strategic alliances between lenovo and ibm

5/19/2018 Strategic Alliances Between LENOVO and IBM

1/29

1

Strategic Alliance between LENOVO and IBM

1.Introduction

Strategic alliances are currently very much in fashion. Indeed, it is argued that

for some global industries, such as airlines, independent firms may no longer

exist in the future there will only be alliances. Some managers, however,

distrust alliances and see them as simply a merger waiting to happen. I argue

here that strategic alliances can be a sensible strategy, provided that the decision

is taken for sound reasons and provided that the relationship is properly

managed.

1.1 Meaning of Strategic Alliance

Strategic alliances are agreements between companies (partners) to reach

objectives of common interest. Strategic alliances are among the various options

which companies can use to achieve their goals; they are based on cooperation

between companies (Mockler, 1999). Strategic alliances are agreementsbetween companies that remain independent and are often in competition. In

practice, they would be all relationships between companies, with the exception

of a) transactions (acquisitions, sales, loans) based on short-term contracts

(while a transaction from a multi-year agreement between a supplier and a

buyer could be an alliance); b) agreements related to activities that are not

important, or not strategic for the partners, for example a multi-year agreement

for a service provided (outsourcing) (Pellicelli, 2003).

Strategic alliance can be described as a process wherein participants willingly

modify their basic business practices with a purpose to reduce duplication and

waste while facilitating improved performance (Frankel, Whipple and Frayer,

1996).

A strategic alliance has to contribute to the successful implementation of the

strategic plan; therefore,the alliance must be strategic in nature. The relationship


2/29

2

has to be supported by executive leadership and formed by lower management

at the highest, macro level. While the following does not represent a

comprehensive definition for a strategic alliance, at this stage, one might define

a strategic alliance as a relationship between organizations for the purposes of

achieving successful implementation of a strategic plan.

1.2 Types

There are a lot of types of strategic alliances,which are listed below:

i. Joint Ventures. A joint venture is an agreement by two or more parties to

form a single entity to undertake a certain project. Each of the businesses has

an equity stake in the individual business and share revenues, expenses and

profits. Joint ventures between small firms are very rare, primarily because of

the required commitment and costs involved.

ii. Outsourcing. The 1980s was the decade where outsourcing really rose to

prominence, and this trend continued throughout the 1990s to today, although to

a slightly lesser extent.

iii. Affiliate Marketing. Affiliate Marketing has exploded over recent years,

with the most successful online retailers using it to great effect. The nature of

the internet means that referrals can be accurately tracked right through theorder process.Amazon was the pioneer of affiliate marketing, and now has tens

of thousands of websites promoting its products on a performance-based basis.

iv.Technology Licensing. This is a contractual arrangement whereby trade

marks, intellectual property and trade secrets are licensed to an external firm. It

is used mainly as a low cost way to enter foreign markets. The main downside


3/29

3

of licensing is the loss of control over the technologyas soon as it enters other

hands the possibility of exploitation arises.

v. Product Licensing. This is similar to technology licensing except that the

license provided is only to manufacture and sell a certain product. Usually each

licensee will be given an exclusive geographic area to which they can sell to. It

is a lower-risk way of expanding the reach of your product compared to

building your manufacturing base and distribution reach.

vi. Franchising. Franchising is an excellent way of quickly rolling out a

successful concept nationwide. Franchisees pay a set-up fee and agree to

ongoing payments so the process is financially risk-free for the company.

However, downsides do exist, particularly with the loss of control over how

franchisees

run their franchise.

vii. R&D. Strategic alliances based around R&D tend to fall into the joint

venture category, where two or more businesses decide to embark on a research

venture through forming a new entity.

viii. Distributors. If you have a product one of the best ways to market it is to

recruit distributors, where each one has its own geographical area or type ofproduct. This ensures that each distributors success can be easily measured

against other distributors.

ix. Distribution Relationships. This is perhaps the most common form of

alliance. Strategic alliances are usually formed because the businesses involved

want more customers. The result is that cross-promotion agreements are

established.


4/29

4

1.3 Reason for Strategic Alliances

Most important reason for the surge in strategic alliance has been under the

recognition of the fact that no corporation has enough capital to acquire all of

the companies and assets needed to compete everywhere in the world. While

with alliances, companies can access global markets and contribute to economic

development without steep exposure to market and political turmoil (Cyrus and

Freidheim, 1999, p.48). The motivations for the formation of an alliance can

range from purely economic reasons (e.g., search for scale, efficiency, or risk

sharing) to more complex strategic ones (e.g., learning new technologies,

seeking political advantage) (Arino, et al., 2001). Generally speaking, forces

that drive the formation of strategic alliances can be categorized into three

aspects.

i.Firstly, companies are seeking for co-option during its globalizing process. Co-

option turns potential competitors into allies and providers the complementary

goods and services that allow new business to develop and usually multinational

companies seek partners with similar products who have a good knowledge of

local market and channels of distribution in order to share the risk during the

expansion of the global market (Bronder and Pritzi, 1992; Doz and Hamel,

1998; Cullen and Parboteeach, 2005). The privileged market access of some

countries sometimes can be a reason for MNC to search for alliance under the

globalization movement (Bleeke and Ernst, 1991; Bronder and Pritzi, 1992; Doz

and Hamel, 1998).ii. Secondly, co-specialization has become a more and more attractive force

behind the strategic alliance. It is the synergistic value creation that results from

the combination of previously separate resources, positions, skills and

knowledge sources. By bringing the resources of two or more companies

together, strategic alliances often provide the most efficient size to conduct a

particular business (Bronder and Pritzi, 1992; Cullen and Parboteeach, 2005).

