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Saudi Arabia – Heart Rate Monitor Watch Essay

1Introduction

Saudi Arabia is a country on the rise and exhibits characteristics of an emerging power, increasing its presence in global affairs. Saudi policymakers have made a rigorous effort to reform the country’s economy and to position it as an investment destination as well as an important player in the global economy. The aim of this research is to analyze the market potential for Heart rate monitor watches in Saudi Arabia and to finally give a recommendation whether the respective market should be entered or not. The first step of the research is to analyze the Macro environment in Saudi Arabia, described in chapter two, by extending the influencing factors with general information about politics, economy, socioculture as well as technical, environmental and legal factors. Chapter three gives an overview of Porter’s five forces including market competitors, potential suppliers, buyers of heart rate monitor watches, possible substitutes and new entrants.

In chapter four, the questions “Why should we enter Saudi Arabia” or “Why should we not enter Saudi Arabia” gets answered. The last step of the search is a literature review on entry modes, described in chapter five. These feasible entry modes will be analyzed, taking into account influencing factors like the risk a company is prepared to take and the desired degree of control, market factors and environmental factors in Saudi Arabia, cultural and geographical distance, especially the problem associated with the role of women in Saudi Arabia. The outcome will be the selection of a suitable entry mode and designed marketing plan guidelines – including the “4 P’s” of Marketing Mix; Price, product, promotion and place – for the chosen entry mode. 1.1 Sport Industry in Saudi Arabia

Sport becomes more and more popular among countries in Asia. A multi-sport event, the Asian Games, held every four years among athletes from all over Asia, including Saudi Arabia, and recognized by the International Olympic Committee and described as the second largest multi-sport event after the Olympic Games (The Sports Biz Asia Team, 2010). FIFA announced, as indication for the progressing interest in sport in Asia, that the World FIFA Cup 2022 will take place in Qatar (FIFA.com, 2012). Saudi Arabia gives focuses on the sport sector by allocating 12,5 % of their national budget to health and social affairs in 2010, which is the second biggest portion after education expenditures, in order to establish numbers of sport clubs to increase the welfare of society (US-Saudi Arabian Business Council, 2013) Saudi Arabia aims to steadily increase investments in sport industry in order to create opportunities especially for the younger population.

2General Information about Saudi Arabia

Saudi Arabia is the largest Arab state with a complete sovereignty in Western Asia by land area and it is the home to Islam’s two holiest shrines in Mecca and Medina. The country’s official language is Arabic and the capital city is Riyadh (Saudi e-Government National Portal, 2012). The map of the country and its 13 provinces are available in Appendix Figure 1 and Figure

2. 2.1Political Factors

2.1.1Political System

Saudi Arabia follows a monarchy system of government. The country is ruled by Al Saud Royal Family according to holy Qur’an. Political parties are banned in the country. The Shura Council, a Speaker and Saudi Cabinet are leading the government (Euromoney Country Risk, 2013). Saudi Arabia has serious problems with terrorism; therefore the government increased efforts to fight against terrorism (Library of Congress – Federal Research Division, 2006). The country is still politically stable, since on the Euromoney Country Risk Index Saudi Arabia had a score of 41.89 in June 2011 (out of max. 100) (Euromoney Country Risk, 2013). Morever, Saudi Arabia ranks 57th out of 183 countries in Transparency International’s Corruption Index for 2011 (International, 2011) which is moderate (TRANSPARENCY INTERNATIONAL – the global coalition against corruption, 2012). 2.1.2Tax Policy, Tariffs and Free Trade

Income Tax in Saudi Arabia consists of two categories, Personal Income and Business Income. There is no personal income tax both, Saudis and foreigners. The Business Income Tax Rate is varying regarding to the sector and the profit range. The current tax law has decreased the tax rate on foreign investors from a maximum of 30 per cent to a flat rate of 20 per cent. The tax rate on companies engaged in the production of oil and other hydrocarbons productions accounts 85 percent (U.S. Foreign & Commercial Service, 2004). There are no tariff quotas, no applied seasonal tariffs, and no other duties and charges on imports (World Trade Organization, 2012).

