International Strategy of Lenovo - Assignment Example

International Strategy of Lenovo Table of Contents Lenovo Group 3 Evaluation of the Overall Market Trend in Global Computer Industry 4 Analysis of Industry Attractiveness through Porter’s Five Forces Model 5 PEST Analysis 8 Drivers of Internationalisation 11 Strategic Analysis 16 16 Application of TOWS Matrix on Lenovo 17 Assessment of the Modes of Entry 19 Strategic Evaluation of Lenovo 20 Conclusion 22 References 23 Bibliography 28 Overview Globalisation had led to greater than ever cross-border trade of products or services, knowledge as well as capital. In the present day’s competitive business environment, it has become important for organisations to cater to a wider base of customers across the world, in order to augment their market share and strengthen their market position. This has resulted in the internationalisation of organisations across many industries. In order to internationalise, an organisation has to initially develop its core strategy, because it is its core strategy that would be the base of the growth of the competitive advantage of the business in the international context. Following this, the organisation should focus on worldwide expansion of its business and the review of its core strategy that had been formulated initially. Finally, the organisation has to execute its global strategy and incorporate it across its business in the various nations (Yip, 1992). The study is focussed on the internationalisation strategy of Lenovo. The preliminary section of the study would present the summary of Lenovo’s business as well as its financial performance. Subsequent to the summary, the study would evaluate the global computer market. The study also discusses the application of PEST analysis and Porter’s five forces model on Lenovo. The study will then focus on the drivers of internationalisation in China and the large organisations based there. The study would also analyse the choice of markets on the basis of Porter’s Diamond model. Following this, the study would illustrate the application of TOWS analysis on Lenovo, and also assess the appropriate mode of entry for international expansion for the computer manufacturing organisations. The study would then conduct a strategic evaluation of Lenovo’s position and also propose certain strategies that Lenovo should employ to successfully build itself as a leading multinational organisation. Lenovo Group The Lenovo Group operates in manufacturing of personal computers (PCs) segment in addition to associated Information Technology (IT) products as well as services. The group also offers an assortment of desktop computers, notebook computers, along with mobile handsets. The Lenovo Group also supplies computer accessories along with upgrades, in addition to providing computer software and services. Thus, Lenovo caters to the service necessities of all the sizes of businesses, be it large, small or medium. The group largely functions in China and North America. Lenovo is one of the biggest computer manufacturing companies not only in China but the whole of the rising markets as well. Headquarter of Lenovo is located at Raleigh, North Carolina and comprises of about 27,039 employees as on March 31, 2011 (Lenovo, 2011). The Lenovo Group recorded sales revenues worth $21,594 million during the year ended March 2011, which was an increment of 30.0% over that of 2010. The company’s gross profit for the period improved by 32.1% from the previous year and amounted to US$2,364 million. China, the company’s largest geographic market, comprised 46.4% of Lenovo’s total revenues during the period. Lenovo accomplished reasonable growth across all the segments, be it in terms of customers, product offerings or geographic areas. This facilitated the company to develop into one of the fastest growing computer manufacturers. Lenovo’s computer business recorded a shipment growth of 28.2% during the financial year 2010/2011. This aided in escalating the global market share of Lenovo to 10.2%, in the computer industry (Lenovo, 2011). Evaluation of the Overall Market Trend in Global Computer Industry During the year 2010/2011, the global computer market persisted to illustrate reasonably healthy growth in the initial part of the year. However, the growth rate declined a little by the end of the period. This was mainly because of the contraction in the macro-economic situation, since a large majority of nations were required to control inflation. This was particularly true in the developing markets. In addition to the contraction of the macro-economic atmosphere, the other reasons for the decline in the growth rate of the global computer industry were reducing demand of computers among the customers as well as the comparison of the industry growth rate to the comparatively elevated year-on-year growth percentages in certain markets (Lenovo, 2011). The global computer market illustrated varied growth rates amongst the corporate and retail consumer computer sections. The impetus in the computer demand by the corporate customers has steadily risen up during the year 2010/2011, driven by the ‘corporate refreshment cycle’. On the other hand, the computer demand amongst the retail customers undermined owing to the deteriorating macroeconomic situation and escalating rivalry from ‘Tablet’ products. For the financial year 2010/2011, the global computer unit shipments for the corporate customers rose by 8.8% year-on-year. This was a turn around to the weakening trend ever since the financial calamity during the