Lenovo ISG is building the road map to become a market-leading infrastructure provider
Lenovo is executing on ambitious growth objectives
At Lenovo’s ISG Analyst Summit, ISG Executive Vice President Kirk Skaugen expressed Lenovo’s ultimate goal is to become the world’s largest IT infrastructure provider, and the group is executing on strategies across all segments within its Infrastructure Solutions Group (ISG) to meet this objective.
Lenovo’s ISG growth over the past two years has been strong, closing its 2022 fiscal year with over $7 billion in revenue, up from $5.5 billion in revenue in 2020, and a profitable operating income. Lenovo ISG is still relatively small compared to Dell Technologies ISG or Hewlett Packard Enterprise (HPE), which reported $34 billion and $28 billion in revenues, respectively, in 2021. But Lenovo’s rapid growth and road map position it to overtake smaller vendors in server and storage market share over the next five years.
Lenovo’s growth strategy has two main facets, building ISG brand awareness and honing its business strategy across the core ISG segments. Lenovo ISG is about 10% of corporate revenue, compared to the devices business at roughly 84%, making building awareness critical to gaining share in infrastructure segments such as server, storage, hyperconverged infrastructure and high-performance computing.
Lenovo is expanding awareness of its ISG portfolio through corporate advertising and sponsorship initiatives as well as tactically through the company’s One Lenovo strategy. One Lenovo will integrate devices and infrastructure go to market more closely, particularly in sales and channel compensation, to ensure customers are aware of the full Lenovo portfolio and to incentivize business referrals across the two groups.
Honing the ISG business strategy to deliver growth across all business segments is a more detailed and complex endeavor that consists of several operational, product and go-to-market initiatives. Core initiatives include:
- Become a trusted partner
- Capture vertical-specific edge compute demand
- Accelerate growth in CSP business
- Differentiate in Enterprise and SMB (ESMB) with services and cloud capability
- Build nuanced portfolios that address geo-specific needs
- Leverage in-house design and manufacturing for competitive advantages
Become a trusted partner
Among the many themes emphasized during the summit, multiple Lenovo executives highlighted: Lenovo strives to earn and retain trust with its partners and, especially, its customers.
Skaugen made this point time and again with external evidence and KPIs Lenovo keeps at the forefront of its organization, such being partner of the year to Nutanix, VMware and Microsoft. The company also boasted its 93.6% on-time deliveries rate, which represents the accuracy of its delivery timeline estimates to its actual execution.
Regardless of the uncertainties created by global supply chain disruptions, Lenovo wants partners to know that they can rely on the company’s word, even if that means taking conservative estimates on delivery lead times and leaving deals on the table that have the potential to dilute customer trust of Lenovo.
Capture vertical-specific edge compute demand
Edge compute still has no dominant forces, but countless vendors are vying for market share in the emerging industry. Lenovo believes its portfolio spanning the data center to the edge to individual pockets with mobile devices differentiates it from competitors.
Beyond its expansive vision, Lenovo’s head of edge infrastructure, Charles Ferland, made it clear the company’s edge compute technology is itself differentiated with practical and customer-centric designing baked into the process of innovation. Lenovo believes its design strengths include physical features ranging from noise minimization and a broad range of form factor sizes to security features with encryption and tampering protection as well as connectivity and automation features.
Lenovo’s portfolios range from a “backpack fitting” form factor to high performance, compute-dense form factors that enable on-site AI inferencing and data-intensive applications. It will take a vertical-centric approach to building edge solutions with the help of its Project and Solution Services group, which has a long-standing history of developing vertical-centric solutions such as retail and quick-service restaurant capabilities. To date, Lenovo’s edge customers range from small nonprofits to large retailers with thousands of locations worldwide.
Accelerate growth in CSP business
Over the past five years, Lenovo has grown its cloud service provider (CSP) business, which designs and manufactures IT infrastructures for cloud service providers, to about $3 billion in annual revenues. The ODM business model is generally considered to be less profitable than the OEM model in sales, but Lenovo is well positioned to generate profitability since bringing its entire ODM process in-house.
In Lenovo’s “ODM+” model, the company provides in-house design and engineering services, builds the infrastructure in its own manufacturing facilities and provides global deployment services, giving Lenovo an opportunity to cut out costs from other vendors while providing customers with end-to-end service capability.
