Saudi Arabia is one of the world's wealthiest nations per capita and, through possession of a large share of the world's oil resources, an economic power. The economic success of Saudi Arabia is built in part on its comparative advantages and on overcoming its disadvantages. Although the government strongly supports the free market economy based on competition, Saudi Arabia is yet to succeed in global competition, but the relative decline in its competitiveness demands a reexamination of its national competitive advantages. This paper analyzes the competitive advantages of Saudi Arabia with Porter's model. Porter's model generates various alternatives for a nation to gain a competitive advantage. However, these alternatives are not prescriptive. The four factors of Porter's model are the basis for analyzing Saudi Arabian competitive advantage.

Copyright MCB UP Limited (MCB) 2001

Sajjad M. Jasimuddin: Lecturer in the Industrial Engineering Department, King Abdulaziz University, Jeddah, Saudi Arabia

Introduction

A substantial creditor to the rest of the world

The kingdom of Saudi Arabia is the largest country in the Middle East and the 12th largest in the world, measuring approximately 2.2 million square km. It has the largest gross domestic product (GDP) in the Middle East. The kingdom is still a substantial net creditor to the rest of the world and the government has almost no foreign debt. Saudi Arabia is dedicated to the concept of free trade based on competition.

The kingdom has yet to succeed in the fast-approaching global economic integration. In this rapidly changing global economy, it has become necessary for Saudi Arabia to use its comparative advantages in order to remain competitive. The relative decline in its competitiveness demands a reexamination of its national competitive advantages. In this article, the conceptual framework of Porter's model will be used to analyze industries and to identify the competitive advantage of Saudi Arabia. The research approach to this study was a descriptive survey based on the data selected from a variety of materials. The facts have been taken from secondary sources and documentations for reference purposes.

Porter's model

Four determinants of national average

In his book, The Competitive Advantage of Nations, Harvard Professor Michael Porter (1990) suggested the need for a new paradigm for analyzing the state of a country by identifying four determinants of national advantage. These determinants are factor conditions, demand conditions, the presence and absence of supporting industries, and the firm's strategy and nature of rivalry effects.

Porter (1990) made valuable contributions in identifying important factors that contribute to national advantage: the factor conditions of a nation, such as the infrastructure and the availability of resources; the demand conditions, which refer to the home country's demand for products and services within an industry; the presence or absence of related and supporting industries necessary for being competitive in the global market; and the firm's strategy, structure, and rivalry with other companies that influence how firms are established, organized, and managed (the nature of the rivalry affects the competitive advantage of industries and nations) (Porter, 1990).

The most favorable condition occurs when a nation uses its factors to take advantage of opportunities outside that nation. Every nation lacks certain factors to some degree and it is these problem areas that need to be overcome for the nation to take advantage of external opportunities. Porter's factor determinants of national advantage relate closely to a nation's strengths in industrial production and, consequently, to its leading industries. Therefore, trends in these determinants also predict to a great extent the nation's industrial competitiveness. Porter mentions that an industry can become competitive due to the proximity of the supportive industry around the cities.

Use their comparative advantages

In this rapidly changing global economy, it has become necessary for individual nations to use their comparative advantages in order to remain or become competitive and prosperous. Nations must optimize the use of their resources in light of their competitive disadvantages. This is the key aspect of Porter's model. Porter's approach will render a nation's business activities more feasible and efficient within the international arena through the proper identification and optimal utilization of each country's factor endowments, thereby promoting the nation's continued global success. The conceptual Porter's model will now be used for a broad country analysis of Saudi Arabia and for the specific analysis of selected industries to illustrate the practical application of the model

Analysis of the competitive situation of Saudi Arabia

Porter's model can be used as a conceptual framework for developing strategies for Saudi Arabia. The development of a strategy, be it for a career, a company, an industry, or a nation, requires a systematic analysis of the competitive advantages and disadvantages of the respective system (the nation in our discussion) which, in turn, operates within a larger environment. The first part of this section discusses Saudi Arabia and its industries in light of their competitive advantages in the macro-environment.

