Business Strategy of Lenovo - Example

Business Strategy Contents Introduction 3 Positioning strategy of Lenovo and its major competitors 3 Porter’s Generic Strategies 3 Major Competitors of Lenovo 4 Bowman’s Strategy Clock 5 Strategic Group Mapping 6 Analysis of External Environment and effect of external drivers 7 PESTLE Analysis 7 External Change Drivers 9 Porter’s Industry Analysis 9 Resources and Core Competencies 11 Resource Audit 11 Analysis of competencies and resources 12 Lenovo’s value chain analysis 13 Conclusion 14 Reference List 16 Introduction The birth of Lenovo computers occurred in the year 1984, as its initial name was Legend (Lenovo, 2013). It is one of the highest known laptop brands across China as well as Asian nations and quickly gaining popularity in western nations. The headquarters of Lenovo laptops are located in North Carolina and Beijing (Lenovo, 2013). The multinational IT firm is known for its product innovation and differentiation as well as a highly effective supply chain process across the globe. The company is also known for its strategic execution as well as quick diversification responding to the changing needs of the industry and customers (Lenovo, 2013). Positioning strategy of Lenovo and its major competitors Lenovo laptops are positioned on premium categories providing differentiated features and unique offerings for its target consumers. The two major positioning strategies followed by Lenovo are on the basis of cost and innovation. Cost oriented positioning strategy is established by maintaining an effective supply chain which in turn provides competitive advantage when there are no differentiating features between Lenovo laptops and notebooks. This positioning strategy is also beneficial in areas or regions where the requirement of laptops is more and customers give less preference to the features and extra offerings (Chen, and Lu, 2008). The second positioning strategy is through innovation where Lenovo laptops and notebooks are manufactured focusing on the needs and unique requirements of the target customers which are provided by the company at a premium price. For instance, Lenovo laptops successfully positioned themselves as technologically advanced and unique brands by establishing, branding and patenting their ThinkPad brand of laptops (Haberberg and Rieple, 2008). Lenovo operates in an intensive market with many small and large competitors. Major competitors of Lenovo laptops and notebooks include Dell, Hp, Fujitsu, Toshiba, Acer, Panasonic and Apple. Porter’s Generic Strategies Strategy Device Justification Cost Leadership Think Pad Low price Product Differentiation Lenovo Tab Differentiated pricing Focus Strategy Lenovo Tablets niche segmentation Analysis: Thus, it can be clearly seen that the company Lenovo implements focused strategy in those brands which are premium and require high innovation, where as cost leadership strategy is achieved by those brands which are backed by effective supply chain process. Major Competitors of Lenovo Figure 1 Lenovo Laptops major competitors (Source: Laptop Mag, 2014) The above information has been implemented in developing another model, Bowman’s clock. The generic strategic of Porter can be better understood through visual expression will help in better explanation of Porter’s generic strategies. Bowman’s Strategy Clock In order to evaluate a more effective differentiation strategy among Lenovo’s laptops and notebooks, Bowman’s strategy clock has been implemented here. The model is known for its placement and flexibility in terms of strategic placement of brands. The model is made using X and Y axis and brands are placed on the basis of their strategies. Rather than using a broad strategic framework, this clock divides the strategy into further smaller sub-sections with unique strategic framework (Chen, and Lu, 2008). Bowman’s Strategy Clock for Lenovo and its competitors Apple, Lenovo, Acer High Dell, Lenovo 4 Differentiation Dell, Lenovo, Apple 3Hybrid Perceived Value 5 Focussed Differentiation 2 Low Cost Lenovo ThinkPad, HP 6 6, 7 and 8 Strategies 1 Destined for Failure Low Low Cost Low Value 8 7 Low Price High (Source: Author’s Creation) From the strategy clock, it can be clearly observed that most of the laptop brands are using more than one strategy for their products. For instance, Dell serves to both business class and college students and provides different features. Therefore, Dell has been placed in focused and hybrid differentiation strategy. Similarly, Acer serves to different class of customers segmented on the basis of income and usage. At the same time, laptop brands from companies such as Apple are only focusing on one strategy such as focused differentiation, as they cater to a niche segment of customers with specific demands (Kalla, 2005; Allen, 2001). According to this strategy clock, Lenovo laptops can be placed across multiple locations of the strategy clock. For instance, Lenovo Essential and Lenovo ThinkPad laptops are perceived as