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Competitiveness, profitability and growth in an emerging economy context
Abstract
This study analyzes the competitiveness of Brazilian companies over the past 15 years
by combining indicators of profitability and growth performance. We argue that
competitiveness has broader impacts on firm-level performance and that growth-
oriented strategies are particularly important in the context of emerging economies.
Using a longitudinal approach, we apply a hierarchical method to estimate firm-level
combined performance and analyze the sustainability of the competitiveness among
Brazilian firms. Our results find no evidence of decreasing sustainability of competitive
advantage over this period and that growth-oriented strategies were less frequent among
Brazilian firms than among U.S. firms during this period. Finally, we discuss the
shortcomings of the analysis of only profitability measures as a single indicator of
competitiveness.
Key Words: Competitive Advantage, Profitability, Growth, Emerging Economies,
Multilevel Analysis
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Competitiveness, profitability and growth in an emerging economy context
1. Introduction
Global economic changes have provoked the rise of the once peripheral economies,
creating new competitive opportunities. The so-called emerging economies are known
for fast-paced developments and for changes in public policies towards economic
liberalization (Hoskisson, Eden, Lau, & Wright, 2000; Wright, Filatotchev, Hoskisson,
& Peng, 2005). Within emerging economies such as Brazil, contrasting situations
coexist: on one hand, the remaining institutional environment does not favor
competition; on the other hand, the pro-market reforms reduce barriers to entry and
promote competition (Inoue, Lazzarini, & Musacchio, 2013; Meyer, Estrin, Bhaumik,
& Peng, 2009; Wan, 2005). Altogether, these aspects are supposed to have shaped the
competitive position and impacted the performance results of firms in the last decades.
Regarding performance, studies about emerging economies are focused on the analysis
of the sustainability of above normal returns after pro-market reforms (Chari & David,
2012; Hermelo & Vassolo, 2010). Classical theory advocates that pro-market reforms
should diminish the persistence of above normal returns; however, some empirical
studies have found contexts in which pro-market reforms positively impacted firms’
profitability (Chacar & Vissa, 2005; Cuervo-Cazurra & Dau, 2009). These studies have
a common focus on the impact of reforms on profitability, where institutional changes
might have promoted other effects over firm competitiveness.
In fact, competitiveness may not be fully observed in a single performance indicator.
The competitive advantage is in the company’s capacity of creating more value than its
competitors (Peteraf & Barney, 2003) and the superior value should yield superior
performance (Powell, 2001). However, performance results are not restricted to above
normal return and other indicators, such as customer preference; growth and operational
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performance can also reveal the existence of competitive advantage (Chatain, 2011;
Priem, 2007). Moreover, the value created may not be fully appropriated by the firm
when other strategies, such as growth, are prioritized (Coff, 1999; Crook, Ketchen Jr.,
Combs, & Todd, 2008). This aspect is particularly relevant in emerging economies,
where firms are faced with extraordinary opportunities for business expansion
(Hoskisson et al., 2000; Wright et al., 2005).
The study of competitiveness in emerging economies has gained more attention, but it is
still an under-researched topic. It is acknowledged that institutional framework
influences market efficiency, entry decisions and access to resources, which shapes
competitiveness (Peng, 2002; Wan, 2005). However, considering the context of fast
growth in emerging economies, it would be important to analyze the impact of
institutional changes on firm-level performance more comprehensively.
To address this research gap, this article analyzes the competitive profile of Brazilian
firms over the last 15 years, combining performance indicators of profitability and
growth. We classify the firm-level performance in accordance with industry averages
and analyze the competitive positions, exploring the distributions of advantage, parity
and disadvantage in three cross-sectional samples (1997-2001; 2002-2006 and 2007-
2011). In a longitudinal approach, we analyze the sustainability of the competitiveness
of these firms and find no evidence of decreasing competitive advantage, or
hypercompetition on among these firms. We then discuss the pattern of growth-oriented
strategies of Brazilian firms and compare the results with a similar study about a
developed country, the United States. In stressing the importance of growth
opportunities for emerging economies, we demonstrate the shortcomings of the analysis
of profitability as a sole indicator of competitiveness. Our study also makes a
methodological contribution in the application of a hierarchical method to estimate
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firm-level performance, controlling for industry effect, and enabling the comparison of
firms from different industries.
2. Theoretical background
2.1. Competitive Advantage and performance
The analysis of existence of competitive advantage is an important research stream in
business strategy (D'Aveni, Dagnino, & Smith, 2010; Wiggins & Ruefli, 2002). It is
acknowledge that a firm in competitive advantage is able to create more value than its
competitors (Peteraf & Barney, 2003), and that should result in above average
performance (Porter, 1985). However, studies have demonstrated that the impact of
value creation goes beyond the limits of value appropriated (Coff, 1999; Crook et al.,
2008; Powell, 2001).
