Saudi Arabia: Opportunity or Risk for New Market Entry - Assignment Example

 Saudi Arabia: Opportunity or Risk for New Market Entry? Report Summary This report has been prepared to identify potential opportunities for new market entry in Saudi Arabia. This is a country that is currently in the stages of early infrastructure development, making it a long-term opportunity rather than one with short-term gains. Though the country has a strong and stable economy, there are many different risks associated with doing business in this country. However, outside of risks, the consumer environment and their adoption patterns for global brands is quite favourable for new market entry. Saudi Arabia has many different features that will impact business decision-making, including religious values, governmental influence in foreign business, infrastructure issues, and the presence of competition in the consumer electronics industry. These features are described in detail. The Saudi environment There is considerable growth in consumer electronics purchases by Saudi citizens. Computer hardware accounted for approximately 51 percent of consumer spending on electronics in 2008 (bharatbook.com, 2010). This is due to the increased growth in Internet usage in this country and growth in adoption of portable computing devices such as the laptop for business professionals and consumer lifestyle. 20 percent of electronics spending was devoted to mobile handset devices in the same year (bharatbook.com). These sales approached nearly $3 billion in 2008, making it a lucrative industry in Saudi Arabia. There are 25 million different Muslims in Saudi Arabia, over 95 percent of the entire population (pewforum.org, 2009). Strong religious values drive much of the business decision-making in this country, such as efficiency and truthfulness in personal or financial transactions. Unlike Westernized nations, there are many cultural symbols and phenomenon associated with Muslim religious values that will require additional research prior to new market entry. For example, women are taught values of modesty and moderation (Ramadan, 2010), therefore Western advertisements depicting women similarly as in the home country would be rejected by traditional Muslim followers. There would be considerable issues to examine in relation to marketing promotion, advertisement, and how the product would be represented to Muslim cultures, especially less-progressive buyers. An advantage in this region is the high level of expatriate workers found in Saudi Arabia (menafn.com, 2009). These are representatives from European, African, and North American companies that are long-term residents as they develop new business models or expand their operations in Saudi Arabia. Many of these buyers have household electronics needs for business and personal living, therefore they make up an attractive segment of buyers with the resources and values for higher sales growth in electronics sales. Expatriate buyers can be targeted using marketing strategies that appeal for foreign buyer needs as well, using some existing materials in the home country for lower cost savings. An environmental analysis Information about the Saudi Arabian business environment was compiled using the PEST framework for analysis, a model that identifies the social, political, economic and technological environments that affect decision-making. Political influence in the Saudi Kingdom is quite intensive. It is driven by strong Muslim values related to economics and business practice and is quite regulatory. All household electronics equipment must include, somewhere in the packaging, manuals written in Arabic (commerce.nic.in, 2009). This will require any product offered by the company to have a new system put in place, at the operations or production level, to ensure that these regulations receive compliance. This will put strain on the information technology departments and the production staff that will need to add this measure to their quality controls checks. The Kingdom government also demands strict compliance to the International Conformity Certification Programme (ICCP) that has rigid quality and safety controls on electronics items (commerce.nic.in, 2009). This provides risk that some electronics products may not meet these regulations and will require re-adaption in process, an operations cost issue. There are risks that certain products will be inspected or held for observation if there is concern about ICCP conformity, which could slow down sales inventory replenishment at the retailer or sales division. Strict Islamic observance to business and the influence of government in regulation makes regulatory presence very high for foreign imports (Morris & Dabbagh, 2004). Socially, the Saudi Arabia has a very high adult literacy rate, at 85 percent (hdrstats.undp.org, 2009). There is a strong emphasis on education in most Asian nations and Saudi Arabia is currently experiencing very high growth in construction of new educational facilities such as universities. There is a good portion of citizens in Saudi Arabia that have affluent consumer values along with the education needed to support interest in a variety of consumer electronics products. Frequency of adopting new technologies is directly affected by these values and educational levels for Saudi