Scenario

Introduction

In May 2005, the worlds thirteenth largest personal computer company, Lenovo, took over the worlds thirdlargest personal computer business, IBMs PC division. Lenovo, at that time based wholly in China, was paying$1.75bn A1.4bn, 1bn) to control a business that operated all over the world and had effectively invented the personal computer industry back in 1981.Michael Dell, the creator of the worlds largest PC company, commented simply: it wont work. Lenovo had been founded back in 1984 by Liu Chuanzhi, a 40-year-old researcher working for the Computer Institute of the Chinese Academy of Sciences. His early career had included disassembling captured American radar systems during the Vietnam War and planting rice during the Chinese Cultural Revolution. Liu Chuanzhi had started with $25,000 capital from the Computer Institute and promised his boss that he would build a business with revenues of $250,000. Working in the Computer Institutes old guardhouse, and borrowing its office facilities, one of Lius first initiatives was reselling colourtelevisions. But real success started to come in 1987, when Lenovo was one of the first to package Chinesecharacter software with imported PCs. Lenovo began to take off, with Liu using the support of his father, well placed in the Chinese government, to help import PCs cheaply through Hong Kong. During 1988, Lenovo placed its first job advertisement, and recruited 58 young people to join the company. Whilst the founding generation of Lenovo staff were in their forties, the new recruits were all in their twenties, as the Cultural Revolution had prevented any university graduates for a period of 10 years in China. Amongst the new recruits was Yang Yuanqing, who would be running Lenovos PC business before he was 30, and later becomeChairman of the new LenovoIBM venture at the age of 41. It was this new team which helped launch theproduction of the first Lenovo PC in 1990 and drove the company to a 30 per cent market share within China by 2005. The company had partially floated on the Hong Kong Stock Exchange in 1994.

The deal

Work on the IBM PC deal had begun in 2004, with Lenovo assisted by management consultancy McKinsey & Co. and investment banker Goldman Sachs. IBM wanted to dispose of its PC business, which had only 4 per cent market share in the USA and suffered low margins in a competitive market dominated by Dell and Hewlett Packard. Higher margin services and mainframe computers would be IBMs future. As well as Lenovo, IBM had private equity firm Texas Pacific Group in the bidding. Lenovo offered the best price, but Texas Pacific was persuaded enough to take a stake in the new group, while IBM took 13 per cent ownership. The government-owned Chinese Academy of Sciences still owned 27 per cent of the stock, the largest single shareholder. The new Chairman, Yang Yuanqing, had a clear vision of what the company was to achieve, while recognizing some of the challenges: In five years, I want this (Lenovo) to be a very famous PC brand, with maybe double the growth of the industry. I want to have a very healthy profit margin, and maybe some other businesses beyond PCs, worldwide. We are at the beginnings of this new company, so we can define some fundamentals about the culture. The three words I use to describe this are trust, respect, compromise. He continued: As a global company maybe, we have to sacrifice some speed, especially during our first phase. We need morecommunication. We need to take time to understand each other. But speed was in the genes of the old Lenovo. I hope it will be in the genes of the new Lenovo.

IBM was not leaving its old business to sink or swim entirely on its own. Lenovo had the right to use the IBM brand for PCs for five years, including the valuable ThinkPad name. IBMs salesforce would be offered incentives to sell Lenovo PCs, just as they had with IBMs own-brand machines. IBM Global Services was contracted to provide maintenance and support. IBM would have two non-voting observers on the Lenovo board. Moreover, Stephen Ward, the 51-year-old former head of IBMs PC division, was to become Lenovos Chief Executive Officer.

