canadian sme

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W ithout a doubt, we are currently living in themost challenging economic times since the GreatDepression of the 1930s. Governments and cen-

tral banks around the world are taking aggressive and, inmany cases, unprecedented steps to stimulate our nationaleconomies in a way that they hope will reverse the negativeimpacts created by the global financial crisis and put coun-tries on the road to positive and sustainable economicgrowth.

Beyond the broader macroeconomic picture, how areCanada’s small and medium-sized enterprises (SMEs) – thosecompanies that represent over 99 percent of Canada’s enter-prise base — responding to these tumultuous times? In thenews, we are accustomed to hearing about the ebbs andflows of our industrial giants, such as AbitibiBowater, AirCanada, Bombardier, General Motors, Nortel, RBC andSuncor Energy, among others, but what about this next tierof companies?

Canadian SMEs are critical to Canada’s economic pros-perity. When discussing this economic subsector, though,we need to go beyond the one-size-fits all approach, partic-ularly as it pertains to those companies that are active ininternational business. Based on our separate research andconsulting work in the Canadian SME community overthe past 15 years, we have identified six distinct types of

SMEs that engage in trade. In this article we will outlinethe six types and propose strategies for them to stay com-petitive on the international front during and after therecession that the Bank of Canada now says ended in thesecond quarter.

S MEs are an integral part of the industrial fabric ofCanada. Of the approximately 1.1 million employer

businesses that exist in our country, 97.8 percent are smallenterprises (fewer than 100 employees), 1.9 percent aremedium-sized enterprises (100 to 499 employees), and theremaining 0.3 percent are large enterprises (500 or moreemployees; see table 1).

Their contribution to Canada’s economic prosperity isalso significant. The following list highlights a number ofthe more noteworthy facts: l On average, small businesses that have fewer than 50

employees contribute about 23 percent to Canada’sgross domestic product (GDP).

l As of 2007, SMEs employed approximately 7 millionindividuals in Canada, or 64 percent of the total labourforce in the private sector.

l Small businesses created approximately 100,000 jobs in2007, accounting for over 40 percent of all jobs createdin Canada.

THE SIX TYPES OF CANADIANSMES: COMPETING TO WIN IN TOUGH TIMESKarl Moore and William C.T. Polushin

Canadian small and medium-sized enterprises (SMEs) are critical to Canada’seconomic prosperity. When discussing this economic subsector, though, we needto go beyond the one-size-fits-all approach, particularly as it pertains to thosecompanies that are active in international business. Based on their research andconsulting work in the Canadian SME community over the past 15 years, theauthors have identified six distinct types of SMEs that engage in trade. In thisarticle they outline the six types and propose strategies for them to staycompetitive on the international front during and after the current recession.

Les PME canadiennes sont indispensables à la prospérité du pays. Mais nousdevons élargir notre approche de ce sous-secteur économique, surtout pour lesentreprises qui font du commerce international. À la lumière de leurs rechercheset de 15 années de services de consultation auprès des PME, les auteurs ontidentifié six types d’entreprises et proposent des stratégies qui préserveront leurcompétitivité sur le marché international, aujourd’hui et au-delà de la présenterécession.

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l In 2003 (the latest year for whichIndustry Canada has publishedthis particular information), SMEsaccounted for $5.3 billion of thetotal $13.4 billion (39.5 percent)spent on scientific research andexperimental development inCanada.

O n the international trade front,Canadian SMEs are active, but the

impact of their exporting activities onCanada’s economic performance is rela-

tively minor — as compared to largeenterprises. In 2006, for example, thelargest 4 percent of exporting establish-ments accounted for 84 percent of thetotal value of merchandise exports.Those exporting less than $1 million peryear represented 72 percent of all estab-lishments, but only 1.5 percent of thetotal value.

However, these statistics do nottell the whole story. In its 2004 Reporton Trade, the Canadian Federation ofIndependent Business stated that 51percent of Canadian SMEs engage intrade — either directly throughexports or imports (36 percent), or aspart of a supply chain that helps otherbusiness contribute to Canada’s tradeactivities (15 percent).

