INTERNATIONAL BUSINESS

Li & Fung: Beyond “Filling in the Mosaic,” 1995–1998

Project Report Submitted By :

Neha Nayak
Questions

Li & Fung: Beyond “Filling in the Mosaic,” 1995–1998

SN Question
1 How is Li & Fung able to maintain margins three times those of the rest of the
industry? What are its specific strengths and how does it differ from more
traditional competitors?
2 What attributes of Chinese business culture does the company exhibit? Are these
strengths for the company?
3 What are the benefits of the Li & Fung matrix sourcing system?

4 How does the venture capital group contribute to Li & Fung’s growth?

5 What are the challenges the company faces going ahead and what issues does it
need to address in order to expand? How and where should it expand
Li Fung’s Major Milestones (case based)
1906 : Established by Dec 28, 1937 : After war (1945 1973-1989
Fung Yiu-hing and Li Established formally onwards) : Included William and Victor joined
To-ming – first as a limited garments, toys, family business after
Chinese owned company in Hong electronics plastic attending western school
(financed solely by (Harvard in US)
Kong flowers
Chinese capital)
(Diversification) Gave them business
trading firm (exports)
End of world War 2 perspectives. LFI
Initially traded in (1944-945) : Fung’s established in 1986
porcelainware, son Fung Hon-chu
took over and Li To- Changed strategies, culture,
antiques, handicrafts; Expanded product organization etc. on return
Later also silk, ming sold his shares trading and sourcing Modernized company,
bamboo, jade, ivory, to Fung family. Yet network in Asia/ established structure,
firecrackers name retained as Li pacific region. internal systems,
Li : Profits ; Fung : &Fung Globalized client base compensation policies
Abundance

1989 1992 1998 1998 :

Private Relisting (HKSE) : Stock options and Use of IT
Restructuring Private - Retail management by Intranet
business – retail and Public – Export objectives Mail system
exports Central proprietary
1995 : Value added services software (faxes)
Acquired IBS/ such as assistance Matrix sourcing system
Dodwell of similar in designing 4 C’s of business
size products, sourcing Organization structure to
materials, handling cater to each client and
of logistics, delivery product (near, customized
to customers solutions and services
(enhancement of , short lead times)
supply chain)
1. How is Li & Fung able to maintain margins three times those of the rest of the industry?
What are its specific strengths and how does it differ from more traditional competitors?

Focus Area
Governance • Goal setting (3 year) and reviews by management
• Strong relationships with Governments and Stakeholders (creating effective and efficient supply chain and business ecosystem)
• Agile business strategies
• Reviewing and revising strategies when necessary
• From Regional to an global supply chain management firm (direction)
• Mix of Public and Private limited (restructuring business – retail and export) – to bring focus
• Reputation of management members (Businessman of the year, member of various business associations Eg: Prudential Asia
Investments Limited, Hong Kong Trade development council, World’s 25 top managers) by business week etc.)
• Management by objectives (continual improvement in governance practices)
• Focus on 4Cs – Connections, Communications, Control of Quality, Consolidation of shipments
• Use of IT (Communication, integrated network)
• Transition teams

Business • Modern business, professionalized management across all hierarchies (administrative and organizational structure)
Strategies • Consolidation of Shipments, manufacturing + shipping
• Shortening the production cycle (Putting operations closer to major customers)
• Quality improvement (customer satisfaction and reduce issues)
• Focused operations management (management engagement)
• Customer relationship management (close contact with clients) Global network (suppliers, manufacturers and customers)
• Merger & Acquisition (increased customer base, more sourcing, gave precedence over being competitive, have access to
resources, gain market share, build brand awareness)
• Company refocus to contemporary way of working, Improving profit margins,
• Use of IT extensively integrated, Focus on integrated and strong supply chain, Stakeholder relationship management, Valued
added services,
• Product Diversification (value added)
• Value added services such as assistance in designing products, sourcing materials, handling of logistics, delivery to customers
1. How is Li & Fung able to maintain margins three times those of the rest of the industry?
What are its specific strengths and how does it differ from more traditional competitors?

Focus Area
Culture • Mix of Chinese and western culture (applying strengths of each culture)

Organization • Professional organizational and administrative structure

Structure • Internal controls and systems (after refocusing)
• Strong and focused quality professionals
• Instilling professional, modern tactics in family business legacy, traditions and culture
• Matrix sourcing system
• Dedicated managers to track turnaround times and supply chain, customer related details
Motivation / • Structured and understood compensation system
Incentives • Policy on salary structure
• No retrenchment of employee (values)
Customers • Main close contact with customers
• Position operations and touchpoints near to customers
• Align organization structure to fit the customers requirements – matrix structure
• Large retail chains in Europe, US
• Focus on 4Cs – Connections, Communications, Control of Quality, Consolidation of shipments
• Study and analysis of market trends (fashion trends, customer preferences etc.)
• Central proprietary software – all communications – faxes to come to central place where management can read)
1. How is Li & Fung able to maintain margins three times those of the rest of the industry?
What are its specific strengths and how does it differ from more traditional competitors?

