BREVIS EGADE Business School, #21 [English]

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BREVIS Latin American Business & Economic Report

Year II, Issue. 9 | May 22, 2017

Dr. Javier Reynoso Professor of Service Administration EGADE Business School Tecnológico de Monterrey jreynoso@itesm.mx

TOWARD A SERVICE-DOMINANT LOGIC IN LATIN AMERICA

O

n any given day, we use a wide range of services, in transportation, communications, information, lodging, food, finance, trade, education, entertainment, and more.

However, we are seeing the winds of change. The first steps toward developing a service-based outlook in organizations were taken in Finland and Sweden more than three decades ago, and the service-dominant logic has now spread to many other countries.

Besides these lifestyle services, organizations are also demanding more and more business-to-business (B2B) services: logistics, maintenance, couriers, financial, trade, legal, design, professional, and other services, all implying very complex service networks in different business ecosystems. Organizations and governments also build service networks.

Under a service-dominant logic, actors do not exchange goods but specialized competences (knowledge and skills). Goods are not final products that are transformed and traded, but rather are transmitters of resources with intrinsic expertise; there are intermediate products that other actors use as devices in the value-creation process. According to this logic, the client is not a passive recipient of these goods whom we segment, inform, tend to, and so on. The client is an active co-producer of the service. The producer does not determine the value, and it is not intrinsic to goods; it is not defined in terms of value exchange.

Today, people, organizations, and institutions take part in recently emerging business models where value co-creation takes place among different actors through shared resources and needs. As obvious as it may sound, some people are still unaware of it. Today, we live in a service society and economy: 63% of Mexico’s GDP is from service activities, and more than 60% of the workforce is in this sector; furthermore, a large part of the population earns a living in the informal economy. Still, Mexico has a product-based logic. Language is still directed by tangible goods related to an organization’s activities and performance, and products and services are still considered as independent concepts.

According to this logic, the beneficiary perceives and determines value in terms of use value; value is the result of the beneficial uses of resources. Businesses do not create or add value; they only make value propositions. In the service-dominant logic, interactions with clients are not merely transactional; they are relational. The client is an active resource who participates in the co-production and in exchanges.

Wealth is obtained by exchanging specialized knowledge and skills”

Therefore, wealth is not obtained and does not lie in tangible resources and surplus goods; it does not mean having, controlling, and producing passive resources. Wealth is obtained by applying and exchanging specialized knowledge and skills. According to this idea, all businesses are service businesses. ❚ 1 BREVIS


BREVIS Macroeconomic developments in Latin America The growth rate for the first quarter of 2017 in Mexico was better than expected, with an annualized figure of 2.7%. The increase in exports has undoubtedly contributed to this result; total exports exceeded U.S.$35.9 billion in March; nonoil exports, accounting for 95% of the total, recorded an annualized growth rate of 34.7%; there was an important contribution particularly from steel products, with a 27.3% increase, and car exports, with 18.3%. Inflation accumulated 10 consecutive months of increase, registering an annualized rate of 5.82% in April. At its meeting in May, the Bank of Mexico decided to raise the reference rate by 25 bsp, to 6.75%. International reserves declined slightly in March, to a record U.S.$178,704 million. Brazil had an excellent result in total exports; the annualized growth rate in April was 27.8%, reaching a total of U.S.$17,686

million, due mainly to the increase in the primary sector. However, the South American giant is still mired in a recession; the unemployment rate reached a new record level of 13.7% in April. In addition, a new corruption scandal involving Michel Tremer shook regional markets on May 18, when the Stock Market suspended activities after plunging more than 10%, and the real depreciated more than 7%. Brazil will need more than decreasing inflation to get out of the recession. Peru’s annualized rate of inflation managed to yield 3.69% in April, having registered 3.97% in March. At its May meeting, the Central Reserve Bank decided to reduce the benchmark monetary policy interest rate by 25bps, to 4.0%; it is the first reduction since January 2015, when the restrictive cycle was initiated. Economic analysts expect inflation to end the year at 3.2%, slightly above the target range established by the Central

The growth of services in Latin America

Bank (1%–3%). Meanwhile, analysts expect 2017 economic growth to reach 2.5%, down from 3.9% in 2016. Peruvian exports grew 15.5% over the same month of the previous year; if the trend continues, the primary export sector will help improve economic expectations for the remainder of the year.

