Bill Amelio Talks Strategy before Departing as Lenovo CEO

During the World Economic Forum at Davos, which ended February 1, Wharton management professor Michael Useem interviewed Bill Amelio, then CEO of the Chinese computer maker Lenovo Group, about the company’s strategy for dealing with the current downturn in the computer industry and in global markets overall. On February 5, Lenovo announced that chairman Yang Yuanqing would replace Amelio as CEO, and that co-founder Liu Chuanzhi would become board chairman. Lenovo joins a list of other high-technology companies — including Apple and Dell — whose founders have, at one point, stepped away from the CEO role, only to return to that position several years later during particularly challenging times in the industry. Amelio, who previously headed up Dell’s Asia-Pacific operations, was appointed CEO of Lenovo in 2005, shortly after the company acquired IBM’s personal computer business. Below is an edited version of the conversation with Amelio.

Michael Useem: Bill, good to have a chance to talk with you. I’m going to begin with a question about your recently announced plan to cut about 11% of your workforce because of the economic crisis. Could you talk us through the cut, and also give us your thoughts about the impact of the global downturn on the high-tech industry, including the computer industry? For example, how has the downturn affected sales? And what is Lenovo’s strategy going forward?

Bill Amelio: I will tell you that any time we do — or even think of doing — a restructuring, it takes a lot of thought and a lot of discussion. It is a very painful process simply because we are affecting people’s lives. We do not take that lightly. In fact, when we go through a process like this … we make sure that those who leave the organization will be treated with the utmost dignity, respect and compassion. I think we have been successful doing that in this last transition. It helps build trust in the organization. While activity like this is a trust withdrawal, so to speak, if you do it the right way, you have an opportunity to at least demonstrate to the people who are leaving, as well as to the people who stay, that you do deeply care about your employees. None of us like to do this, as I pointed out. It’s tough times that [require] you to rethink your entire business model.

As a company, we’ve been positioned such that this economic downturn has really created almost a perfect storm for us…. We have a great position in China — a commercial segment as well as high-priced brands. All of those have come under pretty big attack over the course of the last several months and quarters. For example, [with regards to] the China market, for the first time the market rate is growing slower than the rest of the world even though we’re outperforming in the China market. Given that 53% of our units come from China, mathematically it becomes very difficult for us to grow faster than the industry if our key market is growing slower than the rest of the world.

The second point is our commercial business, which is a stronghold for us. It’s part of what we got with the acquisition of the IBM business [announced in December 2004 and finalized in May 2005]. That’s primarily large accounts, government, higher education. That represents 76% of our business worldwide. And that, too, has essentially started to slow, all the way back [to] the fall of 2007, when the subprime loan [crisis] first hit — and in fact, has decreased ever since. In the last couple of quarters, it has gone negative. Interestingly enough, the consumer [market] around the world still was positive the last couple of quarters — in fact, was accelerating, still, in the first two quarters of this year. It just started to slow this past quarter, but still was positive growth. Those competitors that are indexed more to consumers have fared better simply because there’s been more growth in that part of the market.

Now, the third trend that’s been interesting — that has happened very, very rapidly in this business — is the movement to lower-priced brands. And that, of course, has put pressure on every company’s margins as well as their overall selling prices. Because what occurs is your mix is now shifting from higher-priced brands, higher selling-priced products, to lower-priced brands, lower selling-priced products. Therefore, you have to sell more units in order to get the same revenue. This craze — to go to netbooks — is here to stay for three particular reasons.

First and foremost, it’s a tougher market out there. Therefore, people are going to want to get the most value for their money. If they see a computer for $299, $399, that will give them pause — and they will at least look and make a decision as to whether or not they want to have that system. Second is that we’ve seen a trend to “good enough computing” where, now, the technology that’s inside the netbooks may be good enough for a lot of different customers. Clearly, for first-time buyers who want to view things on the Internet, who want to do rudimentary editing, simple gaming, the system is probably good enough for them. If you want to do a full Office Suite, you’d better go to a laptop. The third trend that’s driving this is the fact that since liquidity has dried up, and credit has dried up, some high end computers, in fact, were being leased using credit. And since credit’s dried up, that gets more people to say, “What can I afford, without financing?” And, of course, going to a lower-priced brand product allows you to do that.

