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Progressive Taxes: An Obstacle to Progress

María Isabel Bernabé

Abstract

Since 1980, there has been a gradual but encouraging reduction of corporate taxes in developed

countries. Nevertheless, the idea of progressive income tax is still widely accepted in these societies. The

aim of this paper is to demonstrate the fallacy of progressive taxation, showing that it not only harms

those who have the most—and who pay higher taxes—but also those with lower incomes who allegedly

benefit from such policies. After presenting a brief history of progressive taxation, both internationally

and in Argentina, the author analyzes the current world situation and concludes that progressive taxes

are an obstacle to progress and a way of punishing efficiency, innovation, and creativity.

Introduction

Governments have levied taxes to meet their expenses since ancient times. Today, nearly every citizen contributes a

percentage of his or her earnings in taxes to cover public spending on security, justice, education, health, and all the other

areas to which resources must be allocated for the normal carrying out of public affairs. 1 But the state must be extremely

careful in drawing up and enacting tax legislation. Taxes should be simple, fair, and nondistortional. They should not

discourage production or burden individuals, corporations, and businesses with complicated and cumbersome systems of

1 “From the elementary tasks of protection against crime or the prevention of the spreading of contagious diseases and other health

services, to the variety of problems which the large urban agglomerations raise most acutely, the required services can only be

provided if the means to defray their costs are raised by taxation.” Friedrich A. Hayek, New Studies in Philosophy, Politics,

Economics, and History of Ideas (Chicago: University of Chicago Press, 1978), pp. 144–145.

JOURNAL of MANAGEMENT for VALUE

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payment. 2 It should be borne in mind that all members of a society are taxpayers even if they have never filed a tax return

and that taxation affects everyone’s real income and wages.

Defining the Problem

There is a widespread belief among tax consultants and academics as well as the media and the general public, that direct

taxes should be progressive. In other words, the more a person has or earns, the more he or she should pay in tax as a

percentage of overall income. 3

The unfairness 4 inherent in this notion of progressive taxation can be demonstrated through a simple example. In a

proportional tax system with a single rate of 20%, a subject whose taxable income is $100 will pay $20 in tax, while

another whose taxable income is $1,000, will pay $200. Both individuals will thus have 80% of their profit left to invest in

their business or to spend as they like. On the other hand, if the tax is progressive and the higher rate is 35%, the

individual whose taxable income is $1,000 will pay $350 in tax and will only have 65% left to invest.

2 “Justice: one of the four cardinal virtues that inclines people to give to others that which they are entitled to or that which belongs to

them.” Diccionario de la Real Academia Española, 22 nd ed. (2001). “Justice is the moral virtue that inclines us to give others what

belongs to them as their own.” Antonio Peinador Navarro C.M.F., Tratado de moral profesional, 2nd ed. (Madrid: Biblioteca de

Autores Cristianos, 1969), p. 74.

3 “Taxes are necessary. But the system of discriminatory taxation universally accepted under the misleading name of progressive

taxation of income and inheritance is not a mode of taxation. It is rather a mode of disguised expropriation of the successful capitalists

and entrepreneurs.” Ludwig von Mises, Human Action: A Treatise on Economics (Auburn, AL: Ludwig von Mises Institute, 1998), p.

803.

4 “Equity and justice are closely related. While not absolutely identical, they belong to the same genus and are both morally good.

What is equitable is just, in one sense, but in another sense it is higher than what is just since equity is the principle applied to correct

justice when it errs.” Aristotle, Nicomachean Ethics, book V chapter 10. Summary available from

http://www.cliffsnotes.com/WileyCDA/LitNote/AristotlesEthicsBookVSummariesChapterXEquityandJustice.id

21,pageNum61.html .

http://www.cliffsnotes.com/WileyCDA/LitNote/Aristotle-s-Ethics-Book-V-Summaries-Chapter-X-Equity-and-Justice.id-21,pageNum-61.html


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Whether taxes are proportional or progressive, the person or company that earns more pays more. What is unfair,

however, about progressive taxation is that it increases the percentage paid by higher earners. It is a way of punishing

efficiency based on a distorted view of justice, fairness, and individual rights. As such, it is just one of the many legacies

of the socialist era (in addition to tax on presumed profits, land reform, and export taxes, to name just a few) whose

purpose was and still is ultimately to seize income and capital from taxpayers in the name of “social justice.” 5

The extent to which the term “social justice” has been abused cannot be stressed enough. In practice, it has served as a

pretext to confiscate wealth from its rightful owners and redistribute it at the government’s own discretion in the form of

subsidies or sinecures. Those governments that claim that they have a right to do so forget that lawful income belongs to

the person who earned it: the right of private property is inherent in the very nature of man, so it is inalienable.

“Social justice,” then, is no justice at all unless everyone is equal before the law. In modern societies, where everyone has

the opportunity to climb the social ladder through their own efforts, justice can only apply to individual people and

companies, not to society as a whole. This is what is meant by blind and universal justice.

Just as there cannot be one justice for the rich and another for the poor, it cannot be fair to take the money that

entrepreneurs have earned through hard work and inventiveness, risking their own capital, and hand it over to others who

have done nothing to deserve it. The social mobility of the market economy allows today’s poor to become tomorrow’s

rich. This is impossible in a centrally planned socialist economy where the poor cannot escape poverty through their own

efforts, nor aspire to a better life in either a material or a spiritual sense.

The Franciscan monks of the fifteenth century were in some ways forerunners of this market economy philosophy. 6

Although the Franciscans were a mendicant order, one of their best known sayings was “charity helps others to survive,

5 “Social justice is nothing but an expression of the natural duty we all have to contribute to the good of the community. Hence, it

should not be confused with legal justice or any of the classic types of justice. Nor is it a new species. It is a common attribute, which

applies to all of them and even to the socalled social virtues.” Peinador, Tratado de moral, pp. 82–83.

6 “Some of the roots of classical liberal thought, Dr. Chafuen shows, lie in Spain, in the great Spanish Late Scholastics, particularly of

the Salamanca school. Through Protestant writers like Samuel Pufendorf (1632–1694), some of the arguments of the Salamanca

school appeared in the course of study Francis Hutcheson established for Adam Smith, and the latter from time to time alluded to them


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but not to live, because living means producing and alms do not help us produce.” 7 In a market economy everyone is at

least free to try, and at least some will experience the true satisfaction of having succeeded in life on their own merits.

Development

One area of the world where governments have constantly found new ways to confiscate private property in the name of

“social justice” and the fair distribution of wealth is Latin America. But in order to redistribute wealth, we must first

create it: we cannot distribute what we do not have or what does not exist. Unfortunately, there is no other way to create

wealth except through innovation, investment, production, and work. History offers us compelling evidence of this. If we

examine different attempts to improve the living conditions of the population at large, we find that economic liberalism

has helped create more wealth and general welfare for humanity as a whole than any other system.

The history of developing countries is full of examples of inefficient redistribution of wealth, giving rise not only to

injustice but to the suspicion of corruption. 8 Taking from some to give to others always creates difficult relationships

in his works. In fact, the perceptions and formulations of the Salamanca school helped to establish the broad tradition and the

‘common sense’ to which British liberals loved to appeal, portraying themselves, not as revolutionary thinkers, but as systematizers of

the common experience of the ages.” Michael Novak, foreword to Christians for Freedom: LateScholastic Economics, by Alejandro

Chafuen (San Francisco: Ignatius Press, 1986), p. 9.

7 “St. Francis of Assisi was an economist as a young man; he knew the situation of the common people and understood that the best

way to help the poor was not through welfare, but through production. And I discovered one of his sayings only three or four months

ago: alms… to produce.” Stefano Zamagni, “¿Cuál es el modelo de democracia para el desarrollo económico?” ACDE Forum

(Christian Association of Business Executives), Buenos Aires, September 2, 2005.

8 “There is no such thing as a just and fair method of exercising the tremendous power that interventionism puts into the hands of the

legislature and the executive. The advocates of interventionism pretend to substitute for the—as they assert ‘socially’ detrimental—

effects of private property and vested interests, the unlimited discretion of the perfectly wise and disinterested legislator and his

conscientious and indefatigable servants, the bureaucrats. In their eyes the common man is a helpless infant, badly in need of a

paternal guardian to protect him against the sly tricks of a band of rogues… Unfortunately the office holders and their staffs are not

angelic. They learn very soon that their decisions mean for the businessman either considerable losses or—sometimes—considerable

gains. Certainly there are also bureaucrats who do not take bribes; but there are others who are anxious to take advantage of any ‘safe’


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between the social actors involved. Even when governments act with the best of intentions, the question still remains: who

is best suited to decide who should give and who should receive and where the limits should be set. Progressive taxation is

just one way governments confiscate hardearned private assets in order to redistribute them in illdefined ways.

In Latin America, much of this wealth is squandered by the state in maintaining inefficient bureaucracies. But even if this

were not the case, why would the state be more efficient at eliminating inequalities than the private sector? Many of

humanity’s great works have been financed with private capital. All over the world, countless people have donated part of

their private fortunes to set up projects, foundations, schools, universities, research institutes, museums, etc., thereby

improving the quality of life of others. In general, these improvements have been achieved more cheaply and efficiently

than if they had been paid for with public money. 9

The error lies in the fundamental idea behind “social justice,” namely, that if one party gains, the other must lose. This is a

zerosum fallacy because the economy is dynamic and not static. Wealth is only created through effort, savings, and

personal dedication—and it must be created every day. The healthiest and most rewarding approach for everyone is for

people to create their own wealth with the means at their disposal. This means undertaking projects and initiatives, taking

risks, and using all of one’s intelligence and inventiveness to get ahead.

It is thus naive to assume that the wealth of some causes the poverty of others or that tax policies can help the poor by

punishing the rich. Wealth creation and capital investment only occur in those sectors of the economy that are capable of

saving and investing. This is the only way to create more jobs and more wealth, and it is the only way out of poverty for

countries whose economies are stagnating or still developing.

opportunities of ‘sharing’ with those whom their decisions favor… Corruption is a regular effect of interventionism.” Ludwig von

Mises, Human Action: A Treatise on Economics, vol. 3, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund), pp. 734–736.

9 “Still another, perhaps surprisingly, was an explosion in charitable activity [in the United States]. This explosion was made possible

by the rapid growth in wealth. It took the form it did—of nonprofit hospitals, privately endowed colleges and universities, a plethora

of charitable organizations directed to helping the poor—because of the dominant values of society, including, especially, promotion

of equal opportunity.” Milton Friedman and Rose Friedman, Free to Choose (New York: Harcourt Brace Jovanovich, 1980), p. 133.

In Argentina, it is easy to find schools, parish halls, museums, and so forth built by individuals and private capital, mostly during the

first half of the twentieth century.


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Paradoxically, although the intention of progressive taxation is to benefit people with lower incomes, the real effect is

exactly the opposite. The more tax employers have to pay, the less capital they have to invest. Consequently, they are

unable to create more jobs to meet increased demand from lower income groups that pay less tax and so could consume

more. It is a fallacy, then, that progressive taxation gives people with fewer resources more spending power. Even if it

were true that progressive taxes help maintain jobs and purchasing power at a high level and so make lowerincome

groups more willing to spend, employers would still have to invest to meet this demand. Obviously, they cannot do so

while a large percentage of their profits disappear in taxes.

In addition, progressive taxes distort the efficiency with which companies use economic resources, creating a disincentive

to work and take risks. Thus, the real result of low production and high demand is often to create inflation. In fact, the

current threat of inflationary processes in some Latin American economies combined with progressive taxation means that

the impact of tax on the total price of products is increasing both in relative and in absolute terms.

As mentioned earlier, a large percentage of the money obtained through progressive taxation is wasted on bureaucracy

and rarely benefits those people most in need. If this money were left in private hands, the authorities would still be able

to collect the same amount in taxes simply because of the additional wealth that would be created by investment.

Certainly, the results of such a policy would be felt gradually and, in the meantime, governments might have to make

unpopular decisions to cut public spending; but the history of Latin America has been mostly one of sacrificing longterm

economic growth to shortterm political expediency.

In short, the capitalization rate of the economy helps create wealth and has a multiplier effect on the economy. It is the

engine of growth, resulting in benefits for the country as a whole and all its inhabitants. Increasing taxes in general and the

top rates of tax in particular results in a reduction in the quantity of goods offered, and hence an increase in price due to

the reduction in overall productivity resulting from the reallocation of resources.

As we know, resources are scarce, and the main purpose of economic policy is precisely the optimal allocation of

resources to meet a large number of human needs. Therefore, increasing the tax per unit of a product by diverting

production factors, which are always in short supply, from areas preferred by consumers toward areas chosen by political

authorities, inevitably leads to a reduction in overall productivity. Moreover, because wages depend on the prevailing


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capital structure, progressive taxes quickly become regressive to the extent that they depress income and wages by

reducing capitalization or investment.