Considering that competitive advantage is in the capacity of value creation, value
creation, also referred as “use value”, is further defined within the boundaries of
customers’ willingness to pay and suppliers’ opportunity cost (Bowman & Ambrosini,
2000; Brandenburger & Stuart, 1996). The moment of value creation is followed by a
process of value appropriation, which involves a bargaining between the firm and its
business partners for definition of the price and the cost for products and goods, also
referred as “exchange value” (Bowman & Ambrosini, 2000; Brandenburger & Stuart,
1996). The exchange value is influenced by market conditions, individual appreciation
as well as the bargaining power of each partner involved and will define the profit level
of the firms (Coff, 1999; Lippman & Rumelt, 2003).
Within the boundaries of value creation, and besides the profit appropriated, the
“supplier’s share” and the “customers’ surplus” also have their impact on the firm
performance (Brandenburger & Stuart, 1996). In managing the suppliers’ share, the firm
will influence the process of collaboration with upstream partners leading to better or
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worse results of innovation, quality, and productivity (Dyer & Singh, 1998). With regard
to customers, the firm has to assure that the surplus is enough to secure competitiveness
and drive customers’ preference and promote business growth (Priem, 2007). Thus, in
the search for profitability, the firm must not jeopardize its operational performance nor
its growth opportunities (Chatain, 2011). Moreover, it is acknowledged that
organizational performance is not confined to financial return indicators (Combs,
Crook, & Shook, 2005; Venkatraman & Ramanujam, 1986)
A firm in competitive advantage creates more value and may seek to appropriate the
value created by charging a premium price. This policy should bring in higher margins
and economic profit, depending on the negotiation with suppliers (Crook et al., 2008;
Porter, 1985)Alternatively, the firm. Alternatively, a firm in competitive advantage may
choose to maintain price parity and increase the customers’ surplus resulting in sales
growth (Newbert, 2008; Porter, 1985; Priem, 2007). Still, some firms in competitive
advantage can also combine both strategies in a dual superior performance (Ghemawat
& Rivkin, 2006).
The value appropriation strategy is influenced by the different levels of context, from
managerial agency, industry rivalry, up to the institutional framework (Adegbesan &
Higgins, 2010; Chatain & Zemsky, 2011; Coff, 2010). As a consequence, the impact of
competitive advantage on organizational performance can be analyzed at firm, industry
and country levels of influence.
2.2. Institutional context and competitiveness
The emerging economies context is known for having greater influence on performance
when compared to that of developed economies (Goldszmidt, Brito, & Vasconcelos,
2011). Due to the complexity of the environment, the study of business strategy in
emerging economies requires the combination of theoretical perspectives –
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Resource based view with institutional framework, transaction costs theory and
governance (Hoskisson et al., 2000; Wright et al., 2005). The institutional framework, as
the set of formal rules and informal regulations, is responsible for reducing business
uncertainty and providing the necessary structure for development (North, 1990). The
absence of a strong institutional framework, such as a clear legal basis for property
rights and agency control, constrains the capacity of business development and
promotes opportunistic behavior from incumbents (Hoskisson et al., 2000). In a
business context, uncertainty and opportunism increase transaction costs and have
negative impacts on entry decisions and entrepreneurial activity. The threat of
opportunism also affects the broader range of business relations, reducing investments
in asset specificities and in firm alliances (Hermelo & Vassolo, 2010; Peng, 2002;
Wright et al., 2005). Furthermore, governance issues, such as dominant owners and
minority rights, are strong impediments for the development of capital markets in
emerging countries (Wright et al., 2005). Altogether, the institutional context of the
country may prevent or foster access to strategic factors and competition among firms.
With restricted entry, emerging economies are known for favoring industry
concentration and the existence of large corporations and business groups (Chacar &
Vissa, 2005; Dominguez & Brenes, 1997; Hermelo & Vassolo, 2010)Well established,
those large corporations tend to be controlled by local families with strong ties to the
government (Hoskisson et al., 2000; Inoue et al., 2013). The competitiveness is mainly
based on network relations and on the influence on public issues that restrict access to
the acquisition or the use of resources (Wan, 2005).
By limiting the access to strategic factors, the incumbents protect their competitive
positions for longer and increased their power and attractiveness for business
partnerships (Hermelo & Vassolo, 2010; Wan, 2005). On the product market side, fewer
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attempts at imitation characterize an ex-post limit to competition, thereby reducing the
demand for innovation (Chacar & Vissa, 2005; Peng, 2002; Peteraf, 1993).
Changes in the institutional context of emerging economies can either compromise or
promote the competitive dynamic (Wright et al., 2005). Starting in the 1990s, pro-
market reforms were intended to promote structural improvements and economic
growth in developing countries (Hoskisson et al., 2000). Among other changes, the
reforms prescribed the reduction of government intervention and deregulation, and were
followed by privatization waves as well as increasing foreign entry (Williamson, 2003).
