Can Lenovo evolve from a PC maker to a data centre innovator?

By By James Henderson Jul 6th 2017
Can Lenovo evolve from a PC maker to a data centre innovator?

Tech giant focuses on post‐PC identity with datacenter and commercial PC transformations.

Lenovo is focusing on a post‐PC identity, following a string of data centre and commercial PC transformations.

Revealed during Transform - the company’s commercial business-focused event - Lenovo clarified its go‐to‐market strategy for its Data Centre Group (DCG), outlining how it plans to compete more aggressively against industry rivals Dell Technologies, Hewlett Packard Enterprise (HPE), Cisco and Huawei.

To demonstrate change, the Chinese giant showcased its new DCG leadership team, bolstered by former Intel executives Kirk Skaugen and Kim Stevenson, who have combined to transform the vendor’s approach to the data centre market.

But despite the shift towards the data centre, the event also showcased the importance of Lenovo’s PC and Smart Devices (PCSD) segment to the company’s overall value proposition, illustrating the new emphasis on commercial PC services in the division’s long‐term financial and go‐to‐market strategies.

“Lenovo is focusing on its post‐PC identity with data centre and commercial PC transformations,” Technology Business Research analyst Stephanie Long said.

From the perspective of DCG, Long said the changes outlined at Transform in many ways jump‐start Lenovo’s new go‐to‐ market approach.

“While there were many additions to DCG hardware and software offerings announced, at the core of these changes are go‐to‐market and portfolio alterations that reinvent how Lenovo will target its customers and address its customers’ demands,” Long explained.

“The reinvention of its server brand, along with hardware enhancements across DCG, creates a foundation on which Lenovo can strengthen its solutions‐oriented approach, earning new customers and reversing DCG revenue and profit declines in the process.”

New-look data centre portfolio

According to Long, a revamped DCG portfolio helps Lenovo close some of the gaps between it and its strongest competitors.

“Unifying its server brands and data centre supply chains will enable Lenovo to craft a stronger value proposition that supports its nascent entries into hyper-scale, hyper-converged and other next‐generation infrastructure markets,” Long said.

In addition, Long said a redesigned DCG global channel program will further enable the vendor to transition its existing portfolio solution to meet modern demands.

“Lenovo is bringing this redesigned DCG portfolio to market to prove to its customers that it is the most trusted data centre vendor in the industry — and not through cost‐ cutting and marketing strategies, but rather through innovation,” Long said.

Yet despite the drive, Lenovo is late to make many of these data centre changes relative to competitors, especially Dell Technologies and Hewlett Packard Enterprise, vendors Long believes are “well underway” with overhauls to respective infrastructure and data centre portfolios.

While the moves are a positive sign for the company overall, Long said the rate of Lenovo’s transformation must accelerate further, in a bid to offset challenges stemming from stronger, larger competitors in the data centre markets coveted by the vendor.

“Lenovo maintains an advantage over many of its peers, however, by being based in China, as Lenovo’s brand strength in what is arguably the world’s largest IT market provides the company a large addressable market for servers, storage, networking and commercial PCs,” Long added.

“But despite this regional advantage, commoditisation is amplifying the challenges of differentiating from competitors at a hardware level.”

As a result, Lenovo, similar to many of its peers, is pivoting to a strategy that intends to create differentiation via software and services offerings.

Delving deeper into the data centre portfolio, Lenovo has made changes across three core areas, revamping organisational structure, portfolio and branding divisions.

The aim? To cement the vendor’s position as a trusted provider of data centre products and solutions.

“With that, DCG has been focusing on addressing the increased requirements and demands associated with data centre transformation,” Long said.

Delivered during Transform in New York, the DCG group unveiled a refresh of its data centre portfolio, bolstered by updates across server, storage and networking products.

To further augment portfolio refresh efforts, DCG is also rebranding the ThinkSystem and ThinkAgile brands.

Specifically, ThinkSystem will encompass server, storage and networking products that DCG is targeting for what it refers to as future‐defined data centres.

A significant part of the new ThinkSystem brand is the integration and standardisation of the former IBM x86 servers and the former ThinkServer line, as well as the standardisation of core component designs such as power supplies and fan trays.

“By standardising server components across its server product lines to increase manufacturing efficiencies, Lenovo will be able to more efficiently manufacture these servers while benefiting from cost savings due to economies of scale,” Long explained.

“ThinkAgile is the brand that DCG is bringing to market to target next‐generation IT for software‐defined infrastructures. There will be overlap in branding, however, as ThinkAgile will leverage server and storage products from the ThinkSystem brand.”

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During Transform, Long said there was “significant emphasis” on the fact that Lenovo’s storage and networking businesses are not “bogged down” by the negative impacts of legacy hardware on revenue and profitability.

“Because Lenovo’s presence in these markets has been historically small when compared to peers such as HPE and Dell Technologies, Lenovo has the opportunity to simply build out its portfolio for the modern era without balancing modern solutions with legacy attrition,” Long added.

“As a result, many of Lenovo’s storage and networking announcements emphasised the roles of software and service in their creation and the added value these software and service assets will add to its overall infrastructure portfolio.”

A change of PC approach

On the flip side, the future success of Lenovo’s PCSD group will be determined by the vendor’s ability to create new levels of customer experience within the commercial space.

