The importance of Big Data

I read an interesting article by Louis Colombus in Forbes on how big data is in the top 5 most disruptive innovations. Based on his research, he quoted that

  • 47% of manufacturers expect big data analytics to have a major impact on company performance making it core to the future of digital factories.
  • 36% expect mobile technologies and applications to improve their company’s financial performance today and in the future.
  • 49% expect advanced analytics to reduce operational costs and utilise assets efficiently

Working in the ecommerce sphere, I tend to agree with Louis’s view and here are the reasons why.

“You can’t manage what you can’t measure”

There’s much wisdom in that saying, which has been attributed to both W. Edwards Deming and Peter Drucker, and it explains why the recent explosion of digital data is so important. Simply put, because of big data, managers can measure, and hence know, radically more about their businesses, and directly translate that knowledge into improved decision making and performance.

The familiarity of the Amazon story almost masks its power. We expect companies that were born digital to accomplish things that business executives could only dream of a generation or few years ago. But in fact the use of big data has the potential to transform traditional businesses as well. It may offer them even greater opportunities for competitive advantage (online businesses have always known that they were competing on how well they understood their data). As we’ll discuss in more detail, the big data of this revolution is far more powerful than the analytics that were used in the past. We can measure and therefore manage more precisely than ever before. We can make better predictions and smarter decisions. We can target more-effective interventions, and can do so in areas that so far have been dominated by gut and intuition rather than by data and rigor.

An HBR article written by Andrew McAfee and Erik Brynjolfsson states that as the tools and philosophies of big data spread, they will change long-standing ideas about the value of experience, the nature of expertise, and the practice of management. Smart leaders across industries will see using big data for what it is: a management revolution. But as with any other major change in business, the challenges of becoming a big data–enabled organization can be enormous and require hands-on—or in some cases hands-off—leadership. Nevertheless, it’s a transition that executives need to engage with today.

1. What is big data analytics?

According to SAS, big data analytics is the process of examining big data to uncover hidden patterns, unknown correlations and other useful information that can be used to make better decisions. With big data analytics, data scientists and others can analyse huge volumes of data that conventional analytics and business intelligence solutions can’t touch.

I have not worked in a business that is not obsessed with analysing data, whether it is customer data, web data, infrastructure data etc. In fact i know that most businesses do because data analyst are very hard to find, and if you are 16 or 18 years old with a good math degree I would seriously consider adventuring myself into this type of role!

2. What has changed in the past 3 years?

Volume

As of 2012, about 2.5 exabytes of data are created each day, and that number is doubling every 40 months or so. More data cross the internet every second than were stored in the entire internet just 20 years ago. This gives companies an opportunity to work with many petabyes of data in a single data set—and not just from the internet. For instance, it is estimated that Walmart collects more than 2.5 petabytes of data every hour from its customer transactions. A petabyte is one quadrillion bytes, or the equivalent of about 20 million filing cabinets’ worth of text. An exabyte is 1,000 times that amount, or one billion gigabytes.

Velocity

For many applications, the speed of data creation is even more important than the volume. Real-time or nearly real-time information makes it possible for a company to be much more agile than its competitors. Now this is where I feel even more progress will be made. Our systems and human nature is to get things faster and faster and faster!

Variety

Big data takes the form of messages, updates, and images posted to social networks; readings from sensors; GPS signals from cell phones, and more. Many of the most important sources of big data are relatively new. The structured databases that stored most corporate information until recently are ill suited to storing and processing big data. At the same time, the steadily declining costs of all the elements of computing—storage, memory, processing, bandwidth, and so on—mean that previously expensive data-intensive approaches are quickly becoming economical.

As more and more business activity is digitised, new sources of information and ever-cheaper equipment combine to bring us into a new era: one in which large amounts of digital information exist on virtually any topic of interest to a business. Mobile phones, online shopping, social networks, electronic communication, GPS, and instrumented machinery all produce torrents of data as a by-product of their ordinary operations. Each of us is now a walking data generator. I work in retail and we are not at the forefront of new technology but we are getting there and beacons are an example of that.