Through the way of alliances, partners can contribute their unique and


5/29

5

differentiated resources to the success of their allies, i.e. skills, R&D, brands,

networks, as well as tangible and intangible assets (Bronder and Pritzi, 1992;

Doz and Hamel, 1998).

iii.Last but not least, alliance may also be an avenue for learning and

internalizing new skills from its partners, in particular those that are tacit,

collective and embedded (Bronder and Pritzi, 1992;Doz and Hamel, 1998).

Therefore, it is self-evident that strategic alliance is central to the corporate

strategy and it is significant and unavoidable for the global reaching step in the

world economy.

1.4Stages of Alliance Formation

A typical strategic alliance formation process involves these steps:

i.Strategy Development: Strategy development involves studying the alliances

feasibility, objectives and rationale, focusing on the major issues and challenges

and development of resource strategies for production, technology, and people.

It requires aligning alliance objectives with the overall corporate strategy.

ii. Partner Assessment: Partner assessment involves analyzing a potential

partners strengths and weaknesses, creating strategies for accommodating all

partners management styles, preparing appropriate partner selection criteria,

understanding a partners motives for joining the alliance and addressing

resource capability gaps that may exist for a partner.

iii. Contract Negotiation: Contract negotiations involves determining whetherall parties have realistic objectives, forming high calibre negotiating teams,

defining each partners contributions and rewards as well as protect any

proprietary information, addressing termination clauses, penalties for poor

performance, and highlighting the degree to which arbitration procedures are

clearly stated and understood.

iv. Alliance Operation: Alliance operation involves addressing senior

managements commitment, finding the calibre of resources devoted to the


6/29

6

alliance, linking of budgets and resources with strategic priorities, measuring

and rewarding alliance performance, and assessing the performance and results

of the alliance.

v. Alliance Termination: Alliance termination involves winding down the

alliance, for instance when its objectives have been met or cannot be met, or

when a partner adjusts priorities or re-allocated resources elsewhere.

2. Research Methodology

The research aims to figure out how to make the strategic alliance work in the

early stage between Lenovo and IBM, and to apply principles into reality. The

researcher attempts to analyze the case from the primary data collecting from

the interviews, and the secondary data.

Research design is the general plan about how to get answers to the research

question(s), it is the argument for the logical steps which will be taken to link

the research question(s) and issues to data collection, analysis, and

interpretation in a coherent way (Saunders, et al., 2007; Hartley, 2004, p.326).

Selltiz et al. (1981, p.50) define design as the deliberately planned arrangement

of conditions for analysis and collection of data in a manner that aims to

combine relevance to the research purpose with economy of procedure.

Case studies are widely used in organizational studies and across the social

sciences; they are normally studied to provide insights into an issue, a

management situation or a new theory in business studies (Hartley, 2004;

Ghauri, 2004). They are beneficial because it provides rich understanding of the

context of the research and the process being enacted (Morris and Wood, 1999,

cited in Saunders et al., 2000). Robson (2002, p.178) defines case study as a

strategy for doing research which involves an empirical investigation of a


7/29

7

particular contemporary phenomenon within its real life context using multiple

sources of evidence and it is both theprocess of learning about the case and

also the product of our learning (Ghauri, 2004, p.109).Yin (2003) also

highlights the importance of context, figuring out that within a case study the

boundaries between the phenomenon being studied and the context within

which it is being studied are not clearly evident. As Hartley (2004) states that a

case study is a research strategy that consists of a detailed investigation, often

with data collected over a period of time and of phenomena studied within the

specific context. And he further points out that the aim of a case study is to

provide an analysis of the context and processes that illuminate the theoretical

issues being studied.

Case studies are a preferred approach when how or why questions are to be

answered, when researcher has little control over the events and when the focus

is on a current phenomenon in a real-life context (Yin, 1994, as cited in Ghauri,

2004, p.110). Ghauri and Gronhaug (2002) argue that when such types of

questions are asked, a case study method as a research strategy is recommended.

Hence it applies to the Lenovo-IBM case study in this research.

A case study can be either quantitative or qualitative; it can also use both

(Ghauri, 2004; Hartley, 2004). As for the nature of the case in this research, it

was decided that the research be qualitative. In addition, qualitative researchgoes beyond the measurement of observable behaviour (the what questions)

and seeks to understand the meaning and beliefs underlying the action (the

why and how question).

The methods of quantitative and qualitative are widely used in business and

management research to differentiate both the data collection techniques and

data analysis procedures (Saunders, et al., 2007). As Denzin and Lincoln (2000)


8/29

8

argue that quantitative research methods focus more on the measurement and

analysis of causal relationships between variables but not process. It is mainly

used as a synonym for any data collection technique (i.e, questionnaire) or data

analysis procedure (i.e., graphs or statistics) that generates or uses numerical

data (Saunder, et al., 2007). However, qualitative method is used mainly as a

synonym for any data collection technique (i.e., interview), or data analysis

procedure (i.e., categorizing data) that generates non-numerical data (Saunder,

et al., 2007). Compared with quantitative data, qualitative data provides a

deeper understanding than would be obtained purely from quantitative data, it is

a useful method to access rich information and it is best to explore the depth and

complexity of phenomenon (Silverman, 2000). Qualitative research method

takes a more holistic approach to the research object and studies a phenomenon

in its context (Marschan-Pirkkari and Welch, 2004).

