Hult IBS - Case Study HBS 701052 -- Legend Lenovo -- FEB-2013
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Case Study of HBS 701052: Technology Legend in China as part of Global Strategy (STR5923) at Hult International Business School ----------------------- Main question: How can we increase revenues from US$2.3bn to US$10bn by 2005? Secondary questions: Is the current strategy sufficient to achieve that goal? And if not, what else could be done? How did Legend beat the “top dogs” and became the #1 PC manufacturer in China?
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Hult IBS - Case Study HBS 701052 -- Legend Lenovo -- FEB-2013
- 1. Team 6 Uravee | Malindile | Ashley | Jordan | Yanik | Jamie | Maximilien A technology Legend in China (HBSP case #9-701-052)
- 2. In 2001, Mr. Liu (CEO, Legend) is faced with an important question: How can we increase revenues from US$2.3bn to US$10bn by 2005? Is the current strategy sufficient to achieve that goal? And if not, what else could be done? How did Legend beat the “top dogs” and became the #1 PC manufacturer in China?
- 3. Agenda (our framework for today) How can we increase revenues from US$2.3bn to US$10bn by 2005? How did Legend (the “underdog”) beat the “top dogs” and become the #1 PC manufacturer in China? 1. History 2. Internal Analysis + SWOT 3. External Analysis Is the current strategy sufficient to achieve that goal? And if not, what else could be done? 4. Current Strategies 5. Alternative Strategies 6. Conclusion
- 4. History Timeline Current Strategy LCS and Digital China Growth Gap Max History Internal Analysis SWOT External Analysis Current Strategies Alternative Strategies Conclusion
- 5. In 1984, 11 colleagues from the Chinese Academy of Science were given $24,000 to start what would later become (a) Legend „84 „85 „87 „88 „89 „90 „91 „92 „93 „94
- 6. In 1984, 11 colleagues from the Chinese Academy of Science were given $24,000 to start what would later become (a) Legend „94 „95 „96 „97 „99„98 „00 „01
- 7. At this point, Legend‟s 3-5 years strategy is to strictly focus on the Chinese market and to expand existing product lines International marketsChina Develop or Acquire New Products/Solutions Focus on Current Product Lines
- 8. At the end of 2000, Mr. Liu restructured the company into two distinct businesses Reference: Exhibit 15 Legend Computer Systems (LCS) Legend Brand Internet Access Devices PCs Notebooks Servers PDAs Motherboards Internet Services FM365 Internet access Digital China (DC) Online Distribution Distribution foreign brand IT Logistics System integration Banking Tax collection Telecom Networking e-solutions WAN VOIP Commercial & Household Networking
- 9. To achieve the US$10bn goal, Legend needs to sustain a 35% CAGR for the next 4 years Revenues ($, bn) 10 1989 1991 1993 1995 1997 1999 2001 2003 2005 2 4 6 8 $1.5bn $10bn $0.6bn $2.3bn
- 10. Jordan‟s takeaways from the history 1. Objective: Become a Fortune500 company by 2010 2. Goal: US$10bn in revenues by 2005 3. Strategy: stay focused on China, split the business LCS/DC
- 11. Internal Analysis Corporate Strategy Leadership Malindi History Internal Analysis SWOT External Analysis Current Strategies Alternative Strategies Conclusion
- 12. Legend‟s Corporate Strategy evolved over time, always adapting to the market Distribution Local over Global “No Joint Ventures” Manufacturing R&D Economies of Scale Differentiation (focus on functionality) Product Customization (“Tian Xi”)
- 13. Cost Uniqueness Broad Target (all China) Narrow Target Cost Leadership Differentiation Focused Cost Leadership Focused Differentiation Integrated Cost Leadership /Differentiation To keep their competitive advantage, they constantly adapted their strategy ‟85: Chinese insertion card ‟88: Buy QDI (manufacturing) ‟96: Aggressive Pricing Strategy Milestones ‟96: Focus on functionality „99: Tian Xi
- 14. Visionary: One dream, One goal Focus on product development Strategic partnerships and acquisitions Pioneer in offering stock option to employees Strong corporate culture Authoritarian but adaptive leadership style Legend became an employer of choice for Chinese engineers and managers with overseas education Promoting young talent internally In 1993, he promoted 29 year old Yang Yuanqing as the general manager for PCBU In 2000, 3 of the top 7 executive are under 40 Mr. Liu‟s Leadership was instrumental in Legend‟s success “(Foreign companies) don’t have glass ceiling for local employees, but Legend has helicopters.” “We were really not sure whether we could survive in the PC manufacturing industry. Given our background, making our own PCs was the dream of the whole company. […] We decided to hang on to manufacturing for one more year.”
