Li & Fung Case Analysis Paper Management Information Systems MGT6352 Section 35940/35941 Shailaja (Shei) Thakkar November

9th, 2008

Executive Summary

This report discusses the strategies implemented by Li & Fung to increase the efficiencies in its global value chain process and to ensure continued growth in net income. One of the primary strategies which set the stage for strong robust growth was the implementation of intranet and extranet information technologies. The internet technology standardized systems across the organization and linked the companys offices and manufacturing sites throughout the world, encouraging easy tracking of orders and improved quality. The extranet technology linked the company directly to the customer and enabled it to meet and sometimes even exceed customer satisfaction requirements. The strong history of the company and the implementation of information systems and technologies enabled Li & Fung to orchestrate the whole value chain process in a virtual manufacturing environment. Lifung.com, studiodirect.com, electronic stock offer and other systems and business processes were implemented to enable the firm to further penetrate into new buyer markets and also to discover opportunities in the supplier markets. This case analyzes the effectiveness of these information and technology systems and recommends steps that could be taken by Li & Fung to draw upon its traditional strengths and explore new opportunities for future growth.

Case Description

Li & Fung grew from a traditional export trading company founded in 1906 by Fung Pak-Liu and Li To-Ming in Guangzhou, China to a global supply chain management MNC it is today. Under the strong synergy of the two Harvard graduate brothers Victor Fung and William Fung, the company received a thrust of new ideas and innovations in technology and management, taking the company to the internationally popular reputation it enjoys today. It operates in 40 economies and employs 26,000 employees worldwide. Li & Fung Limited is listed on the Hong Kong Exchange since 1992 (Mcfarlan, 2005). Li & Fung sources and manages the global supply chain for high-volume and time-sensitive consumer goods for large and successful companies such as The Limited, Warner Brothers, Avon, Bed, Bath & Beyond, etc. (Mcfarlan, 2005). Li & Fung enjoys a competitive advantage in terms of its ability to efficiently orchestrate the entire value chain production process, which is carried out very efficiently in a virtual manufacturing environment. The goal is to add value at every stage of the production process. With the on come of the internet revolution, the Fung brothers were very quick to understand and adapt to the changes the new technology and its implications. They understood the internet as a powerful tool and analyzed the possible impacts it could have for the firm. Li & Fung joined with the technologically savvy company Castling, to form lifung.com. The intranet and extranet technologies were successfully implemented at Li & Fung in 1995 and 1997 respectively, bringing about increased efficiencies and reduced costs. The power of information technology was taken further by launching studiodirect.com, aimed at targeting the SME (Small and Medium sized Enterprise) market. New technology and information systems helped Li & Fung increase its bottom line by strengthening ties and encouraging information

sharing both within the organization and between the organization and all its diverse supply chain clients.

Goals and Strategy Analysis

The goal of Li & Fung is to continue growing its bottom line by offering its clients differentiated, high quality and value adding products at every stage of the value chain. To achieve this, the company performed a complete environmental analysis in the context of both the know-how of the old economy and the innovations of the new and ever changing technological world. Li & Fung followed a strategy of tripartite growth (Mcfarlan, 2005). Its strategy of organic growth saw the company grow from a local import export company China to a multi-national corporation, with 48 offices in 32 countries. The company has high retention ratios and at the same time was able to attract new clients by offering competitive advantages of lower costs and flexible products through its efficient and virtual production process. I think this was a key element in creating a very well established and loyal customer base, which led the company to outperform the Hang Seng Index (HIS) by 75% in 2000 and achieve a place for itself in internationally recognized indexes. Shareholders enjoyed a ROE of 60.2% (Mcfarlan, 2005). The second growth strategy of acquisitions of competing firms enabled Li & Fung to quickly penetrate into new markets and also acquire new technologies such as the design process, which it gained access to after the Camberly acquisition in Asia. The good reputation and brand name of Li & Fung helped make this process a relatively smoother and easier one. The third growth strategy of ecommerce gave Li & Fung access to greater efficiencies and untapped market potential. The implementation of the intranet (in 1995) and extranet (in 1997)

encouraged information sharing, expedited communications, further streamlined the production process, strengthened customer supplier intimacy and increased customer satisfaction by offering flexible, high quality and timely products. The B2B model was implemented with a different target market (SME) than that of the offline market, so profit would not be eaten away by the cannibalization effect. The B2B model was to effectively extend the existing value chain process to the SME market and to keep inventory costs low by following a strategy of make to order. Li & Fungs willingness to change and strive to offer differentiated products played a significant role in its success over the years.

