corporate strategy and public policy in saudi arabia

Long Range Planning, Vol . 22, No. 4, pp. 79 to 88, 1989. 0024-6301/89 $3.00 + .OO

Printed in Great Britain Pergamon Press plc 79

Corporate Strategy and Public Policy in Saudi Arabia

Mushtaq Luqmani, Ugur Yavas and Zahir A. Quraeshi

This paper examines the nature of public sector planning and its impact on businesses strategies and plans in Saudi Arabia, a resource-strong country. With a stable government and a dominant public sector, the Saudi environment typifies conditions in which a firms strategies need to be in accord with government plans and priorities. Insights are gained by utilizing a framework of resource spending, conceptualized in three phases: revenue surplus, revenue deficit and revenue balance. The paper concludes that business firms should develop timely plans to capitalize on opportunities and to cope with pressures during each of the phases.

Strategic planning models, such as those proposed by Ansoff, Andrews and Steiner have focused on planning at the individual firm level.’ They have guided companies in formulating and evaluating strategic plans within the context of available resources, organizational strengths and weaknesses and environmental factors. While these and other subsequent models that followed provided a com- prehensive approach to strategic planning, they have not given adequate attention to the development of corporate plans within the framework of public sector planning. The need to redress this shortcoming is particularly pressing in countries where the government plays a dominant role in the development of the private sector.

With an industrializing base and a dominant public sector, Saudi Arabia presents a classic case of an environment where companies ought to devise their business strategies only after evaluating government plans, priorities and spending patterns. It is a country of strategic importance, being one of the largest oil producers, accounting for one-third of total world reserves and 8 per cent of world market share. Politically, it has one ofthe most stable governments

Dr Mushtaq Luqmani is Associate Professor of Business at Western Michigan University. currently visiting at King Fahd University of Petroleum and Minerals, Saudi Arabia. Dr Ugur Yavas is Professor of Marketing at East Tennessee State University and Zahir A. Quraeshi is Associate Professor of Business at Western Michigan University.

in the region with considerable influence among a number of developed and developing countries. Its sizeable market potential, wealth and liberal economic policies have attracted huge foreign direct investments as well as participation by a large number of multinationals.

Economically, in a short time Saudi Arabia has undergone an amazing transformation, but that progress has been made possible by one resource factor-oil. Approximately 70 per cent of national income is derived from oil revenues, which go directly to the government and provide about 90 per cent of its income. The rapid rise and decline of oil prices have had a cyclical effect on government budgets (see Table l), necessitating revised plans and priorities. In response, business firms and notably multinationals have altered their strategic plans. It is the purpose of this paper to trace the changes in the Saudi planning process and to provide some prognosis of the resulting challenges faced by business.

Gaining an understanding into the progression of public sector planning in Saudi Arabia is important for at least two reasons. First, the Saudi case documents a series of changes in governmental plans and priorities in response to rapid fluctuations, both increases as well as decreases, in government budgets. An examination of this behaviour could provide insights into the planning process of other resource-based countries, such as Malaysia, Indone- sia, Nigeria and Algeria, whose incomes are wholly or partially derived from economic resoures suscep- tible to the vagaries of market forces and economic uncertainties. Second, a study of the effects pro- duced by the Saudi planning process offers a rare look into how business firms may make strategic adjustments to shifts in government plans and priorities. Also, the Saudi case demonstrates the importance of addressing and incorporating the effects of government plans into the long range planning process of business firms.

80 Long Range Planning Vol. 22 August 1989

Table 1. Comparison of Saudi budget estimates 1975-1987 (in billions of riyals)

19751 19761 19771 19781 19791 1980/ 19811 19821 19831 19841 19851 19861 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Revenue 95.8 110.9 146.5 130 160 261.5 340 313.4 225 214.1 200 117.3 Expenditure 110.9 131.2 134.2 144.5 185.8 245.0 298 313.4 260 260.0 200 170.0 Difference 15.1 20.3 112.3 14.5 25.8 16.5 42 - 35 45.9 - 52.7

Source: Saudi Gazette. p. 1, 1 January (1987).

The Cyclical Spending Pattern In terms of resource spending, the development of the Saudi economy can be conceptualized in three phases : revenue surplus, revenue deficit and revenue balance. Reflecting the past, present and future, these phases indicate the extent to which the government has resources to support economic development. They have significantly influenced government spending, which is considered to be the driving force in the Saudi economy. It is therefore important to look at government planning within the context of these phases.

