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THE SIX TYPES OF CANADIAN SMES: COMPETING TO WIN IN TOUGH TIMES
Karl Moore and William C.T. Polushin
Canadian small and medium-sized enterprises (SMEs) are critical to Canada’s economic prosperity. When discussing this economic subsector, though, we need to go beyond the one-size-fits-all approach, particularly as it pertains to those companies that are active in international business. Based on their research and consulting work in the Canadian SME community over the past 15 years, the authors have identified six distinct types of SMEs that engage in trade. In this article they outline the six types and propose strategies for them to stay competitive on the international front during and after the current recession. Les PME canadiennes sont indispensables à la prospérité du pays. Mais nous devons élargir notre approche de ce sous-secteur économique, surtout pour les entreprises qui font du commerce international. À la lumière de leurs recherches et de 15 années de services de consultation auprès des PME, les auteurs ont identifié six types d’entreprises et proposent des stratégies qui préserveront leur compétitivité sur le marché international, aujourd’hui et au-delà de la présente récession.

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ithout a doubt, we are currently living in the most challenging economic times since the Great Depression of the 1930s. Governments and central banks around the world are taking aggressive and, in many cases, unprecedented steps to stimulate our national economies in a way that they hope will reverse the negative impacts created by the global financial crisis and put countries on the road to positive and sustainable economic growth. Beyond the broader macroeconomic picture, how are Canada’s small and medium-sized enterprises (SMEs) – those companies that represent over 99 percent of Canada’s enterprise base — responding to these tumultuous times? In the news, we are accustomed to hearing about the ebbs and flows of our industrial giants, such as AbitibiBowater, Air Canada, Bombardier, General Motors, Nortel, RBC and Suncor Energy, among others, but what about this next tier of companies? Canadian SMEs are critical to Canada’s economic prosperity. When discussing this economic subsector, though, we need to go beyond the one-size-fits all approach, particularly as it pertains to those companies that are active in international business. Based on our separate research and consulting work in the Canadian SME community over the past 15 years, we have identified six distinct types of
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SMEs that engage in trade. In this article we will outline the six types and propose strategies for them to stay competitive on the international front during and after the recession that the Bank of Canada now says ended in the second quarter.

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MEs are an integral part of the industrial fabric of Canada. Of the approximately 1.1 million employer businesses that exist in our country, 97.8 percent are small enterprises (fewer than 100 employees), 1.9 percent are medium-sized enterprises (100 to 499 employees), and the remaining 0.3 percent are large enterprises (500 or more employees; see table 1). Their contribution to Canada’s economic prosperity is also significant. The following list highlights a number of the more noteworthy facts: G On average, small businesses that have fewer than 50 employees contribute about 23 percent to Canada’s gross domestic product (GDP). G As of 2007, SMEs employed approximately 7 million individuals in Canada, or 64 percent of the total labour force in the private sector. G Small businesses created approximately 100,000 jobs in 2007, accounting for over 40 percent of all jobs created in Canada.

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The six types of Canadian SMEs: competing to win in tough times
Querétaro site will also manufacture the electrical harness and perform subassembly systems installation. Those Canadian-based suppliers of Bombardier that have been vendors of materials for the composite structure, or parts for the electrical harnesses of previous Learjet programs, must now take the necessary steps to establish themselves as approved vendors in n the international trade front, Mexico — assuming the Canadian supCanadian SMEs are active, but the pliers want to grow with Bombardier. impact of their exporting activities on Initially, a particular Canadian suppliCanada’s economic performance is relaer, given its experience with As the forces of globalization take even deeper root in Canada, Bombardier Aerospace and and as our industrial base of predominantly small and medium- technological advantage over Querétaro-based vensized enterprises respond to the challenges of an increasingly dors (depending on the integrated and competitive economic environment, the product class), may be able number of SMEs active in international commerce — either export product directly to Mexico, but as the depth directly or indirectly — will undoubtedly rise. and capabilities of more effectively compete in the Bombardier’s supplier base in tively minor — as compared to large global economy. Querétaro improves, the Canadian enterprises. In 2006, for example, the vendor will have to think about establargest 4 percent of exporting establishlishing a manufacturing/ supply base ments accounted for 84 percent of the 1. SMEs that are an intimate part of the in Mexico. Bottom line, as our total value of merchandise exports. value chain of a flagship multinational Canadian champions, like Bombardier, Those exporting less than $1 million per enterprise (MNE). Firms that supply direct their manufacturing operations year represented 72 percent of all estabBombardier, CAE, Nortel or other large to markets across the globe to enable lishments, but only 1.5 percent of the Canadian MNEs face an ongoing disthem to be more competitive, total value. persion of the MNE’s value chain to Bombardier’s Canadian-based suppliHowever, these statistics do not various countries around the world. ers need to adopt a global mindset if tell the whole story. In its 2004 Report For example, on May 29, 2008, they hope to remain an integral part of on Trade, the Canadian Federation of Bombardier announced that its facility supply chain. this MNE’s Independent Business stated that 51 in Querétaro, Mexico, will manufacResearch interviews with hunpercent of Canadian SMEs engage in ture the composite structure for its alldreds of executives in SMEs and MNEs trade — either directly through new Learjet 85 business jet. The exports or imports (36 percent), or as part of a supply chain that helps other TABLE 1. CANADIAN BUSINESSES BY NUMBER OF EMPLOYEES, 2007 business contribute to Canada’s trade activities (15 percent).
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In 2003 (the latest year for which Industry Canada has published this particular information), SMEs accounted for $5.3 billion of the total $13.4 billion (39.5 percent) spent on scientific research and experimental development in Canada.

