WHARTON LEADERSHIP DIGEST 

August, 2004, Volume 8, Number 11

CONTENTS

Leading Change:  “We’ve Decided to Refocus on the PC Business”
Leading Change:  Reinventing Toyota
Leading Change:  Redirecting SAS
Annual Wharton Leadership Conferences:  February 2, 2005 in San Francisco  
  and June 9, 2005 in Philadelphia
 

Leading change:  “We’ve Decided to Refocus on the PC Business” 

Lenovo Group – or Legend Group, as the company used to be called – has long been regarded as one of China’s best-known business success stories. Having begun life in 1984 as a distributor of foreign PCs, the company has become China’s (and Asia’s) largest computer maker. As strong economic growth during the past decades spurred demand for PCs in China, Legend grew into an IT giant with more than $3 billion in annual revenues, and its chairman, Liu Chuanzhi, was hailed as one of China’s top business leaders.   

Recently, though, Lenovo Group has stumbled a little. Aggressive forays to diversify into areas such as IT services and contract manufacturing of motherboards failed to pay off, hurting Lenovo’s profitability. At the same time, intense competition from international rivals caused Lenovo’s market share in China to fall. In an effort to correct course, Lenovo Group has returned to its core PC business ‑ and the initial results have been encouraging. On August 11, the company announced that revenues in the first quarter of fiscal 2005 went up 10% to HK$5.8 billion ($743 million). 

Liu Chuanzhi recently spoke with Knowledge@Wharton about Lenovo’s business challenges, lessons from past experiences, and plans for the future. Among the interviewers were Wharton management professor Michael Useem; Liang Neng, a professor of management and director of the Executive MBA program at China Europe International Business School (CEIBS); and Joseph Wan, a partner in the Boston Consulting Group’s Asian technology and communications practice. 

Useem: You wanted to become a fighter pilot, but instead you became an entrepreneur and the builder of a great company. I’d like to focus my question on your decision in 1984 to start Legend Group. What was your thinking at the time when you decided to start the company?

Liu: Before 1984 I worked for the Chinese Academy of Sciences. At that time I was in a depressed mood, because I thought that my personal goals would not be realized in the academy. The Academy pays more attention to S&T research results, but we could not commercialize them. Before that, the period during the Cultural Revolution was a time of chaos for China. For a long time, I was pessimistic and could not find a way to realize my goals and values. But in 1984, as the process of market reforms began in China, it became possible to develop commercial products and I was able to realize my personal goals. However, at the time when we launched the company everything was unforeseeable. I did not have a specific or clear plan.  

Knowledge@Wharton: Could you explain Legend’s globalization strategy? How does the company intend to go about building an international operation from a Chinese one?  

Liu: Legend has revenues of more than $3 billion and a 27% market share in China. We want Legend to become an international company with revenues of more than $10 billion. Our company can achieve that goal in two ways. The first is through globalization, which means we sell our PCs in other parts of the world. The second is through diversification and going beyond the IT industry.

In the past three years we set up a roadmap to achieve diversification. However, things did not go well with our plans. We were too anxious to achieve our goals, we did not think through our plans clearly, and we did not succeed. As a result, for the next three years we have developed a new strategy. We will focus on the PC industry first. Of course, this is just a three-year plan -- we do not intend to focus just on PCs forever. We are now working on plans for globalization as well as new ways of diversification, but we haven’t reached any conclusion yet.  

Wan: I have two questions. First, many Chinese companies today are looking at globalization. What would you recommend that they do, given what you have learned from your experience? My second question is about the domestic market. Legend obviously has performed very well historically domestically, but looking at some recent developments, it appears that Legend may be losing its edge in the domestic market. What is the company doing to maintain its competitive edge?  

Liu: For your first question, there are companies with different ways. Some companies, like Haier (a white goods producer) are as large as Legend. In order to keep growing and satisfying their shareholders by increasing profits, these companies have to go international. However, some other companies are much smaller. They face a large, standardized market when they venture abroad, and they have to compete with their rivals in areas, while they are still far behind in management, finance and human resources. In order to win, these companies have to be very careful and cautious.  

