Li_&_Fung_Case

ATENEO DE DAVAO UNIVERSITY Jacinto Street, Davao City Li & Fung- The Global Value Chain Configurator Presented to the Faculty of the School of Business and Governance In Partial Fulfillment Of the Requirements in Management 426 (Strategic Management) Submitted by: Del Fierro, Gabriel Escudero, Arvin Edsel Estremos, Jane Naciluan, Rebecca Pogoy, Precious Gift Pulma, Aileen Tan, Ardaves January 2012 Submitted to: DR. ANTONIO A. EMBERDA Professor CHAPTER I-CURRENT SITUATION Company Overview Li & Fung Limited is the Hong Kong-headquartered multinational group and recognized as the world's leader in consumer goods design, development, sourcing and distribution. The Company specializes in supply chain management of high-volume, time-sensitive goods for leading retailers and brands worldwide via an extensive global network. Li & Fung Limited provides sophisticated, one-stop-shop supply chain solutions to meet customers' specific needs. From product design, raw material sourcing and production management to quality control, logistics, shipping and other important functions, its spectrum of services covers the entire supply chain end-to-end. Over the years, Li & Fung Limited has won numerous industry accolades for its performance, governance and sustainability. The Company is committed to the highest operational standards, conducting its business with integrity and good corporate governance practices with an emphasis on transparency and accountability. Sustainability considerations are embedded into its corporate policies and risk management systems. Li & Fung Limited (SEHK: 494) is listed on the Hong Kong Stock Exchange and is a constituent member of the Hang Seng Index, MSCI Index Series, S&P/ StanChart Greater China Index, FTSE4Good Index, Dow Jones Sustainability Asia Pacific Index and Hang Seng Corporate Sustainability Index Series. The Company is a member of the Li & Fung Group, with a history dating back over a century to 1906. Strategic Posture Mission * During the 1980s, Li & Fung revamped its organizational structure to manage its global sourcing network better and meet customer needs. * In january 2004 William said, "With the ability to directly export products from China to our customers worldwide” and to increase it share in the global market. Objectives * To achieve double-digit growth in the face of higher interest rates, a sharp decline in the value of the US dollar and significantly higher oil prices. * To sustain the improvement in the Group’s profitability in the first half of the year. * To sustain in the second half because of continuing demand for the Group’s value-added services, a growing client list, its proven licensing strategy and smaller but strategic acquisitions. * That by the end of 2004, the Group may move successfully into a higher-margin business model that will allow for further growth. Strategies The Group’s drive for growth remains a key focus for 2004 and beyond, and several initiatives are already in place to ensure sustainable growth: * Selective and opportunistic acquisitions remain a focus for the Group, and efforts to identify and secure value-enhancing acquisitions will continue. * Broader geographic reach has already been created with the acquisition of InternationalSources. This has opened up new potential in Mexico and paved the way for other geographicregions to be pursued. * Higher margin business, especially arising from licensing agreements such as those with Levi Strauss Signature™ and Royal Velvet, will allow the Group to add financial quality to its operations. The brand-value benefits of such agreements, to the Group and to its licensors, are also noteworthy. The direct contribution to earnings from the branding and licensing business is unlikely to be immediate but the potential beyond 2004 is significant. * New opportunities from China goes beyond just sourcing and manufacturing. The Group’s export company license from the Ministry of Commerce of the People’s Republic of China delivers a complete supply-chain service advantage that the Group intends to maximize. The Group is now able to import raw materials and export under its own name, as well as benefit from VAT rebates. * Diversification of customer base through an expanding product mix will also continue to provide fresh momentum for growth. The Group’s global role in managing the supply chain for high-volume, time-sensitive consumer goods such as garments, fashion accessories, toys, sporting goods, promotional merchandise, handicrafts, shoes, travel goods and household items will be further enhanced as more brand names and more products are added. Board of Directors of Li & Fung Victor FUNG Kwok King Group Non-Executive Chairman,Chairman of Nomination Committee and Risk Management Committee Victor FUNG Kwok King, aged 59, brother of Dr William FUNG Kwok Lun, is Group Chairman of the Li & Fung Group of companies including the Company and the publicly listed Integrated Distribution Services Group Limited and Convenience Retail Asia Limited. Dr Fung joined the Group in 1973 as Manager and became Managing Director of the Group’s export trading business in 1977. He became Group Managing Director in 1981 and Group Chairman in 1989. Dr Fung holds Bachelor and Master degrees in Electrical Engineering from the Massachusetts Institute of Technology, and a Doctorate in Business Economics from Harvard University. Dr Fung is an independent non-executive director of Bank of China (Hong Kong) Limited, PCCW Limited, Sun Hung Kai Properties Limited and Orient Overseas (International) Limited. He is currently Chairman of the Hong Kong Airport Authority, the Hong Kong University Council and the Greater Pearl River Delta Business Council. William FUNG Kwok Lun Group Managing Director William