Strategic Analysis Case Study-lenovo.pdf 116n52

SHR602-6 STRATEGIC MANAGEMENT

ASSESSMENT 2

STRATEGIC ANALYSIS CASE STUDY: LENOVO

SUBMITTED BY: SAHR SORIE

STU NO: 1316254

SUBMITTED ON: 25/01/2015 1

Table of Contents INTRODUCTION .................................................................................................................. 3 1.0 STRATEGIC OPTION...................................................................................................... 4 1.1 CURRENT TRENDS................................................................................................... 4 1.2 CURRENT PRODUCT STRATEGY & JUSTIFICATION OF FUTURE STRATEGY .... 4 2.0 BUSINESS STRATEGY .................................................................................................. 7 2.1 CURRENT TRENDS................................................................................................... 7 2.2 CURRENT BUSINESS STRATEGY & JUSTIFICATION OF FUTURE STRATEGY ... 7 CONCLUSION AND RECOMMENDATIONS ...................................................................... 10 REFERENCES ................................................................................................................... 11 APPENDICES ..................................................................................................................... 14

LIST OF FIGURES Fig 1: ANSOFF MATRIX ....................................................................................................... 5 Fig 2: PORTER’S GENERIC STRATEGIES MODEL ............................................................ 8

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INTRODUCTION This report is an analysis of Lenovo Group’s Mobile Division. The report aims at analysing current trends in the mobile industry and identifying current product and business strategies of Lenovo. Based on the trends and the capabilities and competencies of Lenovo, future development routes and strategies are also recommended.

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1.0

STRATEGIC OPTION

1.1

Current Trends

According to Recon Analytics (2011), consumers replace their phones an average of 22.05 months which indicates the short life span of mobile phones or mobile phone upgrade cycles. Product strategies that involve penetration in new markets (market development and diversification) are not very feasible because the mobile phone industry is highly penetrated and close to reaching saturation (the point where every consumer that wants a mobile phone has one). According to Dediu (2014), the mobile phone market is forecasted to reach saturation in 2017(see Appendix 1). The BBC (2010) states that Western Europe has a reached a 130% mobile phone penetration while Eastern Europe has a penetration of 123%. The mobile phone industry is however unique because despite the high penetration, it is still a growth market. GSMA (2014) states that mobile broadband connections have multiplied about tenfold from a little over 200 million to well over 2 billion during the period of 2008 to 2013. Growth is expected to rise steadily, driven by global smartphone sales with 4 billion mobile more broadband connection additions expected by 2020. As global smartphone statistics from Statista (2014) show, the global shipments and usage have been increasing steadily since 2009 (see Appendix 2). The implications of these statistics are that demand exists and continues to increase in existing markets but more so in developing countries and emerging economies.

1.2

Current Lenovo Strategy and Justification of Future Strategy

Silicon Angle (2014) states that Lenovo follows a Protect/Build strategy. Although the company has been producing phones and shipping globally, it has not developed new or differentiated technologies in its mobile phone portfolio. The company has therefore been producing the same existing mobile technologies while penetrating the existing markets hence using a protect/build strategy. On the Ansoff Matrix shown in fig 1 below, it is advisable for Lenovo to follow the Product development strategy in its mobile arm especially because of its patent resources and unique in-house hybrid production system.

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Products Existing

New

Protect/Build Existing

Product Development



Consolidate





Penetrate the market



 

Markets

Diversification

Market Development New

With existing or new capabilities Beyond current expectations



New segments, uses and territories.



Use new capabilities

 

With existing or new capabilities Beyond current expectations



 Fig 1

Product development is where an organisation introduces new or modified products into existing markets. According to Gartner (2014), Lenovo was the fourth highest selling smartphone vendor worldwide in 2014 and this shows that Lenovo has the customer base in existing markets to pursue a product development strategy. It is however important that the company move towards the product development strategy for its mobile section because the personal computer industry which is its core business is in a slow decline. International Data Corporation (2014) states that global PC sales in the second quarter of 2014 saw a -1.7% year on year decline after the worst decline (10%) since 2009 that was experienced in 2013. The report goes on to state that the disruption of the PC market can be related to the surge in the sales of tablets and other mobile devices. Lenovo’s unique dynamic capability lies in the form of its absorptive capability in the consumer electronic industry. This is displayed by its talent for acquisition and assimilation of very popular brands. Lenovo displayed this capability when it acquired and assimilated IBM’s personal computer division in 2005 to oust Hewlett Packard and become the largest global PC maker (BBC, 2012). According to The Verge (2014), Lenovo has now purchased Motorola from Google and this opens up a large amount of technological possibilities to Lenovo as Motorola patents will now be available to Lenovo without royalties. The new and unique technological capabilities (patents, human resources and supply chain networks) obtained from Google when combined with Lenovo’s unique 5

