By: Marco Morán, ITAM

The competitive environment that businesses confront today requires the constant improvement of our products or services in order to increase customer satisfaction and, at the same time, increase or maintain operating margins; all of this with an almost immediate set up speed.

On the other hand, there is no longer a business that does not have a strong operational and strategic dependence on information technologies, the technological enabling of processes, products and services. To respond to market changes, you will need to keep pace with the demands that companies face.

Initiatives such as the consolidation of the business unit, acquisitions, divestitures, changes in the business model, or preparation for the initial public offering (IPO) have an important component of information technologies.

In this paper, we will discuss, from a business point of view, the basic concepts of cloud computing, which has become a major topic of interest because of the speed and ease with which we can get state-of-the-art technology at affordable prices for any company and that can help us face current challenges and difficulties.

Even though cloud computing has been on the market for a long time, there is still much confusion about what it means in various markets or business sectors. Cloud computing is the practice of using a remote network of services that are hosted on the internet to store, manage and process data, rather than a local server or a personal computer.

Cloud computing has certain attributes, delivered in different ways and services. The company that uses in-the-cloud technology does not own the assets, it only pays to use them.

It is a scalable and elastic scheme. That is, they are shared services that can increase or decrease as required. The main infrastructure, software and platforms are shared among customers who use a service.

Cloud computing offers a variety of payment models according to use. That is, payment is by consumption without having idle capacity installed in the company or insufficiencies in times in which the processing needs of a company increase. The cloud uses internet technologies, and services are provided using identifiers, formats and protocols such as URL, HTTP, IP, etc.

There are three ways to deliver services in the cloud:

• Public Cloud. Computer assets belong to a third party and anyone can take advantage of them. The assets, definition of the service, cost and risk of implementation are responsibility of the service provider.
• Private Cloud. Computer assets belong to a company, which limits access to the users of its organization or to those who decide to give them the payment. Assets, definition of the service, cost and risks of implementation are responsibility of the customer.
• Hybrid Cloud. Services are coordinated between internal and external computer elements. There are various combinations, so this style has gained popularity.

Finally, let us talk about the services that companies can acquire using cloud computing:

• Infrastructure as a Service (IaaS). It is equivalent to the initiatives of information technology infrastructure and data centers. The IaaS provides an almost immediate self-service scheme of scalable and elastic infrastructure resources complemented by storage and network capabilities.
• Platform as a Service (PaaS). It is the version of cloud services that deals with the infrastructure of applications: the technological foundation to develop, test, integrate and deploy technology.
• Software as a Service (SaaS). It is the layer of computing applications in the cloud. One or more providers own the software applications and are the ones who deliver and manage them. The method of purchasing of SaaS is based on the volume of use or consists of a subscription that depends on certain metrics.
• Business Processes as a Service (BPaaS). It is a specific type of outsourcing through internet-based technologies. The provider is responsible for the management of the process, the steps are highly automated and the customer is given access to data for reporting information or preparation of analysis.

In conclusion, cloud computing is an option for launching business initiatives in an agile, scalable and low cost manner. Cloud technology is state-of-the-art, secure and accessible for companies of all types and sizes. It is a scheme that must be revised at the time of identifying the options when an initiative requires a technological component.

Many providers have a complete offering, and some specialize in a niche. Certainly, the market will continue to evolve and strengthen the offer of services. It is important that the evaluation of options is informed and that it follows a formal procedure to choose the one that best suits the needs of the company.

By: Mara Martínez

“Innovation has nothing to do with how many research and development dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.”

Steve Jobs

The intrinsic relationship between innovation and economic development has been demonstrated throughout economic history, which is why this argument has been used to explain the progress and backwardness of several nations. The evolution of the term “innovation” has gone from being the small introduction of changes in the productive processes to being a tool for the codification of new knowledge. In the era of telecommunications and the internet, this represents a great opportunity for all. On the one hand, for developed countries it implies congruence with their current model of knowledge generation and, on the other, for developing countries it means an opportunity to take advantage of innovation to grow. Despite this great opportunity, Mexico is one of the countries that invest the least in innovation: only 0.57% of GDP is allocated to innovation in sectors such as health, so that these areas are increasingly lagging behind (CONACYT, 2016).

This article will present the situation of the health sector in Mexico and demonstrate the urgency of allocating greater funds to the sectorization of innovation. The proposal will be illustrated by analyzing the following statement made in the last OECD report (2016), OECD Reviews of Health Systems: Mexico: “All the main actors agree that Mexico needs to build a more equitable, efficient and sustainable health care system.” The presentation covers three sections: first, we will discuss sectorial innovation as a vehicle for economic development and strategic regional positioning; second, the elements that explain the current lag observed in the sector will be presented, from the great fragmentation of the system to the low quality in the supply of health providers; and finally the integration of entrepreneurs will be proposed in an experimentation environment that creates bridges between the public and private sector, with the aim of speeding up the dissemination of innovation to sectors such as health, which are in great need of sustained change.

During the last decade, there has been a very dynamic revolution in the information technology sector, which has facilitated the interconnectivity between sectors, such as agriculture, military, medical and even aerospace. This propeller of economic growth has not been an isolated consequence, but a result of the effect of modernization and innovation as a vehicle of development for an increasingly globalized era. However, the concept of modernization in regions such as Latin America has had very different results, compared to the European or U.S. construction project. We live in a disparate world. Worldwide, 20% of the population earns 86% of the total income; the poorest 20% receives 1.1%; developed countries consume 70% of the planet’s available energy, 75% of metals and 60% of the food (Gestiopolis, 2013,s.p.). This scheme becomes alarming if we analyze countries with dissimilar realities within the same region, such as the United States and Mexico.

National innovation is a complex phenomenon, which used to be measured by the single injection of resources into research and development and the number of research staff (OECD, 1996). In the 1990s, it was considered to be a useful theoretical framework, until the difficulty in measuring the general innovation of the economy became increasingly evident. The complexity of its measurement was based on a greater number of coordinated actions between several economic and social agents, both public and private, which caused a substantial change in the way of conceptualizing it. Currently, innovation in a country is conceived in a different way, because its diffusion depends on its effective institutionalization. Today national innovation is conceived as a tool of internal policy making to achieve a regional positioning, in such a way that within the national system different agents are assembled, for example, government agencies and institutions, universities, businesses, productive sectors, research centers, technological institutes, job training centers, intermediary organizations that support business activity and the financial system (Dutrénit, 2010).
In the case of Mexico, the constitution of the National Innovation System has been late. Historically, the social assessment of science and technology and innovation activities has been low, and despite recent efforts such as the Special Program in Science, Technology and Innovation – for the period 2007-2013 – it is clear that there is fragmentation in the interactions between public and private agents. A bibliographic review concludes three fundamental points: first, it is important to achieve a greater linkage between the public sector and the private sector’s intermediary and financial institutions; second, it is necessary to design better mechanisms to transfer knowledge generated in the projects to the end user; third, it is necessary to sectorize innovation with specific demands, for example, detailed calls can go out so that the entrepreneur talent can focus on what the country truly needs.

Faced with an investment of 0.57% of GDP for innovation in sectors such as health, and general investment in the sector equivalent to 10% of GDP, it is clear that there is a discrepancy (AMIIF, 2015, p.3) not only because the health budget exceeds 9.1% of GDP recommended by the OECD, but because of the simple reason that the return on investment in innovation is minimal. Now then we are either taking into account funds for truncated research or we must rethink the fate of the resources.

