International Business Strategy - Term Paper Example

?International Business Strategy Introduction Arcelik Home Appliances is a Turkish firm that long ruled the Turkish market in the production of household appliances. The firm marketed its products mainly under two brands Arcelik and Beko. These two brands jointly governed the Turkish market for well over a decade. During the last few years, Arcelik Home Appliances acquired a number of international organizations by initiating different mergers and acquisition strategies. In February 2001, an economic crisis and subsequent rise in unemployment rate heavily struck the Turkish market. As a result, the Turkish market realized a 35% decline in domestic demand for household appliances. At this juncture, the company is forced to revise its strategic potentiality in promoting its key goal of international expansion. This case study will explore Arcelik’s principal motives for international expansion. It will also evaluate different tactics that would assist the firm to achieve this aim. Principal motives for international expansion The major international growth motive that drives Arcelik is its intention to achieve economies of large scale operation. While sales increase, there would be a proportional increase in profitability also. In order to increase total sales volume, it is necessary for the firm to deal with large scale production processes that would in turn assist the firm to cut down various expenditures. When the company involves in large volume production, it is forced to purchase raw materials in bulk quantities which would aid the firm to earn the benefits of more cash and trade discounts. This strategy would also enable the company to take advantages of transportation costs and warehouse charges. Efficient use of capital equipment and employment of specialized labor are other objectives that lead Arcelik Home Appliances to set international expansion as the key aim. The devaluation of Turkish Lira has also contributed to Arcelik’s objective of international growth as it helped the firm to take advantages of foreign exchange transactions. In the words of Arcelik’s CEO Ozdemir, company’s goal is “to gain an international identity as well to decrease our high dependency on the volatile local market” (cited in Ghemawat, 2008, p.1). It is obvious that international expansion directly contributes to international identity or brand reputation in the global market. When the firm earns a good market stature, it assists them to raise cheaper credits at the time of contingencies. Since large business houses leveraged with stable and potential financial sources and other special reserves, creditors generally believe that these business entities have the potential to repay the money even in the times of difficulties. Therefore, banks and other financial institutions are willing to provide them credit facilities at cheaper rates without having much legal procedure. However, the international expansion and thereby low cost of credit would benefit Arcelik to reduce cost of production. Presently, Arcelik is highly dependant on the volatile local market; it will certainly impede the further economic growth of the organization. Hence, access to international market is Arcelik’s primary motive for international expansion. Since Arcelik deals with household appliances, it would get prospective markets anywhere across the globe. Anyhow, America and Europe will be the most prospective markets for Arcelik as they are considered as the focal points of world’s trading. Ghemawat (2008) reflects that Turkish government eliminated tariffs on imports of household appliances from the European Community in 1996. This liberalization policy intensified imports from Europe and it severely affected Arcelik’s domestic market demand. It also drives them to enter international market. In 1970s and 1980s, the firm acquired technologies from General Electric and Bosch-Siemens; but these companies imposed many restrictions on Arcelik. By the end of 1990s, Arcelik developed its own appliance designs and hence it wished to manufacture and distribute products independently. It is precise that only a large firm can afford the costs associated with product experiments and researches; this also compels Arcelik to expand its business areas. Finally, the product lines of Arcelik very much fit the consumer requirements of Western Europe especially, with regard to compatibility. Different options for expansion The case illustrates four options for international expansion which are discussed below in detail. 1. Organic growth in home appliances in domestic and export markets under current brand names In my opinion, it is a potential and effective strategy for Arcelik’s expansion. As discussed above, this firm markets its products mainly under the brand names of Arcelik and Beko which have already dominated the Turkish market. Since the firm has well reputed brand images, it is easy for Arcelik to convert this brand stature into product demand in domestic and international markets. This market reputation would assist the company to vie with competitors and new entrants in the domestic market. This favorable domestic market ambiance is beneficial for Arcelik to concentrate more on export markets. Under export trading system, the company needs to deliver the goods only according to retailers’ order placements. Therefore, it minimizes the possibilities of business loss. 2. International expansion through further acquisitions Mergers and acquisitions strategies have become popular for the last few years. In the case of Arcelik, it possesses a well domestic market demand, improved product lines, and an experienced management team. At present, Arcelik’s sole need is to expand its business operations or business territory. It would be a risky venture for Arcelik to open independent business branches across different countries since the firm may not be familiar with demographic factors, cultural variations, consumer tastes, and living standards of the target country. However, appropriate business acquisition strategies such as ‘vertical and horizontal acquisitions’ would assist the Arcelik to get access to international territories without taking higher risks. Acquisition concepts are suggestible to reduce cost of production, promotion expenses, transaction costs, and taxation and administration costs. In addition it would also benefit the firm in the process of further capital accumulation. 