3. Why is big data important? Benefits and challenges

A report from McKinsey Global Institute estimates that Big Data could generate an additional $3 trillion in value every year in just seven industries. Of this, $1.3 trillion would benefit the United States. The report also estimated that over half of this value would go to customers in forms such as fewer traffic jams, easier price comparisons, and better matching between educational institutions and students. Note that some of these benefits do not affect GDP or personal income as we measure them. They do, however, imply a better quality of life.

Out of 100s of ideas, McKinsey believes big data analytics is one of the top 5 catalysts that can increase US productivity and raise thee GDP in the next 7 years. For the retail sector, big data applications covered three areas—supply chain, operations, and merchandising. By creating greater performance transparency, these companies can optimize inventory, transportation, returns, labor, assortments, and more. They estimate that this sector will gain $30-55 billion in GDP through use of big data. In our previous article on 20+ big data examples, we provided links to stories about how Walmart, Sears, Kmart, and Amazon are using big data. McKinsey’s quote that will make my CFO and CEO listen is 60% potential increase in retailers’ operating margins possible with Big Data.

5 key benefits of big data:

1. Big Data can unlock significant value by making information transparent. There is still a significant amount of information that is not yet captured in digital form, e.g., data that are on paper, or not made easily accessible and searchable through networks. We found that up to 25 percent of the effort in some knowledge worker workgroups consists of searching for data and then transferring them to another (sometimes virtual) location. This effort represents a significant source of inefficiency.

2. As organisations create and store more transactional data in digital form, they can collect more accurate and detailed performance information on everything from product inventories to sick days and therefore expose variability and boost performance. In fact, some leading companies are using their ability to collect and analyse big data to conduct controlled experiments to make better management decisions.

3. Big Data allows ever-narrower segmentation of customers and therefore much more precisely tailored products or services.

4. Sophisticated analytics can substantially improve decision-making, minimise risks, and unearth valuable insights that would otherwise remain hidden.

5. Big Data can be used to develop the next generation of products and services. For instance, manufacturers are using data obtained from sensors embedded in products to create innovative after-sales service offerings such as proactive maintenance to avoid failures in new products.

However, not all is that simple and McAfee and Brynjolfsson identified 5 key challenges to big data, which are:

1. Leadership: Companies succeed in the big data era not simply because they have more or better data, but because they have leadership teams that set clear goals, define what success looks like, and ask the right questions. Big data’s power does not erase the need for vision or human insight. On the contrary, we still must have business leaders who can spot a great opportunity, understand how a market is developing, think creatively and propose truly novel offerings, articulate a compelling vision, persuade people to embrace it and work hard to realize it, and deal effectively with customers, employees, stockholders, and other stakeholders. The successful companies of the next decade will be the ones whose leaders can do all that while changing the way their organisations make many decisions.

2. Talent Management: As data become cheaper, the complements to data become more valuable. Some of the most crucial of these are data scientists and other professionals skilled at working with large quantities of information. Statistics are important, but many of the key techniques for using big data are rarely taught in traditional statistics courses. Perhaps even more important are skills in cleaning and organizing large data sets; the new kinds of data rarely come in structured formats. Visualization tools and techniques are also increasing in value. Along with the data scientists, a new generation of computer scientists are bringing to bear techniques for working with very large data sets. Expertise in the design of experiments can help cross the gap between correlation and causation.

3. Technology: The tools available to handle the volume, velocity, and variety of big data have improved greatly in recent years. In general, these technologies are not prohibitively expensive, and much of the software is open source. Hadoop, the most commonly used framework, combines commodity hardware with open-source software. It takes incoming streams of data and distributes them onto cheap disks; it also provides tools for analyzing the data. However, these technologies do require a skill set that is new to most IT departments, which will need to work hard to integrate all the relevant internal and external sources of data. Although attention to technology isn’t sufficient, it is always a necessary component of a big data strategy.

4. Decision making: An effective organisation puts information and the relevant decision rights in the same location. In the big data era, information is created and transferred, and expertise is often not where it used to be. The artful leader will create an organization flexible enough to minimize the “not invented here” syndrome and maximize cross-functional cooperation. People who understand the problems need to be brought together with the right data, but also with the people who have problem-solving techniques that can effectively exploit them.

