China Consumer Trends 2017

Team Members:

Carrie YU 72673163

Henry YU 73215162;

Hui SHU 73278160;

Jianjian WU 72991169;

Nevaeh ZHANG 73233165;

Weiyuan TAN 72669161

Lenovo Case Analysis

1. Why did IBM want to sell its PC business? Why did IBM sell to Lenovo?

IBM perspectives:

IBM created the PC industry with open architecture and entered into non-exclusive agreement with its partners and providers. However, the industry is being increasingly completive as more competitors are manufacturing and selling PCs with lower cost and at lower price since the late 1990s. PC in fact has become a commoditized product, and would not be able to generate a higher margin and profit. IBM therefore decided to shield from low-profit products and specifically focus on its consulting service as its core competence.

Lenovo perspectives:

Lenovo, being the dominant PC manufacturer in China with its key focus on individual and small business users, has decided to develop a global brand due to increased China’s domestic competition, and saturating market share in 2003. IBM, on the other hand, targeted commercial users, and is lacking customer coverage in the China region. As summarized in the below table, IBM and Lenovo can complement one another in terms of product lines and customer segments.

[pic 3]

Source: Company annual reports

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Source: Company annual reports

Additional benefits:

Furthermore, although Lenovo entered into a contract with IBM, it has promised not to compete with IBM’s services and consulting groups.

It is also worth noting that that Lenovo received its original funding from the Chinese government, and therefore is a partially state-owned enterprise. By selling to Lenovo, IBM would be granted with potential opportunities in high margin business sectors in China, such as railway, banking and public safety, that fit with IBM’s core business. , and would not be easily assessed without support from China government.

1. What explains Lenovo’s success prior to the acquisition?

Lenovo’s prior success can been attributed to several factors, namely innovation, distribution and regulatory barrier..

Innovation: Firstly, innovation based on the company’s deep understanding of customer needs and the China market. For example, the Legend Card, which is a piece of hardware attached to PC motherboards to translate English-language operating systems into Chinese; its own brand PC and the laptop with Intel Pentium chip and IBM software; Chinese voice-recognition software and graphics pad to input Chinese characters; and preinstalled one-year internet connection to overcome the difficulties in internet access. Lenovo’s innovation extends to areas beyond products. With a young leader, the company took an adventurous step of eliminating direct sales force in favor of a network of hundreds of local distributors for the purpose of maximizing market share at lower cost. It is also the first PC manufacturer to target the average Chinese consumer, which has proven to be a massive market.

Distribution:

Secondly, Lenovo continued to distribute foreign-brand PCs which made its market share in Asia surpassing IBM and Compaq.

Regulatory Barrier:

Lastly, prior to entering into the World Trade Organization, China government imposed quotas and tariffs on imports, and restrictions on foreign companies’ ownership rights, investment, and access to distribution channels. Being a local brand in China, Lenovo was granted with advantages when competing with foreign brands.

1. What challenges did Lenovo face after the acquisition?

The challenges faced by Lenovo are the cultural and operational clashes between IBM and Chinese nationals as China and US differ in language, culture and time; the uncertainty about how existing customers would react to ownership rearrangement since these users demand the highest quality products and services; how to build an international brand from scratch, while making the most out of the IBM legacy; and the media and press perception of Lenovo’s association with China and the Chinese government which might hurt the company’s trustworthiness.

1. How should Lenovo handle the brand management challenges associated with the acquisition?

The brand management challenges can be classified into two categories. Namely brand awareness and doubt clearance.

Brand Awareness:

Lenovo is not well known by customers in the global market. According to the decision making diagram (insert diagram), the low awareness product has a much lower possibility of entering into the consideration phase. As stated above, Lenovo has been focusing on the mass public market, and is a new-comer in the commercial segment. To address the brand awareness issue, Lenovo could leverage international events to boost brand awareness worldwide, and utilize multi-channel to reach out to target audience.