Victor K. Fung: An interview by Bob Morris

Posted on: October 22nd, 2011 by bobmorris

Li & Fung Management Team, with Victor K. Fung fourth from left

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.

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Victor K. Fung became the Chairman of the International Chamber of Commerce on 1 July 2008. He is Chairman of the Li & Fung Group of companies, with major subsidiaries in trading, distribution and retailing, including publicly-listed Li & Fung Limited, Integrated Distribution Services Group Limited, and Convenience Retail Asia. He is also Chairman of the Greater Pearl River Delta Business Council, the Hong Kong University Council, and the Hong Kong- Japan Business Co-operation Committee.

Fung holds a number of civic and professional appointments. He is a member of the Chinese People’s Political Consultative Conference, the Hong Kong Government Commission on Strategic Development, and head of a focus group for the Economic Summit on China’s 11th Five-Year Plan and the Development of Hong Kong, organized by the Hong Kong government. He has written and spoken widely on international trade matters and is a strong advocate of the multilateral trading system. He has served as Chairman of the Hong Kong Trade Development Council, as the Hong Kong representative on the APEC Business Advisory Council, and on the Informal Business Advisory Body to the World Trade Organization. He has also served as Chairman of the Hong Kong Airport Authority.

Born and raised in Hong Kong, Fung holds bachelor’s and master’s degrees in electrical engineering from the Massachusetts Institute of Technology, and a doctorate in business economics from Harvard University. He was a professor at the Harvard Business School for four years before returning to Hong Kong in 1976. He is the co-author of Competing in a Flat World: Building Enterprises for a Borderless World with his brother, William Fung, and Yoram (Jerry) Wind.

Here is an interview I conducted a few years ago. I hope to have the privilege of interviewing Victor again, given all that has happened — and not happened — in the global marketplace since that first interview.

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Morris: In The World is Flat, Thomas Friedman recalls a moment in Bangalore (in 2004) when he realized that “the global playing field was being leveled. The world was being flattened.” Please share your own perspectives on “the global playing field” to which Friedman refers.

Fung:  Our own business evolved from a Chinese trading company to a networked enterprise as the world became increasingly flat. For us, the global playing field was being leveled with globalization and the arrival of the Internet.  Country borders were no longer relevant.  Individuals from different corners of the world could work together to create products and services for customers anywhere in the world.

Morris: In fact, Li & Fung has been operating as a “flat company” since the 1980s. What does that mean in terms of its role as a “network orchestrator”?

Fung: Li & Fung is a flat company with a lean structure.   While a vertically integrated company might own every stage of the manufacturing process, our company doesn’t own its supply chains. Instead, we connect with the capabilities we need anywhere in the world. Li & Fung Limited, the trading arm of the Li & Fung Group, produces more than $9 billion in products for some of the best brands in the world, yet we don’t own a factory. Instead, we orchestrate networks. This flat company gives us tremendous flexibility and scalability, allowing us to connect with the best capabilities wherever they are in the world. We empower our own managers to act entrepreneurially.  In contrast to rigid control systems, the network orchestrator relies not just on rewards, but also upon a combination of empowerment and trust, as well as training and certification to manage a network that it does not own. 

Morris: Li & Fung has a supply chain of about 10,000 suppliers served by more than 70 sourcing offices in more than 40 countries and territories. How does Li & Fung develop the leaders and managers it needs to sustain the efficiency of its supply chain?

Fung:  That is an excellent question. As of the end of June 2007, Li & Fung Limited had a total workforce of 10,825 of whom 3,381 were based in Hong King and 7,444 were located overseas.  We offer our staff competitive remuneration schemes.  In addition, discretionary bonuses and share options are also granted to eligible staff based on individual and group performance.

We are committed to nurturing a culture of learning in our organization.  Heavy emphasis is placed on training and development, as our success is dependent on the efforts of a skilled, motivated workforce.  We launched our annual Management Trainee Course in 2003 with the aim of nurturing young talented professionals to accommodate our business growth.  The course is a structured career development and intensive training program, which consists of classroom training, job attachments, corporate projects and overseas exposure covering a wide range of management competencies and functional skills.  The trainees are expected to assume managerial roles with us after their successful completion of the course.

Morris: In your opinion, what are the key agents of change in a flat world?

Fung: Advances in information technology have driven other changes. Manufacturing processes have become modularized and dispersed. There have been tremendous improvements in communications and logistics. This has allowed the supply chain to be deconstructed with different stages moved around the world. Coordination and logistics costs used to be so high that manufacturing processes needed to be under one roof or you would pay a high penalty. As the friction has been reduced, there is more freedom in how supply chains can be designed and implemented.

