How to own the future

For many entrepreneurs and executives in Canada, this is a time of greater change and uncertainty than they have known before in their careers. While much of this flows from the aftermath of the Great Recession, other powerful forces are also part of the mix: ongoing technological change, consumer empowerment, demographics, environmental concerns, changing patterns in labour and immigration… the list goes on.

The best way to deal with change, of course, is to identify the forces currently building or at work, then prepare and execute a response. To aid Canadian SMEs with this challenge at such a critical time, PROFIT consulted a wide range of experts—academics, entrepreneurs, analysts and consultants—for help in identifying those forces. We also tapped their collective wisdom to determine who will be most affected and what steps business leaders can take in response, whether that means seizing an emerging opportunity or just managing your people better.

Ultimately, our research has led us to three key trends that will change your business more than any others. Master these and you’ll master your future.

REJECT THE NOTION THAT “FLAT” IS THE NEW “UP”
Is it déjà vu all over again? After a rip-roaring, stimulus-fuelled start to 2010, Canada’s economy entered the second half sputtering. Our GDP is still growing (we assume) but at a surprisingly tepid rate—2% annualized growth in the second quarter, for example, a full point below the Bank of Canada’s predicted 3%.

While BoC Governor Mark Carney elected to go through with his third consecutive quarter-point hike in the overnight lending rate at the BoC’s most recently scheduled interest rate announcement on Sept. 8, most observers now believe he’ll stand pat in October, the next time rates are up for review. This go-slow sentiment reflects a big change since June, which saw the BoC’s first rate hike since 2008. Then, the idea that growth and inflation would soon be in a renewed battle for headline space with recession and deflation seemed too remote to consider.

Yet, here it is. And the quicker you get yourself and your business tuned to the idea, the better. Because whichever specifics unfold in the coming months—a rebound here, a double-dip recession there—there’s a solidifying consensus that slow growth will be with us (and our neighbours) for some years to come. Even before the steeper than expected second-quarter slowdown, the BoC’s July monetary report had forecast GDP growth of 2.9% in 2011 and just 2.2% in 2012. In light of recent events, it’s hard to feel bullish about even those limp targets.

It’s not just the aftermath of the recession, experts say. Other factors include an aging population that’s more inclined to save than to spend, ongoing price-cutting and competition from emerging-market players, a seriously damaged U.S. economy, plus pending public-sector deleveraging after the great deficit-inducing stimulus binge of 2008-2009. Also, says Peter Hall, vice-president and chief economist of Export Development Canada (EDC), remember “that we have a financial sector that was critically weakened by the downturn, and it’s going to take it a while to get out.”

So, where does this leave small and mid-sized businesses? Where are the minefields? What’s a good strategy? Does slow growth mean low growth for everyone?

“If we assume the status quo and say, ‘The customers that we have now will always be the customers that we have,’ well, yeah, you’re going to be a participant in that low growth. But I reject that as defeatist,” says Hall. True to his perspective at EDC, he says growth-minded small and medium-sized business need to expand their horizons: “Is there no growth in the world right now? No. That’s absolutely wrong. There are areas that have higher growth than the traditional areas that we’ve been operating in—and, in a lot of cases, that growth is very aggressive. You have to think outside of the box in terms of the markets that one is selling to.”

Entrepreneur and venture capitalist Jim Estill, an admitted “optimist,” is equally positive about the prospects for small businesses in these times. He argues that the post-recessionary, slow-growth era will be harder on large companies than on entrepreneurs. “My experience is larger companies tend to overreact to situations,” says Estill, who launched technology distributor EMJ Data Systems in Waterloo, Ont., in 1980 and grew it to $350 million in annual sales by the time of its 2004 acquisition by Fremont, Calif.-based SYNNEX Corp. At a time like this, he adds, “Many, many people will underinvest and pull their horns in, and that’s where there’s an opportunity. It’s an entrepreneurial mindset that will win and prevail.”

Estill’s mantra can be boiled down to three words: change is opportunity. And in the aftermath of the worst economic collapse since the 1930s, there is no lack of change afoot. Estill highlights three potential growth areas in which the entrepreneurial mindset might be deployed.

First, when the economy slows, all business is up for grabs. “All of a sudden, everyone’s more concerned: ‘Maybe I should look at an alternative to see whether or not I could save money,’” say Estill. “At the same time, there’s also often a change in purchasing staff, for instance, because a company’s been downsized.”

