Going for Gold: Winning Corporate Strategies and Their Impact on Canada

April 5, 2000

EXECUTIVE SUMMARY

Canada may be a small economy, but it does not lack for success stories. From natural resources to high technology, Canadians and their enterprises have made their mark around the world. As globalization and technological change transform their businesses, they are reshaping their strategies to ensure that their growth continues in the years ahead.

The experience of Canada’s global champions shows that the passports of shareholders have little impact on corporate decisions in the new era, and that foreign ownership is not necessarily a barrier to the growth of influential and well-paying jobs in Canada. It is equally clear, however, that if Canada wants its companies to be able to compete with the best in the world, it must encourage them to achieve the scale necessary to play in the big leagues. A failure to adapt Canada’s policies, regulations and attitudes to the realities of global consolidation could push some sectors, notably financial services, into quick and irreversible decline.

In particular, Canada faces the possibility of a wholesale exodus of corporate head offices and strategic functions within the next decade. Canadian and foreign-owned companies alike are restructuring operations along functional lines. Canada has great opportunities to win new and expanded mandates to make products and provide services to customers worldwide. But unless it is successful in transforming itself into a much more attractive base of choice for global enterprises, it will cease to be home to global champions.

LA COURSE À L’OR DES STRATÉGIES D’ENTREPRISE GAGNANTES ET
LEURS RÉPERCUSSIONS SUR LE CANADA SOMMAIRE

Le Canada représente peut-être une petite économie, mais il fournit beaucoup d’exemples à suivre. Que ce soit dans le secteur des ressources naturelles ou celui de la haute technologie, les Canadiens et leurs entreprises se sont imposés dans le monde entier. Au fur et à mesure que la mondialisation et les changements technologiques transforment leur commerce, ils refaçonnent leurs stratégies afin d’assurer leur croissance dans les années à venir.

L’expérience des champions canadiens à l’échelle mondiale démontre que le passeport des actionnaires n’a guère d’influence sur les décisions des entreprises dans la nouvelle ère et que la propriété étrangère ne constitue pas nécessairement un obstacle à la croissance d’emplois d’influence et bien rémunérés au Canada. Cependant, il est également clair que si le Canada veut que ses entreprises soient en mesure de livrer concurrence aux meilleures dans le monde, il doit les encourager à atteindre la taille nécessaire pour jouer dans les grandes ligues. Si l’on n’adapte pas les politiques, les règlements et les attitudes d’ici aux réalités de l’intégration mondiale, certains secteurs, notamment les services financiers, pourraient se retrouver rapidement et irréversiblement en déclin.

Le Canada doit faire face, en particulier, à la possibilité d’un exode d’envergure des sièges sociaux et des fonctions stratégiques au cours de la prochaine décennie. Tant les entreprises canadiennes que celles à intérêts étrangers restructurent leurs activités le long de lignes fonctionnelles. Le Canada offre de merveilleuses occasions de remporter de nouveaux mandats plus vastes pour fabriquer des produits et fournir des services à la clientèle du monde entier. Mais ce n’est que s’il se transforme en un pays qui attire davantage les entreprises mondiales qu’il continuera d’abriter les champions du monde.

Veuillez remarquer qu’étant donné qu’il s’agit ici d’un document de travail s’inspirant fortement de citations directes recueillies lors d’entrevues avec des chefs d’entreprise canadiens, le texte intégral n’est disponible qu’en anglais.

ADAPTING TO A WORLD OF CHANGE

Canada may be a small economy, but Canadians and their enterprises have made their mark around the world. The same talent and drive that opened up Canada’s frontiers is making them pioneers within the global market as well.

As more open borders and the rapid advance of technology change the rules for global success, the strategies of Canadian-based companies have evolved as well. They remain determined to take on the best in the world and win — and what is at issue is not their ability to win, but the extent to which they can continue to do so from a Canadian base.

Interviews with a broad range of chief executive officers of both Canadian and foreign-owned firms suggest that, as Canadians, they have a passionate desire to strengthen the economic and social fabric of their country. But as managers, their strategies are and must be geared to global competitiveness. Canada’s future role in the world will be determined by the extent to which it makes itself an attractive place to use as a base for a growing, worldwide business. Whether they are competing for capital in public markets or within a transnational corporation, Canadian executives need to make a solid business case for expanding within Canada rather than somewhere else.

