LI & FUNG GROUP is one of the signature, if somewhat unlikely, business success stories of the past decade. The Hong Kong-based trading company has reinvented the traditional supply chain and in doing so has created a possible model for the reinvention of the global business enterprise.

Li & Fung produces $14 billion worth of clothing and other timesensitive consumer goods annually for dozens of the world’s leading brands and retailers — companies ranging from Abercrombie & Fitch to Wal-Mart. And it does this without owning a single factory.

Instead, it taps a fluid worldwide network of more than 12,000 independent suppliers so that it can provide rapid, tailored responses to each customer’s order. For example, the Gap might place an order with Li & Fung for 300,000 women’s shorts. Li & Fung responds by ordering buttons from, say, Vietnam, zippers from Japan and thread from Pakistan, then has the fabric woven in China and the shorts sewn in Bangladesh. The same order coming in two weeks later might set in motion an entirely different supply chain, one that maximized efficiency and minimized costs at that moment. Li & Fung manages — or orchestrates, to use the company’s term — its complex supply network through 80 offices in 40 countries.

Under the third-generation leadership of Victor K. Fung, group chairman, and William K. Fung, group managing director, the company has enjoyed enormous success in recent years. From Hong Kong, it has expanded rapidly around the world, through both organic growth and acquisitions. Li & Fung Ltd., the publicly listed trading arm of the family-controlled Li & Fung Group, doubled its revenue between 2006 and 2008 and saw profits rise 13 percent in the first half of 2009, even as many of its retail customers were struggling. Replicating a typical arrangement between Li & Fung and its customers, the company recently took over all aspects of garment production for Liz Claiborne, the New York-based fashion company.

The Fung brothers — Victor is a former professor at and William is a graduate of Harvard Business School — understood the tension inherent in a network-based business model.

To maximize both its flexibility and reliability would require the company to acknowledge the autonomy of its suppliers while exerting some influence over their operations. Although Li & Fung Ltd.’s “network orchestration” business model has received more attention, its talent management model also has been instrumental in its success. The company’s unusual approach to managing its 14,000 employees around the world in some ways reflects the mix of autonomy and coordination that is at the heart of its innovative business model. And like the business model, the talent management model provides lessons for companies in a range of industries. Li & Fung’s approach addresses a fundamental talent management challenge: How do you cultivate individual initiative among managers while keeping them aligned with established corporate goals? Li & Fung seems to have found a successful model for fostering in its managers both a dynamic entrepreneurial spirit and a shared commitment to the organization.

“People management is critical to their business model,” says Yoram (Jerry) Wind, a professor at the University of Pennsylvania’s Wharton School and a co-author with Victor and William Fung of “Competing in a Flat World” (Wharton School Publishing, 2007), which explains the principles of network orchestration. Wind says that although entrepreneurial initiative and organizational cohesion might seem in conflict, they complement each other at Li & Fung.

Empowering the managers of the 170 business units to work toward ambitious three-year company goals and avoiding invasive corporate oversight and frequent revision of targets build trust and engender loyalty to the company, Wind says. So do the generous financial rewards managers receive when those goals are met and the absence of punishment when they are not. The latter encourages managers to embrace challenging goals and take risks to achieve them.

Bruce Rockowitz, a Canadian who is now the group president of Li & Fung and in line to succeed William Fung as managing director, first got a taste of this management environment when his own company was acquired by Li & Fung in 2000. He says the Fung brothers have continually worked to get the right balance between business-unit independence and corporate citizenship. In the early years, the balance probably tipped too much in favor of independence, Rockowitz says. He recalls that as he walked from one division location to another on the same floor of the company’s Shanghai offices, he was struck that each space was decorated differently. “It felt like you were moving from one company to another,” he says.

This display of individual business-unit identity, while arguably inconsequential, symbolized the divisions’ lack of a strong shared mission, Rockowitz says. Harmonizing the look of their work spaces reminded employees of their interconnectedness without undermining the individual units’ operational freedom. “You have to home in on what is truly important in keeping an entrepreneurial spirit alive in a large organization,” says Rockowitz.

