Aziz Bakay

Business Strategy/Policy   Group Project  TEPE CONSTRUCTION

Eric BASTIN   – Aziz BAKAY – Mehmet SADIK

A. General Information

The company Tepe Construction belongs to the Tepe Group. Tepe Group carries out projects in the field of construction, various construction systems, construction materials, doors and frames, furniture and kitchen systems. The Group provides a total service from initial design to complete turn-key delivery and with this approach tries to integrate of various companies in different sectors. In addition to the construction sector, the Tepe Group is also active in such areas as establishment and management of shopping, sports and entertainment centers, establishment of defense industry and security systems, and energy production.

An important point about the Tepe Group was established by the foundations of Hacettepe University in 1969. Tepe Group carries out its activities within the Bilkent Holding Company which belongs to Bilkent University, established by the same foundations in 1986. All 27 Tepe Group’s companies, transfer their profits to education.

Tepe Construction is the first company of the Tepe Group, and is also the main force of the Group. The construction industry is very developed in Turkey; therefore a very competitive sector. Competitors are big companies like STFA, Akfen, Tekfen… Tepe Construction is not as big as these companies. However, this doesn’t mean that they do not compete on big projects. Tepe Construction has an average annual turnover of 350 M USD in the last 5 years. It completed 3.000.000m2 building construction since its establishment in 1969. Thanks to its reputation and experience, Tepe Construction can form strategic partnerships with international companies for big sized projects. Tepe Construction gives importance to the quality. They are one of the few OHSAS 18001 certificated companies in the Turkey.

Tepe Construction defines themselves as specialized construction company. They are specialized in the airports, hospitals, and infrastructure and in housing projects. But they are also take part in commercial buildings, sport centers, shopping centers, education buildings and prefabricated buildings. The table below gives detailed information about the projects of the Tepe Construction.

B. Organisation Mission and Vision

Company Mission

Create resources for bilkent university to develop & maintain its existence

Company Vision

Make Bilkent University one of the leading science and education centre in the world.

Corporate Governance

Tepe Construction is part of the Tepe Group, which is controlled Bilkent Holding, itself owned by Bilkent University, a not-for-profit organisation. This is a particularly interesting organisation, because the University is actually the main shareholder and the beneficiary. Most other private universities depend on a big company or group of company and are therefore controlled. In the case of Bilkent Holding, it is the University that is in charge of the business. The chain of corporate governance is described below:

Many other stakeholders must be taken into account in this organisation. There are of course the customers and suppliers of the different companies, as well as their partners (banks, strategic alliances for foreign project…) and employees. In this case, we also have to consider the teachers and of course the students of the University, which in fine benefit from the existence of the organisation. In fact, the overall beneficiary of this organisation is the people of Turkey, as it provides them with a top level academic institution.

The mission is clear for all members of the organisation, whatever the level (Holding, Group or Company): it is about supporting Bilkent University. One could think that given such a noble mission, conflicts of interests should not occur, every manager being convinced that he or she works for the common good. Ethical problems would be inexistent; therefore controls should be at their minimum. However, our opinion is that such an organisation is even more exposed to conflicts or interests or ethical problem than “normal” companies and hence requires at least as much control. The first reason is that human nature is the same whatever the organisation; therefore managers may come across the same temptations. The second reason is that this situation may create new type of ethical problems; some agents may be tempted to gain advantages for the organisation, and by-pass certain laws or regulations, because “it is for a good cause”.

However, these controls are in place (see chain of corporate governance above) and the ethics of each sub-organisation seems to benefit from the non-profit character of the main shareholder. Indeed for Tepe Construction, such values as security, quality, or environmental responsibility are not sacrificed to profit.

C. Internal Analysis

Value Chain Analysis

The value chain describes the activities within and around an organization which together create a product or service. It is the cost of these value activities and the value that they deliver that determines whether or not best value products or services are developed. Value activities are called primary activities when they are directly concerned with the creation or delivery of a product or service. They are usually presented in the following form:

Value activities are called support activities when help to improve the effectiveness or efficiency of primary activities. They are usually presented in the following form:

We will change slightly this framework, designed by Porter for manufacturing or service industries, in order to adapt it to the specificities of the construction business. We think that it is a good exercise, as it is an interesting way to describe how the business of Tepe Construction works, but also in order to stretch Porter’s model by testing it on a different industry.

