Vertical relationships and corporate performance of Brazilian companies in the electricity...

ABSTRACT

Competition and the quest for competitive advantages on the market are prompting companies to reshape the profiles of their relationships with their customers and suppliers. They are opting for approaches based more on cooperation, trust, loyalty and quality, instead of bargaining power

or clout that that might well be used by vertical scope participants as a way opportunistically pressuring these relationships. Based on the constructs of Durand (1999), this survey investigated the relationship between the possibility of substituting relationships with suppliers and buyers, viewed as resources by companies in the power generator, transformer, electric motor and control and distribution equipment sectors, and the financial and market performance of these firms, grounded on a resource-based view. The findings demonstrated that the less substitutable their relationship with customers, the worst the financial performance of the companies in the target sectors. Inversely, the less substitutable the relationships with their main suppliers, the better their financial performance. Financial performance was measured by the following aspects: return on assets, operating margin or return on sales and the profits generation capacity rating. Based on the homogeneity and specific characteristics of the target sectors, the finding may be explained by other theories, such as the Transaction Costs Theory and the industrial organisation itself, as noted by Porter (1980) and often neglected. These findings will certainly direct the academic community towards new research projects and reflections, in addition to offering a contribution to studies involving non-financial variables that affect the value creation of the companies, which is an international trend.

Key words: resource-based view, competitive advantage, value creation, financial performance and market performance.

1. INTRODUCTION

In the view of Barney (1991), the competitive advantage of a company is the outcome of the resources and capacities that it controls, and which are presented as valuable, rare, imperfectly imitable and non-substitutable. The companies have heterogeneous resources and capacities that ensure sustainable competitive advantages and allow them to bring in revenues that are higher than normal (AMIT et al, 1993).

The conceptual scope of the resource-based view of the firm is not limited to merely one field of science, offering ample research opportunities that are already being explored by experts in other administration fields, such as human resources management, economics and finance, entrepreneurship, marketing and international business (BARNEY et al, 2001). Looking at the economic and financial approach, some directions may be noted. Lockett and Thompson (2001) argue that there is a limited number of works circulating that interconnect specifically resource-based views of firms with economics; this suggests a relationship that is somewhat odd, as the basis of the RBV is grounded on theories drawn up in the economic field. Use of the resource-based view in the economic and financial context is hampered mainly by causal ambiguity, complexity and socialisation, which suggests to researchers in these field topics that are connected more to matters of corporate governance and agency theory (LOCKETT et al, 2001; COMBS et al, 1999; COFF, 1999). Despite this bias, in essence, the specifically resource-based view of the firm was not established to examine who will take over the gains generated by the competitive edge created (COFF, 1999), but was rather intended to understand and construe the reasons behind differences in profitability among the companies (BARNEY, 1991, AMIT et al, 1993). Based on the remarks of Barney (1991) and Amit et al (1993), it is clearly important to relate the resources that are created, controlled and extended by the firm and the impacts on its financial and market performance, justifying studies in this area.

As a result, grounded on the study by Durand (1999; 2001) and the propositions of the specific resource-based view specific to the company, it is intended to identify the relation between the possibility of substituting vertical relationships and the financial and market performance of companies manufacturing power generators, transformers, electric motors and control and distribution equipment.

2. THEORETICAL FRAMEWORK

2.1 Competition and competitive advantages

Barney (1997) drew up an approach on the competitive dimension, defining its three aspects: competitive advantage, competitive parity and competitive disadvantage. According to this author, a company experiences a moment of comparative advantages when its actions within an industry or on a market create economic value, and when few firms are engaged in similar actions. Competitive parity occurs when the strategic actions of a specific firm create economic value, although there are other companies engaged in similar strategies. Finally, a competitive disadvantage occurs when the actions stipulated for creating economic value for the company quite literally fail.

According to Porter (1985), above-average performance over the long term constitutes a sustainable competitive advantage. It is important to make it quite clear that the mere existence of a sustainable competitive advantage does not mean that it is eternal. 'Sustainable competitive advantage' implies a momentum that is not guaranteed (DAY et al, 1997).

2.2 Resource based-view- resources and capacities

Resources represent a set of tangible and intangible assets owned by a company (COLLIS et al, 1997). Barney (1991) groups the resources into: physical capital resources; human capital resources; and organisational capital resources. Physical capital resources are represented by the technology used by the company, its permanent assets, geographical location and access to raw materials (WILLIAMSON, apud BARNEY, 1991). The human capital resources include training experience, judgment, intelligence, relationships and closeness between managers and workers in the company (BECKER, apud BARNEY, 1991). Finally, organisational capital represents all the administrative routines of the firm and also the information relationships between the company and its competitor environment (TOMER, apud BARNEY, 1991).

Capacities represent integrated routines that depend on human capital to deploy the existing resources (AMIT et al, 1993; COLLIS et al, 1997; MARKIDES et al, apud COMBS et al, 1999; GRANT, 1991, PRAHALAD et al, 1990). In contrast to tangible assets, competencies are part of a cumulative process and do not deteriorate when applied and shared by the companies. Much to the contrary, they foster growth (PRAHALAD et al, 1990). Competences correspond to a learning process that takes place collectively and effectively turns knowledge into earnings for the organisation (PRAHALAD et al, 1990).

2.3 Resource based-view--influence of SCP (Structure Conduct Performance)

According to Wernerfelt (1984), the resource-based view appeared in order to show firms that they have or can develop resources that would be able to generate above-normal profits. The resource-based view is underpinned by development over time, meaning a dynamic approach associated with the aspirations of David Ricardo, Joseph Schumpeter and Edith Penrose, which dominated the 1980s (GRANT, 1991).

