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  1. 1. Strategic Alliance —Case Study of Lenovo and IBM By Lili JiangDissertation submitted to the University of Nottingham BusinessSchool, in partial fulfillment of the requirements for the degree of Master of Science in International Business September 2007
  2. 2. ACKNOWLEDGEMENTSFirst of all, I would like to thank my supervisor Bernard Leca for his support and very helpadvices throughout this research. Then I would like to thank my family for giving me thisopportunity to study abroad, and always believing in me and caring about me. And also, I amenormously grateful to the people work in Lenovo who were willing to participate in theelectronic interview, without this, I cannot get the precious primary data to support my research.Last but not least, I would like to take this opportunity to express my gratitude to all my goodfriends, especially to Yanqi and Jingren, for their help and encouragement during this period. 1
  3. 3. ABSTRACTStrategic alliance gains high popularity in recent decades and has become an increasinglyfavorable choice for the company that intends to attain a competitive edge over other rivals soas to make a stand in the global market. Facing with the rapid globalization trend and dramaticeconomic development, it is almost impossible for any companies to develop individually, justas Doz and Hamel (1998) argue that in this new world, networks, coalitions, alliances, andstrategic partnerships are not an option but a necessity for companies to achieve competitivesuccess.Till now, several economists and strategists have examined the strategic alliance in a deep andextensive way, establishing a solid theoretical foundation for later research. These varioustheories and principles identify motivations to the formation of alliances, how to make thealliance work, classifying the benefits brought with successful alliances, and etc. However, asstated by these authors that the failure rate of strategic alliance is quite high especially in theearly stage, the research on how to make the alliance work during this unstable period isrelatively little.Hence, the objective of this paper is to evaluate the alliance between Lenovo and IBM, across-boarder alliance between a Chinese and a U.S. company, and to analyze how to make thealliance work in the early stage of the relationship. 2
  4. 4. TABLE OF CONTENTSAcknowledgements 1Abstract 2Table of Contents 3List of Tables and Figures 6Chapter 1: Introduction…………………………………………………………..7Chapter 2: Literature Review on Strategic Alliances……………………………10 2.1 Definitions of Strategic Alliances………………………………………………….10 2.2 Motives toward Strategic Alliances………………………………………………..14 2.3 Failure Rate of Strategic Alliances…………………………………………………15 2.4 Managing Partnership in the Early Stage of Strategic Alliances…………………..18 2.4.1 The Necessity of Early Stage Alliance Management……………………...18 2.4.2 Trust-Building……………………………………………………………...20 2.4.3 Cultural Compatibility……………………………………………………..22 2.5 Learning Ability during the Strategic Alliance……………………………………..24 2.6 Brand Management under the Strategic Alliance…………………………………...26 3
  5. 5. Chapter 3: Methodology……………………………………………………………30 3.1 Research Approach…………………………………………………………………30 3.2 Data Collection……………………………………………………………………..35 3.3 Data Analysis………………………………………………………………………36 3.4 Limitation of the Research………………………………………………………....37Chapter 4: Research Setting……………………………………………………….39 4.1 Background of the Company………………………………………………………41 4.2 The Strategic Alliance with IBM…………………………………………………..43 4.3 The Necessity to Form the Strategic Alliance……………………………………...44 4.4 Motives toward Lenovo & IBM’s Strategic Alliance………………………………45Chapter 5: Analysis on the Strategic Alliance…………………………………….49 5.1 Analysis—Secondary Date………………………………………………………...49 5.1.1 Problems Occurred in the Early Stage of the Alliance……………………49 5.2.2 Measures Have Been Taken and the Evaluation………………………….58 5.2 Analysis—Electronic Interviews………………………………………………….61 5.2.1 The Main Questions Raised in the Electronic Interview…………………61 5.2.2 Findings from the Electronic Interview………………………………….62 5.2.3 Measures to Be Taken and Limitations…………………………………..65 4
  6. 6. Chapter 6: Discussion……………………………………………………………..70 6.1 Theoretical Insights…………………………………………………………….....70 6.2 Managerial Insights……………………………………………………………….71 6.3 Methodological Insights…………………………………………………………..72Chapter 7: Conclusion……………………………………………………………..75Appendix A—Questionnaire of the Strategic Alliance between Lenovo and IBM………..77References…………………………………………………………………………..79 5
  7. 7. LIST OF TABLES AND FIGURESTables:Table 1: Different types of strategic alliance………………………………………………….12Table 2: Five forms of complex alliances……………………………………………………..13Table 3: Comparison between analysis from secondary data and electronic interview ……73-74Figures:Figure 1: Phases of Alliance Development and the Evolution of Trust………………………21Figure 2: Lenovo Share Price…………………………………………………………………52 6
  8. 8. CHAPTER 1: INTRODUCTIONGlobalization is a trend of the world nowadays; it can also be a very expensive process, as itrequires the firm to own a well-developed R&D capabilities, financial support, production,distribution network, sales & marketing skills so as to make an outstanding over its rivalsinternationally. However, a firm may discover that it lacks at least some of the necessaryinternal resources to effectively extend its global reach. Therefore, in most occasions, a firmmay seek for partners to share the cost as well as the risk in this process.As Doz and Hamel (1998) indicate that the races for the world and the future require thedevelopment of insights, capabilities, and infrastructures at an ever-faster pace that fewcompanies can master, and yet they must be swifter if strategic advantage is to be obtained. If acompany cannot position itself quickly and correctly, it will miss important opportunities andbe far lagged behind the tidal wave, therefore the strategic alliance between different firms haveemerged as the vehicle of choice for many companies in both the race for the world and the racefor the future (Doz and Hamel, 1998). Strategic alliance has become a favorable choice formany multinational companies as a strategy responding to rapid economic development andincreasingly fierce competition in the global market (Gulroy, 1993). Compared with otherwidely adopted strategies, such as mergers and acquisitions, major companies prefer to choosethe ‘bond’ option rather than the ‘buy’ or ‘build’ option to stimulate growth and increasecorporate wealth (Pekar and Margulis, 2003, p.50). With the prevalence of the strategic alliancein recent decades especially in the last years of the 20th century, Cyrus and Freidham (1999)believe that it will become the primary way of global consolidation in the near future, and it 7
  9. 9. may also become the most powerful tool to maintain a firm’s sustainable competitive edge.China, as one of the biggest and most prosperous markets in the world, cannot be exclusive inthis overwhelming trend. Facing with the opportunities and challenges brought with theopening-up policy and entry of WTO, many big corporations in China, like TCL and Lenovo,are intending to go outside as a multinational firm and create a globally recognized brandthrough co-operation and competition with their rivals, thus, strategic alliance becomes one ofthe popular business strategies in the globalization process. Besides that, as Doz and Hamel(1998) argue that in this new world, networks, coalitions, alliances, and strategic partnershipsare not an option but a necessity for companies to achieve competitive success.However, the failure rate of the strategic alliance is quite high, especially for the cross-boarderalliance, which is most often confronting with very different cultures. Therefore, the aim of theresearch is to evaluate the strategic alliance between Lenovo and IBM—a cross-border alliancebetween a typical young Chinese company and a well-recognized western multinationalcorporation, and to analyze how to make the alliance work in the early stage of the relationshipto ensure the success of the marriage.The paper is organized as follows. Chapter one is a brief introduction of the case study on thealliance between Lenovo and IBM. Chapter two reviews the theoretical foundation of strategicalliances, mainly focuses on issues like motivations to alliances, as well as the issues thatclosely related to the success of an alliance in the initial stage. Chapter three describes themethodology that is applied in this research. Chapter four gives the context of this research that 8
  10. 10. the company has encountered both from outside and inside. Chapter five then examines the casein deeper insights from the analysis based on both the primary and secondary data towards thisalliance. Chapter six is the discussion part that induces the insights from theoretical, managerialand methodological level respectively. The last chapter draws lessons from the strategicalliance between Lenovo and IBM and summarizes the extensive research. 9
  11. 11. CHAPTER 2: LITERATURE REVIEW ON STRATEGIC ALLIANCES2.1 Definitions of Strategic AlliancesFor a long time, economists and business strategists have viewed alliances from a muchnarrower perspective, as anomalies worthy only of a footnote (Gomes-Casseres, 1996, p3).With the explosion in the use of alliances in high-technology fields in the 1980s and 1990s, theimportance of strategic alliances has been recognized, and the attitude among theorists ischanging (Gomes-Casseres, 1996, p3). The alliance revolution itself has been gainingmomentum for the past two decades, more than 20% of all revenue earned by the Fortune 1000is derived from alliance activity compared with less than 5% only 15 years ago (Cyrus andFreidheim, 1999, p.47). Moreover, in the last years of the 20th century, there occurs a rapid risein popularity of all types of alliances between firms, which was referred to as the era of alliancecapitalism (Koza and Lewin, 2000). Chief executives are increasingly turning to alliances as atool to develop their business so as to maximize the shareholder value. From the result of surveydone by the Economist Intelligence Unit in 2003, the rate of companies’ dependence onexternal relationships would see a “significant increase” (Anslinger and Jenk, 2004). Moreimportantly, the nature and life span of alliances have changed dramatically, it used to beperceived as having only a single purpose and being incremental to the main business, but nowit becomes a cornerstone of their strategy (Cyrus and Freidheim, 1999, p.47). Just as Gilroy(1993) stated that the strategic alliance has become a favour for many multinational companiesas a strategy responding to the rapid economic and technological development, globalizationand dynamic nature of the market. 10