When some companies in Taiwan wanted to go global, their strategy was to go the OEM route. I believe many of these companies adopted this approach because Taiwan is a very small province, and these companies did not have well-known brands. But unlike such companies, Chinese companies have a large local market, so they can establish their brands in China before they go overseas. Though companies in different places may take different routes because of their specific situation, they have multiple choices in going global.   

Regarding the domestic market, we have seen that recently Legend’s market share has been declining. The main reason is that our strategy for the past three years was not so well set up. Three years ago, Legend’s market share was about 30%. In order to keep growing, the company decided to diversify into multiple sectors. I don’t think the top management team was well prepared for that. Their attention was distracted from the PC business, which is our core business.  

In addition, the domestic market has been changing. In the past, most of our orders came from government institutions or state owned enterprises. Prescriptively they had to spend all their budgets before the end of each year. As a result, it was the best business season for the company by the end of each year. However, now there are tremendous private small- and medium-size companies in the market as well as foreign companies in China. Their purchasing style is different. Our customers have changed dramatically.  

In view of these developments, this year Legend carried out a thorough and careful review of our plans in the past three years. We have decided to retreat from diversification and refocus on the PC business. We have promised our shareholders and investors that in the next three quarters they will see good results because of these changes in our plans.  

Liang: My question is about the decisions you made three years ago. Legend is best known for its thorough approach to decision making, but that diversification decision did not turn out the way you wanted. Was it mainly the consequence of unforeseeable environmental changes, or because there was a problem in Legend’s decision process at that time?  

Liu: I have often thought about this issue. I believe the reason why we did not achieve our goals was 60% because of external factors and 40% because of internal reasons. After I set up Legend in 1984, until the year 2000   or for 16 years   the Chinese economy grew rapidly and the PC industry expanded with it. No one expected it to turn down suddenly or for demand to drop. It was a setback for us. Everyone experiences some setbacks, and they must learn from these experiences. Three years ago we set a goal of achieving revenues of 60 billion RMB ($7.5 billion) but our revenues were less than 30 billion RMB ($3.8 billion). We did not expect that the market and our situation market would turn out to be like this. Of course, we must make a very thorough and detailed review of our decision making process. But to be more specific, the objective environment was different than everyone’s expectations. For example, in the years 2000 and 2001, many venture capitalists in the U.S. also had negative returns. It seems no one had expected the situation to change so dramatically.  

Of course, I also said that 40% of the results were because of internal factors. What I meant was that when the management team and the Board make decisions, they must use their internal support system. This means they must receive as much information as possible and understand what is behind the information and have a clear view of what is likely to happen in the future.  

Secondly, they must have thorough discussions within the top-level management team and also understand the problems that may come up in executing their plans. We are going through this process to ensure that we don’t make mistakes in the future. I think this is good for Legend. In China, many companies grew rapidly when the economic situation was good but when the economy worsened, they were wiped out from the market. But Legend has been able to hold on even when market conditions turned adverse. We have been able to find ways to fight it out.  

Useem: Looking back over the 20 years since you founded Legend, what is the most important single piece of advice you would give an entrepreneur who is setting out to launch a firm in China today? And what is the most important piece of advice you would give someone who is running a very large enterprise, as Legend is today?   

Liu: For those who are starting their careers and their own business at the startup stage, one word I would say to them is “perseverance.” They should know that everyone faces setbacks and failures – that this is part of everyone’s experience – and that they must stick to their goals and keep trying all the time.  

For executives at large companies of Legend’s size, my advice is that they remember that in order to keep the company going over a long time, one success or one setback is not that important. The most important thing is to establish a solid management base. This needs three things. First, you have to find the right people and bring them to your team. Second, you have to decide the right strategy and plan. And third, you have to have strong execution power. With these three points a strong base can be established for the company.
 

Leading Change:  Reinventing Toyota 

Fujio Cho, President of Toyota Motor Corporation, spoke on August 3, 2004, about reinventing his company:   

If you are not busy re-inventing your company I guarantee you are falling backwards. Even worse, your customers are probably looking elsewhere.

When re-invention works, it can be great. Think about James Bond movies – the Bond character is re-invented every few years to the delight of audiences. It has created an amazing franchise that has stood the test of time.

But, of course, re-invention is not without risks. So, why should Toyota...or any auto company re-invent itself now? Because our industry has never been more competitive in history.