A s the forces of globalization takeeven deeper root in Canada, and

as our industrial base of predomi-nantly small and medium-sizedenterprises responds to the chal-lenges of an increasingly integratedand competitive economic environ-ment, the number of SMEs active ininternational commerce — eitherdirectly or indirectly — willundoubtedly rise. Given this situa-tion, we believe that it is importantfor government and industry to go

beyond the traditional grouping ofSMEs as a homogeneous group andsegment them along lines that reflecttheir distinctive roles and positionsin Canada’s international trade sys-tem. Not only will this lead to thedevelopment of government policiesthat will better respond to theunique nature and challenges of ourtrading SMEs, but commercial plansand strategies can be developed by,or for, senior managers of theseenterprises that will enable them to

more effectively compete in theglobal economy.

1. SMEs that are an intimate part of thevalue chain of a flagship multinationalenterprise (MNE). Firms that supplyBombardier, CAE, Nortel or other largeCanadian MNEs face an ongoing dis-persion of the MNE’s value chain tovarious countries around the world.For example, on May 29, 2008,Bombardier announced that its facilityin Querétaro, Mexico, will manufac-ture the composite structure for its all-new Learjet 85 business jet. The

Querétaro site will also manufacturethe electrical harness and perform sub-assembly systems installation. ThoseCanadian-based suppliers ofBombardier that have been vendors ofmaterials for the composite structure,or parts for the electrical harnesses ofprevious Learjet programs, must nowtake the necessary steps to establishthemselves as approved vendors inMexico — assuming the Canadian sup-pliers want to grow with Bombardier.Initially, a particular Canadian suppli-

er, given its experience withBombardier Aerospace andtechnological advantageover Querétaro-based ven-dors (depending on theproduct class), may be ableexport product directly toMexico, but as the depthand capabilities of

Bombardier’s supplier base inQuerétaro improves, the Canadianvendor will have to think about estab-lishing a manufacturing/ supply basein Mexico. Bottom line, as ourCanadian champions, like Bombardier,direct their manufacturing operationsto markets across the globe to enablethem to be more competitive,Bombardier’s Canadian-based suppli-ers need to adopt a global mindset ifthey hope to remain an integral part ofthis MNE’s supply chain.

Research interviews with hun-dreds of executives in SMEs and MNEs

The six types of Canadian SMEs: competing to win in tough times

TABLE 1. CANADIAN BUSINESSES BY NUMBER OF EMPLOYEES, 2007

0 10 20 30 40 50 60

500+

100 to 499

50 to 99

10 to 49

5 to 9

1 to 4

Percent

54.7

21.3

20.1

2.7

1.9

0.3

Source: Statistics Canada, Business Register, December 2007.

As the forces of globalization take even deeper root in Canada,and as our industrial base of predominantly small and medium-sized enterprises respond to the challenges of an increasinglyintegrated and competitive economic environment, thenumber of SMEs active in international commerce — eitherdirectly or indirectly — will undoubtedly rise.


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Employees Number of Exporters Percent of Exporters

Less than 50 33,318 7350 to 99 5,933 13100 to 199 3,651 8200 and over 2,739 6

Total 45,641 100

by Karl Moore have revealed theimportance of linking with Rugmanand D’Cruz’s concept of flagship firms(Multinationals as Flagship Firms, AlanM. Rugman and Joseph R. D’Cruz,Oxford University Press, 2000). Theysuggest a Five Partners Model of busi-ness networks forming around a flag-ship multinational. Rugman andD’Cruz’s system has two key features:the presence of a flagship firm, whichpulls the network together and pro-vides leadership for the strategic man-agement of the network as a whole;and secondly, the existence of firmsthat have established key relationshipswith the flagship.

The Five Partners Model of a busi-ness network encourages eco-nomic exchange among partnerorganizations through co-opera-tive, non-equity relationships.Specifically, the partners are aleading “flagship firm,” which isan MNE; key suppliers; key cus-tomers; select competitors; andthe non-business infrastructure(NBI). The NBI comprises govern-ment, non-traded service sectors,educational institutions, socialservices, trade unions, trade associationsand non-profit cultural organizations,providing highly diversified perspectivesto the firm. The business network’s gov-ernance structure depends upon (1)asymmetric control of the network’sstrategic purpose by the flagship firmand (2) structuring aspects of the part-ners’ business systems (value chains) tocreate a network business system.