hybrid production system with eight in-house manufacturing facilities around the world (World Street Journal, 2012) allows Lenovo the capability of pursuing the Product development strategy. Gartner (2014) ranked Lenovo as the second best supply chain in the Asian Pacific market (bested only by Samsung). The Gartner report also mentioned that in of supply chain, a corporate analytics center of excellence has been scaled up by Lenovo and that a data driven approach has been developed. Procurement leaders (2014) attribute the high ranking of Lenovo’s supply chain to advanced segmentation capabilities and cost reductions while improving their delivery performance significantly. The company’s supply-chain has also adopted a sustainable ‘pallet pooling’ initiative which has significantly increased the business to business attractiveness of Lenovo’s supply chain. This further strengthens the feasibility of adopting the product development strategy as it shows that Lenovo not only has the production capabilities but also has distribution capabilities needed to pursue such a strategy. It would be less feasible to pursue a different strategy that involves disrupting the existing unique supply chain capabilities which has contributed to Lenovo’s remarkable success so far.

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2.0

BUSINESS STRATEGY

2.1

Current Trends

The two leading mobile phone manufacturers globally are Samsung and Apple (see Appendix 3). These two companies are the biggest direct competitors of Lenovo. Apple has always used a differentiation strategy and attempted to make its products unique in order to make them attractive to customers. According to Yahoo Finance (2014), CEO of Apple (Tim Cook) said in an interview that Apple never started out with the objective of selling low-cost phones. According to Jung (2014) since the ‘New Management’ launch in 2009, Samsung has moved from being a low cost leader to a differentiation strategy with products and strong band value. E-Commerce Times (2012) also states that Samsung has risen in the mobile industry especially because of its differentiation strategy. The current trend is therefore shows that the market leaders use the differentiation strategy confirming Peters and Waterman (1982) which states that high performing industries are usually oriented more towards customer value than the cost-side of the profitability equation.

2.2

Current Lenovo Strategy and Justification of Future Strategy

Lenovo currently uses an integrated cost leadership/differentiation strategy. In an interview with Sarah Green of Harvard Business Review in the Harvard Business Review (2014), Mr. Yuanqing the CEO and chairman of Lenovo states that Lenovo aims at balancing innovation and efficiency and the Lenovo philosophy is to innovate as much as possible but to make sure that most customers can afford their innovation. Mr. Yuanqing specifically stated in the Harvard Business Review interview that Lenovo does not wish to operate like other businesses that only cover prices. By the statements of Lenovo’s CEO and chairman, it is clear that Lenovo pursues an integrated cost leadership/differentiation strategy. Using Porter’s generic strategies model in fig 2, it is advisable for Lenovo to use a differentiation business strategy.

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Competitive Advantage Differentiation

Lower Cost COST LEADERSHIP

DIFFERENTIATION

Broad Target

 

Competitive Scope Narrow Target

COST FOCUS

DIFFERENTIATION FOCUS 



Fig 2

Using an integration of the cost leadership and differentiation strategies is risky because according to Mescon and Rachman (1979), it can lead to a ‘discount’ image which may be difficult to shake-off or change in future. Sharp is an example of such a company that competed on the price even though it offered products that were of above average quality and the company suffered due to a ‘discount’ image. Tesco is an example of a company that also sat on the fence in of a business strategy and are now suffering due to lack of a clear identity or strategy. Lenovo has a competitive advantage in the form of its in-house production system (hybrid production system) in an industry where most firms have outsourced production and therefore lack control of the production processes of their products. Lenovo therefore has the capability and control of its production processes to apply total quality systems which could reduce production costs while increasing quality necessary for differentiation. The recommendation for Lenovo to pursue the differentiation strategy is valid if they are to expand in the developed markets where high end phones are more favoured. The differentiation strategy is made even more feasible with the Motorola acquisition because the deal also means that Lenovo acquires Motorola portfolio including the Moto G, Moto X and DROID phones which are differentiated products. The deal also gives Lenovo a global innovative team with intellectual competencies and know-how which cannot be easily codified. Differentiation is further made feasible by Lenovo’s 8