  12. 12. There is no concise definition of strategic alliances; different versions have been put forward bymany economists and strategists. Here given several of the definitions. Among which, one isdescribed as that international alliances are “…cooperative arrangements, involvingcross-border flows and linkages that utilize resources and/or governance structures fromautonomous organizations headquartered in two or more countries” (Parkhe, 1991, p.581).Strategic alliance was also perceived as long-term co-operative partnerships involving vendor,customer, competitor, or industry-related firms and was used to achieve some competitiveadvantage (Stafford, 1994, p.64). Arino et al. (2001) define alliance as a formal agreementbetween two or more business organizations to pursue a set of private and common goalsthrough the sharing of resources (e.g., intellectual property, people, capital, organizationalcapabilities, and physical assets) in contexts involving contested markets and uncertainty overoutcomes. According to Hill (2005), strategic alliance is referred as the cooperative agreementsbetween potential or actual competitors; it is a relationship between firms to create more valuethan they can on their own. However, his definition narrowed the partner selection tocompetitors.To combine the elements of different perspectives, in general, the strategic alliance can bedefined as a cooperative agreement between two or more companies for the aim of accessingcomplementary resources and skills that the company lacks under globalization process, and isused as a flexible way to achieve sustainable competitive edge.According to the nature and life span of alliances, it can also be classified into three differentforms of strategic alliances: horizontal, vertical and diagonal alliance. Specifically, horizontal 11
  13. 13. strategic alliances are formed with competitors within the same industry; this kind of alliance isoften formed for R&D purposes. Vertical strategic alliances can be formed with suppliers orcustomers in several value chain activities. While diagonal strategic alliances are formed withpartners from other industries (Bronder and Pritzi, 1992, p416). To put the strategy in a moreconcrete form, Arino et al.’s (2001) state that alliance’s forms can be varied in a number ofways, it could be performed under the forms like equity joint ventures, non-equity collaborativearrangements, licensing or franchising agreements, management contracts, and long-termsupply contracts. They may end up in two kinds of firms: a consortium of firms or networks oforganization. Firms are increasingly co-operating through non-equity ventures; the strategicalliance goes far beyond the more familiar joint ventures and includes a myriad of non-equityarrangements (see Table 1). In addition to that, other less visible alliances include co-operativestaff or facilities sharing (Pekar and Allie, 1994, p.55-56).Table 1: Source: Pekar and Allie, 1994, p.56 12
  14. 14. Developed from the relatively simple classification of the alliance’s forms, there comes up fiveforms of complex alliances by Anslinger and Jenk (2004), namely invasive, multi-function,multi-project, coopetition and networks form (see Table 2). Here the case falls into the categoryof coopetition form, which means that a firm chooses to cooperate with its competitors drivenby the decided benefits of sharing developing costs, accessing to cross-pipeline expertise andreducing transaction costs, although it comes along with several disadvantages, such as a failureto cooperate (Anslinger & Jenk, 2004, p.20).Table 2: Source: Anslinger and Jenk, 2004, p.20 13
  15. 15. 2.2 Motives toward Strategic AlliancesMost important reason for the surge in strategic alliance has been under the recognition of thefact that no corporation has enough capital to acquire all of the companies and assets needed tocompete everywhere in the world. While with alliances, companies can access global marketsand contribute to economic development without steep exposure to market and political turmoil(Cyrus and Freidheim, 1999, p.48). The motivations for the formation of an alliance can rangefrom purely economic reasons (e.g., search for scale, efficiency, or risk sharing) to morecomplex strategic ones (e.g., learning new technologies, seeking political advantage) (Arino, etal., 2001).Generally speaking, forces that drive the formation of strategic alliances can be categorized intothree aspects. Firstly, companies are seeking for co-option during its globalizing process.Co-option turns potential competitors into allies and providers the complementary goods andservices that allow new business to develop and usually multinational companies seek partnerswith similar products who have a good knowledge of local market and channels of distributionin order to share the risk during the expansion of the global market (Bronder and Pritzi, 1992;Doz and Hamel, 1998; Cullen and Parboteeach, 2005). The privileged market access of somecountries sometimes can be a reason for MNC to search for alliance under the globalizationmovement (Bleeke and Ernst, 1991; Bronder and Pritzi, 1992; Doz and Hamel, 1998).Secondly, co-specialization has become a more and more attractive force behind the strategicalliance. It is the synergistic value creation that results from the combination of previouslyseparate resources, positions, skills and knowledge sources. By bringing the resources of two or 14
  16. 16. more companies together, strategic alliances often provide the most efficient size to conduct aparticular business (Bronder and Pritzi, 1992; Cullen and Parboteeach, 2005). Through the wayof alliances, partners can contribute their unique and differentiated resources to the success oftheir allies, i.e. skills, R&D, brands, networks, as well as tangible and intangible assets(Bronder and Pritzi, 1992; Doz and Hamel, 1998).Last but not least, alliance may also be an avenue for learning and internalizing new skills fromits partners, in particular those that are tacit, collective and embedded (Bronder and Pritzi, 1992;Doz and Hamel, 1998). Therefore, it is self-evident that strategic alliance is central to thecorporate strategy and it is significant and unavoidable for the global reaching step in the worldeconomy.To a nutshell, when confronting with the newly opening markets, intensified competition, andthe need for increased scale, many CEOs have put the formation of cross-border alliances ontheir agendas since 1990s (Bleeke and Ernst, 1991). To international managers, the strategicbenefits are compelling under the synergy effects among partners; and it is a flexible andefficient channel to crack new markets, to gain skills, know-how, or products, and to share risksor resources (Bleeke and Ernst, 1991).2.3 Failure Rate of Strategic AlliancesInter-firm cooperation has reached a feverish pace over the past decade, especially for thetechnology companies, for which alliances have moved to the forefront of the competitivestrategy (Brown, 1999; Duyster et al., 1999; Kelly et al., 2002). However, despite the growing 15
  17. 17. popularity of strategic alliances, the success rate remains low, and also a number of recentstudies have noted that the failure rate of alliances is in the range of 50-60% (Spekman et al.,1996; Dacin et al., 1997; Kok and Wildeman, 1998; Frerichs, 1999; Andersen Consulting, 1999;Duysters et al., 1999; Kelly et al., 2002). This is about the same rate identified in studies doneby McKinsey and Company and Coopers and Lybrand at the beginning of 1990s (Stafford,1994, Kelly et al., 2002). Especially in the early stage of alliances, as Kelly et al., (2002) statethat the initial stage of an alliance is a critical shakeout period fraught with uncertainties andambiguities, managers need to find ways to tackle the early shown or potential problems to laidthe foundation for a good relationship later. Studies have shown that two thirds of all alliancesexperience severe leadership and financing problems during the first two years (Bronder andPritzi, 1992, p.419). Evidence showing that even those ventures that finally succeed mustfrequently overcome serious problems in their early years (Kelly et al., 2002). For instance,Bleeke and Ernst (1993) found out that 66% of cross-border alliances they studied confrontedwith serious managerial problems in their first two years of the alliance. The other study doneby a Bain and Co. also indicated that in every ten alliance relationships, five would fail to meetthe partners’ expectations and of the other half, only two would last for more than four years(Rigby and Buchanan, 1994).There are many reasons for the high rate alliance failures. Draulans et al. (2003) find that aninadequate capability to manage the alliance is the main reason. As Robert E. Spekman statethat leadership played a key role to the success of alliances. Drawing specially trained strategicalliance leaders from outside the organization, as many companies do, can be problematic;strategic alliance managers need the knowledge, relationship and credibility that only an insider 16
  18. 18. can bring to the table (Ellis, 1995). Another frequently cited reason is poor selection of alliancepartners; due to competitive pressures, many firms rush into alliances without adequatepreparation or understanding of their needs, the incompatibility of partners will lead toinsurmountable problems (Medcof, 1997; Dacin et al. 1997). Other reasons that are often citedfor the alliances failure include lack of trust between partners, cultural conflicts, incompatiblechemistry, unique risks inherent in strategic alliances, and lastly focusing on alliance formationrather than sustaining the alliance (Gomes-Casseres, 1998; Kelley et al., 2002).International alliances are increasingly central to the corporate success; however, they often endup in divorce. As Fedor and Werther (1996, p.39) point out that in many cross-boarder alliances,the failure stems from the deal maker’s concentration on strategies, financial, and legalcomplexities, while largely ignoring issues of “cultural compatibility” among the alliancepartners. Therefore, cultural differences could become a barrier to success, especially at theinitial stage. Besides that, the failure to build trust between partners in the early stage of thealliance could be detrimental to further development to the next stage. Trust building is alsoclosely linked to the cultural compatibility between partners. Stafford (1994, p.70) indicatesthat if partners lack compatible cultures and expectations, the trust between partner employeesmay not materialized, which will lead to inter-partner employee conflicts.The next section in this chapter explores literature to identify the importance of trust-buildingand cultural compatibility in managing the partnership in the early stages of strategic alliance. 17