T he key implication of Rugman andD’Cruz’s model is to carefully con-

sider the SME’s alignment with key

MNEs. Becoming a supplier to a flag-ship firm creates a potential for SMEsto supply globally, in some cases lead-ing to foreign subsidiary opportunities.

Canadian media may questionBombardier’s plan to manufacture thecomposite structure and electrical har-ness for its Learjet 85 business jet inQuerétaro versus Quebec or Ontario,but Bombardier is — as the companyputs it — a global transportation com-pany with a presence in more than 60countries around the world. To remaincompetitive in the aerospace industry,it must organize its manufacturingportfolio in such a way that allows it toeffectively respond to internationalcompetitors, a global customer base

and the multiple demands (govern-ments, unions, employees and suppli-ers) of the countries in which it hashave physical operations.

In the 2008-09 economic down-turn, the news is filled with exam-ples of large industrial enterprisesscaling back production or laying offworkers in response to tepid demandconditions. In this context, SMEsmust be particularly sensitive to theoperating dynamics of their MNEclients and be ready to offer themsupply solutions – in Canada and

abroad — that will enable MNE — toreduce costs and effectively weatherthe economic storm. In this case, theSME’s economic well-being is com-pletely tied to the economic healthof its larger and geographically dis-persed buyer.

2. SMEs that are the canadian subsidiariesof foreign MNEs. This group of CanadianSMEs generally does not generate agreat deal of attention in governmentof industry circles — perhaps becausethey are not perceived as “trulyCanadian.” We feel that this can oftenbe a mistake. While many of these sub-sidiaries are primarily sales and servicearms of foreign MNEs, they also have

the potential to earn interna-tional or global subsidiary man-dates, or responsibilities thatwould allow them to add signif-icant numbers of interestingand challenging jobs toCanada’s economy.

Karl Moore, in collabora-tion with Julian Birkinshaw ofLondon Business School, hascarried out research on howsubsidiaries earn these man-

dates. Their findings tell us that alarger number of subsidiaries couldexpand their contributions along var-ious elements of the MNE’s valuechain. The good news is that for mostindustries, Canadian companieswould rank among the top 10 or sonational subsidiaries that are typicallyon the short list of subsidiaries to beconsidered for devolved internationalresponsibilities. It is a limited set ofsubsidiaries to choose from because ofthe need for world-class capabilities,sophisticated infrastructure and afamiliarity with leading — edge prod-ucts and customers when choosingwhere to locate MNE activities.

In order to understand this phe-nomenon a broader perspective helpsdemonstrate the evolutionary pathfor many global MNEs. What is thenumber one advantage of being aglobal firm? Ten years ago economiesof scale and scope may have been theanswer. Today, it is increasingly clear

Karl Moore and William C.T. Polushin

Canadian SMEs are critical toCanada’s economic prosperity.When discussing this economic

subsector, though, we need to gobeyond the one-size-fits-all

approach, particularly as it pertainsto those companies that are active

in international business.

Sources: Statistics Canada, Profile of Canadian Exporters: 1996 to 2006, March 11, 2008; BusinessDevelopment Bank of Canada.

TABLE 2. COMPOSITION OF EXPORTERS BY COMPANY SIZE


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that the top advantage is the abilityto harness learning and innovationthroughout the worldwide network ofthe global multinational. Therefore,the critical question becomes how toharness this potential capability.

Research interviews with several hun-dred executives of large MNEs inEurope, North America and Japansuggest it is by lead subsidiaries,which capture international or globalresponsibilities in MNEs.

I n the 1980s and into the 1990s,holding a watching brief may have

been sufficient participation in one ofthe three regions as long as you hadconsiderable activities in the othertwo. Today, leading firms need to har-ness capabilities in the other two non-home regions. For example, it wouldbe naive to suggest that Finland is theonly country claiming mobile phoneinnovation. Other leading countriesactive in this industry includeSweden, home of Nokia’s rivalEricsson; the US, withindustry giant Motorola;and South Korea, withSamsung. People no longersearch for innovative ideasin one place. Today, multi-nationals must be quick toadopt new ideas fromEurope, North America and Asia,because these are the key areas forinnovation and R&D.