FUNG Kwok Lun, OBE, JP, aged 56, brother of Dr Victor FUNG Kwok King, is Group Managing Director. He joined the Group in 1972 and became a Director of the Group’s export trading business in 1976. He became Group Managing Director in 1986. Dr Fung graduated from Princeton University with a Bachelor of Science degree in Engineering and holds an MBA degree from the Harvard Graduate School of Business. He was conferred the degree of Doctor of Business Administration, honoris causa, by the Hong Kong University of Science & Technology. Dr Fung is an independent non-executive director of HSBC Holdings PLC, CLP Holdings Limited, chinadotcom corporation and VTech Holdings Limited. He is also a non-executive director of various companies within Li & Fung Group including Convenience Retail Asia Limited and Integrated Distribution Services Group Limited. Bruce Philip ROCKOWITZ Executive Director Bruce Philip ROCKOWITZ, aged 46, is an Executive Director of the Company since 2001. Mr Rockowitz is also the President of Li & Fung (Trading) Limited, the principal operating subsidiary of the Group. Mr Rockowitz previously served as President and Chief Executive Officer of Colby International Limited from 1986 until 2000 when Colby was acquired by Li & Fung where he was responsible for Colby’s growth and development and day-to-day operations. He has over 23 years of experience in Supply Chain Management of apparel and consumer hardgoods for markets worldwide. Spencer Theodore FUNG Executive Director Spencer Theodore Fung has been an Executive Director of Li & Fung Ltd. since July 1, 2008. Mr. Fung joined Li & Fung in 2001. He serves as an Executive Director of Li & Fung (Trading) Limited, a wholly-owned subsidiary of Li & Fung Ltd. and is an In Charge of a business unit with 800 staff in 19 countries and responsible for overall sourcing strategy and operating effectiveness of the unit. He is a Certified Public Accountant of the U.S. Mr. Fung holds a Bachelor of Arts degree from Harvard College and Master of Science in Accounting and Master in Business Administration degrees from Northeastern University. Paul Edward SELWAY-SWIFT Independent Non-Executive Director,Chairman of Audit Committee Paul Edward SELWAY-SWIFT, aged 60, is an independent non-Executive Director of the Company since 1992. He is currently Chairman of Singer & Friedlander Group PLC, a banking and investment management group and of SVB Holdings PLC, a specialist insurance group, both of which are quoted on the London Stock Exchange. He is Chairman of The Atlantis China Fund PLC and also a director of several other companies including Alba PLC. Mr Selway-Swift was formerly Deputy Chairman of HSBC Investment Bank PLC and a director of The Hong Kong and Shanghai Banking Corporation Limited in Hong Kong. Allan WONG Chi Yun Independent Non-Executive Director,Chairman of Compensation Committee Allan WONG Chi Yun, JP, aged 54, is an independent non-Executive Director of the Company since 1999. He is currently Chairman and Group Chief Executive Officer of VTech Holdings Limited. He co-founded VTech Group in 1976. He holds a Bachelor of Science degree in Electrical Engineering from the University of Hong Kong, a Master of Science degree in Electrical and Computer Engineering from the University of Wisconsin and an honorary degree of Doctor of Technology from the Hong Kong Polytechnic University. Franklin Warren McFARLAN Independent Non-Executive Director Franklin Warren McFARLAN, aged 67, is an independent non-Executive Director of the Company since 1999. Professor McFarlan is Baker Foundation Professor at Harvard University. He has been a Professor at the Harvard Graduate School of Business Administration since 1973 and was Faculty Chairman of Advanced Management Program and Chairman of Executive Education Programs. Professor McFarlan graduated from the Harvard Business School with a doctorate. He was Senior Associate Dean from 1990-2004. He is currently a non-executive director of Computer Sciences Corporation, Providian Financial Corporation and INVESTools. Makoto YASUDA Independent Non-Executive Director Makoto YASUDA, aged 67, is an independent non-Executive Director of the Company since 2001. He is Chairman and Chief Executive of international advisory firm Yasuda and Pama Limited, which is a joint venture of PAMA Group Inc. (previously known as Prudential Asset Management Asia Limited). He has been engaged in private equity investment and management activities in Asia for more than 34 years. He is well experienced in cross-border corporate advisory, merger & acquisition, project development, and other merchant banking activities. He is currently a non-executive Chairman of Atlas Copco KK and a non-executive director of Yamatake Corporation. He is also an advisor to HSBC Japan and Interface Asia Pacific. LAU Butt Farn Non-Executive Director LAU Butt Farn, aged 57, is a non-Executive Director of the Company since 1995. Mr Lau joined the Li & Fung Group in 1981 as financial controller. Between 1985 and 1998, he was Operations Director for Li & Fung (Retailing) Limited (the retailing arm of the Li & Fung group of companies) with operation in Circle K Convenience Stores (HK) Limited and Toys “R” Us-Lifung Limited. He is a non-executive director of Integrated Distribution Services Group Limited. He was also responsible for the investments of the private group. Mr Lau graduated from the University of London with a Bachelor of Science degree in Physics and is a Fellow of the Institute of Chartered Accountants in England and Wales. Top management Li & Fung is led by Group Chairman Victor Fung, Executive Deputy Chairman William Fung, and Group President and CEO Bruce Rockowitz. The Company's management team represents some of the most experienced