COMPUTER
IBM, entered the computer field during the 1960’s, into a market where Apple Computer Inc. And Tandy Corporation’s Radio Shack Division had been dominating until then with one of its initial attempts to make a ‘mini super computer’. The IBM machine came to be known for its technological impressiveness, and this impressiveness stemmed not from any one single breakthrough, but from a good combination of its excellent features. Also until the time of the launch of the personal computer, IBM had been selling its computers at the rate of $10,000 for a desktop model to several small businesses, and to doctors and to other small companies for the purpose of book keeping and accounting and for billing. This particular model costing considerably less was a matter of ease for it to capture a big slice of the market for itself, even during its initial stages. However due to wrong strategic choices, IBM’s share in the personal computer market has been gradually eroding and decreasing dramatically, until finally, in the year 2005, IBM had to literally exit the business by selling out to Lenovo, which was a Chinese company, getting a share of the equity in return. How did Dell happen to ascend to the number one position, after IBM met with downfall? IBM’s absolute and relative decline led to its ultimate demise in the year 2005, when it had to sell out to a Chinese company, Lenovo. Today, the most important question being asked all over the world is whether or not the Chinese Lenovo would be able to succeed in the personal computer market, in the same way that IBM did, years ago? Will this company be able to rise to the ranks of the large company IBM? Can Lenovo actually succeed in becoming a global player, and also be able to integrate the managers of IBM, in the United States of America into their company? Will the numerous customers of IBM computers feel the need to defect over to Dell Computers; now that IBM is no longer in the running, or will they continue with the Chinese company Lenovo? Will the state owned Chinese companies like Lenovo start to gain in domination in the emerging trends of the international market of today? Will have a sustainable competitive advantage going forward? What are the key challenges for the existing players in this industry today? This paper shall provide an answer to several of these questions raised.
Computer
According to the New York Times, dated August 13, 1981, the ‘International Business Machines Corporation’, also known as IBM, entered the computer field during the 1960’s, with one of its initial attempts to make a ‘mini super computer’. IBM, it is said was also slow to enter the field, because of the fact that several ‘upstarts’, like the ‘Digital Equipment Corporation’, who made attempts to enter the field at around the same time, managed to acquire a large share of the mini computer market, and to subsequently grown into a company with more than a billion dollars in annual revenue. The newspaper article goes on to state that just the day before, IBM had announced that it would start to sell a certain type of a computer known as a ‘desk top’ that could be used in homes and in schools and in places of businesses. (Pollack, 1981)
This was a relatively early entry, thought experts at the time, because IBM was in fact entering into a market where Apple Computer Inc. And Tandy Corporation’s Radio Shack Division had been dominating until then. Thomas J. Crotty, an analyst with the Gartner Group, also said that perhaps they did not want to allow yet another entrant into the Digital technology field, and especially so in the area of personal computers, and when IBM did indeed succeed in a spectacular entry, even though the entry had been expected for many months, it still did manage to send a few reverberations throughout the industry. With the entry of IBM into the ‘personal computer business, it is possible, stated the article, that because of the endorsement for personal machines that a large corporation such as IBM would be able to provide, maybe the already fast growing business of digital technology and the sale of personal computers that can be used at home or at schools and offices, would be able to grow manifold within the next few years.
However, even though the entry of IBM would help business in general, it still posed an extremely difficult problem for Apple and also for Tandy, which together had a huge 39% of the entire personal computer market, with their sales going up to a sum of $2.4 billion in 1980. Christopher Morgan, the Editor in Chief of the Computer Magazine, Byte, stated that the proposed entry of IBM into the computer business was one of the “most important announcements we’ve seen in the industry.” (Pollack, 1981) Another expert in the computer field, Michael Mc Connell, the executive Vice President of Computerland, stated that because IBM had entered the market, it would mean that personal computers are neither a “fad nor a flash in the pan,” and that more people would start to take the concept of actually owning a personal computer for themselves, at home, which could be kept on a desk top, seriously, if IBM said that they could do so. The price of the IBM machine, when it was initially launched in 1981, was $1,565, for a simple machine that would need the users to provide for their own television screen like display units, and also cassette tapes, while the more sophisticated machines, would cost a prohibitive $6,000. (Pollack, 1981)
One of the typical home versions, with a memory of 64,000 characters, or about 10,000 words, would have a single storage disk, as well as a display screen, and this would cost about $3,000, and a business computer, with color graphics, two storage disks, and a printer, would cost about $4,500. IBM was planning to sell its computers through stores like Computerland, Sears, Roebuck, and Company, to several large corporations, as well as through IBM’s own retail stores. At the time when IBM started to manufacture and sell the personal computer in America, it was the time when several large American companies were in fact buying the so-called ‘desk-top’ computers so that the efficiency and the effectiveness of the executives and the various other personnel within their offices would be able to benefit from the machines. Also until the time of the launch of the personal computer, IBM had been selling its computers at the rate of $10,000 for a desktop model to several small businesses, and to doctors and to other small companies for the purpose of book keeping and accounting and for billing. This particular model costing considerably less had been recently announced, and since IBM had a good reputation already, it was a matter of ease for it to capture a big slice of the market for itself, even during its initial stages.
