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An organisation is a social group which aims to achieve a collective goal. Organisations existence reasons change based on its aims and objectives. Business organisations aim profitability on the market in exchange for provided products or services to customers, although the primarily aim of most non-profit organisations is to focus on providing product or services to various groups without the purpose of gaining any profit (Campbell, et al., 2011). Every organisation, either profit intentional or non-profit organisations, has aims and objectives to accomplish predetermined goals. Organisations can group aims and objectives under the term of strategy. Johnson et al. (2008, p. 3) describe strategy as “[...] the direction and scope of an organisation over the long term, which achieves advantage in changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations”. Organisations may allocate every resources and competence easily with a strategy in order to achieve predetermined goals, but changing business environment obstructs organisation strategies because of its nature.

The construction industry is one of the most dynamic sectors of the market due to endless demand. Even contemporary reports estimate that the volume of construction output will grow 85 percent worldwide by 2030 (PwC). Therefore, construction organisations should be able to adopt a constant modification of strategies and operations to compete with vigorous and briskly changing business environment (Kennerley & Neely, 2003). This assignment aims to critically evaluate the impact of the changing business environment in Turkish construction industry, and possible scenarios depend on the influence of the external factors over the writer’s former company.

1.1. The Company in Brief

This section contains essential information about case study company to provide a clear view of analysis. Agaoglu Group established in 1981. The company operates in construction, real estate, energy, tourism and industry sectors. The company finished 16 projects with experience and provided more than 30 thousand residences. The company operates only in the domestic market and targets a middle and high-income customer groups. Agaoglu Group recently finished an iconic project in Istanbul. Maslak 1453 is one of the largest complex residential projects in Europe with 2 million square meters construction area. Project compromises of 19 towers, 5 high rise buildings, 4780 units and many other commercial areas (Agaoglu Group).


2. Business Environment Analysis Methodology

Business environment analysis intends to review primarily external influences which can affect directly organisation’s strategy. In this assignment, the framework of the business environment analysis is adapted general to the specific approach, which also known as the deductive method. The deductive method facilitates effective strategy and scenario building while exploring through a general scope, changing and complex business environment into specific facts like industry, market and competitors. The figure below illustrates general to specific approach of the analysis.

Figure 2-1 layers of the business environment (Johnson, et al., 2017, p. 33)

Johnson et al. (2017) categorise the business environment into series of layers. Campbell et al. (2011, p. 127) describe the business environment as “[...] anything that influences or impacts on the organization”. Lynch (2015) underlines understanding of the competitive environment is a fundamental step to building rigorous strategy in the organisation. Also, Lynch summarises important of the environment analysis for three main reasons: (i) most organisations compete against others (ii) the environment analysis help to shed some light on possible threats and opportunities, finally (iii) there are network and relationship chance to lead co-operation (ibid).


3. The Macro-Environment Analysis

The outermost layer of the business environment is a vast, complex territory to predict based on limited facts. Therefore, the macro environment analysis requires more comprehensive outlook in order to explain clearly. The PESTLE framework provides an intended comprehensive analysis on the macro environment. It categorises environmental influences into six main groups: political, economic, social, technological, legal and environmental (Johnson, et al., 2012). In addition to the general description, the Pestle framework enriches the external environment analysis and makes more suitable for the company in many distinctive perspectives. Agaoglu Group is highly involved with government projects also environmental and social concerns are the main priorities of the company’s customers. In addition, technological, economic and legal influences play a significant role in the construction industry.

3.1. The Political Environment

Akiner and E. Akiner (2009, p. 65) describe the weight of the construction industry in Turkey as “[...] is one of the most important driving forces of the economy with its trigger effect to other industries”. As a result, government influence is an inevitable motion on the construction industry. The Turkish Government’s 2017-2019 Medium Term Programme [MTP] aims new activities which enhance construction productivity and provide investment incentive system for strengthening the industry (Ministry of Development, 2016). Turkey’s political agenda has been keeping a turbulent status since last year because of deadly bombing attacks, the failed coup attempt, constitutional referendum and tensed international relationships (Kirby, 2017). Despite political and security concerns, Turkish Statistical Institute [TÜIK] recently reported 2,9 percent annual gross domestic product [GDP] increase (TÜIK, 2017a). The political environment has a particular importance for Agaoglu Group. The company mostly developed lands which owned by Emlak Konut GYO [EK-GYO] Real Estate Investment Company [REIC] (Agaoglu Group). Housing Development Administration of Turkey [TOKI] is the main shareholder of EK (EK-GYO). Thus, Agaoglu Group has a strong relationship with the government.