Another argument often put forward to justify progressive taxation is that it tends to reduce the disparity in living

standards between the very rich and the very poor. In fact, this simply increases the chances that marginal workers will

remain unemployed.

A Brief History of Progressive Taxes

In the early nineteenth century, customs tariffs and consumer taxes were the main source of financing for large nations.

However, a series of poor harvests leading to one of the worst famines on the continent of Europe in the midnineteenth

century eventually led to the introduction of progressive taxes in Britain in 1902.

The initial reaction to this measure was a widespread rise in tariffs as European countries sought to increase exports of

manufactured goods in order to offset the pressing need to import food. This brought about a chain reaction of spiraling

tariffs and plummeting growth that, along with a series of political conflicts, led to the First World War. Between 1914

and 1918, most of the European countries began to apply progressive rates as a way to finance war since income from

tariffs had passed the point of diminishing returns.

The United States introduced progressive taxation in 1913. The Sixteenth Amendment to the Constitution, which

sanctioned this measure, was passed by Republican William Howard Taft’s government only weeks before Democrat

Woodrow Wilson took office as president. The law establishing the Federal Reserve, also passed later that year, fixed the

relationship of the dollar to gold. That year, income tax came into force with a ceiling rate of 7% on the highest levels of

income, reaching 77% in 1918 after America’s entry into the First World War the previous year. In 1920, this rate was

reduced to 30% by the HardingCoolidge tax cuts, but by 1929 it had climbed back to 62.2% for incomes exceeding

$100,000.

With the stock market crash of October 29, 1929, and the worldwide economic downturn that followed, countries tried to

balance their budgets by raising taxes again, thereby deepening the depression. Further attempts by different countries to


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balance their budgets led to a series of devaluations, starting with Britain in 1931. Roosevelt devalued the US dollar in

1934 in the hope that this would put an end to the Depression. However, this did not produce the expected result. In fact,

once the wage and price controls imposed during World War II were lifted, postwar inflation quickly eliminated the

artificial effects of the 1934 devaluation.

On June 5, 1947, George Marshall, United States secretary of state, delivered a historic speech at Harvard University in

which he urged his countrymen to assist in the reconstruction of a Western Europe devastated by war. His initiative was

approved by Congress and a program for European reconstruction, known as the Marshall Plan, brought $13,300 million

to Europe between April 1948 and June 1952. It was an extraordinary act of charity. But it does not detract from

America’s generosity to point out that European prosperity would not have materialized so effectively without the

unexpected resurrection of the German economy under Ludwig Erhard, Konrad Adenauer’s minister of economic affairs

and the man behind the socalled “German miracle.”

Strictly speaking, however, the “German miracle” was no miracle at all but rather a result of the systematic application of

a series of economic policy measures, guided by free enterprise and deregulation. 10 Erhard was the architect of the free

market, giving the state one role only: that of creating mechanisms and incentives for savings and investment. Among his

priorities was the reduction of taxes. He argued that reducing tax rates would produce greater revenue, thereby

anticipating Laffer and his famous curve by more than thirty years. 11

10 “This was dramatically demonstrated in West Germany in 1948, when the actions between June 20 and July 8 of Economic Minister

Ludwig Erhard in simultaneously halting inflation, introducing a thoroughgoing currency reform, and removing the strangling

network of price controls brought the German ‘miracle’ of recovery. As Dr. Erhard himself described his action: ‘We decided upon

and reintroduced the old rules of a free economy, the rules of laissezfaire.We abolished practically all controls over allocation, prices

and wages and replaced them with a price mechanism controlled predominantly by money...’ It is sometimes claimed that it was

Germany’s share of Marshall aid that brought on the recovery. But nothing similar occurred in Great Britain, for example, which

received more than twice as much Marshall aid.” Henry Hazlitt, The Conquest of Poverty (New Rochelle, NY: Arlington House,

1973), pp. 168–169.

11 The Laffer curve got its name at a luncheon with Arthur B. Laffer, Donald Rumsfeld, and Dick Cheney in the Washington Hotel in

Washington, DC in December 1974 and was popularized by Jude Wanniski’s article, “Taxes, Revenues and the Laffer Curve,”

published in the Public Interest in 1978. The luncheon was held at a time when President Ford was discussing new tax increases and


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Erhard’s policy of abolishing price controls, subsidies, and the whole apparatus of central planning bore its fruits in the

spring of 1949, when prices started to fall while employment, exports, and reserves rose. This policy was not easy to

implement. Strong political endorsement was needed at first; the measures adopted were unpopular and were bitterly

opposed by labor unions. But finally the policy succeeded and Germany became the most prosperous nation in Europe. It

is true that the rest of Europe also resurfaced from the rubble; but Germany was exceptional because it had been the

country most devastated by war. The German example thus underscores the importance of economic freedom. It also

shows that successful economic policies depend on continued political support if they are not to be undermined by lobbies

and pressure groups or fall prey to pessimism as a result of initial setbacks, which are almost inevitable.

Nevertheless, Keynesian economic ideas and the changes in the world economic system after the Bretton Woods

Agreements of 1944, along with the expansion of the welfare state in different countries, led to a continual rise in public

spending and ever higher tax burdens to meet the cost structures involved. When the United States, followed by the rest of

the developed world, abandoned dollargold parity in 1971, the crisis led to currency floating in which currencies were no

longer linked to anything real. This contributed to the oil crisis in 1973, which raised the price of crude oil to levels

consistent with the new exchange rate parity.

During this period, almost every developed and developing country applied progressive tax rates following the

recommendations of Keynesian economists who headed the International Monetary Fund and the World Bank. It was not

Laffer drew a curve on a napkin linking the tax rate to the level of revenue. The Laffer curve shows that initially tax revenue increases

as the tax burden increases. The peak of the curve represents the tax rate that will maximize revenue. Beyond this point, a greater tax

burden will actually cause revenue to decrease. Laffer called this area of the curve “the prohibitive zone.” The Laffer curve is thus the

law of diminishing marginal returns applied to tax policy.


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until the 1980s that there was a return to sanity. The tax cuts pushed through by Ronald Reagan between 1981 and 1988,

reducing marginal tax rates from 50% to 28%, were seen by the world as a step in the right direction.

Current Situation

More recently, developed countries have gradually reduced corporate taxes. This began in the United Kingdom when

Margaret Thatcher’s government reduced corporate tax from 52% to 35% between 1982 and 1986. This decision forced

many countries in the developed world, including most European Union countries, the Group of Seven industrialized

nations, the giant AsiaPacific block, and some Latin American countries, to follow suit in a bid to remain competitive.

Source: KPMG International 2006

According to a study by KPMG International, the European Union’s average marginal rate fell from 38% to 25.8%

between 1993 and 2006. This trend accelerated after ten new member states, eight of them from Eastern Europe, joined

the European Union 2004. In fact, Germany reduced its rates from 59.7% in 1993 to 38.3% in 2006, mainly as a result of

the increased competition.

Within the European Union, the best example of how fiscal cuts have helped to stimulate the economy is Ireland. When

Ireland joined the European Union in 1973, it occupied the bottom position and continued to suffer from economic

0

10

20

30

40

50

Total AsiaPacific EU G7 Lat OECD

Percentages

Global tax rates grouped by regions (19932006)

1993 tax rates 2006 tax rates


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stagnation until the end of the 1980s. But a gradual reduction in the corporate tax from 40% in 1993 to 12.5% in 2006

attracted a huge influx of foreign capital for investment and immigration. The result was that the Irish economy began to

contribute more to the European Union than it received from it; growing at rates of up to 12% per annum, although

currently this has decelerated to 2.5% per annum due to competition from Eastern European countries. Thus, Ireland

became one of the most prosperous countries of the 1990s. However, most European Union countries—especially Eastern

European countries—cut taxes to some extent between 1993 and 2006.


Among the countries of the Group of Seven, the average marginal rate fell from 46% to 36.5% during the same period.

Indeed, except for the United States and France, all G7 members reduced taxes, the most significant cases being Germany,

Italy, and Japan. Japan cut taxes from 52.4% to 40.7%; Canada lowered taxes from 44.3% to 36.1%; and the United

Kingdom made a small reduction from 33% to 30%.

0

10

20

30

40

50

60

Ireland Germany Austria Portugal Italy Poland Cyprus Hungary Slovakia

Percentages

EU countries with the largest taxrate reductions (19932006)

1993 average rate 2006 average rate


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For other countries of the OECD, the average marginal rate was 28.5% in 2006, as compared to 34% in 1993. The

economies of the Scandinavian countries (Denmark, Sweden, Norway, Finland, and Iceland) have all grown remarkably,

thanks partly to these reductions and Iceland now has the third lowest rate in the OECD.


0 10 20 30 40 50 60

Canada France Germany Italy Japan UK USA

Percentage

s

Tax rates in G7 countries (19932006)

1993 average rate

2006 average rate

0

10

20

30

40

50

60

Denmark Sweden Norway Finland Iceland Luxembourg Belgium

1992

1993

1998

1996 2002

Percentages

Tax rates in other OECD countries (19872006)

Years 2006 tax rates

1987 1992


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On the other hand, countries of the Asian Pacific area have shown more modest reductions (32.6% to 30% on average).

Moreover, these cases are hard to compare as only two countries were included in the 1993 statistics, as compared to

nineteen in 2006. The most significant decreases in taxation were in the cases of Bangladesh, Vietnam, Singapore, and

Australia.

Source KPMG International 2006

Finally, Latin America reduced corporate taxes on average from 34% to 28.5% during the same period (1993–2006).

However, while Mexico reduced its rate from 34% to 29%, Brazil and Argentina actually increased theirs from 25% to

34% and from 30% to 35%, respectively.

Argentina

Since the beginning of the twentyfirst century, Argentina’s fiscal measures, particularly its recent handling of

commodities, have been more in line with those of the new “socialist democracies” of Latin America than with the rest of

the developed world. This can only damage still further the competitiveness of Argentina’s economy. And yet, if

Argentina reduced the rate of income tax by only five percentage points, from 35% to 30%, this would represent a

significant savings for taxpayers—approximately two billion pesos per year—and would have an astonishing multiplier

effect, both for the private sector and the state itself.

0

10

20

30

40

Australia Bangladesh Vietnam Singapore

Percentages

AsiaPacific countries with significant taxrate reductions (19972006)

Year 2006 tax rate

2000 1997

1999

2000


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In the context of globalization, it is crucial for Argentina to implement measures to encourage capital investment. The key

issue is to provide security and legal certainty, along with clear and stable rules that do not substantially modify

entrepreneurial risks foreseen by investors. In fact, taxes are part of this security since it is not possible to plan

profitability if taxes and tax rates keep changing without warning. Entrepreneurs need a predictable longterm horizon and

to adjust their projects accordingly. If this can be achieved, then reducing the rate levied on corporate profits would make

this country an attractive opportunity for foreign investment, especially with the current international demand for

Argentine products and goods, which nobody could have imagined only a few years ago.

Unfortunately, Argentina has a long history of arbitrary taxation. Income tax was first introduced by Assistant Finance

Secretary Dr. Raul Prebisch, during the government of General Agustin P. Justo in 1932. Prebisch’s socalled Emergency

Decree Law on Revenues, which was supposed to last for just two years, is still in effect today. 12 Over the years, tax rates

have risen gradually without the principle of progressive taxation ever being subject to review. This is perhaps not

surprising when one considers that over the past eightyfive years nearly all of Argentina’s governments have followed

populist policies of one kind or another.

In my opinion, now is the ideal moment for economic change. After the 2001 crisis, economic policy measures

prioritizing the free market economy could have set Argentina back on track to becoming the country it seemed destined

to be in the early twentieth century. But ideology is often more persuasive than common sense. The damage done to

society by assuming that the state must decide how much a producer should earn and by creaming off the surplus with

distortional taxes is the clearest manifestation of misappropriation, while discouraging homegrown investors and driving

away foreign ones. It is the fear of private enterprise, the eagerness to keep everything under control, as if state officials

12 “In January 1932, Argentina’s de facto government passed a decreelaw introducing personal income tax. This decree was

confirmed (with certain changes) as Law 11,586 by the Argentine Congress in June 1932 and backdated to January 1 of that year. A

scheduler system similar to the British model of income tax was adopted: revenues were classified into various categories, each

category, or schedule, had its own rates and losses in one schedule could not be offset by gains in another. The system is

complemented by an overall progressive tax once individual income exceeds a certain annual amount. Established as a ‘national

emergency’ tax for a specified period (until December 31, 1934), it only remained in force for a few months and was replaced in

December 1932 by Law 11,682. The latter introduced the Prussian model of unitary tax on the taxpayer’s total net income and was to

remain in force in spite of many modifications until 1973.” Alberto Benegas Lynch (h) and Roberto Dania, “Sistemas tributarios: un

análisis en torno al caso argentino,” CIEDLA, (August 2000): pp. 53–54.