The construction industry value chain includes the client or property developer, facilities management, raw material producers and manufacturers of building products. In addition, there are designers, architects and engineers, specifiers such as quantity surveyors, on site sub-contractors like demolition contractors and building maintenance organizations.

On the one hand, the construction industry starts with raw material producers and manufacturers of building products supplying the merchant trade who in turn distribute products to construction companies and their contractors. This would somehow reflect the part of the business of Tepe Construction that manufactures concrete elements and small prefabricated building. However this is not the main business of the company, therefore we will not focus on this aspect.

On the other hand, the construction industry value chain starts with client or property developer and ends with facilities management for the life cycle of a building. This reflects more the core business of Tepe Construction, which is the building business. That’s why we will focus on this aspect. In the construction business, the value chain may look a bit different, as we realized, in mapping the different activities of the company:

Primary activities

Note that the main differences with Porter’s original value chain; is that in the construction industry, Sales and marketing come always first. Indeed, only after a project is accepted and the contract signed can operations really start. Also we used the outbound logistic to describe the building process, as it is in effect a delivery of the final product directly to the customer site. However, this step includes many processes that would usually appear under “Operations”. We will describe in detail below the different steps as we understand them.

Marketing and Sales: / Business Development and Tenders

Marketing is in fact little used by Tepe Construction, only for housing market or to promote the company image. Most of their projects are coming from tenders by the government or private companies. Business development managers scan the specialized press, the Internet and the government publications in order to find potential projects. A first analysis allows selecting only the most interesting tenders to be submitted to the management. The short listed projects will be estimated for cost in order to decide what the bid price will be. A final review with a team of specialists covering all relevant areas of expertise will eventually decide whether the company will bid and at what price.

Operations / Design, Planning & Engineering

Once the project has been accepted, the design and engineering phase can start, where architects, engineers, and designers will prepare the blueprints of the work to be done. At this stage, planners also prepare the schedule of the project and map relevant resources (workers, machines…). The groundwork on-site can also start at this stage. Some administrative tasks are also performed at this stage, like obtaining mandatory authorizations for building, or securing the collaboration of the relevant third party companies to inspect, control and approve the steps of the project when needed.

Inbound logistic / Sourcing of raw materials

Most raw materials are bought by Tepe Construction. The company tries to buy local materials if possible, depending on availability and price. It can also export from Turkey (for projects located abroad) or import from other countries (e.g. steel from China or Ukraine, petrol based materials…). The prices for raw material may vary quite lot depending on the location of the project, the current market price of the material (steel for example fluctuates quite a lot at the moment), and the exchange rate of the currency. The materials must be delivered on-site in a specific order, as planned in the previous activity.

Outbound logistic / Building

This phase is the construction itself, on the customer’s site. Workers can be locals, contracted for the duration of the project, companies sub-contracted for specific parts of the job or permanent employees of the company sent to the site if no skills are available locally. This is an area where the know-how, the experience and the skills of Tepe Construction’s employees is extremely precious. The company emphasizes quality and safety as primary objectives, which contributes to its image and reputation in Turkey and abroad.

Service / Maintenance

Customer service has become a very important issue in the company’s strategy. Although services are usually on a contract basis, 10 year warranty is standard and responsibility in case of defects in design or quality can last as long as 20 years. Often, even repairs not included in the contracts may also be performed, in order to improve customer satisfaction.

Support activities:

Support activities fit quite well to Porter’s model; therefore we did not change anything in the way it is presented:

Procurement

Big projects like those realized by Tepe Construction are consuming a lot of raw materials. However, these are mostly bought by project. Therefore, there is not one department specialized in procurement, but specialists working directly on specific projects.

Technology development

The construction industry is quite stable and standard; therefore there is little space for innovation. However, the Company, sometimes helped by external consultant, designed frameworks to increase the efficiencies of projects. It also developed some new scaffolding techniques. Anti-earthquake requirements are not part of this technology development yet, but are reflected in the requirements of the tenders and in the now mandatory control of specialized third party companies during the construction process.

