A hundred years before Uber popularized the “platform business,” an English teacher and a porcelain merchant were launching their own platform business in Canton, China, called Li & Fung. In 1906, Li To-ming and Fung Pak-liu started a trading company, exporting porcelain, fireworks, jade and silk. They eventually set up headquarters in Hong Kong.
In the 1950s, a United Nations trade embargo on China prodded companies in Hong Kong to begin manufacturing textiles, and so Li & Fung started exporting apparel, which now makes up the majority of their business. Today, the once-small trading company is one of the largest trading and logistics businesses in the world.
Li & Fung’s business model holds remarkable resemblances to Uber’s. Both are platform business models; neither company directly creates the product that their customers use. Instead, they coordinate interaction between groups.
While Uber connects drivers with people needing rides, Li & Fung coordinates the production of goods via a vast global network of providers to arrange for private-label manufacturing, primarily for US and European apparel merchants. Li & Fung connects its providers, which handle product development, sourcing, production, and shipping. If issues occur at any stage, Li & Fung can quickly shift from one provider to another.
Because of this, Li & Fung has successfully adapted over the years as shocks to the industry – from the birth of department stores in the early 1900s, to the global backlash against child labor in the 1910s, through the Great Depression in the late 1920s and early 1930s, to the standardization of clothing sizes and introduction of mass production in the 1940s – caused other less-flexible businesses to fail.
The company pivoted again when the amount of clothing manufactured in the US – where their core customer base is located – declined over time from 95% in the 1960s to about 2% today. When you throw in the recent rise of fast-fashion houses like Zara and H&M, which now dominate the industry, it’s even more impressive that Li & Fung is still thriving.
How do they do it?
What can we learn from Li & Fung that will enable our own organizations to become more agile and fluid?
I recently interviewed Robert Sinclair, president of Li & Fung, to learn more about the company’s business model. Born and raised in Canada, Robert’s career in the industry began at Colby & Staton Fashions, a Hong Kong-based company, in 1986. Since then, he’s held positions with VF Asia and Ralph Lauren. He also founded KOMPASS Global Sourcing Solutions in 2002.
Today, most companies’ efforts to unlock innovation are centrally planned: they establish an R&D lab, hire researchers, build products, and carve out an innovation group. But as you will see, Li & Fung, which has been at it for over 100 years, sees things differently.
When I spoke to Robert, he shared his thoughts on why his company is not only succeeding in the industry, but leading big changes. Here are the takeaways:
- Expose your people to cutting-edge ideas
- Connect your people with trends
- Embrace fluidity
Expose your people to cutting-edge ideas
When employees are encouraged to be innovative, the company thrives. The leaders at Li & Fung know this, so they’ve done several things to ensure that their people are frequently exposed to cutting-edge ideas.
First, they surround themselves with big thinkers. Victor Fung, who is the grandson of founder Fung Pak-liu and serves as group chairman at Li & Fung, was a professor of finance at Harvard Business School, where he met strategy gurus Clayton Christensen and Michael Porter. Their ideas, friendship, and continued counsel help shape the company today. John Seely Brown, an expert on radical innovation, serves as an advisor to the company.
Victor founded and oversees the Fung Academy, which was established to cultivate high-potential talents within the company via four programs:
- The Program for Management Development: Identifies talents and develops them through international and business exposure.
- Corporate Capability Development: Equips leaders with new tools for innovation and experimentation.
- Supply Chain Futures: Helps suppliers build the capabilities they need to navigate the digital economy, and operate sustainable, future-ready businesses.
- Innovation & Experimentation: Pursues a culture of experimentation by incubating new ideas and capabilities that manifest in real-world experiments.
They also had Tom Chi, cofounder of Google X, come to Li & Fung to teach them about rapid prototyping. He talked to them about Google Glass, which allows you to overlay your standard eyesight with digital images. Google Glass was initially developed with the idea that surgeons could use it to perform delicate operations without having to turn their heads to look at a computer screen, which created a greater risk of arm movement. Tom was able to create a Google Glass prototype in one day using a coat hanger and Plexiglas.
Li & Fung has also sent more than 100 senior executive to Singularity University, a Silicon Valley “think tank” that offers educational programs focusing on rapid changes in technology. There, the executives took part in a 3-day workshop with 18 Singularity faculty members.
Can you imagine trying to compete with a company engineered to rapidly implement cutting-edge ideas from the likes of Christensen, Porter, Brown and Chi? This is an “idea engine” that seeks to keep Li & Fung ever a step ahead.
Connect your people with trends
At Li & Fung, they initiate programs to structurally and continually stay in touch with future-oriented, long-term business trends. Our research shows that such “market awareness” is one of the most important factors that determine an organization’s level of internal innovation.
One of the ways they’ve done this is by hiring Deborah Weinswig, a global retail analyst, to lead a group of 27 PhDs who examine the disruptive technologies that are altering the new retail ecosystem, such as the Internet of Things, digital payments, and omni-channel retail. This research keeps them ahead of the curve, helping them prepare for the future when other companies are just catching up.
Another way the folks at Li & Fung stay connected to trends is by going directly to their consumers with proofs of concept. Even if they don’t have an actual product yet, they’ll sell virtual designs to their customers with the understanding that once they get enough people interested, they’ll then produce the physical product. If they don’t have enough interest, they don’t make the product.