year 2008. On the contrary, the global computer unit shipments for retail customer increased only 6.2% on a year-on-year basis. Consequently, the overall global computer unit shipments rose at the rate of 7.4 percent on a year-on-year basis (Lenovo, 2011). The major players in the global computer industry are HP and Dell. These two computer manufacturers along with Lenovo comprise the major proportion of the overall international computer industry. HP earned net revenue worth US$126,033 million during the financial year 2010, while Dell earned US$61,494 million (HP, 2010; Dell, 2011). Analysis of Industry Attractiveness through Porter’s Five Forces Model Threat of New Entry In the midst of the substantial expansion in the business market pertaining to computers, there are prospective accesses in the market. Nevertheless, the barrier to entry in this market is comparatively high. This is due to the fact that there is aggressive competition in the market that had resulted in decline in profit margin owing to the low pricing of goods. Moreover, the research as well as development activities for further innovations in the computer industry require huge investments. Thus, it is difficult for small firms to enter the market. Nonetheless, in today’s competitive environment particularly in the technology markets, it is generally regarded as a continuous likelihood for a new organisation to enter the competition with a fresh invention. Consequently, the existing organisations in the industry are meticulously attempting to bring in fresh engineering abilities in their business. Furthermore, the existing players in this industry have started to utilise complementary services to enhance their market positions. This is an important rationale why organisations like Dell, Lenovo, HP and IBM have been able to sustain their leading positions in the industry (Shah & Dalal, 2009). Buyer’s Bargaining Power The buyers in this market have considerable negotiating power. This is because the majority of the consumers of this industry are corporate houses, who procure huge volume of PCs for their business enterprises. Moreover, with the expanding economy and evolving technological developments as a result of globalisation, there are many options in front of the consumers. Therefore, in order to be successful in the market and to sustain the business in the long run, it is imperative for organisations in this industry to upgrade product as well as service quality. Additionally, the organisations should also attempt to provide added features and sustain strong associations with their customers. The inclination of the customers for wireless connectivity had led to the augmentation of the demand for laptops. Furthermore, the demand of the customers for low cost products resulted in pricing competition among the computer manufacturing organisations (Shah & Dalal, 2009). Supplier’s Bargaining Power The suppliers of hardware elements have restricted bargaining control owing to amplified commoditisation. The two leading suppliers of microprocessor Intel and AMD contend with each other for enlarged share of the market. Nevertheless, the influence of these suppliers is restricted because of their necessity for product advertising among customers. The suppliers of hardware such as hard drives or motherboards also do not have much control because majority of the computer manufacturers purchase the hardware and the microprocessors from diverse suppliers. The manufacturers thus procure their requirements for components from the supplier who offers the components at the most competitive price. Consequently, if the prices are not economical, the suppliers may lose their business (Shah & Dalal, 2009). However, in context of software component, Microsoft controls the market of operating systems (OS) and as a result possesses significant influence over computer manufacturers (Shah & Dalal, 2009). Threat of Substitute Products Innovative developments such as cloud computing in addition to latest products like smartphones are the cause of significant threat to the computer manufacturing companies. This is because these innovative developments can act as substitutes to the laptop industry. With the advent of advancing technologies in terms of computing as well as communication technologies such as WiMax and 3G had facilitated the smartphones to possess analogous competence as that of laptops (Shah & Dalal, 2009). Intensity of Competitive Rivalry The computer industry is a considerably mature industry. The participants in the industry follow an aggressive pricing strategy. This strategy is likely to bring about further consolidation in the computer industry, so as to decrease the expenditures related to research as well as development. At present, the three foremost players in the PC market are Dell, HP and Lenovo. These companies comprise of around 90% of the market share. There are relatively very little differences in the offerings of these computer manufactures, with regards to product features as well as product quality. Lenovo has good product support and superior business association with their clients. However, Lenovo would have to strengthen its brand value further, so as to compete with Dell and HP (Shah & Dalal, 2009). PEST Analysis Political Factors As a result of saturation in the developed countries, the computer industry is likely to expand at a more rapid rate in the developing nations as against the developed ones. Hence, the government regulations in the developing nations and any alterations in their policies could impact