The Mexican health system continues to be fragmented. One of the more important challenges is that attention to the public is provided through a conglomeration of disjointed subsystems. Each subsystem offers different levels of care at different prices and with different results, so each one has its own network of clinics, specialized doctors, hospitals, pharmacies, treatment centers and unions. For example, parastatal companies such as Petróleos Mexicanos and government entities such as the Secretariat of National Defense, the Secretariat of the Navy and the Secretariat of the Armed Forces have their own health services. The approach and the strategies of these institutions vary, and although the complexity of the system makes it appear solid, until a few months ago it was not possible to access services between institutions. In addition to the problem of fragmentation, according to the OECD, Mexico faces a general challenge due to the lack of a long-term health care system that serves an inverted population pyramid, in addition to dealing with the low productivity of health professionals, which prevents greater effectiveness in the results.

These inefficiencies require reform: first, quality care centered on the individual is needed; second, Mexicans must be informed about access to health benefit packages regardless of employment or social status; third, the fragmented approach to health financing needs to be unified; finally, evaluation of the performance of medical services in relation to quality and efficiency (OECD, 2016, pp 1-10) should be included within the reform requirements. The previous requirements point to a profound need for change, which cannot come exclusively from the government sector, since the transformation of the Mexican health system depends on several actors. It is necessary to reverse this situation and create greater links to sectorize innovation, especially in health. This is strengthened by links between academia, the private sector, coordination agencies and entrepreneurs. Even though it may take time, the first efforts toward this approach and linkage could be through the innovators themselves who deal with the specific demands.

It is well known that Joseph Schumpeter (1942) emphasizes the role of the entrepreneur as an agent of innovation who implements new combinations of productive and material forces, whether it be the introduction of a new good, a new product, the opening of a new market, a new source of raw materials or the creation of a new organization within any industry. Thus, the activity involves the use of existing resources in a different way. The case of the Mexican entrepreneur is no exception. The Amway Global Entrepreneurs Report 2014 (AGER) revealed that entrepreneurship is highly valued throughout the world, with China (83%) and Mexico (82%) occupying the top two places. Specifically, e-commerce is the most popular among the average Mexican entrepreneur; however, in the past five years, the application of information technology and the use of low-cost materials have been the driving force behind more health projects.

According to the portfolio analysis of several venture capital funds, about 1,000 health projects have been identified, from those focused on the early detection of chronic diseases or ophthalmological services for the base of the pyramid, to services of accompaniment and transportation for the elderly. More than ever, collaboration in entrepreneurship has been fundamental in this sector, given the complexity of the system in which it operates. This, along with the desire to break with new proposals for the population, have promoted a laboratory of experimentation with cross-alliances and dynamics that have the potential to create new bridges of diffusion that take the initial steps to sectorize innovation.
To demonstrate the above, the following project will be presented as a case study: Adult Care Services, Emma, S.A.P.I. de C.V., hereinafter referred to as “Emma.”

Emma was created in the summer of 2015 to compete in a university contest convened by the ITAM Center of Creativity, Innovation and Entrepreneurship (EPIC Lab) and the Martin Trust Center for MIT Entrepreneurship. This student project focused on creating a new market in Mexico: the non-medical accompaniment for the elderly. The basic idea was to generate a high value added service that promoted self-sufficient aging for seniors who wanted to grow old at home, with a focus on combating social isolation of the elderly and the lack of professionalization of non-medical care.
The problem was clear: in a few years, the inversion of the population pyramid would lead to a population growth from 11 million elderly adults reported in the last census, to more than 30 million in 20 years (INEGI, 2016). In a demographic transition context, the risk of early symptoms of dementia and depression would be five times greater in socially isolated older adults. In addition to the above, the lack of a formal long-term care system, plus the targeting of resources of only 6.2% of GDP for care of the elderly and a pension problem created an unfavorable forecast for the Mexican health system in the next few years.

Emma was founded on the conclusions of previous research and the desire to innovate for a sector that for years had been neglected. Thus, a Mexican company was established that provides transportation services and accompaniment for seniors. Through a digital platform, relatives of the elderly select a companion who their loved ones like, as well as an individual plan with activities which translate into well-being, learning and activating interests such as, for example, from recuperating the enjoyment for playing chess or cards to learning how to use an iPad. In this way, a trilateral service is provided: to the family, to the elderly, and to the companions – called “Emmas” – with great human warmth and with surveillance on the internet.

With a small founding team, an administrator, an engineer and a doctor, a network development team made up of five young entrepreneurs, an Emmas team, a mentoring council and more than 500 hours of accompaniment sold in the first pilot, an operational team with a well established purpose and procedure manuals was established. At the head, there is a general director (in charge of strategy, sales – B2C and B2B -, content management, creation of alliances), an operational director (in charge of accounting and finance, legal framework, human resources and design) and a quality director (medical supervision, evaluation of Emmas performance, management of accompaniment methodology and medical alliances).

Emma relied on the market economy, such as Uber or Airbnb, which has self-regulation capability and dynamic prices, profile of the collaborators and top quality services. The platform retains 25% commission and frees up the rest (75%) for Emma for its service, which incorporates the companions as independent collaborators in a flexible legal and tax scheme that allows them to enter and leave whenever they wish. For that reason, Emma manages to recruit the best companion profiles, which ensures quality and safety through a rigorous selection process.

Innovation and leverage in information technology allowed the creation of a scalable entrepreneurship project with great potential for social impact. In recent months, Emma has collaborated closely with the National Institute of Geriatrics (INGER) and leading companies in its industry, with the purpose of conducting experimental pilot projects that favor synergy schemes. While much remains to be done, Emma’s corporate vision is to reach out to more people and benefit those who really need it, with the goal of occupying an important place in the Mexican healthcare system, concretely, long-term care for the elderly.

In conclusion, there is room for maneuver in innovation in the healthcare sector. While the idea of innovation can be misunderstood as scientific discoveries, inventions or unique creation of hardware, the space for the optimization of information is immense. Emma is a clear example of the combination of software development and the work of a highly qualified accompanying staff. However, the implementation of innovation does not come alone, but must be driven by a national body that prioritizes needs by sector, so that, as an instrument to capture opportunities, it creates solutions. The National Innovation System must go from being an uncoordinated system to becoming a facilitator to execute innovation policy. The national paradigm should seek to improve each social component to achieve greater efficiency, productivity, effectiveness, and above all, job opportunities that inspire others. In my case, as Emma’s co-founder, my motivation is in knowing that “investing in health is equivalent to doing it in all areas of development for a more just, equitable and sustainable Mexico.”