Morris: Change initiatives inevitably encounter resistance. Which strategies has Li & Fung executed in response to such resistance?

Fung:  In Li & Fung, we have institutionalized change through our Three-Year Plan process.  Our Three-Year Plan is zero-based and we review it every three years to see whether we still have a good reason to survive in the latest macroeconomic environment. It offers a balance between stability and renewal. It avoids changing direction every day, but ensures that we create stretch goals every three years.

The Three-Year Plan involves five steps.  First, we paint a scenario of our business universe at the end of the plan.  Second, we paint Li & Fung’s anticipated position in that scenario and hence set the goals for the company to achieve by the end of that Plan –stretch goals that force us to rethink our business models and strategies.  Third, we turn around, look at where we are today, and identify the gap between where we are today and where we want to be at the end of the plan – backward planning.  Fourth, we formulate the business strategies that will get us across that “gap.”  Fifth, we structure the organization and identify the skill set we need to have to execute those strategies. This process keeps the organization fresh. Some managers say that it is like working for a new company every three years.

Morris: In Competing in a Flat World, you and your co-authors explain how to build an enterprise in a borderless world. For those who have not as yet read the book, what are the building blocks when building such an enterprise?

Fung:   Without giving away too much of the book, I would say that the key broad ideas are: develop a broader view of your business, build collaborative networks that create value, striking a balance between the firm and the network, balance control and empowerment, establish a “Three-Year Stretch,” build the company around the customer, follow the 30/70 rule (or create loose-tight relationship with suppliers), and take a broader view of the supply chain to find new sources of value

Morris: Please explain how Li & Fung continues to sustain efficient systems integration throughout its global enterprise.

Fung: While we have very entrepreneurial business units, we pay very close attention to the design of the supporting back office and middle office functions. We fully utilize advanced technology and applications in our information technology infrastructure, which facilitates the efficient and reliable sharing and dissemination of business information among our employees, suppliers and customers. This allows for effective management of supply chain activities and shortened delivery cycles for our customers.

One such application is our proprietary order management system, XTS, running on an Oracle Database that can be accessed by all our offices globally via our intranet or the Internet.  It incorporates a comprehensive database covering our sourcing and export activities and enables our customers to track information about their orders online. Our technology infrastructure is highly adaptable and allows for quick and seamless integration with systems of those businesses we acquire and the systems of our customers.

Morris: Some of the most thought-provoking material in the book is provided in Chapter 5. Please explain the meaning and significance of its title, “Empower ‘Little John Waynes’ to Create a Big-Small Company.”

Fung: Entrepreneurship is crucial to success, so large organizations need to create an entrepreneurial culture while continuing to take advantage of the size of the parent organization.  Managers need to strike a balance between providing these entrepreneurial leaders with enough autonomy so they can serve customers effectively and creatively, and yet ensure that they are aligned with the culture of the parent company and benefit from its infrastructure and support. We use the term “Little John Waynes” to describe our entrepreneurial leaders. Like John Wayne in the old Westerns, they can circle their wagons and fight their battles with smaller rivals on the ground. But unlike typical cowboys, they also tap into the resources of the large company – like having a supply chain with food and ammo running through the center of the circle of wagons. This creates a big company that can act like a small one.

Morris: Now please explain the meaning and significance of the title of Chapter 8, “Follow the 30/70 Rule to Create Loose-Tight Organizations.”

Fung:  What we are saying here is that it is important to have a significant part of the business of each of your suppliers but not their whole business.  You need enough of their business so the relationship is meaningful but not all of their business. This gives you and them flexibility and independence. In practice, our rule is to try to have no less than 30 percent of the business of a given supplier and no more than 70 percent. This allows suppliers to learn from their interactions with other customers, benefiting the network.  We share information with suppliers and gain insights from them.

Morris: In your opinion, how can a company determine whether or not it is fully prepared to “compete flat out”?

Fung:  Managers should ask themselves questions such as these: Have they established the “building blocks,” referred to in a previous response and examined in the book?  Are they taking advantage of the forces that are flattening the world? Are they able to see competition as network against network, instead of firm against firm? Can they build empowered networks around customers rather than relying on traditional controls? Are they focused on specialization or are they taking advantage of opportunities for integration. 

Morris: From your perspective, what seem likely to be the most significant new challenges that Li & Fung and other international companies will face as they proceed into an uncertain future?

