Introduction
Lenovo is a large, global company that, over the long history of its existence, has gradually diversified its activities within the framework of IT technologies. Starting as a PC manufacturer in the most promising time, the organization has grown to the development of mobile communications, software solutions, servers.
Assessing the risks and outlining the development vector, the 3S program was defined, offering development in three directions, including smart Internet of things, infrastructure and industry verticals. In fact, Lenovo with this program is aimed at cutting-edge developments in the field of artificial intelligence, data analytics and the corresponding specificity of integration and transformation of solutions for specific structures and sectors. At the same time, against the background of these innovations, the company had to maintain the pace of revenue growth in its core business of creating PCs, mobile communications, servers and software solutions for various customers.
In the context of the coronavirus, a fairly large number of important processes have become more complicated. These include disruptions in the supply chain, the need to comply with new strict sanitary measures, adapting to legislation, which in some cases could go as far as a complete lockdown (Han et al., 2020). The process of globalization, which the company began to master almost before anyone else during the merger of the Chinese Legend with IBM, when there was a conflict of cultures, views and languages, both facilitates adaptation to new conditions and differentiates risks.
With a worldwide geographic footprint, Lenovo has mitigated production shutdowns in the epicenter of the outbreak, China, by dispersing them across other continents. Many other challenges have been created by the pandemic, not just for the organization, but for the industry as a whole, yet driving sales in certain categories (Morrison & Black, 2020).
As a consequence, in this situation, the company should answer the question of how to support the development of autonomous business sectors under the new 3S program. This work provides an analysis of the big picture in order to give recommendations to management for the most advantageous way out of the current problems.
Autonomous Business Sectors
The Smart Devices Group and the Data Center Group form the entire revenue of the company. Despite falling global demand by 2019, Lenovo’s PC and smartphone sales have only grown (Morrison & Black, 2020). Even though the organization has invested in the server and mobile industries, thereby depriving the corresponding investments in the PC sector, through years of experience and the right course, management manages to maintain revenue.
However, according to Lenovo’s financials, the company’s net revenue was negative in 2016 and 2018, and showed growth only after the pandemic (Macrotrends, 2022). It is very likely that this fact is connected with a lot of operating expenses for development, because 3S was proposed just at that time. At the same time, the cost of goods sold form approximately the same gross profit ratio for several years, therefore, the costs came from other items (Macrotrends, 2022). Negative net income affected metrics such as EPS, ROA, ROE and ROI, thereby reflecting a possible reason for the low market cap relative to other competitors.
However, Lenovo maintains an assets-to-liability ratio in the long run, with the company’s current ratio well below one relative to its short-term liabilities. This fact is partly offset by increased post-pandemic revenue due to accounts receivables that were heavily deferred but paid out (Macrotrends, 2022).
In general, the company’s financial indicators have leveled off and show promising growth. Lenovo’s PE ratio is understated, which indicates the organization’s potential for growth in share prices. However, it takes time and a significant amount of resources to reach the values of the computer, smartphone and software industries, as the indicators differ by more than 10 points (Petrillo et al., 2018). In fact, being the market leader in sales of computers, the decision of management to diversify the company’s activities in the direction of 3S is the only correct one, since there is potential in the industry, but in a specific sector it has already been fully realized.
To support the profits of computer technology, appropriate integration and diversification of software products is needed. This need was raised a few years ago by a CEO emphasizing the need for customer comfort (Morrison & Black, 2020). Lenovo Capital & Incubator Group will be required to perform R&D functions, which will almost always guarantee any technological and timely implementation of hardware in personal computers. The software environment is developing much more rapidly and comprehensively, and here Lenovo must adapt and create a unique offer in certain market niches.
Smart Verticals offer a solution perspective for industry, commerce and education. R&D should also consider those business industries in which the presence of information technology does not yet solve the full range of tasks required, or changes are brewing and fresh ideas are required. These areas include telemedicine, security, finance and bioinformatics.
Developments in telemedicine and bioinformatics always need additional productive capacities not only for scientific theoretical purposes, but also for quite practical ones (Asadzadeh et al., 2020). Participation in and development of such projects with the help of Lenovo will primarily contribute to the company’s reputation and compliance with social and environmental responsibility.
The integration of the tasks of these areas into the main vectors of 3S development can create unique specific solutions for entering a new market that is not yet occupied by competitors. However, additional diversification comes with increased risks. Information security and finance also offer a fairly high demand for expert systems and other IT developments that need a lot of server, hardware and software support (Ahnert et al., 2021). Smart vertical optimization may consider integration as one of the possible tools to improve revenue in a market with potential high margins due to low competition.