Revenue Surplus Phase (1973-1981) From an economic development point of view, the revenue surplus phase can be viewed as utopian. In the Saudi case, this phase was characterized by enormous funds available to the government to embark on ambitious projects, some of which may seem unreachable even to the most optimistic of visionaries. This phase of government planning has had a wide-ranging effect on the Saudi economy. In 1973 alone, the price of crude oil quadrupled, from S3 a barrel to around S12 a barrel. Another doubling of prices occurred in 1979-1980, and Saudi oil production also increased dramatically. Saudi Ara- bia could now be counted as among the richest countries in the world, with a Gross Domestic Product of more than 160 billion riyals, spread over a relatively small population of about 6-7 million. With the exception of 1978/1979, government revenues increased continuously during this period from about 5 billion riyals in 1973 to about 340 billion riyals in 1981-1982. As a result, massive budgets were devised by the government to carry out its commitment to transform Saudi Arabia into an industrialized state.

This great wealth brought about a re-thinking in the philosophy of government planning. Commit- ments were heightened in three ways. First, many existing and future projects were expanded in size, capacity and scope. Second, efforts were made to quicken considerably the pace of development. Third, a complex network of bureaucratic institutions sprang up. The government formulated long range plans with a focus on four somewhat parallel strategies: rapid development of the physical and social infrastructure; formation of state-owned enterprises to foster indigenous industrial development; high-tech acquisition and technology transfer through foreign direct investments and joint ven-

tures; and private sector development with the help of government incentives.

Perhaps the most ambitious of these plans was first to develop the nation’s non-existent infrastructure. This was regarded as necessary for the rapid development of industry and imported technology and to link economically the large, widely dispersed regions of the country (2.25 million km* occupying about four-fifths of the Arabian peninsula). By the early 1980s many of the massive infrastructural projects were completed, mostly with the help and effort of foreign firms and workers. These included:

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15 desalination plants producing more than 203 million gallons of fresh water per day;

23,000 kilometres of paved highways;

700,000 subscriber telephone lines;

more than 15,000 telex lines;

21 domestic airports and 15 local airfields, including an international airport designed to handle 10 million passengers annually;

seven ports consisting of 107 berths handling about 30 million tons of cargo per year; and

1081 government hospitals and 490 private institutions with approximately 23,000 hospital beds.2

Another priority of the government in the revenue surplus phase was to establish state-owned enterprises that could stimulate and support industrial development, with special emphasis on the capital- intensive hydrocarbon-related industries. Here development occurred at two levels. First, the government assumed complete ownership of ARAMCO, the largest oil production centre in the world, at one time jointly owned by a major group of oil companies. The latter were retained on a management contract basis. Second, some companies that were formed as state enterprises mushroomed into huge conglomerates overnight. An example is SABIC (Saudi Basic Industries Corporation), which employs thousands of workers and is responsible for the production of many downstream refined oil products. Handsome budgets also helped create new government agencies and expand existing ones. Simultaneously, the state initiated the development of the private sector which had previously been non-existent. Generous interest-free loans were disbursed to individuals and businesses alike to encourage the formation of local industry.

Corporate Strategy and Public Policy in Saudi Arabia 81

The immensity of government projects and their urgency required the help of multinational firms with technical expertise and huge investment capabilities. With a penchant for American technology, the Saudis preferred U.S. firms to their European and Japanese counterparts. In addition, outside consultants hired to design contract projects and oversee their implementation were mostly Americans, who often developed specifications and standards that were closely aligned with those of U.S. industry. Government strategies, resultant actions and business responses in this phase of development are summarized in Table 2.

Multinationals responded to these demands by forming consortiums, setting up makeshift facilities, using foreign labour, and drawing upon construction engineering and design teams with considerable flexibility. Recognizing that cost was of little consideration, these companies focused on high quality materials and the latest technology to sell to the Saudis. They also hastily formed joint ventures with local influentials to enhance the chances of winning contracts and to facilitate government payments. Profits obtained by companies were abnormal, and competition in growth areas was at best complacent. In many cases foreign technology was simply imported or implanted in order to meet design needs and urgency in the completion of mammoth projects. Companies catered to the magnification trend of ‘big is better’ by revising their proposals on how existing and new projects could be expanded. Those MNCs which responded with alacrity to these demands reaped handsome rewards.

With increased wealth, the orientation of consumers also dramatically changed. Notably, they became more conscious of quality and luxury. To tap into these opportunities, local and foreign companies expanded their services and inventories, particularly for luxury and higher priced products.

