Leadership: Guts not included

For Canadian business leaders, change is the new name of the game. Do you have what it takes to thrive in the new global economy?

In life, you face moments when the world as you know it suddenly changes. You may or may not see it coming; it may or may not be within your control. But one way or another, there comes a point when you suck in a deep breath, take a hard look into the proverbial mirror and assess whether you’re ready to adapt to the challenges ahead.

Business leaders face such a moment now. The economic winds that even five years ago shaped this country’s enterprises are now shifting, and kicking up dust that can obscure an executive’s vision. The loonie trading at par with the greenback. The American economy faltering as a housing crisis turns into a credit crisis, the severity of its effect on Canada uncertain. Productivity still lagging other countries, as investment in new technology falls short. Skills shortages destined to get worse, as experienced baby boomers step into retirement. New employment directly tied to immigration. Global competition from the emerging economies of China and India relentlessly on the rise. Climate change pushing western nations to redraw the economics of, well, nearly everything.

In other words, it’s time for a gut check.

The meaning of leadership changes in times like these. It’s not enough to run an efficient business. Executives need the vision to craft a strategy that prepares for an uncertain future, and do it in a way that places their businesses not in a different regional, national or even continental context — but a global one. That will require executives to question long-held assumptions about the way Canadian companies have always worked, and they must be able to inspire their employees to adapt.

Are business leaders up to the challenge? Some are. But in general, Canada seems behind the curve in terms of exhibiting the global leadership qualities that help businesses thrive. “If you look at the Canadian record, it’s clear that we’re not the global player we should be,” says Anne Golden, president and CEO of the Conference Board of Canada, an Ottawa-based think-tank. “Do business leaders have the right skills? I think they do. I think our leaders are as smart as any leaders in the world. We graduate smart people. Whether they are globally oriented enough is the question. Whether they have a tolerance sufficient for risk is the right question. Whether their attitudes are sufficiently ambitious and entrepreneurial is the question.”

The answers are hard to pin down. But anecdotally, some of the leading voices in business and the economy are not bullish. “There are two fundamental problems in Canadian business,” says Jayson Myers, president of Canadian Manufacturers and Exporters. “One is leadership, and the other is the way people are managed. And those are two critical elements of competitive advantage for any company right now.”

As a matter of public policy, there is no obvious remedy. It just seems Canadians don’t have that certain fire in the belly. “There is some truth to the notion that in the Canadian character, there is a high level of complacency, and that we’re not as hungry in terms of our character to be global best,” says Golden. “In terms of knowledge and experience and attitude and appetite, we don’t appear to have as much as other countries.”

One reason may be Canada’s economic make-up. The foundation of the economy is natural resources, and a banking industry to help finance their exploitation. Once resources are extracted, they are distributed: transportation industries are another pillar of the economy. Some would even classify telecommunications as a distribution industry. Governments have heavily regulated and protected many of these industries, so there has been less reason to look outside Canada’s borders. But more importantly, the competitive advantages inherent in those businesses — their hard assets — are not easily exported.

The result, some argue, is that Canadian business leaders do not have a predilection for adding value and creating wealth. “We have tremendous resources, we’ve got some of the best people in the world, we’ve got some of the best innovation and research going on in the world, but we don’t do a very good job of building wealth around that,” says Myers. “We’ve got a culture that is far more used to redistributing wealth than it is to creating wealth. We create lots of marketing and financial analysts out of our business schools, but we don’t really focus on careers in creating wealth — we focus on careers in sharing wealth.”

The other reason Canadian business leaders tend not to exhibit a globally competitive fire is that a disproportionate number of companies are small. According to Statistics Canada’s 2006 figures, there are roughly 2.3 million businesses in Canada — and about 1.2 million of those are self-employed individuals with no employees. Of the other million or so companies, 97.5% have fewer than 100 employees. Just 2.2% have between 100 and 500 workers, and an infinitesimal 0.3% have 500 or more. All told, 58% of companies have between just one and four employees. “That’s the fabric of Canadian businesses,” says Jean-René Halde, president and CEO of the Business Development Bank of Canada (BDC), a federally owned financier that focuses on small and medium-sized companies. “I think the issue is there.”

Halde has tried to compare those figures to the U.S., and after adjusting for different statistical methodologies, he figures medium-sized companies — those between 100 and 500 employees — make up something like 10–15% of American enterprises. That might be a crucial difference, because only when a company gets bigger can a chief exec step back from operations and see a bigger picture. “Too often we are caught up in the day-to-day challenges of business, and too infrequently are people taking a strategic look ahead and being able to prepare their businesses to respond to challenges, and manage change,” says Myers. “Especially right now, many companies are focusing on how they can cut costs, but most have to be looking at where some of the strategic investments have to occur.”

