By: Antonio Lloret¹ and Elsa Flores²

A company’s competitiveness is linked to its long-term performance and its relationship to its industry and its competitors. A competitive company is one that is constantly aware of the conditions under which it may lose or generate value.

Since competitiveness (and not simply comparison) is a long-term phenomenon, a company must understand how to constantly create value, and one requirement for doing so is having a strategy that enables it to meet its goals. According to Thompson et al. (2009), strategy consists of the competitive movements and business management used by administrators to grow the business, attract and satisfy consumers, and successfully competes through operations that work toward organizational targets. According to Porter (1996), it is the way in which the company’s activities fit together or, more generally, a theory on how to generate competitive advantages (Barney and Hesterly, 2010).

So when a strategy is accompanied by a business model that creates, generates and captures value, the company becomes more competitive. In other words, a strategically directed business model can become a model for a long-term competitive business.

The long-term emphasis is important. Competitiveness understood as a “once in a while” thing is only an illusion. Thinking in this way means generalizing that a good business is infinitely replicable, which is a fallacy out of keeping with the concept of competitiveness. In fact, a long-term competitive advantage is called a “sustainable competitive advantage.” Here, sustainability means permanence amid the restrictions imposed by economic, social and environmental systems, in which business decisions are constantly subject to the limitations of those systems. For example, an economic limitation is the production capacity of a plant; a social limitation would be individual preferences for goods and services, and an environmental imitation would be the scarcity of an input like energy. These restrictions limit the level of competitiveness a company can attain, and therefore its permanence. Neglecting to take these into account is tantamount to assuming that business decisions are linear. Sustainability practices are key to a company’s survival, because well-aimed sustainable actions within its strategy are a source of competitive advantages.

In summary, competitiveness only makes sense in the long term and is subject to the limits imposed by economic, social and environmental systems. Sustainability aligned with strategy is key to making the company more competitive. But if this is true, how do we devise a model for corporate sustainability?

1Profesor investigador de la Escuela de Negocios

ITAM

2Asistente de investigación

ITAM

For a business model to grow, generate and capture value, it requires the simultaneous use of three systems that sustain the company’s strategy. These elements, as shown in figure 1, represent the infrastructure on which the company can generate strategies that enable it to be competitive in the long term. When one or more of these supports is absent or underestimated, the company may lose value over time.

These elements buttress a company’s strategy and serve as the bases for corporate sustainability, and they are what enable it to attain competitiveness.

The first element of competitive strategy is the classic argument of the competitive advantage based on cost leadership and the company’s differentiation or benefits (Porter, 1985). The same argument, which is even more evident from the standpoint of the laws of supply and demand, is the first pillar of the strategy, the catalysts for individual preferences, on the one hand, and the generator of operating margins on the other. Demand represents the perceived benefits customers acquire from the good or service produced by the company. This perceived benefit is what we generally understand as differentiation, and can be measured in the distance between the availability of payment and the price paid. Thus, the company that offers more perceived benefits than the competition will be able to grow and generate more value. Sustainability, from the perspective of differentiation, is an element that enhances the company’s attributes and can increase its differentiation and improve its attraction of value.

On the other hand, in competitive strategy, supply is the way in which the company exploits the average cost of operation, generally through strategic actions that reduce this cost. By comparing the average cost with the price set by the market, the company obtains an operating margin. With standardized merchandise and a price generated by the market, the company is more competitive than its peers if it obtains higher margins based on its lower average costs. By reducing costs it can also lower prices so that consumers perceive more of a benefit when choosing that company. This ratio of benefits less cost is reflected in stronger financial performance and, if carried to the long-term, a sustainable competitiveness. The link between competitiveness and sustainability can be found in the bibliography on financial performance and environmental performance (for example, Clarkson et al., 2011; King and Lenox, 2001; or Lipsky et al., 2003). The results indicate that a company that makes an effort to improve its environmental performance also achieves positive financial returns over time. Porter and Van der Linde (1995) posit that, since pollution is a form of wasted resources, lower pollution should mean higher productivity.

A second element in the model of corporate sustainability is the vision of resources and capacities (Barney, 1991; Hart, 1995, Russo and Fouts, 1997). According to this notion, the company proposes the use and exploitation of strategic assets, resources and capacities based on the tangible and intangible assets that enable it to remain competitive. This position considers a company’s resources and capacities to be accretive when they are valuable, rare, inimitable, and adaptable to the organization in a purely entrepreneurial context or as an extension of natural resources (Hart, 1995), given that strategic assets are subject to the biophysical limitations imposed by the environment itself. Additionally, Hart posits that the biophysical limits imposed can be a source of competitive advantage. One way to obtain new capacities and resources based on the limitations of natural resources is to develop a sustainable vision of the company. Companies may acquire advantages by reducing waste, designing new products and technologies, integrating stakeholders into the decision-making process and, most importantly, having a long-term vision (Hart, 1995). This is the clearest link between ecology, the environment and the company. The varying availability of natural resources for mining and manufacturing companies or for food and beverage makers is a vulnerability that can be strategically managed to ensure the attraction, generation and creation of value. In summary, the sustainability of the business is accompanied by the creation and application of strategic actions consistent with environmental limitations encountered over time.

Finally, the third element, which is institutional theory or the new institutionalism, has recently been explored in the literature on management by Peng et al. (2009), among others. Peng proposes that competitive advantages stem from the institutional limits established within and outside of the company. However, we must go beyond the limits and establish the institutional vision as an indispensable phenomenon for understanding corporate sustainability. Based on the classic definitions, institutions are the precepts, laws, rules, codes, customs and traditions that determine our behavior. They thus establish the limits within which individuals, companies and governments may act. Their main attribute is that they lend certainty to business transactions and reduce transaction costs. In this sense, the institutional theory of the company indicates that the regulatory or cognitive framework establishes the limits within which the organization moves, formally and informally. In order for sustainability to exist, the company must have an institutional vision, because it is subject to regional, national and international regulations, in addition to internal self-regulatory mechanisms that guide its conduct. The capacity to adapt to institutional conditions gives the company the capacity to generate long-term strategies that can help it to create, attract and generate value.

To sum up, the business model of corporate sustainability is subject to the limitations imposed by economic, environmental and social systems. The company’s strategy must be long-term to ensure competitiveness. To this end, it must incorporate the notion of sustainability into the business model, which is obtained by three elements: 1) competitive strategy, in which strategies for differentiation and costs spearhead the vision but are limited if they do not take into account the elements inherit in 2) the vision of natural resources and 3) institutional theory. A strategy that incorporates all three of these elements can be adapted and react more swiftly to changes in the environment, reducing the company’s exposure to risk, because these elements enable the company to adopt a longer-term thought for the purpose of creating, generating and attracting value.?

References

• Barney JB. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management 17(1): 99-120.
• Barney JB. y Hesterly WS (2009). Strategic Management and Competitive Advantage. Prentice Hall.
• Clarkson PM, Li Y, Richardson GD, Vasvari FP. 2011. Does it really pay to be green? Determinants and consequences of proactive environmental strategies. Journal of Accounting and Public Policy 30(2): 122-144.
• Hart SL. 1995. A Natural-Resource-Based View of the Firm. The Academy of Management Review 20(4): 986-1014. http://www.jstor.org/stable/258963.
• King A, Lenox MJ. 2001. Does It Really Pay to Be Green? Accounting for Strategy Selection in the Relationship Between Environmental and Financial Performance. Journal of Industrial Ecology 5(1): 105-116.
• Russo, M. y Fouts, A. 1997. A Resource Based Perspective on Corporate Environmental Performance and Profitability. Academy of Management Review,40: 534-559.
• Orlitzky M, Schimdt FL, Rynes SL. 2003. Corporate Social and Financial Performance: A Meta-analysis. Organization Studies 24(3): 403-441.
• Peng, M. (2009) The Institution-Based View as a Third Leg for a Strategy Tripod. Academy of Management Perspectives. Vol (23) núm. 3 pp. 63-81
• Porter, M. E. (1985). Competitive Advantage.Nueva York, The Free Press: 11-15.
• Porter ME, van der Linde C. 1995. Toward a New Conception of the Environment-Competitiveness Relationship. The Journal of Economic Perspectives 9(4): 97-118.
• Thompson, Strickland y Gamble (2008), Crafting and Executing Strategy, McGraw-Hill/Irwin.

By: Carlos Mondragón
Professor of Marketing at the ITAM

Children play an important role in purchasing decisions, influencing their parent’s acquisition and selection of products. The most common tactics they use are whining or acting up, until their parents give in to their demands.

Children exert an increasingly strong influence on consumer buying, not only in toys and recreational activities, but also in clothes that traditionally parents would choose for them. How successful they are in getting their wishes fulfilled will depend on the type of offer, the characteristics of the parents, the child’s age, and the stage in the purchasing decision process.

When children show consistent behavior, they have a positive approach to new situations, are highly adaptable to change, and therefore are attracted to innovations and different situations.

The problem that children of the 21st century face is that they are over stimulated, making it more difficult for novelty to attract their attention. New things don’t impact them in the same way as an adult, because from an early age they are accustomed to a faster pace of innovation. This makes children want new things and quickly discard the product they already have due to the strong external stimuli they receive and the feeling that what they have is no longer up to date. They easily enter into competition with their environment and greatly want to be part of the group of innovators, by acquiring the latest product. Among the products they seek and most frequently change are: video games, shoes, clothing (especially shirts, hats and jackets), very innovative toys, cell phones and electronics in general, cereals and junk food.

