The Major Challenges that Lenovo Could Be Facing in the Emerging Marketing - Coursework Example

The Major Challenges that Lenovo Could Be Facing in the Emerging Marketing Introduction This essay is based on perhaps the greatest corporate transaction of the 21st Century, so far. In the May 1st, 2005 transaction, the Chinese PC giant, Lenovo, entered the international market, by purchasing the a IBM PC Division for a whooping US $1.75 billion (Peng. 2008). Along with the ThinkPad brand, Lenovo also acquired 10, 000 former IBM employees, IBM management including the then CEO, Stephen Ward (Peng. 2008). On its part, IBM was awarded a 18.9% stake in the new Lenovo formed after the merger besides the US $ 1.75 billion (Keiser, 2007, pp. 23 – 34). The merger also detailed that Lenovo would only use the IBM brand name on the ThinkPad products for the next 5 years, which will soon be ending. Lenovo had previously tried to enter the international market with ventures in Spain and parts of central Asia but failed due to poor domestic performance such that they lost a large part of the domestic market share (McEntire and Bentley, 1996, pp. 154-174). But with the purchase, Lenovo acquired IBM’s management, fast rate technology, brand recognition in the globe and a business liaison with the world’s greatest end-to-end IT solutions provider. The strategy was to use the IBM ThinkPad brand name as a bridge or launching pad to position itself and its brand in the global corporate market for PC’s (Lenovo, 2008). Although a Chinese giant, Lenovo was still a non-entity in the world PC market before the acquisition. Yet instead of maximally using the prestigious ThinkPad brand for five years as the merger contract had offered for, Lenovo only used the contract for a year and then stopped. In many advertisements including the Beijing Olympics, Lenovo deliberately left out any mention or logo display of IBM. This leads to such questions as, was this a good decision? Did they abandon the IBM brand far too soon? On the other hand, was the strategic plan well advised? These questions will help elaborate the thesis of this essay. The essay is thus a critical evaluation of Lenovo’s decision to distance itself from the IBM brand logo long before the 5-year period laid down in the acquisition contract. The essay establishes why that decision was good for Lenovo despite popular believe to the contrary. Further, the paper also discusses the major challenges that Lenovo could be facing in the emerging markets. The essay closely inspects the theories applicable and supporting the analysis of the brand management decisions and the challenges. Relevant literature has also been used to background the essay’s main points. Background Information Lenovo was before the acquisition, a Beijing-based company with a 27% market share in China. It was founded in 1984, at the Chinese Academy of Sciences by 11 scientists. Then it was a regional distributor of IBM’s equipment and PC’s from other company before initiating its own manufacturing plants. Lenovo soon began selling personal computers under their own brand name using licensing agreements. The domestic market eventually reached saturation and all initiatives to diversify into IT services in China resulted in significant losses of the market share to the competition (Deng, 2006, pp. 71-81). The new area of growth was then predictably, internationalization of their brand (Deng, 2006, pp. 71-81). Yuanqing Yang, the current board chairman and CEO of the Chinese PC giant Lenovo, announced on August 2004 that Lenovo would be buying IBM’s personal computing division for a whooping US $ 1.75 billion (Peng. 2008). The acquisition deal was spelt out on December 2004 and finalized in 2005. Lenovo paid US $ 1.25 billion (US $ 650 million in cash and US $ 600 million in stock) for the acquisition and a further US $500 million of IBM net balance sheet liabilities (Peng. 2008). The total cost was thus at US $ 1.75 billion. The acquisition helped the new Lenovo to graduate from the 9th world largest PC Company to the 3rd largest in market share and capital size. It was landmark acquisition from the very word go and it has helped a largely unknown brand Lenovo, in the world market to leap into an amicable leading position in the global PC market without decades of strategized growth, as many global companies have had to go through. Since then, the company has returned an approximate US $13 billion annual revenue, with most of their products targeting both enterprises and consumers around the world (Kotler and Pfoertsch, 2006, pp. 322 – 341). Lenovo had been seeking entry to the international market for a long time with the initial trials in