Ibm Lenovo

Lenovo –IBM Merger

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

November 30, 2012

Submitted to: Prof. Dawn Liu

Submitted by: Prateek Gupta

Roll Number: 2012PGX119

2012PGX119 Lenovo-IBM Merger Prateek Gupta

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TABLE OF CONTENTS

1. Background……………………………………………………………………………. 2

1.1 Background of the Company ………………………………………………………. 4

1.2 The Strategic Alliance with IBM ………………………………………………….. 6

1.3 The Necessity to Form the Strategic Alliance ……………………………… 7

1.4 Motives of Lenovo & IBM’s Strategic Alliance …………………………….. 8

2. Analysis of the Strategic Alliance …………………………………………… 12

2.1 Analysis ………………………………………………………………………………………. 12

2.1.1 Problems in early stages of alliance ………………………………………. 12

2.1.2 Measures taken and their Evaluation …………………………………… 21

2.2 Measures to Be Taken and Limitations ………………………………………. 24

3. Discussion........................................................................................ 29

3.1 Theoretical Insights ……………………………………………………………………. 29

3.2 Managerial Insights ……………………………………………………………………. 30

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


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CHAPTER 1: BACKGROUND

Before analyzing the strategic alliance between these two companies, it is necessary to

understand the changing competitive environment for Chinese firms, like Lenovo, in a global

context.

As for the liberalization of the world trade and investment environment, many international

markets are becoming extremely competitive. In almost every industry, capable competitors no

longer confront each other within the national boundary, but more around the globe (Hill, 2005).

China is an emerging economy developed at a rapid pace, and it has been experiencing

tremendous changes after many economic reforms, which make it become a heated target

market for many foreign companies. In the past two decades, China had undergone significant

changes from a centrally planned economy to a more market-oriented one, though the benefits

derived from being a WTO membership to Chinese economy far outweigh its costs, especially

in the long run, reductions of government protection and loss of monopolistic position imply

greater challenges to Chinese firms in a global competitive context (Liu et al., 2000). In

addition, Chinese government has pushed a “Go Out” policy in recent years, with the intension

to encourage the local companies to develop overseas markets and to acquire the advanced

technology and distribution networks, thus, the government holds a very supportive attitude

towards the firms that intend to go globally (Dickie and Lau, 2004a). However, the inherent

common problem of Chinese company is that they are too rush to go global. The handicap of

TCL, 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


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international brands, in less than three years the firm has experienced a disorderly treat, and has

been forced to shut and sell most of its operations in Europe, which are largely due to its

unrealistic objectives, lack of local market knowledge and poor execution (Jonquieres, 2006).

As Jonquieres (2006) comments that much of Chinese 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).


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1.1 Background of the Company

Lenovo Group is one of the leading IT companies in China, and it has now become the 3rd PC

provider in the world market after the acquisition of 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


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best managed PC venders (Lenovo.com, 2007b). In the year 2003, with an aim to expand its

business globally with a more global-like brand, the company changed its former brand name

‘Legend’ to the name used today as ‘Lenovo’, “taking the ‘Le’ from Legend, a nod to the

heritage, and adding ‘novo’, the Latin word for ‘new’, to reflect the spirit of innovation at the

core of the company” (Lenovo.com, 2007b). The change of the brand name from ‘Legend’ to

‘Lenovo’ was perceived as the first move under the 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).

1.2 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.


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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).

1.3 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


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from that, the company also suffered financial problems, earlier in the year 2004; Lenovo

confessed that ‘its performance over the past three years had fallen short of internal targets’

(Lau, 2004a). In addition to that, shares of the company dropped nearly 60 per cent in the year

2004, and analysts at investment banks including ABN Amro and 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).

1.4 Motives of 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


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(2004), the two computer firms have formed a strategic alliance in PC business worldwide, in

which IBM positioned as the second largest shareholder with a share of 18.9 per cent. The

motivations that drive the formation of the strategic alliance between Lenovo and IBM can be

analyzed from two perspectives.

For 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 2: ANALYSIS OF THE STRATEGIC ALLIANCE

2.1 Analysis

2.1.1 Problems in the Early Stage of the Alliance

The failure rate of strategic alliance is quite high, and the figure is even higher in the

cross-border alliance due to cultural clashes, different management structure, trust issues or

other factors. The deal between Lenovo and IBM, an alliance between an eastern company and

a western one, has caused great market concern and doubts over the feasibility and 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).

2.1.2 Measures taken and their Evaluation

Facing with the financial problems that mainly caused by fierce cost competition from HP and

Dell, and the unprofitable performance of the acquired IBM PC business, the first measure that

Lenovo took was to lay off workers, though it was against its initial will. The first time job cuts

occurred in March 2006, when the company cut 1,000 workers. The second round of job cuts


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was carried out in the early 2007, when Lenovo Group laid off 650 people, mostly in the U.S.

and Europe, and moved another 750 jobs offshore (Taylor, 2007). By cutting down the number

of abundant employees, the company saved $250m annually in labour costs (Allison, 2006). As

Mr. Amelio commented that the restructuring was needed to help the Chinese PC maker

improve the efficiency and boost its growth in key markets, as he said that 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.

2.2. Measures to Be Taken and Limitations

The cultural dimension is a key element to operational success

apart from other aspects such as strategy, finance and law. To ensure the success of the alliance,

the company needs to emphasize more on human and cultural aspects, to realize the differences

between different corporate cultures, and to create a new hybrid corporate culture infused with

beneficial elements from different cultures, which works out in the new strategic relationship.

