Strategic Alliances Between LENOVO and IBM

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 agreements between 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 1

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 the order 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

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of licensing is the loss of control over the technology – as 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 of product. This ensures that each distributor‘s 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. 3

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 4

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.

1.4 Stages of Alliance Formation A typical strategic alliance formation process involves these steps: i. Strategy Development: Strategy development involves studying the alliance‘s 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

partner‘s strengths and weaknesses, creating strategies for accommodating all partners‘ management styles, preparing appropriate partner selection criteria, understanding a partner‘s motives for joining the alliance and addressing resource capability gaps that may exist for a partner. iii. Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partner‘s 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 management‘s commitment, finding the calibre of resources devoted to the 5

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 6

particular contemporary phenomenon within its real life context using multiple sources of evidence‘ and it is both the process 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 research goes 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) 7

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 context. Moreover, Easton (1995) notes that qualitative research method is often combined with interview-based case studies (hence corresponds to the LenovoIBM 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 to gather 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 8

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., faceto-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 LenovoIBM 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 a broad 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 9

(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 researcher‘s 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 have collected primarily with the secondary data.

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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 company‘s 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 IBM‘s 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 company‘s 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 China‘s 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 (People‘s Daily, 2004). Since the year 1996, Lenovo has maintained its leadership position in China for ten consecutive years with over 25 per cent market 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 11

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 world‘s 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 firm‘s global stretch. At the end of the year 2004, Lenovo and IBM announced the agreement of Lenovo‘s acquisition of IBM‘s Personal Computer Division, which was IBM‘s global PC (desktop and notebook computer) business (Lenovo.com, 2007b). In May 2005, Lenovo‘s acquisition of IBM‘s 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 the first 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;

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• 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 Lenovo‘s 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 winter games 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).

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4. Lenovo’s Strategic Alliance with IBM According to Lenovo‘s 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 Lenovo‘s pace into the international market. On December 8th, 2004, Lenovo announced that it would acquire IBM‘s global PC business for US$ 1.25 billion. According to the terms of the agreement, the acquisition included IBM‘s desktop and notebook computer business, as well as its PC-related R&D centers, manufacturing plants, global marketing networks, and service centers (Lenovo‘s 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 (Lenovo‘s 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 PC market 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

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5.Need for the Strategic Alliance with IBM Lenovo was known as one of China‘s most promising companies in the early 1990s, with its sales more than tripled between the year 1994 and 1998, and Asia‘s 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 Lenovo‘s margins. According to Citigroup Smith Barney, although Lenovo still accounted for 27 per cent of China‘s PC market, the growth rate in 2003 far lagged behind the market growth rate; by contrast, Dell‘s shipment in China grew 48 per cent. Apart from that, the company also suffered financial problems, earlier in the year 2004; Lenovo confessed that ‗its performance 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 Citigroup‘s 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, the decision 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

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IBM an 18.9 per cent stake as well as shouldering US$500m in debt; and IBM will become the Chinese PC maker‘s ―preferred supplier‖ of support services and customer financing. For Lenovo‘s 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 Lenovo‘s takeover of IBM‘s 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 Lenovo‘s 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 ―Lenovo‘s distribution network is its biggest problem, and it is not 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 Lenovo‘s products will be integrated into IBM‘s global service offerings, which also became the impetus to the deal (Lenovo.com, 16

2007c). As Stephen Ward, former head of IBM‘s PC division said that IBM promised to push Lenovo‘s 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 world‘s 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 IBM‘s 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, Lenovo‘s right to use the IBM brand on the computers for five years adds more 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 17

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 Lenovo‘s ability to turnaround IBM‘s PC business into a profitable one. UBS said in a report that, ―we believe that the acquisition will boost Lenovo‘s long-term profitability, as the two parties offer complementarities and IBM‘s PC division offers a turnaround opportunity, however, the biggest 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 company‘s prospect. Besides that, Lenovo‘s 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 results publicized initially (i.e., Lenovo‘s shares falling), IBM‘s competitors were quick to predict that the deal would fail. Duane Zitzner, the head of HP‘s 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 IBM‘s customers and employees, they indicated that the deal might help 18

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 IBM‘s 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 Lenovo‘s share value. Although Lenovo‘s 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-thanexpected 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 didn‘t 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 IBM‘s PC business, Dell had been winning customers from Lenovo both in 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 didn‘t change. Although sales jumped almost 400 per cent as a result of the acquisition, the company‘s 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 19

addition, Lenovo‘s global PC shipment grew 12 per cent year-on-year, lower than the industry‘s average rate. 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 didn‘t 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 of about $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 Lenovo‘s 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 to improve the efficiency in the key markets.

The unpleasant situation started to change in the year 2007; this is largely due to Lenovo‘s 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 20

since the deal, and its worldwide PC shipments increased by 22 percent, well above the industry‘s average rate. Referring to the change of Lenovo‘s 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

Share Price HK$ 6 5 4 3

Share Price HK$

2 1 0 2004

2005

2006

2007

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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 Asian‘s company‘s management styles with those of the western‘s, 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 gulf is 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. 22

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 is almost 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 winwin 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 leaders like 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 Lenovo‘s home 23

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 didn‘t 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 even blunt, saying that he will not buy IBM again, ‗It‘s 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 IBM‘s PC division, it is hard to make any change that could link to Lenovo‘s branding image. After receiving the unpleasant feedback upon the first try of launching a non-black model in the range, Bill Amelio, the chief executive of Lenovo, indicated that the company‘s 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 24

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 $100m program to revamp the IBM PC unit and invested heavily in sales and distribution channels in the U.S. in 2006, which greatly turnaround the U.S. operations into profitability.Besides that, Lenovo quickly establish strategic relationship with U.S. private equity groups to access to international industry expertise so that it could challenge industry leaders Dell and HP, and also attracts U.S.$ 350m strategic investments from the three leading U.S. private equity firms—Texas 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, Lenovo‘s financial 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 25

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 the appointment 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 crosscultural 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.

8.3 To 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 Lenovo‘s 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 market leaders Dell and HP for smaller corporate and retail consumers (Dickie, 2005). The chairman further added that under this new strategy, Lenovo‘s focus would be on promoting products that enhanced its image rather than on direct corporate brand-building.

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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 partner‘s 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 firm‘s core competencies or advantages, which could be the complementary skills and knowledge essential for a firm‘s 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 damage the 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, 27

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.

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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 International Business Research.

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and Conducting Case Studies in