In Saudi Arabia there are no foreign exchange controls, which enables complete freedom of movement and of capital. In order to attract foreign investment, Government established Saudi Arabian General Investment Authority, which assists the foreign companies by offering many incentives such as ownership, tax and minimum capital requirement (SABB, 2010). In addition, Saudi Arabia is a member of many bilateral and multilateral trade agreements and international organizations. Further information can be taken from the Appendix. All these factors create free market economy.

2.2Economical Factors

The Kingdom of Saudi Arabia is the world’s largest exporter of oil and one of the biggest producers of oil and natural gas. Thanks to the development strategy of Saudi Arabia, they experienced positive economic performance in recent years, since they have moderate inflation and GDP is growing. In 2010, 23.1% of real GDP, some 91% of government income, and 86% of export earnings were based on hydrocarbons. Manufacturing, developed on the basis of Saudi Arabia’s comparative advantage in energy-intensive industries, represents 12.6% of real GDP, while agriculture and related activities account for 4.6%. Services contribute 50.6% to the real GDP and employ about three quarters of the workforce. GDP per capita is estimated at US$16,500 for 2010.

In 2010, Saudi Arabia ranked 12th among world merchandise exporters and 21st among importers. In services trade, Saudi Arabia ranked 33rd among exporters and 11th among importers (WTO Statistics database). Saudi Arabia’s export base is highly concentrated on petroleum and gas (World Trade Organization, 2012). Saudi Arabia’s economic policy aims to further decrease its dependency on hydrocarbons and accelerating non-oil growth to generate more employment opportunities for the growing Saudi labour force.

An Economic City Concept plays also a crucial role in the development of the economic situation in the country. The goals of these economic cities are growing the national economy and increasing the life-standards of inhabitants until 2020 by raising the competitiveness of the Saudi economy, creating new job opportunities, improving Saudi’s skills, developing regions and diversifying the economy itself. (Saudi Arabian General Investment Authority (SAGIA))

2.3Sociocultural Factors

According to the Central of Statistics & Information, the population of Saudi Arabia accounts 27.1 millions. The working environment in Saudi Arabia is very challenging because of a large number of new labor force entrants. Population has been increasing rapidly, the steady growth rate is about 2.3 percent (Figure 3 and Figure 4). Overall unemployment rates for nationals have been flat since 1990, but high and rising among women (Figure 5). For both males and females, unemployment is concentrated among the youth (Figure 6). Reducing unemployment depends on increasing the absorption of nationals in the private sector. The public sector has traditionally absorbed a large proportion of the national labor force, but the scope for continued expansion is now more limited and could run counter to the objective of enhancing the efficiency of government service provision (Figure 7). Employment in the private sector has been growing rapidly, but the strongest growth happens in low-skilled professions (Figure 8). (International Monetary Fund, 2012)

2.3.1 Hofstede’s cultural dimensions

Saudi Arabia scores high on power distance and low on individualism. It is considered a collectivistic society. The country scores high on masculinity and uncertainty avoidance. The scores for Saudi Arabia and the Arab World are listed in Appendix (Figure 9 and Figure 10). 2.3.2The role of women in society

We figured out the role of the women in society to achieve a better understanding of the cultural environment in the country. Saudi Arabia ranked as the lowest between Middle East Countries according to Global Gender Gap Report (World Economic Forum, 2012). The crucial reason behind this gap is the Islamic religion and its specific laws. The economic and political participation of women is highly limited, since women have no strong voice to participate in decision making processes. Women will have, for the first time, the right to vote in upcoming elections in 2015. The level of education of women is less important than that of men, although the literacy level of women is satisfactory.

Women have to dress in a special manner and are only allowed to go outside of the house with a male guardian. Women in Saudi Arabia are not allowed to drive cars on their own and their access to sport facilities, some restaurants and other places gets denied. For the first time, in 2012, the Saudi Arabian Government allowed some female athletes to participate in the Olympics in London. Although there are some changes in recent years about the rights for women, the improvement process proceeds very slowly (Saudi Arab Market Information Resource and Directory).

