Li & Fung: Internet Issues

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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. 1 - 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. 1.2.1 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.

1.2.2 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...
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