Area Resolution Benefit

On order receipt, it Li & Fung sends credit letter to supplier (charges interest) Accelerate turnaround time
could take months to
receive credit letter
from customer to
supplier
Traditional companies Integrated supply chain, organization structure, management > 3.5 % margins annual turnover
had margins of ~ 1 % focus, agile business strategies
annual turnover Consolidation of manufacturing and shipping
Value (prevent stockouts, high quality goods, excess inventory,
interest charges)
Quota limits Reduce quota limits in China and Hong Kong Reduced impact due to quota limit
Backing chosen factors financially (China)
With direct quota allotment to Li Fung, it chose factory (Hong
Kong)
Lead times Dedicated managers to track turnaround times and supply No risk of delays
chain, customer related details Customer satisfaction
Reduced lead times
Quick decisions Flexible working styles Customer satisfaction
Management commitment Complaint handling
Central proprietary software – all communications – faxes to Process improvements
come to central place where management can read) Reviews

Strengthening Supply Merger & Acquisition (increased customer base, more sourcing, Capacity and capabilities
chain and capacity gave precedence over being competitive, have access to Customer base
resources, gain market share, build brand awareness) Product diversification
Learning from different cultures More resources
English as medium of language in meetings (post merger) Adaptation of strengths from other regions
and culture, knowledge sharing
2. What attributes of Chinese business culture does the company exhibit?
Are these strengths for the company?
u No retrenchment of employees - retain retirees as consultants
u Consider employees as family – not much hierarchy or power display
u Engaging with employee’s family (shopping, touring city etc.)
u In addition to Chinese culture strength, it adapted to foreign cultures for other offices – other office ran
according to local cultures
u Similar incentives and working systems
u Employee loyalty and reward diligence
u Employee rewarded on profit sharing model (bonus proportionate to success of their division) with no
capping limit
u Rotation for poor performance if reasons of failure not in their control instead of layoffs
u Treat employees like entrepreneurs – you give them resources, opportunities, job security in downturns
u Customer oriented approach
u Quality and time focus
u Less confrontational employees, consensus decision making approach
u Too much focus on regional language
u Reluctant to relocate
u Long term orientation
2. What attributes of Chinese business culture does the company exhibit?
Are these strengths for the company?
u Yes factors!
u The strengths have been embedded in the work culture of the company
u Along with it, the company is highly flexible to adapt to local culture wherever it extends its office
or work
u Employees stay close knit like a family and hence , environment of safety, security, loyalty, trust,
less friction exists which are the elements of long term orientation and stability of an organization
u Employee satisfaction will lead to more productivity, efficiency and effectiveness
u This will contribute to the overall organization’s objectives and goals
u Build trust amongst stakeholders , ethical work culture
u Focus on excellence and achievements
u Collectivism, collaboration – no power, aggressive approach
u No Factors !
u Focus on regional language
u Reluctant to relocate outside Hong Kong
u Tackling engagement of non performing employees by rotation
3. What are the benefits of the Li & Fung matrix sourcing system?
• Focus on 4Cs – Connections, Communications, Control of Quality, Consolidation of shipments
• Structured the organization in a matrix structure – divisions along products lines and countries of manufacture
• Each group work independently and own profit/loss accountability –
• Within each product group, business units catered to particular product or client
• Virtual factory , private label manufacturing program – lowest cost, high quality final product components from
various sources throughout region at one factory
• Network of 3000 independent manufacturers

Production Merchandizing Manufacturing and Quality review of

agreement signed specialists work Assembly finished products
with client closely with clients (Outsourced) and shipping

• Pre production • Finalize design • Production • In Hong Kong –

process and process (Sub further testing,
manufacturing contracted to packaging and
plans various sites shipping
depending on
client vicinity)
• Li Fung
supervised
quality standards
3. What are the benefits of the Li & Fung matrix sourcing system?
• Benefits
• Org structure Focus on products and customers – brought improvements in that particular product,
customer account , supply chain
• Strengthened customer relationships – dedicated managers worked closely with them, had
knowledge of their clients, industries, current market scenarios and trends
• Nine factors were considered in negotiations of price and customer delivery – raw materials
selection, selection of manufacturing site, (manufacturer’s reliability, factory skills, lead times,
quota availability, desired product standards, packaging, and costing, soft factors such as
protectionist considerations and financial integrity – proactive considerations helped reduce
operational, strategic, market, risks, and financial issues highly which could have happened and
caused business disruptions
• Worldwide employee network – knowledge and information exchange
• Communication with stakeholders (employees, buyers, suppliers etc) : Communication and
knowledge exchange through IT (PC based intranet, email system) – competitive advantage , short
cycle time of customer, supplier response
• Shorter lead times – benefits Li&Fung, suppliers, customers, retailers
• Customer satisfaction
4. How does the venture capital group contribute to Li & Fung’s growth?
• In 1986 Li & Fung established a venture capital group, LF International. (LFI)

• Investment in textile and hard goods industry (toys) were ignored by most of the venture capitalists - opportunity.