Bibliography

• Asociación Mexicana de Industrias de Investigación Farmacéutica (AMIIF) (2015), <http://funsalud.org.mx/portal/wp-content/uploads/2016/02/memorias-AMIFF-FUNSALUD.pdf>, consulted on December 5, 2016>
  CONACYT (2015), “Recibirá ciencia, tecnología e innovación inversión de 91 mil 650 mdp del gobierno federal”, Mexico, press release, on <http://conacyt.gob.mx/index.php/comunicacion/comunicados-prensa/566-recibira-ciencia-tecnologia-e-innovacion-inversion-de-91-mil-650-mdp-del-gobierno-federal-conacyt>, consulted on December 5, 2016.
• Dutrénit, Gabriela et al. (2010), El Sistema Nacional de Innovación mexicano: instituciones, políticas, desempeño y desafíos, México, UAM, 1a. ed., 2010.
• Garita Roberto (2013). Teoría económica del comercio internacional, en <http://www.gestiopolis.com/teoria-economica-del-comercio-internacional/>, consulted on November 29, 2013.
• OCDE (1996), “Sectorial Cases of Innovation”, on <http://www.oecd.org/sti/inno/sectoralcasestudiesininnovation.htm>, consulted on November 20, 2016.
• OCDE (2016), “Estudios de la OCDE sobre los sistemas de salud: México”, pp.1-10, 20-35.

By: Antonio Lloret, ITAM

It is common to find in articles and books about business strategy definitions of strategy that are intended to sustain a discipline. For example, according to Thompson, Strickland and Gamble (2008), “strategy consists of the competitive moves and business tactics that administrators employ to grow the business, attract and satisfy consumers and compete successfully through operations with which organizational goals are achieved.” For Barney and Hesterly (2010), strategy “is a theory of how to generate competitive advantages,” while Porter (1996) defines strategy as “the creation of a fit between the various activities of a company.” These definitions are very useful, but because they are so general, they don’t give us the simplicity needed to explain how strategy generates value. In fact, if we try to establish the link between a company’s business model and its strategy (Osterwalder and Pigneur, 2010), we find a conceptual void. This situation creates a dilemma, because it can discredit an entire discipline by its vagueness and relativism, instead of adding value to it.

How, then, can we simplify the concept of strategy to understand its importance in a simple, intuitive way?

One possibility (though not the only one) is thinking in terms of a linear function as a straight line. In geometry and algebra, a linear function is a first-degree polynomialfunction. In other words, a function whose representation on the cartesian plane is a straight line. The function can be written as:

f(x) = b + mx

where m and b are constant or parameters, and x is a variable. The constant m is the slope of the straight line and b is the point where the straight line cuts across the Y axis. If we modify m, the slope of the straight line changes, if we modify b, the straight line will shift up or down.

We can think of the concept of strategy in terms of a linear function, or a straight line. We just need to be creative, think about what the straight line means, what it relates, and that the strategy will be the set of actions that must be taken to move the parameters m and b. If we could map out the graph of a business situation, we can understand it. A linear function is very helpful in describing what we have to do, and that “we have to do” is in itself a strategy.

Think about the following situation: you’re the manager of a company and your boss tells you that you have to increase your sales margin (the margin is the difference between the price and the cost of the good sold), you probably only have one way to do this. Since the product price is given by the market (in other words, it’s constant), you have to lower the cost. The straight line can simplify the strategy you should follow. Let’s look at it in terms of a graph:

Step 1: Draw a cartesian plane.

Step 2: Label the vertical axis as margin (price less cost).

Step 3: Label the horizontal axis as products made or sold.

The graph would look like this:

Step 4. Establish the relationship you think should exist in terms of a straight line.

What this linear representation indicates is that the more products you sell, the higher the sales margin. The function is: Margin = b + m (products), where b takes a value of zero because it is at the origin, and m is the value of the slope that gives the level of the margin obtained for each product sold. As part of this example, the price is set by the market, so the only way to raise the margin is to reduce costs. Thus, the previous representation is similar to the following:

In other words, we have to reduce the cost of each product if we want to increase our margin. The linear function in this case is Costs = b – m (products). Here, b represents the costs independently of the product sold and m is the marginal (or variable) cost of each one of the products made or sold.

The mere representation should communicate that if the goal is to increase the margin, the only alternative is to act upon the slope, the value m, and that’s where strategy comes in, because there are countless ways to modify m, which is the ultimate purpose of the strategy. For example, we can think of economies of scale, in production efficiency, in increasing production capacity, or in resources to affect the value of m, reduce the cost and increase the margin.

Let’s look at a more simple and intuitive example. Suppose your level of profitability (vertical axis) depends on the number of clients you serve. Imagine a coffee shop in which just to open the place, without selling a single cup of coffee, you have to spend something. This situation can be represented graphically as we did in the preceding example:

If we express this representation as a function, it would be: Profitability = -b + m (cups of coffee). This means that if you don’t sell any coffee, there’s a loss equal to b, which might be the rent on the shop or the wages of your employees. You have to sell at least b/m coffees to break even, and any additional coffee after b/m would be the coffee shop profit. This b/m, in its simplest form, is the concept of the break-even point, where you neither make or lose money. Strategy then implies, for example, increasing the price of the coffee, reducing the cost of the coffee or modifying b to bring it closer to zero by reducing the costs of your shop, or even lower the wages or working hours of your employees to hire more people to work at the busiest hours, and less at other times.

These linear representations are very useful for understanding business situations; we can also make them more complex so we don’t leave them in these simplistic (which is not to say simple) terms.

One of the creators of strategy, Michael Porter, in 1980 conceptualized five forces of the industry to postulate that, based on a static analysis of the industry, it was possible to determine potential profitability based on two principles: 1) the relative power of suppliers and clients; and 2) the threat of substitutes, rivalry from competitors and threat of new participants coming in to the market. Figure 5 shows this model.

The analysis is very useful, but it’s still ambiguous. How does the straight line help us better understand such an important concept?

The simplest thing, once again, is to represent the concepts in terms of a linear function and see the effect of each of these forces on profitability. For example, let’s think about suppliers’ power of negotiation:

As we see in the graph, as suppliers’ power rises, profitability drops. The function would be: Profitability = b- mRPS. This representation indicates that as suppliers’ purchasing power rises, profitability is reduced. In strategic terms, we need to modify the rate at which the relative power of suppliers grows, and as a result, what the company should do is think of strategic actions to reduce that power -for example, seek out more suppliers, renegotiate contracts, etc. All of these are highly important strategic decisions. The same is true for the client. The representation is practically the same, but this time the horizontal axis represents customers. The strategic movement should be to increase the company’s power vis-à-vis its customers, for example, with switching costs (that is, a client would lose something for no longer consuming) or differentiating itself enough so that the client, instead of seeking out alternatives, stays with the company.

As for the threat from substitute products, rivalry from competitors and the threat of new participants, we can group all of these into a single category called “competitors”:

Here, Profitability = b – m (competitors). This means that as the number of competitors (substitutes or new entrants) rises, profitability declines, unless -strategically-the company makes decisions that raise entry barriers or create mechanisms to insulate it from the competition, like patents, exclusivity agreements or differentiation, which will modify m and increase profitability.

In conclusion, strategy has a graphic representation that can help us to understand and, more simply, intuit the decisions that need to be made.

We have to understand that even though reality doesn’t behave in a linear fashion, a conceptual approach like the straight line is useful for understanding the possible relationship between the company’s strategic decisions. We shouldn’t be afraid of graphs and mathematical functions. Rather, we should realize that what can be graphed out can be understood, and if it is understood, it can be acted upon and decided.

References

• Barney, J. B., and Hesterly, W. S. (2012). Strategic management and competitive advantage (4th ed.), Pearson.
• Osterwalder, A., and Pigneur, Y. (2010). Business model generation: A handbook for visionaries, game changers, and challengers, Wiley.
• Porter, M. E. (1985). Competitive advantage (pp. 11-15), New York, The Free Press.
• Porter, M. E. (1996). What is strategy? Harvard Business Review (November).
• Thompson, Strickland and Gamble; 2008 “Crafting; executing strategy: Text and readings.

