By: Ricardo Medina

The true reach of personal networks, the drivers of effective change, and their implications for your company

¿Are the so-called “social networks” a fad?

With the mass proliferation of Internet connections, the widespread use of cell phones and the development of online collaboration sites -also known as social networks-, marketing, sales and even politics are facing unprecedented changes. Marketing experts are increasingly interested in the value of social networks. Mexico is no exception to this social shift. The Federal Telecommunications Commission reports that, at the end of 2010, there were 81.3 cell phone lines for every 100 Mexicans. Alexa (2011) found that five of the 10 most popular sites in Mexico provide platforms for online social networks, in which users generate and share their own content. Figure 1 shows this trend in online activities from search engines to social networking.

Figure 1. The ten most popular web sites in Mexico (May 2011)

These changes produce very different results, like the development of smartphone apps, the sudden possibility of re-connecting with old acquaintances, or the democratization of video broadcasting. Interaction between individuals online is growing rapidly, and is at once a tremendous opportunity, a trend in marketing research programs, a threatening reality that some want to control, and a challenge that communication and social sciences professionals must decipher.

To better understand this phenomenon, we must first understand the similarities and differences between online and offline networks, and identify whether the drivers of change are short-lived or long-lasting and, if the latter, what elements are permitting them to permanently alter the way our society works.

The real reach of personal networks

Our first task is to gauge the real impact of personal networks offering peer to peer (p2p) networking. In May 2011, Facebook, the most popular and heavily trafficked social network on the web, had more then 500 million users, with an average of 130 friends each. But these figures do not necessarily mean that everything that happens online will have an impact of that magnitude on the brand, enterprise or reputation of the party that generates it, so we need to differentiate the potential reach from the actual impact.

In their article about online relationship management, the Facebook Data Team (2009a) makes some important points. First of all, they point out the number of “people you know,” which is found through the search toolbar and identified as number of “friends,” represents the total number of people with whom you have connected on Facebook and have decided to identify as acquaintances. This number coincides with the general sociological studies of the number of people an individual will meet during his or her life. But the total amount of bonds that are established in the course someone’s life does not imply a daily relationship.

Within the group of acquaintances there is a sub-group of people with whom there is a maintained relationship, and in that sub-group there are smaller sub-groups, first of one-way and then reciprocal communication. In Figure 2, we can see how even the most popular individuals–those with 500 “friends”– actually maintained relationships with forty people and reciprocal communication with only ten individuals. The average person, with 130 people in his network, maintains relationships with only twenty and may converse to four or five people. We can conclude that, in general, the reach of online and off-line personal networks are not substantially different.

Figure 2. Size of online social networking, Taken from Facebook Data Team (2009)

At the same time, the Facebook Data Team (2010) also shows that conversations between individuals on the internet can be charted according to the cluster principle, factoring in the frenetic activity of news in newsfeeds or tweets that spread content to their whole network of acquaintances. People actually engage with friends they get along with, discuss similar topics and communicates with the same symbols. The old saying “birds of a feather flock together” also applies with online relationships.

Engines of change

Although the growth of social networking sites hasn’t made people’s personal networks any larger, or made them more willing to talk to more people about a wider range of subjects, it has revealed three important differences from offline networking: technological support, stability and the speed with which information is spread. These three components have overtaken traditional engagement and, as they reinforce each other, they mark a trend toward social change, with a reach that goes from announcing road closings and the declining service at the restaurant down the street, to the organized mobilization of opposition that demolished Egypt’s governmental regime or supported president Obama’s electoral win in United States.

Today, technological support comes not just from the development of online networking platforms in the Web 2.0, but also from mobility. The rapid proliferation of handheld game consoles, Mp3 players, and smartphones allow for communication and data transmission at unprecedented levels. With this, the Internet has broken free of the anchor of desktop computers: Internet cafés are old hat, and many people who “tweet” don’t even see it as an Internet connection

It also appears that cellphones and online interest groups play a very important role in a youth’s identity and intimacy, so we can safely assume that society will eventually adopt these electronic systems. Rheingold (2002) assures us that the sweeping pace of change in social networking today is a socio-cultural shift as great as the introduction of the printing press, because, among other things, the power of computers has evolved and has gone from making calculations and exchanging files to forming opinions and collective decisions. People don’t just use mobile networks, they express opinions and decide through them. We are going from a means of communication to a mode of social interaction.

It seems that the proliferation of data in response to sharply higher demand will not be a problem either, because it bring an obvious economic benefit to the telecommunications providers and, also, as Intel (2001) reminds us, Moore’s Law establishes that the number of transistors on a chip will double approximately every two years, which increases its efficiency and makes it smaller and cheaper to operate and store.

Stability, on the other hand, means that the p2p networks aren’t just spreading content by word of mouth, but also from text to text and through images. In this way, the durability and impact of our social ties increases significantly. Facebook has been a key vehicle for reviving old ties from the past that have been neglected in more recent times.

In addition, Google and Windows Life systematically organize the proliferation of data from the web, placing automated research within everyone’s grasp. With an infinite amount of data instantly available in text and image form, it’s a lot easier to follow other people’s points of view and take up conversations at any time, as well as to track down other people who have written similar texts.

People’s daily activities and contacts are not the only things readily accessible through the Internet. There are also brands, famous personalities and companies that leave their own trail of messages through self-generated interactions, dialogues with their target groups and in comments on p2p network, even if the famous person himself is not actually involved. Their carefully maintained text-to-text reputation has more grounding, and is less volatile, because it accumulates a history of discussions that can be consulted through any search engine or mobile device. Thus, the margin for error or forgetfulness is smaller every day.

The speed of operation is tied to data mobility and the fact that every individual can record and share content from their cellphone immediately from basically any location, private or public. Now we can also jump between conversations and realities at will: the use of technological communication channels enables us to segment our networks according to the interest of that particular moment, even if we are somewhere else, at a different time. We no longer have to wait until the end of the day or work shift to make room for intimacy, because an SMS that says “I’m thinking about you” is feasible at any moment. Spaces for work and play are intermingled, and in academe it has been acceptable to engage multi-tasking, with resignation for some and enthusiastically for others.

These elements that drive the proliferation and stability of the social networks are apparently an irreversible trend. Although they do not modify the essential structure of personal networks, they require marketing research, communication and other social sciences professionals to assimilate knowledge, interaction strategies and even applications that will allow them to act as fundamental nodes and players in their respective markets and competitive dynamics.

About the author

Ricardo Medina is director of Factor Delta, a consulting firm dedicated to generating and perfecting enterprise growth. He is also a professor in marketing research at ITAM and the author of the book Diferenciarse no basta (Being different is not enough) (Lid Editorial), in which he discusses the creation and design of value proposals. ricardo@factor-delta.com

0738206083

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References

• Alexa (2011). Top site statistics, , viewed 8 may, 2011.
• Facebook Data Team (2009). Maintained Relationships on Facebook, , consultado el 9 de marzo de 2009.
• Facebook Data Team (2010). What’s on your mind? , consultado el 23 de diciembre de 2010.
• Intel (2001). Moore’s Law, , viewed 12 may, 2011.
• Rheingold, Howard (2002). Multitudes inteligentes, la próxima revolución social. Barcelona: Gedisa.

By: Luis Manuel Gomezchico and Francisco Alvarado
Accenture

You survived the crisis… now what?

During an economic crisis, when credit markets shrink, many companies quickly change their strategy to maintain their working capital. With an eye to the short term, they may take actions like delaying payment to vendors as much as possible, while trying to make payments right at the deadline, or minimize inventory restocking. All of this in order to scrape together as much cash as possible to keep operations going. But we know that these actions are not sustainable.

When the crisis is over, the challenge faced by many organizations has less to do with survival than how to improve their working capital to fund investment and resume growth. To do so, they will need to introduce actions that are sustainable in the medium and long term, to manage their inventories and accounts receivable and payable processes in order to have the right impact on their working capital (Figure 1).

Figure 1.

Figure 1. Examples of actions that help improve working capital

Avoid the confusion of having to choose between cash and effective working capital management. Successful companies adopt a focus on working capital management even when they have enough cash for the short term. They understand that working capital is one of the largest and most accessible sources of funding, a source that must be fed regardless of their cash situation. Leading companies are more likely to establish consistent, sustainable business processes, with a vision of ongoing improvement that will allow them to weather economic cycles. In general, successful companies place more emphasis on working capital when their cash position is strong.

From a more strategic standpoint, working capital management has other benefits besides having more liquidity and less debt, because it gives a company the flexibility to grow and invest, and increases value for shareholders through dividends. If more companies had effectively and consistently managed their working capital over the past decade, they might have been better prepared for the crisis and may not have been forced into a paralyzing battle to obtain liquidity.

Accenture conducted an investigation into cost management in organizations that reveals just this point. It surveyed 1,405 senior executives from major companies in North America and Europe, and found that less than a third of those surveyed said they used inventory reduction and payables and receivables optimization to reduce their costs in 2009 (Figure 2), while layoffs, job elimination, organizational structure changes and employee wage and benefits reduction were the most popular actions taken. Meanwhile, 56% of those surveyed said their cost reduction efforts had no impact on cash flow, or in fact inhibited it.

Figure 2. Most popular cash management actions in 2009

Clearly, effective working capital management requires extensive knowledge of the organization. CFOs and treasurers are greatly concerned with working capital, but in most companies, the commitment to improving this capital diminishes in the business units and operating departments.

Taking working capital management seriously means making it part of the operating processes in mentality of the corporation, and not treating it as if it were a one-time exercise. This attitude can be incorporated into corporate culture if it is introduced at all levels, considering its impact on daily and strategic decision-making. Working capital should also be continuously mentioned in corporate communications. Working capital targets even should be incorporated into corporate metrics, performance indicators and bonus packages.

In order for these changes to be sustainable, organizations must be prepared to take the necessary changes in business processes all the way down to the systems level. Luckily, changes in attitudes, processes and systems to improve working capital can help improve other aspects of daily operations. For example, process and technology changes intended to strengthen receivables collection normally improve customer response times and promote effective conflict resolution. Better service means greater client satisfaction and, therefore, greater willingness to pay on time.

Through research and direct experience, Accenture identified six principles that have helped leading companies in their working capital management.

1. Recalibrate expectations through close performance management

Working capital policy should be a priority; but the policy is just the beginning. Top management will have to underscore this working capital priority by communicating and promoting the program until operating managers are convinced of its importance.

Top executives must also be prepared to settle conflicts that may arise between business areas or units during implementation of the changes in processes and structures.

