Taking Charge at Dogus Holding

1. How was the social, political and economic environment of Turkey in 2001? What role do social, political and economic factors play in firms' M&A and divestiture decisions?
2. What is the importance of construction line of business in Dogus Group of companies?
3. Does Ferit have the support and power to restructure construction line of business? What factors do work against Ferit in re-organizing construction line of business?
4. What do you recommend to Ferit in bringing organizational change to Dogus Group? What kind of an action plan do you suggest Ferit to present to Dogus Holding Executive Committee?

Early one morning towards the end of February 2001, only days after Turkey had been hit by its second financial crisis in just four months, Ferit Sahenk, CEO of the conglomerate Bogus1 Holding, A.$., made the drive from his home in Emirgan to his corporate headquarters in Istanbul knowing that he faced the most difficult and important decisions of his career so far. Ferit took the same route that he did every morning, heading into the city on the road that ran alongside the Bosphorus. Yet with his mind focused on the problems now facing his country and his company, the familiar sights and sounds of his daily drive to work seemed imbued with new and even urgent meaning. Ferit looked down along the Bosphorus, with Asia on one shore and Europe on the other, and Turkey itself spanning the divide. The billboards along the highway bore the names of foreign companies, most of them recent arrivals, and many of them from Europe and the United States. Even above the hum of traffic, as he left the highway and headed for Dogus Holding's modern corporate offices, Ferit could hear the voices of muezzins calling the faithful to prayer, as they had since the Ottoman Turks had conquered the former Constantinople five-and-a-half centuries ago. Turkey had seen many changes in the century just ended, and especially in the fifty years that Ferit's father, Ayhan Sahenk, had spent building the Dogus Group of companies. Indeed the Dogus companies themselveswhich had branched out from a construction firm Ayhan had founded in 1951 to include nearly 100 businesses ranging from banking to pasta manufacturing, tourism to automobile distributionhad played a significant role in building modern Turkey. Now Ayhan Sahenk lay seriously ill, but Ferit could not afford to dwell on personal worries about his father. On February 21, the Turkish lira had fallen 27%, shortterm interest rates had shot up 7500%, and the Turkish stock market had lost more than 18% of its value.2 This reversal had come on the heels of a financial crisis in November 2000 that had resulted in large foreign capital outows and a surge in interest rates.3 These recent set-backs had brought the Turkish government's ambitious As a leader, Ayhan was a rather quiet individual. He rarely spoke, choosing to be a listener. When he did talk, he spoke very briey and in a limited number of words. His few words would give great lessons to the listeners. Even his shortest explanation could teach us things we could hardly learn in years of experience . . . Another trait was his careful approach to people. He would do his best not to break anyone's heart. Some of the other senior managers who worked under Ayhan also described his leadership style as intensely personal and characterized by caring for his employees. During Ayhan's years at the helm, the company had very low employee turnover, and many Dogus employees felt that they had a job for life. Senior executive Yucel Celik summarized this aspect of Ayhan's leadership: As he got rich, we got rich. When we weren't doing well, he offered help. He was there for the birth of our children, and he grieved with us at our loved ones' funerals. He would call to see how I was doing, and if I were having a bad day he would reassure me that things would be okay, and I would feel better after talking with him. Another hallmark of Ayhan's leadership style was the high degree of autonomy he gave his senior managers. Saide Kuzeyli (age 47), formerly an executive vice president at Garanti and currently the CEO of Dogus's human resources (HR) organization Humanitas, described this facet of Dogus's culture by saying, \"Bogus Holding [under Ayhan] was more or less run as a loose union of autonomous CEOs. The CEO of a Dogus company was in a sense the lone warrior and reported to the senior shareholder, Mr. Ayhan Sahenk.\" Ferit Sahenk Ferit Sahenk, the only son of Ayhan Sahenk, grew up in the Dogus business. Some of the longtime senior managers who had worked closely with Ayhan recalled Ferit as a small boy running around the halls of the company offices. When he was a bit older, Ferit would shadow his father, going with him to visit the various Dogus companies and talk with employees. Ferit finished high school in Turkey and went on to receive his bachelor's degree in marketing and human resources from Boston College in 1987. Ferit returned to Turkey after college and joined the Garanti Bank management trainee program. After that his father appointed him vice chairman of the newly formed auto distribution company, a position that Ferit still held in 2001. In 1991, Ferit expanded his presence at Dog-us by founding Garanti Securities. Within three years, Garanti Securities became the largest among 112 brokerage houses in Turkey. In 1994, Ferit restructured Garanti Securities into the investment banking arm of the Group, and served there as executive vice chairman. Meanwhile, between 1987 and 1997 Ferit held many other high-level positions at various Dogus companies as he was groomed as Ayhan's successor. Ferit was always enthusiastic about improving his managerial skills, so in 1997 he participated in the Owner / President management program at Harvard Business School. Satisfied with Ferit's performance over the previous ten years and believing that he was ready to face the challenge of leading the holding company, Ayhan named Ferit to the position of president and CEO of Dogus Holding in March, 1999. A senior manager described a challenge that Ferit faced as he came into his new position as Dogus's leader: Now that Ferit has taken over leadership of Dogus, he is presenting a different style of management than his father. Naturally, there is some resistance and anxiety toward this change. Whoever has to replace Ayhan would experience the same challenge that Ferit is experiencing, especially under the current difficult economic conditions. Ferit was on the lookout for the best ideas he could find for leading Bogus Holding into a net era. He was an avid reader of business, economics, and management literature; on his desk, fc example, he kept a wellworn copy of the book jack Welch ('3' The GE. Way: Management Insights an Leadership Secrets of the Legendary CE 0.29 A senior manager described him thus: \"As an avid reads and researcher, Ferit Sahenk is a leader whose vision is borderless, who notices innovation ant developments very quickly and who encourages his employees to learn more about new trends i their businesses.