Cerebration 2012

LENOVO: SUSTAINABLE MARKET LEADERSHIP

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is case was prepared from public sources solely for Cerebration 2012, NUS Business School Case Competition. Cases are not intended to serve as endorsements, sources of primary data or illustrations of eective or ineective management.

It All Starts With A ought

Howie HS Lau, Vice-president of Marketing for Lenovos Emerging Market Group, just nished reading Lenovos FY2012 annual report and couldnt help but feel overwhelmed by the growth trajectory followed by the company. From its humble start with RMB 200,000 (US$ 25,000) seed capital in 1984, Lenovo has now become the second largest PC (desktop and notebook shipments) company in the world with a market value of US$ 30 Bn. As he paced in his oce, he pondered about the reasons for the companys indisputable success. He thought about the product, market and customer composition, the marketing and branding drives, the core beliefs and strategies directing the company, the business models, and any other aspect that came to his mind. He could not determine whether it was a handful of factors or a delicate blend of multiple factors that catapulted the company into the current number two position for PC sales. He wondered if the expected success from all the eorts being put into the PC business will be mitigated in future by adverse global economic conditions, sti competition, or a paradigm shift in personal technology products oered to customers and changes in customer needs. Howie took out his inkPad X1 to write down his thoughts. He immediately knew that there are many intricate questions involved and resources from dierent departments may need to be pulled in to address these questions. He ensured that a consistent theme ran across his message to his global peers what will it take for Lenovo to become the leading PC company in the world (in terms of desktop and notebook sales) and how does Lenovo sustain that position once it gets there?

e Industry
PCs have come a long way from being an expensive and luxury product to an aordable and necessary commodity. e worldwide PC market is closely linked to the global economy and subsequently, for much of 2011, the market was sluggish as it witnessed a slow economic recovery. Mature markets, such as US and Western Europe, saw a decrease by 9% in PC shipments in 2011 compared to 2010. However, worldwide PC shipments ended on a positive note, with a growth of just 1.8%. Both Gartner and IDC (Exhibit 1) project weak growth, 4.4% and 5% respectively, for worldwide PC shipments in 2012 on the back of weak economic conditions, reduced exports and supply constraints (caused by oods in ailand, which produces one third of the worlds hard drives). However, there are strong growth prospects in 2013 due to rising interest in ultrabooks1 and Microsofts forthcoming Windows 8 operating system. As the PC demand is saturated in Mature Markets, where people primarily need to replace their existing units, PC growth will be led by demand from Emerging Markets, both in the short and long term.

1 Ultrabooks are lightweight, high-performance laptops with solid-state drives and long ba:ery life.

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e popularity of media tablets2 and smartphones3 is also hurting the worldwide PC market. Although tablets are tools primarily for content consumption and PCs are better suited to enable content creation, this dierence may not be enough to counteract the growth in the media tablet market. Applications such as e-mail, social networking and Internet access, that were traditionally the domain of PCs, are now being used across media tablets and smartphones. us, these devices represent, in some cases, a more valued and attractive proposition, as few people may consider media tablets as replacement for their PCs putting added pressure on PC vendors to innovate and dierentiate themselves. Accentures 2012 Consumer Electronics Products and Services Usage Report present a study of 10,000 consumers across 10 countries for consumer technology and service preferences. e report emphasizes that the movement to mobility is inevitable and is proceeding at full throttle. Tablet and smartphone ownership is rising steeply and at the same time, the percentage-point increase in tablet and smartphone purchase almost equals the purchase decrease in computers and mobile feature phones (Exhibit 2). While the tablet market is in its infancy stage, ownership of tablets is a hot prospect. Intention to purchase a tablet (out of 19 technologies surveyed) in the next 12 months has doubled from the previous years survey (Exhibit 3). Two critical insights from the survey are that younger consumers (under 35 years of age) are leading the adoption of new technologies and as consumers buy tablets, they increasingly view their laptop as a more stationary device. When talking about markets, with the exception of India, consumers in urban areas of Emerging Markets spent a greater percentage of their annual income on consumer electronics in the past 12 months than those in Mature Markets (Exhibit4).

Lenovo, Aggressively Chasing the Leader

Worldwide PC shipments totalled 89 million units in the rst quarter of 2012. HewlettPackard (HP) increased its share as the global market leader to account for 17.2% of the worldwide PC shipments (Exhibit 5). Lenovo, the second largest PC vendor in the world, experienced the strongest growth among the top ve vendors as the company enjoyed healthy growth in the professional market and successful expansion into the consumer space. Lenovo became the worlds number two PC maker in FY2012 by being the fastest growing PC company for the past 10 consecutive quarters, outperforming the global PC market for the past 12 consecutive quarters.

