International Expansion Strategy for Lenovo Company

Table
1. Introduction 2
2. Motives of international expansion strategy of Lenovo 2
3. Determination of target market 4 3.1 Macro environment factor 4 3.2 Characteristic of Lenovo Company 6
4. Market entry mode 7 4.1 Exporting mode 7 4.2 Licensing and franchising mode 8 4.3 Joint Venture 9 4.4 Wholly owned subsidiary 10
5. International competitive strategy 10 5.1 Strategy clock model 11 5.2 Center identification 13
6. Challenges and suggestions 15 6.1 Challenges 15 6.2 Suggestions 16
7. Conclusion 17

1. Introduction

In the current commercial economy, the global economy has changed rapidly in the near decades. Barrier of trade between the different borders has been not a headache for many multinational companies any more. What is more, in accordance with the data from WTO, the increase of multinational trade is becoming more and more dramatically in comparison with the global output. (Liu, 2005) As a result, it is suggested that current economic system is transferred to be more globalised, integrated and interdependent. Thus for many enterprises or just like your company Lenovo, to have a plan on the international expansion strategies is of the essence.

2. Motives of international expansion strategy of Lenovo

Lenovo, which was found in 1984 with 11 engineers gathered in a boardroom in China, has achieved unbelievable success since its foundation. However, in spite of Lenovo is regarded as the innovative leader in the Chinese market and well-known for creating convenient Internet access for households, its growth in the international market was not so much unpleasing. On consequence, Lenovo could not just concentrate on the Chinese market. In addition, some motives for Lenovo Company to make international expansion strategy into foreign country would be elaborated in the following paragraphs based on our detailed research.

To start, in the technology industry, the core competence has extremely important impact on the market share for Lenovo Company. Nevertheless, Lenovo Company is weak in the research and development activities. What is more, from the financial reports of Lenovo Company, it could be known that the intangible asset is relatively lower than the average industry level. Therefore, it is essential for Lenovo to exploit a competitive advantage on technology through the international expansion. For instance, the acquisition of IBM would be beneficial for the computer technology of Lenovo Company.

What is more, in China, the marketing capability is limited. The target of a firm is to maximum the company value and thus the sales of the firm is a pretty important factor. However, the sales could not have great progress when beyond some degree. As a result, to expand the overseas market is an opportunity under this circumstance. Enterprises have to find new customers for existing products and services when the domestic market becomes saturated. (Buckley and Ghauri, 1999) With the development of economic globalization, consumers in different countries on the demand preferences and spending habits have a tendency to become convergence, which makes that enterprise is possible to provide products and services to a wider market.

Besides that, the macro environment is a major factor when considering taking international expansion strategy. In near decades, economic development of many countries has been slowed down to a decent extent especially after the financial crisis. It would be an excellent chance for Lenovo Company to make more products with less cost through the expansion. Moreover, in China, the economy is not the truly market economy and the government agencies impose on the companies. Therefore, there are some administrative constrains under the domestic circumstance in China.

Finally, the resource that company own could have a better allocation through the international expansion strategy. For instance, the productivity of Lenovo Company would be improved through the acquisition of IBM and thus Lenovo could research the optimal scale production, reduce the transaction cost and have more market share. From the above reasons, it could be concluded that it is rationale for Lenovo to map out the international expansion strategies.

3. Determination of target market

However, the first step for making international expansion strategies is to make a choice of target market. How to choice the target market is an important procedure for Lenovo, as well. Moreover, to identify and critically evaluate international opportunities would have essential impact on the success of the international expansion strategies.

3.1 Macro environment factor

When considering the foreign market, there are several points which the multinational enterprises should be paid attention to. In addition, the most important factor is the macro environment in that country. It is due to the sphere of influence. Take the Iraq for example, the political environment is not stable and thus it would have influence on the economic system. Therefore, it is not advisable for enterprises to make strategies to expand the market of Iraq. As to Lenovo Company, from our point, Korea and German are relatively rationale target market. Thus the factor of macro environment would be taken into consideration firstly.

As a result, in this stage of analysis, PEST analysis method would be conducted to analyze the factor of macro environment. PEST analysis is short for “Political, Economic, Social, and Technological analysis”. Thus in the following content, how to make a choice of target market between Korea and German would be analyzed according to the points of PEST respectively.