Another important feature of the children of the new generations is that they have lost interest in games that stimulate both motor and manual skills. A typical toy for children between the ages of 6 months and 2 years is a plastic octagon with holes formed by different shapes. Plastic shape sorters are also made large enough to keep the child from putting them in their mouths and swallowing them. The child must identify the various shapes in order to insert them in the correct hole. Since this toy is not electronic nor can it be connected to a computer, it is no longer of interest to children.

Parents play a vital role, as they are directly responsible for the intellectual and social development of the child. If they are unaware of the type of activities that a child should develop at a certain age, they may allow them to play with electronic devices, including cell phones, which in no way help to develop their nervous system or motor skills.

The psychosocial development in childhood occurs in stages. The psycho stage is the development of the unique personality of individuals, while the social part involves factors that affect their ability to interact with other people. These skills may be innate, for example, newborns prefer human faces to other visual stimuli. A child’s social behavior will begin to clearly manifest itself when he or she is one year old.

When children begin to interact with electronic devices from a very early age, they lose the opportunity to interact with other children, which is crucial in the social maturation stage. When they play, if you call it that, with other children through a computer, they lose the ability to interact personally. They may be playing with children who live a block away or in another country, but the social interaction is zero, since they don’t know one another, they don’t see their eyes nor do they speak directly with them. The form of communication becomes very elementary, through figures and symbols that have become universal.

Therefore, children are having severe problems in writing, reading and speaking correctly. Their ideas are choppy and they depend on electronic devices to convey an idea. They are not interested in reading, unless it is via electronic devices. They are not interested in writing, unless it is by “chat”. They have lost the ability to read out loud, and do not have basic knowledge of grammar and spelling.

Today’s children, unlike those of the decade prior to the 1990s, are no longer loyal to any one brand. They buy or want the latest fashion, no matter if it is the competitor of the product they have at that time. These frequent changes provoke diverse levels of anxiety, which is apparently overcome if they buy the new products. But this may cause problems for their parents, who in their desire to satisfy them, may end up spending more than what they actually earn. It is very likely that when these children reach adolescence or adulthood, they will have become compulsive buyers, because at a very young age they learned that feeling happy and satisfied depends on acquiring the newest and unique products on the market, as a way of competing in their social milieu.

In the cycle of family life, children will receive their first purchasing stimuli from their parents. For market research experts, it is very important to carry out their studies frequently because buying habits, life styles, tastes and needs of the family gradually change, a dynamic in which children will play an important role.

Social Networks

In Mexico, it has become increasingly common to rely on social networks and new technologies. This is the situation in developed countries, where it has been found that those who drift away from social networks may suffer from symptoms of anxiety. Within this large group of users, we unfortunately are finding that children as early as six or seven years old are joining this group of users who are dependent on social networks or cell phones. Parents, and especially mothers, feel that the child must carry a cell phone with them to communicate in cases of emergency. The problem is that the cell phone is part of the social network in which the child moves and he uses it to communicate with his friends, to send text messages, to download photos, songs, different games, to make videos, visit social networks, even buy online, translate texts and download homework assignments, among other things.

Children use cell phones throughout the day: at home, while eating, in the car or on public transportation, during class, at recess, on vacation. They send messages while listening to music on their cell phone, which keeps them incommunicado in relation to their environment.

Children become trapped in an obsessive and neurotic dynamic that leads them to states of anxiety, making them think that without a cell phone in their hands they are unarmed, inert, held incommunicado and insecure because they cannot communicate with their world, which is unreal and unreflective. The cell phone produces high levels of stimulation in its users that ends up distancing them from everyday life.

Buying a cell phone is not a simple purchase; it must meet a number of requirements, which do not involve solely making and receiving calls or sending or receiving messages. Since the early 1990s, cell phone manufacturers have been in fierce competition with one other, and those who don’t renovate, die. Therefore, the child who does not have the most recent device will be considered “out of it” and subject to ridicule.

Sleep: why children need it

Some authors argue that the main function of sleep is restorative, because you can give your body the time it needs to renew itself and refuel, thus helping the brain recover from the everyday wear and tear, and restock the proteins consumed during the numerous activities of the day. Sleep is reinvigorating because after a good night’s sleep you feel rested and alert. In order to be restful, sleep should be orderly, quiet and comfortable. You should respect normal sleeping hours, go to bed regularly at the same time every night and wake up at the same time in the morning.

Children between 4 and 12 years of age require 8 to 10 hours of sleep a day. However, it has been found that they tend to sleep fewer hours than they should. On an average, they only sleep between 6 and 7 hours a night. To a large extent, this is due to the fact that they surf or play on the Internet or watch television until late – multiple factors that are nothing more than distractions that affect their sleep.

If a child doesn’t get a full night’s sleep, he may feel a little scattered the following day, but he may be able to tolerate it. However, a lack of sleep causes slower reaction time, disrupts concentration, and affects memory and the ability to solve problems. It makes it more difficult to retain information and harms a child’s academic performance. The above situation should induce parents and elementary and middle schoolteachers to investigate to what extent the symptom of attention deficit is caused by a lack of sleep or if it is a disease that has become fashionable. With the previous picture that raises the importance and involvement of children in consumer practices, one might infer that parents of the 21st century, in an effort to offer a “better” life for their children, buy them more toys and objects than they can assimilate, thus setting into motion the creation of compulsive buyers of tomorrow.?

References

• Castells, Manuel, Mireia Fernández-Ardèvol, Jack Linchuan Qiu y Araba Sey. Mobile Communication and Society. A global perspective. The MIT Press. Cambridge, Massachusetts, 2007.
• Davis, Stephen y Joseph Palladino (2008), Psicología, 5a, ed., México. Pearson Educación.
• Marvin E. Golberg, Gerald Gorn y Richard W. Pollay, Advances in Consumer Research, vol. 17 pp. 813-825, 13 de agosto de 2012.
• Escamilla, Héctor, Adicción a redes sociales.
• Nevid, Jeffrey (2011), Psicología. Conceptos y aplicaciones. México: CENGAGE learning

By: Jesús Rodolfo Jiménez
and Annapaola Llanas

Much has been said about sustainability and the environmental issues facing the planet. Governments, non-governmental organizations, participants in the economy, and the population in general have gradually incorporated into their activities of daily living an honest concern about the negative effects of climate change, overexploitation of natural resources, pollution of aquifers and overpopulation, to mention some of these phenomena.

The environmental cost of problems that have been converted, defined, studied and assessed as negative externalities within economic theory has actually been transferred from those who pollute to others. As a result, governments have had to respond by promoting measures to mitigate or encourage society to participate in actions related to environmental impact, when those players do not participate voluntarily with strategies focused on sustainability.

Generally, governments, through regulations, make use of certain types of inhibiting mechanisms focused on punishment, restoration and prevention of environmental damage.

From a legal perspective, the inhibitory and restoration mechanism, par excellence, is the sanction, because it seeks to assess a specific damage, compensation for the damage, and in some cases, creates an exemplary way of preventing future damage. However, essentially the sanction has important weaknesses: 1) it derives from the existence of a regulatory framework (if it is not prohibited, it is permitted); 2) the assessed damage may not always reflect the real impact; 3) it is difficult to speak of compensation because of the complexity of the impact.

Carbon credits between several countries affiliated to the Kyoto Protocol and the trade between them were another mechanism that gained important momentum in the 1990s. Unfortunately, the research that analyzed and studied the effects of the carbon emissions trading focuses more on the difficulties and failures than on the real successes that were achieved.

Today, the mechanisms that have generated the most significant and best results have been specific policies developed in a domestic/regional manner. Together they have developed a kind of international race with regard to innovation and efficiency, stressing those achievements that locally generate sustained optimal results. With the passage of time, these results develop patterns, which in turn generate models that are replicated in other cities. This creates a kind of implicit competition or race between cities in relation to innovation of environmental policies, whose result is mainly positive. That is to say, when an environmental policy is successful in one region, other regions seek to imitate and refine it, because the region, which implemented the policy for the first time, has already absorbed the highest level of uncertainty – the risk of innovation.

The phenomenon of absorption of a replicated risk in a systematic manner has managed to bring down the risk of innovation and promote its emulation in different regions. In an intrinsic way, an implemented policy that is not successful, or whose benefits fall short of expectation, is not replicated and is usually discarded.

Here are some significant examples:

1. Bus Rapid Transit (BRT).This is a land transportation system that consists of allocating exclusive lanes to passenger buses going from one point to another. The first approximation of this type of transportation was in the city of Chicago during the thirties, where they sought to replace railway lines with express bus lanes. Since then, various cities have attempted to improve the quality of this transportation system through replication. However, it was not until 1970, in the city of Curitiba, Brazil, where the system was formally called BRT. Since that time, this system has been imitated and improved in cities such as Runcorn (UK), Ottawa (Canada), Bogotá (Colombia), Mexico City (Mexico), Buenos Aires (Argentina), among others, where it has been successful.In Mexico City alone, the impact of this system consists in a direct reduction of 110,000 tons of carbon dioxide emissions into the atmosphere per year. (Metrobus, Mexico City).
2. Bicycle Program System (BPS).This system provides the free or economic use of bicycles to travel for short distances in urban areas and usually works as a connection between other transport systems. This system began in Amsterdam, Holland, in 1965. It consisted of a system, entirely free of charge and without additional controls, which was replicated in several cities. However, this transportation system eventually evolved into an intelligent system of controls with bicycle racks after the theft of bicycles in Manchester, UK. Today, there are BPS programs in 165 cities with a total of approximately 237,000 bicycles (Susan Shaheen, 2011).In 2012, Mexico City implemented multiple expansion programs, both in the number of bicycles as in the number of stations, which earned the city the Sustainable Transport Award given by the Institute for Transportation & Development Policy on January 15, 2013.