Based on the works of Penrose (1959), which claimed that successful companies will tend to grow in economic terms, although the manner and direction in which this will occur is a direct function of the use of their resources and opportunities, Wernerfelt (1984) outlined a resource-based view. Both he and Barney (2001) worked on the Porter model (1980). However, both of them would have at least three options for positioning a resource-based view, first in relation to the structure conduct performance, second to micro-neoclassical economics, and third is the evolutionary school. Among these three, Barney (2001) selected the first of them, as mentioned previously, as did Wernerfelt (1984).

The basic approach of Porter is to rate the competitive advantage as a position of advantage obtained by a firm that, when compared to its competitors, is perceived by consumers as offering low costs and better goods (PORTER, 1985). Concern with highlighting the approach--aligned with the Porter school--is due mainly to the influence of his work at the time, and above all to the close links built up between his theory and the work of Wernerfelt (1984) and subsequently the work of Barney (1991).

For Sarason et al (2003), Barney (1991) presents the resource-based view considering the attributes of these resources as a source of comparative advantages for companies, constituting potential generators of anomalous returns over the short and long term constituting a sustainable competitive advantage in this case. In contrast to a product-based view, with low costs and differentiation developed by Porter (1980; 1985), a resource-based view of the firm establishes a link between superior performance and the specific characteristics and difficulties in reproducing the resources owned by the company (DAY et al, 1997). The importance of the resource-based view in this context is due to the fact that the competitive advantages, in the view of Porter (1985), will be quickly copied by rivals, implying a brief duration (OLAVARRIETA et al, 1997). The gains posted by a company are significant only if sustained for an additional length of time, and if abnormal (above average). In the quest for reasons explaining these processes, the role played by the resource-based view is of the utmost importance (OLAVARRIETA et al, 1997, page 565).

2.4 Resource based view

The resource-based view of a firm establishes a link between superior performance and the specific nature and difficult reproduction of the resources owned by the company (DAY et al, 1997). Company resources may generate competitive advantages only when valuable, rare, non-transferable, imperfectly imitable and not substitutable (BARNEY, 1991). The strategic values of the resources and capacities are assessed by the difficulty of their acquisition, sale, imitation and substitution (AMIT et al, 1993).

Resources are rated as valuable when they enable the firm to implement strategies that enhance its efficiency and effectiveness (BARNEY, 1991). What decide the value of the resource are the consumer demands for the product made by the firm, its scarcity, non- imitability and the channelling of the appropriate profits, with the intersection of these three pillars forming a value creation zone (COLLIS et al, 1997).

The resources are aligned with the sustainable competitive advantage, meaning a strategy that creates value cannot be based on a valuable resource owned by many firms; to the contrary, it must be well and exclusive to the company when used (BARNEY, 1991). In order to be strategic, resources must be rare, meaning that their access must be limited to the firm or at most to a few competitors (OLAVARRIETA, 1997). "In order to be a source of sustainable competitive advantage, the rarity of the resource should persist the entire time" (COLLIS et al, 1997, page 32).

Resources that are imperfectly imitable represent assets that cannot be imitated by rivals, meaning the strategic implementations deriving from the use of rare or valuable resources tend to be imperfect (BARNEY, 1991). Imperfect imitation makes it hard for a rival to copy a resource, just like the competitive strategy that the resource in question helped to create (MATHUR et al, 1997). In the view of Collis et al (1997) this type of resource represents the heart of the corporate value creation process. Imperfect transfers prevent rivals from duplicating the resource constituting the competitive advantage of the firm (GRANT, 1991).

Resources and capacities are not freely transferable among the participants in an industrial sector, preventing the replication of a competitive advantage over the short term, as well as scaring newcomers away from its environment (GRANT, 1991). Flaws in transferability arise due to a series of factors, including: geographical immobility, imperfect information, resources specific to the firm and immobilisation of capacities (GRANT, 1991).

Non-substitutable aspects blend rarity, value and imperfect imitation. For this classification, there is an inverse relation, where the less substitutable resource, the higher its value, thus creating a competitive advantage for the company (BARNEY, 1991). Durability is defined as the longevity rate during which the resources and competences depreciate or become obsolete (GRANT, 1991). A company may have an imperfectly imitable resource, but the rival may seek a substitute, making use of a more accessible resource (MATHUR et al, 1997). Consequently, it is imperfect substitution that makes this resource non-substitutable, preventing or hampering its effective substitution (MATHUR et al, 1997).

2.5 Resource based view--strategy

In general, the resource-based view appeared in order to explain how the specific resources of a firm may lead to an understanding of the differences in corporate profitability (BARNEY, 1991; AMIT, 1993; COLLIS et al, 1997; DURAND, apud WINTER, 1999). In conceptual terms, the resource theory explores the relation among resources, competition and profitability, as in-house resources are the basic requirements for the strategic formulation of a company, constituting its primary source of profit (GRANT, 1991).

The work of Peteraf (1993) establishes four specific conditions as the bases of a competitive advantage: heterogeneity of resources; ex ante constraints on competition, ex post constraints on competition, and imperfect mobility.

