Best Buy Saudi Arabia International Business

ERGUL, Ahmet Furkan GHAMRAWI, Yahya MUTKEKAR, Niranjan

[ T y p e t h e c o m p a n y a d d r e s s ]

Spring 09 Best Buy Saudi Arabia

Best Buy Saudi Arabia

Table of Contents

I. Executive Summary

II. The Macro Environment

a. Legal and political environment

i. Regulations and Legal Framework

1. Restrictions on Business Ownership and Activities

2. Prohibitions and Licensing

ii. Labor And Human Resource Management

1. Major Labor and Human Resource Factors

2. Education

3. Unemployment

b. The economic environment

i. Main Economic Indicators

ii. Trade Agreements

iii. Current Account and the Balance of Payments

iv. Government Debt and Currency Stability

c. The socio-cultural environment

i. The Location

ii. Cultural Characteristics

iii. Holidays in Saudi Arabia

III. The Industry Environment

a. Competitor analysis

i. Main Competitors

ii. Potential New entrants

iii. Substitute Products and Services

b. Supplier analysis

c. Customer analysis

IV. Business Proposal

a. Proposed Location

b. Proposed Business Structure

c. Proposed Organizational structure


d. Proposed Supply Chain and Operations

e. Marketing

i. Product Marketing

ii. Pricing Strategy

iii. Promotion Strategy

iv. Public Relations

v. Service

vi. Keys to Success

V. Conclusion

a. Proposed Time Frame and Management Expertise

b. Threats During Entry

c. Risks

VI. Bibliography


I. Executive Summary

Governments are pursuing regulatory reforms to attract Foreign Direct Investments all over the world.

The positive developmental impacts of FDI inflows are related to high levels of human capital and on the

existence of good infrastructure in recipient countries. In the following paper, we will study the market

entry of Best Buy to Saudi Arabia. Related to that we will study the legal, social and economic

infrastructure of Saudi Arabia including; regulations in FDI, restrictions, licensing and prohibition,

political stability, major human resource factors, main economic indicators, balance of payments, socio

cultural environment, the business and organizational structure of Best Buy Saudi Arabia, implementation

of marketing plan and possible market entry threats.

This study investigates the determinants of foreign direct investment entry mode choice between a wholly

owned subsidiary and a joint venture. We argue that the entry mode choice of Best Buy Saudi Arabia is

primarily influenced by FDI regulations and the firm's strategic fit to the recipient country. We argue that

market entry of Best Buy to Saudi Arabia with a joint venture is more of a choice, which will have

positive impact on perception related to nationalism issue, except being a regulatory obligation. We will

do joint Venture with Jarir Bookstore in Saudi Arabia. The country lies in the hearth of Middle East. It is

one of the most economically and politically stable country throughout the region. The unemployment

rate is a challenge for the country and also the inflation rate, however the government debt is decreasing.

The market has high competition. German Mediamarkt, French Darty, U.S origin Target and Circuit City

are currently planning to enter Saudi Arabia market. Extra and Carrefour are the existing strong

competitors within the market. The market structure works as an oligopoly presently. However it is

expected that as the threat of new entrants increase, a price war is likely to occur. Online retailers such as

Amazon and Ebay also are important substitutes of brick retailers. The barriers to entry is moderate to

high

Our initial market entry will be in Capital City, Riyadh. We plan to open 2 more stores following 2 years

in Dammam and Jeddah. Our marketing strategy is based on price leadership, which will help us to

develop the highest market share. Our initial target is reaching the highest market share. Due to the high

level of local competitors, we will pursue price penetration. We foresee that other players in the market

will respond to the price change by cutting down prices, thus we believe that supply chain management

plays an important role to work more on cost efficient basis in Saudi Arabia market.


II. Macro Environment

a. Legal and Political Environment

i. Regulations and Legal Framework

1. Restrictions on Business Ownership and Activities

As the Saudi Arabian General Investment Authority (SAGIA) mentioned in their official annual issue, in

order to qualify for a business license In Saudi Arabia (S.A.), the activity of that business should not be

mentioned in the list of the prohibited activities, which are mostly related to religions honoring, safety,

and morality—The prohibited activities will be discussed in depth later in this report. The product

standards and production processes must be in accordance with the prevailing laws in the S.A. However,

SAGIA stated that in case there is no standard specification stated in the prevailing laws in the S.A, the

laws of the European Union or the United States will be activated instead.

It had been required that an international investor must form a partnership with a local Saudi investor in

which the local investor own at least 25 percent of the company. However, since 2005 it is possible to

form a fully owned foreign investment, which can be eligible for all the benefits offered by the Saudi

government, which will be addressed in detail in the following chapters. We are planning to establish a

joint venture with a local investor, Jarir Bookstores, in the future. At this stage, we are aiming to utilize

Jarir’s local market expertise and further take advantage of strong strategic fits.

2. Prohibitions and Licensing

In Saudi Arabia, the importation of certain goods is either prohibited or requires special approval from the

government. Specifically, "the importation of alcohol, firearms, pork products, and used clothing is

prohibited. Imports of certain products, including agriculture seeds, live animals, books, periodicals,

audio or visual media, religious materials that do not adhere to the state-sanctioned version of Islam or

that relate to a religion other than Islam, chemicals and hazardous materials, pharmaceutical products,

wireless equipment, horses, radio-controlled model airplanes, products containing alcohol, natural

asphalt, and archaeological artifacts, require special approval. (Office of the US Trade Reprisntitive)

"Importation of some media products is subject to censorship. In addition, in order to obtain business

licenses, foreign investors should not have been previously convicted of financial or commercial


violations in any country. Also “The grant of a license shall not result in the breach of any international or

regional agreement to which the Kingdom is a party” (SAGIA Web Site)

Also, as mentioned earlier, in order to qualify for a business license, the activity of a business should not

be mentioned in the list of the prohibited activities. We can say that the list of these activities does not

have much limitation to electronic consumer goods. But as we mentioned earlier, religions play an

influential role in the business environment in Saudi Arabia as well as the rest of the Middle East. The

products mix of Saudi Best Buy should not include any of these listed products.

•Products such as (music/CDs/DVDs/movies/books/video games) that offense any religion or any

religious characteristic or sample of Islam, Christianity, Judaism or any other religion.

•Products such as (DVDs/movies/books/video games) that include pornography.

•Products such as (music/CDs/DVDs/movies/books/video games) that conflict with the Government in a

destructive manner. Meaning any product that present the policies of Saudi Arabia as an enemy or as

community deceiver will not be allowed into the country.

All multimedia products should be examined by the Ministry of Culture and Information. Again, these

policies are not expected to negatively affect the company's operations, but they should be along with the

other stated policies being aware of. Regarding the Standards, all other electronic products should be

examined by the Saudi Arabian Standards Organization (SASO) to obtain entry approvals. The standards

are generally the same as those used in the United States and the European Union.

ii. Labor and Human Resource Management

1. Major labor and human resource management factors

Although Saudi Arabia has done lots of activities that intend to reform its economy, some recent policies

took place to solve other internal problems such as the unemployment. The most relevant policy is what

so called the “Saudization” program, which restrict the percentage of foreign employees in regional and

international business. The percentage of Saudis should be at least 25 and reach 75 depending on the

sector. In our case, we might be entitled to employ as much as 35 percent foreign labor. The program

focuses on decreasing the Saudi unemployment rate, which is estimated by CIA to be at least 8.8 percent.

