ASDA Expansion to KSA - Essay Example

?Executive Summary The contemporary business world is faced by many economic and financial uncertainties. It has thus become important for companies to expand their business operations globally. Global expansion helps business boost their sales. However, for the expansion process to be successful, it is important to have an expansion plan to be in a position to come up with ways of overcoming the challenges ssociated with venturing into a foreign nation. This paper focuses in developing a plan that ASDA, a company found in United Kingdom (UK), would use to expand its business operations to the Kingdom of Saudi Arabia (KSA). The study entails an analysis of the market conditions in both UK and KSA to establish the important aspect that ASDA should consider in its plans. The report includes the findings and challenges faced in compilation of the report. Table of Contents Executive Summary 1 Table of Contents 2 1.0.Introduction: 3 1.1.What Should Be Considered and How 4 1.2.Saudi Arabia Overview and PESTLE Analysis: 4 1.2.1.KSA PESTLE Analysis 5 1.2.2.Political analysis 5 1.2.4.Social and Cultural Analysis 6 1.2.5.Technological Analysis 6 1.2.6.Legal Analysis 6 1.2.7.KSA Business Environment Analysis 7 4.0.Market Entry Strategy 9 5.0.Marketing Mix and Product Adaptation and Development 11 6.0.Conclusion 12 Appendix: Clients Preference for Different Supermarkets. 13 Works Cited 14 ASDA Expansion Plan to KSA 1.0. Introduction: Companies are increasingly becoming globalized. The main reasons why companies opt to expand their operations to a global level include increasing their sales due to availability of new markets, acquisition of new resources which could be domestically unavailable or expensive, opportunity to diversify business operations, minimization of competition, and a possible opportunity to minimize tax deductions. Expanding business to a global level results in growth of operation and thus requires coming up with a different plan to facilitate the transformation of the business premise from local dealings to global ones. The plan should be dependent on the kind on business in question since different business has different ways of operating (Alpen Capital, 2011). While seeking to expand business operations globally, it is vital to develop an expansion plan, which should include market research to ensure that your company has a proper understanding of the market conditions in the new nation thus develop ways to adopt to the different government policies, technologies, laws and competition (Luo, 1999). In the past, globalization mainly involves large companies. However, retail businesses are continually becoming interested in globalization. A good example is the supermarket retails such as Tesco and ASDA found in UK and have currently expanded their operations to other regions, which have resulted in increased sales and profits. KSA is one of the nations that many companies are eyeing due to the readily available market (Business Monitor International, 2012). This study focuses on a plan that ASDA, a UK based retail supermarket, could adopt to expand its market and venture into KSA. ASDA Stores Ltd. is a supermarket chain with headquarters in UK, which sells food, general merchandise, clothing, toys in addition to offering financial services. Additionally, ASDA owns a mobile telephone network called ASDA mobile. This study aims at analyzing the market conditions in KSA by exploring the following aspects: A market plan that ASDA can use to expand its market into KSA ASDA background The appropriate mode of entry into the market Marketing mix and Product adaptation and development 1.1. What Should Be Considered and How Before deciding to expand the market into KSA, it is important that ASDA carry vigorous research on the market situation in since global expansion process is often a risky choice faced by challenges. However, carrying out a prior research helps in coming up with ways to counteract the challenges. For ASDA to be in a position to triumph in KSA, it is important to consider factors such as political environment in KSA, economic factors, social as well as cultural factors. The study should involve a comparison of market conditions in UK with those in KSA since factors such as consumer conduct and needs, preferred ways of advertisement, and culture may differ (Business Monitor International, 2012) The market analysis will make use of existing models and theories on global expansion and market entry strategies. The theories consider the role of political system, economic factor, culture, and social systems in determining the market entry strategies and the product adoption modes. One of such models is the Uppsala incremental model of internationalization (Le & Frydrychowska, 2008). This model posits that lack of knowledge on international market operations is the main challenge facing companies aiming at global expansion. It also argues that firms expand into foreign markets to counter market uncertainties and that globalization process progresses with knowledge attained about the market. Another model is the psychic distance concept, developed by Johansson and Vahlnet, which argues that the mode of entry into foreign market depends on political, social, cultural, and economic factors (Le & Frydrychowska, 2008). 1.2. Saudi Arabia Overview and PESTLE Analysis: KSA is one of the wealthiest nations in the Middle East and mainly relies on oil for its revenue generation. Saudi Arabian’s are very religious which dictates their mode of dressing. However, KSA has a great potential for companies willing to expand their market due to the high spending rate, fast economic growth and the fact that most young people are starting to adopt western mode of dressing (Alpen Capital, 2011). 