The company’s reluctance to fire or lay off employees plays a big part in nurturing loyalty. “The underlying philosophy is that you don’t get rid of people,” Rockowitz says. “In fact, when I got here, you couldn’t get rid of someone without William’s signature.” The aim is to find a way for everyone to perform well. “If someone isn’t working out in one place, the assumption is that there’s another place where he’ll do better. That puts a big onus on managers.”

This approach is not motivated simply by soft-heartedness, Rockowitz says. “We don’t own factories,” he says. “What keeps our business going is people.”

William Fung describes Li & Fung’s talent management practices and critiques those of other firms in this edited interview by Paul Hemp, a former senior editor for the HarvardBusiness Review and a contributing editor for The Korn/Ferry Institute’s Briefings on Talent and Leadership.

Why is Li & Fung sometimes referred to as a company of entrepreneurs?

FUNG: You have to know the history of our company and our industry. There are an estimated 40,000 trading companies in Hong Kong, everything from two guys with a few contacts in New York to Li & Fung, which was founded in 1906 and has 14,000 employees in 40 countries. Most of these companies are owner operated. They’re run by people who hustle for business, who meet their customers at the airport, who know the names of their customers’ wives and where their children go to school. When my brother and I first came back to Hong Kong from the U.S. in the early ‘70s, we wanted to build Li & Fung, which was much smaller then, into a professionally run organization. But we knew that if we were to compete with all of these owner-operated rivals, we had to maintain an entrepreneurial character. A buyer at Wal-Mart doesn’t want to deal with a big bureaucracy. The buyer wants to deal with someone who will kill for Wal-Mart, who will die for Wal-Mart, get it the best prices, get it the fastest delivery.

How do you inculcate – or in your case, preserve – this entrepreneurial spirit?

FUNG: First, we’ve tried to retain the characteristics of an owner-operated company in our business units. We have a very flat organization. Many of the 150 operating units are self-contained profit centers. We don’t give them detailed guidance on how to work. Thousands of small decisions are made throughout the company every day, and there’s no way you can control that from the center. Then we incentivize the folks who run those individual profit centers as if they were owner-operators of those businesses. There’s a big emphasis on profit sharing. Being an entrepreneur isn’t a 9-to-5 job. These people work their guts out, and we pay them accordingly. In fact, unlike most companies, but similar to law or accounting partnerships, there’s no cap on upside earnings that a business unit manager can make.

Despite the autonomy and the incentives, don’t your entrepreneurially minded managers chafe at working within a big corporation?

FUNG: Actually, being part of Li & Fung allows them to be better entrepreneurs. Most of these guys, they know the market, they know the products, they know their customers. What you don’t want them to do is to spend any time on administrative or other work — work that normally takes up to 40 percent to 50 percent of an owner-operator’s time. Things like IT, finance and accounting, HR — all of the back-office functions that don’t have a direct impact on their businesses. By providing them with very sophisticated back-office systems — systems they’d never have access to, even on an outsourced basis, as the owner-operators of a small company — we free them up to be more entrepreneurial. They can be more financially successful than if they were running their own trading company.

As entrepreneurs, they benefit from being part of a large organization. But how do you get them to further Li & Fung’s interests as well as their own?

FUNG: Yes, it’s important to realize we’re much more than simply a financial holding company providing back-office systems for 150 successful independent businesses. Those shared systems, besides offering tremendous operational support, are an outward sign of the shared values and culture that define Li & Fung. Herding cats — herding entrepreneurs — isn’t easy. But if you can get them moving in the same direction, you will have a very powerful business. So we’ve established a general business philosophy — how we handle people, how we serve customers, how we work with suppliers — that everyone embraces. Twice a year, we bring together all of our top managers, up to 300 of them. We talk about our business plan and how we’re doing. But mostly we try to inculcate our philosophy with this group, so that when they go back out into the field, they know how to work in unison, without us micromanaging them.

Talk a little about that philosophy.