Second, after a slowdown, many big companies have excess resources that entrepreneurs can access relatively cheaply. “I needed space for my own company,” Estill says. “I ending up renting offices in an accounting firm. They were willing to rent to me for much less than market rent because they had offices sitting vacant. I was able to save a ton.”
Third, big companies that downsize often turn to entrepreneurs to do the work previously done by staff. “In reality,” Estill says, “a lot of the people let go probably weren’t redundant.”

It’s important to remember that your company won’t be the only one sweating over strategies to compete and expand in the low-growth era. As such, the biggest threat to your business might not be the economy, but a competitor out to make your business part of its low-growth survival plan. In this scenario, there’s huge pressure on business owners and senior managers to get innovative or get out of the way.

“Because of tougher economic times, people will be very creative in terms of how they survive and how they thrive,” says Peter Brown, Toronto-based leader of Deloitte Canada’s private-company practice, a portfolio of about 30,000 SME clients. “And so, if you do own a small business, there’s a real challenge there.”

Brown says that a spate of innovation always comes out of a recession. People have had time to think and reflect on their business and where it might be going. Not only that, but the competition is fierce. That puts a premium on innovation. “Innovation is not something that’s necessarily a lab coat thing,” says Brown. “It’s often just about how do I do this business faster, better, cheaper.’ Service innovation. Process innovation. It’s not necessarily just technology. It’s also how to steal ideas from other industries. Or looking around, seeing what other people are doing differently, and then adopting those ideas.”

Can’t just flip a switch and be “innovative?” Then work at being open to ideas. Suggests Brown: “One of the things I really like is when business owners get engaged in some kind of roundtable exercise with other business owners. Whether that’s through suppliers or organizations. Ask around to find out how [others are] dealing with the changes. Use your suppliers and ask, ‘What are other companies you’re selling to doing differently?’”

For many small businesses, innovation goes hand in hand with investments in new technology. It’s a trend that Paul Edwards, research director, SMB and channels research, at Toronto-based research firm IDC Canada Ltd., has already detected among Canadian SMEs coming out of the latest recession. Edwards says IDC’s quarterly surveys show IT spending by SMEs is not only increasing, but it’s shifting to less hardware and more software and services. “There is this growing interest in understanding technology and its potential impact on business performance,” says Edwards. “In order to investigate that, you need to invest in software and services.”

Of course, there’s one other way to gain business or market share in a flat market, and that’s the old-fashioned way—by acquisition. Several factors are conspiring to turn this low-growth economy into a frothy time for consolidation plays. Thanks to the slower growth, cheap money—once thought to be quickly on the way out—could be around for a while yet. Couple that with a loosening in credit markets and pent-up demand due to a lack of deals in 2008 or 2009 because of depressed prices and, says Deloitte’s Brown, you have a market primed for activity.

“We’re seeing a wave of mergers and acquisitions in the capital markets, and I think we’re going to see a bigger wave in the entrepreneurial market,” he says. “The vast majority of bigger private companies are either buying or thinking about selling. Right now.”

Not to be overlooked in all this is demographics. About 58% of Canadian SME owners are aged 50 or older. Translation: there are a lot of older entrepreneurs out there counting on selling their business for a retirement nest egg and who are ready to get out. “If you’re creative about your financing,” says Brown, “this is actually maybe a time of incredible opportunity for those entrepreneurs that are now wanting to get back on the growth train.”

IN THE WAR FOR TALENT, CREATIVITY CONQUERS ALL
Speaking of demographics, if you’re looking at the next five years and laying out a plan to contend with the trends that will change your business, put an asterisk beside 2013. That’s the year that, for the first time in Canada’s history, the country will have more people eligible to retire from the workforce than young entrants coming in. “Low fertility rates are catching up with us,” says EDC’s Hall. “This demographic challenge that we’ve been talking about as if it’s five, 10, 20 years out—it’s now upon us.”

You probably know this “demographic challenge” by another term: the labour shortage. And if you think that it was already a pressing business challenge before the 2008-2009 recession, experts say, you’re in for a rude awakening in the next few years. Increasing numbers of baby boomers coming out of the workforce are going to leave a lot of companies short—of both manpower and senior management skills and leadership—which poses a two-pronged problem that could easily threaten their productivity, profitability and overall competitiveness.

“At the end of the last cycle, there were particular industries that were unusually exposed to the labour shortage—and I think principally of the oilsands in Alberta, where employers were bringing in people from everywhere and training them on site,” says Hall. “That’s sort of a microcosm of what the Canadian labour force in general is going to be experiencing when we finally get a global recovery happening.”

