Post on 08-Oct-2020
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Global Product Solutions
Reinventing The Compass
There’s always space for niche players. But what if a niche is just the tip of the iceberg? After 16 years working for the world’s leading supply-chain manager, a top executive’s life was turned upside down. He took the chance to use his learnings and start afresh. But how
ambitious should the new company be? And how to succeed with fewer resources?
Keywords: Strategy, entrepreneurship, supply-chain, market segmentation, retail, brief cases,
business models, technological disruption, core capabilities.
LOOKING FOR DIRECTION
It was a quiet summer afternoon in Maia. David Schneider contemplated the warm sunset from
the balcony of his brand-new office - strategically located less than 10 minutes away from Porto’s
airport and less than one hour away by car of Portugal’s major industrial cities.
Just eight months ago, in January 2019, David was finishing his eight-year as Executive Vice
President of Li & Fung. He had joined the Hong-Kong based supply-chain orchestrator back in
2002, following the acquisition of his family’s business - a home textiles export trading firm.
Now, the seasoned executive had become an entrepreneur again and had to navigate the rough
waters of international trade in a much smaller and poorly equipped ship, at least when compared
to global corporations. His core crew remained the same, but he could no longer rely on the
multibillion-dollar supply-chain company that he used to call home. Why?
In 2014, a series of restructurings driven by the fight against middleman, hit Li & Fung. It started
with the spin-off of a business unit that accounted for nearly half of its sales, and got more
menacing by 2017, with the divestment strategy of its furniture, beauty and sweaters businesses
(Exhibit 1). In 2018, the time came for Li & Fung’s Portugal office to be closed.
Although market conditions were tough for the retail and logistics industry, the units tied to the
Portuguese office had been growing for the past decade. However, in September 2018,
headquarters informed the local company would have to close doors in the beginning of 2019.
With the support of his previous superiors, David decided to re-establish his family’s business to
continue serving the segments Li & Fung was no longer interested in. His new enterprise - Global
Product Solutions - clearly had potential. But what was the cost of reinventing the compass?
This case study was prepared by Hugo Volz Oliveira and Vasco Amoroso.
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THE LI & FUNG ERA
Li & Fung is best described as a global supply chain orchestrator. It was founded 1906 in Canton,
now Guangzhou. Fung Pak-liu - grandfather of the current Chairman, and Li To-ming - who
eventually retired - wanted to leverage their English and commercial skills to trade porcelain, silk,
and other goods. But it was only in in the 1950s that it began to resemble what is today.
After acquiring, operating, and selling some factories in Hong Kong after the second World War,
the Fung family decided the opportunity lied not in producing, but in coordinating production and
importing and exporting its output - be it toys, electronics, or ball point pens [1].
In the 1970s, Victor and William Fung - grandsons of the founder - were completing a PhD and
a MBA, respectively, at Harvard Business School. They were asked to return home and apply
their education to professionalise the business and transform it into an exporting powerhouse.
Then, in 1978, following the political and economic reforms implemented by Deng Xiaoping, the
landscape changed. China opened-up and Li & Fung was able to connect its growing number
of western customers to new factories across the border - the beginning of its platform.
The company, which in 1973 had been listed by the brothers on the Hong Kong Stock Exchange,
was re-privatized between 1989 and 1992 for restructuring reasons. Between 1990 and 2011,
Li & Fung grew from $230 million to more than $20 billion USD - a CAGR of 22.5% (Exhibit 2).
How? Their network of factories pioneered a business model that later became famous when
Uber, Facebook, Amazon, or Airbnb were hailed the West’s most popular taxi, media, shopping,
or accommodation providers - without owning the underlying cars, content, goods or real estate.
In Li & Fung’s case, it was clear they could become the world’s largest factory without owning
any shop floor. But, for that, they needed to grow quickly. M&A was the only way to go. It all
started in 1995, when it gobbled up a company practically its size - Inchcape Buying Services.
From then until 2010, Li & Fung acquired 70 businesses across the world and onboarded its
management (Exhibit 3). It was even hailed by Strategy&, a consulting firm, as a M&A leader [2].
But this strategy eventually backlashed as growth halted and cultural issues surfaced [3].
So, between 2013 and 2018, Li & Fung repositioned itself to develop the fashion supply-chain of
the future [4]. This meant it would stop focusing on product development and trading to dedicate
itself sourcing services and logistics in a digitalised and agile manner (Exhibit 4 to 8). But for how
long will a middleman find profitable space in an ever more decentralised world?
