Lenovo: for those who do not have a good operating model

Lenovo Brazil created a good business model, but can execute it well?

The Market

The Brazilian PC Market has a few defining characteristics:

  • A large number of both local and global players (incl. Dell, HP, Positivo, Samsung, Sony, LG, Acer and Asus) compete in the market[1]
  • Sales are highly concentrated by a few retailers, such as WalMart, Máquina de Vendas and Via Varejo[2]
  • The importance placed in technological performance and novelty mean that products become obsolete in 18-36 months, requiring a constant pipeline of new models and generations[3]
  • Consumers are increasingly turning to other devices (such as smartphones and tablets) for work, internet and games, what is negatively affecting the PC market[4]

 

Lenovo Brazil Business Model

Lenovo Brazil is a subsidiary of Lenovo Group Ltd., a global consumer electronics company. Its business model consists in buying raw materials and components from other companies, either imported from Asia or in Brazil[5], assembling finished PC, tablets, TVs and smartphones and selling to distributors and retailers in Brazil[6]. The company operates three PC product lines accross two brands: low-cost consumer PCs (CCE brand), premium consumer PCs (Lenovo brand) and commercial PCs (Lenovo Brand).[7]

Lenovo Brazil business model rests on three foundations:

  1. Generating economies of scale in the high-volume consumer market to achieve cost efficiencies in the highly competitive but lucrative commercial market [8]
  2. Maintaining a large portfolio to serve clients of different price sensitivity and needs in order to achieve those economies of scale
  3. Distributing products through an extensive retail network.

 

02

 

Challenges in the Operating Model[9]

 Structure

  • There are seven directors reporting to the general manager: consumer sales, commercial sales, operations, finance, HR, marketing, strategy and planning. There is considerable confusion between functions. For instance, all 4P decisions (product, promotion, price and placement) were taken by consumer and commercial sales directors (instead of marketing).

Processes

  • Retailers does not share “sell through” data with Lenovo, and sales plans are not negotiated in advance with retail customers, leading to frequent sales plan changes. As a consequence, the operating plan is updated constantly, what increases production costs. For instance, when the sales plan increases, a large percentage of raw materials has to be flown in from China, increasing COGS. Alternatively, a decrease in the sales plan volume increases obsolescence and inventory costs.
  • The acquisition of CCE in 2013 meant Lenovo had to work with two parallel and incompatible ERP systems. As a result, the company controls its costs using simple spreadsheets, leading to data reliability problems.
  • The company only measures performance on an aggregate level (e.g. sales, operating profit). Individual employees do not have specific KPIs independently measured. It is uncommon for employees to hold performance conversations and feedback sessions.

Assets and Capabilities

  • Lenovo did not have any factory in Brazil until 2012. In 2014, it had five, four of which used to belong to CCE and are located in Manaus, 2000 miles from the São Paulo headquarters.[10]
  • Products assembled in Manaus have to be sent by truck to the company’s warehouses, leading to long lead times and large logistics costs.[11] Lead times from raw materials procurement to sell-through was between 6-9 months if the product was assembled in Manaus, extremely high for an industry with a short shelf life.
  • High turnover levels and recent cost cutting measures decreased employee morale in the past year

CCE_-_Planta_Brasil.jpg_33444724

 

Consequences

Lenovo Brazil has been experiencing performance problems due to the mismatch between its business model and its operating model. Its business model strives for lower costs through economies of scale. Some consequences of its operating model, such as long lead times, large obsolescence and inventory costs, flawed cost accounting and incomplete performance management stands in the way of a low-cost operation. Until it adjusts its operating model to better support its business model, performance is unlikely to recover.

 

 

[1] IDC reports (http://www.idc.com/tracker/showproductinfo.jsp?prod_id=561)

[2] Company interviews

[3] http://www.extremetech.com/computing/134760-pc-obsolescence-is-obsolete

[4] http://www.hardware.com.br/noticias/2015-09/estudo-da-idc-brasil-mostra-que-mercado-de-pcs-continua-em-queda-livre-no-pais.html; http://www.idc.com/getdoc.jsp?containerId=prUS25742015

[5] http://www.hardware.com.br/noticias/2015-09/estudo-da-idc-brasil-mostra-que-mercado-de-pcs-continua-em-queda-livre-no-pais.html

[6] http://www.valor.com.br/empresas/4267796/tres-anos-depois-da-compra-lenovo-devolve-cce-para-familia-sverner

[7] https://tecnoblog.net/106683/lenovo-fabrica-brasil/

[8] Company interviews

[9] This section is based on company interviews

[10] https://tecnoblog.net/112777/lenovo-compra-cce/

[11] This was offset by large tax incentives for electronics companies to set up factories in Manaus

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4 thoughts on “Lenovo: for those who do not have a good operating model

  1. I believe Lenovo enters Brazil not only to gain manufacturing benefits, but also sales and marketing foothold, which is the basis for future value creation. In order to tap into the Brazilian electronics market, it may prove ineffective to design and build everything in China. This entry will allow the company to design and build PCs, as well as other growing electronic products categories (smart phones, tablets etc.) for Brazil and other South American markets.

    Indeed the supply chain needs to be improved to remove waste. This is likely to be a long and expensive transformation.

    1. Hi Hao,

      I agree with you. Lenovo really wanted to build its foothold in the largest Latam market. Considering the sheer size of the Brazilian market and Lenovo’s volume strategy, it made sense to go for it. However, they may have done it too fast. Plus, the CCE acquisition did not yield good results and may be reversed in the next months. Then, it’s probable that Lenovo will try to grow organically in the next months, as the Brazilian economy recovers.

  2. Thanks for sharing! Very interesting.

    Given your diagnosis of the situation, do you think Lenovo’s business in Brazil is salvageable? There appear to be some straightforward fixes – e.g. planning to have the factories be located closer to the distribution centers, or better technology to facilitate sales planning, KPIs, and employee feedback — but all of these fixes require significant investments of capital and time. This, combined with your assessment of the current market (i.e. highly competitive, and concentrated retailers, who likely would not react well to a hiatus or change in operations as Lenovo fixed these internal issues) suggests to me that there’s a chance Lenovo would pull out of the market… or risk significant losses.

    1. Hey Anna!

      Thank you for your comments.
      I do think Lenovo Brasil is salvageable. First, they are already thinking of getting rid of CCE. Second, the fixes you mentioned (e.g. KPIs, sales planning, employee and customer feedback) are already being done and will gain momentum as the company reorganizes.
      In my opinion, if they focus on cost cutting and production efficiency, Lenovo Brazil can probably become profitable within 2-3 years. The question remains whether HQ will absorb the losses until that happens.

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