Even today, with unemployment bumping along at more than 8%, companies are already complaining that they’re having trouble finding good people. The smaller Gen X and Gen Y population cohorts provide a smaller talent pool to draw on—and, in some cases, those generations’ ideas about where and how they want to work don’t easily line up with established companies’ aims and ways of doing business. Meanwhile, our other traditional source of labour, immigration, is growing more competitive as many Western countries face the same shortage, and many developing countries offer faster growth and opportunities domestically.

In the short term, the recession’s wallop to retirement portfolios and company valuations has kept a larger than expected number of retirement-age boomers in the workforce—but that figures to be only a brief reprieve. “Some of my clients are seeing up to 40% of their total staff retire over the next five years,” says Jim Harris, a Toronto-based consultant in sustainability and small-business strategy, and former leader of the Green Party of Canada. “When you look at the upper echelons, the more senior, you’re looking at 90% turnover in five years.”

Harris says the issue should be a front- and-centre concern for SME business owners and managers everywhere. “Succession planning is going to be really important. And labour shortages,” he says. “Can your organization deal with that? Are you planning for that?”

This situation has all sorts of potential consequences that companies must weigh, depending on their particular situation. But there are a few givens. If labour is tight, for example, it’s going to get more expensive. And paying people more to keep them working for you instead of your competitor, or to keep them working longer, is going to raise costs, hurting competitiveness. The classic solution for costly labour is to replace it with automation and technology. And that’s an option here. But it’s not going to work in all circumstances.

To some experts, the best way to address labour challenges posed by both the aging boomer generation and the Gen X and Gen Y cohorts, is to adopt more creative hiring practices. For the former, a popular option for many workers is part-time work. According to EDC’s Hall, it suits a lot of boomers who don’t want to lose complete touch with their work-life identities. “This way, they get to be part-time retirees and they’re still very engaged in the labour force,” he says. For companies, it’s a great way to alleviate a labour shortage and keep talented, experienced people involved in the business. “They’re very highly skilled, and I believe will be a very sought-after cohort of the population.”

More flexible job structures for younger workers, meanwhile, may also make a company more appealing to generations with different motivations and workplace expectations. “The smartest employers are the ones that are keeping up with creative ways of attracting the labour force,” says Deloitte’s Brown.

The other option, of course, is to accept the reality of the changing workforce and reorganize your business and your processes so that you can run your company successfully with fewer people. If your business is in manufacturing or processing, that could mean more automation. But for a growing number of companies, it’s likely going to mean contracting out work, either locally or globally, in order to keep costs down while maximizing the contributions of the people you do retain in your employ.

Consultant Catherine Daw, president and cofounder of Toronto-based SPM Group Ltd., which specializes in strategic and project-management consulting, calls this concept the “creative” use of your existing talent: “What we often tell our clients is ‘Use your staff for their knowledge of the business and their capability to do the work that has to be done, say, in marketing or IT. And bring in external resources for the things that you don’t have strong internal capability to deliver on.’”

Daw’s firm, for example, will step in to handle a particular project or program. “Because these are temporary endeavours, they have a beginning and an end. You’re not hiring for that, necessarily,” she says. “That’s just an example from my own world. But you can think about it in terms of things other organizations are doing. It’s about deciding what you’re going to use an external resource for or what you’re going to outsource.”

In some cases, that outsourcing needn’t be local. According to Hall, “It essentially means saying, ‘Labour is scarce, so I have to use it very wisely here. So, let’s concentrate our labour force in Canada on a particular function, and then find a country that has an ample supply of labour already. Let’s take those other parts of our production and outsource or offshore those to those other countries.’” Current communications and transportation technologies put this option within reach of businesses of any size, Hall says. Ideally, your workers here can focus on higher-value work. “That’s the way you enhance your productivity,” he adds. “And you’re actually able to pay these folks more, give them more responsibility and excite them about staying.”

LEARN TO SATISFY THE SMARTER, GREENER CUSTOMER
Hands up, every entrepreneur or SME business manager who hasn’t been told at least once this week that environmental issues are the key to everything and that social media is already transforming your business, whether you choose to play or not? Anyone?

