Quest for success in the PC+ Era


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Solution to the Lenovo's business case study for the International Case Study competition organised by the National University of Singapore. This solution was selected in the last 15 of the entire lot.

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Quest for success in the PC+ Era

  1. 1. PROBLEM STATEMENT 2008 – After the global financial crisis, Lenovo recovered relatively well than the other players 2011- Launches Mobile Internet Digital Home (MIDH) division, Lenovo heralded the start of the PC+ era Protect and Attack Strategy 2013 – Achieves global leadership in the PC market, but domination in other smart connected devices still remains a challenge Marketing and Branding Strategies • Fortify its existing dominance in the enterprise segment while trying to gain higher market share in the consumer and SMB segments • Helped transform the company’s brand from a Chinese local player into a serious global competitor  Will the same factors help Lenovo sustain its current position while reaching out for its more ambitious goal of transforming into a PC+ innovation leader ?  What external strategies are need to be put in place to replicate its success in the highly competitive smart connected devices space ?  Is higher focus required on a few key factors, or a balance needed across different areas ? “Balancing growth and profitability across our entire PC business is our focus going forward,” - Yang Yuanqing, Chairman Lenovo Group
  2. 2. MARKET ANALYSIS – GLOBAL PERSPECTIVE Growth Rate 2012-2013 (in %) – Globally others -0.6 [VALUE] -3.9 -10.5 -20.5 -35.3 Source: Gartner Report, ID - 2544115  Worldwide PC shipments dropped to 76 million units in the 2nd quarter of 2013, a 10.9 % decrease from same period last year  Marks 5th consecutive quarter of declining shipments, which is the longest duration of decline in the PC market’s history  Lenovo showed mixed regional results, as it experienced strong growth in the Americas and EMEA, while showing a major decline in Asia/Pacific  Weakness in China was most likely the contributor of Lenovo’s shipment decline in the region as the majority of Lenovo’s volume came from China. “ We are seeing the PC market reduction directly tied to shrinking installed base of PCs, as inexpensive tablets displace the low-end machines used primarily for consumption in mature and developed markets. In emerging markets, inexpensive tablets have become the first computing device for many people, who at best are deferring the purchase of a PC. This is also accounting for the collapse of the mini notebook market. ” Mikako Kitagawa, principal analyst at Gartner
  3. 3. MARKET ANALYSIS – US MARKET Growth Rate 2012-2013 (in %) – US Region 19.7 6.4 [VALUE] others -4.3 -15.7 -11.7 Money Source: Gartner Report, ID - 2544115  In the U.S. market, PC shipments totalled 15 million units in the second quarter of 2013, a 1.4 percent decline from the second quarter of 2012  Money – Rising unemployment and burning currencies results in lesser incentive to buy a PC  Technology – Improvements to PC performance have been a slow crawl with mere 10% CPU PC+ gains y-o-y  Boredom – Mass production of commodity computer with little hardware innovation specially at the affordable end of spectrum where vast majority of sales occur  PC+ - Mass migration to longer PC replacement cycles in the PC+ era means fewer people buying PC on a yearly basis $420 – Average selling price for a non touch windows 8 laptop which is not enticing for a customer when his/her current PC is working well Declining Sales Techno logy Boredom
  4. 4.  MARKET ANALYSIS – EMEA MARKET & ASIA PACIFIC PC shipments in Europe, Middle East and Africa (EMEA) were weakened in the 2nd quarter of 2013  There was a 16.8 % decline over the same period last year, marking the 5th consecutive quarter of decreasing shipments  Lenovo was the only top five vendor to exhibit shipment growth, recording a fourth consecutive quarter of growth  It took second place in the EMEA PC vendor rankings in the second quarter of 2013 Growth Rate 2012-2013 (in %) – EMEA Region 21.2 others -8.9 -19.3 -38.5 Source: Gartner Report, ID - 2544115 -12.1 -34.7  In Asia/Pacific, PC shipments surpassed 26.8 million units in the 2nd quarter of 2013, an 11.5% decline from the 1st quarter of 2012  All country markets across region showed weakness, but India performed slightly better due to a state PC tender fulfilment.  China’s PC shipment remained weak as consumer market was hampered with lack of new demand generation programs, such as subsidized PC program in rural cities Growth Rate 2012-2013 (in %) – Asia Pacific Region -2 -6 -4 -15 -35 Source: IDC, April 2013 -14 others