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were visionaries or superior beings who see beyond ordinary mortals and know what people should do to look after their

own interests better than they do.

Ethical Considerations

When implementing progressive taxes, the state assumes that the people or companies with higher incomes should

contribute more as a matter of “social justice.” What should be borne in mind, however, is that this income is the private

property of those that have earned it. To assume otherwise is to criminalize success—and, of course, if we treat people as

criminals, they will either behave as such (through tax avoidance) or go elsewhere (leading to a brain drain).

On the other hand, if we implement a system that encourages people to enter the market and compete in the belief that

honest hard work is of the highest ethical value, then these people are much more likely to operate within the framework

of the law. In this sense, civil society and the state exist to serve the individual, and not the other way around. Only if the

individual fails to live up to these high expectations should the state intervene, through the administration of justice, to

ensure that the law is enforced.

In other words, people should be free to pursue their own individual goals. The state should not interfere. Rather, it should

allow for expressions of true solidarity, which can never be imposed, where each person is free to decide how to be

generous towards others. 13 It is not the state’s role to decide how much tax different citizens should pay to remedy the

needs of the poor; it is citizens themselves who can and should do so freely out of charity towards their neighbors.

13 “Entrepreneurial impetus and creativity also manifest themselves in the field of assistance to needy neighbors after a systematic

search for and screening of the needs of others. So the coercion of the state or the welfare state neutralizes and largely precludes the

exercise of enterprise search for peremptory situations of human need and helping fellow human beings in difficulties (including those

not so close to us), stifling the natural yearning for solidarity and cooperation which is so important for human beings.” Jesús Huerta

de Soto, preliminary study in Creatividad, capitalismo y justicia distributiva, by Israel M. Kirzner (Barcelona: Ediciones Folio,

Biblioteca de Economía, 1997), p. 32.


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However, it is the duty of the state to assist the neediest, but not through confiscation of taxpayers’ profits, but with real

money obtained through a fair and austere fiscal policy.

In conclusion, progressive taxation is an evil that must be eradicated if countries are to grow and prosper. Eliminating

progressive taxation is also a way to protect individual liberties. Fortunately, the developed world is now moving in that

direction. In Argentina and other developing countries it is important not to let the moment pass. It is our moral duty to

future generations to take advantage of this historic opportunity to innovate and progress.


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http://revista.libertaddigital.com/impuestosyjusticiasocial1276231807.html (retrieved September 9, 2008).

Benegas Lynch (h), Alberto. “Los impuestos progresivos son regresivos.” Ámbito Financiero, 11 de mayo de 2000.

http://www.hayek.org.ar/Los_impuestos_progresivos_son_regresivos.pdf (retrieved December 8, 2008).

———. “Los impuestos progresivos tienen efectos regresivos.” Tópicos de Actualidad (Centro de Estudios EconómicoSociales,

Guatemala) 19, no. 381 (enero de 1977).

Benegas Lynch (h), Alberto, y Roberto Dania. “Sistemas tributarios: un análisis en torno al caso argentino.” Centro Interdisciplinario

de Estudios sobre el Desarrollo Latinoamericano, CIEDLA (agosto de 2000). Published with other articles under the title Reformas

tributarias en América Latina. Buenos Aires: CIEDLA, 2001. Available at

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Chafuen, Alejandro A. Economía y ética. Raíces cristianas de la economía de libre mercado. Madrid: Ediciones Rialp, 1991.

Friedman, Milton, y Rose Friedman. Libertad de elegir. Madrid: Ediciones Orbis S. A., Biblioteca de Economía, 1983.

Hayek, Friedrich A. Nuevos estudios en filosofía, política, economía e historia de las ideas. Buenos Aires: Eudeba/Temas, 1981.

Hazlitt, Henry. La conquista de la pobreza. Madrid: Unión Editorial, Biblioteca de la Libertad, 1974.

———. “Un impuesto que castiga el progreso.” Newsweek, 5 de abril de 1954.

Kirzner, Israel M. Creatividad, capitalismo y justicia distributiva. Barcelona: Ediciones Folio, Biblioteca de Economía, 1997.

KPMG International. “Corporate Income Tax Rate: A Trend Analysis.” (2006). www.bpb.de/files/H7INZU.pdf (retrieved September

7, 2008).

———. “La competencia global lleva a los países a tratar de crecer mediante una reducción de los impuestos.” Press release dated

November 1, 2006. http://www.kpmg.com.ar/pdf/prensa/comunicados/2006/Gacetilla_de_impuestos.pdf (retrieved September 9,

2008).

http://revista.libertaddigital.com/impuestos-y-justicia-social-1276231807.html

http://www.hayek.org.ar/Los_impuestos_progresivos_son_regresivos.pdf

http://www.hayek.org.ar/Libertas_33_Sistemas_tributarios.pdf

http://www.bpb.de/files/H7INZU.pdf


18

Laffer, Arthur B. “The Laffer Curve: Past, Present and Future.” Heritage Foundation (June 1, 2004).

http://www.heritage.org/Research/Taxes/bg1765.cfm (retrieved September 7, 2008).

Mises, Ludwig von. “Desigualdad de riqueza e ingresos.” Translated by Hernán Alberro. Fundación Atlas por una Sociedad Libre.

http://www.atlas.org.ar/economia/mises.asp (retrieved September 9, 2008).

———. La acción humana. 3ª ed. Madrid: Unión Editorial S. A., 1980.

———. “Liberalismo.” In Obras maestras del pensamiento contemporáneo. Barcelona: Editorial PlanetaDe Agostini, 1994.

———. Sobre liberalismo y capitalismo. Madrid: Biblioteca de Economía, Unión Editorial, 1996.

Peinador Navarro, Antonio C.M.F. Tratado de moral profesional. Madrid: Biblioteca de Autores Cristianos, 1969.

Samuelson, Paul A. Curso de economía moderna. 11 a ed. Madrid: Biblioteca de Ciencias Sociales, Aguilar Ediciones, 1964.

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(retrieved September 7, 2008).

Wanniski, Jude. “En torno a la gran depresión.” En defensa del neoliberalismo. http://www.neoliberalismo.com/depre.htm (retrieved

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http://www.neoliberalismo.com/hist_eco.htm

19

EVA Theory

Oscar Bravo

Ignacio Gaitán

José Torres

Abstract

The term value added has become fashionable and calculating it is now a priority for managers.

Managers want to know about EVA, Economic Value Added, 1 and its applications, in order to identify

companies in which poor performance affecting their efficiency in the market results in the destruction

of value, and to choose companies that really create value for shareholders. Even though the

acquisition value of companies in Colombia is often calculated without taking into account consistent

performance indicators, successful managers focus on increasing the value of the business and,

therefore, its shares and capital, through a process of value creation with clear objectives. Through

managerial processes, operational decisions are implemented with strategies consistent with generating

longterm value. Management indicators are the measure to implement appropriate corrective

measures. This paper is a brief study of the performance achieved by investing a certain amount of

money in three different ways. In each case profitability and performance over time are measured in

order to determine whether or not there is value creation.

Introduction

Moving from the traditional way of measuring a company’s performance, based on an accounting system, to a more

understandable and comprehensive system that connects the process of measuring results directly with strategy and key

objectives within a broader package, makes it possible to assess more accurately how successful a company will be in the

1 EVA is a registered trademark of Stern Stewart & Co.


20

future. The system referred to in this paper is known as value based management or VBM. To be a successful

entrepreneur in a globalized world, it is necessary to learn what other leaders of various industries are doing worldwide.

The main purpose of a company in a free enterprise system is to help create value: value for consumers, employees,

shareholders, and value (or wealth if you prefer) for society. Everyone in the company must strive to be well informed and

learn proactively to prioritize decisions based on how the levers of value interrelate within the business and their

respective contributions to the overall creation of value.

When the ability to create value is transformed into an objective governing all the activities of a company, this ability may

itself become an important competitive advantage. A company that cannot create wealth will be unable to satisfy

consumers’ needs on a regular basis, to meet the expectations of its partners, or to ensure its sustainability in the future; as

a result, it will be unable to contribute to the country’s development.

A successful management system for creating value is based on two factors: people’s understanding of the purposes of the

company and of what really helps improve performance, and a systematic process that relates performance directly to

business strategy. If we can get the company to create a system, and not just a series of isolated actions or practices, which

align daily activities at each administrative or operational level with the company’s strategic approach, then we will

ensure that all activities in which management and employees engage will lead to value creation. In short, the challenge is

to turn the strategic approach into the art of creating value, positioning the company in the right place in the value chain—

that is, in the right business—with appropriate products and within specified segments and selecting activities that will

truly contribute to the generation of longterm value.

With these goals in mind, and basing our analysis on the lessons in value based management taught by professor Juan

Carlos Cachanosky and the latest literature on the subject, we set out to explain in this paper in simple terms the principles

of value based management and the benefits of understanding and implementing it in a globalized world.

A Change in the Way Businesses Are Managed

Economic globalization has brought profound changes to the way businesses are managed. The main ones are:

EVA Theory

21

• Proposals of market value in an integrated context.

• Use of strategic planning, balanced scorecard, and activitybased cost, ABC.

• Total quality programs, reengineering, just in time, empowerment, etc.

• Organizational changes: targeting business units, markets, and customers.

• Strategic partnerships: mergers, joint ventures, acquisitions, diversification, synergies, and so on.

• The emergence of the Internet and developments in ebusiness and ecommerce.

These changes have had important consequences:

• Knowledge, learning, a broad vision of the world, and rapid decisionmaking are becoming increasingly

important.

• Centralized control over businesses has been lost.

• Flat administrative structures.

• ITCS.

• Governance systems in companies are being redefined.

• Financial information systems require upgrading.

• The criteria for allocating tangible and intangible assets and resources are difficult to handle.

In response to these challenges, value based management has been adopted by most successful companies worldwide and

with surprising results. Without losing sight of purely economic global processes, it is true to say that the generation of

wealth is sometimes emphasized to such an extent that we overlook the importance of people, perhaps forgetting that the

company will be more productive to the extent that staff, consumers, and shareholders feel their expectations are being

met.

In a globalized world, there is a tendency to emphasize wealth for shareholders at the expense of creating comprehensive

value. This ignores the fact that, in many cases, training, fair wages, the welfare of employees in general, and the use of

highquality raw materials generate more value for the company in the long term.


22

The Creation of Wealth and Prosperity in a Country

Value based management—VBM—starts from the principle that companies should create as much wealth and prosperity

as possible. This means that the strategic assets should be managed so as to be worth more than they would be if they

were managed by another management team or by the company’s competitors. Successful management should focus its

efforts on steadily increasing the value of the business over time and, hence, its share capital. In this way, it will create

value (or wealth) not only for shareholders but, in passing, for everybody connected with the company through a change

in corporate culture, making employees think, act, and be rewarded as owners.

The basic objective of value based management is to maximize the wealth of those who gamble on the success of the

business. This objective:

• Interprets investor interest in the company.

• Ensures that scarce resources in the economy are allocated, managed, and relocated in the best possible way;

benefiting customers, employees, and suppliers and maximizing wealth in society as a whole.

Roberto Goizueta, former CEO of the CocaCola Company, explained this concept when addressing his executives at a

meeting in Chicago in November 1996.

Increasing shareowner value over time is the job our economic system demands of us. We live in a democratic capitalist

society, and here, people create specific institutions to help meet specific needs. Governments are created to help meet

civic needs. Philanthropies are created to help meet social needs. And companies are created to help meet economic

needs. Business distributes the lifeblood that flows through our economic system not only in the form of goods and

services, but also in the form of taxes, salaries, and philanthropy.

VBM makes us all think about the creation of value in everything we do each day at every level of the company. By

concentrating our attention on value creation, we generate benefits for all of us, for all those associated with the Coca

Cola Company. We create jobs and job security. We create more career opportunities. We win in the marketplace. We

enjoy ourselves more.

The wealth of people committed to business success is maximized when the optimum difference between the market value

of the company and the value investors have pledged to develop it is achieved. The market value of the company depends

on its ability to generate wealth for the future.

EVA Theory

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Required market risk premium = Market value of the company – Total invested capital

Required market risk premium = Market value of the company – Adjusted book value

In Colombia, value based management has been implemented by companies like Organización Corona. However, for

many large firms and most small and mediumsized enterprises, or SMEs, EVA is something specialized and beyond their

reach—a sophisticated method whose implementation is seen as long and costly, and used only by a few consultants.