Human resources Management

This is an important activity in construction, where the number and skills of workers needed depends very much on what projects are in progress and at what stage these projects are. Tepe Construction uses its own staff, but also sub-contracts local companies for labor, or uses local labor, especially abroad, if the necessary skills are available. Own staff may be permanent or hired only for the duration of the project. Training of employees is largely used to develop skills and knowledge, thus increasing performance but also motivation. While realizing projects, it is important for Human Resources that the company health, safety and environment policy is respected. The management of human resources is therefore very important and complex in Tepe Construction.

Infrastructure

Different IT systems are used to increase productivity and quality: for example to calculate costs or for project planning. Quality control is also a very important activity for Tepe Construction. The management of finance plays a central role in the decision of whether a project can be accepted or not. Indeed, even if the price is right, as well as the resources and the know-how, the timing of cash-flows is really important in order to evaluate if the company will be able to finance the project to the end. Some project can have initial cash in-flows, or partial payment based on the advancement of the project, but in some cases cash-flows may come only very late or even at the very end of the project. Running out of cash could compromise the project or even the company itself. Therefore the finance department is very much involved in the decision of accepting a bid or not.

SWOT Analysis (1/2) – Strength and Weaknesses

The strengths are the internal forces that drive the firm’s resources and capabilities to create an advantage for the company. These advantages may be such patents that are acquired, strong brand names and good reputation.

For Tepe Construction, the number one strength of the company –stated by the architect engineer whom we spoke to- is know-how of the business. And one of the main reasons for excelling in the business is the workforce. Employees are highly skilled and qualified. Moreover, training is very important for Tepe Construction. Everyone is involved in very intensive programs provided throughout the company. It motivates employees and improves performance. The cost advantages of proprietary know-how are very important.

A typical example would be the approximation of tender in terms of all direct and indirect costs. It requires the experience and knowledge of very professional technical staff. A good estimate is very important because it will be used to calculate the final bid given to the customer. Such deals are calculated in millions of dollars, therefore the price must be right. A price too low could cost a lot of money to the company. A price too high and the tender may be lost. Therefore, the company has trained its staff in order to excel in this cost approximation of tenders and has setup a process of feedback when projects are completed, in order to further improve the estimation process. This ability to give a right price is a strong asset for Tepe.

Secondly the reputation of the company is a significant strength. Tepe is not only one of the leading construction firms in Turkey, it also has an excellent image in its industry, domestically and abroad. One example is the Bakü-Ceyhan crude oil pipeline, which was partially carried out by Tepe Construction. It a huge energy project tendered by the government, won and delivered by Tepe Construction. This demonstrates the trust of the government in the ability of Tepe Construction to carry out such large scale projects.

Baku – Tblisi – Ceyhan Crude Oil Pipeline Project

Lot A : From Turkey – Georgia Border To Posof, Erzurum

Tepe – Nacap Joint Venture – 89.000.000 Usd

Third, Tepe Construction has built relationships with other construction companies, in the form of joint ventures or partnerships, in order to benefit from the synergy between them. For example for airport terminal constructions, but also for businesses which are conducted abroad. It allowed Tepe Construction to win projects in Afghanistan, Iraq, or Dubai. This is very important, because foreign projects generate usually more profits than domestic ones (because of lower prices and higher taxes in Turkey). Many large scale projects can be used as references and to comfort the image and reputation of Tepe Construction in other geographical areas.

What could be seen as a weakness may be the inability to compete on smaller scale projects in the Turkish market where the company expertise, skills, and standards of quality do not match the lower requirements and therefore lower prices expected by the tenders. As the regulations change in the future, standards of quality will increase and controls will become stricter. However, in the present situation, this mismatch can be considered as a weakness. Tepe Construction does not wish to consider the option of decreasing quality on their projects.

D. External Analysis

PESTEL Analysis

PESTEL Analysis is used to investigate the macro environment of a company in order to identify dominant factors: political, socio cultural, economical, technological, legal and environmental factors.