Saudi Arabia's competitive advantages

The competitive advantages of Saudi Arabia, like those of other nations, developed over a long time. Through the years, Saudi strengths have contributed to its current position within the Middle East and the world

Thriving business atmosphere

The Saudi government has built an excellent infrastructure within the space of two decades and this infrastructure has contributed markedly to the thriving business atmosphere in the country. In the past 25 years, the kingdom allocated approximately 1.2 trillion dollars for this purpose. There are no foreign exchange controls - capital moves freely in and out. There are no personal income taxes; there are ten-year tax holidays for manufacturing projects; raw materials and components can be imported duty-free and the protection of private ownership is established.

A very important consideration will be the state of the macro-economy. Saudi Arabia is one of the world's wealthiest nations per capita. The sharp rise in oil prices in 1973/74 and in 1980/81 contributed to an increase in GDP per head from $1,200 in 1972 to $16,650 in 1981. Reflecting the decline in production and price trends in the oil industry during the 1980s, GDP per head fell back to $5,500 by the end of the 1980s. It has remained fairly steady since the 1990-91 Gulf war, reaching an estimated $6,526 in 1998. The inflation rate has been low, by both regional and international standards. The average rate of inflation has been less than 1 percent over the last decade. The government's subsequent success in bringing the cost of living under control was achieved not only through stricter control of the money supply, but also through a policy of subsidising the prices of many commodities and services. Saudi Arabia is determined to pursue healthy macroeconomic policies to stabilize the internal and external values of its currency and to develop its capital market sufficiently to serve as a catalyst for development. The kingdom is determined to adopt a wise and rational financial policy

Increasing population

The population has been increasing by an estimated 3.2 percent per year, one of the world's highest rates. The size of the Saudi market is also attractive to investors since it is the largest market for goods and services in the Arab world. Moreover, it has access to markets in other Gulf Cooperation Council (GCC) and Arab countries through its participation in free-trade zones

There will be a need to look at the stability of the government and the political system. Despite a very few isolated incidents, for example, the bombing incident at a US military housing area near Dhahran on 25 June 1996 and the 13 November, 1995 car bomb that destroyed a military building in central Riyadh, Saudi Arabia is comparatively peaceful country free from all sorts of political and social unrest

A social factor that has strengthened Saudi industries over time is a home market that demands quality. One of Saudi Arabia's strengths is the consumers' demand for high quality products. This demand provided the impetus for the establishment of Saudi leading industries today. A home market that demands quality from its domestic manufacturers creates an atmosphere of expectation for high quality exports to the rest of the world.

Economic factors can best be discussed by focusing on Saudi key industrial strengths. The evolution of Saudi assets, both human and capital resources, provided the pathway to preeminence in the engineering, chemical production, machinery, and banking industries

Strong anti-trust legislation

Some important economic factors contributing to Saudi strengths include strong anti-trust legislation; low entry barriers to business; and development of common standards which promote exports. Saudi antitrust legislation and the generally low barriers to entry in many industries have led to productive competition in Saudi's stronger industries. This competition has allowed Saudi productivity to increase. Furthermore, by working closely with the International Standards Organization (ISO), Saudi Arabia is now at the fore-front of developing standardized guidelines for industrial exports. As export standards become more firmly entrenched, Saudi exports should benefit. Commitment to capital investment has also enabled Saudi Arabia to maintain its position in the very competitive petro-chemical industries. Saudi commitment to capital investments in machinery and the low entry barriers within that sector helped create Saudi's powerful machinery industry. Saudi infrastructure provided outstanding support for the growth of capital intensive industrial expansion. Saudi Arabia is presently providing for its modernization which, among other things, will have the most modern telecommunications and industrial infrastructure in the whole of the Middle East.

