Strategy

When you have completed this chapter you will understand:

the nature of strategy.

that there are alternative views and dimensions of strategy;

the fundamental significance of ideas such as “competitive advantage”;

the importance of choosing the appropriate strategy;

a number of the strategic approaches that predominate;

several strategic planning tools;

the role of accounting and accounting information in framing and assessing strategy.

Strategy to Make the Maths Work, by Demetri Sevaastopulo

When Li & Fung was set up in Canton, now known as Guangzhou, in 1906, it specialised in exporting traditional Chinese goods – from silk and porcelain to tea and fireworks – to the west. Over the past century it has transformed itself into the world’s biggest sourcing company, with turnover last year approaching $21bn.

Wherever you live, there is a good chance that some of your clothes, toys or household goods were sourced by Li & Fung from factories in China and around the globe for retailers such as Walmart, fashion companies such as Calvin Klein, or brands owned by the group, such as Juicy Couture.

Now based in Hong Kong, Li & Fung has succeeded by finding manufacturers to make goods cheaply for retailers such as Target and Marks and Spencer. But it has faced criticism in recent years that its model – acting as the intermediary between factories and retailers – was becoming unsustainable, particularly as labour costs rise rapidly in China.

William Fung, the 65-year-old chairman of the company co-founded by his grandfather, says it received too many accolades in the past and is now being unfairly criticised. Nevertheless, it recently took a “zero-base look” at its business to find a model more suited to the global environment, and thereby answer its critics and rescue a share price that has halved over the past three years.

“We’ve got to find a growth driver in Li & Fung given our size, because now arithmetic is against us,” says Mr Fung, in his Kowloon office in Hong Kong. “When we were small you could grow at 20–30 per cent … nowadays [if] we get a new account even for half a billion dollars, it doesn’t move the needle that much.”

In preparing its new three-year plan, Mr Fung says, the company realised that it must “develop a whole new market”. The result was a big departure from its traditional model: instead of treating the 15,000 factories in its network as suppliers, it would see them as customers. This realisation formed the first element of a three-pronged strategy to help boost Li & Fung’s future growth prospects.

“We’d better get very serious about this game of supporting our factory base,” says Mr Fung, adding that the move could help factories outside China “to pick up some of the slack that China is going to create by being more expensive”.

The new business takes Mr Fung back in time. When he and his brother Victor, honorary chairman, returned to Hong Kong from the US in the 1970s, China was taking baby steps towards becoming a manufacturing powerhouse. Over time, it attracted all the links in supply chains previously located in countries such as Japan, Taiwan and South Korea. Now the reverse is under way.

Driving the new model is what Mr Fung says is a “very clear sign that production for labour-intensive manufacturing will migrate out of China”.

Li & Fung’s new plans range from assisting factories in locations such as Bangladesh to get trade finance, to helping manufacturers in China move up the value chain. The latter is being encouraged by the Chinese government as rising wages make the country less competitive for labour intensive manufacturing …

The second part of the three-pronged strategy involves an investment in logistics through its March acquisition of China Container Line, a sea freight forwarding business. The aim is to generate more bargaining power via larger volumes, providing cost savings on shipping of 5 to 15 per cent.

The third, and according to some analysts, most controversial element involves Li & Fung spinning off a unit called Global Brands Group into a separate listed company as soon as it receives approval from the Hong Kong stock exchange, which is expected within months.

GBG owns a range of brands such as Juicy Couture, but also holds licences from fashion labels such as Tommy Hilfiger and J. Lo – the brand started by film and music star Jennifer Lopez – to produce and sell their products.

Some analysts have criticised GBG, saying the unit used acquisitions to mask a lack of organic growth. Mr Fung says the rationale to split the companies was that they will pursue very different models. The sourcing business provides low margins but a steady income, while the other “is more volatile but overnight it could be a fantastic success” …

He hopes that investors will buy his story. Several analysts have applauded the move, and the stock has risen about 10 per cent since the announcement. But some have a less rosy view, such as Spencer Leung at UBS. In a recent note to clients, he expressed concerns that GBG is taking a higher proportion of Li & Fung’s liabilities relative to its size, and that the sourcing business is overvalued due to limited growth potential.

Addressing one criticism that has been levelled at Li & Fung, Mr Fung says it does not plan any big acquisitions over the next three years: “We really need to pause and just get growth”…

(Financial Times, 3 June 2014)