Operations Management Strategy of Lenovo Essay

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In this regard, Lin and Lin add that, "The Chinese personal computer manufacturer wanted to increase its share in Western markets. The acquisition hoisted the manufacturer from 9th place to 3rd place in terms of PCs sold. These acquisitions illustrate China's desire to spend low-cost money to acquire existing brands and distribution access, as well as securing additional outlets for other Chinese produced goods" (2008, p. 32).

Planning and control.

Although many observers suggest that Lenovo represents a true Horatio Alger success story having begun with a very modest start-up capital of just $24,000, Huang argues that the facts involved in the company's success are much more complex and relate to the company's ability to implement management functions in ways that established planning goals and its ability to control the company's resources to achieve these goals. For instance, Huang notes that, "Its subsequent rounds of financing, including an IPO in Hong Kong, were all quite substantial and they all came from Hong Kong. China's massive financial system had little to do with Lenovo's success. Nor could the informal finance have propelled Lenovo to its current prominence" (Huang 2006, p. 288). Vernon's product cycle theory conforms to the path taken by Lenovo following this name change and the steps the company took to grow its business at home and abroad. In fact, Liu (2007) suggests that it was not so much an issue as to whether the company could succeed in rescuing the struggling IBM personal computer division and turn in into a profitable enterprise, but rather a matter of just how profitable it would become. "In the final analysis," Liu advises, 'we concluded that it was not a question of whether we could turn the PCD around so that it become profitable, but rather a question of how profitable it could be" (2007, p. 575).

Moreover, based on his empirical observations with the company, Liu notes that, "We discovered that IBM PC's gross profit margin was around 24%. This was, in fact, much higher than that of Lenovo's, which was about 14%. However, the latter has a 5% net income whereas the former was not profitable. The reason was quite simple: costs and expenses were higher, some of which were unavoidable as long as the business was still part of IBM" (2007, p. 575). Consequently, the fundamentally different planning and control approach taken by Lenovo's was based on eliminating waste at every opportunity and adding value wherever possible, including the company's procurement practices. According to Liu, in some cases, these planning initiatives were merely common business sense: "Profits could also be greatly improved by merely controlling overall costs and expenses. For example, the assembly cost per unit in the U.S. was U.S.$24 compared with U.S.$4 in China" (2007, p. 575).

An interview with a Lenovo executive conducted by Sweeney is also illustrative of how the planning and control function has been used to help Lenovo grow its business. "We had to build the entire global organization," the executive noted, and adds that "we did it in geographic centers of excellence. So we've got an Americas team and an Asia-Pacific team and a European team" (quoted in Sweeney 2008, p. 36). The Lenovo executive also describes the company's ongoing plans for expanding its business model into new international markets thusly: "We started out with our system deploying into China. We went China, India, Canada. Now we have just finished a complete deployment in Asia-Pacific. Next, we'll be doing Mexico and Poland, our last two manufacturing countries. Then we've got to deploy to the rest of the world where we do business" (quoted in Sweeney 2008, p. 37).

To what extent is the organization's international operations management strategy likely to be appropriate over the next years?

It remains unclear whether Lenovo will be able to sustain its spectacular growth in the coming years following the same pattern of acquisition and internalization that has fueled its success to date. Nevertheless, the company's proven track record of developing innovations solutions and retailing will likely serve it well as it seeks to grow its market share in the Americas, Europe and Asia. Lenovo's business model of acquisition and diversification may end up causing it the same types of problems that have plagued other companies in the past (such as Dell) that have expanded beyond their core competencies and grown faster than their business models can accommodate. Despite these reservations, the company's track record is proof positive that it has been doing something right. For instance, by 2003, seven of Lenovo's Hong Kong subsidiaries were among China's 500 largest foreign operations (Huang, 2007). In May 2007, though, Lenovo also acquired a biochemical enterprise, SPG, for about $120 million, together with a commitment to provide the company with additional financial resources of about RMB5 billion (Liu 2007). According to Liu, "The acquisition by Lenovo will not interfere with the existing commitment by SPG with Unigene because Lenovo pledged that the current management of SPG will remain intact and all its previous commitments shall be honored" (2007, p. 98).

Although Lenovo has enjoyed a high degree of success in the information technology sector, it may be stretching its corporate boundaries to the limit with such acquisitions. As Liu points out, "In addition, it has already announced that SPG shall gradually shift its focus from its traditional antibiotics business to more value-added lines. Biotech pharmaceutical is a clear direction for SPG to decisively move into" (2007, p. 98). SPG may be in a good position to move into biotech pharmaceuticals, but Lenovo's core competencies are clearly not in this field and it may be biting off more than it can easily chew in the process.

The company's recent quarterly report indicates that:

1. The China PC market slowed to levels below global growth;

2. Commercial growth slowed dramatically;

3. Growth was 3.8% in 2009 (down from 13.7%);

4. Company value was down 5.3% (down from 4.5% growth); and,

5. A lower outlook was projected through 2010.

6. Workforce reductions took place in the second and third quarters of 2010.

With respect to positive steps and results, the company reports that:

1. There has been accelerating growth and improving performance in new segments;

2. Consumer sales rise 100% outside of China;

3. Outperforming market in key emerging countries;

4. The company is continuing to gain share in China; and,

5. The company is continuing to win in commercial segment.

Despite these glowing reports, as can be seen from Figure 1 below, the company's sales in its European, Middle Eastern, African and American markets declined, while domestic sales experienced some significant growth during the period indicated.

Figure 1. Balanced geographic mix: Lenovo sales: Third Quarter 2007-2008 through Third Quarter 2008-2009

Source: Lenovo Group Limited (2008/09) Q3 Results, February 5, 2009

Conclusion

The research showed that Lenovo parlayed $24,000 in start-up capital to become the third-largest manufacturer of personal computers and laptops in the world. This rags-to-riches story was fueled by savvy leadership that understood the business environment in which the company was competing and took advantage of every opportunity to grow its business in its domestic market as well as to expand its operations, including manufacturing and retailing, to overseas regions. Although each of the theoretical approaches reviewed could be said to apply to Lenovo's situation in some ways, the company's history is different in many ways as well with respect to its use of Hong Kong branches and acquisition of other companies. The research also showed that in its rush to grow as large as possible as quickly as possible, Lenovo may have reached the boundaries of its current business model, suggesting that it may not be able to sustain its current rate of growth and performance into the future.

References

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Huang, Y. 2006 'Do Financing Biases Matter for the Chinese Economy?' The Cato Journal, vol.

26, no. 2, pp. 287-290.

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pp. 10-11.

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Lecture 2: The internationalization of operations management. 2011

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Lenovo Group Limited. 2008/09 Q3 Results. 2009, February 5.

Lin, C.C. & Lin, J. 2008 'Capitalism in Contemporary China: Globalization Strategies,

Opportunities, Threats, and Cultural Issues.' Journal of Global Business Issues, vol. 2,

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