To begin with, political factors refer to the policy which the government takes. For example, what the degree of government intervention is and whether there is trade restrictions or not. (Child and Yan, 2001) For instance, in comparison with United States, the economy is freer and has less government intervention than in China. If the target country has trade barriers, enterprises would rather not to have new branches there. Moreover, if the target country has some priorities in terms of the financial support or tax reduction for foreign firms, it would be a relatively excellent choice for enterprise’s expansion. It could be suggested that political factors can have impact on many vital aspects for business, such as the education level of the workforce, the quality of the infrastructure of the nation and the commodity market. There is slight difference between Korea and German in the political stability. However, Compared with Korea, German is a more well-developed country and thus the infrastructure is better. So in this aspect, German is more advisable.

Furthermore, economic factors also have influence on the choice. Economic factors include many areas, such as the interest, the exchange rate, economic growth and inflation rate. For instance, in Zimbabwe, the economy is under the hyperinflation and thus it would not be beneficial for enterprises to open a new factory there. Moreover, when the foreign country is on its way up and developing rapidly, it could be known that the interest rate is higher and then residents would be more ready to investment more money in the securities or stocks. Therefore, enterprises would be much easier to get some investment from the foreign country.

Besides that, concerning the social factor, changes in social trends could have impact on the consumer’s demand for products or services and even the individuals’ willingness to work. (Hamm, 2005) For instance, in China, the population has been aging. And thus firms have to increase the cost of pension payments for their workers due to the longer living time. In addition, firms in German have to hire older employers because of the growing labor pool. What is more, the aging population also has influence on the demand of some products. For instance, demand for medicines has increased instead demand for children’s milk powder is falling. Therefore, for high-tech products provided by Lenovo Company, there is less demand in German than in Korea.

In addition, it is also extremely vital to take the technology factors into consideration, especially for Lenovo Company. And the reason is that the core competence for an IT company is rather important. In 2004, IBM was merged by Lenovo and the main reason is the technology of IBM in producing computers. With more innovative technology, Lenovo could enhance the core competence and then have more market share. German is an industrial-based country and thus it is weak in the high technology. Instead, Korea has more advantage on the technology factor.

Expect the above factors, legal factors and environmental factors also should be considered. In reality, the distance usually is regarded as the main important factor. However, it has to be mentioned that the distance is not also the geographical distance, but also means the cultural or informational difference. (Johanson and Wiedersheim-Paul, 1975) After the PEST analysis, from our perspective, Lenovo Company had better to choose a target market which has stable politically environment, favorable economic status, not-aging social circumstance and especially has advanced technology. As a result, German market is more suitable for Lenovo to enter. Apart from the macro environment factor, the characteristic of company itself should be taken into consideration, as well.

3.2 Characteristic of Lenovo Company

According to the theory of Porter generic strategy, enterprises commonly achieve and maintain competitive advantage through three kinds of strategy, which is the cost leadership strategy, differential strategy and focus strategy. As to Lenovo Company, the cost leadership strategy is taken as its main competitive strategy. Based on our research, Lenovo is insisting the slogan of “high quality and low price” to catch the eyes of customers. Lenovo sold its computers at a price which was below the average industry prices to gain market share in the western countries. However, the consistent deficit did not beat the Lenovo Company and thus the low price strategy helped Lenovo Company to achieve substantial success.

Moreover, in Korea, some computer company, such as Samsung, is also taking the strategy of cost leader. Therefore, customers in Korea would not be sensitive about the low price and even prefer to choose Samsung due to the local preference. From this perspective, German is more beneficial for Lenovo to focus its expansion. Consequently, from the analysis of macro environment factor and Lenovo’s competitive strategy, German would be a better choice for Lenovo in comparison with Korea.

4. Market entry mode

After the identification of the target market, it comes to the stage of the determination of foreign market entry mode. Thus the main point of the following paragraphs is to make a sense on that the strategic decision about how to enter foreign markets, which is namely, how to choose a suitable entry mode for Lenovo’s business international expansion. The main methods of entry modes include exporting, licensing, franchising, establishing joint ventures, and wholly owned subsidiary. (Liu, 2005)

4.1 Exporting mode

Many manufacturing companies would choose the method of exporting when in the initial stage of its international extension. The reason is that exporting method does not need the company to spend substantial cost to establish facilities or factories there while exporting still could provide the economics of scale. Furthermore, it can enhance their knowledge of foreign market and the country’s economic system.