1.2.1. KSA PESTLE Analysis PESTLE is an abbreviation for Political, Economic, Social, Technological, Environmental and Legal Analysis. 1.2.2. Political analysis This the degree to which the government intercedes in the economic matters. KSA follows a Monarchy system which involves a council of Ministers ruled by the King. Saudi Arabia is characterized by government regulations that are business friendly. The government allows foreign investors to freely invest in Saudi Arabia. Additionally, there are set policies which foreign investors must follow while operating within Saudi Arabia (Business Monitor International, 2012). However, lenient government policies based on strong religious background dictates the dressing code, which limits sale of some westernised products. Additionally, existence of several violent Islamist groups is a threat to political stability. 1.2.3. KSA Economical Analysis Economically, KSA is one of the Wealthiest nations particularly due to the large quantities of oil that the country produces and markets. KSA has capitalist economy with a GDP of approximately $622 billion and an annual growth rate of about 3.7%. Economically, KSA consented to the WTO to encourage foreign investors in addition to enabling diversification of economic activities. The KSA economy is rapidly growing due to the liberal economic guidelines that encourage foreign investments. However, the overdependence on oil for revenue generation makes KSA economy vulnerable since the world oil prices keep fluctuating. Additionally, the insurance cost is increasingly being added which is a threat to prospective investors. 1.2.4. Social and Cultural Analysis The KSA is Islamic and sharia laws are used in governance. Other religions such as Christianity are prohibited. The society is extremely masculine and women are rarely acknowledged. The culture is Arabic and dictates the eating habits and dressing mode. The dressing code is extremely conservative though the people aged around thirty years are somehow becoming accommodative to western dressing mode. However, the KSA culture is generally welcoming as depicted in their tax-free shopping offers for tourists. However, the strong Islamic religion makes Saudi Arabians quite conservative on the eating habits, dressing code, women employment and advertisement strategies (The Saudi Network, 2011). 1.2.5. Technological Analysis Technologically, KSA has modernised technology. Introduction of internet in 1999 led to adoption of online shopping particularly in the retail sector. The internet penetration grew by about 350% by the year 2000. Existence of world-class infrastructure makes business operation in KSA easy. 1.2.6. Legal Analysis KSA legal system is structured on Share’a, which is a derivative of Quran, Ejtihad and Sunna. However, the commercial legal system operates quite independently from the legal system. This is due to great number of western investors operating in KSA who have greatly influenced the business sector operations. Currently, there are no exchange principles governing the corporate sector. Nevertheless, the ministry of Interior requires all companies to register their employees’ contracts in order to issue them with the residency permit. Additionally, all employment issues and other labour related issues are governed by Labour Law. 1.2.7. KSA Business Environment Analysis KSA is strategically located and suitable for firms wishing to expand operations in the Middle East region. Being a member of the GCC, KSA is able to access markets in Bahrain, Oman, Kuwait, Qatar and the UAE without taxation, that is, duty free (Euromonitor International, 2012). However, there is a deficiency of skillful labor in the KSA in addition to limited brand identity, which would negatively affect the ASDA retails. The frequent shopping festivals in GCC region and tax free shopping attract tourists who are major customers in retail market. A possible threat might arise in the retail sector since the credit card lending services are increasingly becoming strict leading to limitation of credit services reducing consumer spending. Additionally, Retail sectors in Saudi Arabia, prohibits 100 percent foreign ownership. 2.0. Structure of Supermarket Business in the KSA Over the recent past, there has been great transformation of traditional retail markets into shopping malls as well as hypermarkets in the GCC region. KSA has experienced the highest growth in the retail sector with greater penetration of food retails. Launching of several supermarkets has led to increased competition. Increased penetration and use of internet in GCC region has resulted in increasing trend of online purchase especially in the KSA (Oxford Business Group, 2008). There has also been an increase in grocery retailing with most of the growth being attributed to expansion of chain supermarkets and hypermarkets. Some of the most popular supermarkets and hypermarkets in KSA include Carrefour, Hyper Panda, Al Sadhan, Azizzia Panda, The Salova Group, Geant, Al Othain Markets, and Farm supermarkets. Most of the supermarket and hypermarkets are located in the urban areas, though some have branches in the rural areas. In KSA, the number of hypermarkets has increased significantly with about 50 such openings operational in the major cities of Riyadh, Jeddah, and Dammam. The major sector is the food retail market, which as estimated to be approximately US$ 33.0 billion in 2010, a 9.6% expansion rate (Alpen Capital, 2011). 