Beyond Guanxi: Unfolding Strategy of PC Maker Lenovo of China

Learning from foreign competitors, global ambitions and thoughtful, reflective decision-making characterize China’s largest information technology (IT) firm Lenovo, formerly known as Legend.  While the existence of case studies of Chinese firms is scant, Lenovo serves as an excellent model for analyzing the issues of doing business in China, being in the global IT industry, and executing a business strategy that can be realized. Executive MBA students interviewed Lenovo employees while on their trip to China in May of 2004 and crafted this analysis of business strategy alongside Management and Organization Chair John Slocum and strategy professor David Lei.

The award-winning diamond business strategy model, proposed by Hambrick and Fredrickson, is used to highlight how Lenovo crafted its business strategy to build and sustain its competitive advantage of manufacturing PCs in Asia. Five key pillars of strategy form the elements for internal consistency that must be addressed by senior management in executing a viable strategy:

1. Arenas: Markets in which the firm competes or product categories.
2. Vehicles: How the firm will get to the goal, through joint ventures, internal development, acquisitions, etc.
3. Distinguishing features: How to win in the marketplace, through brand image, customization, price, etc.
4. Staging: The sequence and speed of moves.
5. Economic logic: How to obtain returns, by low cost from economies of scale, premium pricing via proprietary product features, etc.

Lenovo Background
Today, Lenovo holds a 27% of the market share for PCs in China with revenues of over $3 billion and first quarter 2004 revenues up 10%. Lenovo’s origins in the mid-80s stem from being a reseller/distributor in China and Hong Kong for the Chinese Academy of Sciences (CAS) and later for foreign brands such as Hewlett-Packard (HP) and IBM. In 1990, they began their own brand, becoming the largest computer manufacturing firm and second largest electronics manufacturer in China. With global ambitions and a desire to diversify, Lenovo has made some miscalculations in the past, but hopes their new strategy will ensure success. Over the last three years, Lenovo’s market share declined from 30% to 27%; foreign competitors like Dell and Hewlett-Packard are making inroads to China.

Regardless of business strategy, the role of guanxi cannot be underestimated for firms operating in China. Guanxi is the connections or relationships that individuals have with others. Guanxi is grounded in trust, mutual obligations and shared experiences. In the case of Lenovo, its ties to the CAS as a major shareholder give it strong technical support and broad connections. “Guanxi is here to stay in China,” states Slocum. “It has existed in China for centuries. Guanxi is the ‘grease’ needed to make things work for a firm in China, especially in relation to the government which must still be accommodated.” At Lenovo, guanxi could be seen as a vehicle which has driven the firm this far, but carefully crafted strategy for the future will take them the distance.

Strategic Moves
In relation to vehicles, Lenovo started their IT services through its own internal development. However, competency of PC distribution was achieved through the joint ventures it formed earlier in its history with HP, IBM and AST computers. Through this learning process, Lenovo used a backward integration strategy and developed a strong base of technological know-how enabling them to capture a large slice of the Chinese domestic PC market. While Lenovo understands its market in a deep way—one of its distinguishing features— obstacles to doing business in China and the arrival of foreign competition will force new strategies. Building a brand will become tantamount for Lenovo as it tries to maintain market share in China and expand globally. In the Asia Pacific market, excluding Japan, Lenovo has captured a 12.4% market share.

One way to distinguish Lenovo further at home and bring international awareness to its brand is through sponsorship of the 2008 Olympics in Beijing. Perhaps this will convince businesses that Lenovo is a potent, low-cost, homegrown alternative to Dell, Hewlett-Packard and other competitors. As technology is in its infancy within China, Chairman Liu Chuanzhi realizes there is a benefit to the IT follower/learner strategy. For management, long-term growth and sustainability calls for a balance between efficiency that may lead to cost savings and creativity which may lead to trendsetting in products.