In addition, the IBM machine was known for its technological impressiveness, and this impressiveness stemmed not from any one single breakthrough, but from a good combination of its excellent features. The new model launched by the IBM had a microprocessor that would be capable of handling 16 bits of information at any one particular time, and this would in turn allow the computer to perform more difficult and complex tasks than any other personal computer of the same kind, of which most had mere 8 bit microprocessors. IBM had in addition launched several different models, some of which were capable of storing up to 260,000 characters in its memory. However, there was intense debate and disagreement on whether the price of the new IBM personal computer was low enough to be able to knock Apple and Tandy out of reckoning, and while some felt that the IBM had not been priced, as aggressively as had been expected, it would not succeed in throwing the others out of the market, and this fact brought about a feeling of immense relief, especially for Tandy, as stated by Garland P. Asher, chief of financial planning for the Tandy Corporation, that he was actually relieved that “whatever they were going to do, they finally did it,” and also said that he was in fact “relieved” at the pricing of the IBM Computers, and that that company had not introduced anything new that would eventually succeed in rewriting the ground rules that had been laid out years ago. (Pollack, 1981)
Therefore, as many analysts believed and stated, there would be room for all the many different computer companies, and that nobody would have to down their shutters with the introduction of the IBM model of the desktop or the personal computer. As far as the IBM was concerned at that time, during the early years of the 1980’s, the entrance into the field of personal computers was a mere evidence of the fact that the company’s image had indeed been undergoing a sort of transformation over the past few years, and also in the way that it generally conducted its business. To some users of personal computers, who state, never trust a computer that you cannot lift; the IBM has been viewed, more often than not, as an enemy, and according to Byte, the computer magazine, this was because of the fact that the IBM company rose to fame mainly on the basis of its mainframe computers, that were large and forbidding, and overwhelmingly bulky. This was probably why, when the rest of the world was eyeing the emerging opportunities in the minicomputer market, the IBM never paid any attention, and even though IBM did succeed in capturing a large chunk of that market, it did not happen until Digital had captured the minicomputer market and had grown into a large corporation.
In the past few years, IBM has agreed to change the ways in which it conducts its business, and adapt to the changing times when the prices of computers have been declining steadily. Therefore, it has started to indulge in mass marketing techniques, and has opened a few retail stores of its own, and has also showed a willingness to buy parts, or even the full and finished product from others, like for example, the low priced copier that IBM sells, that was bought form Minolta. In addition, IBM also made a major decision that would enable private vendors to sell IBM products, especially personal computers, and while in the past, IBM had manufactured its products and also its software in such a way that it would be completely incompatible with other vendors’, in the case of personal computers, IBM has decided that this would not be the case. (Pollack, 1981)
It is an interesting fact that it was during the late 1800’s that computer technology began to be developed in the United States of America, and it was not until the 1950’s that IBM’s dominance in the field started to be recognized. There were a number of methods that the company used in order to maintain its dominance, and some of these were: IBM did not sell its computers; rather, it rented them. In the beginning, the IBM computers were formidably expensive machines, and when one of these machines were rented out, one officer form the company would also be sent along with the computer, in order to take care of the machine. Another method that IBM used to maintain its domination was the method of ‘bundling’ wherein it would provide both the hardware and the software in one single package, and as the company began to be dependent on that software, it would need IBM software more and more, and if the user felt that they could use another computer, then they would find that they would have to buy an entirely new software system as well. IBM also made attempts to control the peripherals of the computer, or in other words, the various ancillary devices that a computer would generally use. What IBM did was to control the connections between the mainframe and the peripherals and make it so very complex that no manufacturer would be able to duplicate something like it, and herein lay IBM’s power. (Triebwasser, 1998)
There are some individual who feel that IBM did in fact resort to unfair business practices at time, like for example, when another computer manufacturer made a computer that was better than the IBM and of a lesser cost. What IBM did was to state that it would also manufacture a similar computer, and at a similar price and the fact is, IBM never did and in the meanwhile the other manufacturer lost out on his sales of his computer because customers were waiting for the IBM. In the early 1980’s, the desktop computer was introduced, and this was when IBM started to face some problems. This was because of the fact that while in a mainframe computer the software for the computer would be generally supplied by the hardware company, in a desktop computer, much of the software would be written by others. This factor made it impossible for the IBM Company to maintain its stringent standards of control over the personal computer market, like it did in the mainframe computer market. IBM had a policy that it would encourage independent software developers to develop software and also at times, ancillary hardware for its personal computers, and this meant that IBM would allow other manufacturers to imitate the IBM desktops.
