By: Giulio Chiesa

Thoughts on a difficult concept: thinking strategically.

Among the concepts that make up a company’s management and administration, the one that has caused more controversy in both the business and academic world is strategy. I remember that it started to infiltrate the industrial and commercial field at the end of the sixties. I came across it during a violent positioning struggle between the four giants of the American chemical sector and the pharmaceutical companies, which were the first to show a disturbing ability to take over competitors. Bruce Henderson from the Boston Consulting Group started this revolution with his “Growth-Share Matrix” and the “Experience Curve”, which shook corporations and universities to the core.

Throughout the years, several articles, books, and booklets on strategy have appeared in several languages, seeking to formulate an appropriate definition or “how” to develop a strategy. oday in 2010, after so many ups and downs in the business world, some more enlightening than others, it is clear that strategy is a decisive factor in the results obtained by any organization or institution. It has been argued that strategic thinking begins with a good business model that takes into account those necessary economic variables related to the goal.

In a competitive world, value creation is a function that company’s top management should take on with enthusiasm. In fact, it is now argued today that a company’s final goal is the creation of value. However, the presence of a competitor demands from us a better search of business alternatives, which implies distinguishing ourselves from the rest. But distinguishing in terms of what? This list of options can be very long. We will concentrate on what is “essential”: innovation (not only technological), choice of markets and clients, adoption of exemplary customer service philosophies, empowerment, and an ethical stance. Entrepreneurial history is written by those elements of distinction.

Linking Strategy to Results

In 1964, Peter Drucker wrote one of his most renowned management books, which he planned to entitle Business Strategy. His editor conducted some informal surveys because at that time the word “strategy” was inevitably tied to military situations.

Drucker cleverly realized a title’s commercial importance and agreed to change it. It became “Managing for Results”, a real poem in business literature.

Drucker cleverly realized a title’s commercial importance and agreed to change it. It became “Managing for Results”, a real poem in business literature.

Unlike war situations, where there is a winner and a loser (nowadays it might not be so) in the business world there is room for more than one winner. Wal-Mart, in the United States, is definitely a winner as well as Harvard Business School (HBS). But Target is also a winner by choosing as its core strategy to create value based on style and fashion for its customers, without exclusively focusing on the lowest price, as well as the visionary Business School of the University of Virginia that in a recent survey outranked the very liberal HBS. Those companies wanting to please everyone will lose because they are not able to compete with an edge. Success is limited by their reluctance to change; in other words, they do not want to venture into the land of strategic thinking.

Are there Rules and Referees?

There are three referees: stockholders, markets, and employees. Stockholders do not have a lot of patience. The market had some, but it is becoming more rebellious. Employees are more flag bearers than referees. There is only one rule: be aware.

• Be aware of how difficult it is to maintain differentiation and how all the changes and technological advances of the past 20 years have contributed to minimize the duration of competitive advantages, especially in very dynamic markets dedicated to research. This awareness is conducive to innovation.
• Be aware that building entry barriers by legal and ethical means, or alternatively, moving quickly to other markets, especially those where brands and patents are respected, however without excluding, with the appropriate products, those emerging markets that are already making headways.
• Being aware of how strategic planning tends to focus more on the numbers rather than guaranteeing the involvement of those assigned to the project. Such an attitude shows ignorance to the fact that execution is not a system’s job but rather a person’s job.

The Danger Lies in the Global Competitor

When these ideas are taken to a global scale, strategic thinking loses linearity, the implementation of strategies becomes more complicated, and the amount of energy required in both human and financial resources increases to incredible levels.

Luckily, someone always appears on the scene with research and publications, deserving a round of applause such well-known cases are Michael Porter and Henry Mintzberg, and more recently (1989) of Gary Hamel (consultant), and C.K. Prahalad (professor at the University of Michigan, who left us on April 10, 2010).

Quoting the authors of “Strategic Intent” (article published in 1989 in Harvard Business Review):

…regaining competitiveness will mean rethinking many of the basic concepts of strategy. As “strategy” has blossomed, the competitiveness of Western companies has withered. This may be coincidence but we think not. We believe that the application of concepts such as “strategic fit” (between resources and opportunities) “generic strategies” (low cost vs. differentiation vs. focus) and “the strategy hierarchy” (goals, strategies and tactics) have often abetted the process of competitive decline.

These are harsh words for those who have not been able to anticipate the actions of global competitors.

Other Legacies that G.K. Prahalad Left Us.

1. 1.Companies that today are global strategic leaders began their ascent in the market with greater ambitions than their existing resources and capabilities.
2. 1.Competition analysis does not end with the tools proposed by Michael Porter. The most feared competitor is not the one whose technical, financial, and human resources are easy to analyze and understand. The real danger comes from the talented competitor that is highly “resourceful” and makes constant and dynamic use of his competitive advantages making it practically impossible or at least expensive to overcome.
3. It is a mortal sin to dilute efforts. Prahalad expresses so in a few words: “Take care of your core competencies.” It means that business is serious and not a toy in the hands of greedy executives..
4. Another lesson is the responsibilities entrusted to executives: a) in order to create value – and he adds – clients should be given the responsibility of becoming co-creators of consumer products b) to create, in a globalized world, more profitable and fairer markets by including the lower income classes in the social pyramid.

Strategy, Leadership, and Strategic Planning

Planning will never become a substitute for leadership. Strategic leadership, based on the intellectual harmonious rapport among individuals (CEO, general directors, presidents), groups ( management teams) and corporate government, goes beyond the interpersonal aspects and issues normally associated with leadership, aimed to obtain a higher level, ethically flawless performance (Finkelstein).

The leader is the first to understand the difference between strategic thinking and strategic planning. Any confusion can cause extremely unpleasant situations. The leader teaches and is encouraged to teach that the objective of planning is to create winning strategies and not to dedicate excessive resources to show their convenience. . In contrast, strategic thinking directs the company to face the markets’ competitive realities ,and to detect and exploit those constantly emerging opportunities. Once strategic thinking is allowed to roam freely in the company’s hallways, it is capable of creating a formal discipline of planning which is the best path to develop successful strategies free from internal rivalries (Mintzberg, Andrews).

Strategy is fruitful. Making a strategic plan is like bearing children. An effective plan makes improvements both in strategy as well as in performance. There is no better task for directors than to shape their strategic initiatives into the action plan. Our experience as company directors is like a self-tailored suit that shines more by adding accessories created by others. The following are some examples:

• Avoid the home-run mentality. Strategic planning is oriented to trigger gradual improvements rather than producing quick results everywhere.
• Do not acquire companies or products with the sole objective of generating accelerated growth. The intelligent strategist offers his best contributions when he insists – because he is convinced – that the ultimate corporate goal is to create new internal opportunities. By doing so, he will adequately manage group and personal motivations, empowerment, and patience.

How Top Management Participates in the Strategic Process

In a serious, unadorned, pragmatic and non-academic way, we can mention some of Top Management’s efficient steps in its participation in the strategic process.

• Developing the strategy’s formulation: what products to choose, which markets to highlight, how to neutralize the competition, how fast to grow, how to distinguish itself from the rest, etc.
• Participating in the implementation: allocating resources, setting principles, policies, and programs, and developing an organization aligned with the company’s strategy as well as goals.
• Developing a context (providing executive personnel, proposing a remuneration system in terms of qualitative and quantitative indexes, educating personnel in promoting respect, education, and style) that contributes to support the company’s sound growth and development.
• Negotiating purchases and/or sales of assets and businesses, increasing or decreasing investments in R&D, avoiding situations in response to fleeting fashion trends, and using symbols to address messages.

Epilogue

The analysis of management concepts and its complex topics, such as the concept of strategy, must not end with the lightness of proverbs or with definite or unchangeable conclusions. Therefore, our conclusions aim to only highlight some issues not included in the previous pages and those that I think should be kept in mind:

• Not all the companies appear on the market with the arrogance of Google or i-Phone. Most have to learn to walk before they can run. There are more Davids than Goliaths, but, at the end, Goliath wins more victories..
• Benchmarking is as old as Methuselah. All Roman statues are copies of Greek models. Copying in an intelligent way does not imply a lack of intelligence.
• Innovation is a state of mind of the Boss. If he does not believe in innovation, the desert of conformism will prevail in his company.

