Li Fung case study Essay - Part 2

LI & FUNG CASE STUDY

 

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EXECUTIVE SUMMARY

Li & Fung Limited, a Hongkong-based global consumer goods trading giant, has evolved into one of the successful survivors in an industry that would have long discarded it for lack of usefulness and for having no more critical role.

It takes real effective strategies to go against the prevailing trend and to achieve sustainability in the light of informed expectations of the natural demise for an enterprise.  Indeed, Li & Fung, instead of succumbing to the common projection that it will be completely out of the picture in the near future as a totally unnecessary mediator between the buyers and sellers of goods, proved analysts and observers wrong by packaging itself in a different way and evolving into an entity that served to help both buyers and sellers.  In brief, instead of dying a natural death, Li & Fung managed to emerge a victor by making itself indispensable in the picture.

The success of Li & Fung had everything to do with able-minded leadership and keen foresight.  The brothers, William and Victor Fung, knew they had to do something to change the course of things.  They defied the natural order by refusing to let their father’s company be among the extinct enterprises whose roles in the business world have come to be totally useless.

Jack Welch, former CEO of General Electric has written, “The first step of making strategy real is figuring out the big ‘aha’ to gain sustainable competitive advantage – in other words, a significant, meaningful insight about how to win - Li Fung case study Essay introduction. “ (Jack Welch; 2005, Winning)  This is exactly what the Fung brothers did – they stopped in their tracks, sized up their situation and that of the entire industry, cooked up a plan that cannot fail and then went for it with all that they had.  It must have been not easy; nobody said it was going to be easy.  And yet, in the end, the brothers can look back to days of sacrifice and hard work for their novel idea and then say confidently that they have won in their bid for survival.

 

MAJOR ISSUES RAISED BY THE CASE

The world today acknowledges Li & Fung Limited as a premier global trading group managing the supply chain for high-volume, time-sensitive consumer goods.  As stated in Wikipedia, garments make up a large part of the Li & Fung business which also covers the sourcing of hard goods such as fashion accessories, furnishings, gifts, handicrafts, home products, promotional merchandise, toys, sporting goods and travel goods. (Wikipedia, the web-based free encyclopedia)

During the time when there were concrete trading barriers between countries in the west such as the United States of America and the European countries and the east such as Hongkong, China, Korean and other Asian countries, companies and business entities that served as middlemen were really necessary and needed for trading transactions to be closed and be carried out smoothly.  There was the language barrier to worry about, and all the complicated factors that make up the entire logistics and systems for bringing the goods from the sellers’ countries to the buyers’ countries.

With the advent of the internet age and the globalization phenomenon, middlemen as plain mediators became dispensable from the scene.  The Westerns companies have eventually caught up with the need to deal straight with their suppliers from the East.  Likewise, it has become a common thing for students from the Eastern countries to go to schools in the USA or in Europe.  In the process, the gap in terms of language and culture differences have become narrow – such that though yet faltering and unsure, both the buyers and the sellers could try to make contact and close business deals with the middleman not anymore around to facilitate and bag a good portion of the profits in the form of commissions and trading gains.  Eventually, the faltering and unsure ways were replaced by confident strides and advances toward the forging of trade ties and agreements.

In such a scenario, the easiest thing for trading companies like Li & Fung to do is close shop and graciously bow their way out of the market.  The easiest recourse in the light of the difficulties in finding transactions and doing business is to simply stop doing business and start anew in altogether improved settings and with workable parameters.

This is the first and well-grounded guess that anybody would make of the future of Li & Fung.  But the Fung brothers knew there was a way of turning things around and to make their company still a necessity and a needed character in the trading story even now that things are way different and more advanced as compared to the early years of their family’s enterprise.

Herein lies the survival issue that the brothers had to address – and that they did with outstanding results.  Today, Li & Fung is far from being just a middleman.  They have established their place in the market as the one entity to go to, whether you represent a buying party from USA, Europe or Asia, or the selling party from identified source-countries like China, Indonesia, Japan and the Philippines.