  19. 19. 2.4 Managing Partnership in the Early Stage of Strategic Alliances2.4.1The Necessity of Early Stage Alliance ManagementResearchers as Yoshino and Rangan (1995), Child and Faulkner (1998), and Parkhe (1998a) (ascited in Kelly et al., 2002) suggest that the real challenge of strategic alliance management is totransform collaborative agreement into productive and effective relationships. It requires theclose attention to the people aspects of alliances especially in the early stage of thecollaboration. However, as Kelly et al. (2002) point out that there are few studies that haveexamined how the process of cooperation between individuals and organizations actually takesplace in alliances, and how these problems could affect the sustaining of the collaboration. Dozand Hamel (1998) note that the initial context of an alliance seldom encourages cooperation, asthe managers and staff will most likely find themselves under unfamiliar circumstances, inwhich they may have different assumptions, attitudes and expectations about the alliances aswell as private fears about their role in it. As Kelly et al. (2002) note that this situation willprobably be further complicated due to cultural differences, communication barriers, lingeringsuspicions about partner motives and latent opposition in the partner companies. If these earlyuncertainties, conflicts and tensions are not handled carefully and deliberately, they can causemistrust and reinforce an “us versus them” mindset in the partners, thereby undermining thefoundation of the alliance (Doz and Hamel, 1998; Kelly et al., 2002).Arino et al. (2001) indicate the importance of managing cultural conflicts from the very start ofthe alliance, as they can be obstacles to keep partners from effective communication, especiallyin cross-border alliances. As it is further explained that as employees at all levels are the onesthat make the alliance work on a day-to-day basis, management must ensure that they can work 18
  20. 20. harmoniously under diverse circumstances, which is the same to the senior managementpersonnel. Therefore, it is top of the priority at the initial stage to avoid the “us and them”syndrome at all costs and be ruthless in eradicating stereotyping, as it breeds distrust andcontempt (Arino et al., 2001). Doz and Hamel (1998) suggest that the early process ofcollaboration is at least as important as the strength of the strategic premise on which it is based.In their viewpoint, the decisions made and particularly the nature of the interaction that takeplace during the initial stages of the alliance will more likely to play a determining role in itsfuture development and even the final success (Kelly et al., 2002, p12). This argument is alsosupported by other authors. More and McGrath (1996) note that the success of strategicalliances largely attribute to the ability of companies to effectively manage relationship issues;and Wildeman et al. (1996) found out that relationship problems were the cause of thepremature termination of 70 % of alliances. Therefore, a lack of attention to issues like trust,chemistry and culture could become the trigger for the failure of most alliances especiallyduring the premature stage of the collaboration, which in turn, become the key to achievingmutually rewarding successful alliance (Kok and Wildeman, 1998; Kelly et al., 2002).Therefore, due to the uncertainties and ambiguities that typically pervade at the initial stage ofan alliance, it is necessary view the early stage of cooperation as a period of mutual discovery,sense making and trust building for the partners and is a key stage to the success of alliances(Kelly et al., 2002). 19
  21. 21. 2.4.2 Trust-BuildingTo make the alliance successful, managers need to make their main focus on bridge building; itis significant for them to create an environment that is trustful for partners (Ellis, 1995).However, some academics have claimed that the lack of study in this aspect and called for moresystematic research into the role of trust in business relations, observing that: “It is clear thatresearch on trust needs to advance beyond a catch-all residual in the unexplained random error.”(Koza and Lewin, 1998; Arino et al., 2001).There are several interpretations of the meaning of trust, one of which is defined by Arino, et al.(2002) that trust is “the belief that the other party will subordinate their own selfish interests tothe interests of the alliance (i.e., the partner relationship) without most expected situations.”According to Faulkner (1995), trust means having sufficient confidence in a partner to commitvaluable know-how and other resources to the venture despite the risk of the partner takingadvantage of this commitment (cited in Kelly et al., 2001, p.12). Sabel (1993) defines it as themutual confidence that no party to an exchange will exploit the other’s vulnerability (cited inKelly et al., 2001, p.13). According to the viewpoint of Child and Faulkner (1998), calculation,mutual understanding and bonding are the foundations on which trust develops. Figure 1shows phases of alliance development and the evolution of trust. 20
  22. 22. Figure 1: Phases of Alliance Development and the Evolution of TrustPhase of Alliance Formation Implementation EvolutionDevelopment overtimeKey Elements Mutual Calculation Bondingin Trust Understandin g ‘Being prepared to ‘Getting to know ‘Coming to identify work with you’ about you’ you as a partner’ Source: Child & Faulkner, 1998, p.56 Arino et al. (2001), and Zaheer and Venkatraman (1995) note that the importance of trust-building lies in the function that it may serve as a substitute for, or a complement to more formal governance structures, as this kind of intangible mechanism implies an expectation that one’s partner will subordinate its selfish interests to the “joint interest” of the alliance under most, but not all, conceivable circumstances. As Ring and Ven de Ven (1992), and Parkhe (1998b) indicate that the existence of trust in a corporation reduces coordination costs and opportunistic behaviours, and facilitates conflict resolution and can help alliances adapt to changing environments (cited in Kelly et al., 2001, p.13). Trust building is most likely to take a long time, and reliance on trust is a complex probabilistic decision for the management, but it is a critical determinant to the alliance success (Williamson, 1993). Parkhe (1998b) believes that it is vital to focus attention on avoiding surprises, being trustworthy and being know to be trustworthy, as he indicates that trust is brittle and if damaged in the early stages of an alliance it 21
  23. 23. could be extremely difficult to re-establish (cited in Kelly et al., 2001, p.13).To sum up, creating and sustaining trust in collaboration is hard, and international alliancesmake it even harder as it involves with cultural differences and clashes in attitudes andassumptions. Without trust between partners, it is most likely that in the alliance, sharinginformation, making investments and commitments will become impossible or difficult (Kellyet al., 2001, p.13). The authors further state that in the absence of trust, an atmosphere ofsuspicion is likely to prevail, which will lead to the divorce of the alliance.2.4.3 Cultural CompatibilityIn the international alliance formation process, there is a key element of operational successapart from the consideration of the aspect of strategy, finance and law, that is the culturaldimension (Fedor and Werther, 1996). It is also suggested by Pekar and Allie (1994) thatsuccessful alliance management places great emphasis on human and cultural aspects of theprocess. Geert Hofstede (1980, p.25) is a respected authority in the field of the global culture;he defined culture as “the collective programming of the mind which distinguishes themembers of one human group from another.” Hofstede’s (2005) four cultural dimensions (i.e.,power distance, collectivism & individualism, femininity & masculinity, and uncertaintyavoidance) help to explain the difference between various countries, and also provide a scale toexplain various work values and attitudes under different national cultures. Each country’sdistinct culture may accelerate or hinder the development of multinational corporations,especially during cross-border alliances when different cultures meet. As the differences innational culture result in the formation of differing managerial ideologies which, in turn, have 22
  24. 24. the potential to affect strategic decision processes in firms (Hitt et al.,1997; Dacin et al., 1997,p.6).Corporate culture is defined as the set of values that establish employee norms and expectations,in reality the cultures of the prospective partners are often overlooked. More often, culturalclashes resulting from the myth that once an alliance is established, the alliance will form itsown hybrid culture can derail the prospect for synergistic benefit of the alliance (Stafford, 1994,p.70). International alliances are often characterized by differing, if not conflicting culturalvalues, beliefs and assumptions that transferred from the parent company, it requires the time,energy, and management talent to reconcile these differences (Fedor and Werther, 1996, p42).They suggest that cultural compatibility or a good cultural match is important; it may play alarger role in successful cross-boarder alliances than any other particular strategic or financialsynergy. It is because that when a company finds a partner that shares its values and beliefs, theresulting clarity and strength enhance and accelerate the alliance, besides that, the compatibilityallows partners of the international alliance to focus their time, energies and talents on theexternal business environment, thereby raising the chances of success in the internationalalliance (Fedor and Werther, 1996, p.43). However, if the partner lacks compatible culture, oreven worse with conflicting cultures, the trust among employees may not realized and conflictswill occur. As Mishler (1965) and Child and Faulkner (1998) point out that the greater thecultural differences, the greater the likelihood that barriers to communication will occur and sowill the misunderstandings. 23
  25. 25. Despite the differences in corporate cultures, creative and effective management of culturaldifferences can lead to a greater variance in ideas and enhanced innovation and dynamism,which will lead to a better group performance (Cox, 1993; Jackson et al., 1995). A variety ofmechanisms provided by Barnes and Stafford (1993) may be useful for adopting partnercorporate cultures within strategic alliances (cited in Stafford, 1994, p.71). It is summarized asfollows: a) Potential cultural differences can be brought out into the open so that co-operative activities can be designed with these differences in mind. b) Education and training among partnering personnel can facilitate adaptation and understanding as well. c) A mutually respected and unbiased consultant can propose recommendations for new inter-partner programmes to mediate and defuse conflicts. d) The use of joint ‘rituals’ and ‘ceremonies’ can force each partner’s employees to become involved in the change process and support a mutual culture. e) The hiring of new personnel can diffuse and mix the partner cultures.2.5 Learning Ability during the Strategic AllianceDoz and Hamel (1998) note that strategic alliance comes along with the learning process fromits partners, and the internalization of the new knowledge; thereby benefits the firm. As hasbeen described above, alliance has many advantages; it can serve as channels for the transfer oftechnology and enable other kinds of organizational learning (Gomes-Casseres, 1996, p.45). AsNeil et al. (2001) indicate that learning from its partners by accessing their critical information,know-how or capabilities is one of the most important motivating factors for forming an 24
