Lenovo's Reverse Development Process and Capabilities Accumulation, Exams of Chinese

Download Lenovo's Reverse Development Process and Capabilities Accumulation and more Exams Chinese in PDF only on Docsity! 1 TMD Working Paper: TMD-WP-59 Capability Accumulation and the Growth Path of Lenovo Zhongjuan Sun Wei Xie Kuanrong Tian Yanyu Wang Tsinghua University and Oxford University Tsinghua University Tsinghua University Tsinghua University December 2013 ISSN 2045-5119 1 Capability Accumulation and the Growth Path of Lenovo Zhongjuan Sun, Wei Xie, Kuanrong Tian, and Yanyu Wang University of Oxford & Tsinghua University 1. Introduction Lenovo Group is the leading IT companies in China. Since its acquisition of IBM’s Personal Computing Division in 2005, Lenovo is the 2 nd PC provider in the world. Founded in 1984 by eleven computer scientists in Beijing, China, as the New Technology Developer Inc., it was soon renamed as Legend and started a new era of consumer PCs in China. In 2004, aspiring to expand its business globally with a more global-like brand, the company changed the brand name “Legend” to the “Lenovo”, taking “Le” from Legend, and adding “novo” the Latin word for “new”, to reflect the spirit of innovation as the core of the company. The current CEO, Yang Yuanqing joined Lenovo in 1989 as a salesman, and rose rapidly through its ranks to CEO in 2005. In less than three decades, with his predecessor, Liu Chuanzhi, Yang Yuanquing has spearheaded Lenovo’s ascend to its current position (Kirkland and Orr, 2013). We try to answer the question that how does Lenovo achieve such a prominent success in less than three decades. In this chapter we drew the concepts of entrepreneurship and capability accumulation to explain the competitive strategies adopted in the growth path of Lenovo. Entrepreneurship has been perceived as an important factor for the creation and growth of firms (Kirzner, 1979; Shane and Venkataraman, 2000; Eckhardt and Shane, 2003; Langlois, 2007). In order to compete in a dynamic and ever-changing market, an entrepreneurial firm has to accumulate capabilities, which is usually defined as the capacity to recognise, conceive, create and exploit opportunities in order to generate competitive advantages (Mitchelmore and Jennifer, 2010; Jyotsna and Ananda, 2011; Zahra and Wright, 2011). The path of entrepreneurial capabilities accumulation includes creation, integration and renewal. These three segments can operate separately, but also integrated as one unit. The creative capabilities include the ability of exploration and ultilisation (Levinthal and March, 1993; March, 1991), such as developing new 4 in the first place and expanded its share to over 1/3 of the Chinese market since 2012 (see the market shares of top four PC manufacturers in China in Table 2). [Table 2 Near Here] Legend Holdings changed its name to Lenovo in 2004 and, in 2005, acquired the former Personal Computer Division of IBM. For 8 years from 2005 to 2012, Lenovo enjoys faster growth in PC sales than its competitors. Its PC market share rose to 14.8% from 6.9% globally (see Figure 1). In 2012, Lenovo became the world's second-largest personal computer vendor by unit sales in 2012. [Figure 1 Near Here] 3. Development Stages and Capability Accumulation Rather than beginning with core proprietary technology and gradually developing downstream capabilities in manufacturing, marketing, sales and distribution, Lenovo followed a reverse development process from downstream (sales and distribution) to upstream (innovation) (Xie and White, 2004). This section describes this process in terms of three phases that include the initial stage of distribution and sale (1984-1990), the ensuing manufacturing and technology developing stage (1991-2004), and the third stage of branding and global deployment (2005-present). We link changes in the market and technology activities to Lenovo’s resources and capabilities accumulation as competitive strategies. 3.1 Distribution and Sale Phase (1984-1990) 3.2.1 Competitive Strategies During the 1980s, second-tier foreign producers, such as California-based AST Research, occupied the leading market shares, because PC sales in China were negligible. From 1987 Legend expanded its activities to trade and distribution and became the first distributor for AST (the leading foreign brand in China at that time). These activities soon became its primary source 5 of revenues, and also generated capital that Lenovo invested in a joint venture in Hong Kong to trade and then manufacturer motherboards and add-on cards. Legend gained technology capability and market knowledge by trial-and-error before 1990. For instance, Lenovo tried to sell televisions with a failure. However, Legend successfully developed Chinese-language computer input devices (Legend Hanka-Chinese