Back ground of the case study Opportunities after getting export company license

from the Ministry of Commerce of the Peoples Republic of China (China)

What does it mean?◦ The Export company can export China-sourced goods

worldwide and can import raw material for manufacturing in China.

◦ Free from many restrictions to enhance competitiveness and increase global business

◦ Provide complete supply chain solutions◦ Neighbor country China is the biggest textile manufacturer◦ Export from China to US doubled from 2001 to 2003 and

still promising high◦ 42 subsidiaries in 13 countries mostly in export trading

Outline Introduction Recent facts and figures Issues in the case Business model Strategic Business units – how it is different? Porters Value Chain Ansoffs Matrix Flow chart for production SWOT analysis Strategy for global expansion IT & Internet implementation Success factors Challenges of Li & Fung Alternatives Recommendations Learnings

HISTORY

Key Dates:

1906: Fung Pak-liu and Li To-ming begin exporting jade and porcelain in Guangzhou, China. 1937: Li & Fung Limited is formally established in Hong Kong. 1949: When China turns Communist, Pak-liu's son Fung Hon-chu reinvents the company to export goods manufactured in Hong Kong. 1973: Hon-chu's sons William and Victor persuade him to list Li & Fung on the Hong Kong Stock Exchange; the Fung brothers institute a more modern management style. 1979: China opens up for trade, and Li & Fung develops a trading network throughout East Asia. 1989: The Fung brothers buy out family shares and take Li & Fung private in a management buyout. 1992: After being reorganized to focus on trade, the export division of Li & Fung is relisted. 1995: Li & Fung acquires the British trading company Inchcape Buying Services. 2001: The "dispersed manufacturing" approach has helped Li & Fung double profits twice over the previous six years.

HONG KONG ECONOMYHighly dependent on international tradePartner with mainland china1/3rd listed companies of Hong Kong are

Chinese company (60% Market cap)Tourism one of the major businessGDP agriculture 0% Services 92.5%,

Industry 7.5%Export $327 billion (China 49%) , import

$345 billion (China 46%)Exchange rate HK$7.8/USD

Li & Fung at present$14 billion revenue Total no of employee 13408 worldwide

(77 % in abroad)Revenue from US 64%, Europe 27%Presently supplier of Wallmart, Target

Corp., Mark & Spencers, Espirit Holdings Inc etc.

Operating profit 29%, Net Profit 12%80 offices in 40 countries3 yr planIn India 6-8% business

Issues in the caseTrading Margin went down to 3 % as

buyers and sellers started dealing directly, doing away with the intermediateries

Due to low cast labor many manufacturers in Hong Kong relocated their factories to Southern China

How to source from more and more countries?

Difficult to optimize value chain using countries as profit centres as coordination ad communication became difficult

1999 2000 2001 2002 20030%

20%

40%

60%

80%

100%

69 70 75 76 75

27 26 21 19 19

Revenue by Geographical Segments

North America EuropeEast Asia South Hemisphere

1999 2000 2001 2002 20030

10

20

30

40

50

16.298

25

3337

42.6

Total Revenue (in HK$ bn)

Total Revenue (in HK$ bn)

1999 2000 2001 2002 20030%

20%

40%

60%

80%

100%

75 78 72 68 67

25 22 28 32 33

Revenue by Product Segments

Hard GoodsSoft Goods

Business Model

• Regional Sourcing Agent [1970 - 1978]• Using knowledge and reach to provide value for customers• Quotas to be used effficienly • Big Buyers to get materials from whole region

• Manager & Delivery Of Production Program [1979 - 1982]• Specification (look, color, quality)• Product Mix of Manufacturing & delivery• Ensuring quality and on-time delivery

• Dispersed Manufacturing [From 1983]• To find the right manufacturer for the specific product with

most attractive combination of cost and quality • Dissecting the value chain and optimizing every step of the

chain• Big[XTS] & Small or Medium[StudioDirect]

Li & Fung Business Model

High end value added activities

Such as Design and QC

Li & Fung Value Chain

Low-end activities Such as

Manufacturing

In Hong KongIn the best possible location across the

world

Production Flow Chart [W & WO IT]

Forwarder Consolidati

on

Shipping Control

Raw MaterialSourcing

FactorySourcing

Manufacturing

Controlling

CustomerClearance

Wholesaler

Local Forwarding

Consolidation

ConsumerNeeds

ProductDesign Product

Development

Copnsumer

THE SUPPLY CHAIN

Continued…..