\" Ferit spoke very thoughtfully and was described as a good listener. He was known to ask a lot (2 questions in order to gain deeper understanding of the Dogus businesses. Ferit also had an energeti and entrepreneurial spirit, which many other people at Dogus shared. He hired a number of young Western-educated managers to assist him in his transformation efforts. A senior manager compare: Ayhan's and Ferit's styles: Ayhan had a rather conservative approach towards business. Ferit differs most from his father on this point: Ferit is much more inclined toward the future. He has a certain tari. He is much more supportive of change and has a keen interest in new technology and new trends. Some radical decisions that are being made today (in 2001) are possible thanks to his readiness for change, without which we could never act quickly enough. Ferit was very involved in the many Dogus companies and cared deeply about the success of the Group and the people working in it. He was often seen working eighteen-hour days. Tuesdays he spent in Korfez Bank, Wednesdays in Garanti Bank, Thursdays in Ottoman Bank; Mondays and Fridays he visited other Dogus companies, and Saturdays he spent at the Holding Company. Ferit knew that he was spending too much time at work, and was trying to find a way to reduce the amount of managerial attention that the companies received from him while at the same time uniting the many companies under the Dogus umbrella. Given the increasingly competitive nature of the business environment in Turkey, he wanted to bring out the synergies that existed among the various companies, use their collective size to increase Dogus's borrowing capabilities, and take advantage of potential economies of scale. Ferit also said that \"a value- added of being united as a group is the support available during crises, such as with the banking crisis in November of 2000 that brought the Executive Committee together to deal with the problems we faced.\" Another of Ferit's concerns was the lack of a succession plan. What if something should happen to him? He could not continue to manage everything by himself, yet given his plans for the company he also didn't see how he could allow it to continue to operate in the decentralized manner it had under his father. A senior executive who had worked for Ayhan analyzed Ferit's dilemma this way: \"He should not lose the ability to control the whole big picture, but he should not be dealing too much with the small details. He is young, and I admire his efforts and dedication, but he won't stay yormg forever. He can't control everything, and he can't be everywhere.\" A senior executive described Ferit's managerial challenges: The major challenge Ferit faces is to keep the balance among three different types of managers within the group. The first are those who were with the group from the beginning and who contributed immensely to the growth of Bogus. The second is made up of professionals who will carry the group into the future and will be the main support to Ferit and his endeavors. The third group consists of the managers who are afraid of losing their position and power, who fight to protect their own interests. Ferit needs to bring all of these groups together to work toward one common goal. Corporate Governance Strengthening the Boards Ferit planned to address the problem of his shortage of managerial time by strengthening the boards of the Bogus companies. In the past, when the general managers reported to Ayhan, the boards rarely met and existed mainly for symbolic reasons. The board of Dogus Holding in 2001 was still a family advisory board, consisting of the three family members (Ayhan, Ferit, and Ferit's sister Filiz) and a few close, trusted friends and advisors to the family who had been involved with Bogus from its early days. Aside from the board, Ferit would meet with his sister Filiz every Friday afternoon to review major issues and activites at Dogus. As Saide Kuzeyli said: This past year (2000), Mr. Ferit Sahenk brought in ideas of how a holding company should create value and how a functional board should facilitate the executive team in setting a clear vision and relevant strategies. That's the great challenge, though: to get the board members more involved in the general vision and strategysetting, and then hold them accountable for their contributions. Ferit said, \"Being a board member is perceived as being retired. We have to change it to something perceived as a great jo .\" Board members' pay was not linked to the success of the individual company or the holding company, and since the group was family-owned, board members were not shareholders in Dogus Holding. As a result, there were no personal incentives for board members to get involved with the companies' management. The changes Ferit envisioned would have consequences for the general managers as well as for the Dogus boardsconsequences that Saide Kuzeyli described by saying: The CEOs would then have to deal with a number of powerful players, as opposed to having the autonomy of the past. This poses an immense challenge for all parties concerned. If the group embraces and fulfills the new challenges, we shall move on with new accomplishments. The Executive Committee Like the boards of the Dogus companies, the Executive Committee, which consisted of the general managers of each of the major operating companies as well as a few key advisors, met infrequently. (See Exhibit 5 for the membership of the Dogus Holding board and the Executive Committee, and Exhibit 6 for an organizational chart.) Compensation, including bonuses, for the general managers was tied only to their individual companies and not to the success of Dogus Holding as a whole. Ferit felt that this system provided little incentive for the general managers to work in conjunction with other Dogus companies. In order to create institutions for the management of the Dogus Group, Ferit felt that he needed to involve the members of the Executive Committee in Dogus Holding issues. Ferit did not want the responsibility of making the difficult decisions by himself. As he also observed, \"Institutions are needed because once people love you, as they love my father, it's hard to be tough and do what needs to be done.\" Ferit believed that involving the Executive Committee would also increase the chance that the general managers would buy into the Dogus Group's strategic plans and carry them out within their companies. Dogus Culture Bogus had only three family members active in the organization, and so relied heavily on hiring outside talent to manage its many companies. Many of the people that Ferit hired to work for him at the holding company were young, ambitious, energetic, and shared many of his own entrepreneurial visions. Both new and old employees saw Dogus as an organization that valued them and rewarded them for their efforts. The top graduate from Ottoman Bank's management training program in 2000 described his impression of Dogus: \"I feel like there is a culture of formality and respect, but there is also a sense that the company is a warm family. I believe that if I do my work well, I will get what I want from Dogus: money and opportunity for good positions.