Introduction to Lenovo
Lenovo, listed on the Hong Kong Stock Exchange, is a US$ 30 Bn personal technology company. It is a global Fortune 500 company with headquarters in Beijing (China) and Morrisville (U.S.), and major research centres in Yokohama ( Japan), Beijing, Shanghai and Shenzhen (China), and Raleigh (U.S.). Lenovo came into the global limelight with the acquisition of the Personal Computer division of IBM in 2005. Since then, the company has grown to employ more than 26,000 people in more than 60 countries, serving large enterprises, small-to-medium businesses
2 According to Gartner, a tablet is any slate over 5 inches running a full operaBng system like Windows, Mac OS X, or

Linux. This may include Apple iPad, Dell LaBtude XT, Asus Eee PC T91, Samsung Galaxy, etc.
3 A device that combines a cell phone with a hand-held computer, typically oering internet access, data storage, e-

mail capability, etc.

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(SMB) and consumer customers in more than 160 countries. With its focus on product innovation and growth, the company has collated a number of reputable accolades: No. 1 in two out of three of the worlds largest PC markets ( Japan and China) No. 1 in global emerging markets No. 1 in global large enterprise/public sector notebooks No. 2 in global commercial notebooks No. 2 in global all-in-one (AIO) PCs Lenovos desktop and notebook products are marketed under two brand names ink Product Group and Idea Product Group. e ink Product Group mainly targets commercial customers. e group leverages on its dual-business model that serves global/ large enterprise customers through a relationship model and SMB customers though a transaction model (wherein, it helps solution providers deliver the right PC at the right price point to the fast growing SMB segment). According to industry estimates, Lenovos commercial PC unit shipments grew by 26% year-onyear and the company has a market share of 16.8% in the worldwide commercial PC market in FY12 (a year-on-year growth of 3%). e Idea Product group primarily focuses on the consumer products segment. e groups strategy is to attack the fast growing consumer markets in China, Emerging Markets and Mature Markets. According to industry estimates, in FY12, the companys consumer PCs unit shipments grew by 51% year-on-year and its market share increased by 3.1% year-on-year to reach 9.7%. Lenovos product line can be broadly classied into the following 3 categories: Laptop & Notebook Products: Lenovo is the worlds 3rd largest notebook company and the worlds 2nd largest commercial notebook company. In FY12, the companys notebook PC unit shipments grew by 36% year-on-year, against the market growth of only 5%. Given its strong performance, Lenovos share of the world notebook market grew by 2.9% to reach 13% for FY12. Desktop & AIO Products: In the current year, the company captured a share of the expanding AIO market and became the worlds largest AIO player, reinforcing its world No. 2 position in commercial AIO. e desktop PC business grew 34% year-on-year to capture a 12.8% share (a yearon-year market share increase of 3.2%) of the world desktop PC shipments. In FY12, Lenovo leaped forward to become the 2nd largest global desktop PC company, up from 3rd place in the previous nancial year. Mobile Internet Products: Lenovo believes that a new PC + Era is on the horizon that goes beyond traditional PCs to include smartphones, tablets and Smart TV. Consequently, the company has been preparing for this paradigm shift, and the Mobile Internet Digital Home (MIDH) Group is driving product expansion in these new devices. is group is also responsible for developing cloud services and applications that will fuel these next generation convergence devices. Notebooks have been the largest sales contributor, followed by Desktop products. e MIDH group, which is a comparatively recent initiative, is steadily increasing its share in the total sales of the company (Exhibit 6). At the core of this unparallel success are Lenovos deep-rooted strategies and priorities. e company believes that success in the highly commoditized PC market is driven by constant and relentless innovation that creates better user experience. Its business model relies on enhancing in-house manufacturing capabilities, strong R&D and building close partnerships with strategic suppliers. All eorts are geared towards striking a balance between the companys near-term performance and building a strong foundation to ensure long-term success.
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A critical part of Lenovos success is its unique Protect and Attack strategy. It understands that its legacy markets are China and commercial customers, which the company needs to protect. On the other hand, to foster growth, it has to attack the Emerging Markets and the fast growing consumer market. erefore, it is equally important for Lenovo to evaluate its performance (Exhibit 7) based on geographies i.e. China, Emerging Markets (ex-China) and Mature Markets. China: China accounts for 42% of the total revenue. Chinas PC market grew by 13% in FY12, making it the largest PC market in the world, and Lenovo continued to outperform the market and extend its leadership in the Chinese market. e company continued to protect its share of the mature cities and attack emerging smaller cities and rural areas where demand is strong due to low PC penetration. It witnessed a 25% year-on-year increase in unit shipment growth in China, helping increase its market share by 3.2% to reach an all time high of 32%. (Exhibit 8) Emerging Markets (ex-China): is accounts for 16% of the companys revenue. Lenovo continues to expand its business operations in these markets through making improvements in distribution channels and product portfolio, and investing in branding initiatives. e strategy behind attacking Emerging Markets is to be aggressive in markets with less than 10% market share and on achieving this threshold, Lenovo will balance further share growth with improved protability. Once market leadership is established, the company seeks to maximize protability. In India, Lenovo became the leading PC vendor, a 13% market share, with ten straight quarters of faster than market growth. In Russia, it became the third largest PC vendor. Overall, unit shipments grew by 38% to achieve a record-high market share of 7.2% in Emerging Markets. (Exhibit 9) Mature Markets: Mature Markets account for 42% of the total revenue. Unit shipments to Mature Markets grew 53%, against an overall market decline of 5%. Its market share reached a record-high level of 8.7% during the scal year, and a record-high of 10.1% market share in the scal quarter four, the rst time its Mature Markets share reached double-digit level. e company has a unique strength in the commercial business and in FY12, it beneted from strong corporate PC demand. e company also increased its SMB business and attacked the consumer space through expanding retail presence and making investments in branding and marketing to increase brand visibility and awareness. During FY12, the successful completion of the joint venture with NEC PC in Japan and acquisition of Medion AG in Germany boosted performance in Japan and Western Europe respectively. (Exhibit 10)

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How Lenovo Can Continue to Grow

As a lot of things are happening simultaneously in the company, Howie needed clarity on what the driving factors are. At one end, the company is looking to extract the most benets from the under-penetrated Emerging Markets and the fast growing consumer segment, but at the other end, the company is investing heavily in For ose Who Do brand campaign, in-house manufacturing, R&D and M&A, and building an end-to-end business model and enhancing vertical integration. All this is being done to achieve the goal of becoming the leading PC (desktop and notebook) sales company in the world. Howie is looking to build a task force from dierent divisions of the company to address broad concerns about how to become the worldwide leader in PC (desktops and notebooks) business: As the consumer segment is showing increased appreciation for MIDH products, who is the prime user and what is the target geographic market to fuel growth for PC (desktop and notebook) business? How should Lenovo tap these markets? In the light of global economic slowdown and increasing concerns about decreasing demand from Emerging Markets, what should be the implementation strategy for the PC business? How real is the product substitution threat for PC products? Where is this threat coming from low cost producers, tablets & smartphones, US based vendors who increasing their focus on emerging markets, etc? How can Lenovo ensure that its market leadership position is sustained in the long run?

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EXHIBITS
Exhibit 1: IDC Projections for PC Shipments by Region (in Millions): Region Type 2011 2012* 2013* 2014* Emerging Markets Mature Markets Desktop Portable Total PC Desktop Portable Total PC Desktop Worldwide Portable Total PC 91.2 110.0 201.2 52.8 99.4 152.2 144.0 209.4 353.4 93.0 122.3 215.3 51.6 104.1 155.7 144.6 226.4 371.0 98.2 140.4 238.6 51.7 116.2 167.9 149.9 256.6 406.5 102.5 164.2 266.7 50.7 128.2 178.9 153.2 292.4 445.6 2015* 105.4 189.2 294.6 50.2 139.0 189.2 155.6 328.2 483.8 2016* 108.2 214.7 322.9 48.8 146.6 195.4 157.0 361.3 518.3

Exhibit 2: Consumer Electronics Purchased in the Last 12 Months

Exhibit 3: Which of the 19 consumer electronics do you plan to purchase in the Next 12 Months?

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Exhibit 4: Spending on Consumer Electronics

Exhibit 5: Worldwide PC Vendor Unit Shipment Estimates for Q1 2012 (Units) Company HP Lenovo Dell Acer Group ASUS Others Total Q 1 2012 Shipments 15,305,413 11,629,510 9,826,121 9,684,524 5,361,994 37,171,419 88,978,981 % Share 17.2 13.1 11.0 10.9 6.0 41.8 100.0 Q 1 2011 Shipments 14,785,739 9,075,667 9,984,358 10,660,254 4,420,328 38,357,841 87,284,188 % Share 16.9 10.4 11.4 12.2 5.1 43.9 100.0 Q-on-Q Growth (%) 3.5 28.1 -1.6 -9.2 21.3 -3.1 1.9

Note: data includes desk-based PCs and mobile PCs, including mini-notebooks but not media tablets.

Exhibit 6: Lenovos Sales by Products (FY12, US$ Millions)

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Exhibit 7: Lenovos Sales by Geography (FY12, US$ Millions)

Exhibit 8: Lenovos China Market Share and PC Shipment Y-on-Y Growth (%)

Exhibit 9: Lenovos Emerging Market Share and Y-o-Y Gain (%)

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Exhibit 10: Lenovos Mature Market Share and Y-o-Y Gain (%)

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