final schematic report

COMPANY ANALYSIS: LENOVO

The following report is a company analysis of Lenovo, the largest PC company in China. A brief history is provided, followed by an analysis of the current position, competitors in the industry and Lenovo’s key issues, success factors and recommendations to propel them further into the global PC industry. Financial forecasts are then provided to show the implications of recommendations upon revenue and overall financial structure.

Presented to: Tod Brokaw, John Keifer, Kate Keifer, John Kiger

Presented by: Matt Burgess, Brent Choban, Ian Machir, Ashley Workman, Caixin Yu

Team 2A AM101

Company Analysis

EXECUTIVE SU

MM

ARYThe following report is a company analysis of the Chinese PC company Lenovo. The report includes an analysis of the current position and strategy of the company, a list of key success factors, key issues and recommendations that will better enable Lenovo to compete with their top competitors, HP, Dell and Acer. A five year financial forecast has also been applied to Lenovo to assess the impacts of the recommendations.

Current Position

In 2010, Lenovo posted revenues of $16.6 billion, but most of the revenue and net profits came from China. China, in fact, was the only of the three market segments, China, emerging and mature, to turn a profit in 2010. The mature market segment and the emerging market segment have experienced a downtown due to the weakened economies from the global financial crisis. Additionally, HP, Dell and Acer have a much larger presence in many of those markets. HP and Dell have plans to inject billions of dollars into China, which could potentially decrease Lenovo’s nearly 30 percent market share. Lenovo’s current strategy of protecting China, and attacking the emerging and mature markets is being done through increased production, more variety of old and new products and new internal business structures.

Key Success Factors and Key Issues

The key success factors that will lead Lenovo to success include: a more recognizable and reputable brand name, innovative products, economies of scale, an increasingly strong presence in China, and more pursuance in the mature and emerging market segments. However, there is a list of issues Lenovo is facing including: increasing presence of global competitors, gross margin strain, lack of innovation, consumer perceptions of Chinese products, and global brand image.

Recommendations

The following recommendations have been made to combat the issues Lenovo is facing and further lead them to success in the PC industry:

•Form a strategic alliance with ESPN to increase brand recognition and advertize in areas outside of China•Increase R&D spending to produce innovative products, increase sales and better compete with Dell and HP•Future acquisition of cloud computation company

Conclusion

We’ve forecasted the revenue growth before and after implementation of the aforementioned recommendations and its effects on Lenovo’s overall financial well-being. Before the recommendations, Lenovo’s revenue growth was forecasted at a percent of 20, 10, 10, 10, 10 for the next five years. After the recommendations, we predict revenues to increase to an overall revenue growth rate of 24, 24, 23, 22 and 21. Also, net income in 2015 could potentially rise to a total of $748 million after recommendation compared to $451 million if recommendations are not implemented. The success of Lenovo is highly dependent upon their ability to compete with competitors with price, innovation, reputation and brand recognition. These recommendations will lead Lenovo on the path to increased profits and long-term stability in a dog-eat-dog industry.

TABLE OF CO

NTEN

TS

Introduction……………………………………………………………………………………………………………………………………………1

History……………………………………………………………………………………………………………………………………………… 2

Ownership……………………………………………………………………………………………………………………………………….. 5Current Position…………………………………………………………………………………………………………………………………….6

China………………………………………………………………………………………………………………………………………………..7Emerging

Markets……………………………………………………………………………………………………………………………. 8Mature Markets……………………………………………………………………………………………………………………………….9Protect & Attack Strategy………………………………………………………………………………………………………………..10Benchmarking………………………………………………………………………………………………………………………………….12Product Lines…………………………………………………………………………………………………………………………………..13Product Trends…………………………………………………………………………………………………………………………….....14Cloud Computing.……………………………………………………………………………………………………………………………15Sponsorship…………………………………………………………………………………………………………………………………….16Competition…………………………………………………………………………………………………………………………………….17

Key Success Factors………………………………………………………………………………………………………………………………. 22Pursue Outside Markets………………………………………………………………………………………………………………….23Maintain Strong Presence in

China…………………………………………………………………………………………………. 24Innovation……………………………………………………………………………………………………………………………………….25

Key Issues …………………………………………………………………………………………………………………………………………….. 27Weak Global Brand Image……………………………………………………………………………………………………………….28Gross Profit Margin

Pressure………………………………………………………………………………………………………….. 29Competition…………………………………………………………………………………………………………………………………….30

Recommendations………………………………………………………………………………………………………………………………… 32Increase Advertising………………………………………………………………………………………………………………………..33Increase

Sponsorship………………………………………………………………………………………………………………………. 34Strong Presence in China…………………………………………………………………………………………………………………35Increase R&D…………………………………………………………………………………………………………………………………..36Acquisitions and Mergers………………………………………………………………………………………………………………..37Increase Operations………………………………………………………………………………………………………………………..38

Conclusion…………………………………………………………………………………………………………………………………………….. 39References…………………………………………………………………………………………………………………………………………….. 40Appendix……………………………………………………………………………………………………………………………………………….. 44

Appendix A: Matrix………………………………………………………………………………………………………………………….45Appendix B: SWOT

Analysis…………………………………………………………………………………………………………….. 46Appendix C: PEST

Analysis………………………………………………………………………………………………………………. 47Appendix D: Porter’s Five

Forces…………………………………………………………………………………………………….. 48Appendix E: Financial

Forecasts………………………………………………………………………………………………………49

INTRODUCTION The following report is a company analysis of Lenovo, the largest PC company in China, and the fourth largest globally. A brief history is provided, followed by an analysis of the current position, competitors in the industry and key success factors and key issues that will propel Lenovo to become more successful in the global PC industry. In addition, recommendations are suggested to guide Lenovo to even more success. Financial forecasts show the repercussions of the recommendations and Lenovo’s overall financial structure.

1

The “Legend” Behind Lenovo

In 1981, IBM’s first PC was introduced, which launched the PC

revolution (Lenovo, 2010). IBM had an open architecture policy,

which allowed others access to the instructions and specifications

that IBM had created to build its very own PC. After the development

of IBM’s computer, interest in the PC industry drastically increased.

Lenovo was established in Beijing, China, by Liu Chuanzhi and ten

engineers, who were members of the Chinese Academy of Sciences

in 1984 (Lenovo, 2010).

Legend created their very first product, a Chinese character card for

computing in 1985, which could read English software and process

commands in Chinese characters. In 1988, the Chinese character set

received the National Science Technology Progress Award (Lenovo,

2010).

HISTO

RY1981

IBM launches PC revolution

1984 Legend is founded in

China

1985Legend creates first product, a Chinese

Character Set

Key Success FactorsIntroduction Current Position Key Issues Recommendations Conclusion

2

HISTO

RY

Largest PC Manufacturer in China

The very first Legend PC was launched in 1990. At that time Lenovo changed its role from being an agent of imported computers, to producing and selling their own brand of computer products (Lenovo, 2010).

Legend became a publicly traded company on the Hong Kong stock exchange in 1994. The Legend PC division was formally established that year. After only four years of launching its first PC, Lenovo manufactured its one millionth PC (Plunkett, 2010).

Lenovo became the largest PC producer in China, producing 770,000 computers per year in 1998, outperforming IBM (Gonela, 2009).