\" Ergun Ozen, Garanti Bank's CEO and a nineyear Dogus employee, said: \"I am proud to be a member of the Dogus family. This level of empowerment doesn't exist at other companies in Europe. The Sahenk family respects the executives and gives them room to make decisions about their businesses." Building on his employees' positive feelings about both their individual companies and the organization as a whole, Ferit worked to promote a common Dogus culture that could be shared by the various companies under the holding company's umbrella. He said, \"You can't expect to have only one culture in a group as varied as this one with so many different people in so many different sectors, but a common platform is needed if we want to take advantage of the synergies that I think exist among the companies.\" The senior vice president of human resources at the holding company described how the Dogus culture was changing under Ferit's leadership: \"In the past, the financial services part of Dogus was most prevalent, and young people were more likely to want to work for Garanti Bank than for Dogus. Now we are moving toward a more united organization, where the financial companies are more clearly under the Dogus umbrella." Another challenge Ferit faced was to adopt a more modern management philosophy for Dogus than it had operated on in the past, while also maintaining aspects of the company's culture that were essential to retaining the older, more traditional members of senior management. Ferit liked to do things such as send his executives to executive education programs at Harvard Business School, take them to the trading floor at Merrill Lynch, and give them books about business. He wanted his executives to be uptodate on what was happening in the international business arena, particularly in the West. Yet despite introducing a Western avor into the organization, Ferit also saw the need to maintain the level of formality and respect for hierarchy characteristic of Turkish business culture. In an example of this cultural legacy, Dogus employees continued to address anyone in a higher position in the organization using the suffix \"bey\" or \"hanim\" (equivalent to Mr. or Ms); Ferit, for instance, was always referred to as \"Feritbey,\" the equivalent to calling him \"Mr. Sahenk\" in the United States. In addition to addressing people in higher positions in the organization this way, it was traditional in Turkey to address elders in the same manner, as way of showing respect. Thus at the same time that Ferit was working to gain credibility and respect as the company's CEO, he still felt compelled to adhere to Turkish traditions and address the executives of his father's generation in the formal manner. Meanwhile, Ferit experienced some difficulties earning the respect of his older, more experienced senior managers because of the importance attached to interpersonal relationships in Turkish business. These senior managers still had personal relationships with Ayhan, and were hesitant to adopt Ferit's more professional standards and institutions. Ferit's situation was further complicated by the Turkish social norm against firing executives, even in the case of failure. Creating the Glue In order to create the glue for a new, more Lmified Dogus Group, Ferit had already introduced some significant organizational changes. Wanting to institute standard business practices across his companies, he had decided that he needed to tread carefully. Ferit knew that if he were to make drastic changes in the operating companies, he risked losing senior managers to foreign companies that were recruiting experienced locals to manage their Turkish operations. To limit turnover, yet still progress toward his goals, Ferit created shared resources at the holding level. By doing this, he hoped to use the holding company as a corporate unifier, change agent, and back door into the independently run companies. Humanitas In January 2000, Dogus Holding established Humanitas, a separate human resources company that drew on the best practices of Garanti Bank's HR department. Humanitas offered assistance with management recruiting, strategic HR planning, training, testing, and finding temporary help for any company in the Dogus Group. In its first year, Humanitas recruited 2,000 employees to work in the Dogus companies and provided Bogus employees with 600,000 hours of training. Humanitas also provided 10,000 hours of consulting services on various HRrelated projects within Bogus companies in the year 2000, and within ten months of its founding was providing 33 Dogus companies with some level of service. In 2001, Humanitas also began offering limited products and services such as training, software packages, and testing materials to companies outside of the Dogus Group. One of Humanitas' key programs, intended to provide consistency among the group's companies, was the centralized recruitment of management trainees. Until 2000, each company had recruited its management trainees individually, and these people were considered employees of the individual companies. With the help of Humanitas, all of the corporation's new trainees in 2000 were brought on as Dogus trainees. Many Do gas companies, while increasingly working with Humanitas, also retained their own HR departments. Saide Kuzeyli, Humanitas' CEO, saw Humanitas as a strategic consultant to the Dogus companies, one that could help them develop and implement HR systems while leaving the execution to the individual companies. Saide described the corporation's efforts to get the Dogus companies to work with Humanitas: This is not being forcefully delivered by senior management, including Mr. Ferit Sahenk. He has never made a phone call to any general manager saying, \"Would you like to work with Humanitas?" He is leading more by example than by direction, and people are beginning to catch on and give us a chance. In creating strategic plans for the individual Dogus companies, Humanitas made sure to take into account the culture that already existed in these organizations. Ilhan Cetinkaya, chairman of DOHAS, said, \"We don't want them to write a book and then we try to apply it. There are some basic things that we won't sacrifice and they should write their books on the basis of those things, considering the realities of our environment and culture.