the prospective rate of expansion of the computer industry. This can be substantiated by the verity that the elimination of import duties in a region on a particular product can result in the amplification of the product’s sales in the region. For instance, in the year 2005, when the import duties associated with laptops were removed in India, there was a 94% increase in the laptop sales in India in that particular year (Shah & Dalal, 2009). The rising attention on the effects of high-tech waste on the environment has resulted in more rigorous environmental policies on the computer industry. The examples of the new environmental rules are directives on ‘Restriction of Hazardous Substances’ (RoHS) as well as ‘Waste Electrical and Electronic Equipment’ (WEEE) among others (Shah & Dalal, 2009). The supplementary testing as well as certification required by the organisations as a result of the new directives, impact the supply chains of the computer manufacturers profoundly. This finally led to augmented expenses for the computer manufacturing and other electronic companies. Since the manufactures are not able to pass these expenses to the consumers owing to competitive environment in the industry, it ends up decreasing the profit margins of the manufactures (Shah & Dalal, 2009). Economic Factors The international economic conditions influence a variety of diverse issues that have an effect on the expansion of the computer industry. The latest global economic as well as financial slow down impacted the sales of computer manufacturers like Lenovo, Dell, Acer, and HP among others. Furthermore, this group of companies generate their revenue from consumers located across the globe. As a result, the fluctuations in the exchange rates of foreign currencies can cause a significant impact on the earnings of these companies. The economies of the developing nations are expanding at a significant rate, while the markets of the developed nations have reached a state of saturation. Thus, the emerging market economies offer better market potential for companies like Lenovo, Dell and other computer manufacturing organisations (Shah & Dalal, 2009). Social Factors Several social aspects, for instance education, and income levels, in addition to cultural factors impact the demand of computers amongst the customers in the diverse areas. As a result the social factors of a region have an intense influence on how an organisation functions in each geographic area. The education, cultural background as well as earning level of the retail customers have an effect on the way they perceive a particular brand of computer. For example, the retail customer base in the emerging markets would give more precedence to the low priced computers as against of those which belong to the premium category (Shah & Dalal, 2009). At the other end, the rising awareness for education and learning in the developing regions such as Africa has also impacted both the demand as well as inclination for computers. Thus, the rising education level in a few of the regions of the world, where education was not given much precedence earlier, has also facilitated the development of a widespread market for the computer manufacturing companies. The development and expansion of industries and businesses in these regions of the globe has also supplemented the demand for computers (Shah & Dalal, 2009). Additionally, the cultural factors of various regions impact the incidence of seasonal sales, which considerably influence the performance of the computer industry as a whole. This can be substantiated from the fact that customers from a particular region of the world are likely to have amplified demand for computers during the start of their school sessions and also during their festive seasons (Shah & Dalal, 2009). Technological Factors The technological developments over the last ten years had a profound influence on the business of the computer manufacturing organisation. During the last decade the market share of the personal computers have eroded significantly, while the market for laptops augmented considerably. The foremost causes for the augmentation in market size of laptops as against the computer industry in general are the attributes of amplified processing power in addition to condensed power utilisation and less expense in laptops. This has been possible due to the standardisation of Windows and Intel in laptops. For example, the decline in the average selling cost of notebook during the year 2008 was made feasible by the economical ‘Intel Atom microprocessor’ (Shah & Dalal, 2009). Additionally, innovative technologies like ‘hosted virtual desktops’ (HVD) are likely to entirely alter the characteristics of the computer industry as a whole. This is because the HVD technique has the potential to bring in low-priced computers in conjunction with reduced software expenses. HVDs comprise of centralised computing, where servers are utilised for processing in place of individual clients (Shah & Dalal, 2009). Gartner, Inc., one of the foremost ‘information technology research and advisory’ organisations across the globe, had forecasted that the global market of HVD will augment in terms of revenue from $1.5 billion in the year 2009 to $65.7 billion in the year 2013 (Gartner, 2009). Drivers of Internationalisation Government Drivers of Internationalisation On account of radical advancements in the economic state of affairs in addition to the interrelated economies throughout the world, the trade barriers across the borders of several countries have