1990Legend launched its first

PC

1994 Legend builds one

millionth PC; and goes public in Hong Kong

1998Legend becomes largest

PC manufacturer in China


Legend’s first PC3

HISTO

RY

The Convergence of IBM and Lenovo

At the beginning of the millennium, Legend entered the Mobile

Phone market and expanded into different categories of the

technology industry.

In preparation for the global market, Legend adopted the name

Lenovo in 2003. They took the “Le” from Legend to honor their

roots and added “novo,” the Latin word for “new,” to represent

the innovation at the core of the company (Lenovo, 2010).

The most important year for Lenovo was in 2005. They

acquired IBM’s personal computing division, making them the

third largest computer company in the world (Plunkett, 2010).

Lenovo became the sole provider of IBM personal computers,

but IBM still continued to finance and provide maintenance

services for their PCs.

2002Legend begins making

Mobile Phones

2003Legend is renamed

Lenovo

2005Lenovo acquires IBM’s

PC Division

IBM

Lenovo


4

OW

NERSH

IP OF LEN

OVO

Percentages of Ownership

The majority of Lenovo is owned by Legend Holdings, which is controlled by the Chinese government. Legend Holdings is a Chinese investment company which was formed by the Chinese Academy of Sciences that invests in IT, investments, and real estate.

Lenovo announced a strategic investment worth $350 million with three leading equity firms in 2005, using part of the investment towards purchasing the IBM PC business ("US Firms Invest," 2005). Texas Pacific Group (TPG) invested $200 million, while Newbridge Capital LCC invested $50 million. TPG is one of the largest private equity investment firms in the world, and they were also the creators of Newbridge Capital. Newbridge is an investment company that invests in emerging markets, particularly in Asia. General Atlantic LLC, that provides capital and strategic support for growth companies, invested in $100 million ("US Firms Invest," 2005) .

IBM also has a significant portion of ownership in Lenovo. When Lenovo purchased IBM’s PC division in 2005, IBM became the owner of 18.9% of Lenovo (Lenovo, 2010). IBM has decreased their shares of ownership in Lenovo, but they still provide Lenovo with support services for “Think” brand products.


Source: Lenovo.com

5

CURRENT POSITIONLenovo is positioned in three market segments: China, emerging markets (excluding China) and mature markets . The following section will explain the whereabouts of the markets, and Lenovo’s future plans in the different regions. Before 2009, the main markets were classified as Greater China; Europe, Middle East and Africa; Americas; and Asia Pacific (excluding China). Lenovo consolidated their market segments to have a more streamlined business approach. Over the last two years, Lenovo has gained the fourth largest market share in the world, and continues to be the largest producer of PCs in China. After a brief description of the market segments, current strategies are included to give insight on their position in the global market.

6

CHIN

AChina is by far the largest source of revenue for Lenovo. As of 2010, China held 47 percent of their total revenue, which is an increase of more than 6 percent from the prior year. About 3.5 percent of the sales are contributions from about two months of Lenovo Mobile revenues, Lenovo’s recent re-acquisition of the mobile internet company in November 2009 (Lenovo, 2010). In Lenovo’s current “Protect and Attack” strategy, China is a main focus. Lenovo’s plan is to protect China, grow revenues and expand in the market in which they have had great success historically. Lenovo is currently the largest manufacturer of PCs in China, and despite the global crisis that has taken a toll on nearly all other markets, Lenovo has continually had strong demand. Demand was driven by economic stimuli and rural subsidy programs. Additionally, unit shipments grew 37.4 percent from 2009. Lenovo is currently targeting rural markets, government stimulus projects, and SMBs, (small-and-medium-sized businesses). Lenovo’s market share in the PC industry in China grew to 33.4 percent. China was the only market segment to have gains in 2010. In fact, from 2009 to 2010, the China segment operating profit increased $68 million, which was the only reason Lenovo turned a profit in 2010. The emerging market and mature market segments both had net losses (Lenovo 2010/11 Annual Report).


7

MATU

RE MARKETS

Lenovo’s current strategy involves attacking the mature markets which include: North America, Western Europe, New Zealand, Canada and Australia. Mature markets are usually fairly stable and lack significant growth and innovation. Historically, these markets have brought in steady revenues throughout the past decade. However, recent revenues have been largely off-set by large expenses, and economies in many mature markets have been severely weakened by the global financial crisis. Over the last four years, sales in mature markets have decreased as a percentage of total revenue. In 2006, about 51 percent of the companies sales came from mature markets, while at the year-end 2010, the percentage of sales decreased to 37 percent. However, sales grew 11.43 percent in 2010 (Lenovo 2007 Annual Report, 2010 Report).

As of Q1 2011, Lenovo increased their unit shipments year-to-year by 49 percent and improved their market share to 5.6 percent in mature markets. Lenovo also improved in profitability. Due to the financial crisis in 2008, Lenovo had a net operating loss of $107 million at the end of the 2009 year, and a net operating loss of $97 million at the end of the 2010 year. However, as of the fourth quarter of 2010, the mature market segment only lost $6 million, which is a huge improvement from a $37 million loss in the fourth quarter of 2010(2009/2010 Annual Report). The improvement in the Mature Market is due to the strong shipment growth and cost cutting measures along with improving economies (Lenovo, 2010). Lenovo is looking to bring a profit in the mature markets in the coming years (Lenovo 2010/2011 Q1 Report).

Within the last year, Lenovo has implemented its Mature Markets Group, which essentially unites many of the markets into one entity for cost cutting purposes. The Mature Markets Group was also created in effort to streamline the business structure. Lenovo also formed a Channel Partner Organization that allows Lenovo to improve their relations, further improving profitability. Their attempt to show their partners their commitment to its Business Partner Channel bas been through holding partner events throughout the year to improve relations (Lenovo 2010 Annual Report).


Map of Mature Markets

8

EMERG

ING

MARKETS

The emerging market segment currently holds the smallest percentage of revenue for Lenovo. After the 2010 year, Lenovo held 15 percent of the yearly sales of $16,605 million, which amounts to about $2,640 million. The emerging markets include: Africa, Asia Pacific (excluding Japan, Australia, New Zealand), Central and Eastern Europe, Hong Kong, India, Korea, Latin America, Mexico, Middle East, Pakistan, Russia, Taiwan and Turkey. China is not included because it is the homeland country. Unlike mature countries with slow growth and innovation, emerging markets are in a state of rapid growth, with much potential for revenues. In both 2009 and 2010 Lenovo posted large losses of $107 and $97 million respectively. Like the mature markets, losses were largely due to the global financial crisis. Lenovo is however recovering. After the first quarter of 2010, Lenovo’s unit shipments increased 69 percent from the prior quarter last year. The crisis is letting up and growth is now starting to take a toll. Likewise, Lenovo’s emerging market share has increased 140 basis points to 5.4 percent. Lenovo’s focus in the emerging markets is primarily on consumers, so they launched more Idea products (Lenovo’s consumer PC line) to address the demand for consumer PCs (Lenovo 2010/11 Annual Report).


Map of Emerging Markets

9

PROTECT &

ATTACK STRATEGY

Lenovo is currently implementing the “protect and attack” strategy, a term coined in 2009 to expand their market shares globally. Essentially, the strategy is to protect their core business in the Chinese market for PCs, and expand in emerging markets and mature markets. Globally, Lenovo holds about 10 percent of the PC industry. Currently, Lenovo is the largest PC manufacturer in China with a market share of 28.7 as of Q1 2010. Revenues from the Chinese market alone made up about 48 percent of Lenovo’s total revenues as of 2010 (Lenovo 2010/11 Annual Report).

Lenovo’s success in China can be attributed to several reasons. Firstly, Lenovo is a China-based company. Since 1984 Lenovo was in the business of producing home computers in China, and were the first to do so (Lenovo, 2010). Since 1997, they have been the largest producer of PCs in China. Additionally, they have held a strong brand name and forecasts show they will continue to be the strongest PC company in China (Mirae Asset, 2010). Even after the entrance of HP and Dell into the Chinese market, Lenovo has held their ground.


10

PROTECT &

ATTACK STRATEGY

The “attack” part of the strategy involves mainly emerging markets, but also mature markets. Lenovo is focusing on SMB and consumer products to increase their market share. Lenovo also “attacked” Lenovo Mobile Communication Technology Ltd. in January of 2009 and recorded about $91 million in revenues in about two months in early 2010 before the year end. Much of the success of Lenovo Mobile Communication Ltd. is in the success of LePhone, Lenovo’s smart phone that is competing with Apple’s iPhone in China. The Group saw an increase in revenue in emerging markets, but due to the change in classification of geographic segments, further extraction of regional revenue is very difficult.

Additionally, The “Lenovo Way” has been a topic of discussion for the entire Lenovo company. From the top down, Lenovo is implementing a new idea to streamline their company culture in order to increase efficiency and innovation (Lenovo 2010 Annual Report). The “Lenovo Way” adds core values to their current “protect and attack” strategy to result in executing excellence and achieving objectives. The “way” includes commitment and ownership to improve overall profitability and increase productivity (2009/2010 Annual Presentation).

According to Dow Jones & Company, Inc, Lenovo is considering opportunities for acquisition in China, specifically in the mobile internet sector, global consumer computer market and developing regions (WSJ, 2010). Although at this time, Lenovo has not made any moves to acquire.


Source: Xing 2010

11

BENCH

MARKIN

GAfter comparing Lenovo to its top competitors, many aspects of the companies stand out. One of the most important financial aspects is the gross margin. Lenovo’s gross margin is pressuring all parts of the business. Even after drastic cost-cutting procedures in 2009 and 2010, Lenovo’s gross margin is the lowest. The challenge will lie in where to make adjustments. Lenovo could raise prices, further increasing gross margin, but that may decrease sales and overall profitability. Competitor’s operations are large enough to utilize economies of scale, in which they can lower their per-unit costs.

Additionally, Lenovo’s research and development costs are also the lowest by a long-shot. Lenovo, being the largest PC company in China should be concerned, especially because HP and Dell are continuing to expand their presence in China with considerable force. Lenovo, even with a home-court advantage ,will have to step up their game to compete with the power-houses of the PC industry.

Lenovo’s leverage is also a number to consider. Having a leverage of 5.58 is relatively high to other PC manufacturers, except for Dell. The high leverage could add a level of risk to current and future investors. The leverage could give investors potential for significant gains, but for a large company like Lenovo, it’s important that they consider the long-term well-being of the company. Leveraging such a significant amount of their finances could over time pose a huge risk for Lenovo.

Lenovo does seem to have a fairly illiquid position against its competitors, but the risk is not as apparent after digging deeper. The reason they have more current liabilities than current assets is in their payment structure of trade payables. Their current ratio is below 1, which indicates they cannot cover their short-term obligations with their current assets. However, their days in trade payables is 77 days and days sales outstanding and days sales in inventory are both about 22 days. This means that Lenovo collects their receivables much faster than they expend their payables, thus showing an illiquid position.


12

PROD

UCT LIN

ES

The IdeaPad is a high quality computer offered at a convenient

price to consumers. It’s “for business and pleasure,” according

to Lenovo. This computer has high definition entertainment

and security tools for consumers. Lenovo offers light notebooks

and touch screen tablet notebooks in this line of their PCs.

Lenovo’s IdeaPad Y550 won “Best Budget Laptop,” from

About.com in 2009. (Lenovo, 2010).

The IdeaPad was 34.5 percent of Lenovo’s sale, as of Q1,

2009/2010, bringing in the second largest amount of the

company’s revenue. Shipments increased 86 percent YTY and

sales increased 94 percent (Lenovo, 2010).

The ThinkPad laptop is well known for its outstanding performance and reliability, it’s “the ultimate business tool.” This laptop offers small-business solutions, enterprise and education solutions, powerful mobile workstations, durability, ergonomic designs, and tools that will save businesses time and money. Lenovo’s ThinkPad X201 won “Best Business Laptop,” from Computer Shopper in 2010 (Lenovo, 2010).

The ThinkPad was 61.2 percent of Lenovo’s sales, as of Q1, 2009/2010, bringing in largest amount of the company’s revenue. This line of PCs primarily target commercial consumers. Lenovo’s Think products grew 9 percent YTY, which was better than the global industry average. It also outperformed the PC Market with 15 percent unit shipment growth this past year (Lenovo, 2010).


Source: Lenovo.com“Best Business Laptop” “Best Budget Laptop”

IDEA34.5%

THINK61.2%

Mobile3.5%

Others0.8%

13

PROD

UCT TREN

DS

On Lenovo’s Q1 results, for 2009/2010, desktop computers accounted for 33.2 percent of Lenovo’s total sales, notebooks accounted for 60.5 percent, mobile devices accounted for 3.5 percent, and other products accounted for 2.8 percent (Lenovo, 2010).

Consumers are becoming less interested in desktop computers as technological trends are changing. Consumers and small businesses are now looking for more portable computers with access to wireless internet. That way they have easy access to the internet wherever they may be. As a result, notebooks have become the core source of revenue for Lenovo.

Notebooks will continue to be a strong source of revenue, but there is also great potential in the mobile internet industry.

Lenovo realized the PC and mobile internet phone industries were converging, so they repurchased Lenovo Mobile for twice the price they sold it for just two years ago (Schuman, 2010).

The company does not believe that mobile internet devices will replace notebooks because of the sizes of keyboards and screens, but there will be an increase in the demand for mobile internet devices within the next few years.

Source: Lenovo.com


Desktop33.2

%

Notebook60.5%

Mobile3.5%

Others2.8%

14

CLOU

D CO

MPU

TING


Cloud computing is a technology that uses the internet and central remote servers to maintain data and applications. Cloud computing is a fast-rising concept that allows consumers and businesses to rent or use numerous IT services without installation. Additionally, businesses can acquire these applications on any computer as long as the computer has internet access. This technology allows for much more efficient computing by centralizing storage, memory, processing, and bandwidth at a low cost.

In a chief information officer survey by Gartner, about 1,600 CIOs managing over $120 billion of IT spending stated that cloud computing is their second most important priority this year (“Singapore”, 2010).