- 15. Jordan‟s takeaways from the internal analysis 1. Corporate Strategy: agile, always changing and adapting to market conditions… 2. Leadership: one dream, one goal, one man…
- 16. SWOT Strengths & Weaknesses Opportunities & Threats Uravee History Internal Analysis SWOT External Analysis Current Strategies Alternative Strategies Conclusion
- 17. Strengths and weaknesses that help explain how Legend become the #1 PC manufacturer in China Strengths Distribution network Local company have knowledge of the market Good leadership Manufacturing capabilities Specialized product for local market (China) Weaknesses Lack of an internationally recognized brand Limited direct sales force Chinese computers/products considered less reliable Limited foreign markets for current products
- 18. Opportunities and threats shaping Legend‟s corporate strategy in 2001 Opportunities Growth in internet usage in China Growth of voice recognition software Rapidly growing internet portal and B2B eCommerce Growth for demand in alternative access devices Growth in eCommerce and online advertising Increase in global competition Customs clearance i.e. more foreign competitors Reduction in prices Heighten domestic competition International competitors just entered the market Mostly by establishing Joint Ventures Internationally recognized brands entering the market massively Foreign company create own distribution channel. Threats
- 19. Jordan‟s takeaways from the SWOT analysis 1. Strengths & Weaknesses: Strong distribution network, but weak international branding 2. Opportunities & Threats: internet usage is booming and competition increases
- 20. External Analysis Competitive Landscape Market Size PEST Highlights Jamie History Internal Analysis SWOT External Analysis Current Strategies Alternative Strategies Conclusion
- 21. Legend increased market share by underpricing competitors and customizing its products. 6.90% 2.30% 28.20% Market Share of Major Competitors - 1996 Legend Other Big Domestic Firms International 28.10% 22.20% 16.90% Market Share of Major Competitors - 2000 Legend Other Big Domestic Firms International
- 22. Legend has key strategic advantages over its competitors, which can position it well in the future for both LCS & DC Legend Computers Legend Founder IBM Dell Toshiba Distribution Network China Customized PCs Gov‟t Relationship Domestic Manufacturing No Import Duties R&D Low Price Digital China Legend Commerce One Ariba Aliba ba eCommerce Knowledge Strong SOE Relationships (Banks & Telecom)
- 23. But Legend also needs to consider some important Political and Social factors into consideration Political China accepted to WTO Lower import tariffs Law: 75% of PC components must be manufactured in China Government connections required Social PC penetration is increasing Credit card usage not yet common Users not accustomed to paying for internet access
- 24. Jordan‟s takeaways from the external analysis 1. Competitive Landscape: Legend increased market shared by capturing most of the market‟s growth 2. Strategic advantage: …and they are well positioned to continue to do so 3. Political: Government highly influences the market
- 25. Current Strategies Tian Xi Computer & One-touch-to-the-Net FM365 online portal Digital China Ashley & Yanik History Internal Analysis SWOT External Analysis Current Strategies Alternative Strategies Conclusion
- 26. Factors affecting internet market in China in 2000 Factors affecting Legend Computer Systems Internet was just starting to take off and the procedure to register an internet account was complicated Most users were not proficient at web-surfing Computer cost was equivalent to +/- one year salary Factors affecting Digital China Logistics services and delivery infrastructures are inefficient and unreliable eCommerce revenues estimated to grow from US$0.05bn (1999) to US$12bn (2004) Of all internet users, only 12% ever purchased online
- 27. Legend‟s Three Strategies to Capture the Internet Market in China Tian Xi PC- One-touch-to-the-Net1 FM 365 Portal2 Digital China3 Package deal to provide easy access to the internet while boosting PC sales Provide consumer services in order to become China‟s one stop shop Become dominant local IT vertical distribution expert in China
- 28. Key Features of Tian Xi Included a Chinese voice-recognition software Graphic processor for handwriting Chinese characters Key Features of One-touch-to-the-Net Provided consumers easy access to the internet One year free internet access subscription Plug-and-play feature Tian Xi PC- One-touch-to-the-Net1
- 29. Tian Xi PC & One-touch-to-the-Net was a Brilliant Strategy Legends focused and leveraged their core competencies Local knowledge and responsiveness R&D department : innovation Manufacturing capabilities With this strategy, Legend Gained competitive advantage over competitors: great differentiation Grew the PC and internet usage in China Results Sales increased by 99% from 1998 to 1999 Sales increased by 50% from 1999 to 2000 Market shares: from 6.9% 1996 to 28.1% in 2000
- 30. Key Features Default web page integrated on each Tian Xi computer sold Features information channel, a virtual community (email & chat room), a search engine and eCommerce services Goals Dominate China Internet Market Benefit from eCommerce & Advertising opportunities Make profits from service fees in two to three years How was it done The FM365 portal was developed in-house Invested US$26 million for development and hired 200 employees Launched large-scale advertising campaign with teen idol FM 365 Portal2
- 31. FM365 portal is not a good fit with Legend‟s core competencies Having a portal is a good idea Helps users find information Develops e-commerce and advertising opportunities Portal development & management is not one of Legend’s core competencies Several portal already existed in China (i.e. SINA.com & China.com) Founder Electronics (main local competitor) signed an agreement with Yahoo! Legends resources could have been better invested using a different strategy Partnership with local portal or foreign player Acquisition of an existing portal Results 15th most visited website in China, but far behind direct informational portal competitors.