As an economic foundation, resource heterogeneity is a basic requirement for a resource-based view of the firm, strategically rating its resources as a source of competition, whose superiority will pave the way for anomalous gains, compared to its competitors (PETERAF, 1993). The ex post constraint on competition consists of the existence of a force able to curtail competition through the anomalous gains that a firm is bringing in at the time when it demonstrates a competitive advantage over its rivals (PETERAF, 1993). The ex ante constraint suggests that earlier attempts seeking a position of superiority on the market should have limited competition (PETERAF, 1993). Mathur et al (1997) called this the bargaining pillar, and indicate market imperfections as the driving force behind the anomalous earnings of the companies. Finally, resources rated as imperfectly mobile may be a strategic force of obtaining a sustainable competitive advantage, as they are tied and made available for use by the firm over time (PETERAF, 1993).

Grant (1991) addresses the resource-based view strategically through a cyclic process consisting of five phases. In the first phase, the company arranges its resources according to its strong and weak points, compared to its rivals, and then manages to position them in terms of some opportunity that may bring out their full potential. The next step is to identify the capacities or competencies of the firm. This is when the organisation manages to establish a level of in-house coordination that can deploy the resource identified in a complex and more efficient way than its rivals. Once its resources and capacities are synergic, the company must assess the gains that may be brought in through the use of these resources and capacities, and whether they will underpin the feasibility of sustaining the competitive advantage generated. By the third phase, the company should establish a connection among value, rarity, imperfect imitation and the non-substitution of these resources with the competitive advantage that might be generated. The fourth phase consists of establishing a strategy that exploits the identified capacities and resources effectively, in terms of an outside opportunity. This is the strategic formulation phase. During the final phase, Grant (1991) makes this process cyclic, suggesting that a resource may not be considered as an eternal source of a competitive advantage, meaning that in order to sustain anomalous gains, investments and adjustments in possible future breaks are required.

2.6 Resource based-view--value creation and performance measurements

Barney (1997) groups performance measurements in three ways: simple accounting measurements of historic performances; adjusted accounting measurements of historic performance, and other measurements. The accounting measurements are certainly the most widespread in studies of business strategies, mainly as they are the most easily accessed (BARNEY, 1997). Among all the financial and accounting indicators available, Barney (1997) stresses the main ratings as being: Return On Assets (ROA), Return On Equity (ROE), Gross Margin, Profit per Share, Profit/Price Index, Cash Flow per Share, Current Liquidity, Net Liquidity, General Indebtedness, Long Term Liability / Net Equity Ratio and Operating Profit / Interest Ratio. In the second group, Barney (1997) lists the adjusted accounting measures, which include: Return On Invested Capital (ROIC), Economic Profit (EP), Market Value Added (MVA) and Tobin's Q. Young et al (2001) used a further three adjusted ratings: Return on Net Assets (RONA); Economic Value Added (EVA); and Cash Flow Return On Investments (CFROI). Barney (1997) establishes a final grouping for the other performance measurements, stressing: Cumulative Abnormal Findings (CARs); Sharpe's measurement; Treynor's index and Jensen's alpha. These measurements represent new way that managers can assess corporate performance in specific contexts.

The resources-based view stresses the creation of rare, valuable, non-transferable, non-imitable and non-substitutable resources, making it quite clear that their development may guide a firm towards value creation, generating competitive advantages and anomalous profits. Similarly, they may serve to maintain or destroy value, precisely because they fail or lose their value or rarity, meaning that they are transferred, copied or substituted easily by rivals. This converges with the approaches of Barney (1997) and Young et al (2001), the value directed approach outlined by Scott (2000). Investing in relationships with customers and suppliers may direct a company towards higher value, even if this takes place only over the long term.

2.7 Vertical relationships--customers and suppliers

For Durand (1999), companies should invest in these relationships, even if this is costly over the short term and reduces corporate profits. Four theoretical approaches may be assessed in order to discuss vertical relationships: transaction cost economics, structure conduct performance, relational view and resource-based view.

Based on the works of Williamson (1985, 1991, 1993) the crucial Transaction Cost Economics (TCE) points are: transactions correspond to the basic analysis unit; according to the costs and transactions proposal, transactions differ according to the frequency, uncertainty and particularly specificity of the asset; each generic type of governance is defined by complex attributes, with each structure presenting discreet structural differences in terms of costs and competences; each generic form of governance is supported by a specific type of contract; transactions, which differ in terms of their attributes, are aligned with governance structures that differ in terms of their costs and competences; Transaction Cost Economics (TCE) always corresponds everywhere to the comparative analysis of institutions, where relevant comparisons occur among possible options.

More specifically, limited rationality, opportunism and the specific characteristics of the assets are the three main factors that underpin the existence of TCE (Williamson, 1985). The work of Joskow (1987) lists some important points on the development of corporate vertical relationships. According to this author, through the Transactions Theory, when a vertical relationship involves significant investments in specific assets, the bargaining power generated becomes a non-attractive factor, which encourages ex-post opportunism. In order to avoid this bargaining position, ex-ante long-term contracts should be drawn up, clearly stipulating the terms and conditions of future transactions.

Opportunism refers to a behavioural aspect driven by self-interest (Williamson, 1985). The specifications in a contract are inevitably incomplete, allowing the appearance of opportunistic aspects, either ex-ante or ex-post (RAO, 2003). Ex-ante opportunism is exercised by a specific agent prior to the completion of a transaction, while ex-post opportunism occurs after its completion. Uncertainties arising from contractual specifications open up an ample field for the exercise of opportunism (KEIL, 1999). The specific characteristics of the asset referred to the extent to which non-fungible assets are connected to specific transactions covered by a contract or some other commitment (RAO, 2003). Contracts are far more complex and varied, in the ways in which they are usually drawn up (Macneil apud Williamson, 1979). Assets are specific when the revenues that they supply are far more valuable, according to their relative or alternative uses (RAO, 2003). If an asset is allocated to an alternative use and loses value in the course of these transactions, it is considered as specific (Williamson, 1979). The more a transaction requires specific investments and cannot be copied by other players, the less the outside incentive to invest in it (KEIL, 1999).

