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

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

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

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.

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.

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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