer demand.
As Kraemer, et al.. (n.d) stated in their study, the PC spending as a share of GDP has been kept increasing over time for all countries. Besides, GDP growth should lead to should lead to a relevant growth in PC investment. “Personal computers increased from 2.8 million to 28.9 million” (Tan et al.., 2002).
Figure 6: China’s Gross domestic product 2005-2007
source: <http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CNY>
The inflation rate can let people knows the relationship between the demand of customers and productions.
Figure 7: China’s inflation rates 2002-2006
Source: Datamonitor, 2007
3.2.3 Sociocultural
“Sociocultlural element is concerned with a society’s attitudes and cultural values” (Hitt, et al.., 2005, p 47).
As China has been developing for nearly 60 years, the Chinese changed their lifestyle over time. Chinese customer would prefer to see the real products before purchasing.
China came into an internet period. People use their computer to surf internet every day. Ariwa et al.. (n.d) did a research about internet using with PC in China, 31% of respondents use internet to do a research and 34% use internet as an information provider. The rest of the respondents are using internet for entertainment and connect with others.
“By June 30, 2007, among the 162 million Chinese netizens, 37.2% of them had often gone to the Internet bars, the second major places for netizens to surf online, and 32.3% more than that in 2006. Of the 67.1 million units PCs connected to the Internet, each Chinese netizen had had 0.41 units on average. Additionally, there had been 110,000 licensed Internet bars around the country by March 2007” (HP opens…, 2007, p 1).
In 2003, China has 17 million students including graduate and undergraduate enrolled in colleges and universities. Since education policy has been established, China improved its literacy rate impressively. The computer education was introduced computers into elementary and secondary schools (Kraemer et al.., 2001).
In relation to domestic demand of PC, Lenovo totally units sold of PC increased from 54,400 in 1985 to 250,000 in 1992 (Bian, 2005). Furthermore, China has 1.3 billion people; only 30 percent are rich enough to afford PCs (Li et al.., 2002). But, in my opinion, only 30percent is enough to make a profit by PC maker. We can try to 1.3 billion multiply 30 percent with each PC price is RMB 5000. How huge profit the PC makers can make.
3.2.4 Technological
Hitt, et al.., (2005,p 48) stated the technological segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, and materials.
First, “Since March 1993, responsibility for China's PC industry rests with the Ministry of Electronics Industry (MEI), and specifically with its Computer Department, the Computer Department has been reorganized to serve mainly as a policymaking and regulatory body for the industry instead of sending down specific plans and quotas to state-run enterprises under the department” (Kraemer et al.., 1994, p 19).
Second, The Institute of Computing Technology (ICT) was set up under the Chinese Academy of Science. ICT is support to develop the PC industry by providing key technologies and enhance innovation and creativity (Li, 2006).
Third, China developed its own computer processor ‘Loongson’ in 2002 and then the 64 bit ‘Loongson’ was established in 2006. In recent years, ‘Loongson’ has been produced by high-tech enterprises. The appearance of ‘Loongson’ mainly achieved the network computer programs, monopoly of Intel and AMD, and Chinese version of Linux runs with Chinese character (BLX…, 2006).
Forth, some high-tech companies have cooperated with PC firms. For example, Chinese domestic PC firms certainly have cooperated with Huawei and Cisco. The PC firms usually issue their products with high-tech functions such as ‘finger-print login’ function.
3.2.5 Environmental
According to Swanson et al.. (2001), China has strong environmental protection laws. However, the Pollution in China is very insightful and important from the viewpoint of environmental protection. The raising energy use will release lots of emission and the large demands of product will cause white pollution (McKibbin, 2006 as cited in Ueta, 2006). In China’s PC market,
3.2.6 Legal
Since China joined WTO, the import duty and tax has been reduced. Chinese Ministry of Electronics Industry (MEI) uses it to protect the domestic vendors. Therefore, there is less restriction on the distribution of foreign imports (Kraemer, 1994).
Chinese government published the latest labour law in earlier 2008. It tends to be more perfect than before and protects the labour with setting the minimum salary.
3.3 Five Forces Analysis
Porter five forces analysis is an essential step to examine the operating environment. “Porter (1980) suggested that five main forces shape competition at the level of strategic business units and that a systematic analysis of each in turn can help managers identify the keys to competitiveness in their particular industry” (Hooley et al.., 2004, p 118).
The goal of competitive environment analysis for a business unit in a particular industry is to find a position in the industry where the company can best defend itself against competitors or can influence them in its favor (Porter, 2004). The five competitive forces are threat of entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors.
3.3.1 The Threat of Entry
Fixed cost can be an important factor for PC makers to produce products to compete with new entrants. Although the customer loyalty is low and the brand awareness (HP, Dell) is high, this will restrict new entrants to enter a new market.