[Those are] the trends that have affected us, pretty dramatically, and they have gotten us now to really rethink our business model. Literally, every business process that we had across the company, we’ve put extra scrutiny on to say, “What do we need to do to ensure ourselves not only survival, but [to ensure that] when the economy does turn around, we are going to thrive?” One of the ways we’re doing that is to make sure that through all of these cuts we still are investing. We are investing in the lifeblood of our company — something that’s in the DNA of both the legacy Lenovo side as well as the legacy IBM side. That’s innovation. We have a strong history of innovation in the ThinkPad as well as our lineup of Lenovo computers. And you’ll see a whole suite of new ideas coming out over the course of this year that I believe will get consumers to want to buy more products again, get large accounts to want to buy more products again. Because there’s enough of a distinction that says, “I have to have that product.” It will be an object of desire.

Useem: Bill, talk a bit about what, specifically, you’re doing in China in light of the crisis. China has been your base, of course, your platform. China had 9%, 10%, 11% annual growth. It’s way below that now. You referenced changing your business model worldwide. In China, what are you doing differently?

Amelio: China is the place where our business model continues to be strong. So we are doing more tweaking than we are revamping — compared to what we are doing outside of China. In China, we have a competitive expense to revenue ratio. Our op ex [operating expenses] essentially is in line with what it should be — in fact, Best in Class. We have a position there that’s second to none. We have 11,000 touch points across the country. We deliver an unequal ownership experience to our customers. Our service is continuing to get the best awards in the country. So we do what, essentially, is the mission of the company, and that’s deliver exceptionally engineered products with unequaled ownership experience, and grow faster than the market at large. We’ve been able to continually do that, even in the downturn, in China. So the models in China are pretty firm. What we’re doing there is making sure that we’re doing the right things to stay productive and making sure that we’re able to keep a sustainable competitive advantage.

Useem: Let me move a little bit into one of the main themes of the gathering here — the annual meeting of the World Economic Forum — which is the search for opportunity in the period we are in. Are there places in your market where, with this crisis, there are opportunities? Such as — when we come out of the crisis, you’re going to be better positioned to extend your brand and sell around the world?

Amelio: I think it’s time for leaders, in these situations, to have courageous leadership. [What] we can do as leaders at this juncture is to find those opportunities, find those nuggets of hope and give the team a mantle of hope to strive for. Because if it’s all about cutting — that’s not too inspirational for any team. It’s important for the team, at large, to be able to see the investments that you’re going to make, that are going to allow you to become a stronger, more viable competitor, at the back end of the economic swing. [What] we’re doing, as I mentioned previously, is we have invested in innovation in our product.

And that’s not only in the product, itself, but also in the entire solution … after understanding what key customer paying points are. For example, if you look at a mobile user…. It’s frustrating, sometimes, if you’re sitting in an airport and you have to quickly replicate to be able to synch all your emails up before you get on the plane. Well, we have some ideas and concepts that we believe are going to make that process a lot less painful and, in fact, become something that you look forward to. Those sorts of ideas, I believe, are the kinds of innovations that get people to say, “I want to buy Lenovo computers,” versus buying somebody else’s computers. If other business leaders think that way, we have a better opportunity to start generating real demand back in the industry again.

Another idea is one where — if you think about a lot of companies that are retrenching — they have to redeploy computers. Well, that gives us a service opportunity where we’re able to help those customers refurbish some of those computers, put new images on them, and get them redeployed to other employees inside the company again. While it’s not the best way we like to sell computers, it’s at least taking advantage of an opportunity that’s availed itself because of this situation.

Useem: A question about your own personal leadership during this period. Yesterday, German Chancellor Angela Merkel and British Prime Minister Gordon Brown both emphasized the importance of confidence — that we’re going to get through this, that we’re going to build a better future. I know you are a confident person. What have you been doing to communicate your confidence, your optimism, about coming through this particular period well?

Amelio: First and foremost, be visible. What we’ve done is taken interviews from all media, all sources — everywhere — to make sure that we get the word out. It’s one of these ideas where we want to be very transparent about what’s going on.