character card) in 1987 and established its key technology. In 1990, the first Legend PC was launched in Chinese market. Legend has completed its transition from an agent for imported computer products to a producer and seller of its own branded computer products. These events mark the start of manufacturing and technology development phase of Lenovo (see Table 3). [Table 3 Near Here] 3.1.2 Learning and Capability Development Lenovo starts as a distributor for AST (the leading foreign brand in China at that time), and then other foreign brands like Hewlett-Packard. By distributing foreign-made PCs, Lenovo accumulated considerable amount of financial resource and marketing and distribution capabilities. The former CEO, Liu Chuanzhi, said ‘our earliest and best teacher was Hewlett-Packard’ (Gold et al., 2001). Through these activities, Lenovo also began to build up its understanding of its Chinese customers and their PC purchasing habits. In the meantime, taking the opportunity as a distributor of Hewlett-Packard, Toshiba and IBM PCs at the early stage of production of its own Legend brand PC, enables Lenovo a closely scrutiny of foreign products designs and customers feedbacks. Lenovo made extensive efforts in creating its national distribution network, which was extremely valuable to a manufacturer (see Figure 2). In 1990s, only the state-owned distribution organizations have distribution networks. The central planning system is responsible for fulfilling the State Planning Commission and relevant industrial bureau’s allocation directives for manufacturing inputs, intermediary products, and final goods. In contrast, Lenovo was geared towards its customers’ needs, not the state’s plan. Therefore, Lenovo could only survive by satisfying customers’ needs. 6 [Figure 2 Near Here] 3.2 Manufacturing and Technology Developing Phase（1991-2004） 3.2.1 Competitive Strategies Since 1990, Legend had contended for PC domestic market. Legend became a publicly traded company after listing at the Hong Kong Stock Exchange in 1994. Legend overtook both IBM and Compaq and became the leading PC supplier in China, and since then has remained in the leading position and expanded its Chinese market share to over 1/3 since 2012 (see Table 2). In 1998 Legend opened its first Legend exclusive store in Beijing, started its exclusive store system, and formed its domestic market strategy. In 1999, Legend became the top PC vendor in the Asia-Pacific region and heads the Chinese national Top 100 Electronic Enterprises ranking. At the end of this stage, Legend authorized 50 distributors in each of the seven regions, into which it divided the Chinese market, and each distributor had its own reseller network. Altogether, there were approximately 2,000 resellers in Lenovo’s distribution system, in addition to Lenovo’s 130 home-PC Franchised Store branded as ‘Lenovo 1+1’. Lenovo identified the different market segments in terms of commercial use and personal use. Hence, the ‘Lenovo 1+1’ home PC range is designed to stratify the needs of individual consumer. The ‘Lenovo 1+1’ franchised store is set to offer services to personal customers. This system is known as the ‘Lenovo 1+1’ retail network. Considering technology development, between 1990 and 2000, Lenovo had to develop a large-scale and low-cost manufacturing capability to ensure its cost-competitiveness in the face of the foreign and domestic fierce competition. In 1993, Legend enters the “Pentium Era”, producing China’s first "586" PC, Legend established ‘1+1’ retail network, and five years later, the millionth Legend PC came off the production line. Legend entered the stage with the capacity of mass manufacturing. In 2002, Legend launched its first technological innovation convention, “Legend World 2002” which opens up its “Technology Era”. In this year, Legend's R&D input reached CN¥800 million, more than double that of last year. These funds mainly invested in infrastructure construction, laboratory construction, wage of technician, R&D of materials input. What’s more, Legend launched its Collaborating Applications project. Through the cooperation with a few large 9 designing leading-edge products that fuse computers and telecommunications. 