What is value based management? Value based management is an integrated management system used to create a

corporate culture of decisionmaking and improve the performance of the company, keeping the best possible balance

between the short and the long term. It seeks to align strategy, policies, goals, and indicators of development,

compensation, organization, processes, people, and systems in order to steadily create value over time.

When VBM works well, managerial processes are based on information and appropriate incentives, and lead to decisions

that create value at all levels of the company. VBM combines beliefs, principles, and processes that make it easier to face

competition in a globalized world. Employees understand the strategic objectives better and wealth is created.

The creation of value is not only part of a company’s mission, but the philosophy behind its everyday work. It is the

framework for everything the company does. This includes maintaining a proactive orientation towards the market,

customers, suppliers, and partners and adopting a philosophy of empowerment, responsibility, knowledge, learning, and

continuous improvement.

A Chain Linking Consumers and Investors

VBM is a tool kit that allows us to understand what creates value in the company and what destroys it. The expression

creation of value is often misunderstood because it has acquired a negative connotation so it is often mentioned as a


24

secondary concept within strategic objectives. Increasing or maintaining market share, maximizing customer satisfaction,

or producing at the lowest cost are all phrases that sound good, but management teams will lack the necessary

responsibility and commitment to carry them through unless they are integrated into the creation of longterm economic

value.

A good strategic approach is necessary but not sufficient to ensure value creation. Depending on the particular

circumstances of a business and the industry to which it belongs, developing strategies to increase consumerperceived

value can lead to value creation in the long term. To achieve this, management must act bearing in mind the three stages

that make the value chain successful.

In a longterm perspective VBM requires us to develop a scheme for creating value that will win the confidence of the

market, supported by an appropriate balance between the maximum return for investors and the interest of other major

players, such as employees, suppliers, and the community in which the company operates.

When investments are made to increase the efficiency of response to the consumer and a differentiation from competitors

has been achieved that the customer is willing to recognize as a premium in the price, the interest of consumers and

investors is aligned and the company creates value. There may also be times in which turning back after making a wrong

investment, may prevent the company from continuing to destroy value. This happened when CocaCola introduced “New

Coke” in 1985. By failing to create a differentiation in the eyes of its customers, and with a greater investment showing no

prospect of improving its operating profit, the company withdrew the new product from the market and immediately

relaunched the traditional product with the label “CocaCola Classic.”

The strategic approach should aim at answering the following question: How can we achieve the objective of creating

value in the long run? And it is in this context that companies must define markets and target customers, clarifying how

they differentiate themselves from their competitors—analyzing their strengths and weaknesses in the economic

environment and the industry in which they operate—and how they will build or increase their competitive advantage

through a successful proposal to the market.

EVA Theory

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The Tools of Value Based Management

EVA

Economic Value Added—or EVA for short—is a useful tool for assessing companies and evaluating management

processes, and is very popular in the business world.

Although EVA and generating value have become equated with development over the last decade, economic and financial

theorists had already been aware of these concepts for quite some time. An early form of EVA was developed by Alfred

Marshall in The Principles of Economics in 1890. According to Marshall, when people commit resources to a business,

their earnings for one year are the excess revenue received over and above their spending on the same business. The

difference between the value of the plant, inventories, etc., at the beginning and end of the year, is considered part of

income or spending, depending on whether there has been an increase or decrease in value. What is left from their

earnings, after interest has been paid on the capital at the current rate, is usually called profit from entrepreneurial and

managerial efforts.

EVA is a variation of what has traditionally been called “residual income or profit,” defined as the result of subtracting

capital costs from net operating profit. The idea of residual wealth appeared with accounting theory in the early decades of

the twentieth century. Initially introduced by Church, in 1917, and subsequently by Scovell, in 1924, it reappeared in the

managerial accounting literature in the 1960s. In an article in Harvard Business Review, Peter Drucker wrote:

Until a business returns a profit that is greater than its cost of capital, it operates at a loss. Never mind that it pays taxes

as if it had a genuine profit. The enterprise still returns less to the economy than it devours in resources… Until then it

does not create wealth; it destroys it. 2

In light of this, we may well ask: Why has EVA appeared only recently? Why has Stern Stewart & Co. spent so much on

advertising and marketing to develop a product with its trademark that is based on a financial and economic theory that is

many years old?

2 www.sternstewart.com


26

EVA is also known as EP or Economic Profit. McKinsey uses this term to avoid problems with Stern’s trademark, but it is

a very similar concept.

The companies get their funding from partners’ contributions, equity, or contributions from third parties, such as

suppliers, employees, the financial system, and so on. Thus the cost of capital is defined as a weighted average of capital

invested by each of the sources of capital at the rate that each has invested in the company.

From this it follows that there are two basic elements for determining whether a company creates or destroys value: ROI,

profitability or return on capital invested, and WACC, the cost of capital invested. Value is created when ROI>WACC. 3

Thus, EVA can be formulated as follows:

EVA = (ROIWACC) * K

= 1 No value creation

>1 Value creation

<1 Destruction of value

Free Cash Flow

Another key component of VBM is free operating and financial cash flow, which measures how much money (cash flow)

the operation of the business makes available to shareholders, when the strategies proposed by management are

implemented, and how surpluses are used or deficits are financed.

Operating and financial cash flow gives a holistic view of the operational and financial performance of the company. By

keeping track of it, we can see how internally generated funds are being consumed and invested, or how operating deficits

are financed by increasing debt or equity. In this sense, its projection allows management and shareholders to establish

3 WACC is the weighted average cost of capital.

WACC ROIC

WACC ROIC

WACC ROIC

EVA Theory

27

adequate policies for investments, debt, and dividends, and to see sustainable growth in the long run.

Free operating cash flow (FOCF) is a better tool than traditional accounting methods for interpreting the real state of a

business. For example, two companies may submit identical net profits but have very different cash flows. Based on their

income statement accounts, the two companies have the same performance, measured in terms of net profits.

EVA can evaluate the performance of a business in the short term. The creation of value and its measurement are based on

a very old concept that is often forgotten because it is so simple and obvious. Over two hundred years ago, economist

Alfred Marshall explained the concept of “economic profit” or “residual income,” whereby a company generates real

value when revenues are sufficient to cover operating costs and the cost of capital committed by investors, whether they

be shareholders and/or lenders. Thus, EVA takes into account all financial costs, unlike the traditional accounting

assessment based on profit and loss, which considers only the financial costs related to debt and does not take into account

the opportunity cost to shareholders. The components of EVA are:

• The amount of resources invested in the operation of the business (investment).

• The return on invested capital (ROIC), obtained in implementing operational strategies formulated by senior

management.

• The cost of capital or opportunity to investors, setting the minimum WACC return they expect to receive for

assuming the risks associated with the operation of the business.

Within this conceptual framework, EVA could be defined as disposable income after all operating costs have been

deducted, including taxes and the opportunity cost of capital, that is, after paying all the productive factors involved in the

development of the business. In other words, investors maximize the value of all the participants in the company when

they try to maximize the residual income belonging to them. To put it in more precise terms: this residual income, or

economic utility, is the result of how well the company has interpreted the needs and expectations of consumers—its

value proposition to the market—and how well it has satisfied the needs and expectations of employees, suppliers,

shareholders, and the community.


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Features and Benefits of EVA

EVA is not a perfect system, but it is consistent with value creation and it is also the most powerful shortterm indicator

when making management decisions.

Benefits

• It is easy to understand.

• It is easy to calculate.

• It is aligned with the objective of longterm value creation.

• It allows easy understanding of historical performance.

• It helps to measure performance for a specific period.

• It helps identify ways in which value creation can be increased, and therefore the employees can understand the

impact of their actions on value creation.

• It facilitates comparisons between different businesses and the ranking of decisions.

Weaknesses

• It does not provide information on trends or help measure the effect of longterm decisions. However, if used in

an analysis of several years, these problems are minimized.

• Although it can be manipulated in a manner similar to accounting performance measurement systems, this can be

prevented with clear guidelines for approving criteria and accounting methods.

• If value creation is measured in terms of EVA at any given moment, there would be a perverse incentive not to

make capital investments because these would appear to destroy value.

Relationship between EVA, Market Risk Premium, and Company Market Value

The great advantage of EVA is that it can be used at all levels of the company and its business units and/or lines. While

senior management’s goal may be to create value measured in terms of EVA, a particular commercial manager’s goal

might be expressed in terms of consumer satisfaction, market share, product quality, or productivity. Also, a

manufacturing manager could focus on EVA in terms of reducing unit costs, cycle time, or the number of defects. Finally,

development managers can apply EVA to assess their work in terms of the time it takes to launch new products, the

number of products developed, and their success in the market compared to their competitors.

EVA Theory

29

How Does Value Creation Increase in the Long Term?

Because economic (or added) value is measured by the difference between the cost of capital and the return on that

capital, the value of the company’s assets or shareholder capital has a real cost in VBM. Following this line of reasoning,

the total value of a company can be seen as the sum of two parts:

• The value of operating assets, assuming the company does not grow. In this case, ROIC = WACC (weighted

average cost of capital).

• The present value of future growth, which in turn depends on the rate of return on invested capital (ROIC) and the

amount of new investment (NI). The behavior of these two variables is closely related to the attractiveness of the

industry in which the company operates and its competitive position.

Growth value depends on the interaction of three components:

1. ROIC>WACC. To the extent that this relationship is maintained, the company generates economic value.

2. The amount of investment or the ratio of operating cash flow after paying taxes that can be invested to earn the

rate of return on invested capital (ROIC).

3. The range of competitive advantage or time n, over which we can maintain the growth rate, that is, ROI>WACC.

The value of a company in terms of generating economic value can also be seen as follows: Because the goal of VBM is

to optimize the economic value of the company, management teams must face and master two kinds of forces in order to

create value.

• External forces: These are the forces of competition, which tend to lower profitability to levels that do not create

value and thus “limit” a company’s period of growth.

• Internal forces: In this case the company itself has a tendency to increase its administrative costs in proportion to

its production and invest capital in activities that do not create value.

Total value of the company = value of the operating assets + value growth


30

Five Ways to Improve and Achieve Value Creation in the Long Term

First, we must improve the scope and results of the operation. To do this, we must first answer some questions. Should we

fight for our market share at all costs or recognize that not all market shares are achieved in the same way? How can we

generate the cash flow necessary to implement our strategy? Should we compete on price?

One way to make an operation efficient is to increase sales without changing costs and expenses, or at least ensure that the

latter grow less than income by improving the efficiency of current assets. Here our aim is to make assets more profitable

without investing more. If we cannot increase the sales volume, we must increase the profit margin on sales by increasing

the sale price, reducing costs, ensuring costs grow at a slower pace than revenue, or by doing all these things

simultaneously. Another solution is to increase the turnover from invested capital in order to generate more revenue

without increasing investment.

How can we manage our balance sheet more efficiently? One way to improve profitability is to invest in business lines or

divisions that generate value and disinvest in those that destroy value. Another measure that would bring about similar

results would be to reduce costs without reducing revenue, or, to put it another way, “doing more with less.” It is always

good to try to apply the maxim that sales are the layer that covers everything.

EVA Theory

31

Return on

invested

capital %

(ROIC)

1. Creates value

2. Neutral

WACC

3. Destroys value

Invested capital

Second, we can increase investment in operating assets that yield a higher return than the cost of capital. As a result,

increased operational utility after tax will outweigh the higher cost of funding, thus increasing EVA.

Third, we can reduce capital investment, while maintaining operational utility, thus obtaining reductions in total funding.

By reducing liabilities we also lower their cost, that is, what is deducted from the utility. Therefore, although the

operational utility remains the same after tax, both the EVA and the company’s assets will increase as the financial cost is

reduced. Measures such as just in time to reduce inventories, timely deliveries, leasing production equipment rather than

buying it, selling real estate not linked to the operation, reducing the period of recovery from customers, or reducing cash

balances all have similar goals.

Many companies create little EVA precisely because instead of optimizing the capital invested, their strategies force them

to continue increasing in size, with major investments in property, machinery, and working capital that do not always

generate sufficient return. Investments are programmed to obtain higher levels of sales that are never achieved. Therefore,

the goal of creating value should not be confused with increasing the size of the company.


32

Fourth, we can reduce the average cost of capital, enabling operating profit to improve due to lower financial cost. This

strategy depends on the evolution of interest and exchange rates in the market, but also on the company’s ability to

negotiate, its insurance coverage, and its credit risk as perceived by financial institutions. Risk reduction and better

bargaining will lower the average weighted cost of capital, thus reducing the firm’s cost of debt as well as the opportunity

cost to shareholders.

Fifth, we can make tax savings through tax planning—decisions that maximize rebates and tax deductions on interest

payments—in order to reduce the weighted cost of capital. For economic groups, this strategy, as well as the wider issues

of tax planning, is often outside the direct responsibility of managers of business units.