\" Not all plans that Humanitas developed would look the same, but they would have a certain amount of overlap. Ferit hoped that this overlap would provide some of the standardization that he thought Dogus needed. Marketing In 1999, Ferit hired Semih Yalman (age 33), who had a master's degree in communications from Emerson College in Boston, Massachusetts, to serve as senior vice president of a newly created department in the holding company called Corporate Marketing and Communication Management. in response to greater competition, Ferit had decided to strengthen the marketing function at Dogus. The corporate marketing and communications department was established to service the marketing needs of Dogus companies in a more consistent, strategic, and cost-effective manner. Early on, to help Dogus companies get accustomed to using the services of this new department and to begin gaining their trust, corporate marketing began providing short-term services such as research, creating brand-loyalty programs, and finding advertisers with low rates. Semih's primary longterm project was called Customer Relationship Management (CRM). He and Ferit had evaluated the marketing systems at the Dogus companies and learned that their customer databases were outdated; customer service had not been imperative in times of high ination because the companies tended to remain profitable regardless of the level of service they provided. The goal of the CRM project was to focus the Group on the needs of customers and to take advantage of the vast combined customer base of the many Dogus companies. Ferit and Semih also created a training program in the Corporate Marketing and Communication Management department. The idea was that new, high-potential employees would work in corporate marketing for 18 months and then be given strategic management positions in companies within the group, where they were intended to act as change agents. Before moving into permanent management positions, these individuals would rotate throughout the different sectors of the holding company's businesses to spread their knowledge of the corporate marketing programs and to continue to build a holistic Dogus perspective. Ferit hoped that this tactic would begin to promote cooperation among the companies. '8th described the objectives and the challenges of this program: We work very closely with Humanitas to train these change agents. With these change agents in place, senior managers of the companies will be pressured from the top (the holding company) and from the bottom (the change agents) to make the desired changes. Challenges to this plan are time, getting this program in the door of the companies, and managing the expectations of recruits. Another reason for the marketing department to reside under the holding company was to market Dogus to its many companies' employees. While using the change agents to promote corporate marketing programs throughout Dogus's businesses, Ferit was also using a Dogus card program to encourage employees to identify with the group as a whole. All employees had been given a Dogus card that they could use to get certain discounts and benets at the Dogus companiesfor example, lower bank rates or discounted dry cleaning service. Ferit hoped that employees would be more willing to cross-train and share knowledge among various sectors of Dogus if they became more aware of the corporation and began to identify the Dogus Group, rather than the individual companies, as their employers. Strategic Business Development Also in 1999, Ferit recruited Czlem Denizmen (age 31), who had recently received an MBA from MIT's Sloan School of Management in Cambridge, Massachusetts, to serve as senior vice president of a new holdinglevel department called Strategic Business Development. In mid2000, Ferit and (")zlem staffed this department with young, talented, Western-educated project coordinators. These recruits were to work in the holding company under the management of Ozlem, who reported directly to Ferit and was one of his key advisors. After their training in Strategic Business Development, they would be slated for management positions in the Dogus companies. The aim of the Strategic Business Development department was to facilitate long-term thinking at both the holding level and the company level, to evaluate new business opportunities, and to support top executives with information and analysis. Financial Services Unification Project Dogus launched a Financial Service Unification Project in 1999 in order to develop synergies and economies of scale among its financial services companies. Through these efforts, Dogus linked the back-office functions of its three banks, joined all credit card operations under the Garanti Payment System, and transferred the securities trading and IPO underwriting businesses of all three banks to Garanti Securities. Garanti Technology In 1998, Garanti Technology, which had previously supported only Garanti Bank, began offering its information technology (IT) support services to the other banks, and had plans to investigate similar synergies with the auto companies. Though the current applications only worked for financial services, the goal was to eventually have one organization supporting the IT structure of the entire Dogus Group. Hiisnii Erel (age 48), general manager, predicted that Garanti Technology would soon provide services to companies outside of Bogus, and would look at entering into joint ventures with well-known foreign companies. A challenge of Garanti Technology as it moved toward supporting more Dogus companies was its Garanti name. Since Garanti was more well-known in Turkey than Dogus, there was an inclination toward keeping the Garanti name. In addition, Garanti Bank was still fully supporting all of the costs of the integration efforts in 2001. 5813 Ratings In 2000, Dogus I-Iolding's CFO, Ahmet Kamil Esirtgen (age 56), suggested to Ferit that Dogus Holding be rated by Standard & Poor's (S&P). No other holding company in Turkey had finished the S&P rating process and publicly reported the results. Ferit saw the benefits of going through this process and agreed with Ahmet's idea. Being up for S&P's rating prompted valuable discussion among the Dog-us general managers, boards, and Executive Committee, since they would all have to be in agreement about the strategy of the group in order to receive a high rating. In December 2000, Dogus Holding received a 13+ / Stable/ B, the highest rating that any company in Turkey could receive at that time due to the limits imposed by Turkey's country rating. Once the rating process began and Dogus's results were publicly released, there was an implied commitment to be rated on a yearly basis, thus making the record-keeping process and group alignment more salient than they had been in the past. To make the maintenance of the rating process easier for Bogus, Ferit set up a rating committee to work year-round on preparing the yearly report, and to make sure that the Group remained in compliance with the standards required by S&P. Ferit saw this rating process as a first step in preparing Do gus Holding for an 1P0. Taking the Next Steps In its 2000 rating report on Dogus Holding, Standard 8: Poor's described the company's strategy thus: The Dogus Group's primary goal is to become the \"leading service provider group in Turkey by customer-driven growth in branded services.\" To achieve this target, it intends to keep its leading position in the financial sector, develop its automotive business, and grow aggressively in the retail sector. As a consequence, the weight of each business in the overall revenues will substantially change in the medium term.21 Ferit now had to decide how much, or even whether, to involve the board and Executive Committee in certain vital strategic decisions he knew he would have to make in the coming weeks and months in order to keep the company on the path to these goals. Ferit decided that he would call a meeting with the board and Executive Committee. He contemplated whether to ask for the committee's input on restructuring decisions or whether to plunge ahead, making the decisions himself and informing the committee of his plans for the group. Mulling over the first alternative, he realized that he didn't even know if he would be able to get candid opinions from the older managers on the committee. When his new strategic planning department had gone to the general managers during the last two years to ask them what they thought their strategies should be, the older ones had often answered, \"What does Ferit think?