Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Identification of Local SMEs’ Development Barriers in Food Service Industry in Kingdom of Saudi Arabia (KSA), The Western Province (2012) By/ Reham H. Al Zahrani

Abstract
This paper examines the actual situation of SMEs performing in local food service industry in Kingdom of Saudi Arabia (KSA). It focuses basically on critical issues that disturb the development of local SMEs. The adopted theoretical framework is SME’s vicious cycle in which all enterprise’s factors are to be investigated. The results were collected from 19 enterprises which are mainly located in the most vivid economic cities in the western province in KSA. The most crucial barriers identified in this research are labor-related issues, product quality issues, governmental issues, marketing issues, business regulation issues, financial issues, competition issues, and technological issues. Finally, the paper provides some recommendations to overcome or minimize the influence of these constraints in order to empower SMEs in Saudi restaurants industry to grow and reach their ultimate potentials.

Key Words: SMEs, barriers, Saudi, KSA, Food Service Industry, Restaurants, development, growth.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Introduction
Food service industry is one of the most active and productive industry in the national private economy in Kingdom of Saudi Arabia. This particular sector has achieved recently focused attention due to its fast growth compared to other similar markets in the area. The value of investment in the food service industry is expected to reach $29 billion by the year of 2014. Besides, small and medium enterprises occupy 97% of the whole sector regarding the amount of the capital invested in the sector which does not exceed 1 million Saudi Riyals by each enterprise1. The importance of this study is derived from the role of the food service industry by participating to one of the most significant sectors in the Saudi National Economy; private sector. It provides plenty of work opportunities. Also, it creates golden opportunities for investors with low or medium financial capabilities. Moreover, it is important study because of the services provided by the sector for the huge population, Saudi and non-Saudi, citizens and residents. Nevertheless, the available information and data about the food service industry in KSA is too weak and superficial compared to the vivid current status of the market. As a result, this study could contribute to build a data bases and reliable information for the restaurants’ sector in KSA. As much as the promising future of the food service industry in KSA, it is very obvious how much hard the road of entrepreneurs is to develop their own projects in this sector. In spite of the special treatment that Saudi Government offers to the food service industry, it still suffers of many different barriers which disturb the growth of enterprises or slow their development process. Regarding all efficient factors of a project which enable it to perform properly (management – marketing – human resources – finance – etc.); a project may have more than one barrier in each section of its components which hinder its development. As a result, this transversal investigation is deemed to detect the most hindering reasons behind the slow development of local SMEs in restaurant industry in KSA.

1

Council of Saudi Commercial Chambers 2010

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Research objectives:
This study’s general objective is to participate in building a well-data base for food service industry in KSA, and to draw a big picture for the investors about the current status of local restaurants’ industry, it aims to help them to capture the opportunities of investment created from the gap between the ignorant investor and the knowledgeable one. Besides, it is deemed to achieve some sub-objectives: 1-To provide a situation analysis of Saudi food services industry’s characteristics and SMEs characteristics as players in the market. 2-Identification of local SMEs’ development barriers in food service industry and the future challenges 3-Provide recommendations to overcome identified barriers in order to reach the ultimate potential of the local SMEs performance.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Economy in Kingdom of Saudi Arabia
By the end of 2011, Saudi economy has achieved significant numbers regarding its gross domestic products index compared to other countries all over the world which have passed through sever economic crisis. The primary estimates referred to 6.77% increase of GDP at 2011. The GDP of 2011 has reached 938 billion of Saudi Riyals in front of 875.8 billion of SR at 2010. Remarkably, the total GDP of the private sector has fulfilled positive growth about 8.28% compared to 2010. This growth reflects what private sector has witnessed considering positive increase in different economic activities especially in manufacturing industrial activities and construction activities. Apparently, most of these successes are results of the complete stability of economic environment and the increase of the oil value. Definitely unforgotten is the role of Saudi Kingdom as the biggest exporter of oil in the OPEC group (Organization of Petroleum Exporting Countries).2 All these indicators emphasize the important and continuous role of private sector as essential partner in the development process which takes place in every economic sector in the country, where the food service sector is one of them. Moreover, private sector participates to economic bias and the national income resources in the Kingdom. It is important to mention the most current changes at 2011 in Saudi Economy. For example, the Saudi government has decreased the interest value; inject new liquidity in the banking system; reduced the level of reserve requirements for banks' capital; founding of the Saudi Company of Technical Development and Investment; allowing GCC companies to open branches in the GCC; and other positive changes which pave the path for SMEs to flourish and develop.