consumers (Al-Ashban, 2001). This poses many opportunities for using sophisticated marketing tools to reach these affluent audiences and knowing that any distributed or on-air promotions will be understood and received by the majority of Saudi customer segments. Saudi Arabian buyers also have a generally favourable view of Western imported products. One study identified that Saudi buyers have the most positive view of U.S- and Japanese-style marketing practices and products, more so than European countries (Shahid, 1997). However, overall, the identity of Western brands are attractive in Saudi Arabia from many different customer groups. Saudi Arabia’s culture of progression also was attractive to Toshiba because of the level to which customers are willing to try new technology products. Offered Toshiba’s Regional Sales and Marketing Manager in 2005, “Saudi Arabia is a very enthusiastic adopter of new technology, and the growth of Internet usage and mobile computing in the Kingdom is at unprecedented levels” (ameinfo.com, 2005, p.2). A well-established hardware and software brand has found alliance opportunities with Saudi’s ALJ Electronics in Riyadh and believes that there is sales growth or sustainability opportunities in this country. Alberto Torres, President of Vertu, offered, “I think Saudi Arabia has tremendous opportunities and is growing really rapidly” (Billing, 2008, p.1). Torres does identify that the retail infrastructure is not quite as strong as larger cities in the UAE, however consumer adoption patterns and interest in consumer electronics products is creating higher competition from interested first-movers looking for new sales opportunities. There are risks, however, to the social condition in this country for new market entry. In 2000, Saudi consumers began boycotting many different goods from the United States in an effort to pressure support for the Israeli-Palestinian uprisings (EIU ViewsWire, 2003). Though these are not necessarily common events, the linkage between religious values, social customs, and political affiliation directly impacts the consumer behaviours for Saudi citizens. In the event of ongoing political problems, it is possible that sales could be impacted for a period of time due to boycotting, sanctions, or other problems that might impact importation and ongoing sales efforts. Economically, the exchange rate of currencies is not necessarily favourable for new market entry. The Saudi Riyal is currently valued at [$1 = SR 3.745], nearly four times that of the U.S. dollar and approximately five times that of the EU (saudiembassy.net, 2010). Consumers in this region have many of the same economic limitations as in the United Kingdom or U.S. in terms of disposable income versus household payments such as rental units, food, and other necessary living expenses. In order to attain profitability as measured against sales in the UK, much higher price tags will need to be associated with these electronics products. Even though tariff charges would be minimised significantly with the exchange rate differences, the sales prices are a risk that the new products might be rejected by Saudi consumers for being higher than those made domestically (if any). Pricing would need to be considered carefully and then weighed against consumer opinion about value and cost versus quality of electronics products. Research would need to be conducted to discover what drives current Saudi buying behaviour prior to new market entry, such as through qualitative interviews or quantitative surveys. The technological environment supports growth for importation of consumer electronics devices. Availability of retailers and other professional distribution outlets for new software packages, sales training programmes, or other software needs can be easily procured in this country. The developing infrastructure and university systems provide opportunities to ally with consulting firms or manufacturers if needed. There is a strong technological environment in Saudi Arabia that poses little to no risk for new market entry. Issues at the organisational level There are very strong cultural differences in Saudi Arabia versus the home country, which must be taken into consideration prior to new market entry. Hofstede identified certain cultural dimensions that most societies value compared to other regions across the world. Under this model, Saudi Arabian consumers and professionals have a very strong institutional set of values related to their social networks. As a group, they will typically not make decisions that have high levels of risk, under what Hofstede referred to as uncertainty avoidance (Bjerke & Abdulrahim, 1993). This could impact relationship-building in B2B marketing, cultural issues when dealing with investment clients, and even when working with distributors in the event that rules need to be bent in order to make temporary changes to distribution patterns. Any situation with risk involved will be assessed highly by this culture under Hofstede’s model. In the business environment, they prefer to keep a very strong distance between authority and employee (Bjerke & Abdulrahim, 1993). This means that organisational culture principles that work in the home country might not be effective in Saudi Arabia. When moving product from retailer to customer, the nature