  26. 26. alliance in the first place. Moreover, for the success of an alliance and the materialization of themaximized benefits for the partners involved, it is essential for companies to develop analliance learning capacity to maximize learning, sharing and absorbing knowledge and skills;otherwise, it will be hard for a company to gain added value from a partnership (Praise andHenderson, 2001; Duysters et al., 1999, p.349). Child and Faulkner (1998) indicate that apartner’s capacity to learn is determined by a combination of the following factors (cited inAliyu, 2004, p.32): a) Knowledge transferability; b) Receptiveness of members to new knowledge; c) Possession of necessary competences to understand and absorb the knowledge; and d) The extent to which the partner has incorporated the lessons of experience into the way it approaches the process of learning.Companies benefit a lot from competitive collaboration if adhere to a set of simple but powerfulprinciples, one of which is being learning-oriented, as Hamel et al., (1989, p.134) suggest thatlearning from partners is paramount, they also state that successful companies are always thosethat view each alliance as a bridge and access to their partner’s broad capabilities. For them,alliances bring with it “synergy” effect, and they use the relationship to acquire skills andknow-how in areas outside the formal agreement and systematically diffuse the new knowledgethroughout their organization. For this aspect, most Japanese companies are the good examplefor being learning-oriented in the alliance relationship with U.S. companies, which partlycontributed to Japan’s fast economic and high-tech development. For Japanese firms, it isself-evident and prevalent across the organization when forming an alliance that the purpose of 25
  27. 27. the alliance is to learn. This idea is enhanced by Hamel et al., (1989, p.138) that the companymust enhance the capacity to learn, the purpose of the alliance that employees perceived is adetermining element of whether collaboration leads to competitive surrender or revitalization.However, the learning process also accompanies with risks, as what has been pointed out by Leiand Slocum (1992, p.98) that “…without clearly understanding and identifying the risksinherent in alliances, collaborations may unintentionally open up a firm’s entire spectrum ofcore competencies, technologies, and skills to encroachment and learning by its partners.” Thisis perceived by Fedor and Werther (1996, p.41) as the alliance dilemmas—‘weigh the promiseof competitive advantage [by learning from its partners] against the threat of giving awayproprietary knowledge, technology, or market access to the alliance partner, who is either apotential or actual competitor.’ Besides the risks of core knowledge leakage, the partner may‘out-learn’ an organization, become independent and leave the organization redundant (Hamel,1991; cited in Aliyu, 2004, p.33). Nevertheless, Garai (1999), from both the legal and strategicperspectives, suggests some ways (i.e., due diligence, shared values, dedicated agreements anddocument with care and trust-building) to get the most out of every alliance while minimizingthe risks of intangible resources being ‘stolen’ and preventing from opportunism betweenpartners (cited in Aliyu, 2004, p.33).2.6 Brand Management under the Strategic AllianceAs Wreden (2005, p7) indicates that brands are “valuable corporate assets that can increaseprofitability, sales and even share value”, and as other investments, branding is a “strategicinvestment” for the firm. Brand equity has become one of the most significant marketing 26
  28. 28. concepts since 1980s, and it represents the “added value” endowed to a product as a result ofpast investments in the marketing for the brand (Keller, 1998, p.44). As Temporal (2002, p.37)states that positioning process is vital to brand management and this process helps one firm tomake the strategic leap from being perceived as an ordinary brand to being seen as world-class,with all the rewards this brings. He notes that whatever strategy or combination of strategiesone adopts; the position must be capable of being communicated simply and carefully, to makethe audience get the real message. Most positioning is a repositioning process, it can be causedby several factors, i.e., a firm’s change in strategic direction, new or revitalized corporateidentity, or change in competitor positioning, some companies find it worthwhile to changetheir identity completely, not just with a new logo, but possibly with a name change, a newpersonality in order to overcome the problems of the past or to take the advantage of newopportunities, and in the present day, repositioning is becoming more frequent as companiesseek to keep up with the pace of change and innovation (Temporal, 2002).Strategic alliance is an effective and flexible way for different companies to share or contributetheir unique and differentiated resources, among which, branding is one of the importantintangible assets (Doz & Hamel, 1998). As marketers try to capitalize on the complementaryfeatures of different brands, brand alliances are becoming more and more frequent.Co-branding is a brand alliance strategy and it is defined as ‘two or more brands aresimultaneously presented to customers’ and it has now become a strategic tool for manycompanies to attain higher market shares (Swaminathan, 2006; Geylani et al., 2006, p.44).Brand alliances or co-branded strategies bring with both opportunities and challenges forcorporate brand management (Swaminathan, 2006; He & Balmer, 2005). As Swaninathan 27
  29. 29. (2006, p.43) indicates that co-branding can result in enhanced brand recognition, increasedproduct differentiation and greater market share for the focal product, a successful co-brandingcan improve the perception towards the partner’s brand and enhance their brand equity (i.e.,brand image reinforcement); but a negative one can also backfire and dilute the partner’s brandequity. A successful example is Virgin Atlantic joining up with Singapore Telecom’s mobilecompany-SinTel Mobil, to form Virgin Mobile for the Asian market. SinTel has a goodknowledge of Asian market but itself is not a really acceptable and well-known regional brandname; whereas, Virgin enjoys a reputable brand name but with little knowledge in the Asianmarkets. Therefore, it turns out to be an ideal marriage with the combination of SinTel’s localand technological knowledge and Virgin’s brand values (Temporal, 2002, p.90).However, as Temporal (2002) further argues that the extension and combination of brands canbe tricky, sometimes, alliances, mergers and acquisitions (M&As) cause serious brandsproblems, and the frequently occurring problem is consumer confusion. The inconsistentimages of the partner brands may result in confusion about the co-branded products and causehigh uncertainty (Geylani, et al., 2006, p.44). In order to maintain the strength and favorabilityof brand associations in the market, it is critical for the firm to stick to the brand consistencyalong with its corporate strategic plan. However, brand consistency does not mean that the firmshould not make any changes to the brand. On the contrary, being consistent in managing brandequity requires many tactical shifts and changes in order to maintain the strategic thrust anddirection of the brand along with the corporate development (Keller, 1998). Whatever themulti-brand portfolio contains, it must be clearly established that there is no overlap betweenbrand territories, and the failure to achieve this will result in consumer confusion and 28
  30. 30. sub-optimization of sales (Temporal, 2002, p.84). Besides that, Geylani, et al., (2006, p.44)suggest that ‘it is not necessarily in a brand’s interest to choose the best performing partner onthe attribute of interest, rather, it is optimal to collaborate with a brand that is perceived to be ofonly moderately higher performance’. In addition to that, a dual-branding arrangement throughwhich both brands are described by the same set of attributes can be a useful mechanism toreduce or eliminate the contrast effects between two brands, it is also perceived as anassimilation process (Wyer and Srull, 1989; Levin and Levin, 2000). 29
  31. 31. CHAPTER 3: METHODOLOGY3.1 Research ApproachThe research aims to figure out how to make the strategic alliance work in the early stagebetween Lenovo and IBM, and to apply principles into reality. The literature part in theprevious section lays the theoretical foundation for the analysis and expatiates on variousfactors that contribute to the success of an alliance. The researcher attempts to analyze the casefrom the primary data collecting from the interviews, and the secondary data.Research design is the general plan about how to get answers to the research question(s), it isthe argument for the logical steps which will be taken to link the research question(s) and issuesto data collection, analysis, and interpretation in a coherent way (Saunders, et al., 2007; Hartley,2004, p.326). Selltiz et al. (1981, p.50) define design as the deliberately planned ‘arrangementof conditions for analysis and collection of data in a manner that aims to combine relevance tothe research purpose with economy of procedure’.Case studies are widely used in organizational studies and across the social sciences; they arenormally studied to provide insights into an issue, a management situation or a new theory inbusiness studies (Hartley, 2004; Ghauri, 2004). They are beneficial because it provides richunderstanding of the context of the research and the process being enacted (Morris and Wood,1999, cited in Saunders et al., 2000). Robson (2002, p.178) defines case study as ‘a strategy fordoing research which involves an empirical investigation of a particular contemporaryphenomenon within its real life context using multiple sources of evidence’ and it is both the 30
  32. 32. process of learning about the case and also the product of our learning (Ghauri, 2004, p.109).Yin (2003) also highlights the importance of context, figuring out that within a case study theboundaries between the phenomenon being studied and the context within which it is beingstudied are not clearly evident (cited in Saunders, et al. 2007, p.139). As Hartley (2004, p.323)states that a case study is a research strategy that consists of a detailed investigation, often withdata collected over a period of time and of phenomena studied within the specific context. Andhe further points out that the aim of a case study is to provide an analysis of the context andprocesses that illuminate the theoretical issues being studied.Case studies are a preferred approach when ‘how’ or ‘why’ questions are to be answered, whenresearcher has little control over the events and when the focus is on a current phenomenon in areal-life context (Yin, 1994, as cited in Ghauri, 2004, p.110). Ghauri and Gronhaug (2002)argue that when such types of questions are asked, a case study method as a research strategy isrecommended. Hence it applies to the Lenovo-IBM case study in this research.A case study can be either quantitative or qualitative; it can also use both (Ghauri, 2004; Hartley,2004). As for the nature of the case in this research, it was decided that the research bequalitative. In addition, qualitative research goes beyond the measurement of observablebehaviour (the ‘what’ questions) and seeks to understand the meaning and beliefs underlyingthe action (the ‘why’ and ‘how’ question) (Buckley and Chapman, 1996; cited inMarschan-Pirkkari and Welch, 2004). 31