Strategically speaking, innovating is eliminating old ways of thinking (organizational pyramids), old ways of acting (working solo), taking away what is useless (wordiness, circumlocution, demagogy), matching content and form (presentations, assemblies), and developing one’s own style (tidiness, kindness, awareness).

A company’s life (actually, life in general) is a trade-off that is the strategic equivalent of a fork in a road. Whether ascending, descending, or walking there are always many forks. If the “world is flat”, an insidious idea, , we should expect to find fewer detours on such plains. However, this is not the case. Even on the plains we can make the wrong turn in the absence of a compass (our strategy). That would be a shame, right?

Bibliography

Prahalad, C.K., y Gary Hamel, (1994). “Competing for the future”, HBS Press.

Prahalad, C.K. (2004). “The Future of Competition”, HBS Press.

Prahalad, C.K. (2004). The Fortune at the Bottom of the Pyramid, Wharton Publishing.

“La inclusión como estrategia central” (junio-julio 2010), Gestión, pp. 116-120.

Finkelstein, Hambrick, Cannella. (2009). “Strategic Leadership”, Oxford University Press.

Mintzberg, H. (1994). The Rise and Fall of Strategic Planning, The Free Press.

Hamermesh, R. G. (2001). “Making Planning Strategic”, Harvard Business Review 1991.

By: Veneta Andonova y Mauricio Losada

Although it is no longer new the follow-up of multinational companies in emerging countries, its study is relatively a new interest in literature that specializes in international businesses. This interest is due to a certain fact that is that up until a few years ago, the purchase of companies abroad was almost the exclusive power of developed countries multinational companies, but currently many firms of emerging economies have consolidated as multinational leaders in their sectors, buying companies in highly competitive markets. Some of those cases are: Cemex, the Mexican cement producing company that today is the second cement company in the world, Companhia Vale do Rio Doce (CVRD), the Brazilian mining company and Embraer, the Brazilian manufacturer of aircraft. These multinational companies of a Latin American source are examples of the Multilatinas.

How do Multilatinas emerge?

In an attempt to explain the growing expansion of multinational companies from emerging markets, some of the proposals related to the traditional internationalization theories have lost their relevance. Santiso (2008; p.12) states that now it is not enough to think that access to cheap labor, the control of natural resources or managerial/technical skills acquired during periods of state protection, are sufficient arguments to explain this trend. Their ideas stem from these approaches by stating for example that innovation is a distinctive feature of the main emerging countries including Latin-American multinationals.

Another explanation to the phenomenon of the multilatinas is provided by Cuervo-Cazurra (2008; p.148). This author states that the changes in the institutional environment forced companies to face new scenarios, in which the skill to innovate and grow was crucial to stay current in the markets. The liberalization of the economies that took place at the end of the eighties in most of the Latin-American countries allows the entrance of world renowned foreign companies to respond with improvements in their efficiencies and innovation.

By tradition, the studies on Latin-American or multilatinas multinational focus above all in Mexican and Brazilian companies that sometimes include Argentinean or Chilean companies, and leave aside the rest in the “others” categories. However, it seems that this approximation to the study of multilatinas companies will have to change at least for the Colombian companies. In the most recent study of these organizations made by the America Economía magazine, a notorious growth in sales of the Colombian Multilatinas happened between December 2008 and December 2009; high above the data of Mexican and Brazilian enterprises. This new dynamism amongst Multilatinas that also coincides with a global crisis presents interesting questions on the strategy of Colombian multinationals and the threat this could represent for the Mexican and Brazilian consolidated enterprises.

In the first place, it is possible to analyze the multinationalization movement of several Colombian companies to better understand their positioning in international markets due to the recent Cuervo-Cazurra (2008) hypothesis, that states that multilatina companies (Colombian, Mexican or Brazilian) have some advantages when they decide to embark on even less developed institutional environments (Africa, for example).

The importance of the institutional environment for the companies lies in that it is a given scenario, the managers develop the necessary skills to manage the institutional world contingencies that surround them, they generate assumptions and attitudes that influence the way firms establish relationships with their environment (Cuervo-Cazurra & Genc, 2008; p. 961). In a multinationalization process, the comparison between the local institutional environment and the institutional environment of the country where it takes its investments, may give the firm “signals” of the degree of easiness / difficulty it will face during the process and in the subsequent development of its entrepreneurial activities in the host country.

In accordance with this statement, one can expect that when foreign investments are made, a firm tries to enter those countries where institutional conditions are similar or lower than those they usually face in their country of origin. This would allow companies to benefit from the experience in managing difficult institutional conducts and would positively impact their competitive advantage abroad. Below we shall assess this hypothesis to see if it reflects the behavior of Colombian companies and if it explains the spectacular growth in sales of Colombian multilatinas which is way higher than the figures reported by Mexican and Brazilian companies. In addition, we shall present some proposals on the internationalization strategy of multilatinas in general.

The Empirical Study

One of the difficulties in studying a new phenomenon is the lack of data on the object of interest. This work is no exception, and therefore the first step in the research was the construction of a data base of companies that made direct foreign investments (DFI) from Colombia in any place in the world. Information was searched in the specialized press on Colombian companies that had made direct investments abroad in the period 2000-2008.

Information was gathered on the year of operation, the sector and the country to which the investment was destined. In addition, it was investigated if a company belonged to a national entrepreneurial group and if it had any experience in international markets (exports, acquisitions, affiliates, etc.). Twenty six companies were identified and 15 beneficiary countries of DFI from Colombia. In the data base of the Superintendencia de Sociedades de Colombia (Colombia’s Superintendence of Corporations) data of current assets and current liabilities was collected and the current ratio of the companies identified was calculated.

Simultaneously, information was collected on the institutional differences between Colombia and the DFI countries of destiny. Databases of the Heritage Foundation were studied to determine the Economic Freedom Ratio (ILE, as per initials in Spanish) of Colombia and the country of destiny in the year in which the investment was made. The same procedure was followed with the World Wide Governance Indicators (WWGI) data of the World Bank, from which he Rule of Law (ROL) indicators were taken.

The table herein below summarizes the relationships found in the variables studied and the decision to make DFI by the Colombian companies between 2000 and 2008 using a logistic regression.

Belonging to an entrepreneurial group, in the international experience of the current ratio are variables that in accordance with the data, do not significantly impact the probability that the Colombian firms included in the study decide to go with DFI to a specific country. Physical distance does have a significant effect on the decision to do DFI and this result supports the approaches of the incremental multinationalization model companies us, for example when making investments in nearby countries benefitting from the knowledge they have or acquiring additional knowledge with more ease, due to the fact that the exchange of information becomes more fluid in view of the existence of common elements such as language or the history of countries; these issues facilitate the mobility of the various key elements to be successful in the multinationalization process, such as factors associated to capital, management technologies and capacities of the human resources in general.

At the same time, we see that the institutional difference between Colombia and the countries of destiny negatively affect the decision of Colombian companies to make DFI. That is, the companies try to establish operations in countries that are not only physically and culturally close, but also institutionally, to benefit from the knowledge on the management of its operations in institutional environments with a similar degree of development. Also, we found that the firms do not take into consideration if the institutional environment in the country of destiny is stronger or weaker than the Colombian, only if there is or not a difference with the institutional environment of Colombia. For the Colombian multilatinas, this result only partially supports the recent idea of Cuervo-Cazurra et al. (2008; p.975) on the potential of multilatina companies in institutionally less developed environments and it has major strategic implications for the internationalization policy of these companies. We find that in general, Colombian companies continue to follow a strategy of multinationalization influenced by the similarity of conditions and the sudden increase in the sales volume of these companies cannot be explained by the hypothesis of search of institutional differences. In summary, it seems that the increase in presence of the Colombian multilatinas is due to their capacity to benefit from factors of similarity and closeness and not so much by the more risky strategies presented by Cuervo-Cazurra et al. (2008). This result is of interest to the Mexican and Brazilian multilatinas that traditionally excelled in the studies of multilatinas in part due to the fact that their internationalization strategies have been different.

