Arcelik Home Appliances is the leading manufacture
of home appliances in Turkey with a market share of 50% in the domestic market
as at 2003. It supplies the market using two brands namely Arcelik and Beko. The company has adopted an international
expansion strategy and has already been marketing its products to more than one
hundred (100) countries mainly in Western Europe, Eastern Europe, Latin
America, Asia, and North Africa. Arcelik was originally founded to produce
metallic office furniture in 1955 but diversified into production of household
appliances shortly after. It has been hailed as the first company to introduce
appliances such as washing machines and refrigerators to the Turkish
households. Arcelik would face further challenges when it became apparent that
the Turkish government would be participating in the European Community’s
tariff reduction which was meant to reduce to zero from 1992 to 1996. The
challenge would be competition from other manufactures from the European
Community who would be able to sell their products at more competitive process
in the domestic market. Arcelik overcame this challenge by investing heavily in
research and development thereby substantially improving the quality of their
products. The company is currently the leading holder of patents in the Turkish
market. This strategy cemented its market leadership in the domestic market as
consumers preferred to spend a little more to obtain goods whose durability
could be assured. This preference was also enhanced by Turkey’s fluctuating
market where inflationary forces were highly unpredictable with the greater
odds being to the consumer’s disadvantage. Arcelik would later grow to
establish its market dominance in Turkey for decades but would later face
challenges that would trigger its focus on international expansion to ensure
its survival and growth.
The focus on international expansion by Arcelik was
triggered by the economic crisis that hit Turkey in 2001. This crisis had led
to soaring levels of unemployment and a significant reduction of market demand
by an estimated figure of 35%. This strategy mainly comprised increasing
exports as well as engaging in international acquisitions. The economic crisis
in Turkey must have proved to Arcelik the vulnerability of firms wholly
dependent on domestic markets. Pressures from business cycles, inflation,
interest rates, exchange rates and political forces are prevalent in domestic
markets. On the other hand, international markets tend to be better insulated
from such pressures since they will rarely apply across several countries.
Economic crisis in one market would normally not be prevalent in the rest of
the markets hence multinationals can ensure stability by marketing their
products across many countries. Arcelik had to get a way to survive the
economic crisis in 2001 and as well ensure that future company performance was
stabilized by reducing its level of vulnerability to domestic market
fluctuations. Arcelik also sought to focus on international expansion in order
to increase its level of production and increase its economies of scale. This
means that with additional production, the cost of producing each unit product
becomes significantly lower hence allowing a company to make higher margins per
unit or allowing them to charge lower per unit without incurring any losses.
Economies of scale allow a company to remain competitive in the ever-evolving
economies. To ensure that the economies of scale do not end up in accumulation
of dead stock, or in the escalation of warehousing and storage costs, Arcelik
would need to look to markets that would be able to support its intention of
increasing the economies of scale through a larger demand. The national demand
within Turkey would not be able to absorb these additional products hence the
rationale behind Turkey looking to expand international trade. The level of
demand for home appliances in Europe alone is about 25% of world demand. Arcetic
sought to tap into this huge demand to support its competitiveness and the
large levels of production occasioned by their strategy of maximizing on the
economies of scale. International
expansion can also be explored where a company seeks to lower its production
costs by having a significant proportion of their production done from regions
where the cost is lower than in the domestic market. One of the major factors
of production that normally influence the decision of overseas production is
labor. When considering labor, it is imperative that a company weighs between
the benefits of the savings from paying the lower labor cost, the differences
in the productivity of the workers between the higher wage and lower wage
areas, and the transport and storage cost implications. It is also worth noting
that in many cases, where the labor costs are low, other factors of production
such as land would also be relatively lower. The labor cost in Western Europe
is estimated to be five times that in Turkey.