2.4Technical Factors

The Saudi Arabia Communications and Information Technology Commission, a government body that oversees the sector, has reported 13 million internet users in 2012 in Saudi Arabia, which accounts for 49 % of the overall population (Figure 11). Compared to the year 2005 there was a rise of 39 % in only six years (Internet World Stats – Usage and Population Statistics, 2012). Mainline phone users account for 4,49 million lines, which is a penetration of 16 %. The mobile phone subscriptions were registered at 54,8 million, which counts for a penetration of 195 %, this means that about 87 % of all Saudi Arabians possess at least one mobile phone (Figure 12) (ArabCrunch, 2012). Concerning radio and television, there are two television channels in Saudi Arabia, one in English and one in Arabic whereas in 2000 there was a penetration of 5,7 million TV owners (Central Intelligence Agency, 2012).

2.5Environmental Factors

Saudi Arabia’s economy does not depend very much on agricultural production, since it accounted in the year 2004 for only 4 % of the GDP and employs only 6 % of its citizens. Saudi Arabia’s climate differs greatly between the coastal line and the inner country. Along the coast, the temperature nearly never exceeds 38° Celsius, whereas in the inner country, which is mostly a desertic area, the average temperature is between 45 and 54° Celsius (Library of Congress – Federal Research Division, 2006). Since there is very infrequent rainfall, Saudi Arabia has not much arable land. A further problem is water scarcity, which also leads to dryness, which causes dust and sand storms that can shut down transportations. A further environmental problem is the lack of permanent inland waterways like rivers, which eliminates a transportation mode as well as coastal oil spills.

2.6Legal Factors

First of all, there is a censorship on the Internet access and on the press. Even though, there are many internet users in Saudi Arabia the international Internet traffic is controlled by a proxy, which bans or blocks certain sites, which the government thinks are immoral. Therefore, it could probably be a problem for advertisement issues. The source in an Al-Watan newspaper shows a number of issues, which are banned by the state (Al Bab, 2001). Further legal restrictions are: There exists a so called “Negative List” in Saudi Arabia, which means that certain economic activities are prohibited for foreign direct investors. The website of Hatem Abbas Ghazzawi & Co. shows a list of prohibited activities. (Saudilegal, 2011) Before the year 2000 doing business in Saudi Arabia was seen as a privilege which has been granted only to few companies. In 2005, after years of judgment from the World Bank, new reforms, like the Foreign Investment Regulation, Royal Decree No. M/1 of 5th Muharram 1421 Hejra, were introduced, as well as the SAGIA – the Saudi Arabian General Investment Authority.

The task of the authority is to attract, encourage and to license investments in Saudi Arabia, from local and foreign sources. The SAGIA has the power to license any form of foreign investment, except when there have been policy decisions, which state that certain business activities are prohibited for foreign direct investors. ‘Article 3 of the Foreign Investment Regulation gives the Supreme Economic Council the power to “issue a list of activities excluded from the scope of foreign investments”’.

“When licensed under the Investment Law, a company enjoys all privileges and incentives offered to wholly Saudi owned companies, such as ownership of freehold property that is necessary to carry out the licensed activity, privileges granted by the anti-double taxation treaties to which the Kingdom of Saudi Arabia is a party, law prohibiting against expropriation or confiscation of investments, rights to repatriate profits, etc.” (Latham & Warkins, 2012). Enforcement of contracts is slower, involves more steps and is more expensive compared to average values of European countries. According to a ranking of the World Bank Saudi Arabia is only ranked at position 124 out of 185 compared countries in this category (Table 2). (The World Bank, 2012).

2.7PESTEL Analysis and Conclusion

According to the OECD, there are common problematic factors for doing business in the Arab World; Factors listed in Appendix (Figure ). Although the country is still an attractive opportunity for doing business (Table 3). Saudi Arabia holds the largest oil reserves in the world, offers a good infrastructure, macro-economic stability, a rapidly growing economy, moderate political stability since it is a Kingdom as well as favorable technological and legal terms, since the Kingdom is opening up for foreign investments. Negative factors include rising terrorism, the economy is highly dependent on the oil sector, which means no economic diversification. All in all, according to the PESTEL analysis, Saudi Arabia is a potential entry market, with moderate risks but it is necessary to have a closer look on the host market environment in detail, analyzing Porter’s Five Forces, before coming to a conclusion.