Final Thoughts

The partial support to the ideas recently presented based on which the competitive advantage of the multilatinas could be built regarding the capacity to manage an underdeveloped institutional environment deserves a final thought. The first multilatinas, like the Mexicans or Brazilians built success when they conquered markets in institutional environments more competitive developed than theirs. This internationalization strategy was and is difficult to follow by Latin companies that more recently opted for internationalization specially in sectors with little innovation and technological development. In general these companies are from Latin countries that opted for commercial liberalization later and their companies are less experienced in competing with the leading multinational companies in their sectors. What the Colombian case reveals is that the companies that are facing such a situation almost always try to expand not so much in the markets of developed countries that have well organized institutional environments; they rather try to establish operations in the neighboring countries whose development level is similar. Given that several of these “new” multilatinas point to strategies which target market is “the base of the pyramid” or the massive Latin clients, its entrance in other Latin markets has the potential of destabilizing the competitive advantage of local competitors. Consequently, one has to be attentive to a new wave of multilatinas that do not opt to invest in the wealthy countries nor do they want to operate in less developed countries, such as the Africans for example, where it has been argued that there is a true opportunity for multilatinas. The “new” multilatinas look for clients in other Latin countries with similar development. Undoubtedly, companies in the traditional birth countries of multilatinas such as México and Brazil should take note.?

References:

America Economía, (2010) http://rankings.americaeconomia.com/2010/multilatinas/ (página consultada el 10 de julio de 2010)

Santiso, J. (2008). “La emergencia de las multilatinas”. Revista de la CEPAL, 95: 7-30.

Cuervo-Cazurra, A. y Genc, M. (2008). “Transforming disadvantages into advantages: Developing-country MNEs in the least developed countries”. Journal of International Business Studies, 98: 957-959.

By: Imanol Belausteguigoitia

The Entrepreneurship topic has experienced a significant development during the last four decades. This orientation started with the creation of new enterprises and as of the nineties it has extended and included existing organizations. Research on this topic is abundant and it has answered questions on the entrepreneurial process. One of the findings is the transcendental motivation for the businessmen when starting a business, namely the wish of independence. This variable is related to others such as commitment and effort (Belausteguigoitia y Portillo, 2003). When you become an entrepreneur you wish to improve revenues, provide for the family, etcetera, but the basic idea is to build a future related to your own initiative without having to continue to be united to the organization that generates the job. Now, those organizations that allow the development of the entrepreneurial spirit of their collaborators and offer more autonomy will have greater possibilities of withholding that talent and applying it to appropriately transform the company.

The name Intrapreneurial has been given to those workers who are able to exercise their entrepreneurial spirit inside their organizations. Without having to go out of their companies they experience a feeling of autonomy that is right for those who decide to become entrepreneurs when they leave their organization.

Under the light of entrepreneurs in this article I explore some of the complications experienced and we shall discuss the four dilemmas companies have before they decide to go “entrepreneurial”

a)  What should change? and what should remain in an organization?

b) The implementation of incremental changes versus radical changes

c) Administrators versus Intrapreneurs

d) The need to achieve versus the fear of failure

What should Change and What should Remain in an Organization?

The members of organizations must agree that in order to achieve success in the long term they must evolve and this inevitably means to change. It is said that man is an animal of habits who does not easily accept changes. On the other hand, it is normally clear that there are issues that should remain, and this is the case of some values, principles and behaviors that in many enterprises have accompanied them since they were created.

This dilemma lies in that it is not clear what should remain and what should change in an organization. It will be very useful to make several exercises, to have clear in our minds what is the path an organization should follow, set the objectives and define the procedures. After a careful analysis and not few discussions amongst the collaborators, the criteria unifies amongst other, those relating to what should remain and what should change.

Implementation of Incremental or Radical Changes

LOrganizations that are not able to evolve are paralyzed and disappear; like the dinosaurs: Good entrepreneurship implies constant transformation of products and processes. This transformation is achieved through two different kinds of products and processes: a) incremental and b) radical (Leifer et al.) changes. Incremental changes refer to gradual evolution, at times imperceptible but constant that slightly modify a product, and this is the case of the “improved”, that makes minor changes in production, substitution of inputs, etcetera..

Radical changes are those that imply a relevant shift in the processes, products or the way they are traded or other changes that can be deemed relevant and even spectacular. They imply major risks; they are more unpredictable, but if they are successful they transform not only the organizations that make them, but also their markets. Enterprises need both, although radical changes are those that challenge more, generate maladjustments and create tensions, however, if they are the right ones, they foster spectacular benefits.

Administrators Versus Intrapreneurs

Traditional management is not oriented to the entrepreneurial spirit. The managerial process implies the setting of objectives, planning, organizing, implementing and control; persons who are able to perform these activities in an orderly and efficient manner are considered to be good administrators; and they are not outstanding due to their capacity to innovate, or take risks. Actually, they are usually adverse to it and feel more comfortable when faced with few risks. Entrepreneurs have a different nature and they normally challenge the status quo and the stable pace of companies. Some researchers of this subject, state that the entrepreneurial orientation in an organization is made up of three components: a) proactivity, namely the attitude of getting ahead of future problems and it is contrary to reactivity, that waits until something happens to act, b) innovation, which is the capacity to create more efficient products and processes and c) risk acceptance, which is the will to assume consequences when faced with uncertainty (Lumpkin y Dess, 1996). An entrepreneurial organization will be more dynamic, will create new ways of doing things and will face risks with a good attitude. Instead, a non entrepreneurial organization, will avoid deviations that are normal in entrepreneurial companies. The uncertainty innovation implies where the cost of inventing a new product is not clear, and where the consequences of doing so are unpredictable, will not be well received by traditional administrators, who are normally risk adverse and far too committed with budgets.

One of the fundamental ideas of Intrapreneur is that the probability of survival of companies that assume an entrepreneurial orientation is higher.

The Need to Achieve Versus the Fear of Failure

Some research shows that normally entrepreneurs have a high need to achieve (Bird, 1989). This makes them endlessly look for challenges that necessarily imply risk. It is assumed that the level of risk they face is moderate, although it may seem very high to others. Entrepreneurs do not see it in this way perhaps because they have trust, knowledge and the appropriate attitude for their initiatives.

Now, while in organizations have individuals that have a high need to achieve, there are others whose fear of failure paralyze them when faced with the possibility of being entrepreneurial. I have realized that the culture of some Mexican organizations is filled with fear of failure. This fosters their not taking risks and the simple idea of doing things not in the traditional way is considered daring. Now, if an initiative does not reach the expected results, even if implemented with responsibility and knowledge, the organization could punish those that undertook it. In organizations where there is really an entrepreneurial spirit, failures are considered to be experiences from which they learn and this does not necessarily imply a punishment. Under the premise that there are bad decisions that lead to good results and good decisions that lead to bad results, those that assess entrepreneurial work see not only the results, they also take into account the process. When punishing failure, an organization’s collaborators know that there are consequences to failure. This on the one hand could be positive, but on the other, it is an efficient way to inhibit initiatives and also the entrepreneurial spirit of those that work in that organization.

Conclusions

There are dilemmas organizations face when they make the decision to change, to be entrepreneurial, and to innovate. Briefly we present conclusions for each one of the dilemmas presented in this article:

1. 1.A sound balance should be sought between what should remain and what should change. This is facilitated when a careful organizational analysis is made and a clear vision of the company is created.
2. 1.Entrepreneurial strategies should consider the need to transform and achieve a sound balance between the incremental and the radical changes. They should be especially careful with the selection and implementation of the latter.
3. 1.Organizations have to assume an entrepreneurial orientation, without neglecting the good work of containing administrators; they should assume more willingness to innovate and take risks, without waiving their control functions.
4. To punish failure may inhibit the entrepreneurial spirit in companies. It is necessary to develop a system of consequences, but not necessarily an inappropriate result should be punished. The need to achieve is a drive for doing thins properly, and therefore it is necessary to channel this need properly in organizations to make it fruitful..?

References

Belausteguigoitia, I. S. Portillo. (2003), Influence of Organizational Climate and Entrepreneurial Orientation on Commitment and effort in Latin American Firms. Frontier of Entrepreneurship Research.

Bird, B. (2000). Entrepreneurial Behavior. Estados Unidos, Scott, Foresman and Company.

Leifer, R. et al. (2000). Radical Innovation. Estados Unidos, Harvard Business School Press.

Lumpkin, G., Dess, G. “Clarifying the Entrepreneurial Orientation Construct and Linking it to Performance”. The Academy of Management Review, Vol. 21, No. 1 (enero 1996).

