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t number due date

BUSM1534 1 12-13-2010 Group 5, Morning class

Course/Unit name Program title
Marketing for Managers M Bus Admin
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Wil Loads
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Family name Given name Student number Student signature Date

Arbelaez Santiago 3297053 12-13-2010

Negi Karan 3301245 12-13-2010

Gupta Mohit 3275688 12-13-2010

Fangfang Li 3305647 12-13-2010

Sapaprot Nuanpan 3296526 12-13-2010

Tripathi Manish 3297622 12-13-2010

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 LI & Fung

Executive Summary
As world became a global market, multinational companies realised the need to capture

international markets to maximise their profits but Increasing environmental forces & competitive

pressures led many companies to realise that the key motivation for expanding abroad is no longer

to access cheap labour or raw materials or to even to build strategic positions but is to tap into

world-wide sources of information, knowledge & expertise to increase their latest competitive

intelligence & advantage

Aim & Purpose

The aim and purpose of this report is to examine strengths of LI & FUNG’S regional matrix sourcing

model; venture capital arm & its benefits to the company & their hybrid western/Chinese family style

business which helped them to maintain their margins three times than their competitors. This

report also aims to understand the challenges & issues LI & FUNG faces in order to expand their

business to other markets.

Factors

 Li& Fung enjoyed the highest margins in the industry by shortening the production cycle,

advancing credit to suppliers for prompt production, giving great emphasis on quality control

& by maintaining close personal contacts with their clients.

 Li & Fung has hybrid western/Chinese family style business, which allowed them to use the

best practices of both cultures. Chinese family style business helped them to create loyalty

among the managers towards the company.

 Li & Fung matrix sourcing system helped them to take competitive advantage over their

competitors. Li & Fung matrix sourcing system helped their managers to work in an

integrated manner across the globe.

 In 1986 Li & Fung established a venture capital group, LF International. Li&Fung had the

opportunity to invest in textile and hard goods industry (toys). It invested in mid-size

4
 LI & Fung

companies whose owners wanted to control the business & helped them to grow their

business.

 Li & Fung faces challenges & issues such as protectionist barriers from U.S & Europe,

finding quality staff & managers, maintain cost benefits & competitive advantages in order

to expand their business.

Conclusion

 Li & Fung is able to maintain margins three time those of the rest of the industry because of

its efficient consolidation of manufacturing and shipping.

 Li& Fung has developed its values rooted in Chinese culture, mainly demonstrated in their

collectivism (family concept), risk taking and long term relationships orientation.

 The venture capital strategy helped Li & Fung to become their business bigger, it was a

very strategic investment in small but successful companies.

 Li & Fung has the opportunity to expand their business to other markets using their existing

infrastructure & their reliable matrix sourcing system

Recommendations

 Li & Fung should train and develop their existing employees, especially rank and file staff.

This provides the company skilled staff, at the same time, familiar with the company’s

culture.

 As Li & Fung become a larger company they will have to adapt its values and

organizational culture to the different countries and cultures where they have operations.

 Li & Fung should also penetrate into new products. Complementary products to clothing

such as footwear, fashion bags, etc. would prove to be a profitable market for Li & Fung.

 Li & Fung should penetrate the growing markets like India, Brazil, Eastern Europe and

Northern Africa by acquiring companies and enhancing relationships with higher end retail

stores.

 Li & Fung should make stronger their relationship not only with the customers but also with
the suppliers, they might still develop their matrix sourcing system and they might invest in
their suppliers as they do with their customers.