In Mexico City alone, the projected impact of this system consists in the direct reduction of 3,645 tons of carbon dioxide in 2010-2020, according to a study submitted by the Environmental Secretariat of the Mexico City government. (2012)

Today, Mexico is in the process of removing a tax that was efficient in terms of revenue purposes, but not in its environmental impact. The annual vehicle registration tax (“tenencia”) in Mexico is gradually disappearing, not only because it was a tax created to finance the Olympic Games in 1968, but because the amount of the tax paid is essentially based on the value of the vehicle. This meant that the most expensive vehicle paid a higher tax, and the most economical one paid a lower tax. Ironically, in environmental terms, the most efficient vehicles in the emission of carbon dioxide consistently had to pay more than the less efficient ones. That is to say, an electric or hybrid vehicle with certain features, which costs more than a vehicle with similar characteristics that uses fossil fuel, will pay a higher tax (“tenencia”) than a vehicle that generates more emissions and is less expensive. In terms of economic efficiency, if there is no real savings, naturally it is more efficient to buy a more economical vehicle – even though it may not comply with such high environmental standards.

According to the latest data published by the World Bank, the volume of carbon dioxide emissions in Mexico increased to 446 million tons in 2009, putting the country in 13th place in carbon dioxide emissions worldwide. In 2012, it is was estimated that the emissions in the Metropolitan Area in the Valley of Mexico would range between 59 and 80 million tons, of which between 22 and 27 million tons would relate to transportation, according to the Mexico City Environmental Secretariat.

At the same time, as part of the direct environmental spending from public resources, the Mexico City Environmental Secretary (the authority responsible for the environmental programs in Mexico City) was given a budget of approximately 970 million pesos in the 2012 financial year, according to the Financial Code of the Federal District. However, the Mexican Social Security Institute reports that the average cost of respiratory diseases is up to 15,000 pesos. With an approximate number of 270,000 patients, the total amount spent on respiratory diseases is about 4 billion pesos.

With this information, it is possible to estimate that the direct environmental cost (of carbon dioxide emissions) in the metropolitan area is nearly 5 billion pesos.

If we prorate the cost per ton of carbon dioxide emission by automobiles, it is possible to divide the total emissions by the amount spent. The result obtained by prorating the amount ranges between 185 and 227 pesos per ton emitted by each car.

Taking as a framework the theory of efficiency in public policies through the origin-aplication of resources, and the elements of the contributions to redistribute the environmental cost among the affected population and the polluter, it is possible to establish the following items for a possible carbon tax:

• Subjects: All owners of vehicles in the Metropolitan Area of the Valley of Mexico that emit carbon dioxide.
• Object: The emission of carbon dioxide.
• Base: Average volume of carbon dioxide emissions.
• Average: Between 185 and 227 pesos per emission of a ton of carbon dioxide.

It should be noted that the feasibiity of assessing this tax in Mexico City is huge. That is because Mexico City has a vehicle emissions control system called the “Vehicle Inspection Program,” that assesses the volume of emissions of each vehicle in order to penalize those whose emissions exceed a maximum number.

While it is true that climate change is a phenomenon of study and its implications, origins and causes – in terms of both health and the environment – are still being debated, the general consensus is that there is a real emission of greenhouse gases into the atmosphere that must be slowed down. There are many policies that have been attempted, some with surprising results and others that are questionable. The remarkable thing is the readiness and willingness demonstrated by the participants of the economy that have generated a collective consciousness of the importance of combating the causes that are damaging the environment in the modern world.

It is important not to lose sight of the fact that each suggestion that promotes and minimizes this deterioraton must not be easily discarded – the costs and benefits of implementing each alternative must be analyzed and assessed, like the one alternative that is described here.

Today, carbon taxes are gaining strength as a feasible measure that could be developed, but the efforts that have been made are not significant enough to be able to assess an immediate benefit. Measures such as the BRT and BPS were not either, but the attitude of the cities that absorbed the risk of innovation has gone beyond this in a historical way.

In conclusion, it is very important to consider that the success or failure of any public policy not only stems from the origin or intent of the rule, but on a comprehensive plan from which it is developed. Therefore, if accepted, the participation and observation of all parties involved will be required, as we have seen in the success of the previous policies described here.

References

• Comisión Económica para América Latina y el Caribe, “Qué es un BRT, o la implementación del Metrobús en la ciudad de Buenos Aires, Argentina” [PDF en línea] Edición 31, número 8 de 2012. [Consulta: 29 abril 2013].
• Gobierno del Distrito Federal, Metrobús, “Beneficios” [Web] [Consulta: 29 abril 2013]
• Gobierno del Distrito Federal, Metrobús, “Qué es Metrobús” [Web] [Consulta: 29 abril 2013]
• Institute for Transportation and Development Policy, “2013 Winner Mexico City, Mexico: Expanding and implementing sustainable transport measures in Mexico City” [Web] [Consulta: 2 mayo 2013].
• Secretaría del Medio Ambiente del Gobierno del Distrito Federal, “Tendencias en las emisiones de gases de efecto invernadero, Escenarios Bajo, Medio y Alto al 2012″ [PDF en línea] [Consulta: 2 mayo 2013].
• Secretaría del Medio Ambiente del Gobierno del Distrito Federal, “Estudio de la Reducción de Emisiones y los Co-Beneficios Generados por la Implementación del Programa ECOBICI” [PDF en línea] [Consulta: 2 mayo 2013].
• Susan Shaheen y Stacey Guzman, “Worldwide Bikesharing” [en línea] [Consulta: 2 mayo 2013].

By: Jéssica Mendoza

We often hear that organizational culture generates competitive advantages. In effect, organizational culture can give an organization advantages over its competitors, which may translate into returns and strong performance for the company.

Organizational culture is understood as a symbolic system created, learned and transmitted internally within an organization, for the purpose of facing the demands of its environment and pursuing its mission (Pariente, 2001). Organizational culture therefore fulfills two basic functions: the first is integration between the organization’s members and the second is adaptation to the environment through various mechanisms carried out by the members.

Because organizational culture is a symbolic system that sends signals to the organization’s members, it becomes an instrument that regulates employees’ conduct, so they know what to do and what is expected of them. However, organizational culture not only tells employees what to do; the concept is much broader because it encompasses all the values and idiosyncrasies with which the members of an organization act.

The culture may enable an organization to resolve problems and ensure its survival and at the same time help members to feel integrated. This situation is achieved when individuals know what to do, how to conduct themselves, and what is expected of them; in other words, organizational culture sets the rules, or the standards that regulate behavior, that must be followed by the members of the organization.

Learning an organizational culture is not always a conscious act. To better understand what this means, consider how newly-hired employees spend the first few days on the job. They do not know the dress code, the corporate jargon, or its general behavior. They may feel uncomfortable when they show up for work in strict business clothing and find the rest of the office dressed informally. New employees soon discover whether meetings are held to solve problems or simply to create opportunities for proving who knows more-meaning whether discretion and humility are company values, or quite the opposite. All of this is culture, and through it, employees learn, day by day, how to behave.

Organizational culture is better explained using the three-level Schein model:

The first level of the model corresponds to artifacts and creations. This is the most superficial level, where we may observe the manifestations of the culture but not its essence. The second level is formed by values and beliefs, which guide the behavior of the company’s members. The last level corresponds to basic assumptions, which reveal how a group perceives, thinks, feels, and acts. This represents the deepest level of culture.

Artifacts encompass the things we see first, including the colors, furniture, and language. Values determine what is important in the organization, and beliefs define how things work.

A frequent problem for companies is that they may have more than one culture. They may have one culture for employees, another for owners, and another for management. Problems arise when the company has not created a general dominant culture in which everyone interrelates.

Although organizational culture is created both by the managers and employees of an organization, management plays a key role in creating and establishing a solid and positive culture through which the company can adapt to the environment and solve the problems it encounters. For the leaders of the organization, culture is a powerful force that can be managed for the good of the company and its employees (Childress and Senn, 1995).

Management’s perspective on organizational culture usually differs from that of the rest of the employees because the values expressed or expected by management may differ from the values, beliefs, and rules expressed in actual practice and behavior. For a company to function and obtain the results that its management wants, its symbols and values must be consistent with its mission and philosophy, as well as its style of management.

Ahora bien, ¿cuándo se convierte la cultura de la organización en una ventaja competitiva? Cuando los miembros logran sentirse parte de la empresa, por el hecho de compartir los mismos valores y las mismas creencias, lo cual les permite generar estrategias para adaptarse a los desafíos del ambiente y hacer frente a las demandas actuales.

La cultura ayuda a normar los comportamientos de sus miembros, a conocer qué es lo que debe y no debe hacerse, y comprende una serie de reglas no escritas, pero que son conocidas por el personal y que ayuda a que las cosas se desarrollen de una manera adecuada.

Thus, when does an organizational culture become a competitive advantage? When members are able to feel a part of the company by sharing the same values and the same beliefs, which enables them to generate strategies to adapt to the challenges of the environment and confront current demands. Culture helps regulate the behavior of the organization’s members, to know what they should and should not do, and it consists of a series of unwritten rules that are nonetheless known by employees, which help things to develop appropriately.