Qualitative methods have been defined as procedures for coming to terms with

the meaning not the frequency of a phenomenon by studying it in its conte xt.

Moreover, Easton (1995) notes that qualitative research method is often

combined with interview-based case studies (hence corresponds to the Lenovo-

IBM research case) (as cited in Marschan Pirkkari and Welch, 2004, p.6).

Therefore, the qualitative research is the most appropriate in this research, as

issues here cannot be measured in quantitative terms.

The interview is the most commonly used method of data gathering in

qualitative research, and it can address quite focused questions about various

aspects of the organizational life (King, 2004). Kvale defines the qualitative

research interview as an interview, whose purpose is togather descriptions of

the life-world of the interviewee with respect to interpretation of the meaning of

the described phenomena (Kvale, S., 1983, p.174; cited in King, 2004, p.11).

The goal of qualitative research interviews is to see the research topic from the


9/29

9

perspective of the interviewee and to understand how and why they come to

have this particular perspective; and the form of interview is employed in

various ways by every main theoretical and methodological approach, i.e., face-

to-face interview, by telephone or via the internet (King, 2004, P.11). As King

(2002, p.17) points out that the qualitative research interview is ideally suitable

for examining topics in different levels of meaning need to be explored, which

is very difficult for quantitative methods to achieve. Daniel and Cannice (2004,

p.186) further indicate that when there is a small population of possible

respondents, interview-based research may be the optimal choice as in such

case, the researchers must focus on the depth of collected data when the breadth

is simply not attainable, through this method, it can offer an opportunity for the

researcher to acquire rich information from each respondent. As for the Lenovo-

IBM case, the possible respondents are small in number and hard to access,

besides that, they are also geographically dispersed, an internet-mediated

interviewing, which is also called as electronic interview is adopted by the

researcher.Morgan and Symon (2004, p.23) use the term electronic interview to

refer to the use of open questions and an interactive approach, moving more

towards forms of research such as face-to-face and telephone interviews, it can

be held both in real-time using the internet as well as those that are undertaken

off-line, in asynchronous mode, using e-mail communications.

The method of electronic interview has the potential benefit of accessing abroad range of extremely busy people; it can be used as a substitute or

complementary way to face-to-face interview as it can overcome some access

barriers (Morgan and Symon, 2004, p.24). The authors further state that

qualitative interviews themselves vary by depth, structure and time, so does the

electronic interviews, they are the new symbolic form of oral-text exchange

with both strengths and weaknesses that should be taken into consideration to

the research purposes (Morgan and Symon, 2004, p.24). As Morgan and Symon


10/29

10

(2004, p.23) emphasize that to generate interview style data using e-mail

requires a series of communication (one list of questions would be more akin to

an open-ended questionnaire). They indicate that in the electronic interview, a

number of e-mails need to be exchanged over an extended period of time.The

series of processes include the initial small number of questions or topic are

raised to hopefully get the reply of the participant by offering their thoughts and

opinions; the researchers respond to those ideas and further questions regarding

to the other linked issues.

As Morgan and Symon (2004) suggest that the electronic interview can be a

time consuming process, these communications may last for some weeks until

the topic is exhausted or the participant shows signs of losing interest. Thus,

time issues and maintaining interest of the respondents are the particularly

difficult aspects of electronic interview.

In addition, secondary data also contributes to the research. Secondary data is

defined as a kind of data that has already been collected for other purposes

(Hakim, 1982; cited in Saunders et al., 2000). As Saunder et al. (2007) note that

it is the most frequently used data in a case study or survey research strategy.

The main advantage of using the secondary data is the enormous saving in

resources, especially the time and money (Ghauri and Gronhag, 2005). Besides,

the authors further argue that it could be useful to compare the data that havecollected primarily with the secondary data.


11/29

11

2.1 Data Collection

Secondary Data

The secondary data mainly obtained from a wide range of sources, including

journals, publications, reviews from the analysts, company annual report and

the Internet information. For this study, such data were mostly from the

companys publicized documents and reports, and the analysts perspectives

that are supposed to have the authoritative status.

3.Background of Lenovo

Lenovo Group is one of the leading IT companies in China, and it has now

become the 3rd PC provider in the world market after the acquisition of IBMs

Personal Computing Division. As a global company after the alliance with IBM,

it has a number of more than 19,000 employees worldwide; and with executive

offices in Raleigh, North Carolina, USA; Beijing, China; and Singapore

(Lenovo.com, 2007). The companys main operations are in Beijing, China; and

Raleigh, North Carolina, USA, with an enterprise sales organization worldwide

(Lenovo.com, 2007). As the largest PC producer in China, it took 27 per cent of

Chinas PC market share in 2003 and Lenovo PCs ranked No.1 in the Asia

Pacific (excluding Japan) with a market share of 12.6 per cent in that year

(Peoples Daily, 2004). Since the year 1996, Lenovo has maintained

its leadership position in China for ten consecutive years with over 25 per centmarket share till 2006. The following is a brief development history of the

company:

The company was first founded in 1984 by 11 computer scientists in Beijing,

China, as the New Technology Developer Inc. (the predecessor of the Legend

Group), which thereafter opened the new era of consumer PCs in China

(Lenovo.com, 2007). In 1989, Beijing Legend Computer Group Co. was

established and launched its first PC in the market in the following year, since


12/29

12

then, the name Legend became a household name in China (Lenovo.com,

2007). By 1994, Legend was trading on the Hong Kong Stock Exchange,

becoming one of the few Chinese companies that listed there (Lenovo.com,

2007). In 1996, Legend became the market share leader in China for the first

time and kept with the line thereafter and three years later, it

became the top PC vendor in the Asia-Pacific region and headed the Chinese

national Top 100 Electronic Enterprise ranking; furthermore, the company

ranked in the Top 10 of the worlds best managed PC venders (Lenovo.com,

2007). In the year 2003, with an aim to expand its business globally with a more

global-like brand, the company changed its former brand name Legend to the

name used today as Lenovo, taking the Le from Legend, a nod to the

heritage, and adding novo, the Latin word for new, to reflect the spirit of

innovation at the core of the company (Lenovo.com, 2007). The change of the

brand name from Legend to Lenovo was perceived as the first move under

the firms global stretch. At the end of the year 2004, Lenovo and IBM

announced the agreement of Lenovos acquisition of IBMs Personal Computer

Division, which was IBMs global PC (desktop and notebook computer)

business (Lenovo.com, 2007b). In May 2005, Lenovos acquisition of IBMs

Personal Computing Division was completed, making it a new international IT

competitor and the third-largest personal computer company worldwide

(Lenovo.com, 2007). After the acquisition and the strategic alliance with IBM,

Lenovo-branded products were introduced to the world outside of China at thefirst time (Lenovo.com, 2007).

Lenovo and its employees are committed to four company values that are the

foundation for all that they do (From Lenovo.com, 2007):

Customer service: We are dedicated to the satisfaction and success of every

customer;


13/29

13

Innovative and entrepreneurial spirit: Innovation that matters to our customers,

and our company, created and delivered with speed and efficiency;

Accuracy and truth-seeking: We manage our business and make decisions

based on carefully understood facts;

Trustworthiness and integrity: Trust and personal responsibility in all

relationships.

With an aim to provide market cutting-edge, reliable, high-quality products and

professional services for the satisfaction of the customers, the company is

dedicated to research and talent development (Lenovo.com, 2007). The

company owns research teams who have won hundreds of technology and

design awards, which includes more than 2,000 patents, and has also introduced

many industry firsts (Lenovo.com, 2007). The goal of Lenovos R&D team is

ultimately to improve the overall experience of PC ownership while driving

down total costs of ownership.

Apart from being a prosperous business entity, Lenovo is also committed to

being a responsible and active corporate citizen, which makes it a reputable

company in the home market.Moreover, as one of the major marketing strategy,

Lenovo also actively takes a hand with sports games to help introduce the

Lenovo brand around the world. In 2004, Lenovo became the first Chinese

company to join the Olympic Partner Program and a sponsor of the 2006 wintergames in Turin, Italy, and it will also be a major supplier of computing

equipment and funding in support of the 2008 summer games in Beijing, China

(Lenovo.com, 2007).


14/29

14

4. Lenovos StrategicAlliance with IBM

According to Lenovos 2004/2005 Annual Report, Lenovo has always aspired

to become a global company. Since the year 2003, Lenovo began to lay the

groundwork for its global stretch. It firstly changed its former name Legend to

Lenovo Group Limited that could be used without restriction around the

world. Then, its wide and active participation in the Olympic events have

accelerated Lenovos pace into the international market. On December 8th,

2004, Lenovo announced that it would acquire IBMs global PC business for

US$ 1.25 billion.

According to the terms of the agreement, the acquisition included IBMs

desktop and notebook computer business, as well as its PC-related R&D

centers, manufacturing plants, global marketing networks, and service centers

(Lenovos 2004/2005 Annual Report). In addition to that, Lenovo also has the

right to use the IBM brand for a period of five years and the permanent

ownership of the renowned Think family trademarks. As part of the

transaction, Lenovo and IBM also entered a broad-based, strategic alliance of

warranty and maintenance services and preferred supplier of customer leasing

and channel financing services to Lenovo (Lenovos 2004/2005 Annual

Report). On April 30th, 2005, Lenovo completed the landmark acquisition with

IBM and entered a new era of globalization, making the new Lenovo a PC

leader in the global market, with approximately 8 per cent of the worldwide PCmarket by shipments, followed after Dell (16.4%) and HP (13.9%).

Table: World Market Share of lenovo

Companies Market

Share(%)

Lenovo 8

HP 13.9

Dell 16.4


15/29

15

5.Need for the Strategic Alliance with IBM

Lenovo was known as one of Chinas most promising companies in the early

1990s, with its sales more than tripled between the year 1994 and 1998, and

Asias leading PC vendor outside Japan at the end of the 1990s (Lau, 2004a).

However, before the declaration of the alliance with IBM, the company had

encountered with obstacles for its further expansion and development. Though

Lenovo is the largest PC maker in China with more than a quarter of the market

share, it does little business outside the country. The increasing fierce

competition from aggressive foreign rivals such as Dell and HP in the past few

years in Chinese market has put further pressures on Lenovos margins.