3.2. The Economic Environment

Turkey is among one of the significant developing economies in the world (UN, 2014). Turkey stands on the 18th position in terms of nominal GDP and has the 22nd largest foreign direct investment [FDI] inflow in the world (The World Bank, 2015; The World


Bank, 2017). Turkish construction sector had witnessed a continuous growth rate between 2002 and 2016 (see Appendix A), except for 2008 and 2009 (Gül, 2017). There is an implicit contribution of the construction industry to economic growth and long-term national development particularly in developing countries (Ofori, 2015). In 2015, a total of 43 Turkish contractor companies were selected for the top 250 International Contractors List prepared annually by the Engineering News-Record (ENR). Consequently, Turkish construction companies generate profit in either domestic or international market.

3.3. The Social Environment

The demographic portfolio is a key indicator for the future of the construction sector in Turkey. The country has the highest young population in the Europe (Kandemir, 2016). For this reason, there is a continuous demand on new residences for the youthful population. TÜIK’s latest March sales report indicate that nearly 130 thousand houses were sold in Turkey. Main three industrial cities have the highest share of the sales with 35 percent. A total number of house sales was 1.3 million last year (TÜIK, 2017b). There is endless circulation of the house sales mainly because of internal migration. Socio- Economic reasons prompt many citizens to migrate western part of the country which is more industrialised, has extensive job field and high-income levels. Turkey’s migration process simulates typical developing country pattern, rural-urban migration from agricultural to industrial sector (Oz & Celebioglu, 2015).

3.4. The Technologic Environment

Turkey’s GDP had raised from $266.6 billion to $717.9 billion between 2000 and 2015 (The World Bank) so increased economic output enabled to encourage investments in the country. OECD report indicates that GDP spending on research and development [R&D] of total ratio had doubled during the same period although ratio still falls behind the OECD average (OECD, 2017). Turkey has several supporting bodies like TUBITAK (Scientific and Technological Research Council of Turkey), KOSGEB (Small and Medium Size Enterprises Development Organization) to encourage local and foreign investors with monetary grants. KOSGEB and partner universities had developed 50 Technology Development Zones in the country to foster the technology sector, which made $2.4 million worth export in 2014 (TGBD, 2015). The Turkish Government also encourages large-scale construction project investments in the country. The current major projects include third airport project in Istanbul, 2 nuclear power plants and other public-private partnership [PPP] projects (Tunc & Altunyuva, 2015). Agaoglu Group is


also one of the pioneer construction firms. The company used self-climbing formwork method on Maslak 1453 project for the first time in the county. Investment and R&D activities are located in the company’s mission statement.

3.5. The Legal Environment

The Turkish Government has various incentive policies like additional tax support, value- added tax [VAT] exemption, tax reduction etc. to motivate foreign investors (Ernst & Young, 2016). Turkey had bilateral double taxation agreements with 63 countries (Revenue Administration, 2006) and by the year 2012, the Turkish Government had stretched the rules that foreign nationals can buy any kind of property like Turkish citizens within the legal restrictions (Ministry of Foreign Affairs). Hence real estate sector had generated roughly 32 percent of FDI with $3,890 billion in 2016 (ISPAT). Agaoglu Group has a good relationship with foreigner investors as well, the company broke the foreigner sales volume record in the past by selling 2 entire buildings to a Saudi businessman (Sahoo, 2013). On the other hand, Turkey’s annual inflation rate hit the ceiling with 11.29 percent in recent times whilst the Turkish lira (₺) reduced depreciation rate slightly against the US Dollar (Hürriyet Daily News, 2017). The Turkish Government recently enabled VAT exemption on house sales to foreign citizens to sustain customer retention (Daily Sabah, 2017).