By: Fernando Velasco

“”The issue is to sell an experience and not a mere product”".

Gian Luigi Buitoni, former president of Ferrari North America and creator of the Dreamketing concept.

A long time ago I found in books, fora and congresses the “marketing of experience” concept and ever since it became a familiar term for me. As a result of that I started to analyze cases and situations where the process happens in a real and tangible way, and I have found examples that illustrate this concept.

In the book Conéctese al futuro, (Connect to the future), Lys Marigold and Faith Popcorn mention that one of the current trends of consumers is individualism: “By feeling unconnected in the depersonalized information era, consumers resort to tailor made and personalized products and services”.

Undoubtedly, consumers are beings whose habits and preferences change. Those of us who have been engaged in marketing for several years are obsessed with the following paradigm: “Deliver everything finished so that the customer only has to use it / eat it / and wear it”, namely, the basic objective sought was the maximum comfort for customers / users and to go from standard to personalized services and now with the direct intervention of consumers themselves.

Time goes by and at present we are seeing a change in several paradigms, and the customer becomes an active agent of change – I would even go further – or until he or she plays the main role in purchases, whether by selecting the materials / ingredients / colors and even the integration or assembly of the final product.

Let’s see some current and successful examples:

IKEA

• Its objective is not to only sell furniture to be assembled.
• It provides a different purchase experience where you choose, measure, combine, transport and assembly a piece of furniture..
• Far from this process becoming a heavy burden, it is enjoyable, a ride, an experience that begins in the parking lot.
• Ikea thought about everything, measuring tape, pencil, notepad, catalogue, the children, food, a mini-supermarket, transportation, its own credit card, even if required, assistance in assembling..
• It has a simple but integrating and impact value proposal: “We do our part, you do the same … And together we will save money!”..
• Therefore, far from being the selection of a finished piece of furniture for the household, it even becomes a gathering of family, relatives and friends, and everyone participates and at the end they can all proudly say: “We build it and we made it!”..

BUILD A BEAR

• Then it went from selling standard and finished stuffed animals (as in many other businesses) to the active participation of a girl (customer), who chooses the colors, forms, eyes, heart and other components to at the end have a bear she built..
• The story does not end there, the girl gives it a name and registers it (birth certificate).
• The relationship continues because she will buy the bear clothes, accessories and novelties that are being constantly launched.
• A complete purchase experience where the isolated elements of a teddy bear are the ingredients to build a unique bear.

THE “ENCHILADAS” HOUSE

• From the sale of standard “enchiladas” (a special Mexican taco) where the client chooses the “tortilla”, the filling, the sauce and the finishing touch to the “enchilada”, and thus having a unique and personalized “enchilada”.
• Variety of tortilla types.
• Variety of sauces / “moles” (a special Mexican sauce).
• Variety of fillings (meat).
• Cheeses, onions and other elements to finish an “enchilada”.
• A Mexican cuisine business where the client participates in the ingredients he or she wants to use to prepare a unique and personalized “enchilada”.

With these three examples (two international and a national one) we prove the customers’ trend to actively participate in the preparation / assembly / setting of their products and services, playing this central role to create a personalized product. To compete with a different value approach the companies I mentioned established value variables that were nonexistent in the market.

Besides breaking the paradigm of competing only through prices, because these three companies cannot be compared (products / services) break the value perception generated:

• How much is an “enchilada” that has the ingredients, sauce, meat and decoration that I like? With what can I compare this?li>
• How much is a teddy bear worth to a girl who chose the pieces and gave it a name and who also has a birth certificate?
• How much is the piece of furniture I chose and assembled over a weekend with the participation of my entire family?

These are all unique experiences.

In conclusion, we all have before us the challenge to involve our customers in a process, and this is an interaction that will create a unique experience and a personalized product, and through it we can compete with added value and not only with price. And in closing, I quote a paragraph from the book La estrategia del océano azul (The blue ocean strategy), which undoubtedly synthesizes everything I mentioned above:

“Innovation in value is the cornerstone of the blue ocean strategy. We have given it this name because instead of whirling round victory over competition, the objective is to not be important because of the qualitative leap in value both for the buyers and also for the company, and by the way opening a new and unknown space in the market”.?

By: María Fernanda Gómez

Considerations for strategic management of the capital structure, survival and profitability of companies.

“Borrowing has been the answer to all economic troubles in the past 25 years. Now the debt itself has become the problem.”

Philip Coggan, The Economist

The recent financial crisis made manifest the financial vulnerability of big companies that if compared with most could be considered to be successful. This was the case of corporations such as Cemex, Vitro or Comercial Mexicana. A bad cash flow forecast, excessive debt in the balance sheet and a wish to make transactions more sophisticated and obtain short term gains with derivatives, caused several of them to restructure their debts in a struggle for survival; others, perhaps smaller, disappeared.

In difficult times, companies need to have a margin to maneuver that allows them to benefit from opportunities. Therefore an appropriate capital structure planning and their liquidity management become valuable; more than valuable, they are essential and unwaiverable. An appropriate capital structure allows them to benefit from new opportunities generated by volatile conditions, while liquidity management allows them to meet fixed costs and survive, even if those opportunities do not happen.

Today, companies should be attentive and adjust their capital structure to changing market conditions and Companies should balance their financial opportunities with strategic planning. Under all conditions, the Chief Financial Officer (CFO) should answer two critical questions. The first is: this is the right time to pay dividends or is it advisable to reinvest? And the second: how should these profitable projects be financed, with debt or with capital?

It is then evident that a key factor in the decision to invest vs. paying dividends is the existence of profitable projects. A basic principle to generate value in the organization is to return cash to the stockholders as payment of dividends or buy back the shares when the company does not have the opportunity to make profitable investments.

Regarding financing decisions, if the Company is efficient and effective in obtaining resources, it may have a significant competitive advantage that will help it grow at a good pace. The financing decision is related to a key concept in finances: capital structure.

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What is Capital Structure?

Capital structure refers to the different funding sources that a Company may use; it is the capital and debt mix that funds the assets and investment projects.

What should be this mix objective of the Financial Department? Maybe take the cheapest financial tool. However, the nature of each source, the objective pursued in obtaining the financing, the sector in which the Company operates and the economic conditions affect the availability of resources and their cost. Another objective could be to have a zero debt balance, but benefits such as the possibility to deduct interest payments or the discipline it presents would be lost.

Does it make any difference to More of One than to the Other?

More than 50 years ago, Merton Miller and Franco Modigliani (M&M), pioneers in the capital structure study proved that in perfect capital markets the use of any financing source did not affect the value of the company and therefore, the companies’ risk was not altered. Their results generated a controversy and ever since several researchers and practitioners have studied their impact on companies.

We know today that the capital structure decision affects the value of companies by their impact in cash flow and capital cost, and in periods of crisis, the companies’ mix may exacerbate the possibility of bankruptcy. Then, what elements do we have to consider to make good decisions?

Facts to be Considered When Defining the Capital Structure

When you making this decision, the CFO shall assess five elements:

1. The wish to maintain financial flexibility.
2. The ratio between weighted average cost of capital and profitability.
3. Debt: gains and losses.
4. Control, how much?
5. Maturity of business.

1. Financial flexibility allows companies to face short term contingencies in the short term under various economic and financial conditions, and also to benefit from non visualized opportunities. The flexibility companies decide to maintain will depend upon factors such as market stability, the entrepreneurial and competitive environment, the possibility to invest in new projects, the relevance of technology and regulatory changes. In addition, it helps obtain credits under favorable conditions.

However, CFOs should be aware of the disadvantage of being too flexible. For example, one can obtain a lax cost policy and increase the probability of investing in projects that may generate a lower return than the cost of opportunity because it will not be bound to make interest payments.

2. Weighted Average Cost of Capital (CPPC, as per initials in Spanish): when companies choose their financing sources, they will have to pay the cost of the debt and / or offer profits to the stockholders on their stock. The weighted average cost of capital is the sum of the financing cost of each weighted source based on its contribution to the total capital of the companies. This weight is based on the debt and capital market value.

