LENOVO recently overtook Dell to become the world's second largest personal computer producer after HP. This achievement is of even greater interest than the obvious one of another Chinese company joining the absolute top ranks of its industry. It illustrates a competitive approach successfully used by others among China's most globalized companies. Many of Lenovo's tactics were learned from international competition, but the competitive strategy which brought this success was indelibly "Made in China."

Lenovo's core strength is its position in China's domestic market, where it consistently has a more than 30 percent market share. In the second quarter of 2011 China overtook the United States both in volume of computer sales, 18.5 million, and their value, US$11.9 billion. Lenovo now has the world's largest home market.

Wave of globalization

However Lenovo's first major step in globalization, in 2005, was partially mis-executed in a way symptomatic of the first wave of China's companies' internationalization. It led to a company crisis. The way this has been turned around to huge success illustrates the decisive importance of the company's strategy.

In 2005 Lenovo bought IBM's personal computer division. It was part of the first wave of foreign acquisitions by China's companies. In the same period China's TCL bought French television maker Thompson, the now collapsed Chinese D'Long Group took over US outdoor power supply group Murray, and Shanghai Automotive Industrial Corporation took over South Korea's Ssangyong.

The idea behind a number of these acquisitions was that by buying well-known brands China's companies would quickly globalize. Such a simplistic strategy doesn't work, and most of the takeovers mentioned failed and didn't globalize the company.

Lenovo's purchase of IBM's PC division was not a spectacular failure but initially led to lack of coherence in company strategy and Lenovo slid from the world's third biggest PC maker, after the takeover, to No. 4 - being overtaken by Taiwan's Acer.

The problems precisely laid in, and were resolved by, top management strategy. After the takeover the team which had led Lenovo to success in China had been moved to the side. Lenovo's global headquarters were shifted to Purchase, New York. The CEO position in the Lenovo was transferred to US management - Bill Amelio from IBM and Dell.

Countryside strategy

Amelio was not an incompetent manager - today he is CEO of CHC, the world's largest helicopter services company. But without a background in China a CEO could not adequately understand the specific strategy in international competition required by a Chinese company. Lenovo's position slid.

In 2009 the original Chinese management team retook direct control. Liu Chuanzhi appointed Yang Yuanqing, who this month replaced him as Lenovo's chairman, as the new CEO. Lenovo refocused on China - its 2010 China sales rose by 33 percent. Lenovo also adopted a strategy used by Huawei, Haier and other successful globalizing Chinese companies that has been named after Mao Zedong's famous phrase "the countryside will surround the cities" - that is, Lenovo began to emphasize rapid build-up not only domestically but in developing markets. In 2010 Lenovo's developing market sales rose by 53 percent - even more rapid growth than in China.

The decisive link for success in this strategy is to pour the resources gained from extra revenue from rapid expansion in China and developing markets back into R&D, design and branding. This creates a virtuous circle allowing a company to also progressively enter higher value added markets. Huawei used precisely this strategy to become the world's second largest producer of telecommunications equipment after Ericsson, and Haier utilized it to become the world's largest producer of domestic white goods such as refrigerators. Huawei invested 10 per cent of revenue in R&D and Bloomberg BusinessWeek selected Haier as one of the world's 50 most innovative companies.

Investment in R&D

The success of Lenovo's enhanced investment in design and technology, and not simply in increasing production volume, was recently illustrated rather graphically in a review of new notebook computers from Apple, Lenovo, and Acer in the Financial Times - a newspaper with a definitely upmarket readership in mind. It concluded: "The (Apple) Air is hard to top with its elegant, ultra-thin aluminum casing, but I give high marks to Lenovo for coming up with its own distinctive design, with smooth surfaces all around…. the Lenovo is arguably the best engineered of the three." Lenovo beat Acer and was only just behind Apple - a comparison at the very high end of the market.

Lenovo has set the goal of becoming the world's No. 1 PC producer within three years. That requires strengthening itself in the consumer market where it is weaker than among business users - a heritage of the business-oriented IBM ThinkPad brand. Milko van Duijl, Lenovo's senior vice-president, has announced Lenovo's target of achieving a 10 percent share of the consumer PC market over the next decade. This will require further strengthening of Lenovo in design.

But the lessons of Lenovo's success are clear. The "countryside will surround the cities" strategy of Huawei, Haier, ZTE, Lenovo and other of China's companies has again been proved a winning one in globalized competition. It cannot be executed by companies from developed countries as it simultaneously requires mastery of production in low cost markets in order to build up scale of production - without this the resources necessary for R&D in technology and design cannot be generated, with the ability to use these resources not to produce more cheaply but for R&D and design to go progressively "up market." In manufacturing, China's companies' management have the uniquely best possibilities in the world to master this specific combination.

Lenovo's success therefore used many tactics learned from the international market, but its strategy was specifically Chinese. That is why Lenovo's success is of even wider interest than its own major achievement in a globalized industry.