Can Lenovo Achieve Competitive Advantage in the Global Smartphone Market?
- Introduction
In 2014, Google sold its subsidiary, Motorola Mobility to Chinese Computer Owned Company, Lenovo for $ 12.5 bn. The acquisition of the company positions Lenovo into the third-largest smartphone maker behind Apple and Samsung. According to the terms of the acquisition, Lenovo will fully operate the Motorola Mobility company whereas, Google remains with the patent portion of the business. Additionally, it means that Motorola Mobility will acquire 3 500 employees around the world, including designers, engineers, and sales support teams. The acquisition of the Motorola Mobility company has been lauded and criticised at the same time. For the latter, critiques indicate that Lenovo has made the worst mistake given that the business’ computer subsidiary is grappling to survive in the computer market. Also, Lenovo’s company performance is mercurial, given that the business’ liquidity has been unstable from 2014 to 2018. The critics’ evidence is based on the company shares crashes of Lenovo by 16% after the successful purchase of the company, Motorola Mobility. However, supporters of the acquisition state that the business is strategically positioned to improve its competitive advantage in the smartphone industry. The debate on whether the purchase strategically sets Lenovo under competitive advantage is yet to be determined. The current report aims to provide exploratory research regarding Lenovo and determine that the company can achieve a competitive advantage in the smartphone industry.
- The Smartphone Industry
The smartphone industry is considered one of the most competitive industries in the world. Smartphones are characterised by advanced computing potential in addition capabilities compared to normal or standard smartphones. Thus, since its inception in the 1990s, the smartphone industry is growing and developing at a rapid pace. It is projected that smartphone shipments from a global perspective will increase by 1.7 billion units by 2020 (O’dea, 2020). It is also estimated that one-quarter of the smartphone users are in China, and it is appraised that 45% of the Chinese population will use a smartphone by 2020 (O’dea, 2020). Lenovo is among the leading smartphone companies in the world recognised due to the recent purchase of Motorola Mobility from Google (O’dea, 2020). From the statistical presentation, it is clear that the Chinese company, Lenovo, is already strategically placed to take over the Chinese and global markets within the smartphone industry.
- The Android Platform
There are numerous factors to consider when it comes to the competitive advantage that Lenovo will possess as a result of purchasing Motorola Mobility from Google. The leading determinant is the android platform. According to O’dea (2020), Android is the current market leader in smartphone operating systems. In 2016, more than 80% of the mobile phones sold in the world run using the Android Operating System (O’dea, 2020). Evidence, therefore, suggests that critics were wrong about the hasty purchase of the Motorola Mobility company under Lenovo.
The theory of strategic realignment theory concurs with the purchase of Motorola Mobility company. The theory explains that the world market is ever-changing (Leepsa and Mishra, 2016). As a result, businesses need to adapt to uncertain business environments (Leepsa and Mishra, 2016). As such, companies such as Lenovo opt for acquisition as a motive to grow through diversification over a long period. According to “Google sells Motorola unit to Lenovo” (2014), Lenovo’s purchase of Motorola strategically places it as a contender in the North American market as well as the growing Latin American market.
Further on the Android system, Google’s purchase of Motorola Mobility led to the improvement of the mobile features. Android devices through Motorola have improved competition through mobile computing and improved access to applications from application developers (Varma, 2012). Also, Motorola has received upgrades, including diversification and multiple-choice types, including Moto X, Moto G, and Moto E, as well as the Droid™series (“Lenovo Completes Acquisition of Motorola Mobility from Google,” 2020). The conclusion, therefore, is that the acquisition of Motorola Mobility by Lenovo has placed the company in a strategic position as a global competitor in the smartphone industry.
- Opportunities versus Costs
Another reason that Lenovo will achieve a competitive advantage is the strategic opportunity seizing against high costs of operation. The smartphone industry is a two-fold competitive platform. They are technological competitive pressures and market competitive pressures (Ma et al., 2019). Both pressures present digital capabilities that determine whether Lenovo will create or lose value under the Motorola Mobility subsidiary (Hirt and Willmott, 2014). Based on the assessment of Lenovo’s current market position, the company is renowned for its innovativeness, resilience in taking up opportunities, and strong momentum in seeking the production of successful new products. Despite Motorola’s sales declining over the past years, there is hope in the business’s strategic investment in Motorola. The idea that Google’s sale of Motorola included 519 000 000 ordinary shares of Lenovo and retaining of patents indicates that the profitable company, Google has a futuristic determination that Lenovo will succeed with Motorola.
The overvalued market theory best explains the potential that Lenovo presents, as shown through Google’s trust that the business will prevail with Motorola acquisition. According to the theory on market timing, acquisitions occur when the securities of a company, such as Lenovo, are undervalued while the selling company, Google, is overvalued (Leepsa and Mishra, 2016). The idea is that the overvaluation of the company may cause long-term gains allowing to benefit long-term shareholders. In retrospect, the investment of Google on Lenovo shares is critical. It indicates that Google, despite the low performance of Motorola subsidiary, can still re-set to improve sales in the future. The opportunity, therefore, lies in the determination and outlook that Lenovo has regarding the android platform.
