Case Study: As one of the largest subsidiaries of the Turkish business conglomerate, Koc Holding, Arcelik is one of Europes

top ten white goods manufacturers with sales of 3.1 billion Euros, and reached a sales volume of 1.2 billion Euros in 2005 in all of the markets that it serves. Founded in 1955 to produce metal office furniture, the company moved quickly into home appliances, manufacturing Turkeys first washing machine in 1959 and first refrigerator in 1960. The company is the leading firm in Turkeys consumer durables, accounting for more than 53% of domestic sales and 54% of exports (UNCTAD 2005b). Its goal is to maintain or even improve on this position while, at the same time, pursuing aggressive international market expansion plans. The company does production and marketing of components , consumer electronics and after sale services. Origins: Turkey Establishment: 1955 Ownership: KOC group[Family business conglomerate] Business Line: Appliance manufacturer[White goods Business] Brands: Beko , Altus, and Arcelik Products:.100 products AC, Dishwasher, Washing Machines,Cooking Appliances, and refrigerator. Market Area:Turkey , Europe(UK, Italy , Czech,Spain, Germany, Romania,hungary) Products: White goods Electronic products Small home appliances Kitchen accessories (refrigerators, freezers, washing machines, dishwashers, aspirators, vacuum cleaners, coffee makers and blenders). Geographical regions Arcelik has occupied: Arcelik is active in more than 100 countries including US and china. It has 13 international subsidiaries and 4500 branches. Having 11 production plants in Turkey, Romania, Russia and China (Refrigerators, washing machines, dishwasher, cooking appliances, components plants). The company offers its products under its 10 brand names. Arcelik Beko

Arstil Flavel Grunding Altus Leisure Blomberg Arctic Defy Ans 2: Turkey is an emerging market as it is transforming into market-driven by liberalizing trade and investment. Turkey is doing more participation in international business and regional economic Integration. In Turkey there is relatively low saturation level and purchasing power is low (outside big 4 cities).50% are younger population (<25 years old).Externally Turkey is applying for EU membership. Trade barriers declined in 1980-90 and Turkey market was opened for outside competitors therefore at that time Arcelik's market hare was threatened. Threats: In Advanced economies household appliance industry is matured and saturated.As Turkey is an emerging market and purchasing power of people is low, therefore Household appliance industry is difficult to charge premium prices and to increase profit margins. Here, it is very difficult to do innovation and to do changings in the products. Innovation is costly because frequent change is needed in production methods and for that the employees need regular training and re-training in order to get used to it. Secondly, there is low spending power of buyer therefore premium prices can't be charged and profit margins would be lessened here. Home appliances are commodities which are comprised to serve the needs and wants and consumers value lower price to it which results in thin profit margins for the marketers. . Indeed, some white goods are seen as commodities by many consumers who are more price conscious rather than brand and feature conscious. Arcelik is operating in different countries having different cultures , different markets and different environment which is a major challenge for marketers. Risks faced by Arcelik while doing global marketing: Commercial risks Cross-cultural risks Although the major appliance manufacturers began to globalize in the 1990s, some of their products remained unique relative to the needs of the target markets. Because of the

cultural differences, manufacturers cannot always market the same product in North America, South America, Europe, and Asia. Instead they have to develop appliances suited to the idiosyncrasies of individual markets. Hence, in many cases the globalization of the industry means consolidating the materials, component development, technology, and manufacturing to create technology and a basic manufacturing process common to all appliances.

Country risks Currency (financial Risks It is difficult for the company to charge average price in every country. It is difficult to suit the local market. A major threat to Arcelik is that its brands are largely unknown outside Europe. Opportunities: Emerging markets are more attractive as compared to advanced economy. Reasons: high population Fast growing markets Urbanization is increasing-low cost labor (ideal bases for locating manufacture) Industry rapidly increasing. The Global Household Appliance Industry

The household appliances industry exhibits common characteristics with other producerdriven global value chains: products are relatively similar and simple to produce, although assembling different parts and subsystems requires the combination of knowledge domains ranging from mechanics to electronics and plastic molding. The industry is mature and is seen as a likely candidate for delocalization to developing countries, where not only input costs are lower, but demand growth rates are higher as ownership of major home appliances is strongly correlated to economic development. On the other hand, since household appliances are experience goods and brand reputation matters to at least some customers, brand loyalty is an important competitive factor in this market. Brand image acts as an information-based barrier to entry, reduces the intensity of short-run demand shifts and allows firms to experiment (brand reputation cannot be brushed away by a single product innovation failure).