In today’s global economy, the customer rules. Consumers have the ability to shop the world for the best product at the best price. They want and will accept nothing less. This insatiable demand for ever higher quality at ever lower prices simply mirrors the economics of the computer revolution, where every year enables processors to do more for less. The pressure for constant improvement has spread to every industry.

One striking result has been an unprecedented wave of mergers, acquisitions and alliances. Consolidation driven by the need to find greater economies of scale and new synergies in turn is creating global customers, companies that expect suppliers to be able to meet their needs not only cost-effectively but globally.

The challenges of the new era are formidable, even within the resource sector that has been the backbone of Canada’s economy in the past. Neither the presence of energy and resources nor the availability of financing, skilled labour or even leading-edge technology can ensure the survival of competitive advantage.

"We have this historic advantage of resource base, of trees and food and fish and fuel. All of those things have been the centrepiece of the economy for most of the last fifty years. But those resources aren’t unique any more. We cannot produce any good or service that’s unique to Canada at a better price," said Robert Peterson, Chairman, President and Chief Executive Officer of Imperial Oil Limited.

In the aluminum business, for instance, modern smelting technology is available off the shelf. Anyone can buy that technology and hire an engineering firm to build a state-of-the-art smelter anywhere in the world. Construction is cheaper in warmer climates. Labour is cheaper in the developing world. And governments eager to attract such investment offer incentives that can range from very low-cost energy and subsidized infrastructure to lower tax rates and lax environmental standards. Justifying an expansion in Canada becomes difficult.

"I’m in a very simple business. It’s cost, cost, cost until you are blue in the face," said Jacques Bougie, President and Chief Executive Officer of Alcan Aluminium Limited. "Our challenge is to earn our cost of capital at metal prices that have been falling in real terms and will continue to fall. To reduce our cost, scale becomes important. By merging, we can simplify the organization and eliminate all sorts of costs."

These same factors have produced new opportunities for other Canadian companies such as engineering giant SNC-LAVALIN Group Inc. "When we compare ourselves to other engineering and construction firms in the world, people are always amazed to see the size of our international business, because our base in Canada is so small," said Jacques Lamarre, President and Chief Executive Officer of SNC-LAVALIN. "Certainly a more unified Canadian construction market would help us become more competitive, but we like the way the world is heading, and we feel we have a major strategic advantage in satisfying the needs of the world in the future."

In every sector, Canadian companies have to meet the growing expectations of customers that purchase goods and services on a worldwide basis. "It does not matter whether you are a European steel mill or a Japanese mill or a Canadian mill. If you want to sell to one of the large American auto makers, you go to Detroit," said John Mayberry, President and Chief Executive Officer of Dofasco Inc. "About 90 percent of our tin plate is sold to two customers. If we want to sell to one of their Canadian operations, we have to go to Philadelphia. If we want to sell to the other, we go to Denver. That is where their worldwide purchasing is based."

Acquisitions abroad have played a key role in the growth of Canadian-based global leaders such as Bombardier Inc. "We believe strongly that we must control our own destiny," said Robert Brown, President and Chief Executive Officer of Bombardier. "Our strategy is to be the leader in selected niches in the market and to control the technology that relates to those particular segments. We don’t want to be component suppliers. We want to take the risk. We believe that if we’re going to be able to have the profit margins we need to prosper, we have to control the technology. And to do that, we have to be geographically diversified as well."

The consolidation amongst manufacturers is leading to similar consolidation in transportation services. The railway business in North America, for instance, has seen a procession of mergers and acquisitions aimed at reducing costs while giving shippers seamless access to suppliers and customers across the continent. Canadian National has been a major participant, forging a pair of major merger deals in the United States, first with Illinois Central and more recently with Burlington Northern Santa Fe.

"I believe that in order to be a centre of excellence, we have to operate on a continental basis," said Paul Tellier, President and Chief Executive Officer of Canadian National. "Either we will become a significant regional railroad or we become a continental player. If we don’t become a continental player, it’s going to have a major impact on Canadian shippers."

