Li & Fung

Integrating the Old World mentality to a New One

Company Background
Founded in 1906 by Fung Pak-Liu and Li Toming. Export Trading Company. Warehousing and manufacture of Handicrafts. Relocated to Hongkong after WW II. 1973- Holding company listed in HKSE. Privatised and streamlined in 1988. Traded again in 1992. By 2000 it became a supply chain manager. Clients American Eagle, Warner Brothers, Abercrombie and Fitch.

Holistic Supply Chain Management

48 Offices in 32 countries. Value added services across the entire supply chain. Supply chain customization shortens order fulfillment and reduction of inventory costs. Managed credit risk on both sides Economies of scale Information and market trends Virtual Manufacturing or product design services. Controlling or owning strategic links. (raw material sourcing 15%)

Corporate Culture
Victor strategic issues and long term planning. William day to day operations. Companies under the group were provided centralized IT, financial, and administrative support. Meritocracy ruled.

Tripartite Growth Strategy

Growth coming by
Organic growth Expansion through acquisition Extension of its supply chain to new markets via internet.

Organic growth
More orders from existing clients New mandates from existing clients
Three year plan 93-95 Filling the Mosaic 96-98- Margin Expansion 99-01- Doubling profits.

Investors were happy. 2000 Market Capitalization $ 6.6 Billion

Acquistions
Acquisition strategy was based o buying rival companies
New client accounts Integrating their operations Increasing the operating margins

Inchcape Buying Services Dodwell Swire Group Camberley

E- Commerce
Disintermediation Expediting Internal Communication Extranets were customized to individual clients Monitoring of production. Outsourced the development of intranets and extranets. Extending the organizations online presence.

Competitive Threats
B2B relationships were fragile. U.S customers were afraid of Internet companies. Internet companies could use the money to damage offline competitors.
Hiring talents Acquiring companies Partnering

Bubbling-In
They did not want to share their business models, strategies to consultant. Addition of technical directors. Acquisition of technology start up.

Advent of e-commerce
Li and Fung saw its future growth coming from three aspects: Organic growth, expansion through acquisition, and extension of its supply chain to new markets via internet. In 1997, they began to launch extranet sites that linked the companys website directly to key customers and was customized to meet that customers needs. William and Victor both decided that resorting to Ecommerce was essential; they believed that staying ahead of the industry was always a strong-suit of Li and Fung.

 Li and Fung employed Castling Group to spearhead their e-commerce strategy. They invested heavily in Castling Group to handle the e-commerce strategy, and thus giving rise to lifung.com. Lifung.com chose small and medium-sized enterprises as their target markets.

Alignment between Business and IT

Dedicated extranet links key supply chain components. Provides tracking capabilities, streamlining the flow of information. Leverage the power of internet as customers are more interested in customized products.

Business model
Clients benefitted from differentiation of product options. Low cost products No minimum orders Reduced inventory Delivering high-quality products with timely response Order flexibility

Strengths
Reputed name and branding Well informed and structured management Ability to operate well in both soft and hard markets Holistic supply chain management and effective Value-added service policies for the customers Positive corporate culture Flexible and interactive design process

Weaknesses
Lack of basic knowledge on developing internet portals Lack of SMEs to implement the strategy Poor requirements gathering and research prior to adopting the strategy

Enter Castling
Castling Group an internet start-up company to defend the offline companies against online companies threat to their markets while extending their online presence.
Evolution of Castling and Li & Fungs needs complemented each other nicely. Co-invested in an initial round of financing for lifung.com

Different from most dot-coms, traditional market researches are performed before fully embarked the e-commerce venture
Top down old economy market research to find out how high the target market is Bottom-up focus group research to identify retailers real need

SME Target Market: B to small b

Characteristics of B2B: Finite number of customers Know whom to target Know the names and address of these retailers Know how to reach them Market research on target SME market by industry analysts 20,000 Retailers & 2,800 Wholesalers in US Market Size of $54 billion

SMEs- Traditionally
SME orders were small & lacked economies of scale
SMEs had to pay importers high margins(25% to 30% of the total order) SMEs were served the least Limited range of options in product specifications Suppliers concentrated more in serving larger clients

SMEs lacked current information and lagged far behind large retailers in identifying fashion trends
Not cost-effective for Li & Fung to trade with SMEs Orders were below factory minimums

SMEs Via B2B Portal

Aggregate SMEs smaller orders Profitably offer SMEs an array of products with the option of limited mass customization Planned to charge SMEs a 10-15% commission, far less than these small retailers were used to paying Limited mass customization further extension of Li & Fungs supply chain customization and innovation, critical in the Internet age in which customers expected even greater speed and reliability of order fulfilment.

 Not requiring minimum order Add further value by allowing SMEs to reduce their inventory levels and use the system for replenishment buying Make it easier for SMEs to respond to changing market conditions and fashion trends Now, lifung.com can provide a given China sourced item available in one shape with 10 different patterns and 15 different colors. This is way ahead of other offline and online companies

B2BParameters
Raised $250 million by placement of 60 million shares through Goldman Sachs $200 million for lifung.com $50 million for acquisitions in the core business start-up

2 of the 3 guiding principles behind lifung.com were old economy standards: Adopt a business-to-business model Took a back-to-basics approach by implementing Li & Fungs supply chain management know-how to SMEs on a back-to-back order basics No inventory risk for Li & Fung

E-commerce Execution
Lifung.com offered a wide array of customization options to clients
Developed and operated independently of Li & Fungs IT department Mapping the connection between lifung.com& Li & Fung Designed to interact with Li & Fung same way as one of the Groups key customers But enjoy a closer interaction with its parent, Li & Fung Internal training courses and daily exposure to the new technology for the offline staff

Future Ventures
Li & Fung expanded its online B2B penetration A new platform Electronic Stock Offer(eSO) Target the other side of the butterfly model Aggregate suppliers Bring buyers & suppliers together Exploit e-commerce as an integral constituent of its strategy of expanding and diversifying its traditional offline business

Was it the right decision to start B2B portal ? What would have happened if it failed ?
We agree with the choice to move a portion of their business to the internet was a very wise decision. It was cautiously made, and was first started to defend themselves from other online companies. It also later exposed new B2B markets and gain more shares . They had a market research survey on their potential customers all over the country before starting the portal. The portal also provided win-win situation for both SMEs and Li & Fung

 Technology is always advancing, and IT systems are becoming increasingly sophisticated and automated. If Technology is not implemented or delayed, competitors could have the first mover advantage and gain wide markets. Since Lifung.com had support from its parent company Li & Fung, it can survive for few years even though SMEs did not turn up as expected.