In the last 20 years, adopting aglobal strategy meant centralizingdecision making in the home countryof the MNE. This development may bea natural outgrowth of a global strate-gy. However, it often has a dysfunc-tional impact on the lead subsidiaries.Under this approach, the interestingand strategic parts of the decision-making process are taken away and

made elsewhere. This reduces the sub-sidiary’s role to one of implementer —clearly less exciting and less strategic.The result: fewer higher-income posi-tions and a generally de-motivatedsenior staff. Also, it becomes more dif-

ficult to recruit clever and ambitiousyoung people from their country, asone can only rise so far in the sub-sidiary. Upward mobility means trans-ferring to the head office, andnaturally, not everyone wants to movewith their families to New Jersey,expensive London or faraway Tokyo.All in all, this centralizing aspect of aglobal strategy means considerablelosses for lead subsidiaries.

O ver the past few years, we haveseen a more positive side of this

trend. Multinationals are increasinglyquestioning why adopting a globalstrategy requires global activities tomove to only the home country. Theseemingly obvious yet critical idea:centralizing aspects of your global

activities not only in the home coun-try but, for some aspects of globalstrategies, whether product manage-ment, manufacturing or R&D or mar-keting, in lead subsidiaries. This ideahas been labelled “decentralized cen-tralization.” From a head office per-spective, this means harnessingmultiple points of innovation in allthree regions of the Triad (NorthAmerica, Western Europe and Asia),creating a net increase in the overallinnovativeness of the MNE’s global

network. From the subsidiary CEOs’viewpoint, this allows them and theirmanagers to be involved in globalstrategic decisions and executionbeyond their national borders. Theresult: more jobs and highly paid posi-

tions, and a better environ-ment in which to recruitand retain the best andbrightest.

The challenge forCanadian subsidiaries isclear: ensure your place as alead subsidiary capable of

international responsibilities, be it inR&D, manufacturing, marketing or cus-tomer support. Many subsidiaries havemanaged this.

We and colleagues have conduct-ed interviews with leading Canadianand European subsidiaries for over adecade on this topic. This researchsuggests that many Canadian andEuropean subsidiaries can successfullycompete for broader responsibilitieswithin the network of their parentfirm. Lead subsidiaries, especiallythose operating in the Triad, usuallyhave earned their roles rather thanbeen given them by an authoritarianhead office. CEOs of lead foreign sub-sidiaries have a special role to play intransforming their subsidiaries intomore than mere sales and service out-

lets. Specifically, they can lead thedevelopment of world-class businesscapabilities that position their sub-sidiary to win broader regionalresponsibilities for achieving corpo-rate goals. Therefore, a subsidiary’scapability could be its skill in devel-oping and manufacturing a productline. For example, Pratt and WhitneyCanada manages a critical line ofengines for P&W worldwide.Likewise, Panasonic in Spain handleskey aspects of pan-European strategy.


Upward mobility means transferring to the head office, andnaturally, not everyone wants to move with their families toNew Jersey, expensive London or faraway Tokyo. All in all, thiscentralizing aspect of a global strategy means considerablelosses for lead subsidiaries.

This research suggests that many Canadian and Europeansubsidiaries can successfully compete for broaderresponsibilities within the network of their parent firm. Leadsubsidiaries usually have earned their roles rather than beengiven them by an authoritarian head office.


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The research shows that foreign oper-ations build their stature in the glob-al corporate network by workingdiligently to establish world-classcapabilities, and by communicatingthose competencies to the head officeand other lead subsidiaries.

One of our most important find-ings was that the senior team of thesubsidiary, especially the lead sub-sidiary CEO, was central to a sub-sidiary winning internationalmandates. Thus, it is critical forCanada’s economy to encourage CEO’sand their teams to aggressively pursueinternational responsibilities so thatthis networking continues to grow.