By: Michelle Lee, Lynne Thomas, Dr. Howard Thomas, Dr. Alexander Wilson*

The African approach to management education has been shaped by a range of environmental, cultural, contextual and regional characteristics.
Africa is by any measure a massive, multi- cultural, multi-lingual continent offering the promise of significant economic growth in the longer term. The environment is characterised by volatility, uncertainty, complexity, ambiguity and, often, disruptive change. Despite this, some African states have tried to adapt and formulate a range of strategies for economic growth management and the development of international and inter-regional trading opportunities arising from globalisation.

Existing evidence suggests that African management educators have tried to adopt a pragmatic perspective that emphasises management practices and somewhat de-emphasises strong analytical rigour and the pursuit of scientific management research, which offers little immediate practical relevance for a managerial audience.

They also prefer a closer relationship with business and practice and favour a faculty role as teacher-first, offering a blend of practical experience and knowledge to students.

Only a relatively few elite schools in Africa have an orientation and resource profile that matches, or even approaches, the best American and international business schools. Yet these African schools have an international mindset that involves a strategic intent to achieve international accreditation and favourable media rankings. They stand in almost complete strategic isolation from the “rump” of basic, vocationally oriented African business schools.

However, individual countries and regions such as Southern Africa, East Africa, West Africa and francophone North Africa are all very different and do not conduct business or even run business schools in the same way. This suggests that a range of different forms of business school is to be found across Africa. Further, they should not necessarily be thought of as carbon copies of models from distinctly different contexts such as the US or Europe.

African countries and their business schools are developing, and will certainly continue to do so, at different rates of growth. Collaboration between them will improve and partnerships with international schools may also provide a useful source of advice and expertise.

Although there are differences across Africa, there may nevertheless be some similarities that can be integrated across cultures to synthesise a “set of features and issues” that could possibly form the elements and content of an African management education model.

Is an African model of management education realistic?

As part of our research we interviewed leading management educators and stakeholders – all of whom had close associations with Africa. One question we asked them was:

Is it realistic to think in terms of an “African model” for management education? If not, what local adaptations might be appropriate? How easy might it be to develop these?

The first part of this question yielded a variety of responses from “yes”, “no” and “yes, if…”,
the latter being the views of respondents who indicated that there could be some form of “African model” for management education if certain adaptations were made. A small minority of respondents claimed that it was realistic to think in terms of an African model for management education. Slightly less than half of respondents said that it was not realistic to conceive of an African model for management education.

Figure 1

Figure 1 summarises the relative strength of the various responses:

What themes are evident in comments about an African model?
Given the roughly 50/50 split between those in favour and those arguing against an African model, it is important to outline the main themes in the interviewees’ comments and to understand their logic and rationale. These themes underlie the propositions and perspectives put forward in the discussion and are summarised in Figure 2.

Figure 2

The most dominant theme was whether (or not) African schools can contextualise management education to produce a national, regional or broader African model. The next theme of adaptation is closely connected with this. It captures a range of perceptions as to whether, and in what ways, management education might undergo adaptation.

As well as the context and adaptation of management education, respondents also debated whether the theory and practice of management itself is universal or locally situated, which produced further debate and conjecture about whether an African model was possible or relevant.

These themes were then mapped onto our earlier research about whether respondents thought an African model for management education was realistic. Our findings illustrate that there are some differences of opinion about the potential influence that each theme has in strengthening or diluting a distinct model for management education. The findings for each theme are shown in Figure 3.

Figure 3

Figure 3 highlights where the differences of opinion arise in the themes discussed by respondents and whether or not they contribute to an African model. For example, the notion that the African model requires further definition and needs leadership to establish it were themes closely aligned with the notion that there is (or could be) an African model. One respondent commented:

“The African business school model for me is a model that talks about social innovation, business model innovation, inclusiveness, entrepreneurship.”

A need to contextualise

The most frequently discussed themes were about the need to contextualise management education given the wide diversity of cultures and experiences across Africa. However, one-third of those who mentioned contextualisation thought that there was not, or could not be, an African model, whereas two-thirds argued that there could be, if properly contextualised.

Management as a universal construct

A theme that also divided how respondents see management education was the nature of management itself; either management was perceived as universal and therefore did not need an African model or such a model would have a standard core of knowledge and require an element of contextualisation. Two-thirds of respondents discussing this theme argued the former. For example: “I think this is not just an African but a global question. It’s a global model… Finance will be finance, marketing will be marketing and so on. So the theory of marketing, I think, is across not just Africa but many other continents”.

Management education requires adaptation

A further point of debate was whether, and in what ways, management education should be adapted in the African context. Again respondents were divided yes (60%) and no (40%) on whether there should be an African model for management education. Those who saw no distinct African model reasoned that another model (for example a theory-driven model of management education) could be used with some adaptation in terms of content, structure and delivery.

In contrast, other respondents argued along the lines of plural, emerging African models for management education, which will require ongoing clear identification of management education needs and substantive adaptation of current provisions.

The Western model is dominant

A further theme that emerged was centred on the role that other models of management education play in enabling or constraining the development of an African model. For example, one respondent reasoned that it is “not realistic” to have an African model when established models are so dominant:

“There are two reasons for that. First, there is the institutional academic and business power, may I call it the ‘Western model’? I cannot see that that will be unseated. Second, where do the book publishers come from, in what language are the books published? English.
Where are the main offices of the corporates of this world, which are basically the focus of management? Therefore, the hegemony of that power, we can’t beat. We’re way too small”.

Contrasting views were also apparent where respondents felt that in the face of a Western- dominated sector some variety of an African model should be seen as an aspiration.

“I think there’s an aspiration. So in terms of the aspiration, should we not as Africans, maybe not build a model but set up our own set of criteria as a beginning? So that we don’t compete with the rest of the world initially but we compete with ourselves. So we actually do it on our own terms and say ‘we think a good school…in Africa [would] adhere to these principles’”.

Management is a local construct

In opposition to those who argue that management is a universal construct, a smaller group of respondents contend that management is local and situational. However, from this position, respondents discussing this theme were evenly split on whether there was an African model or not. This respondent argues that too many differences between different regions and groups of people rule out the possibility for a coherent African model:

“I don’t think so. This is a huge continent. Every single region or market would differ, [with] emphasis on different things. People behave differently. Some things are important in certain in areas, the nature of people differ. I think in terms of that alone, you’ll have to design for the specific context”.

Another respondent takes the view that re-contextualised and adapted models could form the basis of models of management education for Africa:

“Today, I don’t believe in one exclusive model of management education. I do believe in models that are contextualised and take, adapt, adopt and re-contextualise tried-and-tested models elsewhere. To simply adopt, as is usually the case, does not work. But to re-contextualise and adapt is meaningful”.

Conclusion

So should there be an African management education model?

Clearly a very small minority of the interview panel would favour a single African management education model. The balance of responses are almost evenly split between a clear “no” and those who favour a balanced basic model – perhaps using Western ideas but with a contextualised content that reflects the differences in the contexts and cultures across Africa.

