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KENSINGTON COLLEGE OF BUSINESS

Managing Information System A Case Study on Li & Fung.

Submitted by ID No: 15075 Kensington College of Business.

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Managing Information System.

A Case Study on LI & Fung. Introduction From economical point of view Information technology has made a drastic difference in both the relative cost and cost of information. According to Laudon (1990) information systems can be defined as an element of production which can be placed instead of traditional capital and manual labor. Transaction cost theory points out that institutions urge to economize on transaction cost as much as they do on production cost. (Coase 1937; Williamson, 1985) explains that using virtual market is relatively expensive as it includes expenses such as liaising with distant consumers collecting information on products, sorting insurance. Here comes the importance of Information technology as it helps to reduce all these above mentioned expenses. Taking into consideration these facts of Li & Fungs moves to introduce integrated management of information system, the essay analyzes and critically evaluates the strategic steps taken by this firm and its pros and cons. Routed strongly with the educational qualification and experience of William Fung & Victor Fung, this organization has put its foot down decades back in the business environment. Over all these years Li & Fung embraced changes with a positive attitude. This is the main reason why this company has strong basis despite all threats. To be in the flow Li & Fung decided to introduce information management system so as to target more consumers all over the world. Introduction of extranet and intranet for ecommercing is the key concern Li & Fung is facing. For this new wave this particular company has put forward different strategies and liaised with many other business institutions. Lifung.com, studiodirect.com, electronic stock offer and other systems and business processes were put into practical to go ahead with the growth into new buyer markets and also to key out opportunities in the supplier markets. This case study analyzes each and every strategy and critically evaluates the issues faced by Li & Fung.

15075 Bubble-in or Turnkey Solution Basically Li & Fung is a traditional organization which has catalyzed itself to move faster by the implementation of technological innovations. Usually the organizations want to take a hands free stand when it comes to development of an area which the company does not have expertise in. But Li & Fung took its stand to make the strategy clear that it wanted a Bubble-in Solution rather than Bubble-out. Keeping an eagles eye on the macro environmental changes Li & Fung was confident enough to introduce the internet system without outsourcing the work. According to Jensen and Meckling (1976) The Agency Theory which view a firm as nexus of contracts between owners who have self interest to develop firm. In this a principal owner or an entity employs outside bodies to perform and particular task on behalf of the owner. Even though the theory stresses that the principal owner need to review the work from outsiders constantly as there are more chances of risks in it. As the company grows, it is mandatory that it needs to outsource some work so as to get more ideas and caliber channelized into their mainstream work.

Source: http://www.roymogg.com/roywiki/index.php/Agency_Theory The studies show that under controlled and monitored situation, outsourcing work is very good for the fast growth of a firm. In terms of implementing extranet and intranet, Li & Fung confidently adopted outsourcing strategy, which eventually saved a lot of money, time and manual labor. Hence it can be concluded that the right stand at the right time to bubble-in and bubble out the work put forward by Li & Fung proved to be fruitful. Tripartite Growth The three year growth analyzing and implementing strategy put forward by Li & Fung was the perfect way of understanding the base and then to grow further in it. By Organic

15075 Growth the firm enlarged the companys stake organically by receiving more orders and keeping reputation with the current customers. They have stretched their hopes to Bangladesh, Sub-Saharan Africa and Manchester. This was a very planned or monitored move done by Li& Fung as it is the key element to success as customers matter in every business. In 2000 the company came to the top list and outperformed Hand Seng Index by 75%. Acquisition was the next step, which Li& Fung has put forward as another growth strategy. To propel the growth and to expand the firm in terms of money, expertise and size acquisition is one of the best strategies that any company can adopt. After the Camberley acquisition in Asia, Li% Fung hit the markets with more power. E-Commerce was another one which is been implemented over 1995 and 1997. Introduction of intranet and extranet proved to be success. The pros and cons of implementing E-commerce and security threats will be discussed later in this essay. Introduction of internet Li & Fung launched intranet in 1995 which paid the way for a technological development inside the firm. In 1997 the implementation of extranet boosted the ecommerce. Even though these changes have made a tremendous difference, there was a need of constant reviewing to catch up with changes and the dynamic nature of macro and micro environment. To enhance Supply Chain Management and to work effectively, Li & Fung introduce Information System (Intranet & Extranet). Another move was the implementation of ecommerce through which Li & Fung could fetch online products to the customers. Also this gave the options of order tracking and customization. This tied a bond between manufacturers, retailers and customers by stream lining communications in each and every step in the supply chain. The details of the benefits supply chain management has been facilitated by the use of internet can be discussed in different levels. The cream of customers targeted makes the goal more specific. This reduces the unwanted expenses in bill boards and other ways of advertising. This idea of finite customers at the right time of planning regarding