A common error in introducing working capital policies is to not include all levels of the organization, and particularly the affected departments, for example, Sales. Ignoring the priorities of the parties most interested reduces consensus and weakens impetus, undermining the firm’s capacity to introduce a broad-based change. The mentality of sales, for example, should change from “every sale is good” to “sell to high-quality clients that supply the expected level of returns.”

As for governance mechanisms, performance metrics should be included that are broad and deep enough to track processes it in detail, while detecting low-yield areas. An executive or area must be created and put in charge of continuous, structured improvement, and with operating priorities, to deal with areas that need most attention. Finally, when working capital optimization goals are met, the achievement should be publicized constantly in communiqués from top management.

2. Identify high-impact problems and measure them appropriately

This principle should be obvious, but the reality is that many organizations address working capital issues with excessively broad or ambitious programs, without first understanding their greatest opportunities. This generally leads to disappointment, or even abandonment of the effort.

Working capital involves so many different aspects that executives must begin with an exhaustive review of the business areas that contribute to it, from procurement to vendor payments, to product delivery, billing and collection. To understand what aspects of operation currently inhibit working capital, it is useful to prepare and test a set of hypotheses about the main causes of these limitations.

It is important to have precise and up-to-date data, combined with interviews of operating managers, to analyze processes and discover the causes of working capital problems. The best is to have a multifunctional team in charge of this analysis, which should incorporate the finance area, supply chain, business units, sales force, external distributors and, in many cases, vendors. The facts (like “we need 60 days delivery terms to go from procurement to production, while our competitors need only 30, and that costs 100 million”) should serve as motivation to close these gaps.

Issues should be prioritized by financial impact and by viability of the proposed changes. Often, we find one or two areas present the greatest opportunities. For example, with accounts receivable, and analysis of the client database may reveal that the greatest opportunity is in geographic markets, and businesses, or in big clients.

Once a solution is found take advantage of an opportunity in a specific area, that solution is deployed first in the areas of greatest impact and then extended to other segments with a small incremental cost.

3. Select the right performance indicators

To establish priorities and continued improvements, successful companies set working capital goals by company, department, team, and even, when necessary, individually. They also assign a person to be in charge of each target.

This important to set the right goals. Often, companies measure and select the company’s average as their target, instead of breaking down the data, which may be more interesting and significant. For example, management knows sales days in the organizational portfolio, but do they know what affects the performance of this metric: the contribution of the sales terms, the collection process or other factors? If it is based on annual average or general indicator, it may not indicate what is happening right now or in specific parts of the business. Measuring in general terms can obscure variations in performance by region or by country, making it more difficult to optimize working capital.

An appropriate number of regularly monitored performance metrics can help prevent the emergence of new problems. Keeping a scorecard can help management track the most important metrics: five indicators per issue, receivables, payables and inventories. Ideally, metrics are applied at the organizational level, and to each region and business unit. The indicators used should inform management of the status of operations, and the average time it takes to resolve a dispute or deliver an invoice, the number of invoices paid within the term or discounts obtained by the purchasing department. The goal is to help predict future performance.

What is the best possible working capital performance? Comparing a company against others in the same industry may provide an initial estimate of potential performance of the organization, but it is not enough. We must look for the best possible results, given the business model. For example, a pharmaceutical company that wants to improve its performance in raw material storage must not only compare itself against the industry but may study cold storage among the leading dairy product manufacturers.

4. Adjust incentives

Bonuses, commissions and other forms of compensation should correspond to the achievement of working capital goals. In sales, an effective but little-used practice is to tie commissions to what is actually collected, instead of agreed-upon sales.

For bonus incentive programs, in which traditionally payments are determined according to income, the company may add a cash flow component to the bonus formula.

In recent years, Accenture has worked with various clients to include cash flow in their bonus programs. These plans, applied to individuals throughout the organization, have been effective on their own, because they have raised awareness of the impact of working capital in daily decision-making and encouraged cash flow improvements.

5. Adopt a segmented focus for implementation

The company will very likely encounter initial resistance to the extensive changes needed to go from support to optimization of working capital, due to the number of areas and positions affected. That’s why it is important to analyze the client and vendor bases, define significant segments, and chart a plan for each segment.

For example, suppliers of very accessible items or very small vendors may be asked to accept a longer payment terms without risking operations, because it would be easy to change them if necessary. In contrast, with more strategic vendors, it may be appropriate to adopt a focus of partnership or even to collaborate in creating a payment structure that maximizes the benefits of the business for both parties. The same logic applies to clients: impose stricter payment or collection terms on non-core clients which have less of an impact on general performance, and be more flexible with terms for strategic or high-value clients. As for inventory, it is a good idea to plan demand and variability in order to establish priorities for the purchase of raw materials and storage of finished products.

A segmented focus can only be successful with the active and concerted involvement of all the functional groups that come into contact with clients and vendors. If the sales area, for example, cannot help comply with stricter collection policy, the policy will not work in practice. It is the job of top management to guarantee multifunctional cooperation to optimize working capital.

The company must understand in advance the impact on the business and the resistance it may face from clients and vendors, and evaluate beforehand how the organization must change. These are key components of any working capital improvement program. Companies may follow a number of methods to facilitate the transition. For example, they may offer discounts for limited time or launch a more aggressive collection campaign.

6. Evaluate and redesign business processes

Short-term changes in inventory management, payables and receivables policies, are likely to bring only moderate improvements in working capital. Most companies also need to make changes in their operating processes and their systems to ensure long-lasting efficiency and move on to the next level of performance. It may be that they detect the need to give their employees new tools, like improved software and training to strengthen their abilities, apply more sophisticated analytical methods to receivables practices in order to optimize the advantages of offering discounts for on-time payment, or eliminate the discounts altogether, or to modernize supply-chain software to better align the firm’s projections with the real capacities of its suppliers.

Conclusions

Now that many companies have once again set their sights on growth, a big step forward in working capital performance may be a crucial advantage. Improvements to processes, systems and capacities that promote strong working capital management may also encourage high performance in other areas, like more precise planning of demand, on-time product delivery and stronger relationships with suppliers. With the right initiatives, the company can succeed in obtaining a steady flow of free cash flow. Sustained excellence and working capital management can better prepare an organization for ups and downs in the economy, because it strengthens their capacity to survive and prosper in a world of uncertainty and economic volatility.?

References

• Accenture Cost Management, An Aspect of Profit and Cash Optimization Study, 2010.

For more information about working capital management and the contents of this article, write to the authors at: f.alvarado.navarro@accenture.com; luis.gomezchico@accenture.com

By: Norma Betanzos (1), and Francisco Paz (2)

Organizational commitment is an issue that has become increasingly important for human resources experts, because it is crucial for a company’s employees to “wear the team colors,” meaning they love their company and do their jobs well (Arciniega, 2002). It is therefore important to understand the nature, development and implications of employee commitment.

We know that there are different types of commitment (affective, continuance and normative), and that each of these has a different effect on employee behavior and attitudes.

What happens when a company encounters hard times? When it has the wrong leaders? When the climate makes it difficult to work? When employee bonuses cannot be paid, or economic crisis makes wages less appealing to workers? The company needs committed employees to obtain competitive advantages, but it often introduces changes in the guise of efficiency (layoffs, restructuring, mergers, flex time, etc.).

All of this can often weaken the commitment of a company’s employees, diminishing or even destroying their affection for the company and lowering their productivity levels. They may find it more attractive to change jobs in search of better conditions, and the commitment ends. The employee is ready to leave the company; nothing is holding them back.

To prevent employees from abandoning their commitment to the company, it is important to build up their ties to the organization. One option is to establish a strong normative commitment (which has been little studied to date). This commitment strengthens employee retention even when the organization faces adverse circumstances. In extreme cases, for example, when the company is facing bankruptcy, employees may sacrifice their revenues and benefits and stay on to the bitter end because, as Wiener (1982) puts it, “they believe that it is the right and moral thing to do”. This creates a stabilizing force that can keep employee behavior on course when organizational conditions change.

This behavior is different from affective commitment (an emotional bond with the company) and continuity commitment (based on economic gains). Employees gain a sense of obligation through their experiences with the organization. In some cultures, intense feelings of normative commitments are encouraged. In Japan, for example, employees form a long-term commitment to their company and remain with it in good times and in bad, because their commitment does not depend on circumstances, but rather on a personal decision they have made.

Individuals in collectivist cultures (like Brazil) see their obligations as something they want to do, rather than an imposed duty, and they feel satisfied and successful in their jobs, while individualist cultures (like United States) inculcate the moral duty of doing one’s job. So obligations are experienced in different ways from country to country, and therefore, they have different implications for the worker’s job performance and yield.

In Mexico, we conducted qualitative research with focus groups made up of 25 workers from various companies, in order to describe ideas about what they think about normative commitment. We found two categories of this commitment: a) normative commitment and b) moral commitment (Rodriguez and Betanzos, 2011).

The normative component of commitment is experienced as the duty to obey organizational rules and policies regarding the job but employee must do. This commitment is assumed out of conviction and free will, not obligation. It is assumed as an important value and is the responsibility of each individual, independent of the organization, because it is a value acquired and nurtured in the family home and becomes part of the individual’s personality. Respecting this commitment is a personal need.

Workers that do not conform to established policies and duties may become subject to external sanctions against them. They may also face internal sanctions-like value judgments about their performance in the company-that make them feel badly.

“There is no harsher judge than the one we all have inside, meaning when you know you’re failing and you feel remorse [...], because you are failing yourself…”

Unlike normative commitment, with moral commitment, workers understand that, besides the opportunity to work, they obtain benefits from their organization that binds them to it morally and that, as such, they must reciprocate and return these benefits. On the other hand, this reciprocity and retribution could be negative if workers feel they are not receiving a fair treatment or that the labor relationship is not an equitable one, which causes them to behave negatively toward their jobs or to be disloyal to the organization.

In addition, workers have certain expectations that the company will compensate them for their work and efforts. Trusting in this relationship, workers strive to repay the company for the benefits received, so that they do not feel indebted. Finally, this moral bond between the worker and the organization is expressed as loyalty and permanence, even if there are better opportunities elsewhere.

1 Dra. en Psicología. Universidad Autónoma del Estado de Morelos. México.

2 Dr. en Psicología. Instituto Nacional de Neurología y Neurocirugía “Manuel Velasco Suárez”. México.

“This bond that, on a personal level, I formed with this institution [...], this loyalty is [...], in some way, a repayment for everything it has given me [and] other things that [...] for me are even more valuable than money.”

Loyalty is also expressed as a concern for the company’s well-being and protection of its interests.

“They were people that put in for [worked] fifteen minutes and they were paid for half an hour. Fifteen minutes you’d lose in changing clothes, neatening up, going to the bathroom, and when you’re not generating, I mean, you’re jeopardizing all of this [the company].”