- 32. Develop system integrations and networking capabilities/products Proprietary e-commerce software platform Focus on industrial segments (banking, telecom, and tax collection) Strategy 1 E-Channels Phase 1 Migrate current business to internet (offline to online) Phase 2 Extend to more product lines and dealer network. Reallocate resources to form service (net- banking, order fulfillment, customs clearance and after-sales service) Phase 3 Offer complete E2E supply management solutions to any partners (greater margins) Strategy 2 E-Solutions Value added shared services Digital China3 Develop largest B-to-B vertical marketplace for the IT industry in China
- 33. B-to-B online business model fits Legend’s core competencies Takes advantage of local market knowledge, Relationships with different Chinese stakeholders Leverages distribution & network capabilities Migration to online distribution is the next logical step Increase profit margin by offering a value added supply-chain solution Do or die: if you do not do it, a competitor will By offering a full supply chain solution Legend Gains a First mover advantage – no competitors offer the complete solution Difficult to copy : the partnerships are difficult to replicate Controls competition: If successful, global rivals will have to use DC‟s platform Digital China is a good strategy. It offers great revenues potential and leverages Legend‟s core competencies. Projected Revenues: US$3.5bn (2005)
- 34. With the current strategy, there is still a US$1bn gap that will need to be filled Legend Computer Systems: $USD 5.6 billion (20% growth rate) Digital China: $USD 3.5 billion Revenues ($, bn)10 1997 1998 1999 2000 2001 2002 2003 2004 2005 2 4 6 8 US$1bn gap
- 35. Jordan‟s takeaways from the current strategies 1. Successful implementation: focus on core competencies and leverage knowledge of local stakeholders 2. Current strategies will not be enough to reach the US$10bn goal by 2005
- 36. Alternative Strategies Scale Up: cell phones Scale Out: international markets Ashley & Yanik History Internal Analysis SWOT External Analysis Current Strategies Alternative Strategies Conclusion
- 37. To fill this US$1bn gap, Legend has two high-level options: scale up or scale out International marketsChina Develop or Acquire New Products/Solutions Focus on Current Product Lines Scale Up Scale Out
- 38. Scale Up: Product/Solution Expansion LCS core business: PC, Notebook, Server, PD A, STB, Motherboard. Manufacturing & DistributionLCS internet services IT Management & Consulting Digital china: Online distribution, system integration, networ king products Legends‟ Core Business New Strategy Opportunities for Growth Maintenance Mobile phone & others communication devices
- 39. Recommendation for Scale Up: Cell Phone MarketCell phone market offers a tremendous opportunity to close the gap Low cell phone penetration rate in China Rapid GDP growth (9-10% a year) and rising income Poor level of landline infrastructure LCS can leveraged its expertise & core competencies R&D / Innovation Expertise (3 years development plan) PDA Manufacturing expertise Distribution network Local knowledge expertise
- 40. Projected Sales for Cell Phone Market until 2010 Our projections By 2005, we project a total cell phone sales of 673,000,000 units Cell Phone Penetration level of 29,62% By 2010, we project a total cell phone sales of 2,318,000,000 units Cell Phone Penetration level of 65,72% Only a fraction of this market represent substantial revenues per year
- 41. Scale Out: Market Expansion Potential China Singapor e Taiwan Hong Kong South- east Asia Japan Korea USA Europe Emerging Markets
- 42. Scale Out: Expanding to Other Markets Stage 1: Taiwan and Singapore Close proximity for distribution Products currently adapted for Chinese language High PC penetration growth rate from 1995-1998 Stage 2: Other Markets Need Partnership or Acquisition Lack established distribution network Need brand recognition Must adapt products for new market consumers 91% 166 %
- 43. Jordan‟s takeaways from the alternative strategies 1. Scale up: Complimentary products (cell phones) 2. Scale out: Taiwan and/or Singapore. Anywhere else, M&A required.