recent acquisition of IBMs low end server business. This gives Lenovo the ability to create an ecosystem for their total portfolio whereby smart devices (PC, mobiles and TV) will all be interconnected and linked via cloud services. News Observer (2014) states the fact that Lenovo is committed to creating differentiation by using this ecosystem as seen by the restructuring of the company just after the acquisition of IBM’s server unit. A separate business group known as the ecosystem and cloud services group has been created by Lenovo. In order to pursue a differentiation strategy, an organisation must have a very significant amount of financial resources. Lenovo Group 2013/14 Annual Report (2014) states that the consolidated revenue of the group increased by 14% from 2013 to 2014 to reach a record of US$38,707 million. The personal computer division saw revenue of US$31,835 million (7% increase) while mobile devices unit saw revenue of US$5,657 million (86% increase). The Financial Times (2015) states that Lenovo’s total debt decreased slightly from 2013 to 2014 while total assets increased within the same period (see Appendix 4). Lenovo’s strategies are largely influenced by its chairman Mr. Yang Yuanqing. Rising from head of the PC section of Lenovo in 1994 to CEO in 2001, he stepped down in 2005 and during his absence, the mobile business of Lenovo was sold. He was then recalled due to poor sales during the recession in 2009 and immediately bought back the mobile business of Lenovo. After Lenovo’s recovery from the recession, Mr. Yuanqing was appointed chairman and CEO in 2011. According to McKinsey (2013), in an interview with Rik Kirkland and Gordon Orr of McKinsey, Mr. Yuanqing stated that he believes the tech industry is definitely moving towards mobile devices and that Lenovo has been prepared for the shift. The Telegraph (2015) states that Lenovo shareholders were not very happy with the Motorola deal and Lenovo stock lost 28% of its value in the Hong Kong stock exchange in the same month that it was announced. Mr. Yuanqing however stated that the reaction of the capital market was not very important to the management. He proved correct and shareholders have since grown confidence in the value of the acquisition as Lenovo share prices recovered. Therefore we can safely say that management as well as shareholders share Mr. Yuanqing’s vision and this would make the differentiation strategy even more suitable and feasible.

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CONCLUSION AND RECOMMENDATIONS Based on the current trends in the mobile industry and the competencies and capabilities of Lenovo, It is recommended that the company pursue the Product Development strategic option and the Differentiation strategy on a business level. Diversification and Market Development are not advisable routes due to the facts that penetration levels are already very high and market saturation point is forecasted to be reached in the near future. The protect/build strategy is not an option at this point because of the new patent resources and R and D teams which have been acquired from Google on the Motorola deal. These are technological resources which will create new products that Lenovo did not previously have the know-how to produce. A Cost Leadership strategy cannot be followed at this point because new Motorola portfolio and patents will now create a differentiation for Lenovo and competing on price is never a sustainable competitive advantage as price can easily be imitated. The implications are that Lenovo will need to quickly and efficiently assimilate Motorola into its operations. Lenovo will need to merge the corporate cultures of the two companies so that personnel are able to co-work smoothly. Lenovo will also have to keep in mind that keeping focus only on integration of the two companies could affect the daily business operations and core business itself.