cheaper and affordable, with fewer offerings and basic features. At the same time, the Ideapad series of Lenovo laptops are comparable to Dell, Acer and Apple brands and are known for focused differentiation. Lenovo Laptops cater to both high end customers and middle income customers. For instance, ThinkPad X61, from Lenovo which serves business professionals as well as IdeaPad specially designed for entertainment and gamers, fall in focused differentiation strategy of Lenovo (Rugman and Li, 2007). Strategic Group Mapping Lenovo’s strategic map will help in analysing the brands competitive positioning among its competitors in the laptop market. Figure 2 Global Market Shares of Laptop Brands (Source: Daily Tech, 2014) Analysis According to figure 3, the global share of Lenovo is rising at a very fast rate, while those of HP and Dell are shrinking. The recent figures of Lenovo suggest that Lenovo is fast rising in the laptop industry with its innovative and diversified product portfolio. At the same time, other companies such as HP are diversifying into unrelated segments, automatically minimizing competition for Lenovo. However, many small local laptop brands are also entering, creating a competitive environment for the Lenovo market. Analysis of External Environment and effect of external drivers PESTLE Analysis Description Impact Political Experts suggest substantial growth and demand of laptops, especially in developing nations. Also, government policies in these developing nations are becoming more flexible towards import regulations (Chiappetta, 2014). Lenovo laptops have huge opportunities in developing, transitioning and even in under-developed nations, as a direct result of their growth and development (Katie, 2011). Also, lesser tariffs and hassles during important will result in more volume sales. Economic Since economic slowdown in 2008, big and large corporations have cut their spending in IT products, owing to increase in prices of raw materials (Berglof, 2011). Here also, Lenovo has big opportunity in developing nations compared to developed nations and also as a direct result of the increasing difference in their exchange rates (Katie, 2011). Social With the increase in education sectors, ratio of younger population across the globe and also income level among various transition nations, the demand for technology products such as laptops and notebooks have also increased (Sauvant, 2005). By collaborating with educational institutions and smaller business ventures, Lenovo can increase its sales in a substantial amount as well as gain market share (Sauvant, 2005). Technological Technological advances such as high speed processing power, minimum power consumption as well as continuously decreasing costs have increased the overall sales of Laptops (Van Oostveen, Muirhead and Goodman, 2011). Lenovo will have to use its innovation and unique technological offerings as a competitive advantage and improve its supply chain management (Deng, 2009). Environmental Global firms are constantly under pressure from international NGOs and environmental organisation to reduce their carbon footprint and emission of pollution (Jaffe, Peterson and Portney, 1995) Lenovo will have to segregate a fixed amount on corporate governance activities specially aimed towards establishing a pollutant free organisation. Legal Legal obligations vary from industry and even nations. Major legal obligations faced by IT companies include consumer rights, patents, safety and protection of consumers as well as taxes (Akerstrom, 2009). High end Lenovo products might be costlier to import in some countries External Change Drivers Current market share and brand image: Lenovo’s current market share and brand image provide substantial strength to the IT brand. However, Lenovo lags behind Dell and HP in international market. The major reason is that Lenovo, being developed in a country like China, is perceived as less expensive, less innovative and thereby, less reliable. However, the brand has shown tremendous improvement capabilities and with its merger with IBM, it has now gained reputation of producing high end and high quality products. Apart from that, Lenovo has also kept executives from IBM merger who in turn have provided valuable experience, which Lenovo being a relatively new player in foreign market was unable to achieve (Chen, and Lu, 2008). Diversification: The Company has been producing new range of laptop and notebooks in frequent intervals, so that the consumers are kept busy with the brand and its offerings, warding off competitors. The product lines of Lenovo cover high end as well as mid range laptops and notebooks. Cost Innovation: Cost innovation is another strategic external driver for Lenovo. The company started in China, providing strong foundation before going global. Lenovo maintained low cost R&D programs and design programs. Also, contract and in-house manufacturers helped in maintaining low cost in terms of manufacturing, administration and