3.3 Branding and Global Deployment Phase (2005- ) 3.3.1 Competitive Strategies In 2004, Legend announced the adoption of its new “Lenovo” logo in an effort for its global expansion. In 2005, Lenovo completed the acquisition of IBM's Personal Computing division. This acquisition marked as the official starting point for the company’s global expansion. Lenovo entered into overseas market, and integrated domestic and overseas market accordingly by accessing the external resources. Through this process, Lenovo built strong presence in the international market. At the same year, Lenovo became the world's largest provider of biometric-enabled PCs by selling its one-millionth PC with an integrated fingerprint reader. Lenovo renewed its overseas market and business strategy, such as the China areas covering Hong Kong and Taiwan areas from 2006, Russia and other 12 nearby countries were also included since 2007. Lenovo set up new production factory and distribution center at Legnica Special Economic Zone in Poland. With the integration of the business coverage, the international business layout was constructed. On January 27, 2011, in order to boost Lenovo's Japanese sales share, Lenovo formed a joint venture with Japanese electronics firm NEC to produce personal computers. At that time, NEC has 20% of Japanese PC market, while Lenovo barely had 5% market share. In 2007, Lenovo acquired Medion, a German electronics manufacturing company and got 14 percent of the German computer market. In 2012, Lenovo acquired the Brazil-based electronics company Digibras. From 2005, Lenovo started focusing on innovation drawing internal and external resources to speed up the technology upgrade. Especially Lenovo pays attention to external sources, For example, after Lenovo acquired IBM's Personal Computing Division, Lenovo introduced a series of new technology, including the industry's thinnest, lightest and most secure Tablet PC, the ThinkPad X41 Tablet, the first widescreen ThinkPad with embedded wireless WAN, the ThinkPad Z60. Lenovo established Center of Excellence (COE) located in Singapore, to develop advanced technology for international expansion in 2006. At the next year, Microsoft China and Lenovo set 10 up a joint innovation center in China, initiating the new dimension for cooperation and innovation between enterprises. Lenovo maintained its lead position in technology innovation. Between 2008 and 2009, Lenovo sold and bought back the mobile business, promoted the speedy growth of its mobile technology and business. As of 2009, the mobile division ranked third in terms of unit sales in China's mobile handset market. Lenovo invested CN¥100 million providing seed funding for mobile application development for its LeGarden online app store. As of 2010, LeGarden had more than 1,000 programs available for the LePhone. In May 2012 Lenovo announced an investment of US$793 million to construct a mobile phone manufacturing and R&D facility in Wuhan, China (Lee, 2012). 3.3.2 Learning and Capability Development The growth speed of Lenovo was accelerated by the acquisition of external distribution channels. In 2005, Lenovo smoothly entered into overseas market by acquiring IBM's Personal Computing division. This acquisition brought Lenovo with $10 billion potential sales per year (Before acquisition, IBM PC sales were $10 billion per year, see Figure 4). Lenovo acquired IBM's personal computer business in 2005 and improved both its branding and technology (Stephen, 2012). Another example is Lenovo EMC, a joint venture formed by Lenovo and EMC offering network storage solutions. It offers more robust range of products to serve small and medium business than Lenovo previously offered. [Figure 4 Near Here] In 2005, Lenovo acquired IBM's PC business for $1.25 billion. The takeover provided the company with American know-how to expand globally. The acquisition gave Lenovo's PC business a boost. Liu Chuanzhi, former board chairman of Lenovo, said, “We benefited in three ways from the IBM acquisition. We got the ThinkPad brand, IBM's more advanced PC manufacturing technology and the company's international resources, such as its global sales channels and operation teams. These three elements have shored up our sales revenue in the past several years” (Zhou, 2012). Lenovo built global collaborative, efficient innovation system after the purchase of IBM PC, three R&D centers in Japan, China and American, take full advantage of 11 different capabilities to improve technology and productions invention (see Figure 5). This innovation system has created a series of new productions, such as the world's thinnest full-featured notebook in 2008. Research centers of software and hardware in the United States have strong research capabilities. The global research and development management system in the US research centres are well equipped for global operation. The research centres of software and hardware in US have strong research capabilities. The Japan R&D centre is the good in compact notebook designing and manufacturing. The research centre in China responses quickly to customer needs, and there are many talents team members to be ultilised for future research projects. [Figure 5 Near Here] 4 Managerial Implications We focus on the market expansion and technology development as the main competitive strategies and in turns they enhance the organizational capabilities. In a dynamic and