The CPPC is one of the most important elements when determining the financial soundness of companies. It gives management the minimum rate companies should obtain on their assets to satisfy capital suppliers so that they do not look for alternative investments. For example: According to Bloomberg data as of December 2009 América Móvil reported a 17.31 per cent return on assets a 28.67 per cent return on capital higher than the 11.60 per cent weighted average cost of capital. However, during the same period Cemex reported a 0.23 per cent return on its assets, a 0.70 per cent return on capital and a 13.40 per cent capital weighted average cost. Today, América Móvil is an attractive company for investors and it operates without problems, while Cemex has had to restructure its debts to finance this situation.

The following figure shows the relationship between the weighted average cost of capital, the value of companies and their leverage.

Figure 1. Capital weighted average cost and stock value.

3. Debt: although excessive debt may be harmful for companies, there are two significant benefits that make it attractive:

• Tax Benefit: There is a tax benefit because since interest payments are an expense, they generate a lower tax payment, and this does not happen when dividends are distributed. Therefore, the higher the tax rate, it is more likely that companies acquire debt and even in the case of global companies, they may even try to get debt in countries that have a higher tax rate.
• The use of debt introduces discipline: in modern corporations, where there is a Company (principal) owner and managers (agents), it may be that those agents want personal benefits and thus harm the principal. Companies that have excess cash flows may be complacent and inefficient and the agents’ problem is exacerbated. Debt binds them to make constant payments and therefore agents must align their strategy to cover interest and debt amortization. If they do not do it, they will go bankrupt and thus harm the reputation and the professional career of the company officer.

Without adequate planning, there may be harmful effects that generate capital cost increases. Some of them are:

• Possible Bankruptcy: debt in excess and poor operational flow planning increases the possibility of going bankrupt. This is what happened to Corporación Durango (Codusa); due to its excessive leverage, it fell under Chapter Eleven. This probability increases if the operational risk of the company is high. Therefore, companies that operate in high risk sectors should not increase their default by taking a higher financial risk due to the use of debt, as would be the technological sector.
• Credit ratings and risk tolerance: changes to the drop in credit ratings increases the weighted average cost since a higher compensation will be demanded if the risk perceived is higher. Jointly, the drop in rating may cause that due to the investment regimes or risk tolerance of treasuries, debt stops being an attractive investment instrument in their investment portfolios. For example, the Afores in Mexico are limited to acquiring AAA to A corporate debt. This means of the highest credit quality.

4. Control: due to control issues, companies may decide to amend their capital structure. The stockholders, through their voting right, have rights on the decisions made by the companies. If they are not willing to give up control, the Company’s capital level will tend to be stable, the leverage level high and a risk of losing the financial flexibility.

5. Maturity of companies: the previous elements are to be decided by Company managers and / or stockholders through the financial direction, which is exogenous and establishes that based on the state, within the life cycle of the Company, it will be easy for it to access different sources. The following table shows some characteristics depending upon the growth stage and the financing sources that will determine its capital structure:

Table 1. Company cycle and financing.

In closing, mature companies with cash flow stability and limited investment opportunities may incorporate more debt to their capital structure. Instead due to the high growth rates and the cyclic nature highly uncertain companies should try to maintain lower debt levels and their flexibility and benefit from their investment opportunities or instead, face negative effects.

Final Comments

• Management should calculate and monitor the capital structure and its cost based on an objective value that will depend upon the cycle stage of the Company and the desired credit rating.
• An efficient strategy allows companies to minimize capital cost and to preserve the financial flexibility. It should be in line with corporate strategy; it should align with it and inform the market.
• The desire to control the organization should not limit the use of debt, since significant benefits are wasted. The main advantages derive from the tax benefits, and the discipline introduced to the market and the relative lower cost.
• Some recommendations are to prepare the scenario and / or simulation of flows and assess the possibility of covering the debt, define the debt mix and capital that allows the company to keep the desired credit rating, to maintain a maneuvering margin over the debt level desired to have the necessary flexibility and to define what to do with the resulting analysis.
• Finally, even though there is no consensus on how to determine the optimum capital structure, it is relevant, it affects the value and the company risk. Therefore small, medium or big organizations that are starting operations or have matured, shall control their financing sources.?

References

Damodaran, Aswarth. (2006). Applied Corporate Finance: A User´s Manual. Hoboken, NI: Wiley.

Israel, Ronen. (1991). “Capital Structure and the Market for Corporate Control: The defensive Role of Debt Financing”. Journal of Finance 46, 1391-1409.

Graham, John and Harvey Campell. (Spring 2002) “How do CFO´s Make Capital Budgeting and Capital Structure Decisions?” Journal of Applied Corporate Finance, 8-23.

By: Sandra Minaburo

Starting in 2012, public entities in Mexico mandatorily will have to submit their financial statements prepared with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board (IASB), in accordance with the press bulletin PRESS BULLETIN No. 056/2008, published on November 11, 2008 by Comisión Nacional Bancaria y de Valores (National Banking and Securities Commission or CNBV as per initials in Spanish) in México.

According to the CNBV, this adoption will generate several benefits to the market and to the investing public, amongst other:

1. Enabling both Mexican and foreign analysts and investors to compare financial information prepared by Mexican issuers to that of foreign issuers, producing similar information in financial reports and providing equal parameters in different markets around the world.
2. Elaborating consolidated financial statements, in the case of economic groups that have presence in several countries.
3. 1.Promoting issuance of the foreign companies’ securities in the Mexican market and accept as valid the financial statements based on International Financial Reporting Standards.

Regardless of the benefits mentioned by the CNBV, it is important for entities to think about the impact of the adoption of international standards on the financial, operational and of course accounting decisions, and also the impact and changes users and analysts will have to make to use the financial information prepared under international standards.

Although in Mexico we have been immersed in a process of continuous change in accounting policies, the adoption of IFRSs may generate several problems and one of them is the amount of historical information that has to be gathered to present the financial information; the additional effort to adopt the new standards with new disclosure, presentation and evaluation requirements; the application of an accounting system whose fundamental basis is the professional judgment and the lack of previous experience that could be the framework of reference.

The European experience, as per the UNCTAD 2008 study, shows that the adoption of IFRS not only means a limited technical exercise of exchange of one set of accounting standards to another; it goes way beyond that. The European entities had to implement valuation and monitoring derivative instruments, acquire information systems that could carry double accounting and control records for tax and financial purposes in accordance with the IFRS requirements. These examples imply a situation that per se could affect the different organization areas and structures and also their internal control.

Some of the most relevant impacts the conversion to IFRS could bring about, are:

• The information and financial accounting systems shall be capable of generating consistent and robust information to present the financial information under international standards. They also generate information on the depreciation of assets in compliance with IFRS and capture new information for the disclosures required, such as information by segments, fair values of the financial instruments and transactions with related parties. The notes to the consolidated financial statements under IFRS shall reassess their existing systems and processes to guarantee that they can provide all the information required under the IFRS.
• The adoption of international standards could have a significant impact on the financial statements and therefore in the tax obligations. It is essential to carefully review the existing tax planning strategies to verify that they are still meeting their objectives with the changes undertaken by IFRS.
• IFRS may generate significant changes in the profits reported and in performance indicators. Therefore it is necessary to manage the markets’ expectations and to make analysts aware. Managers must understand the differences that could arise in the way performance is perceived both internally and also in the market and agree on the key messages that will be conveyed to investors and other stakeholders. The profits reported may defer the performance perceived due to the growing use of reasonable values and new restrictions in the existing practices. Consequently, it is necessary to report the appropriate information to adequately assess the performance of the business.

• By adopting IFRS, it could be necessary to renegotiate the contracts that refer to the figures reported, and some of them are the indicators and covenants agree upon with banks which at that time were determined under Mexican standards and that now would have to refer to the figures determined under international standards.
• When adoption is finished, there could be a net effect on the amount of the undistributed earnings, which could represent an increase or decrease in the distributable earnings in subsequent years in view of the new equity available. On the other hand, it is necessary to consider that IFRS are oriented to fair value, and frequently this results in unrealized profits or losses. It should be analyzed if these effects may be considered to calculate the distributable earnings, in order to guarantee that, at the end, the distribution of these earnings does not cause a disinvestment of the company.

Regardless of the impacts mentioned, any conversion project to international standards should start with an impact evaluation, diagnosis activities and an exercise on the possible scope. This will allow management to visualize the extent and complexity of the conversion and thus make better decisions on how to plan, structure and provide the resources for the project and determine the steps to be followed; also, how to decide what accounting policies are going to be adopted and what disclosures have to be made so that users can make their own decisions.