Politics

A reason why construction firms are subjected to political factors is because one of their major customers is the government. Projects like airports, hospitals, and infrastructures are given by governments. These represent most of the time very big deals. For example, the project of Istanbul Ataturk Airport International Terminal and Car Park has a project value of $397million. The total value of the national or international airport projects that Tepe Construction is working on is around $826M. Therefore, in every country they have to have good relations with the politics.

Ankara Esenboğa Airport

New Domestic & International Terminals & Carpark Project

Firstly we should look at the national politics. In Turkey, the political system is not as stable as in the developed countries, despite recent developments in the legislations due to the efforts to join the European Union. Even though new laws are launched, it will take some time for them to be implemented. Although these laws may not directly relate to the construction sector, still they affect the smoothness of operations in the state.

Bureaucracy is also a problem for Turkey. Bad planning and difficult economical situation may affect project dramatically. Indeed the government may decide to cut costs and not provide the cash flows as promised. In such cases the project may stopped, temporary or even permanently. However, the efforts to join to the European Union and changes in the legislation may see improvements in the future. Tepe Construction is expecting to have less bureaucracy, which will ease their operations.

The situation is even more complicated in foreign countries, where Tepe Construction also operates. These are usually not developed countries, mostly in the Middle East or in Eastern Europe. For example, Tepe Construction has a project in Afghanistan or in Southern Iraq. They also have completed projects in Kazakhstan, Iran, and Azerbaijan. The political situation in those countries is often difficult. In most of them there is almost no stability at all. For example Tepe Construction won a tender for a terminal in Kiev, but a week later there here been the Orange Revolution in Ukraine. The project was cancelled.

Another problem is the difference of culture in Eastern countries, where personal relationships are very important. Therefore, it may be more difficult for companies who have developed corporate governance and a certain ethic. It is not surprise when the government has a project and the conditions of the tender are prepared in such a way that only one company can bid for the tender. This company has usually close relationship with the government…

Economical

Although, being in Turkey means that a company may face economical crisis from time to time, Tepe Construction has the advantage of not focusing only on national business. They also bid for projects abroad. Whatever the location of the project, they also face problems connected with the global economy, like the fluctuations in foreign currencies, which can affect very much Tepe Construction’s profit margins on a project. For example, since the beginning of the summer, the US dollar appreciated about %25 percent. Similar problems come from fluctuations of the prices of raw materials like steel. One of the interviewees said that the fluctuations are even worse than for the US dollar.

Socio Cultural

A big socio-cultural problem is bribe. When doing business with eastern countries, most of the time you are faced with this problem. In those markets bribing is a part of the business. Bribe is not always handled under the table, but it takes a more official and formal aspect. For example in Dubai it is mandatory to have local partner. Most of the time these companies are just label companies and have nothing to do with the construction. The so-called partner will keep a part of the revenue, without adding any real value to the deal. It will not be surprise that those companies are owned by the relatives of one of the ministers.

Even though Tepe Construction has a limited number of customers, they have another problem to cope with. Most of the unskilled workers are from the local country where project is realized. This means different kinds of peoples with different languages, religions and cultures. It is a big challenge to coordinate and motivate people who may have very different needs and ways of working.

Environmental

When developing project, Tepe Construction is changing its environment. Tepe Holding. Also have factories such as, Tepe Betopan and Tepe Knauf. Therefore they produce waste. In their health, safety and environment policy Tepe Construction states that “While realizing the projects, we are trying to take necessary measures to preserve natural resources, decrease the waste amounts to the minimum level, avoid the air, soil and water pollution and increase the extent of recycling process”. Even though these precautions cause extra costs, they do not cut budget on protecting environment just to be able to lower their prices.

Due to the nature of its projects, Tepe Construction may sometimes shape the environment. One of the objectives of Tepe Construction is to design buildings that fit well in the environment. It is particularly important for large infrastructure projects like the Baku-Tbılısı-Ceyhan crude oil pipeline. This can sometimes be a challenge that may reduce their profit margin.