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DEVELOPING GLOBAL PRODUCT SOLUTIONS
After closing the Porto office, David Schneider hired several members of his former Li & Fung
team to replicate the more complex business model the supply-chain giant was no longer
interested in – that is, the one focused on product development for key retailers and brands.
The team started working in February in an hotel conference room. A couple of months after,
once the new office was ready, the team grew to 15 people. Organization was made simple to
reflect the agile approach this initiative demanded: everyone reported to the founder and the
structure was composed of commercial, quality control, and operations teams (Exhibit 9).
The commercial teams were composed of front office and product development staff – including
designers, engineers, and merchandisers - who coordinated the external manufacturing
elements - as well as the in-house photography, packaging, and marketing materials production.
Processes had to be simple to enable a fast reaction to customer needs. These were distributed
between the Americas, Australasia, and Europe. All production was finished in Portugal, but raw
materials and some semi-finished products came from Pakistan, China, and India.
As Exhibit 9 evidences, the business model has two main areas: the agency business and the
trading as principal business. The former serves clients who want to source products from
Portugal but don’t have a buying office or an agent, meaning margins are quite low – around 5%.
In the latter, GPS develops the whole product – instead of just buying it – for retailers’ private
labels and for brands. Whenever GPS owns the license of the brand, it can have up to full control
over the creative and commercial process – a larger risk that also commands larger rewards.
In cases in which GPS is only offering a design service without having the license, it just acts in
behalf of the brand as if it was a design studio. Obviously, due to the increased complexity of this
business, margins are higher – 20% on average, depending on the complexity of the project.
This is in line with the industry’s margins, made clear in Exhibit 8. In GPS’s case, agency
customers account for nearly 20% of sales. The goal is to end 2019 with nearly €5 million. And
David Schneider is positive the business can grow to €20 million with the existing team.
However, it’s not clear whether it’s possible to achieve that level while guaranteeing the same
agility and speed required by the customers. A company like this can be digitally transformed,
but the service still needs to be human – both to the customers and to the suppliers. After all,
without such service, any technological startup can disrupt the industry’s development process.
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LATITUDE AND LONGITUDE
Navigators were never much troubled with the computation of their latitude. Despite an increase
in accuracy since the quadrant and astrolabe were invented in the Roman Empire, one’s location
between the poles was easily assessed with the help of the sun or of the stars [5].
But calculating longitude was a different problem. It was only in the XVIII century that a reliable
chronographer that worked at sea was developed [6]. This method, which eventually trumped
alternative solutions, allowed sailors to know whether they were east or west of Greenwich.
In corporate strategy, it seems business leaders enjoy repeating history. It’s fairly easy to decide
where an organisation should be positioned north or south of a market’s equator. But it’s far
more complex to know how to get – and successfully stay – there through the course of time.
Note GPS has been serving a select group of clients. It produced Ralph Lauren, Sonia Rykiel,
and Hugo Boss via Fremaux-Delorme – which owns the license for those brands. Directly, it
developed Hackett, Andrew Martin, and Emily Bond. These home goods were destined to
Harrods, John Lewis, Crate & Barrel, Falabella, TJ Maxx. But were these the right clients?
Could bigger brands and retailers be interested in GPS’s flexible level of product development
and service? Or could GPS chase the growing trend for customised products by serving the long
tail of individual end consumers? If so, should that be done alone or through partnerships?
In the short-term, are the current trade wars enough to push customers out of Asia back into
sourcing from European vendors? And, even it if is, can GPS compete against Li & Fung and
other major supply-chain players, e.g. Connor or Junaman, that can offer lower prices?
To mitigate that risk, is it wise to open foreign offices to tap into that opportunity before
developing more sophisticated IT systems and processes? Or can GPS fulfil its global ambitions
using its current Portuguese-based model and just meeting its customers in tradeshows?
Lastly, should it expand beyond home textiles into other home goods? Should it explore other
customer segments in the home – e.g. the hospitality business? If so, should GPS develop the
business directly or through distributors? And which brands should it target (Exhibit 10 to 13)?
As the first anniversary of Global Product Solutions approached, David Schneider decided it
would be important to engage his team to plan the voyage ahead. After all, as Saint-Exupéry
wrote in Citadelle, an unfinished book, “building a boat is not about weaving sails, forging nails,
nor reading stars; but about giving a taste of the singular sea”. So, what should that taste be?
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References
[1] Fung Group, “Fung Group - Our Journey,” 2019. [Online]. Available: https://www.funggroup.com/en/about/our_journey/.
