3. Situation Analysis
3.1 Market Analysis
In this section of the business plan, the focus presents market research and customer demographic profile features defining the company’s market target traits. Therefore, findings on the target market, potential investors’ analysis, which gives a realistic forecast on growth potential for the target market of intended business operation. The aim of conducting a target market profile is because it helps stakeholders comprehend their potential customers, where they live, their needs, and their motivation in purchasing of products. In this case, Costco is a viable business in Saudi Arabia because competitors have not penetrated the market niche.
3.1.1 Business Environment Analysis
The analysis of the business environment provides assessments on the political, regulatory, economic, social cultural, demographic, technological, natural, and physical environments.
188.8.131.52.1 Political/Legal/Institutional Factors
Assessing the target country market political, legal and institutional environment, PEST (Political, Economic, Social and Technological factors) as an assessment tool will be used. This external tool of measurement is useful in understanding market decline or growth, which portrays the position, potential and business direction. In addition, they assess the market for a business and is said to be similar to SWOT analysis, which looks into the internal and external factors (Businessballs.com).
In the political aspect of measurement depicts Saudi Arabia as a hereditary monarchy state, which was formed in 1932 by King Abdulaziz (Ibn Saud) and since 2005, the son, King Abdullah bin Abdulaziz Al Saud has been ruling the Country. From June 2012, the King’s half-brother, Crown Prince Salman bin Abdulaziz al-Saud (Deputy Prime Minister) is the King’s heir apparent (Helen Ziegler and Associates, 2013). In 1992, the royal family introduced the first constitution to the country. The Islamic law (sharia) is the basis of the legal system. The monarchy state leads to stable political environments because the officials are relatives of the royal family. Additionally, Basic Law deals with articulation of government regulations and rights and sets forth civil rights, government systems, and divisions of administration, which enables running of the state (Country profiles, 2006). The Council is appointed by the King and stay in power for four years, which is a renewable term. The political stability is guaranteed because no legislative laws changes because they rely on sharia laws (CIA, 2012) for direction and economy and industry news are discussed by the committee members before forwarding to the King for approval. For Costco Wholesale Corporation, this is an advantage because they will not have to worry about business regulation changes in the future or delays experienced in passing regulations within the legislative.
Influence of the government in Saudi Arabia is considered an important tool in engaging in business in Saudi Arabia. Government officials in the Consulate Committee have an extensive network (CIA, 2012) with the King who follows Islamic law, which gives the direction on whether Costco can engage the population with their activities. The committee also involves other officials in overseeing and monitoring operations of Costco’s business line. Moreover, increased privatization of the economy has led to the new Saudi professionals and technocrats class, but has no informal influence on ministries of the government (Country Profiles, 2006). Business Guides to the Arab Gulf series stipulates that Saudi Arabia is a member of Gulf Cooperation Council (GCC) that encompasses Oman, United Arab Emirates (UAE), Bahrain, Qatar and Kuwait.
Saudi Arabia under the regional category is a member of World Trade Organization (WTO), the Arab League, United Nations UN, the Organization of Petroleum Exporting Countries (OPEC) and Organization of the Islamic Conference (OIC).
184.108.40.206.2 Regulatory Environmental Factors (Present and Anticipated)
Saudi Arabia business entails contracting the government and this is a basic rule that applies to foreign companies engaging in business activities. In Saudi Arabia, varieties of ways are available and range from informal contractual relationships to the forming of an Arabian company. Most require the acquisition of a license from the government, while some rely on Saudi citizen’s investment or employment, which depends on the type of business, involvement duration, and the transaction nature. The different forms encompass direct exports, commercial agents, branch offices, franchises, and joint ventures among others (The Saudi Network).