  33. 33. The methods of quantitative and qualitative are widely used in business and managementresearch to differentiate both the data collection techniques and data analysis procedures(Saunders, et al., 2007, p.145). As Denzin and Lincoln (2000) argue that quantitative researchmethods focus more on the measurement and analysis of causal relationships between variablesbut not process. It is mainly used as a synonym for any data collection technique (i.e,questionnaire) or data analysis procedure (i.e., graphs or statistics) that generates or usesnumerical data (Saunder, et al., 2007, p.145). However, qualitative method is used mainly as asynonym for any data collection technique (i.e., interview), or data analysis procedure (i.e.,categorizing data) that generates non-numerical data (Saunder, et al., 2007, p.145). Comparedwith quantitative data, qualitative data provides a deeper understanding than would be obtainedpurely from quantitative data, it is a useful method to access rich information and it is best toexplore the depth and complexity of phenomenon (Silverman, 2000, p.8). Qualitative researchmethod takes a more holistic approach to the research object and studies a phenomenon in itscontext (Marschan-Pirkkari and Welch, 2004, p.8).Qualitative methods have been defined as procedures for ‘coming to terms with the meaningnot the frequency’ of a phenomenon by studying it in its context (Van Maanen, 1983, p.9; citedin Marschan Pirkkari and Welch, 2004, p.6). Moreover, Easton (1995) notes that qualitativeresearch method is often combined with interview-based case studies (hence corresponds to theLenovo-IBM research case) (as cited in Marschan Pirkkari and Welch, 2004, p.6). Therefore,the qualitative research is the most appropriate in this research, as issues here cannot bemeasured in quantitative terms. 32
  34. 34. The interview is the most commonly used method of data gathering in qualitative research, andit can address quite focused questions about various aspects of the organizational life (King,2004). Kvale defines the qualitative research interview as ‘an interview, whose purpose is togather descriptions of the life-world of the interviewee with respect to interpretation of themeaning of the described phenomena’ (Kvale, S., 1983, p.174; cited in King, 2004, p.11). Thegoal of qualitative research interviews is to see the research topic from the perspective of theinterviewee and to understand how and why they come to have this particular perspective; andthe form of interview is employed in various ways by every main theoretical andmethodological approach, i.e., face-to-face interview, by telephone or via the internet (King,2004, P.11). As King (2002, p.17) points out that the qualitative research interview is ideallysuitable for examining topics in different levels of meaning need to be explored, which is verydifficult for quantitative methods to achieve. Daniel and Cannice (2004, p.186) further indicatethat when there is a small population of possible respondents, interview-based research may bethe optimal choice as in such case, the researchers must focus on the depth of collected datawhen the breadth is simply not attainable, through this method, it can offer an opportunity forthe researcher to acquire rich information from each respondent. As for the Lenovo-IBM case,the possible respondents are small in number and hard to access, besides that, they are alsogeographically dispersed, an internet-mediated interviewing, which is also called as “electronicinterview” is adopted by the researcher.Morgan and Symon (2004, p.23) use the term electronic interview to refer to ‘the use of openquestions and an interactive approach, moving more towards forms of research such asface-to-face and telephone interviews’, it can be held both in real-time using the internet as well 33
  35. 35. as those that are undertaken off-line, in asynchronous mode, using e-mail communications.The method of electronic interview has the potential benefit of accessing a broad range ofextremely busy people; it can be used as a substitute or complementary way to face-to-faceinterview as it can overcome some access barriers (Morgan and Symon, 2004, p.24). Theauthors further state that qualitative interviews themselves vary by depth, structure and time, sodoes the electronic interviews, they are the new symbolic form of ‘oral-text’ exchange withboth strengths and weaknesses that should be taken into consideration to the research purposes(Morgan and Symon, 2004, p.24). As Morgan and Symon (2004, p.23) emphasize that togenerate interview style data using e-mail requires a series of communication (one list ofquestions would be more akin to an open-ended questionnaire). They indicate that in theelectronic interview, a number of e-mails need to be exchanged over an extended period of time.The series of processes include the initial small number of questions or topic are raised tohopefully get the reply of the participant by offering their thoughts and opinions; theresearcher’s respond to those ideas and further questions regarding to the other linked issues.As Morgan and Symon (2004, p.23) suggest that the electronic interview can be a timeconsuming process, these communications may last for some weeks until the topic is exhaustedor the participant shows signs of losing interest. Thus, time issues and maintaining interest ofthe respondents are the particularly difficult aspects of electronic interview (Morgan andSymon, 2004; Saunder et al., 2007).In addition, secondary data also contributes to the research. Secondary data is defined as a kindof data that has already been collected for other purposes (Hakim, 1982; cited in Saunders et al.,2000). As Saunder et al. (2007) note that it is the most frequently used data in a case study or 34
  36. 36. survey research strategy. The main advantage of using the secondary data is the enormoussaving in resources, especially the time and money (Ghauri and Gronhag, 2005, as cited inSaunder et al., 2007, p.257). Besides, the authors further argue that it could be useful tocompare the data that have collected primarily with the secondary data.3.2 Data CollectionThe data of this research were collected through two means: electronic interview and secondarydata. (a) Electronic InterviewThe interviews were conducted by e-mail with the people both from Lenovo employees andformer IBMers to gain the insider’s views about the company’s experience in the early stage ofthe strategic alliance. The 18 people participated in the interview are varied in positions, fromsenior managerial personnel to sales people, the aim of that is to obtain a relatively completeand real inside views. (b) Secondary DataThe secondary data mainly obtained from a wide range of sources, including journals,publications, reviews from the analysts, company annual report and the Internet information.For this study, such data were mostly from the company’s publicized documents and reports,and the analysts’ perspectives that are supposed to have the authoritative status. 35
  37. 37. 3.3 Data AnalysisImpression management is defined by Colleen and Broadway (2007, p.343) as ‘thegoal-directed activity of controlling information about a person, object, entity, idea or event’,and it aims to attain certain purposes and avoid the consequences of negative actions. It is theprocess by which people attempt to influence the image of certain things, and used to create andmaintain specific identity (Drory and Zaidman, 2007, p.290).As for the characteristics of the secondary data, it cannot be denial this kind of information isbiased, which is called by Saunders et al. (2007, p.267-8) as measurement bias—‘deliberate orintentional distortion of data or changes in the way data are collected’, which are difficult todetect. Deliberate distortion occurs ‘when data are recorded in accurately on purpose and ismost common for secondary data sources such as organizational records’, which is gathered totarget certain group of people (i.e. shareholders) or for certain purposes (i.e. establishing asound social recognition) (Saunders et al., 2007, p.268). The authors further point out that thechange in methods when collecting data also introduce measurement bias. However, to someextent, it can also be a useful source to get the information as the analysts are generally moreexperienced with deeper insights, and they are generally have a more objective stance. Theprimary data from the electronic interview is the information from an insider’s view, whichmight be complementary to the secondary data or result in unforeseen discoveries after thecomparison between the two analyses.Therefore, when conducting this case study, the research decides to analyze the phenomenonrespectively based on the secondary data publicized by the company as well as the reviews from 36
  38. 38. the analysts; and the inside perspectives from the electronic interview. It is referred astriangulation—‘the collection of data through different methods or even different kind of dataon the same phenomenon’, and it is one of the defining features of a case study (Ghauri, 2004,p.115). And he further argues that the major benefit of this method is to provide a morecomplete, holistic and contextual portrait of the project under the study after checking andvalidating the information from different source and examining it from different angles (Ghauri,2004, p.115). After making a comparison between the two analyzing results from secondarydata and interview, the researcher intends to provide a more complete and holistic view of thecase study.3.4 Limitation of the ResearchDue to the time limit and other access barriers, the electronic interview by e-mailcommunication is compressed into onetime process. All questions that are related to concernedissues are prepared in one e-mail beforehand before sending to the participant that havecontacted through personal relationship. As the number of participants is small and chosenrandomly in the organization, it may reflect some biases and subjective opinions within theinterviewee. This result of the electronic interview will be used as the primary research for thedissertation, but the amount of the collected data, as stated earlier, might be limited. Besidesthat, just as what has been mentioned above, relying on secondary data also has thedisadvantage that the data might be collected for specific purposes that probably differ from theresearcher’s question(s) or objectives (Denscombe, 1998, as cited in Aliyu, 2004, p.36). 37