But then, small companies rarely have the capital on hand to invest in a strategic change. “The problem when you’re a [small or medium-sized business] is your resources aren’t always terribly deep,” says Golden. “It’s hard to drain the swamp when you’re up to your proverbial whatever in alligators.”

Why does Canada have so many small companies? Geography, and the country’s dispersed population and fractured consumer markets, are factors. But experts also point to high numbers of so-called lifestyle entrepreneurs who are satisfied with growing their businesses only to the point of attaining the three B’s: Bimmer, beach and boat. Similarly, many entrepreneurs are quick to sell when a good offer comes along, rather than risk passing it up.

There’s that perception of the complacent Canadian again. Myers stresses that in cross-border surveys CME has conducted, entrepreneurs in either country report similar tolerances for risk — but Canadian business owners often cite a lack of resources as the inhibitor.

All this might not matter much, if only uncertainty wasn’t the name of the game. Globalization keeps bumping the chess board, forcing companies to change strategies. The Conference Board uses the term “integrative trade,” but really it means supply chains have gone global: companies are competing in terms of the component parts of each product, not just the finished product.

Businesses small and large have to assess this new dynamic, says Halde: “You really want to figure out where you fit in all those global value chains. The need to basically reinvent your business model applies to an awful lot of people.” Manufacturers have been going through this for some time now, thanks to 15 years of free trade with the States. But Halde thinks many service-industry businesses could be caught off guard, because for years they seemed to have been insulated from globalization. “What we thought was pretty safe 10 years ago, people are realizing that even that is no longer that safe,” says Halde. “The speed of changes is such that, with so many influences all happening at the same time, boy, you could be vulnerable overnight if you don’t see the train coming.”

How do you cope? It starts with some soul-searching as to whether an executive really understands what her business is. “Everybody has to be in the business of offering a solution,” says Myers. “And do you really understand how you offer a solution to your customers?” That may lead to a new outlook on the processes upon which a business really runs, and how those could be changed. New technologies can often be red herrings, according to Myers, because a leader will spend money fixing the wrong problem.

But the hardest thing for business leaders is seeing the new opportunities. Canadians suffer from regional myopia: if they’re not fixated on selling to other Canadians, the United States is the de facto export market. It’s rational: 75% of Canada’s trade is with the U.S., the markets are closely integrated, and that strategy has worked like a charm for years. “For a long time, companies have really been able to take advantage of a very lucrative market south of the border. It’s been good business just getting product out the door,” says Myers. “Now, that market is not as strong, the dollar is eating into profit, and just getting product out the door doesn’t cut it anymore.”

It’s time to reassess that strategy, and it starts by looking at global markets. Unfortunately, the current crop of business leaders don’t have a lot of great role models of Canadians taking the world by storm. But that is a generalization, not a rule. Myers, for instance, points to the well-known first- and second-generation immigrant entrepreneurs that have had global success in manufacturing: Frank Stronach, Mike Lazaridis, Robert Schad, Frank Hasenfratz, Klaus Werner. But Myers also says he hears from manufacturing entrepreneurs that they don’t think graduates of business schools are being taught the skills to be leaders who can take over their businesses. As demographics shift, Canada will rely increasingly on the talents of immigrants to not only fill the ranks of labour and managers, but also to leverage their iherently broader perspective. If Canadian companies need to reorient their strategies for more global business, their greatest advantage could be the ability to attract the next generation of leaders from around the world.

At the BDC, Halde sees many small and medium-sized businesses that are, in fact, adapting to a new business climate — but also many others that are not. “The ones that think strategically have fared substantially better because they saw what was coming, and they adjusted early,” he says. Those leaders chose to develop new networks of suppliers and partners, to re-engineer processes, to overhaul IT platforms and to work on intellectual property. “The firms that invest in intangibles smartly I think will adjust well,” Halde adds. Still, “quite a number” of business leaders have reacted operationally, trying to cut costs, which in Halde’s view is not as sound as focusing on strategy first, operations second. “How many are in each camp? I wish I knew,” says Halde. “Clearly, the camp of those that are not reacting quickly, proactively and thinking strategically is too big. It’s always too big.”

Sooner or later, the cold reality of business in the early 21st century will hit home. “You’re not safe anymore — that to me is the big difference,” says Halde. “For a long time, we had all these high-knowledge type of jobs, engineers and so on — until you start to realize that India graduates something like 200,000 engineers a year. And so not only are some of our products becoming commodities, but there are also services that could become a commodity pretty rapidly.”

Golden does not mince words. “I think we’re into a period of huge uncertainty, and we’re in the middle of gigantic paradigm shift,” she says. “We do need to change. The world has changed.” Do Canadian leaders have the guts?