engineering. Thus, manufacturing proximity and low cost innovation provided Lenovo with the opportunity to focus on adaptive and incremental innovation. At present, Lenovo follows adaptive innovation and customization as external growth driver (Chen, and Lu, 2008). Online marketing: Social media and online advertisement can be considered as a crucial windfall in this technology era. Through online marketing, Lenovo is able to substantially decrease its cost on establishment of officers across difficult and inaccessible regions. This helped in enhancing sales, penetration and subsequently market share (Yang, 2006). Porter’s Industry Analysis To provide a more focused and detailed industry description, Pestle analysis of the laptop industry has been created in conjunction with porter’s analysis for laptops of Lenovo. These five industry forces will further assist in formulating tactics and strategies while countering various external as well as internal barriers Competitive rivalry (High) The laptop sector is a matured industry, with consistent price downtrend, resulting in aggressive pricing strategies among firm to gain competitive advantage. Due to various standardization guidelines in laptops such as windows, switching costs have become low and as a result, instead of differentiation in terms of products, competition is majorly driven by price differentiation. Also, the average lives of laptops have gone down to 2 years which indicates high competition in terms of innovation also. Industry Growth: According to industry experts, the overall growth of laptops and notebooks is set to increase drastically, to about 7.7 percent compared to last year. At the same time, price margins are expected to go down with the entry of new players in the laptop and notebook market (Gartner, 2013). Supplier’s Bargaining Power (Medium) The suppliers to Lenovo laptops include hardware providers and software providers. Hardware components are increasingly being commoditized and due to this phenomenon, the bargaining power of suppliers has become limited. While AMD and Intel are two biggest microprocessor suppliers, their power is less due to limited consumers (Thomson and Baden-Fulle, 2010). Manufacturers such as Lenovo look for cheaper suppliers, as standardization processes forces suppliers to produce good quality materials. Thus, suppliers need to maintain competitive pricing otherwise they might lose their contracts to rivals. Microsoft dominates the software supplier market with windows operating systems and has high bargaining power (Chen, and Lu, 2008). Customers Bargaining Power (High) Customers have gained significant bargaining power over laptop manufacturers. This is due to two major reasons. First, institutions and corporate buying laptops in bulk gain from discounts and high margins. Second, consumers have gained high power due to their changing preferences and demands. Another, diminishing laptop prices have lowered switching costs and as a result, consumers are looking for unique products at valuable pricing. As a result of consumer’s continuous demand for cheaper and more mobile forms of laptops, new product lines such as notebooks were introduced. This clearly reflects the buying power of consumers (Kapferer, 2008). New Entrant’s Threat (High) Due to reduced profit margins and aggressive pricing, barriers are high for new firms in this market. While bigger firms are able to invest in research and development facilities, easily hire management talents as well as produce innovative products, these opportunities are very rare for newly established firms increasing their barriers to entry. Further, factors such as distribution, supply chain efficiencies and long-term institutional contracts also restrict new firm to gain access to the market. At present, Lenovo, Dell and HP are major players in laptop industry (Lenovo Group, 2013). Threat from Substitutes (High) The laptop industry is facing significant threat due to entry of new trends like cloud computing which have the potential to reduce the demand for high computation power in laptops. also, advancement in communication technologies and computing power have facilitated devices like Smartphones (Blackberry, iPhone) to act as a substitute or even replace laptops by proc=viding exact facilities and capabilities (Gray, 2007). Analysis: From the above porter analysis, it can be said that though competition is intense, the laptop industry is a good industry for Lenovo to be in. The company can establish competitive advantage through innovation and cost innovation, as described above. Lenovo has many advantage such as effective supply chain and low cost manufacturing which can be further utilized to gain market share and volume growth in future. Resources and Core Competencies Resource Audit Physical Capital assets of Lenovo including equipments, property and plants constituted .365 billion dollars in the year 2013. (Lenovo Group, 2013). 