Managing the new giant

Having an IBM CEO was not entirely a surprise. After all, the $13bn business was nearly 80 per cent ex-IBMand customers and employees had to be reassured of continuity. But there were some significant challenges for the new company to manage none the less. Things had not started well. When the Chinese team first flew to New York to meet the IBM team, they had not been met at the airport as they had expected and was normal polite practice in China. Yang and Ward had disagreed about the location of the new headquarters, Yang wishing it to be shared between Beijing and near New York. Ward had prevailed, and Yang moved his family to the USA. The new organization structure kept the old IBM business and the original Lenovo business asseparate divisions. But still the new company needed considerable liaison with China, a 13-hour flight away,across 12 time zones. Teleconferencing between the East Coast and China became a way of life, with the Americans calling typically at either 6.00 in the morning or 11.00 at night to catch their Chinese colleagues. Calls were always in English, with many Chinese less than fluent and body language impossible to observe. The Chinese nature of the company was an issue for some constituencies. IBM had had a lot of government business, and populist members of the US Congress whipped up a scare campaign about Chinese computers entering sensitive domains. In Germany, labour laws allowed a voluntary transition of IBM employees to Lenovo, and many German workers chose not to transfer, leaving the company short staffed. There was some discomfort amongst former IBM employees in Japan about Chinese ownership. Between the two dominant cultures, American and Chinese, there were considerable differences. Qiao Jian, Vice President for HumanResources, commented: Americans like to talk; Chinese people like to listen. At first we wondered why they kept talking when they had nothing to say. But we have learnt to be more direct when we have a problem, and the Americans are learning to listen. Cultural differences were not just national. Lenovo was a new and relatively simple company basically one country, one product. Multinational giant IBM Corporation, founded in 1924, was far more complex. The Lenovo management team, mostly in their thirties, were much younger than IBMs, and the average age of the company as a whole was just 28. IBM was famous for its management processes and routines. Qiao Jian commented: IBM people set a time for a conference call and stick to it every week. But why have the call if there is nothing to report? On the other hand, IBM people had a tendency for being late for meetings, something that was strictly discouraged within Lenovo.

Some results

At first, the response to the new Lenovo was positive. IBM customers stayed loyal and the stock price began to climb (see Figure 1). Remaining IBM executives recognized that at least they were part of a business committed to PCs, rather than the Cinderella in a much larger IBM empire. The fact that a Lenovo PC manufactured in China had a labour cost of just $3.00 offered a lot of opportunity. However, market leader Dell responded to the new company with heavy price cuts, offering $100 savings on the average machine. With market share in thecrucial American market beginning to slip, ex-IBM CEO Stephen Ward was replaced in December 2005 by William Amelio. This was a coup for Lenovo, as Amelio had been running Dells AsiaPacific region. As well as knowing Lenovos competitor from the inside, Amelio, based for several years in Singapore, had a good understanding of Asian business: In the five years I have been in Asia, one thing I have learned . . . is to have a lot more patience. I have to be someone who has a high sense of urgency and drive, but I have also learned how to temper that in the various cultures that I have dealt with in order to be more effective. Amelio started by addressing costs, removing 1,000 positions, or 10 per cent, from Lenovos non-China workforce. He integrated the IBM business and the old Lenovo business into a single structure. The company launched a new range of Lenovo-branded PCs for small and medium-sized American business, a market traditionally ignored by IBM. To improve its reach in this segment, Lenovo expanded sales to big American retailers such as Office Depot. US market share began to recover, pushing beyond 4 per cent again. Lenovo began to consider entry into the Indian market. Amelios actions seemed to pay off. After a precipitous slide during the first half of 2006, the stock price turned up. But there was no disguising that the stock price in the autumn of 2006 was still belowwhere it was five years earlier, and that it continued to trail the hi-tech American NASDAQ index.

Sources: L. Zhijun, The Lenovo Affair, Wiley, Singapore, 2006;

Business Week, 7 August (2006), 20 April (2006), 22 December (2005)

and 9 May (2005); Financial Times, 8 November (2005), 9 November

(2005) and 10 November (2005).

ASSESSMENT: INDIVIDUAL WRITTEN ASSIGNMENT AS PER BELOW TASKS - 2500 WORDSMINIMUM

LO1: Critically evaluate the implications of the globalisation of business for effective management.

Question 1: How well did Lenovo manage its business by expanding globally after moving to china? what were the benefits drawn out of the situation by the organization? Please critically explore different methods and evaluate information on the subject.

LO2: Present the importance of international business, and the effect of culture as well as the environment that influences international business with supporting evidence.

Question 2: How did the differences in local and organizational culture effect the performance of lenovoin the above scenario. Please back your arguments with supporting evidence.

LO3: Apply different aspects of leadership and management practice to demonstrate how these can contribute to organisational effectiveness within a global context.

Question 3: How well did the leadership manage the change process at Lenovo and how? Please back your arguments with supporting evidence clearly.

LO4:Identify a range of personal skills and suggest areas for development or improvement, underpinned by contemporary practice

Question 4: What more could have been possibly done by the people at leading positions at lenovo to manage the situation even better by extending implications of your evidence from above tasks.