of the employment relationship might impact sales if managers prefer less-social environments with lower-level employees. A new cultural model might need to be identified and created by the human resources division prior to new market entry that involves characteristics of social and cultural values. Any human resources manager, or even line manager, would need to understand the concept of power distance and build cooperative strategies between employees and managers that were specific to their value systems. This could be costly at the budget level for HR and for conducting the research necessary to build an organisational model. Setting vision and mission might be difficult for this country as well because of the distance between management and employee that is preferred. In any electronics business, there is going to be an issue of returns in the event of product dissatisfaction or defect. Statistics show that only 44 percent returns are taken back to the retailer within one week of purchase, with growth in longer duration returns experienced from 13 to 21 percent in just two years (Spectre, 2010). This means that when product is distributed and has been successfully sold, there is a risk that consumers will hold their products during an elongated evaluation period. This makes handling returns nearly impossible to predict or quantify. Because the Muslim culture, at the social and political level, demands efficiency and quality in business dealings, evaluatory periods are likely to be stricter and longer. If certain consumer criteria is not met, handling returns will be a legitimate problem. Is there enough outsourced expertise available in Saudi Arabia to handle these problems in the event of needing repairs? Is the infrastructure available to handle returns to the home country because of product problems? To what extent will traditional and strict Muslim values drive evaluation of products in areas of quality and durability compared to competition? All of these factors need to be considered prior to entering this market as consumer electronics returns could be quite costly and not within an acceptable budget. Recommendations Prior to entering this market with new product offerings, it will be necessary to seriously consider the impact of Muslim values and how they will impact sales success. It is acceptable for government to influence quality standards and impose them regularly on foreign products. It is recommended that initial contact be made with appropriate regulatory bodies, such as an influential Minister of Commerce or other division of the government to fully identify the factors that will impact product importation or the development of a new operational facility to produce electronics. Tariff expectations, quality expectations, and various control systems at the political level are real risks that must be addressed in full, using appropriate legal channels and relationship-marketing principles to assist. Culturally, with the growth of teamworking with foreign expatriates and strong emphasis on education, this is a very favourable environment for new market entry. The main concern prior to moving product into Saudi Arabia is to consider expenses in areas of promotion and the competitive environment. As the infrastructure becomes more developed and new retail opportunities emerge through construction, the question about marketing expenditures is a genuine risk. Many consumers have strict adherence criteria to Islamic law and will base their buying behaviours on these concepts. Personal thoughts about modesty and moderation, especially from women buyers (who are highly influential in the home country) will impact volume purchasing in nearly every detail. It needs to be understood, prior to market entry, who is the main decision-maker in the household and how these decisions are passed throughout the family unit. Consultation with other retailers that have been in this country for over three years would be beneficial to understand what drives the social condition in terms of buyer influence. At risk of any intellectual property issues, such consultations can open opportunities for future business alliances and also help to close any gaps in research with real-time consumer data. The mechanisms behind the family structure and their reliance on electronics in daily living will be necessary prior to entering this new market. A full competitive analysis is recommended to identify companies that have moved into Saudi Arabia in the last five years. Saudi Arabia has not been the focus of a great deal of research into consumer behaviour patterns, organisational theory, and other research studies because of its emerging status. The infrastructure to support competitive retail is only in the beginning stages as the country diversifies from strictly oil to many other industries. It is necessary to gain information by conducting secondary research into the different industries involved with electronics to view sales patterns and opinion about strategy whilst in Saudi Arabia. Full analysis should include consultation with corporate annual reports on various publicly traded companies, along with a comprehensive listing of current electronics leaders in Saudi retail environments. It will be necessary to come up with a competitive strategy to understand the level of