Because of the Saudi financial position which is anti-economic fluctuations, imposing an atmosphere full of trust has been enforced in private sector. Besides, salaries and wages have been increased in public sector which enforces private personal consumption. Meanwhile,

2

General Statistics and Information Department’s estimates, Yearly Report of National Economy 2010-2011

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

expenditures on infrastructure has been increased which encourages private sector to reinforce investments. At 2011, king Abdullah with his council has set up some systematic decisions to develop Saudi Economy. Apparently, these decisions have direct effects on economic itinerary , on citizens, and on business community such as redistribution of income; cut off poverty by enforcing inferior levels in society; higher life level of Saudi citizens by increasing incomes, providing residences, and improving educational opportunities; increasing power of purchase of citizens which leads to increase the demand which also leads to more production, selling and profit for private sector; and decreasing of unemployment average of youth for more social stability. The indicator of Saudi GDP per capita can reflect the financial status of citizens in the recent period of Saudi progressive Economy, or at least estimate the closest amount of Saudi individual’s income average yearly. So, ASPAR Center of Arabic Studies and Researches has recently declared different Arabic GDP per capita last year, and the Saudi GDP per capita of 2011 was one from the countries with highest GDP per capita. It reached 87.277 Saudi Riyals yearly after it was 63.600 Saudi Riyals in 2010 and increase of 15.3% of its value in 2009. This study was based on international Monetary Fund’s and World Bank’s results of Arabic GDP per capita of 2011 which was estimated to reach 81.200 Saudi Riyals. (See Figure 1) 3

3

Source: http://www.asbar.com/ar/

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Eventually, the standing feature of Saudi Economy at 2011 was its notable position on different international scales that appreciated the Saudi economic policies. First of all, Kingdom of Saudi Arabia was arabicly the first and internationally the twelfth in term of doing business easily. Moreover, the report of Transparency of Doing Business has defined KSA as the twelfth transparent among other 183 different countries due to the recent improvements on administrational procedures to commence projects. In addition, in term of the power of financial center of countries, KSA was arabicly the first and internationally the twenty third as the most powerful financial center at 2011. It could be said that banks’ stable economic power, Saudi currency system, being away of sovereign debts, and low cost of doing business in KSA are all causes behind the strong financial position of the kingdom. 4 To conclude, Kingdom of Saudi Arabia is the largest free market in the Middle East. Its economy is distinguished by its fast response to different economic changes internationally, regionally, and locally. It is one of the most fast growing countries in the world.

Small and Medium Enterprises in Kingdom of Saudi Arabia
The importance of small and medium enterprises in economic development and future tactic is derived from their role in augmenting employment capacity, and their contribution to the added value of the economy where creation of free economy mechanism is crucially important. This section is allocated to demonstrate the SMEs’ concept in and their current situation in Saudi market.

SMEs’ concept in KSA
Because of the manifest influence of SMEs’ performance on Saudi economy, many researches have been devoted to study this emerging market of SMEs to shrink their

4

International Monetary Fund, World Economic Outlook, January 2012; the World Bank, Doing Business: Saudi Arabia, 2012/ World Economic Forum, the Global Competitiveness Report 2011 – 2012

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

growth barriers, and magnify their benefits. Unfortunately, a huge obstacle hinders researchers’ works because of the absence of an official definition of SME. Similar situation was spotted in KSA when SMEs had contributed in a considerable portion of the total GDP of the kingdom. In order to enable the kingdom of Saudi Arabia to adopt a general strategic framework of small and medium enterprises’ development, it is mandatory to identify a unified definition of small enterprise. The Saudi definition of small enterprise was framed in light of some important aspects which are necessary to get accurate and usable definition of SME. The definition is related to current available Saudi data; it is easy-understood, usable, based on Saudi social economic facts, and modifying-accessible to economic changes. Thus, the criteria used to identify the general definition of Small enterprise were labor criterion, invested capital criterion, technical advance criterion, production value and volume Criterion, and raw material’s value and volume criterion. So, the proposed definition is not definitive, it is flexible to go along with different industries and economic changes. In the light of Saudi approach, small enterprise was defined as following:

 Small enterprise is a project that employs no more than twenty workers, capital invested is less than a million Saudi Riyals, and its yearly revenues are less than five millions Saudi Riyals.
The definition was framed this way to include many different industries, and the three criteria in the definition are deemed to be available and measurable so that it could be applicable in SMEs researches. The most importantly, the main rule to apply this definition is to identify the economic sectors which must be excluded from one criterion or more of the definition’s criteria. Some industries have special particularity that affords their small enterprises the exemption from or more of the definition’s criteria. For example, small projects in construction sector are exempted from labor criterion; other small projects in wholesale trade sector are exempted from revenues’ criterion; and other small projects are exempted from required capital criterion such as in industrial sectors.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

SMEs’ status in KSA
Clearly, SMEs show significant contributions to Saudi national economy. These contributions are high lightened because of SMEs’ positive phenomena such as; simple productive technology which allow the increase of labor employment, geographical spread of SMEs which helps to minimize the regional disparity in KSA, providing products and services for limited-income owners, providing work’s opportunities for some population’s categories who are unqualified to work in the big advanced business sector, supporting bigger firms by distributing their products or supplying them with production requirements, contributing to the economic structure diversification through their various and dissimilar activities, and helping to develop the secondary cities in KSA which contribute to minimize the intensity of urban concentration. Accordingly, SMEs’ market is promising orientation of Saudi economic performance. According to Saudi official statistics, 92.7% of the total numbers of small enterprises in KSA are contributing 28.7% of Saudi total GDP. Next schedule (figure 1) shows the distribution of enterprises and worker numbers in term of worker’s volume categories.

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Source: Saudi Credit Bank “Growing Small Enterprises Sector 2002”, General Statistic Department .

