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Arzum and the Value Chain Concept

The Faster Fish Beats the Larger Fish

Part 1

As We Begin

AUDIO

Arzum’s branding goes back several decades. In 1966, three

brothers started trading electrical appliances and building

materials. Later, they decided to start exploring partnership

opportunities with some of the foreign brands they were

importing. They were collaborating with a well-known

German brand at that time. When the German company did

not want its brand name to be used in Turkey, the brothers

decided to take a different course of action. As a first step they

got the brand name Arzum, as three brothers wish and

registered it as their trademark (Arzum means “my wish” in

Turkish). Although the Arzum brand name consists of only

five letters, it has an entirely different meaning for us.

Arzum is known as Turkey’s first electrical non-steam iron

manufacturer. It has also produced a mechanical vacuum

cleaner. Through these new products, Arzum started to gain

recognition. How did this happen? The brand appealed to

consumers by offering a variety of appliances for the home. It

continued its long journey by producing Turkey’s first orange

press, then the first heater, followed by the first fan.

During this time, Arzum was actually part of a company called

Güney İthalat, manufacturing as well as importing. They were

VİDEO

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selling electrical appliances in the midst of spices, right

behind the Spice Bazaar in Marputçular, Eminönü, in

Istanbul, Turkey.

Part 2

Creating Value Chain Through Local and

Overseas Manufacturers

In those days, Arzum had a limited product range that

included only 12 -13 different items. The line was not

expanded until 1996 – at which point, we had 16 different

products in our portfolio. In those days we were still

manufacturing in Turkey or subcontracting where needed.

The company was practicing Original Equipment

Manufacturing (OEM) back then. Looking back, registering

the brand in 1966 was a visionary move for that time. We

were also exporting our

products to subcontractors in Italy, Europe and the Middle

East, unbranded or with different brand names. In terms of

electrical appliances, certain production sites both in Turkey

and the rest world are very well known. For instance, there

was a strong production base in the Far East, especially in

China, back in 1992. Today, China is a significant production

base for the global trade. However, we can only differentiate

ourselves from the rest of the world’s products by creating

added value to our products. This could only be achieved

through brand design, innovation or R&D. The way to make

yourself stand out is to have a control over these concepts and

apply them correctly. Would it suffice to collaborate with

China alone? No, it would not! Because importing bulky

products also increase delivery costs. Therefore, we needed to

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think analytically and determine which products should be

produced in the Far East, in Turkey and in Eastern Europe.

During the period from 1992 to 1997, we decided which part

of production will be undertaken in Turkey, which in China,

and which in Eastern Europe. This was done by assessing the

strengths and weaknesses of our supply chain’s different

parts.

Today, Arzum purchases nearly 3.5 million products from

different parts of Turkey as well as the world and makes sure

that consumers around the globe have access to our products.

Roughly speaking, Arzum purchases products from three

continents and sells products to four different continents.

Throughout this operation, timing is crucial, even more

important than costs. Because if you cannot deliver on time,

you will fail inevitably. Thus, logistics is critically important.

We choose to work with at least with one local producer in

each product category. This is how we acquire locally

manufactured products. In addition, we establish good

relationships with the best producers of each product group.

This approach gives us the upper hand in innovation and

differentiates us from the competition. Through these

collaborations, we are able to keep Arzum up to date, while at

the same time transforming it into a fast-moving company. In

addition, we make sure to purchase half of our products from

Turkey and the other half from international producers. This

enables us to disperse our risk. If we encounter a problem

somewhere -it may be related to a customs duty or an issue

regarding the product supply- we make sure that we have

alternatives. This is how we manage the entire process.

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Arzum, which had only 15-16 different products in its

portfolio in 1996, has over 250 different products as of 2015.