Spain and central Asia backfiring. Yet months after the acquisition, Lenovo brand name had expanded operations and initiated its recognition as an international brand (Keiser, 2007, pp. 23 – 34). Experts judge that the esteemed brand name of the American IBM helped make this possible. In its simplest form, the acquisition enabled Lenovo branded products to be marketed outside China for the first time ever (Kotler and Pfoertsch, 2006, pp. 322 – 341). Recent market analysis indicates that Lenovo has currently gained a significant market share for both desktop and notebook corporate sales, most of which are manufactured and marketed by Lenovo (Kotler and Pfoertsch, 2006, pp. 322 – 341). By last year, half of Lenovo’s sales (including those bearing the IBM logo) were outside China although predominantly in Asia still (Kotler and Pfoertsch, 2006, pp. 322 – 341). IBM Brand Utility As part of the acquisition contract, Lenovo gained permission to use the IBM logo for five years. Many marketers thought that Lenovo would and should use the IBM brand prestige, loyalty and recognition to market its own brand maximally for the next five years. Given that IBM was a respected, trusted and reliably popular brand name, Lenovo had much to gain by using the IBM brand in as many of their products as possible. Yet in spite of this permission, Lenovo only used the IBM logo on its ThinkPad series and associated itself with IBM brand name for less than a year after the acquisition in marketing strategies. For instance, in partnering with the 2005 Olympics, Lenovo never once used the IBM brand name as part of its ads. Brand management experts have seen this decision as an indication that Lenovo was solely interested in building its own brand. They desired to be seen as a quality brand, out of IBM’s shadow. Nonetheless, the decision to distance itself from IBM was heralded as not so brilliant by many critics. To reach a consensus on the soundness of this decision, a few points need to be considered. Lenovo’s challenge in the first ten years is to build a brand that has to compete with the likes of Dell and Hewlett-Packard. That means the acquisition deal for only 5 years brand name use was inadequate to attain brand association and then brand differentiation adequate to support the Lenovo Brand after the IBM brand was no longer usable. Had Lenovo used the IBM brand for the full five years, its own brand would have remained undeveloped for the five years only to be left in that weak state when the 5 years lapsed. By abandoning the use of the IBM brand, Lenovo was building on its ability to establish its brand in the US and globally (Keiser, 2007, pp. 23 – 34). Lenovo opted for corporate branding and positioning strategies that utilized synergies of the two brands, Lenovo and IBM, to create a super brand that was superior to the two. On the one hand, IBM’s brand name was the only brand in the market that had epitomized quality in corporate solutions notebooks, the only one that was reputed enough to be called the IT solution leader in the globe. More importantly, IBM was an American brand, with loyalty and prestige in the US, the most important IT solution market today. On the other hand, Lenovo was threatened by the reputation of Chinese companies to sacrifice quality for lower production cost. Lenovo was still regarded as a cheap Chinese brand whose priorities were not in quality products(Bruner, 2005, pp. 227). That adverse repute and stigma associated with Lenovo as a Chinese brand would have remained no matter how much they used the IBM logo in the initial five years. But by refusing to use the IBM logo, Lenovo was clearly suggesting that their brand was on its own a superior brand that needed no endorsement. They had the rights to and permission to use the IBM logo but decided not to, thereby building on their own repute by virtue of omission instead of commission. I.e. Clients would say, “ Lenovo is good enough not to need IBM logo”. The branding theorem in practice here is very informing. ThinkPad despite being reliably innovative, respected in quality and premium in technology for notebook PC, was seen as a sub-brand of the acquiring brand Lenovo and not as a big-brother brand nurturing a weak Chinese brand (Cartwright and Cooper, 1993, pp. 57-70). That image gave Lenovo the image of a master brand, a personality that would have been impracticable to attain if they had extensively used the IBM brand. The branding strategy was to establish an innovative and progressive PC brand that ‘owned’ ThinkPad just as one of their products, and not as their staple product. Given the prestige accorded IBM, any brand that seemingly overshadowed such a brand as IBM