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 LI & Fung

Content

Content Table
Executive Summary........................................................................................................................... 4
1. Introduction................................................................................................................................. 7
2. Aim / Purpose of the Report.................................................................................................... 83.
LI&FUNG: Designing strategies for global competition...............................................................9
3.1 How is Li&Fung able to maintain margins three time those of the rest of the industry?
What are its specific strengths and how does it differ from more traditional competitors?..............9
3.2 What attributes of the Chinese business culture does the company exhibit?.....................9
3.3 Are these attributes strengths of the company?...............................................................10
3.4 What are the benefits of the Li&Fung matrix sourcing system?........................................10
3.5 How does the venture capital group contribute to Li&Fung’s growth?..............................11
3.6 What are the challenges the company faces going ahead and what issues does it need to
address in order to expand?......................................................................................................... 11
3.7 How and where should it expand?....................................................................................12
4. Conclusions.............................................................................................................................. 13
5. Recommendations.................................................................................................................... 14
6. References............................................................................................................................... 15
7. Appendices............................................................................................................................... 16
Appendix 1 Hofstade Cultural Dimensions of China.....................................................................16
Appendix 2 SWOTANALYSIS...................................................................................................... 16

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 LI & Fung

1. Introduction

As the world started to form one big global market the need for companies to capture economies at

international level became the driving force for maximisation of profits. Under the pressure of the

technological revolution, companies are not only facing the challenge of cost efficiency but also gain

a sustainable competitive advantage to be able to stay in the global game.

Increasing environmental forces & competitive pressures has led many companies to recognize that

the key motivation for expanding abroad is no longer to access cheap labour or raw materials, to

capture incremental scales or to even to build strategic positions but is to tap into world-wide

sources of information, knowledge & expertise to increase their latest competitive intelligence &

advantage that can be leveraged & adapted to market needs worldwide.

As noted by Dunning and Lundan (2008: 72),

[This] group of MNEs comprise those which engage in FDI, usually by acquiring the assets of

foreign corporations, to promote their long-term strategic objectives – especially that of sustaining or

advancing their global competitiveness.

2. Aim / Purpose of the Report

The aim and purpose of this report is to examine strengths of LI & FUNG’S regional matrix sourcing

model; venture capital arm & its benefits to the company & their hybrid western/Chinese family style

business which helped them to maintain their margins three times than their competitors. This

report also aims to understand the challenges & issues LI & FUNG faces in order to expand their

business to other markets.

7
 LI & Fung

3. LI & FUNG: Designing strategies for global competition

3.1 How Li & Fung is able to maintain margins three time those of the rest of the industry?
What are its specific strengths and how does it differ from more traditional
competitors?

Li and Fung achieved the highest margins in the industry significantly because of its consolidation of

manufacturing and shipping. This was successful by shortening the production cycle, having the

manufacture prompt for the production beforehand and advancing a letter of credit to the suppliers.

On the other hand, traditional competitors focused on squeezing the margins from the

manufacturers.

The company emphasized on quality control in order to provide great satisfaction to its customers

and reduce possible problems. In addition, they pay attention on the details about the daily activities

of the business and maintain close personal contact with their clients. Finally, the company had

worldwide connection which was able to link its branches in different regions, suppliers,

manufacturers and customers.

3.2 What attributes of the Chinese business culture does the company exhibit?

LI & Fung is a company rooted in Chinese values. Instead of retrenching an employee they retain

some of the retirees as consultants. They treat employee of Li & Fung as family. They tend to let

their foreign operations run to their best local practices. Managers are rewarded strictly on a high

profit sharing model. This means that the bonus of the managers is in direct relation to the success

of their division. In an industry like fashion which is very cyclical this kind of reward can be very risky

for those seeking greater stability. If the managers are unsuccessful they do not get rid of them right

away (See Apendix1 Hofstade cultural dimensions for China).

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 LI & Fung

3.3 Are these attributes strengths of the company?

Particularly Chinese culture attributes are valuable by business people; the strong long term

orientation is for example an attribute that most business men like. Inside the company, the

collectivism reflected in the Chinese traditions make the companies solid and the ability of the Asian

culture to take risk on businesses make them eager of new ventures.

The below attributes are certainly the strengths of the company and reflect the values of the

Chinese culture (Appendix 1 Hofsted cultural dimensions for China):

 Create loyalty among the managers towards the company.

 Enable more Ethical and customer oriented approach.