• Li & Fung invested in companies exhibiting particular characteristics - mid-size enterprises with >3 million in revenue, overseas outsourcing,

owners who wanted to maintain the control of the business, (holding knowledge and skills of existing business) and those who knew to adapt to

market changes

• Li & Fung generated capital and invested in these companies - used their knowledge and capabilities (Design and marketing), existing supply chain

and stakeholder contacts to get competitive prices, business expansion, existing supply and distribution chain, promotional programs. It was a win-

win situation for both the parties.

• Li & Fung also gave its processes and infrastructure wherever required to create a fruitful synergy (with overall objectives of common goals)

• The average venture capital investment in the United States brought in around 30%, LFI’s investments have averaged a 128% internal rate of return

since 1986.

• Investments were done to grow in particular markets – US (Homogenous, large volumes through retail chains), UK (niche markets, local

preferences, different languages and culture)

5. What are the challenges the company faces going ahead and what issues does it need
to address in order to expand? How and where should it expand?

u Regional trade protectionist barriers (protect domestic industries against foreign companies)
u Staffing : To find suitable professionals that have experience, capabilities, align to company’s values & understanding of
the local culture, region, country which they will be working in and for
u Managing the large global supply chain and its operations - heterogenous
u Expand their operations to more target markets
u Add more sourcing hubs near to the client locations other than Asian expertise & network
u Positioning sourcing and manufacturing hubs and have competitive price (cheap labor, rapid turnaround time)
u Maintaining the profits, cost benefits in view of currency related fluctuations (devaluations, rebound, exchange rates)
u Different accounting practices in different regions – makes reviews difficult
u Maintain standard product quality and service, process quality all across
u Organization restructuring with business changes
u Different countries policies, laws, statutes, regulations
u Maintain competitive advantage in product or process technology, infrastructure, and Information technology advantage
u Dependency on large retailers
5. What are the challenges the company faces going ahead and what issues does it need
to address in order to expand? How and where should it expand?

WHERE ? REASON

India (sourcing, •Steadily growing economy, disposable income

manufacturing, •Cheap labour and vicinity to market (growing demand)

customer market) •Government promoting FDI, relaxing regulations, giving subsidies and rebates for ‘Make in India’

initiatives

•Technology and technical skills availability

•Demand for Variety of goods

•Emerging markets : Growing retail chains

In already existing markets (Asia, China etc.) to increase business ecosystem and competitive
New Mergers and
advantage
Acquisition
Availability of skills, infra, distribution network, Market
Vietnam, Japan
Thank You
 Chinese culture (Reference from Internet)
Professor Geert Hofstede conducted one of the most significant studies on how culture influences workplace values.
Hofstede’s most recent publications included 93 countries. He emphasizes and studies five dimensions of culture:
•Power Distance (PDI) – Power distance is the extent to which less powerful people in an organization will accept and
expect power to be distributed differently. China ranks 80 on PDI which is very high. This means there is a lot of power
distance between subordinates and superiors, but that it is accepted and normal.
•Individualism/Collectivism (IDV) – This is whether or not people think with the mentality of “I” or “We.” The
American culture is very “I” focused, meaning that we focus more on furthering ourselves and careers versus furthering
our department or group. On the other hand, China ranks 91 on IDV, meaning that they are highly collectivistic and
think as a group versus individually. This can be seen with the high amount of in-groups and out-groups.
•Masculinity/Femininity (MAS) – This is the first dimension where the Americans and the Chinese rank similarly.
China ranks 66 for this dimension, meaning they are very driven by successful, competition, and achievements. The
Chinese will often put work before family or leisurely activities. This dimension can be seen in the fact that Chinese
workers will leave their families to go work at factories for 11 months out of the year, proving how important work truly
is to them.
•Uncertainty Avoidance (UAI) – This is the second dimension where Americans and Chinese rank similarly as well.
China ranks 40, meaning they accept ambiguous situations and are not deterred by them. It may seem like China has a
lot of rules and regulations in place to avoid ambiguous or uncertain situations, however they are willing to bend and
changes the rules as situations require it. The Chinese language is also very ambiguous; the Chinese characters are hard
to interpret or understand if it is not your native language.
•Long-term/Short-term Orientation (LTO) – The Chinese rank extremely high on long term orientation at 118, meaning
they focus on persistence and perseverance, and that they will dedicate however much time is required to achieve their
goals. This is seen in the very time consuming Chinese negotiation process, the time required to build trust and long-
term relationships, and their focus on long term results versus short term goals.