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

It is obvious in the schedule that 92.7% of the total numbers enterprises employ no more than 10 workers, whereas 96.8% of total enterprises has no more than 20 workers, and this certain category of enterprises represents 24.7% of the total number of workers in Saudi enterprises sector at 2002. In order to obtain a general, short and accurate description of SMEs’ recent status in KSA, certain factors that affect SMEs’ performance and growth will be briefly analyzed in the next sections:

Economic support for SMEs: Currently, there are few official sides which are devoted to provide loans with governmental guarantee to entrepreneurs. Previously, there was a study proposed by commerce ministry clarified the volume of financing issues faced by SMEs. Now, there are three governmental sides where SMEs can get loans, besides of Saudi banks’ positive offer “Takaful”.6

Current dealing structure: There are many official sides that deal with small enterprises to extract licenses in term of the project’s intended activity. Some activities need licenses from more than three official sides (Municipal - Commerce Ministry - Civil defense). This way of dealing causes confusion and weak ability of movement to SMEs.

Work environment: A suitable environment for SMEs better performance is rarely available. Big firms whether they are incubators or service providers are too scarce. The lack of

6

Takaful is a co-operative system of reimbursement in case of loss, paid to people and companies concerned about hazards, compensated out of a fund to which they agree to donate small regular contributions managed on behalf by a [Takaful Operator]. It is defined as an Islamic insurance concept which is grounded in Islamic muamalat (Islamic banking), observing the rules and regulations of Islamic law. (Wikipedia)

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

governmental pressure and official movement towards encouraging this particular industry is affecting the progress of SMEs in KSA. Without a general policy to develop and enforce the sector, SMEs will struggle of big firms’ monopoly. This is why cooperation had been imposed by the government recently to push the big firms and encourage SMEs, so that they can contribute to the added value for Saudi economy. Recently, Saudi government a public nonprofitable firm which provides consulting services, but still not enough to cover the whole market demand of cooperation and encouraging.

An ability to compete and go on: Even though SMEs are struggling of unfully suitable environment to work, but they succeeded in penetrating the market and prove their existence in Saudi economic scene. On the other hand, Most of SMEs in KSA ignore the magnificent role of marketing function. So they could compete to some limit, but later they miss the forward move of the market.

Current SMEs’ growth: Recent statistics show the growth volume in Saudi Economy of SMEs relative to the population growth. The following schedule (Figure 2) is considered a general indicator of economic activities in KSA.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

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The numbers in the schedule show that there is one commercial record per 46 citizens in 2003, where there is one commercial record per 44 citizens in 2007 which refer to notable growth inside the private sector by investors activities. Moreover, the same results could be extracted from the schedule where most of services and industrial sectors grew faster than the Saudi population growth.

Internet and its effect on practicing style: Currently, KSA experience of the internet technology in economic purposes is considered new. Thus, many investments had been devoted to develop and enrich this experience, but issues of timing and costs are crucial to avoid wasting time which could cause loses to Saudi economy. Definitely, there is a demand to develop this sector quickly to ensure e-services culture and availability, and the most important is tom empower and guiding SMEs to beneficiate of the internet services with less costs and higher quality.

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Source: Council of Saudi Chambers, Ministry of Planning Symposium “Growth and development of Saudi small and medium-sized enterprises : Vision for the future until the year 1440”

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

World Trade Organization and KSA’s membership effect on SMEs: KSA’s joining to WTO is considered a subject of concerns for many economic sectors. This accession allows outer competitive companies to enter Saudi market and compete which can lead to eliminate local commercial agencies. Also, there is a huge threat of technical sectors’ entry where the competition can get so fierce, especially in the area of technical services across the borders. Now, trading easiness and abolition of customs barriers are signs for coming competition which requires the ability to confrontation and creation of possibilities so as not to cause discontinuity and therefore economic disaster to SMEs.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Literature Review
Many recent researchers have devoted their studies to the domain of small and medium enterprises issues because of the significance of such a kind of a business. The major aim of all relevant previous studies is to ensure the development of SMEs throughout different sectors in different locations. In this section, barriers of SMEs development which have been investigated previously will be exposed briefly and selectively according to other authors’ points of view about their SMEs’ barriers classifications. First of all, Will Bartlett (2001) argued that small sized firm has a bonus opportunity to increase its growth rather than large scale firm. As Hart (2000) observed that “most studies relating to periods since 1885 show that small firms grow more quickly than larger firms”. This fact has many explanations such as uncertainty of small firms about their costs which leads them to enter the market below the minimum efficient limit and by time they reach growth (Jovanovich, 1980); adaptability and flexibility of small firms (Bartlett and Francevic, 2001); small firms does not suffer of diseconomies of scale (Penrose, 1980); and finally, exogenous shocks of the market which do not affect small firms deeply (John, Conway and Kettuman, 1999). Bartlett (2001) therefore classified the barriers of small firms development into: institutional barriers which combine the legislative framework, corruption issues, and the external market position of the firm; financial barriers which sum up capital availability and its cost issues; internal organizational barriers which include managerial capacity and capability, firms’ objectives, principal agent difficulties and skills; and social barriers which deal with the support or lack of support from local actors and agencies (Bartlett, 2001). In 2004, SMEs’ barriers were divided into two main categories which is considered to be too wide: internal and external barriers. An experimental research on global export market had been conducted by Leonidas C. Leonidou (2004) concerning the growth of SMEs performing in this sector. Thus, internal barriers are meant to sum up all organizational resources and capabilities issues, whereas external barriers are deemed to discuss the home and host environment in which the firm perform (Leonidou, 1995a). As a result, internal barriers include