  5. 5. TARGET MARKET ANALYSIS  Users in emerged markets shifting towards MIDH because it is trendy and portable  High Penetration in these markets (~80%) whereas in Emerging Markets it is much lower(~30%)  Total PC shipments in these markets decreased by 9%, whereas the growth in the emerging markets is about 26%  Moreover the middle class in the emerging economies will spur the PC growth because of the drastic reduction in the “weeks of average income required to buy an averagepriced notebook PC”  Expected CAGR of worldwide PC shipments (2011-16) is 8% but in mature markets it is only 5% whereas in emerging markets, it is 24% 440.5 276.3 174.7 126.2 125.9 111.8 59.5 29 47.7 41.1 1995 78.9 56 16.8 30.6 16.1 2000 Eastern Europe China 2005 India 30.8 Latin America 7.1 16.6 5 6.5 2010 Ermerging APAC 2014 10.3 2.6 8.8 2.2 3.4 Source: WOI to buy NB PC – Intel & Population by GEO – Economist Intelligence Unit (EIU) PC Penetration (in % of households penetrated) 82.2 Hence Lenovo should focus on tapping these emerging markets Weeks of average income to buy an average priced consumer Notebook PC 74.5 98.4 81.9 74.7 90.3 83.8 74.9 48.2 36.5 51.2 37.3 11.6 2011 90.1 92.5 84.5 74.6 61.3 12.1 12.5 12.9 13.4 2012 India 54.4 38.2 91.4 82.9 74.8 57.9 39 2013 2014 2015 Brazil China US UK 39.8 Germany Source: Marketline PC penetration report
  6. 6. TARGET MARKET STRATEGY  As there is income inequality in these countries, providing PCs in a very wide range depending on the configuration will definitely increase the customer base Price Variety  Co-Branding with computer training institutes like NIIT, Aptech, etc. in India to increase the usage of PCs. This would help in this economic slowdown when people prefer to enrol in vocational courses to gain knowledge and increase their employability.  Distribution model must encompass all possible touch points and there must be complete integration in the distribution. Improved Service  Forming partnerships with contract manufacturers would increase the manufacturing facilities in the emerging markets. Increase in Market Penetration  These markets have comparatively younger population who are going crazy behind innovation and so trendy and smart-looking products would be highly acceptable.  Providing products with the configuration required by the customers and then providing improved service would not only increase penetration but also wipe-out competition from “system integrators”. “ Emerging markets such as Turkey & Indonesia were up 70%, India was up 17%, Russia was up 15%, China was up 14% and Latin America as a whole was up 12%. Growth in Brazil would make it the world’s thirdlargest PC market next year, after the U.S. and China. Paul Otellini, Intel President & CEO ” “ CoBranding Product Innovation Approximately two out of every three PCs sold will be in emerging markets by 2014, and that nearly two out of every three PCs will be sold into the consumer segment. Stacy Smith, CFO, Intel Enhanced Distribution Contract Manufactur ers ”
  7. 7. ENHANCED DISTRIBUTION MODEL  Due to global economic slowdown Lenovo cannot afford low ROI in the emerging markets  A strategic alliance or a JV would assist Lenovo to better understand the local market, run production facilities establish a marketing and distribution presence and in some cases get around country trade barriers  Computer training institutes will act as demand aggregators in the rural areas which will send their demand to the national distributors. This demand will be catered by the exclusive stores on a fast-track basis such that the customer is not lost  Regional distributors should be able to cater to the needs of SMEs, consumer electronic stores, super markets, departmental stores etc. Nearest Manufacturing Site National Suppliers(JVs) Co-Branding with computer training institutes Regional Suppliers Exclusive Franchise Stores + Service Centres Consumer Electronics Super Markets, Department Stores, etc.  Immediate provision of services to corporates by setting up dedicated technical support and setting up service centers at exclusive showrooms SMEs Large corporates for relationship building
  8. 8. IMPLEMENTATION STRATEGY Should have clear entry and exit strategy Fostering demand in emerging markets  Incentivise retailers to sell PCs on interest free/low interest EMIs  Customize PCs to support regional languages such that there is technological inclusion  Upgrade technology on a regular basis in laptops and desktops at concessional charges  Leverage the brand equity of IBM and build brand Lenovo for the “pull factor”  Focus on innovation through “FOR THOSE WHO DO STRATEGY” and tap the affluent customers and push the sales of ultra-books to stop people from migrating to tablets I D E A P R O D U C T G R O U P THINK PRODUCT GROUP Can’t afford lower return on investment in new markets due to global economic slowdown Should enter through a JV in markets where economy is in recovery phase After adequate penetration and gaining a foothold in market withdraw operation control from these markets and focus on financial controls Cut down cost and increase efficiency by optimal utilization of all resources  Providing service “at the go”  Setting up call centre and service centre in exclusive showrooms and corporates. Hence, reducing downtime  Providing a “one-stop-shop”  End to end solutions to all technological requirements of corporates, either on its own or through tie-ups  Lenovo must tap recession proof industries like healthcare, education, FMCG and provide personalised cloud technologies  Foster support from lobbying organisation to bag major contracts by competing on price  Lenovo has very high cash to total assets ratio of 26.2%  Deploy excessive cash by setting up own manufacturing facilities wherever feasible  Setup an extensive distribution channel to provide maximum penetration