Revenue Deficit Phase (1982-1986) This rightfully can be called the Realization Phase: the euphoria of rising oil prices and abundance was replaced with a feeling that the bonanza was nearing an end and hard realities lay ahead. Just as the increase in oil prices was sudden, so was the decrease starting in 1983; oil revenues were reduced by about 50 per cent of 1981 values and hit a rock bottom of approximately SlO a barrel in 1986.’ Consequently, funds dried up just as suddenly as they had sprung up, and the Saudi government had to dig deep into its accumulated reserves to support essential expen- ditures.

The response of the government in the revenue deficit phase was to re-work many of its original plans. Recognition was given to the fact that the infrastructure needs of the country had been more than adequately met, and facilities such as housing for Saudi and foreign workers had been overbuilt.

As a result, several infrastructural projects in the early phases of planning and development were scrapped. Others near completion or deemed to be of strategic importance were allowed to continue. For example, the second largest causeway in the world, linking Saudi Arabia to Bahrain, was rapidly completed as an affirmation of the importance and commitment to the formation and support of the Gulf Common Market. However, for the most part, the government shifted emphasis from a building-oriented to a maintenance-oriented strategy, attending mostly to disrepair as budgets relating to construction were slashed and a freeze put on new building. Another shift in policy was to pay serious attention to the generation of revenues from sources other than oil. As such, import duties, surcharges and increased taxes on income earned by local and foreign firms were instituted. However, these increases, such as the 7 per cent duties on automobiles, are still small by world standards.

A particularly interesting policy change has been in the area of contract awards, which account for roughly 80 per cent of all government purchases. The criteria on awarding turn-key projects have shifted from the purchase of top quality materials to reasonable quality at lower cost. In some cases this has meant reduced quality and in others the toning down of excessive and unnecessary material requirements and specifications. The shift from manufacturing and turn-key contracts to service contracts is also interesting to note. This orientation has diffused into literally every type of government activity. Functions such as the mandatory safety inspection for automobiles, cleaning and maintenance of government and university facilities, and the cater- ing of food in royal palaces are now carried out through service and management contracts. It is believed that these have improved services while reducing costs. Contrary to previous arrangements, maintenance services have been stretched to cover late and weekend hours, and other contract termina- tion clauses are being added to accommodate for serious service breakdowns.

To meet these service needs, a group of aggressive, low cost-oriented firms from third world and newly industrializing countries such as Korea and Turkey have emerged and rapidly gained ground in the Kingdom. As a rule, the Saudi government now prefers to replace senior expatriate labour, mostly from Pakistan and Egypt, with labour that is cheaper and perhaps more flexible. This has meant increases in Filipino and Korean workers for skilled, technical jobs and in Thai, Bangladeshi and Indian labour for less skilled work. At a professional level, European engineers and teachers, who cost less because they usually do not bring their families, are replacing their U.S. counterparts. In addition, efficient crews are being employed on a contract basis. Contractors bring in imported labour trained and prepared to work long hours in clockwork precision on a designated project; when the task is


Table 2. Government strategies/actions and private sector/MNC response in the revenue surplus phase

Government Strategies Government Actions Private Sector/MNC Responses

0 Massive infrastructure Q Import foreign technology and 0 Formation of third country joint development (highways, expertise ventures roads, ports, Q Employ large MNCs/credible firms to Sr Formation of consortiums telecommunication and utility build complicated structures rapidly * Use of implanted technology facilities, buildings) b Develop capabilities to mobilize rapidly

and recruit staff, generate make-shift facilities

Q Mass importation of foreign manual and skilled labour

b Development of state-owned b Develop national industries b Completion of huge projects in enterprises * Strong commitment to support relatively short periods

capitalization of newly formed state- * Formation of joint ventures between owned enterprises local firms and MNCs

Q Extensive recruitment of expatriate b Focus on supply of staff/managers services/management contracts; turn-

key plants/proposals

* Private sector initiatives ~2 Subsidies for research and I? Tap into government loans and development payments to finance projects

Q Easy availability of interest-free loans * Rapid emulation/borrowing of * Facilitate the granting of licenses to management and marketing

import foreign technology and ideas/projects from foreign countries equipment

Q Rapidly develop an agricultural sector/water resource base

* Encourage foreign direct h Facilitate joint venture formations investment * Emphasize transfer of technology

* Focus on high growth, abnormal profit- generating markets

* Focus on high technology products

0 Increase consumer welfare h Provide complete health care free of cost

Q Provide interest-free consumer loans Q Increase government agencies/hire

locals o Permanent settlement of nomadic

bedouin communities

Q Emphasis on higher quality/higher priced and prestigious products

* Develop strong consumer brand loyalties

h Increase product support and personalized services

completed workers are re-routed to otherjobs or are promptly repatriated. Koreans, in particular, have made a science of this procedure. The Saudis have also used to good effect, shorter term contracts to gain more re-negotiation flexibility and have stressed price reductions on contract jobs sensitive to experience curves.

