THE ACADEMY OF ECONOMIC STUDIES FACULTY OF INTERNATIONAL ECONOMIC RELATIONS

IBM- Lenovo

Student: Bitan Silvia Costea Anca Dragic Andrea Luca Enaida Oprea Iulia Oprisor Gilda

1. Short presentation of the case study

1. Briefly summarize the case: John Baker, English expatriate and the chief engineer of the Caribbean Bauxite Company of Barracania in the West Indies, conducted an interview with Matthew Rennalls a Barracanian and who is also Bakers assistant and successor. Matthew Rennalls was very racial conscious; his four years studying at London University made him sensitive to any sign of condescension on the part of expatriates. Matt Rennalls would be taking over John Bakers position once he left the company to go work as a production manager of Keso Mining Corporation in Canada. Baker accused Rennalls of racism towards Europeans after receiving complaints from his co-workers in addition to noticing this behavior himself. Baker conducted an interview with Rennalls which lead to accusation of Rennalls being racist in an indirect method. Rennalls composed a letter of resignation the very next day after Baker conducted the interview. Before leaving for his new job, John Baker, an English expatriate and the chief engineer of the Caribbean Bauxite Company of Barracania in the West Indies, conducted an interview with Matthew Rennalls a Barracanian and who is also Bakers assistant and successor. Through the interview, Baker tried to solve a complaint that he has received from Mr. Jacksonone of the European employees who reported that Rennalls had been rude toward him. However, the interview did not go well as Baker had expected. Rennalls resigned from his current position. The primary cause of the problem, in my opinion, is that Rennalls had a deep rooted racial consciousness, which came directly from historical facts that West Indies was colonized by Europe ever since the first permanent European settlement made by the Spanish in 1496 (Williams, 1970). Rennalls racial consciousness has made him even more sensitive to any sign of condescension on the part of expatriates during his 4-year study at London University. His political involvements and family background indicated that Rennalls is sensitive to anything European expatriates said or done. The fact that Baker feels there is an invisible, indefinable, but ever-present barrier between himself and Rennalls indicated that Rennalls has never truly handled well the racial consciousness. Assuming that Baker was able convince Rennalls what he did to Mr. Jackson was wrong, he could never change who Rennalls was a Barracanian. The similar incident did occur between Rennalls and Mr. Godson two years ago, and Baker failed to break through to Rennalls. In Rennalls resignation letter, he mentioned that his father was as disgusted as he about the matter. This was another sign which indicated that Rennalls racial consciousness had a deep root. Besides the primary cause of the problem, Bakers arrogance, poor people management and communication skills have added more fuel to the flaming fire. The problem got worse. Baker claimed that he had innate knack for getting along with regional people, yet he demonstrated clearly that he did not have a

knack for working in a multicultural environment when he used phrases such as you and your forebears and people like you. Baker had to show how much experience he had, which made Rennalls very uncomfortable. One may question that being Bakers assistant for two years, wouldnt Rennalls know how much experience Baker had? The fact that Baker viewed Rennalls racial consciousness as a debit also indicated that Baker has not made the real connection with Rennalls. Throughout the interview, Baker failed to determine the real cause of Rennalls being rude to Mr. Jackson. Toward the end of the
interview, Baker mentioned specifically that Europeans are bound to occupy senior positions in Barracania. Potentially, what Baker was saying to Rennalls was this, if you dont treat expatriates well, you wont get anywhere. To Rennalls, this was a threat more than a friendly reminder. Researchers around the world are trying to find the root cause of the problem that relates to cultural diversity and conflict in multicultural organizational environments. One study states that difficulties happen because people from different cultural backgrounds have different understanding regarding the interaction process and different styles of dialogue (Karoc-Kakabadse and Kouzmin, 2001). The authors of this study suggest that these difficulties can be addressed by understanding communication styles used by different cultures. This theory does address the problem in our case study. If Baker understood better Barracanian culture and its communication style, Baker may break through to Rennalls during the first interview two years ago. Its also true, in my opinion, that if Rennalls understood how European people communicate, he may not let the problem go unsolved for two years. Another study suggests that the reason people from different cultures have difficulties to work together comfortably in a multicultural organization is because organizations have not made efforts to create the feeling of a common culture identity and goal and cultural values (Kidger, 2002). While this theory sounds workable, it may be hard to implement. An organization can set common goals for reaching certain profits, but it cannot simply create feelings and expect people to have common cultural values. People with different cultural backgrounds may feel differently about identity and/or goals. Personality and attitude theories, which are discussed in our text book, also seem to explain the problem. As Luthans points out that gene does have an effect on personality (p. 126). Rennalls may have inherited the personality from his father. When Rennalls discussed the matter with his father, rather than finding out exactly what had happened and providing constructive ways to deal with the problem, Rennalls father was disgusted about the mater as Rennalls did. The problem may also be caused by Rennalls attitude, as Baker puts it, young Barracanians sometime overbearing, sometimes cynical toward other company expatriates. According to Luthans, attitudes can be changed if the following two barriers are broken. The first one is prior commitments, which happens if a person has made a commitment to a particular course of action and are unwilling to change (p.139). The second barrier exists when people do not see any reason to change their attitude (p.139). In Rennalls case, the change of attitude may take place if he can break his action of bland denial that there was any racial prejudice and embrace find some good reasons for change such as promotion and respect.