If I need to tell you how we got there, we have to go back to

1990. Private TV channels had just entered the Turkish

market and “Wheel of Fortune” was a huge hit. We had

Arzum products placed on the wheel and whenever the wheel

stopped on an Arzum product, the presenter would announce

it as “Arrrzum”. Since the program was so popular, the Arzum

brand name became very well known within a short time

span. It reached a point that when we were conducting shop

visits, our customers would greet us by saying “Murat from

Arrrzum is here”. In 1992, we started our first long-term TV

campaign with the Arzum food processor. We achieved a

great momentum with that campaign, as our food processor

sold over 4 million units in Turkey. That initiative we have

taken with the food processor proved to be a significant

turning point for the Arzum brand.

The year 2001 was a milestone both for Turkey as well as for

Arzum. Turkey suffered a deep economic crisis in 2001,

bringing the whole economy almost to a complete halt

overnight. During those hard times, we became the first

company to offer a three-year warranty, so that the Arzum

brand would establish itself better and maintain its sales. This

move also differentiated us considerably from the rest of our

competitors. Our sales suddenly soared. As I mentioned

before, in 1996 we only had 15 products. Today, that figure is

over 250. During the 1996-2001 period, we continued to

increase our product portfolio, although it was not at today’s

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rate. In those days, our production process was mainly based

on metal – either metal molds or aluminum molds were used.

These molds were more costly as well as requiring more time

to process compared to the plastic ones used today. The

revolution in the plastics industry reduced the cost of plastic

mold investments, allowing quicker response times and the

capacity to meet consumers’ demands faster. Thus, we

managed to differentiate ourselves in the market place by

keeping our costs under control, while at the same time

making higher quality and more functional products.

Arzum made the best use of this by outsourcing some of its

production. Because of this, we were able to implement the

best technological adaptations quickly that each producer was

making use of throughout the supply chain. Therefore, metal

and bakelite-based production technology (an early form of

plastic) has gradually transformed into plastic raw materials.

This gave us greater speed, allowing us to produce faster from

2001 onwards. Hence, we became more flexible in terms of

adapting new product processes that consumers were

demanding.

Part 3

Value Chain in Design − Being a “Fast Fish”

As you know, there are books written on this topic. When you

think about it, the faster fish always beats the bigger fish. We

were also able to move faster in the market place. We

answered the market demand better, while keeping product

costs down by working with different producers from Turkey,

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the Far East or the Middle East as needed. As Arzum, we were

able to meet consumer needs, while providing high quality

service. This was especially the case in Turkey. Here, the

crucial question was to determine the specific product that

would give us a competitive edge. As we studied consumer

habits, Turkey’s tea culture stood out. Turkish people drink

nearly 250 million glasses of tea per day. However, in Turkey,

we brew tea differently than the rest of the world. With this in

mind, we launched Arzum Çaycı in 2002. Arzum Çaycı

(“Teamaker” in Turkish) had a headstart. It was conceived by

an Italian designer and was supported by a substantial

advertising campaign. Just as with the food processor I

mentioned earlier, Arzum Çaycı also sold in millions.

Although sometimes it may not be considered within the

value chain, the role of design is very important for our sector.

We know that while purchasing a product, the brand, price

and after sales services are all important factors affecting the

decision-making process. But a person’s kitchen also

represents his/her world and tastes. We decided not to work

with a group of in-house designers for our products, mainly

because once you have an assigned team of designers, this

may lead to a sort of color blindness. A designer who only

works on kettles may start to create similar kettles after a

while. However, a designer who may have recently designed a

motorcycle for a Japanese brand, for example, could bring in

a totally different perspective for our iron’s handle design –

possibly taking inspiration from the motorcycle’s handle bar

on the command panel and the hand-held gas grip. When you

are riding a motorcycle at 100 kilometers an hour, your right

hand is your only connection to the gas and maybe to life as

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well. Similarly, the handle of the iron provides the most

important connection between you and the iron. An incorrect

grip or faulty design may tire your arm. For instance 60-

minute ironing job wear you out very quickly and you may

have to stop ironing after half an-hour. As we began to pay

more attention to such details and to design, we started to

differentiate ourselves more in the market. After 2001, we

started launching different products faster and continued

building upon our brand name. In 2004, we gained a different

momentum, thanks to the Arzum Onan campaign (Arzum

Onan was Miss. Turkey and Miss. Europe in 1993). As our

brand name and our celebrity merged together in the eyes of

consumers, all our products benefited from this synergy.