As a consequence, pro-market reforms are said to have increased competitiveness, as
new entrants became a threat to established businesses . (Meyer et al., 2009).
In terms of value creation, the increasing competitiveness may have impacted both sides
of the value chain - suppliers and customers. Upstream, the process of sourcing has
expanded in the search for competitive productive inputs and in the collaboration with
suppliers, increasing the capacity of value creation (Lazzarini, Claro, & Mesquita,
2008). Downstream, learning and absorptive capacity of local firms have influenced
technological innovation, increasing value to customers (Luo, Sun, & Stephanie, 2011).
Improved capital markets have increased the monitoring of management and reduced
agency costs (Cuervo-Cazurra & Dau, 2009). Taken together the pro-market reforms
and recent developments of emerging economies are supposed to have increased the
competitiveness, but also to have offered better opportunities for value creation for
firms.
2.3. Emerging economies and firm profitability
Pro-market reforms are supposed to have influenced the pattern of profitability in
emerging markets. In the study of pro-market reforms in Latin America, Cuervo-
Cazurra and Dau (2009) found a positive impact over firm profitability, specifically
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among state-owned companies and large domestic businesses. This pattern was not
confirmed in others emerging contexts, such as the Indian market, where Chari and
David (2012) found evidence of deterioration of sustainability of superior profits after
the pro-market reforms.
The work of Hermelo and Vassolo (2010) was specifically devoted to the analysis of
hypercompetition in Latin America after the 1990s. The phenomenon of
hypercompetition implies that the increasing speed of the markets has curbed the
capacity of maintenance of the competitive position the last decades, and that
competitive advantage has become a temporary event (D'Aveni et al., 2010). The study
of Latin American companies revealed an average of 10.1 percent of firms with
persistent profitability in the whole sample. Analyzing the sustainability of profits, the
authors found the existence of a hypercompetitive shift in Latin America, but in
comparison to a similar study with American firms (Wiggins & Ruefli, 2002) they
concluded that there was a less intense competition in Latin America (Hermelo &
Vassolo, 2010). So far, the study of persistence profitability has not indicated the
decrease of above normal returns in Latin America, even though changes in institutional
context are supposed to have increased competitiveness.
2.4. Emerging economies and growth
In the very definition of emerging economies the characterization of rapid-growth is
one of the key characteristics of those countries (Hoskisson et al., 2000). During the last
decades, the fast pace of economic development of emerging countries has offered
increasing opportunities for business expansion and competitive growth (Peng, 2002).
At an institutional level, the government would identify and invest in key industries to
promote the development of strategic factors and boost economic growth (Wan, 2005).
At firm-level, growth-oriented strategies, such as organic growth, merger and
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acquisitions and alliances are contingent to the access to resources and development of
political capabilities (Bandeira-de-Mello & Marcon, 2006; Wan, 2005). Overall, the
emerging economies environment is supposed to offer good opportunities for business
expansion (Peng, 2002).
Within a perspective of less intensive intervention of the government and pro-market
reforms, firms are supposed to take active behavior and develop strategic responses
instead of just adapting to institutional policies (Hoskisson et al., 2000; Oliver, 1991). In
the context of rapid-growth economies, firms should develop their own growth-oriented
strategies to seize an opportune moment. Therefore, the analysis of growth-oriented
strategies is particular relevant in evaluating competitiveness in the emerging economy
context (Hoskisson et al., 2000). However, to date, this is aspect has not been explored
in business strategy literature.
2.5. Brazilian context
The Brazilian economy went through profound changes after the Plano Real, starting in
1994, with economic measures such as the inflation control, economic opening and
liberalization. The process was followed by a privatization program and economic
expansion in the following years. The capital market has expanded after 2002, with
changes in legal requirements, efforts to improve governance practices and the
introduction of segmentation at the governance level (Da Silveira & Saito, 2008).
More than a decade after the initial reforms, Brazil has several challenges yet to be
overcome. In terms of capital markets, ownership concentration and corporate
governance practices are still problematic and prevent the proper development of
investments (Da Silveira & Saito, 2008). Despite the privatization process, government
participation in the economy is still strong and several sectors are dependent on state
financing and government regulation (Do Amaral Gurgel & de Vasconcelos, 2012;
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Inoue et al., 2013; Wan, 2005). Regarding the availability of resources, Brazil´s
infrastructure is still lagging behind that of other developing countries, such as Russia,
India and China, enforcing a strong weight of investments to firms, such as the
construction of logistics solutions (Schwab, 2013). Additionally, the lack of a qualified
labor force has been considered another important bottleneck to Brazilian economic
development.