According to Citigroup Smith Barney, although Lenovo still accounted for 27

per cent of Chinas PC market, the growth rate in 2003 far lagged behind the

market growth rate; by contrast, Dells shipment in China grew 48 per cent.

Apart from that, the company also suffered financial problems, earlier in the

year 2004; Lenovo confessed that itsperformance over the past three years had

fallen short of internal targets. In addition to that, shares of the company

dropped nearly 60 per cent in the year 2004, and analysts at investment banks

including ABN Amro and Citigroups Smith Barney,downgraded the company.

As one analyst said in June 2004 that The company is in crisis, it has lost

direction and does not know how to move forward (Lau, 2004a). Therefore,

rather than just continue to concentrate on the domestic Chinese market, thedecision to go global is a necessity for Lenovo at that critical time.

Under these circumstances, Lenovo decided to form the deal with IBM to

acquire its low profitability PC business with US$1.75bn. According to the

terms of the agreement, Lenovo pays US$650m in cash and up to US$600m in

shares (which later changed to US$800m and US$450m share value), giving


16/29

16

IBM an 18.9 per cent stake as well as shouldering US$500m in debt; and IBM

will become the Chinese PC makers preferred supplier of support services

and customer financing. For Lenovos part, the acquisition quadruples its sales

to more than US$12bn and expands its sales market globally; besides being

given the ownership of the Think family trademarks, Lenovo also gains the

right to produce IBM-branded PCs under a five-year licencing agreement .

6. Objective behind the Strategic Alliance

Lenovos takeover of IBMs PC division has been described as snake ate the

elephant, and the deal pulls Lenovo from the eighth-largest PC maker in the

world to the third-largest just behind Dell and HP. As the news released by

China Daily (2004), the two computer firms have formed a strategic alliance in

PC business worldwide, in which IBM positioned as the second largest

shareholder with a share of 18.9 per cent. The motivations that drive the

formation of the strategic alliance between Lenovo and IBM can be analyzed

from two perspectives.

1.For Lenovos aspect, though Lenovo is the largest IT company in China, its

products are mainly within China. Michele Mak, an analyst at ABN Amro, once

commented that Lenovos distribution network is its biggest problem, and it isnot well adapted to serving the small and medium-sized companies who usually

buy directly . Thus, in the first place, with an intention to expand its business

globally, the firm needs a well-developed worldwide distribution network,

which happens to be the advantage of IBM. As what has been announced by

Lenovo, the agreement between the two firms includes broad-based strategic

alliance under which Lenovos products will be integrated into IBMs global

service offerings, which also became the impetus to the deal (Lenovo.com,


17/29

17

2007c). As Stephen Ward, former head of IBMs PC division said that IBM

promised to push Lenovos PCs and offer financing to its customers and

business partners by its sales teams (Dickie & Lau, 2004b).

2.Secondly, as a world-leading company like IBM, it has specialized and

advanced skills in sales and marketing functions, for Lenovo, the sales and

marketing support, as well as the R&D support are significant and of a necessity

in its way to a multinational enterprise, which is also part of the agreement

(Lenovo.com, 2007). As Dickie and Lau (2004) point out that Lenovo

could get access to some of the worlds most popular laptop designs, access to

the U.S. market, and technological centers as advanced as any of its rivals after

the establishing the alliance with IBM. Just as what has been indicated by Doz

and Hamel (1998), strategic alliance comes along with the learning from its

partners and the internalization of the new knowledge, thereby benefits the firm.

In this case, IBM provides such model and as an iconic enterprise for Lenovo,

who is heading its way globally.

3.Thirdly, the use of IBMs globally recognized brand is an impetus to

accelerate the alliance, and also perceived as a sweet victory for Lenovo. The

local brand Lenovo, formerly known as Legend, will become more valuable

in the market after its association with the ThinkPad series of laptops. And

also, Lenovos right to use the IBM brand on the computers for five years addsmore value and trustworthiness to the brand, as despite the fact that Lenovo is

the largest PC maker in China and Asia, it is little known elsewhere in the

world, even with the ownership of ThinkPad family trademarks, it can hardly

divert the loyal customers from IBM to Lenovo. Furthermore, analysts said that

the deal could enable Lenovo to cut procurement costs.

Therefore, the driving forces behind the alliance reflect the two companies

desires of seeking for co-option, co-specialization during its globalizing


18/29

18

process, with an attempt to learn and internalize within its own organization,

which are also the main three motivations for strategic alliances.