The five biggest players in the sector, which accounts for 60% of European white goods market, are Electrolux of Sweden, BSH - a joint venture between Bosch and Siemens of Germany - Merloni of Italy, Whirpool of U.S., and Candy of Italy (March 2004). The market is fragmented in terms of brands, with the largest brand representing approximately 7% of the market volumes. The companies use both local and global brands. Regional brands are distinguished with decades of tradition and a high degree of awareness in their respective countries, and products offered under these brands were tailored to meet regional-specific needs, such as distinctively national culinary customs. Whirlpool is the global market leaders in home laundry appliances sector, while Electrolux is the leader in both refrigerator appliances and vacuum cleaners and BSH is the dominant player in the global dishwashers market.

According to the market research by Freedonia Group, the global household appliances demand is distributed by region as follows: 34% in Asia/Pacific, 24% in Western Europe, 23% in North America, and 19% in other regions (Exhibit 3). Favorable prospects can be found in the Asia/Pacific region, where ongoing industrialization and increasing standards of living, promise attractive opportunities for manufacturers. The Asia/Pacific region, in particular China, will continue to benefit from above-average urban population growth and healthy gains in the number of households. Latin America will also offer strong potential for appliance suppliers due to the ongoing industrialization and urbanization of the region. Above average gains were also expected in the Africa/Mideast region and most of Eastern Europe.

All of the major players can use similar tools and techniques such as cheap labor, outsourcing. However, cheap labor is only an advantage in the short- to medium-term, as manufacturing plants increasingly become more automated. Therefore, crafting a smart business strategy is necessary. As, hard factors like tooling, equipment, factory layout, materials procurement and design cannot provide a competitive edge, soft factors (e.g., a dramatic breakthrough due to the development of computer technology) are decisive.

Unlike industries that have high levels of fixed costs, household appliances industry is characterized by relatively higher variable cost due to the price changes in raw materials and parts. Company profits are increased by lowering financing costs, market conditions that tolerated higher prices, and strong sales volume of high-end merchandise. Higher prices cannot be easily passed along to customers, due to the significant increase in competition. One result of this high level of competition has been an upsurge in industry consolidation (Gale Group 2003, 219). Premium appliance models like washers, dryers, and refrigerators generally carry higher profit margins for industry manufacturers, whereas lower-end models

like dishwashers and cooking equipment have smaller profit margins. The average life span of a major appliance was 10 to 15 years. The Household Appliances Market in Europe

Arcelik looks at Europe market from two different lenses: West and Eastern Europe. Western Europe has progressive segmentation between commodity and value driven markets. On the other hand, Eastern Europe has the potential of higher market growth rates. In this region, market demand is driven mainly by the upgrading of installed appliances base. Overall volumes in Western Europe were up 3.3%, with peaks in the UK (5.5%) and Spain (8.9%) in 2005. However, certain countries experienced a decrease in demand for household appliances: (Germany down 5% and The Netherlands down 1.4%). In Eastern Europe, trend was quite different, with growth in volumes averaging 14.4% (CIS 11.8%, Czech Republic 10.5%, Hungary 28% and Romania 80%). One of the key reasons for this growth in Central and Eastern Europe was a population of some 430 million people and low penetration levels of household appliances (Exhibit 4).

The Household Appliances Market in Turkey

Demographic profile of Turkey promises continued robust growth. Over 50% of its 65 million residents are under the age of 25. There are around 14.5 million households with an average family size of four. Relatively lower saturation levels of domestic goods promised 5% annual growth in the market for the next five years, which was only 1% for Europe and North America. Nevertheless, its average per capita income was among the lowest of the OECD countries. Purchasing power outside urban areas like Istanbul, Ankara, Izmit, Bursa and a handful of other cities is very low. Competitiveness of the household appliances industry intensified and reached a high level between 1989 and 1996 years in Turkey. Production volume increased by 34% because of the strong growth in both domestic demand and exports which exceeded 7 million units accounting for 62% of total production (Exhibit 5).

Both demographics and economic factors are vital in understanding the drivers of demand in Turkey. White goods consumption is a factor of the number of households. Research shows that around 70% of the population is under the age of 35, where 35% is aged between 15 and 34. Turkeys young population causes higher marriage rates, approximately half a million annually, and eventually results in more households. The average household size is going down due to the increasing number of marriages, divorces and single individual dwelling. Such trends lead to creation of more households. The urbanization is also increasing, stimulating demand for modern household goods for contemporary lifestyles. Urban population increased from 59% in 1990 to 65% in 1997.