In addition, the government is making an effort to increase bureaucratic efficiency through re-organization and retraining. Also, adaptation of materials and methods to the local environment is receiving priority in planning. Particularly, substitutes are being sought for costly foreign products, exempli- fied by recent funding to a university research group to examine the use of date palm bark as a reinforced construction material.

Another policy offshoot of the revenue deficit phase is the added emphasis on conservation, particularly in energy and water use. With a rapidly expanding population and industrial base, these efforts also point toward a committed long range policy of the government to conserve resources for meeting future needs.

The apparent emphasis on efficiency is reflected in two other developments. First, the government has centralized many of its operations. For example, state employees now are paid with monthly computerized checks that come from Riyadh, replacing the older procedure of distributing salaries to the individual agencies on a yearly budgetary basis. Additional regulations and elaborate procedures have been instituted to check fraud and inefficiencies. Second, recognizing that there are areas where local business can do a better job, the government is transferring part ownership of some state-owned enterprises to the private sector. This is seen as a way of developing local industry and reducing dependence on oil by diversifying the country’s economic base. Foreign firms are also being pressured subtly to collaborate with local industry. For example, in 1983 the 30 per cent rule was established, whereby foreign concerns awarded public contracts are mandated to subcontract 30 per cent of the work to wholly Saudi owned companies.

The government also has embarked on a manpower strategy to replace foreign labour and develop indigenous skills. A related effort has been to ‘Saudi- ize’ and create jobs for recent graduates, many of whom have been educated in foreign universities.


The revenue decline phase significantly affected the thinking and actions of international firms doing business in Saudi Arabia. Some abandoned the Saudi market when the lucrative short-term opportunities dried up. In deciding to leave, sometimes prcma- turely, they have risked future access, since re- establishing contacts in Saudi Arabia is costly and time consuming, when possible at all. Those multinationals with a strong joint venture base have managed to cope best with the revenue decline phase. Some successful strategies have been increased market segmentation and market niching. Adaptive rather than transplanted technologies have had particular success. Companies also have had to adjust to lower profits and a low-cost orientation, reflected in the hiring of cheaper labour and revised inventories. Many firms, such as Fluor Saudi Arabia, have gained government approval by contributing to the development of local skills and the Saudiza- tion process. Selective shifts in government strategies and the resulting MNC responses are shown in Table 3.

Revenue Balance Phase In late 1986 the precipitous decline in oil revenues ended and prices stabilized. According to most experts it is highly unlikely that oil prices will decline any further, and instead they may modestly increase. It seems that the worst of the economic crisis in Saudi Arabia is over. However, with its accumulated reserves depleted, the government realizes that it cannot afford to continue to over- spend, and future budgets must be austere compared to previous levels. With its ambitious plans considerably pared down, somewhat rising and firmed up oil prices (four companies-Chevron, Exxon,

Mobil, and Texaco-have agreed to buy Saudi oil at fixed prices in a multi-year contract’), and other revenues derived from its diversifying economic base, the government’s future spending probably will not outpace revenues.

This scenario of a revenue balance phase is based on some key assumptions relating to operations and budgets. First, the Saudi infrastructure will remain intact, should not need substantial revisions and should not deteriorate in the near future. Second, many firms and private individuals will be able to recover their economic losses and be better able to pay back the huge loans that the government so freely disbursed during the revenue surplus phase. Third, various government departments have adjusted to much leaner budgets. Fourth, the rapidly growing number of professionally trained Saudis will replace a high proportion of the presently employed expatriates. This would increase domestic spending of income earned, reduce foreign remit- tances, and increase taxable incomes. It is also anticipated that, given the problems created by revenue increases and the sudden declines in the past, the Saudi government will take a conservative approach to planning, even if oil revenues were to rise substantially.