3.6. The Natural Environment

Turkey’s urbanisation rate increased from 52,9 percent to 73,4 percent between 1990 and 2015 (UNDP, 2010; Statista, 2017). Smith (2015) argues that Turkey must pay an environmental price of this urbanisation as many developing countries. For this reason, The Turkish Government’s 2014-2018 development plan targets sustainable development with R&D and aims to increase use of renewable energy (Ministry of Development, 2014). Agaoglu Group demonstrated its environmental sensitiveness by getting the LEED (Leadership in Energy and Environmental Design) Gold Certificate for Master 1453 Project (Roseneder, 2014). General Coordinator of the Company, Murad Acar underlines the importance of sustainability as “[...] we care about identifying façade solutions that highlight energy efficiency and sustain it with proper materials” (Ekoyapi, 2015).


4. Industries and Competitors Analysis

This chapter constitutes inner layers of the business environment (see Figure 2-1). The macro environment may influence the organisation’s success or failure in a long term. However, closer layers may influence organisation’s position immediately in a short term (Johnson, et al., 2012). Competitor profiling analysis method is implemented to identify the competitive advantages and disadvantages of the organisation against its competitors in the construction industry. Competitors are divided into 4 main strategic groups to identify in general.

i. International Contractors: International Contractors execute the high-scale projects in diversified locations like the Middle East, Russia, Kazakhstan, North Africa etc.

Enka and Rönesans Holding are examples to this category.

ii. Diversified Construction Companies: Torunlar REIC constructed many residential projects and operates several shopping malls. The Makyol Group delivered many highway and road projects in the country but nowadays group diversified services into residence and mall construction.

iii. Large-Scale Contractors: This group includes companies like Agaoglu Group. There are several strong contractors in the company such as Ege Yapi, Nef etc.

iv. Medium-Scale Contractors: This group includes many typical domestic contractors. The medium-scale project defines the range from 200 to 1000


The figure below depicts the position of the strategic groups in terms of budget and project scale.

Figure 4-1 strategic contractor groups adapted from (Johnson, et al., 2012, p. 37)


Agaoglu Group sold the highest amount of residences with 936 units in one project in 2016 (Hürriyet, 2017). Trust is the most important factor in the Turkish real estate sector. The average cost of a new house in Istanbul is in the range of $1500-3000 per square meter. Because of the high prices customers are looking for trust and assurance in the market. Agaoglu Group’s biggest advantage is being partnered with the government’s housing institution TOKI. Medium-scale contractors develop privately acquired lands with own assets. This enables more unshared profit but also bankruptcy risk. Therefore, customers gravitate towards private partners of TOKI. Large-scale projects also require sufficient liquidity to meet project’s expenditures. Sales figures prove that Agaoglu has high liquidity and the company endeavours a large-scale project for a length of time. On the other hand, diversified contractors have various revenue streams from different sectors, this feature puts singular project revenue dependency out of the sight. International Contractors are undertaking several different projects in separate locations. Enka and Rönesans Holding are among the top three Turkish contractors in the world according to generated revenue outside the home country (ENR). High expertise and experience reinforce the top position of companies. Agaoglu Group invested mainly construction industry in Turkey so that the company highly depend on the national economic situation. The table below summarises competitor profiling analysis for selected companies in each category.

Figure 4-2 competitor profiling analysis

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5. Opportunities and Threats

Based on the business environmental analysis, some opportunities and threats are concluded.

5.1. Opportunities

The Government Relationship

Since 2005, Agaoglu Group developed 1.6 million square meters and sold 12,500 residential and commercial units with EK-GYO. In 2016, EK-GYO had generated ₺7.3 billion (which equals around $2 billion) overall with entire partners. Agaoglu Group had ₺1.3 billion (which equals around $380 million) share of EK-GYO revenue, and the company can improve revenue share with new projects by the help of its partner (EK- GYO).

Foreigner Investors

After approval of a recent omnibus bill, foreigners and Turkish citizens who live abroad more than 6 months will be eligible for VAT-exemption on property sales in the country. Real estate experts indicate that new regulation would be a catalyst to draw attention (Daily Sabah, 2017). Agaoglu Group achieved so far $2 billion of the total $5 billion foreign sales volume (Agaoglu Group, 2017), and Ali Ağaoğlu, Chairman of the company, expressed that (Daily Sabah, 2017) “If we develop projects for them, we can bring $10 billion in resources to Turkey annually”.