  9. 9. THREAT OF SUBSTITUTES THREAT IMPACT OF THREAT LOW COST PRODUCERS  Obtain key components from numerous upstream suppliers at reduced rates  Provided components are used to assemble the PC based on configuration the customer wants  Thus the customer gets customised products at substantially low cost compared to branded PC vendors  Distributors are mostly decentralised and local  Do not form a major chunk of the selling  Customer needs to be tech savvy to have a demanded configuration  Thus the impact of threat is NOT VERY HIGH TABLETS & SMART PHONES  Handheld devices primarily for content consumption offering multiple features  Tablet and smartphones purchase has risen tremendously of late  The surge is almost equal to the purchase decrease in computers  Most purchases come from the younger consumers (18-34 years age group) and demographic profile of the emerging nations suggests a very young population and an ever increasing middle class with a higher propensity to buy  Governments widely supporting the 3G technology to bridge the gap between emerging and developing nations. The coming years are expected to see strong growth in subscriber numbers  Increasing purchase of tablets and smartphones with decrease in PC purchase is the real threat to all PC vendors  Ever increasing middle class whose spending on consumer electronics in emerging nations has been on the rise in last 12 months indicates propensity to use tablets/smartphones for both personal and professional reasons  Increasing government involvement in emerging nations will see strong development in the 3G penetration as well as mobile and tablet availability  Increasing availability of low cost tablets and smartphones with entry of number of new players poses a REAL THREAT to the PC industry in the mid to long term  Threat from US based vendors like HP & Dell and Taiwanese OEMs like ASUS & Acer is not a significant one because Lenovo has been consistently outperforming them in terms of y-o-y growth
  10. 10. QUEST FOR GLOBAL SUCCESS IN THE PC+ ERA  In countries with low PC penetration like India, market development strategy is followed by increasing brand penetration  It requires creating new users by offering new products and attributes  Addressing latent needs that are not yet satisfied by existing market players  Products should not be provided at rock bottom prices but at prices that market can bear and product can sell  Gaining margins at low price and low volumes by bringing in operational expertise such as cluster/cellular manufacturing  For segments like ThinkPad consumers and geographies where Lenovo is a market leader, competition is irrelevant  Exploit the existing processes and evolve current customers  Continuous product innovation, superior performance and service to maintain existing loyal set of customers  This is actually the Cash Cow segment of Lenovo New Market Segment Strategy “Competitive Scenario” Sustenance Strategy T Global e Success in x PC+t Era “Stage of business maturity” “Level of customers needs”  For growing but mature markets like Brazil and Mexico where there is surge in competition and consumer needs, a disruption strategy should be employed  Lenovo should play on low prices to grab market share  Focus on low end customers  After acquiring required market share, slowly increase the profit margin  By upgrading the existing customers and disrupting the earlier market  Move on to serve more profitable segments Low End Disruption Strategy
  11. 11. OUR RECOMMENDATIONS TO LENOVO Target Market Strategy With the middle class in the emerging economies showing more propensity to purchase electronic equipment's and PC penetration being comparatively lower, Lenovo to focus more on tapping these emerging markets namely Branding & Strategic Alliance  Improved and enhanced distribution model encompassing all touch points and having complete end-toend integration.  Strategic alliance with local partners to establish strong presence in the emerging economies.  Services delivery to large corporates through dedicated channels to build stronger relationships Supply Chain Strategy  Automate procurement processes as well as engage in supplier development strategy to streamline the supply chain and setup systems to measure and monitor fulfilment rates  Carefully manage outsourcing relationships to ensure high levels of service quality  Start utilising data across the end-to-end supply chain where Lenovo is connected to its partners - help execution in the supply chain and help people make corrective actions  Implement new direct ship enablement program that allows it to integrate new partners quickly to meet new demand Branding & Strategic Alliance     Clear entry and exit strategy Providing services “at the go” and “one stop shop” Customised PC to support regional languages and leverage on the brand equity of IBM Focus on innovation through “FOR THOSE WHO DO STRATEGY” and tap the affluent customers and push the sales of ultra-books to stop people from migrating to tablets