Porter pointed out that five competitive forces determine industrial profitability:

(1) threat of new entrants;

(2) bargaining power of suppliers;

(3) bargaining power of buyers;

(4) substitutes; and

(5) rivalry among existing competitors (Porter, 1990).

Demand determinant

He further noted that the demand determinant promotes clustering of a nation's competitive industries. This demand determinant has, in part, made the industrial makeup of Saudi Arabia unique compared with those of most of the Middle East's industrial powers. Saudi industrial uniqueness also arises from the plethora of medium- to large-sized companies which make up the backbone of export prowess of Saudi Arabia. Intrinsic economic factors affecting Saudi industrial productivity include unlimited natural resources (e.g. oil, gas, industrial metals etc.) vast arable land, and cheap energy costs of Saudi Arabia. The following economic trends are also apparent in Saudi industries:

- rapid productivity growth;

- positive growth in per capita income;

- increasing world shares of most industries; and

- availability of domestic investment.

Competitive advantages of Saudi Arabia can be found in various sectors. Saudi Arabia is becoming one of the largest producers of precious and industrial metals in the world. Saudi Arabia's proven oil reserves are estimated at some 263 billion barrels, with enough reserves to ensure that it will remain a major supplier of oil for at least 100 years. The kingdom's vast oil reserves, which dominates the Saudi economy, presently constitute approximately 26 percent of the world's total. As the world leader in proven reserves as well as in production and exports, Saudi Arabia relies heavily on oil. But while oil is, and will continue to be, an important source of revenue, the kingdom increasingly is looking to natural gas as a means for sustained industrial and economic growth into the twenty-first century. The kingdom's proven gas reserves stood at 204 trillion cubic feet in 1997, the fifth largest in the world. An energy source that was once wasted has been transformed into the backbone of Saudi Arabia's vast and growing industrial sector. As an example, in 1997, the Saudi Basic Industries Corporation (SABIC) facilities alone converted natural gas components into some 23 million metric tons of chemicals, plastics, fibers, fertilizers and steel products worth $6.4 billion.

Powerful economic sector

In fact, the chemical sector is Saudi Arabia's most powerful economic sector after the oil sector. They also have a commanding presence in the machinery sector. While oil and chemical firms are certainly important to the overall industrial success of Saudi Arabia, some larger firms also contribute to Saudi internal strengths. One of Saudi Arabia's premier corporations is Arabian American Oil Company (ARAMCO), the giant in the oil and chemical fields. The Saudi Arabian chemical industry is characterized by a high concentration of large-sized companies including SABIC.

The Saudi industrial sector continued its trend of strong growth with a rate of 8.6 percent in 1997, compared with 9 percent in 1996, and 7.5 percent in 1995. Over the past two decades there has been enormous growth in the number of industrial plants operating in the kingdom. In 1975, Saudi Arabia had about 470 industrial plants with overall investment estimated at $2.7 billion. By October 1997, the total number of factories in the kingdom had reached 2,481, with a total investment of about $43 billion (see Tables I and II). These plants manufacture a wide range of industrial and consumer goods for the domestic market and export 23 billion riyals ($6.13 billion) of products to 118 countries annually.

New phase of development

Saudi Arabia is now entering the new phase of development by shifting from a public sector driven economy to one in which the private sector becomes the engine for growth. The kingdom has already accelerated the privatization drive in various key sectors. Private companies are being encouraged to enhance their participation in infrastructure development, including power, water, sanitation and public transportation. Some aspects of port services as well as the postal system are already under private management. Telecommunication liberalization may bring many opportunities for industrial expansion into these services, as well as increased efficiency of information flow among industries. It is encouraging to note that Saudi Telecom, which is the only telephone company here, has begun to be privatized. However, there remains some uncertainty regarding the regulations that will govern competition with other firms. Saudi Arabian Airlines is already considering privatization and has begun studies in this connection.

A strong banking sector

Saudi Arabia's banking sector is strong and is not susceptible to negative influences from the world financial crisis. The Saudi banking system is one of the strongest in the world. Saudi commercial banks are capable of confronting any challenges posed by negative developments in the international banking system.