The Saudization program aims also to reduce and reverse over-reliance on foreign workers and to

decrease international remittances which were estimated to sum to $200.4 billion in the past 10 years.

(Saudi Arabian Ministry of Economy and Planning)


We believe that this program will not have a serious effect on the performance of Best Buy— at least in

the close future. Still, the company should be aware that such a policy might restrict the company's

operations or increase the spending on salaries as Saudi labor usually cost at least 30 percent more than

foreign labor.

SAGIA website says that employees’ salaries in Saudi Arabia vary according to the employee's status,

position, and experience of the employee as elsewhere in the world. 18 percent General Organization for

Social Insurance (GOSI) contribution for annuities is payable--9 percent by the employer and 9 Percent

by the employee-- for Saudis employed and 2 percent for occupational hazards: health insurance,

transportation or compensation in lieu of cars for more senior personnel, return tickets to the country of

origin and an end of service bonus payment to non Saudis." SAGIA

The following table shows the rank of Saudi Arabia in terms of the ease of employment issue vs. the

average rank of the top ten nations.

2. Education

According to SAGIA, an increase in school funding, coupled with schools building, led to a significant

increase in literacy rates--from 33 percent in 1970 to 83 percent in 2008. Saudi Arabia has also strongly

improved its enrollment rates at the secondary and tertiary levels. Currently, the number of women in

tertiary education now outweighs the number of men. In 2007, the government announced King Abdullah

Project for the Development of Public Education. This project will distribute [approximately] $4 billion in

the next five years as part of a new education improvement plan covering four areas: improvement to the

public education environment, teacher training, curriculum development, and extracurricular activities.

According to a report from SAGIA, the activity is not limited to primary and secondary education. The

establishment of King Abdullah University of Science and Technology (KAUST), which is a research


institution expected to be completed in 2009, with a total capacity of 13,000 students, will help ensure

that Saudi Arabia can train the next generation of scientists and engineers. KAUST along with the other

research institutions are expected to play a crucial role in the Kingdom's future competitiveness, and their

success is anticipated to yield long-term, significant improvements in Saudi Arabia's ability to furnish

companies with a high-quality skilled labor force.” This development has been associated with an

increase of investment spending on the construction of facilities necessary for instructional purposes and

the recurrent expenditure such as wages, salaries, and academic services expenditure, as well as

maintenance of such facilities. Currently, the Kingdom has 19 universities, 102 girls' colleges, 34

technological colleges for boys, 4 technical institutes and 52 vocational training centers, 4,516 secondary

schools, 7,503 inter-mediate schools and 13,454 primary schools.

According to CIA reports , as of 2004, the country spends 6 percent of its GDP on building elementary,

secondary and high schools and supporting improvement programs in the Saudi Universities in order to

fulfill the increasing desire for highly trained professionals in the Saudi market. This is further expected

to assist the country implementing the S.A. economy reformation plans. In the past 3 years, Saudi Arabia

also focused on higher education by increasing the budgets of the major seven universities by as much as

30 percent.

According to the Ministry of

Planning, “The number of

schools falling under

government educational

institutions increased from

3098 in 1970 to 32,119 in

2007. The number of boys'

schools went up from 2602 in

1970 to 14,790 in 2007 while

girls' schools increased from

496 to 17,329 over the same

period. The intensive attention which was given to girls' education resulted in the growth of the number of

girls' schools faster than boys' schools. The average annual growth rate of girls' schools reached 10.1%

compared to 4.8 % for boys' schools.”


“Technical training indicators show

the significant attention paid to this

type of education in order to meet

the economic development needs in

various production and service

sectors. The enrollment at higher

technical training institutions in the

government sector, increased from

840 students in 1969 to 54.7

thousand students in 2007, or by

more than 65 folds over the same period. Also, The number of graduates of higher technical training

institutions in the government sector reached 12.43 thousand in 2007.” Saudi Ministry of Planning

3. Unemployment Rate

The Saudi unemployment rate has been increasing. An unofficial study estimated the unemployment rate

to reach 30 percent of the Saudis eligible to work. Saudi Arabia's population tolls 25 million (including 7

million foreigners). CIA estimates the unemployment rate to be 13 percent as of 2007. And the official

reports of Saudi Arabia say it is in the neighborhood of 6 percent. The following table is an official

breakdown of the labor force by sex and nationality in 2007 showing the unemployment rate in each

segment.

13% among Saudi Males only (local bank estimate--some estimates Range as high as 25 to 30 percent) (2004 est.)

Source : CIA


Regard less of the data above, experts estimate the Saudi unemployment rate to be as high as 30 percent.

The pressure for change is growing rapidly, with unemployment for the 20-24 age groups (the new

graduates) at around 27% and 33% for Saudi males and Saudi females, respectively. “Saudi women

account for only 7.1 % of the workforce. Unemployment among women is reckoned at 16% - more than

double the 6.8 % unemployment rate for Saudi males.” Saudi-American-forum.org

Source: SAGIA

b. The Economic Environment

i. Main Economic Indicators

Preliminary data of the Central Department of Statistics and Information (CDSI) indicate that GDP at

current prices (including import duties) recorded a growth rate of 7.1 percent to SR 1,430.5 billion in

2007 (1 US$= SR3.75). The non-oil sector GDP grew by 4.5 percent to SR840.4 billion, constituting 45.6

percent of total GDP. The non-oil private sector GDP went up by 8.0 percent to SR403.8 billion, and that

of the government sector by 4.2 percent to SR228.9 billion. The oil sector GDP grew by 8.0 percent to

SR778.4 billion, constituting 54.4 percent of GDP at current prices.


The general cost of living index for all cities (1999=100) registered an increase of 4.1 percent in 2007.

The wholesale price index recorded an increase of 5.7 percent in the same year. Non-oil GDP deflator

registered a rise of 1.2 percent.

According to Saudi Arabian Monetary Agency (SAMA), “The average inflation rate [measured by annual

changes in the cost of living indices during 2008] rose by 9.9 percent while the average inflation rate

during the preceding five years was 1.6 percent. The group of renovation, rent, fuel, water, housing and

appurtenances rose by 17.5 percent, the group of food and beverages rose by 14.1 percent, the group of

goods and other services rose by 10.7 percent, the group of medical care rose 5.1 percent; the group of

home furniture by 7.6 percent; and the group of education and entertainment by 2.1 percent.