Normative commitment, on the other hand, seems to be more a characteristic or value that employees acquire in the social group where they were formed (family, schools, friends) and which inspires them to keep their commitments. In Mexican culture, this is what comes closer to the concept of job responsibility. For a Mexican employee, responsibility and duty are an interest in and concern for others, a personal quality, like virtue and conscience. Mexicans consider it to be a basic dimension of social relations, and therefore, responsibility is considered a positive trait for the individual (Díaz-Guerrero and Szalay, 1993).

In their recent review of this variable, Meyer and Parfyonova (2010) find employees with a strong normative and affective commitment are more likely to express a desire to do the right thing according to their moral standards, which in the long run produces positive effects, both for the employee and for the organization (intention of staying with the company, support for change, and the well-being of workers). A solid normative and continuance commitment reveals how employees behave with regard to their obligation to repay a debt (to do something to avoid the social costs).

Personal values and principles are vitally important for normative commitment, because they guarantee that workers will do their job thoroughly, in keeping with the organizational standards and guidelines, without the need for constant supervision.

On the other hand, it seems that when workers receive benefits or facilities from their organizations that are not stipulated in the contract, they tend to correspond by changing their behavior on the job and making a greater effort to avoid betraying the trust the company has placed in them. This creates a virtually unbreakable bond with the organization and stronger even than the economic benefits or the affective bond. It goes back to the reciprocity that is latent in all spheres of social interaction and, as such, is universal. It is a standard that is not imposed, but which determines the actions that will be taken in recompense for certain benefits received. Trust also plays a crucial role, since without it, this relationship would not be possible (Rodriguez and Betanzos, 2001).

The company shows its trust in the worker by communicating material information that makes it vulnerable. Employees’ normative commitment is what makes then behave with loyalty, discretion and confidentiality, to avoid acting the detriment of their organization. This loyalty also facilitates relationships in work groups, since the employee will support decisions that benefit the company, but also the people that work there.

In this exercise of understanding, we believe there is enough evidence to sustain that the normative commitments can be interpreted as stemming from a mature acceptance of a practical daily belief, not intellectually elaborated, that we are what we do. We do things well, even better than what is required of us, not to be exemplary employees, but rather to feel good about the performance of the tasks entrusted to us and satisfied at having fulfilled our responsibilities and duties.

We know that commitment is multi-dimensional, as is the contractual relationship and daily interactions in the company. If we examined these dimensions from the perspective of normative commitment, they are intertwined in a single discourse.

León (2009) explains that experiencing one’s ties to the organization as a moral contract that binds the employee also creates the conditions for critical attitude toward the company when the employee does not feel it has kept up its end of the deal. Normative commitment also takes on the dimension of responsibility toward what we do, in other words, to do the job right, without defects. Therefore, normative commitment creates additional motivation for producing a quality product, and there is no more important goal for workers. If they fail, if the results do not come out as expected, they feel guilt and shame. In short, we find a commitment based on shared beliefs of what makes a “good worker,” a “responsible worker.” Thus, normative commitment brings significant benefits to an organization, but also implies that the relationship must be more balanced in order to maintain this reciprocity between the company and the workers, in which both have something to gain.?

References

• Arciniega, L.M. (2002). Compromiso Organizacional en México: ¿Cómo hacer que la gente se ponga la camiseta? Dirección Estratégica, 2, 21-23.
• Díaz-Guerrero, R. and Szalay, L.B. (1993). El mundo subjetivo de mexicanos y norteamericanos. México: Trillas, pp. 151-163.
• León, F. J. (2009). El compromiso limitado. Un estudio sobre las razones estratégicas e identitarias de las acciones de resistencia y compromiso en el trabajo. Cuadernos de Relaciones Laborales, 27; 2: 115-143.
• Meyer, J. P. and Parfyonova, N. M. (2010). Normative commitment in the workplace: A theoretical analysis and re-conceptualization. Human Resource Management Review.
• Rodríguez, L. C. S. and Betanzos D. N. (2011). Vinculación entre empleado y empresa: analizando el constructo compromiso organizacional normativo en el trabajo. XVI Congreso Internacional de Contaduría, Administración e Informática. UNAM. ISBN: 978-607-02-2548-2
• Wiener, Y. (1982). Commitment in organizations: A normative view. Academy of Management Review, 7: 418-428.

By: Sylvia Meljem
ITAM

This article briefly analyzes the major trends in business today and their repercussions on the information value chain industry, which encompasses most of the activities carried out by accountants.

The Forces that are transforming the world

According to a 2010 study by Ernst & Young, the results of which were published in a paper called Business Redefined, the forces transforming the world today are vast, complex, challenging, and are moving with an unprecedented speed and intensity.

Renowned futurologist Dr. Ian Pearson says that in 2020, the business world will be defined by the following features:

• We will begin to move toward an economy of environmental care.
• There will be more face-to-face interaction.
• People will look increasingly to online resources for organizing their activities.
• Social responsibility will be a key factor in survival.
• The key qualities for a company’s survival will be versatility and adaptability.
• People with solid skills, knowledge, and excellent contacts, will be among those that benefit the most in the economy of the future.
• Miniaturization will continue in voice recognition and fingerprint tracking devices, in interfaces, and in mobile phones.
• Artificial intelligence will steadily improve productivity.
• The Semantic Web will allow users to automate a large percentage of administrative activities, making it less necessary to outsource some services.
• New forms of marketing and distribution will emerge that include the use of wireless memory devices.
• Increasing automation will change the focus of information toward interpersonal work.
• A toward humanization of work and society.
• A general shift in industries toward providing a more local response in manufacturing, financing, and services.
• One of the major effects of E-trade will be a global standardization of tools and procedures used by companies.
• The widespread use of social media will create an almost perfect network for transmitting ideas from the people who generate them, to others who can put them into practice; those who are capable of applying them will reap greater rewards than those who conceive of them.
• The winning companies will be logistics firms and those that can supply resources and financing.
• Greater alliances will be required between small companies and major consortiums, and specialists will have to be hired, given the large number of local and international abilities that will be necessary to operate a business.

Taking into account all these characteristics and with the results of interviews of academic and business leaders, the Ernst & Young study concludes that the six trends that can be expected to have the greatest impact on redefining business will be the following:

1. The increasing political and economic dominance of emerging markets (mainly by BRIC countries) will cause global companies to rethink and customize their corporate strategies.
2. Climate change will remain high on the agenda as companies seek to explore resource efficiency to improve the bottom line and drive competitive advantage.
3. The financial landscape will look vastly different as increasing regulation and government intervention drive restructuring and new business models.
4. Governments will play an increasingly prominent role in the private sector as demand for greater regulation and increasing fiscal pressures dominate the agenda.
5. In its next evolution, technology will be driven by emerging-market innovations and a focus on instant communication anytime, anywhere.
6. Leaders will need to address the needs and aspirations of an increasingly diverse 21st century workforce.

How these changes have affected and will affect the accounting profession

The following briefly sums up most important events of recent years, as well as their consequences, divided into three phases:

I. Redefining the profession

II. Financial crisis and scandals

III. The path toward international regulation and convergence

I. User demands, the information value chain and the challenges of the accounting profession, according to studies carried out in 1995

Already in 1995, leading global accounting firms were becoming concerned over the lack of relevance of the financial information generated in financial statements. Specialist Robert Elliott prepared a study investigating the leading opportunities and threats facing the profession at that time, what user demands were, and what type of profile would be needed to provide them the appropriate services.

The first question he asked was what the information value chain is, and what role the accountant plays in it. As Figure 1 shows, the answer is that we have a wide range of activities in the chain, which go from recording the transactions companies perform to transforming information into value-added knowledge that help users to make the right decisions. These activities are carried out as much by technicians (recordkeeping) as by specialists (professionals), which have very different levels of preparation and compensation (see figure).

The second question was what opportunities are there for the profession in light of user demands. The answer was that accounting must move away from the traditional idea of generating reliable financial information in the form of a document (financial statement package) and move toward one that is more adaptable to user needs, involving the generation of pertinent financial and non-financial information in a variety of formats, taking advantage of the databases with which companies operate (Figure 2).

Finally, the study asks what is the role of the profession, and what an accountant should do to meet these demands. The response at the time was that accountants needed to begin providing “assurance services” in order to give users relevant financial and non-financial information they could use to make the right decisions (Figure 3)

II. Financial crisis and scandals and their repercussions in the accounting profession

In the years following this redefinition of the role of the public accountant, a series of financial crises and scandals broke out, once again calling into question the accountant’s main job, now no longer as a supplier of relevant information for decision-making, but as a professional responsible for establishing controls and informing of business risks.

The World Bank has carried out several studies and found that financial crises are caused primarily by incomplete regulation, ineffective supervision, and the lack of information.

According to the World Bank, it is urgent that countries learn how to avoid these crises, because they cause panic reactions, abruptly halt economic activity and foster deepening poverty.

The strategy of international organizations should therefore be to encourage the generation of reliable, complete and accessible financial information (Figure 4), for the ultimate purpose of increasing economic growth and creating jobs.

At the initiative of the World Bank, other international organizations joined in, among them the International Federation of Accountants (IFAC), which headed up a program to strengthen the accounting profession throughout the world. IFAC pointed out various problems that must be resolved, particularly in emerging countries (figure 5):

• Obsolete legal framework
• Weak accounting profession
• Failure to comply with standards
• Weak monitoring mechanisms
• Lack of access to international standards
• Inadequate programs and training
• Lack of availability of guides and practical manuals

III. The Path toward international convergence

Since that time, a number of significant changes have taken place, the most important of which have been:

• United States: Sarbanes-Oxley Law (2002)
• Europe: Eighth Directive (2006)
• International Accounting Standards Board (IASB)

- Convergence with United States

- Project for small and midsize business standards

- New conceptual framework

- Alliance with IFAC to establish international standards

- Public Interest Oversight Board (PIOB, 2004)

- Compliance Monitoring Program (2004)

- “Clarity” Project

• Rapid convergence toward International Financial Information Standards and International Auditing Standards (IFIS and IAS)

- Growing number of countries have adopted IFIS (Mexico in 2012)

- Banking industry: Brazil (2010), Chile

- Public sector

• Independent control of professional practice

- PCAOB in the United States

- Various programs in Europe and other countries

- First attempt in Latin America: Colombia, El Salvador

• Efforts to reduce the cost of operating a business in each country: competitiveness
• Automation of bookkeeping (XBRL)
• Greater cooperation between countries

- Regulatory institutions

- Standards issuing institutions

All of these changes have dramatically transformed the exercise in the accounting profession, primarily as regards the exercise of professional judgment and the impact it has on the series of players that use the information generated (Figure 6).

