Strategic Direction

Lenovos successful acquisition of the IBM PC Division

Mark Thomas

Article information:
To cite this document:
Mark Thomas , (2016),"Lenovos successful acquisition of the IBM PC Division", Strategic Direction, Vol. 32 Iss 9 pp. 32 - 35
Permanent link to this document:
http://dx.doi.org/10.1108/SD-06-2016-0090

Downloaded by Universiti Utara Malaysia At 06:14 11 November 2016 (PT)

Downloaded on: 11 November 2016, At: 06:14 (PT)

References: this document contains references to 13 other documents.
To copy this document: permissions@emeraldinsight.com
The fulltext of this document has been downloaded 163 times since 2016*

Users who downloaded this article also downloaded:

(2016),"Tata Motors successful cross-border acquisition of Jaguar Land Rover: key take-aways", Strategic Direction, Vol. 32
Iss 9 pp. 15-18 http://dx.doi.org/10.1108/SD-05-2016-0083
(2016),"A cultural integration path for cross-border mergers and acquisitions from the perspective of acculturation: A double
case study", Nankai Business Review International, Vol. 7 Iss 3 pp. 395-422 http://dx.doi.org/10.1108/NBRI-01-2016-0005

Access to this document was granted through an Emerald subscription provided by emerald-srm:394654 []

For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service
information about how to choose which publication to write for and submission guidelines are available for all. Please visit
www.emeraldinsight.com/authors for more information.

About Emerald www.emeraldinsight.com

Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of
more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online
products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication
Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.
*Related content and download information correct at time of download.

Lenovos successful acquisition of the

IBM PC Division

Downloaded by Universiti Utara Malaysia At 06:14 11 November 2016 (PT)

Mark Thomas

Mark Thomas is Professor

of Strategic Management
at the Department of
Management and
Technology, Grenoble
Ecole de Management,
Grenoble, France

Introduction
It was an acquisition that was so full of symbols that it is difficult to know where to begin.
Lenovos purchase of IBM in 2005 was first seen as a sign of the rapid growth and
expansion of the Chinese economy and its transformation away from the traditional
manufacturing base to more high-tech areas. For doomsday merchants in the land of Uncle
Sam, it foretold the end of the world domination of the US economy.
The two companies could not have been more different. IBM could boast of nearly one
hundred years of existence. Created in 1911, the company has grown rapidly throughout
the years, particularly after the Second World War. During the 1970s and 1980s, it was
consistently ranked as the largest company in the world by market capitalization (IBM
Archives, 2016). Such was its domination in the mainframe market that in 1969, the
American government set up an antitrust inquiry to investigate if it was abusing its
monopoly power (Levy and Welzer, 1985). Eventually, the US government dropped the
investigation in 1982 after a 13-year inquiry (Vance and Lohroct, 2009, 7 October),
concluding that newcomers such as Apple and Microsoft were already eating into their
business.
In comparison to IBM, Lenovo was a mere toddler within the industry. The company was set
up in 1984 under the name of Legend by Liu Chuanzhi and a group of ten engineers
(Lenovo company website, 2013). It was said that they had less than $25,000 with which to
create the business. (Johnson et al., 2008, p. 321). That same year IBM had nearly
400,000 employees and revenues in excess of $45 billion (IBM website). Despite
the difference in age and size, the establishment of the Beijing-based firm came at the
same time that another upstart, Apple, was challenging IBMs domination of the
computing industry through the use of one of the most iconic and famous
advertisements that has ever been made, using George Orwell chilling, futuristic novel,
1984, as a source of inspiration.[1]
Notwithstanding its humble origins, Lenovo grew rapidly over a period of two decades to
become the worlds ninth largest manufacturer of microcomputers. By 2005, it had
revenues of $3 billion and a 30 per cent market share in China but only 2.3 per cent
worldwide. (Lenovo company website, 2013). Despite the companys financial and market
positions, its announcement in December 2004 that it wished to acquire the IBM PC division
for a total value of $1.75 billion still came as something of a surprise (Bajarin, 2015, 4 May).
The potential benefits of the agreement were numerous. A successful acquisition would
give Lenovo access to IBMs brand notoriety and worldwide recognition, as well as an
efficient marketing and promotion system with a sales and distribution network operating in
160 countries. IBM was reputed to have professional and highly competent staff as well as