Li & Fung has become the industry expert who has not missed the opportunities brought about by the internet age and the globalization trend.  Those factors that were initially deemed to bring about Li & Fung’s end turned out to be the very factors that enabled them to offer a unique set of services that result to their being sought after to this day, both by the buyers and the sellers.

Familiarization with the business cycles, the sources of raw materials, the cities where labor would be cheap, the way to put together the product with good quality assured, the logistics companies to bring the raw materials and finished goods to where they are needed at the appointed time, the entities to provide the necessary auxiliary processes like the changes in dyes and colors, and the techniques for consistent delivery of the ordered bulks without delays that would have been harmful to the buyers – all these were in the menu of Li & Fung.  Then to seal all these off with a cap is the capability to put the best combination together, depending on the specific needs of the clients.  All these are what made Li & Fung the surviving giant that it is today.

 

RECOMMENDED VISION, MISSION AND OBJECTIVES FOR LI & FUNG

Vision:                        To be a major trader of goods with world-class quality

and at internationally competitive prices

Mission:                      We are dedicated to trading goods in the international markets.

We are committed to be the best partner for buyers and sellers of    goods and services in the supply chain.

We aim to provide good returns to our partners in the trading business.

We work hard to produce quality goods that our client-importers can sell fast and at prices that will yield profits for them.

 

Objectives:

To be ever ready to serve importers with specific products to source out and sell.

To properly match suppliers and buyers of various raw materials, labor and finished goods in transactions that will serve to be equitable for all parties.

To provide good jobs with satisfactory compensation for the employees of the company.

To train employees to be managers, businesspeople and leaders by giving them adequate training in entrepreneurship in the course of their stay with the company.

To produce satisfactory returns for the investments of the shareholders in the form of dividends and through the appreciation of the market value of their stockholdings.

To contribute positively to the economy of various countries in the world:  countries where we hold operations and countries that our clients come from.

 

 

EXTERNAL ANALYSIS

Li & Fung belonged to an industry that was fast losing its place in the market.  It was an industry where you could make a killing out of facilitating plainly the exchange of big volumes of goods and big sums of money.

These days, importing companies have ways of dealing straight with their exporting counterparts without need for the middlemen who used to have a major role in the transaction.  It is a natural thing to assume that companies whose entire operations revolve around being the middlemen are soon to be things of the past.  Innovation, then, is a must for these affected companies.  Either they innovate or they die.

Thanks to the internet and the many things that have become possible because of it, the production of goods in countries like China and Korea and the eventual exporting of these goods to the market countries like the USA and the United Kingdom are now a lot easier to arrange and work out.

Thanks also to the internet, the manufacturing process can now be divided into specific functions, each of which can be monitored closely; and on real-time basis, too.  While the production of a certain commodity used to be confined to a country earmarked for its cheaper supply of raw materials and labor, the same production now can be chopped off into distinct parts and then conducted in different countries – all with maximized productivity and savings as the objective.

Modern technologies have made available options that used to be not possible for the importers.  One acute example of this is the decision as to colors or designs of the product ordered in huge bulk.  With online tracking and real-time monitoring, the importer now has the prerogative of changing the specifications of a placed order to suit the most recent trend prevailing in the market.  While the design and other details are worked on in the production line, details like the color can be decided on at later times – this is unlike the old days when orders cannot be reversed, and changes relayed even just at the onset of the manufacturing process cannot anymore be taken into account due to massive preparations already accomplished for the making of the product.

Indeed, times have changed. The industry has changed, and so have all the external factors in the environment, even if trading remains to be in its essence the same trading that has been practiced since the days of the very first merchants and barter-folks.

Some companies have thrived through these advancements, and Li & Fung is one of these.  However, that is not to say that Li & Fung has no competition that is of its caliber.  For as a matter of fact, Li & Fung has a major competitor whose headquarters is as well in Hongkong and was founded in 1949 – Willian E. Conner & Associates (WEC&A).

