Lenovo's Acquisition of IBM PC: Change Management Analysis

Introduction

"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 Lenovo's acquisition of IBM's personal computer division was a painful affair, and the scholarly literature on change management likewise suggests there were difficult challenges involved throughout the process. The early history of Lenovo is fairly unremarkable: the company was first established in 1984 to sell computer parts manufactured under the IBM label. By 1990, Lenovo was selling personal computers under its own brand name, and in May 2005 the company purchased IBM's PC division for $1.7 billion. Today, Lenovo holds more than 35% of the Chinese personal computer market—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 problems it encountered, a description of the intervention that was used, and an evaluation of the change and the strategy employed to achieve it. A summary of the research and its salient findings are presented in the conclusion.

Diagnosis: Lenovo's Background and Strategic Problem

Brief Background Information on the Organisation

According to the company's website, "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 garages at home, Lenovo was founded in 1984 by 11 engineers working out of a small bungalow in Beijing, and the company went on to become a major force in the information technology industry (Zhijun, 2006).

According to Zhijun (2006), "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" (p. 62). The history of Lenovo can actually be traced back 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, conducted amidst Chairman Mao's "Great Leap Forward" initiative that caused tremendous havoc and devastation throughout the country. Despite this political and social upheaval, the Chinese scientists managed to persevere and developed the country's first computer, dubbed "Number 104" (Zhijun, 2006). This original computer was placed into service almost immediately and provided 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 this convergence of time and place provided, in 1984 these scientist-entrepreneurs took advantage of an increasingly tolerant attitude toward private enterprise and created the Lianxiang company, originally capitalized with fees charged to organizations leasing time on the newly developed computers (Zhijun, 2006).

The Identification of the Problem and Opportunity

When the Lianxiang company—Lenovo's predecessor—was formed, there were approximately 110,000 personal computers in China, almost all IBM models operating in English. According to Zhijun (2006), "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" (p. 63). This approach aligned with one of Lianxiang's core competencies: importing IBM and other branded computers from the West, installing this Chinese character function, and supplying China's domestic market (Zhijun, 2006).

Zhijun (2006) 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" (p. 63). By 2004, the company had acquired more than 25% of the Chinese IT market share (Zhijun, 2006). These results reflect the company's original aims to expand its domestic market while gaining access to the international marketplace.

Aims, Objectives, and the Selected Change Strategy

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).

The change strategy selected for the acquisition can be attributed to Liu Chuanzhi, one of the original 11 founders of the company. 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," whom Zhijun describes as one of China's most creative and decisive business leaders (p. 63). Business Week also ranked Liu Chuanzhi among the world's top two dozen businessmen (Zhijun, 2006). The company's unprecedented acquisition of IBM's PC division in 2005 represented a major step for Lenovo and a significant statement for Chinese industry broadly—proof that Chinese companies can compete not only in domestic markets but also at a global level (Zhijun, 2006).

Intervention: The Change Management Process

Description of the Change Management Process

Like any corporate merger, the decision to acquire IBM's personal computer division was the first step in the change management initiative. The second step was to formulate a company-wide strategy and business model that would pursue the dual goals of increasing domestic market share while simultaneously gaining greater access to the international marketplace. To this end, Lenovo developed a new approach it termed the "Dual Business Model"—designed to serve 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 resolving conflicts in corporate culture that existed between Western managers and the new Chinese owners, and developing a strategic alliance that could leverage both companies' core competencies. Wu (2005) noted early on that "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, Lenovo and IBM developed a long-term strategic alliance 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, IBM also agreed to provide Lenovo with warranty services and to offer Lenovo customers leasing and financing arrangements. According to Liao (2006), "Through this long-term relationship, customers will receive the best products with the lowest total-cost-of-ownership" (p. 3). Among the company's additional initiatives in this final phase were efforts to further support the Dual Business Model. To that 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—including biometric fingerprint scanning and rescue and recovery features—were redesigned to operate seamlessly with Vista's security and backup capabilities (Liao, 2006).

Conclusion

It is likely that many consumers today can remember when the phrase "Made in Japan" connoted inferior and shoddily made products—but that perception, of course, has changed entirely. Similarly, while the label "Made in China" has been met with some derision among Western consumers in recent years, the trajectory is clear: China is well positioned to capitalize on its enormous investments in infrastructure and technology.

The research showed that Lenovo was first established in 1984 to sell computer parts manufactured under the IBM label. By 1990, the company had grown sufficiently to begin marketing personal computers under its own brand name. In May 2005, Lenovo purchased IBM's PC division for $1.7 billion and now holds more than 35% of the Chinese personal computer market—four times the market share held by Dell in China. Through a carefully executed change management strategy that combined a Dual Business Model, a long-term IBM strategic alliance, and leadership styles ranging from transformational to transactional, Lenovo transformed itself from a domestic Chinese IT company into a formidable global technology brand.

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