Lo esencial en la cultura no es ya sólo que sea la guía de comportamiento de las personas en la organización, sino que determine la capacidad de la empresa para adaptarse a las nuevas circunstancias (Elías y Mascaray, 1998) y que los valores culturales ayuden a moldear las orientaciones que la alta dirección trae a sus funciones como líderes organizacionales y tomadores de decisiones estratégicas, a modo de facilitar el logro de resultados a corto y largo plazo.

Organizational culture must also be flexible enough to adapt when the environment changes. Organizations that maintain a rigid structure with a closed culture may encounter conflicts they find hard to resolve, especially in today’s demanding world. The essential thing about culture is not only that it serves as a guide for the behavior of people in the organization, but that it determines the company’s capacity to adapt to new circumstances (Elias and Mascaray, 1998). Cultural values help mold the orientation that members of top management bring to their role as organizational leaders and strategic decision-makers, and thus help the organization to achieve its short and long-term goals.

What is most important is that the organization’s values coincide with those of its employees. Management image is an issue that warrants some attention because it filters down to the employees. As Childress and Sern (1995) point out, effective leaders “cast a shadow” over their organizations. We all know that leaders influence cultural and ethical values by clearly articulating a vision of organizational values that employees can believe in and adopt.

Organizational culture has been compared with an individual’s personality. Just as we have our own beliefs, attitudes, goals and habits that make us unique, over time an organization develops its own characteristic personality.

In the past, some experts have argued that strong cultures could help members to achieve desired organizational objectives, like commitment, cooperation, and consistent decision-making and performance. However, sometimes a strong organizational culture can be both an asset and a weakness. A strong culture may be a weakness when it fails to satisfy the needs of the members or the organization, in the context of the environment where it operates. This can happen when the culture prevents internal integration and does not help the company adapt to its environment. In these cases, the culture may lose its purpose and its reason for being. For this reason, a company must frequently ask itself if its organizational culture is really what it wants, and if not, it should begin managing the change. Remember that change does not take place overnight; it is a long-term process, and it requires a good deal of patience and perseverance.

To conclude, we might say that all organizations have a culture, even when it is not a planned result, because members share values and beliefs. However, a culture should be managed in such a way that it facilitates the creation of competitive advantages. Culture is not written down like a manual of behavior but rather indicates “the way things are done” in a company.

Organizations are formed by individuals that work toward a common purpose and share values and beliefs, and it is this that forms and strengthens a culture. People make up an organization, and its fate depends on them. To the extent that the members share common values and beliefs, the company will be strengthened, and this will be reflected in its results. If you are looking for ways to create competitive advantages, consider your organizational culture because it can both improve a company’s identity, but also have an impact that is measurable even in the form of improved performance.?

References

• Childress, John R. y Larry E. Senn (1995), In the eye of the storm, Los Ángeles: The Leadership Press.
• Elías, Joan y José Mascaray (1998), Más allá de la comunicación interna, la intracomunicación, Diez estrategias para la implantación de valores y la conquista del comportamiento espontáneo de los empleados, Barcelona: Gestión 2000.
• Pariente, José Luis (2001), Teoría de las organizaciones. Un enfoque de metáforas, Ciudad Victoria: Universidad Autónoma de Tamaulipas.
• Schein, Edgar (1985), Organizational culture and leadership, San Francisco: Jossey-Bass Publishers.

By: Carla Guevara y Scott Stewart

Student end-of-course evaluations are widely used by colleges and universities to determine the success of courses and the effectiveness of their instructors. Schools often use such student feedback even to determine instructors’ pay and promotions, to identify instructors who need supplemental training, and to restructure coursework.

There is an extensive academic literature that looks at student evaluations. Many studies explore the practice of rating instructors according to their classroom behavior and to students’ performance on tests. Others delve into the influence of program design on the success of online classes. Yet studies of student evaluations rarely address what matters most–the long-term benefits to students once their educations are complete and they have moved into the working world.

That is despite the fact that the primary objective of education is for students to learn what will be useful to them after they graduate. That does not necessarily mean specific vocational skills; it can mean understanding of the economy and government, public speaking skills, or increased reasoning abilities.

It intuitively seems to be so.

Therefore, as teachers, administrators and researchers, we (the authors) set out to discover the things that graduating students and alumni considered to be the most valuable about their university courses. Our goal was twofold: first, to identify what students view as truly important for measuring courses once they have had time to reflect and put their knowledge into practice, and second, to determine which student survey questions best can forecast these metrics.

Our research was conducted over a nine-year period on a specialized master’s program in business offered at a large northeastern university and included questions regarding instructor performance and career relevance. We used multiple regression techniques to allocate statistical importance to students’ perceptions of learning, the quality of the instructor, and career relevance.

Traditional end-of-course surveys served as a control for the study. Typically, student surveys measure students’ perceptions regarding the classroom environment as well as the instructor’s ability to encourage learning. According to the available research literature, an instructor’s ranking is influenced by a number of factors–including the instructor’s apparent sense of humor. Interestingly, there is a positive correlation between instructor rankings and student perceptions of learning, but not actual learning.

Since we wanted to examine the differences in student opinions at different periods, we also used program exit surveys at graduation time. For one thing, this helped us identify which courses taken early in a college career are more helpful with subsequent coursework. We also used alumni surveys, as they permit former students to evaluate courses more objectively. With some passage of time after completing a program, alumni should be able to better evaluate the relationship between knowledge and skills acquired through an educational program and the ones required in the workplace.

After all three surveys were completed, we compared the results of our end-of-program and alumni surveys with the end-of-course evaluations.

The statistical results suggested that the most important factor for determining satisfaction at the end of a course was the perceived performance of the instructor. The perceived career relevance of a course was not a significant factor using student evaluation data. Statistically, there was a 56 percent chance that students felt that the course material’s relevance to their future careers wasn’t important at all.

However, this changed once students had time to reflect and learn what worked for them on the job. At the end of their program and as alumni, the importance of the instructor for determining course satisfaction declined and the value of career relevance grew to become the single most important factor for determining course satisfaction. In fact, in the regression on alumni course satisfaction, career relevance was 58 percent more influential than the performance of the instructor. A further test determined that students seemed to perceive what courses were relevant for their future careers, but that they did not value that relevance until they completed their education. The results are detailed in the June 2011 edition of the journal Managerial Finance.

While our study is unique in its analysis of data linking students’ perceptions over time, we only had a small data set at our disposal. Perhaps additional studies could be conducted to confirm our results.

Still, the implications are broad. One is that career relevance clearly grows with time in importance for determining course satisfaction. It is not a statistically significant factor for course satisfaction using end-of-course student survey responses, but grows in importance in the later surveys, surpassing both the extent of learning and instructor performance; moreover, instructor performance becomes less important with time.

These findings suggest that colleges and universities should not weigh too heavily their traditional measures of student satisfaction based on end-of-term course evaluations for measuring teaching effectiveness and for policy-making. However, this conclusion places instructors in an interesting position. If they want their students, once they become alumni, to feel satisfied with their course experience, the instructor needs to teach material which will be useful in the real world, even if students do not fully appreciate it during class and it therefore does not substantially help the instructor’s student evaluations.

The results indicate that both teacher performance and course content are important to graduating students and alumni. In order for instructors to be successful in the short and long term, they need to keep their students engaged in the classroom, teach material that is relevant post-graduation, and explain in class the relevance of the course material.

University presidents may also be interested in the results of this study. If presidents want satisfied alumni, they need to ensure their school’s curriculum includes material useful for the working world. Perhaps, one approach to ensuring a program’s success is to initiate a council of alumni, who can consult and provide advice on curriculum and how it is taught in the classroom.?

This article originally appeared at the Pope Center for Higher Education.

By: Manuel Arango
Professor of Finance and Strategic Planning
ITAM

We have heard a great deal about “outsourcing.” It is such a sui generis topic in the business world that a word has not even been invented to define it in Spanish. In spite of the author’s research and experience on the subject, this is not an academic and informative paper. It is an essay on the true utility, scope and myths in relation to this talked-about topic, which was the pillar of the last reform proposed by the administration of former president Felipe Calderón Hinojosa.

What is the relevance of knowing about this topic?

In any planning or strategic planning project, it is necessary to consider the possibility of introducing in the processes of personnel management the contracting of an external company to provide these services. And it is important to fully analyze the benefits and obstacles that this formula offers.

Structure

This personnel recruitment program is really a scheme of subcontracting employees who generally work for a customer or third party. The model is mainly developed in three broad areas of action. One is when a business or company solicits an outsourcing company. From now on, we will refer to the personnel management of the “Customer” as the “Third Party.” Another is when the “Third Party” – in addition to being the personnel manager – is the employer and therefore the signatory of individual or collective labor contracts. And the last one to fall into this concept is the company that performs independent external activities, which are usually not strategic or specialized, for the customer.

The first scenario involves the processes required for personnel management. That is, the calculation of the payroll: payment or retribution for salaries and wages that an employee receives for services rendered in the scheme of subordinated work, the compulsory retention of Income Tax (ISR), which is the tax on the Products of the Work and the Social Security Law, SUA for the retention of the worker-employer quota, as well as income and deductions of the company: bonuses, overtime, salary increases, union dues, INFONAVIT, FONACOT credits, life insurance, savings fund. This activity also involves the follow up and monitoring of the admissions, cancelations and salary modifications before the Mexican Social Security Institute, as well as the calculation and payment of the benefits required by law – always taking into account that the employees belong to the Customer, and the Third Party only handles the administration, charging a percentage or amount negotiated.