In order to alleviating the impact of the rising cost of living in Saudi Arabia, in 2008, the government

exempted wheat, wheat flour, and other grains from import duties and reduced duties on 75 other

foodstuffs to 5 percent. According to the Global Agriculture Information Network, the major foodstuffs

that benefited from the reduced 5 percent import tariff included: chilled and frozen poultry and their

products, eggs, cheese, cheese cream, vegetable oils, pasta, canned meat, fruit and vegetable, mineral and

ordinary water, long life milk, corn flakes, peas, beans, peanut butter, yeast, and baking powder (GAIN,

2008). The government will review the list in April 2011 (Saudi Arabian Monetary Agency (SAMA)).

ii. Trade Agreements

Saudi Arabia is a key player in the international trade life around the world. By signing agreements with

several trade organizations and many European and Asian countries, Saudi Arabia has created a strong

cooperation with the world economy. Saudi Arabia became a full member of the World Trade

Organization (WTO) in 2005. Also, Saudi Arabia is among the OPEC 11-members. In addition, Saudi

Arabia is a member of the Gulf Cooperation Council (GCC). GCC trade agreement includes the United

Arab Emirates, the Kingdom of Bahrain, Saudi Arabia, the Sultanate of Oman, Qatar and the State of

Kuwait.

In addition, Saudi Arabia has signed Investment Promotion & Protection Agreements with eight

countries: Italy, Germany, Belgium, Taiwan, China, United States, United Kingdom, France, Malaysia,

and Austria. In addition, Saudi Arabia has Economic, and Technical agreements with Argentina,

Australia, Azerbaijan, Greece, India, Iraq, Italy, and Japan. Furthermore, the country has singed

investment and technical agreements with many developed and developing countries, such as Japan,

China, and India, in addition to two industrial agreements with Germany, and Denmark. Recently, In

2007, Saudi Arabia signed economic, trade, investment, and technical agreements with China.

iii. Current Account and the Balance of Payments

The U.S. goods trade deficit with Saudi Arabia was $42.3 billion in 2008, an increase of $17.1 billion

from $25.2 billion in 2007. U.S. goods exports in 2008 were $12.5 billion, up 20.0 percent from the

previous year. Corresponding U.S. imports from Saudi Arabia were $54.8 billion, up 53.8 percent. Saudi

Arabia is currently the 23rd largest export market for U.S. goods.


U.S. exports of private commercial services (excluding military and government) to Saudi Arabia were

$3.3 billion in 2007 (latest data available), and U.S. imports were $509 million. Sales of services in Saudi

Arabia by majority U.S.-owned affiliates were $537 million in 2004 (latest data available), while sales of

services in the United States by majority Saudi Arabia-owned firms were $2.8 billion in 2006.

Preliminary estimates of the Kingdom’s balance of payments indicate a current account surplus of

SR356.3 billion (US$95.01 billion) in 2007. The surplus in the current accent was due to an increase of

2.9 percent in the balance of trade surplus to SR565.6 billion (US$150.82 billion) in 2007 compared to

SR549.9 billion (US$ 146.64 billion) in the preceding year as a result of an increase in oil exports and

other exports.

iv. Government Debt and Currency Stability

Government debt, all of which is domestic, has been reduced to SR 366 billion ($97.6 billion) from SR

475 billion ($126.7 billion) at the end of 2005. The repayment of debt combined with robust economic

growth has allowed a substantial improvement in the government’s debt position; debt now stands at 28

percent of GDP compared to a peak of 119 percent of GDP in 1999. SAMA data shows that commercial

bank holdings of government debt declined by SR 8.7 billion (US$2.32 billion, 7 percent) over the first

10 months of the year, around 8 percent of the total debt retired. Most of the remaining debt repaid was

held by the two large pension funds: GOSI and the Public Pension Agency. The continued repayment of

government debt is sharply contracting the government bond market. Nonetheless, SAMA has indicated

that it would like to buy back all outstanding government debt held by commercial banks.


The Saudi Arabian Riyal has been tied to the USD since 1986 at an exchange rate of US$1 to SR3.75.

Monetary policy is centered on maintaining the SAR peg against the USD, thereby restricting inflation

and fostering financial stability. The Saudi Riyal (SAR or SR) has remained stable against the US$ at a

rate of US$ 1: SAR 3.75 for around 19 years.

Interest rates on domestic inter-bank deposits declined substantially during 2007-2008. The three-month

inter-bank interest rate (SIBOR) came down from 4.79 percent at the end of the fourth quarter of 2007 to

2.03 percent at the end of the first quarter of 2008. The differential between the Riyal and the US$

deposits for a three-month period was still high in favor of the dollar the differential amounted to 64 basis

points at the end of the first quarter of 200 against 43 basis points at the end of the 4th quarter of 2007.

(SAMA)

In the first quarter of 2008, SAMA entered into foreign exchange swaps with domestic banks, for several

periods, amounting to SR4.750 million to absorb excess Riyal liquidity and provide required US$

liquidity to the banking system.

In the domestic public debt market, the issue of new government bonds was reduced by 50 percent in the

first quarter of 2008 from SR1,000 million (US$266.66 million) to SR500 million (US$133.33 million)

on a quarterly basis as of early 2008. (SAMA)

Since the Saudi currency is pegged with the US dollar, we believe that there is no significant transaction

risk the company is taking when doing business in Saudi Arabia.

Riyal against Major Currencies (Apr 25, 2009)

Currency Against S.R. Buy Sell

US Dollar 3.7500 3.7505

Euro 4.969 4.9724

Sterling Pound 5.5031 5.5057

Japanese Yen 0.03858 0.03861

Swiss Franc 3.2909 3.29280

Source: SAMA.gov.sa


c. The Socio-Cultural Environment

i. The Location

Saudi Arabia occupies

2,250,000 square kilometers

(868,730 square miles). Saudi

Arabia is bounded on the west

by the Red Sea, and on the east

by the Arabian (Persian) Gulf,

to the south by Yemen, and

Oman; southeast by the United

Arab Emirates (UAE), and

Qatar, and to the north and

northeast by Kuwait Jordan,

Kuwait and Iraq. The major

cities are: Riyadh – the capital,

Jeddah (the chief seaport), and

Dammam – where most of the

Saudi oil reserves and where

the major Saudi petrochemical,

company, Saudi Armco, exists.

ii. Cultural characteristics

The cultural environment in Saudi Arabia is considered highly conservative. Officially all Saudi citizens

(a total population of 21 million) are Muslims and almost 50 percent of the immigrants, a total population

of 7 million, are non-Muslims (Saudi Ministry of Planning).

Islam includes five pillars: belief in the oneness of God and the finality of the prophet hood of

Muhammad; the establishment of the daily prayers; concern for and alms giving to the needy; self-

purification through fasting; the pilgrimage to Makah (Mecca) for those who are able. The major

everyday rituals are the daily five prayers. Those who pray face Mecca, ideally in mosques or individually


or as a group if possible. For that, all businesses close four times every day for almost 30 minutes. The

hajj (pilgrimage), the fifth pillar of Islam, should be performed, if possible, at least once in one's life.

Every year more than 4 million Muslims come from all over the world to do their pilgrimage duty in

Makah. Also, the visitors come to visit Makah the year long. Surveys indicate that Makah is the most

attractive domestic tourism region, attracting almost of 10.9 million tourism (SAGIA).