F rom the perspective of SMEs, this isa variation on the theme of flag-

ship firms, except that this phenome-non is potentially more advantageous.The key challenge for the SME in thiscase, as with flagship firms, is to devel-op supplier relationships with MNEsthat hold international or global man-dates. There are two critical differencesbetween Canadian subsidiaries andflagships firms, though.Firstly, flagship firms aremore apt to understandtheir affiliation with MNEsas a monogamous relation-ship with a certain degree ofloyalty, whereas with Canadian sub-sidiaries, this is not as important.Secondly, there are many moreCanadian subsidiaries that are or couldbe lead subsidiaries than there areCanadian MNEs that could play therole of a flagship firm.

3. SMEs that have gradually gone global These SMEs follow the more tradi-tional model of firms that go interna-tional over a number of years. Themore recent trend is those firms thatare increasingly international as well

as adopting a global strategy. This isnew, and exciting. When does SMEhave a global, as opposed to an inter-national, strategy? There are no hardand fast rules. International businessresearchers have suggested variouscriteria. For instance Alan Rugman

and Karl Moore have proposed hav-ing a minimum level of sales in allthree parts of the Triad; others haveargued for other measures. Academicdebate aside, more Canadian SMEshave moved on from the past andgone global.

A central concern for these firms isestablishing global routes to market orchannels of distribution. One firm thathas done this is the TrudeauCorporation, a designer and marketerof kitchenwares located on Montreal’sSouth Shore. With only 170 employ-ees, the vast majority in Canada,Trudeau sells in 40 countries aroundthe world. To accomplish this distribu-tion Trudeau has set up three man-agers in Europe and one in China toestablish relationships with distribu-tors in those important markets.

Like other Canadian SMEs that areexpanding into international markets,Trudeau has taken a number of yearsto establish a global presence. In arecession, the path to commercial suc-cess is, without a doubt, longer andmore complex, but that in no wayshould deter these companies fromtheir international efforts. In fact,when SMEs are facing a soft domesticmarket, we believe that they shouldproactively pursue commercial oppor-tunities outside of Canada to betterfacilitate sales growth.

4. SMEs that are going global from con-ception. Some of the most intriguingand certainly ambitious of SMEs arethose that are going global from con-ception. Typically, this occurs in tech-nology-based industries whereshortened life cycles, high R&D costs

and sheer opportunitydrive firms to take thisapproach. However, non-high tech firms are alsoconsidering this strategy.For example, Hexago is atechnology-based firm and

global provider of network products. Asample list of its customers includesKorea Telecom, Chunghwa Telecom,NTT, France Telecom, AT&T, KDDI,WIDE Project, T-Systems, Teleglobe,Cyberport, Spawar, the US Departmentof Defense’s Defense InformationSystems Agency (DISA), the US Airforce, General Dynamics, BAE,CERDEC-Army, Boeing, Panasonic,NEC, Surfnet, Ukerna, AARNet andRenater — an impressive set of globalcustomers. Established in 2002,presently Hexago has just over 50employees, the bulk of whom are inCanada, while key sales and marketingstaff reside in China, Korea, India,Hong Kong and Malaysia. At the out-set, the founders of Hexago saw them-selves as competing on a global basisand did not adopt a careful, slow inter-

nationalization process — more con-ventional for SMEs’ early phases.

For this group of SMEs, there is anoverriding need for founders with theheart of a lion, ambition and drive, aswell as parallel support from theCanadian government to help withfinancing and the building of globalconnections.

5. SMEs with an exclusive or dominantlyNorth American strategy. Alan Rugmanof Indiana University has written agreat deal about the about the impor-

Karl Moore and William C.T. Polushin

We believe that it is important for government and industry togo beyond the traditional grouping of SMEs as ahomogeneous group and segment them along lines thatreflect their distinctive roles and positions in Canada’sinternational trade system.

There are many more Canadian subsidiaries that are or couldbe lead subsidiaries than there are Canadian MNEs that couldplay the role of a flagship firm.