professionals in the global supply chain management industry. Our business covers the entire supply chain, and is structured into three interconnected business networks – trading, logistics, and distribution. Each senior executive, guided by an entrepreneurial approach, and with deep knowledge of international consumer markets and trends manages a business portfolio defined by geography and product line. The depth of executive experience provides Li & Fung with a strong and talented team that has been instrumental in its continuous growth and success. Corporate Social Responsibility and Sustainability Li & Fung has developed a Supplier Code of Conduct to be observed by all its approved vendors around the globe. The Code is a set of rigorous labor, health and environmental standards and expectations based on national labor laws, International Labor Organisation (ILO)’s conventions and treaties, and international best practices. For example, vendors are prohibited from hiring child or involuntary labor. They are also prohibited from practicing corporal punishment or any form of discrimination. The importance of environmental protection, occupational health and safety standards as well as compliance with the law is also clearly stated in the Code. Aside from conducting supplier inspections and ongoing supplier verification audits, Li & Fung also provides systematic training both internally to its employees and externally to its vendors to equip them with awareness, knowledge and the necessary skills and tools they need to meet compliance requirements. Li & Fung is a member of Business for Social Responsibility (BSR), an international non-profit organisation based in the US that promotes respect for ethical values, people, community and the environment. Li & Fung is a founding member of the Global Labor Law Database, organised by BSR and funded by its member companies. This project has translated labor laws and regulations of over 60 countries and posted them online to ensure that the members’ compliance teams have ready access to the most current data when auditing production facilities around the world. In 2004, the Group’s Hong Kong and overseas offices in Taiwan and Vietnam obtained the “Chain of Custody” certification in trading of indoor and outdoor home-used wood products certified by The Forest Stewardship Council (FSC), an international non-profit organisation based in Germany whose mission is to promote environmentally and socially responsible forest management worldwide. FSC Chain of Custody certification is independently verified and provides assurance to our committed customers that the forest products bearing the FSC trademark label were produced from certified well-managed forests in all stages of processing, manufacturing and distribution. CHAPTER III-EXTERNAL ENVIRONMENT Hong Kong Economy Hong Kong's Gross Domestic Product (GDP) expanded by a robust 8.1 per cent in real terms in 2004, distinctly faster than the 3.1 per cent rate in 2003. The performance was the second best since 1987, just after the exceptionally high growth in 2000. On a year-on-year comparison, after increasing by 7.3 per cent in the first quarter of 2004, GDP surged further by 12 per cent in the second quarter against a low base in 2003 due to SARS, and sustained notable growth at 6.6 per cent and 7.1 per cent in the third and fourth quarters. On a seasonally adjusted quarter-to-quarter comparison, GDP expanded throughout the four quarters, by 2.4 per cent, 1.9 per cent, 1.7 per cent and 0.6 per cent respectively in real terms. This once again demonstrated the resilience and strength of our economy. In the external sector, merchandise exports sustained remarkable growth throughout 2004, boosted by sturdy demand in all major markets including East Asia, the European Union and the US, as well as buoyant external trade and robust domestic demand in the mainland of China (the Mainland). Apart from this, the increasing competitiveness of Mainland products in the world market, coupled with the weakness of the US dollar, rendered a further boost to Hong Kong's exports. On invisible trade, inbound tourism was vibrant. The tourism sector fully recovered from SARS and was back on a full upswing, with the number of incoming visitors hitting successive new monthly highs in the latter part of 2004. While extension of the Individual Visit Scheme boost in the number of Mainland visitors, the number of visitors from most other major sources also rose considerably. Offshore trade also thrived, underpinned strong trade flows in the region. While external trade was buoyant throughout 2004, the domestic sector also picked up. Local consumer spending maintained notable growth throughout the year, as consumers willingness to spend was well underpinned by optimism over the economic outlook, improving labour market conditions, as well as the wealth effect stemming from the rebound in property prices. Investment demand strengthened as investor confidence returned. The activity upturn and brighter business outlook prompted a broad-based increase in machinery and equipment investment by growing businesses. building and construction output remained in a lull, however, due to the earlier fall-off in new private building projects, and less building in the public sector. The labour market improved progressively on a broad front throughout 2004. As the economic recovery gathered pace, total employment expanded notably. Vacancies rose across many sectors, with particularly distinct rises in trade-related and tourism-related sectors such as freight transport services, retailing, and restaurants and hotels. Reflecting improved employment conditions, the seasonally adjusted unemployment rate fell successively from a high of 8.6 per cent in the second