The second scenario involves all of the first formula with the difference that the employees work for the Third Party, which means it acquires the rights and obligations of an employer. In the daily operation, the following scheme may be present: this company contracts, supervises, trains, promotes and fires, under the instruction of the Customer, and in other cases the Customer itself conducts these activities.

The third scenario is when a company contracts the services of a third party. Generally those services or activities – due to questions of development, specialization or because they do not constitute a strategic nucleus – are transferred outside the company. The personnel that work for the outsourcing company can work physically in the Customer’s installations or in a faraway place.

Relevant things

• One item to consider is the savings in the hiring of specialists to calculate the payroll and the training in tax and labor matters that these activities require.
• Taking advantage of what other companies have invested in infrastructure, allowing the application of those resources that are not used in productive activities.
• The ability to maintain a variable work force and in this way cut costs in times or moments of low production, as well as the inclusion of support staff in cycles of high volume applicable to production, operation, logistics, systems and personnel.
• The existence of many activities and administrative/operational requirements, such as technological and logistical demands, that allows you to focus on true development topics. Other support activities or staff can be channeled to another group administered by the Third Party, but audited by the Customer.
• The possibility of changing personnel through outsourcing, according to needs -specialization, a change in the geographic situation, cutting costs, finding another third party in the market that provides better service, better quality, lower price and better help in their specialization.

Legal Framework

As in any lawful activity, we must consider the legal and fiscal rules; for this reason the changes set forth in the articles of the Federal Labor Law in matters of hiring and/or subcontracting staff apply.

Adhering to this regulation, we found that in Section a) of Article 15-A wording that cannot include the totality of the same or similar activities, a lack of clarity in the wording, non-specification of the maximum percentage of the workforce that can be contracted with this modality, giving rise to a legal interpretation for each contractor. The private -sector has promulgated the issuing of a regulation in this matter to define and avoid arbitrary interpretations that in the end trigger bad legal practices. At this date of publication, it is not known if a rule or distinctive articles in this area have been developed.

Another area of competence concerns matters of the Mexican Social Security Institute, where there are changes in the articles of the law of the institute itself. Cited in this essay are those involved in the recruitment of staff and management relations. The final ruling was decided in the first quarter of 2013.

Approved Dictamen

• Repeal Article 32 of the Social Security Law.
• In the first paragraph of Article 27 change “work” to “work relationship” of the employee.
• In the second part, union dues are included so that they are treated as payment by the employer for income tax purposes.
• In the fifth part, it is stated that food and housing that is provided in kind will be subject to income tax (ISR), the concept of vouchers, reimbursement or in cash was deleted.
• In the sixth part, the concept of vouchers for restaurants and transportation is added, in order that they are treated under ISR.
• The transitory First Article is modified, in which it is established that the reform will go into effect the third calendar month following its publication in the Official Journal of the Federation, and not the following month, as the PRI initiative proposes.

Conclusions

This comprehensive analysis is focused not only on the reduction in costs, but also the search for the best service, greater efficiency and higher quality that allow us not to invest or become distracted from the objectives presented by the organization, as in the consideration of transferring measured risks outside the company.

Generally, the smaller the business unit, the greater the tendency to lack resources for the adoption of these rules, for instance, the requirement to have auditors to monitor compliance with this law.

Taking into account that outsourcing does not adhere to a one special type of industry, it may be applicable to small, medium or large enterprises. What is important is that operational, labor, fiscal and, above all, financial aspects must be considered. There is no tried-and-true administrative formula.?

By: Luis M. Gómezchico
Accenture

In today’s competitive climate, the most successful organizations will be those that have a better structure, coordination, management and commitment to their partners, as well as a stronger understanding of their end clients. The key to the future is working together, rather than battling between vendor and client for a few margin points, to build network of alliances in which vendors pursue common goals.

In short, it’s about together winning the battle for the consumer. It’s time to adopt a different model of operation, leaving behind the traditional modes of competition and beginning to focus on collaboration.

• The time when manufacturers and retail channels fought over a few margin points is past: today, they must work together to retain and conquer the final customer.
• Today’s buyer does more research into the products and promotions of competitors through the mass communications media. Although price remains key, it is no longer the only decisive factor in the purchase.
• The transformation is based on a new architecture for adapting to, satisfying and exceeding the expectations of the new consumer.
• The “new normality” is that neither of the two segments-neither the modern channel nor the traditional channel-have come back to their pre crisis levels, explained Sergio Naylor, managing partner of the Products area at Accenture.
• The new way of competing is to become more versatile in the way we work, swifter in making decisions and more focused on the interests of our customers.
• The development of collaborative systems can improve operating margins by between 0.5 and 1 .5 percentage points.

Today’s business environment presents tremendous challenges. Throughout the world, there are economic pressures and changes in markets that companies must face in unorthodox ways. The European economic crisis and stagnation of traditionally strong economies have altered global patterns of consumption and created an opportunity for trade and development of profitable businesses in emerging countries.

In Mexico, economic prospects are encouraging. In recent years, the market has consolidated and grown alongside the emergence of a new consumer, with new needs, more purchasing power and access to more choices. This means that in the future, the flow of goods and services will be more intense, with the major players consolidating their strengths and others seeking out new ways of reaching the client, in an increasingly competitive and aggressive market. The individual capacities of any one company will not be enough; today, manufacturers and distribution channels must join forces to together pursue the client, and this means the development of collaborative systems.

The time when manufacturers and retail channels battled to win a few margin points is past: today, they must work together to retain and conquer the final customer, for their mutual benefit. With this in mind, Accenture prepared a study entitled Analysis of collaboration in Mexico, which is intended to serve as a tool for designing the actions necessary to develop this state-of-the-art system, whose end goal is stronger performance for all industry participants. The study, based on surveys of companies in this market (266 surveys of 107 companies, with a 95% confidence level), focus groups and personal interviews with company managers, was designed to answer the following questions:

• What is the level of adoption and maturity of collaborative practices between manufacturers and retailers?
• What are the benefits, both present and potential, of these practices?
• What are the main areas of opportunities offered by the Mexican market under a collaborative approach between players?
• What are the lessons learned on the way to successful collaboration?

Increasing competition requires creative solutions

Although Mexico’s current economic climate is promising (stable indicators like inflation and interest rates, prospects of sustained growth in coming years and reforms making their way through Congress), competition has grown stronger and with it, consumers are changing. From a business perspective, these changes create the need for new tools in order to compete efficiently.

Strong prospects for the country and the retail industry, which is currently the 12th largest in the world and is expected to reach USD428 billion by 2016 (total modern, traditional and electronic [SBQ] channels-source: Planet Retail) have sparked a explosion of the retail industry in terms of both formats and companies, and has led to fierce competition. As an example, we can look at sales of retailers associated with the Mexican National Association of Supermarkets and Department Stores (ANTAD), which are now growing even slower than they were before the 2009 crisis broke out. This trend affects not only the retailers themselves, but their vendors as well.

This competition is not limited to the modern channel, as it can also be seen in the traditional channel (what are called mom-and-pop stores). According to Accenture’s analysis, the value of the average ticket in these establishments has not come back to its pre-crisis levels. “The number of tickets or daily visits rose strongly between 2008 and 2009 for both these segments, although the increase in frequency in lower -income neighborhoods was more than double what was seen in upper-income areas,” explains Sergio Nailer, managing partner of the Products area at Accenture. “But perhaps the most emblematic feature of the ‘new normality’ is that neither of these two segments has been able to return to its pre-crisis pace of growth.”

We have also seen the transformation of Mexican consumers, fueled by various factors that have made them better informed, more demanding and with greater purchasing power:

1. Demographic change: there are more working age individuals per household, women are more active in the job market, and there are fewer people on average per household, meaning higher average income per household.
2. Increasing consumer credit: Personal credit is growing at a rate of 23% (while business loans are rising by only 12% year), meaning they have more resources available to purchase goods and services.
3. Access to new communication media, which means a better informed consumer.
4. Consumers now consider a number of attributes, not just price, and respond with varying behavior depending on the product category.

This climate forces companies to develop new forms of interaction with the consumer, to become more versatile in the way they work, swifter in making decisions and more focused on the interests of our customers. They urgently need to adopt a different model of operation and leave behind the old ways and begin assuming a focus on collaboration.

Collaboration: response to the new climate

We are entering an age dominated by a competitive network in which the most successful organizations will be those that have a better structure, coordination, management and commitment to their partners, as well as a stronger understanding of their end clients. The key to the future is working together, rather than battling between vendor and client for a few margin points, to build network of alliances in which vendors pursue common goals. In short, it’s about together winning the battle for the consumer.

The transformation is based on a new architecture for adapting to, satisfying and exceeding the expectations of the new consumer. The essential characteristics are: delivering the right product, to the right client, at the right time, under the right conditions and at the right price.

The collaborative focus should be considered a mutually beneficial relationship that enables both parties to obtain a greater return on their operations by focusing their efforts on the consumer.

The true integration of the supply chain requires not only an internal realignment of process management. It also requires that these processes be aligned with those of suppliers and associates.

We can understand collaboration as all processes that are shared between commercial partners that affect customer service. The fundamental elements of this collaboration are teamwork, common goals and a win-win focus. All of these support results.

