Change Management Implications of Lenovo\'s

Change Management Implications of Lenovo's Acquisition of IBM Computer's Personal Computer Division

Lenovo's takeover of IBM PC is described as a 'snake eating an elephant.' -- Ling Zhijun, "The Lenovo Affair: The Growth of China's Computer Giant and Its Takeover of IBM-PC," 2006

The epigraph above suggests that the recent acquisition of IBM Computer's personal computer division by the up-and-coming Chinese concern Lenovo was a painful affair, and the scholarly literature concerning change management bears likewise suggests that there were some difficult challenges involved throughout the process as well. The early history of Lenovo is fairly unremarkable, with the company being first established in 1984 to sell computer parts manufactured under the IBM label. By 1990, though, Lenovo was selling personal computers under its own brand name and in May 2005, Lenovo purchased IBM's computer division for $1.7 billion. Today, Lenovo holds more than 35% of the Chinese personal computer market, which is four times the market share held by Dell Computer in China. To determine how the company achieved this spectacular growth during a period when others struggled to survive, this paper provides a diagnosis of the situation, including a brief background of the company and the problem it encountered, a description of the intervention that was used, followed by an evaluation of the change and the strategy used to achieve it. A summary of the research and salient findings are presented in the conclusion.

Review and Discussion

Diagnosis.

Brief Background Information on the Organisation. According to the company's Web site, "Lenovo is a global company with executive offices in Raleigh, North Carolina, USA, Beijing, China, and Singapore. Its principal operations are in Beijing, China, and Raleigh, North Carolina, USA, with an enterprise sales organization worldwide. The company employs more than 19,000 people worldwide" ("About Lenovo, 2007, p. 2). In reality, the history of Lenovo is not so different from that of many major competitors in the computer industry today (Tucker, 2006). Just as Jobs and Wozniak worked on their first personal computers in their garages at home, Lenovo was founded in 1984 by 11 engineers who worked out of a small bungalow in Beijing and went on to become a major force in the today information technology (it) industry (Zhijun, 2006). According to this author, "Lenovo's story is far more than a simple business success story. It describes an astonishing period in China's contemporary history as an era of austere, authoritarian economic and political policies gradually gave way to a market economy system -- although it is a system that is still uniquely Chinese" (Zhijun, 2006 p. 62). The history of Lenovo can actually be traced by to 1956 when a group of 45 Chinese scientists visited the former Soviet Union to "see what a computer looked like" and "what applications it could be used for" (Zhijun, 2006 p. 62).

This information-gathering visit came during a tumultuous period in China's history, being conducted amidst the former Chairman Mao's "Great Leap Forward" initiative that caused so much havoc and devastation throughout the country (discussed further below). Amidst this political and social upheaval, though, the Chinese scientists managed to persevere and developed the country's first computer dubbed, "Number 104" (Zhijun, 2006). This original computer was placed in service almost immediately and went on to provide valuable computing services for massive civil engineering projects and the country's nuclear weapons programs (Zhijun, 2006). By 1971, new-generation computers were being built by these engineers and China was able to construct its first integrated circuit computer. Recognizing the unique opportunity that this convergence of time and place provided them, in 1984, these Chinese scientists-cum-entrepreneurs took advantage of the increasingly tolerant attitude towards private enterprise and created the Lianxiang company which was originally capitalized with the fees charged to organizations leasing time on these newly developed computers (Zhijun, 2006).

The Identification of the Problem/Opportunity. When the Lianxiang company, Lenovo's predecessor, was formed, there were approximately 110,000 personal computers in China, almost all IBM models and all of them operating in English. According to Zhijun, "Perhaps the Lianxiang company's most important initial achievement was to recognise the importance of developing a Chinese character computer system allowing 1.3 billion Chinese to enter the computing age. Lianxiang had the vision to opt for a character function that had what is described as 'linked thought' functionality" (2006 p. 63). This approach was congruent with one of Lianziang's core competencies, which was importing IBM and other branded computers from the West on which the company installed this Chinese character function and began supplying China's domestic market (Zhijun, 2006). This author concludes that, "Using the brand name Legend, Lianxiang promoted PC usage throughout China by enabling the translation of English software into Chinese characters. And from such comparatively modest beginnings a company was born that currently employs more than 19,000 people worldwide with $13 billion in annual revenues. In 1994, Legend was successfully listed on the Hong Kong Stock Exchange and in 2003 the company re-branded itself as Lenovo" (Zhijun, 2006 p. 63). In fact, the company went on to acquire more than 25% of the Chinese it market share in 2004 (Zhijun, 2006). These spectacular results reflect the original aims and objectives of the company to expand their domestic market while gaining access to the international market, and these issues are discussed further below.

Aims and Objectives of the Change. According to Dessler (2006), "Managers in China face an intensely competitive global industrial environment. With revenue streams still supported by fast-growing but increasingly competitive domestic demand, Chinese firms such as Lenovo Group are expanding abroad" (p. 11). As a result, Dickie (2005) suggests that Lenovo's decision to acquire IBM's personal computer division "was driven in large part by eroding margins in the PC business and the steady encroachment of foreign brands such as Dell into Lenovo's dominance of a liberalizing Chinese market" (p. 4).