Another work written by Dyer et al (1998) strives to stress the competitive advantage of a firm viewed as a fact shared among the companies involved in the vertical relationship. The relation based view is grounded on four core categories: investments in specific assets; exchanges of expertise that result in joint learning processes; combination of resources and capacities that results in the creation of a unique product, service or technology; low transaction cost and effective governance. According to this author, alliances based on these four points are fully able to generate competitive advantages for both sides involved in a relationship, which would be the basis of the relation-based gains. "We define a relation-based gain as anomalous profits generated jointly in the external relationship, and which cannot be generated by another firm individually, being created solely through idiosyncratic links deriving from partnership" (DYER et al, 1998, p.862).

The third line, developed by Porter (1980), stipulates that the relationship between suppliers and customers in the industry is the bargaining power that they have, in terms of the negotiation process.

For Porter, a group of customers or buyers is powerful when: it channels most of the sales of a company; the products that it purchases represent its total cost, meaning that it will bargain more for prices; the products are not exclusive or differentiated, making the relationship acceptable to auctions and rivalries; a shift in supplier or vendor will result in low change costs; being in a low-profits period; forcing suppliers to seek better sales conditions; start-up of the manufacturing of the material for its product, reducing the negotiating power of the suppliers; the product offered by the supplier is not important for the quality of a product or service rendered by the customer; the buyer has a high level of knowledge, meaning that it has valuable information that may endow it with greater bargaining power.

A group of suppliers is powerful when: its sales to multiple customers, deploying considerable influence on price, quality and condition; it does not need to compete with substitute products in the industry where it operates; the industry is not important to the supplier and efforts to maintain the relationship do not occur; the feedstock provided by the supplier is crucial to the buyer; the costs of shifting suppliers are not feasible for the customer; this becomes a specific threat to integration within the industry.

Finally, the specific resource-based view, as already discussed, affirms that competitive advantages are achieved through value, rarity, non-imitability, non-transferability and non-substitutability of the resources of the firm. For Olavarrieta (1997), the relationships established among the core firm and its customers and suppliers may be socially complex and consequently hard to substitute or imitate.

For Durand (1999), not even the Transaction Costs Theory based on the works of Williamson in 1975 and 1985, nor even the analysis of the industrial organisation by Porter (1980) adequately explain the effects of relationships with suppliers on company performances. Initially because the transaction cost effects may vary among those involved in a specific transaction, not clearly defining the issue of variations in performance among the companies involved. Second, due to the fact that Porter (1980) is in the view of Durand (1999) overly simplistic when viewing customers and suppliers as merely antagonic forces. "The bargaining power theory of Porter is very limited when analysing differences in performance ratings, because relationships involving suppliers and customers are far more complex than merely antagonic (DURAND, 1999, page 8).

Using data provided by the Brazilian Statistics Bureau (IBGE), the target sector selected for this study consists of the manufacturers of power generators, transformers, electric motors and control and distribution equipment. Most of these companies have undergone sweeping changes since the 1990s, initially with market deregulation that directly affected every sector of the Brazilian economy, and then with the privatisation of the power generation and distribution segments, which altered its structural competitive bases. According to Matsudo (2001), as an integral part of this process, the agents in this sector became active players on this market, consisting of free consumers, co-generators, self-producers and energy traders. Added to this listing by the author are the suppliers of power generation and transmission equipment, the producers of electric motors and also the manufacturers of power control and distribution equipment, all of which are analysed in this research project. Through this new approach, the negative outcomes inherited from the State-run era can no longer be tolerated, and new business strategies based on competition must emerge. At the moment, the power distribution utilities are rated as the potential customers of these companies, and are subject to stringent regulation by the Brazilian Power Sector Regulator (ANEEL) in this sector. Through penalties written into their contracts, this hampers compliance and undermines the quality of the services rendered. From another standpoint, electricity price controls mean that these same potential customers must know how to reconcile costs with quality. On average, this sector accounted for 4.5% of Brazil's gross domestic product from 1997 onwards.

3. METHODOLOGY

3.1 Hypothesis and variables

In all, 151 questionnaires were completed. The data were checked individually, noting typographic errors, missing or blank replies and also inconsistencies in the financial and market performance data. The financial data were analysed through economic and financial indices in order to adjust any possible inconsistencies. For example, this process picked out exorbitantly high returns on assets, negative gross margins, operating margins less than net margins, profit generation capacity ratings that were completed out of step with returns on assets, and other aspects. This allowed all inconsistencies to be ironed out, resulting in a total net sample of 150 companies. The market performance data was run through the same process.

Some 72% of the surveys collected were answered by the medium and senior management of the companies, adding together the percentages obtained from the management through to the CEO. There was widespread participation among companies in operation for 25 years or less. These companies account for 56% of the total sample, or 84 companies in absolute figures. Some 25% of the companies manufacture more than one type of product.

Based on the studies by Durand (1999), the creation of supplier relationship that is less open to substitution requires time, coordination, trust, patience and money (LARSON, apud DURAND, 1999). "The heavier the investments in non-substituting the relationship with the supplier, the more the profitability and margin of the firm shrink and its market performance improves" (DURAND, 1999, page 8). Thus, for this author, the costs incurred in creating a non-substitutable resource in terms of the supplier act negatively on the financial performance of the company, while the qualitative aspects of the relationship drive its market performance. "This relationship underpins the competitive advantage of the firm, and helps its market performance" (DURAND 1999, page 7). According to the model drawn up by this author, the market relationship is a reflection of the market share of the firm and its position in terms of its competitive advantages, compared to its main competitors. In view of this, and grounded on the specific resource base view of the firm, the following hypotheses were drawn up:

H1: The less substitutable the relationship with its suppliers, the better the market performance of the company.