3Porter´s five Forces

In a next step we will analyze the heart rate monitor industry in Saudi Arabia based on Porter´s five Forces. Firstly, we identify possible market competitors, secondly, if there are already existing suppliers and potential buyers or not. Thirdly, we try to find out whether competing firms are also going to enter the market. In a last step, we analyze the existence of any substitute products.

3.1Market competitors

As Saudi Arabia belongs to an emerging market it is difficult to determine potential competitors that are already operating in the market. According to our research, no specific suppliers of heart rate monitor watches could be identified. We found out that Polar Electro is the leading company in heart rate monitor watches. There might be some small retailers which offer heart rate monitor watches. However, we think that their market presence in the country might be of small importance because we identified that products can only be obtained through the United Arab Emirates. Major online shopping platforms like Amazon or Ebay offer heart rate monitor watches to worldwide markets.

As these platforms have a global presence, their offer is not specifically created for the Saudi Arabian market. Therefore, we believe that the market is not saturated and the competition is low. Due to the fact that the importance of sports is increasing substantially in the country and modern sports like soccer and basketball have a major following (Saudi Gazette, 2012), doing business in Saudi Arabia by offering heart rate monitor watches becomes an attractive opportunity.

3.2Suppliers

We found out that, currently, there is no manufacturer of heart rate monitor watches in Saudi Arabia. Therefore, the offer is low and products need to get imported from other countries.

3.3Buyers

As already mentioned, heart rate monitor watches are not offered explicitly by a retailer in Saudi Arabia. There is a sports good retailer and wholesaler, called Sun and Sand Sports, which has a leading position across the Middle East. The company offers a wide range of world-known sporting brands and stores are located in the major cities Riyadh, Khobar and Jeddah. Furthermore, there is the website souq.com, which is the largest e-commerce site in the Arab world. It offers a wide range of products including electronic devices. Through these two types of retailers there is a potential to reach different types of customers.

3.4New Entrants

Firms are reluctant to enter extremely uncertain markets especially if competing there involves expensive start-up costs (Dun & Bradstreet, 2008, S. 37). The threat of New Entrance in an industry depends on the height of entry barriers that are present. The threat of new entrants to the heart rate monitor industry in Saudi Arabia is minimal. As we did not find heart rate monitor retailers in Saudi Arabia, moreover, the market leader Polar Electro serves the Saudi Arabian market only over the United Arab Emirates and has no points-of-sale available in that country, we would not face the threat of new entrants in Saudi Arabia. As a new entrant, we should pressure price by targeting groups that pay at lower price levels than groups that are loyal customers of Polar Electro and pay more for the competitor’s products.

3.5Substitutes

The final force in Porter’s model is the threat of substitute. If an industry’s product has few close substitutes, companies in the industry have the opportunity to set prices at a higher level and still earn additional profits. (Hill & Jones, 2008, S. 56) A heart rate monitor is a personal monitoring device which measures an individual’s heart rate in real time or records the heart rate for later study. Modern heart rate monitors usually comprise a chest strap transmitter and a wrist receiver. As there are only these two possibilities of wearing and using a heart rate monitor, and although there are a wide number of receiver designs with various features, including average heart rate over exercise period, calories burned, measuring overall physical fitness and breathing rate, varying the product and thus achieving market advantages is not the right solution.

Although the current market leader in exercise devices is Polar Electro with more than 75% market share, various heart rate monitor producers, for example Beurer, Garmin and Sigma, exist. We should concentrate on offering heart rate monitors at a lower price level or cooperating with fitness machine producing companies and integrating heart rate monitors into their cardio machines so that customers do not need to buy or wear an extra heart rate monitor but can just grab the sensors on the bicycle, treadmill or cross-trainer and measure the heart rate easily while using the machine. As there is no reason why cardio machines with integrated heart rate monitors, as substitutes of heart rate monitor watches, should get more expensive, there are no direct substitutes that might influence an entry into Saudi Arabia negatively.