This happened to create an open specification, and this eventually led to the development where many manufacturers managed to make clones of the IBM computers. It was Microsoft that had developed the basic operating system for the IBM computers, and although the system was used in all the personal computers manufactured by IBM, other manufacturers used the same program as well, and this meant that the IBM had to lose a share of the personal computer market to other manufacturers. (Triebwasser, 1998) IBM, when it engaged outside writers for their software programs contributed in no small measure to its initial success, but in the long run, the same transparency happened to make IBM a victim of reverse engineering, and engineers started to manufacture a different hardware which would be capable of running software that was actually written for IBM, and they found that they could sell such programs for less that the IBM’s rates, and this meant that they could successfully undercut the IBM. (Triumph of the Nerds)
IBM’s share in the personal computer market has since that time been gradually eroding and decreasing dramatically, until finally, in the year 2005, IBM had to literally exit the business by selling out to Lenovo, which was a Chinese company, getting a share of the equity in return. These are some of the opinions voiced by experts on what would happen now, that IBM has sold off its share of the personal computer market. One opinion was that with IBM selling off its share, the entire personal computer market of the world is in fact headed for a major ‘shake-up’, wherein the Lenovo Group of China, which bought he company for the amount of $1.25 billion, plus the $500 billion debt of IBM, has become all set to become the third largest personal computer manufacturer in the world. Why, did IBM sell off its personal computer business? There are several good reasons why IBM did what it did, and some of them are: the company had, in fact, been outsourcing most of its manufacturing several years ago, and it had in fact sold off its last personal computer manufacturing plants in the year 2003. The IBM was not able to set its market prices at a rate above that of the general market prices, perhaps because of the fact that IBM used the Microsoft operating system in its desktops, and also in its Intel chips, and the only thing that was actually unique about the IBM personal computer was that it was unique and original in its design. (Who’s the No. 1 PC maker now?)
The CEO of IBM also said that the reason why IBM was being sold off was because it had become too much like consumer electronics, which in fact relies for the most part on individual customers and on the economics of sale and demand. Selling IBM’s personal computer manufacturing to another company did bring “a huge benefit to their profitability,” states another report. (Who’s the No. 1 PC maker now?) When IBM entered the personal computer market, there was a virtual explosion in sales, and in the year 1980 alone, about 25 fledgling computer companies sold more than 724,000 personal computers for the amount of $1.8 billion, and when IBM happened to join the industry in the year 1981, almost 50 different companies happened to sell more than 1.4 million personal computers for about $3 billion. By the time it was 1982, about a hundred companies had sold about 2.8 million personal computers for about $5 billion. (From Bits to Boom, IBM PC turns 20)
These figures show that IBM’s entry, although it did not make ‘the’ difference, it did manage to make a great difference in the sale of personal computers across America, and started the trend of one computer for one user, perhaps a family, or a business. It was also felt that when IBM did make its entry, what it did was not just ‘flex its marketing muscle’, but also used a particular specific business strategy that many analysts even today, find difficult to understand whether it was a gross miscalculation, or a masterstroke. What IBM did was this: it licensed the operating system from Microsoft, and the chips needed from Intel, so that all the various bit players would be able to sell their products to various other companies. When this happened, not only did Bill Gates and Andy Grove become phenomenally rich, but it resulted in the spawning of a spate of clones that would eventually be able to outpace IBM itself. (From Bits to Boom, IBM PC turns 20)
How did Dell happen to ascend to the number one position, after IBM met with downfall? IBM had been considered as the best ‘computer Solutions Company’ with operations in many more segments of the computer market than the Dell Company. The personal computer sales alone were able to account for $15.7 billion of IBM’s total revenue of 1997, which was a $68 billion. In 1997 IBM had sales of $1.3 billion in workstations, about $4.3 billion in entry servers, and also about $6.0 billion in mid-range servers, in which it was the market leader. The IBM had in fact been the market leader for the sale of mainframe computers for many years previously, and it generally made a $19.3 billion in the revenues obtained from technical services offered to their customers, and through support. In fact, the IBM had about 160,000 technical support personnel in its employ, and these were the people who would service customers. (Profiles of Selected Competitors in the PC Industry)
It was in the year 1997 that IBM introduced mainframe computers that were based on the microprocessors that personal computers generally used, and these computers would offer the speed that the traditional mainframe computer would provide, in combination with both a lower purchase price, as well as lower operating costs. During the 1990’s IBM had experienced a growth rate of about two percentages, and the result was that its revenues rose form the figure of $69.7 billion in 1990, to $78.5 billion in the year 1997. The net income in the year 1997 was actually hardly above the $6.0 billion in the year 1990, and this was well below the $6.6 billion record earnings that the company had shown in the year 1984.IBM was in fact struggling to re-invent itself, at the time when all corporate and large businesses were in fact starting to depend on the personal computers which, it was felt, was infinitely more versatile than the mainframe computers that were sold until then.
