If there was a single piece of advice that Peter Drucker shared more often than any other with corporate executives, it was the need to “slough off yesterday” in order to create tomorrow—which is exactly why he would find the Chinese computer company Lenovo Group so fascinating.
Lenovo, it seems, is trying to make the future by bear-hugging yesterday.
Last week, Lenovo announced that it was buying IBM’s low-end server business for $2.3 billion, a move that helps Big Blue continue its transition from a hardware company to a software and services provider. For Lenovo, the acquisition signals another step into a market that many are convinced is on an inexorable downward slope.
Demand for the kind of products that IBM is shedding “grew quickly in the 1990s as the Internet took off and data centers powered by servers the size of pizza boxes proliferated,” the Wall Street Journal noted. “But technological advances in the last decade such as ‘virtualization’ allowed users to squeeze more power out of fewer machines. In recent years, the acceleration of cloud computing has led companies to rent computing resources more often, which has cut into server sales.”
This isn’t Lenovo’s first foray into a line of technology that has surely seen better days. The company snapped up IBM’s personal-computer business for $1.75 billion in 2005, a time when some forward-looking folks were starting to warn that new devices were poised to supplant the PC. Since then, their prescience has been proven, with global industry shipments of PCs having now declined for seven straight quarters.
So, why would Lenovo bet so big on things that appear, on their face, to be retrograde?
First off, the company clearly understands that size matters. The latest IBM purchase instantly makes Lenovo a serious player in low-end servers, lifting its revenue in this area more than 10-fold and giving it the No. 3 position in the market, up from No. 6. “We’ve gone from being an upstart to being very relevant,” said Gerry Smith, the head of Lenovo’s North American business.
In PCs, Lenovo is now ranked No. 1, ahead of HP and Dell, with about 18% of the market.
Although Drucker cautioned against growth for growth’s sake (a subject I’ve taken up before), he would have appreciated Lenovo’s appetite for claiming a significant piece of the pie.
“A company with a small share of the market will eventually become marginal in the marketplace, and thereby exceedingly vulnerable,” Drucker warned. “In the slightest economic setback its customers are likely to concentrate their buying—and then they will concentrate on suppliers that have a substantial share. . . . Market standing, regardless of the sales curve, is therefore essential.”
Lenovo is also confident that, with its ever-increasing scale, it can find more and more efficiencies in development, manufacturing, marketing and distribution.
In its aggressiveness, Lenovo is something of an anomaly. As Drucker observed in Managing in Turbulent Times, “Large organizations successful in yesterday’s technologies tend to be defensive rather than offensive.”
Actually, it is fairer to call both PCs and low-end servers “today’s breadwinners,” in Drucker’s parlance, as opposed to “yesterday’s.” PCs still constitute a $200 billion annual market, and servers about $50 billion. There remains, in other words, plenty of money to be made in both.
And that, of course, is just what Lenovo hopes to do, using its profits from these products to fuel what it has staked out as the company’s next major growth area: smartphones.
The cash generated from low-end servers could well give Lenovo “the breathing room it needs to invest more heavily in its mobile business,” helping it one day pose a serious challenge to Apple and Samsung, Fortune’s Miguel Helft explained.
Just yesterday, Lenovo said it was reorganizing into four units: PCs, mobile, enterprise and an ecosystem-and-cloud group—all part of a push to diversify and get beyond being so PC-dependent.
But that doesn’t mean the company is out of danger. Even with its restructuring, Lenovo will have to avoid the temptation of over-milking PCs and servers and, in turn, failing to invest sufficiently in tomorrow’s breadwinners—not just in terms of capital, but also focus, energy, talent and the fostering of a truly innovative culture.
“One reason for this common over-allocation of key resources to today’s breadwinner, is the belief that one can make it again into a growth product by putting a lot of effort behind it—even though everybody really knows that there is not much additional growth to be had,” Drucker wrote in his 1964 book, Managing for Results. “There is a tendency to consider a product today’s breadwinner when, in reality, it has already become yesterday’s breadwinner.”
As last week’s IBM deal was unveiled, Lenovo’s chief executive, Yang Yuanqing, declared: “We are confident that we can grow this business successfully for the long term, just as we have done with our worldwide PC business.”
The question that Lenovo must answer carefully and correctly, if it’s to realize its very lofty ambitions, is: Just how long is the “long term”?
“The innovative company organizes itself to abandon the old, the obsolete, the no longer productive,” Drucker asserted in The Frontiers of Management. “It never says, ‘There will always be a market for a well-made buggy whip.’”