  39. 39. Besides the data limitation, the researcher’s own biases or preferences beforehand mightimpose an effect upon the research, though the author may have tried to remain as objective asshe can. Moreover, the insufficient time and resources also constrain this dissertation to someextent. 38
  40. 40. CHAPTER 4: RESEARCH SETTINGBefore analyzing the strategic alliance between these two companies, it is necessary tounderstand the changing competitive environment for Chinese firms, like Lenovo, in a globalcontext.As for the liberalization of the world trade and investment environment, many internationalmarkets are becoming extremely competitive. In almost every industry, capable competitors nolonger confront each other within the national boundary, but more around the globe (Hill, 2005).China is an emerging economy developed at a rapid pace, and it has been experiencingtremendous changes after many economic reforms, which make it become a heated targetmarket for many foreign companies. In the past two decades, China had undergone significantchanges from a centrally planned economy to a more market-oriented one, though the benefitsderived from being a WTO membership to Chinese economy far outweigh its costs, especiallyin the long run, reductions of government protection and loss of monopolistic position implygreater challenges to Chinese firms in a global competitive context (Liu et al., 2000). Inaddition, Chinese government has pushed a “Go Out” policy in recent years, with the intensionto encourage the local companies to develop overseas markets and to acquire the advancedtechnology and distribution networks, thus, the government holds a very supportive attitudetowards the firms that intend to go globally (Dickie and Lau, 2004a). However, the inherentcommon problem of Chinese company is that they are too rush to go global. The handicap ofTCL, China’s large consumer electronics company, gives a good lesson to learn from. As apioneer under this ‘Go Out’ policy to expand its business globally by buying well-known 39
  41. 41. international brands, in less than three years the firm has experienced a disorderly treat, and hasbeen forced to shut and sell most of its operations in Europe, which are largely due to itsunrealistic objectives, lack of local market knowledge and poor execution (Jonquieres, 2006).As Jonquieres (2006) comments that much of Chinese industry’s foreign expansion to date hasbeen for defensive reasons inspired by the fierce competition that drives down prices andmargins at home. He further says that as Chinese firms cannot easily respond by innovating andmoving up-market, geographic expansion therefore becomes a survival issue. The general aimof the foreign partnership has been to seek access to technology, brands, marketing anddistribution networks.Under these circumstances, many firms in China are compelled to undergo more radicalchanges and tend to adopt these measures more vigorously as a result of the more turbulentenvironment and keener incoming competition (Liu et al., 2000). In order to maintain itscompetitive advantages and profits compared to its rivalries, a firm must make a clear andviable strategic choice with regard to its position at the frontier, and take actions at theoperational and strategic level to support this position. This is especially significant and urgentfor Chinese firms that are not in monopolistic status and struggling for the global presence asmultinational companies. Under this tidal wave of global stretch, Lenovo, like TCL, becomesone of the pioneers in China. Moreover, it is said by Joseph Ho, analyst at Daiwa Institute ofResearch, that, “Lenovo was a lot more ready than TCL when it did the IBM deal. Itsmanagement is more open-minded and determined” (Lau and Dickie, 2006). 40
  42. 42. 4.1 Background of the CompanyLenovo Group is one of the leading IT companies in China, and it has now become the 3rd PCprovider in the world market after the acquisition of IBM’s Personal Computing Division. As aglobal company after the alliance with IBM, it has a number of more than 19,000 employeesworldwide; and with executive offices in Raleigh, North Carolina, USA; Beijing, China; andSingapore (Lenovo.com, 2007a). The company’s main operations are in Beijing, China; andRaleigh, North Carolina, USA, with an enterprise sales organization worldwide (Lenovo.com,2007a). As the largest PC producer in China, it took 27 per cent of China’s PC market share in2003 and Lenovo PCs ranked No.1 in the Asia Pacific (excluding Japan) with a market share of12.6 per cent in that year (People’s Daily, 2004). Since the year 1996, Lenovo has maintainedits leadership position in China for ten consecutive years with over 25 per cent market share till2006. The following is a brief development history of the company:The company was first founded in 1984 by 11 computer scientists in Beijing, China, as the NewTechnology Developer Inc. (the predecessor of the ‘Legend’ Group), which thereafter openedthe new era of consumer PCs in China (Lenovo.com, 2007b). In 1989, Beijing LegendComputer Group Co. was established and launched its first PC in the market in the followingyear, since then, the name ‘Legend’ became a household name in China (Lenovo.com, 2007b).By 1994, Legend was trading on the Hong Kong Stock Exchange, becoming one of the fewChinese companies that listed there (Lenovo.com, 2007b). In 1996, Legend became the marketshare leader in China for the first time and kept with the line thereafter and three years later, itbecame the top PC vendor in the Asia-Pacific region and headed the Chinese national Top 100Electronic Enterprise ranking; furthermore, the company ranked in the Top 10 of the world’s 41
  43. 43. best managed PC venders (Lenovo.com, 2007b). In the year 2003, with an aim to expand itsbusiness globally with a more global-like brand, the company changed its former brand name‘Legend’ to the name used today as ‘Lenovo’, “taking the ‘Le’ from Legend, a nod to theheritage, and adding ‘novo’, the Latin word for ‘new’, to reflect the spirit of innovation at thecore of the company” (Lenovo.com, 2007b). The change of the brand name from ‘Legend’ to‘Lenovo’ was perceived as the first move under the firm’s global stretch. At the end of the year2004, Lenovo and IBM announced the agreement of Lenovo’s acquisition of IBM’s PersonalComputer Division, which was IBM’s global PC (desktop and notebook computer) business(Lenovo.com, 2007b). In May 2005, Lenovo’s acquisition of IBM’s Personal ComputingDivision was completed, making it a new international IT competitor and the third-largestpersonal computer company worldwide (Lenovo.com, 2007b). After the acquisition and thestrategic alliance with IBM, Lenovo-branded products were introduced to the world outside ofChina at the first time (Lenovo.com, 2007b).Lenovo and its employees are committed to four company values that are the foundation for allthat they do (From Lenovo.com, 2007a): • Customer service: We are dedicated to the satisfaction and success of every customer; • Innovative and entrepreneurial spirit: Innovation that matters to our customers, and our company, created and delivered with speed and efficiency; • Accuracy and truth-seeking: We manage our business and make decisions based on carefully understood facts; • Trustworthiness and integrity: Trust and personal responsibility in all relationships. 42
  44. 44. With an aim to provide market cutting-edge, reliable, high-quality products and professionalservices for the satisfaction of the customers, the company is dedicated to research and talentdevelopment (Lenovo.com, 2007a). The company owns research teams who have wonhundreds of technology and design awards, which includes more than 2,000 patents, and hasalso introduced many industry firsts (Lenovo.com, 2007a). The goal of Lenovo’s R&D team isultimately to improve the overall experience of PC ownership while driving down total costs ofownership.Apart from being a prosperous business entity, Lenovo is also committed to being a responsibleand active corporate citizen, which makes it a reputable company in the home market.Moreover, as one of the major marketing strategy, Lenovo also actively takes a hand with sportsgames to help introduce the Lenovo brand around the world. In 2004, Lenovo became the firstChinese company to join the Olympic Partner Program and a sponsor of the 2006 winter gamesin Turin, Italy, and it will also be a major supplier of computing equipment and funding insupport of the 2008 summer games in Beijing, China (Lenovo.com, 2007).4.2 The Strategic Alliance with IBMAccording to Lenovo’s 2004/2005 Annual Report, Lenovo has always aspired to become aglobal company. Since the year 2003, Lenovo began to lay the groundwork for its global stretch.It firstly changed its former name ‘Legend’ to ‘Lenovo Group Limited’ that could be usedwithout restriction around the world. Then, its wide and active participation in the Olympicevents have accelerated Lenovo’s pace into the international market. On December 8th, 2004,Lenovo announced that it would acquire IBM’s global PC business for US$ 1.25 billion. 43
  45. 45. According to the terms of the agreement, the acquisition included IBM’s desktop and notebookcomputer business, as well as its PC-related R&D centers, manufacturing plants, globalmarketing networks, and service centers (Lenovo’s 2004/2005 Annual Report). In addition tothat, Lenovo also has the right to use the IBM brand for a period of five years and the permanentownership of the renowned ‘Think’ family trademarks. As part of the transaction, Lenovo andIBM also entered a broad-based, strategic alliance of warranty and maintenance services andpreferred supplier of customer leasing and channel financing services to Lenovo (Lenovo’s2004/2005 Annual Report). On April 30th, 2005, Lenovo completed the landmark acquisitionwith IBM and entered a new era of globalization, making the new Lenovo a PC leader in theglobal market, with approximately 8 per cent of the worldwide PC market by shipments,followed after Dell (16.4%) and HP (13.9%) (Buetow, 2005; Ling, 2006).4.3 The Necessity to Form the Strategic AllianceLenovo was known as one of China’s most promising companies in the early 1990s, with itssales more than tripled between the year 1994 and 1998, and Asia’s leading PC vendor outsideJapan at the end of the 1990s (Lau, 2004a). However, before the declaration of the alliance withIBM, the company had encountered with obstacles for its further expansion and development.Though Lenovo is the largest PC maker in China with more than a quarter of the market share,it does little business outside the country. The increasing fierce competition from aggressiveforeign rivals such as Dell and HP in the past few years in Chinese market has put furtherpressures on Lenovo’s margins. According to Citigroup Smith Barney, although Lenovo stillaccounted for 27 per cent of China’s PC market, the growth rate in 2003 far lagged behind themarket growth rate; by contrast, Dell’s shipment in China grew 48 per cent (Lau, 2004a). Apart 44