In addition, the sales of computer hardware by IBM were also becoming low, and in fact, flat, and the areas in which it was showing an appreciable growth were those of service and in software. Therefore, it was felt that the time had come for a boost in sales, and this was the reason that the company wanted to add multiple new products to its lineup. The company, therefore, purchased ‘Lotus Development’, the spreadsheet software pioneer in the year 1995, for a sum of $3.5 billion, and also Edmark — educational software meant primarily for children, in the year 1997. In the same year, IBM happened to sell its ownership rights of ‘Prodigy’, an online service provider that was once considered to be on par with America Online, for the sum of $250 billion. (Profiles of Selected Competitors in the PC Industry)
However, IBM’s market share in the field of personal computers was in fact eroding at this time, and by the 1990’s, it had lost more market share than any other player in the personal computer market. IBM’s primary strengths, in the field, happened to be laptop computers, and also in desktop sales to several corporate customers, most of whom were already proud owners of the mainframe IBM computers, and had been loyal customers of IBM for a great many years. Since IBM had been regarded as one of the best and the top producers of personal computers, it was also possible for IBM to be one of the highest costing producers of the personal computer, and had been able to command a premium price for them. When the idea of notebook computers or laptops as they are known was created, IBM saw this as an opportunity to bolster their sales to corporate customers who had reached a stage when mobile computing capability had become very important and, in fact, a must.
Therefore, IBM launched its own range of notebook computers, which were, again, typically higher priced than those of rival sellers’. IBM was able to compete against its rivals by re-emphasizing on its long maintained standards of software applications, the excellent standards of its service, and of its service personnel, and also in the confidence that users had in the brand name, IBM. Dell had by this time managed to make several inroads into direct sales, and IBM attempted to take advantage of this idea in building up sales for itself in the personal computer market and in the laptop segment of the market. This is the reason IBM allowed some of its chosen resellers to ‘custom-assemble’ the personal computers of IBM into customer-based specifications, and the hope was that this would enable the company to cut costs up to a ten percentage, because, in the first quarter of the year 1998, IBM was believed to have been operating at either a breakeven, or at a little loss, and various attempts were being made by the company to resuscitate lost sales. (Profiles of Selected Competitors in the PC Industry)
IBM’s revenues in the year 1993 were $62 billion, and this was a sum that effectively dwarfed that of its competitors in the same field: HP was progressing at $21 billion, Digital showed a figure of $13.9, and Compaq at $7 billion, and Dell was not even in the picture as yet; it was just a simple personal computer company, with revenues at a $2.9 billion. It is evident that IBM’s revenues were at least $10 billion more than all the four of its main competitors combined. In the year 2003, the picture had changed completely, and while IBM was still the largest in terms of revenues, two of its largest competitors did not even exist any more: Digital and Compaq had been acquired by HP, and HP was also about to down its shutters in 2003, at a closing arte of about $64 billion. The number three systems vendor in the year 2003 had become Dell, with a stupendous $35.4 billion in annual revenues. The main reason for Dell managing to transcend the giant IBM is the changing nature of the IT industry, wherein today, more attention is being paid to the vendors’ share price, and a minimal attention on other performances, and this is a poor way to judge relative performances of various companies in the market. (Philipson, 2003)
Revenues, in fact, manage to give a much clearer and truer picture of the relative importance of any particular supplier, and this, particularly in relation to its competitors, especially when tracked and noted over a specific period of time. For example, IBM had stopped growing in the year 2003, and in fact, its revenues had topped out at an $87.5 billion in the year 1999, and had been declining ever since that time. Dell, which came from nowhere, is now one of the world’s number one service vendors, and has managed to overtake not only IBM but also Digital, Compaq, and HP. Perhaps the secret behind Dell’s success is that it managed to bring in low cost direct sales models of personal computers to large systems, and this was how it managed to capture such a large slice of the total computer market in a relatively short time. (Philipson, 2003)
IBM’s absolute and relative decline led to its ultimate demise in the year 2005, when it had to sell out to a Chinese company, Lenovo. Today, the most important question being asked all over the world is whether or not the Chinese Lenovo would be able to succeed in the personal computer market, in the same way that IBM did, years ago? Will this company be able to rise to the ranks of the large company IBM? When the sale of IBM to Lenovo happened, two important things became evident immediately. One was that there was today an increasing amount of commoditization, and second, China was fast emerging as a global player. Wharton Professors offer the opinion that both the trends need to be monitored very carefully, and state that the important questions that have arisen from the phenomenon of IBM selling out to Lenovo must be answered carefully. (Strategic management, the IBM Lenovo deal, Victory for China?)
Some of these questions are: can Lenovo actually succeed in becoming a global player, and also be able to integrate the managers of IBM, in the United States of America into their company? Will the numerous customers of IBM computers feel the need to defect over to Dell Computers; now that IBM is no longer in the running, or will they continue with the Chinese company Lenovo? Will the state owned Chinese companies like Lenovo start to gain in domination in the emerging trends of the international market of today? The actual deal that IBM concluded with Lenovo is that in which $1.75 billion in stock, cash, and various assumed liabilities would be taken over from IBM by Lenovo, and thereafter, Lenovo would have three real owners: the state, with a 46%, the public investors with a 35%, and IBM with 19%, with the Chinese Government owning a 57% of Lenovo.