- 44. Conclusion Wrap-Up What happened? Key Takeaways Jordan History Internal Analysis SWOT External Analysis Current Strategies Alternative Strategies Conclusion
- 45. Wrap-up: the key questions we seek out to answer How did Legend (the “underdog”) beat the “top dogs” and become the #1 PC manufacturer in China? Strong leadership Focus on Core competencies Consumer driven Innovation Is the current strategy sufficient to achieve that goal? And if not, what else could be done? No. Need to scale up or out
- 46. So What Actually Happened? „01 „02 „03 „04 „05 „06 „07 „08 „09 „10 „11 „12 „13
- 47. Key Takeaways… Market Understanding Design for the market‟s special demands (understanding the consumer) A local office (localization) will speed up a company‟s response to changing market trends Product/service Product differentiation (core technology and product features) Focus on current and future requirements Company strategy Set a clear goal; e.g. $10bn in 2005, Fortune500 in 10 years Focus on core strengths to grow and diversify to survive Resources, skills and management are all key for company success
- 48. Thank you! Team 6 Uravee | Malindile | Ashley | Jordan | Yanik | Jamie | Maximilien
Editor's Notes
- ‘88: AST now #1 PC vendor in CN‘89: Caught attention of Government. MEI inspect HK‘91-92-93: all competitors are signing JVs with international big manufacturers… Not Legend.
- ‘88: AST now #1 PC vendor in CN‘89: Caught attention of Government. MEI inspect HK‘91-92-93: all competitors are signing JVs with international big manufacturers… Not Legend.
- Objective: Fortune500 by 2010Goal: US$10bn in revenues by 2005Strategy: Split the business (LCS / Digital China) and localization(stay focused on China for 3-5 years)Is this enough??
- Logistics:OrderingCustoms clearanceAfter-sales ServicesNotes:Legend’s strong distribution network was seen as inefficient, and digital infrastructure in China was at a very early stage of development. Legend partnered with SOE’s to leverage its distribution network through digital enhancements…Digital China Focuses:Online Distribution: ordering online, customs clearance, after-sales serviceSystem Integration: Supply Chain ManagementNetworking – e-solutions: banking, tax collection, telecomPage 14 – Distribution strategy and building up its nationwide distribution network.First Mover advantage again competitors Commerce One and AribaDC “inherited from Legend the Largest and most efficient dealer network in the IT industry.”See Strategy Slide Continued for additional DC strategy including e-channel and e-solution.
- Born in 1944, Mr Liu was denied to be a military pilot due to family background (activist)He entered the Xi'an Military Electronic Engineering Institute (specializing in nuclear weapons and missiles).Due to his sensitive background, Lui was assigned to study radar. During his studies Liu received an introduction to computing.In 1966: Liu was labeled an intellectual during the Cultural Revolution. Sentencd to a state-owned rice farm near Macau for commenting on the revolutionThen, sent to a farm in Hunan dedicated to reforming political criminals through hard laborIn 1970:Liu took up a post in Beijing as an engineer-administrator at the Computer InstituteLui worked on mainframe computer (number 757)His Leadership style can be described as visionary. He steered the company from the beginning with focus on product development, from Lian Xiang in 1985 to Tian Xi in 1999. When the company was not granted license to manufacture in China, he moved to Hong KongAlong the way he made strategic partnership, such as the one he made with Dao Yuan, a hongkong based company. A partnership which Mr Liu himself described as “the blind carrying the lame”. A partnership which allowed Legend to enter the competitive Hong Kong market. He also made acquisitions that took the company in the direction he envisioned, such as the acquisition of the QDI, a motherboard manufacturing company in order to expand into the motherboard and PC markets.His vision led him to pioneer the offering of stock option to employees, the first company to do so in China, this resulted in 35% of Legend holding owned by the employees.This is how he described his decision to stay in PC manufacturing in 1993….
- Thank you _____________ . After understanding the ____________________________ it is essential to get a better sense for the Legend outlook in terms of the corporate market, it is helpful to understand the internal analysis of the company by its strengths and weaknesses.StrengthsLegend’s major strength was the knowledge of the current market needs. They recognized the need of Chinese language solutions for PC’s and developed a new pattern recognition technology. Mr. Liu had established a high degree of leadership. Yanik will give you more details later about how Mr. Liu manage the company.In 1990 Legend got its license to manufacture PCs in China.Develop desktop PC based on local needs. In 1999 Legend’s launch of the Tian Xi based on localized design.Legend moved from a small bungalow and established its outlets in many parts of the world.By 1997, Legend had over 3000 distributors/POS in China (expected 10,000 by 2004).WeaknessesLegend management was comprised of many young staff and management with very less work experience. By 1994, the general manager cut the sales force from 100 sale representatives to only 18 people. They wanted to sell products through a distribution channel rather than direct sales. This lead to less control over marketing, less insights into innovationAt that time Chinese computers or products were considered less reliable compared to foreign product.Lack of an international recognition.No preferential tax treatment from the government.