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beyond the traditional grouping of SMEs as a homogeneous group and segment them along lines that reflect their distinctive roles and positions in Canada’s international trade system. Not only will this lead to the development of government policies that will better respond to the unique nature and challenges of our trading SMEs, but commercial plans and strategies can be developed by, or for, senior managers of these enterprises that will enable them to

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s the forces of globalization take even deeper root in Canada, and as our industrial base of predominantly small and medium-sized enterprises responds to the challenges of an increasingly integrated and competitive economic environment, the number of SMEs active in international commerce — either directly or indirectly — will undoubtedly rise. Given this situation, we believe that it is important for government and industry to go

1 to 4 5 to 9 10 to 49 50 to 99 100 to 499 500+ 0 2.7 1.9 0.3 10 20 30 Percent 40 50 21.3 20.1

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Source: Statistics Canada, Business Register, December 2007.

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Karl Moore and William C.T. Polushin
abroad — that will enable MNE — to MNEs. Becoming a supplier to a flagby Karl Moore have revealed the reduce costs and effectively weather ship firm creates a potential for SMEs importance of linking with Rugman the economic storm. In this case, the to supply globally, in some cases leadand D’Cruz’s concept of flagship firms SME’s economic well-being is coming to foreign subsidiary opportunities. (Multinationals as Flagship Firms, Alan pletely tied to the economic health Canadian media may question M. Rugman and Joseph R. D’Cruz, of its larger and geographically disBombardier’s plan to manufacture the Oxford University Press, 2000). They persed buyer. composite structure and electrical harsuggest a Five Partners Model of business for its Learjet 85 business jet in ness networks forming around a flagQuerétaro versus Quebec or Ontario, ship multinational. Rugman and 2. SMEs that are the canadian subsidiaries but Bombardier is — as the company D’Cruz’s system has two key features: of foreign MNEs. This group of Canadian puts it — a global transportation comthe presence of a flagship firm, which SMEs generally does not generate a pany with a presence in more than 60 pulls the network together and progreat deal of attention in government countries around the world. To remain vides leadership for the strategic manof industry circles — perhaps because competitive in the aerospace industry, agement of the network as a whole; they are not perceived as “truly it must organize its manufacturing and secondly, the existence of firms Canadian.” We feel that this can often portfolio in such a way that allows it to that have established key relationships be a mistake. While many of these subeffectively respond to international with the flagship. sidiaries are primarily sales and service competitors, a global customer base The Five Partners Model of a busiarms of foreign MNEs, they also have ness network encourages ecothe potential to earn internanomic exchange among partner tional or global subsidiary manCanadian SMEs are critical to organizations through co-operadates, or responsibilities that Canada’s economic prosperity. tive, non-equity relationships. would allow them to add signifWhen discussing this economic Specifically, the partners are a icant numbers of interesting subsector, though, we need to go and challenging jobs to leading “flagship firm,” which is an MNE; key suppliers; key cusCanada’s economy. beyond the one-size-fits-all tomers; select competitors; and Karl Moore, in collaboraapproach, particularly as it pertains the non-business infrastructure tion with Julian Birkinshaw of to those companies that are active London Business School, has (NBI). The NBI comprises governin international business. ment, non-traded service sectors, carried out research on how educational institutions, social subsidiaries earn these manand the multiple demands (governservices, trade unions, trade associations dates. Their findings tell us that a ments, unions, employees and suppliand non-profit cultural organizations, larger number of subsidiaries could ers) of the countries in which it has providing highly diversified perspectives expand their contributions along varhave physical operations. to the firm. The business network’s govious elements of the MNE’s value In the 2008-09 economic downernance structure depends upon (1) chain. The good news is that for most turn, the news is filled with examasymmetric control of the network’s industries, Canadian companies ples of large industrial enterprises strategic purpose by the flagship firm would rank among the top 10 or so scaling back production or laying off and (2) structuring aspects of the partnational subsidiaries that are typically workers in response to tepid demand ners’ business systems (value chains) to on the short list of subsidiaries to be conditions. In this context, SMEs create a network business system. considered for devolved international must be particularly sensitive to the responsibilities. It is a limited set of operating dynamics of their MNE he key implication of Rugman and subsidiaries to choose from because of clients and be ready to offer them D’Cruz’s model is to carefully conthe need for world-class capabilities, supply solutions – in Canada and sider the SME’s alignment with key sophisticated infrastructure and a familiarity with leading — edge products and customers when choosing TABLE 2. COMPOSITION OF EXPORTERS BY COMPANY SIZE where to locate MNE activities. Employees Number of Exporters Percent of Exporters In order to understand this phenomenon a broader perspective helps Less than 50 33,318 73 demonstrate the evolutionary path 50 to 99 5,933 13 100 to 199 3,651 8 for many global MNEs. What is the 200 and over 2,739 6 number one advantage of being a global firm? Ten years ago economies Total 45,641 100 of scale and scope may have been the Sources: Statistics Canada, Profile of Canadian Exporters: 1996 to 2006, March 11, 2008; Business answer. Today, it is increasingly clear Development Bank of Canada.
