The Case Study Of Li & Fung The Global Value Chain Configurator

Case#: 2

Submitted by Group 1 On 12.09.2011

Members: Kishaloya Gohain Biki Sahu Swapnil Duarah Nishant Thard Nabajyoti Sonowal

TITLE: THE CASE STUDY OF LI & FUNG LIMITED

ABSTRACT: The case illustrates the business history and evolution of Li & Fung Limited, one of the Hong Kongs oldest and largest trading company. The case gives an overview of its evolution from a traditional trading company to a global export giant and a customers supply chain management giant. It discusses the companys strategies to change its business models to the changing external environment and customer needs and preferences. The case elaborates the companys strategies such as integration of operational strategy with its organizational strategies, customercentric organizational structure, supply chain management strategies, technology and Internet initiatives, and globalization efforts to become a global company. Finally the case analyses the current situation of Li & Fung of 2004 and future challenges facing ahead. HISTORY: The Company was formed in early 1900 in Hong Kong.LI & Fung was formally established in Hong Kong as limited company in 1937.In 1943 Fung family became the sole owner of the company. In 1973 the company went public and was listed on the Hong Kong Stock Exchange. In 1989 the company again made a private company. In 1992, the firms export trading business, I & Fung (trading) Pvt.Limited, was relisted on the Hong Kong Stock Exchange. By the end of 20th century, I &Fung was a premier global trading company, with more than 95% of revenues coming from North America and Europe. East Asia and South Hemisphere counted the rest. The companys major products were both soft goods and hard goods. The soft goods constitute garments whereas the hard goods constitute fashion accessories, footwear, gifts, and furnishings. KEYWORDS: Value Chain Configuration, SCM Strategy, Global Supply Chain, Internet-enabled Supply Chain, Knowledge Sharing, Customer-Centric Organizational Structure, Global Expansion, Hong Kong's Export Trade Industry and External Environment

OBJECTIVE: 1. To study the efficient and effective value chain management for a global trading company and its importance in maintaining its global competitive advantage. 2. To analyze the role of Information Technology (IT) played in a company in expanding its business globally 3. Study the importance of acquisitions and alliances in a company's globalization strategies. 4. Understand how innovation, differentiation and customization can be used as strategic and competitive advantages by a company, to maintain its leadership in the domestic market, and emerge as global play 5. To study how visionary leadership and management capability can work as a core advantage for a company to attain success in the global market ISSUES: 1. The companys much hyped B2B initiative StudioDirect expected response. Symptom: Due to conversion of StudioDirect from a full service e-commerce company into a private label golf wear specialist and the company reduced its stakes from 57 to 15%.The StudioDirect failed to major progress in U.S. market which was not conducive for its growth. 2. The continuous fall in the growth of the revenues and revenues failed to get

Symptom: For the fiscal year ending December 31, 2000, the growth in profit and revenue came down to 14.35 percent and 12.06 percent respectively, by the fiscal 2003. The sharp decline in overall revenues derived from European market during early 2000s, was also a bad symptom.

3. The high dependence on large retailers of Europe and America. Symptom: a major consolidation in North American retailing industry, the largest export market for Li & Fung, might severely affect the companys business. 4. The fear of antisurge quota Symptom: The United States and Europe were entitled to impose antisurge quotas until the end of 2008, in case they felt any threat to domestic industries due to exports. ALTERNATIVES: 1. The optimal use of global acquisitions for manufacturing purposes. 2. The expansion of StudioDirects business outside America and make it a fully e-commerce site. 3. Making effective strategies to increase revenue share from European market, which, is next to the United States. 4. Reducing focus on American retailers to other retailers such as South Asian and Latin American market. SWOT ANALYSIS: INTERNAL ENVIRONMENT ANALYSIS: STRENGTH: 1. Broad market coverage 2. Manufacturing competency 3. Proper Information System. 4. Brand name. 5. New venture management expertise. 6. The ability to manage strategic change. 7. Good financial management.

WEAKNESS: 1. Improper strategy formulation. 2. Improper forecasting

OPPORTUNITIES: 1. Developing new markets. 2. Making new profitable acquisitions. 3. Licensing deals with foreign companies. 4. Large number of alliances worldwide. THREATS: 1. The continuous fall of profit and market revenue. 2. Uncertainties in the retailing industry 3. Emergence of newer players. 4. Threats from antisurge quotas

RECOMMENDATIONS: 1. Diversify its business to BRICS and Latin American countries as these are emerging economies. 2. Opening up online shopping portal for retailing business. 3. Entering into direct retailing market. 4. A proper strategy for gaining maximum of European market. 5. Making StudioDirect a full e-commerce company.

