A Look At Lenovo's Strategy & Business Model

Since its founding in 1984, Lenovo Group Limited (OTCMKTS: LNVGY) has enjoyed a prodigious rise to become one of the world’s largest technology companies. In this article, we take a look at the strategic model underlying one of China’s most successful corporations.

At the heart of Lenovo’s growth in recent years has been a strategy—known as “protect and attack”—that was put in motion by CEO Yang Yuanqing in 2009. As its name suggests, this strategy combines defensive and offensive elements. Defensively, Lenovo seeks to build on its success in China, where it currently occupies a dominant position as China (and the world’s) top vendor of PCs. Offensively, Lenovo seeks to grow internationally by leveraging acquired assets and expanding sales to emerging markets.

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In carrying out this strategy, Lenovo makes use of two interrelated business models, referred to by Lenovo executives as their “Transactional” and “Relationship” business models. The transactional model emphasizes sales to retail consumers and small to medium-sized businesses, both directly (through online and physical Lenovo storefronts) and indirectly through distributors and retailers.

The relationship model targets enterprise customers such as educational and governmental institutions, as well as large businesses. Sales occurring through this model are characterized by a greater degree of personalized service by Lenovo staff, and are executed through a combination of internal sales representatives and business partners.

As Warren Buffett famously remarked, the most enduringly successful businesses are those that possess economic “moats” protecting their profits from encroachment by competitors. On face value at least, Lenovo has many such moats in China. (For more, see: What is an economic moat?)

Perhaps the most impressive advantage enjoyed by Lenovo in China is its immense network of distribution channels. Indeed, in a 2009 presentation to analysts, Lenovo executive Chen Shaopeng boasted that the company had access to over 13,000 sales points in its Chinese distribution network, of which 80% were exclusive distributors of Lenovo products.

The advantages of this network extend beyond mere scale. Lenovo’s local expertise as a company born in China lends it an advantage over non-Chinese competitors. A case in point--Lenovo’s “wedding computer”, a low-cost product adorned in red (a color connoting luck in China) and emblazoned with the Chinese character for “happiness.” The local insight embodied in this product, which has proven wildly popular among rural Chinese consumers, suggests that foreign competitors may face difficulty in unseating Lenovo in the hearts and minds of Chinese consumers.

Lenovo’s executives have made it clear that protecting these competitive advantages in China is a top strategic priority. But they have also made clear that their ambitions do not end there.

For most companies, becoming a market leader in China would be amply ambitious. For Lenovo, however, it is only the start of their dreams. Having established themselves as the leaders of China’s PC market, they have since undertaken to expand their presence in emerging markets such as India, Russia and Brazil.

This strategy is not without sacrifices. Initially, these expansions generally cause operating losses as a company invests in establishing its sales presence in the target market. However, this unprofitable period is endured with a clear goal in mind: once a double-digit market share is attained, Lenovo’s policy is to switch their priority toward a balance of continued growth and profitability.

In theory, Lenovo’s long-term goal is to recreate the dominant position it enjoys in China in each of its expansion markets. In practice, however, this is far easier said than done. Lenovo’s executives are well aware that the diverse markets in which they operate—which include the Americas, Europe, Africa, the Middle East and Asia—are each home to unique consumer preferences, competitive landscapes and regulatory regimes. As such, simply copying the factors that contributed to Lenovo’s success in China and exporting them throughout the world would unlikely result in success in other markets. Instead, Lenovo has sought to leverage the local expertise of competitors through acquisitions. (For more, see: What's an Acquisition? - Video)

Lenovo has completed several such acquisitions in recent years. In October 2014, Lenovo completed its acquisition of Motorola Mobility from Google Inc. (GOOGL). In a conference call to investors months before the completion of the acquisition, Lenovo's CFO Wai Ming Wong cited Motorola’s “[s]trong relationships with retailers and carriers in North America and Latin America” as one of the acquisition’s key benefits.

Lenovo made similar moves in 2011 and 2013 when it completed its acquisitions of Medion and CCE. Through these deals, Lenovo effectively doubled its share of the PC market in Germany and Brazil, respectively.

Although Lenovo’s rise has rested mainly on the PC market, in recent years it has moved toward more diverse revenue streams. Underlying this movement is CEO Yang Yuanqing’s belief that PCs are developing toward what he calls the “PC+ Era”, in which PCs exist as the central hubs linking a network of interconnected devices such as tablets, smartphones and “smart TVs”.

Implicit in this vision is a desire to steer Lenovo from a world leader in traditional PCs to a world leader across the range of “PC+” devices. As shown in the chart below, Lenovo has steadily grown the proportion of their revenues drawn from non-PC product streams:

Note: For the periods 2011-2012, 2012-2013, and 2013-2014, the "PCs" category was further broken down into the sub-categories "Desktop" and "Notebook". These categories were consolidated in the 2014-2015 report. Furthermore, the 2014-2015 report includes a category for "Enterprise" products. Because this category does not appear in the previous periods, it has been included in "Other" for 2014-2015 for ease of comparison.

This diversification has allowed Lenovo to secure third position in the global smartphone and tablet markets, where it trails Samsung Electronics Co. Ltd. and Apple Inc. (AAPL) by a significant margin in both product categories.

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If Lenovo’s “protect and attack” strategy is to succeed, the company will need to continue to defend its leadership position in China and the global PC marketplace, all while expanding its foothold in emerging markets and “PC+” product categories such as smartphones and tablets. While the long-term potential of Lenovo’s strategy remains to be seen, few can deny that the company has taken significant strides in recent years.

At the time of publication, Jason Fernando had no positions in any of the securities mentioned in this article. He does not intend to trade any of the securities mentioned in this article within 48 hours of publication.