The guide to be followed by the Mexican entities is the International Standard IFRS 1, “Adoption for the first time of the IFRSs”, that establishes as a fundamental principle that the entity that adopts for the first time these standards should prepare its financial statements “as if it had always used IFRS”; that is, that it shall retrospectively apply all the international standards in effect on the closing date of the balance sheet of the first financial statements issued under international standards. In the first place, this implies a tremendous amount of work of gathering all the historical information of the Company, starting with the date the company was incorporated. But fortunately for these entities, this is not really that true because the IFRS 1 establishes some exceptions and exemptions to this fundamental principle in order for the adoption not to represent an onerous, long and almost impossible process.

The exceptions are mandatory. This means that the IFRS 1 prohibits its retrospective application. The exemptions are voluntary, this means that IFRS 1 allows the entity that is adopting for the first time IFRS 1 to determine whether to retrospectively apply one or more of the 16 exemptions established both in Appendix C as well as D of that Standard. It is broadly recommended that the entities carefully analyze the exemptions that IFRS 1 allows, since with their election benefits or damages could be generated.

Lastly, the entities should consider the fact that IFRS 1 binds them to submit three balance sheets, two income statements, two statements of comprehensive income and two cash flow statements, prepared under IFRS, and also a letter clearly specifying all the accounting policies adopted, all the effects of those policies and also the reconciliation between the figures obtained under Mexican standards and those obtained under the international standards. This note should be sufficiently clear, detailed and broad so that users may compare, analyze and make decisions with this information..?

Bibliography

Comisión Nacional Bancaria y de Valores. (12 de noviembre de 2008). “Boletín de Prensa 056/2008″. www.cnbv.gob.mx. Recuperado el 3 de junio de 2010, de http://www.cnbv.gob.mx/recursos/056_Adopcion_IFRS.pdf

IASB. (3 de junio de 2010). “International Financial Reporting Standard No. 1″. www.iasb.org. Recuperado el 3 de junio de 2010 de http://www.iasb.org/IFRSs/IFRS.htm

UNCTAD. (Agosto 2008). www.unctad.org. “Practical implementation of international financial reporting standards. Lessons Learned”. Recuperado el 3 de junio de 2010, de http://www.unctad.org/templates/webflyer.asp?docid=10754&intItemID=1397&lang=1&mode=downloads

By: Yanira Petrides

A daily characteristic of professional accountants’ life is ethics; a commitment demanded every single day to the professional at the service of public interest. However, ethics is a permanent challenge, not only in times of crisis and scandals, but also when there is relative calm.

The word “ethics” comes from the Greek word “???? ethos” that means “habit, custom, practice”. In the introduction of the book “Ethos, destiny of man”, Juliana González explains that the Greek word “ethos” can be spelled in a different way and therefore accepts more than one meaning (González, 1986). And she continues if we write the word ethos with its first letter “? eta” instead of the letter “? epsilon”, according to González it would mean something like “dwell”, which can be read whether external – like the house in which you live – or internal – as a way of being, in essence the “character”. And it is, like a way of being how profession accountants live ethics: as a lair that gives us security, prestige, and also a way to service the public interest.

The International Federation of Accountants (IFAC) was created in 1977; its mission is “to develop and promote the accounting profession with harmonized standards, capable of offering high quality services appropriate for public interest” (IFAC, 2010). Therefore, by establishing a code of ethics, the accounting profession declares its intention to comply with society, to serve it with loyalty and diligence and to respect itself.

One of the crucial points in preparing a code is to get a balance between the standards and the appropriate principles. The IFAC code is a set of principles and values (The International Ethics Standards Board for Accountants, IESBA, 2010) that guides the profession all over the world towards the same path and recognizes the cultural diversity of its members, thus, the IFAC code promotes commitment to the following five items:

• Integrity. Accountants should behave rightfully and honestly in all their professional relationships.
• Objectivity. Accountants should not allow conflicts of interest; they have to be impartial in all of their professional judgment.
• Commitment with competence and professional care. Accountants have to maintain the professional knowledge and skills required by their clients.
• Confidentiality. Accountants should respect the confidentiality of the information obtained in their professional work.
• Professional behavior. Accountants should comply with the law and must avoid all practices that discredit the profession.

The Instituto Mexicano de Contadores Públicos (Mexican Institute of Public Accountants or IMCP as per initials in Spanish) is the collegiate body that gathers and identifies professional accountants in Mexico.This organization is member of IFAC and it issues its own professional code of ethics which establish professional performance standards thatconverge and are aligned to the Code of Ethics of IFAC and furthermore offers more moral solvency guarantees.

The scope of this Professional Code of Ethics of the Public Accountants of Mexico is encompassed in 12 principles (IMCP, 2010) that are:

• Responsibility to society is stated in Principles from I to V, which refer to the accountants’ freedom of criteria, the quality of the job; the professional education, and also the personal responsibility.
• Responsibility towards the person that sponsors the services is stated in Principles VI to IX which imply the professional secret, the obligation to reject immoral work, loyalty to the sponsor’ services and economic compensation.
• Responsibility to the profession is stated in Principles from X to XII, that involve the respect for the profession’s colleagues, the dignity of the professional image based on the quality and dissemination and teaching of technical knowledge.

Codes have become one of the most visible traits of ethics in business, besides being a promise of the profession to society, codes entail more than the conventional morale and law. A code may serve as orientation but it could hardly be enough, therefore through the International Accounting Education Standards Board (IAESB) IFAC issues education standards as well, which are the fundamental pillars to endorse professional accountants.

Regarding the ethics, IAESB issued the International Education Standard 4 (IES 4): “Values, Ethics and Professional Attitude”, which its fundamental objective is to set the values, ethics and attitude that public accountants should acquire during their education program (International Accounting Education Standards Board, 2010) in order of being recognized as “professional accountant”.

The IES 4 establishes that values should lead accountants towards a commitment with public interest and social responsibility, continuous improvement, responsibility and respect, and also to laws and regulations.The board has also provided a guide that recommends a flexible framework based on four teaching objectives:

1. Increase knowledge on ethics,
2. Develop ethical sensibility
3. Improve ethical knowledge and
4. Maintain an ethical behavior commitment. These objectives have a linear progression, and therefore can be considered as stages so as research areas at the same time.

The standard recommends that the first three stages shall be studied along the undergraduate program within the syllabus of the accounting courses but the fourth stage should be addressed in the professional development program practice. There may be two ways to achieve first two objectives: One way is by including ethical topics in curricula syllabus and another way is include a specific course in the program curricula. The third objective is seen as the link between the first two stages and the fourth, it could be an integrating subject, or rather through professional practice with a mentor; and the fourth one could be achieved rather in professional practice or training.

Although the learning of ethics can be measured, the IES gives a warning, the fact is nor the learning of ethics neither the development of codes can certificate an ethical behavior, since it constitutes a personal decision, which is based on the integration the person has of all of its personal resources and the awareness of being in community.

The accounting profession in all its areas is one of the most regulated professions nonetheless; in the ethical area there will always be members that do not honor the professional standards. As stated before a code per se cannot stop anyone from breaking it; the responsibility to follow the code and apply its principles is individual. Sartre affirms (Murguerza, 1997) that moral acts are decided in the deep solitude, above and beyond Sartre states “when a man chooses to be moral, he chooses on behalf humanity”; likewise when accountants choose, they represent the entire profession. As a result, there will be some failures that will lead to a situation of “scandals” and the profession will have to face its consequences.

At present Ethics is the most important issue in the accounting profession and it exists because society has given the profession a license to exist. Ethics is the dwelling of all professional accountants since all over the world in recent years the credibility of the accounting profession is measured more on its ethical performance than in its technical competence.

In closing, there is not a better phrase than “An ethics professional code is only a guideline to moral action; through it, the profession declares its intention to comply with society, with the sponsor of its services and to serve them with loyalty and diligence and, to respect itself” (IMCP, 2010)..?

References:

González, J. (1986). Ethos, destino del hombre. México: FCE, FFyL, UNAM.