The revenue balance phase can be viewed as a consolidation period during which the government will make full utilization of its past and present investments in infrastructure, agriculture and industrial development. Emphasis will be on improving rather than replacing present technologies and on localizing the development effort.’ Private industry will be increasingly called upon to solve the nation’s

Table 3. Government strategies/actions and private sector/MNC responses in the revenue decline phase

Government Strategies

* Infrastructure maintenance

Government Actions

* Service-contract orientation

Private Sector/MNC Responses

* Utilize low-cost strategies Q Shift in labour content of country of

origin

Q Private sector development and diversification of

economic base

* Efficiency improvements

* Denationalization

* 30 per cent rule * Joint venture rationalization

* Low-cost contracting * Retraining of locals I? Centralized organizational structure * Increased regulations

h Emphasis on management contracts

Sr Strengthen linkages with local firms

* Offer adaptive technologies Sr Increased sensitivity to cultural factors 0 Reevaluate/re-organize joint venture

relationships

* Profit satisficing objectives 0 Revised quality of

products/requirements * Anticipate/prepare for increases in

regulation, impose self-regulatory procedures

Q Resource orientation

* Manpower development

* Adoption of technologies/methods to improve efficiency

* Conservation of energy and water use 12 Anticipate increases in energy and

water use cost

* Retraining of locals 12 Local skills development

* Expand work force skills and managerial responsibilities and accountability of

~2 Shift from administrative to upgraded locals technical jobs


problems. The boost to the private sector is likely to heighten protection of import-sensitive industries. Recognizing the problems of oil dependency, the government is intensifying efforts to diversify the economic base and is encouraging the private sector to take the lead. The disinvestment in and privatization of the public sector initiated in the revenue decline phase continues. SABIC, which was a wholly government owned subsidiary when it started operations in 1976, disinvested 30 per cent of its shares to Saudi citizens in 1984 and is planning to disinvest another 75 per cent of the remainder. In response to a government push, the private sector is creating a strong and viable domestic engineering base. For example, 25 per cent of all new industrial licences in 1986 were allocated to the metal and engineering sectors. Similarly, privatization is expected in the healthcare industry. Foreign companies would do well to study the potential for helping in this diversification effort. Mineral resource development and energy-intensive light manufacturing are good examples. Also, the government’s effort to boost exports may mean handsome incentives for export-oriented industries, and multinationals should seriously consider establishing joint ventures particularly with local companies. Joint arrangements for the export of mela- mine, ethylene glycol and polyethylene have already met with some success.

With the decline in expatriate workers and the inability of the Saudis to fully replace them in the short term, it is likely that the demand for and growth in capital-intensive products will continue. With conservative budgets, the search for low-cost options could also mean a further replacement of American, Japanese and European firms with those from other LDCs, notably Pakistan, India, Korea, Turkey, Egypt and Sudan. It should be noted, however, that the search for less costly operations relates to mature and service industries and is by no means likely to alter the government’s support of viable foreign projects that show promise in transfering technology to local firms. For example, Boeing Corporation recently won a S3*5bn contract in Saudi Arabia for the ‘Peace Shield’ defence system. It was awarded the job on the premise that it would invest 35 per cent of the technical value of the contract in projects that would aid in the transfer of technology to Saudi Arabia. Several high technology joint manufacturing projects, including an aircraft modification centre, an advanced electronics and telecommunications centre, and biotechnology centres, are expected as host country benefits.

The Saudi government is also committed to ensuring the success of the Gulf Common Market. For foreign companies this may mean increased external tariffs for their exports to the region. Local manufacture is therefore imperative for companies who want to maintain or enhance their current market share as well as to take advantage of standardizing their product offerings in the Gulf.

The intense competition that was generated in the revenue deficit period is producing a competitive shake-out. In the process, Saudi firms have been learning the real effects of competition and ways to compete effectively. A number of firms, like National Motor Company, have encountered substantial difficulties in remaining competitive and profitable. Some continue to survive by paying more attention to innovations, efficiency and customer needs. In a number of cases local firms, such as Saudi Cable and Al-Zamil, have held their ground against attacks from the more aggressive Japanese, Korean and Taiwanese competitors. Moreover, such pressures are contributing to the growth of Saudi firms that are customer-oriented. Further emphasis along these lines will require marketing efforts and the design of products that serve local needs. In addition, the continued growth of local firms may increase the confidence of Saudi consumers in domestic production with a concomitant increase in demand for local products.