In terms of growth opportunities, Brazilian performance was not comparable to that of
other emerging economies, such as China or India. But, the country managed to
overcome the impacts of the world depression in 2008 and 2009, and even expanded
2010. Lately, economic growth in emerging countries has been said to be going through
a process of deceleration, as well as the opportunities for business expansion in Brazil
(Economist, 2013). In this scenario, the study of growth would be imperative in
analyzing the mistakes and successes of Brazilian companies’ strategies.
Table 1: Brazilian GDP Growth Year GDP Growth rate 1995 4 .4 1996 2 .1 1997 3 .4 1998 0 1999 0 .3 2000 4 .3 2001 1 .3 2002 2 .7 2003 1 .1 2004 5 .7 2005 3 .2 2006 4.0 2007 6 .1 2008 5 .2 2009 -0 .3 2010 7 .5 2011 2 .7
Source: World Bank (2013)
The Brazilian case has become more prominent after the economic take-off of the last
decade; however, we know little about the moment of economic boom and about firm-
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level performance during that period. In general, the study of competitiveness in
emerging economies is still under-researched; particularly the study of competitiveness
and growth performance is very poor or nonexistent.
3. Method
Following the theoretical discussion, this article aims to measure the competitiveness of
Brazilian firms by analyzing the impact of value creation on performance. Within the
domain of financial performance (Venkatraman & Ramanujam, 1986), we propose a
combination of performance indicators. In line with the majority of studies in business
strategy, we use profitability as an indicator of value appropriation (Coff, 1999; Powell,
2003; Wiggins & Ruefli, 2002). However, to capture the broader impact of value
creation, we have added sales growth to the model (Newbert, 2008; Priem, 2007).
Therefore, the proposed model combines two financial performance indicators that are
results of value creation.
Figure 1: Combined performance model
A firm in competitive advantage creates more value than its competitors and may
appropriate more value, and/or maximize customers’ surplus, depending on its pricing
policy. In such case, the firm combined performance will be (i) superior return with
Competitive Parity
μ
μ
Profitability
Sales Growth
+-
+-
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average sales growth or (ii) superior growth with average return. Yet, for some firms
with distinguished value creation, it could be possible to outperform competitors on
both indicators. In no case should the competitive advantage yield under average
performance.
Competitive disadvantage is analogous to advantage however, on the other side; the
firm will have to sacrifice returns to maintain market share, or vice-versa. In the worst
case scenario, the firm will have to decrease market share and have under average
returns. A vast majority of firms should be observed in positions of competitive parity,
with performance indicators within the boundaries of the industries (Powell, 2003). By
controlling the simultaneous performance outcomes, the model is sensitive to
performance trade-off and the results of unbalanced value appropriation or unhealthy
growth strategies (Fleck, 2010; Jensen & Meckling, 1976; Penrose, 1955).
3.1. Sample and variables
The model was applied to a longitudinal database of Brazilian listed firms, revealing the
competitive trajectory of the firms in that period. Data was extracted from Economatica
database, covering a period of fifteen years between 1997 and 2011. The initial
extraction accounted for 669 firms with active and historical data, and was further
analyzed in three steps: the selection of industry sectors, the number of observations per
firm and number of firms per industry. First, to enable comparability, we followed
previous studies in excluding financial services, government and non-classified business
sectors, as well as those firms with assets or revenues under US$ 10 million (Brito &
Brito, 2012; McGahan & Porter, 1997). The longitudinal data was separated into three
intervals of five years each, so that results could overcome random noise and account
for the observation of performance variation (Richard, Devinney, Yip, & Johnson,
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2009). We considered the five year interval to be compatible with the observation of
business cycles in most industries (Powell, 2003).
In the next stage, each interval was analyzed separately to reduce censoring problems.
We eliminated firms without financial information for all of the five years and with
aberrant information. Finally, we aggregated firms per industry classification, using
NAICS (North America Industrial Classification System) two and three–digit codes, and
eliminated all industries with less than three firms. Over the 15 year period, we analyzed
358 firms in 27 industries, as detailed in Table 2.
Table 2: Database Interval 1997-2001 2002-06 2007-11 1997-2011 Firms 174 235 254 358 Industries 16 20 26 27 Observations 1,740 2,350 2,540 6,630 Assets Mean (US$ Million) 1,651 1,892 5,116 Assets Std. Deviation (US$ Million) 5,495 6,443 21,297 The number of firms in the selected samples demonstrates the effects of governance
developments in the Brazilian capital market during the last decade. In closing 2011,
Bovespa/BMF reported 373 listed firms. In the analysis of the overall sample
composition, we identified that an average of 75 percent of the firms remained in the
database in the following interval, and only 97 firms remained in the three samples.
In the selection of variables, profitability was measured as return on assets (ROA), net
income divided by total assets, as it is a frequent measure in business strategy studies
(Wiggins & Ruefli, 2002). To analyze the sales growth, we calculated the compounded
rate of sales growth within each interval as per Helfat (2007, p. 103-104) proposal:
St = St-1 (1 + g)t, where:
S is the sales value in period t
g is the average growth rate for period t.