  46. 46. from that, the company also suffered financial problems, earlier in the year 2004; Lenovoconfessed that ‘its performance over the past three years had fallen short of internal targets’(Lau, 2004a). In addition to that, shares of the company dropped nearly 60 per cent in the year2004, and analysts at investment banks including ABN Amro and Citigroup’s Smith Barney,downgraded the company (Lau, 2004b). As one analyst said in June 2004 that “The company isin crisis, it has lost direction and does not know how to move forward” (Lau, 2004a). Therefore,rather than just continue to concentrate on the domestic Chinese market, the decision to goglobal is a necessity for Lenovo at that critical time.Under these circumstances, Lenovo decided to form the deal with IBM to acquire its lowprofitability PC business with US$1.75bn. According to the terms of the agreement, Lenovopays US$650m in cash and up to US$600m in shares (which later changed to US$800m andUS$450m share value), giving IBM an 18.9 per cent stake as well as shouldering US$500m indebt; and IBM will become the Chinese PC maker’s “preferred supplier” of support servicesand customer financing. For Lenovo’s part, the acquisition quadruples its sales to more thanUS$12bn and expands its sales market globally; besides being given the ownership of the Thinkfamily trademarks, Lenovo also gains the right to produce IBM-branded PCs under a five-yearlicencing agreement (FT reporters, 2004; Simon, 2004).4.4 Motives Toward Lenovo & IBM’s Strategic AllianceLenovo’s takeover of IBM’s PC division has been described as “snake ate the elephant”, and thedeal pulls Lenovo from the eighth-largest PC maker in the world to the third-largest just behindDell and HP (Buetow, 2005; Ling, 2006; London, 2004). As the news released by China Daily 45
  47. 47. (2004), the two computer firms have formed a strategic alliance in PC business worldwide, inwhich IBM positioned as the second largest shareholder with a share of 18.9 per cent. Themotivations that drive the formation of the strategic alliance between Lenovo and IBM can beanalyzed from two perspectives.For Lenovo’s aspect, though Lenovo is the largest IT company in China, its products are mainlywithin China. Michele Mak, an analyst at ABN Amro, once commented that “Lenovo’sdistribution network is its biggest problem, and it is not well adapted to serving the small andmedium-sized companies who usually buy directly” (Lau, 2004a). Thus, in the first place, withan intention to expand its business globally, the firm needs a well-developed worldwidedistribution network, which happens to be the advantage of IBM. As what has been announcedby Lenovo, the agreement between the two firms includes broad-based strategic alliance underwhich Lenovo’s products will be integrated into IBM’s global service offerings, which alsobecame the impetus to the deal (Lenovo.com, 2007c). As Stephen Ward, former head of IBM’sPC division said that IBM promised to push Lenovo’s PCs and offer financing to its customersand business partners by its sales teams (Dickie & Lau, 2004b).Secondly, as a world-leading company like IBM, it has specialized and advanced skills in salesand marketing functions, for Lenovo, the sales and marketing support, as well as the R&Dsupport are significant and of a necessity in its way to a multinational enterprise, which is alsopart of the agreement (Lenovo.com, 2007c). As Dickie and Lau (2004) point out that Lenovocould get access to some of the world’s most popular laptop designs, access to the U.S. market,and technological centers as advanced as any of its rivals after the establishing the alliance with 46
  48. 48. IBM. Just as what has been indicated by Doz and Hamel (1998), strategic alliance comes alongwith the learning from its partners and the internalization of the new knowledge, therebybenefits the firm. In this case, IBM provides such model and as an iconic enterprise for Lenovo,who is heading its way globally.Thirdly, the use of IBM’s globally recognized brand is an impetus to accelerate the alliance, andalso perceived as a sweet victory for Lenovo. The local brand ‘Lenovo’, formerly known as‘Legend’, will become more valuable in the market after its association with the ‘ThinkPad’series of laptops. And also, Lenovo’s right to use the IBM brand on the computers for five yearsadds more value and trustworthiness to the brand, as despite the fact that Lenovo is the largestPC maker in China and Asia, it is little known elsewhere in the world, even with the ownershipof ThinkPad family trademarks, it can hardly divert the loyal customers from IBM to Lenovo(London, 2004). Furthermore, analysts said that the deal could enable Lenovo to cutprocurement costs (Guerrera and Dickie, 2004).Just as Yang Yuanqing, the chairman of Lenovo, said that ‘Through acquiring IBM’s global PCbusiness and forming a strategic alliance with IBM, Lenovo would absorb and integrate theskills from both sides and acquire global brand recognition, an international and diversifiedcustomer base, a world-class distribution network with global reach, more diversified productofferings, enhanced operational excellence and leading-edge technology’ (People’s DailyEnglish 2004). He also added that, the alliance with IBM would also help establish Lenovo’sinternational recognition by leveraging IBM’s powerful global brand through a five-year brandlicensing agreement as well through the ownership of the globally recognized “Think” family 47
  49. 49. trademark (People’s Daily English, 2004).For IBM’s aspect, it expects that the deal with Lenovo, China’s largest PC maker will furtherconsolidate its presence in the world’s fastest growing IT market (People’s Daily English, 2004).The strategic alliance with Lenovo might become a move towards the shifting of demographics(Musthaler, 2005). On the one hand, IBM’s largest markets for its PCs are in North America andEurope, which are saturated, might partially explain its losses in the past two years. On the otherhand, China, as the second largest PC market except the U.S. has become the most importantmarket in the world with its large population and growing per capita income. However, as amarket, China is a tough nut to crack especially for outsiders. Much of the competition comesfrom Lenovo, which is far and away the market leader in China with nearly 25 per cent marketshare, in order to expand Chinese market and enjoy a slice of Lenovo ownership, IBM choosesLenovo as its strategic partner (Musthaler, 2005).Therefore, the driving forces behind the alliance reflect the two companies desires of seekingfor co-option, co-specialization during its globalizing process, with an attempt to learn andinternalize within its own organization, which are also the main three motivations for strategicalliances. 48
  50. 50. CHAPTER 5: ANALYSIS ON THIS STRATEGIC ALLIANCE5.1 Analysis — Secondary Data5.1.1 Problems Occurred in the Early Stage of the AllianceThe failure rate of strategic alliance is quite high, and the figure is even higher in thecross-border alliance due to cultural clashes, different management structure, trust issues orother factors. The deal between Lenovo and IBM, an alliance between an eastern company anda western one, has caused great market concern and doubts over the feasibility and Lenovo’sability to turnaround IBM’s PC business into a profitable one. UBS said in a report that, “webelieve that the acquisition will boost Lenovo’s long-term profitability, as the two parties offercomplementarities and IBM’s PC division offers a turnaround opportunity, however, thebiggest challenge for the ‘new’ Lenovo is the weak sector outlook” (Dickie, 2005a). Once theagreement is announced, one immediate occurring problem is investors’ low confidence overthis deal; Lau (2004c) indicated that upon the declaration of the acquisition, many investorssold shares of Lenovo due to the doubt over the company’s prospect. Besides that, Lenovo’sHong Kong share price also drop as much as 7.5 per cent to HK$2.475 after the announcement,which was worsen by its decision to issue new stocks to IBM as part of the payment (FTreporters, 2004; Lau, 2004c). Upon the unpleasant results publicized initially (i.e., Lenovo’sshares falling), IBM’s competitors were quick to predict that the deal would fail. Duane Zitzner,the head of HP’s PC division, predicted that the deal would ‘create a lot of turmoil within IBMaccounts’; and Michael, the chairman of Dell, also said that it could not turn out to be successful(London, 2004). In addition, analysts also have warned the difficulties and risks that Lenovomay encounter with in managing a big foreign business without losing IBM’s customers and 49
  51. 51. employees, they indicated that the deal might help Lenovo to fulfill its international ambitions,but it could also face serious execution problems as it has to manage a business that is threetimes its own size (FT reports, 2004; Lau, 2004c). Thus, it is not hard to tell that the strategicalliance between the two companies is under great doubts and even denial, and it does bringwith many problems that could lead to a divorce of the alliance at the initial stage. It will beanalyzed from three main aspects based on released financial statistics of the company andreviews from other analysts as followed: (a) Financial AspectsSince Lenovo revealed its plan to acquire IBM’s struggling PC business unit, investors havebeen held a skeptical view towards the deal, the low confidence of the shareholders also led tothe falling of Lenovo’s share value. Although Lenovo’s global PC shipments and the marketshare increased since the acquisition in December, the shares fell 7.2 per cent in Hong Kong intheir biggest drop in just under a year after the company reported weaker-than-expectedquarterly results and falling margin (Lau, 2005c). In the first quarter of the year 2005, the netmargin fell sharply to 1.82 per cent from 5.73 per cent, notwithstanding the steep increase of therevenue from HK$5.88bn to HK$19.6bn (Lau, 2005a). The situation didn’t improved in thesecond quarter of that year. As Lau (2005c) indicated that the gross profit margin fell from15.33 per cent to 14 per cent that quarter, and the net margin further fell from 1,82 per cent to1.2 per cent. Kevin Rollins, the chief executive of Dell, said that after Lenovo bought IBM’sPC business, Dell had been winning customers from Lenovo both in China and globally. Dellgrew rapidly in China through its direct-selling model and also claimed 8.4 per cent of themarket in the first quarter of 2005 as the third-largest PC seller in the country (Lau, 2005b). By 50