7. Problems faced during the Alliance

The failure rate of strategic alliance is quite high, and the figure is even higher

in the cross-border alliance due to cultural clashes, different management

structure, trust issues or other factors. The deal between Lenovo and IBM, an

alliance between an eastern company and a western one, has caused great

market concern and doubts over the feasibility and Lenovos ability to

turnaround IBMs PC business into a profitable one. UBS said in a report that,

webelieve that the acquisition will boost Lenovos long-term profitability, as

the two parties offer complementarities and IBMs PC division offers a

turnaround opportunity, however, thebiggest challenge for the new Lenovo is

the weak sector outlook (Dickie, 2005). Once the agreement is announced, one

immediate occurring problem is investors low confidence over this deal; Lau

(2004) indicated that upon the declaration of the acquisition, many investors

sold shares of Lenovo due to the doubt over the companys prospect. Besides

that, Lenovos Hong Kong share price also drop as much as 7.5 per cent to

HK$2.475 after the announcement, which was worsen by its decision to issue

new stocks to IBM as part of the payment.Upon the unpleasant resultspublicized initially (i.e., Lenovos shares falling), IBMs competitors were

quick to predict that the deal would fail. Duane Zitzner, the head of HPs PC

division, predicted that the deal would create a lot of turmoil within IBM

accounts; and Michael, the chairman of Dell, also said that it could not turn out

to be successful. In addition, analysts also have warned the difficulties and risks

that Lenovo may encounter with in managing a big foreign business without

losing IBMs customers and employees, they indicated that the deal might help


19/29

19

Lenovo to fulfill its international ambitions, but it could also face serious

execution problems as it has to manage a business that is three times its own

size. Thus, it is not hard to tell that the strategic alliance between the two

companies is under great doubts and even denial, and it does bring with many

problems that could lead to a divorce of the alliance at the initial stage.

7.1 Financial Aspects

Since Lenovo revealed its plan to acquire IBMs struggling PC business unit,

investors have been held a skeptical view towards the deal, the low confidence

of the shareholders also led to the falling of Lenovos share value. Although

Lenovos global PC shipments and the market share increased since the

acquisition in December, the shares fell 7.2 per cent in Hong Kong in their

biggest drop in just under a year after the company reported weaker-than-

expected quarterly results and falling margin. In the first quarter of the year

2005, the net margin fell sharply to 1.82 per cent from 5.73 per cent,

notwithstanding the steep increase of the revenue from HK$5.88bn to

HK$19.6bn. The situation didnt improved in the second quarter of that year.

As Lau (2005c) indicated that the gross profit margin fell from 15.33 per cent to

14 per cent that quarter, and the net margin further fell from 1,82 per cent to

1.2 per cent. Kevin Rollins, the chief executive of Dell, said that after Lenovo

bought IBMsPC business, Dell had been winning customers from Lenovo bothin China and globally. Dell grew rapidly in China through its direct-selling

model and also claimed 8.4 per cent of the market in the first quarter of 2005 as

the third-largest PC seller in the country.By the end of the year 2005, the

problem of the declining profitability didnt change. Although sales jumped

almost 400 per cent as a result of the acquisition, the companys net profit failed

again to match analysts expectations, and the gross profit margin for the

quarter to December 2005 fell to 13.2 per cent, so does the operating margin. In


20/29

20

addition, Lenovos global PC shipment grew 12 per cent year-on-year, lower

than the industrys averagerate. The financial situation is not promising in the

year 2005, the full-year net profit fell 85 per cent to HK$ 173m, and the

weaker-than-expected results also sent its shares in Hong Kong down 3.9 per

cent to HK$ 2.45.

In the year 2006, the financial performance of Lenovo didnt make any

progress. The company reported a larger-than-expected drop in earnings for the

second fiscal quarter, its net profit declined 16.6 per cent to $38m, compared

with $45m in the year 2005 and analysts forecast ofabout $42m. The operating

margin also fell to 1.6 per cent from 2.9 per cent a year ago. Apart from its own

unpleasant financial performance, the strong global price competition from its

aggressive foreign competitors also deteriorated Lenovos situation. All these

negative financial indexes imposed burden and pressure to Lenovo, as well as

threatening the alliance with IBM.

The reasons that cause the financial problems can be analyzed as follows.

Firstly, the pressure from the market leader Hewlett-Packard and Dell led to

fierce cost competition, which made the firm even harder to raise its margin.

Secondly, Lenovo was struggling to cut costs and return its U.S. operations to

profitability in the face of fierce price competition from HP and Dell, which

leads to the organizational restructuring and two rounds job cuts so as toimprove the efficiency in the key markets.

The unpleasant situation started to change in the year 2007; this is largely due to

Lenovos restructuring processes and cost-cutting measures. As Lex (2007)

reported that the first quarter of 2007 is the best quarter since the IBM purchase,

as the pre-tax profits, excluding restructuring costs, rose by 2.6 times year on

year, the operating margins in the US was 3.4 percent, reaching the highest


21/29

21

since the deal, and its worldwide PC shipments increased by 22 percent, well

above the industrys average rate. Referring to the change of Lenovos share

prices from 2004, it was now reaching HK$ 5.20, compared to HK$ 2.75 in late

2004, and its market capitalization reached $ 5.7bn now.

Chart: Lenovo Share Price on Honkong Stock Exchange

0

1

2

3

4

5

6

2004 2005 2006 2007

Share Price HK$

Share Price HK$


22/29

22

7.2 Cultural Problems

Cultural differences between the two companies must also be taken into

account, as it can be tricky especially between a western and eastern company.

The differences can be caused from the different corporate cultures or national

cultures.

The culture issue has also been considered as a tricky ring to the successful

alliance circle, the cultural and communication challenges are even greater

when the partnership is between a western company and one from an emerging

market in the east. When being asked about the hardest part of taking the

Chinese routes and the American part of the company, Bill Amelio, currently

the chief executive of Lenovo, said that different business cultures was the

tough nut to crack. He cited the example to that happened between the two

design teams to illustrate this point. When the two teams working on to figure

out how to have a commercial design language and a consumer design

language, the word common stopped the discussion, as in different cultures, it

conveys different meanings, sometimes even in the opposite way.

