Arcelik Home Appliances is the leading manufacture of home appliances in Turkey with a 2003 domestic market share of 50% (Ghemawat, 2008). They supply the market with two brands, namely Arcelik and Beko. The company focussed on adopting an international expansion strategy and has already been marketing its products to more than one hundred countries, mainly in Western Europe, Eastern Europe, Latin America, Asia, and North Africa (Ghemawat, 2008). Arcelik's strategy originally was to produce metallic office furniture in 1955, although they diversified into the production of household appliances soon after. They were the first company to introduce home appliances such as washing machines and refrigerators to Turkey, although Arcelik was to face future challenges when the Turkish government participated in the European Community's tariff reduction promising a reduction to zero from 1992 to 1996 (Ghemawat, 2008). This opened up new challenges from other manufactures in the European Community who were able to sell their products more competitively in the domestic market. Arcelik overcame this challenge by investing heavily into research and development, thereby substantially improving their product quality. In addition, Arcelik is currently the leading holder of patents in the Turkish market. This strategy has cemented their leadership in the domestic market as consumers preferred to spend a little more to obtain goods whose durability could be assured. Arcelik would later grow to establish its market dominance in Turkey for decades, but would later face challenges that would trigger a new strategic focus on international expansion and growth.
Arcelik's Motives for International Expansion
The focus on international expansion by Arcelik was triggered by the 2001 economic crisis in Turkey. This crisis led to high levels of unemployment and a significant reduction of market demand by approximately 35% (Ghemawat, 2008). The expansion strategy focused on increasing exports as well as engaging in international acquisitions. The economic crisis in Turkey alerted Arcelik's management to 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, the economic crisis in one market would not normally be prevalent in other markets; hence multinationals can ensure stability by marketing their products across many countries.
Arcelik had to ensure its survival throughout the 2001 economic crisis and stabilise the company's performance by focusing on international expansion in order to increase its level of production and increase its economies of scale (Ghemawat, 2008). This meant that with additional production, generally the cost of producing each unit 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 and remain competitive. 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 focus on markets that would help support its intention of increasing the economies of scale through larger demand. The level of demand for home appliances in Europe alone was about 25% of world demand (Ghemawat, 2008). Arcelic sought to tap into this large demand and support its competitiveness plans by increasing production and maximizing its economies of scale.
One of the major factors of production that normally influences the decision to move production overseas is labour. When considering labour, it's imperative that a company weighs up the savings from paying the lower labour cost with the differences in the productivity, the addition transport and storage costs. The labour cost in Western Europe is estimated to be five times that of Turkey. Labour cost in Turkey is three times that in Eastern Europe (Ghemawat, 2008). In China, it is four times lower than in Turkey, although productivity in China is just half that in Turkey. In additional, there are extra transportation costs which are determined by both the distance between the production facilities and the legal requirements of the countries through which the products must travel.
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. This meant the company would need to charge relatively higher prices for the products. On the other hand, 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 Arcelik would either have to lower their prices to maintain its domestic share market, or expand its operations to European and other markets to maintain or increase its level of sales to clients that focus more on quality, suitability and durability.
Arcelik's Options for Expansion
In order to realize its goal of expansion into the international markets, Arcelik adopted a number of market entry options to help them realize their goal. These include international acquisitions, exports, the use of private label contracting, and product diversification.
Organic domestic growth and use of exports
Arcelik ensured growth domestically by guaranteeing reliability and only using distributors and agencies who offered after sales services. These distributors developed an exclusive network which also provided an entry barrier for any new market participants.
Exporting entails maintaining the company's operations in the home market and selling the products in overseas markets (Schell, Giroud, Sinkovics, and Yamin, 2011). It is acclaimed as the least costly mode of foreign market entry, but at the same time the most vulnerable to various entry barriers, such as government regulations. The cost effectiveness of this entry method is enhanced by the fact that it requires little or no involvement with the foreign governments or the companies operating in the target market. With growth of exports, the company may also open sales agencies in the foreign markets that link in with the company's clients overseas. By 2003, Arcelik had grown to be the leading player in Estonia and Lithuania with approximately a 25% market share in both. The company also was developing a commanding presence in the rest of Eastern Europe. The presence of Arcelik's sales agencies helped growth significantly in Western Europe with a 15% markets share in the United Kingdom. Arcelik also conducted a successful export strategy gaining a 70% market share in Romania through 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 (Ghemawat, 2008).