All right, it’s not going to come as a huge shock to read that increased environmental regulation, the move toward a lower-carbon economy and the greening of consumers represent a game-changing trend in the years ahead. Ditto for the rise of social media and mobile technology and their work-remaking byproduct: a hyper-informed, hyper-connected, hyper-powerful customer. But you will get some fresh insights by viewing the two trends as part of a bigger whole—a power shift whereby consumers, customers and the public at large are setting businesses’ agendas like never before.

“Public policy is either leading or lagging the consumer,” says Brown. When it comes to increasing demand for green products, sustainable business practices and the development and use of green energy technologies, he says, customers—or investors, or myriad other stakeholders—are way out in front. “I think, on this one, the consumer is almost creating self-regulation in this space.”

The same also applies to customer empow­erment through technology. It starts with access to information, permitting more informed purchasing decisions, but then extends to sharing that information and collective decision-making through social media. “Technology is levelling the playing field,” says Brown. “The buyer
is so empowered today because of the Internet.”

And so it is that the latest manifestation of that power, social media, is now finding its way into the workplace. “Social networking was really a consumer-driven activity that now is being adopted by companies, and adopted by smaller companies as well as large ones,” says IDC’s Edwards.

Specific responses to these equally challenging trends will vary. But both are going to put huge pressure on companies, especially smaller ones for which manpower is short, to keep pace with new technologies, new customer demands and, in the case of the environmental file, new regulations, taxes and pricing regimes.

At the same time, says Estill, the necessary responses are clear. If you offer good value, deliver good service, embrace green trends and lead your business in a responsible manner, you’ll have nothing to fear, and much to gain, from all the public comparison and scrutiny that comes with social and customer empowerment.

Edwards says that technologically challenged business leaders need, first, simply to understand social networking and how it works from a consumer perspective. “They’re going to rate products, they’re going to rate companies,” he says.

Once they understand it, Edwards adds, SMEs will hopefully use it as well. “It’s probably in their best interest to start to use it within their own business, and then also as an extension externally to do things like marketing or just get engaged in various networks that are out there.

“Social media certainly has an impact now,” says Edwards. “I wouldn’t say it’s huge. It’s going to get bigger as things become more integrated electronically.”
But from the standpoint of an entrepreneur hunting for new business opportunities, there’s not much bigger game than what’s roaming on the environmental front. “Green seems to be a lasting trend through people’s buying patterns,” says Brown. “It’s certainly leading to lots of business opportunities for small business around cleantech and water and solar. None of these trends is going to go away. So, it’s creating opportunity and it’s creating risk for those people who ignore it.”

Stewart Thornhill, associate professor of strategic management and entrepreneurship at the Richard Ivey School of Business in London, Ont., talks about “energy” and “environment” as “two simultaneous forces.” The drive to reduce energy use, he says, is an “unstoppable” force. “Entrepreneurs who come up with something here could be on a gold mine,” he says.

Harris writes a regular column in a national newspaper that is built on one simple premise: magic bullets or no, going green is profitable. “For three reasons,” he explains. “It cuts costs. So, when you cut carbon, you’re cutting fuel, you’re cutting costs, you’re increasing profitability. Second, it raises revenue, because 80% of Canadians say they want to deal with a green company. So, you can gain market share or, similarly, not lose market share to competitors going green because you’re also going green. Three, it mitigates risk against rising energy prices.”

Brown adds a fourth payoff for companies that go green. “It often has a great impact on their talent,” he says. “People are proud to work for organizations that care about these things because they also care about them. These things all tie together because employees are consumers, too.”

Not everyone is as sanguine about the ease with which every company can develop new green opportunities or adapt to the evolving environmental restrictions, however. SPM’s Daw worries about all the companies for which increased pricing, regulations and market-driven constraints on resources use put the sustainability of existing business models and metrics at risk. “One example is water management when used for manufacturing,” she says. “Water use is going to be a big issue as we go forward.”

And Daw has a warning for many of her fellow business owners: “Looking at the future, if you’re resource-dependent—and more of us are than we might think—you might find your business in jeopardy.” This is especially a problem for businesses that make things, she says, and solutions lie in questioning the very fundamentals of one’s business.
Estill shares some of Daw’s trepidation. While he insists that the environment is a big-growth business, part of the problem in figuring out a way forward is that for years, our economy has been operating without certain environmental “externalities” factored into the pricing of what we do. As that changes, it will create huge opportunities—but also a great deal of confusion.

“It’s a very disorganized business,” says Estill. “It’s disorganized in terms of who will win, how this will scale. We don’t know where it’s going to hit. All we know is that it’s going to be a factor.”