Another concern over the cultural issue is how to merge Asians companys

management styles with those of the westerns, and how Chinese managers and

former IBM employees from the U.S. would get along. Mary Ma, the chief

financial officer of Lenovo said that the national gulfis actually less of an issue

than the difference in culture between a youthful Chinese venture only in its

second generation of leaders and a global giant with a long history (Dickie,2005). She further indicated that the real difference is between an entrepreneur

company and a well-established multinational company (Dickie, 2005). As

Marsh (2005) warned that the path to successful cross-cultural management

between Lenovo and IBM is strewn with pitfalls. This view is also consistent

with expectations from other analysts, who said that the combination of

the two very different management teams would be a huge challenge for

Lenovo, which had little international experience before the acquisition.


23/29

23

7.3 Branding

Before the alliance with IBM, Lenovo has no presence in the world with very

low brand awareness. Therefore, as discussed previously, one main motive for

Lenovo to form the alliance with IBM is to gain the chance to build its brand

globally by sales through the IBM sales force and using its well-known brand.

As London (2005) suggests that because the Lenovo name isalmost unknown

outside of China, it is hard for marketers to build an international brand from

scratch; in order to succeed, they not only need to decide what Lenovo stands

for but also come up with products that support the claim. However, it is not

exactly the brand reputation that matters; it is the actual effect it exerts in the

integration process after the alliance. Though IBM has a world-known brand as

well as the Think family trademarks, it is not a separate entity that can be

combined to any other organization randomly, it has become part of the

corporate, an integrated part of its culture and values. As Temporal (2002)

indicates that co-branding could cause brand problems, such as consumer

confusion or inconsistent brand image in the market, it is not necessary a win-

win situation. Lenovo also faces with the problems regarding to the brand

management after the strategic alliance with IBM. Despite that Lenovo gains

the well-known IBM brand and the ownership of ThinkPad family, it has not

been well perceived in the market to be as good as the other PC market leaderslike Dell and HP. It has been under the doubt that marketing ThinkPad laptop as

made by Lenovo might put off buyers since the announcement of the deal

(Dickie, 2005).

After the alliance, Kevin said that Dell had been winning customers from

Lenovo, both in China and globally. Moreover, Lau (2006) also argues that

Lenovo lost share in the U.S. due to its limited presence in the consumer market

and low brand awareness. The impact of negative reactions in Lenovos home


24/29

24

market, where it accounts for over a quarter of the market share cannot be

ignored. Ma Liyuan, a government worker in Shanghai said that, I didnt think

much of the Lenovo PC I used to have and I feel IBM has now suddenly lost a

lot of its cachet. And one previously loyal IBM user and network engineer

Song Yingqiao is evenblunt, saying that he will not buy IBM again, Its a gut

feeling, it feels uncomfortable that international IBM has become domestic

Lenovo (Dickie and Lau, 2004).

The whole co-branding thing not only arouses the negative reaction from the

local customers, but also caused the brand confusion. As Burt (2005) suggests

that the new Lenovo has a strong IBM presence during its global process, which

might cause brand confusion in the market. Besides its own brand change from

Legend to Lenovo, the firm also has the IBM brand under the five-year

licencing agreement. In China, the brand names like IBM, ThinkPad and

Lenovo will all be used; while in the U.S., Lenovo will continue to use the IBM

brand, this messed up situation might cause confusion in brand identities for

consumers in the global market, and make it even harder for the firm to market

itself using a single brand name.

In addition to that, though Lenovo acquired the ThinkPad brand as part of its $

1.75bn acquisition of IBMs PC division, it is hard to make any change that

could link to Lenovosbranding image. After receiving the unpleasant feedback

upon the first try of launching a non-black model in the range, Bill Amelio, thechief executive of Lenovo, indicated that the companys efforts to update the

look and the feel of the iconic IBM ThinkPad brand of notebooks had not been

well received by customers, and were likely to be abandoned. He further told

the Financial Times that corporate IT managers, who form the core of the

ThinkPad customer base, had not reacted well to changes to the classic design.

It is also suggested by the chief information officers that it is better to keep the

system the way it is, any change like putting different colours or models in can


25/29

25

create some angst among the customer. Therefore, to innovate or update the

existing brands owned from IBM could be tough, as it may arouse negative

reaction from both the customers and some of the employees within the

corporate.

8. Solutions to the Problems

8.1 Facing with the financial problems that mainly caused by fierce cost

competition from HP and Dell, and the unprofitable performance of the

acquired IBM PC business, the first measure that Lenovo took was to lay off

workers, though it was against its initial will. The first time job cuts occurred in

March 2006, when the company cut 1,000 workers. The second round of job

cuts was carried out in the early 2007, when Lenovo Group laid off 650 people,

mostly in the U.S. and Europe, and moved another 750 jobs offshore. By cutting

down the number of abundant employees, the company saved $250m annually

in labour costs. With the savings from the workforce, Lenovo launched a $100m

program to revamp the IBM PC unit and invested heavily in sales and

distribution channels in the U.S. in 2006, which greatly turnaround the U.S.

operations into profitability.Besides that, Lenovo quickly establish strategic

relationship with U.S. private equity groups to access to international industry

expertise so that it could challenge industry leaders Dell and HP, and alsoattracts U.S.$ 350m strategic investments from the three leading U.S. private

equity firmsTexas Pacific Group, General Atlantic and Newbridge Captical.