quarter of 2003 to a near three-year low of 6.5 per cent in the fourth quarter of 2004. The underemployment rate also fell from a high of 4.3 per cent in the second quarter of 2003 to 3.1 per cent in the fourth quarter of 2004. Downward pressures on wages and labour earnings, which were still pronounced in 2003, began to recede gradually in 2004. The fall in labour earnings narrowed from 1.0 per cent in nominal terms in the fourth quarter of 2003 to 0.6 per cent in the fourth quarter of 2004. Water and Waste We recognize that water is a scarce and valuable resource and have therefore made efforts to reduce our water consumption in Hong Kong and globally. In 2010 in our Hong Kong operations, we consumed 9,790 cubic meters of water, which is a 5.5% reduction on our consumption in 2009. We will continue to roll out water reduction efforts in our global operations. Our waste reduction campaign focused on reducing A4 paper consumption, and in 2010 we achieved a reduction of 20.9% paper consumption per colleague in our global operations. Our total paper consumption in 2010 was 103,089 reams. We also maintained our “Class of Excellent” Wastewi$e Label in Hong Kong. Energy and Carbon We recognize the risks posed by climate change and understand that business action is crucial for our global efforts to combat climate change. In 2010 we continued our partnership with the Clinton Climate Initiative and engaged Honeywell to conduct an Investment Grade Audit (IGA) of our headquarters in Hong Kong and advise us on energy efficiency opportunities. In 2010, we began to implement the audit’s recommendations and have begun to see reductions in energy consumption. For the second consecutive year, we have been awarded the Energywi$e Excellent rating for our Hong Kong offices and the “Class of Good” Energywi$e Label under the Hong Kong Awards for Environmental Excellence program of the Hong Kong government. In conjunction with our efforts on energy efficiency in our Hong Kong headquarters, we reduced our Scope 1 and 2 carbon emissions by 12% compared to 2009. Globally, we are taking additional energy conservation measures, enabling us to reduce carbon emissions by 2.8% per m² compared with 2009 in our global operations. While reduction efforts have resulted from analysis on top of the IGA, many initiatives have been “bottom up” as a result of engaging our employees and leadership taken by key functional departments such as IT and corporate services. Overall in 2010 our total global energy consumption was 187,099 GJ (51,972,203 KWh) while our total global emissions were 37,614 tons of CO2 equivalent. This data forms part of our disclosure through the Carbon Disclosure Project. Human Rights Since the founding of Li & Fung, respect for human rights has always been at the core of our beliefs and embedded in the way we do business. As we continue our transformation into a leading multinational group, we have formalized these principles into group policies and codes of conduct that foster a respect for human rights amongst our employees and business partners. We are committed to uphold the International Labor Organization's Declaration on Fundamental Principles and Rights at Work and the ten principles of the UN Global Compact, covering human rights, labor, environment and anti-corruption, throughout our operations. As a business within society, we will play our part to support the UN Declaration of Human Rights as a necessary foundation for social development and economic progress. Sustainable Building and Renovation In parallel to our initiatives to increase the sustainability of our existing facilities and operations, we are also seeking to practice sustainable design for our new offices and renovations. In 2010, two of our offices in the United States were certified to the Leadership in Energy and Environmental Design (LEED) Silver standard. As we gain experience with the design and operation of sustainable offices, we aim to make sustainable building a core part of our global sustainability strategy. CHAPTER IV-INTERNAL ENVIRONMENT Corporate Structure The Board The Board is composed of the Group Non-Executive Chairman, the Group Executive Managing Director, four executive directors and six non-executive directors (of whom four are independent). In order to reinforce their respective independence, accountability and responsibility, the role of the Group Chairman is separate from that of the Group Managing Director. Their respective responsibilities are clearly established and set out in writing. The Group Chairman is responsible for ensuring that the Board is functioning properly, with good corporate governance practices and procedures, whilst the Group Managing Director, supported by the executive directors, is responsible for managing the Group’s business, including the implementation of major strategies and initiatives adopted by the Board. The non-executive Directors (the majority of whom are independent), who offer diversified industry expertise, serve the important function of advising the management on strategy development and ensuring that the Board maintains high standards of financial and other mandatory reporting as well as providing adequate checks and balances for safeguarding the interests of shareholders and the Company as a whole. The Board has received from each independent non-executive director a written annual confirmation of their independence and satisfied their independence up to the approval date of this report in accordance with the Listing Rules of The Stock Exchange of Hong Kong Limited. The Board has established four committees with specific responsibilities as described below. Major matters that are specifically delegated by the Board to management include the preparation of annual