Differentiate in ESMB with services and cloud capabilities
Lenovo’s ESMB segment accounts for roughly half of ISG revenue and faces stiff competition from fellow OEMs as vendors fight for limited share as growth is constrained by cloud erosion. Lenovo’s approach to adding value in the ESMB segment is similar to competitors, focused on providing a portfolio of end-to-end, “as a Service” solutions and developing private cloud and hybrid cloud capabilities.
Lenovo is rapidly expanding its portfolio of TruScale subscription offerings, which currently includes storage, hybrid cloud, multicloud, virtual desktop infrastructure and SAP solutions, in addition to device-specific offerings. Beyond adding use cases, Lenovo will expand the capabilities of the TruScale platform with more options for metering, AI-based insights, and enhanced user interface for management and automation.
Like peers, Lenovo has built a portfolio of private and hybrid cloud solutions leveraging alliances such as Microsoft Azure Stack and VMware-based cloud offerings. Lenovo’s strategy diverges from peers in the storage space, where Lenovo offers cloud services through its partnership with NetApp, including the ONTAP operating system and NetApp Cloud Volumes services. Other vendors, such as Dell Technologies and Pure Storage, are rewriting their storage operating systems to run on major public clouds or acquiring software companies that specialize in cloud management.
Regardless of vendor alliances used in building solutions, Lenovo intends to be an end-to-end cloud solutions provider and the accountable point of contact for customers.
Build nuanced portfolios that address geo-specific needs
Lenovo believes its competitive advantage is its positioning as a global vendor that can deliver on localization. With its focus on bringing design services and manufacturing completely in-house, Lenovo can provide local customization for its products that meet the specific needs of the region, including power specifications and component configurations. Lenovo’s presence with headquarters in both the U.S. and China gives it the ability to separate its businesses for the two countries, including software design and hardware manufacturing, to navigate geopolitical pressures seen across the market.
Partner strategy is also a key piece of tailoring the IT infrastructure portfolio to specific markets, particularly in China, where local vendors dominate market share compared to global ISVs and CSPs that hold a commanding presence in other markets, requiring a deep and specialized partner base.
Following the successful implementation of a joint venture with NetApp in China, which began in 2018, Lenovo also announced it is expanding its partner investments with a new APAC-based technology solutions business, PCCW Lenovo Technology Solutions Limited (PLTS). Lenovo will own 84% of PLTS, including 80% direct interest in its partner PCCW. PCCW Solutions is an IT services provider with over 4,000 employees specializing in systems integration, application development and operations, which will be complemented by Lenovo’s infrastructure portfolio and close-to-the-box services.
Leverage in-house design and manufacturing for competitive advantages
Throughout the event, Lenovo made it clear that despite challenges in 1Q22, the company’s supply chain and vertical integration is one of the most valuable assets it has. As part of its ODM+ model, Lenovo has its own in-house design and manufacturing capabilities, which allows it to supply hyperscalers but also leverage processes to optimize cost in ways traditional OEMs cannot.
Lenovo utilizes the Root of the Tree Model, which uses adaptable base models that act as the “root” and can therefore be modified to bifurcate into distinct products fill various performance and use-case niches. Significant advantages of this model — and key tenets of the philosophy — are the reuse of design and the commonality between products, which unlocks otherwise inaccessible component procurement scale and simplifying assembly, ultimately lowering cost. Powerfully, this reuse of design and components can be leveraged across portfolios, across ISG products as well as between ISG and CSG products, such as reuse of XPUs, motherboards, cabling or even certain chassis.
According to Lenovo, high-performance computing clients are taking full advantage of its robust, in-house design capabilities. For next-generation exascale supercomputing, Lenovo emphasized two primary factors that differentiate its approach from competitors: the modularity of its systems and its energy efficiency.
Competitive exascale offerings mainly consist of large rack-sized units, many of which are larger than standard server racks, weighing in at thousands of pounds. Customers can purchase Lenovo’s exascale servers down to the server, enabling smaller customers without large capex budgets to acquire and access the same technology at lower scale to large enterprise customers.
The other differentiating factor is Lenovo Neptune, a direct, warm-water-cooling system that eliminates the need for refrigeration, thus reducing power consumption. By decreasing energy consumption, Lenovo Neptune subsequently reduces energy costs, which aligns with its environmental objectives to lower emissions.
Lenovo’s ISG division remains small versus market share leaders, but the company is invested in building the business into a formidable competitor. With a multifaceted strategy starting at the corporate level, with One Lenovo initiatives, product-centric development strategies, and a robust design, manufacturing and supply chain, Lenovo is well positioned to maintain, and even accelerate, its revenue and profitability growth.
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