Through this deal, Lenovo not only gains the access to new funding, but also

gains back the confidence from its investors and shareholders. After taking

these measures, Lenovosfinancial status has been improved greatly; there is an

almost twenty-fold increase over the share value now since the deal, and also

the operating margin reaches its highest rates. From the statistics and analysis


26/29

26

released till now, financially the company is still heading forward to a more

promising direction.

8.2 To ease the culture clashes, Lenovo decided to move its headquarters to

Raleigh, North Carolina, and to give foreign managers high-profile roles in the

new Lenovo, such as theappointment of an American chief executive (Lex,

2007). Besides that, shortly after the deal,Lenovo changed the official company

language from Chinese to English to create a straight-talking culture inside the

firm, just as Randy Zhou, analyst at Bank of China International, said that in

order to become a true global company, the first step is to drop some of the old

habits (Lau, 2006). The power of leadership is important especially in a cross-

cultural management. However, though these measures do work to some

extent, they are far from enough as the two companies are with vastly different

business models and corporate cultures.

8.3To solve the branding problems, Lenovo have launched a global

brand strategy, that is using the Think trademark for high-end products and its

own corporate name Lenovo for mainstream offerings since the year 2005

(Dickie, 2005). In an interview with the Financial Times, Mr. Yang, said that

the Think name would be adopted around the world as Lenovos premium brand

aimed in particular at major corporate customers, while the Lenovo name would

be used for computers and other products competing with PC global marketleaders Dell and HP for smaller corporate and retail consumers (Dickie, 2005).

The chairman further added that under this new strategy, Lenovos focus would

be on promoting products that enhanced its image rather than on direct

corporate brand-building.


27/29

27

9.Conclusion and Recommendations

International Strategic Alliance has become favoured business strategic choice

for many companies.The forces which resulted in the alliance may differ from

one company to other.The main reason for strategic alliance is to get hold of

partners knowledge of vast markets,sharing risks during its expansion process

and complementary technology & skills, forming the economics of scales to

reduce costs. It is a useful tool to make an easy entry into a market through

establishing a partnership with the local company; it is a channel to make use of

the other firms core competencies or advantages, which could be the

complementary skills and knowledge essential for a firms further development;

and it could also be a precious learning process for a firm to internalize the

distinct skills from its partners.However, as discussed above, it is difficult

to maintain a long partnership and the failure rate reaches as high as 60 per cent,

and it is even worse in a cross-border alliance due to culture clashes and trust

issues. Besides that, as indicated by Kelly et al. earlier that the initial stage of

the alliance is a critical period, and it is essential for the firm to tackle the early

shown problems or potential ones to laid the foundation for a good relationship

later.It can be said that the alliance between Lenovo and IBM is successful, but

it still has some problems that needed to be tackled lately to make sure the

smooth development on the road to success eventually.Problems that occurred

due to different corporate cultures and mutual trust in the alliance could damagethe long lasting relationship of the alliance; hence, the company must find

effective ways to remove these obstacles. We can see that Lenovo has taken

several measures to ease the clashes and conflicts between the two companies.

To enable the success of the strategic alliance, Levono needs to enhance its

learning capability so as to make great out the partnership, as well as focuses on

its brand management, but not simply relying on the borrowed brand

recognition from the well-known IBM.To ensure the success of the alliance,


28/29

28

the company needs to emphasize more on human and cultural aspects, to realize

the differences between different corporate cultures, and to create a new hybrid

corporate culture infused with beneficial elements from different cultures,

which works out in the new strategic relationship.

As Barns and Stafford recommend that hiring mutually respected and unbiased

consultant to propose recommendations for new inter-partner programmes could

be adopted as well by the company to ease the culture clashes. Furthermore, it is

essential for the company to provide systematic education and training among

partnering personnel so as to facilitate adaptation and understanding, it should

not be a one-time thing, the process of creating a compatible culture could be a

long lasting process, which requires time, energy and management talents.The

communication between the two companies should not only emphasizes on one

side or just focuses on the senior managerial level, it should be implemented

from the top to the grass roots across the organization by providing systematic

formal or informal meetings, or other recreational activities of different forms.


29/29

29

10.Reference

1.www.lenovo.com/in/en

2.www.ibm.com/in/en

3.www.academia.edu

4.http://english.sohu.com/20041209/n223402729.shtml

5.Barnes J.W. and Stafford E. R.,1993. Strategic alliance partner selection:

When organizational cultures clash, in D.W. Cravens and P.R. Dickson (Eds).

6. Dickie,Mure, May 2005a. COMPANIES ASIA-PACIFIC: Lenovo Moves

into Global PC Top Ranks.

7. Ghauri Pervez, 2004. Designing and Conducting Case Studies in

International Business Research.
http://english.sohu.com/20041209/n223402729.shtmlhttp://english.sohu.com/20041209/n223402729.shtmlhttp://english.sohu.com/20041209/n223402729.shtmlhttp://english.sohu.com/20041209/n223402729.shtml

strategic alliances between lenovo and ibm

Documents