Term paper in MGMT 5027 08.08.2012 Student: Erlend Opdahl Individual term paper. Emerging markets in the global economy ”Maintaining integration while going global” 08.08.2012 Harvard University 2012
Term paper in MGMT 5027 08.08.2012
Student: Erlend Opdahl
Individual term paper.
Emerging markets in the global economy
”Maintaining integration while going global”
08.08.2012
Harvard University 2012
Term paper in MGMT 5027 08.08.2012
Term paper in MGMT 5027 08.08.2012
Table of contents
1. Table of contents 0
2. Summary 1
3. Introduction 1
3.1 Main problem. 2
4. Company background. 2
5. Internal factors and environment. 4
5.1 Company structure 4
5.2 Holistic value chain management 5
5.2.1 “Orchestration from above”. 5
Trading: 6
Logistics: 6
Distribution: 6
5.3 Three year plans as strategic tool 7
5.4 Acquisitions as a growth strategy 8
5.5 Integration of acquired businesses. 9
5.6 Internal culture 9
5.7 The new leaders 9
5.8 Information technology and welcoming change as a core strength 10
6. External factors, challenges and opportunities. 10
6.1 Rise of labor cost in China 11
6.2 Opportunities 11
7. Conclusion 12
8. Referances a
Exhibits b
Term paper in MGMT 5027 08.08.2012
Summary
Li & Fung have a 100-year history as a market intermediary. Through the years they have
moved up to the very top of the value chain and are now the market leader in retail and
consumer goods from the east. The business has been expanding at a high pace since the Fung
brothers bought out the rest of the family in 1989. A main factor for this growth has been the
high number of acquisitions, their size and the very successful integration of them. My goal
was to analyze this and try to find some of the key factors of this success. It seems like the
companies highly professional management has played a big role, together with the company’s
historical and cultural values when it comes to welcoming change and innovations. Integration
of the value chain also seems to be of great importance. Some of this success is based on the
use of computer systems and technology and some are on people, and local capabilities. At the
end I point out that one of the challenges Li & Fung now face is the rise of labor costs in
China. I would recommend that Li & Fung to a higher degree would consider moving more of
its production to other low cost production lands so that the risk is diversified. However rising
income in China could also be seen as a opportunity to capture a new market.
3. Introduction
Li & Fung is a company that has gone through a period of tremendous growth and has
established itself as a world leader in consumer goods design, development, sourcing and
distribution. When the two brothers, Victor and William Fung bought out the rest of the family
in 1989 they started out by implementing a more active strategy for growth. Through their
three-year plans they put up high targets for revenue and profits, and by making a number of
acquisitions alongside with organic growth and successful implementation of acquired
businesses they are now in the position as one of the worlds leading retailer firms.
Term paper in MGMT 5027 08.08.2012
As a result from their aggressive strategy of acquisitions and growth they have incorporated a
very fine-grained value chain. In this paper I will try to identify which key factors that lies
behind the strengths that has made it possible for Li & Fung to win at such a broad spectrum of
business and economies. What are the tools that the two young men brought back from
Harvard in their intellectual backpack to use in their family`s business? And what are the
challenges they face into the future?
3.1 Main question.
What are the key factors that have lead Li & Fung`s aggressive growth strategies to success
and what challenges should they be aware of in the coming years?
4. Company background.
Fung Pak-Liu and his partner Li To-Ming founded Li & Fung in 1906. Although Mr. Fung was
born in a small town, he was lucky to be granted with the opportunity to go out and develop a
career in the world outside. He went to Hong Kong and started studying at Queen`s college.
Here the young man learned how to speak fluent English (Feng, 2007, p5), a skill that laid the
foundation for his first business. At this time coastal cities like Guangzhou and Shanghai was
influenced and opened up by communication with seafarers from the western world. There was
however a lack of English skills in the population. After the studies Fung Pak-Liu wished to go
back to Guangzhou to use his new knowledge to do business. In 1904 Pak-Liu met Li To-Ming
and started working as an export manager in his merchant company selling mainly fine
porcelain products. However, the market was to a degree monopolized by the British trading
companies. Mr. Fung thought that Chinese companies could have an advantageous position
over their Western counterparts because of their connections and knowledge of local products.