"In Saudi Arabia, social interaction is marked by strong gender segregation and respect for age

differentials" (everyculture.com). Male-female interaction in a commercial shop is generally formal and is

limited to the process of buying and selling. Females don't drive. We estimate that 85 percent of families

that include over 3 members have their own drivers. Saudis tend to remain in close physical contact

during normal social interaction. For example, walking arm-in-arm or holding hands while talking is

normal and common, especially among persons of the same gender who know each other well. Gazing

and staring at strangers is generally rude.

Social visiting within such contexts is common and occurs on both daily basis and for special events and

occasions. In business meeting and a personal visiting, a guest, upon arrival, should greet the host and the

others present by shaking hands or, if well-known to each other and of like age, by kissing on the cheeks

three times. The person being greeted should also stand. The guest should be offered refreshments of

Arabic coffee or black tea. An invitation to lunch or dinner is usually expected from the host of the

meeting.

iii. Holidays in Saudi Arabia

Saudi Arabia has two main holidays: Eid Al Adha, comes after hajj (pilgrimage)season, and Eid al-Fitr

(the breakfast holyday)comes after the month of Ramadan, the ninth moth in the Arabic calendar, which

Muslims fast from sunrise to sunset for almost 30 days. During the month of Ramadan, businesses must

shorten the required working hours and make the operations start slightly later than usual—around 10 am.

The festival of Eid al-Fitr in Saudi Arabia is widely popular. For many businesses, Both holidays are

major shopping seasons, especially, Eid al-Fitr “the breakfast holyday.” So, it is a perfect opportunity for

our company to conduct promotional campaign in those holydays—Jarir, our business partner is usually a

strong player in such seasons. In both holidays, banks and government services stop for around 4 days

while other businesses like, apparel retailers, car dealers, and electronic retailers compete with each other

by introducing their major annual promotional activities.


III. The Industry Environment

a. Competitor analysis

i. Main Competitors

Extra, established in 2003, has almost 25 percent market share of the consumer electronic goods market in

Saudi Arabia. Also according to our analysis Extra ranked number one in terms of its competitive

strength. In the past 5 years, Extra opened 11 stores among them is the biggest electronic store in the

Middle East. The company owns stores in competitive locations. The number of stores will come to 15 by

the end of 2009. Among the current stores are stores in cities other than Riyadh, Jeddah and Al Dammam,

where the market is less competitive.

Jarir bookstore, the proposed business partner, was established in 1979 with a small store located in

Riyadh. This single store specialized in supply of office and school products to meet customers' demand

and to provide high level of satisfaction.

Today, Jarir Bookstore is well reputed and highly respected among its customers and among the business

community. The company is led by a strong management team with effective leadership skills and which

respects individual initiative and provides opportunities for personal growth to employees. The company

currently operates 21 stores in Saudi Arabia in addition to three stores in UAE, Qatar, and Kuwait.

Through its stores, Jarir sells computers and laptops; video games and computer software; Movies;

computer supplies; English and Arabic books, magazines and newspapers; arts and engineering supplies;

and office Supplies.


Competitors Analysis

Industry Key Success

Factors Weight Competitors

Extra Jarir Banda Supermarkets Carrefour Average Small retailers

Economies of scale 0.35 2.8 2.45 2.1 2.45 1.75

Brand Equity 0.15 1.2 1.35 1.35 1.35 1.35

Stores & distribution 0.35 2.45 2.65 2.45 1.75 1.75

Products and Promotions

innovation 0.15 1.35 1.35 1.05 1.2 0.9

Totals 1 7.8 7.8 6.95 6.75 5.75

Market share 25% 17% 8% 3% 47%

ii. Potential New Entrants

Our industry within Saudi Arabia is growing at an increasing speed, which may attract many global

competitors such as German Mediamarkt and French Darty, U.S origin Target and Circuit City. However,

the expansion strategy of stores, such as Extra, and Carrefour, which plans to open 15 new stores in the

next 5 years, is a huge threat to our company. For that, a strong and fast expansion strategy is a perfect

way to compete with the other companies in the next years in order to sustain a performance that meets

the expectations of the shareholders and the management of Best Buy and Jarir. (The conclusion,

specifically, in the Risks section, will further discuss this issue more in depth)

iii. Substitute Products and Services

There are number of substitutes present for Best-Buy. All the sellers of consumer electronic goods can be

considered as the substitutes. Extra – chain in electronic retailing, Modern Electronics, eBay, Amazon,

other websites selling consumer electronic goods and other small-medium electronic shops all pose as

substitutes for Best-Buy. Because so many competitors are present in the market, they bring down the

prices and decrease the profit margins. We need to refine our pricing strategy to compete in such


environment. eBay, which is an online marketplace, will pose a big threat to Best-Buys strategy. eBay has

an advantage of being an online peer-to-peer operator with no inventory and other fixed costs. Still, there

are many electronic items which customers need to see, feel, touch and use before they decide to buy the

item(s). Extra – retail brand will pose the maximum threat to Best-Buy as it is a direct competitor. Extra

has been in electronics retailing business since 2003, so it has experience advantage, it has big shopping

floor space, detailed customer service plan which includes anytime and anywhere maintenance service,

highly advanced store design etc. “In 2009, Customer traffic is expected to exceed 8 million shoppers

with a total shop floor space of over 57,400 square meters”. 1

b. Supplier analysis

Primary suppliers for Best-Buy are major electronics manufacturers, which are located throughout the

whole world. There is an intense competition between suppliers. Many new manufacturers are competing

with huge conglomerates in price and quality. Major suppliers are in consumer electronics, appliances,

books, DVDs, cellular and mobile electronics segments. The hardware market is the key segment for Best

Buy, dominated by IBM, HP and Dell, and Japanese conglomerates, such as Toshiba and NEC. Those

vendors have shown an ability to innovate and lead the market in new directions, giving them key

importance for Best Buy. IBM and Intel's innovations, Dell's continuing price reductions, HP’s efforts to

keep their market leadership with innovative marketing strategies and sales channels make them key

suppliers for Best Buy.

The continually changing dynamics of the sector increases the importance of the segment in Best Buy’s

product line. Moreover consumer electronics vendors, such as Sony, Siemens, Philips and Panasonic has

a great importance especially in LCD and Plasma technology market for Best Buy, even though they

generate a large proportion of their income from other industrial activities. Furthermore in mobile phone

market Nokia remains the top supplier for Best Buy with the highest market share in Q1 2009. Samsung,

which has unseated Motorola from its second position, LG Electronics and Blackberry are other key

suppliers for Best Buy. Best Buy has a wide variety of products, thus there are many other suppliers to

list, we should note that Best Buy has a moderate power on its suppliers due to the high competition and

the number of firms.

1 http://www.ameinfo.com/189249.html


c. Customer analysis

Best Buy and Jarir will offer almost everything that is related to electronics. For that, the products and

services provided by Best Buy and Jarir target a huge percentage of the residents of Saudi Arabia.

Students, professionals, and stay-at-home mothers, are all among our target market. The needs of male

and female consumers should be considered in our strategies.

Prices play an important role in the performance of electronic goods retailers and it is one of the major

key success factors; so, sustaining competitive prices is expected to give the company the ability to

penetrate the market, to achieve excellent performance and to expand even faster and easier. After sale

services is also a most to achieve the company’s long-term goals. Our estimate of the buying power is that

residents of Riyadh have the strongest buying power among the three major cities. Residents of Riyadh

spend in average of $1500 on electronics, while the Residents of Jeddah and Dammam spend $1000, and

$800, respectively.

The market annual growth rate is almost 4 percent. Extra, one of the biggest electronics retailers in Saudi

Arabia estimates the consumer electronics market in S.A. to worth almost 8 billion U.S. dollars. Extra, a

5-years old retailer dominating the market with almost 25% market share (Extra). Other superstores have

around 30 percent, small retailers have almost 47 percent market share. Almost 100 percent of Saudi

families have T.V. and satellite receiver. And it is estimated that 80 percent of the Saudi Families have

access to internet and the number is increasing. Almost 100 percent of the residents of Saudi Arabia have

at least one cell phone (SAGIA). According to Extra, in 2007-2008, cell phone sales accounted for 40

percent of the total market.

According to CIA fact book, Saudi’s population include 38% of the population, or (10.8) million

under 14-years-old. We will exclude 90% of this segment since their buying power and decision power is

usually weak at this stage. But the situation will differ in and will make the target market increase in a

rapid phase in the next 6 years. So the company should continually track the changes in the country's

population characteristics. 10 percent of 10.8 equal 1.8 million target market in the segment of 14 years-

old and under.

The population Saudi Arabian population includes 5,576,076 non-nationals (CIA, July 2009). From

this segment we will exclude 20 percent who are conceded low-income (under $400 monthly income)

(insufficient data). Then we will include all Saudis who are older than 14-year-old (17.08) (male

9,608,032/female 7,473,543) million. So, the total market population is (19.45) million


Most of the population is concentrated in the major cities: Riyadh (population around 6.7 million),

Jeddah (population 3.7 million), Dammam (population: 1.3 million), Medina, Tabuk (population: 0.5

million), Abha(population: 0.4 million), and Ta'if. According to Saudi Arabia CIA fact book, the Saudi

GDP/Capital equals to $20,700 (PPP) (est.2008).

Potential Customers by Segments

Saudies under 14 years-old

(male+female), 1.8 million

Saudies over 14 years-old (Male),

9.6 million

Saudies over 14yo (Female), 7.47

million

foreigners, 4.4 million


IV. Business Proposal a. Proposed Location Best Buy will be launched in three cities in a three stage-expanding plan, which consists of opening a new

store in every 2 years. The initial launch will be in Riyadh. Riyadh, the capital city of Saudi Arabia, is the

largest and fastest growing market of Middle East. The city is the center of it all economic and political

activities. Not only home to the kingdom's government, the city has all the key institutions, embassies,

diplomatic missions, trade centers making it the legitimate control center of the country. Thus launching

our first store in Riyadh will allow us to be close to the decision-making area of the country. It will also

increase our brand recognition. Riyadh provides opportunities in all key economic sectors offering an

ideal platform to participate in Saudi Arabia’s economy. The oil resources have transformed the

infrastructure of the city and have been attracting large number of population. Considering that the oil and

petroleum products account for more than 90% of the city income, the purchasing power of the

population in well above minimum levels for our products. In addition to oil and petroleum products, the

capital is also rich in iron & steel, processed foodstuffs, cement and electrical equipment, which are other

signs showing the high income level of the population. The city is also important for hosting many

international trade shows and expos such as Riyadh Motor Show, Saudi Petrochem and Saudi Stone along

with numerous events making the city a frequent destination for international investors. Riyadh

Exhibitions Center is the leading exhibit Center in Middle East hosting about dozen exhibitions annually

in key economic sectors and attracting business people from over 40 countries from Eastern Europe, Far

East and Gulf Region. We see that a strategic advantage to increase our brand recognition in those regions

for future expansion in those markets. We believe that business relations made in those platforms may

help us expand to other countries in the region.

Saudi Arabia Stock Exchange Market is also in Riyadh. We also believe that opening our first store and

locating our headquarters in Riyadh, where Stock Market is located, will help us to follow market

conditions closely. The city is also one of the biggest shopping places in Middle East, such as Olaya

District and Salahuddin District with many others. Olaya District is one of Riyadh's finest and major

business & commercial centers, surrounded by various deluxe shopping centers. It also has the main

Computer Market of the city. The district is packed with big local companies, ministry offices, banks,

hospitals and exhibition centers, making it the true heart of commerce in Riyadh. Thus locating our store

near or/and in the district has strategic importance. Moreover Salahuddin District is another important

commercial site in Riyadh with numerous shops, world-class restaurants and huge malls. The district is


usually packed with tourists all over the world, mostly from Eastern Europe, Far Asia, Northern America

and Gulf Region. We believe that tourist, who are visiting Salahuddin District are in our target market and

are potential customers. The biggest manufacturing area – Shifa Area – is also in Riyadh, thus close

proximity to where most suppliers are, will help us to decrease transportation costs.

We plan to open our second store in Jeddah. Jeddah has gained its importance from its important location

on the Red Sea on caravan routes and proximity to Makkah. Jeddah was used by muslims along the

eastern coast of the Red Sea on ships to continue their trip to Makkah for Hajj and to Medinah to visit

Prophet Muhammad's Mosque. Thus the city was and is still a gate to the Muslim holy places. Jeddah lies

halfway between the northern and southern ends of the eastern coast of the Red Sea. Being a coastal city

gives a boost to international trade. The importance of Jeddah as a major trade area rose after opening the

Suez Canal in 1869, when ships began to reach it from the south and north of the Red Sea, making the

city the main route for shipments along the country. Jeddah is a passage through which huge quantities of

imports and imports move. Due to its proximity to shipment routes, we believe that we can manage to

decrease our shipping costs. Jeddah is considered to be a big, busy and vital center of business. There are

a lot of banks, shopping centers and malls, where all kinds of locally-made and imported goods are

available. Jeddah having the biggest seaport and airports of the country, results with an endless flow of

people coming for both commercial and tourism purposes. The city became the heart of shopping in the

country after the opening of the finest shopping centers such as Al-Hijaz, Hiraa', Al-Mahmal, Al-

Basateen, Al-Corniche, Al-Jamjoom, Sairafi Mall and Jeddah Mall.

We will open our third store in Dammam City, which is in northwestern Saudi Arabia with the population

over 750 000. It is the capital of the Eastern Province with 3.3 million inhabitants. Dammam is the

combination of Dammam city, Khobar, Qatif and Dhahran cities and form a large metropolitan and

industrial area at the shore of Persian Gulf. The population of the Dammam area is over 2 million.

Dammam is a major seaport and has a high export and import volumes. It is the centre for petroleum,

natural gas and all commerce activities in the eastern province of the kingdom. Dhahran area within the

city has big trade connections with other urban centers of Saudi Arabia and Bahrain. Dammam City is an

important Saudi port on the Arab Gulf and is far the largest city in the eastern region. The city was

strategically placed for the requirements of the oil industry, the continuous development of Riyadh and

the major provincial cities in the Eastern and Central Provinces.

b. Proposed Business Structure The Kingdom of Saudi Arabia initiated number of economic reforms to attract foreign direct investment

to Saudi Arabia. The country realized that achieving the way to achieve higher economic goals required a


steady flow of technology and expertise into the country. Therefore, its new policy encourages foreign

capital and invites it to participate in economic development projects in Saudi business. In the past the

government used to impose restrictions on the movement of capital into and out of the Kingdom and the

ownership of foreign enterprises. The new Foreign Investment Act lifts all privileges of national capital

and offers same treatment, protection, and incentives to foreign capital. The Act requires that foreign

capital should benefit same privileges as national income had for more then 20 years. The new Foreign

Investment Law also allows foreigners 100 percent ownership of the projects, as well as ownership of the

property for land and housing. Moreover projects that are 100 percent foreign owned are eligible for loans

from the Saudi Industrial Development Fund. Investors are also able to hold investment licenses in more

than one type of activity. Another change is the reduction in the corporate tax rate for foreign companies

with profits over SR100.000 a year, from 45 percent to 30 percent. However the Act also excludes

numerous industries and business type including retail sector. According to the a section of the same Act,

Best Buy in Saudi Arabia cannot be fully owned, and at least 51 percent of our company should be owned

buy a Saudi Enterprise, which forces us to choose joint-venture as our business structure. In that sense we

should be careful on our relations with a Saudi Forming a joint-venture, which should be build with

caution that is also determined by a regulation. The relationships between a foreign contractor and Saudi

partner are regulated by Royal Decree No M/2 of 21 Muharram 1398 H (January 1978). This regulation

applies to both sides. It also applies to all contracts and agreements to which the foreign contractor and

the government of Saudi Arabia. While choosing our partner, we should keep in mind that it should be a

Saudi national residing in the Kingdom of Saudi Arabia and should be registered in the Commercial

Register of the Ministry of Commerce authorizing to act as an agent. Forming a joint venture will allow

us favor from Saudi Industrial Development Fund that is not restricted to fully owned foreign enterprises

in some industries. This is an experienced credit institution under the supervision of Ministry of Industry,

which provides low cost loans for up to 50 percent of the capital.

Best Buy in Saudi Arabia have strong potential for growth and its concept will attract huge number of

people by filling a big gap within the industry, however a local touch might be necessary to match the

market needs and the local population.

We know that entering into joint venture is a major decision, especially different cultures and

management styles result in poor integration and co-operation. Moreover objectives of both parties should

match. Thus we are looking a partner whose management styles and objectives match with ours. The ideal

partner for us is the one that has resources, skills and assets in multimedia industry and retailing. We are

also looking for a good fit between the cultures. The high sales volumes in its industry, trustworthiness

are important determinants. How well brand value of our partner complements ours and how their

reputation are, are other important factors to consider. Our partner should also be financially secure and


should not have any credit problems, which may prevent our future growth. Our potential partner’s

already existing sales force and marketing team is also important, if have any.

A joint venture will allow us to generate more resources and will give us a greater capacity. We will also

need technical expertise over the market structure, which will buy us lots of time, during our launch. It

will also give us rapid access to established markets and distribution channels.

We also look for strong management team with effective leadership skills and which respects individual

initiative and provides opportunities for industry growth. Our partner should not hesitate to initiate

aggressive marketing and expansions activities, when the conditions are right. We also look for a parent,

who can help us to provide products of superior quality at the best prices to our customers with already

existing distribution and supply chain. Thus our first choice would be the market leader in electronics or

related industry, which has a large sales volume.

We have scanned the whole electronics and multimedia industry in Saudi Arabia and we believe that Jarir

Bookstore might be a nice choice to form a joint venture with. Jarir Bookstore is not just a bookstore, the

company offers books, audio cds, DVDs, small electronics, office supplies and is market leader in

multimedia superstores in Saudi Arabia. The company was established in 1979 with a small store in

Riyadh, selling office supplies. Jirar’s existing market share and good company image will help Best Buy

to access an already existed market.

As Best Buy, our partner should have the capacity to change the negative perception of a foreign

company – the stranger - and give us a local touch. Jarir Bookstore is well reputed and highly respected in

the kingdom among its customers and among the business community, which will allow us to reach locals

more effectively. The company has 6 stores in Riyadh, 6 in Jeddah and 2 stores in Dammam, which will

help us to perceived as a local enterprise when complemented with Jarir’s brand image.

c. Proposed Organizational Structure Best Buy used to use functional form of organizational structure at its top level. The company added Best

Buy International division to its top layer converting its organizational structure into a hybrid form. We

will use the same form in our Saudi Arabia subsidiary. We have formed the Middle East department

under Best Buy Saudi Arabia. At the moment we only have Saudi Arabia department within it. However

we are planning to add Turkey, Emirates, Israel departments in the close future. Within the Saudi Arabia

department we use hybrid organizational structure, which includes of 6 functions (Human Resources,

Marketing, Technology and Quality, Supply Chain Management, Finance, Strategy and Business

Development), 3 regions (Riyadh, Jeddah, Dammam), 3 product categories (TV- Video- Audio,

Computer & Office Supplies, Music-Movies&Books). We use this approach because we believe that


hybrid organizational structure can be beneficial to us considering that we are selling to a sizable and

homogeneous class of customers. Those 3 product categories are crucial for our industry, and market

leadership in those three categories defines the industry leader.

d. Proposed supply chain and operations

Supply Chain Management is one of the most important parts of company’s business. Supply chain

management refers to the activities that are involved in producing a company’s products and services and

Organizational Structure Chart


how those activities are linked together2. Supply chain management manages the flow of company’s raw

materials, information, finances and services in and among the different value chains of the company.

Best Buy has transformed its supply chain management from a high volume distribution mechanism to a

customer facing operations that drives strategy as well as product.3 It has become the best representative

of a company with customer-centered approach. Best Buy’s supply chain network in Saudi Arabia will

also focus on agility, responsiveness, and accuracy, ready deliveries and integration of smaller processes

to meet the changing tastes of different customers. The strategy of Best Buy through its supply chain will

be of “Customer Centricity”4 which will study customers buying habits and investing in the stores which

will provide customers with totally satisfying buying experience according to demographic segments such

as Young professionals, Family, Active younger males, teens etc. The store in Riyadh will focus on these

demographics and will plan out the store map accordingly. In order to be customer centric, Best Buy will

focus on achieving best value and efficient utilization of resources in its Supply Chain Network.

Best-Buys supply chain network will be as shown below:

2

International Business: The challenge of Global Competition by Ball et al 2007 Page 593 3

Continuous renewal, and how Best Buy did it (2007): Bala Chakravarthy, Peter Lorange Volume: 35 Issue:6 Page: 4 - 11 4

http://money.cnn.com/magazines/fortune/fortune_archive/2006/04/03/8373034/index.htm


Best-Buy will achieve efficiency in supply chain by utilizing its value chain correctly. The proposed

supply chain management will focus on freeing more time for sales representation and in store employees

so they can focus more on customer service.

Best-Buy will use its already established Supply chain network with advanced process mapping and IT

systems to improve the flow of goods from its purchase offices in Asia to its distribution centers. Best-

Buy will depend upon vendor-managed inventory system5 in which Best-Buy will have shelf-ready

products directly shipped to its stores and it will take help from vendors who will assist in inventory

management. This system will cut costs of keeping large warehouses and will increase the efficiency of

the value chain. Best-Buy will utilize different IT systems such as

Financial package from Oracle, i2 technology’s demand planning, replenishment planning, transportation-

management, supply chain management software, Retek’s transaction-processing system.6 All these

software’s will help Best-Buy achieve total supply chain transparency. “The Oracle financial system

manages all of Best Buy's finances, and i2 Technologies' software supports inbound freight operations,

carrier load rating, network analysis, carrier bids, and optimization of inbound freight movement.”7 We

will implement Best-Buy’s ‘demand-driven supply network’ principle in Saudi Arabia.

It will also implement direct-import strategy which will involve sharing the demographics and forecast

information from Saudi stores to our suppliers, working with suppliers for new products and just-in time

inventory maintenance for both Best-Buy and Suppliers. By understanding the buying patterns of our

customers we will establish import relations with purchasing offices in Asian countries. This strategy will

help us maintain demand driven supply and cut costs of carrying excessive items in inventory.

The supply chain management software will track records, shipments, and inventory positions and will

forecast the demands. Thus our supply chain will increase the flow of information, will give more

autonomy to employees for changing store stock situation or changing floor plans etc, will increase the

delivery frequency from distribution centers located near-by, decrease the warehouse costs, produce better

forecasts and improved customer service.

5 http://www.allbusiness.com/retail-trade/miscellaneous-retail-retail-stores-not/4555352-1.html 6 http://www.informationweek.com/news/global-cio/showArticle.jhtml?articleID=59300926 7 "Best Buy Bolsters Supply Chain" Elena Malykhina Information Week (Feb. 2005)


e. Marketing Plan

Saudi Arabia is not much affected by the global credit crunch. The economy is still in good shape with

retail and other markets still moving in vertical direction. Saudi Arabian electronic market grew from

35,023 million dollars in 2001 to 44,085 million dollars in 2007. The electronic consumer market in Saudi

Arabia values $3.5 billion in 2004, is still in developing stage but its growing very fast with rising

population. In comparison to the growing demand, there still remains gap between demand and supply.

Thus, being a new market there is perfect opportunity for Best Buy to introduce itself in the Saudi

Arabian market. Best Buy will enter Saudi Arabian market with Jareer Bookstores. By doing this it will leverage the brand

name of both Best Buy and Jareer Electronics to market its presence in the market. Being the best

electronics retailer in US, majority of people around the world are already aware of Best Buy’s business.

We will use the company image and use it to market Best Buy in Saudi market. By using the customer

centric approach, allowing people to select what they like and want, and by providing best product and

customer service we intend to create demand for Best Buy in Saudi Arabian market.

Competition in the retail electronics market is intense with large consumer electronics chains such as

Extra (Dominant consumer electronics retailer), Modern Electronics (part of Al Faisaliah Group has 26

fully owned showrooms and more than 600 dealers) and many small players.

Best buy will answer the competition with its marketing strategy directed at the customer’s need, wants

and demands. Best Buy will use three main strategies. The first strategy involves using the Jareer

Bookstore’s existing large customer base to create the beginning buzz in market for Best Buy. Combining

experience of Jareer Bookstores with added electronics retail experience of Best Buy will do this. The

customers from Jareer Bookstores will be attracted to Best Buy.

The second and probably most important strategy will focus on pulling the serious electronics consumers.

These go in stores with intension to buy but they are thoroughly aware of the prices in different stores.

This group of customers will be most important for Best Buy as define the trend of the market. These

users can differentiate between different stores on basis of their prices, customer service and any

additional features, which will result in more customer satisfaction. These users will be enticed by Best

Buy’s customer centric approach combined with competitive pricing strategy.

The third strategy focuses on building a firm brand name and brand recognition in the Saudi market,

which will help in attracting more customers, increasing the chances of expansion in neighboring


countries and reducing costs with increasing profits. Our value proposition will be providing quality

products with best customer service at an affordable price. Our value proposition to our customers will be

– They will find anything and everything in electronics, at more attractive prices and with satisfying

service. We will combine the best qualities of Best Buy’s consumer electronics experience with Jareer

Bookstores customer relation, culture and market experience in Saudi Arabia. Best Buy provides best -

Electronics, Customer Service and Price. Combining with Jareer Bookstores, our marketing mix will

focus on customers. Customer service goals will be set which will ensure quality service. Quality of our

products will be top notch and it will be coated with enticing discounts and price reductions.

Newspapers, Online Media, Coffee Bars, Television, Website, Events etc will all contribute to the

marketing mix.

i. Product marketing

Being an electronics retailer, we have less control over our customer’s point of view regarding different

products. But we have control over the product choices we make and the way in which offer the products

to our customers. Our ambiance will incite excitement in our consumers to look for different products on

the display. The arrangement of products will be chosen through carefully crafted mechanism of knowing

about hot selling items, which items will be sold if placed where and which kind of products will be

grouped or which others should be kept apart.

Central part of the store will host small events like Gaming competition for kids, or Items on sale, Hot

Selling Items etc. As stated earlier Customer Service is also a key component of our marketing mix. Our

service will be our best advertisement.

ii. Pricing Strategy

Best Buy will have pricing strategy aligned to provide High-service retailing which will provide great

experience for their customers. This strategy will be constantly communicated throughout the

organization. The pricing will be differentiated based on the type of category the product resides in. Some

categories like HDTV’s, Plasma TVs etc will be priced to increase the total revenue of the company,

products from other categories such as MP3 players, DVD players, Games will be priced more

competitively in order to draw more customers in the store. Even though prices in some categories will be

higher, they will have added values of experience to them. Prices will be kept comparable to the

competitors. We will implement penetration pricing to get the highest market share.


iii. Promotion Strategy

Advertising: Advertising budget will be less as Best Buy will primarily use the advantage of its

international brand name and Jarir’s extensive experience in Saudi Arabia. Initial advertisements will be

run in local newspapers and television marking the arrival of Best Buy in Saudi Arabia. The

advertisements will show Best Buy as one of the eagerly awaited brands in Saudi Arabia. Each of these

ads will be theme based and will be targeted for different audiences. Along with these promotional events

will be held in malls, cafes and supermarkets. Jarir Bookstore will be used as one key advertisement place

in which small best buy experience will be created which will entice customers for more Best-Buy

experience.

iv. Public Relations

Addition to the advertizing additional PR will be achieved through getting ‘Best-Buy’ quoted by experts

in publications and websites. Direct Marketing will be offered through mailboxes. Customers who will

wish to participate in email advertisements will be sent promotional emails, discounts and additional

offers only available to those customers giving them opportunity to shop in Best-Buy at discounted

prices.

v. Service

Service will be Best-Buys key strategy. Best-Buy will back up quality product with cheerful and fast

customer service. Efficiency of our service will also play a vital role in generating customer loyalty and to

provide maximum customer satisfaction. We will provide best shopping experience in our store.

iv. Keys to Success

Keys to the success for our Best-Buy store are :

• Selling products, which are of high quality, technologically advanced yet comparable in price.