The current evidence from Association of African Business Schools (AABS) and others suggests that Africa can already be clustered into (at least) five sub-regions: North Africa, Southern Africa, West Africa, Central Africa and East Africa. They are all quite different with a range of ways of doing business. Even within regions individual countries have their own way of operating businesses.

Within these regions there is already a set of diverse business schools with, in most cases, models largely adapted and contextualised from models generated elsewhere – typically in North America or Europe. These schools have largely achieved a strategic balance between mimicking Western models but with strong country and regional factors of differentiation.

In the spirit of adding to the debate about how to build an African model, a suggested holistic business school curriculum design is proposed in Figure 4 (See in PDF). This design argues that there is a range of “African business school models” and not a single African paradigm.

Figure 4

In summary, this holistic curriculum contains three key elements.

The first covers the core foundations, which represent the key “universal” aspects of management such as the basic disciplines of accounting, finance, marketing, decision analysis and organisational behaviour.

In the second element, the communitarianism, the ubuntu philosophy and the importance of the relationships between family, the tribal organisation (the micro-nation and its languages) and the nation state are discussed and evaluated.

The third element provides a set of potential key topics that are important in applying management concepts in the African context. For example, the study of leadership theories may require knowledge of previous successes and failures of leadership.

This may lead to a focus on values-based leadership and a thorough discussion of the role of ethical principles and culture in governance. In addition, given the economic growth imperatives in Africa, economics and finance courses, for example, may need a greater focus on issues and principles of economic and financial development that are critical in macro-economic management.
Note that this model is presented with a few suggestions about structure and some curriculum illustrations in order to create further debate about appropriate topics and models and to promote even more research about the needs, management practices and curricula requirements in an African context in which greater economic collaboration and integration between African countries may be essential.

*Authors:

Michelle Lee

Professor Michelle Lee is Associate Professor of Marketing (Education) and Academic Director (Accreditation) at the Lee Kong Chian School of Business at Singapore Management University. Her main research focus is on the more passive or unconscious influences of memory on consumer behaviour.

Lynne Thomas

Lynne Thomas is a co-author of this and numerous other works including Promises Fulfilled and Unfulfilled in Management Education (2013).

Howard Thomas

Dr Howard Thomas is Distinguished Term Professor of Strategic Management and Management Education at Lee Kong Chian School of Business, Singapore Management University, and Ahmass Fakahany Distinguished Visiting Professor, Boston University Questrom School of Business.

Alexander Wilson

Dr Alexander Wilson is Lecturer in Strategy at Loughborough University, UK. Previously he worked as a research fellow in strategic management at Warwick Business School, UK, examining the evolution and development of management education, teaching and research and the role of business schools globally. He has held visiting fellowships at Singapore Management University (2011, 2012 & 2013). His doctoral research at Warwick Business School examined the strategic adoption of technology and organisational change.

This article was originally published in http://globalfocusmagazine.com/does-africa-need-an-african-management-education-model/

Por: Luis González Fernández,
Universidad de Salamanca

“If I could ignore for 8 minutes of arc I would adapt my hypothesis, but as I cannot ignore them, those 8 minutes alone with lead us along a path to the reform of the whole of Astronomy,” wrote Johannes Kepler when he submitted his hypothesis of perfect solids to Tycho Brahe’s observations of the orbits. And he did not ignore them, but by joining observation and theory he built the foundations that explain the orbits of the planets around the sun. The theory of company organization and management can no longer ignore, as collateral and minor, the employee’s behavior at the moment of explaining how the company achieves a competitive advantage and sustains it over time. Just as those 8 minutes of arc led to a reform of astronomy, incorporating employee behavior into management as a central element leads to a revolution in business management and, more specifically, in human resource management. This revolution is known as “micro-foundations of administration.” This micro-foundation of management implies integrating the micro aspects (employee behavior) with the macro aspects (company strategy). The model of human resource management presented below integrates these two components by placing the employee’s behavior at the core or, to be exact, the variables, processes and theories that explain the different aspects of that behavior. In addition, compared to the classic proposals that separate the behavior at work from its determinants (knowledge, abilities, skills and other characteristics), the model that we present integrates them as interrelated elements in an expanded conception of human capital that can be placed at the base of the mechanisms with which to obtain a competitive advantage for the company.

Dimensions of Human Resource Management

An analysis of human resource management allows one to define the essential dimensions that characterize it, among which are the following:

• Conception of the employee
• Way of acting
• Strategic perspective

The progressive replacement of the personnel division by human resource management is determined in large part by the change in the company director’s conception of the employee. It is no longer considered a cost that must be minimized; rather it must be understood as one of the most valuable resources that the company has to achieve its objectives. Human resource management is no longer oriented toward reducing staff costs, but all its activities are directed toward the optimal use of this resource.

The second dimension refers to the mode of action in human resource management, which must be essentially proactive. The activities of human resource management are integrated into policies and programs with multiple interrelationships and interdependencies, in order to anticipate and facilitate the achievement of the company’s objectives. This is what today is called “horizontal adjustment” of human resource management.

The third dimension is the strategic perspective of human resource management. The strategy in human resource management may refer to a way of acting, to the process of relating human resource management to the company strategy or to the mechanisms by which human resource management contributes to obtaining and maintaining a competitive advantage.

Strategic Human Resource Management

A great variety of theoretical frameworks have been proposed to foster strategic human resource management. Of all of them, the theory of resources and skills is the most accepted.

The resource-based view or theory of resources and capabilities stipulates that companies are different, heterogeneous, in terms of the resources they have and the capabilities they acquire from the combination of resources, and that it is precisely in these resources and capabilities where its sustainable competitive advantage is found.

An organization, a company, is seen as a system or configuration integrated by objectives and values, a set of resources and capabilities necessary to compete in the market, structures and a strategy in a concrete environment. The resources are the factors, the assets, the inputs that the organization owns and controls and that intervene in the production of goods and services. The capabilities are the dynamic mechanisms that allow the company to perform an activity by integrating the resources to achieve a performance that is superior to its competitors. The combination of resources and capabilities generates organizational competencies; that is, that which the organization is able to do with a performance that is superior to its competitors.

Resources can be classified in many ways. One of the main classifications is to divide them into tangible and intangible resources. Tangible resources are those that have physical support, such as machines, facilities, tools, financial capital, etc. They are easy to identify, value and integrate into the company’s financial statements. The objective of the management of these resources must be the optimal use by the company. In addition to tangible resources, the company also owns and controls intangible resources that do not have a clear physical support, such as patents, brands, culture or human capital, among others. Unlike tangible resources, intangibles are difficult to identify, value and incorporate into company accounting. Among the intangible resources of the company is human capital.

Human capital differs from other resources of the company in its composition, as it has two components of which one is a necessary condition and the other condition is sufficient to generate value for the company. That is, mere possession of the resource will not generate value automatically. These two components are, on the one hand, the set of knowledge, abilities, skills, etc. the company needs to achieve its objectives. It involves a component of competencies, since the company needs to equip itself with this set of elements that the employees possess to reach its objectives. However, possessing these elements is not enough to generate value in the company. It is necessary that they become behavior. That is, the employee must develop a certain behavior. This is the second component of human capital, a dynamic flow component. The two components are inseparable; to develop the behavior that allows the company to obtain a sustainable competitive advantage, employees must have certain knowledge, skills, abilities, etc. Likewise, the possession of this knowledge, abilities, skills, etc. does not generate value for the company if it is not transformed into a certain behavior.