15075 expansion of the business will help Li & Fung positively. Through this the trust can be build up and there will be narrow down of delivery channel. By giving options of customization the e-commerce system gets saturated with lots of customer satisfaction. More and more options of enhancing the software and to make the extranet more user-friendly will give the customer peace of mind before they make a decision on what they have to buy. Moving with market will be another challenge of Li & Fung. The firm has to understand the wider and faster developments in the IT field and hence there should be constant review on the software packages that they have introduced in the e-commerce system. A thorough understand of macro environment is imperative in this juncture. By facilitating sale in large amounts to the retailers hit the pinnacle of profit then and there. Stadtler H (2004) pointed out that internet technology gives better option and facilitate effective interactions between customers and retailers which in turn help the organization to key out the demand and act accordingly. Li & Fung gave options to its customers to develop products on their requirement. This helped the firm without any wastage of the product. Also the product can be closely inspected by digital imagery technique. Another key benefit Li & Fung achieved was to expand/shrink the market according to the new trends. For example if the red polo shirts are in demand in a particular time, people can order polo shirts in red color itself by using the customization option. As soon as the trend changes to blue color the product can be produced according to the demand. This facilitated an effective supply chain management. In this fast life customers may be pushed to get things done in the last minute due to different circumstances. A faster delivery system which is being implemented in this ecommerce ensured quick delivery to the customer. This was put into practical by having a definitive data base of delivery channels. Immediate solution can be put forth if in case there is a problem in delivery channels. This was facilitated by the order tracking system. The smooth flow of raw materials has also been managed effectively across all countries by the introduction of information management system. The introduction of studidirect.com targeting SME (Small and Medium Sized Enterprise) was a wise move. All these have helped Li& Fung to have a better communication and tie-up within the

15075 organization and also between other organizations as well. More over, the e-commerce has helped to reduce the cost of the products as there will be an overall reduction of expenses that the company has to pay in terms of tax and building cost. Security threats While putting forward the new technology into being, one must be really careful about the potential threats that it can face. As two sides of coin, even the information technology has positives and negatives. Though this information management system is a vast opportunity for a quick development, there are high risks which should also be considered and necessary steps taken. The threats can be broadly classified as internal and external. Internal threats refer to the risk factors from the micro environment such as employees. The people who have the passwords and security codes can be potential threat in future. External threats refer to hackers, viruses and may also be threats from competitors. A good and strong security system is the only solution for this. As the extranet is being used by different people over different countries high risks of getting the website affected with virus cant be denied. Constant updating and password changes will be essential to keep the situation under control. Hacking of email as it is been used as a prime communication tool in organization can possibly affect the confidentiality and smooth running of the business. Eavesdropping which means altering the conduct of the message and sending to the people can create great tensions and miscommunications. By cracking the password the hackers can access anybodys email inside the organization and can send malicious virus and unnecessary contents to the customer which in turn will affect the reputation of the company. By using intrusion detection tools, these problems can be solved to an extent. This analyzes shows that introducing internet technologies into a companies business will have a wide range of advances at the same time having quiet a lot of threats as well. Along with this other security issues also need to be considered while implementing an ecommerce system. Though Li & Fung favored a Bubble-in approach in applying internet technology, LI & Fung use outsourcing strategy for the successful implementation of extranet and intranet. Li & Fung did not opt for staying aback from these changes as it foresee a rise of competition from the internet companies if they start acquiring all the