Just recently, Lenovo has announced the company’s cloud computing strategy and named it Secure Managed Client. Lenovo’s cloud computing strategy consists of offering a number of cloud computing products, ranging from its LePhone, ThinkPad and IdeaPad laptops, desktops, enterprise servers and large public computing facilities (Xinhua News Agency, 2010). According to the company, Secure Managed Client will help businesses to reduce IT costs and security risks by turning off hard drives and storing all data in a non-server remote location. Lenovo states that cloud computing can reduce the average $120 a month that enterprises spend to fully manage a PC to as low as $70 (Channel Insider, 2010). The company hopes their vision will appeal to enterprises and both small and medium-sized businesses. Mr. Chen Xudong, Lenovo’s vice-president and general manager of the Chinese operations, said “Lenovo will be offering a simple cloud solution with a flexible and streamlined way to manage companies’ complex IT environments.” Lenovo plans to introduce more cloud terminals in 2011 (Xinhua’s China Economic Information Service, 2010).

Liu Jun, senior vice president of the company mentioned a cloud terminal, internet TV. Mr. Jun believes that capturing the internet TV market will post an explosive growth of over 336 percent each year (Xinhua’s China Economic Information Service, 2010).

15

SPON

SORSH

IPLenovo was a sponsor for the 2006 Winter Olympic Games in Turin, Italy and the 2008 Summer Olympic Games in Beijing, China (Clifford, 2008). Lenovo provided the Olympics as well as other partners of the Olympics computers, servers, engineers, technicians and a variety of other technologies. Lenovo also won the Olympic torch design beating out over 300 competitors for the 2008 design. The torch was named “the cloud of promise” (Lenovo, 2010). Lenovo is able to associate their product as a world class brand by sponsoring the Olympics.

Lenovo did not want to be seen as just a Chinese company, but as a global brand with a high quality computer (Clifford, 2008). This is highly concentrated on building brand awareness because not many consumers know of the company outside of China. Lenovo had decided to associate themselves with sports to not only establish themselves as a global brand, but to also associate themselves with values that are closely related to the company. That is exactly what the Olympics and Formula One Racing provided for Lenovo (Ladousse, 2009). Creating a sponsorship with the Olympics and Formula One provided Lenovo with the opportunity to market their product worldwide.

Lenovo contributes to Formula One’s business in every way possible. They provide the Vodafone McLaren Mercedes Team with technology to help improve race team performance, engineering and testing, product and development and even to start the cars before races and test sessions (Ladousse, 2009). Formula One has such a large dependence on technology, which is why this partnership is so successful. Lenovo is able to associate their products with top performance and high reliability by providing the Vodafone team with the technology they need to win.


16

COM

PETITION

Lenovo HP Dell AcerAsusand

ToshibaApple

This section deals primarily with Lenovo’s main competitors. Other computer companies are trying to maximize their market share at home while also reaching abroad, beyond their country’s borders. China is seen as one of the most profitable emerging markets in the world, and the PC industry has taken great interest to say the least. The following briefly discusses each of the global top five PC manufacturers as well as the popular Apple corporation. Lenovo was already the largest PC maker in the world’s most populous country, China, when it acquired IBM’s PC operations for approximately $1.75 billion in 2005 (Hoovers, 2010).


The deal allowed Lenovo to have exclusive access to the prestigious IBM logo for five years, along with permanent ownership of the “ThinkPad” brand of computers. IBM helped pioneer the PC industry in the 1980s, but more recently its PC division has dragged down on their profits, a factor that led to their decision to sell off the branch. Now IBM can focus more on its services and software, while simultaneously boosting Lenovo into the global PC market (Knowledge@Wharton, 2005). Lenovo currently owns approximately 10% of the worldwide PC market, and 28.6% of the market share in China, where it generates about half of its sales (Fletcher, 2010).

Source: Lenovo.com

17

COM

PETITION

: DELL

At the moment, Lenovo is the fourth-largest PC maker in the world by shipments behind Hewlett-Packard, Dell, and Acer (Fletcher, 2010). Although Lenovo is number one in China’s market, the competition for this coveted position is becoming more intense. Dell in particular is about to turn up the heat and implement some significant changes in its overseas strategy. China is the company's largest source of revenue besides the United States, and in their last quarter, their revenue from China grew 52% from the year before. Dell now owns about a 9% share of the Chinese computer market. Just this month Dell announced it would be shutting down its large manufacturing plant in Winston-Salem, North Carolina, and it will be investing $100 billion in China over the next decade. Dell and Lenovo both make laptops, netbooks, desktops, servers, and now they have started to create smart-phones (Local Tech Wire, 2010). Dell also ships almost twice as many units as Lenovo on a global scale, which puts Lenovo at a disadvantage in gross margin and per-unit research and development and administrative costs (Technology Business Research, 2008).


Source: Lenovo.com 18

COM

PETITION

: HP

HP is the world’s largest PC manufacturer by sales, and it was the second largest PC vendor in China. Now Dell and HP are both at about the same level with about an 8 or 9 percent market share as seen in the graph on the previous slide. They are trying to strengthen their presence even more, and are in the process of negotiating a deal with China’s three mobile carriers China Mobile, China Unicom, and China Telecom to start offering HP’s low cost netbooks for sale (Chao, 2009). HP has a distinct advantage over Lenovo on a global scale because they sell more than twice as many units as Lenovo, and enjoy many of the benefits that come with economies of scale like lower costs associated with each unit (Technology Business Research, 2008). Interestingly, David Roman, a former Apple executive and former vice president of HP’s worldwide marketing communications, was just hired by Lenovo this year. Mr. Roman was the man behind HP’s acclaimed “The computer is personal again” advertising campaign. Lenovo’s brand name may gain a significant boost with the help of this well-respected marketer (Madden, 2010). HP is also looking to open many large-format branded stores throughout the Asia-Pacific region, a strategy that proved successful in the U.S. and in India where it already has more than 1,000 retail outlets (Hicks, 2008).


19

COM

PETITION

: ACER, TOSH

IBA,

ASUS

The Taiwan-based company Acer just fell into third place this year behind HP and Dell as the top leaders of the PC industry (Sherr, 2010). Acer acquired the well-known Gateway and Packard Bell brands in 2007 for $710 million which greatly increased their market share in America and Europe. This also gave Acer access to popular retailers like Best Buy and Circuit City. Lenovo also had their eyes on Packard Bell, which had a strong presence in Europe and would have strengthened Lenovo’s brand image to consumers outside of China before Acer took control. Thankfully for Lenovo, Acer doesn’t have nearly as strong a presence in the Asian market with 6 percent market share compared to Lenovo’s nearly 30 percent. However, Acer’s CEO J. T. Wang says that, “Lenovo is strong in China, but we are growing everywhere”. The senior vice president of Lenovo, Ravi Marwaha says, “The most important thing is to make sure Lenovo continues to grow in China. The Chinese market is the company’s primary concern and will act as a growth engine driving Lenovo’s expansion in global markets” (Gonela, 2009).