Arceliks Response: Transformation from a Domestic Player to a Global Player

To meet its competitors acquisition strategy, Arcelik looked to acquire foreign brands as well. The first big success for Arcelik was to establish the Beko brand of white goods and TV sets in the UK at the beginning of 1990s, now extended to France, Germany, and Spain. By the late 1990s, the company had set up sales offices in France, Germany and the UK and identified specific strategies to enter each market (Exhibit 7).

The 2000s saw the flowering of Arceliks internationalization strategy, aimed to expand its brand portfolio, market penetration and product mix in Europe. Building on the experience acquired while bidding unsuccessfully for Brandt, Arcelik made major purchases of brands in 2002 Blomberg (a subsidiary of Brandt) in Germany, Elektra Bregenz and Tirolia in Austria, and Leisure (cookers) and Flavel (appliances and TV sets) in Britain. In 2004 Arcelik acquired the brand name Grundig, after the German firm went bankrupt. In Romania, Arcelik acquired Arctic; it immediately invested to modernize the companys operations and doubled its productive capacity. Arctic makes washing machines and ranges as well as TV sets; it now has 50% domestic market share in refrigerators and exports close to 40% of its output. In June 2005 Arcelik launched the construction of a refrigerator and washing machine greenfield plant in Russia, located 110 kilometers from Moscow (Exhibit 8 & 9).

Using Information Technology

Arcelik embraces internet technology as a key weapon in its drive to become a global force. For example, Cisco aided Arceliks e-transformation by supplying the underlying networking technology that supports Arceliks key business applications. It also provided invaluable guidance to increase the appliance makers awareness of the business opportunities of web enablement. Arcelik is using the Internet to create a virtual networked organization where information and knowledge can flow not only internally but also externally to business partners such as sales outlets and service centers. Savings of millions of euros are being achieved along with increased customer satisfaction and better quality products.

Of greatest appeal to Arcelik is the concept of a virtual networked organization where all supply chain partners are connected over an extranet and have access to certain levels of information and value added content. Now all of Arceliks 3,000 authorized dealers selling products in Turkey (under Arcelik and Beko brands) can dial up twice a day to Arceliks intranet to place orders for products and check product specifications and prices. The orders are collated and provide manufacturing plants with reliable and timely information on which to base their forecasts, manufacturing

plans, inventory turns, warehousing costs, and so on. This program, which Arcelik calls e-bayii (or e-dealer), is seen as a great leap forward in the Turkish marketplace. Ahmet Ceylan, CIO for Arcelik, explains: With e-bayii, we expect Arceliks inventory levels to be reduced substantially and it will also be possible for us to identify, react to, and exploit market trends much sooner.

Furthermore, to better protect information assets and the efficiency of its operations, Arcelik turned to EMC to help build a centralized storage infrastructure designed to not only support disaster recovery, but also day-to-day productivity through 24x7 business continuity. Data protection and continuous availability are critical factors, says Ahmet Ceylan. We started working with EMC because we wanted a safe and secure solution for our data.

Business Challenge

Arceliks primary goal is to increase its strengths in order to maintain growth in the domestic and international markets and to become one of the leading household appliances company in the world. To achieve this goal, the company has identified three main objectives that will sustain growth and create shareholder value. These objectives are:

The improvement of operational efficiency in core industries to a level that will at the very least match the global competition, Where possible, the expansion of exports and operations outside Turkey, and Increase in investment in high-growth businesses.

Arcelik has been the dominant player white goods industry in Turkey for decades, and it has increased its efforts to enter new markets in Europe and North Africa. Nevertheless, growing foreign competition due to Customs Union agreement with the European Union, coupled with unstable Turkish economy has caused a tremendous pressure on the white goods giant domestically. In an effort to reduce the exposure to cyclical fluctuations inherent in the Turkish economy, Arcelik has increasingly emphasized expansion outside Turkish market. While management considered its options for international expansion, lower import tariffs invited foreign competitors to enter the Turkish market. Now, Arcelik has to decide how to balance its resources between maintaining its domestic market share and expanding into foreign markets. Research has indicated that European integration is making it more difficult for smaller companies to survive.