 Create power to influence suppliers and manufacturers because of strong relationship and

trust.

 Ensure Quality and on time Delivery.

3.4 What are the benefits of the Li & Fung matrix sourcing system?

Li & Fung Company adopted a matrix sourcing system which implies taking in to consideration

various factors which are responsible for the better performance of the company by choosing the

best source for their company irrespective of the location. Some of the important factors of Li &

Fung matrix sourcing system are,

 Raw material selection.

 Selection of the manufacturing site.

 Reliability of manufacturers.

 Factory skill level.

 Lead times and quota availability.

 Desired product quality standards.

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 LI & Fung

 Packaging and costing.

Li & Fung matrix sourcing system helped their managers to work in an integrated manner across

the globe. It also helps the mangers to get the best possible deal for their clients. Company was

also able to provide the delivery of order before time to their clients.

3.5 How does the venture capital group contribute to Li & Fung’s growth?

In 1986 Li & Fung established a venture capital group, LF International. Li & Fung had the

opportunity to invest in textile and hard goods industry (toys) those investments were just ignored

by most of the venture capitalist. According with Golis, venture capitalist is by far the more

financially rewarding route for an ambitious individual to follow (Golis, C et al. 2009).

Li & Fung invested in companies with some particular characteristics. First of all, mid-size

enterprises with more than 3 million in revenue, secondly, they looked owners who wanted to

maintain the control of the business, they considered the founders as a talent people with design

and marketing skills; lastly and for the first stage they invested in US companies with the argument

that it easier to grow in US than in Europe, due to the size of the market and no boundaries such as

the language.

Li & Fung tactic was to make those mid-size companies grow, they used their supply chain to obtain

competitive prices, and they took advantage of their business contacts to sign contracts with

important companies by creating different promotional programs. Li & Fung were owners of the

distribution channel but also owned the supply chain and at the same time had the opportunity to

make mid-size companies grow, those three factors were the key to made Li & Fung grow with this

strategy.

3.6 What are the challenges the company faces going ahead and what issues does it need
to address in order to expand?

The challenges & issues LI & FUNG are facing in order to expand are:

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 LI & Fung

 The protectionist barriers imposed by America, Europe & other countries to protect

domestic industries against foreign companies.

 To find suitable staffs that have experience & understanding of the country or region they

are overseeing.

 To either expand their operations to their target markets or could the company rely on its

expertise & network in Asia.

 How to maintain the cost benefits of manufacturing once devalued currencies has

rebounded.

 How to maintain competitive advantage in product or process technology.

 The depleting quality & quantity of higher level managers.

3.7 How and where should it expand?

LI & FUNG should expand their business to:

MARKET REASON

Brazil As it is one of the fastest growing markets in

the world; LI & FUNG can export textiles, and

hard goods using the existing structure in El

Salvador and Mexico

Eastern Europe and Northern Africa Are potential markets taking into account their

already establish infrastructure in Turkey.

Countries like Russia and Morocco could be

very profitable markets to Li & Fung.

India Has become in one of the most rapid growing

markets in the world; as well as one of the

11
 LI & Fung

best producers of goods. India can be other

potential market to keep expanding Li & Fung.

4. Conclusions

 Li & Fung is able to maintain margins three time those of the rest of the industry because of

its efficient consolidation of manufacturing and shipping. On the other hand, traditional

competitors focused on squeezing the margins from the manufacturers.

 Li & Fung has developed its values rooted in Chinese culture, mainly demonstrated in their

collectivism (family concept), risk taking and long term relationships orientation.

 The venture capital strategy helped Li & Fung to become their business bigger, it was a

very strategic investment in small but successful companies. Li & Fung own a very strong

supply chain and different opportunities of vertical integration.

 Li & Fung has the opportunity to expand their business to other markets using their existing
infrastructure.

 The Matrix sourcing system gave the advantage to Li & Fung for:

 Raw material selection.

 Selection of the manufacturing site.

 Reliability of manufacturers.

 Factory skill level.

 Lead times and quota availability.