However, every coin has two sides. The disadvantage of exporting method is relatively apparent, as well. First drawback is the expensive transportation cost, which would make this method uneconomical. Moreover, the tariff barriers in some countries may bring headaches for exporters, which would reduce product profit. (Luo, 1999) For instance, in United States, the cheaper tires from China would have to pay more taxes because the government has to protect the native tire manufacturing companies. Besides that, agency cost is also a tough trouble.

As to Lenovo Company, it is not the first time to conduct the international expansion. So the exporting mode is not applicable for Lenovo. And it is because that exporting method would provide some negative effect on Lenovo current situation, not to mention the advantage.

4.2 Licensing and franchising mode

The strategy of licensing means that the company gives a license to others for a period and could receive fees as return. Moreover, franchising is “a specialized form of licensing in which the franchiser sells intangible property to the franchisee and insists on rules to conduct the business” (Hill, 2004). As a result, here the two modes would be discussed together due to their similarity.

Considering the advantage of licensing, it could be suggested that licensing could avoid investing heavily in the foreign markets and withstanding the risks due to the macro environment of foreign market. For example, if an enterprise has not enough capital but has potential intangible property which would make profits in the target market, licensing method would be the best choice. Besides that, licensing still could be applied when the tariff barriers of the government are difficult to cope with.

However, the company could not have tight control on its licensing firms and thus the market commitment would be difficult to be achieved. Furthermore, the resource of every licensing could not be integrated and reallocated to reach a more efficient management. And what is most important, as to Lenovo Company, licensing is related with transferring technology to overseas licensing companies, which means that company would have the potential risks of lack of control of technology. (Liu, 2005) As is known, the core competence for Lenovo Company is the technology in computer. Therefore, licensing or franchising other firms would make Lenovo under huge risk and thus Lenovo could not choose the two methods to extend their market.

4.3 Joint Venture

Since exporting mode and licensing mode is not suitable to Lenovo, whether to establish joint ventures would be matching or not. To establish a joint venture means that the company is going to cooperate with other firms. Generally, establishing a joint venture typically needs to negotiation with other companies about how to separate percentages among parties (McMillan, 2005).

Through the joint venture method, a firm can benefit a lot from its partners, for instance, to have knowledge of the foreign country’s market, such as culture, information about rivals, economic systems etc. Moreover, when the relationship with government agencies has substantial importance, to cooperate with a powerful partner would have positive influence on reduction of entering the foreign market.

While, what is worthy mentioning, to establish a joint venture has the same drawback with the licensing mode. It is the transfer of the internal technology. Besides this, between the partners, many conflicts about the share and control would exist and this is also hard to tackle with. From the above analysis, to establish a joint venture seems not to be a good advice for Lenovo because of the risk of losing core technology.

4.4 Wholly owned subsidiary

When a company owns 100 percentage common stock of another company, the company is called as the parent company. What is more, the parent company could maintain the whole amount of control on wholly owned subsidiaries. According to the theory that reward matched with the risk, the parent company also has to stand with all the costs and risks. In addition, there are two ways to establish a wholly owned subsidiary. One is to open a new branch and the other is to acquire a firm in the foreign market through the acquisition.

First of all, as to Lenovo Company, the most important competitive advantage of wholly owned subsidiary mode is the possibility to maintain its technological competence. What is more, to use this strategy can enhance control on its overseas companies and thus the firm could reach the economies of the owned resources. Although this entry mode is the most expensive compared other ways and have to suffer more potential risk, to establish a wholly owned subsidiary in the foreign country seems to be the most advisable for Lenovo Company.

To conclude, Lenovo Company has to choose to establish a wholly owned subsidiary as the entry mode because it could not suffer the risk of losing core technology.

5. International competitive strategy

To constantly enhance the competitiveness of enterprises and environmental adaptability, multinational enterprises need to make plans. At the meantime, the determination of international competitive strategy is also extremely important for firms to gain the market share in the international market. In this stage of analysis, the strategy clock model would be used. Developed by Cliff Bowman and David Faulkner, strategy clock model is usually used to analyze the competitive position of a firm compared with the products of competitions.