One of the opportunities that lie for Motorola includes data traffic. The smartphone industry depends greatly on data traffic. Given that the company is expected to tap into the Chinese, North America, and Latin American markets, it is expected to have a lot of customers (Varma, 2012). Presently, data traffic is regarded as one of the costliest ventures for any business in the mobile industry. To transmit such data, the company, Lenovo, has to invest extensively in data pipes and cables (“Lenovo Completes Acquisition of Motorola Mobility from Google,” 2020). It also means that the business will create a bigger platform compared to what Google achieved. The opportunity, therefore, is that the business can diversify into data management and supply under the umbrella company, Motorola (Hirt and Willmott, 2014). There are numerous opportunities for the business in the future under the smartphone industry, as depicted in the opportunity versus cost portfolio.
Currently, the company is showing a growing portfolio in the smartphone industry. The strategic investment is shown by the profit mark-ups Lenovo has reported since the acquisition. As shown in figure 1, Lenovo has recorded a steady increase in revenue since 2014.
Figure 1: Lenovo reports of increased revenue generation since the acquisition of Motorola in 2014. Source: https://www.zdnet.com/article/beyond-the-pc-lenovos-big-plan-for-the-future-of-computing/
The Chinese company, Lenovo reported a pre-tax profit since its acquisition of Motorola in 2014. In 2018, for instance, the company reported a pre-tax profit of $3 million compared with the $ 124 million loss in 2017 (Waring, 2019). It is estimated that the revenue dropped by 19.6 percent year-on-year to $1.67 billion (Waring, 2019). The reason was due to the strategic execution of Motorola products in targeted markets, which was purposefully done to reduce expenses and streamline its product portfolio (Waring, 2019). As a result, the company reported a turn around in the profits made recording a $ 10.7 billion (11.6%) with the North American volume outgrowing the Chinese market by 40 points (Dignan, 2014).
Figure 2: Lenovo’s Motorola Market Growth in FY2018/2019. Source: https://www.zdnet.com/article/beyond-the-pc-lenovos-big-plan-for-the-future-of-computing/
- Digitisation
The smartphone industry has limited barriers to entry. The advantage of this is the long-term established boundaries within the industry, which offer digital assets for companies such as Lenovo (Hirt and Willmott, 2014). The downside of this advantage on digital assets is that it causes value chains to disaggregate, creating opportunities for fast-moving competitors. In lieu of this, it may be difficult for Lenovo to achieve its mandate in tapping the potential that exists in the smartphone industry (O’dea, 2020). The opportunities, nonetheless, that exist for Lenovo include the platform for increased scaling up into new markets. In turn, it means that customers are willing to join the new company through the purchase of the new Motorola phones. According to Lenovo, the company anticipates improved models of Motorola phones due to the acquisition of the license to the “rich portfolio of patents and intellectual property rights” (“Lenovo Completes Acquisition of Motorola Mobility from Google,” 2020). Motorola under Lenovo will retain more than 2000 patents as well as a large number of patents across license agreements. The company, through the patents, is allowed to modify the smartphones to suit the competition, especially in China.
The efficiency theory depicts the advantage that Lenovo possesses through the acquisition. Based on the theory, efficiency is achieved through specialised skills and the sharing of technology between Lenovo and Google company (Leepsa and Mishra, 2016). The Motorola acquisition parallel with the acquisition of the 3 000 employees that worked in the company. It means that Lenovo acquired the right skills and human resource asset, which would be beneficial in improving Motorola products. Based on the press statement released by Google’s CEO Larry Page, “the company’s acquisition of Motorola will be better served by Lenovo. The company, Lenovo, is a rapidly growing smartphone business and one of the largest in the Personal Computer manufacturer in the world” (Dignan, 2014).
- Market Demographics
The purchase of Motorola company assures Lenovo of increased market share. From a historical perspective, Lenovo did not have a significant smartphone market share before Motorola acquisition (Singh, 2017). Motorola, according to Singh (2017), is a renowned brand name not only in the United States of America but Europe, India, and Latin America. It is the belief according to Lenovo, during the purchase of Motorola, that the company would provide the best route for the business to gain entry into foreign markets (“Lenovo Completes Acquisition of Motorola Mobility from Google,” 2020; Singh, 2017). The company also believed that the acquisition would promote the exploitation of emerging markets within the smartphone industry (Singh, 2017).
The company was not wrong in investing in Motorola. Soon after its investment, the company reported growth in profits. According to the theory on synergy gain theory, the benefits combine an economy of scale of operations that bring about gains from financial and operating synergies (Leepsa and Mishra, 2016). The synergistic combination of the operations between Lenovo and Motorola Mobility shows a great strategy in improving performance, operation, and improving geographical market accessibility. In theory, as well, it is depicted that economies of scope where complementary resources are used to gain more profits (Leepsa and Mishra, 2016). As shown in figure 2, the company has increased its geographical portfolio in the market, including EMEA and America. Alongside this, Lenovo stated that the increased market share through Motorola also increased market share for its computer market segment doubling in profits. Therefore, the acquisition of the company, Motorola Mobility, was a strategic investment for the Chinese company, Lenovo.
- Conclusion
The current report has provided concrete factors that render the acquisition of Motorola Mobility as the best investment option for Lenovo, the Chinese company. Ideally, the report has presented factors on geographical demographics in which the acquisition of Motorola resulted in increased market share in the smartphone industry alongside the Personal Computer industry. Simultaneously, the competitive advantage the business has gained includes the android platform, which is renowned for being the leading operating system in the world ahead of iOS. Also, the report indicates that the company is gaining a competitive advantage through the exploitation of opportunities regardless of the costs that led the business incurred through losses. All in all, the report concludes that the Chinese company Lenovo can achieve a competitive advantage in the global smartphone market.
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