and interim accounts for board approval before public reporting, execution of business strategies and initiatives adopted by the Board, monitoring of operating budgets, implementation of adequate systems of internal controls and risk management procedures, and compliance with relevant statutory requirements and rules and regulations. Corporate Culture The Board of Directors is committed to principles of corporate governance consistent with prudent enhancement and management of shareholder value. These principles emphasize transparency, accountability and independence. Set out below are those principles of corporate governance as adopted by the Company. In order to reinforce their respective independence, accountability and responsibility, the role of the Group Chairman is separate from that of the Group Managing Director. Their respective responsibilities are clearly established and set out in writing. The Group Chairman is responsible for ensuring that the Board is functioning properly, with good corporate governance practices and procedures, whilst the Group Managing Director, supported by the executive directors, is responsible for managing the Group’s business, including the implementation of major strategies and initiatives adopted by the Board. The non-executive Directors (the majority of whom are independent), who offer diversified industry expertise, serve the important function of advising the management on strategy development and ensuring that the Board maintains high standards of financial and other mandatory reporting as well as providing adequate checks and balances for safeguarding the interests of shareholders and the Company as a whole. Corporate Resources Information Technology Li & Fung adopts the latest mature information technology for enhancing efficiency and effectiveness in its external and internal communications. The IT infrastructure established by the Group includes the sharing of dedicated Extranet sites with technologically advanced customers and other key partners of the supply chain network, such as vendors and freight forwarders, to facilitate speedy dissemination of business information and better management of supply chain activities. Foreign Exchange Risk Management Most of the Group’s cash balances are deposited in HK$ or US$ with major banks in Hong Kong. The Group has a HK$41 million short-term revolving loan denominated in Japanese Yen as a currency hedge against shares held in Sojitz Corporation (formerly Nissho-Iwai Nichimen), a strategic investment in Japan made during 2001. Apart from the above, most of the Group’s assets, liabilities, revenues and payments are either in HK$ or US$. Therefore, we consider our risk exposure to foreign exchange rate fluctuations minimal. Human Resources As of 31 December 2004, the Group had a total workforce of 6,685, of whom 2,344 were based in our Hong Kong headquarters and 4,341 were located overseas throughout our sourcing network of close to 40 countries and territories. The Group offers its staff competitive remuneration schemes. In addition, discretionary bonuses and share options are also granted to eligible staff based on individual and Group performance. The Group is committed to nurturing a learning culture in the organisation. Heavy emphasis is placed on training and development, as the Group’s success is dependent on the efforts of a skilled, motivated work force. Total staff costs for the year 2004 were HK$1,726 million, compared against HK$1,546 million in 2003. Financial Performance In 2004, Group turnover increased by 11% to HK$47 billion. Profit attributable to shareholders was HK$1.53 billion, representing a 25% increase over the HK$1.22 billion of 2003. Earnings per share were 52.6 HK cents, compared with 42.3 HK cents in 2003. Figure 1.1 Earnings per Share Dividend per Share based on the 3 year plan The Board of Directors has proposed a final dividend of 30 HK cents per share, and also a special dividend of 25 HK cents per share, to be paid as a return of excess cash to shareholders. The Group is keen to ensure efficient capital utilisation and feels that its existing businesses will be able to generate a healthy cashflow. Should additional funds be required to support Group operations and acquisition programme they can be well covered from remaining cash reserves plus the judicious use of additional gearing, if necessary. Together with an interim dividend of 12 HK cents per share, the total dividend for the whole year would amount to 67 HK cents per share (2003 total: 35 HK cents per share). Turnovers The strong increase in profit was mainly driven by the increased proportion of higher-margin businesses. The Total Margin rate increased from 9.3% to 9.6% during the year. In line with the Three-Year Plan strategy, the Group has been striving to create more added value for our customers along the supply chain. This also led to an increase in our Core Operating Profit Margin from 3.1% to 3.4%. Core Operating Profit increased by 21% to HK$1,595 million as a result. Figure 1.2 Turnover Ratio Based from the 3-year Plan In terms of non-operating items, the adoption of the Hong Kong Financial Reporting Standard 3 “Business Combinations” during the year has resulted in a change in the accounting policy for goodwill as detailed in the accounts. Because of this, the Group did not have to amortise goodwill relating to acquisitions from 1 January 2004 onwards. Goodwill amortisation charges amounted to HK$26 million in 2003. Taking into account the above, plus net interest income, contribution from associated companies, tax, and minority interest, profit attributable to shareholders amounted to HK$1,530 million, an increase of 25% over 2003. Segmental Analysis The softgoods business accounted for 67% of