The need for bigger and faster networks is compelling whether they are formed from steel rails or optical fibres. Nowhere has the pace of acquisitions and alliances been more vigorous than in communications and information technology.

Competition in the telephone business began with long-distance services. But as traffic in data overwhelms voices, landlines are going head to head with wireless, cable television and satellite services. The communications sector, increasingly hard to define precisely, is groping its way toward the optimum convergence of carrier and content provider. Canada’s leading companies have been both buyers and sellers, but once again, both their major competitors and their growth strategies are increasingly global.

Mergers and acquisitions are not always necessary for growth, as demonstrated by companies such as oil-sands specialist Suncor Energy Inc. The only alternative to being very big, however, is to be very good within a narrow specialty.

"If you want to survive as an independent player in the global economy, you have to pursue your specific advantage and do what others are not doing or can’t do," said Rick George, President and Chief Executive Officer of Suncor. "We haven’t made acquisitions of any size. No mergers, just focusing on what we do, so as to be the best at it in the world and drive it home. If you want to be successful, you really have got to find your niche and excel."

However, as the evolution of financial services is making clear, size is becoming increasingly important even for niche players. "We have seen a tremendous pick-up in technology spending by our competitors around the world, and with the Internet and the advantage it gives to those who move first, settling for second is not good enough," said Charles Baillie, Chairman and Chief Executive Officer of TD Bank Financial Group.

"What we’re really concluding is that the Internet has made scale much more important. We see it with our discount broker. We have to move really quickly now. We are doubling what we spend on our technology and we are doubling what we spend on our advertising. We have to get to be one of the top three or four names across North America. If we don’t spend and get the brand known, others will pass us by. We have to do things on a much bigger scale than we really dreamed of before and even if we’re really good, it’s incredibly uphill in this new world," Mr. Baillie said.

"Canadians ultimately are going to want the best provider of financial services," added John Cleghorn, Chairman and Chief Executive Officer, Royal Bank of Canada. "They are not going to care about nationality. That has already been proven in mutual funds, which is a pretty broad-based product. There’s no reason why it would not be so in credit cards. We’ve got to be good not just in Canada. We have to be good in a North American context."

The recent spate of demutualization in the insurance industry is another sign of the drive for efficiencies through consolidation. Going public makes it possible for former mutual companies to raise the capital they will need for acquisitions, whether within Canada or beyond.

"We want to create a world-class company that is based here in Canada," said Dominic D’Alessandro, President and Chief Executive Officer of Manulife Financial. "To do that, we have to compete everywhere in the world. We can’t build it on the Canadian population base. We can’t ever have enough market in Canada to make us a player in the world league. Out of necessity, we have to expand abroad."

CHAMPIONS WITH TRANSNATIONALS

For Canadian companies, going global means expanding their activity and operations beyond Canada’s borders. At the same time, some foreign-owned subsidiaries are building global businesses based within this country.

Perhaps one of the most intriguing examples is the Swiss-based food group, Nestlé. In effect, the executives of Nestlé Canada Inc. have built up the subsidiary’s reputation as a hotbed of innovative product ideas — and Canada’s reputation as the ideal test market for new global products.

For instance, Nestlé has a plant in Trenton, Ontario, that used to make mass-market frozen dinners. It could no longer compete in that line of business, but after moving production to the United States, Nestlé kept the plant open and used it as a test-bed for a whole new line of business. The Canadian subsidiary developed the idea of selling restaurant quality frozen food prepared in custom batches to foodservice operators in areas such as hospitals, hotels and airlines. The plant today employs more people than ever, with much of its output being exported to the United States.

"Canada has highly sophisticated consumers, and yet a population base that allows us to experiment without breaking the bank," said Frank Cella, former president and chief executive of Nestlé Canada and now a senior executive at world headquarters. "We made a case for allowing us to be an experimental lab, and that has given us a uniqueness in the Nestlé world that we would not have otherwise. We add value by innovation, by trying new ideas and getting them to market faster. We are so innovative that the worldwide group is sending people here to learn about how we are doing it."