Pre Order•Product Concept•Market Research to find source of material•Assembled and prototype if send to Levis for Inspection

Order Receiving •Inspects the prototype•Places Order with Delivery Within 6 weeks

Order Manufacturing•Yarn – Purchase @ Korea, Woven & Dyed @ Taiwan•Zip & Button Japan China •Garment manufacture at Thailand in 5 Factories

Example Levi’s of Dispersed Manufacturing

Global Supplier Network (delivery within 6 weeks)

The SCM StrategyFor more efficiency they started

organized production and small production run

Utilizing 30% to 70% of factory capacity of suppliers to ensure flexibility, to remain as a important customer to the supplier, to search for new suppliers

Suppliers evaluation method, SWOT analysis of suppliers

Porters Value Chain in Li & FungO

pera

tion

Team

for

Levi’s

Opera

tion

Team

for

Kohl’s

Opera

tion

Team

for

Aberc

rom

bie

& F

itch

Opera

tion

Team

for

gro

up

of

small

cust

om

ers

Profi

t

ProfitFinanceHuman Resource

Administrative

OSG

Each division HK$30 million to HK$50 million

Each division run by an independent entrepreneur with all the departments required

Company is highly Conservative in Finance and operating procedure

Li & Fung Product Lines

Hard Goods (30%)

Soft Goods (70%)

Products

Fashion Accessories, Footwear, Furnishings, Gifts, Handicrafts, Home Products, Promotional Merchandise, Toys, Stationary, Sporting Goods, travel Goods

Garments

Major CustomersKohl’s Department store chainAbercrombie & FotchAnn TaylorDisneyAmerican Eagle Outfitters GuessLaura ashley jeansLevis’ReebokThe Limited Warner Brothers

CHALLENGES High dependency on large retailers Consolidation in North American Retail Industry “Antisurge” Quotas Needs of the market are changing very rapidly The initial plan of developing a B2B portal was based on the old

economy model, change was not sufficiently accounted for Manufacturing, infrastructure and labour developments The political and regulatory environment Rising cost levels in some markets

Business ExpansionApart from trading business Li &

Fung started focusing on following business

Retailing and distribution business with privately held companies

Venture capitalInvestment holding Property investment

Ansoffs Matrix for Li & Fung Expansion Strategy

Market penetration

Diversification

Product development

Market development

New

Exis

ting

Existing New

ProductsM

ark

eti

ng

S

eg

men

ts

Li & Fung Expansion Options Backward Vertical integration Core Business

Forward Vertical Integration

Expansion:•During 1990s companies focused on Supply chain process for efficiency

•SCM offering companies charge more so companies move towards outsourcing.

•Li & Fung already have SCM expertise and followed acquisition strategy to strength its position in global trading market that expands its sourcing N/W, Product line, Customer base.

Acquisition:

•In 1995 they acquired Inchape (Dodwell) which established South Asia , Mediterranean, Caribbean where previously Li & Fung had no presence, this acquisition doubled it coverage especially in north America. They got double profit compared to previous year.

• In December 1999 they acquired (Swire & Maclaine) for Design process Expertise which adds customers like (Laura Ashley & Ann Taylor)

•In November 2000 they acquired (Colby Group Holdings LTD) Which already had strong recognition in the market which helped them to become the Largest consumer goods exporter in HongKong.

Contd… In 2003 they acquired remaining (1/3)rd of the New York

based garments to increase profits, so they focused to expand their customer base to non US Market such as Asia and southern Hemisphere.

They identified Japan as Potential Market since fashion retailing business was booming, so they made alliance with Nichimen corporation to offer higher value for Japanese Retailers.

In early 2000 they interested to improve their profits in Hard goods to strengthen its position so in December 2003 they acquired Hong Kong based 1st world garment LTD & US based International Porcelain LTD for US $ 27 billion which strength their Hard goods business.