3. Expansion of OEM and Private Label contracts in international markets This option would not contribute much to the Arcelik’s objective of expansion. Under this concept, the products are “marketed under a brand name belonging either to another home appliance firm or a retailer” (Ghemawat, 2008, p. 12). Often, it is found that the sales volume under this strategy is directly proportional to the level of brand royalty of selected firms. If the selected firm’s or retailer’s brand has a weaker market demand, it would adversely affect the expansional notions of Arcelik. Under certain circumstances, this concept would not only impede the firm’s expansion operations, but also its existing domestic market performances. The only attractive feature of this strategy is that it does not impose any risk on Arcelik because the firm only acts as a supplier under this strategy. 4. Diversification into other businesses within Turkey From a detailed analysis, it is identified that this concept equally offers opportunities and threats to Arcelik’s goal of international expansion. The firm’s reputed retail stores and exclusive distribution channels are the potential opportunities pointed out by this strategy so as to sell goods other than home appliances in Turkey. Arcelik’s well established brands would make demand for newly introduced goods. This favorable market condition will certainly cut down new product’s initial establishment charges such as promotional expenses, market research expenses, and other distributional expenses. At the same time, the development and launching operations of new product may seriously impinge on the market activities related to home appliances once the management fails to concentrate effectively on both areas of the business simultaneously. However, it is evident that the efficiency of management team is the central aspect that determines the success or failure of the diversified expansional strategy. Recommendations for future implementation In addition to the above discussed strategies, there are wide ranges of expansional strategies that an organization can practice. The most fitted strategies to Arcelik are described below. I. Develop a new market segment Under this strategy, the company’s existing products are moved toward a new market segment or a new geographic area (Business expansion: Expansion strategies). This concept necessitates thorough market research since Arcelik is not aware of the persisting market trends and other cultural factors of new region. Although, the market research processes requires huge amounts, the firm can take advantage of increased profitability if it discovers a potential market. We know that Arcelik is a well established company and it possesses an experienced and efficient management team that can easily perceive opportunities and threats in the market. Therefore, Arcelik is in a position to detect the areas where their products would be accepted and where not. Moreover, this firm may also develop new products according to the needs of new selected demography through the application of market research and demand forecasting tools. II. Start a chain It is a process of business expansion by which a chain business is established so as to maximize the already achieved success. Under this concept, new markets are opened for the existing consumer accepted products. Since the management has a thorough knowledge in the production and distribution of these products, Arcelik can successfully launch them into new business areas. Even though the firm does not continue the current levels of success in the new market, this concept would certainly increase the firm’s revenues and thereby profitability. III. Creating business bonds with corporate giants This technique is almost similar to mergers and acquisitions strategy. Under this strategy, the only difference is that firms do not merge but function on a cooperative basis. By practicing this concept, Arcelik can get access to another nation’s market if it forms a good business bond with a company of the destination. It is advisable for the Arcelik to form business bonds with related industries as this would boost the sales revenues of both the firms. Conclusion From the above discussion, it is clear that Arcelik has set international expansion as its major future strategy. There are ranges of factors that become the principal motives behind this strategic formulation. It seems that liberalization of import tariffs by Turkish government has largely motivated Arcelik to expand internationally. The company mainly considers four distinct options for international growth. Out of these four concepts, growth in domestic and export markets under current brand names and acquisition expansion methods are found to be the most potential one. Private label contract method has been identified as a weaker strategy as it demand less participation from the part of Arcelik. Finally, new market segment developments, starting of chains, and creation of business bonds are also suggestible for Arcelik to expand internationally. References ‘Business expansion: Expansion strategies’. Community Futures. viewed 22 March 2011 Ghemawat, P August 11, 2008, “Arcelik Home appliances: International Expansion Strategy”, Harvard Business School. Read More