turnover in 2004, with turnover and operating profits increasing by 11% and 27% respectively. The higher growth rate in profit reflects an increase in demand for our value-added services such as product development, and goods delivered on a landed duty paid basis instead of FOB country of origin. After two years of high growth, the Group’s hardgoods business consolidated its strong base core customers in 2004. Turnover and operating profit increased by 10% and 6% respectively. The Group’s business with mainstream retail customers continues to see satisfactory growth in turnover and profits. However, profitability was affected by the poor performance on some specific product lines such as fireworks, which the Company is confident in reversing in the coming Three-Year Plan. Geographically, United States continued to be the Group’s major export market, accounting for 68% of turnover in 2004. The Group has made good progress in growing our business outside of the United States with new customer additions. In Europe, turnover grew at a faster rate of 13%. Operating profit increased by 15%, reflecting an increase in margin that is in line with the rest of the Group. Sales to Canada and Latin America accounted for 4% and 1% of the total in 2004. Although still small, the Group sees good potential to grow in these markets as they were dominated by large retailers that are conducive to using our services. Figure 1.3 Total Margin Core Operating Profit Margin Business in Australasia accounted for 4% of the total. Turnover and operating profit saw strong increases of 55% and 71% respectively. The Group has signed up major new customers in Australia and has established a strong presence in that market through working with a number of leading retailers there. For the Rest of the World, reflecting mainly the Japanese market, saw a moderate increase in turnover of 3%. After a three-year trial, our partnership with Nichimen (renamed Sojitz Corporation in 2004) met with little success. The Group continues to view the Japanese business as a strategic market in the long-term with great eventual potential. We are currently pursuing projects with a few major retailers that may help us reach a breakthrough in this market. New Business Ventures The strategy of focusing on margins has been an important part of our Three-Year Plan 2002-2004. In line with this, since 2003 the Group has started to build a brand business in the United States. This is an extension of our role in the supply chain, and is expected to further enhance the Group’s profit margin going forward. Shipments for the Levi Strauss Signature license for tops commenced in Fall 2004 with satisfactory response from retailers such as Wal-Mart and Target. The brand business has yet to contribute to the Group’s profitability as startup expenses were incurred for the launch of this brand and other brands such as Disney, Levi’s Red Tab tops, Cannon and Royal Velvet with the first shipments planned only for Spring 2005. Indications for orders for these new brands are strong and the brand business is expected to be an important contributor to our new Three-Year Plan 2005-2007. Acquisitions In the latter half of the year, the Group made several acquisitions of smaller companies that will complement the growth of our business. These included an apparel sourcing company targeting the French specialty store market, and a design-led knitwear trading company with a strong US customer base. Figure 1.4 Operating Cash flow based on the 3 year plan The acquired businesses have total annual turnover of approximately US$128 million and this will be reflected in the Group’s turnover going forward in 2005. Integration of these companies is well underway and there are solid prospects of increased growth rates and profitability of these new business units. Financial Position and Liquidity As indicated above, the Group continues to be in a strong financial position in the period, with more than sufficient cash and cash equivalents amounting to HK$2.1 billion on 31 December 2004. Normal trading operations are well supported by over HK$17 billion in bank trading facilities. In addition, the Group has available bank loans and overdraft facilities of HK$1.5 billion, out of which only HK$243 million has been utilised. As at 31 December 2004, the Group has no long-term borrowings, therefore the gearing ratio is not applicable. The current ratio was 1.4, based on current assets of HK$8.2 billion and current liabilities of HK$6 billion. At the end of December 2004, charges on assets amounted to HK$124 million to cover banking facilities in the ordinary course of business. The Hong Kong Institute of Certified Public Accountants has issued a number of new or revised Hong Kong Financial Reporting Standards (“HKFRS”) and Hong Kong Accounting Standards (“HKAS”) (collectively referred to as “new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. In the year, the Group has adopted the following new HKFRSs in advance of their effective date: Figure 1.5 Current Ratio based in the 3-year plan HKAS 36 Impairment of Assets HKAS 38 Intangible Assets HKFRS 3 Business Combinations The adoption of the HKFRS 3 “Business Combinations” in the year has resulted in a change in the accounting policy for goodwill as detailed in the accounts. In terms of non-operating items, because of this change in accounting policy for goodwill, the Group did not have to amortise goodwill relating to acquisitions from 1 January 2004 onwards. Goodwill amortisation charges amounted to HK$26 million in 2003. CHAPTER V-ANALYSIS OF STRATEGIC FACTOR CHAPTER VI-STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY Strategic Factor Analysis Summary External Factors/ Internal Factors | Strengths (S)S1 Quality Li & Fung CultureS2 