He therefore wanted them to start their own export company to tap into the opportunities and
Term paper in MGMT 5027 08.08.2012
advantages they had as Chinese men with local anchoring and knowledge.
To start with, Li and Fung was basically an export trading company that charged a commission
for putting buyers and sellers together. As a transaction facilitator (Khanna and Palepu, p. 71.)
they where exploiting the language barriers between the trading parties. English speaking
buyers who were primarily from the US where not able to communicate with the producers.
The lack of English understanding among the Chinese producers and sellers made it difficult
the other way. Using their local knowledge and contacts they traded largely in porcelain and
silk before exporting jade, ivory handicrafts and fireworks. Through the 1920s and 1930s they
diversified their business into warehousing and manufacturing of handicrafts. Fung Pak-Liu
passed away in 1943 and his son Fung Hon-Chu took over in his place. In 1945 Li To-Ming
retired and sold his shares to the company. However they kept the Li & Fung name as the word
“Li” was a homophone for “profit” and Fung was a homophone for “abundance”.
“Together they gave a auspicious ring ” (Internet issues, 2005 ).
At the end of World War II they relocated their headquarters in Hong Kong and expanded their
business to also include toys, garments, plastic flowers and electronics (Internet issues, 2005 ).
In the early 1970`s Fung Hon-Chu´s two sons William and Victor Fung came back from the
US to join the family firm. William had archived a major in electrical engineering from
Princeton University and a MBA from Harvard. The other brother had also been quite clever
and came home with a Ph.D. in business economics. He had also been working as an assistant
professor at the Harvard Business School for a while (Hutcheon, Robin. 1991. p. 50 .).
When they started to look at the company`s organization from their professional management
perspective they went into a process that transferred it from a family owned business to a
professionally managed firm. A professional budgeting and planning system was put in place
for the first time, and in 1973 they took the company public on the Hong Kong stock exchange
Term paper in MGMT 5027 08.08.2012
(Internet Issues, 2005 ). Throughout the 1980s the company grew into a fully incorporated
supply chain manager, which oversaw all the processes from producer to costumer. Li & Fung
was ensuring the quality in the whole spectrum of the value chain, ranging all the way from
design to quality assurance and delivery tracking of the orders. They also started to use
“dispersed manufacturing” a method in witch the production process is separated into modules.
Labor-intensive parts of production was outsourced to China, while more high value activities
such as inspection and packaging remained in Hong Kong (Li & Fung 2012 ). From 1992 to
2010 Li and Fung experienced a compound annual growth (CAGR) of 21% in turnover and a
increase in CAGR of 22% in core operation profit (Exhibit 2 ). This numbers witnesses of a
highly successful integration of a strong growing business, since both the turnover and profit
developed at this speed.
5. Internal factors and environment.
Li & Fungs vision is “to be the premier trading firm that delivers the right product at the right
prices at the right time to consumers across the world.”( Feng, Bang-yan, 2007.)
5.1 Company structure
From the headquarters in Hong Kong, Li & Fung manages about 300 offices around the world.
They are represented in about 40 economies with a staff of about 41.000(funggroup.com).
As we can see from Exhibit 1, Li & Fung is today a company that is divided into four
divisions. The holding company is Fung Holdings (1937) Limited. Li & Fung Limited is
incorporating the main activities that are trading, logistics and distribution, but they also have a
retailing division from which they manage their own retail brands as Toys “R” Us that is it`s
own entity and Circle K, which operates under Asia Convenience Retail Asia Limited.