\" Yet if he were now to go ahead and make major strategic moves on his own, he would undercut the message of organizational change that he felt he urgently needed to deliver. Matrices Ferit think?for the moment, he had to admit, that was the overriding question. \fExhibit 2 Dogus Companies by Sector Financial Automotive Media Garanti Bank Dogus Otomotiv Holding IXIR Ottoman Bank Dogus Motor - Audi, Porsche NTV Korfezbank Dogus Otomotive Service - Volswagen E-Haber Ajansi United Garanti Bank Int'l Genpar - auto parts and logistics Dogus Iletisim Garanti Bank Moscow Katalonya - Seat CNBCe Garanti Securities Genoto Marketing - Dealership Radio Eksen Garanti Leasing Dogus Agir Vasi Sebit Garanti Asset Management Yuce Auto - Skoda Garanti Life DOD - used cars Garanti Health/General Food Processing Aktif Factoring Filiz Gida - Barilla Aktif Leasing Lamb-Weston VW Dogus Finance Tourism and leisure Uno Antur Tourism Voyager Tourism Construction Dogus Air Retail Dogus Construction Garanti Tourism Tansas Dogus Real Estate Datmar Tourism Macrocenter Dogus Sondaj Hyatt Regency Doguskent Marinas Teknik Eng. Jeeves Gucci Armani Todsstabilization and antiination efforts to a grinding halt, and the country was now facing its worst financial crisis since 1994.4 With 65% of Dogus Holding's revenues currently coming from the financial sector, this systemic shock was sure to have serious implications for the company. Even before the current crisis had hit, Ferit had been focused on the need to prepare the Dogus companies to compete in a dramatically new environment. As a candidate for admission to the European Union, Turkey was now in the midst of overhauling its regulatory and taxation systems to bring them in line with EU standards. Having been part of a customs union with the EU for the past five years, the country had already opened its market to imports in a variety of sectors. And back in 1993, the Turkish government had relaxed its rules on the operation of foreign banks in Turkey, leading a number of foreign banks to open branches in the country in the mid19905. Besides preparing the Dogus companies for the new competitive challenges they would face, Ferit saw a need for major changes in Dogus Holding's portfolio. Though Dogus was one of the top three private sector groups in Turkey, with US$144 billion in consolidated assets and 20,000 employees, he believed that some of the Dogus companies had been failing to pull their weight by the late 19905. With 14 of the 96 firms accounting for 65% of revenues, Ferit had been preparing to get out of some sectors, such as food processing and construction, and shape the group around more profitable consumer- and service-oriented businesses such as banking, auto distribution, and retail. Yet these strategic considerations, important as they were, were far from the only issues weighing on Ferit's mind as he contemplated the Dogus Group's future. Looming over all of the strategic issues he faced was the question of how to start making the kinds of organizational changes he believed were necessary to lead Dogus Holding into the new century. Ferit had been appointed by his father as CEO of the Dogus Group in 1999. For nearly fifty years prior to that, Ayhan had been more than the CEO; he was the charismatic patriarch of the company he had founded and grown to its current size. As chairman of the board and 96% owner of the holding company, he remained an influential and much-beloved gure. Successful as the company had become under his father's leadership, Ferit believed that it would need a different kind of leadership in the future, and worried about whether he could make the changes he believed were necessary. Ferit recognized that reshaping Dogus was going to be a formidable task. The Dogus Group's structure was a labyrinth of crossshareholdings among operating companies held by the private holding company. The operating companies had traditionally been run by general managers enjoying a wide degree of autonomy, most of whom held Ayhan in the highest esteem and continued to call on him for advice. Only 37 years old, Ferit now grappled with the question of how to gain the confidence and support of these managers for the changes he envisioned. These changes included not only his plans for reshaping the Dogus Group's portfolio but also his intention to align the organization so as to take better advantage of the holding company's value-creation potential. For these purposes, Ferit wished to create new corporate-wide institutions and standards as well as a common Dogus Group culture. Yet how could he accomplish this without alienating, and potentially losing, the autonomous senior managers who were not only Ayhan's close friends but who also possessed such valuable knowledge of their businesses and important business relationships? How could he persuade senior managers in sectors such as banking and automotive where Dogus's performance had been excellent under the old system of independent general managers and inactive company boardsof what he saw as an urgent need for change? Exhibit 3 Revenue Distribution by Sector Revenue Distribution 1999 Automotive Others 1 1% 5% Tourism 1% Retail 7% Financial Services 76% Revenue Distribution 2000 Others Automotive 4% 20% Tourism 1% Financial Retail Services 10% 65% Revenue Distribution 2002 Goals Others Media/New Automotive 3% Media 3% 18% Tourism 1% Financial Services 52% Retail 23% Source: CompanyExhibit 4 Transformation of Business Focus 1950 1990 Construction 1990 2000 :> Financial Services 2000 - |:> Retail Network Source: Company documents Dogus Holding Board: Ayhan Sahenk, Chairman (age 71) Yucela Celik, Vice Chairman (age 66) Ferit Sahenk, CEO, Chairman of the Executive Committee (age 37) Suleyman Sozen, Vice Chairman of the Executive Committee and Ferit's chief advisor (age 55) Sencar Toker (age 61) Filiz Sahenk, daughter of Ayhan (age 34) Gonul Talu, head of construction companies (age 63) Sadi Gogdun, head of tourism businesses (age 63) Dogus Executive Committee: Ferit Sahenk, Chairman Suleyman Sozen, Vice Chairman Gonul Talu Sadi Gogdun Sencar Toker Ilhan Cetinkaya, Chairman of Dogus Otomotiv Holding (age 55) Aclan Acar, former CEO Ottoman Bank, board member of Garanti Bank, Chairman of new retail group (age 47) Akin Ongor, former CEO Garanti Bank (retired), board member Ottoman Bank (age 56) Suleyman Tugtekin, food processing group director (age 50) Nehizi Alpturk, head of budgeting at the holding level (age 50) Ahmet Kamil Esirtgen, CFO, Dogus Holding (age 58) Ahmet Kurutluoglu, head of Dogus domestic legal (age 49)Exhibit 