The factors of collaboration are grouped into the following axes:

• Collaborative DNA: the culture or willingness of the company to work collaboratively.
• Value directives: methods that guide daily activities to generate the expected value from the collaboration.
• Facilitators: methodological or technical elements that enable and optimize the value directives.
• Tools: Systems elements or applications for collaborative activities.
• Analysis: reports or models that enable us to understand the status of activities and make decisions.

Accenture’s collaborative frame of reference

As collaborative initiatives are introduced around the world, Accenture has established a framework of reference for collaboration between suppliers and their clients, as shown in the following diagram:

In this schematic representation of collaboration, we can chart a company’s strategic decisions to introduce collaborative practices and include them in its organizational culture.

We can see that the model is made up of five axes, each of which entails a set of practices and concrete elements of collaboration between companies. The elements of collaboration are ranked on three levels or states of development: Basic, Progressive and Emerging Leader. This dimension tells us about the practices and behavior of the organizations in their collaboration with clients and suppliers: where they have been, where they are and where they are headed.

In Mexico, the process of adopting and implementing collaborative practice is in a phase of consolidation. The following chart shows the results obtained from the study into the general level of adoption of each of the models elements, according to a color code.

This analysis shows that manufacturers are further along in the adoption of collaborative practices than retailers, except for facilitators. In general, the strongest differences are found on the axis of value directives and analysis, as well as some elements of the tools axis (ERP-ERP Integration).

The level of culture or willingness to work collaboratively is similar between the two sectors, but there are differences in the elements that enable this collaboration.

All of the companies surveyed considered collaboration to be important, but the overall level of adoption or use of collaborative practice is 59%.

Las directrices de valor, como las hemos definido, son los métodos y metodologías que determinan las acciones que hay que realizar (es decir, determinan los procesos y la forma en que se opera) y que habilitan a las compañías para alcanzar resultados que repercuten en las variables de negocio. La gráfica anterior muestra que es precisamente este eje el que presenta el menor nivel de adopción. No contar con un método definido limita la capacidad de ejecución, ya que no se han establecido acciones concretas para sustentar el trabajo diario ni, por tanto, los beneficios de negocio.

The study also shows that companies do not fully understand what collaboration means, because only some of those surveyed integrate the essential concepts: teamwork, common goals, and a win-win focus.

Knowledge is another factor that empowers or limits the adoption of collaborative practice. The study revealed a high correlation between knowledge and adoption, and higher in the case of value directives, meaning companies require a deeper knowledge to adopt these directives then to adopt a tool or facilitator.

Challenges and development plan

Charting a collaborative system is more than establishing formal channels for sharing information or joint planning. It requires clear and specific goals about expected results, and pointing out processes focused on teamwork and the resources needed to start up the system, to the benefits of all the business partners.

Additionally, once the collaborative processes and practices are in place, internal conditions in the workplace must encourage personnel who are key to the development of collaboration to devote time to the various practices.

The goals should be the meeting point between the mutual interests of the players, so that companies can deal with the many clients and suppliers that make up the market. For example, in any one channel there are product categories that have various players, both on the manufacturing side and on the retail side. When the parties understand their function in relation to their counterparts, they can then establish collaborative systems and common efforts.

During the study, Accenture found that some companies integrate their clients’ business indicators into the indicators they use to evaluate their employees. The interviews revealed that this practice generates new paradigms that transform behavior, culture, and therefore results.

Collaboration will be one of the key issues in coming years and will spread increasingly throughout companies’ ecosystems. One of the main challenges to this process will be devising fair and balanced systems that can preserve the capacity for competition and the differentiation of the value offerings from each company.

Estimated benefits

According to the level of adoption observed in Mexico, we estimate that the improvement in the use and level of adoption of a solid, comprehensive collaborative practice can generate benefits equivalent to 48 billion pesos (estimated for the modern channel alone), which would represent an improvement of between 0.5 and 1.5 percentage points in the operating margins of retailers and manufacturers.

This opportunity not only benefits companies’ P&L statements, but also increases customer satisfaction, because it gives them more products, more quickly and at a lower price.

In conclusion, the adoption of a comprehensive collaborative model (with all the elements on all the axes) can create significant advantages:

• Better conditions for understanding customer needs
• Better coordination to satisfy these needs
• Impact on key business variables: Sales and profitability

Companies must evaluate their current status, identify opportunities for collaboration, prioritize them and make the necessary adjustments, combining a focus on the short term (execution) and long term (sustainability) in order to optimize their performance.

Finally, collaboration will become a prerequisite but at the same time a competitive advantage. The invitation is out: Let’s collaborate!?

By: C. P. C. José Frank González¹

Closer than ever to the employer and the professionals…

On October 17, 2012, the Ministry of Finance and Public Credit published the Federal Law for the Prevention and Identification of Operations with Illegally Acquired Funds (LFPIORPI) in the Official Journal of the Federation, which should go into effect nine months after the date of publication.

When we hear someone speak about this issue, we generally refer to the financial system as the main one affected by these transactions. However, it is important to note that the objective of this law is not only to protect the financial system, but also the national economy, by establishing measures and procedures to prevent and detect acts or operations that involve illegally acquired funds, better known as “money laundering.”

This Law adopts the most advanced international standards in the field of prevention of money laundering and at the same time establishes a state-of-the-art system to protect the national economy through inter-institutional coordination to obtain useful elements to prevent and investigate the crime of operations with illegally acquired funds, the financial structures of the criminal organizations, and the way to avoid the use of funds to finance them.

Mexico also complies with the Recommendations of the Financial Action Task Force on Money Laundering (GAFI by its French acronym) that relates to certain non-financial businesses and professions.

But, what exactly is the Law? Where does all this come from? What is the impact on Mexican companies, whether or not they are in the financial sector? Who is required to comply with this Law? What are my obligations? What kind of responsibilities do I incur?

What is money laundering?

Money laundering is defined as the process in which the illegal source of money or the proceeds derived from this illicit activity is concealed in order to make its origins appear legal. From this definition, it’s worth highlighting the following elements:

1. It is a process.
2. The existence of an illegal source is hidden.
3. The goal is to make it appear legal.

Money laundering has three stages:

1. Placement: The money derived from illegal activities is introduced into the financial system or into the economy with the purpose of hiding or disguising its origin.
2. Layering: Different transactions are performed within the economy in order to avoid the tracking and auditing of the funds.
3. Integration: There is an attempt to reinsert the laundered money into the economy, through operations and/or legitimate businesses.In this stage, the launderer gets the real benefit of the illicit activity, despite losses or inherent expenses.

1Certified Public Accountant from the Mexican Institute of Public Accountants A. C. (IMCP), a graduate of the ITAM, with graduate courses in Taxes and in Corporate and Stock Market Finances. He received his Certification in National and International Accounting from the Mexican Institute of Public Accountants A.C. (IMCP). General Director of Grupo GSG Mefintax and Grupo Montes Pirineos. Sr. Partner of GSG Consultores Asociados, S. C. and MEFINTAX México, S. C., firms specializing in consulting and accounting training (national and international), fiscal, financial, corporate governance and SOX. jfgonzali@gmail.com Twitter: @jfgonzal GSG Consultores

Some background….

With the purpose of facilitating the prevention and deterrence of crimes of Operations with Illegally Acquired Funds – commonly known as money laundering – and of Terrorism and its financing, the Financial Intelligence Unit was created through a decree published in the Official Journal of the Federation on May 7, 2004.

The Financial Intelligence Unit is the national central authority to:

• Receive reports on financial operations;
• Analyze financial and economic operations and other related information; and
• Disseminate intelligence reports and other useful documents to detect operations probably linked to money laundering or terrorist financing.

The main tasks of the Financial Intelligence Unit are to implement and follow up on mechanisms for the prevention and detection of acts, omissions and operations, which could encourage or help in any way the commission of the following offenses set forth in the Federal Criminal Code:

• Operations with Illegally Acquired Funds (Article 400 bis)
• Domestic terrorism and its financing (Article 139) and
• International terrorism and its financing (148 bis)

The unit’s mission is to successfully contribute to the achievement of the aims of the Mexican State directed at:

• Preventing Operations with Illegally Acquired Funds and Terrorism and its financing;
• Punishing those who carry it out; and
• Converting as many of the funds involved in favor of the State.

And where is the detail?

Purposes of the Law:

• Establish elements to investigate and prosecute the crime of Operations with Illegally Acquired Funds – those crimes related to this and the financial structures – and to avoid the use of resources that finance it.
• Protect the financial system and national economy.

Main measures:

• Restriction on the use of cash, in some operations, and linked to certain goods.
• Subject the Prevention of Money Laundering rules to those conducting “Vulnerable Activities.”

But the most important thing is precisely this: Vulnerable Activities.

What are Vulnerable Activities?

• Activities related to raffles, lottery or gambling
• Issuance or trade of service cards, credit or pre-paid cards, or traveler’s checks.
• Offering of loans
• Real estate services
• Buying and selling precious stones and metals, jewelry, watches and works of art
• Sale or lease of cars, boats or planes
• Transfer or custody of money or securities
• Armored car services
• Rendering of independent professional services when offered or provided to a client or on behalf of a third party in any of the following operations:
• Real estate transactions
• Administration and management of securities or assets
• Management of bank accounts, savings accounts or stocks
• Incorporation, spin-off, merger, operation and administration of legal entities
• Public brokers (notaries and real estate operators)
• Customs agents
• Nonprofit organizations
• Renting of real estate

If you are conducting Vulnerable Activities, what are your obligations?

