The SWOT Analysis of Lenovo-IBM Acquisition
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Case study: The acquisition case of American IBM Personal Computer by the Chinese computer company Lenovo. This article uses SWOT matrix to analysis the post-merger situation of Lenovo’s PC business and try to demonstrate a possible roadmap for future business.
On December 8th of 2004, Lenovo announced its merging of IBM’s world personal computer (PC) business which included the ThinkPad line of PCs. This deal costing Lenovo $1.25 billion, including $650 million in cash, 600 million shares and an additional $500 million of IBM’s debt. The merger makes two companies formed a complex joint venture. For Lenovo, even the cost is relatively high for it to purchase IBM PC at 2004, it benefits a lot for Lenovo in a long term development. Lenovo took over IBM’s PC business and potentially took over IBM’s customers, distribution and marketing channels as well. As the consequence, the IBM purchase puts Lenovo in the world’s third-largest PC Corporation and make it in the dominant position in the world’s personal-computer industry. Since then Lenovo became the head leader of China’s PC industry and, thereby, won the attention of the world.
However, after the merger and acquisition, Lenovo encountered various problems, including culture conflicts, inefficient integration of human resource, supply chain issues and the financial distress. In order to describe and analyze the strength and relative obstacles faced in front of Lenovo’s computer business, the established SWOT matrix analysis are used in this article. At first, the history and the background information of Lenovo’s merging IBM’s PC department as well as the situation of IBM’s PC business will be illustrated. Secondly, the SWOT analysis method will be used to demostrate Lenovo’s computer business after acquires IBM PC division in more detail. At last, the author will try to demonstrate a possible strategy roadmap of Lenovo’s business future. At 2004, Lenovo encountered its bottleneck of development. Lenovo has been the largest PC manufacturer in China with since 1996. However, during the high competitive external conditions of international computer industries, Lenovo suffering a decreasing domestic market shares.
Before 2003, Lenovo’s PC business have occupied almost 30% of Chinese market. However, during the second quarter of 2003 and 2004, Lenovo’s domestic market share was approximately 24 percent while Dell’s business rose from 6.2 percent to 7.4 percent (Rui and Yip, 2008). Although the dominate market leadership still belong to Lenovo, it could not be ignored that new rivals like Dell has aggressively challenged Lenovo’s domestic market position and its distribution networks. More important, the PC industry in China is about to mature, especially new technologies (e.g. Internet) make consumers could communicate with each other without PC devices. Apart from highly competitive domestic marketplace, one of the biggest inherent competitive disadvantage for Lenovo is from overseas market. Before 2003, only 10% of Lenovo’s revenues came from outside China which significantly lower than other international brands (Biediger et al., 2005). Therefore, Lenovo have to make a strategy change in order to enlarge its business globally.
Biediger et al. (2005) hold a critical perspective on its marketing strategies change and point out that Lenovo’s global expansion cannot be easily acquired or developed. Unlike Lenovo encountered its domestic developing bottleneck, the situation is quite different for IBM. IBM, which mostly known for its world-PC manufactory and mature operating system, has decided to give up his PC business at 2004. One reason for it is because IBM’s PC business were not profitable any more. The financial reports pointed out that the PC division of IBM have been made a huge financial losses of $9.65billion from 2001 to 2004. Nonetheless, comparing to its raising software business which remain about 15%-18% of the total revenues in recent years (Deng, 2009:10), IBM’s traditional PC industry was totally a deficit division. Another reason for IBM to sell its PC division is due to its strategy aims. IBM have shifted its major business from traditional PC productions to its software innovations. For IBM, their strategic intension to sell its PC business was obey its overall strategy of developing software and reinforing its service businesses (Deng, 2009).