The global banking group HSBC also sees its Canadian subsidiary as a centre for innovation. "Canada has proven to be a great place to develop new approaches, to pilot new products and services that we want to launch on a worldwide basis," said Youssef Nasr, former president and chief executive officer of HSBC Bank Canada.

"With any new invention, the take up in Canada is faster than almost anywhere else, particularly in the banking industry. The highest pickup rate for ATM cards and for debit cards was in this country. Internet banking is heavily used here. So it is a place where you can test new products three to seven years ahead of the rest of the world. The United States is sometimes faster, but if you make a mistake in that market, it is a lot more damaging than if you make a mistake in Canada. And if our products prove themselves here, then we offer them to consumers elsewhere, in places like Brazil and Singapore."

Canada’s role as a test market has led to the creation of a software development centre in Burnaby, British Columbia, with some 400 programmers. It is one of only four such centres the bank maintains worldwide, with the others in Buffalo, New York, London, England and Hong Kong, China. "The most productive, the lowest cost per line of code and the one that has the best record in terms of delivering on time and under budget, is in Burnaby," Mr. Nasr said.

Another wholly owned subsidiary with a global reputation is IBM Canada Ltd. Its primary role is to work with and support Canadian customers, but it has also been successful in winning continental and worldwide missions within the IBM Corporation. "We have doubled the overall number of executives in Canada in the last two years and tripled the number of female executives. Many of these people have responsibilities beyond Canada and focus on North America or worldwide mandates," said John Wetmore, President and Chief Executive Officer, IBM Canada Ltd.

Based on its past achievements, the Canadian subsidiary also was able to win the role of providing telephone technical support to customers across North America. "Over the past two years, we have built up a call centre in Toronto with 1,500 people in it. This is not low-level work. This requires university graduates. The technical talent that we have in Canada is phenomenal. And the diversity, I would stack up against any city in the world. We speak 23 languages out of that call centre," he said.

"The integration and the movement that is going on in the world has great potential to hurt Canada, but it also gives us the opportunity to play — if we are aggressive, innovative and think things through. We have to be flexible, recognize worldwide economics, and pick our spots to develop roles for the Canadian subsidiary within the global corporation. It’s a double-edged sword."

Some global mandates have a long history. Pratt & Whitney Canada Corp., for instance, has a well-established role as the worldwide developer and builder of small engines for its global parent.

"It’s a very unique situation. We have been a Canadian subsidiary in an American company with a world mandate," said David Caplan, Chairman and Chief Executive Officer of Pratt & Whitney Canada. "We have never had a project we wanted to do that we have not been allowed to do. As we grew and developed, we created a success. We were small, but we were more focused and we did the job. We kept going and we stayed profitable. We have earned our status, and through several generations of management, the parent company has never tampered with the mandate. We have even been able to expand it."

Other global mandates are still evolving. Pharmaceutical companies have expanded their research operations dramatically in recent years, but their future as worldwide centres for manufacturing as well depends on federal policies affecting intellectual property.

"Our talent is well recognized. Our ability to deliver has been well recognized. Our ability to innovate as a company has been recognized. That leaves us well positioned to be a key player in Glaxo Wellcome’s worldwide manufacturing operation," said Paul Lucas, President and Chief Executive Officer of Glaxo Wellcome Inc. "To capitalize on this opportunity, we need Ottawa to support aggressively knowledge-based industries like pharmaceuticals."

Some of Canada’s most interesting global relationships do not involve wholly owned subsidiaries. Finning International Inc., for instance, started its life as a Caterpillar dealer in British Columbia, selling and servicing that brand of heavy equipment for the province’s mining and forestry sectors. Over the years, Finning not only built a successful dealership in British Columbia, but expanded its territory into Alberta and the North and then persuaded the American manufacturer to let it take over dealerships in Chile and Britain. The result is a billion-dollar company built on the power of a dealership agreement.

Partnerships also play a role in the growth of Canadian jobs in the new economy. INTRIA-HP is a joint venture between CIBC and Hewlett-Packard. Its goal is to offer highly reliable and highly secure computer services to very high volume industrial customers. Its potential customers are the largest corporations in the United States, but it is providing its services entirely from a Canadian base.