WEC&A is also one of the major export trade companies in Hongkong in the early 21st century.  It optimized the supply chain for its clients by managing every aspect of sourcing, right from product design and development to distribution and delivery of the finished product.  Indeed, it is much like Li & Fung, though it comes only as second to it in terms of sales volume and asset size.  WEC&A’s products include apparel, fabrics, fashion accessories, footwear, decorative accessories, textiles, house wares, furniture, lighting, office products, stationery and fashion-related products.  As seen here, a lot of WEC&A’s products are the very same products that Li & Fung itself is into.   (ICMR Case Collection:  Li & Fung – the Global Value Chain Configurator)

 

INTERNAL ANALYSIS

Li & Fung has the makings of a survivor.  With keen-minded business people such as William Fung and Victor Fung leading the company, it had a fighting chance to manage to stay afloat while the rest of its kind – the trading companies of olden times – sank and ceased to operate.  And indeed, Li & Fung has become a success story.

Other than great leadership, another strength of Li & Fung is its people.  Having been trained to think like entrepreneurs, and having been compensated in a manner that enabled deserving employees to receive more than what the rest would get, the people in the organization of Li & Fung are seasoned and capable businessmen who know very well the objectives and targets set for each transaction.

Li & Fung invested heavily in computer and internet systems which empowered its employees to be well-versed on the updates and developments in the industry and within the company.  Communications among the people flow freely and the same applies among departments, each of which is given independence and is mandated to be run by the department heads without close and tight supervision from top management.  Thus, the creativity and entrepreneurial skills of the employees are encouraged to be demonstrated and let out in the open – never curtailed and hidden.

The long track record of Li & Fung in the trading arena has also given it a distinct advantage.  When the brothers William and Victor Fung decided to go beyond plain trading and to make the most of their knowledge, exposure and network in the industry, the goodwill that has become established through time worked well – Li & Fung was in no time the recognized expert in the configuration of the best value chain for each product.  Li & Fung was the irrefutable consultant telling importers and raw material providers where to go and how to do things to optimize profits.

Practice makes perfect and Li & Fung eventually had thousands of suppliers of raw materials and labor in their menu – composed of parties who each approached Li & Fung with their individual offerings and contributions to the manufacturing of a named product.  There is no perfect configuration for any given product.  Parameters vary, prices vary, volumes vary, both sides of the buyers and the sellers can decide to change their terms and their lines… Through all this, Li & Fung maneuvered each transaction to get the most for its client in terms of the quality of the finished products and the price at which they will be available.

In the same way, providers of raw materials and labor came to trust Li & Fung.  In Li & Fung, they found a sincere advisor who wanted them to earn with each transaction while all the time looking out for long-term stability and continuity of the trading transactions.  Thus, it was not just a matter of going straight to the importers and presenting themselves as prospective suppliers of products and services.  It became an important thing that they instead choose to go to Li & Fung, then get sound advices and a good match for the things they have to offer.  In the end, they get good business opportunities and satisfactory profits.

Li & Fung has become an icon and has gone as far as buying companies that were to bolster their hold on leading spot in the trading industry.  Year after year, the Fung brothers acquired companies for specific purposes.  Looking at the big picture, they were working on getting a larger share in the total value chain of goods – both hard and soft goods – in the global markets.

 

FINANCIAL ANALYSIS

The following is a summary of the financial performance of Li & Fung during the years 2004 to 2006:

(in millions, and in HK $, except share amounts)
2006
2005
2004
Profit before Taxation
2,373
1,942
1,620
Taxation
172
151
130
Profit for the Year
2,201
1,791
1,490
Increase from Previous Year
23%
20%
27%
Earnings per Share (in HK cents)
67.10
55.60
46.50
Cash Dividends per Share (in HK cents)
55.00
45.50
38.20
Current Assets
15,335
10,528
8,246
Current Liabilities
12,937
9,862
6,026
Current Ratio
1.18
1.07
1.37
Total Liabilities
13,778
10,643
6,561
Total Equity
8,267
4,625
4,709
Debt-Equity ratio
62:38
70:30
58:42
Source (except for the ratios and market prices):  The Li & Fung website (www.lifung.com)

