Answer any ONE of the following two questions.
Question 1Apply the Strategic Alignment Model (SAM) to analyze the IT (i.e., ERP) initiative at Li & Fung. As the SAM is not a one-time event, please ensure that you specify which part of the case you are beginning your analysis from and where you are ending your analysis. For this part of the case that you select, ensure that you answer the following questions. Explain/justify your answers:
• Which domain drives which domain in which order?
• Is there any domain that is neglected or not addressed well?
• What should be the role of top management and IT management for the domain alignment perspectives you are analyzing?
• Identify and
iefly describe how you would assess IT for the domain alignment perspectives specified in your analysis.
Question 2 If you select this question, please answer all parts (a, b, and c) of this question.
a. Identify the target market for Lifung.com (LF.com). Explain if the bargaining power of these customers was low/medium/high. (High bargaining power would mean that the customers had high bargaining power that was not in the favor of Ali
is). Do you think that these customers would flock to LF.com in the first year after the launch of LF.com? Explain/justify your answers.
. Was the transition to the cloud worth it for Lumière? Explain/justify your answer.
c. In general, identify and
iefly describe some factors a medium or large business can use to measure the success of its large-scale IT projects? Explain/justify your answers.
Li & Fung (A): Internet Issues
“I’m not an Internet guy, I’m a business guy,” quipped William Fung, managing director of Li & Fung Trading Co. Clad in chinos and a black American Eagle T-shirt, Fung looked much more like a new-economy entrepreneur than the self-described offline, old-economy relic: “I'm 51; I'm more than a grey hair in Internet terms—I'm a fossil.”1 Nor did lifung.com, his elder
other Victor’s new online company, resemble a typical Internet start-up, particularly with the founders having a 96-year parent born at the end of the Qing Dynasty. In August 2000, the day before beta launch of the new business-to-business (B2B) e-commerce portal, William described the challenges facing Li & Fung:
About three or four years ago, Victor and I discussed the Internet and how it impacts us. Our starting point was a defensive posture: Would the Internet disintermediate us? Would we get “Amazoned”2 by someone who will put together all of the information about buyers and factories online? After a lot of research we realized that the Internet facilitates supply- chain management and we weren’t going to be disintermediated. The key is to have the old- economy know-how and yet be open to new-economy ideas.
With a press conference the following day, William was confident of the Group’s3 performance and lifung.com’s prospects. But he knew that important issues remained unresolved: Was there any chance of channel conflict or cannibalization between the offline business and the startup? How would the market react to the start-up once it was launched the following year? And how specifically would e-commerce ultimately transform his family’s century-old company?
Company Background4
Li & Fung was founded in 1906 by William’s grandfather, Fung Pak-Liu and his partner, Li To- Ming in Guangzhou, China, as an export trading company in Southern China selling to overseas merchants. In the 1920s and 1930s the company diversified into warehousing and the manufacture of handicrafts. Shortly after Fung Pak-Liu passed away in 1943, his son Fung Hon-Chu took charge of
1 Rahul Jacob, “Inside Track: Traditional Values at the Click of a Mouse,” Financial Times, August 1, 2000, p. 14.
2 Online bookseller Amazon.com had decimated the ranks of independent booksellers by aggregating services and offering a
oader selection of stock at lower prices than the small bookstores could.
3 “Group” refe
ed to the group of companies that made up Li & Fung’s trading, retailing, and distribution businesses.
4 Some information in this section is drawn from the following Harvard Business School case studies: “Li & Fung: Beyond Filling in the Mosaic—1995–1998,” HBS No XXXXXXXXXX, by Michael Y. Yoshino, Carin-Isabel Knoop, and Anthony St. George; and “Li & Fung (Trading) Ltd.,” HBS No XXXXXXXXXX, by Gary Loveman and Jamie O’Connell.
301-009 Li & Fung (A): Internet Issues
the company. Two years later, silent partner Li To-Ming retired and sold his shares to the company. The company retained Li’s surname, a homophone for “profit” in Chinese, which, along with “Fung,” a homophone for “abundance,” had an auspicious ring when combined.