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

three sub-categories of SMEs barriers which are informational, functional and marketing issues. Meanwhile, external barriers include four sub-categories of barriers which are procedural, governmental, environmental, and task issues (C. Leonidou, 2004). Another classification of SMEs’ growth constraints were found in study focusing over developing countries. This classification adopted Ansoff’s framework (1965) to begin and keep a successful business by solving common problems. This framework divided SMEs barriers into administrative, operating, strategic, and exogenous (Harris and Gibson, 2006). In details, administrative issues deal with organizational structure and its capabilities to get resources such as personnel, finance and management issues. Operating barriers include issues of marketing, operations, and inventory management. Strategic barriers involve a business owner ability to catch the demand conditions of the external environment (Harris and Gibson, 2006). Exogenous barriers are deemed to focus on other kinds of issues such as infrastructure issues, corruption, technological issues, and demand conditions (Okpara and Kabongo, 2009). The results of Okpar and Kabongo research (2009) gave rise to financial constraints, management issues, corruption, and infrastructure issues as main hindrances of SMEs’ growth in developing countries. Remarkably, these main issues which disturb the growth of such enterprises are correspondent to other researchers findings (Tushabomwe and Kazooba, 2006; Mambula, 2002; Kiggundu, 2002; Koop, de Reu and Frese, 2000). Besides, a presence of a huge gap of information availability between business service providers and entrepreneurs is certainly a significant issue which negatively affects the enterprise performance locally and abroad (Okpara and Kabongn, 2009) Unfortunately, the cultural side of barriers was not investigated sufficiently. Some cultural features could influence SMEs’ performance and growth positively or negatively depending on the feature itself and its implementation. There is a study conducted in China in which cultural effect was investigated to discover its influence on project management, but not its development (Wang and Liu, 2007) Their literature review shows the main four cultural barriers which are the doctrine of the mean, family consciousness, and boss orientation, strong hierarchy. The study revealed that the strong Chinese values are standing for family consciousness, boss orientation and strong hierarchy; these are considered to act as the major

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

obstacles of project management (Wang and Liu, 2007). So, it could be said that a project have cultural side which have effects on projects’ development, and it could be demonstrated according to Hofstede’s Theory of Nations Cultural Dimensions. The most efficient classification of SMEs barriers is Dasanayaka’s (2010). The classification of barriers is set up of project different functions. In this classification, all project functions are supposed to suffer of weaknesses or absence of required skills or advantages or any supportive feature that cause success. According to Dasanayaka (2010), all functional departments of a project have barriers that disturb the progress of SMEs, but the aim of the study is to find out the correlation between these functional barriers (cross-functional investigation). It has a deep overlook at the growth issue and providing a coherent analysis of hindering barriers of SMEs. In his study, SMEs growth constraints were classified according to theory of SME’s Vicious Cycle in which all components of a business will be detected (figure 3). This current study of food service industry will apply the same theory of SME’s vicious cycle that had been used by Dasanyaka (2008) in order to investigate the barriers of SMEs in food service industry in KSA.

Figure 3: SME’s Vicious Cycle as the theoritical framework of the study 8

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Source: Dasanayaka, Kankanamge and Sardana,(2010), ”Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area”, Business Research/Practice Notes, pp.69-101

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

A Glance on Food Service and Restaurants Industry in KSA
0.0 Brief Cultural Analysis of KSA
The main point of demonstrating the cultural dimension of Saudi Arabia is to explain briefly the common business conduct, and to find answers of the study’s finding results which will be extracted later. As known, Saudi country and other countries in the region had been subject to the cultural dimension theory of Hofstede’s studies. According to his five dimensions (5-D) model, it is possible to get a clear overview about Saudi cultural drivers which could be comparable to any other cultures.

Figure4: Saudi Cultural Dimensions By Hofstede Theory9

At the beginning, power distant dimension(PDI) deals with differences in control and power possession. The indicator of this dimension refers to the degree of society acceptance or unacceptance of unequal empowerment . As shown in figure 3, KSA scored high degree of 95% in this dimension which means that saudi people believe in heirarchy, where organizations are seen as reflecting inherent inequality, and centralization is the
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Source from: http://geert-hofstede.com/saudi-arabia.html