was thus a greater brand than IBM’s former competitors Dell, HP and the others. The brand management strategy adopted by Lenovo thus achieved a threefold mission, overcame the stigma of being thought of as a cheap Chinese company, built a master brand that was perceptibly better than IBM and strike at the competition with the threat of a competitive brand long before the actual competition was offered. Heding T. and Knudtzen C (2008) have developed a theory of strategic brand management while teaching at the Copenhagen Business School in Denmark and in their consultancy firm, Heding & Knudtzen. According to their conception, a brand is the single most important value creator that must at all times remain the top management priority. A company needs to structure its global expansions campaigns not just on their capital and infrastructure consolidation, but more importantly, on their brand repute in their brand management theory they have examined several real-world brands, case studies and research incidences one of which is the Lenovo-IBM acquisition deal (Heding and Knudtzen, 2008, pp.23-70). They concede that what Lenovo did in abandoning the IBM brand was motivated by sound principles of international brand management, the need to be singularly known for quality and worth (Heding and Knudtzen, 2008, pp.23-70). Finally, there is another area of consideration in analyzing the decision by Lenovo to abandon the use of IBM branding. They only used the IBM logo on the ThinkPad products, and even there alongside their own ‘IdeaPad’ logo. Instead of riding the wave of IBM brand, Lenovo had decided to focus on marketing their brand not as an IBM protégé, but one that is better than IBM. That means that they are now ready to sail the market on their own and they are at an advantageous position already. This is important to consider since it denotes the genius in Lenovo’s brand management strategies (Chen, and Lu, 2008, pp. 12). Lenovo is interested in pursuing the ThinkPad corporate market seriously and this market has been dominated by IBM. It is a market niche they are interested in and one in which they want to capitalize their future products on. Instead of branding their products as ‘ThinkPad’ (the IBM brand name), Lenovo used both the brand name ‘IdeaPad’ and ThinkPad’ alongside each other such that the two brand names gained equal exposure and reputation (Borys and Jemison, 1989, pp. 234-249). This was strategic in that the moment Lenovo handed over and stopped using the IBM logo, Lenovo’s IdeaPad will have launched their brand recognition for good in the ThinkPad market. Major Challenges that Lenovo Could Be Facing a) Promotion and Perception Challenges Despite its monumental growth to the third largest PC company in the globe, Lenovo is still faced by the challenge of negative perception in the global forum. The stigma associated with Chinese companies as exclusive producers of cheap, low-end It products, is the single greatest threat that the company faces today (Child and Rodrigues, 2005, pp. 381-410). To face this challenge, Lenovo has refused to roll out any of its low-end products in the global market, some of which are already in sale within China. This is then coupled by the challenge of low entry success in the PC corporate market (Marks 1982, pp. 38-44). Corporate seem satisfied with the current notebook providers a reason why IBM had not been doing very well in the years leading to the acquisition. There are three major brands in PC corporate the market currently, HP, Dell and Lenovo, commanding over 90% of the market share. Dell commands over 50% of this market share and thus stands as the single greatest competitor for Lenovo. In their promotion efforts, Lenovo has to craft a distinct advantage over the competing players that will appeal to the corporate market and prompt them to try out the Lenovo notebooks. This can be done with high quality, rich product features and reliable customer service (warranty maintenance). The IBM ThinkPad hade dominated a market niche for its brilliant innovativeness and if Lenovo was to master the same and even better innovative initiatives, the challenges can be overcome. b) Brand Identity Challenges The need to enter the international market could not only have been served by acquisition. Lenovo had the capital to fund an infrastructure of global distribution and marketing without the aid of IBM. They had a quality brand that had appeased 27% of the domestic. Yet having capital is not enough in establishing a global market presence (McEntire and Bentley, 1996, pp. 154-174). International businesses rely on capital as much as on sound promotion and brand image (perception). In fact, most