PAGE 32 STRATEGIC DIRECTION

VOL. 32 NO. 9 2016, pp. 32-35, Emerald Group Publishing Limited, ISSN 0258-0543

DOI 10.1108/SD-06-2016-0090

a loyal customer base. The deal would make Lenovo the third largest PC supplier in the
world (Lenovo Press Release, 2004, 7 December).
Symbols aside, many saw the immense and diverse number of hurdles that Lenovo would
have to face to successfully manage Big Blues PC division. These challenges can be
effectively analyzed using a CAGE Framework (Ghemawat, 2001).
A CAGE framework analysis of the IBM acquisition
Ghemawat (2001) considers that companies wishing to expand into foreign territory, be it
through organic growth or through acquisitions, have four major hurdles to overcome. They
are cultural distance, administrative and political distance, geographical distance and
economical distance. To ensure a successful integration of what would be a much-watched
acquisition, Lenovo would have to navigate through all four.

Downloaded by Universiti Utara Malaysia At 06:14 11 November 2016 (PT)

Cultural distance
From a cultural perspective, few would question the huge gap that exists between
American and Chinese business practices. Geert Hofstede contrasts the two cultures on
such aspects as uncertainty avoidance (low in China and high in the USA), the collectivist
nature of Chinese society compared to the American predilection for individualism and the
considerably more restrained society within the Middle Empire compared to the more
outgoing American society (Geert-Hofstede.com). This was summarized by Qiao Jian, Vice
President for Human Resources at Lenovo, when he stated that:
Americans like to talk; Chinese people like to listen (Quoted in Johnson et al., 2008, p. 321).

This led to worries that many of the senior managers at IBM would leave the firm. However,
Lenovos hands-off approach, trusting the senior managers in the USA with the continued
development of the firm, meant that most of them stayed on, thus ensuring a smooth
transition and stability within the organization (Bajarin, 2015, 4 May).
Administrative and political distance
Administrative and political distance also presented a great challenge. This was due to the
nature of Chinese companies as well as the relationship that the two had with their
respective governments. Ironically, Lenovo was free to purchase IBMs PC division, but the
reverse would have been impossible given the fact that the Chinese government required
of a minority stakeholding for any foreign company (US Department of State, 2014).
Lenovo managed to overcome the initial challenge to the deal by the US government
worried about a Chinese company having access to US technology. This was especially
delicate given that IBM had many contracts with the government and so, by definition,
access to sensitive data. Lenovo guarantees ensured that this problem was overcome
within a year (Bajarin, 2015, 4 May), which further ensured successful integration.
Geographical distance
The geographical distance was also a major challenge. Lenovo was based in Beijing,
whereas the IBM PC division was based in North Carolina. This was a 13-hour flight and
also spanned across 12 time zones, making it extremely difficult to engage in direct
communication within normal working hours.
However, since Lenovo skillfully avoided any form of micromanagement of its new
acquisition, most communication between the two firms could be dealt with in an
asynchronous fashion through email. More complicated issues were then dealt with
through teleconferencing, becoming a way of life for the company (Johnson et al., 2008,
p. 321). Typically, Americans called their Chinese colleagues at 6 am or 11 pm.

VOL. 32 NO. 9 2016

STRATEGIC DIRECTION

PAGE 33

Economic distance
Finally, the economic distance between the two countries and the two firms was also a
challenge. The Chinese economy was growing rapidly though income per capita, which
was still very different. IBM was famous for its leading technology, so its clients and
cooperation partners were mostly at the high-end of the market. Lenovo catered to more
low-and-middle consumers. Equally, the Lenovo brand was virtually unknown (Johnson
et al., 2008, pp. 321-323).
However, by playing off the notoriety of IBM and its products along with taking a skilful
approach to market segmentation, Lenovo was able to successfully circumvent these
challenges, transforming itself into the leading PC manufacturer within a decade (Bajarin,
2015, 4 May).