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

common way to mange. Second dimension is individualism versus collectivisim (IDV). It deals with the extent of interdependence a society provides to its people. KSA has a score of 25% on the scale of individualism. This low score expresses the high degree of saudi society collectivisim. It is clear in a long-term commitment to the member of a group whether it is family, or extended family, or extended relationship. Loyality to group is collectivist virtue that individuals must maintain towards their groups. In Saudi Arabia, offence leads to shame, employer-employee relationship are percieved in moral terms which is similar to family links. In such a society, individuals pay attention to common collectivist openion about their behaviours and principles. The extent of individualist life style is too narrow and limited in saudi society. Thirdly, masculanity versus femininity dimension (MAS) is essential issue concerning what motivates people. It indicates whether society is driven by acheivment, success, and competition (masculine point of view) or by the domenent values in a socity and the quality of life (feminine point of view). So, a feminine society is a society where success can be seen in the high quality of life. Accordingly, Saudi Arabia has scored 60% which means that its masculine society . people live there to compete, achieve, and performe . Normally, managers in Saudi Arabia are to be desicive and assertive and emphasizing on equity. The fourth dimension is uncertainity avoidance(UAI). It deals with the fact that the future can not ever be known. It reflects the extent to which the members of a society feel threatened by ambigous situations and have created beliefs and institutions that try to these uncertainities. Saudi Arabia scored 80% which refers to a preference for avoiding uncertainity. It maintain rigid codes of believes and behaviors. It is also intolerant of unorthdox behaviors and ideas. Innovation is resisted to some limit due to its uncertain results. Last but not least, long-term orientaion dimension (LTO) deals with the extent to which a society exhibit a realistic future oriented perspective rather than conventional short-term point of view regarding its search for virtues. Accordingly, long-term oriented society gives high value to hard work, perseverance and savings whereas short-term oriented society gives much value to respect the traditions of the past and duties towards society which is the case in Kingdom of Saudi Arabia.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

0.0 2 Analysis of Saudi food Service industry Environment in the scope of Porter’s Five Forces
Food service industry is similar to any other industry regarding its components such as suppliers, buyers, distributers, products and so on. But in the so called industry, the nature of its product which is food and food service is so diverse. As a result, restaurants’ market has a special structure due to its product’s nature and the continuous demand by the end-customers. The aim of this section is to understand the food service industry in KSA throughout looking at the market’s structure to figure out the strength and weaknesses in the industry’s environment, also to comprehend the general atmosphere of the market participant’s competition and profitability. Apparently, the most appropriate way to achieve a coherent analysis of an industry’s competition and profitability is throughout applying the theory of porter’s five competitive forces that shape industry competition by which analysts can form a proper strategy. According to porter’s theory, structure of any industry is driven by five forces that their intensity is needed to be determined in order to discover the attractiveness of this industry in term of its completion and profitability. The five competitive forces are shown in next Figure (5).10

Presently, Saudi food service industry will be analyzed according to porter’s theoretical framework of the five competitive forces. First competitive force is the threat of new entrants
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Source: Peter Crowther (2008),” THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY By MICHLAEL E. PORTER”, Harvard Business Review | January 2008 | hbr.org, pp.: 78-93.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

to the restaurants’ industry. Having new entrant in the industry means further capacity and conflict to gain market share which leads spontaneously to market pressure on price, cost, and capital required to compete (Crowther, 2008). In Saudi restaurants’ industry, threat of new entrants is evaluated as “too high”. The restaurants’ market barriers are low to some distance which make entry whether easy and possible or difficult but not unreachable. Obviously, the existing entities in Saudi Food Industry that have supply-side economies of scale are considered a very disturbing barrier to entry. Large international companies such as Mc Donald’s and Kentucky are performing in the local market; they produce in a large volume while their costs are fixed. Besides, they are enjoying the demand-side benefits of scale; the advantage that means the buyer’s willingness to pay for the most entity other buyers patronize because they trust it more. This way, these big entities make it harder and challenging for new entrants to whether enter the market in large scale or accept the difference in costs. Another remarkable barrier of entry is the unique advantages of well-successful entities existing in the market, or let’s says their comparative advantages that distinguish them among other competitors. These advantages could be the entity’s brand identity, possible access to best raw materials sources. So far, these two major barriers have obvious effect on the new entrants’ decision. Meanwhile, there are some other hindrances to enter, but they are possible to be overcome. For instant, switching costs incurred by customers in case of changing restaurants especially changing from international ones to its local counterparts and unequal access to local Saudi distribution channels are both entry obstacles that could be resolved by a proper strategy. Clearly, all these obstacles can be paved through a proper business plan and targeting a specific market’s niche to serve. Lastly, capital requirement to enter the Saudi restaurants industry is not unattainable even though most of the banks have very restrictive conditions to allow loans for restaurant’ entrepreneurs. Consequently, Saudi government affords some practical solutions for funding projects in the private sector in order to widen the bias of its national economic income. These governmental solutions are embodied in three public sector credit institutions which give loans to Saudi entrepreneurs. They are Public Investment Fund (PIF), Saudi Industrial Development Fund (SIDF), and Saudi Arabian Agricultural Bank (SAAB). By demonstrating the previous entry factors to this industry, it is clear that the threat of new entry is high due to the market current