7.2 percent market share in emerging markets and 8.7 percent market share in mature markets. The overall increase in capital investment was 22 percent in 2013, from 2012 (Lenovo Group, 2013; Kassinis and Vafeas, 2006). Financial Equity holders profited almost 635 million dollars from company profits (Lenovo Group, 2013). Profit margin rose to 12 percent in the financial year 2012 from 11.7 percent in year 2011 (Lenovo Group, 2013). Human More than 35,000 employees including research and development personnel, technicians, scientists, management and workers (Lenovo Group, 2013). 57.81 percent share is public and 33.58 shares are owned by Lenovo’s parent firm Legend Holdings (Lenovo Group, 2013). Intangibles Patents and trademarks have provided Lenovo with financial profits worth more than 100 million (Lenovo Group, 2013). Analysis of competencies and resources Industry Wide Sources giving competitive advantage Necessary Resources Capital Financing Equipment Infrastructure Base Technology Unique Resources The various natural sources which provide competitive advantage to Lenovo are its market leadership in China and high brand image, reverse supply chain, increasing popularity in developed nations due to cost innovation and wide product portfolio (Gold, Malhotra and Segars, 2001). Threshold Competencies Human Capital R&D Innovation Customer Base Product Core Competencies 1. Lenovo has achieved threshold competencies from attracting top talents from the industry, adaptive technology and establishing unique mix of local and international leaders (Zu and Kaynak, 2012) 2. Before the company was acquired by IBM, it was highly successful as a local personal computer brand. Through unique market segmentation as well as customization, it was able to achieve the status of an innovative brand across China (Keiser, 2007). Lenovo’s value chain analysis Support Activities Infrastructure Direct shipping and in-house manufacturing have provided a lean infrastructure for Lenovo, minimising cost on capital expenditure. H.R. Management Unique training institute have been specially designed for the overall development of Lenovo employees. In includes aspects such as diversity management and technical training (Nankervis and Cooke, 2013). Technology Development Lenovo has been consistently spending on technology advancement and is heavily investing in research and development to gain competitive advantage (Lenovo Group, 2013). Procurement 95 percent of the total expenditure is invested in procuring equipments and raw materials. Lenovo has achieved competitive advantage through long-term contracts with suppliers (Ding and Chen, 2008). Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Primary Activities In-house manufacturing and design as well as backward integration of supply chain provide competitive gain for Lenovo (Pershke, 2012). Lenovo strategically chooses its partners such as IBM and Quanta for ensuring effective operations Outbound logistics include direct shipments Major marketing activities include television advertising and mass marketing Service activities include Lenovo Care Centres (Cai, et al., 2009). Analysis: Of the total value chain activities, the strategies providing highest value to the laptop brand include inbound logistics, cost innovation, research and development facilities and unique offerings at affordable prices. A core link between value chain activities and core competencies of Lenovo is that these value chain activities form the core functions of the IT firm. These functions, subsequently give competitive advantage to the company. Conclusion The current was an analysis of the strategic frameworks implemented by Lenovo with the objective of gaining market share and achieving competitive advantage in the laptop and notebook industry. The major frameworks used in this report were competitive positioning, strategic positioning, external forces in the industry, internal competencies as well as primary and secondary value chain activities, which altogether have enhanced the overall positioning and brand image of Lenovo as a laptop brand. Strategic Mapping While Lenovo is a market leader in China and is a highly competitive brand in Asian subcontinent, it is perceived as less innovative, less reliable and inexpensive across almost of the western nations. As a result, Lenovo laptop’s overall market share across western regions such as America and Europe is still low. Lenovo develops its own designs through established and state-of-the art research and development facilities. These designs are manufactured and marketed through reliable and highly effective communication strategies which have become cult over the past few years. The last section helped in elaborating the competitive advantage that Lenovo has gained through its various competencies and after the analysis, it can be easily concluded that the strategic positioning of Lenovo is sustainable. A major reason behind this can be the high inventory control, backward integration as well as contractual outsourcing by the firm. 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