The service economy contributes the most to total gross domestic product (GDP) in both developed and emerging countries. In 2015, on average, 67% of GDP in Latin America was generated by activities in the tertiary sector, while the average for OECD countries was 74%.

annual growth rate of the sector remained above 6% in Peru and Panama, while in Chile and Ecuador, the figure was higher than 4%; the comparative figure for OECD countries is only 1.6%. However, the low productivity in the sector and the high level of informality in the region limit the impact of growth on the sector.

The tertiary sector contributes the most to GDP in Latin American countries like Brazil and Panama, registering 73% and 69%, respectively. In Venezuela, the contribution is much lower, 52% of GDP. Furthermore, most employment in the region is in the service sector; according to World Bank figures, approximately 70% of employment in Latin America is in the service sector. The service sector has also been the fastest growing in recent years. Between 2010 and 2015, the average

In Uruguay, the benchmark rate of monetary policy remains at 9.25%, continuing the restrictive cycle initiated at the beginning of 2010. Inflation has decreased from its highest point in recent history, when it reached an annualized rate of 11% (September 2016), to 6.46% in April; it has met the Central Bank’s target range (3%–7%). In addition, the unemployment rate continues the upward trend that began at the end of 2016, reaching 8.2% in February, the latest information available. Analysts expect the growth rate of economic activity in 2017 to be 2.3%, higher than the 1.5% recorded in 2016. ❚

During the cycle of high commodity prices, incentives were aligned to increase production in primary goods. The end of this cycle is undoubtedly an opportunity to stimulate innovation in the sector and to take advantage of the fact that the dynamism in the sector is a source of employment; furthermore, with the implementation of appropriate policies, it is possible to create incentives to increase productivity in the sector and to formalize it. ❚

Annual growth rate by sector, 2010–2015

Share in GDP by sector, 2015

%

%

14

70

12

60

10

50

8

40

6

30

4

20

2

10

0

LAC

OECD

ARG

BRA

CHI

ECU

MEX

PAN

PER

Services

VEN

LAC

Industry

OECD

ARG

BRA

CHI

ECU

MEX

PAN

PER

0

VEN

Agriculture Source: WDI, World Bank.

Venezuela deepens its social and economic crisis

Mixed Behaviors in Latin America Markets %

So far this year, the main Latin American currencies have shown mixed behavior. The Brazilian real and the Colombian peso experienced only marginal changes, as is seen in the figure. However, both had previously accumulated a depreciation—31.6% and 51.4%, respectively—since January 2014.

2

The Mexican peso has had the best performance in the region, with an accumulative appreciation of 9.2% since January of this year. However, previously accumulated depreciation was 58.9%, the highest reported. The Chilean peso accumulated a depreciation of only 22.07% in the same period, the lowest among the most-important economies in the region.❚

70

The situation in Venezuela continues to deteriorate. Social protests and low estimated economic figures portend another difficult year of ongoing economic and social crisis.

60 50 40

30 000 25 000

30 20 10 0 -10 -20 -30

2014

2015

MXN

2016

COP

accumulated 2014-2016

2017

CLP

BRL

Source: Own estimation, with data from Bloomberg; refers to spot price. Last observation, May 12 , 2017. th

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International Reserves, Venezuela Millions of Dollars

The International Monetary Fund (IMF) estimates a drop in economic activity of 7.4% for this year, while inflation is expected to reach 720%. International reserves continue to decline. Since Nicolás Maduro’s takeover in March 2013, there has been a total loss of 41%, to U.S.$10,000 million. Meanwhile, the bolivar has lost more than 400% of its value on the black market in less than 7 months. ❚

20 000 15 000 10 000 5 000

2012

2013

2014

2015

2016

17

3 Source: Thompson Reuters, monthly figures through March 2017.

BREVIS


BREVIS | EGADE Business School Editorial Committee: Dra. Sonia Monárrez, Dr. Jorge Velarde | Co-editing: Santiago Velázquez | Design: Daniela Barajas Contact: Dra. Sonia Monárrez | Tel. 52 (81) 8625 6155 | e-mail: sonia.monarrez@itesm.mx

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