Labor cost in Turkey is three times that in Eastern Europe. In China, it
is four times lower than in Turkey. Labor productivity also varies and must be
taken into account. For instance, in China, labor productivity is just half of
that in Turkey. Additional
transportation costs are determined by both the distance between the production
facilities and the legal environments of the countries through which the
products must cross to get to its intended markets. Access to international
markets is crucial to any organization that seeks to expand itself. Domestic
markets will often in many cases be found insufficient to support the growth
targets that the companies set for themselves. They are also in many cases
unable to enable an organization to recoup the investments they may make in
research and development in time. The complexity and the level of innovations
in the global market is advanced and often leads to production of new and
better fulfilling products. This significantly reduces the product life cycles
and the companies engaging in research and development need to gain assurance
that their investments can be recouped before the products lose demand. This
assurance can only be found by marketing extensively in the international
markets where the demand is much larger and can ably support the level of sales
needed. Arcelik was motivated to focus
on international markets since it had opted to distinguish itself as a research
and development specialist who focused on the production of quality and durable
products. These features would mean that it would need to charge relatively
higher prices for the products. On the other side, the products from other
European countries were finding their way into Turkey due to the zero tariff
arrangement with the European countries. The entry of other products in Turkey
meant that Arcelik would either have to lower their prices in order to maintain
its domestic share market, or expand its operations to European and other
markets in order to maintain or increase its level of sales to clients that
focus more on quality, suitability and durability of the products they
purchase.
In order to realize its goal of expansion into the
international markets, Arcelik has adopted a number of options to help them
realize this goal. The international market entry options adopted by Arcelik
include use of exports, international acquisitions, use of private label
contracting, and product diversification.
Arcelik ensured growth domestically by ensuring
reliable accessibility to the market using exclusive distributors and agencies
who also served as centers for offering after sales services. This exclusive network
also served as an entry barrier for any new market operators.
Exporting entails maintaining the company’s
operations in the home market and selling the products in overseas markets. It
is hailed as the least costly mode of foreign market entry but at the same time
the most vulnerable to various entry barriers as government regulations. The
cost effectiveness of this entry method is enhanced by the fact that it
requires no involvement with the foreign governments or the companies operating
in the target market. It is often seen as the best mode of entry for an
organization operating on a lower scale. With subsequent growth of exports, the
company may open sales agencies in the foreign markets to be the link with the
company’s clients overseas. By 2003,
Arcelik had grown to be the leading player in Estonia and Lithuania with a
market share of 25% in these two markets. It also had a commanding presence in
the rest of Eastern Europe. The presence of Arcelik’s sales agencies helped
grow significantly in Western Europe with a markets share of 15% in the United
Kingdom. Arcelik also conducted a successful export strategy gaining a 70%
market share in Romania with its Beko brand. The net effect of these exporting
strategies was a significant increase in Arcetik’s production capacity from
440,000 to 750,000 in 2003 and 2004 respectively.
This mode involves a company buying out another firm
operating in the target market hence assuming full legal rights over it. This
method is hailed as the best mode of expansion into other markets since it
grants a company total control over the foreign subsidiary as well as full
profits generated thereafter. The full control over the activities of a
subsidiary is viewed as essential in ensuring they run in accordance with the
philosophies of the parent company hence ensure the goals of the company are
achieved as intended. The targets for acquisition would need to have the
unquestionable ability to complement Arcelik’s growth strategies. Arcelik would
also evaluate the foreign firm’s brands and take consideration on how these
brands would help strengthen them as well as complement their capabilities. The
target subsidiary’s contribution to sustainable growth was also a key factor.
Arcelik’s acquisitions in 2002 include Blomberg, Electra, and Flavel and
Leisure in Germany, Austria and the UK for the two latter brands. They also
acquired Arctic in Romania. The acquisitions of brands in the target markets
was likely informed by the fact that many consumers tend to prefer purchasing
brands that they can identify with: the brands they consider national brands.
These acquisitions tremendously increased the product range offered by Arcelik
and lead to its significant growth within the European markets.
Licensing involves the company transferring certain
rights to another firm to enable it manufacture products using its brand. In
licensing, the consideration that the licensor gets is only the royalty or the
license fee. It does not take part in profit sharing or any other marketing
processes of the licensee. Licensing offers the advantage of enabling a firm to
avoid government regulations and other restrictive policies such as tariffs and
quotas. It also enables market penetration without involving extensive capital
expenditures. However, this method is highly restrictive in the level of
control the company can have over the activities of the licensee. There is also
the risk of the licensee gaining the technical expertise and becoming a competitor
in the production of close substitutes after the expiry of the mutual
arrangement. Arcelik’s production in 2004 comprised 40% from various licensing
arrangements. This complimentary effort helped ensure Arcelik’s brand presence
in the European’s markets.