Using the Concept of Value Creation in Multiple Situations Facing a Company

The concept of value creation can be used in numerous situations, such as:

• Assessing and monitoring the business.

• Valuation of companies and/or their lines of business, channels, shops, and products.

• Assessment of acquisitions, mergers, or strategic alliances.

• Transfer of lines of business and/or subsidiaries.

• Evaluating investments.

• Product launches.

• Opening of stores.

• Debt policy and changes in capital structure.

• Dividends policy.

• Issuance of debt securities.

• Remuneration of executive staff.

EVA Theory

33

Closing the Virtuous Circle of Value Creation: Key Success Factors to Take into Account to Successfully Implement VBM

The leadership and commitment of senior management are key factors in the success of a company. Top management

should not simply pay lip service to the program, but take a proactive approach, using the means and forums necessary to

set an example for managers and employees and encourage commitment to VBM. By the same token, senior managers

should provide the necessary resources and time required for full implementation of the program.

There should be consistency in the message of value creation throughout the management process. If the company

globally is administered according to the principles of VBM, individual investment projects and operational decisions on a

daily basis should also follow this strategy.

Education and training programs in VBM aimed at managers and officials from the different business processes must also

be designed and implemented. Their implementation should be focused on daytoday business, showing operational staff

how VBM can be used to improve management decisions and influence the amount of value created. We must work hand

in hand with those involved in the operation of the business to identify the key variables in creating value at each level of

the company.

Communication is essential if employees are to understand VBM. In order to be effective, a program of this nature should

follow four rules: repetition, reinforcement, reception, and redundancy. We must be aware from the outset that the

successful implementation of VBM takes time. The transformation of a company is a multifaceted and multidisciplinary

process, involving a number of different stages. We must not create false expectations in terms of obtaining immediate

results at the level of understanding and implementation. Usually, this involves changes in company culture and full

implementation may take between two and five years, depending on the particularities of the company.

The program must have a champion or person accountable to top management. This person will lead the implementation

of VBM, give support, and permanently monitor the progress of the program. It is crucial that essential information, such

as financial statements, is available on time and has a high degree of reliability. Also, the periodic reports that are used for

assessing how the business is developing must be standardized and easy to understand and assimilate. In due course,

revisions to performance and compensation schemes should be guided by results in value creation in order to strengthen

the implementation of VBM.


34

Companies that Have Adopted VBM

VBM is a system of performance that requires training and support as well as staff responsible for its implementation.

However, it is being put into practice more and more by companies with longterm vision.

Opportunity Cost

Opportunity cost is a concept that has acquired different meanings throughout its long history, depending on the school of

economics that has adopted it. For the English school, it is a purely technical concept and refers to the spending needed to

produce goods. For the Austrian school, it is the result of demand because it fixes the level of production in accordance

with buyers’ needs. Opportunity cost is the potential profitability of an investment compared with that of other possible

investments. Interest rate or expected return is what one will no longer obtain if one invests in an asset. In general, it is

what must be waived in order to obtain something else. In other words, the value of the lesser alternative is sacrificed. 4

For the purposes of this paper, we have decided to compare three sectors in Colombia in which money could be

invested—(1) shares listed on the stock exchange, (2) traditional banks, and (3) government debt (known as TES—títulos

de tesorería or treasury securities) with which the government finances public spending. By deciding which of these

sectors is most profitable, we will thus be able to calculate the opportunity cost.

To obtain information about shares, we interviewed doctors Mauricio Botero and Ricardo Durán from Corredores

Asociados, one of the oldest and most prestigious stockbroker and brokerage firms, as well as Dr. Alexander Cárdenas

from Acciones y Valores, another wellknown firm of stockbrokers. They advised us to examine shares from different

sectors and make up a portfolio of shares in companies representing the most dynamic sectors of the country’s economy,

such as construction (TABLEMAC), oil (ECOPETROL), steel (PAZ DEL RIO), and investments (SURAMIN).

The tables below show the average value of these shares over time, from July 2007 to January 2008.

4 Dictionary of economics www.economiacl/aw500.

EVA Theory

35

Forecast for shares listed on the Colombian Stock Exchange Index (IGBC) for 2008

ANNUAL

PERCENT

CHANGE %

9.2 CORREDORES ASOCIADOS

11.1 STANFORT BOLSA Y BANCA

15 SERFINCO

11.8 AVERAGE

Source: Colombian Stock Exchange

Forecast share losses for 2008

4.5 SERFINCO

2.0 CORREVAL


5.95 CORREDORES DE COLOMBIA

15 STANFORT

6.0 AVERAGE

Source: Colombian Stock Exchange

SURAMIN

JULY 19420.9091 AUGUST 18814.7826 SEPTEMBER 18602 OCTOBER 19081.8182 NOVEMBER 19081.8182 DECEMBER 20256.2791 JANUARY 18111


36

SURAMIN SHARES

JULY AUG SEPT OCT NOV DEC JAN

MONTHS

M O N T H L Y

A V E R A G E

Series 1

20500 20000 19500 19000 18500 18000 17500 17000

From July 2007 to January 2008, Suramin shares fell by 1,309.90, representing a loss of 6.74% compared with their initial

value (July). They showed a profit of 690.70 in twelve months so for purposes of our calculations (seven months), the

yield was 402.90.

TABLEMAC

JULY 10.6045455 AUGUST 9.51565217 SEPTEMBER 9.4075 OCTOBER 9.12 NOVEMBER 10.0372727 DECEMBER 10.2566667 JANUARY 9.4565

TABLEMAC SHARES

8 8.5 9

9.5 10

10.5 11


MONTHS

M O N T H L Y

A V E R A G E

Series 1

EVA Theory

37

From July 2007 to January 2008 Tablemac shares fell 1.148, representing a 10.8% loss compared with their initial value

(July). The profit per share was 0.70 in twelve months or 0.40 for our sevenmonth period.

ECOPETROL

NOVEMBER 1787 DECEMBER 1996.42857 JANUARY 1882.75

ECOPETROL SHARES

1650 1700 1750 1800 1850 1900 1950 2000 2050

NOVEMBER DECEMBER JANUARY

MONTHS

M O N T H L Y

A V E R A G E

Series1

In November this company launched a package of shares on the market to popularize investment. By December, the price

of these shares had appreciated so much that they were among the most popular and profitable in Colombia. The price of

oil, around 100 dollars per barrel for WTI crude, was one reason for this price increase and the acquisition of shares with

high yields in the future, as the company earns 145 billion pesos in EBIDTA (earnings before interest, taxes, depreciation

and amortization) for every extra dollar on the price of a barrel of crude.

Expectations for 2008 are of an increase in value close to 15%. 5 From July 2007 to January 2008 the price per share grew

by 95.75, which represents 5.3% over the baseline (July). This share had a profit of 127.88 in three months.

5 Portfolio 21 December 2007, p. 25.


38

PAZ DEL RIO

JULY 84.0681818 AUGUST 79.673913 SEPTEMBER 81.05 OCTOBER 77.3043478 NOVEMBER 77.7954545 DECEMBER 73.4285714 JANUARY 64.1775

PAZ DEL RIO SHARES

0 20 40 60 80 100


MONTHS

M O N T H L Y

A V E R A G E V

Series1

The demand for steel for public works, construction, and the expansion of the Panama Canal increase the prospects that

these shares will increase in value in 2008. From July 2007 to January 2008 their price fell by 19.89, representing a 23.6%

loss with respect to the baseline (July). The profit per share was 1.75 in twelve months, and so 1.02 for our sevenmonth

period.

As far as the stock market is concerned, it is very difficult to predict the behavior of shares and even more so that of

equities. But the fact that the local economy has remained strong and the financial performance of listed companies is still

encouraging will surely have a positive effect on future developments in stock prices. Unfortunately, Colombia’s

economic future seems more uncertain at the beginning of 2008 because of the deterioration of relations with Venezuela,

and more recently with Nicaragua, and the outlook has been further marred by confirmations that the U.S. economy has

entered a recession. For this reason, share investments should be considered in the long term and in companies with good

balance sheets whose profitability is due to the economic growth of the sector as a whole. A good example would be

ECOPETROL with rising oil prices. Student projects tend to reflect the belief that the stock market offers greater

EVA Theory

39

profitability, but this study actually indicates something different: low but fixed incomes may be a better investment

option. For example:

Forecasts for TES treasury securities

% OF GDP BROKER

10.2 CORFICOLOMBIA

10.0 SERFINCO


9.5 BANCOLOMBIA

9.98 AVERAGE

TES treasury securities offer an average return of 9.98%, constituting a secure investment, although one with low

profitability.

TCDs

Traditional banks offer 90day TCDs (time certificates of deposit), which generate annual cash returns of between 9% and

10% on average. In this case, having determined that the stock market is unlikely to rally, fixed income investments are

the safest option even if they are less profitable. Colombia ended 2007 with a very positive GDP growth, close to 7%.

Here, the best investment was in real estate properties (which appreciated in value between 18% and 20%). Shares (which

fell 4.21%) and TES (which lost 5.57%) were not good investments; neither were dollars (whose value fell by 10.64% in

one year).


40

What would 10 million pesos have been invested in a year ago?

INVESTMENT FINAL INVESTMENT IN

PESOS

CHANGE IN INVESTMENT

IN PESOS

TCDs (AVERAGE FTD) 10,794,483 7.94%

IGBC (COLOMBIAN STOCK

EXCHANGE INDEX)

9,581,620 4.18%

REPRESENTATIVE MARKET

EXCHANGE RATE (TRM)

8,999,326 10.01%

TES 20 8,939,650 10.60% Source: Corredores y Asociados

Investment of 500 million pesos from July 2007 to January 2008

INVESTMENT AMOUNT PROFIT CHANGE EARNINGS

SHARES

PAZ DEL RIO

TABLEMAC

SURAMIN

ECOPETROL

500,000,000

12,500,000

12,500,000

12,500,000

12,500,000

TCDs 500,000,000 9.5% per year

0.79% x7 months

=5.53

27,650,000

TES 500,000,000 8.39% per year

0.69% *7

4.83

24,150,000

EVA Theory

41

Conclusions

A sharp inflow of dollars into the country in the first weeks of 2008 triggered a significant drop in the value of the

currency. Most of these dollars belonged to foreign investors and were diverted to the stock market, circumventing the

measures the government adopted in 2007 to control portfolio investors. These measures require portfolio investors

wanting to bring money into the country to freeze 40% of the amount set aside for investment in the form of securities,

primarily shares and TES. In this way, the government hopes to limit any massive influx of dollars into the country from

portfolio investors.

On the other hand, investors fulfill these legal requirements by purchasing securities and real estate with the money

entering the country for foreign investment. In other words, they do not create real companies, but simply use the money

to speculate, taking advantage of the fact that profitability levels are higher in Colombia than in other countries.

In the first half of 2008, 1,098 million dollars entered the country in foreign investments, compared with 624 million

during the same period of 2007, and 473 million in January 2006. 6 1,162 million dollars entered the country from foreign

direct investment, while there was a negative portfolio balance of 65 million dollars, corresponding to resources that left

the country and investment by Colombians in securities abroad. According to Banco de la República, preventing the entry

of dollars into the country would slow growth. It is not uncommon for investors to acquire loans in the United States,

where interest rates are low, and invest the money in Colombia, where interest rates are 10% or 12% per annum.

Although these transactions are speculative and there is a risk that if the value of the dollar rises, profitability will fall,

conditions for investing in Colombia have improved in recent years: internal security, tax incentives for hotels, and export

processing zones all encourage the entry of dollars into the country. Last year, foreign investment was close to 7,700

million dollars and, as mentioned before, direct foreign investment in Colombia in the first month of 2008 was 1,162

million dollars; 7 this suggests a figure close to 9,500 million dollars for the whole of this year.

6 Source: Corredores Asociados, Dr. Mauricio Botero.

7 Source: Banco de la República.


42

The draft portfolio included in this paper indicates that the most profitable investment for 500 million Colombian pesos

would be in TCDs with commercial banks, which would give us a return of 27,650,000 pesos, compared with the second

option, TES or treasury securities, which would give us 24,150,000 pesos. Share investments are not attractive because of

the rates of return shown in the tables and graphs above.

EVA Theory

43

Bibliography

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crear valor. Barcelona: Gestión 2000, 1999.

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García Alonso, Arturo. “Qué es y cómo se utiliza el EVA.” Available at:

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%20el%20EVA.pdf.

García, Oscar. Administración financiera. Cali: Prensa Moderna Impresores, 1999.

Fernández, Pablo. Creación de valor para los accionistas. Barcelona: Gestión 2000, 2000.