Customer- Centre Organizational StructureS3 Employees Relations | Weaknesses (W)W1 Lack of cooperation and coordination among country unitsW2 Resources AvailabilityW3 Trade Regulations | Opportunities (O)O1 Globalization of MarketsO2 Globalization of ProductionO3 Economic Development | SO StrategiesS1O1- the company should have the supply chain management company function online which will give more customers input into the design phase.S2O2- continue with their current strategy and bypass getting into the online arena | WO StrategiesW1O1- The benefit of adding a B2B portal would ensure they’ve positioned the company to continue to be the largest SCM company in a competitive market.W2O2- By outsourcing the materials needed for production, it can help the company lessen their expenses. | Threats (T) | ST Strategies | WT Strategies | T1 Strong Competition among competitorsT2 Economic CrisisT3 Increase Price of materials | S1T1- To improve the quality of their products through monitoring their day to day operations.S2T2- To provide cheaper products for the customers through outsourcing their production in the country which provide cheaper labor cost. | W1T1- Li & Fung should improve their communication so that the flow of their production will be constant.W2T2- Li & Fung should always monitor their available resources for them avoid shortage of resources.W3T3- Li & Fung must look for a country that has lesser tariff charges so that it can minimizes their expenses. | Strategy S1O1 The Company should have the supply chain management company function online which will give more customers input into the design phase. Pros: It will help the company gain additional profit through online services. Online transactions are much easy than the normal transaction. Example: Those customers who will buy the products online have its own advantages. (1) Online shopping, Orders are made easily, payment is made through banks. (2) Customers can view and review their selected products. Con: (1) Additional costs for the buyer because of the shipping fee. (2) There are lots of online scammers. Strategy S2O2 Continue with their current strategy and bypass getting in the online arena Pros: (1) The customers do not need to adjust to the new strategy. (2) The customers will not be confused on what to do because they still follow the old ones. Cons: (1) They will have hard time in transacting their business deals due to sticking to the old system. (2) Difficult for them to map out the operation due to manual/poor system of tracing the transactions. Strategy S1T1 To improve the quality of their products through monitoring their day to day operations. Pros: (1) There will be less defect that will occur due to constant monitoring of products (2) Improve quality of products (3) The defects can easily be monitored and provide solutions to the problem occurred. Cons: (1) Another cost to the company due to additional overhead that will be hired. (2) The person assigned to this job might not do its task efficiently and efficiently that may occurred lapses on the defects. Strategy S2T2 To provide cheaper products for the customers through outsourcing their production in the country which provide cheaper labor cost. Pros: (1) May compete to the competitor’s prices due to lower cost of raw material and labor. (2) The work will be divided and may fasten the production of merchandise. (3) Less hassle to the part of the company because all the things or materials that they will be needed is passed to the one with high expertise on that kind of task. Cons: (1) They cannot assure the work of the producer (2) Additional cost for the company Strategy W1O1 The benefit of adding a B2B portal would ensure they’ve positioned the company to continue to be the largest SCM company in a competitive market. Pros: (1) Having a B2B portal would ensure that they will accommodate the needs of the customer. (2) They will easily monitor on what happening in the market because they have portal that will take action if problems occur. Cons: (1) They will somehow lack monitoring and may cause inconsistency of doing their task. (2) They might invest to wrong portal and additional liability for the company. Strategy W2O2 By outsourcing the materials needed for production, it can help the company lessen their expenses. Pro: (1) Competitive advantage for the company due to lower labor cost and they can compete with the competitor’s prices Con: (1) No assurance on the quality of work Strategy W1T1 Li & Fung should improve their communication so that the flow of their production will be constant. Pro: (1) All the actions happening in the operation will be monitored and tracked. Con: (1) Additional Investment for the company Strategy W2T2 Li & Fung should always monitor their available resources for them avoid shortage of resources. Pro: (1) It will prevent from freeze of production due to consistent supply of resources Con: (1) It may be costly to the part of the company because they need inventory to continuous supply of resources Strategy W3T3 Li & Fung must look for a country that has lesser tariff charges so that it can minimizes their expenses. Pros: (1) They can used it for additional investment for the company (2) They can do what they want due to less government regulation around them Con: (1) They will be a sudden change of tariffs that they can hardly adjust to the new system. Recommendation Li & Fung should continue using their B2B, refining it to be a user- friendly interface. Since 75% of its customers are large retailers in the US, a portal from the retailer to Li & Fung should be established so retailers can manage their internal inventory in real-time in conjunction with the ordering process of Li & Fung. For example, if Kohl’s is selling a