conglomerates export their reputation into new territories and not the products (Galpin and Herdon, 1999, pp. 115 – 117). By the acquisition, Lenovo gained the association and infrastructure that helped it access the international market. But the challenge they still have is to live up to the reputation of a global PC provider. The theory in practice here is, by associating with a reputable brand name, customers would also judge the Lenovo brand name as reputable, without having to wait for it to prove itself. Most customers view the products with affection and prestige (Galpin and Herdon, 1999, pp. 115 – 117). So by association, the Lenovo brand name as is elevated from insignificance to the recognition and respect accorded the global giant IBM. Last year, Lenovo was estimated to have a command of 19% of the global laptop market, four years only after the acquisition. The future of Lenovo is thus very promising, alike to what IBM was before a decline in competitiveness emerged in the years leading to the acquisition (McGregor and Guerrera, 2004, pp. 63-79). Lenovo’s challenge is to build identity for their own brand. Brand identity alongside performance, social image, trustworthiness and value are the five of brand equity (Galpin and Herdon, 1999, pp. 115 – 117). With a clearly identifiable brand, Lenovo will ensure that most corporate identify themselves with the Lenovo brand and even feel attached to it such that Lenovo becomes a brand they are happy to be associated with globally. c) Cross Cultural Challenges Most mergers involving organizations with different cultural backgrounds such as IBM (American) and Lenovo (Chinese) have in the past shown a very low rate of survival. Research has however established that the high percentage of failures accrue because the acquisitions are designed primarily from the business and financial point of view without considering the cultural and psychological secondary concerns (Buono, 1985, pp. 477-500). Lenovo lacks the global exposure not only to manage such an acquisition of a foreign company but also as a global entity that has presence in almost all cultural contexts in the world (Buono, 1985, pp. 477-500). That lack of exposure and experience is a challenge that the company has to take head on, as it integrates itself in the global PC market. d) Standardization Challenges As noted above, Lenovo is threatened by a stigma usually associated with Chinese manufacturers and it is upon the new company to proof to its global clientele that they are more than a Chinese company (Child and Rodrigues, 2005, pp. 381-410). The core challenge is to standardize their products in the same leagues or even better than the IBM products, that had gained a great repute in the PC market. Media reports whose authenticity Lenovo admitted to at the beginning of 2007 is that most former clients of IBM were expressing fears that Lenovo will not maintain the quality integrity they had entrusted with IBM. The challenge here is for Lenovo to proof to the former IBM enthusiasts and the new markets that they are an innovative company committed to high quality, reliability and customer service excellence. e) Rebranding Challenges Lenovo cannot survive in the world market with the brand image of a Chinese company due to the stigma associated with Chinese manufacturers (Child and Rodrigues, 2005, pp. 381-410). It cannot also swim forever on the IBM legacy. This means that Lenovo has the challenge of creating a distinct brand that the market can identify with. Notably, Lenovo has mainly emphasized on the ThinkPad and IdeaPad brand names as the standard definition of high-end products. The challenge that still remains is for Lenovo to separating these brands from IBM as much as is possible so that they be conceived as new products in the market with a reputation of their own (Borys and Jemison, 1989, pp. 234-249). Brand management requires that one build a brand with a particular market in mind (Hill, 2003, pp. 147 – 181). That market must not only be defined, but also simulated in needs and such that the products offered are targeted at those needs. This means that the brand is identified to be a solution for a particular need, the brand gaining repute in that niche (Porter 1985, pp. 84). Another important facet of brand management is SWOT analysis, which helps the company first to analyze its strengths and weaknesses such that in between these strengths and weaknesses, opportunities can be established and exploited (Hill, 2003, pp. 147 – 181). As it enters new markets in North America, Africa, Australia and some unexplored markets in Asia, Lenovo must rebrand itself anew as the PC notebook provider of the 21st century. Lenovo