There has been a growing international effort to bring about this convergence, and an increasing awareness of the importance of protecting the public interest. The IFAC has said that “public interest” is the common benefit that all citizens receive from the services provided by the accounting profession. The “public” should include all individuals and groups in society, since the activities of the accounting profession affect each consumer, supplier, and taxpayer that receives a service.

The responsibilities of the accounting profession are conceived of in a way that protects certain public “interests”, which include:

• The solidity of financial information
• The capacity to make international comparisons of financial information
• Fiscal prudence in public spending
• The contributions that accountants make to companies’ corporate governance and their organizational performance

For this reason, many participants have an interest in strengthening the accounting profession in the world, because they are aware that reliable, transparent and accessible financial information on a global scale is indispensable for meeting the following goals:

1. Improving the economic climate and making it attractive to investors
2. Creating conditions that are good for company growth, facilitating access to credit
3. Promoting the development of pension funds
4. Facilitating integration
5. Facilitating oversight by fiscal authorities
6. Helping credit institutions to function better
7. Assist the government in supervising and overseeing the activity of public service companies

In coming years, international efforts will continue in the following areas:

• Convergence toward IFIS
• Training and ongoing education for professionals
• Strict standards for obtaining and renewing a professional license
• Qualified supervisory agencies, with the resources and authority needed to enforce application of standards and sanction those who fail to meet themP
• rofessional institutions with the wherewithal to participate actively in the process

A report from the McKinsey Quarterly highlights five key trends in accountants’ work, and to some extent they converge with the mega-trends that are redefining business, listed at the start of this article:

1. An increase in the audience for and type of reports, and in social responsibility. More emphasis will be placed on the “social license to operate” (certification) and the need to reevaluate the expectations of stakeholders, like clients, employees, communities, and capital markets. This will mean a larger public for accounts to communicate with, and an increasing diversification in the way they communicate.

2. An increase in the regulatory and compliance aspects of accounting. Many aspects of accounting, particularly financial accounting, will become regulatory in nature. As a business goes beyond compliance, it must develop guidelines that reflect the dynamic and complex nature of its administrative and commercial practices, particularly the management of risk and ethical conduct.

3. Greater synergy between internal and external reporting. The way in which companies are analyzed is changing, particularly in the limits of the analysis, because companies place a high priority on their relationship with supply chains and clients. Clarity about the focus and scope of financial reports will help to narrow the gap between internal performance and what is disclosed to the public. Accounting information systems are used both to record transactions and to make decisions.

4. Fundamental role in an organization’s corporate governance. Accountants not only supply financial information and recommendations to the Board of Directors, but also serve as a vital component of corporate governance, helping to maintain a climate of transparency and ethical conduct. Accountants will play a key role in the development and application of regulatory frameworks that have emerged to guide organizations’ corporate governance.

5. Reports on the social and environmental impact of organizations. The term “sustainability” has begun to be used by organizations to refer to the long-term permanence of the business. Sustainability is a term that touches on various facets of the business and its relationship with the world around it.

Accountants are very good at measuring everything that can be quantified and monetized. Social and environmental transformations can provide crucial information on the future course of business with ambitious plans for economic sustainability. The challenge for accountants will be to help develop knowledge on creating and expressing metrics that relate an economic entity’s creation of economic value with its environmental and social sensitivity.

Like recent advances in the measurement, registry and disclosure of carbon use and trading in carbon certificates by companies and governments, accounting will need to take the new trends into account in order to formulate information on the business’s economic results together with its impact on biodiversity and ecosystems.

Having reviewed the recent changes the accounting profession has faced, and those that lie in store for the future, the reader cannot help but agree with the title: we are in the eye of the hurricane. There are daunting challenges ahead, but also opportunities to protect the public interest, and this will preserve the essential relevance of our profession.?

References

• World Bank. Report on Observance of Standard and Codes (ROSC) in emerging countries.
• CIMA (2010a). Accountants in the next decade. World Conference of Accountants, Kuala Lumpur.
• CIMA (2010b). Accounting trends in a borderless world. World Conference of Accountants, Kuala Lumpur.
• Elliot, Robert (1995). The Future of Assurance Services: Implications for Academia. Accounting Horizons, (9); 4: 118-127.
• Ernst & Young (2010). Business redefined: A look at the global trends that are changing the world of business.
• Holtzman, Y. (2004). The transformation of the accounting profession in the United States. Journal of Management Development, (23); 0: 949-961.
• IFAC Policy Position Paper 4 (2010). A Public Interest Framework for the Accountancy Profession.

By: Rogerio Domenge

In recent decades, there has been a growing concern in the national and international business world over activities that may cause pollution, global warming, greenhouse gas emissions and exhaustion of renewable energy sources. These concerns have had an increasing impact on business strategies and models, incorporating new variables into their design or redesign (planning, mission, vision, values, organizational culture, sustainable development, etc.) and in their execution (quality systems, waste and emissions management, product and production technologies, recycling, facilities, logistics, energy generation and consumption, etc.), all according to the relatively new notion of the “sustainable company.” Many times, however, there is no clear idea of what “sustainability” means, its purposes, or the reasons for a company to adopt it.

Sustainability

The concept of sustainability has been defined by a number of organizations from perspectives that vary depending on the nature and goals of each. Perhaps the most important definition of sustainable development is that proposed by the Brundtland Commission, or World Commission on Environment and Development (WCED), formed by the United Nations in 1983 amid growing concerns over the deterioration of the environment and natural resources and their negative impact on the world’s economic and social development.

This commission’s goal was to establish sustainable development policies, on the assumption that these problems are global in nature, and therefore require a global perspective to diagnose and solve them. In 1987, the Brundtland Commission published its report, entitled Our Common Future (WCED, 1987). Among other points, the report asserts that sustainable development is the only way to satisfy current and future human needs without disrupting the balance of the planet, which includes all forms of life, natural resources, water, air, etc.

For the WCED, sustainable development has to do with social and economic advance that “meets the needs of the present”, ensuring a healthy and productive life for current generations, “without compromising the ability of future generations to meet their own needs.” This concept relates the activities of companies that produce goods and services for society to their tremendous responsibility as the largest user of natural resources, taking into account nature’s limited capacity to offset, balance or maintain its own natural state. A company identifies and defines the type of goods and services it will offer according to human needs, particularly basic needs. But the companies are also part of a social system in which there are factors that limit them, like the type of technology used in their processes, the social and cultural organization surrounding them, and the laws they must abide by.

From a broader perspective, it is possible to conceive of sustainability as the capacity of a dynamic system to reach a stable state by achieving a balance among the resources it uses and its environment, achieved through internal mechanisms of self-regulation, adaptation, flexibility, response capacity and resilience (Minolli, 2000). Sustainability can be said to exist when the measures or indicators of the system do not decline (Gallopín, 2003), or in other words, when they maintain or improve their performance and use up resources more slowly than those resources can renew themselves. In the systemic focus, this characteristic is also known as homeostasis (from the Greek word meaning “an equal or similar state or position than”). This concept is used in various types of system-biological, ecological, economic, social and cybernetic.

In 2002, the Johannesburg Declaration on Sustainable Development (JDSD) adopted a more general focus on sustainable development, envisioning a model with three basic pillars (economic, social and environmental, or triple outcome) which has since then been broadly accepted and used (Kates et al., 2005). This model proposes to build and strengthen these three pillars to achieve sustainable local, national, regional and global development. The three pillars refer to the following factors:

Economic development. This concerns economic growth and the pursuit of well-being. It incorporates industries and productive sectors that provide jobs and all the aspects of an economy: markets, consumption, competition, efficiency, productivity, technology, innovation, and research and development.

Social development. This includes the cultural, legal and political climate as expressed in beliefs, traditions, customs, habits, lifestyles, education, values, goals, institutions, laws and regulations, all of it directed at maintaining a stable state (homeostasis), but leaving room for changes, renewal and adaptations which many times are introduced amid disputes and objections. Sustainability is, among other things, the result of the application of or conformity to a system of social norms, which is in turn dynamic because it gradually incorporates modifications for the purpose of self conservation and development.

Environmental protection. This pillar refers to the rational use of scarce natural resources. Sustainability is achieved when the company does not exploit one or more resources beyond its capacity to renew itself, which would lead to an imbalance or deterioration of the environment, and therefore, the company itself.

If the company and its environment are considered the focal system, this system’s sustainability can be understood as the capacity and potential to maintain a healthy and productive balance, meeting the needs and favoring the well-being of the population through the supply of goods and services, without exploiting (by technology) natural resources (energy, forests, water systems, etc.) beyond their capacity or speed of renewal, and within the institutional (regulatory) framework of the social environment (Figure 1).

Figure 1. Company and environment as focal system

Companies today face sustainability issues that were not present in the past. If a company intends to be sustainable, its management must explicitly include new elements in its strategic planning–responsible forms of engineering and exploitation of natural resources, and new investments in technological development that take into account their impact on the energy supply and their production of contaminants–to keep up with the rapid changes in the institutions around it. Ideally, these elements should be consistent with the current and future needs of the population.

At the same time, we might ask what is it that really prompts a modern company to adopt a system of sustainable management. What or who are the drivers or catalysts of this process?

Three triggers

Figure 1 shows the agents of the activities that influence sustainability: the population, or private and public consumers of goods and services, which show a growing trend to consume more responsibly, influencing the management and performance of the company; the companies that produce the goods and services, through their environmental management; committed employees and workers, who are increasingly trained and aware of their responsibilities toward the environment; visionary investors, whose decisions now take into account the performance and sustainability of their projects; regulatory entities, both formal and informal, in the social environment, which compel companies and the population in an increasingly decisive (mandatory) fashion to adopt the path of sustainability through policies, laws, standards, etc.; and other profit and nonprofit organizations, like academe, the media, and the voluntary sector. The following are three of the primary triggers for this process.

Obligation

This is the legal aspect. One of the fundamental elements in the issue of sustainability, companies and the social environment (figure 1) is the regulatory entity in charge of designing environmental legislation (in Mexico, the General Law on Ecological Balance and Environmental Protection), based on an ideal vision of the overall system and its development policies. This entity must balance the interests of society, the natural needs of the environment and the economic health of companies in developing government policies that take the form of laws, standards, taxes, fines, subsidies, incentives, and information programs (for example, the Mexican Ministry of the Environment and Natural Resources).

