Executive planning every three years, which is called a

Executive Summary    

Li & Fung is renowned in the global export trade area. The company
is headquartered in Hong Kong where it exports its “non-durable” products in
three main markets around the world: LF Asia, LF Europe, and LF USA. LF Asia is
the new, dominant market, especially in China. Since its inception, the company
has been quite successful with local sourcing. However, the company is
currently faced by critical challenges following rapid technological
advancement. China shifts from a low labor cost market to a consumer market and
growing innovations of external business environment. Labor cost is
consistently rising in China and it is on its way to develop into more of a
consumer market than a labor-intensive market. Under these changing conditions,
should Li & Fung shift to the suppliers and manufactures from other lower
labor cost countries to open other opportunities to expansion or should they
follow the existing growth or should they abandon the whole Asia market?

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Background

Li & Fung was
founded in 1906 by Fung Pak-liu and Li To-ming in Guangzhou. It operates three
business networks, which include distribution, trading, and logistics. Li &
Fung mainly engaged in production, designing, shipment, and distribution of
consumer goods. The company has been publically traded on the Hong Kong stock
exchange ever since 1973. (Mcfarlan, 2012) Li &
Fung will re-assess the strategic planning every three years, which is called a
three-year plan. The company developed
two overseas markets (LF
Europe & LF USA) in the early years. Then, in their new three-year plan
(2011-2013), they would like to expand the domestic market because the turnovers
were almost covered, all of the market shares combined LF Europe with LF USA in
2010 and 2011 (exhibit 1). Therefore, the company had to make certain
transformations in its strategic framework like establishing the network, focusing
on cross-selling for the external environment, and retaining the internal
cultural values. The leadership at the company also has to devise appropriate
responses to the emerging requirements in order to keep its long-term survival
and growth in the Asian market. Consequently,
William Fung aims to maintain these as he prepared to be the next chairman of
the company.

Description of the issue

In 2010, there was an
incident that shocked the world, even affecting the policies in China: suicides
of Foxconn employees. With the fermenting of these events, it captured the
attention of the government. The government issued the new policies on minimum
wage protection of workers. The policies increase the minimum wage by 13% to
14% annually and an overall increase of 80% in the next Five-Year Plan
(2011-2015). Since
then, the industries decided to transform into high value and well-developed
company in the consumer market in lieu of a labor-intensive market. (Mcfarlan, 2012)

This scenario
reveals that the main issue faced by Li & Fung is the changing economic
conditions in China. Rising labor cost in China is likely to affect its profit
margin in the future due to the suppliers raising their prices to adjust for higher
wages. Hence, three strategic priorities to tackle this issue are suggested
below.

Analysis
of Alternatives

Option
1:
Maintaining the present status

The first strategic
alternative is to go with the intact strategic framework or do nothing. The
company could continue to follow its existing growth and business strategy
without implementing any major changes. This implies that Li & Fung could wait
for the spontaneous solution of the challenging issues, such as the transition
from a labor-intensive market to focusing on consumers.

It is a good
strategy as a whole because the company will be able to maintain its
familiarity with the current ways of operating. They do not need to adapt to
the changes of a new situation, especially for a big, global company which
owned 240 offices and 15000 suppliers because changes are cost a lot also. (Mcfarlan, 2012)

However, one of the
most critical disadvantages of this passive approach is the fear of labor costs
that continue to rise in the Chinese market. With the increase of the labor
cost, it will critically affect the prices of goods sourced by Li & Fung. The
company will have to compromise on its profit margins. They have to accept the
truth with gradually decreased revenue in Asia market. It is also hard for
companies to survive in today’s business environment, which require the
abilities of innovation and energetic.

Option
2: Shifting the sourcing center from China to other countries

This strategic priority requires Li & Fung
to gradually reduce its reliance on the suppliers from China due to its 50% of
total sourcing being dependent on the domestic market, and resort to suppliers
from other countries such as Malaysia or India (emerging countries in 2017).