 

The financial statements of the company show that for the recent years 2004, 2005 and 2006, Li & Fung has reaped profits amounting to HK$1,490M, HK$1,791 and HK $2,201.  Though the three years resulted to profits, however, it is noted that in terms of growth in income, the year with the highest growth was 2004.  In 2004, there was a 27%-increase in the net profits generated by the company from operations.  Meanwhile, the increase in the net profits in 2005 was 20%; and in 2006, 23%.  Indeed, this mirrors the concerns shared among financial analysts and investors.  These percentages show that much as the company generates profits consistently, the yearly increases in such net profits have not been growing.  This can indicate a standstill in the growth of the company’s revenues, and the top management will have to think of ways to maximize the investments of its stockholders by way of placing them in vehicles and ventures that will have higher yield.

The company has been consistently giving out dividends, as shown by the data.  The company also turns out to be liquid.  As shown by the current ratios computed based on its financial statements, Li & Fung can easily pay up its current debts as they fall due through the use of its cash and assets that are convertible to cash within a year.  This means short-term debtors of the company have no cause to worry about Li & Fung’s timely payment of their liabilities.

Meanwhile, Li & Fung’s liabilities are higher than its equity.  This means that creditors and other third parties have invested more in Li & Fung – in terms of bonds, loans, investments in Li & Fung’s promissory notes – as compared to the investment in the company shares of the shareholders.  This further means that the company might not find it easy to tap additional funds through new loans from banks and other similar ways of raising cash.  Still, some fund-sources would still be willing to lend Li & Fung cash resources based on the company’s track record and goodwill.

PROPOSED STRATEGIES

Li & Fung must never rest on its laurels and think that the company will always be the leading trader in China.  To be complacent when one has attained success is never a wise thing and it a tendency that is to be resisted.

Among the strategies that Li & Fung can consider for its further growth and eventually, for its sustainability are the following:

To relentlessly pursue ways and schemes to improve quality of finished products delivered to the clients without much additional cost to be incurred by the latter.  This strategy will instill the loyalty of the existing clients and will serve as the best form of advertisement to bring new clients to the company’s doorsteps.
To invest in the public image and goodwill of Li & Fung as a company that has been there for over a century now – specifically, since 1906.  This will come a long way to tap additional markets for the company.  The dependence of the company on US and Europe as its market will have to be lessened.  These two regions of the world comprise almost 90% of the entire market of Li & Fung.  This is not wise.  Li & Fung will have to go into direct selling of manufactured goods.  It will have to have its own brand eventually, and capitalizing on boosting the company’s image will be a good investment.
To keep a tight rein on the finances and management of the ventures that Li & Fung has invested in.  It pays to grow bigger in terms of holdings and operations scope so long as focus is not compromised.  Though the company now is into a lot of other functions in the value chain, it will do good to stick mainly still to its forte:  trading goods.  The bigger the conglomerate, the more competent people will be needed to oversee the growing number of operational segments.
IMPLEMENTATION

The leadership and culture of Li & Fung have been well-ingrained in the brothers William and Victor Fung, having been raised and taught by their father who himself was at the helm of the trading company in his time.  It is worth noting that the company currently has in its employ middle management people who as well live out the vision and mission of the company each day they spend working therein.

The transformed company can be sustainable and can outlive the leaders who established the mighty changes in the nature and transactions of the company during this last decade.  By finding the right people who themselves will be the next generation of leaders in the company, Li & Fung can better secure its place in the future of the trading industry.

Transfer of knowledge will matter a lot to keep the methods and tactics practiced, applied and constantly improved.  However, that should be coupled by the sincere commitment of the upcoming leaders to diligently work for what will be best for the company.

That is legacy.  That is sustainability.

REFERENCES:

Welch, J. Winning. New York: HarperCollins, 2005.

Wikipedia, the web-based, free encyclopedia. Florida:  Wikimedia Foundation, 2003.

The company website of Li & Fung (www.lifung.com)

 

ICMR Case Collection:  Li & Fung – the Global Value Chain Configurator

 

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