Conviction

This is the ethical aspect. The ethical company that generates economic and social value has a vision that is not confined to a simple short-term return on investment, which many more nearsighted companies adopt. It incorporates the aspects of an ethical and social responsibility for service that incorporates all stakeholders–society, clients, shareholders, employees, suppliers, lenders and the government. It arises from the profound convictions of the company’s directors, and is expressed in a number of actions, like behavior and respect for codes of ethics that incorporate the best business practices and standards, transparent action and reporting, anti-corruption measures, supervision of compliance with official rules and procedures, and investment in research and development to develop explicit sustainable practices for respecting, preserving, or improving the environment. The company generates social value because, among other actions, it trains and educates its members in an organizational culture with its own identity, objectives and values, and it sows the seeds of many social behaviors, institutions, values, attitudes and actions.

Good for business

“Good” in this case means profitable. Ideas differ with regard to the benefits or disadvantages of being a sustainable company from the standpoint of economic profitability. Sustainability can be perceived as an expense that brings no economic return, as an investment decision in traditional cost-benefit terms, with its corresponding return and risk, or as a strategic path and investment, as is summed up in Porter’s hypothesis (1995 and 2006), under which stricter environmental legislation not only lessens environmental damage but also leads to the development of better technological innovation and reduces production costs, while improving product quality. Porter considers sustainability to be a means of survival for the company in a dynamic, global and aggressive climate, in which it must adapt to new needs and demands of consumers in order to improve its competitive position.

In MIT’s global survey (2009, www.sloanreview.mit.edu) on sustainability and business, applied to company executives, there was a general consensus that sustainability heavily influences business decisions. And although 92% of companies take sustainability into account when deciding, most of them do not do everything they could to seize the opportunities it may offer. Thus, 70% have not drawn up a business plan that includes sustainability aspects. The companies that initiate vigorous sustainability actions discover an increasing number of opportunities.

In the corporate environmental survey by BDO Kendalls (2009) the triggers of sustainability are ordered as follows: economic, social and environmental. Another example is published by Siemens (2011, www.usmayors.org), reporting on a survey on sustainability among a sampling of US city governments, finding that the expected economic benefits are the primary trigger for cities to design strategies to develop new clean technologies. The survey discovered that one out of every three US cities has already budgeted for investments in adaptation to climate change.

According to Loch (2010) there is a great deal of proof of the business value to be generated in following the path of sustainability, but the strategies to achieve it must be defined and more clearly communicated to consumers, employees and investors. Loch’s study was based on the results of the survey applied to a sampling of 304 executives from a list of Fortune’s 1000 top companies, and another of 2600 American consumers over the age of 18. Loch recognizes that there is still a certain amount of skepticism-only 29% of executives and 16% of customers believe the companies are highly committed to sustainability, and 88% believe the companies should assume a moral responsibility to sustainability independent of regulatory requirements. Among the reasons for this skepticism is the low level of return on investment (78%) in sustainability projects, and the difficulty of measuring and evaluating sustainability (41%). On the consumer side, 71% are not willing to pay more for goods and services with sustainable characteristics. Among the executives, 61% believe that the main motive for a company to incorporate sustainability would be cost reduction.

Some indicators in Mexico also reveal a trend toward sustainability. For example, in a multinational survey on attitudes about global warming published by the World Bank (2010), related with results of the COP-15 Conference in Copenhagen and carried out by PricewaterhouseCoopers (PwC), 93% of respondents for Mexico said they agreed that their country should commit to sustainability, understanding that it would involve certain costs, in order to reduce greenhouse gases, because 94% of them believe that they affect human health. These are the highest figures in the world! In the PwC 2010 report entitled Sustainability Reporting in Mexico, it analyzed 38 reports from Mexico’s top companies, looking specifically for indicators of their performance in the three-pillar model. It found growing pressure to be more transparent in communicating the company’s social responsibility values, principles and results, among others. It concluded that these reports help improve risk management and valuation, because they allow companies to identify strategic opportunities that can be economically, environmentally and socially profitable. Among the issues most discussed by companies in referring to their sustainability activities are energy, water, solid waste and atmospheric emissions. Leaks and spills, environmental fines, the environmental impact of transportation, and environmental investment are among those least mentioned.

Conclusions

Conceiving of the focal system as a whole, including all the elements shown in Figure 1, and not just as a system of company-environment, can help us to define the actions and responsibilities of each participant, in turn making it easier for company to take on the dynamics of sustainability. Sustainability incorporates practically all human activities, and companies are a link that can contribute greatly to achieving this. The elements of the system are the social climate and its institutions, which orient the system toward sustainability through policies that coherent with the current and future needs of the population (together with their awareness and education), the environment and its limited resources, and the company with its sustainable management.

Entrepreneurs increasingly agree that business decisions and investment in sustainability will be a fundamental factor in corporate strategies in coming years. Sustainability opens new business opportunities and may even be the seed for the development (not just economic growth) of new industries with new technologies, such as renewable energy. A review of the secondary sources cited in this article tell us that the primary trigger for companies’ efforts to adopt sustainability are economic benefits, profitability, cost reduction, risk mitigation, and brand image, followed by the regulatory framework and the ethical aspect. Ultimately, however, sustainability is an effort to conserve the natural world, balancing business decisions with environmental and social criteria to create value not just for the company but for society as a whole.?

References

• World Bank. (2010). Climate change poll, http://blogs.worldbank.org/climatechange/category/tags/poll,
• BDO Kendalls (2009). Corporate and environmental sustainability survey, www.scribd.com/doc/23356084/2009-Corporate-and-Environmental-Sustainability-Survey.
• Gallopín, G. (2003). A systems approach to sustainability and sustainable development.
• CEPAL, UN: Sustainable Development and Human Settlements Division.
• JDSD (2002). The Johannesburg Declaration on Sustainable Development, www.housing.gov.za/content/legislation_policies/johannesburg.htm.
• Kates, R.W., Parris, T.M. y Leiserowitz, A.A. (2005). What Is Sustainable Development? Goals, Indicators, Values, and Practice. Environment. 47(3): 9-21.
• Federal Government of Mexico. Ley General del Equilibrio Ecológico y la Protección al Ambiente. Diario Oficial de la Federación, 28 January 1988.
• Loch, R. (2010). Gibbs and Soell Sense and Sustainability Study, www.gibbs-soell.com.
• Massachusetts Institute of Technology (2009), www.sloanreview.mit.edu,Minolli, C. B. (2000). Empresas resilientes. Buenos Aires: UCEMA.
• Porter, E.M. y Kramer, M.R. (2006, diciembre). Strategy and Society. HBR.
• Porter, M.E. y Van der Linde, C.(1995). Towards a new conception of the environment: Competitiveness relationship. Journal of Economic Perspectives. 9(4).PwC (2010), Sustainability Reporting in Mexico, www.scribd.com/doc/38689573/.
• Secretaría del Medio Ambiente y Recursos Naturales. Liderazgo ambiental para la competitividad, www.semarnat.gob.mx/liderazgo/Paginas/liderazgo.aspx.Siemens (2011), www.usmayors.org
• World Commission on Environment and Development (1987). Our Common Future. Oxford: Oxford University Press.

By: Imanol Belausteguigoitia
ITAM

Introducción

In this article, we will review the elements with which organizations can take on an entrepreneurial nature through a three-dimensional model, the Three-dimensional Intrapreneurial Model (TIM). The elements are the following: a) strategy and structure, b) organizational culture and c) formation of intrapreneurs.

It is often difficult for a company to exchange conservative attitudes for more entrepreneurial behaviors, but it can be a highly rewarding venture. Adopting an entrepreneurial culture does not guarantee an organization’s success, and it might even jeopardize it. However, when the environment is taken into account, appropriate strategies are designed and implemented, and personnel are trained with an entrepreneurial attitude, the possibilities for success increase significantly. Bygrave (1997) argues that organizations that cannot change become rigid and die like dinosaurs, unable to evolve. One of the biggest motivations for starting one’s own business is the desire to work freely. Many good employees cannot tolerate the company that hires them, among other reasons, because they feel like they are not given enough autonomy to make decisions. They feel stifled by their bosses and by the company, because they do not feel the climate encourages the expression of their ideas and feelings, and independently of their economic motives, they may decide to quit and start their own businesses.

Organizations are constantly losing valuable people, even if they are well-paid, and they are not clear on what they need to do to hold onto them. The cost of high employee turnover can be tremendous, and an organization has a hard time meeting its goals if it cannot maintain a stable, competent and committed team of employees. Companies of an entrepreneurial nature put these teams together and understand the tremendous importance of ideas being generated among their employees (De Clercq et al., 2005).

Empirical evidence shows that entrepreneurial behavior improves a company’s performance, because it strengthens employees’ willingness to run risks and develop new products, processes and services.

The discipline that studies innovation and the creation of new businesses within existing companies is called intrapreneurship, which is associated with the entrepreneurial spirit of organizations and is derived from the term entrepreneur (which in French means “one who undertakes an enterprise”). Although it may be difficult to pronounce and write in our language, the term intrapreneurship has been gaining traction in the Spanish-speaking business world. In a number of countries, it is recognized that entrepreneurial organizations are able to encourage and respond appropriately to technological innovations, among other things, because they can reduce the negative impact of excessive bureaucracy that may suffocate them.

The Three-Dimensional Intrapreneurial Model

The figure below shows the Three-Dimensional Intrapreneurial Model (TIM), which identifies some factors that influence the willingness of an organization and its employees to take on new challenges.

The following is a simplified scheme of the TIM:

Figure 1. Three-Dimensional Intrapreneurial Model (TIM)

Environment

An environment determines not only the species but also the organizations that will survive. In effect, to endure over time, organizations must have a thorough knowledge of their environment. The environment is made up of a number of factors, like the industry, competition, population, political system, etc. The environment influences design and implementation of strategies (I), culture (II) and the method by which intrapreneurs are formed (III).

I. Entrepreneurial strategy and structure

Designing organizational strategies without considering the nature of the environment is very risky and frequently leads to failure, so proposals must be carefully analyzed. The company must study the industry, determine its nature and ask the basic questions, for example, is it a mature or young industry?

It may be that organizations that intend to become entrepreneurial need to radically change the way they develop or implement strategies, so that they learn to focus on developing new products, systems, services and products. When an organization charts a course that is entrepreneurial in nature, even the people who are reluctant to adopt new paradigms must accept the changes if they want to remain consistent with the organization’s objectives. It is possible to quantitatively define strategic objectives so that all of the employees of the company visualize the changes it desires in a given period of time.

Porter establishes three generic strategies: differentiation, cost leadership and segmentation, in which a series of elements can be specified that make a company more or less entrepreneurial. These strategies lead to quantifiable goals: How many new products? What percentage of sales in total revenues? How many improvement projects? How many gradual or radical process innovations? How many new patents?, among others.

