Grandiose goals at Lenovo: Drinking games & hazing rituals?

Did anyone else find this Fortune magazine article about Lenovo a bit disconcerting?    The article describes a "lighthearted drinking game" that occurs each year among top executives at which they set their ambitious goals for the coming year.  The head of human resources even endorsed the ritual!  I understand cultural differences should be respected, but should a global company really be setting management goals while executives engage in "good-natured hazing" rituals?   The phrases in quotes come from Fortune writer Miguel Helft, not me.  Hazing?  Drinking games?  I can see many  executives at leading multinationals cringing when they read these words.  

The article goes on to lavish praise on the Lenovo management team ("a cocksure crew") for the performance it has achieved in recent years:

"Even without a few drinks in them, Lenovo's top executives are a cocksure crew these days, and for good reason: The company's contrarian bet to double down on the PC business has paid off handsomely. In recent years Lenovo invested heavily in R&D and acquisitions. It beefed up its own network of factories, allowing the company to bring innovations to market more quickly than competitors that outsource most of their manufacturing. As a result, Lenovo's growth has outpaced the industry's for the past 16 quarters, and it has tripled in size since the IBM deal to more than $33 billion in sales. This year it's on track to edge out HP to become the world's No. 1 PC maker."

What's missing from this paragraph lavishing praise on the company for its performance?  One little word:  profit.   Yes, the company has grown rapidly. Yes, it has achieved an impressive market share in the PC market.  Has it made any money?   Hmm... that would seem to be a desirable metric on which we should focus.  Late in the article, the author finally gets around to a discussion of margins.  Here's what Helft writes:

"At the same time, Lenovo benefited from its Chinese cultural heritage, in particular the propensity to focus on long-term goals. Lenovo approaches every new market with a similar strategy: pricing products aggressively at first, sacrificing margins. Executives are expected to deliver profitability only after market share gets to double digits. The risky approach has largely paid off. "The company has surprised me over and over," says Alberto Moel, an analyst with Sanford Bernstein. Its continued growth amid the industry's disarray, Moel says, "is a major achievement." But Moel warns that expanding margins, which at 2.5% are about half those of Dell's and HP's PC units, will be harder than management thinks. Such concerns have weighed on the stock, which has been stuck in a narrow range for the past year (its ADRs, now at $18, are down from $23 a share). With net income of $575 million over the past four quarters, Lenovo has a market capitalization of about $9 billion." 

Margins are half of those found at Dell and HP, and as it is, those American rivals have very thin margins in the PC business.  The firm apparently focuses on margins after getting to double-digit market share.  Yet, Lenovo has 15% market share in the PC business.  Will the margins improve?  How much?   Consider that the personal computer industry has been one of the least profitable markets on earth in recent years.   A simple structural analysis of the industry shows that it is highly unattractive - high buyer and supplier power, high threat of substitutes, and intense rivalry.  Increasing margins will be challenging. Lenovo has brought many product innovations to market.  It has developed strong relationships with many corporations and institutional buyers.  It has many positive attributes.  However, it will be challenging to make high profits in the PC business.  As Warren Buffett once said, "When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact."

See's Candies Moves East

This week Fortune features an article about the planned eastward expansion of See's Candies.  For folks on the west coast, you are quite familiar with the See's chocolate shops and airport kiosks that sell fresh delicious chocolates.  The company does not have any shops east of the Mississippi though.  That will change over the next few years, according to plans described in the article.  The company, owned by Warren Buffett for the past forty years, aims to expand with up to 30 new stores in the eastern part of the United States in upcoming years. 

The See's expansion offers some interesting challenges.  First, the company will have to introduce themselves to those on the east coast and deal with existing luxury chocolate brands such as Godiva that have a significant share in that region.  Second, the supply chain will be a challenge.  The chocolates do not have preservatives.  Thus, they have a short shelf life.  The company will need a factory close to its east coast locations.  Third, the firm must expand its appeal young mothers, according to its new head of marketing, Tracy Cioffi.  She notes, "We can't focus on great-grandma anymore." 

As I read the article, I kept thinking that the company could learn a great deal from another highly successful California retailer that expanded eastward after many years of focusing on the west coast.  That company would be Trader Joe's.  The firms have much in common:  fiercely loyal customers, longtime employees who enjoy working there, strong profits, and a reputation for quality products.   Trader Joe's found success on the east coast through a careful and methodical expansion strategy, rather than rushing to open tons of new stores all at west.  It appears that See's will do the same.  The article mentions that See's uses pop-up stores to test new locations before committing to a new store.  That makes a great deal of sense too. 

Still, the company will face challenges.  On the west coast, the firm generates a great deal of revenue through on-line and phone orders.  The stores help build the brand, and they encourage people to try the product.  Yet, the company depends on on-line sales to achieve strong profitability.  It will need to do the same on the east coast, but without the long-time customers who know the firm well and have been ordering particular chocolates by phone or on-line for years.

One final note: I learned in the article that Lucille Ball trained at See's plant for her famous chocolate factory scene on the hit show, I Love Lucy.  Here's that classic clip: