Market Attractiveness: Al-Mir Incorporation in Hookah Industry

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Executive summary

This report entails an evaluation of market attractiveness in the international market. The report takes into consideration Al-Mir Incorporation which operates within Saudi Arabia hookah industry. The report includes an analysis of overseas countries as a potential destination. These include Jordan, the UAE and the US. A choice of potential investment destination is illustrated. In order to attain its profit maximization objective, the firm targets the US as its preferred investment destination. To evaluate the attractiveness of the market, the report considers a number of elements.

These include market size, market growth, and competitive analysis. The report also evaluates the government regulations with the US hookah bar industry. Additionally, the political and economic stability within the US is also analyzed. The report also illustrates the target market and segmentation strategy used in the market. Possible challenges to be experienced in venturing the market in addition to the market entry strategy used are also evaluated. Finally, a conclusion and a number of recommendations are outlined.

Introduction

Background to the study

According to Longenecker and Gale (2006, p.57), understanding the market is a critical element in a firm’s operation. This is due to the fact that a firm is able to understand the opportunities and threats available in the market. In an effort to attain their profit maximization objectives, firms are increasingly incorporating the concept of internationalization (Glowik & Smyczek, 2011, p.8). Internationalization presents businesses with an opportunity to increase their sales volume hence their profitability in addition to attaining economies of scale. Prior to venturing the targeted foreign market, a firm’s management teams should conduct a comprehensive market analysis in order to determine its attractiveness (Doole & Lowe, 2008, p.112).

During the process of evaluating the market attractiveness, Doole and Lowe (2008, p.112) assert that firms should take into consideration a number of factors. Some of these factors include the market size, government regulations, market growth, political stability, economic stability and the competitive environment. In an effort to achieve its profit maximization objective, the management team of Al-Mir Incorporation which operates within the Saudi Arabian hookah lounge industry has come into a consensus to incorporate the concept of internationalization

Aim

This report entails an analysis of the attractiveness of the international market with regard to the hookah industry.

Scope

The report covers a number of elements which include an analysis of overseas countries as potential destination and a choice of a potential investment destination. The report also evaluates other factors such as market growth, market size, demographic changes and culture. Other elements considered in the study include competitive rivalry, government regulations, political stability and economic stability. The report also illustrates the target market and segmentation strategy used. Possible challenges in venturing the market in addition to the market entry strategy are also evaluated. Finally, a conclusion and a number of recommendations are outlined. The report only focuses on the hookah industry.

Analysis of overseas countries as a potential destination

There are numerous countries that Al-Mir Incorporation can consider in its internationalization strategy. Some of these countries include Asian countries such as the United Arabs Emirates and Jordan. Additionally, the firm should also consider the United States as a potential investment destination. Most Middle Eastern countries have established a culture of smoking shisha (hookah). For example, in Jordan and UAE, smoking tobacco using shisha have been a tradition for a long duration (Benedict, 2011, p.11). As a result, there are numerous hookah bars established within these countries both in the upcountry and also in the cities. According to Christensen (2010, p.12), there are numerous hookah lounges in Abu Dhabi.

Choice of potential investment destination

In an effort to establish its market, Al-Mir Incorporation should select the United States as its investment destination. This arises from the fact that the US presents a high market potential for the firm to exploit. Specifically, the firm should consider investing in Georgia in the US market.

Firstly, the intensity of competition within the US hookah bar market is minimal. This arises from the fact that hookah smoking is a relatively new phenomenon in the US. Additionally, the US is increasingly becoming a cosmopolitan society as a result of a large number of individuals of the Middle East descent who are migrating into the country. The choice of the United States as an investment destination is also based on a number of factors which include the market size, market growth, and government regulation, political and economic stability. These factors are analyzed in the report.