6 Dogus Holding Organizational Chart Ayhan Sahenk, Chairman Ferit Sahenk, CEO, Chairman of EC Chairman, Chairman, Chairman, Garanti Bank Ottoman Bank Korfez Bank CEO, NTV Ozlem Denizmen, SVP CEO, Garanti Strategic Business Dev. Securities CEO, CNBC-e CEO, Ixir Semih Yalman, SVP Marketing CEO, Sebit Sadi Gogdun Chairman of EC Sencar Toker Gonul Talu Head of Legal Filiz Sahenk Sozen, Vice Food Processing Suleyman Ahmet Esirtgen, CFO Group Dir. Chairman of Board Yucel Celik, Vice Chairman DOHAS Head of Budgeting Garanti Bank Chairman Ilhan Cetinkaya, Akin Ongor, former Aclan Acar, Retail, former Ottoman Bank Chairman Dogus Board of Directors Executive CommitteeFerit felt that the way to gain these employees' acceptance and respect for himself as the company's leader was to \"create success." As he contemplated his first two years as Dogus's CEO, Ferit believed that he had made some headway. Yet surveying the economic turbulence suddenly engulfing Turkey, he found himself focusing on one particular question: whether to involve Dogus Holding's Executive Committeewhich mainly consisted of the senior managers of each of the company's key business sectorsin current decisions about what to divest, acquire, or consolidate. Ferit saw dangers in both possible courses of action that now presented themselves. If he were to involve the Executive Committee in these decisions, he could risk delaying the latter and allowing Dogus to fall behind the competition. If he did not involve the business managers in the current decision-making process but opted, instead, to first complete the organizational changes he sought, he risked losing his senior team's support and cooperation. A5 Ferit said of both of these options, \"The right change could bring disaster if it's not done at the right time.\" Modern Turkey and its Economy5 In 1923, Kemal Ataturk established the Republic of Turkey on the ruins of the Ottoman Empire. Under the leadership of Ataturk, the state was separated from the Islamic faith and placed on a secular basis, although the majority of the population remained Muslim. Between the founding of the Turkish republic and the 19805, the country's democratic, multi-party system had been interrupted three times by military rule, with the last and longest period of military rule coming between 1980 and 1983.6 By the end of the twentieth century, Turkey, with a population of 65 million, was the third most populous cormtry in Europe (after Russia and Germany). It was also a very young country, with 34% of its population under the age of 18. It was modern Turkey's programs of institutional reform and stateled industrialization that had propelled the country into the twentieth century. During the 19605, 19705, and early 19805, private initiative did not play a dominant role in the Turkish economy. Committed to a \"planned development" effort, the state issued recommendations to the private sector. By the end of the 19905, Turkey's economy was a mix of modern industry and commerce along with traditional village agriculture and crafts. Agriculture contributed 14.6% of GDP in 2000 while accounting for over 25% of male employment and nearly 60% of female employment. Industry excluding constructiondominated by manufacturing and the private manufacture of consumer goods, the most dynamic sector of the economydeclined from 30% of GDP at the end of the 19805 to 22% in the period 1998-2000 as the economy shifted increasingly toward services. Construction contributed about 5%6% of GDP between 1996 and 2000. The service sector, including hotels and catering, accounted for about 20%. Transportation increased slightly in importance during the 19905, and by 2000 accounted for 14.1% of GDP.7 Turkey was a NATO member and since 1996 had a customs union with the European Union, which accounted for more than half of the country's total exports in recent years.3 in 1999, Turkey gained candidate status for admission to the European Union. This motivated the government to intensify efforts to align its regulatory and tax environment with EU standards. With assistance from the International Monetary Fund (IMF), an ambitious anti-ination program was launched in January 2000 to bring Turkey's chronically high ination rate down from 70% to 12% within two years. (See Exhibit 1 for ination rates in Turkey from 1990 to 2000.) Ination had been reduced to 30% by the beginning of 2001, but based on the financial crisis of February 215t, the government recognized that it would have to revise its goal upward.9 Family-Owned Enterprise in Turkey During Ottoman rule, all land in Turkey had belonged to the sultan, and private property rights had been difficult to establish. Families had therefore provided the financial security that was not provided by the government. Even decades after the fall of the Ottomans, Turks were still very loyal to their families, more so than to their communities or to their state.10 The private sector in modern Turkey was dominated by large family-owned conglomerates such as Koc, Sabanci, Cokurova, and Dogus. During the planned economic development of the 19605 through the early 19805, these and other family-owned businesses took advantage of the opportunities provided by the government to grow and ourish, and a few eventually found themselves with a large number of companies in many diverse sectors. Even though some of these companies were publicly traded and professionally managed to some degree, the family presence in them remained strong. Traditionally, leadership and management responsibilities were passed down from the owner to his eldest son. According to a 1999 McKinsey survey, more than onethird of familyowned businesses worldwide break up through bankruptcy or sale after the founder dies, and 70% do so by the third generation.11 According to Klaus Mund, a director of McKinsey's Istanbul office, \"these weaknesses are aggravated by the lack of clear business plans, scattered portfolios, weak human resources management, personalized decision-making processes and a lack of institutional capabilities.\"12 Mund continued, \"A number [of the Turkish family business owners] had recognized this issue. But you still found the founders who were dealing with the business in the good old way.