diminished over the period. Now a days, organisations are allowed to enter the markets of overseas countries by way of foreign direct investments (FDI), in addition to coalitions with the domestic organisations, in the appearance of strategic alliances, joint ventures, mergers and acquisitions, franchising, wholly-owned subsidiary and licensing among others (University of Manchester, 2003). In addition to this, the admission of China into the World Trade Organisation (WTO) also acted as a major reason of internationalisation amongst the organisations based in China. Nolan & Zhang (2002) stated that the Chinese administration’s industrial strategies in addition to the alleged ambush of international business rivalry subsequent to China’s taking office into the WTO in the year 2001 as the key drivers of global expansion. This can be validated by the fact that, post the access of China into the WTO, the government of China had developed large number of globally viable State Controlled Enterprises (SCEs) (Yang & Et. Al, 2009). Institutional drivers were also apparent in China’s inbound foreign direct investment (IFDI) strategies. During the early stages of Chinese trade and industry reforms, the government of China decisively formulated IFDI in order to make the Chinese organisations ready to develop into multinational corporations (MNC) in the aggressive international market (Yang & Et. Al, 2009). Thus, ever since the year 1979, inbound FDI has been lawfully and officially acceptable in China. Over the years, the value of FDI inflow into China amplified and China became one of the countries with the biggest value of inbound FDI (The US China Business Council, 2011). The huge inflow of overseas capital played a vital function in the financial liberalisation of China, and consequently led to the growth and development of Chinese multinationals (Steinbock, 2005). Furthermore till the 1990’s, the administration of China formulated overseas investment regulations to facilitate the SCEs to obtain overseas capital, expertise, and management structure by means of licensing accords, joint ventures, and other types of planned alliances (Yang & Et. Al, 2009). As a result, these big SCEs turned out to be the preferred associates of MNCs from the developed nations. During the past twenty years, overseas corporations aided these SCEs to take on the most modern knowledge and expertise, western administration methods as well as market norms. The MNCs also assisted these SCEs to get hold of overseas capital along with worldwide contacts and associations by means of an assortment of affiliation arrangements (Zhou & Et. Al, 2005). Market Drivers of Internationalisation In the worldwide computer industry, there are homogenous or analogous basic needs of customers. Nevertheless, there are instances when certain product requirements have to be adapted depending on the characteristics of the products. Additionally, as per the market-based observation, the magnitude and the type of business in the home market could have a profound influence on the expansion of an organisation. China comprises of more than 1.3 billion inhabitants (Central Intelligence Agency, 2011). This endows the organisations with the biggest domestic market across the globe. This can partially justify the rationale behind the fact that a large proportion of Chinese organisations were not as much of aggravated to spread out in a foreign country in comparison to the organisations of other small countries such as Japan. For example, the Legend Group, that came to be recognised as Lenovo ever since the year 2003, was instituted in1984. In the year 1988, the Lenovo Group expanded to the Hong Kong market. However, the Group made the decision to shift back and concentrate on the Chinese market alone and subsequently it developed into the foremost manufacturer in the computer market of China by the 1996. It is noteworthy that Lenovo did not execute a global strategy till the year 2004 when it obtained ‘personal computers division’ of IBM (Quelc & Knoop, 2006; Yang & Et. Al, 2009). Cost and Resource Drivers of Internationalisation The internationalisation of any business leads to the sharing of the costs of the organisation on the whole. Though on the other hand, an organisation has to put up with the expenditure pertaining to research as well as development activities in each market the organisation decides to enter. Further, organisations are able to achieve economies of scale as a result of expansion across the whole world (University of Manchester, 2003). Researchers have stated that the flow of resources or expertise is a two way process between the MNCs and the subsidiary companies. Thus, competencies can flow from the headquarters of the parent companies to the subsidiaries as well as the other way round. This is for the reason that the subsidiaries can also build up their individual firm-specific lead (Luo & Peng, 1999; Peng & Wang, 2000). The multinational organisations gather administrative resources from the target market and add further to the lead gained by the subsidiary (Gupta & Govindarajan, 2000; Birkinshaw & Et. Al., 1998; Ghoshal & Nohria, 1989). Hence, it can be comprehended that an organisation is not merely reactive, but it also dynamically develops fresh management practices for gaining a competitive edge over others (Birkinshaw, 1996; Horaguchi & Toyne, 1990). Global organisations have utilised FDI as a mode to obtain the right to draw on skills and expertise from diverse subsidiaries and then distribute those acquired skills within the