Finally, we must highlight another of the characteristics of human capital that is directly related to the mechanisms of obtaining a competitive advantage. The mere possession of a base of knowledge, abilities, skills, etc. does not automatically become the behavior that the company needs. It is necessary to manage this human capital to obtain it. Therefore, strategic human resource management must allow the company to equip itself with human capital and turn it into flow, in the behavior that it needs to reach its objectives. This double composition of human capital is graphically represented in Figure 1.

According to the theory of resources and capabilities, in order for resources and capabilities to generate a sustainable competitive advantage, ie, to be considered as strategic, they must possess a series of characteristics. In this sense, in order for a resource or capabilities to generate a competitive advantage for the company it must have value. This value depends on two conditions, the scarcity in the market of the resource or the capabilities, or if there is no scarcity, the limited availability among the competitors. Possessing a range of valuable resources and capabilities generates a competitive advantage for the company. Maintaining this advantage depends on other characteristics, among which are: durability, inimitable, irreplaceable and non-transferable.

Figure 1: Human Capital and its Components

Deciding factors of organizational behavior

Organizational behavior

Intangible resources and capabilities, including human capital, have these characteristics, so they are strategic resources and conform organizational competencies, that is, what the organization does better than its competitors. These organizational competencies should be articulated with the organization’s strategy based on the characteristics of the environment, which ultimately determines the attainment of a sustainable competitive advantage.

Strategic human resource management, through configurations or systems of practices of high performance that constitute the capabilities of human capital management, endows the company with a human capital base and transforms it into a behavior. Figure 2 shows this scheme of strategic human resource management and its action on human capital through human resource management capabilities. Human resource management practices provide, develop and maintain the company with human capital that has a set of characteristics (knowledge, abilities, skills, etc.) and certain behavior (motivation, commitment, performance, etc.) susceptible to becoming a strategic asset for the company. Human resource management practices create dynamic structures capable of becoming a strategic asset and generating a sustainable competitive advantage.

Structure and functions of human resource management

One of the first aspects that must be analyzed in human resource management is the structure of this function within the organization. The analysis of the structure of human resource management has to address both its articulation within the organizational structure and its internal composition.

In relation to the first element, the articulation of human resource management within the organization, there is no structure that is valid for all companies. Each company must define the best way to articulate human resource management once the contingencies of each organization have been assessed. Three basic elements must be taken into account: the management model, the size and the structure of the company.

With regard to the size of the company, determined by the number of employees, three broad categories are usually demarcated: small, medium and large enterprises. As for the organizational structure, we will consider the basic modes of functional, divisional and matrix structure. The most frequent ways of articulating human resource management according to the size of the company are: small company (external counseling or consulting); medium size company (internal consulting or functional structure) and large company (internal consulting, functional structure, divisional, matrix or a combination of any). This does not mean that another articulation is not possible, always depending on the objectives, strategy and contingencies of each organization.

Figure 2: Strategic Human Resource Management

External counseling or consulting is the most common form of articulation in small businesses. Given that the volume of human capital management is very small in these companies, it is common practice to outsource human resource management. An external counsel or consultant conducts or overseas all human resource management. Therefore, it is a mode of articulation with an unspecific, very generic response and with a limited cost. However, it is important to emphasize that there must always be human resource management. The fact that the size of the company and, consequently, the volume of human resource management and the financing capacity of the company are very small does not mean that there should not be a specialized response. This can be done through organizations such as business or government associations that offer this consultancy to small businesses.

The most common way of articulating human resource management in medium size companies is internal consulting. The volume of human capital management and the financial capacity of the company make it advisable to incorporate a specialized structure in human resource management. In this way, a specific, very specialized management is achieved and without great costs. Internal consulting is situated as a satellite between the management of the company and the different departments. Internal consulting establishes the objectives and human resource management strategies, designs the programs and combines their execution, with the advice and guidance of the line supervisors.

The medium-size company may also opt for a mode of articulation with a functional structure. In this case, human resource management is integrated as one more function within the management structure of the company. In this way, a high degree of specificity and specialization is achieved in the responses to human resource management needs. However, the cost is higher than internal consulting.

The large company, given its volume of human capital management needs and its financial resources, can opt for all the alternatives and even frequently combine several. In addition to internal consulting, articulation through a functional structure, it can also resort to a mode of articulation divisional or matrix. The divisional mode increases the degree of specificity and speed of responses in human resource management. However, there may be problems of coordination and integration of management practices between the divisions of the same human resource management strategy. The cost is also higher than the functional structure.

Figure 3: Practices of Human Resource Management

Finally, the matrix structure, which arises from the combination of a functional structure and a divisional structure, is the way of articulating human resource management in the company that provides with greater speed the most specific, specialized, coordinated and integrated responses within the same strategy. In return, it is also the most costly for the company and frequently generates conflicts of activities between those responsible for human resource management. The internal structure of human resource management can also take a variety of forms, such as functional, divisional, matrix or mixed, although (as in the case of the articulation of human resource management with the structure of the organization) it will depend on the objectives, strategies and contingencies; the most frequent international structure is the functional one. Depending on the objectives and strategy, as well as the size of the organization, human resource management will have units specialized in different practices, such as job analysis and performance selection or evaluation, to cite two examples. As we have pointed out, strategic human resource management acts on human capital through activities or practices, as shown in Figure 3.

Human Capital

As we have seen, human resource management acts on human capital to obtain a sustainable competitive advantage. Human capital, unlike other assets of the company, has two inseparable components that constitute the necessary and sufficient condition for employees to adopt a behavior that, in line with the company’s strategy, allows the possibility of obtaining and maintaining a competitive advantage. The first of these components is the set of competencies, that is, the knowledge, abilities, skills, etc. that the employees of a company have and that are necessary to exhibit certain behavior. The second component refers precisely to that behavior that the employee cannot cultivate if he/she does not have certain knowledge, abilities, skills, etc. This transformation is not automatic or mechanical, but requires the management of human capital. In other words, the mere possession of a set of knowledge, abilities, skills, etc. does not assure the company that its employees will exhibit the necessary behavior. It is a necessary condition, but it is not sufficient. This asset must be managed, and human resource management is responsible for this. All its activities, which constitute mechanisms for the integration of this resource and therefore can be conceptualized as capabilities, are aimed at providing the company with a human capital base and facilitating the transformation of this base into behavior.

Given the characteristics of human capital, to manage it, it is essential to know the scientific bases that explain its elements. That is, to know the theoretical models and tools which allow their evaluation and management. This behavior responds to the same laws and processes of any human behavior, but occurs in a very concrete environment: the organizations.

The rigorous and scientific management of human resources, not based on implicit beliefs or common sense, requires a deep and scientific knowledge of human capital. This knowledge is the foundation and the starting point of human resource management, without which it is not possible to carry it out efficiently. An example will help us illustrate and understand the importance of human capital knowledge in human resource management. A human resource director could not properly develop a motivational program for the employees of a high performance team if he/she does not know the theoretical bases and tools of motivation. Guided by intuition, by beliefs that are almost always wrong, leads only to the failure of programs and, which is much more serious, to a progressive loss of commitment of the employees with the company project, which has a direct impact on the results of the organization.