During the second quarter of 2010, Asus and Toshiba tied for fifth place in the worldwide PC market. Asus is a Taiwan-based company and it is notable for being the world’s largest manufacturer of computer motherboards. In 2008 it made a big appearance in the consumer market when it released the Eee netbook, one of the most attractive and inexpensive computers available. This wildly successful product helped launch Asus into one of the biggest computer manufacturers. Asus is quickly becoming a considerable threat as their shipments rose 80 percent from the second quarter of 2009 to the second quarter of 2010, nearly quadruple the industry average (Ogg, 2010). The Toshiba corporation is based in Tokyo, Japan and they are known for their computers as well as medical equipment, transportation systems, appliances, and a variety of other products. Because of their wide breadth of products, Toshiba may have an advantage over Lenovo in that they have the power to drop some of their business units and pour more funds into their computer manufacturing unit. Toshiba’s shipments in the lucrative U.S. market grew 50 percent in the first quarter of this year (Pettey, 2010).


20

COM

PETITION

: APPLEApple on the other hand is “missing a huge opportunity in the Chinese market” says Lenovo chairman Liu Chuanzhi. “We are lucky that Steve Jobs has such a bad temper and doesn’t care about China. If Apple were to spend the same effort on the Chinese consumer as we do, we would be in trouble” (Hille, 2010). Apple has not responded to Mr. Liu’s comments but they are planning on opening a new store in Shanghai along with 25 other retail outlets in the country by the end of next year. Part of the reason Apple doesn’t have much of a presence in China is because only a few stores are authorized to sell their products. The iPhone for example, is only legally available through China Unicom, the country’s second-largest mobile phone operator, and its selling price is much higher than the normal going rate. China Unicom is the Chinese equivalent of the American telecom network AT&T, the sole cell-phone provider for the iPhone in each company’s respective country. China Unicom is far behind market leader China Mobile, and it is notorious for its bad service, which negatively affects Apple’s image (Einhorn, 2010). The iPhone is also in direct competition with Lenovo’s smart phone, LePhone, which is customized for Chinese users. Apple has the advantage of having over 100,000 content providers that create apps for the iPhone, whereas LePhone only has 1,000 (Hille, 2010).

HP; 18.1%

Dell; 12.8%

Acer; 12.4%

Lenovo, 10.1%Toshiba, 5.4%

Asus; 5.4%

Apple; 4.9%

Others ; 30.9%

Global PC Market Share

Source: (Wilkins, 2010)


21

KEY SUCCESS FACTORSFor Lenovo to continue making profits and continue competing against its massive competitors, there are several key success they must reach in order to see the company prosper. These factors include: pursuing markets outside China, becoming more innovative, reaching economies of scale and continuing their strong presence in China.

“We focus every day on meeting our commitments and delivering results. Guided by a clear strategy, we are able to protect our core businesses and attack new opportunities for growth

in any market worldwide. Our business requires exceptional execution every day, in every market, for every customer”-Yang Yuanqing 22

PURSU

E OU

TSIDE M

ARKETSIn order to continue to grow outside of China and keep up with competitors in the PC Industry,

Lenovo is concentrating on pursuing outside markets. This includes emerging markets such as

Asia Pacific (Excluding Japan, Australia and New Zealand) and India as well as mature markets

such as North America and Western Europe. This presented an extraordinary opportunity for the

global success of Lenovo. In the 2009/2010 Q1 results, Lenovo achieved for the first-time ever,

double-digit market share worldwide increasing their global PC market share to 10.2 percent

(Lenovo, 2010).

As a result of Lenovo’s global strategy to pursue outside markets, emerging markets sales rose

50 percent and mature markets sales rose 39 percent (Lemon, 2010). As Lenovo continues to

pursue this strategy, the company will gain a stronger global presence as well as increase market

share in emerging and mature markets.

“Our performance was strong globally, Lenovo has a clear strategy when and where to focus on gaining

share, and when and where to focus on maximizing

profit, and we executed that strategy well.”

-Lenovo Chairman, Liu Chuanzhi


Emerging MarketsMarket share increased by 1.4 points year-

over-year in the 2009/2010 Q1 results (Lenovo, 2010).

Mature MarketsMarket share increased by 1.3 points year-

over-year in the 2009/2010 Q1 results (Lenovo, 2010).

23

MAIN

TAIN STRO

NG

PRESENCE IN

CH

INA


China is Lenovo’s original and biggest market base. Sales in the country have been consistently increasing and it is currently responsible for nearly half of Lenovo’s total sales (Fletcher, 2010). It clearly needs to maintain its position as the number one PC manufacturer in this lucrative market. Lenovo is currently trying to make a stronger presence in other regions around the globe, and its strength in China acts as a metaphorical cushion that bolsters the company’s sales when demand elsewhere decreases.

In 2004 Lenovo decided to launch a subsidy program to become a significant presence in the poorer rural areas of China. They started selling low-cost computers to farmers in rural segments of the world. This product line was named “Yuanmeng” which means “making dreams come true” (Lemon, 2005).

Lenovo is marketing the Yuanmeng computers as an educational tool that will help children in rural areas have a brighter future. This is especially significant in China seeing as how each family is restricted to having only one child under the “family planning policy” that was enacted in 1978 (Huiting, 2002). These families want the best for the future of their child and will pay a significant amount for that to happen.

The Chinese government passed a program that helped with the targeting of rural markets. Those who pursue rural areas will receive a 13 percent discount when they purchase electronic products (Xinhua, 2009).

Within the next three years, Lenovo aims to sell five million computers in rural areas, establish 700 county-level sales and service outlets, and cover 320,000 villages across the country through 7,800 sales networks (Xinhua, 2009). With this marketing strategy, it shows Lenovo intends to cover all the Chinese market segments, from low end to high end. It is forecasted that PC sales in China will increase in both the rural and urban areas of the country. It is of vital importance that Lenovo remain on top in its home country by pursuing every market possible in China. 24

INN

OVATIO

N

Lenovo has made a commitment to become well known for their innovation in products and technology. “Our goal is to put more innovation in the hand of more people, so they can do more amazing things” (Lenovo, 2010). Of the top 50 most innovative companies of 2010, Lenovo ranked 30 according to Bloomberg’s Business Week (Boston Consulting Group, 2010). This is a great achievement considering Lenovo is a much younger company than their competitors.

At this past year’s Consumer Electronics Show, Lenovo stood out with several of their industry first products such as the IdeaPad U1, the world’s first hyrbid notebook, the IdeaCentre A300, the world’s thinnest all-in-one PC and IdeaPadS10-3t, the world’s first multi-touch capacitive tablet netbook (“Understanding Lenovo,” 2010).

Lenovo is also expanding into new categories such as the mobile internet market. Their latest product was their “LePhone” Smartphone, which is only available in China. This device runs on the same program as the Google Android OS. It is now the number one preferred mobile device in China (Lenovo 2010/11 annual report).


Source: Lenovo.com

IdeaPad U1 IdeaCentre A300 IdeaPadS10-3t LePhone

-First modern laptop to fly in space-First with a spill-resistant keyboard-First with built-in CD-ROM-First with built-in DVD-ROM

-First with built-in wireless capabilities-First with embedded security system-First with built-in fingerprint reader-First dual-screen mobile work station

Record For Innovation

25

INN

OVATIO

NLenovo has many plans for the future of the company. They are planning to release a hybrid computer sometime in the near future, a game console in 2011, and they are currently working on the development of an Android tablet PC.