IBM has long been recognized as a good choice of partner for strategic alliance, apart from

technological support or using of worldwide distribution networks, it is necessary for Lenovo to

learn from its partner on how to blend with a new corporate culture to make the alliance succeed.


25

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,


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so as to seek for more credible commitments from the partner to avoid unexpected pitfalls along

the alliance. But these measures are more likely to be defensive ones for the company; hence,

apart from this, Lenovo also needs to adopt more active measures to create an atmosphere of

trustworthiness. Establishing a sound inter-personal relationship through either formal or

informal mechanisms could help to bridge the gap and accelerate the pace of trust building.

Besides that, the good inter-personal network established through informal occasions could

facilitate conflict resolution in a more formal context.

It is essential for the firm to adopt some measures to improve the

current situation. As previously indicated by Neil et al. that it is essential for firms to develop

the alliance learning capability to maximize the benefits and gain added value from a

partnership, and it is a key element to the success of an alliance. From this aspect, it is necessary

to learn from Japanese companies. In a Japanese company, it is prevalent across the

organization and known to all employees from top to down, that the purpose of the alliance is to

learn from its partners by accessing their core competencies, know-how, or other critical

information that it is hard or costly for the firm to develop on its own. In order to be a

learning-oriented firm, it is essential for Lenovo to develop its employees’ receptiveness to new

knowledge, as well as their personal competences to understand and absorb the knowledge

from the partner. This goal can be achieved by constant training or education for the employees,

making the employees involve in the 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.


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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


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participation of the subordinates; and this kind of hierarchical and centralized management

style has long commonly existed in Chinese firms and is hard to change in a short time.

Furthermore, the lack of communication and involvement of employees also weakens the

motivation to be learning-oriented along the alliance process.


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CHAPTER 3: DISCUSSION

3.1 Theoretical Insights

Theoretically, as the initial stage of an alliance is usually pervaded with uncertainties and

ambiguities, many authors have pointed out that there are several variables that need to bury in

mind when evaluate an alliance or attempt to make it work out. They are generally referred to

the cultural compatibility of the alliance partners, the degree of mutual trust among partners, as

well as the learning capability along with the strategic alliance, which are considered as the

determining factors to the alliance success, especially in the initial stage. Besides that,

especially nowadays when more cross-border alliances occur, they often come along with

co-branding alliance. Hence, the effectiveness of brand management goes hand in hand with the

strategic alliance.

However, as Kelly et al. (2002) state that there are few studies that have examined how to

manage the alliance in the early stage so as to sustain the collaboration in a long run. Not

mention the study in the cross-border alliance, especially the partnership between a western

company and one from an emerging market in the west. As such kind of alliance is the generally

tendency in the near future, there needs more and deeper theoretical studies in this specific area.


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3.2 Managerial Insights

After the analysis of the case, there are lessons to be learned from this unusual international

alliance. The managerial personnel need to make great efforts in the following aspects when

implementing the alliance:

The company needs to be well prepared before choosing to establish the alliance with

another company. The most important foundations for alliance not just related to

financial aspect, strategies or law, it has now lies more in the adaptive cultural

atmosphere of the company and the strong learning capability across the organization,

which is especially true for a local company to seek for the alliance with a foreign

company in developed countries.

Enhance the capability of knowledge transfer across the organization. As Praise and

Henderson (2001) note that knowledge resources range from intangible, tacit resources

to tangible resources, as the intangible resources are hard to extract and evaluate, the

company must have an explicit strategy to codify, internalize and disseminate the

knowledge it obtains throughout the organization.

Consistent and effective brand management under the strategic alliance. Raising a

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


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the most important thing is to avoid brand overlapping in the same market, and to

implement the consistent brand management in order to enrich the brand equity of the

firm and to enhance its brand image internally.

As this case study is typical, the problems of which is similar in crucial respects with others,

therefore the findings from the research can be generalized and are likely to apply elsewhere.

However, the company in this case is also with its own specific situations, hence, each company

needs to take measures by taking account of its own specifics.

:


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CHAPTER 4: CONCLUSION

To sum up, international strategic alliance has become a favored business strategic choice for

many firms during its global reach in recent years. The forces driven the alliance may be varied

from one firm to another, but generally speaking, the main reasons for seeking strategic alliance

can be summarized as the following ones: taking advantage of the local 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


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for a good relationship later. Generally speaking, Lenovo has achieved success from the

financial aspect. It has turnaround the profitability of former IBM PC business after two years’

efforts since the completion of the alliance, its shares value keeps increasing with a good

prospect, and the profit margin grows faster than ever. Notwithstanding the relatively pleasant

results the company has achieved till now, the managers still need to pay much attention to the

problems that have shown in the early stage of the alliance. Problems that occurred due to

different corporate cultures and mutual trust in the alliance could damage the long lasting

relationship of the alliance; hence, the company must find effective ways to remove these

obstacles. We can see that Lenovo has taken several measures to ease the clashes and conflicts

between the two companies, but it is still far from enough. To enable the success of the strategic

alliance, Levono needs to enhance its learning capability so as to make great out the partnership,

as well as focuses on its brand management, but not simply relying on the ‘borrowed’ brand

recognition from the well-known IBM. Till now, it can be commented that the alliance between

Lenovo and IBM is successful, but it still has some hidden problems or ones that have shown

needed to be tackled lately to make sure the smooth development on the road to success eventually.

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