ASSIGNMENT

1. Li& Fung owes much of its ongoing success to its expertise in global value chain configuration. Define the concept of value chain and critically discuss the importance of value chain management for global companies. How did Li & Fung use the value chain configuration in its globalization process? ANS: The value chain, is a concept from business management that was first described and popularized by Michael Porter in 1985. It is a linked set of value-creating activities that begin with basic raw materials coming from suppliers, moving on to a series of value-sdded activities involved in producing and marketing a product or service, and ending with distributors getting the final goods into the hands of the ultimate consumer. It has two broad categories: a) Firm level and b) Industry level.
a) Firm Level: A value chain is a chain of activities for a firm operating in

a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of the independent activity's value. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter, as a profession, can be used to illustrate the difference of cost and the value chain. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. Typically, the described value chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of the business, e.g. ISO 9001.

b) Industry Level: An industry value chain is a physical representation of

the various processes that are involved in producing goods (and services), starting with raw materials and ending with the delivered product (also known as the supply chain). It is based on the notion of value-added at the link (read: stage of production) level. The sum total of link-level value-added yields total value. The value chain categorizes the generic value-adding activities of an organization. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs and value drivers are identified for each value activity. Large manufacturing companies seeking to increase their profitability often turn to value chain management to find ways to increase their revenue, reduce costs, gain efficiencies, and alike. A critical pre-requisite for optimizing value chain management involves analyzing the materials, processes and capabilities of key suppliers. Gaining an in depth understanding of suppliers' business strategies, decision making processes and competitors allows you to evaluate their potential impact on your profitability and develop strategies and relationships to achieve financial success. This much more sophisticated approach to optimizing value chain management, combined with increasingly global suppliers, has led many companies to incorporate strategic intelligence into techniques for evaluating supplier impact on profitability. Not surprisingly, gaining an understanding of supplier's business strategy often leads to unexpected revelations as the following case studies illustrate. The case study elaborates the philosophy behind the supply chain management Hong Kong based trading giant Li & Fung Ltd. It has been an innovator of global supply chain management system. . Li & Fung has also been a pioneer in "dispersed manufacturing. "It performs the higher-valueadded tasks such as design and quality control in Hong Kong, and outsources the lower-value-added tasks to the best possible locations around the world. The result is something new: a truly global product. To produce a garment, for example, the company might purchase yarn from Korea that will be woven and dyed in Taiwan, then shipped to Thailand for final assembly, where it will be matched with zippers from a Japanese company. For every order, the goal is to customize the value chain to meet the customer's specific needs. To be run effectively, the company maintains, trading companies have to be small and entrepreneurial. He describes the organizational approaches that keep the company that way despite its

growing size and geographic scope: its organization around small, customerfocused units; its incentives and compensation structure; and its use of venture capital as a vehicle for business development. 2. According to John Mathews, a Professor of Management in Macquarie Graduate School of Management, Sydney; and the author of Dragon Multinational: A New Model for Global Growth, Li & Fung is one of the first truly global companies. Describe the various stages in the globalization process. Examine the role played by alliances and acquisitions in a companys globalization strategy, with specific reference to Li & Fung. ANS: The various stages of globalization process: 1. Exporting of products/services: The exporting of products or services is the first major stage in the globalization process of a company. In this stage the company makes agreements with foreign markets for the expansion of the business. 2. Expanding business: In this stage the companies takes over all manufacturing, processing and marketing activities in its own. 3. Acquisition: in this stage the companies goes for various acquisitions for newer market capturing. 4. Managing global supply chain: it is one of the prominent features of global companies. 5. Expanding network globally. In the case of Li & Fung alliances and acquisitions played a major role in globalization strategy.
1. Swire & Maclaine and Camberly Enterprise: in December 1999 Li &

Fung acquired this company. This acquisition helped Li & Fung design process expertise and helped it further strengthen customer base in the United States and Europe.
2. Colby Group Holdings: In November 2000, Li & Fung acquired this

company , a Hong Kong based leading consumer goods giant.

3. Janco Overseas: In mid 2002 Li & Fung acquired this company. It has

specialization on hard goods manufacturing. It increased hard goods port folio of the company.

4. International Sourcing Group: In August 2003 Li & Fung acquired onethird stake of this company.
5. Nichimen Corporation: To trap the Japanese market Li & Fung made an

alliance with this company of Japan.

6. First world garments and International Porcelin Incorpration: In

December 2003 Li & Fung acquired these two companies. The aim was to reach Mexican market.

All the above acquisitions and alliances are made to strengthen global business presence of the company.

Q3. William Fung believes that Li & Fung is an information and knowledgebased business. Discuss the importance of knowledge management for global companies. Describe the knowledge management initiatives typically taken by global companies and examine the implementation process of a knowledge management system at a company. Study Li & Fungs organizational structure and examine how such a structure enables efficient and effective knowledge management at the company. ANS: The global economy is now knowledge driven. It is now referred as knowledge economy. Companies all around the world are now giving much attention on knowledge management. Because knowledge is very much essential in this modern competitive world in order to get competitive advantage over other rivals. The differentiating element in the "knowledge economy" for companies to compete is usually the capability differential harnesses from intangible resources. The value incorporated in products and services is mainly due to the development of organizational knowledge resources. In today's business environment, companies need to know what they have in terms Companies no longer compete on the basis of tangible assets of materials and labor but on of knowledge resources and competencies, and how they can use them more effectively to gain or sustain competitive advantage. Knowledge Strategy Implementation Process: The following are the steps Knowledge Management (KM) strategy: Step 1: Align KM strategy with the business strategy Step 2: Audit and analyze existing knowledge Step 3: Analyze existing infrastructure Step 4: Build a KM team