The new company will supposedly be managed by former IBM executives who would operate out of New York, and out of a total of 19,000 employees, about 10,000 employees would be from the former IBM. Out of the 10,000 former employees of IBM, about a 40% would be based in China, and a 25% in the United States of America. How did such deal benefit IBM? IBM in fact managed to escape form a situation that was managing to pull it down with its unprofitability. What happened was that when IBM entered the personal computer business, during the early 1980’s, the personal computer was what actually defining the company. However, within a matter of time, the same business started to drag the company down, and it literally became a drag on profit margins. Over the past ten years or so, IBM has concentrated its businesses on the service sector and in the software market, and has also set its sights on China as being an all-powerful and a potentially huge market for computers. (Strategic management, the IBM Lenovo deal, Victory for China?)
This is why IBM has, over the past few years, managed to discard disk drives, displays, desktop manufacturing, and also its network processor businesses, while at the same time adding PricewaterhouseCooper’s services from the company, PwC Consulting, and also acquiring several software companies at the same time, such as Tivoli, Rational, and Informix. A Staff Industrial Engineer of IBM, who had worked in that capacity for about ten years, Mark J. Zbaracki, remarked that the deal that IBM made successfully with Lenovo demonstrated the excellent resilience of the company, and for the Beijing-based Lenovo, the acquisition of the personal computer business division of IBM was one of the first steps that China would be taking in the international market, is the capacity of a key player in global industries. Not only did Lenovo acquire a status of a world player, but it also became a participant in the worldwide personal computer market, and became, in fact, a leading computer maker with about $12 billion in annual revenues.
In addition, the company would also have access to the IBM logo for a period of five years, and also have access to the ThinkPad of IBM. China is a big believer in successful public relations, and these acquisitions would mean that now China would have achieved a major victory for itself. There are some people, like for example, Michael Useem, of the Wharton’s Center for Leadership and Change Management, who feel that this was indeed a totally unexpected and a sudden move by a Chinese company to start to operate on a world stage. This was a completely unprecedented move, he said, and also stated that it was IBM for whom it was a better deal, because of the fact that by becoming partners with Lenovo, it was in fact gaining infinitely better access to the market for various services, in China. (Strategic management, the IBM Lenovo deal, Victory for China?)
In addition, IBM would also be able to develop, through the deal, stronger relations with the Chinese Government, and this factor would only serve to boost IBM’s standing and its position in China. It must be remembered that good and strong relationships with the government are extremely important in china, and probably IBM sees this as a perfect alliance with the Chinese government, something that would further its stake in the world market. Therefore, even if the price that it received for the sell off may not have been excellent, perhaps the development of better relations with the Chinese government would more than make up for this lack. However, the point here is whether or not Lenovo would be able to play with such players as Dell and Hewlett Packard, and succeed inn its efforts? Obviously, Lenovo feels that the answer would be a definite ‘yes’, and at a Press conference that was held in Beijing immediately after the deal with IBM was announced, the retired Lenovo Chairman, Liu Chuanzhi, stated that since there was not much space left for the company to keep growing in the domestic market, it had no option other than to start to globalize and to expand its businesses on a world wide stage.
However, the deal did not come without inherent risks, stated Liu. One risk was whether IBM’s old clients and the computer market would be able to gladly accept the new Lenovo as the new player in the market, and the second risk, would be whether or not the former employees of IBM would still be proud to be working for a Chinese company Lenovo, which many people would not have even heard of in the United States of America. Thirdly, Liu stated, another risk would be whether it would be at all possible to consolidate and combine the two vastly different corporate cultures into one single unit. In fact, quite a few critics have been keenly aware of the fact that this would be one area in which China would find it very difficult to attempt to combine the two entirely and completely different cultures, and also attempt to manage the very highly complicated and complex logistics of supply chains, in order to successfully move forward bravely into an area which has been known, lately, for its shrinking profit margins, above anything else. (Strategic management, the IBM Lenovo deal, Victory for China?)