- Thank you _______________. Now that we have discussed the internal analysis lets talk about the external analysis of this company. I will start with the Opportunities.OpportunitiesBy July 2000, Internet penetration accounted for only 1.4% of the Chinese population. This is mean there was a growing market in Internet usage in China.Potential to be largest market in the world: 1.25 billion peoplePenetration rate 2000: 1.4% (16.9 million users) Projection for 2003: 2.7% (34 million users)Estimation of e-commerce revenues:1999: $US 43 millions in revenuesProjection for 2004: $US 12 billionsChina is one of the world fastest growing market and this an opportunity for distribution growing Tian Xi PC also included Chinese voice recognition software and a graphics pad for handwriting Chinese characters. This product became the most popular desktop system in China is tailored to local market.As China is a fast growing market, the establishment of distribution channels are needed in this market.Rapidly growing internet portal and B2B e-commerce such as Alibaba is now a popular online B2B community. Distribution business to an online B-toB marketplace would be an advantage over foreign competitors. China is the fastest growing market and also the one of largest population, so there is growing in service and products industry.Alternative access devices such as wireless devices has come to play big part of the market, eg. mobile phones and personal digital devices.With China’s internet advances more people have access to the Internet and have started depend more on the online world, for instance online banking and online shopping. ThreatsAfter China agreed to joining WTO in 2001, this increased the global competition because foreign companies can now engage in trading and distribution- related services for both imported and self-ownership. This can be a high competition within local market.In 1993 many domestic Chinese manufacturers establishing joint ventures with foreign companies in multiple regions across China in order to expand their market. This is the threat for the Legend, loss of sales because of the increase in foreign product sales volume, also after joining WTO, foreign company allow to set up their own distribution channel. This will increase the competition within the local market.
- -Legend gained market share by leveraging low manuacturing costs to underprice competitors, and including a chip on motherboards to provide Chinese-language operating systems.-Legend has the largest market share for PC sales in China. -This is at risk with China lowering Import tariffs with the pending admission to WTO
- Although PC usage is increasing, Legend will face stiffer competition from foreign firms.They also need to leverage the digital environment that is still being established.
- In 2001, Legend Holdings had three distinct strategies to reach its goals:Tian Xi Computer & One-touch-to-the-NetFM365 portal Digital ChinaWe will now analyse those and determine if Legend is on the right path to meets its goal.
- LCSService-for-fee concept not yet adapted (not willing to pay for internet accessDCLow credit card penetration rateChinese perception: Lack of security, Web site legitimacy, Quality of goods, Safety of information transmitted
- Simplistic access to internet with one button on computerPlug-and-play featureFree Internet for one year for computer buyer (special deal with China Telecom)
- 1 million users, 15.4 million daily page views by 2001
- In first phase: migrate current business to internetSecond phase: Extend product line (telecom equipment and consumer electronics), expand dealer network (from 3000 to 10000 by 2004), and reallocate its internal resources to form individual service modules (net-banking, order fulfillment, customs clearance and after-sales service)Phase three: open system to all partners to provide frictionless transactions along whole distribution channel. Be a supply-chain manager rather htan a product distributor. E-soulution: Develop legend’s system integration and networking capabilitiesFocus resources on industrial segments (banking, telecom, and tax collection)In order to have a fully integrated proprietary e-commerce software platform
- Objective: Fortune500 by 2010Goal: US$10bn in revenues by 2005Strategy: Split the business (LCS / Digital China) and localization(stay focused on China for 3-5 years)Is this enough??
- ‘94: Low Cost model. Inv Turnover improved to 7 times. 30 offices worldwide. ‘95: Distr. Agreement with HP (PC, Servers) and with Toshiba, Apple, Sun…*‘96: Insight: Foreign manufacturers don’t launch in China until 4-5 months later (b/c high tariffs and low consumption‘98: Start customizing products to CN customers
- For any industries… Success? Failures? What worked well, what didn’t, what can be replicated…?Do not underestimate the competition (e.g. the PC price wars)Take the risk and promote young talent, people who understand the company’s core business and prevailing market trends