We want to make sure that we display and confront the real reality of the day — don’t be deluded by false hopes — but also get people to understand that “This too, will pass.” Tomorrow will be better than today. There is hope out there. And I point to certain things that are happening, even in the world, that I think are very positive. Just look at the election that occurred in the United States. Think about it. There were two million people on the inaugural lawn when [President Obama] gave his address — and there wasn’t one arrest. These people came from trains, planes, automobiles — squeezed into tight situations — and there wasn’t an arrest. That’s a demonstration, in my mind, that there is real hope out there. People are striving to do the right thing.

Useem: There’s a fine line between communicating to everybody the hard reality you face, and, at the same time, keeping people optimistic that there is a better future. If you could just talk about that line between the hard reality that you’re facing versus keeping people’s morale up, keeping people optimistic, keeping people confident. Where is the line that you need to hit?

Amelio: It’s important to be clear about exactly what trends are affecting us and why we are getting affected differently than the industry at large, or getting affected the same as the industry at large — and demonstrate [this] with a clear story that’s very simple and not complicated. This whole idea of simplicity is what’s very important in our communication, especially at this juncture. I think we’ve been pretty successful being able to get people to literally see the trends that I talked about. We’ve spent time thoroughly analyzing, “How do we communicate effectively” with sharp bullet points that get people to understand what’s happening. Once that’s done, it’s also then important to say, “Okay, here is the action, based on the situation that we’re in.” And it becomes obvious to anyone that you have to take some action, and that the action that we’re taking is a reasonable action. The third thing is to then paint a picture of, “Well, what are you going to do when you come back out of this? What, exactly, is the strategy for continued success in this company?”

Then you’ve got to paint the vision of where we’re going to go in the future, with some clear-cut specifics. I mentioned a few already in our conversation.

Useem: Let me ask about how you’re leading differently, now, compared to when you came in. You joined [Lenovo] in 2005 and had a couple of very good years in there. Now the world has hit this very rough patch. Has your own leadership style had to change? Have you adapted? Have you operated differently, in the last quarter, because of what has happened in the world?

Amelio: We regularly do 360s in the company. I put myself through those … to make sure I’m getting unadulterated comments from the team. So I know how everybody feels. Because sometimes, it’s very difficult for somebody to confront the CEO and say, “Here’s how I really feel.” But when you do a 360 with a competent party that actually goes and interviews all my team, interviews high potentials in the organization, you get a real sense of what areas of strength you have and what areas you need to develop. What I’ve learned over the years, through this process, is I keep working on areas that I need to fix. At times like this, it is especially important for me not to allow myself to move to the dark side — which, essentially, in my areas of development, would be taking my passion one step too far and becoming intimidating. Clearly, in this kind of environment, it’s very easy to let your passion run away. So I’ve been working very diligently to be much more patient and not allow that side of me to come out. Because it’s a fearful time to begin with. They don’t need the CEO to cause them more stress in their lives.

Useem: A question about your relationship with the board — and I know your board has been very important in the role it’s played going way back, but especially since the acquisition of the IBM PC line. If you could say a few words about how the board has worked with you, as you’ve entered this crisis period.

For example, how often do you talk with board members? Could you describe a bit what the tenor is when you sit down in a formal board meeting? Broader question — talk a bit about the role of the board of directors.

Amelio: First, let me talk about the role of the board of directors. We have a unique board from the standpoint of having some people with deep skills that have really helped us. We have two private equity firms on it. We have our founder, Mr. Liu, on it — who represents the Chinese Academy of Science and has deep knowledge of the personal computer industry. That’s boded extremely well for us from the standpoint of getting some real insights on the strategy that we ought to take forward. I talk to the board probably at least once a quarter in quarterly meetings. I talk to Mr. Liu almost once a week and I reach out to a few of the other board members at least every other week.

Useem: The board, in that sense, has been a critical source of helping you develop your strategy over the last several years. To turn this into a question: Does the board run the risk of becoming so directly involved in helping you formulate and drive strategy that it gets too wedded to it and can’t step back and say: “Look, this strategy may not be going the right way?” The question is, as your board has become directly involved in helping you shape the direction of the company, is there a danger that its oversight function could be compromised?

Amelio: That’s a very interesting question. But from the way our board operates, I have not seen that problem simply because they are quick to be able to point out performance issues — whether or not they were part and party of helping me devise a strategy. I have not had any fear, whatsoever, that they have been able to keep their oversight.