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tance of region. Two of his books, TheEnd of Globalization (AMACOM; 1stedition, 2001) and The RegionalMultinationals (Cambridge, 2005),have had considerable impact. In anarticle in Strategy and Business, Rugmanand Moore argue, “Much of the rheto-ric around globalization is out of syncwith reality and multinational execu-

tives would do well to avoid its sirencall. The action has always beenregional, and will remain so…Wefocused a recent research study on theactivities of the Fortune Global 500.” Itis widely accepted that a relativelysmall set of multinational enterprisesaccount for most of the world’s tradeand investment. Indeed, the largest500 MNEs account for over 90 percentof the world’s stock of foreign directinvestment and they themselves con-duct about half the world’s trade. Theirimportance is paramount; where theylead, so goes the world. But some ofthe results were surprising. The 500MNEs are not “global” businesses, inthe sense of having a broad and deeppenetration of foreign markets acrossthe world. Instead, most of them havethe vast majority of their sales withintheir home triad of North America, theEuropean Union, or the Japanese mar-ket in Asia. The activities of these firmstell us the Triad economies are stillparamount. Region is where the actionis at. As our research demonstrates,very few large MNEs are truly global.Consequently, a regional focus may bemore appropriate for smaller SMEs.

Three of Canada’s leading men’ssuit manufacturers, Jack Victor,Peerless and Samuelsohn, have adopt-ed a strong regional focus strategy bycentring the majority of their valuechain in North America. TheCanadian industry faces tough com-petition from China and other Asian

suit-producing nations, althoughCanadian businesses can use the phys-ical and cultural proximity to the USas leverage. While it can take weeks tohave a suit made and shipped fromAsia, these firms can have suits deliv-ered to US retailers often on a next-day basis. Also, Canadianmanufacturers have a deep insight

into the American men’s suit marketand are able to produce productswhich are highly successful in the US.Though Peerless does some manufac-turing in Asia, all three have retainedthe bulk of their production inCanada, and perhaps more important-ly have kept their critical design, mar-keting and sales activities in Canada.

6. Family owned and operated SMEs.Canadian family businesses are a sig-nificant part of Canada’s SME popu-lation. A large number of Canadianfamily-owned firms will be undergo-ing a generational change in owner-ship and operation. Our fiveprevious categories would certainlyinclude some family-owned SMEsbut we chose to put them in theirown category because of someunique challenges they face.According to “The First SuccessReadiness Survey of CanadianFamily-Owned Businesses,” by theDeloitte & Touche Centre for TaxEducation and Research at theUniversity of Waterloo, an estimated27 percent of Canada’s family busi-ness leaders will retire in the nextfive years, another 29 percent in sixto 10 years, and an additional 22 per-cent in 11 to 15 years.

Many of these firms were starteddecades ago by boomers who are nowentering their late 50s and early 60s.Many are actively looking for successorsoutside their own immediate families.

R esearch suggests that Canadian fam-ily business owners are more apt

than their US counterparts to “cash out”of their businesses as they approachretirement age rather than hand the busi-ness over to one of their children.Boomers are looking to impart their busi-ness to an ambitious younger person intheir 30s or 40s, someone with a decade

or more of business experi-ence yet with the energy,determination, ambition andneed to achieve more typicalamong those in a youngerage group. We believe that asthis generational handoveroccurs, these younger people

will be quite open to internationalexpansion. This is a specific group thatthe Canadian government should target.A number of business schools across thecountry have opened or will be shortlyopening centres for family businesses.We encourage the government to consid-er working with these family businesscentres to develop programs that targetthese firms and their potential for inter-national business.

Traditionally, most financial insti-tutions and government policies haveregarded SMEs as a homogenous group.We have outlined six types of SMEs andbriefly suggested their parts to play inCanada’s globalization efforts. Wethink it is important to segment SMEsbecause at times they adopt quite dif-ferent strategies on their path to goinginternational and are best helped bysupport that is tailored for their needs.Beyond government and other sup-port, we have also suggested ways thatsenior management of these SMEs caneffectively exploit their strengths asthey go global, even in the toughest ofeconomic times.

Karl Moore is associate professor in theDesautels Faculty of Management atMcGill Univesity and associate fellow atGreen Templeton College, OxfordUniversity. [email protected]. WilliamC.T. Polushin is president of AMAXIS Inc.and founding director of the Program forInternational Competitiveness at theDesautels Faculty of Management.


Some of the most intriguing and certainly ambitious of SMEsare those that are going global from conception. Typically,this occurs in technology-based industries where shortenedlifecycles, high R&D costs, and sheer opportunity drive firmsto take this approach.

canadian sme

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