International acquisitions
International acquisitions involve a company buying out another company 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 as it provides the acquiring company total control over the foreign acquired company, as well as full profits generated thereafter (Schell, Giroud, Sinkovics, and Yamin, 2011). The full control over the activities of a subsidiary is viewed as essential in ensuring they run in accordance with the philosophies of the acquiring company. The target company would need to have the ability to complement Arcelik's growth strategies. Arcelik would also need to evaluate the foreign company's brands and consider how this brand would help strengthen and complement their capabilities. The target subsidiary's contribution to sustainable growth is also a key factor. Arcelik's acquisitions in 2002 included Bloomberg, Electra, and Flavel and Leisure in Germany, Austria and the UK for the two latter brands (Ghemawat, 2008). They also acquired Arctic in Romania. The acquisitions of these brands was likely formulated on the fact that many consumers tend to prefer purchasing brands that they can readily identify with, such as national brands. These acquisitions tremendously increased the product range offered by Arcelik and lead to its significant growth within the European markets.
Use of license contracting
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 (Schell, Giroud, Sinkovics, and Yamin, 2011). It does not take part in profit sharing or any other marketing processes of the licensee. Licensing provides the advantage of enabling a company to avoid government regulations and other restrictions, such as tariffs and quotas. It also enables market penetration without extensive capital expenditures. However, licensing can be highly restrictive in the level of control the company has over the activities of the licensee. There is also the risk of the licensee enhancing its technical expertise and eventually becoming a competitor after the expiry of the mutual arrangement. Arcelik's production in 2004 comprised 40% from various licensing arrangements (Ghemawat, 2008). This complimentary effort helped ensure Arcelik's brand presence in the European's markets.
Diversification into other businesses within Turkey
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.
Additional Options for Expansion
Arcelik's ambitious goal of achieving revenues of three billion Euros by 2005 may be difficult unless additional methods were employed to ensure its continued growth in the international markets. Domestically, Arcelik could opt to buy out local competitors in a bid to cement its hold on the local market. This would help reduce the downward pressure on its product prices by reducing the significant competition locally. In addition, the extra channels of distribution it gained through acquisition would act as an additional 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
Joint ventures involve the formation of a partnership arrangement with a different company where the parent company provides the resources to operate it, shares responsibility of management, and shares profits realized thereafter (Schell, Giroud, Sinkovics, and Yamin, 2011). This type of venture is especially popular when it comes to sharing technical knowledge gained through research and development. With a determination to distinguish themselves as innovators of product development, a joint venture can help to ensure rapid growth. Instead of engaging in competition in a foreign market, Arcelik could identify a strategic partner who knows the market remarkably well. Then through the joint venture, they develop new products and capture the unreached market. This method would be convenient for Arcelik since it would avoid many unnecessary government regulations that normally bar entry. In addition, such a venture would easily capture the market as it would be supported by goodwill and the distribution network of the strategic partner.
Franchising
Arcelik needs to consider franchising in order to minimize the risks involved with the licensing it currently practices. Here, Arcelik would transfer some rights to the franchisee to produce products under its brand but will reserve the right to provide some aspects of technical support (Schell, Giroud, Sinkovics, and Yamin, 2011). This way, Arcelik will be able to be informed of the activities of the franchisee. In addition, the royalties are based on the amount of sales, hence Arcelik will generate higher revenues in the event the franchisor is able to produce higher sales. Also as the franchisor Arcelik will incurs minimal capital costs as it expands into more foreign markets. Moreover, the franchisee assumes all the risks such as political risk and fronts for all labour costs and facility establishment.
Strategic alliances
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 (Schell, Giroud, Sinkovics, and Yamin, 2011). One very essential factor in ensuring product penetration in the market is the distribution network, a strategy Arcelik used to capture its domestic market. 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 more convenient to identify foreign companies with a distribution network that serves their target customers and enter into a strategic alliance with them. The strategic alliance could also involve sharing of certain technologies between the companies. Arcelik could choose to leave the production of a certain product components to a company with a comparative advantage in exchange for providing a component which it can produce more efficiently helping to become more price-competitive in that market.
Conclusion
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, a strategy the company must continue to focus on and develop, if it's to advance its growth and prosper in to the future.
