Li Fung

Introduction

Li and Fung, a Chinese company founded in 1906 has been experiencing high growth rates due to a series of acquisitions and the offer of a wide range of services in the whole elements of the supply chain (from raw material till finished goods). Recently the question its managers have to deal is how to face the challenges posed by the internet, more specifically, its lifung.com (after was renamed studiodirect.com) internet site. This company was an extension of its brick and mortar operations allowing the company to enter the SME (Small and Medium Enterprises) market.

What capabilities of Li and Fung does StudioDirect.com leverage?

Because, in the end, the company keeps its traditional mentality by just adding a new mean of making business, studiodirect.com can take advantage of the Li & Fung traditional business and become a success. Several factors would contribute to this:

* Li and Fung Brand name - Li and Fung reputation is widely know and to demystify any possible fears of using the internet from potential customers it is extremely important that they rely on a well know player in the industry with an history of success.

* Share Li & Fung corporate Values - Although lifung.com is a new company it belongs to the Li & Fung group and therefore shares its culture. Company's historic values are, for example, pragmatism aligned with innovation. Moreover the company encourages diversity and communication among the group divisions. Also, a spirit of autonomy and entrepreneurship is part of the decentralized corporate company's structure. Finally meritocracy is shown through a performance-based promotion and compensation system. This set of values if, correctly apprehended by the new venture, would serve as a strong initial guiding corporate tool to its employees.

* Developing the company's core competences - The Company viewed itself as an "information and knowledge-based service company" where technology plays a primordial role. In this sense a web presence is viewed as strategic to the Li & Fung group. Therefore, the online business can take advantage of this technology-oriented mentality and its employees will have the certainty this project is being considered by their managers in a long term perspective. Moreover, studiodirect.com can use its parent company market research as it gives detailed and valuable information on the online company's target market (SME).

* Build on the efficiency of processes through all the steps of the Li & Fung value chain - This allow studiodirect.com to charge commissions of 10-15% to its target market (SME) which is way below the 25-30% margins those customer's were used to pay according to the company's research. Moreover the high degree of customization the company can offer to its clients is certainly crucial to satisfy the each time more demanding SME market. This allows the company to customize its orders, differentiate from its competitors and become more efficient. Finally because small orders are possible the company achieves a twofold objective. On one way it's able to reduce its inventory costs and, on the other way, it's able to react fast to any change of the "market conditions and fashion trends". In fact, such service offered by the company assumes a big importance because the benefits of an accurate demand forecasting are extremely high. Actually, the closer the company is to the final customer the better it is able to estimate its demand and "fight" the Bullwhip Effect. Such phenomenon leads to distortive information as we move up in the supply chain with negative consequences in the inventory management (excess inventories), causing long backlogs and manufacturing uncertainties. Consequences on the supply side are an increase inventory and manufacturing costs and on the demand side high levels of customer dissatisfaction.

* "Use an old economy mindset" - Although studiodirect.com is developing according to the lines of the new economy it keeps the traditional Li & Fung "guiding principles". In this sense, the financial analysis of the internet company is made with the old economy Li & Fung standards allowing the "new" company to have a solid financial back-up due to a more conservative approach than, for instance, the internet companies of the time. Additionally, and taking advantage of Li & Fung supply chain know-How, studiodirect.com is not going to hold any inventory risk. This is certainly possible because suppliers rely on the company's reputation which, in turn, increases studiodirect.com negotiation power.

Also, although 20% of the initial staff company belongs to Castling (internet start-up), such possible inexperience and riskier mentality is balanced with many employees with 30 years of experience in the merchandising field.

* Rely on Li & Fung Information Technology Experience - In 1995 the company launched its Intranet allowing it to "link the Group's offices and manufacturing sites around the world". In 1997 the company started launching Extranet sites with key customers offering them customized services. This improved communication along the whole supply chain and this online experience can certainly be leveraged by studiodirect.com.

* Financial support - Although partially mentioned, the parent company financial health (market capitalization around $6.6 billion and ROI of 60.2%), is a huge safety pillow to the internet company which can be used to surmount any possible financial derails with capital injections, especially in the initial phase of the online project. Additionally,