[2] Strategy&, “The Capabilities Premium in M&A,” 22 February 2012. [Online]. Available: https://www.strategy-business.com/article/12105?gko=05907.
[3] Financial Times, “Li & Fung faces guidance questions,” Financial Times, 14 January 2014.
[4] Li & Fung, “Annual Report 2018,” 2018.
[5] Smithsonian Mag, “The Story of the Astrolabe, the Original Smartphone,” January 2017. [Online]. Available: https://www.smithsonianmag.com/innovation/astrolabe-original-smartphone-180961981/.
[6] The Longitude Prize, “History of the Longitude Prize,” 2014. [Online]. Available: https://longitudeprize.org/about-us/history.
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Exhibits
EXHIBIT 1 – LI & FUNG’S BUSINESS DIVESTMENTS
Source: Li & Fung, Investor Day 2019 and 2016 Results Presentation
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EXHIBIT 2 – LI & FUNG’S METEORIC RISE AND FALL
$0
$5,000
$10,000
$15,000
$20,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Li & Fung Revenues between 1990 to 2018in '000 USD
Source: Li & Fung public data, compiled by the authors
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EXHIBIT 3 – LI & FUNG ACQUISITIONS BETWEEN 1995 AND 2010
Year Led by Hong Kong office Led by LF USA Led by LF Europe Led by IDS (now LF
Asia & LF Logistics)
1995 - Inchcape Buying Services
1996 - Macneil - Perfect Trading
1998 - Standard Fireworks Livring
1999
- International Buying Services Swire & Maclaine - Camberley
2000 - Europe Sourcing Colby
2002 - Janco - Holport / Texnorte
2003
- Civati Momentum Kariya - International Sourcing Group - International Porcelain / Firstworld Garment
2004 - Comet - BMB Apparel Zeeking - Ralsey
2005 - Promocean - Tropicanusa - Briefly Stated
2006 - KQIS Global Sourcing
- Youngstuff - Homestead - Oxford Industries (men’s wear) - Rosetti
- Impac SittTatt
2007
- Tommy Hilfiger Global Sourcing - CGroup - Alliance Merchandising - Liz Claiborne (Project Astro) - Star Profit
- Regatta - American Marketing - Enterprises Inc.
- Peter Black - PB Logistics - Sebor Sarawa - Sebor Sabah
2008
- Imagine - Silvereed - Wilson Textile - RT Sourcing - Mexx
- Giant - Van Zeeland - Miles
- Shanghai Healthcare - WTI - Universal Pharmaceutical
2009
- JMI - Liz Claiborne - Talbot - Hudson's Bay
- Wear Me Apparel LLC (Kids Headquarters) - Shubiz
- Roots - PT Westside - AGI
2010
- HTP - Jackel - Kenas - IDS - Fenix
- Cipriani - Oxford Industries (women’s) - Jimlar - Kenneth Cole - Production Inc.
- Heusel - Just Jamie
Source: Li & Fung public data, compiled by the authors
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EXHIBIT 4 – LI & FUNG’S RESTRUCTURING PLAN
EXHIBIT 5 – LI & FUNG’S GLOBAL FOOTPRINT AS OF 2018
Source: Li & Fung, Investor Day 2019
Source: Li & Fung, Investor Day 2019
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EXHIBIT 6 – LI & FUNG’S PLAN TO OUTCOMPETE ANALOG BUYING OFFICES
Source: Li & Fung, Investor Day 2019 and 2016 Results Presentation
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EXHIBIT 7 – LI & FUNG’S NEW DIGITAL PLATFORM
EXHIBIT 8 – LI & FUNG’S SIMPLIFIED P&L FOR COMPARABLE BUSINESS UNITS
Source: Li & Fung, 2017 Analyst Presentation
Source: Li & Fung, 2018 Annual Report
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EXHIBIT 9 – GLOBAL PRODUCT SOLUTIONS ORGANISATIONAL STRUCTURE
CEO
Agency Business Principal Busines
Own Brands Third-party Brands
Quality Control Operations
Source: Case authors
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EXHIBIT 10 - OVERVIEW OF A HOME TEXTILES COLLECTION PLAN
EXHIBIT 11 - OVERVIEW OF A HOME LIFESTYLE COLLECTION PLAN
Source: Case authors
Source: Case authors
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EXHIBIT 12 - HOME TEXTILES AND DECORATION MARKET TRENDS
EXHIBIT 13 - THE HOSPITALITY OPPORTUNITY
Source: Center for the Promotion of Imports, Netherlands Ministry of Foreign Affairs
Source: Case authors