This was the title of an article in the WSJ today, which examines the quality, durability and advertising decisions of a Chinese laptop manufacturer named Lenovo. (Full article posted as a comment to this post).
They specialize in laptop computers that are durable and high quality, but are much higher priced.
I have a few questions/comments about this article.
1. Given the nature of the computer industry, where technology is advancing so quickly that technology becomes obsolete in less than 5 years, is it wise to invest in durability? It remains to be seen how profitable their line of computers will be. They have a $5000 laptop they market to top corporate executives, which illustrates the income rule we saw in class.
2. Because the computer industry is so competitive and growing so rapidly, does the durability-innovation tradeoff even apply? It seems like this company focuses on innovating ways to make their product more durable and desirable. Also, the market is far from being saturated, especially as technology advances. This suggests that innovation will not be hindered (perhaps because the market is so highly competitive).
3. As Lenovo strives to be the industry leader in durability, they have actually cross-licensed many of their innovations. Is this in their best interest, even though it decreases their computers' attractiveness to consumers because they can get some of the same durability from cheaper brands?
As an interesting tidbit, some of the quality features of that Lenovo has pioneered include
spill-resistant keyboards (two drains on bottom of laptop designed to let liquid flow out), airbag technology that senses when the computer is being jerked around and instantly protects the hard drive, "battery stretch" setting (lets users extend battery life to more than eight hours by shutting down energy-sucking features like CD drives and USB ports), security function that allows users to log on to Web sites by swiping their thumbs instead of remembering a password, new fans in the shape of "owl's wings" to reduce the laptop's quiet whirring sound, and a roll cage in case the computer is dropped.
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By JANE SPENCER May 17, 2007; Page B1
HONG KONG -- In Lenovo Group Ltd.'s latest advertising campaign, ThinkPad laptops get hurled against walls, dropped off cranes, stuck in the deep-freeze and dragged underwater by scuba divers.
Facing tough competition from rivals like Taiwan's Acer Inc., which makes lower-cost notebooks, and a revitalized Hewlett-Packard Co., Lenovo is pitching the durability and engineering pedigree of its laptops. As a part of the push, the company's sales reps regularly stand and bounce on the laptops during sales pitches to corporate clients.
In an industry dominated by a brutal pricing rivalry, championing quality over cost is a bold tactic. ThinkPad laptops, which are typically bought by businesses for their employees, are priced about 10% higher than the industry average. And Lenovo is poised to launch one of the most expensive notebook computers on the market -- a $5,000 ThinkPad laptop aimed at top corporate executives. The laptop comes with support services including a promise that if you have a problem, a technician will meet you in person within hours to help solve it. The average PC sold to a corporate user in the U.S. costs $1,125, according to research firm Gartner Inc.
"We're not trying to sell the cheapest computers money can buy," says Deepak Advani, Lenovo's chief marketing officer. Mr. Advani draws a parallel with Apple Inc. "They have a higher price point, but people buy for the brand reputation," he says.
Lenovo's torture-test campaign follows last week's launch of a new line of ThinkPads, black laptops with a red-dot mouse that have been a staple of the corporate world since their debut in the early 1990s. Lenovo, which has headquarters in both Raleigh, N.C., and Beijing, inherited the ThinkPad line from International Business Machines Corp. when the Chinese company bought IBM's personal computer division for $1.25 billion two years ago.
The tagline for the new campaign will be: "From the world's best engineers come the world's best-engineered PCs." The campaign will include posters and online ads, and will be incorporated in other marketing events. Durability has long been a theme in the company's ads, but the company says this is the first time a whole campaign has been organized around its engineering.
The campaign comes at a critical time for Lenovo, as the company begins to phase out the IBM brand name and strike out on its own in the U.S. market. While Lenovo dominates the computer industry in China -- controlling more than 35% of the country's computer shipments -- the company is struggling to turn profits in the U.S., the world's largest PC market. Lenovo has been mainly dependent on sales of ThinkPads to big businesses, but that segment of the PC industry has stagnated as growth in the consumer side of the market has surged. Lenovo controls about 12% of the global corporate laptop market in terms of shipments, behind Dell Inc., which controls 19%, and HP, which has a 16% share, according to research firm IDC.
The company intends to make an aggressive push into the consumer side of the market in the coming months as it tries to make its U.S. business less dependent on the corporate-oriented ThinkPad line.
While Lenovo isn't permitted to mention the IBM name directly in its ads, they are aimed at infusing the Lenovo brand with IBM's legacy of quality engineering. The spots, designed by WPP Group PLC's Ogilvy & Mather, will begin appearing in parts of Asia in the next few weeks, and will launch in the U.S. later this summer in airports frequented by business travelers in New York, Chicago, Los Angeles and elsewhere.