It is to be noted that some environmental changes that resulted in part from governmental policies in earlier phases of development are in turn influencing public sector planning. For instance, the revenue balance phase comes at a time when there have been substantial increases in the number of young people and of female graduates among the Saudi population. Both of these demographic changes were enhanced by the provision of free medical care and education, considerably reducing mortality and illiteracy rates. Recognizing these trends, the government is preparing to respond in two ways. First, it is setting up recreation centres and parks to channel the activities of young people in a positive manner. Second, the government is trying to create jobs for its female graduates. Although the sepa- ration of sexes at work is likely to continue in Saudi society, the presence of more women in the work- force will require new ways to serve the needs of this segment. The private sector is already responding to this challenge by designing banks and shopping malls for female customers staffed solely by women. Selective developments that are likely in the revenue balance phase are summarized in Table 4.

Successful Adaptations Two examples will help to illustrate how some companies have successfully responded to this highly regulated and dynamic Saudi environment as characterized by the spending phases.

Olayan Group Olayan is a large and diversified trading, services and investment Saudi organization with annual revenues well in excess of lbn riyals. During the revenue surplus period, Olayan rapidly expanded into construction, equipment and engineering services, transportation, real estate and the distribution of food products. Huge government projects

Corporate Strategy and Public Policy in Saudi Arabia

Table 4. Government strategies/actions and private sector/MNC prospects and responses in the revenue balance phase

Private Sector/MNC Government Strategies Government Actions Prospects and Responses

Q Continued emphasis on high- * Foreign projects and joint ventures * Technology transfer orientation tech development with a evaluated on a high-tech/technology Q Increased use of computer software for practical orientation transfer basis improving business efficiency

a Emergence of local technical advisors * Increased vocational training

Sr Calculated growth orientation Q Normal incentives * Rationalized markets b Feasibility studies of project impact on * Normal market orientation

environment, efficiency and ti Market demand stimulation in place of productivity automatic expected increases

~2 Selective growth * Selective marketing * Completion of a GCC common market * Consumer orientation

h Emphasis on regional market growth

$r Reduced dependence on oil and government industries

$7 Formation of semi-private firms * Growth in entrepreneurial activity 2r Increased share of private ownership of * Emergence of commercially active, local

public firms banks Q Decentralization of industry b Generation of local capital * Investment in new resources * Restructuring of promotion and

performance criteria

I? Increased emphasis on security

ti Purchase of security systems Q Military expenditure increases to

continue

I? Establishment of integrated security systems/supply and maintenance firms

b Revenue generation from non-oil sources

Q Export/import substitution orientation

* Control of critical resources

I? Emphasis on local consumption

* Increased fees on services * Prepare to cope with overhead and * Investment in mining, resource administrative cost increases/indirect

exploration and development taxation Q Downstream integration of petroleum ~2 Adjust to lower rates of return on

industries investment

Q Pressure on other sectors to relax Icl Search for growth markets requirements * Joint ventures with LDC firms, third

6 Favour joint ventures with the potential world countries to replace imported items and generate 12 Emergence of Saudi-based MNCs exports * Increase foreign direct investment to

Q Protection of fledgling industries compensate for cost increases in ~2 Increases in import duties/tariffs imported parts/products * Import quotas * Development of mature/competitive * Incentives for exports firms

Q Restrictions/caution on use of scarce ti Demand for water conservation resources equipment, sanitation facilities

* Water resource management

Q Further shift toward purchase of local d Increased use of local appeals for materials promotion of products

Q Promote demand for local products * Increase in local content of foreign manufactured products

b Reduced dependence on foreign labour

Q Re-thinking of contracts * Training of Saudi manpower Q Development of local manpower, * Demand for innovative, capital

increased incentives equipment projects * Support of capital-intensive projects * Demand for training programmes for Q Emphasis on public women

projects/participation schemes geared * Demand for equipment for female towards women workers

offered handsome profit opportunities and were handled, financed and completed in a remarkably short time through joint ventures with mostly U.S. and European partners. To capitalize on opportunities, the company used its reputation and government contracts to obtain new business. Although emphasis was on getting the job done rather than on cost efficiencies, enormous profits often resulted in pay-off periods of a few months or less.

With the onset of the revenue decline phase, Olayan made some rapid strategic adjustments:

* Cost reduction. These were mainly achieved by a reduction in manpower. Unlike many other companies, however, Olayan retained its quality personnel, assigned them additional responsibilities to handle any work load increases, and refrained from salary cuts. This policy helped maintain staff morale.