Conclusion

Downloaded by Universiti Utara Malaysia At 06:14 11 November 2016 (PT)

Few doubted the ambition of Yang Yuanging, CEO, Lenovo, when the decision to acquire
IBM was announced in 2005:
In five years, I want this (Lenovo) to be a very famous PC brand, with maybe double the growth
of the industry. I want to have a very healthy profit margin, and maybe some other businesses
beyond PCs, worldwide (Lenovo website).

Keywords:
China,
Technology,
IBM,
Acquisition,
Cross border,
Lenovo

Despite a considerable number of skeptics at the time, Lenovo was clearly up to the task.
Such was the success of the acquisition that by 2015, Lenovo could claim to have grown
into the worlds number 1 PC maker, number 3 smartphone manufacturer and number 3 in
the production of tablet computers (Lenovo company website, 2016). Indeed, by 2014, the
firm had enough confidence to add the IBM server business to its portfolio Lenovo Press
Release (2014, 23 January). This time, however, few analysts looked up in surprise from
behind their computer screens.

Note
1. Younger readers may wish to click on the following link to see this advert for the first time:
www.youtube.com/watch?vR706isyDrqI, For the more mature reader, it is still worth another look!

References
Bajarin, T. (2015), 10 Years later, looking back at the IBM-Lenovo PC deal, 4 May, available at:
www.pcmag.com/article2/0,2817,2483557,00.asp
Ghemawat, P. (2001), Distance still matters, Harvard Business Review, Vol. 79 No. 8, pp. 137-147.
IBM Archives (2016), Think, IBM interactive history, available at: www-03.ibm.com/ibm/history/
interactive/ibm_history.pdf
Johnson, G., Scholes, K. and Whittington, R. (2008), Exploring Corporate Strategy: Text and Cases,
Pearson Education, New Jersey.
Lenovo company website (2016), available at: www.lenovo.com/lenovo/us/en/history.html
Lenovo Press Release (2004), Lenovo to acquire IBM Personal computing division, 7 December,
available at: http://news.lenovo.com/news-releases/lenovo-to-acquire-ibm-personal-computingdivision.htm
Levy, D. and Welzer, S. (1985), System error: how the IBM antitrust suit raised computer prices,
Regulation, Vol. 9 Nos 5/6, p. 27, available at: http://object.cato.org/sites/cato.org/files/serials/files/
regulation/1985/9/v9n5-6.pdf
US Department of State (2014), Diplomacy in action, June, available at: www.state.gov/documents/
organization/228504.pdf
Vance, A. and Lohroct, S. (2009), US begins antitrust inquiry of I.B.M., available at: www.nytimes.
com/(2009),/10/08/technology/companies/08antitrust.html?_r0

PAGE 34 STRATEGIC DIRECTION

VOL. 32 NO. 9 2016

Further reading
Geert-Hofstede.com (2016), Comparative analysis of Chinese and US cultures, available at: https://
geert-hofstede.com/geert-hofstede.html
IBM Archives (2016), IBM corporate website, available at: https://www-03.ibm.com/ibm/history/
history/year_1984.html
Lenovo Press Release (2014), Lenovo plans to acquire IBMs X86 server business to acquire IBM
personal computing division, 23 January, available at: http://news.lenovo.com/news-releases/lenovoplans-to-acquire-ibms-x86-server-business.htm
Williams, M. and Kallender, P. (2004), Chinas Lenovo to buy IBMs PC business, 7 December,
available at: www.infoworld.com/article/2681991/computer-hardware/china-s-lenovo-to-buy-ibm-s-pcbusiness.html

About the author

Downloaded by Universiti Utara Malaysia At 06:14 11 November 2016 (PT)

Mark Thomas is Associate Dean for International Affairs and Professor of Strategic
Management at Grenoble EM, France. Mark Thomas can be contacted at: mark.thomas@
grenoble-em.com

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com

VOL. 32 NO. 9 2016

STRATEGIC DIRECTION

PAGE 35