Following that campaign in 2004, we had another

breakthrough.

Every year since 2005, the Istanbul Mineral and Metals

Exporters’ Association (IMMIB) organizes an industrial

design competition. I was also a jury member in 2007 and

that year we began the production of the award-winning

toaster by Atıl Kızılbay. This was the world’s first toaster in

which the bread could be placed from the side, rather than

from the top. It brought us six separate design awards from

all over the world. This success truly belongs to Atıl as much

as to Arzum. That product really differentiated us. If I am not

mistaken, it is sold in 12 countries today and the demand for

it continues to grow. Arzum approached the traditional

toaster design from a different perspective, which really had

not been done until then. As a result, we can now toast the

middle slice of a giant Trabzon bread without having to cut it

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into two. Once again, seemingly small details make a world of

difference for consumers.

We also produced a thermos bottle that has two parts,

allowing tea and water to be poured separately. This enables

our customers to make their tea light or dark, whichever way

they prefer. Another example was created when we listened to

our mother customers and made a chopper with two parts, so

that different parts could be used for different functions. For

example, mothers can chop onion or garlic in one part, while

making banana milkshakes in the second part, without

getting any complaints from their children. These all made a

difference for Arzum. Arzum listens to both its consumers as

well as its own employees. I would like to emphasize the word

‘employee’ here. We conduct think tank workshops which we

have created with our employees. If an idea generated here

gets approved and implemented, we pay our employee 1.5

percent of the profits arising from the sale of that product for

the first five years. The blender I mentioned earlier was

developed by Elif, one of our employees. Even more striking,

the original design was drawn by her son Berk. We took that

original design and revised it, made it compatible with

industrial design principles and in the end developed a new

product with added value. The number of such products will

gradually rise.

We label these products “Only at Arzum” since they are truly

unique to Arzum, in respect to original design and idea

generation. No other electrical appliance brands can have

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these products. Thus, we aspire to develop them to

differentiate ourselves from competition, set ourselves apart,

creating innovation to get our customers’ attention. We strive

to do this, not only for consumers in Turkey, but also on a

global scale. That is why we want to increase the Arzum

product portfolio.

Following oil, coffee is the second most traded commodity in

the world, with a trade volume amounting to $20 billion.

Turkish coffee is at the center of this trade. This is because

coffee first came from Ethiopia to Yemen, then arrived at the

Ottoman Empire during Suleyman the Magnificient’s reign,

gradually becoming the everyday drink of the public.

However, today 1.2 billion cups of coffee are consumed daily

throughout the world; but the consumption of Turkish coffee

does not even account for10 percent of this total. With this in

mind, we have investigated why Turkish coffee is not popular

and realized that the major setback is in its preparation. This

is why we made the first electrical coffee pot. Another brand

soon followed us with its own machine. There was no other

machine for Turkish coffee other than these. So, that was

where we had to focus. Our idea was to promote Turkish

coffee to the world and to spread the culture all over the

globe. In this way, Turkish companies would benefit from

everything surrounding that culture: the coffee pot, the

machine and everything else that comes with it. Expanding

Turkey’s coffee culture could create a difference in the $50-

billion coffee machine market. Among the electrical

appliances, coffee machines have grown in the double digits

for the past decade, selling 100 million units annually

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throughout the world. Even though espresso seems to be the

trend at the moment, we believe Turkish coffee has great

potential, as it is being consumed more and more every day.