* Consolidation. Duplicative activities were reduced and utilization of existing equipment was improved by re-organizing and merging divisional units. For example, the Equipment

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Long Range Planning Vol. 22 August 1989

and Automotive Division was formed by group- ing three previously independent units with overlapping needs and functions. The re-organization reduced several workshop stations to one common facility under one general manager.

E~ciency-Performarlce improvement. Priority was given to an updated inventory system with an ABC analysis capability, performance appraisals, formation of purchasing committees and track- ing of product shipments. The availability and use of personal computers were expanded at the individual department and functional level and helped to improve efficiency and performance.

Disirlvestmetrt-Liquidatiotl. Such Olayan units as Saudi General Transportation Co. were disman- tled because of expected declines in business volume, increased competition and lower price margins. Several joint ventures were also liqui- dated, among them FMC-Saudi Arabia (joint venture with the U.S. firm FMC Corp. in electrical contracting, oil equipment and so forth), RSD Saudi Company (Dutch joint venture in mechanical construction), Saudi Lord Electrical Construction (Lord International, a U.S. joint venture), Owens Corning-Saudi Arabia (U.S. joint venture in construction), Interbeton Saudi (HBG Group, Holland), and Held & Francke (German joint venture in road construction and maintenance). Most liquida- tions were tied to depressed market prices and profits, increasing bureaucracy, problems with accounts receivable payments, and excessive competition. It is interesting to note that Olayan has continued its maintenance-oriented business (for petrochemical plants) by teaming up with Dcscon, a Pakistani-based third world MNC in the Dawood Group, replacing Mitsubishi, which dropped out because of lower profits.

As the Saudi economy moves closer to a revenue balance phase, a stabilizing era, Olayan has begun to respond in several ways. Al-Muallimi, president of Olayan, describes the company’s present thrusts as follows:

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Emphasize controlled growth by maintaining market share in urban markets, expanding in rural areas, and entering into potentially profitable emerging markets on a selective basis.

Continue to focus on efficiency by increasing automation, using computer technology, and offering training programs for labour.

Improve communication and build morale among employees.

Encourage and train locals to assume career responsibilities at Olayan.

Enhance customer satisfaction and service.

Maintain the quality of Olayan products and services while attempting to reduce costs.

* Shift to local manufacturing wherever feasible (for example, Olayan has begun production of Jello and paper cups).

* Subcontract services in which Olayan is not competitive (such as pest control by Ciba Geigy and waste handling by Kanoo).6

ISCOSA (Industry Services Company of Saudi Arabia) ISCOSA is a joint venture between Westinghouse Electric Corporation (75 per cent equity ownership) and a local Saudi firm. The company specializes in industrial services, such as the maintenance and installation of electrical and mechanical equipment in power stations and petrochemical plants. Formed in 1973, ISCOSA was able to establish a foothold by working closely with two major clients, ARAMCO and SCECO (Saudi Consolidated Elec- tric Company). The dearth of construction related equipment during the early boom period created demand for the repair and maintenance services offered by ISCOSA. It earned handsome profits by offering quality service and charging relatively higher prices. During the revenue surplus phase the company shifted emphasis from repair to testing and commissioning equipment at the construction site for government contractors, which substantially increased the demand for its services.

As the boom slowed, ISCOSA decided to revert to its original maintenance and repair business but with an emphasis on adding clients and new services. The latter included, among others, the re-winding of power transformers, repair of submersible motor pumps and maintenance of fire protection systems, elevators and industrial computers. This diversification strategy helped the company weather the shrinking market for construction services in the revenue decline phase. In this period of lower profits, ISCOSA contained costs by freezing wages and benefits and by reducing surplus staff while retaining key employees. In addition, for cost reasons, a number of U.S. expatriates in engineering and supervisory positions were replaced by other expatriates, mostly British. Encouraged by government policies, the company also gradually began the local manufacturing of industrial components, such as controllers, combustion baskets and mechanical parts. The rationale for this strategy is three-fold: (1) ensure maximum utilization of existing equipment, (2) reduce rising import costs, and (3) permit flexibility in engineering design and provide technical staff the opportunity to do creative work.

With the progression of the economy toward a revenue balance phase, ISCOSA is pursuing the following strategies.

A Re-invest profits to help finance the development ofnew service capabilities and new clients.

$r Maintain a strong customer orientation.


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Train Saudis for technical and supervisory positions.

Improve efficiency and scheduling work with the help of personal computers.

Subcontract jobs to other companies in areas where cost efficiencies cannot be accomplished by ISCOSA ( sue h as cleaning and janitorial work on projects which are handled by Ben-Sahil; heat exchange repairs are also subcontracted).