15075 trading companies. This thought was a worth one and that idea gave Li & Fung the confidence to cross the miles of IT innovations. To make this move successful and long lasting, various security measures can be adopted. This can vary according to the need and pattern of the organization. In the case of Li & Fung, this security measures can be put into practice in terms of authentication, integrity, privacy non repudiation, firewalls etc. Besides strong security passwords digital certificates can be generated as an authentication. Smart cards and other identity cards can be suitably used. These all gives the organization an authentication of each and every move and this would be a backlash for intruders. Keeping things under privacy is a big challenge for all organization nowadays. This can be demonstrated in an organization by giving the access strictly to the concerned people only. There can be different teams in an organization. Giving access to concerned people means it can even narrow down the number of people accessing the key information which can include only the relevant teams in it. Over lapping of information can be fetched to other team when in need only. Once a data is been entered there can be integrity in it which means that the particular data is kept as original without any sort of alterations. Pure data is always essential for the efficient business. Many organizations use digital signature and certificates as a solution of this. There are chances of non commitment from the customers. This is another risk which needs to be addressed. Sometimes the customer may order a particular product and when it comes to the payment part they deny that order. This also can be tackled to an extent by digital signatures. Firewalls which can be called as monitoring agents helps to filter any malicious interventions. This will be an imperative area which needs to be configured in the system. These above mentioned security measures can be taken into consideration to stop any sort of potential threats which may come in the way of the smooth running of e-commerce or supply chain management. Critical Evaluation Li & Fung in its new strategy to adopt a technological revolution in order to facilitate the supply chain management has to consider a lot of other factors pertaining to the issues associated with it. It would be appropriate to analyze the issues concerned with Li &

15075 Fung. Among this the competition amongst the existing firms is taken into serious consideration by Li & Fung and an acquisition strategy is followed in this case. This is the most appropriate strategy that can be followed by firms which are financially sound. This not only avoids the threat of competitors but also add the value of firm. Besides the number of potential customers increases to a great extend. This can be demonstrated very well by citing examples from Li & Fung itself. It acquired Dodwell in1995 and it could increase the operating margins from a mere 0.8% to 3%.The case is similar with all other acquisitions. Besides acquisition strategy the company is using technology to face the rivals. This has been proven by implementing the internet and extranet technologies which laid the platform for the company to go on line and thereby become strong against the rivals and at the same time managing the supply chain side more effectively. The threat of new entrants is another aspect to be considered. But as far as Li & Fung is considered threat of new entrants is not a serious issue. This is due to the fact that the company follows a traditional strategy along with implementing innovational strategies and it maintains highly competitive stands by spreading its wings across the globe. Li & Fung is not new in business. They are aware about the pulse of customers and thus they have been following various methods to be buyer oriented. They have been providing valuable services to the buyers besides providing quality products. The acquisitions by the company have also been adding value to the buyers by enhancing the product choices. The technological environment also boosted up services to the buyers by providing wider choices along with customization options by the company. The delivery time was also greatly reduced by enhanced technology. The suppliers are also benefited by Li & Fung. They are enhancing the value of suppliers by providing premium. This is another possible area of threat in this age of technological revolution as there are possibilities for potential online companies to start their work and pose challenges. However the synergy of the traditional knowledge along with strong technological back up makes le & Fung makes sound enough to face the problems. The supply chain aspect of the organization is greatly facilitated by the technology and it strengthens the need for the business to go online. While implementing an e-commerce strategy it should follow a bubble in approach to avoid unnecessary problems. It is also

15075 required to extend the strategic implementations across the business units spread around the world and not just limiting the application to a small portion. Such an approach would also help in gaining momentum for a century or more years. There is also security threats associated with outsourcing technique since outsiders may become aware certain key aspects and will ultimately result in problems. Michael Hsieh as mentioned in the case describes outsourcing as putting fox in the chicken coop. Thus, the concept of Bubble in is most suitable for Li & Fung. Supply chain management plays a significant role in organizations. Supply chain directly affects the manufacturing industries like Li & Fung because it affects its ability to meet the market requirements in time bound and cost effective manner. Li & Fung aims at building longer and healthy relationships with its customers. In this regard it has been taking some significant steps towards offering better services besides the technological development. Among this the most important one is the acquisition strategy followed by the organization. It is indulged in acquiring its near competitors to not only avoid competition but also strengthen itself by expanding its customer network and products and services. The rise in the marginal profit through these acquisitions points on to their success. Some of these acquisitions provided new services like virtual manufacturing. It can be success only through online processing systems. Another major positive part of the organization is that it is following a three year plans right from 1996. These plans focus on clear cut objectives and appropriate methods are adopted for the fruitfulness of the objective. Such plans should be continued in future and the objectives should be focused on technology driven supply chain management. Porters Value Chain model According to Laudon (2007) the value or advantage of Porters chain model is that it helps to identify the strengths of a firm and from that point it helps to discover the importance of implementing Information management system and the ways of implementing as well. By classifying the activities into primary and secondary levels, this helps to clearly identify the strategy that can be put into place. This analysis is imperative when it comes to the supply chain management. Primary level consists broadly of products and its