According to Khanna and Palepu (p. 71) Li & Fung has evolved into an aggregator, distributor,
Term paper in MGMT 5027 08.08.2012
credibility enhancer, information analyzer and adviser (Khanna and Palepu, table 3-1) in three
lines of business: trading, distribution and retailing.
5.2 Holistic value chain management
Since it was founded in 1906, Li and Fung have gone a long way up value chain. They have a
strong track record of implementing changes and it’s amazing to see how they have evolved. In
the start they where basically just a market intermediary, exploiting the lack of English
knowledge among the producers and the lack of understanding of Chinese amongst the buyers
of the products. Li and Fung`s core business and strength is today built around their ability to
deliver products to the costumers from a very complex map of more than 15000 production
facilities and delivering this to their about 7700 costumers in soft and hard goods. They are
even able to meet their demand at a fast pace. An example could be if a costumer from the US
orders a jacket, some of the buttons might be made in Bangladesh while the zipper could come
from China and everything would be assembled in Guatemala. All this could happen in weeks
from the time where the order is placed. And this ability is also one of the factors that put Li &
Fung in “pole position”. Through at all time optimizing the value chain and by continuously
being able to stay “value added” in meeting their costumer needs.
Taking on such a high tempo of growth, together with their business model of exploiting small
differences in production costs in different locations has resulted in a highly complex and
fine-grained distribution chain (Gupta and Wang , p. 112). From 1989 when the Fung brothers
took over, they have experienced revenue growing from less than US$500 million to US$16
billion. This could not have happened if it where not for successful dissection, optimization
and integration of the whole value chain as they expanded.
5.2.1 “Orchestration from above”.
As Victor Fung puts it: “Li & Fung does not own any of the boxes in the supply chain; rather
Term paper in MGMT 5027 08.08.2012
we manage and orchestrate it from above …”
“The creation of value is based on a holistic conception the value chain ...”(funggroup.com ).
Instead of looking at which country that can produce most of their goods at the cheapest price,
they are pulling apart the value chain and optimizing every step and asking “who can produce
this zipper or that button at the cheapest price .”
Li & Fung is today is separated into three core businesses. Trading, logistics and distribution:
Trading:
Li & Fung is taking care of a network of about 15.000 suppliers in over 40 countries. Their role
is to be a market intermediary between the buyer and the seller in the network. There are
serving as much as 7.700 costumers.
Logistics:
The Company offers a comprehensive menu of logistics solutions, from warehousing,
transport, repacking, customs brokerage, freight forwarding, hubbing and consolidation, and
other value added services, including supply chain analytics and value engineering work.
Distribution:
Li & Fung first began its distribution business in the U.S. in 2005 and then expanded to Europe
in 2008. By working closely with brands and retailers, Li & Fung address their specific needs
in the area of design, sales, marketing and distribution, as well as managing the supply chain
(Lifung.com). As I have pointed out earlier, Li & Fung has a fine-grained value chain.
According to Gupta and Wang p. 112(Figure 4.2 ) such companies should have good
capabilities at cross border integration. In a era where communication as well as transportation
technologies are advancing exponentially, Gupta and Wang suggest to overinvest in integration
capabilities. It seems to me from the research I have done, that this capability is one the key
Term paper in MGMT 5027 08.08.2012
strengths of Li & Fung. Like CEO Rockowitz puts it in Li & Fung 2012:
“If we didn`t integrate the acquired business, we would just be a conglomerate. We give them
new wings: better sourcing, better logistics, more costumers, and more products..”
5.3 Three year plans as strategic tool
When the Fung brothers bought out the rest of the family in 1989, they started crafting out and
implementing three year plans as the superior development strategy. Inspired by the “five year
plans ” of the Chinese Government, the plans sought out to take a “zero point perspective ” on
the status of the company (Feng, Bang-yan, 2007. p. 237 ). Meaning that they look at their
company with new eyes every three years, asking themselves how they could manage their
opportunities and resources the best way in the future. As explained by William and Victor
Fung (Feng, Bang-yan, 2007. p. 239-241) the process of making these plans take place in four
steps.