Brief Summary of the Change Strategy. The company's change strategy in the acquisition of IBM's personal computer division in 2005 reflected the goals of Lenovo's leadership to gain access to the international marketplace, but it is likely that few observers would have expected such an aggressive tactic from this up-and-comer.

Selection of the Change Strategy. The change strategy selected for the acquisition of IBM's personal computer division can be attributed to Liu Chuanzhi, one of the original 11 founders of the company, in response to increasing market demand for state-of-the-art personal computers at home and abroad. According to Zhijun (2006), "The battle between China and the West actually created the space for the creation of an indigenous company able to offer PCs on the Chinese market at an affordable price. The principal driving force behind the Lenovo company (or the Lianxiang company as it was first known in China), was one of its 11 founder members, Liu Chuanzhi," who Zhijun describes as one of China's most creative and decisive business leaders (p. 63). The U.S. business journal, Business Week, also ranked Liu Chuanzhi amongst the world's top two-dozen businessmen (Zhijun, 2006).

Implications of the Change for the Organisation. The company's unprecedented acquisition of IBM's PC division in 2005 represented a major step for the company as well as a major incentive for Chinese industry across the board. Indeed, the acquisition of the IBM division was proof-positive that Chinese companies are not only capable of being competitive in their domestic markets but can also compete at a global level (Zhijun, 2006).

Intervention.

Description of the Change Management Process.

Like with any other type of corporate merger, the decision to acquire IBM's personal computer division was the first step in the instant change management initiative.

The second step for Lenovo was to formulate a company-wide strategy and business model that would take the company in the right direction according to the dual goals of increasing its domestic market share while simultaneously gaining increased access to the international marketplace. To this end, Lenovo developed a new business model called it termed the "Dual Business Model" to achieve the goals of both the enterprise market (the relationship model) and the consumer market (the transaction model). According to Liao (2006), "The relationship model will be based on offering customized offerings and services to meet the needs of the larger enterprise customers. On the other hand, the transaction model will use a more efficient and reliable value chain, strong demand generation on attractive offerings, and the ability to adjust and react to market changes and competitor activities to deliver new Lenovo products" (p. 3).

The final step involved in the acquisition of the IBM PC business division was to resolve any remaining conflicts in corporate culture that might have existed between the Western managers and the new Chinese owners and develop a strategic alliance that could take advantage of both companies' core competencies. In this regard, Wu (2005) noted early on, "Successfully integrating and sustaining the IBM brand will be a litmus test of Lenovo's management savvy in the coming critical months" (p. 26). To achieve this crucial aspect of the change, Lenovo and IBM developed a strategic alliance that was designed to provide a best-in-class experience for enterprise customers. According to Liao (2006), "The companies have entered into significant, long-term agreements that give Lenovo customers preferred access to IBM's world-class customer service organization and global financing offerings. This will enable Lenovo to take advantage of IBM's powerful worldwide distribution and sales network. Lenovo's customers are able to count on the entire IBM team - including sales, services and financing - for access to IBM's legendary end-to-end it solutions" (p. 3). In addition, pursuant to IBM's five-year contractual commitment, it will also provide Lenovo with warranty services and provide Lenovo customers with leasing and financing arrangements. According to Liao, "Through this long-term relationship, customers will receive the best products with the lowest total-cost-of-ownership" (2006 p. 3). Among the company's initiatives in this final phase of the change management process were additional efforts to further support their new dual business model. To this end, Lenovo upgraded its technology to work with Microsoft's newly launched Windows Vista operating system; likewise, the so-called "ThinkVantage" technology innovations from IBM that include biometric fingerprint scanning and rescue and recovery features, have been redesigned to operate seamlessly with the security and backup features offered by Vista (Liao, 2006).

Identification of the Key Events and Reactions. There are two fundamental reactions involved that may affect the company's change management strategy over the long-term. The first reaction is from the Chinese stakeholders involved. In this regard, Zhijun (2006) reports that, "Perhaps one of the most interesting facts to emerge from the Lenovo Affair was the broadly nationalist sentiment that had grown amongst Chinese entrepreneurs driven, in the main, by a perception that there was a 'plot by global Western enterprises to gulp up a large share of the Chinese market'" (p. 62). Given the country's history of foreign domination, such perceptions might not be completely unfounded, but nevertheless, the implications for Lenovo's stakeholders were the same: "Whether there was a basis to this paranoia or not, China's 'underlying anxiety' only served to increase the West's distrust of China which in turn fed Chinese antagonism towards foreign players" (Zhijun, 2006 p. 62).