Another advantage of Saudi Arabia lies in the distinct labor-management relations. Trade unions are illegal in Saudi Arabia, and there is no minimum wage. There is no labour unrest in the kingdom. Since 80 percent of the total labour force in the kingdom are non-Saudis, there is no scope for labour unionism. While these unique labor-management relationships have helped prevent strikes in the past, there is no pressure for wage increase, which can make Saudi companies more competitive in the global market.

Saudi competitive disadvantages

While most Saudi industries remain viable, weak areas also exist and must be addressed. One important factor that makes Saudi companies less competitive in the world market is the complacency of businesses and their slow response to the changing environment. Some business people believed that prosperity had come to an end.

Saudi Arabia has been incurring large budgetary and balance of payments deficits since 1983. The Saudis' post war decision to double their armed forces and to acquire more sophisticated military equipment will exacerbate their long-term financial problems (Kanovsky, 1992). In September 1994, the IMF highlighted Saudi Arabia's rising burden of domestic debt, which had reached $84.9 billion by the end of the year. The 1995 budget introduces higher charges for public services for the first time in recognition of the importance of reducing the huge budget deficit. To participate successfully in the fast-approaching global economic integration, Saudi Arabia will need to control its budget deficit.

The major problem faced by Saudi banks is that there is no secondary market where they can resell these instruments to raise cash. The stock market is still undeveloped; many new issues are waiting to come to the market.

Lagging industries

Shortcomings in Saudi business attitudes and capabilities have also resulted in the lagging of industries such as steel and consumer electronics. Another Saudi weakness is the lack of skills and expertise in the new sciences (e.g. semiconductors, fiber optics, telecommunications, software, and biotechnology). In addition to skill, there are shortages in good secretarial skills coupled with sufficient English-speaking skills. There have been few breakthroughs in new fields of scientific work. A weakness also exists in certain technological areas like electronics and computing, which exposed these industries to foreign competition. Saudi Arabia's future prospects in engineering do not look too promising either.

While various regions of the world do provide opportunities, they also pose threats to Saudi Arabia. For instance, the GCC seeks to achieve four fundamental freedoms: the freedom of movement of goods, services, capital and persons. The economic integration of the GCC member states may create opportunities for Saudi industries to expand. But at the same time, the integration may bring increased competition from outside Saudi borders as well. The strategic merger by transnational companies may weaken the competitiveness of Saudi industries.

Saudi Arabia is already at a disadvantage due to its high social costs. The country is also beset by huge financial requirements for its its high social costs. High levels of unemployment add to this burden.

Strategies for Saudi Arabia

A set of strategies should be considered

In light of the competitive advantage and disadvantage of Saudi Arabia, a set of strategies should be considered. Michael Porter suggested that corporate rivalry contributes to a nation's competitive advantage (Warner et al., 1995). The Saudi oil export-driven economy relies on gaining and maintaining market shares in many foreign markets. Saudi exports account for 24 percent of its GDP, most of it coming from oil. The long-term objective of the Saudi government's industrial policy must be to diversify the kingdom's economic base and to reduce its dependence on the export of crude oil. Although Saudi Arabia has greatly reduced its dependency on oil in the past two decades, there is still a long way to go. This abundant energy resource can be made available to develop domestic enterprise, to attract international investors and to diversify the Saudi economic base. While some industry remains of an import substitution nature, more of it must be export oriented so as to create a considerable scope for export finance business.

The kingdom should expedite the program of privatization, encouraging wholly owned foreign investment, and restructure its company laws. An extensive effort is needed to join the World Trade Organization (WTO) in order to provide more opportunity for its private sector and enhance its attractiveness to foreign investors. Manufacturers in Saudi Arabia may implement Japan's just-in-time and total quality control methods in an attempt to minimize threats from foreign competitors.