It is not enough to design an strategic plan with an entrepreneurial style; the organization’s very structure must be coherent with the strategic logic. The short-sighted focus and anxiety that comes from doing a job day in and day out in which everything is urgent, can often relegate innovations and entrepreneurial projects to a back seat, because their fruits are often evident only in the medium and long terms. Because of economic pressures, companies innovate and undertake new projects with limited resources, and many times they assign these responsibilities to people already saturated with work, who are unlikely to place a high priority in the new initiatives. This long-term focus often affects immediate results, because it consumes resources, distracts attention and offers no guarantee that the results will to be as expected. Using a sports analogy, the process of innovation is like a team that invests in basic strengths and resists the temptation to rack up a quick streak of wins by hiring proven athletes. It must be patient and wait for the rookies to become a championship team over time.

In conclusion, if organizations really want to their entrepreneurial activity to pay off, even if it means additional investment, they must have the right personnel structure, which frequently means creating new teams of employees.

II. Entrepreneurial culture

Among the characteristic behaviors of an organization that lacks entrepreneurial culture is that it punishes failure and deviations from the plan. Although the results are not as expected and responsibility lies with whoever made the decisions, the punishments are unpredictable, generating fear and paralysis among the workers. In contrast, an organization with an entrepreneurial attitude assumes failures as an inevitable part of the learning curve, another step along the path to reaching their final objective. The TIM model divides entrepreneurial culture into two factors: entrepreneurial focus and organizational climate.

a) Entrepreneurial focus

There is evidence that organizations with an entrepreneurial focus, whose workers function more as entrepreneurs (intrapreneurs) than salaried workers, are more capable of taking risk, innovating and being more proactive. An enterprising organization is one that promotes the pursuit of opportunities, adapting its structure, management and processes to the idea of increasing its versatility, speed and creativity. These companies are welcoming of personal initiatives and decision-making autonomy. They expect that all employees, regardless of where they stand in the hierarchy, seek out solutions and put them into practice. They also inculcate among workers the sense that each one is a leader of their own business, albeit articulated with the rest of their coworkers and aligned with organizational objectives.

The entrepreneurial orientation of an organization can be seen in five factors (Belausteguigoitia and Portillo, 2004, 2004):

• Proactivity. This is an attitude of acting in advance of problems. Members of proactive organizations do not leave things until the end, and instead resolve problems the instant they arise, so they are constantly seeking out opportunities.
• Innovation. This is the capacity to break old paradigms and constantly discover new ways of doing things. Innovation and creativity are inextricably linked.
• Risk. Entrepreneurial organizations assume calculated risks; they are not suicidal, nor do they err on the side of caution, but rather carefully measure the risks of their undertakings. A culture of punishing failure leads an organization’s members to shrink from risk and to lose their entrepreneurial drive.
• Aggressive competitiveness. People and organizations with an entrepreneurial spirit are not easily frightened by competition; in fact, it inspires them to be better. They are not afraid to compete and, like good athletes, they know how to lose, because they take defeat as an important lesson that serves to strengthen them, so that the next time they face their rivals they have a better shot at winning.
• Autonomy. Organizations that are aware that they must foster a climate of freedom among their employees are often entrepreneurial; for this reason, they give them greater authority, responsibility and decision-making power. They avoid excessive bureaucracy as well as a succeeding supervision and control.

b) Organizational climate

There are investigations that have shown that organizational climate is related to the retention and commitment of workers to the organizations (Arias Galicia et al., 2000). The organizational climate can be defined as the properties of the workplace environment that employees perceive as characteristic of their organization, or the way in which people perceive and interpret their surroundings.

Brown and Leigh (1996) refer to the organizational psychological climate, and divide it into two dimensions: psychological security (workers’ perception of a safe environment) and psychological signification (employees’ perception of the meaning of their work). They propose three factors for each dimension.

The factors of psychological security corresponding to the first dimension of organizational psychological climate are the following:

• Support of immediate superior. This is the subordinates’ perception of how they are treated by their boss. There are two extremes in this dimension. At one end there is the inflexible, rigid style that indicates a lack of confidence that the subordinate can do the job without close supervision; on the other, a style that allows methods to be changed in order to take advantage of errors and apply creativity to problem solving.
• Job clarity. This is the degree of precision in the description of job duties and expectations. If the activities of the job and the expectations as to its results are imprecise, tension rises, while satisfaction and commitment diminish (Arias Galicia, 1989; Kahn, 1990).
• Expression of one’s own feelings. This is the workers’ perception of the organizational consequences of expressing their ideas and feelings. If the members of that organization feel confident to communicate their ideas and sentiments, they will have a favorable perception of their workplace environment.

Psychological signification, a profound and to some extent philosophical facet, includes these three factors:

• Personal contribution. This is the workers’ perception about the importance and significance of their job as a means to achieve the organization’s goals. If employees feel that their efforts contribute to the organization’s processes and results, they will perceive that their work is important, and this sentiment can give tremendous significance to the activities they carry out.
• Recognition. This is the conviction that the organization appreciates and values the effort, contributions and results of their workers. One of the most powerful motivations for workers is that their organization recognizes them. Unfortunately, there many employers and bosses who refuse to recognize their subordinates because they believe that it encourages workers to ask for raises that they are not willing to grant (“since I’m doing so well, why aren’t I paid better?”).
• Work as a challenge. This is en employee’s perception about the degree to which the work requires the use of their capacities and abilities. One of the sources of personal development on the job is to face problems and resolve them by applying skills and creativity. If a superior assigns tasks to subordinates and does not allow them to apply their talents, and there is no room for the expression of creativity and ingenuity, the subordinates will interpret their climate as non-stimulating and lacking in significance.

The design of an appropriate organizational climate exercises a positive influence on the workplace environment and on entrepreneurial culture, and also brings other benefits (Belausteguigoitia, 2000).

III. Formation of intrapreneurs

Training workers in the spirit of entrepreneurship must take place at all levels of the organization. It means moving from risk-averse attitudes and the habitual rejection of new paradigms toward an attitude of challenging the status quo and obsessively seeking out new opportunities.

Timmons (2004) makes a distinction between traditional managers and those that function more as entrepreneurs within their organizations. The former possess good management abilities, but they are reluctant to run risks or to innovate. In the case of administrative managers, the difference is obvious: they stick firmly to their budgets and established paradigms and close the door on the development or implementation of new products, systems or processes, because the results cannot be predicted, so by nature they entail uncertainty. Entrepreneurial managers are able not only to accept changes that affect the status quo, but to encourage them. They take on greater risks, and uncertainty is not so uncomfortable for them.

Just as there are traditional or entrepreneurial managers, there are also employees that are more or less entrepreneurial by nature. Each employee will have the possibility of acting as an entrepreneur in their organization. With this, besides contribute to the company, they will gain a sense of freedom.

An organization can benefit from having entrepreneurial employees, but it is not easy to train them to think and act this way.

a) Building leaders

It is indispensable that those who direct others are well-trained to promote the entrepreneurial spirit in their work groups. They must adopt styles of leadership that encourage growth, allow for delegation of responsibility and authority, and draw on all the talents and capacities of their subordinates. Leaders can create the climate needed for intelligent and creative expression by their subordinates, which is necessary for the generation of new ideas.

b) Training employees

Employee training should incorporate both theoretic and practical aspects, meaning both the foundations of entrepreneurial spirit in the organization, and exercises, discussions and workshops aimed at brainstorming and putting new ideas into practice.

c) Job rotation

In recent years, the practice of job rotation has been gaining popularity, because it is believed to promote teamwork and give employees an overall knowledge of the processes within their organizations. It also raises workers’ awareness about the problems faced by their colleagues in other departments, and gives rise to new ideas and problem-solving from different points of view. There are a number of forms of job rotation, which range from a few days to more prolonged periods.

d) Incentives for the intrapreneur

Organizations should reward good performance, innovation and entrepreneurial spirit in order to promote teamwork and encourage creative thinking. These compensation systems, far from inhibiting entrepreneurial decision-making, with all the risks implied, actually encourage it.

IV. Performance

Good performance results from the correct articulation of the three steps that we have just gone over (entrepreneurial strategy and structure, entrepreneurial culture and formation of intrapreneurs). Care must be taken to appropriately define the indicators by which results (performance) will be measured, and not expect that the dissemination of culture, generation of ideas and formation of intrapreneurs to have a short-term impact on the company’s financial statements.

It is fundamental to evaluate the results obtained in order to validate or modify the TIM model. Perhaps some of the phases should be changed to improve the outcome. These processes, in which a later phase feeds back into previous phases, are illustrated in the model with rising arrows (see figure 1).

Conclusions

Organizations that have lost their entrepreneurial spirit sooner or later become rigid, dusty, and perish, because they are overtaken by more dynamic companies. The task of recovering this spirit is a difficult one, but not impossible. The TIM model can be useful not only for organizations that want to regain their entrepreneurial vigor, but also for those who aspire to maintain it.?

References

• Arias Galicia, Mercado, P. y Belausteguigoitia (2000). El compromiso personal hacia la organización, la búsqueda del empleo la intención de permanencia y el esfuerzo. Revista Interamericana de Psicología Ocupacional, (19); 1.
• Belausteguigoitia, I. (2000). La influencia del clima organizacional en el compromiso hacia la organización y el esfuerzo en miembros de empresas familiares mexicanas. Tesis Doctoral. Facultad de Contaduría y Administración. UNAM.
• Belausteguigoitia, I. y Portillo, S. (2004). The family business in Chile and Mexico: organizational climate as antecedent of entrepreneurial orientation. En Entrepreneurship in Latin America, cap. 15. Praeger.
• Brown, S.P. y Leigh T.W. (1996). A new look at psychological climate and its relationships to job involvement, effort and performance. , 81.
• Bygrave, W. (1997). The portable MBA in entrepreneurship, 2a. ed. John Wiley & Sons.
• De Clerq, D., Castañer, X. y Belasteguigoitia, I. (2005). Lobbying for and getting entrepreneurial ideas accepted within an established organization. Frontiers of Entrepreneurial Research. Babson College.
• Timmons, J. (2004). New Venture Creation, 6a ed. McGraw-Hill.

By: Luis Alberto Harvey
Nexxus Capital, S.A. de C.V

The private equity industry, as are known internationally investments in private companies, is very important in the world. The vast majority of companies listed on developed markets stock exchanges have received private equity capital at one time or another.

Within the theory of diversification of portfolios the most important asset classes are: stocks, fixed income and cash. Investments that are not one of the Traditional Investments are known as Alternative Investments. These are more complex, have different regulations and limited liquidity.

Private equity is one of the most important types of Alternative Investments. Other important investments types are real estate, precious metals, raw materials, art and jewelry, among others.