must necessarily create a new brand image that will sufficiently market high-end and mid-range PC notepads, laptops and other PC products to corporate clients, in such a way that the company is thought of as the ‘one-stop shop’ for all company notebook needs. In assuming that new brand image, the rebranding must also be cognizant of the fact that they need to retain the clientele inherited from IBM by incorporating them in the marketing campaigns lest they leave them out in pursuit of new markets (Borys and Jemison, 1989, pp. 234-249). f) Leadership Challenges Lenovo inherited most of IBM’s management after the acquisition including the CEO Mr. Ward. Ward was however replaced by William Amelio as CEO in another move seen by experts as an attempt to distance themselves from the IBM mentorship. After reporting a loss of US $ 96.7 million in 2008, Amelio also stepped down and Yang took over as board chairman and CEO. This indicates that there is a leadership problem at Lenovo. The challenge is to establish a new, dynamic, innovative and diverse leadership that can take the company to new global heights, one that is apt in taking up the role of a global PC provider (Marks 1982, pp. 38-44). g) Emerging Markets Lenovo also has a challenge in entering some new markets that IBM had not already penetrated with their PC products. Emerging markets is a concept referring to countries currently restructuring to modern market-philosophy and thus presenting great opportunities in technology transfers, trade and foreign direct investment. The World Bank 2009 report earmarked the five best emerging markets as India, China, Indonesia, Russia and Brazil. Other nation in the same league and catching up fast include Argentina, Mexico, South Africa, Turkey, Poland and South Korea. The fact that the countries have transited from developing countries to emerging market mans that they hold perhaps the greatest key for Lenovo’s growth in that they are adopting technology even faster than already established markets. China is however already concurred and Lenovo would be looking at expending their reach into such new markets. More than any other sector of technical advancement today, the PC is becoming a global tool for business and daily lives. This is the challenge that Lenovo has to face in providing PC solutions to the globe as a whole, venturing into markets that had hitherto been considered less lucrative. While these emerging markets may not rely on cutting edge PC innovations just yet, Lenovo needs to structure its supply and customer service lines in each emerging market in a move that could outflank HP, Dell and Hewitt Packard. The advantage is that now Lenovo will enter these markets as a global brand and not simply as a Chinese brand. Conclusion The essay has established that Lenovo has achieved much as a global brand and that its decision to abandon the use of IBM brand was well informed since it enabled them to build their own brand image and consolidate themselves as a master brand. Had they concentrated on using the IBM brand, five years would have met them still being thought of as a protégé of the IBM company. Rightly, Lenovo conceived that they needed to be seen in their own right, as a brand preferably better than the one they had just acquired. The essay has also discussed several brand related and leadership challenges that Lenovo must address if at all it will succeed in exploiting new markets and dominating the world markets in which they are already established (Zhang, 2006, pp. 32). They need to be seen as a formidable brand that will not only maintain IBM’s repute of quality but one that will innovatively induce even higher scales of product quality. Overcoming the stigma of being a Chinese manufacturer, building on their global esteem and attaining credible leadership are some of the underlying challenges at Lenovo today. Continued brand consolidation in quality delivery, customer service excellence and innovativeness ought to help Lenovo attain global supremacy as a PC provider, especially for the corporate market (Zhang, 2006, pp. 32). References Bruner, R 2004, Applied mergers and acquisitions, Wiley & Sons, New Jersey, pp. 227. Borys, B and Jemison, D 1989, Hybrid Arrangements as Strategic Alliances: Theoretical Issues in Organizational Combinations, Academy of Management Review, Vol 14 (2), pp. 234-249. Buono, A et al., 1985, When cultures Collide: The Anatomy of a Merger. Human Relations, Vol 38 (16), pp. 477-500. Cartwright, S and Cooper, C 1993, The Role for Culture Compatibility in Successful Organizational Marriage, Academy of Management Executive, Vol 7 (11), pp. 57-70. 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