The second reaction involves those of Western stakeholders. For instance, according to Tucker (2006), "The largest obstacle to China's international corporate development is the nation's communist political system, in which the government serves as a major stakeholder in all Chinese companies. Investor wariness over China's chaotic banking system is also slowing the country's rate of growth, as well as frustration over its currency model" (p. 12). The country's banking system might be making foreign investors more cautious about forging joint venture relationships or other mergers, but it is the West's reaction to the Chinese government that represents the most significant concern for Lenovo in the future. According to Tucker, "Another obstacle facing Chinese firms looking to establish brand-name recognition might be negative perceptions of either Chinese products or Chinese politics. Many consumers in the West regard the Chinese government as oppressive, environmentally reckless, and an egregious violator of human rights. Concerns about outsourcing and domestic job loss also color many Western consumers' perceptions of China" (2006 p. 12). This observation is congruent with Wu's (2005) assessment that, "Recent high-profile international acquisitions and take-over bids by Chinese companies have dramatically shifted media attention from spotlighting China as a 'giant sucking vacuum cleaner' for global inward foreign direct investment to characterizing the country as a cash-rich 'predator' embarking on a global buying binge" (p. 26).

Special Features of the Change. In his essay, "Do Financing Biases Matter for the Chinese Economy?," Huang (2006) points out that a number of Western analysts have pointed to Lonovo's acquisition of IBM's PC business as a clear indication of the rising world-class domestic Chinese companies. According to Huang, "Using the success of firms like Lenovo as evidence, a McKinsey Quarterly article has gone so far as to claim that China has the 'best of all possible models.' These business analysts are unusually perceptive except in one detail: Lenovo is a foreign company" (p. 287). This means that the change involved in acquiring IBM's PC division was achieved under less stringent laws and regulations than the company's domestic competitors might have encountered in a similar move. For instance, as Huang (2006) notes, "All of the manufacturing, service, and R&D operations of Lenovo in China are legally organized as subsidiaries of its Hong Kong firm and as such they are subject to laws and regulations pertaining to FDI, rather than those far more restrictive laws pertaining to domestic private businesses. In 2003, seven of Lenovo's Hong Kong subsidiaries were among China's 500 largest foreign operations" (p. 288).

Instances of Resistance and/or Unexpected Difficulties Encountered. As noted above, Lenovo's early years were forged during a turbulent period in China's history, and it is reasonable to assert that lesser individuals might have not prevailed. In fact, the success of Lenovo today is not so much what the Chinese government has done to assist the company in crafting a business model that others now cite as an exemplar, but rather what they simply allowed the company's leaders to do: leave the country and make the critical connections with business leaders abroad that have helped fuel the company's meteoric growth every since. In this regard, Huang (2006) emphasizes that, "The story of Lenovo and its Hong Kong connections tells us about both what the Chinese policymakers have done right and what the limitations of their approach are. Amidst massive institutional inefficiencies, Chinese policymakers have done two things vitally right and important. One is that they have allowed FDI to come in; the other, which is underappreciated, is that they have allowed Chinese citizens to travel abroad since the early 1980s" (p. 287). This author makes the point that this ability to travel likely represents the single most important reason that some of the entrepreneurs.".. could at least escape from the clutches of a very bad system. Thus, China's success has less to do with creating efficient institutions but with allowing an escape valve from inefficient institutions" (Huang, 2006 p. 287).

Summary of Outcome Achieved. Today, Lenovo is poised to develop its markets around the world and the brand reached an enormous global audience as a major sponsor of the Olympic Winter Games in Torino in 2006 and will again during the 2008 summer games in Beijing (Zhijun, 2006).

Evaluation.

Redirection is a type of leadership is an attempt to redirect an organization, field, or product line from where it is headed toward a different direction (Sternberg, 2005). In this type of leadership, the organization's leader makes the decision concerning which direction the organization is currently headed is less than adaptive, and therefore redirects the organization in other directions (Sternberg, 2005). In order to be successful, though, redirective leaders need to match to environmental circumstances (Sternberg, 2005). According to this author, "If they do not have the luck of matching environmental circumstances, their best intentions may go awry. Under Louis Gerstner, IBM transformed itself from a company that specialized in making computers, especially mainframe computers, to a company that specialized in information-technology services" (Sternberg, 2005 p. 37). The company's leadership, though, determined that more changes were in order and this was the impetus behind the sale to Lenovo: "The company as it had been was dying and Gerstner redirected it. Even more recently, under Sain Palmisano, it sold its personal-computer division to a Chinese company, Lenovo. The transformation thus became complete" (Sternberg, 2005 p. 37).

The fact that a fundamental transformation took place within Lenovo as a result of the change suggests that some transformational leadership was used on the part of Lenovo, an assertion that is congruent with Bass's (1997) analysis that such leadership styles are not restricted to Western leaders, but are rather universal: "The transformational paradigm views leadership as either a matter of contingent reinforcement of followers or the moving of followers beyond their self-interests for the good of the group, organization, or society by a transformational leader. The paradigm is sufficiently broad to provide a basis for measurement and understanding that is as universal as the concept of leadership itself" (p. 130).

Finally, the change management process used can be viewed from a transactional leadership perspective on the part of Lenovo's leadership as well. In this regard, Warner (2000) reports that while transformational leadership is not unknown in China, a far more common leadership style used is transactional leadership. In his analysis of manufacturing companies and banks in China, although the most senior management did demonstrate a more transformational leadership styles, even in these cases, middle management and those in charge of personnel demonstrated the more transactional approach (Warner, 2000). Therefore, it is reasonable to assume that this type of leadership style has also been used in the Lenovo acquisition of IBM's personal computer business division.