Throughout the world, institutional investors are the most important private equity investors. They include public and private pension funds, insurance companies and development banks, such as the International Finance Corporation (IFC). Other major investors are universities, foundations and wealthy families.

During the last decade, a new, very powerful group of institutional investors was formed: the sovereign wealth investment funds. These funds are a vehicle created by countries with substantial foreign monetary reserves to obtain additional returns for those reserves. Among the most important sovereign wealth funds are Abu Dhabi Investment Authority, GIC and Temasek of Singapore, Kuwait Investment Office and China Investment Corporation.

The participation of institutional investors in Alternative Investments is small, typically totaling less than 10% of their total investible funds. The intention is to obtain higher yields than those produced by Traditional Investments, so that the average of all investments yield a higher return. They are interested in Alternative Investments since they have lower correlation with Traditional Investments.

Private Equity in Mexico

The private equity industry in Mexico has been in existence for a short time. The first investments were in the early 1990s and the industry havs developed slower than in other countries.

Private Equity investments in Mexico as a percentage of GDP has been around 0.03%. This compares with 0.2% in Brazil, 0.4% in Chile, 0.4%, and 0.5% in Peru. In developed countries these percentages are much greater. In Europe, the average has been approximately 0.8% and in the United States, more than 3.0% of GDP.

In recent years, the number of private equity funds operating in Mexico has increased, and therefore more transactions have taken place between 2000 and 2010.

In developed countries, in the Asian markets and in Brazil, private equity has been a great catalyst for the institutionalization and growth of many medium-sized companies. In many cases, they are now listed on the stock exchange, and have boosted the development of these countries’ economies.

For example, during 2009 and 2010, there were about 80 private equity transactions a year in Brazil, while in Mexico there were 25 in 2009 and 19 in 2010.

The size of the industry in Mexico is small in relation to its economy and we expect it to grow in the coming years. Mexican financial authorities took a big step in 2010, when they launched the Capital Development Certificates (CKDs). Through these certificates, the AFORES, private pension funds and insurance companies can now invest in private equity. We hope that the participation of Mexican investors – including institutional investors like AFORES, private pension funds and insurance companies – increases substantially and reverses the trend of the past, when more than 70% of the private equity investment in Mexico was made by foreign investors.

Overall, private equity investments in Mexico operate in the same way as in other countries. Each private equity fund has its own peculiarities, but they all follow similar procedures.
In the private equityindustry, investment activities can be broken down into several areas, including the following:

• Venture Capital – Investments in new companies or start- up operations.
• Early Stage – Investments in established, but young companies.
• Late Stage – Investments in well-established companies and with a good market position.
• Industry Specific – Investments in companies of a particular industry.

Investments are also made in accordance with the financial situation of the company and the destination of the resources. There are funds that specialize in buying financially troubled companies: they solve their problems and then sell them. Other funds invest in companies to help them put their finances in order so they can eventually grow. Funds also invest in what is known as expansion capital, with the idea that the amount invested will be used exclusively for growth.

Private equity funds can also be used to buy a percentage of a company or the entire firm. Some funds will only start with a minimum purchase of 51% of the company. In many cases, in addition to funding the growth of the company, the original shareholders need liquidity and they sell part of their actions to the fund, which is known as a secondary sale. Capital increases are commonly known as primary investment.

Although funds may have their investment preferences, many investments are a combination of the options we have just mentioned. It is very common for a fund to make a primaryinvestment and at the same time a secondary sale to provide liquidity to the original shareholders.
Nexxus Capital has been managing this type of investments for more than 12 years. We define ourselves as a generalist fund that invests in growth capital for companies Late Stage companies.

The investment process is divided into four key stages:

1. Search and Analysis of Investment Opportunities

In the first stage, the investment opportunities presented to the fund are analyzed as are the opportunities generated by the fund’s executives who communicate directly with companies that have the potential to receive a private equity investment.

Each fund determines its investment guidelines, in which they define the industries of interest, the size of the target companies, the amount of investment, the share of the company they want to acquire, and the preferred expectations for divestiture.

Many investment opportunities are examined to find those with the greatest growth potential, according to the fund’s preferences. At this stage, continual talks with the owners of the company are maintained.

When a company meets the requirements that the fund is looking for, a letter of Terms and Conditions is negotiated with the owners. This letter defines the principal terms of the investment, which includes a preliminary valuation, although the company’s financial situation has not yet been verified in detail.

During the analysis of the company, possible ways to divest in the future will begin to be identified.

2. Structuring and Closing the Investment

At this stage, the investment is structured according to the terms and conditions negotiated in the previous stage. The executives of the fund conduct a thorough analysis of the financial situation and operations of the company. Auditors are hired to verify the accounting and fiscal information of the company and, on many occasions, industry specialists are called on to analyze its operations in more detail.

According to the results obtained in the operational, accounting and financial review, and an analysis of the industry and the competitive situation of the company, it is determined if the valuation and the terms of association or purchase are appropriate. Given that the information provided by the company has been validated, a new negotiation with the owners generally follows. If both parties are in agreement, the lawyers prepare a stock subscription agreement and a shareholders agreement in the event of a partial purchase or a capital increase of the company, or a purchase agreement in the event of a total acquisition of the company.

When the contracts are ready, it is time to close the transaction. The time that elapses between the first talks with the owners of a company and the closing of a transaction is approximately between four and eight months.

3. Operation and Growth of the Company

During the negotiation of the transaction, the analysis of the company’s operations will identify what areas need to be strengthened and whether the quality of the management must improve. Many companies do not have the right personnel to enter a phase of accelerated growth. Therefore, it is important to determine what management needs to be hired to improve and enhance the operations of the company.

The areas that generally require rapid changes are finance, sales and marketing. The area of operations must be reinforced, taking care not to affect the day-to-day operation of the company.
Under normal conditions, medium-sized companies do not have the appropriate capital structure or debt. Once the investment is made, the capital structure of the company improves substantially because the investment always includes an injection of capital. The debt structure of a company almost always has to be modified. Usually, these companies are financed by suppliers or with short-term debt. It is important to obtain a reasonable amount of medium term debt and restructure the relationship with suppliers to obtain adequate suppliers financing without affecting them. If the plan is to increase the company’s operations, it is important to have suppliers that can satisfactorily cover the growing needs of the business.

This phase is paramount because growing businesses face greater chances of losing control of the main operational variables. In many cases, after a period of growth it is necessary to dedicate some time to consolidate operations before starting a new period of growth.

4. Divestiture

Private equity funds are structured to receive funds from investors, invest them in companies, help these companies grow and then sell them at a higher price in order to give back to the investor the amount originally invested, plus the return. Normally, this cycle lasts between six and twelve years. At the end, the funds always divest, so an important part of the analysis prior to investing involves the examination of the possible ways to divest from the company.

The main forms of divestment are:

• Sale to a consolidator
• Sale to another private equity fund
• Sale to the original shareholders
• Company’s Initial Public Offering (IPO)

It is always an alternative to sell to another company that will consolidate the operations of the business in which the fund invested. There are companies that seek to consolidate industries by acquiring smaller players. They are willing to pay reasonable prices because it means buying market share.

In the same way, there are private equity funds that are already invested in an industry and are looking for smaller players in order to increase their investment in this sector. By increasing the volume of operations, they hope to be able to sell a larger company in the future or make an Initial Public Offering of the company in which they invested.

On many occasions, the shareholder agreemens include clauses with terms that allow the original shareholders to acquire the shares of the company owned by the private equity fund. In these cases, the original shareholders get bank financing and leverage the company to buy back the shares.

Finally, one of the most attractive ways to divest is through an Initial Public Offering of shares on a stock market. It is an interesting alternative because the private equity fund sells all or part of its stake in the company in the secondary portion of the public offering. Given that the company receives fresh resources with the primary portion of the offer, many times the private equity fund sells only a portion of its shares, with the expectation that the company will grow and they will be able to sell their remaining shares at a higher price.

What is required for a business to have access to private equity investors?

Entrepreneurs interested in obtaining capital to finance the growth of their company should focus on certain points to draw the attention of private equity fund managers.

• The company must have the potential to grow. If not, the fund will be reluctant to invest in the company because it is looking for a return on its investment. This means the company needs to grow so that when the fund sells its stake, it will be able to do so at a higher price.
• The size of the company is important when determining which type of fund to look for. If the company is small, there is no need to search for funds that invest in Late Stage. Likewise, a mature company is not going to be interested in Venture Capital or Early Stage funds.
• The company should be prepared before contacting a fund. It is important to have the adequate corporate structure and appropriate accounting. If those are missing, the process will be much slower. Funds prefer to work with companies that are better prepared. They receive many investment requests each year, but they closely examine less than 30%, and invest in 2% or 3% of them. If a company is well prepared before beginning the process, it facilitates the fund’s analysis of the company’s merits.
• The owner of the company has to be very clear about what he expects from a fund. Does he want some capital to grow? Does he intend to do what is necessary to maximize its development? Is he lacking capital or is he searching for a partner to help him grow? He must know the amount of capital he needs to change the future prospects of the company. There are many cases in which owners want less capital than the company really needs because they want to sell a lower percentage of the business. This is a fundamental issue for the funds because if the appropriate amount is not injected into the company, it is often impossible to make the investments and carry out the projects required for the company to grow.
• It is important to have realistic expectations in relation to the time the investment process in the company will take. Approximately 60% of the transactions take between four and eight months; 25% require more and 15% less than four months.

Conclusions

Private equity may boost the growth of a company, provided that the owner is willing to make the necessary changes to support it.

Venture capital and Private Equity funds seek companies with committed and capable operators who they can count on to “institutionalize” the company and prepare it for a new stage of growth.
There are sufficient private equity funds in Mexico. Companies should look for funds that share common interests and objectives.
?

By: Caroline Auvinet

At the beginning of the 21st century, the number of people living on less than two dollars a day reached more than 4 billion. Society has become increasingly aware of the limitations of governments, civil society organizations and aid agencies in terms of providing health services, education, housing, and environmental and agricultural assistance. (Prahalad 2010). Facing these global challenges, social and environmental enterprises have emerged as an alternative solution for reducing poverty and inequality in the world. They are, in fact, “creating a new frontier, a quiet revolution.” (Bornstein, 2004)

In Mexico, many families and cooperatives have chosen to undertake income-generating activities to ensure a secure and stable employment. Some of these companies try to satisfy unmet needs in a community, employ people with low incomes or provide goods and services to the disadvantaged. In this way, they fulfill a social function that has not yet been resolved. Could these companies be called social enterprises?