One of the trends Li & Fung is keeping a close eye on are millennials and their buying habits. Millennials are changing the way the retail world works because they’re now the largest segment of the consumer market and they do things differently than previous generations. They’re not brand loyal, and while they have less money to spend, they still expect a great experience when they shop.
This is why concepts like Five Below have become so successful. All of Five Below’s products cost – you guessed it – $5 or less, but their stores don’t feel like discount warehouses. Rather, they offer their customers an enjoyable and stylish shopping experience.
Another emerging trend in retail that Li & Fung is considering is the “sharing economy” concept, which includes fashion rental services, and a peer-to-peer marketplace that allows consumers to borrow clothes from each other.
“The world is moving faster than ever before,” says Robert. This is especially true in the apparel industry, which is experiencing an historic acceleration of change, driven by several global trends.
Therefore, fluidity is key to survive in the 21st century. Li & Fung is doing this in three ways: defining their business strategically, adopting agile approaches, and avoiding the “technology trap”.
1. Defining their business strategically
Peter Drucker famously defined strategy as determining “What is our business and what should it be?” When Li & Fung defines their business, they seek to hold on to a definition that allows them to maintain flexibility.
Therefore, they do not define themselves as a manufacturer or a retailer or a logistics company. They don’t own a factory. They don’t manufacturer products. Doing so would greatly limit their adaptability.
Rather, they rely on the platform business model, serving as the “middle man” while facilitating exchanges between groups. “We’ve been in the ‘Uber’ business for more than 100 years,” Robert says. This allows them to be flexible in ways other businesses cannot.
But they don’t just take orders from clients; they help clients design products and come up with new ideas for products. According to Robert, “consumer products in general” defines their business.
2. Adopting agile approaches
The folks at Li & Fung regularly embrace agile approaches. One way they’re doing this is by adopting 3D design software to create virtual product samples. Once a design has been approved, a virtual sample can be created in days instead of the weeks it would take a traditional physical sample to be created. They can quickly swap out colors and patterns of a garment without affecting the timeline or price. They can even get a solid idea of how the garment will look and fit on a real person. This technology makes the whole process faster, cheaper, and more efficient for their customers.
They’ve also adopted rapid prototyping, which Tom Chi explained when he spoke to them about Google Glass. The idea behind rapid prototyping is to get an actual product in the hands of the client as quickly as possible so they can see and feel a physical model. Many companies that engage in brainstorming are just guessing at what the product will look like and how it will perform, but at Li & Fung, they can provide a physical prototype – quickly – so nobody has to guess.
While other companies are building plans, developing detailed designs and crafting near-perfect “betas”, Li & Fung have a practice of rapidly building an inexpensive minimum viable product (MVP), allowing them to get customer insight long before their competitors.
Another way Li & Fung embraces agility is by engaging customers in an idea before moving forward with it. Someone within the company proposes an idea, and rather than investing a lot of money in it right away, they go straight to their customers with the idea and ask “What do you think?” They can then quickly pivot if necessary based on the response they get. It’s an easy and inexpensive way to find out if the idea is worth pursuing.
3. Avoiding the “technology trap”
I spoke with Bharat Anand, author of The Content Trap. He pointed out that just as media companies have suffered by falling into the “content trap” – that is, focusing on products, or “content”, rather than creating and fostering connections – every company has some form of “content” that they get trapped in trying to protect.
When you try to own technology, for example, your investment in it can become an anchor. When technology changes and yours proves obsolete, leaders are pulled by an irrational tendency to hold on longer than they should. They want to feel that their sunk investment was worth it, so they keep on using the outdated technology. “Shutdown economics,” as economists term it, dictates you should abandon such “sunk investments.”
Nokia disappeared practically overnight because its strategy was based on building all its phones on a common technology platform. When the market demanded something different, Nokia was too slow to abandon its platform for something new. RIM (now Blackberry) was tripped up by a similar “technology trap”.
To avoid this trap, Li & Fung has taken an uncommon stance. In an era in which nearly every company – from GE to Ford – wants to become a technology company, Li & Fung has decided explicitly to avoid that trap.
“We just don’t think it would be believable to say we are going to be a tech company,” says Robert. Instead, they focus on supply chain services, while using disparate technologies.
Indeed, this unique strategic stand is at the heart of Li & Fung’s history. They decided from their founding not to become a manufacturer, not to build a factory, and this has allowed them to be fluid and adaptable all this time.
Beyond the platform business model
I have long argued that what hinders the pace of innovation is not technology but the human behavior around the technology.
Li & Fung’s experience supports that view. The real barrier to change is not technology or capability, but that their customers are slow to change their mindsets. Selling their ideas to their customers is an uphill battle, according to Robert.
They have gone from serving their customers – retailers and brand owners – to leading and helping them evolve from a purely physical to a physical-virtual world.
How can your organization use Li & Fung’s strategies to become more innovative?
- Expose your people to cutting-edge ideas. Are you actively educating and cultivating high-potential talents? Are there experts you can bring in to speak to your employees?
- Connect your people with trends. Do you have a group dedicated to this? Are you keeping your eye on what your younger customers are doing?
- Embrace fluidity. How are you defining your business? Are you adopting agile approaches? Have you managed to avoid the “technology trap”?