IFAC. (2010). International Federation of Accountants Leading the Development of the Global Profession. Recuperado el 30 de junio de 2010, de www.ifac.org

IMCP. (2010). Instituto Mexicano de Contadores Públicos. Obtenido de http://www.imcp.org.mx/spip.php?article529

International Accounting Education Standards Board. (2010). IFAC. Obtenido de IAESB Pronouncements: http://www.ifac.org/Education/

Murguerza, J. (1997). “El ethos, destino del hombre”. Revista Vuelta, 39-42.

The International Ethics Standards Board for Accountants, IESBA. (2010). IFAC Publications and Resources. Obtenido de The International Ethics Standards Board for Accountants, IESBA: http://web.ifac.org/publications/international-ethics-standards-board-for-accountants/code-of-ethics

By: Sylvia Meljem

At the same time that globalization is found in every corner of the world, the issue of national and international standards convergence becomes more relevant every day. Almost in all the capital markets convergence towards a set of generally accepted accounting and auditing standards is actively discussed. The contribution of these standards shall be to reduce vulnerability and to strengthen accountability in all the accounting information systems, specially in the securities market, where public companies are listed.

In this process, education plays a very important role because the quality of a profession cannot be sustained and improved if the individuals that form it are not educated to comply with the standards established. Therefore, this article will analyze the objective and the standards issued by the International Federation of Accountants (IFAC) on education and also their impact in the design of the curricula in business schools in Mexico.

International Education Standards (IES)

The IES sare generally accepted “good practices” in education and the development of professional accountants;; they are the benchmark to be used by IFAC members to comply with the minimum requirements established for them to be considered “professional accountants” in the world. These standards are essential elements that education and extension programs must include to be internationally recognized, accepted and applied.

Legally the IES may not contradict local laws or regulations. However, they are a reference for regulators to know the generally accepted good practices. They are prescriptive by nature as they help to implement the best practices; they recognize the cultural, language, education, legal and social systems diversity, but they also establish unique essential elements for all.

Their objective is to educate professional accountants so that they may make a positive contribution to the profession and to the society where they will work throughout their life.

The documents issued by the International Accounting Education Standards Board (IAESB) are of three kinds as seen in Figure 1.

The IAESB statements aim to comply with the following functions:

• IES.- Prescribe good practices..
• IEPS.- Assist to implement these good practices providing guidelines to reach them using some examples of the “best practices” in the world.
• IP.- Promote discussion in education and development issues that impact the accounting profession, by providing conclusions or describing professional related situations of interest.

The IESs shall be analyzed as they are of higher hierarchy; eight of them have been issued to date:

• IES 1- Entry Requirements to a Program of Professional Accounting Education
• IES 2- Content of Professional Accounting Education Programs
• IES 3- Professional Skills and General Education
• IES 4- Professional Values, Ethics and Attitudes
• IES 5- Practical Experience Requirements
• IES 6- Assessment of Professional Capabilities and Competence
• IES 7- Continuing Professional Development: A Program of Lifelong Learning and Continuing Development of Professional Competence
• IES 8- Competences Requirements for Audit Professionals

The IESs may be grouped as shown inFigure 2:

As can be seen in that Figure, the IESs set a evaluation point to assess the minimum skills and a person’s competences in order to be considered a “professional accountant”.

Before the evaluation point, the International Standards refer to professional knowledge, skills, attitudes, values and ethics that, together with experience should translate into the relevant and appropriate competences of professional responsibilities. To agree and achieve some level of competence maintained in education, practical experience and continuous education, demands the setting of standards in these areas.

This pre-evaluation period should be sufficiently long and intensive to acquire the competences and to have good professional growth and development in the future.

Professional accounting studies are part of the pre-evaluation program, and as fundamental basis should include the following areas of knowledge:

Accounting, finances and related knowledge.- They should provide the essential technical bases to be successful as a professional accountant.

• Organizational and business knowledge.- It should provide the context under which professional accountants work..
• Information Technologies (IT).- Their importance has increased because their use has transformed the role of professional accountants.

General education should contribute to develop the skills needed by professional accountants, which can be grouped as follows:

Intellectual Skills.- Help solve problems, make decisions and use good judgment in complex situations in the organization.

Technical and functional skills.-They are:

• Basic arithmetic and IT knowledge.
• Risk analysis and decision models.
• Measures.
• Reports.
• Compliance with legal and regulation requirements.

Personal Skills.s.- Are related to the attitudes and behavior of professional accountants.

Interpersonal and communication skills.- They include:

• Work with others in a consultation process to solve problems..
• Team work.
• Work with people of different cultures and education
• Negotiate and reach acceptable solutions in the professional world..
• Work efficiently in a cultural mix scenario.
• Present, discuss, inform and defend appropriate opinions with formal, informal, written or verbal communication.
• Listen and read efficiently; including understanding different cultures and languages.

Organizational and business administration skills..- These skills have become more important for professional accountants:

• Strategic planning, project administration, human resources and decision making.
• Organize and delegate work, motivation and personal growth and development.
• Leadership.
• Professional judgment and understanding.

The objective of education in general is to develop non professional knowledge and the skills and attitudes mentioned before, which are:

• Understanding the flow of ideas and events throughout history, the different cultures in the world and the international perspectives.
• Human behavior.
• Have broad ideas, topics and world economic, political and social contrast.
• Research and evaluation of quantitative data.
• Conduct focused on research, logical and critical thinking.
• Appreciation of art, literature and science.
• Awareness of personal and social values.
• Value judgments.

The scope of the values and attitudes in the public accountants’ education programs must be committed with:

• Public interest and social responsibility..
• Continuous improvement and learning.
• Compliance with laws and regulations.

The teaching of values, ethics and professional attitudes must include::

• Use of didactic materials as multidimensional case studies.
• The role they play.
• Discussion of lectures and videos.
• Analysis of real situations in businesses including ethical dilemmas.
• Discussion of disciplinary statements.
• Seminars of professional lectures focused on corporate decision making.

In addition to formal studies, professional experience must be part of the pre-evaluation program. The experience period must last enough so that the candidates may prove that they have the initial professional competence and the necessary basis to professionally continue to grow and develop in the future. A minimum three year period is established.

Professional experience provides the right environment to develop the competences required because:

• Aumenta el entendimiento sobre las organizaciones, el funcionamiento de los negocios y las relaciones en el trabajo.
• It increases understanding of organizations, operation of businesses and work relationships.
• Relates accounting work with other business functions and activities.
• Creates awareness of the environment in which the services are rendered.
• Acquires the right professional values, ethics and attitudes for real life situations

In this manner, it establishes that the evaluation to be acknowledged as a “professional accountant” will be based on the skills and competences and not on knowledge per se, since candidates will have to prove the following:

• Application of technical knowledge in an analytical and practical way..
• Solving complex problems. .
• Detection of relevant information..
• Identification and setting priorities of problems.
• Integration of diverse knowledge and skills.
• Effective communication of recommendations in a logic and concise manner.
• Identification of ethical dilemmas.

This evaluation proposal changes the traditional approach that existed in the accountant’s education, because all the curricula highlighted the transmission of knowledge and little development of skills and attitudes. The important thing was to be in control of the accounting technique and not the integration of other areas of knowledge.

Professional competence is developed by the combination of academic studies, training at work, labor experience and professional education. The academic approach covers the accounting theory, while professional education focuses more on practice and the skills professional accountants need. Labor experience concentrates in work training and continuous updating.

Aligning the three approaches (academic, professional education and work experience) to develop functional competences and skills will be more productive than trying to develop a broad range of competences required by only one of these paths.

The academic, labor and professional education factors will determine how much these three components can be combined to guarantee the professional accountants’ competence. When the evaluation of the work environment is not favorable or education has a low standard, then the professional entities will rather be backed up by their own education programs and professional competences exams.

The approach in developed countries has to take into consideration the economic and cultural environment. The approach based on competences is specially important in these countries, due to the growing drive they are immersed in because they are part of the global economy.

Business Schools in Mexico

In the case of our country, professional regulations established by government play a fundamental role in curricula, because when a higher education institution with a program that as a valid official registry grants a public accountant’s degree, the Mexican government automatically authorizes or gives permission to practice in the professional arena.

Hence, the curricula in Mexico has a professional orientation and it focuses on providing knowledge in the short term as demanded by the labor market.

There is a saturation of technical knowledge given the amount of accounting, tax and legal rules that an accountant has to know to practice as a professional accountant. There are few optional subjects and to a large extent education continues to be traditional; namely, it is focused on transmitting knowledge.