Increase presence in Asia-Pacific

The Saudi businessmen should increase their presence in Asia-Pacific and also should consider setting up companies in developing countries to exploit cheaper labor costs. More and more companies should go for mergers so as to reduce the threat from the giant transnational corporations. The Saudi American Bank (SAMBA) and the United Saudi Bank (USB) merger has been completed, the largest of its kind to date in the Middle East. It would be the second largest private bank in the Middle East, the most highly capitalized (US$ 5.6 billion) in the region as well as the most profitable.

In order to compete in the domestic and international markets, industry should increase spending on research and development (R&D), both independently and in cooperation with universities and research institutions in Saudi Arabia and abroad.

Another solution for Saudi companies may be to "insource", or take back the work from suppliers. In fact, some companies have recently moved away from outsourcing and begun "insourcing" instead.

Conclusion

In this paper, the methodology of Porter's model was demonstrated by using Saudi Arabia as an example. Undoubtedly, the oil sector has helped Saudi Arabia gain and maintain its competitiveness. Moreover, Saudi industrial strengths in gas, chemicals, machinery, and banking are important contributing factors to the nation's success. However, the relative strengths in many of these industries have started to diminish. Furthermore, its disadvantages, the relative slowness in innovation, the lack of skills in the new sciences of semiconductor, computers, software, and the bio-technologies, and other problems in industries such as electronics, and steel, indicate the need for transformation. So what are the reasons for Saudi Arabia's prosperity despite such shortcomings? While strategies based on the factors shown in Porter's model are important, it is the combination of the strengths and opportunities and the total socioeconomic system that has ultimately contributed to Saudi Arabia's success. Although the huge budget deficit aggravated by the costs of the Gulf War has been running at unsustainable levels, the economic shock after the Gulf War may have been the best thing that happened to Saudi Arabia. Saudi Arabia is now considering restructuring more seriously. Government officials are now recognizing the problem with globalization and justifying cutting social benefits.

Useful framework

Although Porter's model provides a useful framework for analyzing the environment, especially the economic one, and this article focused on the practical application of Porter's model on Saudi Arabia, other countries may also benefit from generating strategies for maintaining or gaining competitive advantages in the global market. However, it is clear that the Saudi Arabian socioeconomic system cannot be easily duplicated by other countries. Nevertheless, national competitive analyses and a systems approach will account for what is best for the country being considered.

This analysis of the competitive situation of Saudi Arabia is mainly descriptive and does not necessarily result in the formulation of alternative strategies. A different analysis for developing Saudi strategy for survival in the competitive global market can be accomplished by using concepts from strategic management - namely, the strengths, weaknesses, opportunities, threats (SWOT) matrix. This approach does not contradict but, rather, supplements Porter's analysis.

Executive summary and implications for managers and executives

Competitive advantage - Porter's model plus

Michael Porter's work on international competitiveness produced the first real challenges to classical economic thinking about international trade and national advantage in over 100 years. Prior to Porter's work most of the criticisms of "comparative advantage" and other elements of classical trade theories has arisen, via Marxism, from the left. Most of these criticisms sought to demonstrate that Riccardo's "comparative advantage" idea - trade as a win-win situation for every nation - was weak in some way.

What resulted was (and we still see it from the anti-globalization brigade) a belief that international trade is a zero-sum game. There is only so much to go round and therefore some nations win at the expense of others. Leaving aside the fact that this argument is false - trade increases the size of the cake so everyone makes gains - the resulting national strategies (import substitution, protection of domestic markets and "national champions") served much of the world very poorly.

Porter's work did not seek to deny the benefits of free trade but to identify the factors within a nation that contribute to economic growth and development. As a result, public policy can focus on creating the environment for trade success and put an end to trying to second-guess business performance. Indeed, the importance of domestic competition underlines the reasons for the failure of many nations' industrial policies and strategies.