FUNG: Taking a long-term as well as a short-term view of the business is a big element of it. Consider our three-year planning process, which is different from the business plans you normally encounter in the American or Western context. The aim is to combine flexibility and stability — flexibility so that our business units can respond rapidly to changes in customer needs and the business environment, stability so that they can maintain strong customer relationships and not lose sight of ambitious company goals.
Our process obviously includes annual budgets and financial goals, which business units and their leaders are measured against. But it also includes three-year stretch goals, created in conjunction with the business-unit leaders and designed to force a significant rethinking of the business, at either the operating unit or the company level. Unlike the rolling targets common in many companies, these stretch goals don’t change. The stretch goals are unusual in another way: Falling short of them isn’t punished. Business-unit leaders still receive rewards based on their meeting incremental financial targets. This encourages people to set stretch targets that are truly ambitious, instead of more modest goals they know they can meet. Let me add, though, that no business unit leader wants to have to explain the failure of a stretch goal to his peers at one of the semiannual meetings!

How does combining short-term and long-term views of the business contribute to this distinctive blend of entrepreneurial spirit and alignment with company goals among your managers?

FUNG: It’s not just a long-term view of the business. It’s a long-term view of people. Many of our managers spend their entire career with us. It sounds very short-term to say that generous profit sharing is a key motivator. But it’s basically a long-term philosophy. People share in the continued success of the business. Combine that with the tremendous back-office support systems we offer to the business units, and people know that if they spend their whole career at Li & Fung, they’ll have made enough money to retire very comfortably.

Are you saying that their loyalty to the company is based primarily on the likelihood that they’ll become rich?

FUNG: No, I’m getting to that. We’ve only talked so far about the hard piece of the motivation: monetary rewards. But there’s also the soft piece of the motivation: values. You might even say family values.
Let me tell you a story to explain what I mean by this. I came back to Hong Kong from Harvard Business School at the age of 23, thinking I knew everything, and went to work for my father. He gave me a pretty free hand early on, and one day I said to him, “You know, Dad, you’ve got a lot of deadwood here. Some of these guys aren’t pulling their weight. They’re old, they’re not efficient anymore.” You know, age was a big thing with me then.

And here’s what my father said to me: “You think this guy is deadwood? Do you know that four years ago, he pulled off the biggest deal in the company’s history? And that guy there, he did this and this in the past.” What he was saying was, you can’t look at someone at any one point in time to judge their efficiency. They may be going through a difficult time in their personal life — a divorce, an illness in the family. You have to take a long-term view in evaluating people — not just in the past, but in the future. If you nurture them through a difficult period, they’ll come back and make incredible contributions for you. My father taught me that how employees treat the company reflects how the company treats them. It’s a mirror. You may be the sort of company that says, “This guy’s not operating at maximum efficiency, he’s out.” And so a guard stands over him as he cleans out his desk. And then he’s escorted out. Well, if that’s the case, this is how your employees will treat you. When an offer comes along from the outside, they’re out of there. At least, that’s the way Chinese society works. One other thing: What I’ve said is true even if the guy being escorted out the door is an older employee. My father said, “What you’re doing to the older people, well, the younger people are watching.” I think the Americans have the idea that younger people are happy when older workers are let go because it allows them to advance. But the Chinese view is different. The young people are thinking, “I’m 30 years old. But what you’re doing to this guy at 50 is what you’ll do to me when I’m 50. So I better plan for that.”

That’s a powerful image, those young people anxiously watching the older guy getting escorted out the door.

FUNG: I think it’s one way the Chinese and the Americans are different. Americans — no offense meant here — are much more short-term in their thinking. I don’t advocate the Japanese system in which employment is a guaranteed lifetime thing. But you have to have an intermediate kind of decency and loyalty toward your employees. Loyalty is a two-way street.

It sounds like fostering both entrepreneurial drive and company loyalty among managers can occur only at a Chinese company like Li & Fung.

FUNG: It’s true that this combination of family loyalty and entrepreneurial spirit is often associated with Chinese culture.
Here’s another story. I came back from business school in the U.S. with the typical Western idea that a corporation should have a life of its own, that it deserves the best people to run it. And one of my uncles said to me: “William, why do you always talk about the ‘company’? You mean, the ‘family.’ The company is only an extension of the family — the means by which we keep the family in the lifestyle to which it has become accustomed!” What he was saying was that the company itself is not alive, it’s nothing. It’s a means to an end, not an end in itself. It’s also true that the Chinese are a very entrepreneurial people, which is why communism as a philosophy now exists in China in name only. The idea of being your own “laoban” — the word for “boss” in Chinese — is very important. We’re able to harness that drive and let people form teams that have a strong entrepreneurial spirit.