business (Bartlett & Ghoshal, 1989). The multinational organisations of Chinese origin generally gave precedence to joint ventures over wholly owned subsidiaries. This is due to the verity that the joint ventures facilitated the Chinese organisations to take advantage of the crucial resources by means of their associates. Kang & Ke (2005) had accounted that almost two-third of Chinese organisations operating overseas were in the form of joint ventures and only about one-third were by means of wholly owned subsidiaries. It had been observed that the Chinese organisations started getting involved in mergers and acquisitions much later in comparison to the organisations that were headquartered in the developed countries. The Chinese companies that operated across borders initiated mergers and acquisitions about 25 years following their preliminary internationalisation (Yang & Et. Al., 2009). Strategic Analysis According to Porter’s Diamond Model, the essential attributes required to be present in a country in order to gain a competitive edge over others can be grouped into four constituents. The four constituents are ‘industry structure and rivalry’; ‘factor conditions’; ‘demand conditions’; and ‘related and supporting industries’ (Cavusgil & Et. Al., 2009). The foremost constituent involves the nature of the state of affairs and domestic competition in the country. These factors are imperative establishing the management of the business in the particular region. The existence of an extremely aggressive environment assists the formation and maintenance of competitive lead in the global level (Cavusgil & Et. Al., 2009). The factor conditions of a country, such as natural resources, assets, know-how, human capital and expertise among others, are very significant in instituting its core advantage and its ensuing preference by overseas businesses. The characteristic of demand in a nation for a definite product is a crucial condition, because multinational organisations assess the demand conditions for their offering in the country, prior to their entry into the market of that country (Cavusgil & Et. Al., 2009). The ample presence of ‘related and supporting industries’ in a country is essential for the establishment of any business enterprise in the country. This requirement is vital for both local organisations as well as foreign companies willing to set up a business in the country. For example, if there is shortage of suppliers of software constituents or microprocessors in a particular region, it could be detrimental for Lenovo to operate in that region because it would have to transport those constituents from China, which would increase the operating expenditure (Cavusgil & Et. Al., 2009). Application of TOWS Matrix on Lenovo The core strength of Lenovo is its superior brand image in addition to its augmented share in the market. In the global scenario, Lenovo’s position in terms of sales revenue earned from their corporate clients is just after Dell and HP. Lenovo holds a considerable market share in the Chinese computer market and is the foremost computer manufacturing company of China (Lin, & Et. Al., 2008). The foremost position the domestic market gives a competitive edge to the company and it can leverage on this strength during its expansion in the international markets. Lenovo has been able to maintain its position in the Chinese market even subsequent to the entrance of global players like Dell and HP in China. As a result of its alliance with IBM, it has developed tremendous competency for advancements in terms of product quality as well as consumers service. Lenovo had diversified its product offerings and have been expanding internationally in order to reinforce its position in the global computer market (Lin & Et. Al., 2008). The major weakness of Lenovo is that it is yet to develop the broad product range as well as service line which are similar to that of HP and Dell. Moreover, Lenovo does not have any direct customer service support and also lacks in-house service competence for repair of its product offerings. Additionally, the Lenovo Group employs a sole marketing conduit, and its product offerings are made available to the customers through monopolised stores (Wang & Et. Al., 2008). The strategy that Lenovo should potentially follow in order to build on its strength and mitigate its weakness is to acquire more knowledge about the markets of the US and the UK as well as the developing economies. Lenovo should attempt to build more service teams in the foreign markets. This would enable the company to maintain its superior customer services even in the overseas markets. There are many opportunities in front of Lenovo due to the expansion of the overall global computer industry. On the basis of its core strengths, Lenovo can strategise its expansion in the European markets. The Lenovo Group can enter those markets by means of alliances with local European organisations (Wang & Et. Al., 2008). The local firms would benefit Lenovo in terms of regional know-how, and Lenovo could leverage on its strength in terms of product quality and superior service, to reinforce its position in the new markets. The major threat for Lenovo as any other transnational organisation is the impact of foreign exchange fluctuations and the potential economic instability across nations. The strategy to mitigate these threats and overcome the weaknesses of Lenovo would be to spread out its operation across various markets around the world. This strategy would help the company to distribute its business risks