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

attractiveness and profitability, and any other barriers entrepreneurs can successfully overcome by adapting a proper strategy for its appropriate market niche. The second competitive force is bargaining power of suppliers. The power of Saudi restaurants’ market suppliers is too high no doubt. Since the industry has been spotted growing rapidly, and the customer spending has increased 47% from 2005 to 2009, the structure of Saudi food service industry have been changed, supply chains and the market infrastructure could not go along with the growth rate of the market. As a result, tough monopoly has dominated the market by the suppliers. Most of the restaurants performing in the market have one source of their raw ingredients supplies and their food preparing equipment. Consequently, suppliers exploit the current huge demand situation by rising up prices which caused restaurants to suffer of raw ingredients costs as high as 47% - 86% relative to their conventional costs before the market booming. Besides, local supplies are aware of the difficulty faced by restaurants in name of switching costs they incur if they change their original suppliers. Also, it is important to mention that some kinds of restaurants cannot find a substitute for what their original supplier provides especially when talking about the Saudi traditional restaurants. Third competitive force is bargaining power of buyers. In this kind of industry, buyers could not be anyone but the end customers of the food served .Here, buyers are the population who lived in KSA. Most of this population enjoys the current prosperous economic circumstances of Saudi Arabia. Regarding the high disposal income, global exposure to other culture and too limited sources of entertainments in KSA, customers’ willingness to have dinner outside increased especially that the costs of this entertainment does not represent a remarkable fraction of their procurement budget. Nevertheless, bargaining power of buyers could be stronger if the food service industry’s special structure has been considered. Because of its special nature of its product which is food and food service, the industry should be divided into groups according to the kind of style and product. For example, there are fast food restaurants, Mexican food restaurants, Italian restaurants, Saudi traditional restaurants and so on. In each group of restaurants, buyers can change restaurants due to the standardized product, or due to their little few switching costs they incur by changing restaurants. This way on, it is apparent that buyers bargaining power have high effect on the market performance, but not dramatically. Fourth competitive force is the threat of substitutes. It is obvious that this threat is invalid because of the product nature of restaurants industry.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

The demand of food and food service will be continuously essential and basic all time along, and there will not be substitutes of food. The last and the most powerful competitive force in Saudi restaurants market is the rivalry among its existing competitors. Recently, food service industry in the Middle East is booming because of its positive economic leap especially in the touristic sector. Kingdom of Saudi Arabia has the bigger portion of the private investment projects relative to other countries in Middle East. As mentioned later in figure 5, Saudi restaurant market has experienced a huge pounce forwards. This notable advance took a place generally because of the powerful and forwarding economy and stable political situation in KSA. Nowadays, fierce competition is the most manifest feature of Saudi restaurants’ market. Small and medium enterprises (SMEs) are suffering of harsh competition by many big franchised restaurants’ brands of international companies or by other local numerous restaurants especially those who have the same size and power. SMEs face different types of competition; they compete the large franchised restaurants such as Mc Donald’s, Apple Bees, Fridays; they also compete the large successful local restaurants such as AlBaik, AlTazaj; besides they compete other small entities especially those who perform in the same niche market. Another competition fierce driver is the rapid rate of the restaurants’ market growth. The market revenues has a steady increase since 2005 until now which refers to the rising profits of the market.

Figure 6: Revenues and Expenditures of Saudi Restaurants industry Index 2005-2009

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The reasons behind the fast growth of this market are the income disposable of Saudi population which increased the capacity of customers’ procurement budget, and 60% of the
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Source: Central Department of Statistics &Information, Annual Economic survey of Establishment, Saudi Industry & Commerce Ministry

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

total population in KSA representing the youth who are exposed to global cultures and start to consider this market as their intellectual and entertaining platform, also the identical products in each specific market niche which afford customers a low switching costs. Most importantly, the rivalry between enterprises in restaurants market depends heavily on price competition, especially the same restaurants’ group, or the niche the serve where their products are identical and the switching costs are little. Moreover, the big restaurants with supply-side economies of scale enjoy a privileged feature regarding their costs. They have a high fixed costs and low marginal costs which allow them to increase production without notable excess in costs. Accordingly, small and medium enterprises will suffer of switching costs and loosing of customers due to demand-side benefits of scale phenomenon. At the summary, Saudi food service industry is witnessing a fierce positive competition driven by its attractiveness and profitability. (See Figure 7) Figure 7: The Five Competitive Forces in Saudi Restaurants’ Industry

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Methodology

The Conceptual Framework
To investigate the most significant constraints of local SMEs growth in Saudi food service industry, it is mandatory to specify a defined pattern of these possible constraints. As long as this research topic is cross-functional, the concept of vicious cycle might be the perfect fit for the research main objective which is to find out the barriers of SMEs development in Kingdom of Saudi Arabia. As it was mentioned earlier, theory of vicious cycle shall be associated with SME’s problems to create a conceptual bias of the study searching. Vicious cycle is a set of events controlled or uncontrolled that reiterates or reinforces itself through a feedback loop. It has appositive feedback loops in which each reiteration of the cycle reinforces the first outcome. The cycle will continue in its negative direction and will build up to a critical mass state until it is disrupted by factors or forces that diminishes or reduces the positive outcome and then the cycle is broken. Easily speaking, one trouble leads to another that aggravates first in vicious cycle. This concept was first created and used by Prof. Dasanayaka S. (2008a). He developed special vicious cycle of SMEs where all business components are proposed to act as problems’ causes. To clarify the notion, in SME’s vicious cycle, barrier starts in one position and move on to another which cause SME suffer inside the cycle. In summary, it could be said there is interlink between series of barriers. For example, if a restaurant does not invest properly in marketing activities, it will be clearly obvious on the restaurant low financial revenues or low liquidity, which in return will cause difficulty to get high technology, which leads to poor product quality. In such a vicious cycle, SME struggles in sever cycle of vicious barriers which make SME goes from bad to worse. (See Figure 8)