Useem: And then back on to strategy — if you could just offer a couple of thoughts on how the thinking of the board members on strategy has been communicated to you especially as we have come into this crisis. You said you talk to Mr. Liu once a week. Obviously that’s a very important channel. Do you, for example, informally talk to the other directors on the phone from time to time? So just stretch that out a bit, if you could.

Amelio: Yes, it goes for more than just strategy. It also goes in our talent review process, our compensation strategy — how do we align objectives, measures and rewards, as effectively as we can, across the company? I have those dialogues, as well, with several of the board members. It goes to discussions about — are there any potential ideas that we might have with respect to acquisitions? We have an acquisition strategy that looks like the following: We would like to add scale to our company. We would like to find if there are any opportunities for adjacent profit pools, in services, in software peripherals. And the third area — if there’s any technology that we can add to the company that would help us with our future products and our future innovations. So those discussions happen with the board as well. We get their input on ideas that we may have. And they can also point us to the right person in the industry who they may know, who could help us with a certain target. [We are] able to get more in-depth knowledge before we act on anything.

Useem: You have several classes of owners, so to speak. The Chinese Academy of Science is still a major owner. You have two very large private equity firms with a couple of places on the board of directors. Of course you have many stockholders around the world through your public equity listing. Again, over the last 12 months, what are the messages that you’re hearing from these different ownership groups? What do you hear from the Chinese Academy of Sciences? What are you hearing from the two private equity firms? And what are you hearing from the institutional investors and the equity analysts?

Amelio: The best way to describe it is that it’s almost like a schizophrenic behavior at times. A lot of them want to talk about the long term, but simultaneously, they want to talk about short-term results. Make sure we have a dividend that gets paid, make sure you are able to return the profits that you’ve committed to the business — even in a downturn. Then the discussion is, “Yes, we understand there’s a longer, bigger issue that’s happening inside.” Then there’s a discussion, of course, of, “Yep, the global economy is affecting all businesses, including yours.” So there’s an understanding of that. But yet there’s a sense of urgency that says, “What are you going to do, as a CEO, to make sure that we come out of this much more effectively than any other competitor does?” So, I think it’s a healthy tension. I call it a bit of a “schizophrenic” [situation], but it’s a healthy tension that creates thinking about the long term as well as making sure you don’t forgo the short term … still making the right decisions, longer term, to be successful. And it’s an interesting debate that we have on the board that kind of bounces between both of them. You’ve just got to make sure you can deal with ambiguity. One of the key lessons that I’ve learned as a CEO is not to react as fast as I would when I was younger. In my background, I used to wrestle and box. So it’s point-counterpoint, punch-counterpunch. I had to learn to stop doing that and, essentially, take a moment and pause before I react to something. I think that’s made me a better executive.

Useem: Bill, I have one final question. If somebody came to you and said, “What would the leadership profile be for a person to come into a position like you have at a major technology company?” Not your own, necessarily. But given the world that we live in, given where the market’s been going, what are the two or three leadership qualities you would say are absolutely vital for someone to become the chief executive of a very large technology-driven company?

Amelio: I think the top of the list is the ability to build trust — trust and confidence with people who are around you. That means building deep relationships, demonstrating to your employees that you deeply care — through your actions, not just your words. I think it’s important to have a view of what the vision’s going to be, and to paint a vision that demonstrates that tomorrow is going to be better than today.

I think the third thing is to have some level of confidence that you bring to the table so that somebody can say, “Why should I come talk to you? What problems are you going to solve for me?” One of the jobs of a leader is to be able to make meaning out of chaos, and to also be able to solve problems and remove obstacles that are in the way of people’s progress — as opposed to adding more rocks to the pile. The fourth element is [that] everybody has inside them [the ability] to be inspirational. Some people don’t believe they can be. But I believe that it’s a trained thing. You can learn to be inspirational. I think everyone’s got to find it in themselves if they want to be a leader. Be inspirational. Get people excited about moving from Point A to Point B. This is not easy work because every day, we’re forcing change where change isn’t really desired by people. If you think about your own life for a moment — if somebody disrupts your morning routine, you’re pretty annoyed about it. Because the truth is, none of us really like change. But in order to be successful in any business, we’ve got to drive change. Therefore, you need leaders who are able to do it in such a way that they get people to come with them and stay engaged along the way, versus being disengaged.

Useem: Bill, thank you for taking the time to talk with us today. We really appreciate it.

Amelio: Thanks, Mike.

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