and also develop Lenovo into an organisation with wide product variety and enhanced international presence. One of the threats confronting Lenovo is the fierce competition from strong brands such as HP as well as Dell who have wider operation in the global market. However, there are ample opportunities for Lenovo to expand in the overseas market. Lenovo is a very successful brand in its home market, China. Lenovo had developed certain capabilities and resources over the years that had helped it to sustain its leading position in the Chinese market and generate a competitive edge over other organisations. Lenovo could leverage on its inherent competencies and strengths and build up its position in the overseas markets as well. This would enhance Lenovo’s chances to compete with organisations like Dell and HP, and augment its global market share. Assessment of the Modes of Entry There are various modes of entry for an organisation in terms of global expansion. Some of the entry modes are exporting, franchising, joint ventures, licensing, and wholly owned subsidiary among others (Chen, 2008). In the computer industry, the products offerings can be treated as a single type of commodity as they are homogenous in nature. In other words, there is very less differentiation in the products offerings of the computer manufacturing firms. Chen (2008) stated that lesser differentiation in the products bring about elevated technology transfer which results in lower transfer expenditure. The low transfer expenses involved during the technology transfer for less differentiated products make acquisition the preferred choice as a means of expansion, for homogenous product manufacturing foreign firms. This is because acquisition results in elevated profit for the overseas firm, in case of less differentiated offerings. To be precise, when the transfer expenses are suitably low, acquisition can be considered as the ideal entry mode, provided the overseas firm deals in differentiated products (Chen, 2008). This is the reason why organisations in the computer industry predominantly assume the approach of acquisition with the intention of expanding in the overseas market. For instance, when Lenovo, being the foremost computer manufacturing organisation in China decided to spread out into the US as well as European markets, it did so by acquiring IBM’s PC division in 2004 (Chen, 2008). Strategic Evaluation of Lenovo The acquisition of IBM’s computer segment facilitated Lenovo to internationalise and develop itself as a multinational organisation. This acquisition also lessened the expenses related to production. Moreover, Lenovo got an opportunity to gain knowledge of the supply-chain management from its overseas associate in addition to obtaining a strong international brand image. Lenovo possesses a diverse global management team, which endows the organisation with experience, proficiency as well as outlook to contend productively in a rapidly altering global scenario (Lenovo, 2011). Considering the market position of Lenovo in its domestic market and its inherent strengths, international expansion would provide Lenovo with the prospect of enlarging its business structure. The expansion of Lenovo’s structure would further reinforce the organisation’s negotiating control over its suppliers. The company had declared a joint venture with Japanese firm ‘NEC’. This alliance would build Lenovo as the foremost computer company in Japan. This would highly benefit Lenovo’s global market position because Japan is the third biggest market for computers in the world (Lenovo, 2011). The ‘relationship model’ of Lenovo providing service to the international, big enterprises in addition to public accounts has been a genuine strength for the company and has helped it to earn outstanding profits. Simultaneously, Lenovo’s ‘transactional model’ catering to the needs of small and medium-sized businesses (SMB) in addition to retail customers is being executed globally and the company has been performing well in this area (Lenovo, 2011). Moving forward, the strategy to be employed by Lenovo is to sustain its business base in China as well its business in the US markets through its alliance with IBM. In addition to this, Lenovo should utilise the high-growth prospects in the emerging market economies. The company should also focus on its other business segments as well along with its computer segment. Lenovo should also continue to make investments in bringing about innovations that would set apart its products from that of its peers. Conclusion The study revealed that Lenovo holds a very strong position in terms of market share and credibility in its domestic market, i.e., China. Following its acquisition of IBM’s computer business segment, Lenovo entered the global market in 2004. Though, Lenovo possesses much potential for future growth and is a major player in the global computer market, it is way behind its competitors like HP and Dell. This is because Lenovo’s international presence is much limited in comparison to these companies. However, the analysis of the environment and the assessment of the attractiveness of the global computer industry reveal that there are ample opportunities for Lenovo to expand and develop as market leader. The TOWS’s matrix analysis of Lenovo depicted that Lenovo possesses the core competencies and experience required to sustain itself in the global computer market. Lenovo had declared its entry in the Japanese market through an alliance with ‘NEC’. 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