Lenovo’s Acquisition of IBM’s PC Division:
A Short-cut to be a World Player or a Lemon that Leads Nowhere?
1. General presentation
2. Identification of problem, causes and negative effects
Strategic problem definition:
• Acquisition of IBM – PC division as part of the expansion strategy.
• Lenovo was number 9 on PC market and had 2.2% market share worldwide and therefore it wanted to increase its market share position. • Lenovo became a market leader in China with 27% market share and wanted to expand. • They first tried to diversify into non-PC areas but they failed and consequently they decided to concentrate only on PC-products. • The PC-products expansion was easier by acquisition because opening subsidiaries would have been costlier. • The need to expand was also motivated by the competitive pressure pushing for a lowering of the production cost.
• Losing opportunity of economies of scale.
• Inability to maintain cost competitiveness.
• Other expansion strategies might be too difficult to apply and it would take a lot of time to get the same access to international markets in other ways.
3. Alternative solutions
3.1. Acquisition of IBM’s PC division.
• Increase in market position.
• Guaranteed presence outside of China.
• Capitalizing on the IBM brand.
• Managerial know-how spill-over.
• Saving $200 million per year.
• Benefits from the reputation of IBM products (ThinkPad, ThinkCentre). • Assertion of leverage on global market.
• The combined entity’s global infrastructure would help drive cost savings by marrying an efficient supply chain with a low cost manufacturing base. • Sharing of best practices, consolidation of vendor lists and increasing the use of standardized parts by consolidating product lines. • Opportunity to sell Lenovo’s low cost consumer products in emerging markets through IBM’s extensive distribution network. Disadvantages:
• Lenovo’s lack of knowledge of free market mechanism being a Chinese company. • Lenovo’s lack of experience in managing different markets within a portfolio. • Enforcing the competition by the crowding out of previous IBM clients towards Hewlett – Packard and Dell. • Financial risks.
• Integration risks – cultural and operational (distinct cultures within the two companies). • Political risks – resistance from U.S. politicians. • Competitive response risk – competing head–to–head with Dell and Hewlett-Packard, IBM PC might have to match aggressive pricing, thereby cutting into the firm’s profitability. • Brand risk – degradation of the ‘ThinkPad’ brand around the world and risk in combining the ‘high-end’ IBM brand with the ‘lower-end’ Lenovo brand.
3.2. Not to acquire IBM’s PC division; Postpone internalization until new acquisition opportunities arise
• Use its earnings to invest in R&D for developing their own more advanced technology and be able to compete with the big players. • Make a name for itself through its own powers. • Maintain a relatively small, but safe profitability (140 million$ profit; 20 billion$ sales).
• The acquisition of IBM PC by competitors (especially Dell, HP) would lead to a considerable increase in their market position and power. • They would not benefit from foreign technological and managerial know-how. • It is inconsistent with the manager’s vision of...