This approach makes the international trend difficult as it is based on an Anglo-Saxon model, and in it academic education is not totally linked to professional practice and thus it can focus on general education based on human beings in the long term; each individual, with the help of a guide, designs his or her own program (selecting optional subjects) based on his or her future expectations as is shown in Figure 3:

Hence, and given the diversity in the quality and content of the different Public Accountant curricula in the country, in order to be considered a “professional accountant” in Mexico, called Certified Public Accountant CPA), the Mexican Institute of Public Accountants (IMCP, a professional organism) uses the three “E”s model:

• Education.- Public Accountant’s degree.
• Professional Experience.- At least three years.
• Exams.- Evaluation of knowledge in the basic areas of this profession.

As mentioned above, this model converges in the IES. However, there are some problems in each one of the elements considered as mentioned herein below:

1. Educación.- 1.Education.- There are many curricula throughout the country that grant the public an accountant degree and that are extremely heterogeneous, with different approaches, times (between three and five years of school) and quality. In the three “E’s” you only need a public accountant degree regardless of its nature. On the other hand, as was already mentioned, education continues to focus on technical orientation and not on developing skills, attitudes and values in the long term.
2. Professional Experience.- In general the jobs offered to students in the first years of the public accountant career are extremely technical (as bookkeepers) and do not reach the objective set by the IES; and there is no way to monitor the performance of the individuals, since the “mentor” is hardly ever found.”.
3. Exam.- The exam covers all the basic and supplementary areas of the profession. However, it measures knowledge and not competences.

Other additional weaknesses of the Mexican model is that it is not mandatory and it is only a requirement for external auditors that give their opinion on financial statements for tax purposes, and asides from the three elements mentioned they are isolated instead of being part of as is established by the IES.

Challenges and Conclusions

One of the challenges of the international approach based on competence is to establish the cut-off points and how to evaluate them. The most difficult component is to obtain sufficient evidence of the quality of performance at work. Another problem we find in continuous professional education is how to monitor competences after they have gone through a certification process.

The main challenge in adopting the International Standards in the world is to guarantee that public accountants obtain the necessary knowledge and skills to comply with their responsibilities, even taking into account the cultural, economic, legal and social differences.

The academia must prepare students and professionals who are able to understand the new international standards, to apply them in the various national contexts that require them, since this knowledge will be reflected in better accounting recording practices, which in turn will translate into better quality of information and this will affect the decisions made and will be more in tune with the international businesses reality.

The objective, as shown in Figure 4, is to build trust environments that involve market participant agents: the academia, the public and private sectors and also professional and international organisms. Coupled with these participants, transnational companies will be certain that they can make investments in environments regulated in standard ways and with the guarantee that there will be a reliable accounting-financial record basis that complies with international standards.?

Bibliography

International Federation of Accountants (IFAC), International Accounting Education Standards.

Ponencia Central ANFECA (2005), Academia ANFECA.

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By: Alberto Napolitano

The organized public accountant’s profession in Mexico, formed by the Instituto Mexicano de Contadores Públicos (Mexican Institute of Public Accountants or IMCP as per initials in Spanish) reported the decision to incorporate as of 2012, the International Auditing Standards such as the standards that will regulate the financial information auditing works, of assurance and other related services, provided by independent public accountants in substitution of the current standards issued by the Comisión de Normas y Procedimientos de Auditoría (Auditing Standards and Procedures Commission or CONPA as per initials in Spanish) of the Institute.

In view of this communication there is a concern about knowing if the adoption of these standards will generate a significant change in the professional practice and the audit work performed, especially if you compare them with the standards issued by CONPA throughout time and that at present are the current point of reference to perform the work entrusted to independent public accountants. Consequently, it seems prudent to attempt some notations and accuracies on the International Auditing Standards (IAS) issued by the International Auditing and Assurance Standards Board (IAASB), as a branch of the International Federation of Accountants (IFAC) of which the IMCP is one of the founding members.

In accordance with the preface of the international statements, the IAASB is committed to develop the standards that will be universally applied as a response to the interest of the public in general and of the accountant’s profession in the world regarding legislations or specific regulations of each country that rule the audit or assurance works, which are exclusive work to be performed by independent public accountants. In turn, the above mentioned preface states that if these laws or local regulations are in conflict with the IAS, it is understood that the work made in accordance with local rules will not comply with the IAASB. Therefore, no public accountant should say that his or her work was done in accordance with the IAS if those rules were not fully applied to the corresponding work.

The IAS’s content is structured by topics and documents, starting with (a) the structure of the standards; (b) a preface on international quality control, audit, revision and other assurance works’ standards and related services, and also a glossary of terms. In turn it has the following:

• International quality control standards
• International framework of reference for works to be certified

Afterwards, to incorporate the audits and financial information revision standards divided into:

• General principles and responsibilities
• Evaluation of risk and response to the risks assessed
• Audit evidence
• Use of the work of others
• Conclusions and auditor’s opinion
• Specialized areas
• International statements of audit practices (punctual procedures and the auditor’s communications))
• International standards for revision works (that include provisional financial information)

Of course, each one of the previous titles includes a series of rules or specific standards pursuant to provisions in those Titles. On the other hand, the content of the IAS also includes standards for:

• Works to verify other than audit or financial information revisions
• Related services (procedures agreed upon and gathering of information)
• Documents to be discussed and
• Studies

Through the content previously described, it can be understood that the IAS respond to a ruling other than the Auditing Standards and Procedures and Assurance (NAGA, as per initials in Spanish) issued by CONPA, and which the Mexican public accountants have used to support their assurance works, so that the user may feel confident of their opinion. The idea is not to make an analysis of the differences between the two sets of standards. However, it is possible to anticipate that the content of the NAGAs is not significantly different from the IAS and that if there are differences, they shall not be deemed to be significant, at least on its fundamental aspects.

It is interesting to point out that the IAS refer to assurance works in their framework of reference, when they mention that these are Works in which public accountants express a conclusion to increase the degree of trust of the assumed users, other than the party responsible for the result or measure of a significant issue (this is to be understood as information, a statement or a representation or measurement of an entity incorporated to the financial information, a process, specific criteria, contractual clauses, etc.); that is, that financial statements audit is included in the concept of “assurance work”. However, Mexican standards have a structure that segregate the audit work from other assurance work, when internationally although they are identified as different work, the assurance work includes all the public accountants work on which he gives a conclusion to make the user feel confident of the “main issue” (financial statements, assertions, amongst other) as a result of the work accountants perform within the applicable standards.

Another difference stems for the IAS structure with regard to the Mexican standards, it is the standard on quality control for firms that make audits and historical information reviews and other assurance works, that is seen in the initial chapter in these standards, as a topic that covers all the other professional standards and in accordance with the public accountants’ work. In the Mexican standards quality control of the work done by accounting firms, it is included in those related to the execution of the financial statements audit work. Again, both sets of standards relate to quality control, but a different weight is given to them when included in the structure of these standards. Under these considerations, one can see that in the IASs the works’ technical standards are preferred to assure the public accountant’s work in the ethical principles contained, first, in the Code of Ethics (in this case issued by IFAC) and second, in the International Quality Control Standards, that in its conception gathers several ethical requirements addressed to set policies and procedures designed to provide a reasonable security that the firm (accountants’ firm) and its personnel comply with the most relevant ethical principles.

Ethical requirements are included in the Code of Ethics issued by IFAC, and they include the fundamental principles related to:

• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional conductl

It is more a conceptual approach of independence in assurance work.

In turn, the International Quality Control Standard states that the Quality Control System of a public accountant’s firm should include the policies and procedures related to:

• Responsibilities of the firm’s quality control heads
• Ethic requirements
• Acceptance and continuity of relationship with clients and specific works
• Human resources
• Work performance
• Monitoring

Conceptually it can be concluded that the NAGAs that set the stage at present and guide the public accountant’s professional conduct in Mexico, jointly with the Code of Ethics also issued by the IMCP, are not significantly different from international standards, especially regarding the ethical principles and the quality control that should be established by public accountants in their assurance work when considering, again, that the technical standards are not significantly different, and therefore the adoption of the IAS by Mexican public accountants will not derive in inconvenient or significant changes in their professional activity, or even additional costs, as the case may be, provided the firms have set their standards in accordance with the NAGAs in effect.?

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