Arcelik is also seeking a more variable cost structure that would reduce its operating costs. These costs are directly related to the number of people who are working on a project, and the length of time for which they are needed. Outsourcing would enable the organization to reduce costs by managing people resources more flexibly. It would also make the company more agile in its response to market conditions by, for example, changing directions on a project without causing unacceptable delays or budget increases. However, managing people resources efficiently is hard task to accomplish for many organizations.

Discussion Questions:
1. The CEO of Arcelik has just retained you as a strategy consultant. How would you respond to these challenges? More specifically, as a strategy consultant, how would you allocate the companys resources between international expansion and maintaining strong market share position domestically? To reduce the companys operating cost and be more competitive in the marketplace, would you lean toward to outsourcing knowing that the company will lose some degrees of control if it chooses to outsource some certain functions? What would some other options for the company be in terms of being more cost efficient?
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It seems mass production and, more importantly, brand positioning and effective distribution networks are the key competitive drivers for the industry. It was also stated that Arceliks distribution and after-sales network is a very valuable asset for the company to reach its goal of being among the top performers across the world. How do you think that Arcelik be able to sustain or improve current distribution and after-sales service network? What would some obvious barriers be for the company to overcome? Arceliks international expansion strategy (e.g., acquisitions) into Europe was a bold move. Nevertheless, it may have overstretched its resources. Was it too ambitious? Did the company really have to acquire all of these brands? What does Arcelik gain a collection of brands that may not fit well together? Do these brands, collectively, stand for a uniform image? Are corresponding market segments similar in nature? Would non-equity-based international expansion be an option for Arcelik? For example, project-based collaborations. Arceliks response to European Union and volatile economic environment in Turkey is to achieve cost efficiency through consolidation of its companies in white goods and home appliances industries. Do you think that the companys consolidation strategy is sufficient to offset both the intensified competition coming from European manufacturers and the risk coming from unstable Turkish economy?

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Do Arceliks forays into Europe and Turkey really represent a cohesive, coordinated strategy? Is this strategy to fragmented or piecemeal? How successful is applied to be? After its acquisitions, Arelik has become very successful in Europe. In 2004, the British State Organization, Energy Saving Trust, appreciated Beko dishwashers for their superior performance in the field of efficient energy consumption. With this performance in the United Kingdom, Beko has become the leader in the refrigerator market, excluding freezers. In the same year, the European Energy Commission prized Blombergs CT1300A model refrigerators as the most energy efficient refrigerator. Moreover, Blomberg washing machines received the design award in PlusX, a major technological competition in Germany. On the other hand, Beko dishwashers have been rated as one of the best buys in the German market, by Stiftung Warentest, the most prestigious consumer magazine in Germany. While these successful results gained in a very short term are rather promising, will Arelik be able to sustain or improve this current trend, or is it possible that Arelik is in the verge of missing big opportunity? What would you recommend for this company going forward in terms of international expansion? How about maintaining dominant local market position? Are there more opportunities for Arcelik to pursue that the company have not been able to?

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Acquisition Trends in the European Household Appliance Industry

The household appliances industry has become very competitive for its participants, particularly where markets are relatively mature and there is little room for growth. Furthermore, the industry continues to become more consolidated as the high level of acquisitions and mergers forces out smaller independent players (Euromonitor 2003). Waves of consolidation has become pervasive in the U.S. first, a trend which was followed afterwards in Europe. In the early 1970s, there were approximately 400 producers of household appliances in Europe (Exhibit 6). With consolidation in the industry in the late 1980s the number had shrunk to about one hundred. By early 1995, it was estimated that five companies, including Electrolux (with a 25% market share), Philips Bauknecht, and Bosch-Siemens, controlled over 70% of the market. The industry is highly regionalized, with many of the companies producing a limited number of products for a specific geographic area.

Due to the fragmented structure of the household appliance industry in Western Europe, top four appliance companies had 49.4 % of the market in 2000, according to Appliance Magazine. Intensified competition in the recent years led to acquisitions and increased market concentration. During 2001, Moulinex-Brandt Group, which

was the fifth in market share in Western Europe in 2000, declared bankruptcy, and sold its assets Whirlpool (which acquired Polar SA) and Groupe SEB (KrupMoulinex). Other important buyouts included DeLonghis acquisition of the UKs Kenwood Group in 2001; Glen Dimplexs takeover of Stoves; and the sale of 50% of General Domestic Appliances to Merloni Elettrodomestici SpA (Standard&Poors 2004).