  52. 52. the end of the year 2005, the problem of the declining profitability didn’t change. Althoughsales jumped almost 400 per cent as a result of the acquisition, the company’s net profit failedagain to match analysts’ expectations, and the gross profit margin for the quarter to December2005 fell to 13.2 per cent, so does the operating margin (Allison, 2006; Lau, 2006a). In addition,Lenovo’s global PC shipment grew 12 per cent year-on-year, lower than the industry’s averagerate (Lau, 2006a). The financial situation is not promising in the year 2005, the full-year netprofit fell 85 per cent to HK$ 173m, and the weaker-than-expected results also sent its shares inHong Kong down 3.9 per cent to HK$ 2.45 (Lau, 2006b).In the year 2006, the financial performance of Lenovo didn’t make any progress. The companyreported a larger-than-expected drop in earnings for the second fiscal quarter, its net profitdeclined 16.6 per cent to $38m, compared with $45m in the year 2005 and analysts’ forecast ofabout $42m. The operating margin also fell to 1.6 per cent from 2.9 per cent a year ago (Lau,2006c). Apart from its own unpleasant financial performance, the strong global pricecompetition from its aggressive foreign competitors also deteriorated Lenovo’s situation. Allthese negative financial indexes imposed burden and pressure to Lenovo, as well as threateningthe alliance with IBM.The reasons that cause the financial problems can be analyzed as follows. Firstly, the pressurefrom the market leader Hewlett-Packard and Dell led to fierce cost competition, which madethe firm even harder to raise its margin (Lex, 2007). Secondly, Lenovo was struggling to cutcosts and return its U.S. operations to profitability in the face of fierce price competition fromHP and Dell, which leads to the organizational restructuring and two rounds job cuts so as to 51
  53. 53. improve the efficiency in the key markets (Taylor, 2007).The unpleasant situation started to change in the year 2007; this is largely due to Lenovo’srestructuring processes and cost-cutting measures. As Lex (2007) reported that the first quarterof 2007 is the best quarter since the IBM purchase, as the pre-tax profits, excludingrestructuring costs, rose by 2.6 times year on year, the operating margins in the US was 3.4 percent, reaching the highest since the deal, and its worldwide PC shipments increased by 22 percent, well above the industry’s average rate. Referring to the change of Lenovo’s share pricesfrom 2004, it was now reaching HK$ 5.20, compared to HK$ 2.75 in late 2004, and its marketcapitalization reached $ 5.7bn now (Figure 2).Figure 2: Source: Thomson DataStream, cited in Lex, 2007 52
  54. 54. As Yang Yuanqing, Lenovo’s chairman commented that, ‘Given the results of the past twoquarters (of the year 2007), this merger has successfully completed its integration phase’ and hesaid that the largest overseas acquisition by a Chinese company had transformed Lenovo from a$3bn a year domestic business into a true multinational with annual revenues of $15bn(Mitchell, 2007). (b) Cultural ClashesCultural differences between the two companies must also be taken into account, as it can betricky especially between a western and eastern company. The differences can be caused fromthe different corporate cultures or national cultures.As Schneider and Barsoux (2003) state that countries that ranked high on power distance wouldbe expected to be more hierarchic and centralized in the organization. In China, the business ismore often characterized by centralized power and personalized relationship, which is quitedifferent from that of the West. For example, for the decision-making process of the firm inChina, as the power is more centralized in the company, the decision-making process will bemore centralized to the top management, and employees would prefer the boss to makedecisions for them, thus, the decision might be less likely to be challenged and denied by thesubordinates, to some extent, it would be more easily and smoothly to the implementation of adecision in the company. However, on the other hand, it also hinders the participation ofsubordinates, as the employees’ fear of disagreeing with their superiors will block thecommunication between the leading and the led. Besides that, it also weakens the initiatives ofthe employee in the company. While in the U.S., employees are eager to have their voice heard 53
  55. 55. on the company decisions without being afraid of offending the authority and are moreexpressive in the discussion. They are recognized as part of the decision-making and are deeplyinvolved along with the process.Just as Qian Jian, Lenovo’s vice-president of human resources in Beijing said that ‘Americanslike to talk, Chinese people like to listen. At first we wondered why they kept talking when theyhad nothing to say, but we have learnt to be more direct when we have a problem and theAmericans are learning to listen. Both sides are learning’ (London, 2005).From this comments, it is not hard to tell that employees from both organizations haveencountered with cultural clashes, which are derived deep from its national or corporatecultures, different assumptions or values. The employees can learn along the way of theprogress, however, without any doubtfulness that proper measures need to be taken in order toease the fraction or problems coming up.The culture issue has also been considered as a tricky ring to the successful alliance circle, thecultural and communication challenges are even greater when the partnership is between awestern company and one from an emerging market in the east. When being asked about thehardest part of taking the Chinese routes and the American part of the company, Bill Amelio,currently the chief executive of Lenovo, said that different business cultures was the tough nutto crack. He cited the example to that happened between the two design teams to illustrate thispoint. When the two teams working on to figure out how to have a commercial design languageand a consumer design language, the word “common” stopped the discussion, as in different 54
  56. 56. cultures, it conveys different meanings, sometimes even in the opposite way(Freeland, 2007).In the West, it has an interesting meaning; while when it is translated into Chinese, it means“uninteresting” and “boring” (Freeland, 2007). Another example quoted by Lau (2006d) is theemployees’ confusion to adopt English names. It happened that when a Hong Kong-basedanalyst recently called Lenovo’s Beijing office and asked for an employee by the English firstname on her business card, he got a puzzling response that the operator told him that the persondid not exist. However, when he called back again and asked for the same person in her Chinesename, he was put through to her office immediately (Lau, 2006d). As the analyst said that theemployees have encountered confusion under the transformation of a corporate culture. Lau(2006d) further suggested that the spontaneous move by staff to adopt English names may becausing slight confusion, but it underlines broader changes in the company’s culture, whichanalysts perceive as key to its success in managing the alliance with IBM.Another concern over the cultural issue is how to merge Asian’s company’s management styleswith those of the western’s, and how Chinese managers and former IBM employees from theU.S. would get along. Mary Ma, the chief financial officer of Lenovo said that ‘the national gulfis actually less of an issue than the difference in culture between a youthful Chinese ventureonly in its second generation of leaders and a global giant with a long history’ (Dickie, 2005b).She further indicated that the real difference is between an entrepreneur company and awell-established multinational company (Dickie, 2005b). As Marsh (2005) warned that the pathto successful cross-cultural management between Lenovo and IBM is strewn with pitfalls. Thisview is also consistent with expectations from other analysts, who said that the combination ofthe two very different management teams would be a huge challenge for Lenovo, which had 55
  57. 57. little international experience before the acquisition (London & Dickie, 2005). (c) BrandingBefore the alliance with IBM, Lenovo has no presence in the world with very low brandawareness. Therefore, as discussed previously, one main motive for Lenovo to form the alliancewith IBM is to gain the chance to build its brand globally by sales through the IBM sales forceand using its well-known brand. As London (2005) suggests that because the ‘Lenovo’ name isalmost unknown outside of China, it is hard for marketers to build an international brand fromscratch; in order to succeed, they not only need to decide what Lenovo stands for but also comeup with products that support the claim.However, it is not exactly the brand reputation that matters; it is the actual effect it exerts in theintegration process after the alliance. Though IBM has a world-known brand as well as theThink family trademarks, it is not a separate entity that can be combined to any otherorganization randomly, it has become part of the corporate, an integrated part of its culture andvalues. As Temporal (2002) indicates that co-branding could cause brand problems, such asconsumer confusion or inconsistent brand image in the market, it is not necessary a win-winsituation. Lenovo also faces with the problems regarding to the brand management after thestrategic alliance with IBM. Kevin Rollins, the chief executive of Dell said that, ‘[Though] IBMhad a very, very good brand globally, when it stepped out of the industry, the name dropped out’(Lau, 2005b). Despite that Lenovo gains the well-known IBM brand and the ownership ofThinkPad family, it has not been well perceived in the market to be as good as the other PCmarket leaders like Dell and HP. It has been under the doubt that marketing ThinkPad laptop as 56
  58. 58. made by Lenovo might put off buyers since the announcement of the deal (Dickie, 2005c).After the alliance, Kevin said that Dell had been winning customers from Lenovo, both inChina and globally (Lau, 2005b). Moreover, Lau (2006c) also argues that Lenovo lost share inthe U.S. due to its limited presence in the consumer market and low brand awareness. Theimpact of negative reactions in Lenovo’s home market, where it accounts for over a quarter ofthe market share cannot be ignored. Ma Liyuan, a government worker in Shanghai said that, ‘Ididn’t think much of the Lenovo PC I used to have and I feel IBM has now suddenly lost a lot ofits cachet’. And one previously loyal IBM user and network engineer Song Yingqiao is evenblunt, saying that he will not buy IBM again, ‘It’s a gut feeling, it feels uncomfortable thatinternational IBM has become domestic Lenovo’ (Dickie and Lau, 2004b).The whole co-branding thing not only arouses the negative reaction from the local customers,but also caused the brand confusion. As Burt (2005) suggests that the new Lenovo has a strongIBM presence during its global process, which might cause brand confusion in the market.Besides its own brand change from Legend to Lenovo, the firm also has the IBM brand underthe five-year licencing agreement. In China, the brand names like IBM, ThinkPad and Lenovowill all be used; while in the U.S., Lenovo will continue to use the IBM brand, this messed upsituation might cause confusion in brand identities for consumers in the global market, andmake it even harder for the firm to market itself using a single brand name (Ritson, 2005).In addition to that, though Lenovo acquired the ThinkPad brand as part of its $ 1.75bnacquisition of IBM’s PC division, it is hard to make any change that could link to Lenovo’sbranding image. After receiving the unpleasant feedback upon the first try of launching anon-black model in the range, Bill Amelio, the chief executive of Lenovo, indicated that the 57