Written Case #1 Li & Fung: Internet Issues Li & Fung is a Hong-Kong based import-export trading company that provides value-added services across the entire supply chain in a borderless manufacturing environment. The growth strategies for the company are a combination of an organic model, acquisitions, and use of E-Commerce technologies to extend the supply chain to new markets. Li & Fung hopes to offer its supply chain services to the small and medium-sized enterprise (SME) market by developing an Internet portal.
In the prevailing business environment, it has not been cost effective to trade with SMEs since orders were small and below the factory minimums for production. Through a proposed Internet portal, Li & Fung hopes to aggregate orders across multiple SMEs to capture the necessary economies of scale. The company is ready to beta-test the portal, but is now worried whether the SMEs will adopt the new model, and whether this new Internet portal would weaken the existing trader-based organizations that serve the large corporate customers. 1. Li & Fung (A): Internet Issues (pp. – 20) 1. 1 Li & Fung Company Background (pp. 3 – 5) Founded in 1906. $2 billion dollar company (At the time of the case), listed under HKG on the Hong Kong Stock Exchange. Comprised of a global network of partners and clients. 69% of total sales from the U. S. Products include a mix of hard goods (quality controlled products such as toys and sporting goods) and soft goods (clothing and apparel). Profit margin for soft goods was between 6% – 8%. Profit margin for hard goods was between 10% – 30%. 1. 1. 1 Holistic Supply Chain Management (SCM) (pp. 5 – 6)
Li & Fung is an SCM chain in itself, producing finished products from raw materials. Provides a number of value-added services within its global supply chain. Value-added services include: Reduced turnaround time. Reduced matching and credit risks. Greater quality assurance. Lower cost and more flexible sourcing. Up-to-date fashion and market trend information to clients. 1. 1. 2 Corporate Culture and Compensation (pg. 7) Although a public company, William and Victor Fung remained as key executives. Victor handled strategic issues and long-term planning. William handled day-to-day operations.
Li & Fung recognized new-age and forward thinking as important aspects for sustained advantage. Enforced a culture that was humble, agile and responsive and externally focused. The corporate structure was decentralized allowing for adaptability and rapid reaction to seasonal fashion shifts. Promotions and compensation were based on merit. And executive bonuses were determined by profits (no ceiling). 1. 2 Tripartite Growth Strategy (pp. 7 – 10) In 2000, Li & Fung viewed the future success determined by: Organic growth Expansion through acquisitions And extension of its supply chain to new markets via the Internet. . 2. 1 Organic Growth (pp. 7 – 9) What would drive organic growth would include: More orders from existing clients. New mandates from strategic clients. And an extended and diversified network around the globe. Established the modified three-year plan in 1996: The first three-year plan (1993-1995) looked to fill gaps in its network of offices to cover new sourcing markets. The second three-year plan (1996-1998) looked at margin expansion to increase profitability and looked to double profits every three years and achieve $3 billion in annual sales Li & Fung outperformed Hang Seng Index by 75% in 2000. . 2. 2 Acquisitions (pg. 9) Li & Fung would gain new client accounts through the acquisition of rival sourcing companies, and in the process, integrated operations, bringing the operating margins of these acquired units up to Li & Fung levels. List of Acquisitions by date: 1995: Sourcing company Inchcape Buying Services (Dodwell) equal in size to Li & Fung 1999: Export trading operations companies Swire Group, Swire & Maclaine and Camberley. By August 2000, Li & Fung was five-times the size of its closest competitors (William E. Connor and Associates and Colby International). . 2. 3 E-Commerce (pg. 10) Li & Fung’s global intranet was first launched in 1995 and provided: Real time orders and shipments. Digital imagery for online inspection. Troubleshooting. Secure extranets were launched in 1997 and linked Li & Fung directly to key customers (10 such extranets were in place by 2000). Secure extranets: Allowed for online product development as well as order tracking. Eliminated paper trail of hard copy documentation. Streamlined communication as orders moved through the supply chain. 1. 3 Competitive Threats (pp. 10 – 11)
Rather than strictly looking for quantity, Li & Fung focused on narrow and deep relationships with its customers. William Fung viewed the Internet as just another communications technology. Victor Fung viewed the Internet as a revolutionary technology that would change speed of information transfer but not the business model. 1. 3. 1 Bubble In (pp. 11 – 13) Li & Fung looked to develop an in-house e-commerce solution, adding two technical directors to its board (one, a CEO from a technology company and the other an academic). 1. 3. 2 Enter Castling (pp. 11 – 13)
Li & Fung’s focus in e-commerce would be on a combination of technology and supply chain reform (that would ultimately transform the retail end). The e-commerce solution would also focus on both old and new school economic ideas. Through LF International, Li & Fung’s venture capital group, Li & Fung invested in the Internet startup company called Castling. Castling used the Internet to defend the offline old economy companies such as Li & Fung, while simultaneously extending their own online presence. As a strategic partner, Castling created lifung. com. Lifung. com: 20% of lifung. com’s staff came from Castling 0 full-time professionals (expanding to 80). 25 consultants. 1. 4 SME Target Market: “B to small b” (pp. 13 – 16) Market research conducted by Li & Fung showed that small- and medium-sized enterprises (SMEs) would be the best target population for an e-commerce (lifung. com) initiative since: SMEs generally paid the most for both hard and soft goods. And SMEs were usually only offered a limited range of options in product specifications and oftentimes overlooked by suppliers more concerned with serving larger clients. For Li & Fung, historically, it was not cost effective to trade with SMEs.
However, an aggregated B2B portal could offer SMEs an array of products while also profiting Li & Fung through: Economies of scale. Li & Fung could concurrently manufacture the aggregated orders while giving SMEs enough differentiation of choice to enable them to each have a different product. Table B (pg 14) provides a side-by-side comparison of what lifung. com offered over existing competitors in the online market (taking into account product differentiation, price, reliability and information flow). 1. 4. 1 B2B Parameters (pp. 14 – 15) Startup capital of $250 million through the creation of 60 million shares.
Implementing Li & Fung’s supply chain management know-how allowed for virtually no inventory risk. Lifung. com would operate standalone (although integration at some level was required) from Li & Fung (the parent organization). Lifung. com would run without fear of having to produce instant profits. 1. 4. 2 E-Commerce Execution (pp. 15 – 16) The Fungs believed that due to the power Li & Fung had in back-end logistics infrastructure, reliable procurement, market knowledge and brand reputation, other e-commerce companies would not be able to compete with lifung. com. 1. Future Ventures (pp. 16 – 18) Li & Fung looked to e-commerce as an integral constituent of its strategy of expanding and diversifying its traditional offline business. Li & Fung expanded the B2B initiative to include Electronic Stock Offer (eSO). eSO looked to create an efficient system for reaching out to Li & Fung’s supplier base and posting surplus stocks on the Internet. Additionally, the tool would provide a more efficient and cost-effective platform where Li & Fung could sell to buyers primarily interested in purchasing more. 1. 6 Outlooks and Prospects (pp. 8-19) The trend towards business casual attire in the American workplace offered considerable upside for retailers of polo shirts and khakis and thus for sourcing agents such as Li & Fung. During the economic downturn, Li & Fung looked to outsourcing to remain competitive and minimize costs. Jitters existed between executives wondering what the actual impact would be to Li & Fung (on the old economy and existing key partners and clients). Lastly, would lifung. com break away from Li & Fung, or would it remain within the confines of the brick and mortar organization?