Sales in US dollars suffered a logarithmic transformation; therefore sales growth rate (g)
was calculated as follows:
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Log St = log St-1 + t.log (1 + g).
The results yielded the compounded rate of growth (g) for each interval and sales
growth considered both organic and acquisitions results.
3.2. Multilevel Model
Performance data are composed by different spheres of influence: the institutional
context, the industry and the business units. The multilevel method is superior as it
permits the decomposition of the nested effects of performance, considering its
hierarchical ordering (Hofmann, 1997; Raudenbush & Bryk, 2002). Additionally,
multilevel modeling allows for the observation of random variation of the individual-
level independent variable, which is the objective of our study (Misangyi, LePine,
Algina, & Goeddeke Jr, 2006).
The hierarchical model for the profitability was parted into three levels (year-firm-
industry), as follows:
Level-1: 푅푂퐴 = 휋 + e 푒 ~푁(0,휎 )
Level-2: 휋 = 훽 + 푟 푟 ~푁(0,휎 )
Level-3: 훽 = 훾 + 푢 푢 ~푁(0,휎 )
where:
In the first level, ROA is the ROA for company j, at the time i, industry k; π is
the mean ROA for the company j (across five years) and e represents the variance
across time. The mean ROA can be further decomposed into β (ROAind) the
average performance for the industry k and the level 2 residual r ,, representing
the difference between each firm´s performance and its industry average. Here it is
assumed that r is normally distributed with mean zero and variance σr2. We refer
to it as the firm component (ROAfirm). In the third level, the performance between-
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industries, β ,is modeled in a grand mean, γ , and a residual random variation
k, u .
Modeling growth as the market share variation required the insertion of the slope
coefficient for each company. The slope coefficient in the first level represents the
compound growth rate in the observed period as detailed below:
Level-1: 푙표푔푆 = [휋 +휋 (푇푖푚푒 − 푐)] + e 푒 ~푁(0,휎 )
Level-2: 휋 = 훽 + 푟 푟 ~푁(0,휎 )
휋 = 훽 + 푟 푟 ~푁(0,휎 )
Level-3: 훽 = 훾 + 푢 푢 ~푁(0, 휎 )
β = γ + u 푢 ~푁(0,휎 )
where:
In the first level, LogS represents the sales logarithm for company j, at the
time i, in industry k. π stands for the sales logarithm for company j (log S0 as
previously defined) in the first period, this parameter is added by π ,
representing the growth rate in time, or log(1+g) as previously detailed; and a
random variation e . In the second level, the parameters are decomposed into
means β and β (g-ind) for industry k and residuals r and r . The
between-industries variance is represented in the third level. The residualr ,
referred as the firm component (g-firm), is normally distributed with mean zero
and variance σr12. However analysis of this component will be preceded by the
reversion of the logarithmic equation (log (1+g)).
The parameters considered in the prediction of each individual company´s performance
are associated with the residual distributions. These residuals were estimated with the
empirical Bayes prediction method, which combines the likelihood estimates with the
prior distribution of the values. The Bayesian estimator (also known as shrinkage
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estimator) reduces values proportionately to their level of reliability and extreme values
are forced to zero (Raudenbush & Bryk, 2002, p 153). As a consequence, the Bayesian
estimator can generate good estimates independently of the number of participants in
each level. The method also provides the variance of the estimates so that we could test
the significance of the values against each industry average, and compare the firms’
results across different industries.
4. Results and discussion
The firm residuals (ROAfirm and g-firm) and industry parameters (ROAind and g-ind)
were estimated for both profitability and growth variables. Therefore, the decomposed
performance can be analyzed at firm and industry level, and for total average
performance per interval.
Table 3 shows the descriptive statistics and correlations of the study variables. Average
profitability (ROA) ranged between 9 and 7.5 percent, while growth demonstrated
stronger oscillations in the three intervals. The first interval (1997 to 2001) was marked
by a strong retraction for the sampled firms (-3.52%), followed by two intervals of
market expansion (27.87 and 19.56%). It is interesting to note that the business
expansion of sampled firms in the first interval was inferior to the level of growth of the
Brazilian economy for that same period (1997-2001= 6%) and superior in the following
decade. Both variables’ distributions are leptokurtic and right skewed, with the
exception of the left skewed growth in the first interval.