4Analyzing market potential

After having taken into account the PESTEL and the Five Forces analysis above, we came to the result that Saudi Arabia has potential for offering heart rate monitor watches. As Saudi Arabia, as an emerging market, is growing substantially, we do believe that the Kingdom is an attractive country to invest – not only because of its good infrastructure and macro-economic stability, but also because the country does not levy tariffs, quotas or other duties, which makes it an attractive country for imports. One negative aspect might be the role of women as their economic and political participation is really limited. It is true that the country faces problems with terrorism, however, Saudi Arabia still has a moderate political stability. As the competition is low at the moment and therefore the market is not saturated, it is easier for us to enter the country.

At the same time it is difficult to estimate the potential demand as the offer of the product is quite low yet. However, according to Prahalad´s theory, focusing on the “bottom of the pyramid” by satisfying unmet social needs and new consumer preferences will create market opportunities of substantial value (Hollensen, 2011, S. 224). Prahalad states that even poor customers can be good ones. Addressing low income markets requires a commercial strategy, especially consumer education is a crucial factor to be considered (Hollensen, 2011, S. 227). This aspect is going to be mentioned in more detail in the following section.

5Market Entry Strategy

Considering both, macro- as well as microeconomic factors, we came to the result to enter the Saudi Arabian market through exporting to a local partner. We decided to use this kind of market entry strategy because of a lack of knowledge about the foreign market. Therefore, we prefer to keep market commitment on a low level (Johanson & Vahlne, 2009) . As we found out that the offer of the product is not widespread at the moment, a risk-averse method is preferable. Furthermore, it is difficult to estimate the acceptance of our product and the degree of demand. Another reason why we would like to use a local partner is because customers of emerging markets are often critical about multinationals (D’Andrea, Marcotte, & Morrison, 2010) and we think that a local partner, who is already well-known, could distribute the products more successfully. On the one hand we would like to export our products through local sporting retailers, e.g. Sun and Sand Sports.

One the other hand a cooperation with local gyms would also be an option. We think that we can best target our potential customers, namely male customers, in these institutions. Local trainers can inform people about the benefits of heart rate monitor watches to raise the awareness of the product. As in 2012 Saudi Arabian women were allowed to participate at the Olympic Games for the first time we believe that the number of women doing sports in the country will increase in the next years, even if it is going to be a slow process. The goal to reach women as potential customers as well could be reached by offering our product at shopping malls through a local sales representative with an information booth. According to Prahalad a key element in order to be able to address the low income market is the education of consumers (Hollensen, 2011, p. 225).

Saudi Arabia as an emerging market is developing rapidly. As we have already mentioned, the use of the Internet is increasing too. This is why we choose to distribute our products through a fourth channel – the Internet. Using souq.com, seems to be the most appropriate website because it is the most popular shopping platform in the Middle East. Since the US is the biggest trading partner of Saudi Arabia, we will export the products from US. As Saudi Arabia is the largest advertising market in the Gulf region – the country spends 40% of all advertising budget of the region – promotion has a crucial role during our market entry. As TV advertising is expensive at the beginning, we prefer focusing on the Internet, including social media because the online consumption among the young population is growing substantially.

Print ads will be another promotional tool for us since there are plenty of newspapers and magazines in the country. When communicating to our potential customers, we will take into account cultural factors, like the Arabic language and diverse Islamic rules. Although women are the less important target group, we can reach them by sponsoring some sport events for women and thus creating social value for them. Concerning our price policy it is important to notice that consumers in emerging markets have a different buying behavior (D’Andrea, Marcotte, & Morrison, 2010). According to D’Andrea, Marcotte and Morrison consumers focus on quality, not on status. They buy a lot of the cheapest and little of the best – this is why we would like to aim the products at the low income segments from the very beginning (D’Andrea, Marcotte, & Morrison, 2010). We believe that offering heart rate monitor watches in the Saudi Arabian market could help increasing sports activities and therefore improving lifestyle and health in the country.


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