We will offer differentiated products yet products will be chosen to satisfy the customer needs

based on repetitive studies of customer buying patterns. Customers will find present and future

best selling items in our store.

• Best Customer Service is our next key to success. Customers are most important for us and we

will design customer care plans to provide best customer service possible.


• Highly refined targeted advertisements and promotional events will generate awareness of Best-

Buy in Saudi market and bring more customers into the store.

• We will leverage the existing suppliers of Best-Buy to give our customers same product

experience.

• Being the price leader

V. Conclusion a. Proposed Time Frame and Management Expertise As discussed in previous chapters Best Buy will be launched in three cities in a three stage-expanding

plan, which consists of opening a new store in every 2 years. Unlike our major competitors in Europe, we

will not follow guerilla marketing. We aim to grow at a steady state. Sustainable growth plays an

important role in our time frame for entry. We will have Retail Chain Manager, Finance, Customer

Operation, Supply Chain, Marketing departments, which will require local expertise in their areas. The

major management team expertise, we are looking for will be local expertise on marketing and supply

chain management. Both areas are backbones for our success in Saudi Arabia. The supply chain is crucial

to work on costly efficient basis, which may help us to be the market leader. We foresee that with a

successful management over our supply chain, we can be the dominant price leader in Saudi market,

which is not populated with major retailers yet. Related to that, maximizing our market share will be a

challenging issue in order to be the market leader and implement sustainable growth. Thus marketing

expertise plays a key role for our success in Saudi Arabia. Moreover managerial expertise to handle the

relations between Saudi subsidiary and Best Buy international will be needed. We will also need

managerial expertise to handle relations with Saudi government. Furthermore we will need expertise in

technology and quality management, human resources to form talented workforce and expertise on legal

counseling.

b. Threats During Entry We foresee that global economic downturn poses a great threat for our entry to Saudi Arabia market.

Saudi Arabia cannot avoid the problems of recent economic crisis. The Saudi Cabinet announced that

series actions would be taken to ensure economic stability and protect the country’s financial institutions

from the fallout of the global financial crisis. Thus the Saudi government announced tax reduction on

investments (both foreign and domestic) to reduce the impact of economic crisis. A 50 percent tax cut on

the annual cost of training Saudis and another 50 percent tax cut on annual salaries paid is offered to the


companies investing not less than SR 1 million and employ not fewer than five Saudis in basic technical

and administrative jobs for a year. Moreover decreased demand due to the economic crisis has resulted in

lower wholesale and retail prices on products, which is a direct consequence of economic downturn and is

nor favorable for Best Buy. Thus we see economic downturn as a major threat for our market entry.

As the global crisis is spreading to even wealthiest nations, establishing an efficient supply chain and

working on cost effective basis play a key role to implement sustainable market growth. Due to lowering

overall demand, working at a cost efficient basis, which can be implemented with a successful supply

chain management, is crucial during our market entry.

Another important threat is failing to form talented management force. Best Buy Saudi Arabia needs

talented workforce, who can understand the market conditions, legal environment and is capable of

implementing parent company’s policies to the Saudi market. We see that our workforce will play a key

role in implementing our market entry strategy. Any step back due to poor management capabilities may

fail to match our market entry time frame.

High bureaucracy may cause time delays for our market entry. We foresee that the legal licenses needed,

quality standards, constructions procedures to build our warehouses, etc… may require longer time then

we estimate due to slow and high bureaucracy procedures.

Another important threat is the lack of control over joint venture. Due to Saudi FDI laws, we cannot own

more then 49 percent of Saudi subsidiary. Thus we may face with lack of control over the market entry

operations. Related to that any collusion with our partner may cause failure during entry process.

Moreover our partner may not spend enough effort and/or may not poses enough capability to

successfully implement our market entry strategy, which may lead to market entry failure.

c. Risks The biggest risk we foresee in this venture is the recent economic downturn that we discussed earlier. We

see that the financial crisis may lead to higher level of unemployment, inflation, lowering demand and

economic instability throughout the world. Thus it may pose a big threat on our venture in Saudi Arabia.

The global financial crisis may cause economic and political instability within Saudi Arabia, which may

reduce consumption levels, thus reduce our profit margins. We should develop and implement successful

marketing strategies in order to increase our market share. One big threat we may face is the nationalism

movement. We will use our Saudi partner to prevent any problem may occur related to that threat.

Another important risk is that, our industry within Saudi Arabia is growing at an increasing speed, which

may attract many global competitors such as German Mediamarkt and French Darty, U.S origin Target


and Circuit City. Thus new comers may lower the market price, and related to that reduce our profit

margins. German Mediamarkt is the major threat as a new comer, who are known to use guerilla

marketing at their first entry. The company opened over 12 stores in 3 years as a market entry strategy to

Turkey between 2006-2009. The company declared their interest in other Middle East markets such as

Saudi Arabia. Thus new comers pose a great threat for our venture.

Another important threat is the level of local competition within the market. There are other local

competitors in Saudi Arabia market, which already have existing customer database and market share.

Those competitors are likely to reduce their prices to force us quit the market after our first entry.

Competitors’ knowledge on the local market, developed over many years, may help them sustain

competitive advantage over our venture.

Another big threat is the economic distance. Economic distance is a measure of economic disparity

between two nations; U.S and Saudi Arabia. It is easier to deal with countries that are close in economic

distance from our home country. Due to economic distance both countries have huge differences in

market segments, the demographics of consumers that can afford to consume similar types of goods and

services and knowledge about market demand. Moreover there are differences in physical infrastructure,

such as airports, roadways, railways, and seaports, which lowers the level of efficiency in supply chain

operations thereby increasing costs. Due to the huge differences in market structure, skills learn in U.S

market may not be replicated in Saudi Arabia. Thus we should adjust our marketing strategies in Saudi

Arabia for successful market entry. Related to that cultural distance plays key role in generating market

share. However we should note that, our industry is least likely to be effected by cultural differences since

the demand for certain type of technological products do not vary among different cultures. But we may

have difficulties to market our products and meet local consumers.

Another big risk is the failure to adjust Best Buy policy and global strategies according to cultural

differences. The cultural dimensions of Saudi Arabia that affect its consumption pattern, shared values

have a huge impact on the execution and implementation of marketing and management strategies. In

sensitivity to cultural differences in administrative policies, marketing mix and managerial strategies may

cause market failure. We should define clearly how customers derive meanings about the brand or

product. Mistakes arising from misunderstandings of brand names may cause huge losses. From a

managerial perspective failure to adjust organizational structure according to those cultural differences

may create collusion at the workplace. For instance there exists a distinct dichotomy between

subordinates and managers within Saudi Arabian companies. Those with most authority are expected and

accepted to issue complete and specific directives to others, which shows the degree of power distance.


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