Leveraging IT and the Internet 1995 Integrated its global network of offices with Intranet 1998 Started creating Extranet sites for its customers

o Customers could track their orderso Could make last minute changes

2000 Web-based communication systemCustomers could cancel their orders before the production started

2000 Entered e-commerce market thro’ its B2B initiatives StudioDirect Inc. was formed as an e-commerce subsidiary which allowed

placement of highly individualized orders

Success Factors•In Early Days

• Language barrier [Traders]

• Labor intensive consumer product [Refugees to China]

•In Recent Days• SCM [Total $4 & Hit the $3 leaving $1]

• Customer Centric [Internal & External] (Specialized Group OSG)

• Supplier Relation & Management (30% -70%)

• Separate Business Units [Flexi & Strength] (Small & Big)

• Unit Head & Incentives

• Labor & Incentives

Success FactorsFocus on efficiently managing the

supply chainUnique customer centric

organization structureLeveraging IT and the InternetGlobal expansion strategies

SWOT ANALYSIS

Strengths: World’s Largest exporter of textile and clothing. More than 30 offices around china Diversified portfolio of goods (Soft & Hard goods) Lower Labor cost Effective Regional Network SCM Expertise earlier to other competitors Ensuring Quality and On – time Delivery More Ethical and customer oriented approach Electronic Trading System called as XTS supports trading. StudioDirect Addressing Medium and small sized Retailers Built Barriers to new Entry Power to influence suppliers and manufacturers because of strong relationship

and trust Private label manufacturing for large customers Faster response to customer requirement

Weakness: Over dependence on US Market. Obsolete Inventory at times which require Efficient SCM Manufacturers dependent on company. Vast supplier network makes it tough to maintain. Poor business performance in holiday seasons Miscalculation in StudioDIrect , which failed to give expected response Failed to come up with effective strategy to increase revenue in European

market. Failed to build opportunity given by Inchape to make string presence in

Europe.

Opportunity: IT & Internet Strategy to enhance Internal &

External Communication. Lower labor cost in developing countries Exposure to New suppliers outside US

Markets

Threats: Early Stiff Competition External environmental problems Like

Transformations Lack of Cooperation leading Loss of

Customers Emergence of Internet making companies

redundant Depending on Large retailer causes threat in

long Run Anti surge Quota in China which would

restricted annual Growth of imports.

EXTERNAL FACTOR EVALUATION MATRIX

Opportunities Weight Ratings Weighted Score

Global Expansion 11% 4 0.44

New Customers 12% 3 0.36

Low Cost Labours 10% 4 0.40

Growth of Asian Markets 8% 3 0.24

Diversification 16% 3 0.48

Threats

New Competitors 10% 1 0.10

Government policies 5% 3 0.15

E-Commerce 8% 2 0.16

Price Rise 5% 2 0.10

Economic Downturn 15% 1 0.15

Total Weighted Score 100% 2.58

INTERNAL FACTOR EVALUATION MATRIX

Internal Strength Weights Rating Weighted Score

Largest SCM provider 10% 4 0.40

Supply to Major Retails 12% 4 0.48

Good Reputation 4% 3 0.12

Strong Management 8% 4 0.32

Good Image 4% 3 0.12

Increasing cash flow 5% 3 0.15

Loyal Employees 4% 3 0.12

Minimal complaints 3% 4 0.12

Access to cheap services 4% 3 0.12

Financial ratios 5% 4 0.20

Internal Weakness

Saturated Market 10% 2 0.20

Little Diversification 15% 2 0.30

International Market 16% 3 0.48

Total Weighted Score 100% 3.13

By 2003 Li & Fung became a cutting edge sourcing company

One of nest professionally run companies in Hong Kong

Company committed to excellence and high standards in corporate governances

Learnings From The Case

•Respond to change swiftly

•Explore the entire world

•Respect the individuals

•Share responsibility judicially

•Discuss to know the true needs [Customers & Suppliers]

•Choose the right people

•Do mergers & alliances judiciously

•Above all Decision Making with calculated risk is the Key

Thanks for your attention