1. Analyzing the business environment and making a forecast of this scenario
2. Based on company`s vision and the projected scenario they come up with a
development goal that is challenging.
3. Look at the status quo of the company from the vantage point of the new goal,
determine the distance in between, and figure out the strategy to beat that distance.
4. Formulate and (make) implementation plan for the strategy.
The input factors to this process are shown in Exhibit 5 .
It starts with where they want the company to be in the projected business environment in the
end of the period (LI & Fung 2012). Individual goals for revenue for the different divisions are
then crafted and if goals are not met at the end of the period, they need to measure and analyze
why they failed. Some of the benefits that William Fung mentions is: It’s easier to maneuver
through rough times and it lessens work fatigue amongst the people involved.
Term paper in MGMT 5027 08.08.2012
“The three-year plan turned a corporate marathon into a three-year sprint ” says CEO Bruce
Rockowitz (Li & Fung 2012). The companies incentive programs are also connected to the
three-year plans, providing extra motivation for managers and employees to follow them up.
In the present plan going from 2011 to 2013 Li & Fung targets to double core operational profit
from 725 million to 1,5 billion dollars (Exhibit 6 ).
5.4 Acquisitions as a growth strategy
William explains this in a interview with CNBC Squawk box Asia: “It’s a two handed
strategy..” On one hand they have organic growth and on the other hand they have acquisitions.
He explains that they also pursue organic growth, but when that is not present buying other
companies is natural. Also because that in bad times there is usually a good climate to make
acquisitions (CNBC ). Even tough they focus on organic growth, a central part of the growth
strategy since the 1990s has been to acquire other companies. Most of the time it has been
done as a measure to “fill the mosaic ”. This means to use acquisitions to position themselves in
markets where they lack presence, expertise or talent. But, also to gain control over the rival’s
client accounts and integrate their operations (Li & Fung 2012 ). Finally they would implement
their management and systems to bring their margins up to Li & Fung levels. “By far the
greatest development of the mid 1990s was the purchase of Inchape Buying Services Ltd (IBS)
for HK$450 million – with the advantage of being financed primarily from internal
resources“(A burst of crackers p. 73). They had went out and bought a company almost their
own size without even having to raise a considerable amount of capital from external sources.
This move was one of the main factors that made Li & Fung able to more than double its
growth between 1990-1995. These acquisitions as with other actions of the same character
extended the company`s resources in many ways as for instance sourcing, outlet network,
intellectual resources and qualified management. The acquisitions have also made the group
Term paper in MGMT 5027 08.08.2012
less vulnerable to stresses in the market by diversification of the product portfolio and stronger
at tackling cyclical changes. CEO Rockowitz believes their acquisition expertise is as good as a
private equity firm. Its also a fundamental point that Li & Fung adds value to the companies
they buy by giving them “new wings in form of “better sourcing, better logistics, more
costumers and more products ”(Li & Fung 2012). “Between 1992 and 2010 they had made over
70 acquisitions and became a truly multinational company” (Li and Fung 2012).
5.5 Integration of acquired businesses.
According to CEO Rockowitz, an important part of the acquisitions strategy is to quickly
integrate them into the culture of Li & Fung. Within 100 days after the takeover the people
should be located in their right place. They have a so called “plug and play” model of computer
systems to integrate the management, accounting, handling of orders etc. Both the Fung
brothers also believed that informal contacts between colleagues are an important factor,
making it important to create inter-personal relationships at an early stage.
5.6 Internal culture
People oriented approach. The staff more than doubled from 13.000 to 27.000 only in the fiscal
year of 2010(Li & Fung 2012 ). But Li and Fung still strive to maintain entrepreneurial spirit.
Managing a portfolio of 300 small profit centers, and the managers of those referred to as the
“little John Wayne’s ”. These units react quickly to changes in the environment, and many of
the entrepreneurs that started the companies remain behind the wheel of them as managers after
it had been sold to Li & Fung. These are also given profit sharing incentives based on profit
performance. Long term commitment where also secured by stock options with lock-in periods
for as long as nine years (Li & Fung 2012 ).