The new Chairman of Lenovo, Yang Yuanking, stated that he was, in fact, very optimistic about his company’s future on the international and global stage. He said, with enthusiasm, “Lenovo of China is going to be Lenovo of the world,” and also said that Lenovo would hardly be happy and satisfied I being the world’s number there player; in fact, it would much rather be number One, and would attempt with all the resources available, to achieve this position, by beating the other two giants at their own game, within a matter of a short time. He also added that they had conducted an analysis on their own about the reason why IBM had failed as it had done, in the world market for personal computers, and what they had discovered was that IBM was basically a service-oriented company that laid primary emphasis on products which had high returns. But the sad fact was that since the personal computer business was at a stage wherein the better the efficiency, the more the success rates, and IBM was not able to put this simple fact into action on time, and was rather,
In fact, applying its old business model to the same, it had to face failure and defeat. The personal computer market is one in which, in order to reach a scale of high efficiency, there would have to be a big product scale, and since IBM had been focusing only on the very big corporate clients, and had been literally ignoring all the middle sized ones, it very definitely hurt IBM in the long run, especially in the market where competitors and rivals like Dell and Hewlett Packard were also in existence. The new Chairman stated that since the company Lenovo had analyzed all these factors and come to various conclusions, it would be much easier for them to overcome whatever defects and problems IBM may have faced when they had been the major players in the computer market, and when they did so, emphasized the Chairman, they could be reasonably sure of a bright and brilliant future for their company. (Strategic management, the IBM Lenovo deal, Victory for China?)
The ongoing commercial relationship between IBM and Lenovo has come to herald and bring in a brand new era in ‘post-sale support’ following divestiture and division of the product manufacturing business. In general, when a divestiture happens, all the related sensitive issues of post-transfer marketing, goodwill, and customer support, would all have to be taken care of. When the divestiture is of a global company to a regional buyer, and in particular, a foreign government owned regional buyer, then several other sensitive issues would also be brought to the forefront, and some of them are the political review of the technology, the financial aspects, and so on. (Outsourcing Law, Deal structure, Case Study)
In the same way, the IBM-Lenovo transaction happened to convert an American owned company involved in product manufacturing, marketing, selling, as well as financing operations, which had in fact been completely integrated with several other products and services, into entering into a joint venture with the control resting with the Chinese buyer of the company, in this case, IBM. The benefits that Lenovo gained from this deal with American IBM were manifold, and among several others, these are the more important ones: a reduction in the infrastructure and the services costs, a transfer of the technology, know-how, and other expert advice on to Lenovo, so that this company may be able to reach the standards of IBM. Lenovo would in fact need such skills and technical know-how form that company, so that it may be able to compete successfully, and also be well prepared to combat with the others in the field, like Dell, and with Hewlett Packard.
However, when looked at from the other side, Lenovo has also managed to acquire some very significant risks, and some of these are that Lenovo lacks in proper and adequate leadership. In fact, the sale in itself took place based on the innate belief that this company would eventually learn to compete, on a global scale, with several other competitors in the same field. This fact was especially exacerbated because, at the time of the sale, Lenovo was neither a veritable technology leader, like IBM was, or like Apple Computers was, nor was it a cost-efficient producer, like Dell was. In addition, a few years before the acquisition of IBM, Lenovo had in fact attempted to diversify into technology services, and also into contract manufacturing, both areas in which it apparently met with more failure than success. Furthermore, the failure seems to have resulted in layoffs and retrenchments, and the very ability of Lenovo to absorb the entire personal computer manufacturing division, and also to be able to develop the required expertise in several areas of product support, and in customer support presents a very important challenge, and this particular challenge includes the fact that the very likelihood and possibility that while pursuing a global marketing strategy, Lenovo could very well start to neglect its own domestic market would be putting the entire company at a severe and significant risk. (Outsourcing Law, Deal structure, Case Study)
Another risk is that when Lenovo dedicates its homegrown products to its indigenous market, the result would be severe logistical challenges, and this would eventually mean that the company would be forced to depend on IBM to face the various challenges of process management and of transitioning. Therefore, IBM would have to out of necessity continue to offer its services that support product delivery, installations, repairs, and also other after sales services for a long time to come. The point of fact is that companies like Dell have already been outsourcing such essential services for a long time now, and it cannot be denied that Dell definitely has infinitely more experience in the selection and in the management of such service providers across the globe. Therefore, it can be said that now Lenovo would not only have to learn how to manage the foreign company IBM, but it would also have to put in a lot of effort to learn and to develop and also to manage the global network of service providers, like Dell, and of logistics support. This is true even though it is apparent that when acquiring IBM, Lenovo has also acquired many such personnel and facilities, but, process management would be something that the company would have to learn over a period of time, and maybe, in the meanwhile, its various customers would be adversely affected by it.