2. Identification of the problem/problems, the causes and the negative effects 2.1. Identification of the problem/problems

Problem no.1 The main problem of the Chinese company Lenovo is represented by the globalization strategy, because of the future/potential acquisition of the company IBM. Lenovo wants to become a global company without having a good plan, without a good management team, who can analise the situation of going globaly. In what concerns the merger of Lenovo and IBM the fact that this agreement combines two very different companies is a major problem. Lenovo is an independent company which operates locally and has close links with the government, and on the other hand, IBM is a company that acts globally having important customers.\ Problem no.2 A second problem encountered by the Chinese company is about the cultural differences. The Americans and Asians have completely different ways of approaching businesses and also choosing business management systems.

2.2. Identification of the causes that have generated the problems The causes that have generated the problems are related to the identity of the company, which is a Chinese one. The managers of Lenovo wanted their company to become as soon as possible a major player in the global market and in consequence they acted without seriously thinking and they didnt establish a concrete strategy. Another element that put pressure on the Chinese company is the increasing fierce competition from aggressive players on the PC market such as Dell and HP. The target of Lenovo is to conquer boyh the European and the American markets. The difficulties that may arrise from the acquisition of IBM are caused also by the differences between the companies, the cultural ones in particular. Cultural differencies are due to the fact that countries that ranked high on power distance would be expected to be more hierarchic and centralized in the organization. In China, the business is more often characterized by centralized power and personalized relationship, which is very different from that of the West companies. 2.3 Identification of potential negative effects that can appear if problem/problems is/are not solved the

The existence of the problems mentioned above leads to a series of negative effects for the company. So, the incapacity of local managers to lead the company in a global context will determine also the maladjustment of the general strategy of the company into the markets that wants to be known.

The impossibility to adapt and to accept new cultures (the culture of the host country) leads to a lost in the workforce, proven in 2002, when the Lenovos company recruited a series of American IT specialists, whom, in last than one year give up their jobs because of the cultural differences they faced. Their explanation was that they couldnt adjust to the demands of the Chinese company to sing the local companys anthem before all the important meetings or to do fizical exercises every morning. Moreover, the existence of certain political barriers due to the fusion of the two companies, showed that IBM lost its place on the market. This was indicated by the fact that in 2002, the General Electric Company, which was for IBM the second distributor, gave up to the services of IBM in favor of those of the Dells Company. 3. Identification of alternative solutions for each identified problem: Each solution would be presented with its own advantages and disadvantages Problem no.1 a) For the first problem identified we suggest Lenovo should reevaluate the internationalization process in order to become globally known without appealing to a radical change because IBM has much higher experience in this area compared to Lenovo, which was founded later in 1994. So it may be taken into consideration the possibility of opening branches abroad or conducting mergers and acquisitions globally, but with similar companies as Lenovo, in terms of size and experience. Regarding opening a branch there are many advantages such as: access to information necessary to adapt products to local demand; permanent contact with the market; promotion and strengthening the position of the brand in foreign markets. But it could also occur disadvantages like: high costs due to the research in order to make the best choices; investments in equipment, land, personnel; business risks; high costs related to personell involved in international activities; very high competition; costs with training the employees; difficulties in selecting foreign market; no more support from the state as it is the case in China; cultural differences. b) For the same problem we can take into consideration acquisition of an existing global player but as we said before it has to be similar regarding the size and experience.

The biggest advantage of buying and existing company is the fact that it has already formed an image, its own clients, has a network of stable relationships with suppliers and already qualified employees. Another advantage would be the access to technology, to know-how and to product portfolio. And most of all it would gain credibility by acquiring the firm, because Lenovo would takeover the positive effects of previous results of the company. Or an experienced management team for the development and execution of international strategy. As disadvantages there would be some difficulties in adapting their strategy to the other firms.The problem may also be the cultural differences and probably the different management styles. Problem no. 2 In what concerns the cultural differences between Americans and Chinese it is difficult to establish a solution. As stated in the case study, the Chinese company focuses a lot on cultural aspects making American workerss job very difficult because they can not accommodate to the corporation culture. We suggest that the company needs to be well prepared before choosing to establish the alliance with another company. The most important foundations for alliance not just related to financial aspect, strategies or law, it has now lies more in the adaptive cultural atmosphere of the company and the strong learning capability across the organization, which is especially true for a local company to seek for the alliance with a foreign company in developed countries. They should also focus on enhancing the capability of knowledge transfer across the organization. Knowledge resources range from intangible, tacit resources to tangible resources, as the intangible resources are hard to extract and evaluate, the company must have an explicit strategy to codify, internalize and disseminate the knowledge it obtains throughout the organization.

