Economic Forces

Shift to a service economy in Colombia:

Depending on each sector, the service economy will vary for the company; this is a major driving engine for growth and innovation. As our company is specialized in accessories, it is very important to get to know all important aspects of the service economy that Colombia is having. Skilled services, manufacturing, forestry, utilities, wholesale, communications, other services and more, are crucial for our company, some are more important than others, but we still decided to investigate them, in order to have a general view of the country.

-Competitive Profile

Matrix (CPM)

-External Factor

Evaluation: (EFE)

Matrix

-Competitive Analysis:

Porter's Five Forces

Model

-Political, Governmental,

and Legal Forces

-Social, Cultural,

Demographic, and

Natural Environment

Forces

-Competitive Forces

-Technological Forces

-Economic Forces

External Analysis

Availability of credit:

Colombia has developed a private credit reporting industry, a public credit registry and a variety of other important financial and commercial data in both the public and private sectors. This has relied upon credit reports to evaluate customer risk. The implementation of credit reporting is viewed negatively by many Colombians, like a threat that limits opportunities for credit or business rather than a valuable tool. The needs of the economy for information and transparency are a major factor in determining the future direction of the industry. Important factors such as the economic growth, sound and sustainable financial institutions and greater access to credit. As we can see in later GDP analysis, the extent and development of credit reporting and its availability, depends on the economy itself. Firms are more credit constrained in economies with less developed credit information systems. Depending on how accurate banks can be, in order to predict risks, percentages of the availability of credit may vary; also the different sectors may apply for this. This will affect on how our company will work, as it has to satisfy all legal aspects, rules and more, if we want or need this type of economic aspect (variable).

Level of disposable income:

According to the euromonitor for Colombia, we can visualize, more or less, the disposable income that this country is having, this can help us understand the amount of annual income, and it has changed during the past 4 years. Each year, and thanks to our investigation, we can notice that companies, are having higher amounts of disposable incomes, more availability for credit, developing the chance and possibility to spend more and increase their businesses. GDP growth has decreased and inflation as well, apart from that, everything else has increased.

Areas

1,138,915 km2

Population

50,119,000

Propensity of people to spend

Also known as the average propensity to consume (APC) refers to the percentage of income that is spent on goods and services rather than on savings. The research that Mercedes Hernandez, Jefferson Pinzon and Miguel A. Ramos did for the past years, from 1990’s till 2005, helped us understand how in Colombia, people tend to consume.

Colombians tend to spend about 80%-86% of their total incomes, leaving less than half of what they receive for savings. No matter what industry or business, there still will be more income being spent in goods and services, rather than saved.

Interest rates

Know that we investigated the average interest rates of Colombia, we can visualize how, over the past year it has changed and is still changing in 2016. This shows us how Colombians tend to use credit, due to its interest rates, no matter how we start our company, there will always be a moment in which we might have to borrow money in order to grow.

Monetary Policies

According to the index of economic freedom, Colombia went from being moderately free in 2012 to mostly free in 2015. This shows how the government had decentralized the economic constraints of the market and this open the way for companies to grow exponentially leading the country to experience an economic growth within these years.

Nevertheless, since 2015 until 2016 the Colombia’s freedom index score has gone down, this shows that the government had to step in and take more control over the national economy and its monetary policies in order to counteract the accelerated inflation and the Colombian peso devaluation that the country has been experiencing since 2015

Fiscal Policies

“Colombia has the seventh highest Gini coefficient of income inequality in the world. The Santos Administration is aware of this challenge and is taking important measures to reduce disparities”. As expressed before Colombia has one of the highest income inequality in Latin America, as we can see in the following graphs taken from the book “Fiscal Policy in Latin America”.

Colombia has a high public investment in comparison with the other Latin American countries but when it comes to education the percentage that the government destines to this factor is the second lowest after Peru. This shows not only that the social and capital spending are being directed to the most urgent matters instead of thinking ahead and investing in education for future progress.

Tax Rates:

This year (2016), the tax commission is proposing some adjustments, which is going to affect the nonprofit entities, companies and individuals.

One of the principal plans is to simplify the taxes for individuals and companies; eliminating charges created recently such us CREE, IMAN, IMAS, and wealth, and just leaving only one tax and broadening the base.

The Commission for Equality and the Government Tax Competitiveness also proposes the increase of the IVA from 16% to 19% and reduce the list of goods excluded from this tax. On the other hand, this proposal also states that the nonprofit entities will start to pay taxes.

If the IVA increases to 19%, this will affect us since we will have to increase prices for profit and possibly lose clients because of this or just leave the same prices but earn less profit.

Demands shifts for different categories of goods an services

These are the factors that cause shift in demand:

Income: Enables customers to afford goods and services; when there are low taxes and high wages, there will be a higher income. (This affects the demand curve.) When the income falls, the product with less quality helps the business to adjust to the demand shifts, when it’s high quality products, the business will affect the most.
Prices: Depending on the product, the higher the price, the lower demand; the lowest the price, the highest the demand.
Quality: Increase the quality goods shifts the demand.
Substitutes: Increase of the price substitutes.
Population shifts: This happens when people move from one place to another; this impacts the company sales.

Income differences by region and consumer groups

The regional inequality is because of the differences in the education, which depends on the departments labor forces.

“The gross differentials (without cross-classification) are of the following orders of magnitude: eleven-to-one ratio between persons with higher education and persons with none; four-to-one between prime age workers and the very young; a 25% differential advantage for men over women; four-to-one ratio between the richest department and the poorest; three-to-one between urban workers and rural workers; and 60% more for employers and the self-employed than for wage and salary employees.” (448, Fields, Schultz).

In the table below, we can se the income in different regions:

Price fluctuations

The price fluctuates depending on the supply and demand. Handmade products give value to the products (the quality of the product and finishes, the working time, the specification of materials, the uniqueness of materials, etc.)

Inflation

Colombia’s Price To Consumer index has had the trend of lowering year after year in the past. Although, thanks to multiple drastic changes in global economy the last year it was seen that it got a monumental change of almost 4%. From this information we can infer that this trend is going to change to an inverse destiny, one in which increase will be the rule. Therefore it is necessary for our company to consider how the prices of almost everything got higher, from raw materials to competing products. Its is imperative for us to take advantage of this by showing ourselves as a great choice to help the confrontation of change of acquisition capacity.

Money Market Rates

We have seen that the trend In economy related to the money profitability has been lowering year after year. This tells us that the banks and diverse entities are not in a very well shaped capacity. Thanks to this we need to consider how to enter to a market were people do not have an easy possibility of expending through credit, neither have an easy relationship with banks. Also it is necessary for us to consider that that kind of difficulties are going to be faced by the enterprise too.

Federal government budget deficits

We can see that every year Colombia has faced problems with money requirement, as the government spends more that it gets (evidently seen in the table). Now, involving our enterprise with government issues is necessary as this lack of money can affect us now and in the future because of the possibilities of increasing taxes, for our activities and products.

Consumer patterns

Annalists of consumers and the general market have seen the continuous look by costumers of products that consider the environment. This because of the current situation faced by it. Every generation has shown a bigger interest in considering their planet in all the customs, and this includes what they buy. Our enterprise sees this as an opportunity, as it allows knowing that our kind of product will be well received as an option for the costumers to get to be what they want to be (eco-friendly).

Unemployment rates

In Colombia there has been a change in the unemployment rates, they have been decreasing with the years, this might be due to the governmental measures to reduce this rate, like the creation of more employment, despite that the rates of employment does not seem to increase, this is because the growing population.

This is positive for the company, because this law of employment affect positively to the companies that want to hire employees, by giving tax reductions mainly.

Worker productivity levels

Colombia has been suffering from low worker productivity levels, turning the country in one of the lowest rates in the region, the rate is not going down, but it is not growing as fast as the countries neighbours, even when the country has been developing a good economic growing.

For the industry of accessories it might be bad, because the country competiveness is low respect to the direct competitors in the region, causing that enter in those markets can be hard, in order to expand the market. However as the statistics support, the investment is changing this trend, so this might change the current trend.

Value of dollar in worl markets

The dollar has shown a trend to increase its value across international markets, this cause some currencies to devaluate.

For the accessories industries, is really bad, because it is causing the resources and machines needed to process them get their prices higher, as a consequence of that the price of the accessories go up, that can be reflected in a deceleration of the industry.

Stock markets trends

The stock market has showed a trend to go down, because of the dollar and the low international investment. No matter that in the first months of the year, the stock market tend to have good returns for investment. This could affect the accessories industry negative for starting companies, because actual companies can decide not to return money to shareholders, but to invest in the company, augmenting their competitiveness.

Foreign countries' economic conditions

There has been a change in the economic trends, because developing countries are growing their outcomes, and their participation in the global market is going bigger and bigger, while the participation of developed economies is going lower. Despite that the participation in goods outcome of developed countries is getting lower and the developing countries is getting more participation, is happening the opposite in the service market, this is one of the reasons the income for developed countries is not getting lower as their world participation in the economy.

For the accessories industry this might be good, because it is locating the production of their products in developing countries, and Colombia is turning in one of those.