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During Transform, a long‐term vision was presented for the future of the division, built on customer experience, services and solutions — not PCs, peripherals and other accessories — a departure from Lenovo’s prior successes that were largely built on the company’s ability to excel in many areas as a PC hardware manufacturer.

According to Long, Lenovo’s main objectives are based around aligning PCSD’s value proposition with how collaboration among workers is changing and how the workplace itself is evolving.

Consequently, Long said this moves into how commercial PCs are purchased and deployed and how commercial PC use cases are transitioning from completing discrete task‐oriented functions to utilising a variety of local, virtualised and cloud applications and services.

“The commercial PC will remain a central component of enterprise computing, but its previously static role is changing, and will continue to change as new applications, services, use cases and deployment models emerge,” Long said.

“Focusing on the customer experience creates opportunities for Lenovo to utilise PC services and new offerings such as PC-as-a-Service (PCaaS) to bolster the profitability of PCSD, which consistently provides the bulk of Lenovo’s overall revenue and profits.”

For Long, greater emphasis on services, whether attached a la carte or included in a PCaaS solution, enables Lenovo to expand its share of wallet among its installed base and boost the company’s ability to catch up to, and compete with, Dell Technologies and HP, vendors that have historically had more mature and diverse PC service portfolios than Lenovo.

“Expanding its portfolio of attached commercial PC services and PCaaS offerings is a critical facet of Lenovo’s ambition to offset prolonged operating losses from DCG and Lenovo’s Mobile Business Group, and protect the company’s overall profitability as it invests in sales and marketing intended to stabilise and then improve the financial performances of those lagging segments,” Long added.

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Looking ahead, Long believes these new pieces fill in major gaps in Lenovo’s commercial PC portfolio, especially by enabling the company to provide customers with real‐time endpoint analysis and predictive maintenance tools.

“By gaining ground in these areas in the short term, Lenovo will be able to better compete against Dell Technologies and HP,” Long explained. “Increasing profit per sale by improving commercial PC service attach rates will also help Lenovo stave off the impact of higher PC component costs, especially memory chips and solid‐state hard drives.”

But Long anticipates this new commercial PC service‐centric go‐to‐market strategy will take time to resonate with Lenovo’s customer base, as the vendor has prioritised its commercial PC hardware over services.

Therefore, results will manifest as incremental PCSD revenue gain and slower PCSD gross and operating margin erosion.

“With the announcements at Transform, Lenovo has demonstrated heightened awareness of the potential for PC services to propel PCSD revenue and profit growth, protect its installed base, and help underwrite DCG’s transformation,” Long added.

“However, among the largest obstacles for Lenovo will be transforming the company’s hardware‐centric culture and encouraging its teams to embrace services as an equally important driver of manufacturing prowess and product design, if not to adopt services as the primary pillar of PCSD’s long‐term financial and go‐to‐market strategies.”

Financial challenges

Considering the resetting of go-to-market strategies for both DCG and PCSD divisions, Long believes the collective result will help Lenovo ease some of its ongoing financial challenges.

“As opportunities to earn net‐new customers in the IT hardware market shrink, data centre and PC vendors are turning their attention to ensuring their businesses’ value propositions are aligned with customers’ business challenges, which drives changes related to the customer’s, or end user’s, experience,” Long said.

“Business leaders are tasking their IT staff with building infrastructure and deploying endpoints that increase productivity by supporting end‐ user mobility and application ubiquity.”

Prior to Lenovo’s revamped strategy, Long said the company’s go‐to‐market strategies were “out of sync” with market dynamics.

“Lenovo’s volume‐centric sales models contrasted with the solutions and consultative approaches employed by Dell Technologies, HPE and HP,” Long recalled.

As a result, year‐to‐year overall revenue declines stagnated for four consecutive quarters before rebounding in 1Q17.

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Furthermore, gross and operating profits declined in tandem with lower revenue, compelling Lenovo to reassess the roles underperforming DCG and PCSD segments will play in Lenovo’s long‐term strategy.

As explained by Long, the shift in focus began in 3Q16 for DCG and PCSD, as Lenovo concentrated on the more profitable segments of the businesses’ respective markets.

Specifically, supercomputing, software‐defined networking and hyper-converged for DCG, and commercial PC services for PCSD — highlighting the potential for these current initiatives to transform Lenovo’s longer‐term financial prognosis.

While restoring gross and operating profit growth remains a challenge for Lenovo as x86 server average selling prices fall and competition intensifies in commercial PC markets, Long believes the move can benefit the wider business in the long run.

“These new initiatives enable Lenovo to come from places of strength, particularly as the company can leverage its supply chain prowess and lean operating structure to maximise profit per sale in segments that typically carry margins two to three times larger than the bulk of Lenovo’s addressable market,” Long added.

But while Lenovo is differentiating its portfolio, its success will be determined by the company’s ability to message these differentiators to its customers through various marketing tactics.

“The revamped portfolio and greater emphasis on commercial PC services will take time to resonate with customers and generate demonstrable financial benefits in DCG and PCSD,” Long added.

“However, the initiatives indicate Lenovo’s awareness of the trends influencing data centre and commercial PC markets, and the heightened urgency with which it must make these changes to stave off margin and profit erosions, particularly in DCG and to a lesser extent in PCSD, that threaten to push Lenovo to operating in the red.”

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