Table 3: Descriptive statistics and correlations for average total performance (ROA and growth) Interval Variables g1 g2 g3 ROA1 ROA2 ROA3 µ% σ% 1997-2001
g1 1 -3.52 16.14
2002-2006
g2 0.349** 1 27.87 36.15
2007-2011 g3 -0.107 0.171* 1 19.56 23.28 1997-2001
ROA1 -0.325** 0.034 0.008 1 7.51 7.59
2002-2006
ROA2 -0.196*
-0.132* -0.056 0.546** 1 9.00 9.09
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2007-2011 ROA3 -0.249* -0.127
-0.203** 0.356**
0.550** 1 7.62 6.13
**Correlation is significant at the 0.01 level. * Correlation is significant at the 0.05 level.
In the analysis of industry performance (ROAind and g-ind), we can depict the growth
trajectory of some industries such as oil and gas that emerges with strong expansion in
the period between 1997 and 2006; however, it loses the strength in the last interval as
opposed to the trajectory of construction industry (Figure 2). Growth is also a highlight
for agribusiness, real estate, educational services, healthcare and transportation and
warehouses in the last interval (2007-2011). On the other hand, manufacturing
industries were not as successful in following the growth opportunities in the last
interval (2007-2011).
Figure 2: Industry performance between 2002 and 2007 (ROAind and g-ind)
In terms of profitability, the oscillation was much lower. On average, profitability level
was higher in the second interval for most of the sampled industries. However,
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industries such as technical services and textile products outperformed their peers,
whereas construction decreased profitability in the observed period.
Performance parameters at firm level (ROAfirm and g-firm) were estimated as residual
values, normally distributed and with zero means. The distribution of profitability
(ROAfirm) presented a steady standard deviation along the three intervals, whereas the
sales growth (g-firm) presented greater variance and was particularly higher in the
second interval (2002-2006).
Table 4: Distributions for performance at firm level (ROAfirm and g-firm) Interval g-firm1 g-firm2 g-firm3 ROAfirm1 ROAfirm
2 ROAfirm
3 µ% σ% 1997-2001
g-firm1 1 -0.206* 1.35
17.47
2002-2006
g-firm2 0.226** 1 -0.089 2.00
27.92
2007-2011 g-firm3 -0.261** 0.090 1 -0.200** 0.79
13.49
1997-2001
ROAfirm1
-0.292** 0.077 -0.033 1 0.346** 0 4.75
2002-2006
ROAfirm2
-0.147 -0.156*
0.007 0.497** 1 0.562** 0 6.57
2007-2011 ROAfirm3
-0.206* -0.089 -0.200** 0.346** 0.562** 1 0 4.33
a Market share growth of (g-firm) was reverted from logarithm transformation. **Correlation is significant at the 0.01 level. * Correlation is significant at the 0.05 level.
4.1. Combined Performance and Competitive Advantage
As discussed herein, competitive advantage cannot be identified in the observation of
isolated performance result. Thus, as per the proposed model, the results of value
creation can be captured in a combined set of performance indicators. To verify the
competitive position, the performance indicators for each firm were tested against the
industry performance and classified as average, under or above normal performance.
The combined distribution of profitability and growth reveals the competitive position
of each firm per interval and Table 5 shows the distribution of firms in each competitive
position in the three intervals.
Table 5: Competitive Position and Performance Classification (1997-2011) Interval Competitive Position Performance Classification*
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Under Average
ROA
Average ROA
Above Average
ROA
Total Growth
Distribution
1997-2001 2002-2006 2007-2011
Competitive Advantage 11% 9%
15%
Above
Average Growth
0%
0.4% 0%
7.5% 2.6% 8.7%
0% 0% 0%
7.5% 3.0% 8.7%
1997-2001 2002-2006 2007-2011
Competitive Parity 79% 84% 76%
Average Growth
0%
1.7% 1.2%
78.7% 84.3% 76.0%
3.4% 6.4% 6.3%
82.2% 92.3% 83.5%
1997-2001 2002-2006 2007-2011
Competitive Disadvantage 8% 5% 7%
Under
Average Growth
0% 0%
0.4%
8.0% 3.4% 5.5%
2.3% 1.3% 2.0%
10.3% 4.7% 7.9%
1997-2001 2002-2006 2007-2011
N=174 N=235 N=254
Total ROA Distribution
0% 2.1% 1.6%
94.3% 90.2% 90.2%
5.7% 7.7% 8.3%
100% 100% 100%
* Performance variables were tested at 0.05 level.
As expected, most of the firms (above 75%) were positioned in competitive parity in all
three intervals. Competitive advantage encompassed 11, 9 and 15 percent of the
sampled firms in the three intervals, in performance results distributed between average
profitability and above average growth and average growth and above average
profitability. Yet, competitive disadvantage was a less frequent phenomenon,
encompassing not more than 8 percent of the firms. Of those firms in disadvantage,
most (over 60%) managed to maintain an average profitability while diminishing their
growth rates during the analyzed interval.