The government policy will also restrict new entrant to enter a new market somewhat, but it still have some benefits for new entrant. And then the growth of PC sale revenue will attract new players. So the threat of entry is medium to high (Datamonitor, 2007).
Economic of scale
In China’s PC industry, the unit costs of production are low due to the low labour cost. Some new entrants will enter the market with large scale in order to achieve the low costs level. The cost reduction in the PC industry is vital (Lynch, 2006).
As the Chinese leading company Lenovo has already had retailers in more than 1,000 cities in China. And they have 4000 stores in China and still gain high sale revenue. However, Lenovo was established just only with capital investment of RMB 200,000.
HP has a lot of retailers in more than 400 Chinese cities and employed 1,000 professionals to focus on their research and developed software center in China (HP…, 2001).
Founder was set up with just only RMB 400,000 and now it has over 20,000 staffs.
Product differentiation
Branding, customer knowledge, special levels of service can create barriers for new entrants to spend extra funds or simply take long time to establish in the market (Lynch, 2006).
Lenovo has achieved the personalised innovation in their PC. Lenovo divided its PC market into a small segment with introduced ‘Tianxi’ model with ‘one touch to the net’ function in order to satisfy customer demand.
By compared to Dell, It introduced Chinese character keyboard for people who is not good at English. In addition, Dell used to sell their PC on the internet with low price in order to reduce the distance between the PC vendor and end customer.
Mac daily news (2008) stated founder pre-install apple iTunes in every PC. "Digital music is becoming very important in the Chinese PC market, and Apple's iTunes is the runaway market leader," said Wei Xin, chairman of Founder Group.
Capital investment
The level of capital investment in China is not high due to the government policy. The Chinese government will provide the facility and technology. Most of PC in China is made in China.
Switching cost
In 2007, PC companies had price war in China. The price of leading PC companies in the particular target segments is nearly the same. So the switching cost is low in China
Access to distribution channels
Lenovo created a distribution network that has proven nearly impossible for foreign and even most domestic competitors to replicate (Xie et al.., 2004). Dell only sells the product through direct sale. Lenovo may create barriers to the potential new entrants but the rest of PC makers can not threaten the new entrants.
Government policy
Chinese government published a series of policy to help development of the PC industry. For example, increase the percentage of domestic components in Chinese PC makers and apply computer technologies to the traditional industries (Kraemer et al.., 2001). Those series of policy supports domestic PC industry to catch up with foreign PC firms. Lenovo is classic PC enterprise which has already obtained a lot of advantages from the government.
Because of policies, other foreign firms come into new market will get into trouble unless they know the environment very well in China. The Chinese government also slowed down foreign firms’ development and increased their costs by certification processes regarding quality, local content, and export limits. This means that foreign firms must get a license before they produce their own products.
For example, Dell opened the factory in Xiamen, but the political and legal segment in China is a threat to Dell. The Chinese government favors local companies over foreign companies, and has many regulations and protectionist tariffs on foreign goods (Ransford at al.., 2004). The government can create high barriers to new entrants.
3.3.2 The Threat of Substitutes
Porter (2004, p 23) indentified that substitute of products is matter of searching for other products that can perform the same function as the product of the industry. More often, substitutes do not entirely replace existing product but it can introduce new technology or reduce the costs of producing the same product (Lynch, 2006).
Some high technologic potential firms may threaten the PC industry such as mobile phone (PDA) in China. They probably could be substitute products for PC but basically they can not entirely replace the PC. In mobile phone industry, the Apple iPhone may become substantial product for PC. It has many functions like PC which bring the large value to the customer.
For example, it has WiFi function which could provide an internet function for users in anywhere with WiFi linkage. However, the price is quite high in China due to it has not associated with China Mobile for the moment.
So the iPhone does not threaten the PC industry for now. The PDA also is kind of mobile phone which has high-tech function within the phone, but the unaffordable price makes the customer abandonment. They prefer to buy a low level PC than buy the PDA. Therefore, the threat of substitutes in China is low.
3.3.3 The Bargaining Power of Buyers
“Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other” (Porter, 2004, p 24).
If buyers are concentrated and there are few of them
Usually the organizations or institutions purchase a large portion of industry’s product through the PC company directly. The customers usually purchase the PC through the retail, supermarket, shopping mall, and Chain-stores.
However, most of Chinese customers would like to purchase the PC from IT store. In Shenzhen (one of the popular city), most of PC were purchased from IT store (Chinese name: segem).
If the product from the organization is undifferentiated
The customer will consider the product differentiation within the market in terms of technical specification (memory size) such as styling, and support services offered which tends to decrease buyer power. However, Apple recently moved to the use of Intel's x86 processors. This will strengthen buyers. For instance, most PC software will run on PCs made by any player, so buyers do not need to purchase new software. In general, most customers are more interested in the quality and specifications of individual products (Datamonitor, 2007).
