The document is a report submitted by Rajdeep Roy Choudhury to Dr. Payal Mehra analyzing the problems facing the small Chinese company "Bags of Luck" due to changes in the economic landscape. It begins with an introduction outlining the purpose, scope and limitations of the report. It then provides relevant facts about the company's background and history, organizational structure, and the root causes of its current crisis. These include rising costs, outdated machinery, overdependence on labor, ineffective management structure and lack of strategic vision.

1. INDIAN INSTITUTE OF MANAGEMENT, LUCKNOW
A report on “The changing landscape for Chinese
small business: the case of ‘‘Bags of Luck’’
Submitted to : Dr. Payal Mehra
10/1/2011
Submitted by:
Rajdeep Roy Choudhury
Roll No: pgp27107
Section B

2. Letter of Transmittal
Dr. PayalMehra
Area Chair, Communications Group
Indian Institute of Management, Lucknow
Dear Madam,
I am pleased to submit the report on “The changing landscape for Chinese small business: the case of
‘‘Bags of Luck’’.
If you have any questions and/or comments regarding this report, please let me know. I hope that
the recommendations will be helpful to you in charting a strategy for entry into the new markets. It has
been a great learning experience while working on this project.
Yours sincerely,
Rajdeep Roy Choudhury
Pgp27107
Section B
IIM Lucknow

3. 1. Summary
The case is about a small Chinese company “ Bags of Luck” which was started as a partnership between
two brothers Alfie and Ben Zhang. The company initially went for manufacturing school uniforms and
school bags until competitors with more sophisticated technologies arrived which forced the company
to change their strategy and they started making ladies hand bags, unisex fashion backpacks and trendy
lightweight cases for laptop and netbook computers for export to the US market. They had performed
very well over the years as a small enterprise and had managed to survive during the recession. With
increasing material and employment costs, severe labour shortages and appreciation of Chinese
currency the company was undergoing a crisis. Also ineffective management structure and
overdependence on labour and declining production volumes compounded their problems further.
2. Case Analysis
2.1. Stated Problem
“Bags of Luck” was finding it difficult to keep their profit margins high and it was failing to provide timely
delivery of goods at competitive prices. This was due to the fast changing market trends and economic
environment, rising material and employment costs, fast appreciation of the local currency, severe
labour shortages, declining product volume and profitability,dated machinery, too much dependence on
labour, ineffective management structure and a complete lack of strategic vision. The business was in a
deep crisis.

4. 2.2. Unstated Problem
Since the organization didn’t have a formal structure, coordination among the important persons
running the company was deteriorating as the organization was facing a crisis. Tensions between Alfie
and Ben were running high, Cindy was not able to communicate her concerns to Alfie,Dorothy spoke to
Ben about her worries but went unnoticed. Everyone was blaming each other and Mr. Zhang’s failing
health also added to their miseries.
3. Introduction
3.1. Purpose
The purpose of this report is to analyze the problems faced by “Bags of Luck” due to recession. Bags of
Luck (BoL) or XingyunBao was located in a small coastal town, Xiao Min Nan (XMN), in South Eastern
Fujian province, People’s Republic of China, halfway between the coastal cities of Xiamen and
Quanzhou. The company which was prospering at the beginning of its operations started to breakdown
which led to drive the family apart.
3.2. Scope
This report discusses the impact of fast changing market trends, rising material and employment costs,
continuing appreciation of the Chinese currency, severe labour shortage, declining production volume
and profitability, dated machinery, ineffective management structure and a complete lack of strategic
vision on the “Bags of Luck”. After an in depth analysis of the problems and root causes the report
presents recommendations on what the company should have done in order to tackle such problems.
3.3. Limitations
Some factors like money and time could impede the success of the recommendations discussed in this
report. If the company cannot finance the recommended changes,it will be difficult to successfully
implement the changes. Also, if the changes cannot be presented in the recommended time frame, the
company may suffer a huge loss in market share. This is due to the fact that this industry has low entry
barrier and hence has a great threat of more players entering thereby increasing the competition.