\"13 A few companies began trying to institutionalize their operations in order to separate the business from the family. However, the lack of bureaucracy in the familyowned businesses sometimes served as an advantage. Due to the volatile economy in Turkey, some owners found that the ability to make quick decisions was essential. Until a catalytic event forced these companies to change, most of the initiative for change would have to come from the families themselves, and the transition toward institutionalization could take years to complete. Dogus Company History Ayhan Sahenk, a civil engineer, founded a construction company in 1951 that he named Dogus lnsaat. The word Dogus means \"birth," and Ayhan's firm did indeed help give birth to the modern Turkish economy in the decades after World War II. Between 1951 and 1965, Dogus Insaat focused on the construction of dams, highways, and other infrastructure projects, and was dependent on the government for the majority of its work. From 1965 through 1980, the company continued to take on large infrastructure projects, still commissioned primarily by the government. Ayhan had a keen business sense, and was able to take advantage of economic conditions and government initiatives to expand his company's portfolio through acquisitions and new business development. In 1966, Ayhan entered into real estate with a hotel acquisition. In 1974, he established Filiz Gida, a food processing company named after his daughter that focused on the production of pasta. In 1975, he created Dogus Holding, A.E., to manage his group of companies. He was able to move quickly in making changes to his businesses because he was the sole owner. While many other privately-held organizations in Turkey brought in family members to help manage their companies, Ayhan ran each of the businesses on his own until it reached a certain size, then brought in a general manager to head it. A CEO of one of the Dogus companies said, \"Until Ferit joined Dogus there were no other CEOs in the group with the family name of Sahenk, which was an indicator of the group's professionalism.\" Until the 1980s, Dogus Holding depended on construction projects to generate cash for the group. In that decade, Dogus Holding expanded into the financial sector, acquiring Garanti Bank in 1983 and Krfez Bank in 1987. Dogus also entered the automotive sector in 1987 via a distribution agreement with General Motors. The early and mid-19905 was another period of growth for Bogus Holding. In the financial sector, Dogus acquired Ottoman Bank, an insurance company, a leasing company, an investment banking and brokerage rm, and a financing company. In real estate, Dogus acquired five more hotels. Dogus Holding continued to enter into joint ventures in the food-processing sector, via agreements with Barilla pasta and Lamb Weston potato chips, and acquired a bakery products company and 30% of a soft drink company. In the automotive industry, Dogus expanded its distributions. (See Exhibit 2 for a list of Dogus companies by sector.) By 2000, major companies of the Bogus Group were considered to be among Turkish industry's blue-chip firms. The group, now consisting of almost 100 companies, had sales of US$57 billion, making it one of the top three private-sector groups in Turkey.14 In planning for his succession, Ayhan appointed his son Ferit as CEO of Dogus Holding in 1999, while remaining chairman of the board. Though still a strong presence at Dogus, Ayhan began gradually relinquishing his role as its leader after he was diagnosed with cancer and began spending time abroad receiving treatment. Dogus Core Businesses15 Construction Dogus's original business was construction. Dogus lnsaat focused on the construction of dams, highways, and other infrastructure projects. By 2001, Dogus Insaat had completed projects totaling US$45 billion. Dogus's construction business contributed 3.6% of Dogus Holding's revenues and 3.5% of assets in 1999, with EBITDA margins of nearly 50%. Although the construction companies had boards in place, the latter were mostly symbolic as Dogus 5 construction businesses were run primarily by Gioniil Talu, a 33-year Dogus construction manager who reported directly to Ayhan. Ozlem Denizmen, appointed vice president of Strategic Business Development for the holding company in 1999, said that the focus of the construction companies moving into 2001 would be on real estate and contracting. An Executive Committee member shared his thoughts on Dogus's construction business: The construction business, since Turkey is still an emerging country, will never vanish. There are always either infrastructure or housing projects to do. There will be plenty of business opportunities in this country. One thing is clear though. The construction business started with Mr. Ayhan Sahenk, and there is no one in the family to study the business from scratch, who will visit the sites and look at and feel and smell the cement. There is no one who can replace his knowledge. Ferit said that the family would be deciding what to do about the possibility of getting out of the construction business. Since this segment of the business represented Dogus's heritage, it had a great deal of sentimental value to Ayhan. Ferit seemed hesitant to broach the subject of divesting the construction arm, but he felt that it did not fit with the new consumer-services focus of the holding company. Financial Services While Dogus offered a broad line of financial services, its core businesses in this sector were its banks. By 2001, a significant part of Dogus's revenues and assets were attributed to the financial services companies, in particular the banks. (See Exhibit 3 for Dogus Holding revenue distribution by sector.) Garanti Bank, the agship in Dogus's financial services group, was the third-largest private sector bank in Turkey. It was founded in 1946 and acquired by Dogus Holding in 1983. In 2000, Garanti was majorityowned by the Dogus Group, while 31.51% of the bank's shares were publicly traded on the Istanbul Stock Exchange. Garanti was the first multi-branch bank in Turkey to offer online service, and was also the first bank to offer service during the lunch hour and on Saturdays. In 2001, Garanti had 175 full service branches in Turkey, 7 corporate branches, 9 investment centers, and 3 international branches. Korfez Bank was involved in corporate banking, trade finance, and capital market activities. Its customers were primarily large private companies and upscale retailers. Prior to 1997, Korfez Bank's profits came mostly from its treasury business, but disappointing financial performance prompted a shift of focus toward corporate customers. The third bank in Dogus' portfolio was Ottoman Bank. Founded in 1856, Ottoman Bank was the oldest bank in Turkey, and had been used as the central bank for the country from 1874 through 1933. It was acquired by Garanti in 1996, and by 2000 was a midsize bank that was active in commercial and retail banking, trade finance, asset custody, and treasury activities. Its customers were large corporations, selected small and midsize companies, and some medium-tohigh-networth individuals. Between 1996 and 1998, the number of branches and employees increased rapidly, then remained stable at 1,700 employees at the head office and 65 branches. At Ferit Sahenk's insistence, the banks adopted management committees in 1999. Each of Dogus's three banks had fully structured boards, but with strong CEOs the boards had been infrequently used, with most decisions traditionally being made in oneonone consultations between the CEO and Ayhan Sahenk. Although a great deal of business decision-making still occurred one-onone, the formation of the committees was the first step toward instituting corporate standards. The banking environment in Turkey began to undergo a major change in 1993 when the Turkish government relaxed its regulations on foreign banks opening branches in the country. in 1996, Citibank opened its first retail branch in Turkey, drawing a great deal of attention from Turkish bankers. An article in Retail Banker International stated, \"Citibank's entry is expected to force Turkey's domestic banks to sharpen their service and develop a more varied array of investment products.