The Sharia is the fundamental source of law therefore, governs commercial relations in respect to taxes/labour relations. The labour laws of Saudi determine employment terms and whom a company may hire. As a result, when it comes to terminating or restricting employee rights the company proceeds cautiously. Personal income in Saudi is not taxed even though the citizens pay Zakat (tax of the net worth of their assets), and other forms of tax are present. For example, Costco Wholesalers Corporation will pay taxes based on their business earnings and income. Saudi Arabia’s status as a limited producer of certain beverages creates an avenue for Costco to import coffee beans and with effective transportation systems, the corporation will be subject to paying, 2.5% rate on Islamic Tax (Zakat). In addition, a 20% income tax is subjected to non-residents (KPMG International Cooperative, 2011). Other payments like royalty, which are made for foreign entities, are subject to Saudi withholding taxes and those who fail to comply with this regulation risk the possibility of becoming liable for the tax. Moreover, certain corporations qualify for tax relief for several years if they qualify for a tax holiday. This only applies after employing a certain percentage of citizens from Saudi Arabia (KPMG International Cooperative, 2011).
Trademarks, patents and copyrights are intellectual property law found in Saudi Arabia and are same to other countries around the world. Since 1984, trademarks have been in effect and those given this protection are Saudi citizens/entity (ltd) or reside in a country that offers same protections to the Arabians. However, priority claims can be filed by those with registered trademarks from a different country. In current business setting, enforcement of this law is becoming more effective. Copyright (1989) protection depends on the type of work and for foreign-owned, same protection is received as Saudi-owned ones. Patents (1989) require individuals to have local agents and serve a term of fifteen years, which is renewable.
Disputes in Saudi Arabia are resolved using Saudi courts or other nation’s tribunals, type of Saudi tribunal resolving the dispute, and arbitration (The Saudi Network).
Foreign investors are able to engage in signing of contracts because they adapt a dual-column format. Foreign ownership in Saudi is allowed 100%, but caveats ascribed to the rules include: foreign investments are not allowed in areas on Negative List maintained by Saudi Arabian General Investment Authority (SAGIA); SAMA regulates the banking industry and thus, licensing of foreign banks follows their own set of restrictions and rules; and foreign investors of professional services partner with licensed Saudi practitioners. Visas issued depend on status of the applicant, purpose of visit and passport type. Obtaining a visa requires a sponsor and takes months to process (Al-Ghazzawi Professional Association, 2010, p.2).
An official identity card called the Iqama is issued to Saudi residents and gives them an opportunity to open a bank account, rent accommodation, and buy a mobile phone or car. Iqama should also be acquired by foreign investors to enable them move around freely (Al-Ghazzawi Professional Association, 2010, p.3).
As a member of WTO, tariffs of Saudi Arabia are expected to bind and this resulted in lower rates for agricultural products and industrial goods. Through the AACCI (Australia Arab Chamber of Commerce and Industry), export documentation requiring documentation are available on their website. In regards to labelling very strict requirements are placed, which are administered at the port by the Government Quality Laboratories and Saudi Arabian Standards Organization (SASO). Registration and stringent standards of labelling applies to personal care products, food and pharmaceuticals. Therefore, Costco Wholesalers will engage in business activities with the Arabians if all regulations and requirements are followed. Selling of their goods and services will be through Saudi intermediary, but in some cases direct sales is possible.
220.127.116.11.3 Economic Conditions
The factors considered being associated in describing the economic environment of Saudi Arabia encompass gross domestic product (GDP), unemployment, quality of infrastructure, and inflation. The GDP of the country established in 2012 as 6%, but in 2011, it was 7.1%, which reveals that the country experienced and downturn, and the same was evident in 2010 (5.1%). In relation to the purchasing power parity (GDP), Saudi Arabia constant improvement is exhibited from year 2010 (US$652.8 billion), 2011 (US$698.8 billion) and 2012 (US$740.5 billion). Though the GDP growth experience in 2010 decreased in overall, it is evident that the purchasing power remains constant in terms of improvement (CIA, 2012).
Saudi Arabia’s unemployment rate shows declining occurrences of 10.9% in 2011 to 10.7% in 2012, which is data relating to the male gender only. Local estimates of the bank show a range of as high as 25%, which entails improvement of the country’s economic environment. Therefore, for Costco Wholesaler’s Corporation, this generates more customers for their products and services. In regard to their inflation rates, they year 2011 were at 5%, while in 2012, it was 4.6% (CIA, 2012).