H2: The less substitutable the relationship with its suppliers, the lower the margin and profitability of the company.

In terms of customers, the author suggests that, when investing in these relationships, the company should focus on making its product essential to the customer, which will be willing to pay more for loyalty and quality and delivery guarantees offered by the firm (DURAND, 1999). Through this, the financial performance of the core company will increase as the relationship becomes less susceptible to substitution. The same may not be said of market performance, which will be influenced by constraints on developing new customers and market expansion (DURAND, 1999). This basis generates the following hypotheses:

H3: The less substitutable the relationship with the customers, the worst the market performance of the company.

H4: The less substitutable the relationship with the customers, the higher the margin and profitability of the company.

These secondary hypotheses covered by this survey consist of:

H5: The higher the market performance of the company, the better its margin and profitability.

H6: The higher the margin of the company, the higher its profitability.

The measures were calculated for 2001, 2002 and 2003, for all the variables. The dependent variables consist of: profitability, margin and market performance.

Independent variables: non-substitution of supplier relationships and non-substitution of the customer relationships.

Six indicators were used: SCSUP, SCSUPCUS, SCCUS, SCCUSSUP, COMPSUP and ADAPT. The SCSUP measured how much it would cost a company to switch suppliers. The SCSUPCUS was used to check the level, in terms of consequences, that the loss of a target company viewed as the customer of a given supplier would cause. These two variables are directly linked to the issue of the costs incurred in vertical relationships. In the view of Durand (1999), who extrapolated this relationship to the resource-based view, the higher the costs incurred, the less substitutable the relationship and the more firmly established is the relationship among the parties involved. This would be a type of differentiated relationship that is not based on power and threat. The SCCUS and SCCUSSUP variables follow the same reasoning, although from the customer standpoint. Meanwhile, COMPSUP measures the indications of competitive pressures, meaning whether the core company prefers its suppliers operating in rivalry centres such as auctions, rather than assigning high priority to continuing its relationships. Finally, ADAPT indicates the commitment of the company to its customers, meaning whether investments are assigned by the core company in order to satisfy its end-customers. The control variables are: company size, export level and import level.

The structural equations model was used. This study analyses the parameter estimates, meaning that the model was adapted to the data through calculating the estimated parameters. In contrast to Durand (1999), the GLS and ML methods were used for this purpose, as there is no need for huge samples for a reliable estimate of the parameters. Durand (1999) opted for the WLS method which, or according to Garson (2004) requires a sample of more than 2,000 cases for effective findings. In principle, this survey adopted the same strategy as that used by Durand (1999), namely confirmatory modelling.

Four adjustment measurements were used in the study: Chi-Square (x2); Goodness of Fit Index (GFI); Adjusted Goodness of Fit Index (AGFI) and Root Mean Square Error of Approximation (RMSEA).

4. ANALYSIS AND CONCLUSIONS

4.1 Analysis of the findings

The estimation methods used in this study consisted of the greatest likelihood as presented below. All the measurements are adapted to the proposed model.

The following Table presents the Spearman correlation coefficients among the study variables, as there are a large number of qualitative variables.

[FIGURE 1 OMITTED]

According to the standardised estimates presented in Figure 1, the ICGL and ROA reach 64% and 62% respectively for implied profitability; the ROS shows a positive association of some 0.62 with the margin. KEYPOS and BCG have significant implications on performance, having similar associations with the factor of some 0.53 (KEYPOS) and 0.55 (BCG). The SCSUP and SCSUPCUS have significant implications on supplier's substitution, having associations with the factor of some 0.54 and 0.60 respectively. SCSUS 0.52 and finally SCCUSSUP and ADAPT have implications for customer substitution, although ADAPT have a lower implication (0.45) than the others.

There is also a substitution implication in the supplier relationship for profitability of around 50%, when the supplier relationship is less substitutable, the higher the profitability. The substitution for the customer relationship has a negative implication of some -61% on profitability, demonstrating that the less substitutable the relationship with customers, the lower the profitability.

In terms of margin, the same remarks are valid, meaning that there is a substitution implication in the supplier relationship on the margin of some 82%, demonstrating that the less substitutable the supplier relationship, the higher the margin, with the non-substitution of the customer relationship having a marked negative implication of -87% on the margin. This demonstrates that the less substitutable the relationship with the customers, the smaller the margin.

No variable presented any effect on the market performance of the companies. In closing, there is a strong trend towards profitability affecting the margin by 82%, indicating that the higher the profitability, the higher the margin.

In terms of the qualitative variables, the average findings were compared for several characteristics observed, using an Analysis of Variance (ANOVA) among the different import levels, forming a total of three groups for analysis. The ANOVA may be used to determine the differences among the subgroups in terms of the dependent variables in the survey (CARLSON et al. 1997). This method presents significant findings, the more that the two groups are compared (CARLSON et al. 1997). When no homogeneity was noted in the variances, an adjustment was made through the Brown-Forsythe (BF) test. In the verified comparisons, the only variable that indicated a significant difference among the groups was BCG. It is also worthwhile stressing that Keypos was close to a significant finding. In this process of identifying the groups presenting differences among themselves, for this variable, multiple comparisons were carried out, meaning comparisons between pairs of groups, using the Games-Howell test, and also indicating a difference, when p-value <0.05.