5. Company culture: The first question a data-driven organisation asks itself is not “What do we think?” but “What do we know?” This requires a move away from acting solely on hunches and instinct. It also requires breaking a bad habit we’ve noticed in many organizations: pretending to be more data-driven than they actually are. Too often, we saw executives who spiced up their reports with lots of data that supported decisions they had already made using the traditional HiPPO approach. Only afterward were underlings dispatched to find the numbers that would justify the decision.Without question, many barriers to success remain. There are too few data scientists to go around. The technologies are new and in some cases exotic. It’s too easy to mistake correlation for causation and to find misleading patterns in the data. The cultural challenges are enormous, and, of course, privacy concerns are only going to become more significant. But the underlying trends, both in the technology and in the business payoff, are unmistakable.

Convinced that Big Data should be part of your business strategy for the next 5 years? If not, you might be heading down the well and your business with it!

Benoit Mercier

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Chester Triathlon National Championship

Well Sunday was my first triathlon is 2 years without any training. I had decided to renew with the competition in Chester, a City that I really like. Chester Tri, the organiser, has done a fantastic job over the years and it was a fair reward for the national championships to be held there.

I arrived late saturday and I found it hard to sleep the night before as the stress of the competition got to me. It is a sensation I love. You play in your head your race time and time again.

Early wake up, at 5.30am to go and register an hour before the race. The morning of the race you have a great atmosphere, triathletes are a nice breed and all supportive from one another. My aim was simple, finish it. 2 years ago I had completed it in 3h10 but this time with no training I knew it would be hard on my ageing body.

At 7.45am, I jumped in the Deva, bloody hell was it cold (14 degrees), and as the klaxon was released I started getting into my strides. To my surprise I got into my rythm very quickly and posted a personal best on the 1.5km distance at 25min.

Exiting the swim though was a different affair, at that point the GBR female passed me and the Channel 4 commentator made a sexist remark that made my blood boiling. I lost no time on getting on my bike and again posted a personal best of 1h12 for 40km

I finished by the 10km run in 39min, I felt like the flash, and believe me I was not on EPO. I did train in Colombia 3,000m above the sea!

I finished 305th out of 1,000 and 39th of my category out of 285. My body is paying for this effort but I will now go back into training knowing that I can improve.

Benoit Mercier

Colombian macroeconomy

I take the opportunity to be in this incredible country that is Colombia to analyse its macroeconomy and its potential

1. Overview

At the end of the 1990’s, Colombian economy suffered the most serious recession in its last fifty years. It was so deep that output decreased about 5% in 1999. In addition, the unemployment rate started to rise consistently from 7.5% in the 1980’s and reached 20% in 2000. This increase in unemployment was accompanied by a gradual reduction in inflation from 41.65% in 1992 to 9.75% in 2000. Past Governments have worked hard to tackle this issue and reverse the macroeconomic trend by implementing various policies.

Current overview

In 2014, according to the World Bank, Colombia is now the 31st biggest economy in the world with $378.1bn of GDP. Colombia is part of the CIVETS, which regroups the six favoured emerging markets behind BRIC countries, which demonstrates the economic potential of Colombia.

On June 15th 2014, Colombian voters handed President Juan Manuel Santos a mandate to continue his efforts to negotiate a peace deal with leftist guerrillas (FARC) and end more than a half-century of internal conflict.

Under an effective countercyclical framework, Colombia’s growth was 4.1% in 2013 and is expected to reach 4.5% in 2014. Growth in 2013 was above the South American regional average which was 3.7%, and although there remains fiscal pressures from the slower economic activity and labour unrests, the government remains committed to fiscal stability. To date, the Colombian Government has managed to stabilise the country’s inflation at 2.79% and the current unemployment rate is at 8.80%.

The monetary policy framework in Colombia is based on an extended Inflation Targeting strategy that aims at maintaining a low and stable inflation rate, stabilizing output around its natural level and contributing to the preservation of financial stability. A key issue regarding the exchange rate in the monetary policy framework in Colombia is the set of conditions that allow the exchange rate to work as a shock absorber. As in other open emerging economies, in Colombia the bulk of shocks are real, not nominal. Thus, a flexible exchange rate regime is appropriate to stabilize the economy in the face of those shocks, especially in the context of rigid formal labour markets. Importantly, a flexible exchange rate regime is necessary for a countercyclical monetary policy response to the shocks. Therefore, ensuring the conditions for a flexible exchange rate is crucial.