5.1 Strategy clock model

Figure 1 Strategy Clock
[pic]
Source: http://www.marketingteacher.com/lesson-store/lesson-bowman.html

As is shown in figure 1, there are eight options for the company’s competitive strategy. What is more, some of the options would lead to the failure while some would have a positive influence on the performance of the firm.

First of all, the strategy one means that the company has low added value with pricing relatively low. Therefore, once the company decides to adopt this strategy, it would produce low-added value with low price. And thus this method is only suitable under some circumstance. In general, if the company takes the strategy one, it is suggested that the focus of the company is on the market segments which is rather sensitive with the price. (Oviatt and McDougal, 1994) When considering the product of computer, the elasticity is low and thus this strategy is not appropriate for Lenovo Company.

What is more, the most typical method that companies choose in this competitive atmosphere is the low price strategy, namely strategy two. In this strategy, firms need to keep the price of their products or services low without reducing the quality. The disadvantage is that rivals also could take the same way when in the same market. Once the company could not set the price below the competitors or customers have no judgment on the difference between different products, this strategy may make no sense and even have negative impact on firm’s financial situation. Moreover, to cope with the risk of price war, the company needs to have the cost leadership due to the low profit margin. Nevertheless, in the long run, it would always be effective for companies to take this strategy and thus in the initial stage of competition it is much more appropriate. Therefore, as to Lenovo Company’s situation, the low price strategy is not suitable any more.

In comparison with low price strategy, the hybrid strategy has to make customers to perceive added value of the products together with low price. Whether this strategy would achieve success most is determined by the capability of fulfilling the customer’s needs. Apart from it, the company still has to keep low cost. Therefore, it is difficult for other companies to imitate. At the meantime, the company also is required to have cost leadership and effective quality control. However, just same as the low price strategy, it is appropriate in the short run.

The fourth strategy is called differentiation strategy. To implement this strategy, companies could set the price either the same with the competitors or a little higher. The core concept of this strategy is to make customers to perceive added value of the products or services. And thus companies could either gain more market share or make more profit margins. For instance, Haier Company requires its employers to be patient and ready when they are offering service. Therefore, this would satisfy the customers and then Haier can gain more market share. In addition, companies could make different in the visible or invisible aspects. For example, Lenovo could make more efforts in the outlook, quality or function. And Lenovo can also try to be distinctive in service and brand culture. What is more, it is important to be unique in current commercial economy and thus the differentiation strategy is no more than an advisable method.

Next strategy is called focused differentiation strategy. Companies would provide perceived added value to customers while the price would be set pretty high. As a result, this strategy would be effective in a particular segment market. For instance, the operation of the Apple Company is really a huge success of the focused differentiation strategy in the near decades. For many teenagers, especially in China, Apple is not just a mobile telephone and becomes a symbol of fashion. As a result, the sale of Apple is increasing at a surprising speed in spite of its expensive cost.

The rest of options would be chose only when the company is in the industry of monopoly. Moreover, the cost of products and the added value would not be taken into consideration by companies. Only if there are no rivals who have not similar products, the strategy would succeed in gaining market share. (Root, 1987) As a result, the sixth, seventh and eighth strategies are all not appropriate for Lenovo Company. In conclusion, the differentiation strategy is the most advisable.

5.2 Center identification

Besides the marketing strategy, to choose the center is extremely vital, as well. Commonly, it could be divided into three categories and they are national center strategy, multinational center strategy and global center strategy.

The goal of national center strategy is to gain the competitive advantage though the highly integrated capital and strength. The distinguishing feature of this strategy is that the decision-making power is wholly controlled by the parent company. Moreover, only parent company would design, produce and coordinate sales in different areas. Therefore, this strategy could have economies of scale and thus reduce the product cost. While it would make the products would not be adaptive in the host country due to the different preference in different countries.