Markowitz, Harry. Portfolio Selection: Efficient Diversification of Investments. 2 nd ed. Cambridge, MA: Blackwell, 1991.

McTaggart, James M., Peter W. Kontes, and Michael C. Mankins. The Value Imperative: Managing for Superior Shareholder

Returns. New York: Free Press, 1994.

Rappaport, Alfred. Information for Decision Making. Englewood Cliffs, NJ: Prentice Hall, 1982.

Rico, Luis Fernando. Cuánto vale mi empresa. Bogotá: Alfaomega Grupo Editor, 2003.

Stern Stewart & Co. www.sternstewart.com.

Termes, Rafael. Inversión y coste de capital. Madrid: McGrawHill, 1998.

Velásquez, Guillermo. “La innovación y el valor agregado en los productos de exportación.” Éxito Empresarial (Cegesti) 6 (2002).

Available at: http://www.cegesti.org/exitoempresarial/publicaciones/publicacion_6_102002_es.pdf.

Vélez, Ignacio. Decisiones de inversión. Para la valoración financiera de proyectos y empresas. 5 a ed. Bogotá: Editorial Universidad

Javeriana, 2006.


44

45

Suggestions for Improving Value Oriented Business Models in Guatemala

Roberto Gándara Guzmán

Abstract

By definition, business models describe ways of competing or converting technology into economic

value. Increasingly complex markets and information have made business models progressively more

important and they are now used as a means to communicate the basics of the business to investors and

associates. Their advantages are especially noticeable when their basic concepts give a company a

competitive advantage, just as their limitations are obvious when they are inflexible. This paper

discusses the significance of business models, as well as their scope and limitations for management in

general and their use for value creation. Following Nielsen’s and Bukh’s classification into generic,

narrow, and narrow with a broad description of the business, the author argues that the most widely

used models in Guatemala are generic models, which describe a company’s position in terms of the

industry. Chesbrough’s and Rosenbloom’s description of the characteristics and main components of

business—such as a focus on market segments and position in the value chain—is discussed next.

Finally, based on the results of a survey among Guatemalan company directors, an analysis is

presented on how these concepts are currently used in Guatemala and best practices for creating value.

The author concludes that leadership, the search for innovation, the application of knowledge and

experimentation, as well as longterm planning are fundamental for value creation.

Introduction: Using Business Models

The use of business models for value creation has become increasingly popular and has been widely discussed in

academic and business circles although it is not fully understood. This paper attempts to clarify the different types of

business models available, their most common features and how they can be better used in Guatemalan companies.


46

In general, business models are used to design, promote, launch, analyze, and manage companies or business units better.

They are used to describe the competitive environments and to forecast, as accurately as possible, the behavior of

producers, shareholders, employees, competitors, purchasers, and consumers in various conditions. They are

interpretations of people’s reactions to changes in the supply of goods and services and the decisions these may trigger.

They have also been defined as “ways of doing business,” ways of competing, 1 and frameworks for turning new

technology into economic value, 2 hence their appeal to businesspeople and investors seeking to increase profits or sales,

or to attract capital investment, among other things.

Business models have also become increasingly popular because of greater market competition and the more open

structure of organizations, which requires company members to see the whole picture, not just a particular specialist’s

view. “Business has simply gotten too complex for most people to even see the big picture, let alone keep that picture

clearly in mind. This makes it difficult for them to make decisions and take actions which make sense for the business as a

whole.” 3 The use of business models has also increased because it is paramount to highlight and communicate a

company’s valuedrivers outside the company and to manage its intangibles better. 4

In short, business models have become increasingly popular over the last years not only because of technological

advances in exchanging and managing information but, more importantly, because companies need to renew and use their

intangible assets better, including their general working plans. The largest Guatemalan companies in terms of assets and

employees belong to the agricultural, financial, commercial, and industrial sectors. Their greatest assets are tangible, not

intangible.

1 Christian Nielsen and Per Nikolaj Bukh, “What Constitutes a Business Model: The Perception of Financial Analysts” (working

paper, Department of Business Studies, Aalborg University, Denmark, 2008): p. 2.

2 Henry Chesbrough and Richard Rosenbloom, “The Role of the Business Models in Capturing Value from Innovation,” Industrial

and Corporate Change 11, no. 3 (2002): pp. 528–555.

3 Lynn Kearny, “Wearing Business Glasses: A WholeView Business Model,” under “Why a Business Model?” http://www.pignc

ispi.com/articles/strategic/kearnybusiness.htm#castellano.

4 Nielsen and Bukh, “What Constitutes a Business Model.”

Improving Value Oriented Business Models

47

In general, business models are used as an overall guide for assessing new proposals or products. Promoters use them to

offer interested parties a general description on how the organization will benefit from a particular innovation. Business

models now play an integral part in the administration of a company as they focus largely on the management of

intangibles, patents, knowledge, and working methods. In particular, the management of knowledge and working methods

are becoming increasingly important in Guatemala.

Obviously, the use of business models to describe ways in which the company can compete is not new. Technologies

aimed at increasing productivity such as Taylor’s Scientific Management, Management by Objectives or Reengineering,

are all implicit business models predicting the ways people will react to their implementation. Early models described

how the demand for a company’s products would increase if productivity increased. They rested on the assumption that

improved procedures and greater quality would lead to greater profits because consumers would prefer these higher

quality and lower priced products and services. These models have been termed narrow business models.

Since those early days, business models have become more sophisticated in their conception with the development of

markets. Increased specialization has privileged the role of knowledge and experimentation in modern companies. In

resource management, one important advance has been the separation of ownership from management, while another has

been the discovery of innovative ways to serve clients. 5 One important feature of many current business models is that

they allow businesspeople to access new forms of financing and to launch new products and services in local and

globalized markets on a more regular basis.

The creation and implementation of a model is largely influenced by a desire to achieve better results or to create tangible

competitive advantages. The intuitive assumption is that the organization will do better if a business model is used than if

it is not used. The advantage for management is that business models provide general working frameworks that make it

possible to unify efforts. This is especially true if they help define the company’s strategic position or its way of creating

value to obtain more profits.

On the other hand, business models not only need sound theoreticalpractical foundations; they must be flexible, too.

Companies will only have a competitive advantage if managers are able to interpret, or predict reality better—and reality

5 Peter Drucker, La gerencia en la sociedad futura (Bogota: Editorial Norma, 2002).


48

is complex and changing. Thus, business models can help foster actions to create economic value in a consistent way and

can be very helpful for companies. However, it is important to realize that they have substantial limitations.

Scope and Limitations of Business Models

Business models predict possible market or individual reactions to new business proposals. They present general

frameworks for achieving the objectives of their promoters. The most common objectives are: achieving greater

profitability in the sale of goods and services, making the company more competitive in its markets of interest,

outperforming competitors, persuading investors that the new initiatives will be profitable.

Not all business models are aimed at creating economic value in an explicit and direct way. For example, models to

reduce the company’s operational risk, or to improve its social responsibility, do so indirectly. Those that are directly

oriented to creating value tend to predict demand and the reactions of most of the value chain to the new products or

services. For example, the model of the Guatemalan firm Canella, states its objectives as: “Competing in the office

equipment and vehicle sales market, offering stateoftheart items of recognized Japanese brands, such as Yamaha,

Canon, and Isuzu, emphasizing distribution in the capital city without using subdistributors.”

Models predict possible client reactions on the strength of proven or new concepts, according to available technologies.

They seek advantages for interested parties mostly by attempting to predict how new patterns of behavior, improvements

in managing time or any other resource, or changing market conditions will affect supply and demand.

In the 1990s, business models were associated in the United States with the companies of the new Internetdriven

economy. 6 Most of these companies failed and the minimum conditions for such companies to be profitable have since

been reviewed. The four value creation dimensions for Internet companies are: (1) they must create efficiencies in terms



49

of the usual way of doing business; (2) they must facilitate supplementation; (3) they must take advantage of novelty;

and/or (4) they must make it easier to win clients. 7

Business models are useful because they simplify the patterns of operation of the markets targeted by particular products

and services, as well as the core content of what the company eventually seeks to achieve. Their scope and usefulness

depend largely on the effect the organization seeks to have on the market in question, as well as on the market size and its

present and future purchasing capacity; that is, the strategic projection of the organization in its area of interest, the

relation between market development and the model value proposal.

The most successful innovations have led to the creation of large new markets, such as Dell’s original concept of custom

assembly of computing equipment for any client worldwide and at a very competitive price. Other companies have taken

advantage of new technologies to make traditional concepts more profitable and appealing, for example, sending flowers

to girlfriends or wives via Internet florists.

Business models have advantages and limitations, which should be kept in mind when using them:

a) They are frameworks that may work or not, depending on how they are presented and on whether they are

accepted by the market and/or the company itself. Their success will largely depend on such acceptance matched

by welltimed implementation with adequate resources.

b) They can be useful for promoting new ideas in the markets, especially among new investors and those involved in

implementing the projects.

c) They can be based on sound economic concepts or be a result of something new. Their effectiveness is not fully

predictable. Successful business models are likely to be copied by others.

d) They must be submitted to market tests and rigorous analysis before they can be considered financially viable and

attractive.

e) They must be adapted to changing market conditions.

7 Raphael Amit and Christoph Zott, “Value Creation in Ebusiness,” Strategic Management Journal 22, no. 6–7 (2001): pp. 493–520.


50

f) They assume that clients and competitors will act in certain ways. These assumptions may prove true for a longer

or shorter period of time—or not at all.

Types of Business Models and their Relation to Value Creation

Strategy, value creation, and business models are not only essential for the short and longterm development of any

organization—they are in fact closely interrelated. 8 Strategy sets out general rules for competition and, from a practical

standpoint, this means a business model, or framework of general and operating decisions, for creating value that clients

will be willing to pay for and that will result in profits for the organization.

Similarly, economic value—that is, corporate profits after capital costs have been deducted—results from “solving a

problem, improving performance, or reducing risk and cost.” 9 In technical terms, economic value is said to be created

when Net Operating Profit After Tax (also referred to as NOPAT) is greater than Weighted Average Cost of Capital (or

WAAC). Although models can be applied intuitively or systematically, value creation is more likely to be achieved in an

effective and sustained manner if it is explicitly defined in the model and if the model takes into account globalization as

an economic reality. 10

How then can business models be classified? Although the economic and administrative concepts supporting them have

not changed much, business models have evolved a lot over the last few decades both in the management concepts they

use and in more general features. Nevertheless, business models can be divided into three categories according to the way

they describe the core business: 11

8 Patrick Sweet, “Strategic Value Configuration Logics and the ‘New’ Economy: A Service Economy Revolution?” International

Journal of Service Industry Management 12, no. 1 (2001): pp. 70–84.

9 Kirsten D. Sandberg, “Is it Time to Trade in your Business Model?” Harvard Management Update (January 2002): p. 4.

10 Tim Koller, Marc Goedhart, and David Wessels, Measuring and Managing the Value of Companies (Hoboken, NJ: John Wiley &

Sons, 2005); Drucker, La gerencia.



51

a) Generic

b) Narrow

c) Narrow with a broad description of the business

Generic business models typically describe:

a) The company’s characteristic way of thinking (strategy).

b) Its operational system (processes and value chain).

c) Its capacity for value generation (how resources are managed). 12

Generic models focus on the way of competing within an industry. They have been associated with industry models

because “the name of the industry served as shorthand for the prevailing business model’s approach to market structure,

organizational design, capital expenditures, and asset management.” 13 Furthermore, their approach is likely to improve

any organization’s chance of success. Taxi companies in the city of Guatemala are an example, as all of them operate with

the same business model. Another example is Grupo Solid, which makes and distributes paint for the middlecost real

estate market in Guatemala and Central America and is expanding to other regions of Latin America. The approach is to

manufacture proprietary paints at the company’s own plants, and distribute them through a broad network of distributors.

This business model encourages growth through staff engagement and professional family and external management.

An alternative type of generic or industry model includes the following components:

a) Customers, competitors, the company’s offering, and its generic strategy.

b) The activities, the human and physical organization, and its resources.

c) Production factors and inputs. 14

12 Kazem Chaharbaghi, Christian Fendt, and Robert Willis, “Meaning, Legitimacy and Impact of Business Models in FastMoving

Environments,”Management Decision 41, no. 4 (2003): pp. 372–382.

13 Sandberg, “Is it Time,” p. 3; Gary Hamel, Leading the Revolution (Boston: Harvard Business School Press, 2000).

14 Jonas Hedman and Thomas Kalling, “The Business Model: A Means to Understand the Business Context of Information and

Communication Technology” (working paper, Lund Institute of Economic Research, Lund University, Sweden, 2001): p. 9.


52

Not surprisingly, executives or investors use generic models when trying to place the company into an industrytype

relation with other companies.