\"16 In addition to Citibank, a number of foreign banksincluding BankAmerica Corp, Citicorp, and IN G Banktook advantage of the more relaxed government policies and opened branches in Turkey. A senior manager spoke about the banking business in Turkey and the implications of the new environment for Dogus: \"Whoever can adapt to the new competitive banking business will be successful. Out of 70 to 80 banks in Turkey, maybe 15 to 20 will survive. Who will go and who will stay, that is the name of the game.\" Metin Ar (age 48), president and CEO of Garanti Securities since May 1999, was recruited by Ferit to implement the consolidation of securities and investment banking within the Dogus Group. He spoke about the strategic strengths and weaknesses of Dogus's banking portfolio: The major strength of the group is in the fact that most of its activities are in the service sector. The threat to that, as we are focused on finance, is that there is international competition coming here, and with the international global traders becoming more and more active in the finance sector, we shall have difficult times. Strategically, Dogus owning three banks is too many. Perhaps it would be a good idea to sell one or two of the banks, or consolidate two and sell one, or consolidate all three. I think that we should also aim for a strategic intemational partner in order to minimize the risks associated with the incoming international competition. DOHAS (Dogus Otomotiv Holding, A.S.) In April 1987, Dogus entered into an agreement with General Motors (GM) to distribute GM vehicles in Turkey. In 1993, GM decided that it wanted to manage its own Turkish operations, and ended the relationship with Dogus. Rather than exit the auto business, Dogus began a relationship with Volkswagen. As the exclusive distributor of Volkswagen (VW) vehicles in Turkey beginning in 1993, Dogus Otomotiv (Automotive) became the leading importer of passenger cars and the third-largest car seller in Turkey. Dogus's import business was aided by the 1996 customs union with the European Union and European Free Trade Association that eliminated the 33% tariffs previously levied on cars imported into Turkey. The Turkish market contained a great deal of growth potential, as vehicle ownership among the young population (under 35) was only 67 per 1000, 30% below the world average. As a result, auto manufacturers such as Toyota, Honda, Hyundai, and Ford opened plants in Turkey in the late 1990s. In 2000, imports in Turkey reached an all-time high of 54% of total auto sales. 17 By 2001, Dogus Automotive was distributing Volkswagen, Audi, Porsche, Seat, and Skoda passenger cars, VW, Seat, and Skoda light commercial vehicles, and Scania trucks and buses. Dogus had also developed its own automotive retail network over the last 7 years that represented about 30% of total VW sales in Turkey and that subsequently expanded into high-margin ancillary businesses such as parts and accessories, auto service, and consumer finance. Dogus Automotive Holding, A.S. (DOHAS) was established in 1999 and was run primarily by Ilhan Cetinkaya, chairman of each of the auto companies and of the DOHAS board, who reported to Ferit Sahenk. The automotive segment of Dogus accounted for 20% of Dogus Holding's revenues and 2% of its assets in 1999. Dogus was making plans to float 30% of DOHAS in 2001. In December 2000, however, Dogus began rethinking those plans as sales of cars and light commercial vehicles in Turkey fell from 67,000 units in November to 38,000 units in December. Sales continued to fall to 13,200 units in January 2001 and 12,600 in February, down 62% from the corresponding months in 2000. 18 Entering New Sectors19 Retail During Ferit's tenure as CEO, the Dogus Group began expanding to include new businesses and sectors. Dogus expanded into the retail sector in 1999 with the acquisition of Tansas, the leading supermarket chain of the Aegean region; a year later it acquired Macrocenter, an upscale grocer that had 18 store sites at the time of the acquisition. By the end of 2000, Tansas had been transformed from a regional chain into a national chain and become the second-largest retail chain in Turkey bothin terms of sales and net sales area. Garanti Bank owned 19% of Tansas and was planning to introduce co-branded cards and in-store bank branches. (See Exhibit 4 for the evolution of Dogus's business focus from the 1950s to the present day.) Media Businesses Since becoming CEO in 1999, Ferit had hoped to take advantage of the young market in Turkey by entering into the technology, media, and telecom businesses. In late 1999, Dogus became the owner of an Internet service provider (ISP) with the establishment of IXIR. By 2001, IXIR was growing quickly, but earnings were falling short of expectations since most ISPs in Turkey were charging subscribers low fees that did not cover the cost of connecting users to the Internet. Sebit, the leading educational software company in Turkey, joined the Dogus Group in 2000. Among other products, Sebit produced Akademedia, a set of CD-ROMs aimed at supplementing the high school curriculum. The company's goals for the future included developing educational software for adults. In 1999, Dogus also acquired NTV and CNBCe, leading cable-television news stations in Turkey. That same year, Dogus established Dogus Iletisim Group, a publisher of print magazines that by 2000 became the third-largest magazine publisher in Turkey. In addition to publishing National Geographic magazine in Turkish, Iletisim Group teamed with Tansas stores to distribute an exclusive women's magazine, and joined forces with NTV to publish NTV Mag and N Style. Tourism and Services In the tourism business in 2001, Dogus owned five hotels, one first-class holiday village, and a travel agency. In conjunction with the hotel business, Dogus established a dry cleaning service in 1999, and in 2000 expanded to offer laundering and dry cleaning services targeted to middle-income individuals. Dogus was planning to expand in the tourism and services business in the future. Dogus's Leadership Ayhan Sahenk had run the Dogus companies very successfully for nearly 50 years, a period during which his (in Turkish terms) very traditional management style was quite compatible with the growing organization and its environment. On succeeding Ayhan as CEO, Ferit recognized that changes in the Turkish economy-particularly increased competition from abroad-and the sheer size and complexity of the Dogus Group would likely require a very different approach to leading the company. A senior executive described the difference between Ayhan's and Ferit's tasks in leading Dogus by saying, "Ayhan Sahenk founded this company and built it with his friends. Ferit Sahenk's task is to carry the Dogus Group into the future." Ayhan Sahenk A senior executive described his impressions of Ayhan thus: "Ayhan Sahenk was a visionary leader who had a feeling for opportunities and threats." Another senior executive said