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Figure 8: The Conceptual Framework of SME’s development barriers

Hypotheses
As it has been discussed in the literature review, most of previous studies had found out certain points of which specific barriers disturb SMEs’ growth mostly. For instant, financial problems are the most common and affecting on the SMEs’ development. Financial issues such as lack of capital or its shortage, difficulties to obtain loans, inflexible systems and regulations of banks and low financial returns of investments are the most significant issues. Financial constraints have the clearest effect on the enterprise development. Another common barrier throughout most previous studies is managing related barriers. Regarding SMEs’ nature as being small firms, management positions are to be held for few persons who are supposed to manage the firm performance properly, so that they need to maintain management skills. Thus, issues in management skills or lack of its capabilities and awareness could also affect many

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

other departments negatively such as low awareness of managing working capital, bas skills of managing human resources, or bad capability of comprehension of the market environment generally. Moreover, there are many other problems which were given rise such as technological issues, infrastructural issues, labor issues, governmental issues, networking issues, corruption and so on. Depending on the literature review and the situational analysis of the food service industry in KSA, the following barriers will be proposed as hypotheses, and will be detected to determine its correctness and validity Hypotheses 1: Competition Issues are the most hindering barriers of SMEs’ development. Hypotheses 2: Financial Issues are the most hindering barriers of SMEs’ development. Hypotheses 3: Management Issues are the most hindering barriers of SMEs’ development. Hypotheses 4: Labor Issues are the most hindering barriers of SMEs’ development.

Research Sample
The sample of this study was randomly chosen from small enterprises’ official list which was provided by Jeddah Commercial Chamber, Department of Information and Studies. The chosen restaurants are located in the most three significant cities in the western province of KSA which are Jeddah, Taif, Makkah. This particular choice of these three cities was made intentionally to guarantee the actual feedback of the sector real position. In fact, 40 samples of the study’s questionnaire were distributed to 40 different restaurants that categorized as small or medium enterprises. The target of the questionnaire is to be filled in by the one who functionally manage the project total performance whether he is the owner or the manager, and they were given a deadline to recollect the questionnaires in one month since its distribution. Around 50% of the questionnaires were successfully recollected, and one of them was invalid which made the total number of the study’s valid questionnaires 19.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Research Instrument and Data Collection Procedures
The main objective of this study is to identify the barriers of local SMEs’ development in Saudi food service industry. To achieve this goal, specific information about SME’s point of view regarding the growth barriers must be gathered from original players in the market. In this case, tow sources of data collecting were adopted: 1- Secondary Sources such as ILC (Intellectual Learning Center) which include official reports and the most recent academic papers to provide this study with required data to compose literature review of the study question. Besides, there are other data about the Saudi economy and local food service industry in general which were taken from the official Saudi commercial chambers, especially the commercial chamber of Jeddah and Riyadh, the first two main cities in KSA. 2- Primary Sources were used to collect primary and essential information from SMEs about their entities, performance, and market of their products. First instrument was the visits to some small enterprises’ managers to extract the affecting unfamiliar problems hindering their projects’ development. The interviews with these managers afforded our study with the base of different issues that hinder the progress of SMEs in restaurants industry. Also, there were other visits to Saudi commercial chambers to discuss the situation of SMEs in KSA. Second instrument was the questionnaire which was used to gather essential data from SMEs directly to answer the study question about SME’s development barriers in Saudi food service industry.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Questionnaire Structure
The questionnaire was designed using a five point’s likert scale. The questionnaire was divided into four sections. The first section was developed to gather general information about the enterprise. The second section was devoted to the enterprise’s manager’s characteristics. The third section’s aim was to evaluate the enterprise’s growth since its origin. The aim of this section is to compare the rate of projects’ growth to their progress’s barriers. Finally, the last section was developed to evaluate the intensity of SME’s growth barriers. This part was developed based on the information gathered from interviews with some SMEs mangers, and from a similar research in which SMEs’ growth barriers are investigated regarding wood and furniture industry in Sri lank (Dasanayaka’s ,2010). The following table shows the variables of both SMEs’ development criteria and SMEs’ growth barriers listed in the third and fourth sections of the questionnaire.

Table (1): Variables of SMEs growth Criteria
Notation GC1 GC2 GC3 GC4 GC5 GC6 GC7 Development Criteria Item The business has achieved notable growth in the number of employees since its origin The business has achieved notable growth in the sales volume since its origin The business has achieved notable growth in the sales revenues since its origin The business has achieved notable growth in the profits since its origin The business has achieved notable growth in investment in lands and buildings since its origin The business has achieved notable growth in machinery and equipment since its origin The business has achieved notable growth in local market share since its origin The business has achieved notable introduction of new products since its origin