Lenovo is allowed to use the IBM logo on its ThinkPad products until 2010, and can show products with the logo its ads. However, in an effort to wean customers off the IBM brand, Lenovo has already started to remove the IBM name from ThinkPads shipped to some long-term clients, and the IBM logo won't appear on products in the new campaign. "We want to stand on our own," says Craig Merrigan, vice president of marketing strategy and design at Lenovo.
Still, Lenovo has fought hard to hold on to IBM's engineering reputation. Most of the design and engineering team has stayed in place since the acquisition. "IBM paid fastidious attention to every detail regarding quality," says Leslie Fiering, research vice president covering the laptop market at Gartner. "Lenovo is investing very, very heavily in this because they recognize that they cannot afford to let quality drop, or the perception of quality."
The original ThinkPad line pioneered many of the durability features that have become standard across the industry, including spill-resistant keyboards. If you flip over a ThinkPad, you'll see two small drains designed to let liquid flow out. Other ThinkPad features include an airbag technology that senses when the computer is being jerked around and instantly protects the hard drive.
New features include "battery stretch," a setting that lets users extend battery life to more than eight hours on some models by shutting down energy-sucking features like CD drives and USB ports, and a security function that allows users to log on to Web sites by swiping their thumbs instead of remembering a password.
The redesign tries to reduce the laptop's quiet whirring sound, which some users complain is like a mosquito's buzz, with new fans. A Lenovo engineer in Japan created fan blades in the shape of owl's wings, which the company says cut through the air more quietly.
The new models are also slightly lighter than previous generations, although ThinkPads are still heavier than the industry average, in part because of added durability features, such as a magnesium roll cage that lines the inside of the case to protect the computer if it is dropped.
Some analysts say Lenovo's engineering edge has weakened as other companies have caught up and added new durability features. "Lenovo still has that legacy of good engineering, but if you look at their intellectual property, they have cross-licensed a lot of it, so they don't have exclusive use of it anymore," says Roger Kay, president of the research firm Endpoint Technologies Associates Inc.
He also warns that corporate buyers may be more concerned with price than with quality. "The issue is that end-users don't want to pay for that extra engineering," he says. "You tell them you've got a roll cage, and an airbag, and they say OK, how much do we have to pay for that?"
Other companies have also started pitching durability to business customers. Panasonic Corp., for example, which long made high-priced, ultra-rugged computers for the military and law enforcement, has developed a line of Toughbook products aimed at business users, but they are generally costlier than most ThinkPads.
Assessing quality differences between computer brands is difficult, because most of the big computer manufacturers, including Lenovo, outsource manufacturing to the same set of companies in Taiwan. But many branded companies, including Lenovo, still maintain strict control over design and testing specifications that can lead to quality differences.
While companies closely guard failure rates, the ThinkPad line typically scores well on reliability in surveys of corporate technology buyers.
"From a toughness perspective, there's still a pretty big gap between ThinkPad and their closest competitors," says Kirk Yang, a technology hardware analyst for Citigroup Inc. in Hong Kong. "But now that PCs are a commodity product, there's a big market of consumers who care only about price."
It seems to me they are able to raise their prices not so much because of their quality innovations, but because of the price inelasticity of their target customers. When you sell something like a laptop to a regular person, in general, they would likely be a lot more responsive to a change in price than would a big business that is buying many computers for their employees, where the process of buying the computers has to go through many different departments, get multiple sets of approvals, etc. Either the business has a deal with a supplier, or it's simply too complicated to change the policy within a large corporation, either way, the result is that a company like Lenovo can get away with raising prices much more than a company that targets individuals rather than businesses could.
As for cross-licensing, I think this relates to the overall inelasticity (as opposed to just price elasticity) of their customer base. Because changing any preexisting policy in a corporation is generally much harder than it would be for an individual to shift their respective purchasing habits, for the same reasons described previously, it's almost as hard for a company like Lenovo to gain customers as it was for them to lose them by raising prices as mentioned above. Thus, maybe in their eyes the best way to get revenue is to license to other companies if they think any innovation they make will not gain them many customers.
Evan - thanks for your comment. Your right about pricing and their target customers. They have a big corporate customer base in China and in the US.
Now they're trying to move into US consumer markets as well - as you said, high prices there are much more of a hindrance because of lack of brand loyalty in the US and the elasticity of demand for non-branded laptops.
As the article states, "now that PCs are a commodity product, there's a big market of consumers who care only about price."
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