Market growth and market size

Over the past decade, there has been significant growth within the US hookah industry (South Smoke, n.d, para. 1). This evidenced by an increment in the number of hookah bars established within the US (American Non-Smokers Rights, 2011, para. 1). The high growth rate indicates that the US market is attractive for Al-Mir to venture. A number of factors are associated with the high growth rate of hookah bars in the US. One of these factors relates to changes in consumer lifestyle with regard to the smoking of tobacco. Americans are increasingly gaining knowledge regarding the ancient Middle Eastern tradition with regard to smoking tobacco. Most tobacco consumers consider smoking a hookah to have minimal negative health consequences compared to other forms of consuming tobacco, for example, smoking an ordinary cigarette. Additionally, hookah smoking is being considered as a social activity by most individuals who smoke tobacco.

Demographic changes and culture

The US is also experiencing demographic changes in its population. Over the last few years, there has been an increment in the population of Arab-Americans in the US. This has emerged from a large number of Arab immigrants in the US. A census conducted in 2000, indicated that the number of Arab Americans increased to 1.2 million from 610,000 in 1990 which represents an increment with a margin of 40 % (Norwood & Pollack, 2008, p.443).

Hookah smoking is a common culture within the Middle Eastern countries such as Saudi Arabia. The rise in the population of Arab American coupled with the change in lifestyle with regard to the smoking of tobacco indicates that there is a high probability of the industry experiencing an increment in the number of customers. For example, hookah bars do not discriminate against the Arab-Americans. This is due to the fact that Muslim faith does not allow the consumption of alcohol. Hookah bars provide an opportunity for the Arab-Americans to socialize. As a result, there is an opportunity for Al-Mir increasing its customer base.

The size of the market is relatively large, as evidenced by a large number of young professionals and youth who are patronizing the hookah lounges. According to US News Publishers Corporation (2008, p.61), there is an increment in the number of young professionals in different economic sectors and college-age students who are seeking new forms of socialization. Their main objective is to seek a unique experience with regard to leisure. A considerable proportion of these customer categories are considering patronizing hookah lounges. In an effort to achieve a substantial market share, Al-Mir Incorporation will ensure that its hookah pipes are of different colours, designs and styles. Additionally, the firm will also incorporate different flavours of tobacco in its hookahs.

Competitive rivalry

According to Remenyi (2004, p.286), understanding the competitive environment within the international market is a critical element in a firm’s internationalization strategy. In an effort to venture the US market, the firm has conducted a comprehensive competitor market research. Findings of the competitor market research revealed that the degree of competitive rivalry within the US hookah industry is minimal. Within Georgia, there are only two hookah bars which include Ali Baba’s Café & Hookah Lounge and Eagle Diner Café.

These firms have effectively been established within the Georgian hookah market for a number of years. As a result, the two hookah bars have gained substantial market recognition. Kapferer (2000, p.137) is of the opinion that gaining brand awareness, for example, with regard to the products and services that a firm offers to play a critical role in enhancing its competitive advantage. To cope with the competitive environment, the firm will incorporate an effective competitive strategy in an effort to enhance customer loyalty. Al-Mir will achieve this by offering high-quality hookah services. The firm will ensure that the hookah is fitted with a music system. In addition to the hookah, the firm will also incorporate a variety of other services such as games, for example, backgammon, cards and pool.

Government regulations and political stability

The US legal environment also enhances the attractiveness of the hookah bar market. Over the recent past, the US government has developed legislation that bans smoking in public places, for example, casinos, workplaces, hotels, bars and restaurants. Most states in the US have adopted this legislation. However, hookah bars have not been affected by the legislation. This means that the legislation will enhance the probability of success within the US hookah market (Armstrong, 2011, p.1). This arises from the fact that there is a high probability of smokers turning to hookah bars as an option. A study conducted by Hookar-bars.com in 2008 revealed that there are approximately 2-5 million hookah smokers in the US.