Saudi Arabia experiences modern infrastructure and the government contributed to the development of the Ninth Plan by investing US$385 billion between 2010 and 2014 (October, 2012). They aim at reducing their dependency on the exports of crude oil in order to meet the burgeoning demands of the population. The developed infrastructure has enabled the country increase in investment programs of its private sector and therefore, Costco will be embraced as a multinational corporation that brings adjustments on the GDP of the country.
The inflation rate as at 2012 was 4.6% and in 2011 it was 5%. The consumer spending in Saudi decreased to 173011 SAR Million in 2012, in the third quarter from 176871 SAR Million in 2012, in the second quarter. However, the Consumer Price Index (CPI) increased in January 2013 to 144.90 Index Points. For the disposable income, high levels are experienced due to the increase in urbanization, currently at 82.1% of the total population (Equities, 2012, p.4). This has led to the country being the largest retail market in the Middle East and thus, is the fastest-growing consumer markets for Middle East products. In longer terms, consumer spending is boosted with the presence of the growing middle class (Equities, 2012, p.5).
18.104.22.168.4 Social and Cultural Factors
The social and cultural environment of Saudi Arabia looks into those aspects that helps in comprehending the target market and includes family, cultural context, religion, linguistic, and culinary (CIA, 2012). The segment of religion (officially) is 100% Muslims, and the ethnic groups comprise of 90% Arabs and the remaining 10% are of Afro-Asian group. From this revelation, it is to be considered that the highest population comprises the Arabs and thus, multinational organizations will need to look into their daily culinary. This is because they do not consume alcohol and pork and thus, the major segment will avoid such delicacies.
Linguistic is the second aspect, where Saudi Arabia’s official language is Arabic, even though English is spoken as the second main language. As a result, many communicate using Arabic (amiya), but many subdialects and internal variants are in existence. The other aspect under scrutiny is the family role and cultural context. Saudi’s culture has been noted to contain a high degree of ethnocentricity and thus, belong to a collectivist society. Family bonds are strong because they manifest in long-term, close commitments to member groups. In this sense, the bond existing between individuals and their extended family is superior compared to Western cultures (Long, 2005, p.26). Stronger relationships are fostered in the society, and everyone takes responsibility for fellow group members (The Hofstede Centre).
22.214.171.124.5 Demographic Trends
The population of Saudi Arabia established in 2012 is 26,939,583, which includes non-nationals who total to 5,576,076. According to the released 2011 report of World Bank’s Doing Business, the world ranked it 11 as the most business-friendly country. In the entire Middle East and Arab World, it is ranked as the best in engaging in business activities. Furthermore, it is ranked the Kingdom ahead of Japan, France, and German advanced economies. The high population in Saudi Arabia gives a promising marketing for international markets. For this international marketing project, we chose Saudi Arabia because of the above factors and the large population capacity. As from 2009 data, Riyadh is the major city with the highest number of people (4,725 million); Jeddah (3,234 million); Mecca (1,484 million); Medina (1,104 million) and; Ad Dammam (902,000). In Saudi Arabia, ethnic groups in existence are the Arabs (90%) and Afro-Asian (10%). For the age structure, 25-54 years are the dominant group (44.8%) followed by those between 0-14 years (28.2%). In both cases, the proportion of the male gender is greater than that of the females. The least dominant group is of age 65 years and above (3.1%) and the males’ proportion is still greater (CIA, 2012).This makes the median age to be 25.7 years overall, and the birth rate is 19.19 births/1,000 population. Of the total population more than 86.6% can read and write and a total of 28.2% of the total population are unemployed because majority of the people are females (45.8%). In Islamic communities, the males are the ones domineering and thus, females are not expected to hold any positions. It is only recently that the King appointed a female representative (CIA, 2012). Studies conducted indicate that the average family size is 5.2; small households who are a fourth (size of up to 3 family members), medium who are a third (4 to 5 members) and 40% large households (6 or more members). This statistics excludes friends and helpers (AMEinfo.com).