Li & Fung relocated permanently to Hong Kong at the end of World War II, expanding its operations to include toys, garments, plastic flowers, and electronics. In the early 1970s, both Fung
others had just returned from the United States: William had earned his MBA from Harvard Business School and returned to the business in 1972. Victor had recently completed his Ph.D. in economics at Harvard University and, following a two-year stint teaching at Harvard Business School, rejoined the business in 1974. Their return heralded Li & Fung’s transition from a family- owned business to a professionally managed firm, with a planning and budgeting system in place for the first time. William and Victor, the third generation to run the company, felt that the next logical step in growing the company was to go public. In 1973, Li & Fung became the holding company for the Group and was listed on the Hong Kong Stock Exchange. Throughout the 1980s, Li & Fung expanded its regional network of offices throughout the Asia-Pacific region as more sources of supply emerged in the rapidly industrializing Asian economies. In 1988 the Group was privatized and streamlined, incorporated in Bermuda in 1991, and its trading activities were listed on the HKSE in July 1992. With the 1995 acquisition of Inchcape Buying Services5 (formerly Dodwell), Li & Fung expanded its customer base in Europe while simultaneously shifting its sourcing network beyond East Asia to include the Indian sub-continent, the Medite
anean, and Cari
ean basins.
By 2000, Li & Fung was a $2 billion global export trading company with 3,600 staff worldwide, sourcing and managing the global supply chain for high-volume, time-sensitive consumer goods. (Exhibit 1 shows 1999 Li & Fung financial data.) By 2000, 69% of Li & Fung’s sales were in the United States and 27% in Europe. Key customers included The Limited, Gymboree, American Eagle, Warner Brothers, Abercrombie & Fitch, and Bed, Bath, & Beyond. Tesco, Avon Products, Levi-Strauss, and Reebok had become customers within the last two years; Royal Ahold, Guess Jeans, and Bebe had signed on in 2000.
Li & Fung’s product mix included hard and soft goods. Soft goods refe
ed to apparel, including woven and knit garments for men, women, and children. Hard goods included fashion accessories, festive or holiday products, furnishings, giftware, handicrafts, home products, fireworks, sporting goods, toys, and travel goods. Hard goods provided higher margins than soft goods because, despite a generally lower item value per unit, they required higher value-added services for orders that were also usually much smaller than soft goods orders. Hard goods items such as watches, shoes, suitcases, kitchenware, or teddy bears required an inspector for quality control evaluation for even the smallest batch order, thereby greatly increasing what Li & Fung could charge. Margins for soft goods were roughly 6% to 8%, while margins on hard goods ranged anywhere from 10% to 30%, depending on the degree of complexity involved in sourcing raw materials. Li & Fung attempted to expand its sale of hard goods. In 1998 soft and hard goods contributed 77.5% and 22.5% of total sales, respectively, while the proportion of hard-goods sales grew to 25% in 1999 and was projected to increase to 27% in 2001 and 29% in 2002.
Holistic Supply-Chain Management
Although Li & Fung described itself as a trading company, by 2000 it was far more sophisticated than a typical Hong Kong import-export trading company and had come a long way from its roots in matching Chinese manufacturers with Western buyers. In Victor’s words:
5 For details, see Acquisitions on page 5.
2
Li & Fung (A): Internet Issues 301-009
We have been changing. Now we're orchestrating a whole production process that starts from raw materials all the way through to finished product. If you look at the old days, language skills could guarantee you margins better than we have now. My grandfather used to charge 15% or more, basically to be an interpreter. Those days are over.6
With 48 offices in 32 countries, the company provided value-added services across the entire supply chain in a so-called “borderless” manufacturing environment (see Exhibit 2). A down jacket’s filling, for example, might come from China, the outer shell fa
ic from Korea, the zippers from Japan, the inner lining from Taiwan, and the elastics, label, Velcro, and other trim from Hong Kong. The garment might be dyed in South Asia, stitched in China, then sent back to Hong Kong for quality control and finally packaged for delivery to The Limited or Abercrombie & Fitch. Victor explained:
Say we get an order from a European retailer to produce 10,000 garments. We determine that, because of quotas and labor conditions, the best place to make the garments is Thailand. So we ship everything from there. And because the customer needs quick delivery, we may divide the order across five factories in Thailand. Effectively we are customizing the value chain to best meet the customer’s needs. Five weeks after we received the order, 10,000 garments a
ive on the shelves in Europe, all looking like they came from one factory.7
Li & Fung clients benefited in several ways: supply-chain customization could shorten order fulfillment from three months to five weeks, and this faster turnaround allowed clients to reduce inventory costs. Moreover, in its role as a middleman, Li & Fung reduced matching and credit risks, and also offered quality assurance to its customers. Furthermore, with a global sourcing network and economies of scale, Li & Fung could offer lower cost and more flexible sourcing than its competitors. In addition, through acquisitions and global expansion, Li & Fung was extending this knowledge base to Sub-Saharan Africa, Eastern Europe, and the Cari
ean. Finally, Li & Fung provided up-to- date fashion and market trend information to clients. As a result of its Camberley acquisition in 1999 it started offering clients virtual manufacturing, or product design services.
According to