4.1.1 Control variables

Isolating the BCG, the result of the multiple comparisons shows only a trend towards differences in the indexes among the groups with "no level of exports" and "1% to 25%", suggesting that this latter presents higher averages.

In the comparisons of the qualitative variables categories, the chi-square test was used, considering a significance level of 5%. The chi-square test was used as the variables are independent and qualitative. Thus, differences among the groups were taken into consideration when the p-value was less than 0.05 (p-value <0.05). It was noted that was no difference among the various import levels for any of the qualitative variables. In brief, the import level control variable generally did not show any impact on the different groups under analysis.

In order to compare the qualitative variables between the two groups of interest, "export" and "non-export", the t-Student test was used at a significant level of 5%. According to the findings presented above, differences were noted between the groups for the ROS and ICGL variables, in both situations generally indicating higher values for companies that did not export.

For the comparisons among the qualitative variables, the chi-square test was used taking a significant level of 5%. Through these findings, it appeared that there were statistically significant differences among the various import levels for SCSUPCUS and ADAPT, indicating that there is a higher percentage of low scores in the group of companies that do not export.

In order to compare the quantitative variables among companies with up to 99 employees and companies with 100 or more employees, the t-Student test was also used, with a significance level of 5%. These findings indicated that there are differences among the groups for the ROS, ICGL and BCG variables, indicating on average higher values for companies with fewer employees, except for BCG, which obtained a higher score for companies with 100 employees or more.

As mentioned previously, in the comparisons of the qualitative variables, the chi-square test was used taking a significance level of 5%. It was noted there were statistically significant differences for all the variables except COMPSUP. In all the comparisons, there is a higher percentage of high score among company with more employees.

5. CONCLUSIONS:

Among the secondary hypotheses drawn up for this survey according to Durand (1999), H6 was proven, demonstrating a positive implication on corporate profitability margins of around 82%. The introduction of the profit generation capacity index variable observed had the greatest effect on profitability, proving that this an effective measurement that is perfectly adapted to studies involving a resource based view and the structural equations model. In terms of the H5, although the BCG and KEYPOS variables observed have significant implications on the latent performance-dependent variable, this was not proven. Thus, the market performance of the core companies had no implication on their respective margins, represented by returns on sale collected.

In terms of the primary hypotheses, H1 and H3 were not proven through the proposed model. Despite the good fit of the model, with all the qualitative observed variables SCSUP, SCSUPCUS, SCCUS, SCCUSSUP and ADAPT, except COMPSUP, presenting quite significant implications on the independent latent variables, the non-substitution of customers and suppliers caused no implications for the market performance of the companies.

For hypotheses H2 and H4, the less substitutable the supplier relationship, the lower the margin and profitability of the company, and the less substitutable the customer relationship, the better the margin of the core company, in this order, with inverted findings presented. Consequently, the non-substitution of the supplier relationships has positive effects on profitability and margins, while the non-substitution of customer relationships has negative effects. This model was perfectly adapted to this inversion, proving that the less substitutable the customer relationship, the worse the financial performance of the core firms, and the less substitutable the supplier relationship, the better the financial performance of the core firms. The fact that the findings presented an inversion means that the hypotheses suggested by Durand (1999) may be subject to variations when surveys are carried out of different economic sectors in a country, demonstrating that the grounds underpinning the construction of hypotheses still requires more solid theoretical backing. This backing is obviously linked to vertical scope and value creation. The implications noted in the model were quite marked, mainly in terms of the margin. These figures reach some 82% for suppliers and -87% for customers, taking into account the standardised estimates. For profitability, the impacts were highly significant, but a little less marked at 50% for suppliers and -61% for customers.

It is important to mention some information that is required in order to construe more effectively the findings obtained through the survey. Initially, 94% of the companies surveyed belong to the power generator, transformer and distributor group, and these companies service the industry in general, as well as power generation, distribution and transformation utilities.

This sector currently operates under a concession system, and has undergone sweeping changes during the 1990s. According to data issued by the Brazilian Power Sector Regulator (ANEEL) the power distribution market is serviced by 64 companies: 21 are still State-owned and 43 are in private hands, the latter controlled by Brazilian, Spanish, Portuguese, French and US groups. These concessionaires cover 99% of Brazilian municipalities. Most of this market is clustered in Southeast Brazil, while stand-alone diesel-fuelled thermo-power plants predominate in the North and Northeast.

According to the Brazilian Regulator, this sector is expanding mainly among residential, rural and commercial consumers. This means that its growth rate, which has always stayed above the GDP growth rates, bears little relationship to the industries that have focused on developing more sophisticated technologies over the past few years, in order to ensure more rational use of electricity. In general, growth, expansion and investments that are increasingly intensive seem to be the keynote in this sector, which does not effectively mean value creation. Particularly among the private players, there is much concern with cleaning up their billings, pruning costs and bringing their performances to above average.

Formerly compact and homogeneous, this sector works on geographically demarcated bases, with little risk of newcomers and with pre-established core companies serving as suppliers. Through the restructuring of this sector, new suppliers appeared, as the new keynote was based on competition and free trade practices. However, some specific situations must be dealt with by these new players, such as: the obligation to purchase electricity in order to avoid adverse effects on supplies for their consumers; regulatory obligations imposed by Brazil's Power Sector Regulator; concern with competitive practices and also Brazilian culture. The purpose of the Brazilian Power Sector Regulator (ANEEL) is to ensure and regulate the rendering of services in this sector. Companies that fail to comply with the directives and laws regulating this sector are subject to fines ranging from light to heavy, or may even lose their power generation, transformation and trading licenses. This also includes the tariffs restatement and pricing model, which is not free from constraints. It should be noted that a concessionaire may work with all three functions, two or just one of them.