The case of Saudi Arabia - a lucky country

Jasimuddin describes how Saudi Arabia is struggling to break away from being an economy almost wholly dependent on the export of oil. Indeed, we could argue that oil has been both a blessing and a curse for Saudi Arabia. The money from trading in oil has provided the kingdom with the wherewithal to invest in industrial plant, to attract skilled people to work in them and to develop a modern infrastructure.

At the same time as the kingdom has realised these benefits from oil, it has suffered from complacency brought about by the value of raw material assets (chiefly oil and natural gas) and also has to work within a volatile and difficult international oil market. Furthermore, Saudi Arabia has recognised the lack of stability within the Middle East and has invested very heavily in sophisticated military technology. The result of these investments and fluctuations in oil prices have brought about a series of substantial budget deficits - something that would not have been the case prior to the Gulf War.

Having said all this, however, we must recognise that Saudi Arabia is a lucky country. The challenge is to make sure that the benefits from oil create a sustainable economy with robust, private businesses and strong local demand. It is this shift from public sector control of the economy to private sector leadership that must take place if the kingdom is to achieve its aim of a diverse, competitive economy. As Jasimuddin notes, there is a need for changes to the way in which the Government regulates and controls companies if the element of local "rivalry" (identified as an element of competitive advantage by Porter) is to develop. Without competitive domestic markets, international advantages are hard to realise.

Applying Porter's model - some thoughts and lessons

Jasimuddin shows how the assessment of advantages and disadvantages drawn from Porter's model of competitive advantage can work well in an immature economy such as that of Saudi Arabia. What we need to consider is how we apply the model in more complex and mature economies such as those of Europe and North America.

Economic success depends - according to Porter - on hard factors such as infrastructure, resource availability, local demand, supporting industries and competition within the domestic economy. All these can be measured with some degree of confidence for developed economies. Porter's model can be applied quite effectively to the UK, France or Switzerland.

However, one resource that becomes harder to measure is the availability of skills, the levels of education and the cultural orientation towards trade and entrepreneurship. At one level we could argue that the strength of the US economy now depends as much on social factors as on questions of resource, competition and infrastructure. Jasimuddin, in talking about Saudi Arabia, argues that the socio-economic environment of the kingdom is a vital element in driving development.

The main lesson, therefore, is that Porter's model seems incomplete - it is a good diagnostic tool but does not always provide the guidance needed to develop economic and industrial policies. Any application of the model needs the addition of a qualitative assessment of the cultural, social and educational factors that contribute to economic success or failure.

(A precis of the article "Analyzing the competitive advantages of Saudi Arabia with Porter's model". Supplied by Marketing Consultants for MCB University Press.)

References

1. Kanovsky, E. (1992), The Economic Consequences of the Persian Gulf War - Accelarating OPEC's Demise, The Washington Institute for Near East Policy, Washington DC.

2. National Center for Financial and Economic Information (1998), Ministry of Finance and National Economy, Saudi Arabia

3. Porter, M. (1990), The Competitive Advantage of Nations, The Free Press, New York, NY.

4. Warner, J., Templeman, J. and Horn, R. (1995), "The world is not always your oyster", Business Week, 27 November.

Further reading

5. Al-Farsy, F. (1986), Saudi Arabia: A Case Study in Development, New York, NY.

6. Arabian American Oil Company (1980), ARAMCO and Its World: Arabia and the Middle East, Washington, DC.

7. Farr, M. (1990), "Corporate strategy: the giant aroused", International Management UK, March.

8. Jacob, R. (1995), "Introduction to Fortune's global 500 - the world's largest corporations", Fortune, 7 August.

9. Looney, R.E. (1990), Economic Development in Saudi Arabia: Consequences of the Oil Price Decline, JAI Press, Greenwich, CT.

10. Kanovsky, E. (1994), The Economy of Saudi Arabia: Troubled Present, Grim Future, The Washington Institute for Near East Policy, Washington DC.

11. Weihrich, H. (1982), "The TOWS Matrix - a tool for situational analysis", Long Range Planning, Vol. 15 No. 2