Legal

Since, most of the time it is expected that the customers prepare the conditions of the tender in accordance with the law. Legal issues are not a real concern for the Tepe Construction. However, there are recent changes in regulations that they have to take into account. After the two destructive earthquakes in 1999, the Turkish government changed the legislation about constructions. Before the earthquakes, regular controls were supposed to be performed by an engineer employed by the state, but this was rarely the case. Often an engineer would visit the building site only once or even not at all. Now independent private companies are controlling the buildings regularly during the project. These changes did not cause extra costs for Tepe Construction because they did not sacrifice quality for cost, but some small companies had difficulties to adopt new legislation. Also now according to the Turkish laws any construction firm is responsible for 20 years for the buildings they constructed.

Technological

Construction is not an innovation driven sector. However this does not mean that they don’t use technology at all. Tepe Construction is following the sector standards, but if there is a strict time constraint for a project, then they may use some of the latest methods or technologies to speed up the work.

Porter’s five Forces

Porter’s Five Forces is a model for industry analysis. Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

Competition

There is a very hard competition in this industry, especially in Turkey (STFA, TEKFEN, ALARKO, AKFEN…). Tepe Construction is competitive on big and complex projects where its skills and scale can be leveraged. However, for smaller projects, small firms often out-bid them because they can offer much lower prices, as high quality or specialized skills are not required for such deals. However, Tepe Construction does not wish to sacrifice their standards of safety or quality to cut costs. Therefore it may be more advantageous to look for bigger projects abroad, also because taxes are sometimes much less than in turkey. In such cases though, they compete against local and international competitors

Suppliers

Raw materials are mostly bought when needed, according to the current projects. Therefore, prices can fluctuate a lot, depending on where (domestic or import) or when (prices and foreign exchange fluctuations) the materials are bought. However, given size of the projects carried out by Tepe Construction, it can negotiate volume discount.

Buyers

There are several types of buyers, governments, private companies, or customers (for housing). Tepe Construction has usually little power on prices, as most projects are based on tenders. Therefore the estimation of the costs of a project is a critical step and the profit expected must be calculated carefully in order to win the bid, but not lose money. There is little or no scope for negotiation once a contract is signed.

Potential entrants

Foreign firms can always bid on specific projects, in Turkey or abroad. This is however unlikely because the construction market is already very competitive in Turkey and Turkish construction companies are also very competitive internationally. Therefore we do not see potential new entrants as a big threat for Tepe Construction.

Substitutes from other industries

We could not identify any substitute products for the main business of Tepe Construction.

SWOT Analysis (2/2) – Threats and Opportunities

The environmental changes may create certain opportunities for a company to engage in lucrative business and growth. Generally, opportunities occur in fast emerging and developing markets and/or industries, such as technological sectors like IT or Genetics. However, it is not so much the case for the construction sector. It is a more stable and structured sector, which does not benefit from quick technological improvements.

One of the opportunities for Tepe Construction is war, unfortunately. Wars cause mass destruction and are always followed by urgent needs for reconstruction of both housing-building and infrastructure. After the wars in Afghanistan and Iraq, there were big opportunities for companies like Tepe Construction to help the reconstruction efforts. The company decided to enter these markets, but was very careful to accept projects only in locations where risk was limited, like southern Iraq and some secured places in Afghanistan.

Bringing the skilled workforce from Turkey to foreign locations is another opportunity, because Turkey’s construction industry is remarkably developed compared to Middle-east or Asia. Therefore there is often abroad a need for qualified and trained-experienced employees, from the worker level to design and project management level.

Another opportunity is earthquakes. Turkey had two of them in last decade. Earthquakes also create need for reconstruction. In such circumstances the aim is to provide the fastest prefabricate and ordinary housing services. Thus the firm contributes to the recovering activities of the area and society at large, by engaging in mass production of prefabricated constructions.

Changing environmental values may also affect negatively the company performance and strategy. Shifting demands for certain products and changing consumer preferences are the main pitfalls for companies operating in a market. In our case considering Tepe Construction, the threats would be wars (or the risks created by them), costs of raw materials, impact of currency fluctuations.

Wars are threats as well as they are opportunities. It is possible for Tepe Construction to go for reconstructing an area to recover the aftermaths of war. However such engagement may expose them to high risks. Indeed, even if Tepe Construction tries to minimize such risks by accepting projects only in areas that have been mostly pacified, there is always uncertainty concerning what can happen in such unstable environments. A sudden burst of violence can not only compromise a project, but also the lives of the employees working on it.