Currently, the Turkish electrical appliances market is

estimated to be worth nearly 2.5 million Turkish Lira, and

Arzum has a good grip this market. As a result of a number of

initiatives, Arzum made it to the top 10 brands after 2004,

especially in the kitchen, tea, drinks and toaster groups. The

electrical appliances market is worth about $50 billion

globally.

Arzum created a significant difference by specializing in small

electrical appliances and by communicating the right

messages to consumers. In the event of any shortcomings, we

have always stood by our brand and products. The success we

achieved in 2004 and 2007 drew the attention of various

foreign investors. We always wanted to take the necessary

steps to move from a family-owned company towards an

institutionalized corporation. Naturally, we did this with the

consent of the family. Our desire was to go beyond being a

strong Turkish brand and open up to the world as a small

electrical appliances company born in Turkey. We wanted to

dedicate ourselves to this cause. Ashmore, a well-known

London-based private equity fund, invested in Arzum in

2008. We sold 49 percent of the company to Ashmore,

leaving us with the majority 51 percent. Up until that time,

Arzum worked through various distributors and agencies.

However, the company wanted to open its own subsidiaries.

Having Ashmore as our partner made us stronger financially.

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In 2008, we opened our first office in Hong Kong. The first

store followed in Skopje, Macedonia. We ran that store for

about a year before handing it over to a distributor there. In

this way, we paved the way for a system where local

distributor would take over, looking after our brand once we

left. Later on, we established a company in Munich to take the

first step into Europe and the European Union. In the period

from 2008 until 2013-2014, we doubled our revenues with

Arzum-branded exports. We have also restructured during

these five years by exporting about 10-11 percent of our total

revenues with our own brand. During this time, Arzum had a

major transformation. It had subsidiaries abroad and doubled

its revenues. In 2013, Mediterra, another prominent private

equity company, sought to purchase Ashmore’s shares. As a

result, Mediterra became our minority partner, with 49

percent of the company shares, since the middle of 2014.

Part 4

Market Results

We strive as much as possible to take rational steps and offer

our consumers products and services that are produced

quickly and in a cost-effective way. For us, the process does

not end once the product is sold and delivered to the

consumer. That’s why we assign special importance to after-

sales service and offer a three-year warranty. We make every

effort to provide customer services around the clock. We can

even pick up a product, repair it and return it to the

customer’s home, when requested and in certain cities. We

aim to expand this service throughout Turkey. Because if you

want your brand to be ingrained in your customers’ mind and

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even more important, in their hearts, you should not let them

down. If for any reason you cannot satisfy your customers or

meet their expectations, then you need to stand by your brand

and take responsibility for it. In my opinion, Arzum has done

this to a great extent, as it is the market leader in terms of

volume, while also maintaining fifth place in value share in

the Turkish electrical appliances market. Arzum became the

market leader in terms of volume share in the 2004-2007

period, becoming the most-selling brand. Roughly speaking,

we sell nearly 3.5 million products annually, meaning that one

in every four households owns at least one Arzum product. In

addition, during this period Arzum was placed in the fifth

position, in terms of value market share. Therefore, we fully

believe in our brand and continue to seek success in every

possible way.

Part 5

Q & A on “Value Chain”

Question 1: What is a Value Chain?

It was 1985 when Harvard professor Michael Porter published

his book, Competitive Advantage, which made its way to

the bestseller list. The business world heard of Porter’s name

for the first time in 1980, when his first book, Competitive

Strategy, was published. They have been closely following

him since then. Porter focused on the value chain concept in

his second book. Simply put, the value chain describes the

totality of all activities that a company needs to do, to be able

to produce valuable products and/or services. Porter argues

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that companies need to reconsider their entire processes with

the help of value chain concept, starting with procurement,

continuing with production, marketing and distribution, all

the way through after-sales. Porter states that a company

could create cost advantage only through this method. In the

end, this advantage becomes the company’s competitive edge.