Investments in new Services on the Existing Market

Agaoglu Group can be part of new PPP project trend in the country. Turkey invested a huge amount of money to PPP projects in health, transportation and logistics sectors (ERBD, 2016). Agaoglu Group can extend its portfolio, and expertise in new services.

Last year, Agaoglu Energy Group, the subsidiary of the company, invested ₺370 million (which makes around $95 million) in renewable energy. The Group signed a contract with a German company and desire future investments as well (Agaoglu Group, 2016).

Investments in new Markets

Turkish International Contractors have been working victoriously in abroad more than 45 years (STFA). Agaoglu Group can be part of the International Contractors in new or current international markets. International contracts enrich value stream and sources of the company.


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5.2. Threats

Political Instability

Turkey suffered totally 269 attacks in 2016 (Kirby, 2017). Syrian refugee number in the country had reached nearly three million (UNHCR, 2017) while the neighbour is sinking further into international turmoil between Russia and America. Additional to tangled situation in the east, Turkey is moving away from Europe. Then, domestic affairs have continued to slip, reports indicate that after the coup attempt, fifty-thousand people had arrested during the state of emergency (The Economist, 2017).

As a result, the Turkish Government must stabilise political issues after constitutional referendum victory to regain foreign investors attractiveness.


Turkey’s economy is highly dependent on imports. Therefore, economic and political issues cause directly raise on import prices and implicitly inflation to balance increased prices. The previous year, the inflation rate had estimated 7.5 percent but finished at 8.5 level (JLL, 2017). Inflation ratio rose sharply to its highest level more than eight years, in parallel with consumer prices rose by 11 percent in March (Wenkel, 2017). Construction materials are very volatile due to inflation fluctuation. Therefore, inflation casts pessimist situation either construction companies or customers.

Foreign Exchange Rates

Foreign Exchange [FX] Rate is one of the priorities of the foreign investors. The Turkish Lira [TRY] depreciated around 20 percent point against the US Dollar from 2015 to 2016 (JLL, 2017). FX Rates creates similar threats like inflation. However, the occurrence of middle-level inflation determined as normal in developing countries (Baharumshaha, et al., 2016). Therefore, FX rates situation come to the forefront for foreign investors rather than inflation.

6. Developing Scenarios

Section six projects company’s possible future situation based on various scenarios. Developed scenarios diverged into 2 main perspectives: political and economic based scenarios, market option scenarios.

6.1. Political and Economic Scenario

The variation in economic performance has a strong correlation with country’s political status quo. In theory, the country’s economic situation should not be related to politics but there is a solid interrelationship between two terms in practice. Therefore, developed scenarios must be determined according to both criteria.


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 Figure 6-1 favourable scenario

As follows from the figure shown above, political, economic and social stability have an imaginary chain which fosters each other. Construction industry gains beyond any doubt favour in a similar positive scenario. On the other hand, emerged problems may cause a chain reaction which damages the entire country. The construction industry would be one of the head sectors.

Figure 6-2 unfavourable scenario

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6.2. Market Option-Based Growth Scenarios

Secondly, market growth scenarios developed based on opportunities of the company. Agaoglu Group may enlarge project scale with EK-GYO in the domestic market or diversifies into new areas in the same market. Another possible scenario of the company that new investments in different sectors like hotel complex or renewable energy. The company owns a large-scale usable land in south part of the country (Forbes). Agaoglu Group may develop another huge-scale resort project in south touristic part of the country. Joining the International Turkish contractors is another convenient option. Figure 6-3 outlines possible risk profile of developed market option scenarios.

Figure 6-3 risk profile map of the company scenarios, adapted from (Campbell, et al., 2011, p. 219)

7. Conclusion

The results of extensive analysis of the business environment enlighten opportunities and threats of the external environment whilst predicting imaginable scenarios for the company. Turkey proved profitable investment environment from the historical point of view. Agaoglu Group used real estate boom like many other companies during the profitable period. In contrast, political tensions and sluggish economic development are the main issues that the government must interfere immediately. Therefore, Agaoglu Group should allocate assets and develop new strategy plans, includes contingency plans, based on the current and future business environment.

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