competition, assess their marketing activities, and then build an outperformance plan in all areas upon entry. Full analysis is required of the entire distribution infrastructure in Saudi Arabia prior to market entry. Roadways, transportation companies, availability of airports and other channels, will be necessary before launching a new electronics line in this country. Limitations in ground channels might force more reliance on air transport to replenish stock in various retailers, making it more cost-effective long-term to simply build a new manufacturing facility or distribution hub. Depending on the volume of financial resources that the company wants to devote to this effort, these are real risks to finding success in a market where exchange rates are considerably unfavourable for success in product pricing. Seaway transportation, if necessary, represents a time-restrictive effort that can lead to supply issues in the event of spikes with high demand. The ability of the company to successfully move products across the country in a way that satisfies cost expectations must be given more emphasis. Language barriers will be a problem when trying to offer support to Arab-speaking citizens. The regulatory demands that require Arabic language manuals to be inserted in the packaging is once concern, however setting up the hotline or support websites necessary for consumer service is a genuine issue and risk. Consumer electronics, in any country, require the availability of a representative or system that can provide real-time question support or hands-on advice about issues of programming, recording, or other functional issues. These customers will have strong Muslim values and a primarily Arabic language. This will require stronger emphasis and strain on the human resources role at the company to locate bilingual support representatives or the need to outsource this function to Arabic companies. Regardless, it represents a very strong and measurable change to how service is supported by the company and could be a situation that is not cost-effective. It is recommended that the company conduct a full internal audit of capacity issues in terms of restructuring telephone and website support systems to meet an Arabic cultural need as well as the operational process changes to include Arabic instructional manuals. This task should not be under-represented as consumers will ultimately reject products if they cannot receive some sort of live support from Arabic-speaking individuals that understand their needs at the household level or technological level. Just like in the home country, it is a labour-intensive activity with many costs attached. Conclusion It is recommended that the company does not, currently, pursue opportunities for new market entry in Saudi Arabia. The risks and genuine requirements to changing internal operations and concerns about distribution costs and return scenarios seem to outweigh the positive gains that might be found here. The infrastructure is developing to support retail competition and the competitive environment looks to be growing each year with companies looking to invest or diversify. All of the recommendations suggested prior to new market entry would need to be completed prior to launch, representing nearly a year (or more) of total investment to uncover elements of the Saudi environment that will impact decision-making. There is a great deal of uncertainty that this report could not identify that poses just too much risk at the moment, based on professional recommendation. Regulatory forces, potential distribution costs, and concerns about internal organisational development versus cultural lifestyles are the largest issues that create the recommendation to postpone market entry at this time. References Al-Ashban, A. (2001). Customer adoption of tele-banking technology: The case of Saudi Arabia, The International Journal of Bank Marketing, Bradford. 19(4/5), pp.191-201. Ameinfo.com. (2005). Toshiba signs power retailer at GITEX Saudi Arabia. http://www.ameinfo.com/58566.html (accessed April 26, 2010). Bharatbook.com. (2010). 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UAE Retail luring more global brands, Khaleej Times. http://www.menafn.com/qn_news_story_s.asp?StoryId=1093269226 (accessed April 26, 2010). Morris, D. & Dabbah, M. (2004). The development of consumer protection in Saudi Arabia, International Journal of Consumer Studies, Oxford. 28(1), p.2. Pewforum.org. (2009). Mapping of the Global Muslim population: a report on the size and distribution of the world’s Muslim population, Pew Research Center. http://pewforum.org/newassets/images/reports/Muslimpopulation/Muslimpopulation.pdf (accessed April 26, 2010). Ramadan, T. (2010). Good Muslim, bad Muslim, New Statesman, London. 139(4988), pp.22-26. Saudiembassy.net. (2010). About Saudi Arabia, Royal Embassy of Saudi Arabia. http://www.saudiembassy.net/about/country-information/facts_and_figures/ (accessed April 27, 2010). Shahid, B. (1997). Saudi consumers’ attitudes toward European, US and Japanese products and marketing services, European Journal of Marketing, Bradford. 31(7), p.467. Spectre, M. (2010). Returns issues in the consumer electronics industry. http://electronics.comze.com/returns-issues-in-the-consumer-electronics-industry (accessed April 27, 2010). Read More