Analysis of the problems in business processes and operations

It would be most effective to analyze the problems encountered by Li & Fung in terms of Porters value chain model.

Firm-based value chain model: This model was developed by Porter in 1985. Its advantage lies in the fact that it helps the firm to identity its competitive advantages and also identify where it can apply information systems so as to achieve the most positive impacts (Laudon, 2007). The value chain model is a detail oriented model which breaks down the firm into a series of activities, each of which add value to the product and with the final product being of higher value than the sum of its parts (Value Chain, n.d). In this model, activities are broken down into primary and secondary activities. Primary activities are activities that are directly related to the production and distribution of the products and services of the company (Laudon, 2007). The product mix of Li & Fung includes

hard and soft goods. Hard goods have significantly higher margins by 10%-30% (Mcfarlan 2005). Primary activities create value for the firm and include inbound logistics, operations, outbound logistics, sales, marketing and service. For Li & Fung, the primary activities included receiving orders from customers, analyzing customer requirements and procuring raw materials, distributing these orders and raw materials to the most appropriate manufacturer for this order, ensuring continued quality assurance and ensuring that the export and shipping companys logistics deliver the product in a timely manner. Primary activities would also include the sales personnel involved in marketing the product and the service group assigned to manage after-sales service requirements. Support activities make the delivery of the primary products possible and include the management, administration, human resources, technology and procurement departments (Laudon, 2005).

Model application: Li & Fung orchestrated the entire value chain process and added value at each stage of the process. As a crucial element at the start of entire value chain process, Li & Fung followed a pull technology approach by letting its clients customize their products according to their tastes and preferences. After receiving an order from the customer, Li & Fung utilized its global sourcing network to place an order for raw material and send the raw material to the production center to plan and design the product as per the customer requirements. After product planning, the order was outsourced to manufacturing factories. Manufacturing factories were chosen from its world wide system of factories so as to benefit from labor costs, quotas, laws, transportation costs etc. Li & Fung generated revenues by charging a commission to the factories it supplied raw materials to. Through the new information systems and B2B platforms, customers could also make last minute

changes to their order requirements. This flexibility served to increase customer satisfaction. Further quality and order control was maintained by keeping one central office in Hong Kong to oversee this process. Dedicated and professional teams also managed the shipping and export of the products to ensure that the finished products were delivered in an efficient and timely manner.

Source: lifung.com

The diagram above depicts how Li & Fung smoothly orchestrated the value chain process which was carried out in a virtual manufacturing environment. This process benefited Li & Fung through higher profits, lower risks and economies of scale. Clients benefited from timely, high quality, differentiated and low cost products. Support activities play an important role of making the delivery of the products possible. For Li & Fung, an important support activity is the technology department in New York, the 60 employees involved in managing the IS/IT systems and the financial and administrative support departments in Hong Kong. The strong historical experience of Li & Fung, its brand name, its well established reputation for high quality low cost products and

its continued implementation of information systems and technologies, helped it achieve significant competitive advantages through this efficient value chain process.