On August 15, 2016, the Mexican Financial Reporting Standards Board (CINIF, by its initials in Spanish) issued a new financial reporting standard, NIF B-17, “Fair Value Measurement,” and accepted comments on it up until November 15 of the same year. This new standard is part of the process of standardization undertaken by the CINIF since its founding in 2004, when the Mexican Public Accountancy Institute (IMCP) turned over responsibility for issuing accounting standards in Mexico.

This standard is important because of the historic connections between accounting and economics. In other words, as the economic climate continues to evolve, accounting will have the opportunity to change and adapt to these changes as well, and to play a role in its modifications and innovations. This creates an opportunity for accounting to transform itself by incorporating postulates from other disciplines (economics and mathematics). According to Carmona (1995), “the progress of accounting will not be achieved through introspection and the exhaustive use of its own methods, but rather by the application of methodologies from other disciplines to the accounting process.”
Other authors, such as Barlev and Haddad (2003) recognize the need for accounting to evolve from a historic value-based system to one based on fair value, since fair value accounting contributes greater value and relevance to the figures reported in financial statements than historic value, which conceals the true value of a company’s financial position and profits.

Barlev and Haddad (2003) measure relevance in terms of the closer correlation between fair-value-based accounting and the market, reduced agency costs, an increased commitment by company management to operating efficiency, and better information supplied to shareholders for decision-making. Similarly, fair-value-based accounting provides more complete and detailed rules for presentation, which help make the information more comparable and transparent.

Bleck and Liu (2007) show that market valuation can supply investors with a more timely alert mechanism than historic-cost-based valuation. These researchers prepared a model that explains various empirical discoveries, demonstrating the increased transparency that the use of fair value brings to accounting figures.

SFAS 157: Fair value measurements

The first predecessor of the new Mexican standard on incorporation of fair value into accounting comes from the U.S. Financial Accounting Standards Board (FASB).

In 1938, American banking regulators agreed to adopt historic cost as the primary method for reflecting the financial position of investors and lenders, because investments were long-term and interest rates were controlled and stable. The historic cost method worked very well in faithfully reflecting banks’ financial position.

But the world changed dramatically in the 1980s, when interest rates were deregulated and the economic climate became more volatile. Almost on a daily basis, when closing out their operations, banks had to seek alternatives for controlling and covering their exposure to interest rate fluctuations.

During the 1990s, the historic notion that investments were held until maturity was eliminated. The figures presented were no longer relevant when showing historic cost, because they did not faithfully reflect the banks’ financial position. So while historic cost was used to avoid artificial distortions in the reported figures, their use in the 1990s, in fact, distorted and obscured the true volatility. This meant that historic cost was no longer a realistic measurement for financial institutions. It became increasingly evident that market figures were more appropriate and readily available for making investment decisions.

The SEC supported the FASB’s 1986 draft of a standard on financial instruments, which would introduce market-value-based accounting. In drafting the standard, the FASB insisted on the relationship between accounting, economic theory and market forces.

In 2006, the FASB issued SFAS 157, “Fair value measurements,” because there were different definitions of fair value and few guidelines to clarify the concept. The guidelines were scattered throughout various standards, giving rise to confusion and, in some cases, inconsistencies.

The purpose of the standard was to improve the consistency and comparability of various fair value measurements, and to expand the disclosures reporting companies had to make in their financial information regarding these measurements.

NIF B-17: Fair Value Measurement

1. Definition

The draft of the standard issued by the CINIF for review and commentary this past year, in paragraph 30.1, defines fair value as “the price which, on the valuation date, would be received for selling an asset or would be paid to transfer or settle a liability in an orderly transaction between market participants; in other words, between independent, interested, willing and informed parties, in a free-market transaction.”

To better understand this definition, we must break down its elements. In the following paragraphs we will examine some of the characteristics and situations that should be taken into account to determine fair value.

a) Assets and liabilities

Companies must measure the fair value of each specific asset or liability. Therefore, the measurement must take into account attributes specific to the asset or liability. For example, the condition or location of the asset or liability, and any restrictions that might exist on the sale or use of the asset on the measurement date. The asset or liability could be an independent asset or liability (for example, a financial instrument or operating asset), or a group of assets or liabilities (for example, a set of assets, a reporting unit or a business). The unity of the asset or liability is determined by whether it is independent or part of a group of assets or liabilities. The accounting unit determines what is being measured by reference to the level on which the asset or liability is consolidated (or broken out) for the purposes of applying other accounting pronouncements.

b) Orderly transaction between market participants

The definition of fair value assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell an asset or transfer the liability on the measurement date. An orderly transaction is one that assumes exposure to the market or a period prior to the measurement date so that market activities are normal and usual for transactions involving those assets and liabilities. In other words, that it is not performed under duress (for example, a forced liquidation or foreclosure). The transaction to sell an asset or transfer a liability is a hypothetical transaction on the measurement date, considered from the perspective of the market participant that owns the asset or owes the liability. Therefore, the objective of fair value is to determine the price that would be received for selling the asset, or which would be paid for transferring the liability, on the measurement date–in other words, an exit price.

Similarly, measurement at fair value assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or, in the absence of a principal market, the most advantageous market for the asset or liability.

The principal market is the market on which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability.

The most advantageous market is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received for the asset or minimizes the amount that would be paid to transfer the liability, considering transaction costs in the respective market(s). In either of these two cases, the principal (or most advantageous) market is considered from the perspective of the reporting entity, which means different values may be reported by entities engaged in different activities.

If there is a principal market for the asset or liability, the measurement at fair value would represent the price from that market (whether the price is directly observable or otherwise determined by a valuation technique), even if the price on a different market were potentially more advantageous as of the measurement date.

The fair value of the asset or liability would be determined based on the assumptions the market participants would use to set the price of the asset or liability. In developing those assumptions, the reporting identity does not need to identify the specific market participants. Instead, the reporting entity must identify the characteristics that distinguish the market participants, generally considering factors specific to: a) the asset or liability, b) the main (or most advantageous) market for the asset or liability, and c) the market participants with which the reporting entity would trade in that market.

2. Valuation techniques

To measure fair value, the valuation techniques applied must comprise either the market approach, the income approach, or the cost approach. The main aspects of each one of these are as follow:

Market approach. The market approach uses prices and other material information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques comprising the market approach often use market multiples derived from a set of comparable metrics. Multiples may be presented in ranges, with a different multiple for each comparable. It may be that judgment must be applied in choosing where, within that range, the appropriate multiple falls, considering factors specific to the measurement (both quantitative and qualitative). Valuation techniques comprising the market approach include matrix pricing. Matrix pricing is a mathematical technique used primarily to determine the value of debt instruments without depending only on prices quoted for the specific securities, but rather relying on the securities’ relationship to other benchmark quoted securities.

Income approach. The income approach uses valuation techniques to convert future amounts (for example, cash flows or profits) into single present amounts (discounted). The measurement is carried out based on the value indicated by current market expectations regarding those future amounts. These valuation techniques include present value techniques; option pricing techniques like the Black-Scholes-Merton formula and the binomial model, which incorporate present value techniques, as well as the multi-period excess earnings method, which is used to measure the fair value of certain intangible assets.

Cost approach. The cost approach is based on the amount that would normally be needed to replace the service capacity of an asset (also called current replacement cost). From the point of view of a market participant (seller), the price that would be received for the asset is determined based on the cost for a market participant (buyer) to buy or build a replacement asset of comparable profit, adjusted for obsolescence. Obsolescence incorporates physical deterioration, functional (technological) obsolescence and economic (external) obsolescence. It is broader than depreciation, for financial information purposes (an assignment of historic cost) or for tax purposes (based on a specified useful service life).