Even though the frontier performance is expected to be rare (Devinney, Yip, & Johnson,
2009), it should be possible to observe some dual superior performance; however no
firm was positioned in above average profit and growth simultaneously. As per the
disadvantage of under average profit and growth, it is understandable that the market
discipline would prevent its occurrence among listed firms and only one firm (Wembley
–textile) was in that position in the last interval. Few firms (up to 2%) were positioned
in abnormal profit and diminishing growth rates and only one firm in abnormal growth
20
and under-average profit. These unbalanced positions were exceptions and due to the
contradictory character of their performance, we did not categorize them as advantage,
disadvantage or parity. We tested the homogeneity of the groups, analyzing the average
size of the firms in the different competitive positions and the ANOVA test for total
assets produced no significant results (at 0.05 level).
The analysis of the combined performance reveals the shortcomings of the observation
of a single indicator. For example, when considering ROA distribution, 8.3 percent of
the firms achieved abnormal returns in the last interval, a number similar to that of other
studies about persistent profitability reported by (Hermelo & Vassolo, 2010). However,
in terms of competitiveness, we cannot consider those firms (2%) to have superior
profitability but decreasing sales.
On the other hand, considering the context of an emerging economy, it is important to
observe whether abnormal return is aligned with the market opportunities. In that sense,
7.5 percent of the firms presented above-normal growth in 1997-2001, only 3 percent in
2002-2006 and 8.7 percent in 2007-2011. In general, abnormal growth was combined
with average profitability and therefore those firms were in advantage in relation to their
industry peers.
4.2. Sustained competitiveness
We analyzed the persistence of the competitive position by following the trajectory of
those firms that remained in the database for more than one interval. On average, more
than 70 percent of the firms could be observed in continuous intervals, and we analyzed
their evolution along the competitive positions of advantage, parity and disadvantage.
Between the first and second intervals, 136 firms were observed, and between the
second and third intervals, 171 firms. Comparing those with the firms excluded, we
found no relevant difference in terms of competitive position.
21
Table 6: Dynamics of Competitive Position From\To 2002-2006 From\To 2007-2011 1997-2001 Disadvantage Parity Advantage 2002-2006 Disadvantage Parity Advantage Disadvantage 1% 7% - Disadvantage - 3% 1% Parity 1% 74% 4% Parity 7% 72% 6% Advantage - 8% 2% Advantage 1% 4% 3% Total 2% 89% 6% Total 8% 79% 10% N 132 (76%) N 171 (73%) Discontinued 42 Discontinued 64
Regarding the capacity to sustain the competitive position, the most relevant result is
the maintenance of competitive parity, accounting for over 70 percent of the observed
firms (Table 6). As per disadvantage only one, Sergen a construction company,
maintained average return with decreasing sales from 1997 to 2006. As per competitive
advantage, 2 percent of the firms managed to sustain the position between 1997 and
2006, and another 4 percent between 2002 and 2011. Among those, Souza Cruz Tobacco
was the only one that managed to keep advantage throughout the three intervals, with
average growth and above- average profitability.
Overall, our results do not support the assumption of a hypercompetitive shift in the
Brazilian market (Hermelo & Vassolo, 2010). In opposition to the predictions of
hypercompetition theory (D'Aveni et al., 2010), the analysis of the dynamics between
the competitive positions demonstrates a decreasing flow of migration towards the
parity and an increasing maintenance of advantage among sampled firms.
4.3. Compared Competitive Positions
To explore the difference between institutional contexts, we compared our results with
those obtained by another similar study conducted with a sample of firms from United
States (Brito & Brito, 2012).
Figure 4: Compared competitive positions Brazilian versus U.S.* firms
22
*Data from Brito and Brito (2012) The first finding of the comparative analysis concerns the level of concentration in
parity, as not more than 66 percent of U.S. firms were positioned in parity as opposed to
the 80 percent of Brazilian firms. The second finding regarded the distribution between
advantage and disadvantage. In the U.S. sample, firms were evenly distributed in the
positions of advantage and disadvantage throughout the period analyzed (1990-2009),
whereas Brazilian firms positioned in competitive advantage were nearly double the
number of those in disadvantage.
Considering the competitive advantage distributions of the two countries, one should
expect a lower concentration of firms in advantage among U.S. firms, reflecting a more
competitive environment. Even though it did not occur, the results demonstrate an
increasing number of firms achieving advantage in Brazil, which is aligned with the
alternative argument that there is a similar competitive pattern in emerging and
developed economies (Chacar & Vissa, 2005). On the other hand, in terms of
competitive disadvantage our results demonstrate that there might be institutional
barriers to low performance, such as governmental financial support to firms,
collaborative networks among large corporations (Do Amaral Gurgel & de Vasconcelos,
2012; Inoue et al., 2013; Wan & Hoskisson, 2003).
Figure 5: Compared profit and growth strategies Brazilian versus U.S.* firms
23
*Data from Brito and Brito (2012)
Finally, analyzing the aggregated profit and growth distributions, it is surprising that we
found more firms with superior growth in the U.S. sample, around 15 percent, than
among Brazilian firms, between 3 and 8.7 percent. Figure 5 reveals that even though
Brazil is considered to be an emerging economy, the frequency of superior growth was
comparable to that of superior profit and opposed to firms from the U.S, of which 13 to
19 were concentrated in superior growth.