A hybrid personal computer, IdeaPad U1, is planned to be launched in China in early 2011 (“Lenovo Sets Hybrid,” 2010). This will be the industry’s first hybrid PC, which has a detachable screen that functions as a netbook computer as well as tablet. “By fusing the functionality of a notebook with the slate tablet’s rich multi-touch entertainment and mobile Internet experience, U1 provides consumers the freedom to choose the device they prefer for any activity,” Lenovo’s vice president Liu Jun stated (Lenovo, 2010).

Lenovo also saw an area of growth potential in the video game console market. They are launching a game console, called eBox, with Beijing Eedoo Technology Ltd, in 2011 (“Lenovo to Launch,” 2010). The eBox does not use a physical game controller. Instead, the game console is controlled by movements and gestures detected by a camera. This device will integrate a cloud computing software architecture, providing interactive games for users (Lee, 2010).

An Android tablet, known as LePad will be launched sometime in the near future. This device is similar to the iPad that was recently introduced by Apple. The company has yet to enclose a launch date, as the device is still under development but they do believe that tablet PC’s will be a smaller portion of the market at least for the next five to ten years.

Lenovo plans to launch new technology to keep up-to-date with the technological trends, but they will still maintain their focus on notebooks and desktops (“Lenovo to launch tablet,” 2010).


Hybrid IdeaPad U1 LePad Android Tablet eBox Game Console

26

KEY ISSUESLenovo is in a position to face many challenges in the PC market. The emerging markets are still in a rough financial position. Likewise, mature markets are still lacking financial strength and are easing out of recession. Also, China is the fastest growing country in the world, so Lenovo must be quick to adapt and respond to movements in the market. Without the revenue from China, Lenovo would be in a world of trouble. In 2009, Lenovo recorded a loss of $225 million, making it the biggest loss in the history of the company (Lenovo, 2010). Fortunately at the year end of 2010, Lenovo pulled out a $129 million gain. The following section will debrief the challenges Lenovo is facing and will potentially face in the near future.

27

WEAK G

LOBAL BRAN

D IM

AGE

Despite Lenovo being the fourth largest computer company in the world, their brand image is not well known outside of China. Many Chinese companies have not succeeded in marketing their products in other countries very well, mainly due to their lack of advertising, sponsorship, and the perceived quality of Chinese products. Foreign consumers may have a stereotypical notion that Chinese products are cheap and low quality because of the abundance of “dollar store” products that are stamped with the well known “Made in China” mark. This stigma may negatively affect Lenovo, though their recent purchase of the PC division of the American company IBM may help that.

Lenovo has also not advertised their products in other countries well enough for consumers to identify the brand. This puts Lenovo at a competitive disadvantage in their pursuit of new markets where industry giants like HP and Dell already have a well known presence.

A variety of different marketing strategies have been implemented to strengthen brand awareness, including the exposure Lenovo received in its purchase of IBM’s personal computing division. The company also renamed itself in 2003 from Legend to Lenovo, they sponsored the 2006 Winter Olympics and the 2008 Summer Olympics, and they continue to sponsor Formula One Racing. Each of these events have helped increase Lenovo’s brand awareness, but there are many consumers in the market that are still unaware of who the company is.

In order to dissociate itself from not be recognized as a low quality product, Lenovo has stepped away from being portrayed as a Chinese company. Lenovo has blended their management staff to include original Chinese managers as well as American managers who used to be a part of IBM. They have also established several headquarters and manufacturing plants in multiple countries around the world.


28

GRO

SS PROFIT M

ARGIN

PRESSU

RECurrently, Lenovo’s cost of sales is extremely high; nearly 90 percent. This indicates that the mark-up on Lenovo’s products is very low. This is mainly attributable to the emerging and mature markets. For the last 2 years, both the emerging market segment and the mature market segment have had losses. In the 2009 year, Lenovo reported a combined operating loss of $244 million and in 2010 a loss of $162 million in the emerging and mature markets. The decrease in losses in 2010 can be attributed to their significant cost-cutting measures and increased overall sales. Lenovo decreased their selling, general and administration costs nearly $350 million. A portion of this is their 11 percent staff layoff, sales and distribution expenses were reduced by $100 million, administrative and research and development expenses decreased $66 million, and other operating expenses were lessened by $170 million (SinoCast Computers & Electronics Beat, 2010). However, sales increased from 15 billion in 2009 to over 16.5 billion in 2010. Additionally, their PC shipments rose 48 percent in China, outperforming the market growth rate of 21 percent. Even still, economies in the emerging markets and mature markets are hurting Lenovo’s profitability. Lenovo has had to keep prices down in effort to keep sales up. In those segments they have increased profitability, but until the economies gain significant strength, gross margin will remain under pressure.

While the strengthening economies will add profits to Lenovo’s operations, economies of scale will also significantly increase their gross profit margin and ultimately their net income. Economies of scale is when a company such as Lenovo can produce mass amounts of their product in order to decrease per unit costs. Companies such as Dell and HP have operations much larger than Lenovo and with gross margins of 18 and 24 percent respectively, they have much more control over price and less strain on other parts of their operations.


29

COM

PETITION

: DELL &

HP

The PC industry is currently one of the most competitive industries in the world. Since the PC revolution in the 1980s, PC manufacturers have been constantly striving to produce the newest, fastest, most innovative machine. Lenovo was born in China, one of the fastest growing countries in the world, and they have a significant market advantage over its competitors there. They have a strong brand image in their home country and have had no trouble bringing in high revenues.

However, industry giants HP and Dell have already started infiltrating China and have no intentions of letting up. They are trying to grasp the opportunity of increasing their profits, especially in times like this, when many of their historically successful countries are struggling financially. Lenovo now has to compete both at home and abroad with some of the strongest companies in the world. Dell already owns a 9% share of the PC market in China, and over the next decade they plan to invest around $100 billion into the country. HP owns an 8.2% share and they are currently the biggest PC manufacturer in the world. These two companies appear to be the biggest threats to Lenovo both globally and in China.

Dell and HP both have higher revenues than Lenovo, and have the ability to pursue a wider variety of options with all their money. It isn’t as big of an issue for them to penetrate a foreign market like China. Obviously Lenovo’s funding is more limited, so they need to find an efficient balance for their expenses between the Chinese market and outside markets. The graph on the next slide illustrates the differences in purchasing power between the three companies.

The graphs depict the worldwide total amounts of revenue, gross profits, and net income of HP, Dell, and Lenovo, which are the top three PC companies in China. Clearly Dell and HP have a lot more capital to work with compared to Lenovo. The distribution of spending power between the three has remained pretty consistent over the past several years. The fiscal year ended 2011 is not yet complete and is therefore not portrayed.


CHINA

30

COM

PETITION

: DELL &

HP


HP Dell Lenovo

Net Income 7264000 2583000 161138

Gross Profit 25041000 9987000 1887000

Revenue 104286000 57420000 13978000

10,000,000

30,000,000

50,000,000

70,000,000

90,000,000

110,000,000

Fiscal Year Ended 2007

USD

in T

hou

san

ds

HP Dell Lenovo

Net Income 8329000 2947000 485157

Gross Profit 28295000 11671000 2450000

Revenue 118364000 61133000 16352000

10,000,00030,000,00050,000,00070,000,00090,000,000

110,000,000130,000,000


USD

in T

hou

san

ds

HP Dell Lenovo

Net Income 7660000 2478000 -226400

Gross Profit 26651000 10957000 1797196

Revenue 114552000 61101000 14901400

-10,000,00010,000,00030,000,00050,000,00070,000,00090,000,000

110,000,000130,000,000


USD

in T

hou

san

ds

HP Dell Lenovo

Net Income 6223000 1433000 129400

Gross Profit 21690000 9261000 1789600

Revenue 92755000 52902000 16604800

5,000,000

25,000,000

45,000,000

65,000,000

85,000,000


USD

in T

hou

san

ds

HP’s fiscal year ends in October. The 2010 graph only reflects their first 3 quarters of the year.