Implementation Opportunity Analysis: Information systems and technology provided important opportunities to Li & Fung in terms of functional area processes and decision levels. In terms of functional areas, the implementation of studiodirect.com offered online penetration via the B2B model (to target the untapped SME market) and the eSO (Electronic Stock Offer) model (to reach out and enhance relationships with the supplier base). Li & Fung could gain an edge in this fragmented and poorly served SME market by offering limited mass customization and charging commissions which were lower than what the SMEs paid other service providers but high enough for lifung.com to well cover its minimum profit requirements. These new technologies enabled Li & Fung to expand and diversify its traditional offline business. In terms of decision levels, IS and IT enabled Li & Fung to work effectively under its decentralized structure by providing a platform for streamlined communications and speedy communications. Li & Fung was headquartered in Hong Kong. Victor Fung heads as the Group Chairman and William Fung is the Group Managing Director. There are 90 senior managers who manage their own teams as separate individual companies. Lifung.com was headquartered in San Francisco consisting of full time professionals and consultants. A senior manager acts as an interface between Li & Fung and lifung.com. Studiodirect.com was founded by a management team of 6 people that led 90 employees. The decentralized structure provides a sense of empowerment to the managers and greater responsibility towards their performance levels and that of the company as a whole.

Implementation Effectiveness

Li & Fung started out as a small local import export company in China in 1906. Over the years as the size of the company grew, new offices were set up in different parts of the world. Li & Fung lacked a common business process and system to effectively link employees and offices within the company and also the operations of the company with that of its external customers. The implementation of the intranet and extranet technologies provided the needed solutions to these problems. The functionality of these information systems and technologies very closely matched the business needs of Li & Fung. Li & Fung took the ecommerce growth strategy further by implementing studiodirect.com in 2001 to enable it to reach out to the untapped and fragmented SME market and benefit from economies of scale. During the first half of 2001, this new technology generated sales revenues of $5 million but this was lower than expected. The customers were slow to adapt to this change and new technology (Mcfarlan, 2005). They were not motivated to place orders themselves and may be did not find the customer interface to be very friendly. They continued to rely on the sales personnel to take care of their orders. This meant increased costs for Li & Fung. At the same time, the burst of the Internet bubble aggregated the problem. Li & Fung did not experience the tangible and intangible benefits it had hoped for. Professional costs increased, operational costs increased, organizational earning decreased by $10 million and asset utilization decreased. Li & Fung failed to achieve the flexibility it desired to achieve through studiodirect.com. The company failed at achieving its goal of enhancing the bottom line via market penetration in the SME market.

Conclusions and recommendations

During these periods of organic growth, the companys focus, understanding and implementation of IS/IT systems enabled it to remain above its competition and enjoy a robust and growing bottom line. However, in 2001, its studiodirect.com technology implementation in 2001 did not yield the desired results. I think along with focusing on SMEs as its target segment, Li & Fung should focus on acquiring competing firms around the world. The developing countries like India have seen their economies grow at the rate of 7% per annum. Middleclass people have seen their income levels soar. Li & Fung should penetrate these growing markets in Asia by acquiring companies and enhancing relationships with higher end retail stores. Along with this market penetration strategy, Li & Fung should also penetrate into new products. Complementary products to clothing such as footwear, fashion bags, beauty products etc would prove to be a profitable market for Li & Fung. The action plan for Li & Fung should be to continue to implement its value chain process in these developing countries. The developing countries would respond very positively to the differentiated quality products. The culture of the developing countries is very receptive to building long term, meaningful and trustworthy relationships. Developing countries would really leverage from the higher quality and reasonably priced products which would raise their standard of living. Li & Fung would benefit from having access to a large and growing market, with large promises for the future.

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References
Laudon, K. & Kaudon, J. (2007). Management Information Systems: Managing the Digital Firm. Information systems, Organizations and Strategy (pp. 96-106). Upper Saddle River, NJ: Pearson Education, Inc. Mcfarlan, W. & Young, F. (2005). Harvard Business School Cases: Li & Fung (A)(B) Internet issues (pp. 1-23). Value Chain. Retrieved November 9, 2008, from Wikipedia. Web site: http://en.wikipedia.org/wiki/Value_chain Value Chain Framework of Li & Fung. Retrieved November 9, 2008, from web site: http://lifung.com/eng/business/service_chain.php

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