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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

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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.

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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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