Examples are everywhere. Hyundai has quality and prices that have caught customers’ attention...not to mention ours...General Motors now has plants and products that are standouts...Ford has great trucks and turn-around profits...Chrysler’s new 300 is flying out of showrooms...Honda has top quality and new hybrids coming...And Nissan is on fire with the fastest growth of anyone in the business.

Is this highly competitive market stressful for us? Most certainly! Is it good for us? Absolutely! Does it lead to better products for the customer? Without a question!

In a sense, the idea of “re-invention” is similar to the concept of “kaizen,” or continuous improvement that is a cornerstone of The Toyota Way philosophy.

But a few years ago, we realized we needed to develop a greater sense of urgency in our business. Steady success is good, but it can foster serious weaknesses. Complacency sets in...customer focus declines...creative ideas dry up...and...before you know it...you are in trouble.

So, two years ago, Toyota announced a long-range plan to re-invent ourselves. We called it “Global Vision 2010.” Developing a new “Global Vision” was actually an admission on our part that we faced a crisis.

There used to be a time when we could handle everything from Japan. But starting in the 1980s, our own business started to move at turbo speed, and it has been accelerating ever since.

The sense of crisis we feel...despite increasing sales and profits...stems from our fear that we have not kept up. And particularly fears that we have NOT kept up with environmental issues...the demands of globalization...and the need to develop our people for the future.

Identifying these three priorities is easy enough. But instituting the necessary changes in a big company like ours is another matter. New approaches are necessary in every area of our business, from R & D and purchasing...to production and marketing....

And...what I have discovered in the process...is one universal ingredient that makes it all work...and that is ATTITUDE.

Until everyone...and I mean everyone...sheds their regional or national label we will NOT be able to reach our true potential as individuals...or as a company.

Japanese? American? European?

Does it really matter these days? We all want to sell globally and grow globally. It is the common bond that binds us all here today...and keeps us vital as an industry.

By re-inventing ourselves...and our companies...regularly...we will better serve our customers...prosper...and preserve our planet for future generations.

Note:  The full text of Fujio Cho’s comments can be found here.

Leading Change:  Redirecting SAS 

Formerly Scandinavian Airlines System, SAS AB has undergone significant revamping under its chief executive officer, Jørgen Lindegaard, who took the helm in 2001.  With annual revenues of nearly $8 billion in 2003, SAS provides air service to 90 destinations, wholly or partially owns  several regional carriers (Braathens and Widerøe in Norway, Cimber Air in Denmark, Skyways in Sweden, and Air Botnia in Finland), and operates 200 hotels in 40 countries.  SAS is publicly traded, though the governments of Denmark, Norway, and Sweden still hold 49% of the shares.   

With a background in telecommunications, Jørgen Lindegaard had served as CEO of Fyns Telefon and Københavns Telefon, and Director of TeleDanmark before coming to SAS.  In collaboration with LinKS – Leadership in the Knowledge Society – an organization for public and private sector leaders, Lindegaards talks in a set of short videoclips about his leadership challenges since taking over SAS.  The airline has faced intensifying competition from international and low-cost carriers.   

In one of his commentaries, Jørgen Lindegaard had been asked “What is the greatest challenge of the CEO in a change management process?”  His response:  “You have to understand the market that you’re in, and you have to understand your where’s the starting point….  And then have to be very open and very frank, and you have to realize where are your weaknesses and you have to communicate them, openly, although many people don’t like the message….  In a big organization, you have to accept the fact that you have to do this simultaneously, and you have to do it across the board, everybody has to be involved, and also, equally important, you have to report the results.”   

Jørgen Lindegaard's commentaries on how he has managed the process of downsizing, streamlining, and otherwise restructuring SAS can be found here, and he can be contacted at jorgen.lindegaard@sas.se.
 

Annual Wharton Leadership Conferences:  February 2, 2005 in San Francisco and June 9, 2005 in Philadelphia 

The Wharton School’s next annual leadership conferences will be held in San Francisco on February 2, 2005, and in Philadelphia on June 9, 2005.  The theme for the second annual West (San Francisco) conference and ninth annual East (Philadelphia) conference is “Leading with Creativity and Conviction”. 

A summary of the West conference in 2004 can be found at here, and an overview of the East conference at here.