In 1984, the Institute of Computing Technology, a department of the Chinese Academy of Science
(Academia Sinica), established Legend Company which began operations by distributing foreign
brand-name IT products.1 Later, the company started to develop and manufacture computers itself
which it distributed in addition to foreign products. After having grown its own manufacturing arm
into a mature business, it was felt necessary to separate the business of distributing other brand-name
IT products from that of manufacturing and marketing self-branded products. Therefore, the company’s top executives decided to divide the group into two, one focusing on manufacturing computers—Legend Computer—and the other focusing on distributing IT products—Digital China. The splitting process was completed in May 2000 and the new entity, Digital China Holdings Limited, became listed on the Hong Kong Stock Exchange on June 1, 2001.
The group’s activities comprise three distinct businesses:
Distribution of IT products
Providing IT services
Manufacturing and distribution of networking products
Its distribution business accounts for the bulk of its revenues (79%) with IT services contributing 14% and networking products contributing the remaining 7%. However, among the three businesses the networking products business displays the strongest growth (see Exhibit 1 for key statistical figures). The company’s strategy currently emphasizes its IT services business while continuously extending and deepening its use of its ERP system including the complete electronic integration of its customers and suppliers by the year 2005.
Historically the earliest type of commercial activity, the company’s skills in building and leveraging relationships with foreign brand-name IT products suppliers still form its core business. This business is divided into twelve divisions, either by brand or by product category (see Exhibit 2 for an organization chart of Digital China). The manager of the PC peripherals department, Qiu Xiaodong, describes the process of dealing with suppliers:
At the beginning of every year, producers make their sales plan and then allocate the sales
to distributors, including us. At the same time, we make a sales plan ourselves. So there will be
a negotiation between producers and us; finally [we] get an objective target. And every month,
we communicate with producers specifically. All these things are handled by product
managers for [individual] product lines. Every month, both product managers and the sales
division of each platform [sales subsidiary] separately prepare sales forecasts for each product
line according to the market situation. Then, we compare the two forecasts to make a sales plan
for the following month. Then, product managers will order products from producers.
Thus, the ordered amount reflects both the company’s assessment of the market situation and the desire of suppliers to distribute a certain amount of products. Each product division has a large sales force which continuously monitors the sales process and takes action if required. Peng Qiang, a sales manager in this department, describes his task:
[M]ost of our time is spent on communicating with distributors [the company’s customers]
through telephone. We will urge them to order the products according to our [sales] plan. If
the communication is smooth, distributors will place orders through the system so as to take
the products from our inventory. If the distributor says that he cannot order so many products,
then we will try to find out the reasons. We will check the distributor’s historical information.
Then we keep on communicating with the distributor, trying to solve the problem.
Initially, the company had exclusive distribution rights for a large part of its products. However, this part has steadily declined and now comprises only about 1/8 to 1/10 of its total sales according to estimates of the group’s top management.
Product managers are responsible for gross margins as they negotiate prices and conditions with suppliers and set prices and sales policies for the sales department. Sales employees are evaluated by the sales revenue generated for the geographical area they are responsible for.
All of these activities are distributed over a wide range of legally independent units. The group comprises ten regional sales and distribution centers (called platforms) located in the major cities plus a sales office in Hong Kong. The Beijing firm includes both, the Beijing platform and the group’s corporate staff. It thus functions as the group’s headquarters.
Although the platforms include warehouses for local distribution, these are strictly controlled by Beijing’s operations center. Thus, if a sales order is executed, the local platform first has to buy the product from the Beijing firm before it can be delivered to the customer. This concept has been developed by Digital China and is called the “sub-warehouse concept.”