126.96.36.199.6 Technological Environment and Trends
According to the Business Monitor International (2013), Saudi Arabia’s spending forecast of IT has increased 6.6%to SAR15.3 billion. The fuelled demand for hybrids, tablets and slim-line laptops, as well as, the adoption of cloud computing and smart system investments that need services, software and hardware has enabled Saudi maintain a lucrative IT market in. the Gulf region. The statistics shows how the population has embraced technology and has used the ideology well in promoting business activities. Majority of the people are they youths and thus, they are a potential target group ready to try on new inventions and products. Youths are an inquisitive lot and will promote the products through the Internet and for Costco will benefit from the advertising and promotional activities. In 2009, 9.774 million of the populations were Internet users, which are increasing with time. This implies that strategies of market promotions are enhanced since customers of Costco are easily reached. Internet marketing and social media promotion will be utilized. As pertaining to mobile users, 2011 data states that 53.706 million use them and promotes mobile promotional advertisement and marketing (CIA, 2012). Saudi Arabia is an IT hub and thus, many of the communication devices are available to the population.
188.8.131.52.7 Natural Environment (Effect of Seasonal or Climatic Factors)
The location of Saudi Arabia lies in the Middle East, which borders the Arabian Gulf and Red Sea, north of Yemen. The total area is 2,149,690 sq km with no water sq km. The climate is harsh, with great temperatures due to the dry desert therefore, most of the terrain is uninhabited due to the sandy desert. In spite of the extreme harsh conditions, the natural resources found include petroleum, gold, natural gas, copper, and iron ore. The arable land constitutes1.67%, land with permanent crops is 0.09% and for others is 98.24% (CIA, 2012). According to Johany, Berne and Mixon (2006, p.112) much of the farming practiced in Saudi Arabia is nomadic, but agricultural products include cereals (sorghum and wheat), fruit (dates, grapes and citrus) and vegetables (melons, tomatoes and onions).
184.108.40.206.8 Physical Environment (Infrastructure Indicators)
The pillar of sustainability and economic growth in Saudi Arabia is attributed to their modern infrastructure. The technological advancements in Information Technology have contributed on the growth of the economy because communication is fast, effective, efficient and reliable. The paved road ways total to 47, 529 km while the unpaved roadways are 173,843 km. The data presented is for the year 2006, but today, most of the road network comprises 100,000 miles of road (RESAIO, p.11).For example, King Fahd Causeway is most spectacular and links Saudi Arabia to Bahrain. The international airports are King Khalid (Riyadh), King Fahd (Dammam), Prince Mohammad Bin Abdulaziz Airport (Al Madinah) and King Abdulaziz (Jeddah).However, the total number of airports is 26 and has 10 heliports (CIA, 2012). The presence of 9 large modern ports also contributes to international marketing and development (RESAIO p.12). Saudi generates power and thus, constant supply of electricity is experienced. In relation to this concept, electricity is efficient and thus, traders are able to communicate and work for long hours under comfortable environments. Water is a scarce commodity in Saudi Arabia, yet it is extremely valuable, but with the rapid growth, the demand is increasing. As a result, the Kingdom has searched for innovative ways of providing their population with water. Aquifers, underground reservoirs, are common sources of water. In addition, the sea, through desalination has become a major producer of portable water. Other resources include dams and recycled water (USSABC, 2009, p.8).
Considering all these facts, Saudi Arabia is a good place since it poses as a stable market target for Costco, this will lead to the expansion of activities. As a Corporation, Costco will be able to meet the people’s demands for grocery items, housewares, appliances, luggage, tires, cookies, toys, tobacco, furniture, sporting goods, and food packaging among other items. Costco Wholesalers engage in many things and thus, this multinational company will meet the demands of its populace and eventually, sustain a cordial business relation with other investors. The reason behind this is because of the adverse climatic conditions that discourage farming of certain crops and thus, the supply and demand of these products will be maintained and fostered at Costco Wholesalers Corporations.
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