Li & Fung Case Analysis Paper

Management Information Systems

MGT6352

Section 35940/35941

Shailaja (Shei) Thakkar

November 9th, 2008

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 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 company’s 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.

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 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

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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)

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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

Porter’s 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

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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 company’s

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

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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

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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 SME’s 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.

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 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.

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 Conclusions and recommendations

During these periods of organic growth, the company’s 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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