Multinational center strategy is slightly different from the national center strategy. Under the guidance of the uniform business principles and objectives, subsidiaries could organize the operation in accordance with the actual situation of the host country. The parent company is mainly responsible for the decomposition of the overall strategy development and business objectives. Moreover, parent company has to implement target control and financial supervision on overseas subsidiaries. Therefore, overseas subsidiary has larger business decision-making power and could rapidly response to the local market changes. The advantage of this strategy is to enhance the ability to adapt to the market demand. However, the drawback is an increase of the difficulty of coordination between the subsidiaries.

In comparison with the former two strategies, the global center strategy regards the world as a unified market. As a result, the enterprises could obtain the best resources within the scope of the world. Overseas subsidiaries would be linked through the global decision-making system global business network of resources. This strategy not only takes into consideration the specific different needs of the host country, but also takes into account the overall interests of multinational corporations. Thus it has become the major trend of the corporate international strategy. However, this strategy requires the enterprise to have excellent management and enough capital for investment. Therefore, as far as the situation of Lenovo is concerned, it had better to choose the multinational center strategy.

6. Challenges and suggestions

During the process of internationalization of Lenovo Company, it would be faced up with many troubles and challenges. In addition, this part would give some suggestions to cope with the challenges.

6.1 Challenges

In nowadays competitive age, it is not so easy for enterprises to realize the internationalization. First of all, the issue of capital seems to be a headache for many managers. For example, if one company could not afford the transportation cost due to the financial distress, the company could not even export its products, not to mention to open a new operation in foreign country. Besides that, many company purchases some foreign firms to gain experience of internationalization. However, the quality of those acquisitions is commonly low due to the lack of funds.

What is more, some enterprises are not familiar with the host country. To operate in foreign country needs the company to suffer huge potential risk due to the difference in economy system, culture, politics, laws and customers’ preference. Furthermore, many companies enter the foreign market without any research and thus failure would be their last results.

In addition, the weakness of technology also needs to focus attention on. Take Chinese enterprises for example, the industry distribution of multinational companies is mostly concentrated in the resources industry and primary processing industries. (Madsen and Servais, 1997) And these industries are mostly low value-added, low-tech and labor-intensive industry. Due to the limited capacity of the international market, the demand for such products in the world would become saturated in the near future. As to Lenovo Company, this challenge would be the hardest to face with.

In addition, it is well known that companies would not achieve the goal without good management. As a result, companies are desperately in need of high-quality managers. However, in practice, in most multinational companies the management level does not match the standard. Besides that, many companies have little experience to operate in two or more countries and thus it would prevent the company from better development.

6.2 Suggestions

Based on the above analysis, some suggestions would be put forward. Firstly, to solve the problem of capital, there are two ways. One is to decrease the scale and thus less capital is needed. And when it has rooted the brand in the local customers and has enough money, the company could enlarge the scale. (Xie and White, 2004) The other one way is that the company needs to finance more from the bank or search support from the government through kinds of channels. Besides, it is necessary for Lenovo to study the feasibility of the international expansion strategy before the implementation.

Since Lenovo is in the high technology industry, it is necessary to enhance the core competence on technology. If one company just relies on its cheap price to gain share in such a competitive market, the strength would be difficult to maintain. As a result, Lenovo can pour more capital into the activity of research and development and thus to develop new technology to compete with its rivals.

To improve the management level is vital, as well. For Lenovo, firstly it should take measures to maintain the existing high-quality personals such as offering good salary or giving more options. And when necessary, companies could let them take part in some overseas training to enhance their management skills. What is more, Lenovo Company could recruit some talented personals that are familiar with host country’s culture and has excellent management ability from foreign countries.

To conclude, Lenovo Company should grasp the opportunity of international expansion. While at the same time, it should make sufficient preparation for the possible challenges. From our perspective, under current circumstance to enhance the core competence in the global market is the most vital.

7. Conclusion

To conclude, to make international expansion strategies is extremely important for Lenovo Company. Based on above analysis, German is an appropriate target market for Lenovo Company. Besides, to establish wholly subsidiaries is much more conservative method due to the risk of losing the core technology.

What is more important is to make right decision in every stage during the internationalization process in according with its strengths and weaknesses. Thus in accordance with the situation of Lenovo, to take the strategy of differentiation is the most advisable in the long run. Therefore, if every step is on the track, Lenovo Company would gain the foreign market share and it is certain that the bright future would be the near future.

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