The US government has also made it possible for foreign investors to venture into the US market by creating an enabling environment that makes it easy for investors to obtain a business license. The government also protects investments through patents and copyright laws (Bird & Jain, 2008, p.42). The attractiveness of the US as an investment destination is also enhanced by the fact that the US is politically stable. The US has enjoyed a long duration of peace. The resultant effect is that the political risk of investing in the US is minimal. Additionally, US politicians formulate effective policies aimed at stimulating economic growth.

Economic stability

The US is one of the largest developed economies in the world. For a considerable duration, the US has experienced significant economic growth. In addition, the rate of unemployment is relatively low (Baumol & Blinder, 2011, p. 111). This has led to an increment in the consumers’ disposable income culminating into an improvement in their purchasing power. However, the occurrence of the 2008 economic recession in the US greatly affected the consumers’ purchasing power. A large number of households lost their source of income hence a decline in their purchasing power. However, the US government has incorporated numerous stimulus packages in order to enhance economic recovery. Therefore, there is a high probability of the economy stabilizing. As the economy stabilizes, there will be an increment in the consumers’ purchasing power which presents an opportunity to the firm.

Target market and segmentation strategy

Effective market targeting and segmentation is an important element in a firm’s success (Sahaf, n.d, p. 12). In its internationalization strategy, Al-Mir Incorporation targets two main categories of customers. As a result, the firm will segment its market on the basis of demographic variables. The main market segmentation variables that the firm has taken into consideration related to income, age and culture. The firm will mainly target Middle Eastern Americans and young professionals.

The Middle Eastern Americans consist of all the Arabs who have migrated into the US. Middle Eastern countries have developed a culture of hookah smoking. Targeting Middle Eastern Americans will also contribute to the firm attracting non-Arabs. This is due to the fact that the Arabs who patronize the hookah will also encourage their non-Arabs friends to patronize the hookah lounge.

The firm will also target young professionals, specifically those aged between 22 to 35 years. This category of consumers is increasingly considering other forms of socializing other than the traditional bars. One of the options that they are considering includes hookah bars. The young professionals also include college and university-age students. These consumers have a relatively high purchasing power. Additionally, these customers are increasingly spending a substantial amount of their income on leisure.

Possible challenges in venturing the market

The three main challenges that the firm expects to face relate to cultural differences, consumer attitude towards tobacco and financial challenges. Smoking hookah is a new phenomenon amongst Americans. Therefore, it will be challenging for the firm to introduce smoking hookah in the US.

Over the recent past, there has been a change in consumer attitude with regard to their consumption patterns. A large number of consumers are increasingly becoming health conscious in their consumption (Miller, 2003, p.298). This means that the firm may not achieve the desired increase in sales volume. Additionally, the firm will also experience a challenge with regard to finances considering the negative effects of the recent economic crisis. A substantial amount of money will be required to establish a hookah lounge.

Market entry strategy

In venturing the US market, the firm will adopt the concept of Foreign Direct Investment (FDI). This will entail establishing a hookah lounge from scratch. The firm will rent a building in Georgia within which the hookah lounge will be set up. The decision to adopt FDI as an entry strategy arose from the fact that it would give the firm a high level of control over the market. Additionally, FDI would enable the firm to develop an effective control over the market.

Conclusion

Internationalization strategy is an important consideration in firms’ effort to achieve their profit maximization objective. Prior to entering the foreign market, firms have to evaluate the degree of market attractiveness. From the analysis above, there is a high probability of Al-Mir Incorporation succeeding upon venturing the US market. This is evidenced by the existing macro-economic environment in the US, such as a stable political and economic environment. Additionally, demographic changes also present an opportunity for the firm to exploit.

Recommendation

It is important for the firm to consider the following recommendations.

Incorporate an effective marketing strategy. One of the ways through which the firm can attain this is by incorporating the marketing mix.
The firm should create effective market awareness by incorporating the concept of integrated marketing communication.

Upon venturing the market, the firm should continuously evaluate the success of the marketing strategies adopted.

Reference List

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