4.1 Optimal solution acquiring an existing global player We consider that going global by acquiring IBM is the best possible solution for Lenovo at the moment. A global company presumes having a worldwide vision on markets and competition. It guaranties reaching the top in PC market and therefore the optimal solution is saying yes to IBMs acquisition.

Alternative solution is building Lenovos subsidiaries - higher costs and more effort by Chinas brand. It will bring out the negative sides of such a choice pointing out cultural differences and low management skills of China preventing China to go global. Chance caused the computer division of IBM losses so that company managers are trying to find solutions to reduce those losses and to focus on other divisions which bring profit to the company. Therefore, following the analysis of all factors, acquisition is profitable for both companies as Lenovo will use the vast experience that IBM has on the external market including the distribution chains, international reputation as a company that sells efficient and reliable products, high portfolio and access to know-how, IBM technology and experienced management. On the other hand Lenovo's contribution will be its cost effectiveness, market share, Chinese government support and a huge retail market- where Lenovo is the leader. 4.2 Advantages of IBM acquisition are: In the first phase Lenovo might enjoy international recognition, being related to IBM and its products known to be reliable and efficient, having these sold under the name Lenovo keeping brand Think; Access to know-how, technology and experience of a global player such as IBM and qualified management and performance; Access to distribution channels of IBM; A dramatic increase in a relatively short time; Rising to the 3rd place in the PC market worldwide; Increasing portfolio of products, markets and consumers.

Disadvantages of IBM acquisition are: Cultural differences; Different management styles; A misperception of new products (made in China) causing consumers mistrust in the new brand.

Advantages of opening international branches: Increasing client portfolio; Raising global awareness; Economies of scale by increasing production;

Disadvantages of opening international branches: Facing international competition; Dynamic business environment; Lack of state support; Lack of control over technology; Economies of scale failure; Political barriers; Lack of experience inselling products globally( consumers, managers, competition).

4.3 Disadvantages of optimal solution can be reduced as follows: Promoting a corporate culture that imposes high standards and presents a relationship between the company and its management staff so that there is no discrimination thus creating an environment conductive to conflicts and misunderstandings caused by cultural differences. Adopting a management style adapted depending on the target market, causing offices in China to adopt such management style that fits the corporate culture above mentioned. During the first 18 months period the product will be marketed under the name IBM keeping ,,ThinkPad nominator then switching to the brand name Lenovo ThinkPad in the second period of 18 months. This strategy could initially experience a decline in sales caused by the change, further causing consumers to find the same reliability and quality that has accustomed IBM now under a new brand, called Lenovo. 5. Implementation of the optimum solution- resources and actions needed to put in practice the optimum solution -> prove the feasibility Those from Lenovo will have to clearly define a global strategy. Promotion will have an essential role to take advantage of Lenovo - IBM brand awareness and values promoted by them. IBM trademarks, such as: "ThinkPad", "ThinkCentre", "ThinkVision" must also be exploited in order to acquire consumer confidence. Annother important aspect is the establishment of a department regarding "Customer Care", where customers can receive assistance. The Chinese lack on Customer Service, therefore, a wide knowledge transfer from IBM to Lenovo management is imperative.

To achieve economies of scale in manufacturing, Lenovo should orient their production department to China, with great care personnel to receive training to the highest level. Having in mind that the distribution is more complex global Lenovo must put in place a supply chain effectively to renew contracts with distributors. Creating an online supply chain would be an excellent way to promote and restore the company's image in the online environment. Lenovo Website must provide access to all customer data, therefore it is necessary to enable site navigation in all languages of the countries the products will be distributed. Another aspect to consider is the creation of departments of technical assistance across the entire distribution network (major cities). For the acquisition of IBM PC division, Lenovo will pay $ 1.75 billion and IBM will instead receive 18.9% of the newly created company. Actions taken will be: renew contracts with distributors; bringing production to factories in China to reduce costs and increase their production rate to meet demand; promoting the new corporate culture of the company; promote products under the new brand; setting priorities for expansion or reaffirmation of market position / target markets; adoption of new distribution channels offered by Internet; creation of a specialized department with technical assistance ThinkPad products to potential product problems solved in a short time, thus supporting the reliability and efficiency of the company's products.