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The six types of Canadian SMEs: competing to win in tough times
network. From the subsidiary CEOs’ viewpoint, this allows them and their managers to be involved in global strategic decisions and execution beyond their national borders. The result: more jobs and highly paid positions, and a better environment in which to recruit Upward mobility means transferring to the head office, and and retain the best and naturally, not everyone wants to move with their families to New Jersey, expensive London or faraway Tokyo. All in all, this brightest. challenge for The centralizing aspect of a global strategy means considerable Canadian subsidiaries is clear: ensure your place as a losses for lead subsidiaries. lead subsidiary capable of ficult to recruit clever and ambitious international responsibilities, be it in Research interviews with several hunyoung people from their country, as R&D, manufacturing, marketing or cusdred executives of large MNEs in one can only rise so far in the subtomer support. Many subsidiaries have Europe, North America and Japan sidiary. Upward mobility means transmanaged this. suggest it is by lead subsidiaries, ferring to the head office, and We and colleagues have conductwhich capture international or global naturally, not everyone wants to move ed interviews with leading Canadian responsibilities in MNEs. with their families to New Jersey, and European subsidiaries for over a expensive London or faraway Tokyo. decade on this topic. This research n the 1980s and into the 1990s, All in all, this centralizing aspect of a suggests that many Canadian and holding a watching brief may have global strategy means considerable European subsidiaries can successfully been sufficient participation in one of losses for lead subsidiaries. compete for broader responsibilities the three regions as long as you had within the network of their parent considerable activities in the other firm. Lead subsidiaries, especially ver the past few years, we have two. Today, leading firms need to harthose operating in the Triad, usually seen a more positive side of this ness capabilities in the other two nonhave earned their roles rather than trend. Multinationals are increasingly home regions. For example, it would been given them by an authoritarian questioning why adopting a global be naive to suggest that Finland is the head office. CEOs of lead foreign substrategy requires global activities to only country claiming mobile phone sidiaries have a special role to play in move to only the home country. The innovation. Other leading countries transforming their subsidiaries into seemingly obvious yet critical idea: active in this industry include more than mere sales and service outcentralizing aspects of your global Sweden, home of Nokia’s rival Ericsson; the US, with industry giant Motorola; This research suggests that many Canadian and European and South Korea, with subsidiaries can successfully compete for broader Samsung. People no longer responsibilities within the network of their parent firm. Lead search for innovative ideas in one place. Today, multi- subsidiaries usually have earned their roles rather than been nationals must be quick to given them by an authoritarian head office. adopt new ideas from lets. Specifically, they can lead the activities not only in the home counEurope, North America and Asia, development of world-class business try but, for some aspects of global because these are the key areas for capabilities that position their substrategies, whether product manageinnovation and R&D. sidiary to win broader regional ment, manufacturing or R&D or marIn the last 20 years, adopting a responsibilities for achieving corpoketing, in lead subsidiaries. This idea global strategy meant centralizing rate goals. Therefore, a subsidiary’s has been labelled “decentralized cendecision making in the home country capability could be its skill in develtralization.” From a head office perof the MNE. This development may be spective, this means harnessing oping and manufacturing a product a natural outgrowth of a global strategy. However, it often has a dysfuncmultiple points of innovation in all line. For example, Pratt and Whitney tional impact on the lead subsidiaries. three regions of the Triad (North Canada manages a critical line of Under this approach, the interesting engines for P&W worldwide. America, Western Europe and Asia), and strategic parts of the decisionLikewise, Panasonic in Spain handles creating a net increase in the overall making process are taken away and key aspects of pan-European strategy. innovativeness of the MNE’s global that the top advantage is the ability to harness learning and innovation throughout the worldwide network of the global multinational. Therefore, the critical question becomes how to harness this potential capability. made elsewhere. This reduces the subsidiary’s role to one of implementer — clearly less exciting and less strategic. The result: fewer higher-income positions and a generally de-motivated senior staff. Also, it becomes more dif-