• Identify customers and users with those who conduct the Activities that are subject to supervision and verify their identity based on credentials or official documentation, and obtain copies of such documentation;
• Request from each customer or user who participates in Vulnerable Activities information on whether they are aware of the existence of the owner or beneficiary and, if applicable, request that they provide official documentation that identifies him or her;
• Preserve, retain, safeguard and prevent the destruction or concealment of information and documentation supporting a Vulnerable Activity, as well as that which identifies their customers or users, and which must be stored physically or electronically, for a period of five years from the date of completion of the Vulnerable Activity.
• Provide the necessary assistance for carrying out verification visits, as set forth in the Law, and
• File notices in the Finance Ministry in accordance with the time and in the form required by the Law.

What sanctions can you be subjected to?

• Several types of economic sanctions are established in case of failure to comply with the obligations of the Law, which have the character of tax credits.
• Providing false information, documentation, data or images, or altering or modifying them is punishable with imprisonment or a fine.
• Misusing information obtained from the application of the Law or disclosing or divulging it without authorization is also punishable by law.

As you can see, it is necessary to identify if, as a result of your activity at any time, you fall into any of the Vulnerable Activities (which in some cases is very common in the business world) that require you to comply with the respective provisions. If you fail to do so, you run the risk of committing a serious mistake with severe consequences for the person who is responsible. Remember: “Ignorance of the law does not exempt us from responsibilities.” ?

By: Gerardo J. Weihmann I. and Esteban Figueroa P.

The recent global financial crisis that began in 2008, has aroused increasing interest in alliances between the public and private sectors, not just in developing countries, but in developed countries as well.

The demand for better risk management¹

in developing countries, in both the private and public sectors, is rising and will probably continue to do so, fueled by factors such as:

i) the growing integration of developing countries in the global economy;
ii) the increased opening of the economies of these countries to trade and financial flows;
iii) the tremendous volatility of parameters crucial to the global economy-commodity prices, exchange rates and interest rates, among others;
iv) the development and growing complexity of financial derivatives like futures, forwards, options and swaps;

v) the changing involvement of the governments of developing countries, which are acting less as direct participants in transactions with the rest of the world and more as facilitators of those transactions, leaving companies to negotiate among themselves on international markets.

The recent global financial crisis that began in 2008, has aroused increasing interest in alliances between the public and private sectors, not just in developing countries, but in developed countries as well.

Many countries, especially developing ones like Mexico, face a pressing need for high-quality infrastructure and public services. In these countries, a substantial amount of public funding has been invested to increase and improve services for society.

Despite these efforts, there are still considerable shortages of infrastructure in sectors like energy, transportation, housing, health, education and public security (penitentiaries)². The perennial lack of public-sector budgetary resources, at times combined with inadequate planning, selection and administration of projects, led the World Economic Forum to rank Mexico 53rd in its Global Competitiveness Index 2012-2013, and 68th in the infrastructure component.

1 Uncertainty exists when we do not know for certain the result of a future event. Only uncertainty that affects the welfare of a given party can be considered a risk.

2 In some countries, there are specific sectors that are not included in the definition of the PPPs, like telecommunications, because they are already efficiently regulated or because the private sector is already heavily involved. In other countries, the definition excludes certain types of agreement in which, for institutional reasons, there are substantial limitations on the transfer of risk.

What is a public-private partnership (PPP)?

Some of the characteristics of infrastructure assets that are appealing to private investors are their very long-term horizons, relatively stable revenue flows, generally adjusted for inflation, relatively consolidated markets, potentially attractive yields and limited competition.

Public-private partnerships have become an increasingly popular resource for a growing number of countries that seek to take advantage of these characteristics of infrastructure assets.

There is no universally accepted definition of the term “public-private partnership” (PPP). The term describes a range of possible relations between public and private entities in the context of the supply of public services and infrastructure.

For example, Mexico’s Law on Public-Private Partnerships defines a PPP project as one carried out under any scheme to establish a long-term contractual relationship between government and private enterprise, to provide services to the public sector or to the end user, through infrastructure supplied fully or partially by the private sector, for the purpose of improving social welfare and investment levels in Mexico.

PPP projects also include those carried out under any type of partnership to develop productive investment, applied scientific research or technological innovation.

³

Mexico’s Law on Public-Private Partnerships requires that projects of this type: i)are fully justified; ii) specify the social benefit they seek to generate; and iii) have a demonstrable financial advantage over other forms of financing, particularly over the alternative of the federal government developing the project on its own.

Public-private partnerships allow the involvement of the private sector but recognize and structure the role the government must play in ensuring they meet the corresponding social obligations, and that the necessary reforms are made to the sector, along with the necessary public investment.

The Asian Development Bank has stated that the primary motivations for governments to participate in PPP for infrastructure and service provision, are the following:

1. To attract private investment that can help complement limited public resources or free up taxpayers’ resources for application to other needs. Infrastructure services are frequently supplied inadequately, and sometimes require subsidies that involve an additional loss of public resources that could be used to satisfy other pressing needs of the population. The private sector, for its part, participates in the PPP to obtain a return on invested capital that is attractive in proportion to the risk incurred.
2. To increase the efficiency and use of scarce public resources, because the public sector often has fewer incentives to incorporate the concept of efficiency into its organization and processes. In contrast, private enterprise’s goal is maximizing its wealth, which implies it will try to maximize efficiency in both investments and project operation. This efficiency is also likely to improve the quality of infrastructure services, and make those services economically sustainable at prices accessible to the population, even after satisfying the requirement of financial return for the private entity.
3. To use the public-private partnership as a catalyst for reform in certain sectors of the economy, in which the existence of PPP is just one of the conditions necessary for carrying out those reforms, by reassigning functions, incentives and responsibilities among the different participants with the goal of eliminating possible conflicts of interest.
   By establishing contractual relationships and structures appropriate for financing, each risk is reassigned to the entity best able to manage it, which leads to a better alignment of incentives with the efficiency objectives of each project.

Public-private partnership projects have different funding structures for their construction, operation, maintenance and conservation, depending on the country in question. In Mexico’s case, financing is a combination of public resources (federal budget or non-budget funding, like the National Infrastructure Fund) and private resources raised on the debt or venture capital markets, on which the government may often impose a minimum equity percentage.

The contribution from the government may be either monetary or in-kind, as is the case with rights-of-way. In other countries, self-financing projects are common, in which the funding comes only from private contributions or from the revenues generated by the project itself.

3 Articles 2 and 3 of the Law

PPP as an alternative for the development of infrastructure in Mexico

Given the need to increase private investment in Mexico, new institutional and evaluation mechanisms have been created to encourage greater private-sector participation in long-term public projects that generate a net benefit to society.

Among recent efforts to address these needs through PPP are the publication of the Law on Public-Private Partnerships and its Regulations in the Official Gazette of the Federation (D.O.F.) in the year 2012, and the “Manual establishing the Provisions to determine the Social Return and the Advisability of carrying out a Project under the Public-Private Partnership Scheme” published by the Ministry of Finance and Public Credit (S.H.y C.P.).

The following are some ways in which the PPP scheme may contribute additional value to an infrastructure project:

• By providing private sector services, the project may bypass restrictions that reduce the public sector’s degree of freedom, which opens a range of possible solutions.⁴
• By encouraging a more detailed and precise analysis of the infrastructure projects⁵ and a better selection of projects, to permit the private entity to maximize its financial returns.
• Infrastructure projects can be carried out on time and within budget, which is more difficult to achieve if the project is carried out as a traditional public work.
• The private sector becomes a facilitator of new technology and innovation both during the construction phase and during the operating phases, which often increases the amount and quality of supply of public services.
• They pave the way for the development of local know-how in the private sector, through alliances with major multinational companies.
• New sources of project financing and revenue are accepted, which makes it possible to collect tolls or fees from the users of that infrastructure.⁶
• They often lend an element of greater certainty to budget planning, because they specify project outlays not just for the present but for the future as well.
• They encourage the application of the principles of corporate governance to infrastructure, as well as more appropriate regulation of infrastructure. In Mexico, there is still a great deal of room for improvement in private corporate governance.
• Contingent costs are transferred to the private sector and taxpayers resources are freed up for other purposes. They facilitate the application of the concept of value-for-money during the phase of project structuring and evaluation.
• The PPP is flexible, because it can be applied not only to greenfield projects (ground-up infrastructure), but also to improvements or expansions of existing infrastructure (brownfield).

4 The PPP scheme, by avoiding some controls, may also originate future problems that are not always foreseen at the outset.

5 Among other methods, there is a matrix detailing every risk, the entity responsible for absorbing it, and the way it will be managed. The PPP contract incorporates elements of that matrix to ensure its strict execution. The use of the risk matrix is a standardized practice in other countries and is promoted, among other entities, by the World Bank.*6

6A major risk in this type of project is that the public objects to paying the toll or rate.