Another significant risk that Lenovo has undertaken is the fact that it is in a keenly observed competition as far as price is concerned, with Dell Computers. In addition, Lenovo has not yet learnt how to master the technique of ‘just-in-time’ method of manufacturing, and what this means is that its ‘days of inventory’ where their computers remain unsold, are significantly higher than that of other companies like Dell, and Hewlett Packard. A Wall Street Journal article has revealed that Dell has a mere four-day rate, while Lenovo has a rate of 27 days for inventory. Such high inventory levels in fact result in the creation of a risk of either ‘non-sale’, or a ‘depressed rate’ of sale. It could also lead to increased incentives and a price protection for its wholesale customers, and perhaps many other similar prices-based discounts, wherein competition would basically drive prices down in a sort of constant spiral. Finally, the record of a successful enterprise established by the acquisition of a Western company by a joint venture is extremely short and unsuccessful, and nobody knows how this particular acquisition by Lenovo of IBM would eventually develop and end. Therefore, the question of whether or not Lenovo would be able to improve its position in the personal computer market over what IBM had remains a moot question, and it remains to be seen whether Lenovo would be able to achieve what many others have not. (Outsourcing Law, Deal structure, Case Study)
What exactly is ‘competitive advantage’? And what exactly is Sustained Competitive Advantage? This is something that one would achieve as a direct result of offering more value to a particular customer than the competition succeeds in doing. (Talk: Sustainable Competitive Advantage) It is in recent years that the subject of competitive advantage has gained in importance, and the topic has in fact managed to take center stage during discussions on business strategy. However, the exact definition of competitive advantage has remained just out of grasp, and some persons opine that it is in fact the value that has been created by favorable trade in product markets, some others state that advantage is in fact actually ‘super-normal returns’, and some others feel that it means that there has been an advantage in the stock market. When a firm is to have a ‘sustained competitive advantage’, what it has to do is to be able to capture the value that it has created. Therefore, if it is said that Dell has a sustained competitive advantage, what it means is that this company has an advantage that should persist even after it has been sold off to another firm, at a fair market value. (Rumelt, 2003)
Therefore, why is it that while many companies flourish, many others are floundering in a desperate state? The former marketing executive at Dell, when asked about why Dell was such a big success, stated that Dell’s business model might have been the real cause for its continued and sustained success in the personal computer market. The two main and critically important points that were in the business plan were: an excellently efficient supply chain management, and secondly, an integrated demand-chain management. While the supply chain management has been able to successfully provide certain structural cost advantages that have in fact enabled the company to offer consistently good services to all its customers, the demand chain management has enabled Dell to leverage and manipulate the advantaged value proposition into an efficient and effective customer retention and a customer acquisition program. Therefore, says the former marketing executive of Dell, Integrated Marketing, as utilized by Dell, is one of the best methods in which to do marketing, and it can be defined as the alignment of the organization’s resources and all its activities in such a manner that it would be able to successfully acquire as well as to retain customers. (About / Best Practices Center, Results Oriented Integrated Marketing the Dell Way)
This is, in essence, why Dell has been managing to do so very well in what it has been doing, and perhaps this is what gives Dell the sustained competitive edge that it needs in order to move forward, as well as to maintain its present status as one of the foremost players in the personal computer market. These are the various steps that Dell has taken in order to remain at the top: it has managed to align all the activities within the company, like for example, its product development, its marketing operations, its sales, and its service and operations, and so on, in such a way that all the functions are executed effectively and efficiently. Also, Dell has allocated certain resources to areas of high returns, and this also means that it has successfully managed to cut out all its non-effective activities within the company. The primary emphasis and focus is on customers, and the various ways and means in which to serve the customers with a competitive advantage.
The idea of executing marketing programs across the several multimedia available today in a coherent and cohesive manner also helps Dell in gaining a sustainable competitive advantage over other companies, and would probably help it to move forward into the future with ease. Dell also has the cutting edge over others, of learning from the several different feedback loops that it uses, and utilizing these feedbacks and opinions in a positive way, wherein a constant striving for improvement and changing, and learning from one’s mistakes is the hallmark of Dell. The most important practices that Ell has been using over the past many years in order to remain in the running for the position of Number One are the following: Dell focuses on the exact market segments in which it has hopes of winning. Dell also continuously defines as well as improves its basic value proposition, and, thirdly, it has been redefining its basic business model so that the value proposition may be enhanced. When the entire operation is aligned in such a way that the value proposition to distinct market segments is carried out profitably, then that is the way to success that Dell has formulated and perfected over the years. (About / Best Practices Center, Results Oriented Integrated Marketing the Dell Way)
It is a fact that the past five years have seen major and often irreversible changes in the computer industry. The emphasis today is on next-generation computer technology. (Nancy, 2003) The fashion today, is, however, to blame all the big companies and vendors in the personal computer and software market for dominating all the big chunks of market segments available. (Whining by a Barrel of Rocks) The threats and challenges being faced by the players in the computer and especially in the software and in the personal computer businesses today are manifold. Hewlett Packard, for instance, is not able to maintain its position as the world’s number one, in IT hardware manufacturing, because its financial performance is not up to the required standards.