Another threat comes from the effects of the global economy. Quick change in the price of steel, cement or other raw materials can impact severely the profitability of a given project. Indeed Tepe Construction needs to purchase huge amounts of raw material for its projects. Recently for example, due to international tensions, the prices of raw materials increased sharply. A similar economic threat is the sudden fluctuation in the currency exchange rate that Turkey is accustomed to. When raw materials are bought abroad, this can have a very negative impact on the bottom line.

E. Strategy

Porter’s Generic Strategy

Porter outlines three main strategic options open to an organization wishing to achieve a sustainable competitive advantage. Each of the three options is considered within the context of two aspects of the competitive environment. We have to consider the sources of competitive advantage: product differentiation or the lowest cost producer in the industry. At the same time, competitive scope can be divided into two sections: broad or narrow (focused).

Tepe Construction can be located in the differentiation-broad scope quadrant, because the company has a wide range of business, differentiated from it competitor by an emphasis on quality and a set of skills allowing the realization of big complex projects.

Tepe Construction’s experience, reputation and know-how are indeed perceived as very important by many clients (governments, municipality, army, public etc.) and uniquely position the company on its selected markets.

Miles & Snow Typology

Tepe Construction displays many characteristic of a defender; they stay in the construction industry and do not seek to develop in very different industries, they try to improving their processes (“creating frameworks to improve efficiency”) and defend their positions on their markets (quality associated with company brand name is important), they try to avoid risk by selecting projects that are in their area of expertise. They also develop incrementally and in some case vertically (beton, doors & windows).

However, they also display some characteristics of prospectors, in the sense that they look for opportunities other sectors (medical, infrastructure, defense, aviation, retail…) in order to decide to enter new types of markets. If they feel that the timing and potential are right, they can then use their overall know-how in the construction domain and focus it in this new market. This allows creating a new vertical expertise in the company that can be used to target similar targets in that market, leveraging the experience acquired. However, diversification is not a main, nor an intensive, activity and these opportunities are always in the same domain, i.e. construction.

Therefore we decided to classify Tepe Construction as an “opportunistic defender”. They have a smart and efficient way to diversify the portfolio of projects they can develop. They build on their core knowledge and skills and adapt them to specific target markets, within their domain. This allows seizing new market opportunities.

F. Recommendations

Using the TOWS (Threats Opportunities Weaknesses and Strengths) matrix, we have identified some recommendations for Tepe Construction:

TOWS MATRİX

Strengths

Weaknesses

Opportunities

Using experience and know-how in sectors requiring reconstruction to exploit its resources and capabilities

 continue to look for new opportunities in sectors where skills and know-how can be leveraged.

Small business and projects can be followed by sub-units to compete in low price segment

 Create a specialized unit to handle smaller projects. This unit could be used as “play grounds” to train new employees and managers.

Treats

– Using company credibility (well-known) to avoid risks, using futures markets for material acquisition and currency fluctuations

 Create a department specialized in procurement to leverage the buying power of Tepe Group.

 Lobby in the industry sector in order to increase the quality standards and therefore benefit from their position as quality construction provider.

Table of contents

A. GENERAL INFORMATION 3

B. ORGANISATION MISSION AND VISION 4

COMPANY MISSION 4

COMPANY VISION 4

CORPORATE GOVERNANCE 4

C. INTERNAL ANALYSIS 6

VALUE CHAIN ANALYSIS 6

SWOT ANALYSIS (1/2) – STRENGTH AND WEAKNESSES 10

D. EXTERNAL ANALYSIS 12

PESTEL ANALYSIS 12

PORTER’S FIVE FORCES 15

SWOT ANALYSIS (2/2) – THREATS AND OPPORTUNITIES 16

E. STRATEGY 17

PORTER’S GENERIC STRATEGY 17

MILES & SNOW TYPOLOGY 18

F. RECOMMENDATIONS 19

G. REFERENCES 19

G. References

TEPE Construction web site: http://www.tepeconstruction.com/frameset.html

TEPE Group web site: http://www.tepe.com.tr