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Karl Moore and William C.T. Polushin
4. SMEs that are going global from conception. Some of the most intriguing and certainly ambitious of SMEs are those that are going global from conception. Typically, this occurs in technology-based industries where shortened life cycles, high R&D costs and sheer opportunity We believe that it is important for government and industry to drive firms to take this go beyond the traditional grouping of SMEs as a approach. However, nonhigh tech firms are also homogeneous group and segment them along lines that considering this strategy. reflect their distinctive roles and positions in Canada’s For example, Hexago is a international trade system. technology-based firm and and Karl Moore have proposed havglobal provider of network products. A One of our most important finding a minimum level of sales in all sample list of its customers includes ings was that the senior team of the three parts of the Triad; others have Korea Telecom, Chunghwa Telecom, subsidiary, especially the lead subargued for other measures. Academic NTT, France Telecom, AT&T, KDDI, sidiary CEO, was central to a subdebate aside, more Canadian SMEs WIDE Project, T-Systems, Teleglobe, sidiary winning international have moved on from the past and Cyberport, Spawar, the US Department mandates. Thus, it is critical for gone global. of Defense’s Defense Information Canada’s economy to encourage CEO’s A central concern for these firms is Systems Agency (DISA), the US Air and their teams to aggressively pursue establishing global routes to market or force, General Dynamics, BAE, international responsibilities so that channels of distribution. One firm that CERDEC-Army, Boeing, Panasonic, this networking continues to grow. has done this is the Trudeau NEC, Surfnet, Ukerna, AARNet and Corporation, a designer and marketer Renater — an impressive set of global rom the perspective of SMEs, this is of kitchenwares located on Montreal’s customers. Established in 2002, a variation on the theme of flagSouth Shore. With only 170 employpresently Hexago has just over 50 ship firms, except that this phenomeees, the vast majority in Canada, employees, the bulk of whom are in non is potentially more advantageous. Trudeau sells in 40 countries around Canada, while key sales and marketing The key challenge for the SME in this the world. To accomplish this distribustaff reside in China, Korea, India, case, as with flagship firms, is to develtion Trudeau has set up three manHong Kong and Malaysia. At the outop supplier relationships with MNEs agers in Europe and one in China to set, the founders of Hexago saw themthat hold international or global manestablish relationships with distribuselves as competing on a global basis dates. There are two critical differences tors in those important markets. and did not adopt a careful, slow interbetween Canadian subsidiaries and flagships firms, though. Firstly, flagship firms are There are many more Canadian subsidiaries that are or could more apt to understand be lead subsidiaries than there are Canadian MNEs that could their affiliation with MNEs as a monogamous relation- play the role of a flagship firm. ship with a certain degree of Like other Canadian SMEs that are nationalization process — more conloyalty, whereas with Canadian subexpanding into international markets, ventional for SMEs’ early phases. sidiaries, this is not as important. Trudeau has taken a number of years For this group of SMEs, there is an Secondly, there are many more to establish a global presence. In a overriding need for founders with the Canadian subsidiaries that are or could recession, the path to commercial sucheart of a lion, ambition and drive, as be lead subsidiaries than there are cess is, without a doubt, longer and well as parallel support from the Canadian MNEs that could play the more complex, but that in no way Canadian government to help with role of a flagship firm. should deter these companies from financing and the building of global their international efforts. In fact, connections. 3. SMEs that have gradually gone global when SMEs are facing a soft domestic These SMEs follow the more tradimarket, we believe that they should tional model of firms that go interna5. SMEs with an exclusive or dominantly proactively pursue commercial opportional over a number of years. The North American strategy. Alan Rugman tunities outside of Canada to better more recent trend is those firms that of Indiana University has written a are increasingly international as well facilitate sales growth. great deal about the about the imporOPTIONS POLITIQUES
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The research shows that foreign operations build their stature in the global corporate network by working diligently to establish world-class capabilities, and by communicating those competencies to the head office and other lead subsidiaries.