In addition, it is facing mounting threats and challenges from the various other competitors in the market, and several analysts have in fact been issuing warnings to the company about this. Gartner has warned that they would be forced to launch a campaign in which significant ‘cost cutting’ methods would be analyzed and implemented, so that they would be able to face the growing threats from Dell and from IBM, and Lenovo, with some ease. Today, HP is one of the leading manufacturers of IT hardware in the world, and its sales figures show that in the first quarter of the year 2005, it had sales of about $13.5 billions. However, state experts, this may not be sufficient enough for Hewlett Packard to be able to keep up its current position of unchallenged leader, and it may have to step down for its competitors. (Jacques, 2005)
In fact, Dell came a very close second to HP during the same time period, and Dell may well turn out to oust HP from its position as leader. Another emerging challenge today in the computer industry is the fact that IBM has sold out to Lenovo, and this company has been emerging gradually as a significant threat to both Dell and to HP. Therefore, most probably, both HP and Dell would have to undertake cost cutting efforts so that they may be able to cope with the challenge of the Chinese group, Lenovo, which, with IBM’s backing and support, has started to pick up profits. However, cost cutting alone may not be sufficient; it would have to be necessarily accompanied by challenges to the companies to increase, significantly, their revenues. Both Dell and HP would not sell off any of their existing business lines, however, in a bid to cut costs; rather, they would make several short-term plans that would be able to cope with the challenges. In the same way, they would not attempt to make any changes in their product portfolios, nor in their market strategies. (Jacques, 2005)
Lenovo would also be faced with many challenges today, and this is because of the fact of increasing globalization and of the trade liberalization in China today. The computer companies of China had in fact, at the time of the sell out by IBM, been reducing the prices of their computers, so that customers may not be attracted by the IBM-based computers that were about to flood their market, and this posed a problem with pricing for Lenovo. However, it was widely believed that Lenovo was indeed capable of overcoming all the challenges, and that it would go on to becoming another important player in the computer market. Although this is yet to be ascertained, there is hope everywhere that this is a company to watch out for, in the future. (Spulber, 2005)
References
Ellett, John. “About / Best Practices Center, Results Oriented Integrated Marketing the Dell
Way” Retrieved at http://www.nfusion.com/about/best_practices/Results-Oriented_Integrated_Marketing.html. accessed 27 July, 2005
Konrad, Rachel. (10 August, 2001) “From Bits to Boom, IBM PC turns 20″ Retrieved at http://ecoustics-cnet.com.com/Mixed+record+as+PC+turns+20/2009-1040_3-271422.html. accessed 27 July, 2005.
Outsourcing Law, Deal structure, Case Study.” Retrieved at http://www.outsourcing-law.com/DealStructures/IBM.Lenovo.2005.01.06.htm. accessed 27 July, 2005
Philipson, Graeme. (December 2, 2003) “A decade on and how the mighty have fallen”
Retrieved at http://www.smh.com.au/articles/2003/12/01/1070127342434.html?oneclick=trueaccessed 27 July, 2005
Pollack, Andrew. (13 August, 1981) “Big IBM’s Little Computer” The New York Times.
Retrieved at http://www.darron.net/firstibm.html. accessed 27 July, 2005
Profiles of Selected Competitors in the PC Industry.” Retrieved at http://www.mhhe.com/business/management/thompson/11e/case/dell7.html. Accessed 27 July, 2005
Jacques, Robert. (23 February, 2005) “Dell and IBM threaten HP’s dominance” Retrieved from http://www.pcw.co.uk/vnunet/news/2126820/dell-ibm-threaten-hp-dominanceaccessed 28 July, 2005
Nancy, Herther. K. (2003) “Today’s Computer Industry, Facing Major Challenges”
Retrieved at http://wotan.liu.edu/dois/data/Articles/julfpcatty:2003:v:21:i:3:p:262-265.html. accessed 27 July, 2005
Rumelt, Richard. P. (5 August, 2003) “What in the world is Competitive Advantage?”
Retrieved at http://www.anderson.ucla.edu/documents/areas/fac/policy/WhatisCA_03.pdfaccessed 27 July, 2005
Spulber, Daniel. F. (January, 2005) “Lenovo, the leading Chinese Company enters Global
Competition” Journal of Strategic Management. Retrieved at http://www.kellogg.northwestern.edu/academic/international/research/workingpapers/SpulberLegend.pdfaccessed 28 July, 2005
Strategic management, the IBM Lenovo deal, Victory for China?” Retrieved at http://knowledge.wharton.upenn.edu/article/1106.cfmaccessed 27 July, 2005.
Talk: Sustainable Competitive Advantage” Wikipedia, the free encyclopedia. Retrieved from http://en.wikipedia.org/wiki/Talk:Sustainable_competitive_advantageaccessed 27 July, 2005
Triebwasser, Marc A. (1998) “The Computer Industry” Retrieved at http://www.ims.ccsu.edu/Computer.htm. accessed 27 July, 2005.
Triumph of the Nerds” Journal Note, AAS. (June 13, 1996) Retrieved at http://www.msu.edu/course/aec/810/nerds810.htm. accessed 27 July, 2005.
Whining by a Barrel of Rocks” Retrieved at http://software.ericsink.com/bos/Whining_by_a_Barrel_of_Ro.html. Accessed 28 July, 2005.
Who’s the No. 1 PC maker now?” (10 December, 2004) Times News Network. Retrieved from http://infotech.indiatimes.com/articleshow/msid-954630,prtpage-1.cmsaccessed 27 July, 2005
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