 Desired product quality standards.

 Packaging and costing.

12
 LI & Fung

5. Recommendations

 Li & Fung should train and develop their existing employees, especially rank and file staff.

This provides the company skilled staff for working in local and abroad and, at the same

time, familiar with the company’s culture.

 As Li & Fung become a larger company they will have to adapt its values and

organizational culture to the different countries and cultures where they have operations.

Adaptability is a very critical factor to success in foreign markets.

 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.

 Li & Fung should penetrate the growing markets like India, Brazil, Eastern Europe and

Northern Africa by acquiring companies and enhancing relationships with higher end retail

stores. Li & Fung would benefit from having access to a large and growing market, with

large promises for the future.

 Li & Fung should make stronger their relationship not only with the customers but also with

the suppliers, they might still develop their matrix sourcing system and they might invest in

their suppliers as they do with their customers.

(Words count 1475)

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 LI & Fung

6. References

 Aaker, D. A. , 1998, Strategic market management. 5th edition, John Wiley and Sons, New

York.

 Coughlan, A., Anderson, E., Stern, L. W. & El - Ansary, A., 2001, Marketing channels, 6th

edition, Prentice Hall, Sydney.

 Chaisse, J., Gugler, P., 2009, Expansion of Trade and FDI in Asia : Strategic and Policy
Challenges, Routledge, New York.

 Golis, C., Mooney, P. & Richardson T., 2009. Enterprise and Venture Capital, 5th edition,

Allen & Unwin, Crows Nest, NSW, Australia.

 Hofstede - itim, 2010, Geert - Hofstade, China, viewed 6th December 2010,

<http://www.geert-hofstede.com/hofstede_china.shtml>

 Quelch, J.A, Bartlett C. A., 2006, Global Marketing Management: a Casebook, Thomson

South Western, USA.

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 LI & Fung

7. Appendices

Appendix 1 Hofstade Cultural Dimensions of China

Hofstade cultural dimensions Hofstade score

Power of distance 80; high level of inequity of power and wealth
Individualism/collectivism 11; extremely collectivism in the Chinese
culture, loyalty and family are highly valued
Masculinity 50, The female and male have the same
opportunities.
Uncertainty avoidance 38, Chinese cultures can take risk, they are
prepared for it
Long term orientation 118, is the highest index, long term
relationships characterize Chinese culture

Appendix 2

SWOT ANALYSIS

Strength Weakness

The top managers were very well educated Incentive system were total decided by the top
managers’ objective judgement

Strong relationship with both Hong Kong and

Beijing governments Traditional Chinese culture might not be
appreciated in other countries

Strong company culture- decentralized

management style

Flexible and adaptive foreign culture

Well designed supply chain(gain more profit

from several points in the supply chain)

Strong connection with clients

15
 LI & Fung

Opportunity Threats

Internet enables an efficient communication both Online shopping and e-commerce are growing
within the company, such as e-mail system and rapidly
managing customer relationships.

Relay too much on the top managers,

Venture capital group explore the potential of the insufficient training for future management
company

Incentive system if was considered as unfair, Li

and Fung might loss some talents.

Appendix 3 PESTLE ANALYSIS

 Political/Legal- The political stability of China is strong which happens to be a positive

point for Li & Fung, and also China government is getting more flexible to support the

companies which are operating in international market.

 Economical- China is one of the fast growing country in the world with growth rate of 12%

yearly for last few years. The economic growth of China is beneficial for the Li & Fung to

expand their business and make a high profit margin.

 Social- The Chinese people were more family oriented and were not comfortable and

working in others countries whereas others US employees were ready to work in any part of

the world.

 Technological- The evolving intranet technology proved to be quiet helpful for Li & Fung in

developing a network among all employees from different countries which help them in

giving a quick response to their clients, and also resolving issues quickly.

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 LI & Fung

 Environmental- Li & Fung should focus on the type of raw material they are supplying to

their clients (should be made of environmental friendly material) should not be harmful to

the environment.

17