Risk allocation in a Mexican PPP

The risk conditions of investment projects that are guaranteed by a flow of revenues derived from the project itself, known as Project Finance, require that investors, financial backers and the government assume a role focused more on risk management to reduce cost overruns stemming from speculative risk premiums or the obligation for one of the parties to absorb monetary consequences, with unforeseen financial results. PPPs can be considered a form of Project Finance.⁷

Some of the characteristics of a Mexican PPP are the following:

• The structure recognizes that the interests of the partners are different: the government has a social interest, and the private sector a financial interest.
• The incentive is for long-term business.
• They promote the involvement of a range of participants (builders, operators, banks, promoters, investors, infrastructure developers, insurance companies, and consultants), both domestic and foreign.
• They recognize the changing risk profile for each phase of the project. Each participant is best able and willing to absorb some specific risks.
• An effort is made to control initial risks; for example, in the case of highway infrastructure, construction risk.
• This scheme creates rules for regulating uncertain variables in the concession period, like natural disasters, suspensions, expansions and new projects.

The case of Mexican highway infrastructure

One of the sectors in which the PPP scheme has been most in vogue for many years is highway infrastructure, given its strategic importance, in which it facilitates Mexico’s connectivity and competitiveness, promoting economic growth, jobs and social welfare.

In 1940, Mexico had a little less than 10,000 km of highways, so the federal government strategy at the time was to connect state capitals and the largest urban areas of the Mexican Republic with highways. Thirty years later, the national highway network totaled almost 72,000 km.

In the 1970s and 1980s, the strategy focused on interconnecting smaller urban centers with rural areas through highways built with lower technical specifications, and by the year 2000 the highway network had grown to 323,000 km.

With the arrival of NAFTA and the globalization of goods, services and financial markets, the goal became building new high-tech highways that linked the main centers of domestic economic activity in Mexico and routes to offshore markets, which substantially shortened distances, transportation times and costs, to make the country more competitive in this new globalized climate.

By the end of 2011, Mexico’s highway network consisted of more than 372,000 km of roads.⁸ The Ministry of Communications and Transportations (SCT) estimates that the country requires around 60 billion pesos a year for maintenance, modernization and construction of new roads. Because the federal government does not have the funding to meet this total need, the SCT has designed and implemented three different types of public-private partnerships:

• Concessions
• Service provision projects
• Asset utilization

7In Mexico, up until the 1970s, almost all the financing of major public works came from government coffers. In other countries, on the other hand, during most of the history of industrialization in the modern world, almost all the financing for very large infrastructure works for public services came from private capital. It was not until the end of the 19th century that public funding became more dominant. This trend continued through almost all the 20th century, but since the start of the 1980s, private funding of major infrastructure projects has become increasingly popular again, and increasingly takes the form of what is known as Project Finance.

8Comparing the total length of Mexican highways with Germany, the latter has approximately 650,000 km of highways, 100% of which are paved, while only 50% of Mexico’s 372,000 km are paved. If we look at the indicator of the number of kilometers of highway per square kilometer of territory, Germany has 7.8, while Mexico has only 0.2.

PPPs are not the solution to all of Mexico’s infrastructure problems

By transferring some risks to the private sector, which has the capacity and is willing to absorb them, and sharing other risks between the two sectors; facilitating a more intensive use of assets with the resulting reduction in fixed unit costs; making government payments conditional on the contractual compliance with certain quality standards in the service; and better identifying and estimating the costs and needs for future financing, among others, PPPs can contribute greatly to economic and financial efficiency.

However, the PPP scheme is not necessarily a sure path to all these potential benefits. Some of the limitations of PPP schemes are the following:

• Financing is available only if the cash flows from the project provide an attractive financial return for the private investor.
• Some projects are more difficult to finance, particularly if there is no tested technology or if the obligations of the private sector have not been clearly identified.
• Some projects do not have the capacity to generate foreign currency revenues⁹, so they are more subject to of the local financial market restrictions and limit access to foreign capital.
• A poorly structured PPP project may encourage corruption in the short-term and complicate infrastructure management in the long-term.
• If the project is difficult to carry out for political reasons, when a social group feels that its interests are in jeopardy, tolls may have to be increased to obtain the necessary financial return, and this could result in a shrinking of the market.
• Because there is always a possibility that the private sector may acquire know-how and experience in the PPP scheme after the initial learning curve, it acquires an advantage over the government, which is the regulatory entity. The private sector will only meet the performance requirements it is paid for.
• The private sector, especially the project’s financial backers, tend to be even more cautious about accepting high-impact risks that they do not control, like exchange rate risk. They therefore charge higher interest rates, lend for shorter terms, and increase and/or restrict credit conditions. This situation could lead to an increase in the tolls or rates charged for the services and a resulting decline in the financial return of the project.
• The PPP scheme may fail if the government, at some point during the execution of the project, modifies the legal framework, which is the inalienable right of governments.
• The use of the PPP scheme may substantially reduce the government’s degree of future flexibility in the future. Since PPP’s may create long-term contingent fiscal obligations, it is more difficult to estimate the true future fiscal cost than with other more traditional schemes with established upfront payments. This contingency element of the PPP could increase the temptation to invest in more infrastructure today than would be fiscally prudent, as has happened in countries like Portugal and the United Kingdom.

For these reasons, among others, PPP schemes are not always the best option for the provision of infrastructure and public services. They must therefore be evaluated on a case-by-case basis. This evaluation must incorporate the following analyses:

1. Proof of socioeconomic profitability, with tools like the preparation of a factsheet (for projects requiring an investment of less than 50 million pesos, or maintenance of less than 150 million pesos), cost-benefit or cost-efficiency analysis, if the benefits of various alternatives are the same or when they are difficult to quantify in monetary terms.
2. Eligibility analysis, to determine in the very early stages of the project, its potential for development under the PPP scheme. This analysis includes calculation of an eligibility index¹⁰ This analysis is necessary, but not sufficient, to implement a PPP. The project must also demonstrate that the private alternative is superior to the public alternative, through a value-for-money analysis.
3. Risk analysis, (identification, assessment, allocation and mitigation), which is obtained from a combination of the probability of occurrence of an event and the gravity of its impact.
4. Public-private comparison analysis, to evaluate whether it would be more appropriate to develop the public project as a PPP or as a traditional public work, applying the value-for-money concept.

9For example, airports and seaports have more capacity to generate foreign currency flows than infrastructure projects related to, for example, the water supply.

10 10 This index is based on a structured questionnaire (30 questions) that weighs five factors: institutionality, stakeholders, complexity, macroeconomics and competition; the last one made up of two sub-factors: public bidding and size. The value of the eligibility index goes from 1.0 (definitely not appropriate for development under a PPP scheme) to 5.0 (definitely appropriate for development under a PPP scheme); a score of 3.0 means either option is equally valid.

Conclusions

The public-private partnership scheme has become increasingly important as a complement to traditional public investment; however, it will never replace the role that the government must play, because the involvement of the private sector is not always appropriate or even viable in infrastructure projects and public service supply. We must always bear in mind that the ultimate responsibility of the government is continuous and nontransferable, and society will continue to hold the government accountable for the quality of public services.

In Mexico, the increasingly broad and detailed requirements for determining eligibility of a PPP scheme in comparison to other schemes, established in the new Law on Public-Private Partnerships and the provisions issued by the Ministry of Finance and Public Credit for public-private partnerships, among others, enable planners to know and understand from the earliest phases of the project, the variables and criteria that must be considered when supplying infrastructure and basic services to society. The increased depth and breadth of analysis and greater awareness of each variable’s impact on the project’s development helps agents to make more effective and efficient decisions in later phases.

Given the complexity of infrastructure projects and their very long-term horizons, it is practically impossible to identify all the contingencies that may arise, like acts of God or force majeure, so they are either not specified in the original contracts or they are provided for on a very general level, which leaves room for the possibility of conflicts and interpretation between the participants. For this reason, it will be necessary to make the contracts flexible and leave open the possibility of renegotiating them.

The recent global crisis that began in 2008 because of the subprime mortgage crisis in the United States proved once again that an in-depth analysis of assets, including infrastructure projects, is more important than analyzing the components of capital structure (debt and owners equity), because even though the value of all tangible or intangible assets is given by the net present value of expected future cash flows, meaning that to maximize that value the denominator-financing cost-must be minimized, the most important valuation element is the numerator, which implies that the most appropriate selection of the asset or project.

The greatest opportunities for extraordinary financial gains (financial or economic)¹¹ lies in the choice of assets in which to invest; in this case, in what type of infrastructure projects. Even with the imperfections of the market, this corroborates the importance of Franco Modigliani and Merton Miller’s first theorem regarding the “irrelevance” of the capital structure.?

11 11 In other words, positive net present value. In the current global financial system it is more difficult to find financing schemes with positive net present value, due to increasing competition and lower barriers of entry in these markets, among other factors, then in the asset markets.

Esteban Figueroa Palacios

CEO of AFH Consultores y Asociados, S.C., a consulting firm specializing in infrastructure planning, financing and administration, as well as public-private partnerships and risk analysis in infrastructure investment. Associate professor of Planning at the UNAM School of Engineering for the last 27 years. Civil Engineering degree from the UNAM; Master of Science degree in Civil Engineering in Infrastructure Planning and Management from Stanford University.

Gerardo Johannes Weihmann Illades

Associate consultant at AFH Consultores y Asociados, S.C., a consulting firm specializing in infrastructure planning, financing and administration, as well as public-private partnerships and risk analysis in infrastructure investment. Associate professor at ITAM for the last 23 years; Professor for the last15 years in the Law School of the Universidad Panamericana. Civil Engineering degree from the UNAM; Master of Science degree in Civil Engineering in Infrastructure Planning and Management from Stanford University; Master of Science degree in Industrial Engineering (Management Science and Engineering) from Stanford University, and Master in Business Administration from the University of Pennsylvania.

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