The peso has lost 15% of its value against the US dollar since early 2013, when the government took steps to weaken the currency to protect the export sector. The Central Government fiscal deficit is almost unchanged at 2.3% of GDP, below the 2.4% expected result of 2013, and in line with the fiscal rule. Finally The overall public debt was reduced from 32.6% in 2012 to 32.3% of GDP in 2013.

  1. Long strengths and weaknesses

The country continues to exhibit very positive macroeconomic conditions, even though there are some long-terms challenges that need tackling.

Strengths

  • Strong macroeconomics track record through a well-balanced public budget. The deficit reduction policy was to alter the tax structure by reducing the corporate tax rate to 30% of revenues, eliminating double taxation (tax deductions related to inflation adjustments and increasing personal income taxes). As a result, inflation is under control at around 3%.
  • Strong availability of its factors of productionso   Land –26thlargest nation with abundance of natural resources. Colombia is well placed to tap into new sources of growth provided by natural capital (e.g. Petroleum, Gold, Natural Gas and Emeralds).

o   Labour – overall strong and young availability of workforce with high levels of education. Strategy to fight unemployment established in 2010 was based on three key reforms: (1) in depth reform to the education system; (2) implementation of a social safety net to help the most vulnerable strata of population; (3) reform of the labour code aimed to: (i) reduce and flex non-wage costs; (ii) introduce mechanisms to help make wages more flexible; and (iii) provide a wider variety of hiring modalities and ways to organize the time within the firms[1]. As a result, unemployment rate has been declining from 17.87% in 2002 to 9.19% in 2014 and it is forecasted to reach 7% in the next 5 years.

o   Capital – accumulation of capital, the investment rate has been increasing gradually since 2000 and has now reached a high record above 30% of GDP.

o   Enterprise – 20.6% new businesses launched within the last three years, compared to an average of 11.8% in the Andean economic region. Achieved through education and tax relief measures.

o   Financial services are relatively sophisticated with a considerable market size, developed under a model of specialized ‘vehicles’ subject to severe restrictions on permissible activities, especially for deposit-taking institutions.

Weaknesses

  • Negative dominance of natural resources related FDI, to the detriment of the manufacturing and service sectors where it has actually been declining in absolute terms in the wake of the recent global financial crisis. There has been a lot of FDIs in minerals but specifically with no manufacturing value added.
  • Dutch disease. Too high dependence on commodity exports, especially oil. The level of diversification of the Colombian economy is relatively low and the country is dependent on the export of a narrow range of commodities, which makes the country vulnerable to commodity price fluctuations.
  • Political and social instability (FARCS conflict) will 1) cost a lot of money; 2) discourage external investments. To raise funds, Colombia needs to borrow from international markets and raise taxes, which will impact negatively savings and consumption levels.
  • Colombia shows a strong gap in improving the productivity of human capital, generating poverty traps and limits the availability of skilled labor force.
  • Ambitious transportation infrastructure plan, worth $25bn investment to be completed in the next 5 years. It will add competitiveness:
    • By increasing the investment grade from 1% of GDP to 3% of GDP and keep it there for at least 10 years.
    • By increasing employment across industries that feed the construction sector
    • By doubling speed of transportation (trucks will go twice faster), the cost of operations will be cut by half.

Increase of FDIs. Colombia has one of the largest, portfolio of projects in the pipeline with private sector investors and are a very stable country for private investors

  1. Analysis of Colombia’s trade position and its comparative advantage

Trade position

Colombia recorded a trade surplus of 0.06 USD Billion in May of 2014. Balance of Trade in Colombia averaged -0.07 USD Billion from 1980 until 2014, reaching an all-time high of 0.81 USD Billion in December of 2011 and a record low of -1.15 USD Billion in April of 2014.

The trade of balance has been much more volatile since 2007, which coincides when the NAFTA agreement was signed between the US and Colombia.

The Country’s leading markets for exports were U.S. 36.6 %, Spain 4.8%, China 5.5%. Its leading suppliers were U.S. 24.2%, China 16.3%, Mexico 10.9%, and Brazil 4.8%. Today there are 10 agreements in course including agreements with the European Union, Canada, Panama, Korea, Israel and Costa Rica and initial conversations have started with Japan.

Colombia exports

In the past 5 years, exports have on average gradually increased. However, exports amounted to USD 4.3 billion in April of 2014, compared with last year’s USD 4.9 billion (-13.1% yoy). This drop is due to a fall in manufacturing shipments (-19.8%) and lower sales were recorded to the United States (-41.4%), India (-43%), Venezuela (-27.2%) and Ecuador (23.5%). Export growth remains modest and below the import pace due to supply problems, particularly in the mining sector.

Colombia imports

Like the exports, imports have gradually increased in the last 5 years. Imports increased 5.6% yoy to USD 5.5 billion in April of 2014, against USD 5.2 billion one year earlier. Higher imports were made from the United States (+12.3%) mostly fuels, mineral oils and products and cereals; imports of aeronautical from France increased 170.9% and those of electrical recording, iron and steel from China rose 13.6%. Both public spending and household consumption are gaining momentum, fuelling import demand.

Impact of the trade agreements

The positive impact of the NAFTA and other trade agreements are:

  • Opened new markets for its exports (+47% increase in just three years)
  • It has expanded the variety of goods available to businesses and consumers meaning a reduction in the country’s vulnerability to the volatility of commodity prices.
  • It has increased competition and thereby reducing the extent of monopolistic pricing and the inefficiency that results from it, and pushing up the rate of productivity growth.
  • Increased FDI from on average USD 200m prior to 2007 to USD 3,900m in 2014. Laws and decrees were created to remove barriers of trade.
  • With the entry of new participants in the Colombian market and entry of domestic firms in the U.S., it is expected that Colombian firms increase their investment in R&D in order to position their products in the national and international markets, which will benefit domestic consumers who will have a greater variety and quality of products available.

The negative impact of these trade agreements are:

  • Local companies are not ready yet to go out to the market due to a lack of knowledge and skills and a lack of exposure to inexperienced industries. Not yet experienced economies of scale and will not be able to withstand foreign competition.
  • Not all industries will have benefited from NAFTA (e.g. small agricultural producers are competing against a flood of cheap imports, which means prices and income dropped).
  • These agreements make Colombia become much more dependent and vulnerable to these partners’ economies, especially the USA.
  • Drug cartels benefit from NAFTA
  • Colombia’s economy still has competitive disadvantages to maximize the expansion of Colombian’s export markets. The geography of the country, with three major mountain ranges presents difficulties in transporting goods from the Midwest to the coast and their subsequent export

Colombia’s comparative advantages

I firmly believe that Colombia’s existing and well established comparative advantages are:

  • Its location (adjacent to two Oceans) and its natural resources. Colombia has a wealth hardly comparable to any other country in the world. This biodiversity allowed the country to establish itself as a very important supplier of raw materials worldwide because of the relative abundance of resources that it has.
  • Its workforce, with a large pool of qualified professionals with great prospect with scope for improvement.
  • Its sound economy. Currently, Colombia has established itself as one of the main destinations of foreign direct investment: high rates of growth and low inflation that has been submitted, the tax reforms implemented and it has shown outstanding performance among financial turbulence, have become one of the most promising emerging economies and stronger macroeconomic fundamentals.
  • Colombia is looking to capitalise on new industries (e.g. tourism).
  1. Impact on the macroeconomy if there is a sustained fall in the real exchange rate

If there was a sustained depreciation in the real exchange rate it would impact mainly two aspects of Colombia’s macroeconomy:

  • Balance of trade through both imports and exports – it would work in Colombia’s short-term favour as it would grow exports and contract imports, thus reducing the deficit
  • Imports – increases the price of imports, such as machinery (#1 import) and reduces the foreign price of a country’s exports. If consumers (e.g. US) buy fewer imports, while exports grow, AD will rise – and there may be a multiplier effect on the level of demand and output. The potential drawback for Colombia is that in order to produce more, therefore export, it needs machineries.
  • Exports – exporting countries would find it cheaper to buy products from Colombia. However, the risk for Colombia would be a rise in inflation.
  • Higher demand from a fiscal stimulus e.g. lower direct or indirect taxes or higher government spending. If direct taxes are reduced, consumers have more disposable income causing demand to rise. Higher government spending and increased borrowing creates extra demand.
  • Also, monetary stimulus to the economy: A fall in interest rates may stimulate too much demand.
  • Debt is denominated in US Dollars if the Peso falls then it means that they would need more Pesos for a given Dollar.
  1. Impact of the financial crisis on Colombia’s economy

The current global financial and economic crisis is the most serious threat that the world has faced in over half a century. It is worth considering that Colombia experienced the worst recession in its history in 1999, a crisis that originated in the mortgage and financial sector. As a result a number of macro-prudential measures were taken early 2000, including a strengthening of financial regulation, which was essential to avoid a contagion through the financial channel in the global crisis of 2008. Thus, the effects of the crisis were short-term and the country quickly regained the path of economic growth.

Colombian economy was not isolated from the events of the global economy. GDP growth for 2008-1Q revealed the first contraction in four years. It is rather difficult to establish if this change in the trend was a consequence of the international crisis, but from that moment on the overall economic growth started its slowdown. By 2009-Q1 the adverse impacts of the crisis had become more evident, especially in the labour market and poverty reduction effectiveness. According to the Colombian Central Bank most of the slowdown in the economy was due to internal and regional factors, rather than the international crisis. Growth rate decreased from a maximum of 6.9% in 2007 to a minimum of 1.5% in 2009, as a consequence of the poor results in the areas of exports, financial markets, and remittances. One of the main impacts of the slower growth rates was the increased unemployment rates.

As in many other developing countries, policy response in Colombia has limited to some sort of counter-cyclical measures, mainly related to interest rates management, prioritization of already planned government expending on infrastructure, and precautionary securing of public debt financing. Measures include the undoing of recent credit tightening by the Central Bank. From April 2006 to the beginning of the second semester of 2008, the Central Bank increased interest rates from 6% to 10%, in the face of increased governmental expending, high foreign capital inflows, and an expansionary credit market. To try to smooth the impact of the crisis, since the late 2008 and during 2009, the Central Bank decreased the interest rate by 650 basis points, leading to a 3.5% interest rate, the lowest in recent Colombian history, helping grow consumption. Also, the Central Bank dismantled the requirement for commercial banks to marginally increase the amount of deposits they have to keep from lending to the public and the requirement for borrowers in the international market to deposit in the Central Bank a share of the amounts borrowed. The central government took measures to face the likely decrease in government revenue. It obtained Congress approval to increase the fiscal deficit by 0.6% of GDP, as well as to postpone expending in about the same amount. Furthermore, a FCL (worth US$11m) was contracted in May 2009 with the IMF to secure coverage against adverse balance of payments shocks and for increasing the scope for countercyclical measures.

All experts are in agreement that the economy has been able to face the global financial crisis thanks to its sound macroeconomics fundamental. In fact in 2009 the country had a positive growth of 1.7%, while the other economies in the region in general and emerging economies registered negative growth. The main transmission channel of the crisis was real, since a decline in growth in the developed world was presented thus affecting external demand for export products of Colombia. This drop in external demand affected the dynamics of Colombia’s exports and by extension the overall economy. However, as mentioned, the Colombian economy quickly regained the path of growth, and in 2010 showed an increase of 4.0% and 6.6% in 2011

  1. Recommendations to improve future long-term growth

In June 2014, Colombia President was re-elected with a campaign around “peace”. It was welcomed by Europe and the US, which have largely been relying on Santos’s image as a moderate to justify their continued relationship with Colombia. Therefore, please find below Colombia’s key objectives by order of priority to sustain and grow Colombia’s macroeconomics.

Peace process

The key success factor to growing the economy is for Colombia to experience a peace process with the Marxist FARC. It will create greater social and economic stability in the medium term. The economy of the country relies on that peace process because:

  • The new transportation infrastructures will inevitably go through FARC territories, and due to the size of the investment cannot risk being blown up.
  • FDI will only increase if the country can show stability as conflict means instability and investors will lose confidence and exit.
  • Tourism is a huge opportunity but like in the financial sector, tourists will only come if they feel in security.
  • Reduce public spending is a key component in the budget. Peace will come with a huge cut in defence budget, which can they be partially be reinvested. Currently Colombia’s military expenditure accounts for 3.3% of GDP.
  • It will slow down the migration of internal population towards the capital city Bogota. Non-skilled people would benefit more to the economy if they were farming than living in favelas around Bogota.

Transportation infrastructures

One of the main bottlenecks faced by the country is poor quality and coverage of transportation infrastructure, which increases transaction costs and transport, thereby reducing the competitiveness of various sectors of the economy, such as industry and trade. According to the World Economic Forum, Colombia is ranked 108 of 144 in infrastructure quality, and less than 15% of the roads are paved. Transport also carries an important social and environmental load, which cannot be neglected. At macroeconomic level, transportation and the mobility it confers are linked to a level of output, employment and income within a national economy. The aim is for transportation to account for 6% of the GDP. The added value and employment effects of transport services usually extend beyond employment and added value generated by that activity; indirect effects are salient. The Government has developed a $ 60bn ambitious plan which aims to reduce this gap by developing infrastructure projects fourth generation (4G), which will be built and will conform more than 8,000km of roads and highways between 2012 and 2020.

Public finances

Colombia has made significant achievements in economic terms in recent years as the reduction of inflation, institutional fiscal framework with strong public finances, reducing poverty and inequality. It is crucial for Colombia to reduce its military expenditure and reinvest it into education and raising national income to develop new sectors (e.g. IT, R&D).

Financial Direct Investments

Capital flows, especially foreign direct investment (FDI), are one of the key components of globalization and international integration of developing economies. Larger inflows of foreign investments are needed for the country to achieve a sustainable high trajectory of economic growth. FDI has an employment creation effect. If more jobs are created it will increase the consumption and savings, therefore increasing GDP. As a consequence, we should consider offering foreign companies a tax relief to install their operations in Colombia as well as employing and training Colombian workers.

Benoit Mercier

Pricing strategy: difference between multichannel and ominchannel

As my first post, I thought I would discuss an issue that I have come across throughout my career: multichannel or omnichannel. There is little knowledge it seems within the corporate world of the difference between the two and its implications on retail pricing strategy. Therefore based on my research here is a summary of my findings:

According to the results from the Retail Systems Research report, retailers are facing a wide variety of strategic business challenges in determining the cost of products across channels, which include (1) Customers’ increased price sensitivity (67%); (2) Amplified pricing aggressiveness from competitors (51%); (3) Increased price transparency (47%); (4) Need to protect a brand’s price image (42%); and (5) Need to provide consistency in price across channels (27%). Consumers are utilising a larger variety of channels to browse and buy nowadays in retail. According to Google consumer barometer, 86% of consumers do both online and offline research before purchasing. It might be a retailer’s worst nightmare that a consumer stands before a product, contemplates a purchase, and pulls out a smartphone to see if a better deal is available elsewhere. So managing pricing coherently across channels is a particularly tough challenge for brands that are distributed via multiple channel

1. Understanding multi-channel and the pricing dilemma

Multichannel retailing is the set of activities involved in selling merchandise or services to consumers through more than one channel (Levy and Barton, 2009). All multi-channel retailers are motivated by improving their financial performances, which includes: (1) low-cost access to new markets, (2) increased customer satisfaction and loyalty, and (3) creation of a strategic advantage (J. Zhang et al, 2010). The proportion of multi-channel shoppers has gone up in recent years (Wallace et al., 2004). A recent analysis of online retail sales by Experian indicates that multi-channel retailers accounted for over 59% of internet sales, compared to the 31% garnered by retailers who sell online exclusively.

2. Multi-channel retailing benefits and challenges

Benefits

The growing popularity of multi-channel retailing can be attributed to the benefits received by the consumers as well as the retailers. The greater utilitarian value of online stores in the context of information search and price comparison has been hypothesised by Noble et al. (2005). Multi-channel retailing offers plenty of benefits to retailers. According to Kumar and Venkatesan (2005), the benefits provided by multi-channel customers include:

  • Improved customer perception
  • Increased sales
  • Higher share of wallet
  • Greater profits
  • Better data collection
  • Enhanced productivity

Challenges

According to a research done by eConsultancy. The multi-channel challenges for retailers include:

  • Pricing
  • Consistency
  • Relevancy
  • Understanding customer behaviour across channels
  • Adapting to change
  • Operational costs per channel are different.
  • Different competition per channel

3. Complexities of multi-channel pricing

The main dilemma for retailers are most products stores are a more costly channel than online, and retailers cannot be competitive in both if this is not reflected in pricing. Amongst academics and practioners, there is a clear schism on agreeing the best pricing strategy for multi-channel retailers. Firms have to strike a delicate balance between consumers’ expectations of prices in different channels and the cost structure of each channel (Grewal et al. 2010). There are two school of thoughts and a hybrid solution:

  1. Different retail price per channel for the same product

he main argument in this scenario is that e-tailers (pureplayers) can pass their economic advantage on to shoppers in the form of a substantial price discount, whilst multi-channel retailers basing their pricing strategy on brick-and-mortar operating costs are becoming uncompetitive in the online channel that is delivering 10 times more growth. Therefore, having an adaptive channel pricing structure would enable the retailer to remain competitive and maximise profitability in all channels.