Agenda for Action These cases suggest how business can accommodate to a changing environment fueled by government actions and policies. Crucial to the success of these firms was the early identification of government spending phases and the formulation of business strategies in anticipation of shifting priorities.

As an agenda for action, companies could adopt the following steps.

(1)

(2)

(3)

(4)

Identify current and future expenditure phases by conducting a careful analysis of resource trends.

Delineate possible government actions during each phase.

Prepare industry/company outlook and prospects.

Develop company plans which are sensitive to and compatible with projected government plans and actions.

Under current conditions, some specific actions may be recommended for businesses operating in Saudi Arabia.

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Consolidate existing market shares.

Focus on selective consumer markets for growth.

Tap into rural and secondary markets.

Develop a portfolio of diversification strategies.

Carefully monitor cash flow and liquidity.

Build/maintain a strong quality image.

Develop a strong customer orientation.

Continually search for influential Saudi partners.

Establish performance and appraisal systems.

Stress efficiency and productivity improvement strategies.

Conduct extensive training programs to develop Saudi manpower and professional and managerial skills.

Instil motivation, confidence, and the work ethic among the Saudi work force.

Shift to local manufacture and assembly of products with export potential.

The importance of timing in these circumstances also requires that top managers pay careful attention to implementation, a phase recently described as the new frontier in corporate planning.’ Company success in implementing and adjusting strategic plans within the public sector framework could be facilitated by focusing on the following organizational characteristics and policies.

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Develop a rapid internal communication network.

Assign clear-cut implementation responsibilities to management.

Increase the ability of managers to cope with decision-making changes.

Establish a liaison with government policy- makers and officials.

Hire or train labour and professionals for multiple skills and with the ability to adjust rapidly to changing conditions.

Develop alternatives to government markets, sources of supply and resource funding.

Design a highly responsive and flexible logistical system.

Conclusion With its industrializing base and stable government, Saudi Arabia provides some insights into business strategies resulting from government actions. Furthermore, since it is a locomotive economy in the Gulf region, its policies will significantly influence the future development of and opportunities for business in those Middle Eastern and Asian nations that are wholly or partially dependent on the Gulf for their exports, expatriate income and oil imports. Examples are Pakistan, Bangladesh, Egypt, Sudan, the Philippines and, to a certain degree, India.

Saudi Arabia has experienced many phases of development in an amazingly short period. This has enabled us to observe planning at both the public and private levels through a single prism, providing a kaleidoscopic view of the effects and results of each stage of development almost simultaneously.

The three cyclical spending phases of revenue surplus, revenue decline and revenue balance, suggest that companies should seriously consider this framework in strategic planning. International firms that may encounter a changing environment as a result of rising and falling government revenues do well to devise time-responsive and contingency strategies. That is, they should develop plans that enable the firm to mobilize rapidly and exploit opportunities during high growth revenue phases and just as rapidly adjust during highly deflating revenue phases.

As Saudi Arabia continues to pursue a balanced


economy, that is, where profits are normal and competition intense,n a continuing appraisal of the Saudi case may provide further insights into the nature of strategic planning and implementation at the private sector level in this pivotal Gulf nation.

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References (7)

(1) I. H. Ansoff, CorporateStrategy, McGraw-Hill, NewYork (1965); K. Andrews, The Concept of Corporate Strategy, Dow-Jones- Irwin, Homewood, IL (1971); G. A. Steiner, Top Management Planning, Macmillan. New York (1969).

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Saudi Arabia 1973-1983, Newsweek, 30 May (1983); A. D. Johany. The Saudi economy: yesterday’s performance and tomorrow’s prospects, working paper No. 81d. University of Petroleum and Minerals, January (1981).

After shock: recession is bad for You, The Economist, GCC Survey, pp. 25-26, 5 February (1986).

Saudi Gazette, p. 1, 5 February (1987).

Fourth Year Plan of Saudi Arabia (1985-1990). 1, 41 (1985).

A. Al-Muallimi. President, Olayan Corp., Interview with Luqmani, April (1988).

8. Taylor, Corporate planning for the 1990s: The new frontier, Long Range Planning, 19 (6). 17, December (1987); J. Mason, Developing strategic thinking, Long Range Planning, 19 (3). 77, June (1986).

Saudi Arabia monitor, Business international. 4 (1 ), January/ February (1987).

corporate strategy and public policy in saudi arabia

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