Step 5: Develop the KM system Step 6: Deploy the KM system Step 7: Evaluate the results

Step 1: Align KM and business strategy : It is the starting point of any KM program. In order to establish the KM strategy and align it with its business strategy, the company has to analyze the environment within which it operates. Things like competitive threats, the regulatory controls or the technical opportunities the company faces, set the context for the companys activities and operations. The next step is to examine its strategic context: which products the company will produce, which markets it will enter, how it will best use its resources, who are the customers, etc. Then, the company can specify its KM strategy by deciding on how it will use the existing knowledge to create a competitive advantage. In this regard, useful tools and activities can include KM mapping, innovation and the role of IT can be considered. Step 2: Audit and analyze existing knowledge: It is the second step of KM program. It is a survey which considers elements such as a companys knowledge assets, its knowledge use and communication, its cultural receptiveness to KM and how it values knowledge, KM opportunities and deficiencies, gaps and problem areas. The two main elements in a knowledge audit are knowledge mapping (locating knowledge throughout the organization) and knowledge flow (examining how people process data, information, and knowledge). Step 3: Analyze existing infrastructure In this step an analysis is made about the existing infrastructure for KM. The infrastructure should be analyzed from the perspective of knowledge generation and acquisition, storage, access, communication and use. There is a need for a critical analysis of the technologies available in order to leverage the correct infrastructure for the specific aims of organisational knowledge management. Step 4: Build a KM team A KM team is made for proper implementation KM. Step 5: Develop the KM system

Now the KM system is being developed to help the company to gain competitive advantage. The KM system should be in line with the KM strategy and build upon the existing infrastructure Step 6: Deploy the KM system Now the KM process is fully deployed in the company. Step 7: Evaluate the results Feedback and evaluation is very much essential as KM is an ongoing process. There should be a good cooperation between the evaluation and the deployment teams are highly desirable. Furthermore, all the companys personnel should participate in the evaluation process and be given the opportunity to express their opinion regarding the pros and cons of the KM system and its implementation (again this could be done by using questionnaires, interviews, focus groups, etc.).

Organisation Structure of Li & Fung:

The company has a customer centric organization, which have various small customer centric divisions. In this system an entire division focused on serving a big customer. A single division aimed at fulfilling the needs of a group of similar customers and similar needs. Li & Fung created small divisions dedicated to serving one customer, and the person managing the unit as if it was his/her own company. The division manager is responsible for understanding customers needs and fulfilling them by mobilizing resources from the groups sourcing and process network. Li & Fung created Operation Supply Group (OSG) to provide knowledge, financial support to the customers. Li & Fung provided the decisions with all necessary financial resources and administrative support through OSG, which provided back-end support to the entire group operations. The OSG also acted as an in-house HR provider. The divisions can take loans from OSG an interest cheaper than the market rate. The OSGs performance can be measured against its profit and loss account as was the case of any other division of the group. Such a model provided the company the flexibility of a small company and while having the strength of a global company. 4. According to William Fung, it has always been a policy at Li & Fung to embrace information technology (IT) in all aspects of the companys business to provide more value added services to its customers worldwide. Critically comment on the importance of IT for global companies. How did Li & Fung use IT to enhance its global competitiveness? ANS: The importance of IT for global companies:

1. The Internet is used by the global companies to take orders from the

customers who are spread all over the world.

2. To promote the companys products and services through various ways

all over the world. 3. To maintain CRM (Customer Relationship Management). 4. To maintain B2B relationship all over the world.
5. Using intranet the companys can provide content and services to its

employees across various divisions.

6. Using an extranet, customers, suppliers and business partners can gain

business information.
7. Using IT, customers can track their track their orders and access

related information through electronic trading system. 8. Online retailing can be possible through online shopping.
9. Companies can properly co-ordinate their organizational resources by

using ERP (Enterprise Resource Planning) software.

Li & Fung are the leader in business in using IT in their business. The company created intranet in 1995 and a dedicated extranet to enable customers to track their orders and gain other related information through Electronic Trading System known as XTS. Li & Fung designed an extranet site for Coca-Cola called Kodimsum.com, enabling CocaCola executives and bottlers place online orders. Li & Fung used internet as tool to make supply chain more transparent, it used extranet Sites and internet to coordinating specifications. When an order is received and as it moves through different phrases of production customers can make last minute changes through Li & Fungs website. In March 2000 Li & Fung entered e-commerce market through its B2B initiative and StudioDirect.com which allowed highly individualized orders from customers with highly customized facility. It aggregated all orders placed on its website and passes to Li & Fungs manufacturing facility. StudioDrect tied up with Danzas group for logistic services. The company may choose direct mailing strategy for B2B business.

StudioDirect is able to beginning of production within six hours of receiving an order from a client over the internet .In the early 2000s, Li & Fung maintained internet based communication with all its major customers worldwide. Thus Internet helped in the success story of Li & Fung.