Overall, the buyer power in China is moderate to high.
3.3.4 The Bargaining Power of Suppliers
“Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services” (Porter, 2004, p 27).
If there are only a few suppliers
Major suppliers to PC makers are component manufacturers that including integrated circuit manufacturers (Datamonitor, 2007).
If there are no substitutes for the suppliers they offer
Microsoft's dominates operating system market which often provides Windows factory installed. And Intel leads CPUs area. It can charge PC manufacturers substantial licensing fees for the use of its brand name. Due to the substantial brand power of its products, Intel is incorporated into a large proportion of PCs on the market. (Datamonitor, 2007).
If suppliers’ prices from a large part of total costs of the organization
“The majority of components used in the manufacture of PCs display minimal differentiation between suppliers and in order to reduce costs are often sourced from companies operating from low cost manufacturing regions. PC manufacturers do not incur significant costs when switching suppliers of basic components” (Datamonitor, 2007, p 13).
“In China’s PC market, an original equipment manufacturer (OEM) typically outsources a large proportion of its manufacturing to electronic manufacturing service (EMS) and original design manufacturing (ODM) companies. Such contract production companies are key suppliers with heavy involvement in the production process, providing them with significant supplier power due to high switching costs for PC manufacturers. Overall, the supplier power is strong in China” (Datamonitor, 2007, p 13).
3.3.5 Rivalry Among Current Competitors
Porter (2004, p 17 ) stated that rivalry among current competitors takes the familiar form of jockeying for positoon such as using price competition, advertising battles, product introductions, and increased customer service.
In China’s PC market, there are many competitors with different size. Some of companies are strongly focused on the PC market such as Lenovo, Dell, and Hp. And some of them have broadly diversified businesses such as Sony, Samsung, and Toshiba.
The outsourced manufacturing and assembly replaces a component of fixed costs to the EMS firms, who has responsible for maintaining extensive production facilities; this tends to weaken rivalry between players in the PC market. Strong market growth has a similar effect, making it possible for a player to increase its revenues without necessarily taking much from competitors. Overall, rivalry is moderate in China (Datamonitor, 2007).
4. Strategic Direction
4.1 SWOT Analysis
As Sun Tzu said “Know the enemy and know yourself, and you can fight a hundred battles with no danger of defeat”. Johnson et al.. (2008, p 119) stated SWOT is the key issue from the business environment and the strategic capability of an organization that are most likely to impact on strategy development. It also can be useful as a basis against which to generate strategic options and assess future courses of action. It includes the factors that are Strengths, Weaknesses, Opportunities and Threats.
Strengths
- Lenovo has over 30 percent market share in China’s PC market and is the leading company in both notebook computer market and desktop computer market. The business in greater China strengthened its leading position by achieving 24% year-on-year growth.
- Lenovo enhanced the brand image through the Beijing Olympic Games and acquisition of IBM PC divison.
- Lenovo has the excellent distribution channel consist of 6,000 retail outlets in China that nearly impossible for foreign and even most domestic competitors to replicate.
- The manufacturing capability (prime PC manufacturing facilities in Shenzhen, Huiyang, Beijing, and Shanghai).
- Product differentiation (Think Pad).
- Lenovo is under the protection of government policies.
Weaknesses
- By comparing to the Dell and HP’s margins and returns, Lenovo has low margins and returns. Lenovo’s margins and returns have been recorded declining in recent years. The gross margin declined from 16.4% in fiscal 2003 to 14% in fiscal 2007. For the same period, HP has recorded gross margin of 24.3% and Dell was 17.8%.
- Since Lenovo was established, it does not have core technology and it has to follow Intel trend.
- Lenovo has too many employees and the overall quality of the staff needs to be raised.
- By comparing to foreign competitors’ fund, Lenovo has a huge gap with them.
- Lenovo must improve its marketing method in order to make advance in international market.
- After Lenovo acquired IBM division, Lenovo must have more concentrations on integration (Lenovo SWOT…, 2006).
Opportunities
“An important objective is a condition in the general environment is identifying opportunities and threat” (Hitt at al.., 2005,p 41).
4.2 Market Options Matrix
Lynch (2006, p 461) stated that the market options matrix identifies the product and market options available to the organization, including the possibility of withdrawal and movement into unrelated markets.
It not only examines the possibility of launching new products and moving into unrelated markets, but also explores the possibility of withdrawing from markets and moving into unrelated markets.
Figure 5 Market Options Matrix
Source: Learn marketing, <http://www.learnmarketing.net/ansoffs.htm>, [n.d]
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