Editor’s note: Lenovo’s latest earnings report last week in which the global tech firm reported its first loss in six years reflects in part problems in its data center business. Technology Business Research Analyst Krista Macomber says Lenovo’s Enterprise Business Group, which is based in RTP, is struggling to keep pace with the disruption taking place in the data center industry.

HAMPTON, N.H. – Lenovo recognizes and is investing to capitalize on opportunity created by ongoing, heavy disruption in the data center industry. However, accelerating market evolution is outpacing Lenovo’s ability to refine its strategy and execution outside its domestic market, China.

Customers are migrating quickly to next-generation architectures, such as hyperconverged platforms and hybrid cloud services. Meanwhile, incumbent vendors including Dell, EMC and Hewlett Packard Enterprise (HPE) are responding with equally radical business model transformations and targeted competitive displacement initiatives. As a result, Lenovo’s Enterprise Business Group (EBG) revenue declined 7.6% year-to-year in C1Q16 — the group’s first quarterly year-to-year revenue decline since its inception, according to TBR estimates.

Additionally, the segment’s reported pretax income remained at a loss and reversed three quarters of sequential improvements, decreasing from a -1.1% margin in 4Q15 to a -1.6% margin in 1Q16.

Lenovo proceeds through 2016 armed with a largely restructured roster of EBG executive leaders who have long-standing experience at Lenovo that will help Lenovo gauge potential effectiveness as it attacks growth segments in the market. The company will prioritize correcting sales execution challenges in mature markets — in particular in North America, where Lenovo faces stiff and entrenched competition and brand perception challenges as a result of geopolitical tensions — to avoid being shut out of long-term and high-value transformation-centric deals with customers.

Competing with greater agility and more comprehensive sales motions will improve Lenovo’s competitive posture, but execution will be challenging as Lenovo relies heavily on partners in a rapidly evolving competitive landscape for critical capabilities, such as hyperconverged platforms.

Responding to storage industry disruption is necessary for Lenovo to execute on aggressive data center goals

As customers prioritize increasing leverage of, and efficiency within, their data environments, effectively navigating Lenovo’s go-forward strategy in the storage market is essential to ensuring its goal of maximizing its brand awareness and installed base in the data center. However, this feat will prove increasingly challenging as the storage market endures a period of heavy disruption. Customers’ storage purchasing behaviors and technology requirements are shifting rapidly as they migrate to converged and software-defined architectures, and to “as a Service” resource delivery.

Vendors are responding in kind; notably, Lenovo’s years-long partner, EMC, is preparing to shift from its pure play business model to become integrated into an end-to-end portfolio through its planned acquisition by Dell, slated to occur later in 2016. TBR believes Lenovo’s key to success is finding a quick but viable, from a long-term perspective, path to keeping pace with customers’ evolving storage requirements in key markets such as flash and hyperconverged platforms.

Lenovo’s storage strategy is currently alliance-heavy, especially in hyperconverged platforms and software-defined storage. This strategy helps Lenovo maximize its touchpoints in the market as these strategic (yet emerging) markets evolve.

However, TBR anticipates ongoing industry disruption will limit the longevity of alliances. As a result, we expect Lenovo to drive an owned storage strategy in the mid- to long-term. Lenovo began a foray into storage R&D during 2015, but differentiation against established pure play and multiplatform peers, as well as niche vendors in areas such as flash, is challenging.

As a result, we believe acquisitions are a viable path forward for Lenovo to round out its competencies. In light of the increasing urgency for Lenovo to fill out its storage capabilities, we believe the vendor will look to acquire a smaller-scale file and block storage provider for foundational capabilities, while evaluating purchasing niche all-flash and software-defined vendors to build a comprehensive portfolio to address customers’ ongoing balance of traditional and next-generation applications.