Data Source: Hoovers.com 31

RECOMMENDATIONS

32

The following recommendations have been made to address their key issues that are impeding their profitability: increase advertising and sponsorship, maintain a strong presence in China, pursue outside markets and consider future acquisitions. Implementation of the recommendations will give Lenovo the strength it needs to compete with their competitors.

INCREASE AD

VERTISING


Lenovo has already taken several steps to increase its brand awareness outside of China, such as sponsoring the Olympics, an event that ensures advertisers that their message will reach a global audience. Unfortunately for Lenovo, that is not enough, as many people still have not even heard of them.

Lenovo hired former Apple and HP executive David Roman earlier this year. Mr. Roman was responsible for the famous HP “The computer is personal again” advertising campaign. Lenovo should use this man who has so much experience to their advantage. HP’s advertisements featured well-known celebrities using HP computers in stylized television commercials and magazines. Lenovo should put Mr. Roman in charge of a fresh advertising campaign that should be distributed to their most promising markets outside of China. At the moment Lenovo is making more than twice as much revenue in mature markets like America and European countries, than in their emerging market segment. People in mature markets are more likely to have access to televisions and purchase magazines than those who live in less developed areas, and Lenovo’s ads have a greater chance of being seen there. For this reason Lenovo’s forecasted advertising budget has been increased in order to pursue this new strategy. This is reflected in the selling and distribution expenses section of the income statement. It may take some time before the full impact of these ads are realized and benefit Lenovo’s net income. The important aspect of this advertising campaign is to get Lenovo’s name to reach a wider audience, not to increase profits immediately.

33

INCREASE SPO

NSO

RSHIP

In order to increase brand awareness and capture the global market, Lenovo should form a partnership with ESPN. ESPN is known as the worldwide leader in sports entertainment. They will be able to provide Lenovo with the opportunity to increase brand awareness in the United States as well as in other areas of the world. ESPN televises 65 sports in 16 languages in more than 200 countries (ESPN, 2010). They will be able to increase Lenovo’s market share globally with an emphasis on the values their company possesses.

Lenovo has a reputation for sponsoring sports. They sponsored the Winter Olympics in 2006, Summer Olympics in 2008 and they continue to sponsor the Vodaphone McLaren Formula One Race team. Forming a partnership with ESPN will only enhance their association with sports and they will reach a much larger audience.

Lenovo will be able to provide ESPN with the technological equipment they need to perform everyday business activities including computers, servers, software updates, and even website assistance. In return, ESPN anchors will use Lenovo laptops live on Sports Center when broadcasting. ESPN will benefit from being provided with up-to-date technology and Lenovo will benefit from ESPN by increasing their brand image all across the nation. ESPN could also have a sports segment, featuring “New World Sports,” showcasing sports from around the world and could be “brought to you by” Lenovo. This could increase international sports exposure along with Lenovo computers to ESPN viewers.

Not only would this partnership open up doors for Lenovo to expand into the United States and other countries, but this will also benefit ESPN in becoming more popular in China. In order to carry out this partnership Lenovo’s sponsorship expense will increase, which is also reflected in the selling and distribution expense in the forecasted income statement (Refer to Appendix E).


34

STRON

G PRESEN

CE IN CH

INA

Lenovo is currently the number one PC manufacturer in China, and their growth rate is about 1200 basis points higher than the Chinese industry average. They should carefully watch their two main competitors, Dell and HP, on their home front and make sure they stay ahead. Lenovo currently owns a 28 percent market share in China, which is about three times more than Dell and HP which hold the number two and three positions respectively. These two companies will most assuredly try to increase their own brand awareness to Chinese consumers to become more of a household name and increase their sales. Lenovo should try to diffuse their efforts as much as possible through counter advertising (refer to advertising recommendation page for markets outside of China). Their ads should emphasize that they are a Chinese company and garner some national pride among their Chinese customers. It should also include references to their superior customer service awards so that they become established as a reliable, helpful company that keeps their customer’s needs in mind.

This year Lenovo was among the top 10 winners of the fifth annual rankings for Best Customer Service in China, an event that is widely considered to be the benchmark for evaluating customer service in the country. They won awards for providing exemplary customer service practices and also for best service innovation. Liu Chuanzhi, chairman of Lenovo Group, also won a prize for outstanding leadership in customer service (China Daily, 2010). It is important for Lenovo to maintain this prestigious position as it will help differentiate itself from its competitors and build brand loyalty for its customers. If they continue to pursue a customer-driven marketing strategy, then their reputation will grow, more consumers will find them attractive, and they will keep their current customers coming back time and time again, producing high customer equity. A good reputation is a valuable intangible asset that breeds word of mouth advertising that rakes in more potential customers.


35

INCREASE R&

DKey Success FactorsIntroduction Current Position Key Issues Recommendations Conclusion

In an effort to better compete with competitors, we recommend that Lenovo increase their research and development costs to 3 percent of their annual revenues. In the past 3 years, Lenovo has allocated between 1.3 and 1.5 percent of revenue. This boost in R&D will ideally open up the grounds for better, more innovative products that will out-perform competitors. Currently, Lenovo is among the lowest of HP, Dell, and Apple in terms of R&D, mostly because of the sheer size of their competitors. An increase of about 1.5 percent will be a drastic change. Over the next five years, Lenovo will be spending over $1 billion per year on R&D. In addition, we are confident that the increase in R&D will allow Lenovo to control more of their pricing due to the differentiation of their innovative, superior product line. This will increase gross margin, allowing Lenovo to reach much higher profits, than with their old allotment of R&D. In 2015, Lenovo could see a net profit of $631 million, $180 million larger than the forecasted net income for 2015 without the increase of R&D. As a result of the increase, we expect Lenovo to see a constant 5 percent additional revenue growth per year for the next five years. However, holding all else equal, Lenovo could experience a slight drop in net income in 2011, but the other recommendations will balance the loss until drastic innovative measures can take place.

Source: Yahoo Finance In Millions

36

ACQU

ISITION

S & M

ERGERS


Mr. Yang Yuanqing, the CEO of Lenovo, hasn’t identified any suitable acquisition targets recently. “There currently are no opportunities for mergers and acquisitions,” he said. “Acquisitions are an important means of expansion,” but buying opportunities could surface when market prices are “more rational,” he said (Chao, 2009). Now may not be Lenovo’s time for acquisitions, but the company should keep its eyes open towards the near future. Even though Lenovo is the fourth largest PC manufacturer in the world, there is a large gap between it and its larger competitors in terms of revenues, assets, and size in general (see graphs on page 31).