According to Steve Mills, Senior Vice President and Group Executive, “(Lenovo-IBM’s acquisition) allows IBM to focus on system and software innovations that bring new kinds of value to strategic areas of our business, such as cognitive computing, Big Data and cloud” (Deng, 2009:81). Therefore, when Lenovo decided to set its globalization expansion through merger as a strategy, there were no doubt for IBM to act repeatedly on selling its world PC business. Overall, under the more fierce competition in the domestic marketplace, Lenovo’s international expansion is an “essential stepping-stone for company’s growth” (Deng, 2009:82). The acquisition of the two corporates also serves as a push for Lenovo to expand its business worldwide. The merger provides a possibility for Lenovo to be part of the world-class company. However, Lenovo and its decision makers as well as the CEO Mr. Liu Chuanzhi have to face a post-merger integration problem of IBM’s former business. In order to analysis the possible integration strategies for two corporates after merger, the feasible theoretical SWOT framework will be illustrated in detail.
SWOT analysis is “the most straightforward strategy to analyze company’s performance” according to Terry Hill and Roy Westbrook (1997:51). SWOT model as a traditional and popular strategy method to analysis firms circumstance have “its mutual origins in the work of business policy academics at Harvard Business School from 1960s onwards” (Hill and Westbrook, 1997:47). Subsequently, Kenneth Andrews (1971) developed the model and made it more popular in his age. In a macro perspective, he first announced that a good strategy should cover two aspects of external situation and internal situation of the organization which SWOT matrix could do perfectly well. However, there are also some disapproval voice in the history. A critic as Henry Mintzberg (1994:120) who believe that SWOT is only a process of “conception and involves the use of a few basic ideas to design strategy” which have no feasible possibility. Although the minority hold disagree opinions, we should not ignore that SWOT analysis is fundamental of all attempts to formalize the strategy making process.
The framework is called SWOT which is the abbreviation form of four attributes: “Strengths”, “Weaknesses”, “Opportunities” and “Threats” (Hill and Westbrook, 1997:47). This strategic framework aims to help organizations identify the strengths and weaknesses as well as the opportunities and threats. The greatest advantage of SWOT analysis is that it could help executives gain insight into “the significance within the framework of the firm, and accordingly initiate suitable actions” (Houben, Lenie and Vanhoof, 1999:126). With the assistance of SWOT analysis and by identifying more specific of each factors, this strategy framework could efficiently help firms to “build on the strengths, eliminate the weaknesses, exploit the opportunities or counter the threats” (Dyson, 2004: 632).
Generally, the four compounds can be split into “Internal Circumstance” and “External Circumstance”. The internal appraisal consists of “Strengths” and “Weakness” which helps executive to examine the crucial aspects of the organization covering (e.g. facilities, products, and services). The external appraisal, on the other hand, is a good approach to define “Threats” and “Opportunities” (e.g. social, technological, economic and competitive environment) that any corporates need to deal with. The SWOT framework are shown in figure 1.
Figure 1 The SWOT framework (Wang, 2006:113)
The internal environment, as shown in Figure 2, are employees, brands, innovation capabilities, customer membership and facilities.
Figure. 2 Internal appraisal, strengths and weaknesses (Dyson, 2004:632) The internal strengths for Lenovo’s PC business after merger appeared in its rapid spreading brand and improved advanced technology. Innovations ability as well as advanced technologies are strongly intensified. Although Lenovo has never been a technology leader throughout its history, it still try to keep pace with the trends of the world. Therefore, the merger not only provide Lenovo a new chance to adapt technology to fit the needs of consumers, but also due to join venture advantages, Lenovo developed a strong technological based products that enabled the corporate to capture more market shares in Chinese domestic PC business (Biediger et al., 2005). For example, the new PC ThinkPad X41 came to the market at 2005 from Lenovo (PC Magazine, 2005). This product combined latest high technology of bidirectional fingerprint reader in that age and still a good sale product of Lenovo until now.
Additionally, with the assistance of new technologies adopting from IBM and the prevalent of Internet, Lenovo also designed an entirely new line of products for different market segments (Biediger et al., 2005). Apart from technic benefits, Lenovo also adopt IBM’s powerful brands. The combing force of IBM and Lenovo merger creates a special kind of brand loyalty not only keep their old customers but also bring new one. As a consequence, this has deterred customers from switching to other firms (Biediger et al., 2005). The weakness parts of Lenovo after merger happens to its integration of organization and employees. The acquisition is a good chance to improve internal culture and motivate new staffs to work. However, as a Chinese PC company, Lenovo’s employees are mainly Chinese. It means the corporate might suffering culture crash and language barriers when Lenovo build up its branches overseas. Therefore, the firm should begin to provide opportunities and trainings for the Chinese staff to improve their English ability and cultural awareness.