The transition to a stable growth rate of gross, operating and net margin financial indicators may contribute to the development of the company’s investor attractiveness. A broader diversification of promising technologies, differentiated by specific industries, can give a complete picture of the demand for specific tasks. Lenovo should consider this option as a potential branch into more niche products after appropriate market intelligence.
The smartphone market is filled with competitive solutions every year more often than the PC market. Flagship positions Apple and Samsung are globally recognized leaders in the premium product segment. While Samsung also offers lower-end options, Lenovo has entered the market for relatively cheap products in developing countries (Morrison & Black, 2020).
As a consequence, Lenovo should consider horizontal expansion in a geographical sense. In other words, the company should continue to follow the previously outlined strategy to capture the budget markets of developing countries, offering the most convenient product. At the same time, software solutions integrated with the products of this sector also represent a promising direction. Whereas in the case of PC software, Lenovo can focus on the more in-depth, specialized tasks of large enterprise customers, in the case of smartphones, the reach should be aimed at a wide audience.
Appropriate surveys, budget proposals and thoughtful, culture-integrated, socially and environmentally responsible marketing campaigns that are unique to each deployment region can contribute to this. Given the impact of the coronavirus and the need for social distancing and remote work, smartphones may be accompanied by free versions of the most popular and necessary programs for remote interaction, which will make the offer on the market relevant and comfortable, as required by Lenovo management.
3S Complexity
When revenues decline due to a pandemic, and spending only rises and requires enforcement, development becomes more problematic. On the other hand, each crisis presents new opportunities in a dynamic world, and the first one to respond to them properly will be able to occupy a certain niche in the changed reality. The Internet of Things has become more relevant due to the fact that people are forced to spend more time at home, and the home environment is full of various things that can be adapted in this direction (Kumar et al., 2019).
Given the coronavirus agenda, collaborating with healthcare organizations can provide Lenovo with invaluable experience in developing relevant equipment. For example, people can get special health monitoring devices that integrate with smartphones and PCs to recognize signs of illness and alert the owner about it (He et al., 2020). In addition, cloud storage and analytics tools can be provided to medical companies in order to process data faster and better to solve the fleeting problems of a pandemic.
Smart infrastructure projects can also be outsourced to big data companies. While Lenovo can provide and develop products for medical purposes with government funding or reputational support, scientific labs, industry, and retailers can turn to Lenovo for data analysis without resorting to costly outsourced solution development services. Such services have a fairly large margin, have a high gross profit ratio, and can be carried out even under the most severe restrictions during a pandemic (He et al., 2020).
It is worth noting that the company is unlikely to be able to make any fundamentally new developments in the relatively near future due to increased costs and disruptions in the supply chain. Infrastructure and the Internet of things at this stage represent a field of opportunity, which, however, cannot provide instant short-term earnings, but, on the contrary, requires financial injections. Accordingly, in order for the plan not to be idle, and for Lenovo to be able to gradually increase its customer base and diversify earnings into these groups, a number of recommendations should be taken into account.
Recommendations
Firstly, the most promising group of the new 3S direction is connected with verticals, namely, the search for potential niches for solutions in various business industries. In addition to the obviously highlighted commerce, industry, and education, Lenovo should look to banking and telemedicine. The medical and pharmaceutical industry will be central and most funded by both investors and governments during the pandemic.
Collaboration with such companies can provide not only experience, but also potentially progressive solutions at the intersection of information technology and the fundamentals of health care, bringing control over human health to a new level. This step contributes to the processes of globalization, however, it is associated with certain financial risks, while completely eliminating reputational risks.
Secondly, new software solutions are needed to preserve autonomous markets that have been successfully operating in sales for a long time. Lenovo smartphones should continue to be sold in the budget segment of emerging markets, as the flagship Apple and Samsung in the premium segment have captured the audience and set a high bar for quality, which requires impressive funding.
Software integration can include in the operating systems of finished products the most useful free solutions during the pandemic, which are paid from other manufacturers. The personal computer market should be developed into an area of broad and specific programs that will accompany already successful hardware products.
Conclusion
The combination of globalization, the 3S approach, and the pandemic crisis is another challenge for Lenovo, which in the long run should bring more benefits than potential short-term problems. It is almost certain that a company will suffer some losses once development teams introduce and test the first IoT products or niche solutions for a business industry, but diversification always comes with high risks in every area where the company is present.
However, as a leader in PC sales, finding itself in a highly competitive smartphone market, Lenovo simply needed to find new branches of development, since even with further globalization, the organization would risk falling into a state of stagnation. An important criterion for success at this stage will be constant quality control and analytics of each step, which will predict the feasibility of following the 3S model and appropriate diversification in the markets.
References
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