Should any smaller company come out with a cutting edge product or technology, Lenovo should consider buying the company and adding the new innovation to Lenovo’s repertoire. The same goes for any other relevant company that would be willing to sell itself for a reasonable price. If Lenovo purchases these smaller companies wisely, then they will become one step closer in catching up with, and ideally surpassing its bigger rivals.

One popular movement that is taking the technology world by storm is the concept of cloud computing. Lenovo President and COO Rory Read said “There’s no doubt there’s going to be a continuous evolution of ubiquitous connection to data and applications. We saw it happen with the Internet. It created a ubiquitous connection point for data. What’s happening now with this convergence movement is now data and applications can move across the Internet and be accessed through that ubiquitous connection point. You can call it cloud computing… What’s more important is that now data and applications can be connected and be more easily accessed across a number of different devices” (Wright, 2010). Lenovo should seriously consider acquiring one, or several, of the many new-born cloud companies. Clouds will be involved with many of Lenovo’s wide range of products. If they control their own cloud company, Lenovo can avoid paying for any associated cloud service, and keep up to date with any advancements in the field.

37

INCREASE O

PERATION

SKey Success FactorsIntroduction Current Position Key Issues Recommendations Conclusion

Studies show that Lenovo should pursue outside markets and increase operations. These recommendations will allow Lenovo to lower gross profit pressure resulting in higher revenues. Lenovo has placed these goals in their sites, and have put them in a position capable of being achieved. To do this, Lenovo must continue to use the revenues from the PC market in China to fund the pursuit of outside markets while they can. Lenovo should implement a customer service unit that will help its customers with software and technical difficulties. This customer service recommendation will establish a great customer experience and help spread the Lenovo brand name to emerging and mature market segments. Also, Lenovo has made cuts in areas such as work force, distribution expenses, and research and development expenses. The company must continue to be aware of costs and not allow unnecessary costs to be reacquired. Lenovo will continually look at ways of simplifying its business processes from product development to supply chain, to sales to remain competitive in an increasingly competitive marketplace.

38

CONCLUSIONLenovo is in a position to be very successful in the PC market. Their addition of the LePhone and their historically successful IBM computer line has kept their company among the best technology companies in the world. Research shows however, that there are certain aspects of the business that need attention in order to combat their fierce competitors including: a weak global brand image, little control over price, and innovative products. Recommendations have been made to improve these aspects of the business such as: increasing research and development costs to be more innovative, increasing advertising to better Lenovo’s global brand image, and increasing operations to increase their gross margin and turn a larger profit.

39

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40

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APPENDIX

44

MATRIX

Key Success Factors Key Issues Recommendations

Pursue Outside Markets

Reputation for Innovation

Strong presence in China

Weak Global Brand Image

Competition: Dell & HP

Increase advertising

Increase Sponsorship

Balance globally

Increase R&D

Acquisition & Mergers

Increase operationsEconomies of Scale

Maintain a strong presence in China

Gross Profit Margin

Appendix A

45

SWO

T ANALYSIS

Strengths-Strong presence in China. Largest market share in China in PC industry-Low price strategy-Possess multi-cultural managers, some of which are IBM employees with more experience on a global scale -Wide variety of products

Weaknesses-Weak global brand image-Potential low quality product perception-Late entry into global market-Gross margin pressure and little control over prices-Possible conflicts between Chinese and American style of management-Too dependent upon Chinese Market

Opportunities-Sponsoring major events like Olympics-Growing netbook and mobile phone markets-Expanding into mature and emerging markets-Cloud computation services

Threats-Competitors are well-known and established in many markets-Competitors have significant capital advantages-Major competitors are strengthening their presence in China-Weak economies in emerging and mature market segments

SWOT Analysis

Appendix B

46

PEST ANALYSIS

• Wide variety of products• Increase in R&D to expand

product lines• Cloud computing concept• Price of technological

products decreasing

• Reducing environmental impact

• Migration toward notebooks• Stereotype of Chinese

products• Trends shifting towards

mobility

• Recent recession in emerging and mature market segments

• Budget and expense cuts• Recovering economies in

mature and emerging markets• Low cost of labor in China

• Low PC regulations in China• Incentive for growth in the

PC market• Low competition regulation• One child per family in China

Political

EconomicTechnological

Social

Appendix C

47

PORTER’S FIVE FO

RCESThreat of New Entrants

•Dell and HP have entered the Chinese Market (a combined 18% of the market)(Lenovo.com)

•Apple is working with China Unicom to increase their presence with the iPhone (Einhorn)

Rivalry among competitors•Competition is intense globally•Major PC companies have also entered emerging markets and mature markets

•Because of competitors established presence in many markets, Lenovo is faced with the challenge of penetrating these same markets

•High demand for mergers and acquisitions

Bargaining Power of Suppliers•Suppliers have little bargaining power because of a high quantity of the competing suppliers. Suppliers have little to no room to raise prices because PC companies such as Lenovo will take their business elsewhere

Bargaining Power of Consumers •Consumers have a lot of bargaining power because they have a wide variety of companies and products to choose from

Threat of Substitute Products or Services •Threat of substitutes is decreasing because of how Lenovo is adapting their products to meet the needs of consumers. They are focusing on innovation and variety of products that will lead them to the future of the PC industry

Porter’s Five

Forces

Appendix D

48

FORECASTS

Appendix E: Income Statement

49

FORECASTS

Forecasted Balance Sheet

50

FORECASTS

Forecasted Balance Sheet

51

FORECASTS

Forecasted Ratios

52

FORECASTIN

G ASSU

MPTIO

NS

1. Pre-recommendation revenue growth rates are expected to be the following: Pre-recommendation: 2011: 18% Post-recommendation: 2010: 24%

2012: 10% 2011: 24%2013: 10% 2012: 23%2014: 10% 2013: 22%2015: 10% 2015: 21%

2. In 2012, Lenovo will begin investing 3 percent of their total revenue to research and development. As a result of innovation and new abilities to decrease cost of producing products, starting in 2012, Lenovo increased their gross margin to 14 percent, an increase of 200 basis points.

3. To increase their presence in America and other mature markets and emerging markets, Lenovo has increased their advertising expense to basis 5.3 percent of total revenue.

4. The excess funds were invested into short-term securities to increase Lenovo’s liquidity.5. Dividends were paid in the following amounts

2011: $120,0002012: $105,0002013: $160,0002014: $200,0002015: $225,000

Forecasting Assumptions

53

RECOM

MEN

DATION

FORECAST

Advertising & Sponsorship Expense Recommendation

54

RECOM

MEN

DATION

FORECAST

R & D Recommendation

55

RECOM

MEN

DATION

FORECAST

LePhone Recommendation

56

PRE-RECOM

MEN

DATION

FO

RECAST Pre-Recommendation Income Statement

57

PRE-RECOM

MEN

DATION

FO

RECAST Pre-Recommendation Balance Sheet

58

PRE-RECOM

MEN

DATION

FO

RECASTPre-Recommendation Balance Sheet

59

PRE-RECOM

MEN

DATION

FO

RECASTPre-Recommendation Ratios

60

final schematic report

Business

success of lenovo

company analysis of

lenovos key issues

lenovo company analysisthe

chinese pc company lenovo

list of issues lenovo

list of key success

aforementioned recommendations