In addition, during integration process Lenovo also encountered restructured problems. Fleischer and Bensoussan (2007:192) has provided some mature and feasible methods to structure a corporate, such as “centralized/decentralized, flattened/hierarchical, and outsourced/autonomous”. Thus, in order to integrate Lenovo’s staff and overseas branches, Lenovo’s management group should assess possible occupancies of positions in order to keep the company operating. A centralized structure may suitable for Lenovo to act and quickly response to the fast-pacing PC industry. The opportunities for Lenovo in the external environment is cross country partnership. With the success of access to the global market, more companies were seeking for cooperation. For example, Lenovo has signed an agreement to be the exclusive computing technology equipment and service provider for the 2006 Turin Winter Olympics (Biediger et al., 2005).
Similarly, in 2004, Lenovo have the honor as first Chinese corporation join the Olympic Partner Program. Such cooperation provided Lenovo a platform to introduce its brand internationally. The brand effect could stimulate customers to purchase and therefore build a brand loyalty for the long-term development. Another opportunity appears when merger create an ally rather than rival and make Lenovo to compete against other rivals such as Dell and HP with combine force. In fact, IBM’S global sales channels help Lenovo to increase its competence in PC distribution (Biediger et al., 2005). Due to IBM are originally known by its quality PCs and dominate in overseas marketplace, IBM’s competitive advantages make Chinese PC corporate Lenovo have no need to spend enormous efforts to overcome market barriers to entry foreign market. Thus, Lenovo’s global business generally have formed an economics of scale which efficiently compete against rivals. For instance, on November 2013 Lenovo has achieved twice as much as digit market share in the United States (Ohnesorge, 2013). Similarly, as shown in figure 3, Lenovo has become the top PC vendor worldwide in the second quarter of 2013 (Framingham, 2013).
IDC Worldwide Quarterly PC Tracker in the second quarter of 2013 (Framingham, 2013) The threats from external environment are various. Firstly, whether Lenovo could successfully operates two different culture in one firm is still a question. Lenovo booms its business based on Chinese domestic market, therefore, the strongest and distinguishing feature is the ability to understand the Chinese market, especially for its values and preferences ( Rui and Yip, 2008). Thus, it consider to be a big threat for Lenovo as foreign market and its culture are relatively unfamiliar for them. Secondly, Lenovo’s PC business which based on domestic market are catering for Chinese customers. Their PCs has combined Chinese ideographs and symbols. As a result, it has been difficult for Lenovo firms to compete effectively in the overseas PC market.
Thirdly, a new challenge for Lenovo is about its global services. Building a service-based infrastructure in a vast country requires enormous investment, especially to build service centers and infrastructure. For the company at a scale like Lenovo, it is not a one day job. This essay has explained why Lenovo tends to acquire IBM PC business and illustrate the implements faced by the two companies which made them eventually formed an acquisition. Acquiring IBM has been an anticipated strategic that force Lenovo expansion. IBM has brought an immense amount of technologies and insight to Lenovo to help Lenovo build up its business. A post-merger-integration is always extremely difficult, especially for Chinese PC Company like Lenovo who might suffer various implements including culture clash, organization restructure, global distribution and service quality.
This is why strength and weakness are coexist with threat and opportunity. The established SWOT analysis used to illustrate what strength and weakness that Lenovo might encountered in the internal environment and what threat and opportunity in external environment. Nevertheless, the SWOT analysis gave executives a significant insight into company and assist the company operating and organizing its business. Overall, SWOT is a sensible and efficient management-tool to assess strategy implementation. For further study of Lenovo’s business should cover its recent performance into account. The most useful strategy for Lenovo to expand its global market is through merger and acquisition. Through M&A, Lenovo could easily gain advanced sources and occupied limited market share. Therefore, the continuous acquisition of IBM’s x86 server business by Lenovo at 2014 (People.cn, 2014; Jones, 2014) has not been a great surprise. However, some weakness and threats also posed in front of Lenovo’s business. A more dynamic and integrated SWOT analysis is needed for further study.
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