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PC company needs to rethink strategy to turn things around for growth
Chinese global PC giant Lenovo continues to receive some of the most severely critical media coverage in its history. Not that surprising given that the company recently reported a 51 percent fall in first quarter profit to $105 million.
Even a rise in revenue, albeit a modest 3 percent, to $10.7 billion has been interpreted by large parts of the international media as "below forecasts".
But what has not been reported fully are the possible causes of this apparent downturn in the world's leading PC producer's fortunes, and the turnaround rebranding strategies that Lenovo are considering, and which could lead to a dramatic and sustained recovery.
Also not as widely reported is the pre-tax loss of $292 million in the three months to the end of June recorded for the mobile division, which appears to shine a spotlight on the root cause of Lenovo's recent profits plunge.
Lenovo reported recently that its PC business had reached a worldwide market share of 20.6 percent, with a 13-percent stake in the key US market, which increases the focus on the company's move into mobiles and the recent performance of its mobile division.
In response to news of its nosedive, Lenovo has acted swiftly and decisively. A major cost-cutting program with a short-term target of saving $650 million has already been launched. Cutting 3,200 jobs will play a big part in this radical project, and represents almost 10 percent of its nonmanufacturing employees worldwide and about 5 percent of its global workforce.
To gain sufficient understanding of Lenovo's competitive challenges it is necessary, as is often the case, to delve into the PC giant's past performance and strategic decision-making. In particular, it is most enlightening to expose the key reasons behind Lenovo's relatively rapid rise to global PC producer leadership.
Of course, the seeds were sown behind Lenovo's meteoric rise many years ago, but a quantum leap took place in 2005 with the audacious takeover of IBM's PC business. Crucially, the IBM acquisition included ownership of the corporate brand name, as well as already established and powerful product brands such as ThinkPad. Naturally, Lenovo paid handsomely for these brands, a not inconsiderable $1.25 billion, but also assumed an additional $500 million of IBM's corporate debt.
Despite the initial financial outlay, Lenovo benefited in numerous ways from this takeover.
While IBM's more advanced PC manufacturing technology and access to global markets are the most obvious, it is perhaps the far more intangible benefits such as the growth in confidence, ambition and self-belief that lie behind Lenovo's continued rise over many post-acquisition years.
As part of the 2005 deal, Lenovo also acquired the rights to continue to use the IBM brand name for five years, but such was the consequential gain in confidence from the takeover that Lenovo soon began promoting its own corporate brand name and identity.
As a result, the company's corporate brand is now recognized globally and not at all tarnished with any negative Chinese associations.
This corporate brand strategy, where product brands such as ThinkPad continue to receive investment and promotion but only under the dominant lead of the corporate brand name, represents the key success factor behind Lenovo's incredible rise as a global PC producer.
Such a strategy also reveals why Lenovo is experiencing difficulties. Diversification into the smartphone business appears right now to have been a reckless maneuver, but many have pursued the same path and have prospered spectacularly, such as Apple.
It is, therefore, not the diversification into smartphones that lies behind the current corporate woes at the Beijing-based behemoth. Rather, it is the brand strategy that Lenovo has chosen to pursue in this eminently logical venture.
Lenovo spearheaded this venture last year with the acquisition of the Motorola Mobility corporate brand from Google for $12.5 billion. Once again, a huge outlay, but also once again a smart move into a highly competitive but growth industry.
But this is where the similarities with the 2005 IBM PC acquisition end. Motorola's brand image, in sharp contrast with IBM's, has not enjoyed positive association in recent years. IBM will perhaps always conjure up positive associations such is the history and once global hegemony. But Motorola's brand, despite rising to global prominence during the 1990s, bears no comparison.
Despite these clear corporate brand differences, Lenovo appear to have chosen to integrate the Motorola business and maintain a prominent Motorola brand identity alongside, if perhaps only slightly overshadowed by the Lenovo corporate brand. Such a strategy, where Lenovo and Motorola in effect combine to present a form of two-tier branding, regularly referred to in the academic world as "source branding", works well in the case of Lenovo-ThinkPad.
In that case, both brand names bring complementary associations to the market. ThinkPad's brand meaning can be described with "creativity" and "imagination", a perfect emotional association to match the Lenovo corporate brand's "trust" and "respect".
But such is the negativity associated with the Motorola corporate brand image that any tie-up with the Lenovo name faces a huge uphill challenge, perhaps an insurmountable one.
The absence of any powerful Motorola product brands prohibits an obvious alternative two-tier branding arrangement, too.
What appears to have evaporated at Lenovo is the ambitious, even audacious, corporate culture that led not only to the IBM takeover, but also the relatively rapid usurping of the IBM brand name and the emergence of the global rise of the Lenovo brand name.
Had such a corporate culture remained, and perhaps even flourished, then surely a similar removal of the Motorola brand name from any Lenovo corporate brand identity would have taken place by now.
Acquiring the Motorola Mobility brand business remains a smart move, but even smarter would have been the immediate public declaration that the acquired company's brand identity would form absolutely no part of the continued management and development of the overall Lenovo brand architecture.
A key part of Lenovo's turnaround strategy right now, therefore, is the elimination of the Motorola brand name from public view and a strong corporate brand strategy. Investment in the Lenovo brand name is the only way forward across all product lines unless takeovers involve suitably strong product, ThinkPad-like, brands, too.
The author is a visiting professor at the University of International Business and Economics in Beijing and a senior lecturer on marketing at Southampton Solent University's School of Business. The views do not necessarily reflect those of China Daily.