Fung:  Another excellent question. I would say the uncertain trade environment and, in particular, the US-China trade relations. Today the basic challenge of trading, or engaging in any other global business activity, is the same – linking products to customers. Where can companies find the best products in the world? How can the right products be delivered to customers at the right time and at the right price? What are the best routes through this world? But the paths through this world are affected by the trade environment.

While physical terrain is less significant, other constraints, particularly regulations, are shaping the new global business terrain. Regulation and trade agreements sometimes create mountains that block trade (through quotas, safeguards, or other constraints). Regulations and trade arrangements can also create tunnels or superhighways (through preferential bilateral agreements between two countries) that facilitate trade. The result is a patchwork of shifting multilateral, bilateral, and local regulations. This is a significant challenge for any global business. Just as traders in the past needed to understand the Silk Road, business leaders need to understand these new Silk Roads and the forces that shape them.

Morris: In your opinion, which strategies will be most effective when responding to those challenges?

Fung:  The best strategy I believe would be to stay as flexible as possible.  In a world of bilateral agreements, quotas, and other barriers, managers have to navigate the shifting terrain of a world that is not completely flat. In addition to pushing for a coherent set of global rules, the key implication for managers is to recognize and anticipate how the global terrain is changing and develop strategies for moving through this terrain. Although the complexity of global regulations might be inefficient, opportunities arise from the world’s lumpiness.

 

The breadth of the network of suppliers can help to buffer the network orchestrator from rapid shifts in global trade regulations. A presence in many different countries makes it easier to scale up operations there if regulations become more favorable or shift production to other regions if a certain country becomes less attractive. In fact, one of the driving forces in the development of broad global networks has been the need to address trade quotas and shift manufacturing to different parts of the world as a result. Companies also can avoid the barriers of manufacturing in the target market by moving manufacturing to the consumer market. This is what Toyota and other Japanese automakers did to continue to grow their US businesses despite import quotas and to address public backlash against the role of imports in taking jobs from the Big Three U.S. automakers.

In light of the shifting terrain of global business, companies also have to develop skills in anticipating changes in regulations. This means monitoring trade discussions in many parts of the world and tracking changes in protectionist trends. Companies that can anticipate these changes can move more quickly than competitors in taking advantage of the new terrain, gaining competitive advantage.

Morris: The final question is for you to pose. What have you not been asked to discuss in this interview that you wish to discuss? What is your response to that?

Fung: So far our focus has primarily been on how businesses need to compete in this world. “What does a flat world mean for governments and policy makers?”

There are several implications for policymakers. First, the flat, networked world creates opportunities for countries to create finely tuned strategies for where to play. Whereas countries once looked at developing whole industries such as automobiles and semiconductors in a networked world, now they can work with businesses to make decisions about what processes they can best contribute to global supply chains. In Thailand, for example, the government encouraged the Thai auto industry to look for the niches in the global supply chain where it could add the most value. As a result, all of Thailand is talking about the global supply chain and which process in the chain Thailand should focus on. Thailand is looking at ways to tie its strengths into global supply chains. In a connected world, countries are increasingly making decisions about a specific vision or strategy for where to compete in that world. Will the country become a hub for manufacturing, as China has, or will it become a financial center, as in Dubai? To support these decisions about where to play, governments can invest in research, and can also support dynamic and flexible organizational structures and initiatives.

Second, policymakers need to take a careful look at the impact and implications of bilateralism, and business leaders need to urge them to do so. A multilateral world trade system is our very best hope for addressing the broad range of issues such as market access, tariff and nontariff barriers to trade, trade in services, and trade facilitation. With respect to market access and tariffs, multilateral solutions will help us optimize the efficiency of the complex cross-border flows generated by dispersed manufacturing.

Businesses shouldn’t have to design systems to qualify under “rules of origin” to obtain preferential treatment. Instead, the question should be, “What is the optimal way to deliver the best product to the right customer, and do so at the right time at the right price?” That should be the only concern network orchestrators have. Why worry about the point of “substantive transformation”? This should be on the basis of economics alone. For the future world-trading regime to mirror economic reality and to allow the use of modern business strategies, we need a single overarching multilateral framework for trade. We can have either a flat world or a patchwork of crisscrossing mountain ranges and tunnels.

Finally, as we shift our focus from competition between companies to dispersed supply networks that compete network against network, we need to change the way we look at and regulate this world. Concepts such as “substantive transformation” and “country of origin” need to be reexamined. We need new language to reflect the realities of dispersed manufacturing.

 

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