5. Discussion and conclusions
In this article we explored the competitiveness of the Brazilian firms over the last 15
years. Our analysis had three main objectives: (i) the evaluation of the distribution of
competitive advantage, disadvantage and parity analyzing the combined performance of
the firms; (ii) the analysis of the variation of that distribution over time; and (iii) the
analysis of growth-oriented strategies over the last 15 years.
We started with the recollection of the conceptual definition of competitive advantage as
superior value creation, and elaborated on the implications of the value created upon the
organizational performance. From the theoretical discussion, we deducted a model of
combined performance, profit and growth, to evaluate the competitive position of the
firms. To analyze the firm-level performance, we used a multilevel model segregating
the spheres of influence in terms of performance variance in time, within industries and
24
between firms. We chose to present both performance distribution and the competitive
positions, so that we could compare our results to other studies and demonstrate the
performance profile of the Brazilian firms. The first contribution of our study is in the
demonstration of the difference between competitive positions and performance
distribution, showing that value creation has a broader impact on the company
performance.
The cross-sectional analysis of the combined performance shows an increasing amount
of firms achieving competitive advantage in the three intervals and a stable proportion
of disadvantage. The results indicate that pro-market reforms might have enabled firms
to expand value creation, benefitting the sampled firms. Learning, copying and
innovating, firms can expand value created to customers and access new clients (Luo et
al., 2011). Additionally, market openness can expand the access to inputs and resources
and reduce opportunity cost (Cuervo-Cazurra & Dau, 2009).
One interesting aspect of the performance distribution regards the similarity between
superior profit and superior growth concentrations, as opposed to the distributions of
inferior profit and inferior growth. In the context of market expansion, it is expected that
firms would prioritize opportunities for growth at the expense of profitability, but the
results demonstrate the opposite. This finding is also corroborated by the negative
correlation between the variables of profit and growth, indicating a deficiency of
growth-oriented strategies.
Regarding persistence of competitive position in time, the longitudinal analysis
demonstrated that most firms remained or migrated to parity. However the persistence
of competitive advantage did not diminish in time as predicted by hypercompetition
theorists (D'Aveni et al., 2010). In that sense, our results confront the idea of a
hypercompetitive shift among sampled firms. Moreover, the phenomenon of temporary
25
advantage would also have impacted the cross-sectional results, in diminishing the
percentage of firms positioned in advantage, which did not occur. This finding can shed
light on the extension of pro-market reforms and their capacity to change the
competitive context. In our results, firm size was not differentiated between the
competitive positions and most of the listed firms are representatives of large
corporations with privileged relationships with the government and access to state
financing (Inoue et al., 2013). However, the analysis of barriers to entry can only be
investigated with the inclusion of multinational and the non-listed firms.
The third objective regards the analysis of growth-oriented strategies in the context of
an emerging economy. Our findings demonstrate an unstable trajectory of growth in the
period of 15 years, with a maximum of 8 percent of the firms with superior growth in
the first and last intervals, and only 3 percent in the middle interval of 2002-2006.
The relevance of growth-oriented strategies of emerging economies is in the capacity of
revelation of firm proactiveness. More than responding to the governmental guidelines
for industry expansion, as is the case of the construction industry, firms are expected to
develop their own strategies to seize growth opportunities. According to our findings,
Brazilian firm-level growth was modest and concentrated within industries average, and
that does not indicate the existence of strong initiatives among firms. The comparison
with the sample of United States firms shows that relevant growth-oriented strategies
can be observed in other contexts. Ultimately, the existence of weak growth-oriented
strategies among Brazilian firms can help explain the country´s performance, as a
compound of total performance. The novelty of our analysis should encourage other
studies as well as the comparison with other emerging economies, since growth-oriented
strategies are an important part of business competitiveness in emerging and developed
economies.
26
Among the limitations of this study, we recognized that the effects of competitive
advantage in organizational performance may be more comprehensive than those
studied here. In terms of sample limitations, we acknowledge that the conclusions are
restricted to the sample of Brazilian listed firms and that competitiveness might affect
other segments such as medium and small firms differently. Another restriction imposed
by the database regards the level of industry aggregation that might impact the
classification of performance. In that sense, the expansion of the database can bring new
information about the competitiveness in the country; however, the reliability of
performance reported by non-listed firms may also compromise the results.
Notwithstanding the limitations, this article brings important contributions to the study
of competitive advantage.
Finally, for future research, other the characteristics of the firms such as the relationship
with business groups and the level of government influence in their business could be
further analyzed. Moreover, regarding growth-oriented responses, it is important to
investigate the context of other emerging and the possible changes provoked by pro-
market reforms.
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