Term paper in MGMT 5027 08.08.2012
5.7 The new leaders
“Victor is the deep thinker, and I just make the money .” – William Fung joking about their
roles in a interview with Forbes magazine (Forbes).Going from a family run company in the
70s, Li & Fung may be a excellent example that implementing professional management really
matters. As the business grew and they kept on buying other businesses it was essential to keep
going forward. According to Victor: “Once the business was successful, it was essential to
keep an open mind and, rather to rest on their laurels to move past success and look forward.”
This sounds just like the same reasoning as for the zero based perspective of the three-year
plans. It`s kind of a “keep looking forward, even if you`re doing good” philosophy.
To manage the ever-growing diversity of cultures they went by the strategy of giving all
managers the freedom to work as they see fit, as long as they get the job done (Far eastern
economic review ).
5.8 Information technology and welcoming change as a core strength
“The ability to manage change is imprinted in the DNA of the company ” -Victor Fung,
”Since our founding in 1906, a constant ingredient in our development into a Hong Kong-based
multinational group is the way we adapt to new market opportunities brought about by global
and local economic changes ”. -Lifunggroup.com
Li & Fung has always been aggressive in adapting new technologies (Internet issues, 2005 ).
The adoption is also a central part of their infrastructure for dealing with integration of
acquired businesses as well as an key factor for dealing quickly with costumer needs and
processing orders and deliveries across their highly advanced and fine grained value chain that
we will take a look at in the following chapter.
Term paper in MGMT 5027 08.08.2012
6. External factors, challenges and opportunities.
Even tough Li & Fung seem to have done a tremendous job of implementing new technologies
they should not be resting on laurels. The exponential development of technological tools is
making it easier for costumers to get transparency when looking in to a new market and more
and more knowledge is at costumer’s fingerprints through the web. Governments are also
taking measures to open up markets for foreign players, and costumers finds information
themselves about products, making it easier for them to make decisions of witch product to
buy. These examples together with the institutional voids being filled, should as I se it make it
a top priority issue for Li & Fung to watch these changes and make efforts to only play in the
“fields” where they are needed.
6.1 Rise of labor cost in China
An important change in the context for Li & Fung is now the rise of costs of workers in China.
As they are still sourcing as much as 30 % from China (Exhibit 7), their exposure to this effect
is considerable. In Chinas new 5-year plan, which ranges from 2011 to 2015 the target is to
raise the minimum wages by 13% annually. This makes the total rise in minimum salary a total
of 80% trough these years. William Fung points out that this mainly started with the “Foxconn
episodes ” (WSJ.COM ) and that we now might see a situation where China for the first time is
contributing to making costs higher since they opened up their markets in 1979 and made a
huge low cost labor force available to the world market. This has been depressing developed
market prices for the last 20-30 years. He also points out that the governments focus has shifted
from focusing on export, to creating more inland consumption (Cnbc ).
Term paper in MGMT 5027 08.08.2012
6.2 Opportunities
On the other hand we can read from the 2011 annual report (Lifung.com ) that they expect the
cost of production to go down. One question is if this implies that they are planning to ramp
up the production in other low cost countries since wages in China is going up?