The staging issues for Lenovo have many twists and turns depending on which IT products and services it focuses on in addition to PCs. Lenovo’s consulting services derived from its PC business faces obstacles as the Chinese do not fully understand the value that these services add. In developed markets, training and consulting services are used extensively, but not in China. For software development in China, the open-source movement or a partnership may hold more promise for Lenovo as a strategy, but this will require a paradigm shift in the minds of Chinese business people. Business conducted is often framed into a winners-losers mindset rather than win-win opportunities, which can come even from competitors that form alliances.

Top leadership must now decide if Lenovo will further refine its PC-based competencies  (and thus become more like Dell or Hewlett-Packard), or further diversify into new types of electronics such as a broad range of hand-held gadgets and other consumer electronic devices. Lenovo holds a 20% share in the fragmented, growing hand-held devices market.

Leveraging Critical Success Factors
While Lenovo has managed to perform very well in their home territory, the global ambitions held by the firm’s management require them to leverage existing strengths in order to succeed in the more fiercely competitive global arena. Strong leadership and management practices are a cornerstone of the firm. Chairman Liu Chuanzhi is known for having a thorough approach to decision making. His management team studies other leading firms and reads foreign management journals. Thus, there is a strong commitment to learning and copying successful techniques.

As one of the first companies to be listed on the Hong Kong stock exchange, Lenovo has learned how to obtain capital from financial markets and deal with shareholder pressure. Liu views the pressure from shareholders, namely greater transparency and more systematic management, to be a form of motivation in serving its shareholders. Moving towards greater agility in manufacturing is a competency of Lenovo’s. With the underpinnings of guanxi, it has distribution channels in China with more than 200 home-PC specialty shops (consumer IT) and more than 3000 dealers. While their model in China may be replicated in other less developed countries as in Greater China/Asia Pacific, the build-to-order strategy of Dell may prove formidable competition in developed markets. Lenovo intends to compete with Dell head on by copying its manufacturing and distribution methods.

On the organizational design front, Lenovo management revolves around two levels: the nuts and bolts of management and the culture. Liu has tried to instill a culture based on motivation and ethics whereby leading managers will want to ‘serve’ the company. Lenovo is a leader in China in creating “professional” management; it is a rule-based firm and uses and disseminates public information. The professionalism of Lenovo management speaks to an important reform in China as many firms have strong nepotistic traditions and the influence of state-run administrative constraints. Chairman Liu structured Lenovo as a private company early on and has run into various obstacles in dealing with a Chinese legal system, still in its infancy.

Future Strategy
Deciding how to become global is the key for Lenovo, and other Chinese firms with global ambitions. Does it create a brand and attempt to go head on with other branded competitors in markets like North America and Europe? Or does it leverage its low cost structure and make products for other firms and grow through large volume? As Sony of Japan and Samsung of Korea have achieved (and Haier of China is accomplishing), Lenovo Group of China keenly desires global recognition of its products. It would like to be another success story— of an Asian brand that began as a low cost product and developed into a premium brand.

For Chinese businesses in the world’s industrialized countries, the big hurdles are brand recognition, marketing skills, perceived quality problems, and innovation. The biggest obstacle for Chinese manufacturers is the lack of vital marketing acumen. A launch by Lenovo of two computer models in Italy failed due to the lack of effective advertising strategy. In China, a national leader from the National People’s Congress gave notice in late 2000 that the development of brands was essential for sustained national economic growth. Part of Lenovo’s re-branding campaign resulted in the company name change from Legend to Lenovo Group Limited in March 2004 (also the name of its computers since ‘93). Lenovo’s exclusive agreement to supply the 2006 Turin Winter Olympics and the 2008 Beijing Summer Olympics with computer technology equipment will be an investment  it hopes will bring international recognition to its brand and the creation of a global image.

Lenovo’s guanxi initially generated business connections that foreign competitors could not match. While guanxi is still an important part of China’s cultural heritage, Lenovo must focus on its manufacturing and marketing competencies if they are to remain competitive.

“Learning from Practice: Strategic Action at Lenovo” by Jerry Biediger, Tracy DeCicco, Timothy Green, Greg Hoffman, David Lei, Karthik Mahadevan, Jane Ojeda, John Slocum, and Kyle Ward is forthcoming in Organizational Dynamics in 2005.