Li & Fung Trading Case Study

1. The trading industry is a complex one that involves dealing with many different stakeholders while making strategic alliances with suppliers of raw materials, manufacturers and transporters. A porters 5 forces analysis reveals that the suppliers in this industry (including those that supply raw materials and those that manufacture) are highly fragmented and are high in number. As a result no single supplier firm commands a dominant market share in their respective product markets. Trading companies not only have more negotiation power on the bargaining table but also establish guidelines, which their suppliers must follow. As a result suppliers to this industry do not wield much bargaining power.

The buyers of the services rendered by this industry include large multi national corporations that outsource their supply chain management activities as it is outside their core competencies. Some customers are extremely large volume buyers and as a result have a large amount of influence on the price of these services. The cost of switching between traders is small and the process quick, therefore buyers that are price sensitive are very likely to switch to those traders who can supply the same goods for a lower price. But even though there are many traders in the industry, only a handful have distinguished themselves because of their large global sourcing and manufacturing networks, such companies can even charge a premium for their services as they deliver extremely high levels of value and quality. Thus although buyers in this industry are price sensitive, there is a constant struggle between value for money (quality, timely delivery, customer service) and low cost.

The trading industry lacks any significant barriers to entry thus allowing new comers to enter the market at any time. Furthermore, governments around the world are taking steps to increase international trade creating many new opportunities for new entrants into this market. Although competing in this industry is not capital intensive there exist significant economies of scale and learning which new comers will take time to take advantage of. Most importantly its only those firms that have a strong established global network that succeed in this industry, firms entering this industry will require time and significant resources in order to be able to compete or prevent being acquired by the incumbents in this industry.

With the increasing pace of globalization many firms have begun going directly to the manufacturers removing the need for generalized trading firms. Although this may seem like a significant threat to firms within the industry it is neutralized by the fact that any company going directly to the manufacturer will always be at the risk of hold up. In addition to that risk there is no way to be completely sure that they are getting the best price for their needs. Trading firms offer significant value adding activities like quality control and timely delivery, which are skills and capabilities that are acquired over years of experience in the industry.

The Porter’s 5 forces analysis reveals that this is an industry in which competition is faced by many acquisitions and mergers. There are many firms within the trading industry all with various skills specializing in various areas of the industry. Firms compete on the basis of price and value added activities but because of the low cost of switching between traders, firms need to compete intensely to retain their clientele.

The competencies that are critical to succeeding in this industry are primarily the ability to deliver significant value through customer service activities while offering competitive prices. In order to do this a successful firm must have a global footprint. It must have the ability to source raw materials from those parts of the world where they are the cheapest and manufacture the goods in those parts of the world where the labor is cheapest, all of this while insuring the quality and timely delivery of the goods. A successful firm is distinguished by its ability to handle the supply chain activities of its customers, something that requires excellent customer service and flexibility.

2. Li & Fung have become Hong Kong’s largest exporter and trader. While globalization was looked at as threat by all the other “middle men” traders, Li & Fung have made an opportunity from what every other firm perceived as a threat. They have moved from simply being a link in the chain between manufacturers and retailers to extensively managing the entire value chain. The process begins with Li & Fung designing the product to fit the specifications of their clients. Once approved Li & Fung will go through its global sourcing network in order to find the best place to source the raw materials from. After that, through dispersed manufacturing Li & Fung are able to manufacture the product