Is there anything in your approach that Western companies can adopt?

FUNG: Actually, I believe we have a lot in common with Western businesses. Look at the success we’ve had integrating the numerous companies we’ve acquired.
One reason for this success isn’t exactly cultural. The plug-and-play nature of our back-office systems allows an acquired company to immediately mesh its operations with our existing businesses. We also have occasionally sought to downplay our own culture when acquiring a business in another part of the world. We try to be a bit of a chameleon, adopting some of the character, values and practices of the community we’re working in. We don’t believe in sending a Chinese guy from Hong Kong to run something in the Czech Republic. In this, we’re different from a lot of multinationals.
Still, you’d be surprised at some of the cultural similarities that have emerged after we’ve acquired another company. Take our first big acquisition, in 1996, of Dodwell, part of the Inchcape Group. Like many of our bigger competitors, Dodwell began as a “hong,” one of the English trading companies set up in the 1800’s to export Asian goods to England.
Although the business parameters for the acquisition created a perfect fit — for one thing, our customers were mostly American; Dodwell’s were primarily European — most analysts said that we could never absorb them culturally. We were the Chinese family company with the American business school bent; they were the quintessentially British hong. We were big on profit sharing, and if a manager made enough money, he could buy a Porsche. They were big on corporate perquisites for their expatriate managers — houses on the Peak in Hong Kong, chauffeur-driven cars. But we surprised the analysts. We found that if you went beneath the surface with Dodwell’s expat managers, their aspirations were not that different from the Chinese guys who want to be their own boss. The English expat may want to retire and die in Surrey, but while they’re out in Asia, they want to make as much money as their Chinese counterparts. Instead of giving them a company house on the Peak, we give them a housing allowance, and if they want to live more cheaply, then they can do that. Instead of being given the obligatory car and driver when they reach a certain rank, they can buy a Ferrari, or a VW. It’s their choice. We found that there’s the ability to be an entrepreneur in people who seemed culturally anything but that.

So Western companies may be able to tap an entrepreneurial streak in their managers that they didn’t know existed. But what about the sense of mutual loyalty you describe?

FUNG: I admit, that may be harder to achieve. In America, a lot of companies talk the talk but they don’t walk the walk. They say, “Yeah, human resources are our greatest asset,” but guess what happens. Any small downturn comes along and people are out of there. That’s because the company is focused on the short-term, quarterly results.
In a family business, we think in terms of generations. I’m the third generation of our family in the company, and the fourth generation is already working here. We’re not thinking about the next quarter; we’re thinking about the next generation. What’s the best strategy so that the next generation can have a profitable business? Also, because we don’t emphasize short-term profits, we’re able, as I said earlier, to be more generous and forgiving in dealing with people. We can show a little tolerance, let people work through their problems, not require that they be at peak efficiency all the time.

Is this a cultural chasm that can’t be crossed?

FUNG: In the end, I’m not sure this is about culture. We enjoy some mutual trust and loyalty with our employees. But it’s not because we’re Li & Fung, not because we have Chinese family roots, not because we’re an Asian company.

In the end, I think it’s about ownership, not culture. Ultimately, a company responds to the owners. And if the owners are short-term — fund managers who hold a company’s shares an average of six months rather than five years or even three years and are only interested in maximizing profits in the months rather than five years or even three years and are only interested in maximizing profits in the next quarter so they can sell out — you can’t expect a company to think long-term, even if it’s in the best interests of the company. That short-term thinking affects not only how a company treats its people but how people view their work. A lot of bankers tell their employees: “We just want you here for two or three years. Consider us part of your CV. Maximize your opportunity and do what you can in two or three years. Then you should be out of here so we can bring in some young blood.” That is a totally different philosophy from ours.

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