A big advantage of
implementing this option is increased certainty. Current outlook of China’s labor market is threatening
for the companies that source heavily from this country. Rising labor price and
the government’s plan to exploit the consumer based market will certainly
affect the profit margins of Li & Fung in the long run. Nonetheless, the
company could avoid these negative implications by timely entering into
agreements with suppliers from other lower cost countries. Another benefit is
to open up the door to new possibilities of expansion. The other countries may
provide a lower cost not only for the labors, but also for the suppliers. Sometimes,
the government also encourages the external investors by giving some concessional
treatments, lower the boundaries, or flexible policies. For instance, according
to the Malaysia government, Malaysia allows the investment
immigrants to have long-term visas, there is no minimum residency
requirement, etc.

Nonetheless,
cultural differences are a huge difficulty for a large-scale company. It is
cross-cultural business, so Li & Fung need to re-adjust their existing
business model to be applicable to the other countries. Moreover, they need to
take more time to investigate the consumer preference at that country,
otherwise its challenging to compete with the local industries. It is difficult
to find appropriate employees to manage the overseas market. They could not
merely find someone of any nationality to take this position. It may also
negatively affect sustainable development if they are not continued to local
sourcing.

Option
3: Changing
the business model

As the above mentioned,
the Chinese market is shifting from manufacturing and sourcing to the consumer-centric
market. Therefore, Li & Fung could maintain the current market in China,
but the core business now could be selling products in the Chinese market. The
consumption rate of China keeps growing annually. The economy increased 6.9% in
2017. According to the website Statista, there is a forecast for the average
consumption from 1995 to 2030 (exhibit 2). It is clearly illustrated that the
consumption rate had a sharp rise from 48% in the first stage (1995-2010) to
56% in the second stage (2011-2015), and it continues to grow in the next 15
years. It is a positive prospect for Li & Fung if they could get into the
consumer market, which means a big market requirement. Familiar with the
current market is another advantage of Li & Fung. It helps with further
development of domestic market by collaborating with the old, stationary suppliers
and understanding the customer preference. In a sense, these strategies save
more time and costs for the company.

Conversely, this
option is riskier due to the uncertainty. The variation of consumption began to
decline since 2012. The consumption was increased by 9.1% in 2012, but the
trend is gradually reduced (exhibit 3). The website FocusEconomies forecasts
the rate would be decreased to 6.4% in 2018 and 6.1% in 2019. The second
drawback comes from a lack of experiences of selling in developing countries.

The company may need to figure out a new operating model, such as a new
quotation, especially because China is the source area; or a new logistic
network as this is “reverse flow”.

Recommendation

Combining with three
options, the third one should be the best option for Li & Fung. The first
two options will bring more loss than the last one. Maintaining the current
status will pay more on the raw materials and make hard to further expansion. Shifting
to another Asian country will waste a vast human and material resources. In
addition, the two options would cost significant amount of funds and time to
build offices or training the new employees because the different cultural
background. In this way, compared with the inescapable disadvantages, changing
the business model to adapt to the current market conditions in China is more reasonable.

On the other hand, Li & Fung should make some changes based on the combination
of the second option and the third option. They could do sourcing from other
lower cost countries like Malaysia and selling to the emerging consumer markets
like China as well to motivate more sales. This is probably more promising for Li
& Fung.

Current
status of case initiatives

William Fung, the chairman of Li & Fung announced that he expects
China will be the biggest consumer market around the world by 2030. He wants to
promote the retailing industries and he was trying to increase the market share
in 2016. Mr. Fung said, “a rise in the minimum wage was one
example of the steps taken to boost consumption in the world’s second biggest
economy.” (CNBC news)

Li & Fung stated
the strategic partnership with two large retail groups in Shanghai and Beijing,
China in 2015. The operation is enabling the private labels and licensed
brands. The company is looking forward to opening up to 300 retailer stores in
China and to $161 million in turnovers. “Through this strategic partnership, Li
& Fung is able to extend the global supply chain into a substantial retail
network that serves a large growing middle class in China” said by William
Fung. (License Global, 2015)

In 2017, Li &
Fung released their new three-year plan (2017-2019) officially, which focuses
on speed, innovation, and digitalization. The goal is to further develop the
future supply chain to help their consumers “navigate the digital economy” and
affect the lives of one billion people in the supply chain.