GC8

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Table (2): Items that represent SMEs’ growth barriers in the questionnaire’s model
Domain Management Issues (Mng-I) 1 2 3 4 5 6 7 8 1 2 3 4 1 2 3 4 1 2 3 4 5 1 2 3 4 1 2 3 4 5 6 1 2 Barrier Item Lack of awareness in working capital management No proper production and sales targets Shortage of raw materials in the local market Short-term financial difficulties Not preparing a business plan Not formulating management strategies No concern on the business environment and competitors Absence of guide and assistance of commercial chambers Lack of knowledge on new technologies Lack of technological training Producing products for rural level and under-developed markets Lack of local market assistance for technical development Not having proper training for the staff about quality of products Inability to use technology to improve the quality of products Inability to use high quality of raw materials High production cost comparative with other big competitors Lack of concern on advertising and sales promotion Lack of concern on building a special brand Not following market development strategy Not using e-marketing Poor customer relationships Non-availability of information about local markets, its trends and customer preferences Non-availability of information on competitors Non-availability of information about Business Development Services providers Non-availability of information about business rules and regulations High interest rates imposed by banks High collaterals Banks not offering flexible terms and conditions in difficult financial situations Lack of awareness on newly introduced credit schemes Banks ‘low interest in financing small scale entrepreneurs High cost of location rent Non-availability of public transport facilities Poor infrastructure like electricity, water, sanitation, phone lines, computers, etc

Technological Issues (Tech-I)

Product Quality Issues (PQ-I) Marketing Issues (Mrkt-I)

Information Issues (Info-I)

Financial Issues (F-I)

Infrastructure Issues (Infr-I)

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Competition Difficulties (Comp-I) Labor Issues (L-I)

1 2 3 4 1 2 3 1 2 3 4 1 2 3 4 1 2

Business Regulation Issues (BR-I) Governmental administration Issue (Gov-I) Cultural Issues (Cult-I)

High competition from large-scale firms Threat from similar goods Difficulty to mark a reasonable price High level of involvement by the intermediaries Difficulty to provide skilled workers Difficulty to find skilled Saudi workers Difficulty to retain Saudi labor due to their leaves without informing or Shifting to another firm without resigning Imposition of jobs’ Saudization in Saudi projects Absence of official fees relief at the initial stage of the business High cost on importing raw materials Difficulty to apply the obligatory sanitary requirements High level of bureaucracy Absence of governmental surveillance on local projects Difficulty to obtain official licenses to start projects Complication of some general systems such as Zakat and Passport Issuing Refusal of some Saudi customers to eat at some restaurants due to certain religious doctrines Traditions and customs play role in some Saudi customers keeping away from dining out in restaurants

Data Analysis
The answers of questionnaire were processed by using the statistical software of (SPSS) version 16.0. These descriptive statistics were used to underpin obstacles faced by SMEs in Saudi restaurant industry, and to compare the degree of each project’s axis intensity relative to other one.

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Findings
Samples of 19 papers of questionnaire were basically scrutinized to extract the results and then the findings. The response rate was 47.5%. Next, the result will be exposed and analyzed against each part of the questionnaire.

Part 1: General Information of the enterprise The first part of the questionnaire was devoted to gather information about the enterprise itself. The results shows that investors mostly prefer to invest in full food service restaurants’ projects 57.9%, whereas proprietorship is found to be the dominant ownership mode of the projects 78.9%. Also, most of the projects (68.4%) have an age of less than five years. Regarding criterion of employee number, 42.1% of projects are employing five workers or less whereas another 42.1% of projects are employing less than 16 workers. The capital range is fluctuated between two ranges; 47.4% of projects are capitalized by 100,000 to 500,000 SAR, and 36.8% of projects are capitalized by 500,000 to 1,000,000 SAR. Finally, financial sources rate are mainly accumulated in own savings as a method of financing 73.7%, the surprising result is that bank loans reflects only 5.3 % of the total projects financing source. Next table will demonstrate the results of responses numbers and their rates of the first part of study’s questionnaire. (Table 1)

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Table (3): General Information of the enterprise
General information Business line Full food service restaurant Take away restaurant Self-service restaurants Ownership mode Sole proprietor Partnership other Business Age Less than 5 years 5-10 years 10-15 years More than 15 years Employees Number Range 5 or less 6-15 employees 16-30 employees Over 30 employees Capital Investment Range Less than 100,000 Saudi Riyals(SR) 100,000-500,000 SR 500,000 -1,000,000 SR Over 1,000,000 SR Source of Finance Own savings Family heritage Bank loans Informal source 14 4 1 -73.7 21.1 5.3 -2 9 7 1 10.5 47.4 36.8 5.3 8 8 1 2 42.1 42.1 5.3 10.5 13 3 1 2 68.4 15.8 5.3 10.5 15 3 1 78.9 15.8 5.3 11 3 5 57.9 15.8 26.3 Number of responses Rate %

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Identification of Local SMEs’ Development Barriers in Food Service Industry in KSA, the Western Province (2012)

Part 2: Enterprise’s Manager Characteristics
This part was devoted to gather information about manager’s characteristics. Around a half of projects’ managers are in age of forties, and 100% are male. A 52.6% of mangers have university education whereas those of intermediate and secondary education have an equal rate of 21.1%. Next table summarize these results clearly. (Table 4)

Table (4): Enterprise’s Manager Characteristics
Characteristics Owner age > 30 years 31-40 years 41-50 years 51-60 years 30 years Male Elementary level 31-40 years Intermediate level 41-50 years Female Secondary level 51-60 years University Education