Back in 1985, Michael Porter was stressing the fact that

companies need to pay special attention to creating a value

chain, both in its primary and secondary activities in order

not to lose its competitive advantage in the market place.

From the very start, the company’s goal must be set towards

creating value, beginning from the purchase of raw materials,

to intermediate products needed for production, to finished

goods; and then extending throughout the entire process,

including distribution, marketing and after-sales services. It

will not suffice to consider a value chain only in the primary

activities of the company. Similarly, companies’ secondary

activities, which comprise supplying input to companies in an

indirect manner - such as company infrastructure, human

resources, technology and the total supply chain - should be

revisited to make their entire processes more efficient than

those of competitors.

This is the only way to increase the company’s profit margins.

Once this is achieved, the company can enjoy better means of

infrastructure, hire more competitive personnel and always

be one step ahead in terms of technological advances – which

all leads to acquiring a more competitive position in the

market place. Therefore, the value chain concept is generally

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covered in the first chapter of marketing books and is studied

by every company.

During the 1990’s and 2000’s, internationalization became

more widespread and companies began to put it into practice

more often. In addition, the value chain gradually

transformed from a domestic concept to an international one.

Parallel with technological advances and the spread of the

Internet in particular, companies began to obtain expert

views from different parts of the world on R&D, design and

even marketing and branding, to increase their productivity

and optimize their profitability. Globally, there was also more

of a focus on qualified labor forces from emerging countries.

Therefore, while emerging economies prepared for more

important roles in the global trade, having additional

revenues and improved economies; developed countries on

the other hand achieved cost advantages, leading them to be

more competitive both in domestic and international markets.

In the end, the concept of value chain created a win-win

situation for all related parties.

Today, technology has nearly eliminated all geographical

borders. Companies that do it all within themselves are

replaced by companies with different departments and units

in different parts of the globe, run by groups of

individuals/institutions that work for these companies in

completely different parts of the world. Company

management teams are gradually letting go of the control

function and opening up to global solutions. As seen in the

visual, those companies that can better orchestrate their

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network of relationships end up with strongest organizational

structures.

For instance, over 3 million parts needed to produce a Boeing

777 jet, are supplied by nearly 900 companies from 17

countries. Similar examples can also be found in the textile

industry.

Today, a windbreaker travels a long journey before it is finally

sold to a consumer. First, it starts with its raw materials being

purchased from six to seven countries just in time (JIT), then

it is sewn together yet in another country, then finally sent to

its final destination for end-users.

Question 2: Please explain the “value chain” concept,

using Arzum case as an example?

At the end of the 1990s, Arzum recognized global

developments and implemented the concept of “value chain”

by collaborating with various producers and designers across

the globe. Thus, they gained a significant market advantage

both domestically and abroad. In the mid-1990s, Arzum

decided to eliminate its own production unit and instead

started working with other domestic and international

producers, both to improve its efficiency and to differentiate

itself from the competition. With this action, it protected

domestic producers and dispersed its own risk. The flexibility

of the system eliminated the need to carry stock and enabled

the company to work with producers that provided the best

conditions. Similarly in the 2000s, Arzum began to apply the

value chain concept to design. Instead of working with an in-

house design team, the company collaborated with reputable

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designers as well as promising young talents, creating some of

the most unique, ergonomic designs in the world. This move

not only provided considerable cost savings for Arzum, but it

also allowed the company to differentiate itself in terms of

design, to enjoy the freedom of applying new designs and to

benefit from the synergy of different teams.

Arzum has not only created value chain in production,

distribution, logistic support and after-sales, which Porter

describes as “primary activities” , but it has also managed to

apply it on “secondary activities” such as the company

infrastructure and work environment, while increasing work

place efficiency and the motivation of human resources.