In order to enhance further growth in the domestic
market, Arcelik sought to capitalize on its elaborate distribution network to
provide consumers with additional products. By 2004, Arcelik was offered
various types cellular phones and was already getting into arrangement with
various Japanese firms to act as distributors of various electronic products.
The diversification proved to be a great success and further cemented Arcelik’s
leadership in the Turkish market.
Arcelik’s ambitious goal of achieving revenues of
three billion Euros in the next year may be difficult to realize unless
additional methods were employed to ensure its continued growth in the
international markets. Domestically, Arcelik could opt to but out local
competitors in a bid to solidify its hold on the local market. This
solidification would help reduce the downward pressure on its product prices by
reducing the significance of competition locally. In addition, the additional
channels of distribution gained through any such acquisition would act as an
entry barrier to any foreign firms hence ensuring steady domestic growth.
Internationally, Arcelik could embrace a number of methods to ensure its
continued growth. These methods include engaging in Joint ventures, franchising
and use of strategic alliances.
Joint ventures involve the formation of a
partnership arrangement with a different company where the parent companies
provide the resources to operate it, share responsibility on management, and
share profits realized thereafter. This type of venture is especially popular
where it comes to sharing the intelligence and technical knowhow required for
research and development. With their determination to distinguish themselves as
the masters of innovation and product development, this method can be used to
ensure its rapid growth. Instead of engaging in competition with the already
existing companies in the foreign market, Arcelik could identify a strategic
partner who knows the market remarkably well. They could then research into the
market needs in a bid to try and unveil any unsatisfied demands in the market.
Having found the features lacking in the products found in the market, they
could, through the joint venture develop new products that would suit this need
and capture the unreached market. This method would be convenient to Arcelik
since it would not involve many unnecessary government regulations that
normally bar entry. In addition, such a venture, if well implemented would
easily capture the market as it would be riding on the goodwill and
distribution network of the strategic partner in the foreign market.
Arcelik needs to consider franchising in order to
minimize the risks involved with the licensing as it currently practices. Here,
Arcelik would transfer some rights to the franchisee to produce the products
under its brand but will reserve the right to provide some aspects of technical
support. This way, Arcelik will be able to be abreast with the activities of
the franchisee. In addition, in Franchising, the royalty is based on the amount
of sales hence Arcelik will be able to generate higher revenues in the event
the franchisor is able to realize significantly higher sales. Franchising is
easy to start since the franchisor incurs minimal capital cost hence Arcelik
can expand into more foreign markets with relative ease. Moreover, the
franchisee assumes all the risks and foots for all costs of labor and facility
establishment. The company will also be able to avoid any political risks
associated with foreigners operating in national markets. Arcelik can therefore
easily expand its scale of production without worrying about high capital
expenditure hence edging closer to achieving the revenue targets
A strategic alliance differs from joint ventures in
that it does not necessarily involve formation of a legal entity. Strategic
alliances are formed to enable companies use each others’ distribution
networks, technologies, production capacities, management experience and
others. One very essential factor in ensuring product penetration in the market
is the distribution network. This has been evident in the manner in which
Arcelik has been able to capture the domestic market by using effective
distribution networks in Turkey. Arcelik should also try to replicate this
experience in the foreign markets. However, by virtue of the fact that it’s a
foreign market, they may not have the resources to establish an effective
distribution network in those markets. It would therefore be relatively more
convenient to identify foreign companies with a distribution network that
serves their target customers effectively, and then enter into a strategic
alliance with them. This may be companies offering similar products or those
making completely different products. When the products are easily available to
the consumers, they more likely to buy these products and this would lead to an
increase in the amount of sales realized by Arcelik. The strategic alliance
could also involve sharing of certain technologies between the companies in
question. Arcelik could choose to leave the production of a certain product
components to a company with a comparative advantage in its production in
exchange for providing a component which it can produce more efficiently. This
exchange could lead to lowering the production cost which would be useful in
helping the company become more price-competitive in the market.
Arcelik’s growth is mainly dependent on how the
company can enter and prosper in the international markets. This is because it
is already commanding the domestic market in Turkey and may have limited growth
opportunities locally. Growth and diversification are often related as is
evident from Arcelik’s company history. Arcelik has grown in the past by
steadily improving on the product range that it offers to the market and this
diversification should be continued to ensure continued growth.
For more theory and case studies on: http://expertresearchers.blogspot.com/
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