complex market, demand and supply constantly in flux, knowledge which used to be valuable could turn obsolete. As a result, in order to maintain competitive advantages, the firm needs to keep unlearning the outdated knowledge and learning new knowledge. Put differently, the firm needs to create, maintain and expand capabilities through relentless learning (Chandler, 1992). Lenovo’s development history and the conceptual elements in the market and technology are worth learning for managers. In this section, we conclude some of the conceptual resources and capabilities accumulation paths in the process of Lenovo’s development. Reverse development process Lenovo represents the way in which a new entrant may challenge incumbents, especially foreign competitors, by developing resources and capabilities that are especially adapted to the local market. On the one hand, the payoffs of innovation activities are determined by market process that involves not only the activities of the innovator, but also the reactions of customers and competitors (Koellinge, 2007). 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Lenovo, on Top of the PC World, People's Daily, 19 November. 16 Table 1 Critical events of Lenovo Year Events 1984 Established in 1984 as ICT Co., a government-funded R&D institute under the Chinese Academy of Sciences. 1987 Became a distributor for AST, and later for HP and other foreign branded PCs. 1988 Established Hong Kong Computer Group, a joint venture with a Hong Kong partner to produce PC motherboards and add-on cards and operated a trading business. 1989 Renamed as Legend Group Co. 1990 Legend changed its role from that of an agent for imported computer products into that of a producer and seller of its own branded computer products. 1993 Became the largest local PC manufacturer in China, behind AST and Compaq. 1996 Legend became the market share leader in China for the first time and control over 30% of the country's market share. 1998 Legend establishes the first Legend Shop. 1999 Legend became the first Chinese PC manufacturer to be the top seller (by units) in the Asia-Pacific region (excluding Japan) and heads the Chinese national Top 100 Electronic Enterprises ranking. 2000 Legend becomes a constituent stock of the Hang Seng Index-HK. Legend ranked in top 10 of world's best managed PC venders. 2001 Legend successfully spun off Digital China Co. Ltd., which is separately listed on the Hong Kong Stock Exchange. 2002 Changed its English name from Legend Holdings Limited to Legend Group Limited. 2004 Changed its English name from ‘Legend’ to ‘‘Lenovo’. Lenovo decided to develop the rural market. 2005 Lenovo completed the acquisition of IBM's Personal Computing Division and became the third-largest personal computer company in the world. 2006 The first Lenovo-branded products outside of China debut worldwide. 2007 Lenovo became the partner of the 2008 Olympic Games in Beijing. 2008 Lenovo entered the worldwide consumer PC market with new Idea brand. 2009 Lenovo led PC industry in using recycled material. 2010 Lenovo achieved its highest ever worldwide market share and became the world’s fastest growing major PC manufacturer. 2011 Forbes names Lenovo one of the world’s “100 Most Reputable Companies”. 2012 Lenovo became the world second-biggest PC manufacturing firm. Sources: Lenovo official website and Xie & White (2004). 19 Figure 2 Lenovo’s Distribution Network Sources: Xie & White (2004) and the publicly available interviews of key decision makers of Lenovo from newspapers and business magazines. Lenovo Direct Sales Department, Telephone Sales 1301+1 PC Specialty Shops in 1999(Est.600 in 2004) Customers North, East, South and West Regional Sales Platforms 7 Regions (18 Regions after February 2004) 300 Distributors by 1999 (420 Distributors in 2004) 2,000 Resellers by 1999 (2,800 in 2004) 20 Figure 3 Lenovo’s Two-Tier R&D Organization Structure Sources: Xie & White (2004). First-Tier R&D (Business Unit) Desktop PC Development Lab Common Parts and Component s Commercial System Consumer System Application Software Architecture & Standard IT Business Cluster (Including Servers, Notebooks, Consumer IT, Commercial Desktops, etc.) Other Business Clusters (Mobile Telecommunications, Service Businesses, others) Lenovo Research Institute Software Design Center Industrial Design Center Added-On Card Design Center Second-Tier R&D (Corporate) 21 Figure 4 The IBM's Distribution Channel Sources: Lenovo official website and interviews of Lenovo’s key decision makers from newspapers and business magazines. IBM IBM Sales compa ny IBM Direct Selling Company Specialty Computer Stores Agency Stores Distributors End Users Sell to big customer Mail-order service, telephone book Retailers, franchises Sell to middleman and customers with small demand Industry big users