5. 3.4. Assumptions
A number of basic assumptions are made in this case. These assumptions serve as cornerstones to the
case, creating context and structure for the decisions and information expounded upon in this report.
These assumptions are:
3.4.1. Post recessionimproving economic situation
3.4.2. Effectiveness of the new stock evaluation system
3.4.3. Support and coordination within the family members
3.5. Methods
Personal experience, internet searches, and some independent reading comprised most of the research
done for this case. Information gathered through these methods and other research provided a base
from which to form all contextual analysis. All of this information was considered when making
decisions concerning this case.
4. Relevant facts
A good knowledge about the facts are very important in analyzing a case & providing a solution.
Understanding the facts properly plays a crucial role in solving a problem. Here I would like to present
few facts which were pertinent to the case.
4.1. Company’s background
4.1.1. History
Set up in 1992 as a partnership business, Bags of Luck started to serve the school uniform market. Soon
this business model was copied by three other players with advanced techniques. To prevent their
operating margin being squeezed further, they started to make school bags to match the designs of the
range of school uniforms they made. Bags accounted for 80 per cent of the company’s revenue. But
soon there were five more players that entered the bags market with more sophisticated purpose built
production facilities. Then they started supplying their bags to the US retail giant, Wal-Mart by
increasing production capacity, change in designs to fit the US market and launch of unisex fashion

6. backpacks and trendy lightweight cases. In supplying ladies bags to the US market they were helped by
a retired English couple – Katie and Simon Jones whose daughter was associated with Walmart in the US
4.1.2. Organisation structure
The two brothers and their wives were the four key people involved in running the business. As things
stand their roles are described below:
4.1.2.1. Alfie Zhang
He was in charge of all aspects of production including organization of work-in-progress, maintenance,
and stock management, etc. He was the eldest member of the family in the business and his decisions
were taken as final in the day to day running of the business.
4.1.2.2. Ben Zhang
He was responsible for all external relations including working with export agents, and managing
relationships with suppliers, customers and relevant Chinese government agencies, etc.
4.1.2.3. Cindy Wang
She kept all records of the company’s incoming and outgoing finances, prepared the quarterly cash-flow
reports and annual financial statements including profit and loss account and balance sheet. She was the
wife of Alfie.
4.1.2.4. Dorothy Zhao
She joined the company initially to keep an eye on the shop floor operatives to ensure that they
understood their tasks and were able to perform them to the required standard. As the company grew,
she developed into an HR manager being involved in recruitment, training and managing the welfare of
all the workers. She was the wife of Ben Zhang.
4.2 Root causes of the crisis
4.2.1. BOL’s dependence on single supplier
Due to the absence of an established purchase department , it could not source competitive supplies on
a regular basis. Thus they were dependent on limited number of suppliers. Since they were heavily
dependent on these few suppliers any delay on part of these suppliers caused Bags of luck to miss the
delivery schedules as it happened after the Wenchuan earthquake in 2008.

7. 4.2.2. Inefficient material handling system
The company had a system of tracking Work in Progress inventory using paper based cards. This system
was inefficient when the production levels peaked and the supervisors were prone to make mistakes.
4.2.3. Faulty Stock evaluation system
The stock records being manually updated on the computer proved to be a time consuming process and
difficult to maintain. And also it created a lot of duplication of work further decreasing the efficiency of
the system.
4.2.4. Labour Intensive operations and dated machinery
The fact that BoL depended so heavily on labour intensive operations as compared to their competitors
who used automation had an impact on their efficiency. This was precisely the reason why their
margins were low.
4.2.5. Increase in freight costs
A major factor contributing to the increased cost was more dependency on air freight which was ten
times more expensive than sea freight. Before the recession started, BoL was able to schedule most of
its production in advance so that 90 per cent of their products could be dispatched by sea-freight.
However, afterwards 45 per cent of their products were air-freighted to the USA due to production
delays caused by shortage of accessory supplies and migrant workers
4.2.6. Ignorance of individual product range cost
BoL never carriedout any analysis on the relative profitability between different product ranges. As far
as the management was concerned, all that mattered was that each year the sales revenue covers all
the costs. Hence there was no way of knowing which products were most profitable and which were
causing losses.
4.2.7. Severe labour shortage
The beginning of severe labour shortage worsened the problem as Bags of Luck struggled to compete for
a declining pool of migrant labour force. The problem was further compounded in May 2010 when a
string of suicides at Foxconn captured the attention of the media worldwide. To keep production
facilities up and running the wages had to be increased even up to 20 per cent.