as adopting a global strategy. This is new, and exciting. When does SME have a global, as opposed to an international, strategy? There are no hard and fast rules. International business researchers have suggested various criteria. For instance Alan Rugman

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The six types of Canadian SMEs: competing to win in tough times
esearch suggests that Canadian family business owners are more apt than their US counterparts to “cash out” of their businesses as they approach retirement age rather than hand the business over to one of their children. Boomers are looking to impart their business to an ambitious younger person in their 30s or 40s, someone with a decade or more of business experiSome of the most intriguing and certainly ambitious of SMEs ence yet with the energy, determination, ambition and are those that are going global from conception. Typically, need to achieve more typical this occurs in technology-based industries where shortened among those in a younger lifecycles, high R&D costs, and sheer opportunity drive firms age group. We believe that as this generational handover to take this approach. occurs, these younger people will be quite open to international into the American men’s suit market tives would do well to avoid its siren expansion. This is a specific group that and are able to produce products call. The action has always been the Canadian government should target. which are highly successful in the US. regional, and will remain so…We A number of business schools across the Though Peerless does some manufacfocused a recent research study on the country have opened or will be shortly turing in Asia, all three have retained activities of the Fortune Global 500.” It opening centres for family businesses. the bulk of their production in is widely accepted that a relatively We encourage the government to considCanada, and perhaps more importantsmall set of multinational enterprises er working with these family business ly have kept their critical design, maraccount for most of the world’s trade centres to develop programs that target keting and sales activities in Canada. and investment. Indeed, the largest these firms and their potential for inter500 MNEs account for over 90 percent national business. of the world’s stock of foreign direct 6. Family owned and operated SMEs. Traditionally, most financial instiinvestment and they themselves conCanadian family businesses are a sigtutions and government policies have duct about half the world’s trade. Their nificant part of Canada’s SME popuregarded SMEs as a homogenous group. importance is paramount; where they lation. A large number of Canadian We have outlined six types of SMEs and lead, so goes the world. But some of family-owned firms will be undergobriefly suggested their parts to play in the results were surprising. The 500 ing a generational change in ownerCanada’s globalization efforts. We MNEs are not “global” businesses, in ship and operation. Our five think it is important to segment SMEs the sense of having a broad and deep previous categories would certainly because at times they adopt quite difpenetration of foreign markets across include some family-owned SMEs ferent strategies on their path to going the world. Instead, most of them have but we chose to put them in their international and are best helped by the vast majority of their sales within own category because of some support that is tailored for their needs. their home triad of North America, the unique challenges they face. Beyond government and other supEuropean Union, or the Japanese marAccording to “The First Success port, we have also suggested ways that ket in Asia. The activities of these firms Readiness Survey of Canadian senior management of these SMEs can tell us the Triad economies are still Family-Owned Businesses,” by the effectively exploit their strengths as paramount. Region is where the action Deloitte & Touche Centre for Tax they go global, even in the toughest of is at. As our research demonstrates, Education and Research at the economic times. very few large MNEs are truly global. University of Waterloo, an estimated Consequently, a regional focus may be 27 percent of Canada’s family busiKarl Moore is associate professor in the more appropriate for smaller SMEs. ness leaders will retire in the next Desautels Faculty of Management at Three of Canada’s leading men’s five years, another 29 percent in six McGill Univesity and associate fellow at suit manufacturers, Jack Victor, to 10 years, and an additional 22 perGreen Templeton College, Oxford Peerless and Samuelsohn, have adoptcent in 11 to 15 years. University. [email protected]. William ed a strong regional focus strategy by Many of these firms were started C.T. Polushin is president of AMAXIS Inc. centring the majority of their value decades ago by boomers who are now chain in North America. The and founding director of the Program for entering their late 50s and early 60s. Canadian industry faces tough comInternational Competitiveness at the Many are actively looking for successors petition from China and other Asian Desautels Faculty of Management. outside their own immediate families.
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tance of region. Two of his books, The End of Globalization (AMACOM; 1st edition, 2001) and The Regional Multinationals (Cambridge, 2005), have had considerable impact. In an article in Strategy and Business, Rugman and Moore argue, “Much of the rhetoric around globalization is out of sync with reality and multinational execu-

suit-producing nations, although Canadian businesses can use the physical and cultural proximity to the US as leverage. While it can take weeks to have a suit made and shipped from Asia, these firms can have suits delivered to US retailers often on a nextbasis. Also, Canadian day manufacturers have a deep insight

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