Within this context, companies supplying materials to these end-customers may adversely affect the financial performance by investing in these relationships. These benefits will probably appear only over the long term, as supported by the specific resource-based view of the firm. However, as the procurement procedures of power generators, transformers, distributors and control and distribution equipment manufacturers continue to be measured and controlled partially or totally by the bidding procedures run by the Brazilian Power Sector Regulator (ANEEL), as this entity announced, over the short and medium term, these suppliers should really focus more on seeking competitive prices among their suppliers, particularly as their product consists of a tangible resource that is not very complex and homogeneous. By investing in their suppliers, they may be willing to seek a structure that is increasingly less costly, enhancing quality, investing in reputation, and ensuring that the accounts are evenly balanced. At the moment, or even recently, at the time when the research data were collected, between 2001 and 2003, the mission of offering products at competitive prices and with cutting-edge technology was assigned to the core companies in partnership with their suppliers of inputs.

These broad-regulations have also affected the sub-sectors involved in the vertical scope of GTD which is confirmed through more recent information provided by the Economic Department of the Brazilian Electric-Electronic Industry Association (ABINEE). According to this entity, the sales of companies linked to GTD improved during the first quarter of 2005, compared to the same period in 2004. For the transmission segment, this increase was linked to the auctions that were conducted over the past two years, and new State and Federal Government investments and strengthening transmission grids. On the distribution side, there has been an increase in industrial consumption and the repercussions of the Light for All (Luz Para Todos) Programme, established by the Brazilian Government. Only the power generation segment failed to grow, with the prospects of further auctions for the second half of 2005.

Having noted this, the industry where potential customers are found for the core firms is subject to Government intervention. The Government must be acknowledged at all levels as a sixth force in almost all sectors of the industry, both direct and indirect (Porter, 1980). For Porter (1980) the regulatory acts promulgated by the Government may impose limits on the behaviour of companies as suppliers or buyers, meaning throughout their entire vertical scope. The author adds: "the Government may affect rivalry among competitors, influencing the growth of the industry, and its costs structure through regulation, and so on" (PORTER. 1980. Page 44). Thus, even though the resource-based view has been proven for the financial performance aspect, the aspirations of Porter (1980, 1985) may not be discarded.

The way selected by the Government to undermine free competition, as explained previously, is to regulate the system through contracts. This resource or asset, as classified by Collis et al (1997) was the way selected to control the concessionaires, ensuring their commitment to power generation transmission and distribution activities through an ex-ante step, designed mainly to curtail possible ex-post opportunistic actions on a market that should be allegedly free. In fact, many concessionaires have already begun to feel the weight of the contracts that they signed with the Brazilian Power Sector Regulator (ANEEL). For example, according to a news item published by the Reuters news agency in May de 2005, the Rio de Janeiro electricity distributor Light alleged that its Earnings Before Interest, Taxes, Depreciation and Amortisation (EBTIDA) fell 53% during the first quarter of 2005. According to the company, the reasons for this lie in the contract: initially due to the insufficient restatement granted by ANEEL of 5.02% and also because of clandestine connections siphoning off electricity in urban areas, particularly the Rio de Janeiro State capital. Nevertheless, ANEEL granted a further 6.13% restatement, but this did not produce effects in the expected time.

This same month, in an article published by Lage (2005) in the Folha de Sao Paulo newspaper, ANEEL announced measures to curtail electricity theft through clandestine connections, and agreed to alter Resolution 456 of its contract. Appendix G presents in full the contract signed by Light and ANEEL in 1996. Since then, the company has invested some R$3.2 billion, and states that it intends to invest a further R$1.0 billion by 2007, despite announcing the threat of a gradual departure from Brazil. It claims that the RAO (2003) reflects opportunistic ex-post or ex-ante activities arising from poorly worded contract specifications. The same claims have been set forth by Williamson (1979; 1985) and Keil (1999).

If concessionaires under private control are encountering difficulties in generating value and building up sustainable compatible advantages, the remnants of the State-run era that are now administered by the Eletrobras holding company offer even harsher indications of financial difficulties. According to Pamplona 2005), since 1997, the Brazilian Government has channelled R$6.0 billion into bridging operating shortfalls, with no type of improvement in service quality. The State-run utilities are clustered in North and Northeast Brazil, where the purchasing power of the population is lower. Possibly in these States, the local Governments deploy direct influence over the control of the GTD of these regions, fostering interests that are merely political and opportunistic.

This is why, based on the findings of this survey and adding this qualitative information to the specific resource-based view of the firm, grounded on the aspirations of Barney (1991) the relationship to the financial performance was proven, as the model presented strong compliance with the collected data. For the core companies, the mission is to invest qualitatively in specific resources, striving to build up a relationship of non-substitution and strengthening their relationships with suppliers and customers on cooperative bases. Meanwhile, the customers should wait for the results of these costs incurred to convert into value generation over the longer term. The forecasts are for more investments channelled to this sector, paving the way for growth and further opportunities. Moreover, the Government--the sixth force of Porter (1980) is hinting that the model adopted is flawed, and requires progressive fine-tuning in order to avoid a capital flight from Brazil.