In contrast, narrow models focus on internal aspects of the organization. 15 However, this type of business model should

not present detailed descriptions of the company’s social system, but rather the logic for creating value and the processes

that make this possible; that is, the infrastructure to support company strategy. 16 Narrow models typically describe the

networks, processes, and causal chains that create value by identifying potential customers, indicating how the business is

different from the others or how it will add value and describing profit patterns, associated cash flows, and attendant risks

within the company. 17 That is to say, narrow business models focus on the internal prerequisites for profitability. 18

Finally, there is a third type of model known as narrow with a broad description of the business. 19 These focus on the

whole enterprise system, including how the firm is positioned in relation to its partners in the value constellation. This

value chain perspective includes suppliers, clients, and other external forces. The most common elements in the socalled

narrow model with a broad description of the business are: 20

a) Value proposition: the client’s problem and the product that solves it.

b) Market segment: who the target of the product is.

c) Value chain structure: the company’s position in the value chain and how it will capture value within that chain.

d) Margins and revenue generation: the revenue that will be generated, the cost structure, and the target margins.

e) Value chain position: competitors, collaborators, and any chaintype effect that may be used to create value.

f) Competitive strategy: how the company will develop a sustainable longterm strategy.


16 Otto Petrovic, Christian Kittl, and Ryan D. Teksten, “Developing Business Models for eBusiness” (working paper, Evolaris

eBusiness Competence Center, 2001).

17 Sandberg, “Is it Time.”



20 Chesbrough and Rosenbloom, “Role of the Business Model.”


53

The typical features of these three types of business models, including their strengths and weaknesses, are shown in the

chart below.

Features, strengths, and weaknesses of different business models

Type of model Attributes Possible strengths Possible weaknesses Generic, industry based business model definitions.

• Components that constitute the business.

• General industry attributes.

• General model that can originate others.

The advantage of aggregation: that is, gaining an understanding of how value is created and taking advantage of that understanding.

The picture is too general to convey anything relevant about decisionmaking.

Narrow business model definitions.

• Describes the uniqueness of internal aspects of the infrastructure to create value.

• Details the links, processes and networks to create value.

• Detailed descriptions.

• The level of detail depends on the specific firm.

• Loss of overall understanding.

• Accounts may become too specific to make sense.

Narrow business model with a broad description of the business.

• The method of doing business.

• Focus on the whole enterprise system.

• The architecture for generating value.

• Description of roles and relationships.

Value creation must be understood across the whole value chain of the company.

• Not sufficiently focused on the value creating processes.

• Includes factors not completely controlled by the company.

Source: Nielsen and Bukh


54

Narrow business models and narrow models with a broad description of the business have become more important with

the advent of the knowledge economy. But to be effective, they must consider new situations in the twentyfirst century

and answer the following questions:

How can new models of value creation be designed to take full advantage of new technologies?

What factors determine business model agility in the digital marketplace where speed can be the determining factor

separating success from failure?

What are the opportunities and threats of the new economic and social life forms born from the synergy of new

organization paradigms and new technologies? 21

Regarding this last issue, Por’s main concern is how new value creation models impact organization and, hence, people’s

daily lives. Por considers that in a knowledge economy most of the abovementioned models are no longer useful, because

the driving factors to create new models are not taken into account and because they are not agile enough to change and

remain effective. He argues that companies need to focus on two aspects of value creation to produce results: how value is

being created and in which parts of the global and local economy. According to Por, the basic drivers that create value

within a knowledge economy are new technologies and new forms of organization that strengthen one another in a

positive feedback loop, as seen in the graph below.

21 George Por, “The Value of Emergent Value Creation Models in the Knowledge Economy: Towards a Framework for Analysis and

Action” (paper presented at the Consultation Meeting on the Future of Organizations and Knowledge Management, Brussels, 2000).


55

Source: Por, “Value of Emergent Value Creation Models”

In particular, we can only become more creative in our approach to business models if we are aware of new organizational

and employment patterns, which require new ways of using power and technologies.

Por agrees with Drucker that the new economy is based to a large extent on the value of individuals in the global economy

and on the use of individual inputs in the creation process. 22 Thus, the need to adopt a more creative approach to business

models will obviously apply increasingly in Guatemala in the near future.

Even at present, the use of business models in Guatemala is characterized by a growing emphasis on creativity. Most

companies are now oriented towards permanently seeking innovation, constant development, and the search for projects

that affect the value chain with a clear proposal targeted at specific segments. These elements—innovation and

experimentation—are well in line with the socalled experience economy.

22 Por, “Value of Emergent Value Creation Models”; Drucker, La gerencia.


56

Knowledge and Experience in Value Creation Models

As mentioned earlier, value is created mainly in the global economy, by applying knowledge to satisfy the consumer’s

search for new experiences. Those Guatemalan companies that have managed to join the global economy have developed

activities with flexible and wellfocused approaches to local and global competitors, leaving the door open for further

exploration and experimentation.

Surveys conducted in Guatemala show that such companies operating beyond the local context are more likely to create

value because leaders have to create business models that will give their companies sound advantages in markets that are

riskier but more diverse. This is why Guatemalabased and transnational exporters like Bayer tend to serve customers

better than companies focused only on the local market. (See survey in appendix I.)

Flexible and agile models are extremely important if organizations are to adjust to new market conditions and if their

value propositions are to take advantage of opportunities provided by new technologies. To understand what this means

for Guatemalan companies, we need to look at Pine’s and Gilmore’s strategies for developing business models that create

value. Pine and Gilmore emphasize that the notion of the experience economy provides a basic framework for

understanding the actions taken by various companies worldwide to develop new models. 23 This framework is

summarized in the following table.

23 B. Joseph Pine II and James H. Gilmore, The Experience Economy: Work is Theater and Every Business a Stage (Boston: Harvard

Business School Press, 1999).


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Creating value based on the experience economy

Source: Pine and Gilmore, The Experience Economy

In the experience economy, creating value in an organization depends to a large extent on taking advantage of what is

“new”—new substances, new products, new goals. Business models especially need to focus on providing new

experiences for customers, both old and new, by offering customers new ways of using a product or service.

It is vital to recognize the value of the unknown when developing and implementing business models for value creation

because this leads to risk taking and the internal and external changes that benefit both customers and the company.

Among the companies surveyed, open models lead to excellent results as far as value creation is concerned and, more

importantly, to a level of job satisfaction that goes beyond revenue as a measure of the company’s value.

Evans and Wurster highlight the importance of attitudes towards innovation in fostering effective models for value

creation in the information economy. According to Evans and Wurster, customer information services add value

depending on:

a) Their scope: connecting customers to other services, customers, goods, etc.

Commodities

The material is the offering.

Goods

The product is the offering.

Services

The operation is the offering.

Experiences

The event is the offering.

Transformations

The individual is the offering.

Origination New substances are discovered.

New inventions are developed.

New procedures are devised.

New scripts are depicted.

New aims are determined.

Execution Extracting is the core activity of the trader.

Making is the core activity of the manufacturer.

Delivering is the core activity of the provider.

Staging is the core activity of the promoter.

Guiding is the core activity of the elicitor.

Correction A poor site leads to further exploration.

A problem leads to fixing a mistake.

A reaction triggers a response.

Forgetting triggers preservation of memory.

A relapse leads to stronger resolve.

Application A trade connects in markets.

A transaction connects with users.

An interaction connects with clients.

An encounter connects with guests.

Perseverance connects with candidates.


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b) Their affiliation: the way they offer consumers more possibilities to compare services from different organizations

and make the best decisions.

c) Their richness: the depth and detail of the information given to or collected from the customer. In other words,

how well the company knows and serves the customer.

It is on these dimensions of information management that the competitive advantage of companies focused on value

creation is defined. 24

It is worth pointing out how the right strategy supports an organization’s proposal to its customers. The surveys carried

out in Guatemala show that value creation is very much related to tangible aspects of the product or service, and not so

much to the customer experience or to the advantages of connecting with the organization. This leaves plenty of scope for

improving the way companies use models. Some entrepreneurs have already realized this, as is the case of banking

services.

The value creation models used in Guatemala stress cost management and tangible marketing operations. Mercedes

Luizarralde, an executive from a sugarexporting company, is very clear about this. The position of organizations in

Guatemala will not influence global markets. Most companies focus on offering services with highly competitive costs.

As the country’s economy is not that buoyant, and does not create a large number of jobs, many services are targeted at

foreign customers with a higher purchasing capacity. Value creation, in crossborder assembly plants and call centers, is

based on low labor costs, or other lowcost factors such as land and management of goods and services. Other companies

focus on offering goods and services to potential customers in the Far East or Europe interested in Guatemala’s abundant

raw materials, which may be modified to their requirements.

24 Philip Evans and Thomas S. Wurster, “Getting Real About Virtual Commerce,” Harvard Business Review 77, no. 6 (1999): pp. 85–

94.


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Typical Components of Guatemalan Value Creation Models as Reported in Surveys

Guatemalan surveys (summarized in appendix I) show that managers and supervisors have many doubts about the

business model concept and how it relates to value creation in their organizations. Many survey participants associate

business models with a search for profits and markets, but cannot be specific. Of these, most first level, second level, and

first line supervisors consider that business models need to be developed and worked on collaboratively, but do not

consider this to be a priority in order to achieve the company’s goals.

In attempting to discover the concepts most used in Guatemalan companies to increase their economic value, the

interviews nearly always began by asking: (a) What is economic value? (b) How important is the business model for the

company? The answers fall between two extremes: ignorance and conscious application of models.

At one extreme, many participants saw economic value as a byproduct of managerial actions, and business models as

programs to increase productivity or to improve the company’s competitive position, but not as a direct point of reference

for decisionmaking. In fact, most participants consider business models as trends or something external to their daily

work.

At the other extreme, Guatemalan companies that use business models extensively relate them to the search for

innovation, an aspect mentioned by Chesbrough and Rosenbloom. TAK, a Guatemalan company that exports flowers to

Europe, deliberately uses business models for constant innovation. Like many exporters, TAK’s offer of value is based on

managing the value chain (a narrow business model). EVA is measured and directors use the year’s results to make

forecasts for the future.

It is clear that innovation, value creation, and leadership are closely interrelated. Value creation takes place because

management is constantly seeking new opportunities and ways to improve. The most popular models are generic ones or

narrow ones with a broad description of the business. Typical attitudes underpinning each model are described in the chart

below.


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Common attitudes of middle and highlevel Guatemala management when applying value creation models based

on Chesbrough and Rosenbloom

Characteristic Most common attitudes found when using industrybased

business model

Most common attitudes found when using a narrow model with a broad definition of the

business Value

proposition

It is taken for granted that the company knows the customer’s problem and must improve its internal processes to be more profitable; big changes in the business model are not expected.

Attempts to understand customers’ problems better and find new ways to satisfy them.

Market

segment

The target market segment is clear and managers seek to improve the company’s position in that segment.

New segments are sought, most of them resulting from the progress of the economy or the problems found; possibility to improve the internal processes in order to improve value creation.

Value chain

structure and

position of the

company in

that chain

There is little specific data on how the value chain works and the company’s position in that chain is not known either.

The company’s position in the value chain is constantly analyzed as well as how it changes when the market and its participants change.

Margins and

revenue

generation

The company knows quite well where revenue will be created, its source and structure, and costs and margins sought.

The sources of revenue are not well defined or the origin of that revenue is broader, because new projects contribute a lot to the growth sought; precision is lacking.

Competitive

strategy

The competitive advantage is already defined, as a result of the decision to operate in that market.

Considered dynamic: must be constantly reconsidered.

Source: companies surveyed in Guatemala, appendix I

Interestingly, these surveys appear to indicate that when companies introduce business models as a value creation concept,

the industry model changes and becomes much broader. This is especially true when the board of directors and

management are anxious to make progress in the market.


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Leadership as a fundamental condition to create value for companies in Guatemala

Surveys show that the most important prerequisite for value creation models to succeed is leadership among directors and

middle management. Participants emphasized that without leadership the objective of creating more Economic Value

Added (EVA) cannot be pursued.

In one survey, the general manager of IVEMO, a company that does automobile paint and body work, stated he first

realized how to achieve a sound competitive advantage while working at Nissan. He noticed that the efficiency of the

body and paint work could be improved. More importantly, he recognized that such improvements added value for the

customer and when clients are offered something they value, like good and timely service, this translates into sales. His

idea of coordinating the body work and paint, instead of doing them separately, helped him to develop the basic model for

value creation he applies today. Here, the concepts of productivity and improvement translate into a narrow model. The

firm will remain competitive as long as it focuses on immediate benefits for the client.