Naturally, working with production and design teams located

in different parts of the world and coordinating this complex

relationship network is no easy task. However, in new global

companies, managerial control is diminishing, opening the

way for more specialized staff. In addition, new areas of

expertise are appearing by the day – all of which are

interrelated. Hence, the new managerial system should be

able to orchestrate these complex relationship of networks,

introducing the ability to have business relationships across

many different platforms. With the above in mind, we

sincerely believe that companies such as Arzum will help in

bringing a different perspective to the value chain concept.

Question 3: How did the value chain concept evolve

with globalization? Please give examples.

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As globalization spreads throughout the world and Eastern

countries get the upper hand over Western ones in global

trade, we will witness more and more companies to open up

to the world. Only those who will succeed in orchestrating this

network of complex relationships will grow stronger by the

day.

For instance, Jansson provides interesting examples in his

book titled, International Business Marketing in

Emerging Country Markets, published in 2007. Here’s

one: A UK company buys fish from Norway and then sends

the fish to China after freezing it. The frozen fish is defrosted

and filleted and then sent back to the UK. At first, China was

used for the filleting process due to its lower labor costs.

However an extra 20 percent savings was achieved by having

the filleting process performed manually in China, instead of

with the help machines somewhere else. There are many such

striking examples. Consequently, the value chain concept has

gradually gained wider acceptance globally.

These examples prove that traditional companies that

perform all their processes themselves are being replaced by

companies trying to create

value chains around the

globe, moving away from a

centralized control

function and eliminating

geographical borders with

the help of technology.

Like Arzum, other Turkish

companies have also taken

steps in this direction after

the 1990s and have made

great progress. Arzum is

one of these successful

examples

Bye for now, until we meet

again for another case in

the series.

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References

Fung, Victor K., William K. Fung, Yoram Wind (2008) Competing In a Flat World,

Pearson Education, New Jersey.

Jansson, Hans (2007) International Business Marketing in Emerging Country Markets,

Edward Elgar Publishing Ltd., UK.

Porter, Michael (1985) Competitive Advantage: Creating and Sustaining Superior

Performance, The Free Press.

Vardar, Nükhet (2010) “Uluslararasılaşmada Adım Adım İlerlemek…Arzum”

(Internalizationalizing Slowly), Türk Markaları (Turkish Brands) Volume 3, Reklamcılık Vakfı

Yayınları, Istanbul (in Turkish).

Suggested Videos

1. Value Chain Analysis Explained http://www.vidrope.com/video/5505203/value-chain-

analysis-explained

2. The Value Chain http://www.youtube.com/watch?v=zEidSBtqeTI

3. The Five Competitive Forces That Shape Strategy by M. Porter

https://www.youtube.com/watch?v=mYF2_FBCvXw

4. Porter’s Value Chain https://www.youtube.com/watch?v=hkis CzFHx80

5. Value Chain Analysis https://www.youtube.com/watch?v=7wL6x1BSlw8

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Markalar Fısıldıyor (Brands ‘r Whispering) is a registered trademark of

El İzi Communications Consultancy Ltd.

Project Idea Prof. Dr. Nükhet VARDAR,El İzi Comm. Consultancy

Ltd.

Arzum Case Written Prof. Dr. Nükhet VARDAR, El İzi

Project Team Prof. Dr. Nükhet VARDAR, El İzi

Murat ÇOLAKOĞLU, PwC

Cömert KUN, PwC

Duygu MERZİFONLUOĞLU, PwC

Şebnem ENÇ, PwC

Serkan YETKİNYILMAZ, PwC

Production Pomus Produksiyon

Müzik Rondo alla Turca (Mozart) Muzikotek/Boosey Classic

Voiceover Prof. Dr. Nükhet VARDAR, El İzi

Markalar Fısıldıyor Logo Design Seran SUKAN

El İzi Logo PwC Logo

www. markalarfisildiyor.com

March 2015

This case, cannot be partially or completely used, copied, reproduced or sold without the permission of

El Izi. Otherwise, the articles of the law numbered 5846 and 3257 will be applied without exception.

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