William Fung mentions this in the interview with Cnbc.com when asked if they are going to
produce more in the “Cambodias ” and “Bangladeshes ” of the world and mentions that
Bangladesh and India is competitors to sourcing from China. But, these changes in the macro
economic context will also increase inland buying power significantly. This together with the
tremendous size of this market should make it an interesting opportunity. It actually seems like
it has already started. If we look at exhibit 8 we can see that sales in Asia has went from only
4% in 2010 to 12% in 2011, and according to Mr. Fung they now have a own Asian leg in their
sales division. It will be interesting to see how big part of the turnover that in the future would
come from China and how much of the products that will be sourced in countries like
Bangladesh, Cambodia. Seeing their history of adapting to changes we should however not
expect Li & Fung to be something else than on the winning team as globalization evolves. As
we can see from exhibit 3 they do not have much presence in South America. Since the US is
their biggest market (Exhibit 8 ), it seems that it could be beneficial for them to research the
possibility to tap into the low cost labor market in South America. This will also be closer in
distance from the US market. Another possibility that I have not seen discussed anywhere, but
should at some time be considered is listing abroad. The New York Stock Exchange (NYSE)
would for instance be a good platform for them to diversify capital market and investor
exposure. As of today they are only listed on the Hong Kong Stock Exchange.
7. Conclusion
The main factors behind Li & Fung`s success story seems to evolve from their culture,
Term paper in MGMT 5027 08.08.2012
historical values and uppermost the managements ability to select and pursue the right
strategies for growth and integration of a highly complex value chain. Strong leadership, good
adaption to market changes, new technologies and the implementing of the acquisitions made
Li & Fung to grow at a very fast pace. From another point of view they should closely watch
the cost position in China and consider further diversification of the cost base. However there
are also opportunities in these market changes as Asia could someday be in the end of the value
chain as inland buying power increase as a result of a rise in income.
Term paper in MGMT 5027 08.08.2012
8. Referances
1. CNBC. Interview with William Fung on CNBC Squawkbox 24 of march 2011.
Available from address: http://video.cnbc.com/gallery/?video=1857007033
(visited 03.08.2012)
2. Internet issues, 2005. Warren Mcfarlan, F and Young, Fred. Li & Fung (A): Internet
Issues, Harvard Business School.
3. Li & Fung, 2012. Warren Mcfarlan, Shih-Ta Chen, Michael and Chi-Ho Wong Keith,
2012. Havard Business School.
4. Forbes magazine. May 15, 2000, p.310
5. Far eastern economic review. July 22, 2000. p. 10.
6. Feng, Bang-yan, 2007, “100 years of Li & Fung: Rise from family business to
multinational” .Thomson Learning, Singapore.
7. Hutcheon, Robin, 1991. “A burst of crackers: The Li & Fung story ”. Second edition. Li
& Fung limited, Hong Kong.
8. Wikipedia, Li & Fung. Available from address:
http://en.wikipedia.org/wiki/Li_%26_Fung (visited 04.08.2012)
9. Khanna, Tarun and Palepu, Krishna G. 2010. “Winning in emerging markets”. Harvard
business press, Boston.
10. Gupta, Anil K and Wang, Haiyan, 2009. “Getting China and India right ”. Jossey-Bass,
San Francisco.
12. Wall street Journal, Shai oster, May 9, 2011. “China's Rising Wages Propel U.S. Prices ”
Available from url:
http://online.wsj.com/article/SB10001424052748703849204576302972415758878.html
(visited 08.08.2012)
Term paper in MGMT 5027 08.08.2012
Exhibits
Exhibit 1. Business overlook.
Source: Lifung.com
Exhibit 2. Financial development. 1992-2010.
Term paper in MGMT 5027 08.08.2012
Source: Lifung.com
Exhibit 3. Global network.
Source: Lifung.com
Exhibit 4. China real GDP growth 2011- 1Q2012
Term paper in MGMT 5027 08.08.2012
Source: National bureau of statistics of China .
Exhibit 5. Process of making the three-year plans.
Source: Kwok-King, Victor. Fung, William. Fung,Yoram Wind. Competing in a Flat World:
Building Enterprises for a Borderless World
Exhibit 6. Current three year plan, core operation profit targets. 2011-201
Term paper in MGMT 5027 08.08.2012
Source: Lifung.com
Exhibit 7. Sourcing trends.
Source: Lifung.com
Exhibit 8. Geographical turnover 2011.
Term paper in MGMT 5027 08.08.2012
Source: Lifung.com