Larger companies were found to use a whole range of different methods to add value for the client. But in each case, the

aim was to increase competitiveness, without which value creation cannot be sustained for very long. Thus, the purpose of

managing resources is to increase immediate profits as these are commonly understood by the consumer.

Nevertheless, whichever way a company decides to target its resources in the short term, it also needs to take into account

changes that may happen in the long term. The more variables that need to be taken into account, the more important

leadership becomes for sustained growth because effective use of resources requires a vision of the organization’s future.

This vision, in turn, depends on sound knowledge of the way the market operates and how to link opportunities and ideas

arising in that market with the company’s internal operation.

In the cases analyzed in Guatemala, the transition towards an explicit and clear use of a value creation model involved an

understanding of the role played by the company in its environment, clear management of information, and clear plans. In

general, leadership correlated highly with a continuing ability to adapt to and take advantage of market changes.

When survey respondents were asked why leaders applied value creation models, the following reasons were given:

a) Experiences of one or more directors in market changes and in taking advantage of these changes.

b) Specific training in analyzing the climate and conditions for business.


62

c) Analysis of the challenges of increasing global competition.

d) The emergence of challenges requiring the company to change.

However, the main reason was directors’ experiences of market changes and their belief in the need to use different tools

to improve productivity, processes, basic activities, and human resources. Applying a business model and creating value

means focusing individual efforts in the same direction; therefore, a business model is also a summary of what has been

learned from past experience.

Whether a business plan is successful or not depends on how well each area of the company is able to use it as the basis

for short and longterm decision making. According to the surveys, value creation leadership is related more to the long

term approach.

Different approaches to applying value creation models in Guatemala

As we have already seen, business models are being used increasingly in Guatemala for value creation. In several cases,

surveys show that companies have made significant progress when models are clearly linked to action indicators within a

company’s culture. Success has been greatest when a longterm approach has been adopted.

Influence of planning terms on the use of business models in Guatemala

Terms in the use of value creation business models

Description Remarks

1. Short term: constant search for new opportunities.

Takes advantage of fast market changes.

Very common. Capital is not measured and knowledge is not taken into account. Seizing opportunities is vital.

2. Medium term: search for opportunities.

Focuses on the local market taking close competitors and the most dramatic market changes into account.

3. Long term: search for opportunities.

Goes beyond the local market and considers competition from a global perspective.

Capital and knowledge innovation is strong and very important.

Source: Guatemala survey participants, appendix I

Nevertheless, the shortterm approach (six months to a year, or less) is still the most popular in Guatemala when

considering the potential impact of actions in the market. Capital is seen as more or less fixed and less important than


63

taking advantage of shortterm opportunities or simply surviving. Such companies rely on introducing ad hoc

improvements as the occasion arises rather than systematic business value models.

The search for opportunities is vital in this approach. However, there is no corporate program to search for them, even

though companies may adopt a proactive approach when business opportunities arise. As Kirzner points out, such

entrepreneurs are alert to opportunities, but not always ready to take advantage of them, and it is not part of the culture to

involve all members in searching for opportunities. 25

In contrast, the mediumterm approach was clearly described by a survey participant from a sugar export company. The

mediumterm approach analyzes shortterm market changes and considers that variations are not influenced by the

company’s actions and that value creation will always be focused on costs in relation to price. This approach was also

found in other sectors analyzed in this survey.

But, as mentioned before, it is the longterm approach that tends to lead to value creation. This makes sense because the

effort of developing that value depends on decisions linking production closely to results. The longterm approach (more

than three years) is also very important from an administrative point of view, especially when it comes to facing and

taking advantage of market ups and downs or changes.

Surveys suggest that companies with a longterm approach tend to create more permanent value—and to do so more

quickly—because the valuedrivers formed part of their culture. The people working in this type of organization know

that value results from a constant renewal of strategies made possible by investment in knowledge and operations in every

area of the company.

25 Israel M. Kirzner, Competencia y función empresarial (Guatemala: Universidad Francisco Marroquín, 1975).


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Suggestions for Applying Value Creation Models More Effectively in Guatemala

Business models will be more successful in creating value for Guatemalan companies if the following principles are

adhered to:

a) Business models should contribute to the development of the company. They should outline ways of working and

competing and position the company better in the global economy.

b) They should relate longterm strategy to developing economic value.

c) They should specify investments allowing directors and executives to experiment with new forms of value jointly

with clients and collaborators.

d) Business models should be communicated constantly, both inside and outside the company, according to the

company’s needs.

e) They should be based on innovation, using new service approaches as pivotal points, searching for areas where

experience, human interaction, and information management open up opportunities for service.

f) They should adapt to market conditions flexibly and quickly.

g) Business models should be promoted through sound leadership that clearly recognizes their advantages and

limitations.

h) They should go beyond the industry model and its current value chain and focus on value creation.

i) They should be based on proven managerial and economic concepts, not trends.

Above all, they should contain a welldefined schedule of practical measures related to longterm strategy. Financial,

marketing, and operating goals need to be widely discussed and clearly explained and the model needs to be tested before

it is applied. If there are plans for continuous innovation in the organization, this will bring business models to life and

lead to the search for new markets where the products and services of the organization are most valued. A key indicator of

such markets is increased use of information facilities for internal and external clients and greater interaction with

customers, suppliers, and workers.

Flexibility needs to be considered in every area of business model management. We should allow for the fact that valuable

input will be obtained from shareholders, investors, workers, assistants, and clients—and sometimes even from

competitors. On the other hand, going beyond purely industrybased models means using more specific conceptions of


65

networks, conditions, people, information, and procedures that help connect the company’s actions with the creation of

value.

Guatemala is competitive and well situated with respect to other Latin American markets. It has an advanced

communications network and does business in foreign currencies. It thus has the potential to add value to a wide range of

imports and exports, for example, translating movies from English into Spanish, education via the Internet, the use of new

industrial protection products, mining data and information generated in other countries for use in different parts of the

world, and applying new knowledge at home and abroad. Opportunities for innovation will depend largely on cultural ties

with the rest of Latin America and the emerging global labor market in services, as well as on Guatemala’s capacity to

process information and reexport it. In other words, opportunities for innovation in Guatemala will come from parts of

the value chain being created and developed in stronger markets abroad.

Guatemala’s value offer depends on integrating execution and connection to markets using the means available in

Guatemala, initially advantageous in terms of costs, communications, and international relations, and then agilely

evolving towards other forms of work.

Conclusions

Value creation models are valuable management tools, especially if they are agile and relate to market operations. They

also have many limitations, but these can be overcome if different options are taken into account when applying them.

The main one is analyzing the changes that take place as the models are developed.

Value creation models have become increasingly popular with the development of technology and greater connection

among globalized markets. Their use, however, is widely misunderstood. They are descriptions of ways of competing or

of converting technology into economic value.

In Guatemala, they have been used mainly for applying new technology and improving productivity, which are indirectly

aimed at creating value. The most popular types are generic, or industryrelated, models and narrow models with a broad

description of the business. However, the key element for their success is leadership in the search for innovation.


66

Indeed, if they are to work Guatemala, the main prerequisites will be leadership with a longterm approach that makes the

best possible use of the knowledge economy.


67

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Appendix I: Surveys

Mercedes Luizarralde (sugar exporter)

1. What business model does your company use?

Offering a commodity to international companies.

2. What is the value proposition of your company?

Offering a necessary product at a competitive cost.

3. Who is the target?

American brokerage companies.

4. How did the business model start? Is technology important?

Naturally. Technology is not important.

5. How is it updated and kept current?

Seeing how assets, surplus grow. Indirectly, profits, ROE, cost control.

6. What are the factors that affect updating the model?

Following up on the market, changing prices.

7. How important is the model for the future of the company?

We still need to further define the model concept and its relation to value creation. It will be more important in the

future because this is a familyowned company.

8. What would you suggest to other Guatemalans when implementing business models?

That they are going to become more and more important.

Gerardo Townson (paper products)


Offering a product at a low price to local companies.


Low price and 1 or 2day deliveries.


70


Anyone who consumes more than 10 boxes.


It started naturally. Technology is not important.


With data on how the company is making progress.




To differentiate themselves in some important aspect.

María Mercedes Barrios (Bayer)


Doing business in Central America and the Caribbean, in places where there is a market, through mergers and

developing businesses to create a broad portfolio.


The search for and application of innovation.


Any person who wishes to improve their health, crops, tools...


Through constant innovation.


By constantly studying the market.


Great emphasis is placed is on everybody’s participation.



71

Very.


Use innovation. Adjust to customer needs. Longterm approach.

André Delprée, Tzanapuj, S. A. (distributor of basic consumption, nontraditional products)


Providing a quality product to fulfill a need in an unattended market.


Providing quality presentation, as far as size is concerned.


Anyone who needs products in smallsize packages, where normally only large ones are available.


On a trip to Mexico, where we saw the idea and imported it. The range of products offered was extended.


Everybody working in the company participates in them, even the lowest level employees.


Recognizing unattended needs.


Very.


Keeping your ears open and always being attentive to the needs of others, as this is where opportunities are to be

found.

Edgar Barrios, Solgroup (security firm)


Offering attractive services.


72


Generating peace of mind.


Other wellknown companies.


Technology is very important.


By taking into account internal and external customer suggestions.


A lot of emphasis is placed on everybody participating.


Very.


They should learn to use value creation, which is very practical. Focus on achieving longterm goals.

Mario Tello, Guatevisión (communications)


Delivering quality television productions.


Delivering the quality people already have.


Cable TV subscribers.


Yes, to innovate entertainment.


By studying market opportunities.


73


The time considered in planning.


Very.


First, know how to create value; then, apply it.

Mario Sánchez, EY (financial and consulting firm)


Adding value to our clients in all the services we offer.


Adding value in essential things.


Our clients.


Technology is the basis of our services: it is a fundamental tool.


Everybody cooperates in the company.



Very.


Don’t forget the final goal of the company: creating value.

Yara Tobar and David Jiménez, Piedra Santa (publishing)



74

Quality in local materials, offered at good prices with our own distribution.


Educational material with quality local information.


Students from elementary school to university.


Through constant innovation in the appropriate department.


Through contact with teachers and students.


The use of the founders’ philosophy.


Very.


It is important for people to find financial and philosophical value creation.

Diego Tárano, Promelina (lumber)


Quality packing, with qualified transportation.


Quality, certified packing. Quality guarantee.


Exporters.


When we wanted wood forests with the goal of exploiting them better.



75

Everybody works on it: customers and suppliers.


The business opportunity from having forests, and updating technology that allows us to compete. This is an

embryonic company, but it will grow.


Very.


Try to improve Guatemala. By creating value, we will use resources better and will become more productive.

Pablo Aguilar, Conteca (construction)


Quality construction materials: differentiated materials.


The company’s differentiation in the final quality delivered: increasing customer satisfaction.


Both the private and public sectors, although our main target is the private sector.


Technology is essential; however, not as much as IT.


Through bulletins and publications in magazines that show innovative techniques.


Above anything, the competition.


Very.


Use them to focus on sustained success.


76

Vinicio Sosa, Agregua (mining)


Quality in mining materials for construction using our own plants and stateoftheart technology.


Quality additions, with the latest construction technology.


The construction sector.


Several businesspeople got together to supply the market with quality value added using the latest technology.


By relating it to the construction sector.


Market consolidation.


Very.


Consider the effectiveness and efficiency of operations.

Juan Luis Guzmán, Ufinet (telecommunications)


Telecommunication services.


Telecommunication services, with great diversification to suit the customer.


Telecommunications companies. Customers with communications needs.



77

Technology is a priority. It started as a way of exploiting the existing infrastructure for personal use.


Thanks to all the staff. Innovative solutions, to intercommunicate different points, regardless of protocols,

capacities, and speeds.


The need to grow.


Very.


Good planning and studying the model.

Álvaro Puatz, Cabcorp (brewery)


Production and distribution of beer for the national market.


Beverage tailormade to the economic means and preferred taste of the customer.


Drinkers.


It started through certain alliances.


Everybody participates.



Very.



78

They are useful for aligning the entire organization.

Felipe Karina, Inmaco (construction)


Quality local construction materials. Experience in the local market.


The materials. Experience and knowledge of 50 years serving the local market.


Anyone in construction who wishes to live comfortably.


It started from the need to create an orangecolored environment, because bricks have noble properties.


Constructors, architects, national and foreign distributors offer their ideas.


The need to survive in the market.


Very.


It is important to know how to reach what we want to achieve and to be clear.

Patricia Furero, Seguros El Roble (insurance)


Ensuring that losses resulting from unexpected problems will be recovered.


Guaranteeing permanence and services to those who suffer a loss.



79

People who need financial protection.


It is very important.


By implementing new products that respond to customer needs.


The company’s values.


Very.


Growth depends on being able to generate value for customers.

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