particular shirt which appears to be very popular. Kohl’s would predetermine at what minimum to reorder. When the inventory system confirms that the specific number has been met, there is an automatic order placed with Li & Fung through their partnering portal. CHAPTER VII- STRATEGY IMPLEMENTATION, EVALUATION AND CONTROL Evaluation and Control Strategic Factor | Action Plan | Priority System | Who will implement | Who will review | How often Review | Criteria Used | The company should have the supply chain management company function online | Formulate a new supply chain strategy that can establish online usage | 4 | Head of Information Technology | CEO | Quarterly | Flow of Operations | To continue with their current strategy and bypass getting into the online arena | Maintain the positive strategies which helps the company in its current performance | 2 | Head of Information Technology | CEO | Quarterly | Flow of Operations | To improve the quality of their products through monitoring their day to day operations. | Find Alternative materials that has better quality | 3 | Head of operations | Production VP | Quarterly | Sales Growth | To provide cheaper products for the customers through outsourcing their production in the country which provide cheaper labor cost. | Find Alternative materials which have lesser cost yet yield the same quality | 3 | Head of the Production | Production VP | Annually | Sales Growth | By outsourcing the materials needed for production | Purchase expensive materials in other countries that has low cost of the said material | 2 | Head of Production | CEO | Semi- Annually | Price of materials | Improve their communication so that the flow of their production will be constant. | Monitor the Relationship bewteen Top to Lower Management | 2 | Head of Human Resource Management | HRM VP | Monthly | Flow of work | monitor their available resources for them avoid shortage of resources. | Checklists must be provided and Monthly forecasts must be done | 1 | Head of Production | CEO | Monthly | Consumer Demands | minimizes their expenses. | look for a country that has lesser tariff charges | 1 | Head of Marketing | Marketing VP | Annually | Feasible Alternatives Generated | Appendix: External Factor Analysis Summary OPPORTUNITIES | Weight | Rating | Weighting Score | Comments | 1. Information Technology | .10 | 4 | .4 | Advancement of Technology | | .10 | 4 | .4 | | 2. Globalization of Markets | .02 | 3 | .06 | Global Intervention | 3. Globalization of Production | .05 | 4 | .20 | Global Intervention | 4. Economic Development | .02 | 3 | .06 | Stable Market | 5. Economic Integration of Chinese Community | .03 | 1 | .03 | | 6. Cheaper raw materials | .05 | 1 | .05 | Decrease in prices | 7. Trend to “Super Stores” | .01 | 1 | .01 | Improvement of Stores | 8. Demographics Favor quality textile | .05 | 4 | .20 | | | | | | | THREATS | | | | | 1. Strong Competition among competitors | .15 | 5 | .75 | Competitive Advantage among Competitors | 2. Economic Crisis | .025 | 1 | .025 | Unstable Economy | 3. Uncertainties in the retaining industry | .025 | 2 | .025 | | 4. Fortuitous Events | .10 | 4 | .40 | Unexpected Events | 5. Increase Price of materials | .05 | 4 | .20 | Lack of supply | 6. Improving margin | .05 | 3 | .15 | | 7. Government regulation | .05 | 2 | .10 | Tariffs and Taxes | 8. Anti-surge quotas | .01 | 2 | .08 | | 9. Communication problem | .03 | 3 | .06 | Miscommunication | 10. Competition with customers | .25 | 1 | .025 | | Total | 1 | | 3.65 | | Internal Factor Analysis Summary Strengths | Weight | Rating | Weighting Score | Comments | Strong Financial Marketplace | .10 | 1 | .1 | Well positioned | Company Expansion | .10 | 4 | .4 | Will take time | Customer- Centre Organizational Structure | .05 | 3 | .15 | Key for the company to success | Employees Relations | .05 | 4 | .20 | Good, but deteriorating | Structured organizational Structure | .02 | 3 | .06 | Quality key to success | Centralized, Functional Work teams | .03 | 1 | .03 | Dedicated Leaders | Loyal Consumers | .05 | 1 | .05 | Consumers trusted the company | Quality Li & Fung Culture | .05 | 3 | .5 | Quality Key to success | | | | | | Weaknesses | | | | | Lack of cooperation and coordination among country units | .10 | 5 | .50 | It needs improvement | Competitive pressures | .03 | 3 | .09 | Supervise daily | Financial Position | .03 | 2 | .06 | Uncontrollable | Distribution Channel | .05 | 5 | .25 | It needs improvement | Lacks financial knowledge of competitors | .03 | 2 | .06 | Questionable | Manufacturing needs improvement | .02 | 3 | .06 | Should be managed well | Global positioning | .02 | 5 | .10 | Need to be located properly | Resources Availability | .02 | 2 | .04 | Should be prioritized | Transportation Network | .05 | 5 | .25 | Need to be developed | Trade Regulations | .15 | 5 | .75 | Well positioned | Outsourcing Capability | .05 | 3 | .15 | Questionable | Total | 1 | | 3.8 | | Comparative Financial Statements Figure 1.6 Comparative Financial Statements from 2001-2004 Figure 1.7 Comparative Financial Statements from 2001-2004 (Balance Sheet) Sources: http://en.wikipedia.org/wiki/William_Fung http://investing.businessweek.com/research/stocks/people/person.asp'personId=8294079&ticker=494:HK http://investing.businessweek.com/research/stocks/people/person.asp'personId=46448988&ticker=494:HK http://investing.businessweek.com/research/stocks/people/person.asp'personId=8304313&ticker=PURE:LN&previousCapId=795846&previousTitle=LI%20%26%20FUNG%20LTD http://www3.hku.hk/cpaoonweb/honfellows/fellow_detail.php'section=main&id=198 http://www.lifung.com/eng/company/management.php http://www.lifung.com/eng/company/ http://www.lifung.com/eng/company/directors.php http://www.lifung.com/eng/ir/reports.php'year=2002