This is supported academically by some of the studies specifically focused on the price competition between online retailers and brick and mortar retailers. For instance, Smith et al. (1999) analysed that online prices are 9-16% lower than traditional brick and mortar prices. Dolan and Moon (2000) studied the pricing and market making on the internet and found that it is optimal for the multi-channel retailers to use a different pricing mechanism on different channels. Tang and Xing (2001) found that price dispersion for pure play e-tailers is lower than price. Reduction in information asymmetry and buyer search costs has led to on average lower prices for products of comparable quality sold through electronic channels compared to traditional brick-and-mortar stores (Hughes 2006).

The cost structure associated with each channel is distinct. In general, a large component of the costs for direct channels are variable costs due to order picking, packing, shipping, processing returns, etc., while costs of brick-and-mortar stores are largely dominated by fixed costs. Therefore, from an economics point of view, direct channels should charge higher prices due to their higher marginal costs, whilst brick-and-mortar stores are more sensitive to the need to generate sufficient sales volumes to cover their fixed costs and thus should be priced more aggressively. This inherent difference in the cost structure puts the direct channels at odds with consumers’ expectations of lower prices in these channels.

 2. Identical retail price per channel for the same product

Although scenario A makes financial sense, it does not take into account the customer’s perception and satisfaction into account. A product’s brand equity and price positioning can deteriorate when consumers see a product online at a discounted price versus in-store. Therefore, the argument in this scenario is that the multi-channel retailer should price the product at the same level irrespective of the costs and competition involved in either channels. This strategy has been branded “omnichannel” pricing. It offers:

  • Consistent price information in all channels
  • Ease the customer experience
  • Remove barriers to purchase

Self-matching policies

As scenario A offers greater financial reward (optimise margins in each channel) and B higher customer satisfaction rate, we have seen an increase in multi-channel retailers implementing scenario A but self-matching in order to keep a good level of satisfaction rate. Self-matching allows a multichannel retailer to offer the lowest of its online and in-store prices to consumers. With such a policy, the retailer commits to charging consumers the lower of its online and in-store prices for the same product when consumers produce appropriate evidence (Kireyev et al, 2015). For example, Sainsburys, RadioShack, Best Buy, Target, Staples and Toys“R”US price-match their online channels in-store.

4. Importance of controlling your distribution channels from a pricing strategy point of view

Retailers have to address questions such as parity in pricing across channels, what markdowns and promotions to implement in different channels. It is crucial for retailers to decide on the right distribution channel and the level of control they want to assert. Pricing conflict is common, and it can jeopardise an entire strategy. Distribution strategy is influenced by the market structure, the firm’s objectives, it’s resources and of course it’s overall marketing strategy. There are three types: intensive, selective or exclusive. From a pricing point of view, only the exclusive channel grants brands a tighter control over the intermediaries’ price. It is very difficult to keep a tight control on intensive distribution channels, as we will see in the Lacoste case study, which could lead to disastrous consequences through huge price drops:

  • Negative PR coverage
  • Negative impact on brand positioning and perception
  • More intense competition within the channel

However, Apple, is a very successful Brand in managing its intensive distribution channels, and they do so through price maintenance. Even though each product has a “manufacturer suggested retail price” (MSRP), each retailer is free to set its own sale price. Apple, however, extends only a tiny wholesale discount on its products. The company supplements its tiny wholesale discounts to resellers with more substantial monetary incentives that are available only if those resellers advertise its products at or above a certain price, called the “minimum advertised price” (MAP). This arrangement enables retailers to make more money per sale, but it prevents them from offering customers significant discounts, resulting in the nearly homogeneous Apple pricing we are used to.

Benoit Mercier