3.0. ASDA Background ASDA was formed following the amalgamation of three Asquith supermarkets and Associated Dairy. ASDA is a UK based retailer that deals with clothing, food, general merchandise, telephone networking and general merchandise and is a subsidiary of the Wal-Mart, an American based and the largest retailer in the world. ASDA owns about 16.5% of the shares in the UK grocery and is ranked as the second largest chain retailer in UK after Tesco. However, as the chart in the appendix, ASDA is facing stiff competition from Tesco, Morrisons, Sainsbury, and Waitrose (Price, 2012). ASDA relies on promotions to market its products by offering products at a low price as depicted by its marketing slogan that states “British Lowest Priced Supermarket, 14 Years running”. 3.1.1. SDA Analysis (SWOT Analysis) Strength: -ASDAs collaboration with world's second largest retailer, Wal-Mart, will enable it gain fast acceptance. -ASDA offers high quality products at an affordable price, which is what most people are looking for. -ASDA has a diversified business activities ranging from food retail to mobile networking which give it a competitive advantage in the market. Weakness: -As a partition of Wal-Mart, ASDA incurred great losses in the year 2010. ASDA recorded revenues of $31.2 billion in 2010 (FY2010), which was a considerable decline of 8.2% over 2009. The decline is mainly attributed to the fluctuations in currency exchange rates (Datamonitor, 2010). - ASDA has minimal innovative ways of decreasing negative impacts of the waste from its products impact on the environment and is likely to face confrontations from environmentalists. Opportunities: -There is an increased consumers’ zeal for shopping as a leisure activity, the increased spread of technology in the KSA is an opportunity for ASDA to enhance online shopping (Euromonitor International, 2012, Web).  -The low prices of ASDA products has enabled it gain vast popularity which has resulted in high profits. The expansion plan by ASDA would mean increased job provision to KSA local which would earn the supermarket acceptability. -ASDA can make use of religious festivals, a common and important occasion in KSA to advertise its products. Threats: - Threat of new entrant by the existing retailers. -Other popular retailers such as Tesco are eyeing the middle east inclusive of KSA which might be another source of competition for ASDA. - ASDA supermarket is facing stiff competition in UK from other supermarkets such as Tesco. -Occurrence of global fluctuations would highly affect ASDA which has already been partially affected by the 2008-2010 global economic crises. 4.0. Market Entry Strategy A market entry strategy is the planned techniques of delivering and distributing goods  and services  to a target market inclusive of the importation services. The appropriate market entry strategy for ASDA should be determined by the findings of the market conditions in KSA and the consumer requirements. The strategy should include a comprehensive analysis of potential customers as well as competitors. Additionally, the plan should consider the trade barriers and local knowledge on their brands. KSA is characterised by presence of anti-western groups, thus ASDA should come up with strategies to counter possible resistance of their products especially at the initial stages (Dlabay, Scott, & Scott, 2010; Luo, 1999; Kalyanaram & Gurumurthy, 2012; Estonia, 2008). Considering the KSA policies that do not permit 100% retail ownership of retail by foreigners and the anti-western attitude, the preferable market entry strategy is joint venture, exporting or alliance with local enterprises. ASDA should ensure they make use of local labour to encourage acceptance of their products (Meyer & Bernier, 2010; Parker, 2005). In exporting strategy, ASDA can establish strong ties with local super and hypermarkets in KSA and make them purchase products from them. Joint venture involves shared ownership of enterprise between two or more investors. Joint ventures allow sharing of risks and allow a foreign company to join with a local company to increase local acceptance of their products. Alliance is somehow similar to joint venture but the companies retain their managerial independence in case of alliances as opposed to joint ventures where managerial roles are shared. The most appropriate mode is joint venture since the KSA does not allow 100% retail ownership by foreign investors (Vrontis & Thrassou, 2007; (Terpstra & Sarathy, 2001). This market entry mode will entail ASDA forming a partnership with a local retail company in KSA to enable sharing of risks. The joint venture should entail a contract of about ten years between ASDA and the local retailer to enable ASDA establish itself locally after which it can freely operate on its own. Additionally, partnership with a local investor will enable KSA acquire local employees. Employing local employees is advantageous since it makes it will make it easy for KSA to deal with the local who have a different culture as compare to that in UK. Joint venture is advantageous in that it will enable ASDA to leverage managerial capability and learn the new business and social culture gradually. Joint venture will enable KSA have a say on how the business operation of the joint venture will be conducted in addition to being able to gain new expertise on KSA market operations. Joint ventures are also flexible in aspects such as management style and time of contract making it a good for ADSA. However, ASDA must be careful when selecting the partner to enable it counteract the cultural differences (Terpstra & Sarathy, 2001; Vrontis & Thrassou, 2007). 