15075 distribution which can be called inbound and outbound logistics, operations, marketing and services. In the case of Li & Fung their products were soft and hard goods. In the supply chain, by the introduction of E-commerce, we can see that and effective communication, time management, reduction of unnecessary cost, all that has been achieved. The options of customization, production under demand and managing raw material delivery across country made the E-commerce implementation successful. Hence in the primary level we can analyze that the introduction of Information management system has proved to be a successful venture.

Source: http://eng19.wikidot.com/sb03-lecture-it-impact-and-strategy The secondary level includes obtaining, human resource management, technological development and infrastructure. We can clearly see effective implementation of secondary level elements in Li & Fung by the introduction of acquisitions, SME, Tripartite Growth and e-commerce. Hence it is obvious from the analysis using porters value chain model that each and every strategy put forward by li & Fung proved to be successful and is potential base for the future growth. Conclusion Li & Fung with its adopted new strategies logically proved to be of highest chemistry between the old system and new system. The knowledge based on accumulated experience of the organization proved to be beneficial in its different methods and strategies and is well established globally by the presence of the same. The important steps like amalgamation methods was highly beneficial to the organization as it provided great strength to the organization by increasing the profit margin together with fulfilling 10

15075 the desires of more potential customers. The strategies like three year plans commenced by the organization has resulted in accomplishing new heights to the firm and therefore the firm was in tone with accepting such strategies in the future. Li & Fung under control of good managerial skills revealed that it is ready to accept appropriate changes in time and to act along with it. The employment of new means like intranet and extranet strategies and its accomplishment is a good proof of it. This success persuaded them to go online and to the application of research to study deeply into it. In considering the future of the organization Li & Fung approved the policy of going along with Bubble in approach. In this regard the firm had to give due importance to the security concerns to make sure the future success. To ensure and maintain smooth supply chain operations a well established security policy backed up timely updating facility is prominent. The development of Product Line of the firm proved to quite beneficial in keeping along with its firm stands. The Li & Fung is at the zenith of success which is due to its strategy of being traditional together with the application of innovative strategies to suit the changing global technological situations.

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Reference Stadtler, H., C. Kilger. 2004. Supply Chain Management and Advanced Planning: Concepts, Models, Software and Case Studies (3rd Edition). Springer-Verlag, Berlin, Germany Coase 1937; Williamson, 1985. Part one. Organizations, Management, and the Networked Enterprise. Page 90. Laudon, K. & Kaudon, J. (2007). Management Information Systems: Managing the Digital Firm. Information systems, Organizations and Strategy (pp. 96106). Upper Saddle River, NJ: Pearson Education, Inc. Jensen, M.C and W. H. Meckling: 1976, Theory of the Firm. Managerial Behavior, Agency Costs and Ownership Structure Journal of Financial Economics 3 Mcfarlan, W. & Young, F. (2005). Harvard Business School Cases: Li & Fung (A) (B) Internet issues (pp. 1-23) Coyle, J.J., E.J. Bardi, C.J. 2002. Langley: The Management of Business Logistics (7th Edition). South-Western College Publications, Mason. Poirier, C.C. 2003. Using Models to Improve the Supply Chain. CRC Press, London, UK. http://www.roymogg.com/roywiki/index.php/Agency_Theory viewed on 01/12/2011 http://eng19.wikidot.com/sb03-lecture-it-impact-and-strategy viewed on 01/12/2011

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