To measure fair value, the valuation technique selected must be the one most appropriate under the circumstances and the one for which there is sufficient information. In some cases, only one valuation technique will be appropriate; in others, multiple valuation techniques are preferred. If technical valuation multiples are used to measure fair value, the results should be evaluated and weighted, as appropriate, considering the fairness of the range indicated for those results.

Valuation techniques used to measure fair value must be applied consistently. However, if it is appropriate to change a valuation technique, or if its application results in a measurement that is equal to or more representative of fair value, a change in valuation technique is acceptable. This may be the case if, for example, new markets arise, new information becomes available, the information used formerly is no longer available, or valuation techniques improve.

a) Input data for valuation techniques

Input data refer generally to the assumptions that market participants will use to set the price of an asset or liability, including assumptions about risk; for example, the inherent risk in a specific valuation technique used to measure fair value (like a price setting model) or the inherent risk in the input data for valuation techniques.
Input data may be observable or non observable:

Observable input data reflect the assumptions that market participants would use to set the price of the asset or liability, developed on the basis of market information obtained from sources independent of the reporting entity.
Non observable input data reflect the assumptions of the reporting entity itself regarding the assumptions market participants would use to set the price of the asset or liability, developed on the basis of the best information available under the circumstances.

Valuation techniques used to measure fair value must maximize the use of observable input data and minimize the use of non observable input data.

3. Fair value hierarchy

To improve the consistency and comparability of fair value measurements, the fair value hierarchy prioritizes input data for valuation techniques used to measure fair value, on three broad levels. The fair value hierarchy assigns highest priority to quoted (unadjusted) prices on active markets for identical assets and liabilities (Level 1), and the lowest to non observable input data (Level 3).

The availability of relevant input data for the asset or liability, and the relative reliability of the input data, may affect the selection of appropriate valuation techniques. However, the fair value hierarchy prioritizes input data for the valuation techniques, not the valuation techniques themselves. For example, a fair value measurement that uses the present value technique may fall under Level 2 or Level 3, depending on the input data that are important to the measurement as a whole and the level on the reasonable value hierarchy those input data fall under.

a) Level 1 input data

Level 1 input data are quoted (unadjusted) prices in an active (liquid) market for assets or liabilities identical to those the reporting entity is capable of accessing on the measurement date. An active or liquid market for the asset or liability is a market in which the frequency and volume of trading in that asset or liability are sufficient to supply price setting information on a continuous basis. A quoted price in an active or liquid market supplies the most reliable information on fair value, and should be used to measure fair value whenever it is available.
In some situations, a quoted price on an active or liquid market may not represent the fair value on the measurement date. This may be the case if, for example, there are material events (principal-to-principal transactions or IPO announcements) after the close of a market and before the measurement date. The reporting entity must establish and apply a uniform policy for identifying the events that may affect fair value measurements. However, if the listed price is adjusted for new information, the adjustment drops to a lower level in the fair value measurement hierarchy.

b) Level 2 input data

Level 2 information is data other than quoted prices included in Level 1, which are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specific contractual term, a Level 2 input data must be observable for substantially all of the term of the asset or liability. Level 2 input data include:
Listed prices for assets or liabilities in active or liquid markets.

Listed prices for identical or similar assets or liabilities on non-active markets; in other markets, markets where trading in that asset or liability is lighter, in which prices are not current, or price quotations vary substantially, or those for which little public information is released.

Adjustments to Level 2 input data may vary depending on factors specific to the asset or liability. These factors are the condition or location of the asset or liability, the degree to which the input data relate to concepts comparable to the asset or liability, and the volume and frequency of activity in the markets where the input data are observed. A substantial adjustment to the fair value measurement as a whole could cause the measurement to fall to Level 3, depending on the fair value hierarchy level under which the input data used to determine the adjustment fall.

c) Level 3 input data

Level 3 input data are non observable data for the asset or liability. Non observable input data may be used for measuring fair value to the extent that observable input data are not available. Therefore, at this level situations are permitted in which there is little or no market activity in the asset or liability on the measurement date. The purpose of fair value measurement remains the same, however; in other words, an exit price from the point of view of a market participant who owns the asset or owes the liability. Consequently, non observable input data should reflect the assumptions used by the reporting entity itself regarding the assumptions that market participants would use for setting the price of the asset or liability (including risk assumptions). Non observable input data must be obtained based on the best information available under the circumstances, which may include data from the reporting entity itself. The reporting entity must not, however, ignore information on the assumptions of market participants that is readily available without undue cost or effort.

4. Conclusions

Given the history and the background of the accounting discipline, the combination and mutual dependence of economics, mathematics and accounting information is inevitable, so fair value measurement may be a response to this combination, or rather the response that regulators have adopted to solve this problem and provide more accurate accounting information.

The evidence compiled in recent academic research by various authors shows that the fair value of assets and liabilities obtained through an observable market (Level 1) relate closely to the relevance and reliability that financial statement information. But for the fair values obtained by other means or markets (Level 2), the results are mixed and indicate that the reliability of the estimates is limited to certain assets and liabilities.

As was proven by Benston (2006) in his paper on Enron, a Level 3 fair value measurement is neither as reliable nor as representative of a company’s situation. Enron had been valuing its energy contracts using Level 3 techniques, and all of those figures had been backed up by the accounting firm Andersen Consulting. The problem was that the financial information was unable to quickly absorb the volatility of those markets, which eventually resulted in a series of explosive ethical and valuation scandals that erupted at the start of this century.

Other difficulties in fair value measurement relate to the following aspects:

• Inefficient markets, or no markets at all.
• When there is no active market, fair value is not representative of prices, so many assumptions must be made to determine it.
• When a market is inefficient, the value of the assets or liabilities may be over- or under-estimated.
• Lack of data.
• Market volatility.
• The implicit shortcomings of valuation techniques.

Finally, there is still no general or widely accepted agreement in the global accounting community regarding the proposal that all financial information be presented at fair value, even though international regulators like the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB) and now the Mexican Financial Reporting Standards Institute CINIF) have made considerable progress in line with this trend.

References:

• Barlev and Haddad. “Fair value accounting and the management of the firm.” 2003. Elsevier Sciences. Journal of Critical Perspectives on Accounting 14.
• Benston, George. “Fair value accounting: a cautionary tale from Enron.” 2006. Journal of Accounting and Public Policy. No. 25.
• Bleck y Liu. “Market transparency and the accounting regime.” 2007. Journal of Accounting Research, Vol. 45, No. 2.
• Carmona, S. 1995. Por los límites de la contabilidad, cited in Tua, J., Evolución y situación actual del pensamiento contable, p. 120.
• CINIF. 2016. NIF B-17: Determinación del Valor Razonable, in <http://www.cinif.org.mx/uploads/NIF_B-17.pdf>.Viewed November 5, 2016.
• FASB. 2016. ASC Topic 820: Fair Value Measurement, in <https://asc.fasb.org/>. Viewed November 5, 2016.
• IASB. 2016. IFRS 13: Fair Value Measurement, in <http://eifrs.ifrs.org/eifrs/bnstandards/en/2016/ifrs13.pdf>. Viewed November 5, 2016.