5.0. Marketing Mix and Product Adaptation and Development Expanding operations to KSA means ASDA will be venturing into a territory with a different culture where the needs and tastes of the customers will be different from those in UK. There is need to find strategies to standardise and adapt their products to the local situation. This will require considering the customers culture hence demands and preference. Another aspect is the ethical issue. Different countries have different business ethics. Ethics are important in that they determine the acceptability of goods. Being a westernised supermarket, ASDA requires to ensure the employee it might import from UK understand the language and culture of the Saudi Arabians (Vrontis & Thrassou, 2007; TheSaudiNetwork, 2011; Luo, 1999). Marketing mix strategy adaptation is an international marketing strategy for altering the marketing approach and mix marketing features to make them applicable to each international target market. Bearing more costs but hoping for a larger market share and return. ASDA will have to adapt their marketing mix to be contingent on the culture KSA. The eating habits and preference in KSA is different, thus it is impossible to standardize products in UK and market them in KSA. Because of this fact, ASDA have to adapt their products the new market. Another factor that is important to consider is the packaging to make their products more recognisable. Supermarkets that are currently operating in KSA have limited variety of products. Thus, introduction of several varieties requires appropriate packaging to reduce confusion (Kalyanaram & Gurumurthy, 2012). Since Adso has already expanded to some regions in the Middle East, it already has some experience on the customer requirements, which it should employ when adopting the marketing strategies. Additionally, the country laws and regulations are an important aspect to consider. Islamic laws that are crucial in KSA prohibit use of products such as alcohol, pork, and drugs. The dressing code is also strict especially for women who are required to cover themselves in public. The clothing retail should thus consider altering their clothing products to suit the needs of the KSA residents (Le & Frydrychowska, 2008). Another area to focus on is the advertisement strategies. As opposed to UK where clothe advertisement often involve sparsely dressed women, the KSA culture does not allow use of commercials with naked or sparsely dressed women. The packaging should also not use such images (The Saudi Network, 2011). This study is important in that it provides an insight on the issues that any company willing to expand its operations into KSA or the Middle East countries should consider. Additionally the work lists the strengths, weaknesses, opportunities, and threats that characterise KSA retail market, political and economic systems. This study is particularly important to ASDA since the discussion mainly focused on products offered by ASDA. The study is limited in that it wholly relied on existing literature without any attempts to ascertain the truthfulness of different issues, some of which may have changed with time. The main challenge was finding the appropriate data regarding KSA market conditions (Alpen Capital, 2011). 6.0. Conclusion This study sought to establish the retail market conditions in KSA. Additionally, the paper sought to analyse the issues that ASDA should consider when developing a plan to expand its market to KSA. The market study showed that global expansion is important and helps companies realise their potential and increase their profits. The retail market in KSA still has openings thus ASDA can easily venture into the market. The preferable market entry strategy for ASDA is joint venture since there is anti-western perception among some Islamic groups within KSA. Additionally, KSA government does not encourage 100% retail ownership by foreigners. Appendix: Clients Preference for Different Supermarkets. (Price, 2012, Web). Works Cited Alpen Capital 2011, November 1, GCC Retail Industry. Viewed July 25, 2012. Business Monitor International 2012, March 13, Saudi Arabia Defence and Security Report Q2 2012. Viewed July 25, 2012. Business Monitor International 2012, May 30, Saudi Arabia Business Forecast Report. Viewed July 25, 2012. Datamonitor 2010, October, ASDA Stores Limited - SWOT Analysis. Viewed July 25, 2012. Dlabay L, Scott J, & Scott C 2010, International Business.Cengage Learning, Stamford. Estonia T 2008, December 12, Standdardization Vs. Adaptation of the Marketing Mix Strategy in SME Exports. Viewed July 25, 2012. Euromonitor International 2012, July, Retailing in Saudi Arabia. Viewed July 25, 2012. FAO Corporate Document Repository 1997, Global agricultural marketing management. (Marketing and Agribusiness Texts - 3). Viewed July 25, 2012 Kalyanaram, G & Gurumurthy R 2012, April 4, Market Entry Strategies: Pioneers Versus Late Arrivals. Columbia Essentials of Mnagement, p. Issue 12. Le, J & Frydrychowska, M 2008, June 19, The International Expansion of a Multinational Company. Luo, Y 1999, Entry and Cooperative Strategies in International Business Expansion. Greenwood Publishing Group, London. Meyer, E & Bernier, I 2010, May 25, Standardizing or Adapting the Marketing Mix across Culture. Oxford Business Group 2008, The Report: Saudi Arabia 2008. Oxford Business Group, London. Parker, B 2005, Introduction To Globalization And Business: Relationships And Responsibilities. SAGE, New York. Price, G 2012, March 29, Precise. Viewed July 25, 2012. Terpstra, V & Sarathy, R 2001, International Marketing, 8th edn, Dryden Press, Chicago. The Saudi Network 2011, Saudi Arabia - Marketing and Sales Strategy. Viewed July 25, 2012. Vrontis, D & Thrassou, A 2007, Adaptation VS.Standardisation in International Marketing -the Country-of-Origin Effect. Innorvative Marketing, Volume 3, Issue 4. Read More