The reality is that in Mexico the term “social enterprise” is not yet clearly understood. Social and environmental companies have existed for many years, but nowadays they have adopted a new role. According to Julián Costabile, director of the Social Investment Fund (FIS in Spanish), the principal goal of social enterprises is “to generate a social impact, to see profitability and business structure as a means rather than an ultimate end.” In other words, they are companies that cover the three basic criteria that distinguish them from other organizations: having social purposes, using business mechanisms to reach their objectives, and being independent. (Reficco, Gutiérrez and Trujillo, 2008).

The primary objective of a social enterprise is to seek a positive social or environmental impact and generate profits, and to contribute to maintaining or improving social conditions beyond the financial value created for those who have links with the companies. It is therefore important to understand the differences between a social enterprise and the social initiatives of business enterprises.

The goal of a social enterprise is to create social value and profits through marketing goods and services. In contrast, the objective of a social initiative of a business enterprise is to create economic value through the resolution of social problems, and to generate social value. (Reficco, Gutiérrez and Trujillo, 2008).

The innovations of social enterprises challenge the established players of an industry, offering simple and sufficient alternatives to a group of underserved consumers. These innovations change the status quo by providing adequate solutions to poorly addressed social problems. These innovations are called “catalytic innovations,” whose main goal is to create social change. (Christensen, Baumann, Ruggles and Sadtler, 2006). Christensen and his colleagues argue that through catalytic innovations, a subset of disruptive innovations, social enterprises can achieve success.

According to them, catalytic innovations:

(1) create systematic social change through scaling and replication; (2) satisfy a need that is either over-served (because the existing solution is more complex than many people require) or not served at all; (3) offer goods and services that are simpler and less costly than existing alternatives and whose performance may be perceived as somewhat inferior, but that users consider to be good enough; (4) obtain resources, such as donations, grants, volunteer manpower or intellectual capital in ways that are initially unattractive to established competitors, and; (5) are often ignored, disparaged, or even encouraged by existing players for whom the business model is unprofitable or otherwise unattractive and who therefore avoid or retreat from the market segment.

In Mexico, there are few businesses that meet these criteria. However, there are successful social enterprises that do not necessarily follow this model.

One of the main problems facing this movement is that people must understand and consider it as a real option for investment. Another is to create the necessary ecosystem that will allow these companies and investments to thrive.

According to New Ventures México, an ecosystem consists of a group of interrelated, but independent elements that interact in a dynamic way. Currently, the players that contribute to making the ecosystem more conducive to impact investment can be divided in the following manner:

Generators of knowledge. Schools that formally teach subjects related to social enterprises and impact investment.

Creators of capabilities. Organizations that advise social entrepreneurs, accelerate company growth, train, shape and link the players. These organizations include New Ventures México and Ashoka.

Investment providers. They facilitate investment, finance projects and provide funds to social enterprises. For example: Ignia and Adobe Capital.

Social enterprises. They are the core of the ecosystem.

The Impact Investment Ecosystem

In Mexico, various players are consolidating their efforts. Since the rules of the game have not yet been fully defined, their interactions are still deficient and poorly articulated. However, there are already cases of prosperous social enterprises, such as Échale a tu Casa, Aires del Campo and Chizca, to mention a few. These three examples come from different social sectors and have diverse strategies and organizational skills, but they concur in trying to have a social and environmental impact, in addition to generating profits.

The Survey

To learn more about the different business models of social and environmental enterprises, and understand how they innovate in their products, processes or services in Mexico, we conducted a survey to 200 companies during the XIII National Social Enterprises Fair, Expo FONAES 2011, and obtained a 25% response rate. These companies were supported by FONAES because they fulfilled the institution’s requirement of being located in priority areas, such as micro-regions, micro-watersheds, and urban polygons of poverty. Despite being companies that do not have large financial resources, some of these social enterprises have demonstrated a productive and organizational capacity, developing productive, commercial or service projects inherent in enterprises with a social character.

The survey was conducted by different means during the FONAES fair trade. It was conducted directly with the entrepreneurs who were actually present at the Expo. If the person in charge was not the entrepreneur or could not respond at that moment, they received a letter explaining the study and the reference of the website. Finally, companies with an email address were sent messages asking them to respond online.

The companies were selected so that all states of the republic were represented. Information on the following three main themes was obtained:

1. Companies and their strategies
2. The social impact they have or seek to have
3. The success of the companies

The results provided interesting data, which we will discuss below.

On the Companies and their Strategies

The survey showed that the majority of the companies (58.7%) are family-owned, followed by 32.6% that are community-owned. The minority are private enterprises.

It also showed that 40.4% of the companies operate locally, 46.8% regionally, 21.3% nationally, and only 10.6% have activities abroad.

The activities of the surveyed enterprises include: 52.2% are focused on raw materials (forestry, agriculture, agribusiness, aquaculture, fisheries, minerals, etc.); 28.3% in manufacturing (power generation, management of resources such as water or waste, pharmaceutical, automobile, etc.); 41.3% in services (wholesale, retail, restaurants, hotels, tourism, energy, water, waste, financial services, transportation, distribution); and 4.3% in information (research and development, education, consulting, information technology, training).

³ Some of the survey questions were taken from the Call 2011 for New Ventures México.

As businesses, their main strategies for the future include:

1. To grow through new sources of income, such as new products, customers and markets.
2. To increase productivity by improving their production processes.

The majority considered that they create value for their customers by offering better quality as well as a variety of products. They think that what makes them different is having a better product.

Asked about the competition, 91.5% of the companies said they knew who their competitors were. They also said they had cheaper products or services that were better quality, more convenient and more complex than the competition. This leads us to think that what is lacking is a defined strategy to differentiate themselves as a company and to cover a specific market.

Asked if they had duplicated their business model, 79.5% said they had not duplicated it, but of these, 76.9% said they would duplicate it if it were possible. Of the 20.5% that duplicated the business model, only 44.4% obtained the same results. /p>

On the Social Impact

According to the survey, 61.4% of the companies covered an already addressed need, and 38.6% an unmet need. Upon analyzing the latter, it was noted that the unmet needs were local needs that were already covered in other localities or regions.

Although 72.3% of the companies stated that their main objective was to generate profits and to create a social or environmental impact, when asked about their main social objective, 71.7% of those surveyed said it was to generate employment. Taking into account that the companies surveyed have an average of 10 fulltime employees, and are family-owned, we conclude that in general the companies interviewed are forms of self-employment.

Table 2 What is the Main Objective of the Company?

On Success Factors

In analyzing the companies’ key success indicators, we obtained the following results:

Of the companies surveyed, 89.4% made profits, but only 48.9% have managed to grow since their founding. The number of employees remained the same in 51.1% of the companies, while 72.3% have increased the number of products offered.

On average, the companies interviewed had been in business for eight years, which suggests that they are established companies.

When asked how they had used the resources received from FONAES, 75.7% replied: to strengthen the company (purchasing equipment and machinery). They also took training courses to learn how to develop a business plan, an illustrated manual, a web page, and received advice on reinforcement and competition.

Conclusions

Several conclusions can be drawn from the data obtained in the survey.

1. As businesses, the majority of the social enterprises interviewed lack a clear differentiation in relation to the competition, which suggests the absence of strategic planning for the future.
2. The majority of the companies have little social impact and the sources of work that they generate are mainly for self-employment.
3. The success factors that were analyzed show that, in general, the companies are growing.

These businesses receive advice on how to consolidate their efforts as social enterprises. Since they are at the initial stage of the process, recommendations on how to clarify their strategies would be useful.

If we consider the key points catalytic innovations share, we did not found companies that comply with the five qualities simultaneously. The method devised by Christensen, Baumann, Ruggles and Sadtler is a good tool when developing a new social enterprise or when investment funds in search of new opportunities identify possible disorders within an industry. However, it is difficult to apply the theory of catalytic innovation as a strategy once a social enterprise has found its way and has adopted another business model.

The main difficulties facing social enterprises are: to generate a social impact that is systematically verifiable; to differentiate themselves from their competitors; and to become independent of government or NGO support. Therefore, the main focus of their work should lie in the measurement of its performance, the innovation within their business model and their independence.

We are not criticizing the support social enterprises receive. When they first start up, the majority obtain various kinds of support. But social enterprises should aspire to become independent, and the sooner they do, the better.

As we said at the beginning, a social enterprise must generate profits while having a positive social or environmental impact. Among the companies surveyed, the social impact of many of them is questionable.

Social enterprises must understand that their goal is to produce a social or environmental impact while generating profits. Self-employment can be an attractive part of the undertaking, but the social impact must seek social change. For this reason, the measurement of the impact is a key factor for the development, credibility and survival of these companies, just like it is in any business. Without a correct measure of its impact, they will have difficulty attracting investors.

Finally, speaking of business strategies, needless to say it is difficult for any company to survive, whether it be a social enterprise or not. If it does not clearly differentiate itself from its competitors with an innovative business model, it will have trouble surviving when the financial support ends and when it tries to enter new markets in which its product faces competition that did not exist in its original locality.

In summary, companies should follow three strategies to attract private investors or to ensure sustainable growth:

• Clearly identify its social impact and adopt it as the main pillar of the company. Businesses should choose at most five variables to measure its impacts. Here the most important thing is to measure them continuously with internationally recognized standards to prove that they have been achieved.
• Define the company’s future goals, and based on them, elaborate a strategic plan. Various strategic tools, like the analysis by Porter and the FODA, can be useful in determining to whom the product is directed and to differentiate it from the competition.
• Become independent as a business. Government programs, and those of NGOs and private companies, are a great help when starting a social enterprise or when trying to strengthen it, but they should not be depended on.?

References

• Bornstein, D. (2004) Cómo cambiar al mundo: Emprendedores sociales y el poder de las nuevas Ideas.
• Christensen, C. Baumann, H. Ruggles, R. Sadtler, T. (2006, diciembre) Disruptive Innovation for Social Change. Harvard Business Review.
• New Ventures, Convocatoria 2011 New Ventures México, .
• New Ventures, “El Ecosistema de Inversión de Impacto en América Latina” realizado por New Ventures con el apoyo de Oportunidades para la mayoría del BID, Artemisia, Ashoka, Avina, Ayllu, The U.S.-Mexico Foundation, IPADE, NESsT, Nexii, Promotora Social México, RTI, SEAF y World Resources Institute.
• Prahalad, C.K. (2010). The fortune at the bottom of the piramid: Eradicating poverty through profits. 5a. ed. New Jersey: Wartton School Publishing.
• Reficco, E. Gutiérrez, R. Trujillo, D. (2008, octubre-diciembre). Empresas sociales: ¿una especie en busca de reconocimiento? Revista de Administración-RAUSP, 41, .4: 404-418.

Web sites:

• FONAES
• Iris