6. FINAL REMARKS

The entire context described above may not apply to companies manufacturing electric motors. These companies focus far more on industry, and are to an increasing extent involved in cutting their outlays on electricity through high-technology products, without allowing the end-quality of their finished products to be adversely affected. This requires coordination and commitment within the vertical scope. Perhaps, if the sample of companies working with electric motors were to be separated out, the findings would be different. However, this target sub-sector had the lowest number of sample collections out of a total of 150 cases, meaning that out of all the companies surveyed, only fourteen of them work in this segment, and five of them rate electric motors as their secondary activity. Right from the start of the data collection stage, countless difficulties were encountered in finding companies in this sector. Many of them refused to supply data, while others simply import ready-made motors. It is worthwhile recalling that this group posts some of the worst shortfalls in the Brazilian Electric-Electronic Industry Association (ABINEE), with some information obtained indicating that industries are importing directly, including some finished products, mainly from Southeast Asia. According to the descriptive statistics, almost 40% of the companies interviewed do not import any type of consumer goods or feedstock, 43% import 1% to 25%, and the rest less than 20% above this level. If the sample of electric motor manufacturers were to be larger, the proportions would certainly be different.

A second remark should be stressed regarding the market performance data. According to the survey forms and records, these data were almost as hard to obtain as the financial data. Apparently, the way that this market has boomed over the past fifteen years does not seem to tie in with the information that the companies have to hand. For instance, there were a large number of companies with up to 99 employees that obviously do not have any accurate information on market shares, not even their own, far less those of their main competitors.

Surveys have already been carried out in Brazil by Balderrama (2004) in the auto-spares sectors, and by Meirelles et al (2005) in the software sector, proving that some of the assumptions set forth by the author makes sense. Even so, the failure to prove some of the hypotheses is nothing new. The manner in which Durand (1999), constructed his model, associated with the fact that this survey is sectorially demarcated, does not mean that the theory will not be effectively proven.

Finally, this study proved that Kirsten Foss and Nicolai Foss (2004) published in the Management Review entitled "The next step in the evolution of the RBV: integration with transaction cost economics". According to the authors, Transaction Cost Economics (TCE) may provide inputs for covering any possible gaps in what they called the specific resource-based view of the firm in its pure form, based on the works by Barney (1991) and Peteraf (1993). This integration can and should be extended in greater depth.

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Professor Claudio Malki earned his MA at Presbyterian University, Sao Paulo in 2005. Currently he is a professor of business administration at graduate program, Presbyterian University, Sao Paulo-Brazil.

Professor Dr. Leonardo Fernando Cruz Basso earned his Ph.D in economics at New School for Social Research, New York in 1985. Currently he is a professor of business administration at graduate program, Presbyterian University, Sao Paulo-Brazil.

Professor Dr. Diogenes Leiva Martin earned his Ph.D in financial economics at FGV, Sao Paulo in 1996. Currently he is a professor of business administration at graduate program, Presbyterian University, Sao Paulo-Brazil.

Table 1--Dependent variables and their measurements

VARIABLES       MEASUREMENTS

MARGIN          ROS = OPERATING PROFIT / NET SALES REVENUE

PROFITABILITY   ROA = NET PROFIT / TOTAL CORPORATE ASSETS
                ICGL = OPERATING PROFIT / TOTAL CORPORATE ASSETS

PERFORMANCE     KEYPOS = ([summation] i,j KSF x EVAL) / [summation]
                i,j KSF BCG = MARKET SHARE - COMPANY / MARKET SHARE
                - RIVAL

Source: The authors.

Table 2--Independent variables and their measurements

VARIABLES                      MEASUREMENTS

NON-SUBSTITUTION OF SUPPLIER   SCSUP
RELATIONSHIPS                  SCSUPCUS
                               COMPSUP

NON-SUBSTITUTION OF CUSTOMER   SCCUS
RELATIONSHIPS                  SCCUSSUP
                               ADAPT

Source: The authors.

Table 3--Model adjustment measurements

                                 Benchmark reference
                  Value found    indicating a well-
Measurement       in the Model     adjusted model

Chi-square test      0.030              <0.05
GFI                  0.92               >0.90
AGFI                 0.90               >0.90
RMSEA                0.079            0.05-0.08

Source: Prepared by the authors on the basis of the collected data.

Table 4--Matrix correlating the variables observed

                                                  SCSU
              ROA      ROS      ICGL    SCSUP     PCUS

ROA            1
ROS            0.48     1
ICGL           0.63     0.62     1
SCSUP         -0.09     0.00    -0.08     1
SCSUPCUS      -0.05    -0.08    -0.12     0.43     1
COMPSUP        0.04     0.00    -0.05     0.05     0.04
SCCUS         -0.02    -0.06    -0.15    -0.22     0.31
SCCUSSUP       0.05     0.00    -0.08     0.19     0.44
ADAPT          0.02    -0.02    -0.05     0.30     0.25
BCG            0.01    -0.03    -0.18     0.16     0.25
BCG (avrg)     0.02    -0.02    -0.16     0.18     0.25
KEYPOS         0.01     0.02    -0.01     0.03    -0.01

              COMP              SCCU                       BCG
              SUP     SCCUS     SSUP    ADAPT     BCG     (avge)

ROA
ROS
ICGL
SCSUP
SCSUPCUS
COMPSUP        1
SCCUS          0.00     1
SCCUSSUP       0.03     0.34     1
ADAPT         -0.02     0.27     0.26     1
BCG            0.13    -0.02     0.28     0.17     1
BCG (avrg)     0.13    -0.01     0.29     0.18     1.00     1
KEYPOS        -0.03    -0.10    -0.08     0.01     0.27     0.22

Source: Prepared by the authors
on the basis of the data collected.