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REFERENCES BBC (2014) Over 5 billion mobile phone connections worldwide, [ONLINE], Available at: http://www.bbc.co.uk/news/10569081 [Accessed 21 January 2015]. BBC (2012) Lenovo ousts HP as world’s top pc maker, says Gartner, [Online], Available at: http://www.bbc.co.uk/news/business-19906119 [Accessed 22 January 2015]. Bloomberg (2014) Lenovo’s Yang to End Losses at Motorola in Six Quarters, [ONLINE], Available at: http://www.bloomberg.com/news/2014-02-24/lenovo-s-yangto-end-losses-at-motorola-mobility-in-six-quarters.html [Accessed 20 January 2015]. Dediu, H. (2014) When will smartphones saturate, [Online], Available at: http://www.asymco.com/2014/01/07/when-will-smartphones-saturate/ [Accessed 20 January 2015]. E-Commerce Times (2015) Samsung May Have Edged out Apple, [ONLINE], Available at: http://www.ecommercetimes.com/story/74985.html [Accessed 21 January 2015]. Financial Times (2015) Lenovo Group Ltd, 992: financials, [ONLINE], Available at: http://markets.ft.com/research/Markets/Tearsheets/Financials?s=992:HKG [Accessed 19 January 2015]. Gartner (2014) Gartner Says Sales of Smartphones Grew 20 Percent in Third Quarter of 2014, [ONLINE], Available at: http://www.gartner.com/newsroom/id/2944819 [Accessed 20 January 2015]. Gartner (2015) Ten of the Best Supply Chains in Asia Pacific, [ONLINE], Available at: http://www.gartner.com/newsroom/id/2838817 [Accessed 21 January 2015]. GSMA (2014) The Mobile Economy 2014, [Online], Available at: http://www.gsmamobileeconomy.com/GSMA_ME_Report_2014_R2_WEB.pdf [Accessed 20 January 2015]. Harvard Business Review (2015) Yang Yuanqing: The HBR Interview, [ONLINE], Available at: https://hbr.org/2014/06/yang-yuanqing-the-hbr-interview/ [Accessed 18 January 2015]. International Data Corporation (2014) PC Rebound in Mature Regions Stabilizes Market, But Falls Short of Overall Growth in the Second Quarter of 2014, [ONLINE], Available at: http://www.idc.com/getdoc.jsp?containerId=prUS24981914 [Accessed 18 January 2015]. IT Web (2015) Lenovo wades into smartphone war, [ONLINE], Available at: http://www.itweb.co.za/index.php?option=com_content&view=article&id=139689 [Accessed 23 January 2015]. 11

Jung, S.C. (2014) ‘The Analysis of Strategic Management of Samsung Electronics Company through the Generic Value Chain Model’, International Journal of Software Engineering and Its Applications, vol. 8, no. 12, pp. 133-142. Lenovo Group Limited (2015) 2013/14 Annual Report, [ONLINE], Available at: http://www.lenovo.com/ww/lenovo/pdf/report/E_099220140529a.pdf [Accessed 18 January 2015].

McKinsey & Company (2015) Thriving in a 'PC-plus' world: An interview with Lenovo CEO Yang Yuanqing, [ONLINE], Available at: http://www.mckinsey.com/insights/high_tech_telecoms_internet/thriving_in_a_plus_world [Accessed 21 January 2015]. Peters, T. J., & Waterman, R. H. (1982) In search of excellence, New York: Harper & Row. Procurement Leaders (2015) Samsung and Lenovo top Asia-Pacific supply chain ranking, [ONLINE], Available at: http://www.procurementleaders.com/newsarchive/news-archive/samsung-and-lenovo-top-asia-pacific-supply-chain-ranking [Accessed 21 January 2015] Mescon, M.H., and Rachman, D.J. (1979) Business today, 2nd ed. New York: Random House. Recon Analytics (2011) INTERNATIONAL COMPARISONS: THE HANDSET REPLACEMENT CYCLE, [ONLINE], Available at: http://mobilefuture.org/wpcontent/s/2013/02/mobile-future.publications.handset-replacement-cycle.pdf [Accessed 22 January 2015] Silicon Angle (2013) Lenovo’s Protect & Attack Strategy Threatens Global Domination – Apple & Samsung Better Watch Out, [ONLINE], Available at: http://siliconangle.com/blog/2013/01/31/lenovos-protect-attack-strategy-threatensglobal-domination-apple-samsung-better-watch-out/ [Accessed 18 January 2015]. The Telegraph (2015) How Lenovo plans to take on the mobile giants, [ONLINE], Available at: http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/108 54483/How-Lenovo-plans-to-take-on-the-mobile-giants.html [Accessed 21 January 2015]. The Verge (2014) Google sells Motorola to Lenovo for $2.91 billion, [Online], Available at http://www.theverge.com/2014/1/29/5358620/lenovo-reportedly-buyingmotorola-mobility-from-google [Accessed 23 January 2015].

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Yahoo Finance (2015) Apple’s pricing strategy and product differentiation, [ONLINE], Available at: http://finance.yahoo.com/news/apple--pricingstrategy-product-191247308.html [Accessed 20 January 2015].

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APPENDICES

APPENDIX 1- SMARTPHONE SATURATION TREND

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APPENDIX 2- TOTAL WORLDWIDE MOBILE PHONE SHIPMENTS

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APPENDIX 3- TOP SMARTPHONE VENDORS

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APPENDIX 4- LENOVO FINANCES

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