There is an increasing focus on megacentres of production that can serve the entire globe from two or three locations, said INTRIA-HP President Dan Branda. "The objective is to get critical mass, and Canada by itself does not compare well to the United States. However, by adding United States business to our mix, we can attain the critical mass necessary to reach our goal of becoming a megacentre."

THE SEARCH FOR CRITICAL MASS

Critical mass is a term that crops up in almost every discussion about the future of companies and countries alike. Developing a new cluster of leading-edge activity requires a critical mass of talented people and successful enterprises. And if Canada wants to be home to companies that are world champions, it has to encourage its enterprises to achieve the optimum scale for global success.

Critical mass is not always easy to determine, but at the very least Canadians have to come to terms with their historic suspicion of corporate size. Either we want Canada to be home to global leaders, with all of the good jobs and economic activity they bring, or we do not. If we do, we have to accept that a Canadian company may dominate its sector in Canada to a far greater extent than used to be considered acceptable. The solution, however, lies not in preventing mergers between Canadian companies, but ensuring that Canadian customers have still greater access to global competition.

"Canada needs much more critical mass in various clusters of enterprises," noted Marc Fortier, Chairman of the Board and Chief Executive Officer of Air Liquide Canada Inc. "Our domestic market is very small, and yet we decide to keep our champions fragmented. The way to alleviate consumers’ concern is to create very big, strong Canadian companies that, from a home base, can compete worldwide. And then you allow other large companies to come and compete in Canada. We are afraid in Canada of creating champions because we’re suspicious of success. We say small is beautiful. We are prepared to be second best, or third best. This is not acceptable."

"I think there is scope for a smaller number of world-class institutions," said Donald Stewart, Chairman and Chief Executive Officer, Sun Life Financial Services of Canada Inc. "When we talk about the need for Canadians to be extremely good at their chosen field of endeavor, the key message is this: we have to make choices and we must focus. We can no longer be many things to many people."

"I don’t think that Canadian companies can build fences around Canada and say we will fly within our own sphere," said James Stanford, Chairman of the Board of Petro-Canada. "The world just won’t allow that to happen. People will demand and get access to Canadian opportunities, and Canadian corporations must be equally aggressive in demanding access to opportunities around the world. But once they get that access, they have to be able to compete."

Even as foreign competition floods into the market in many specialized areas, Canadian regulators and politicians are still paralyzed by the fear of allowing Canadian companies to get "too big". Nowhere is Canada’s perverse approach to building critical mass for global success more obvious than in the financial services sector.

"The impersonal market forces that are creating a global system of financial services cannot be stopped or walled off. The only effective Canadian policy responses to deal with them are ones that create an internationally competitive system in Canada," said economist Edward Neufeld in a paper for The Institute of Intergovernmental Relations at Queen’s University.

If current merger and tax policies continue even as foreign penetration of the Canadian market grows, "the chances are that this would cause the banks to lose a substantial share of their own domestic market and become inconsequential players internationally, ending with eventual absorption by foreign banks. Even their chances of evolving into significant niche players in Canada would be small because niche players themselves have become international in scope. Such an outcome would be irreversible and it is difficult to see how it would serve Canada’s national interests. It would be a very high price to pay for whatever short-term advantages are seen in perpetuating such policies," Mr. Neufeld concluded.

"We’re number two in the world in discount brokerage, and we do have a shot if we’re fast enough to overcome some of the disadvantages of having the bank mergers turned down," added Charles Baillie of TD Bank. "But I think that we all have to achieve greater scale, or in a few years, we won’t have head offices in Canada and we’ll be part of global empires controlled by foreigners."

"Brand names are going to become more important in the world of e-commerce," noted Youssef Nasr of HSBC. "While the Canadian banks without any doubt will have the brand name in Canada, they will not have it on a global basis."

It is critical for governments to rethink the role they play in encouraging the development of global champions operating from a Canadian base. Part of this process must include a re-examination of competition policy. According to Lawson Hunter, a former head of the federal competition bureau who is now a partner at Stikeman Elliott, Canada’s competition laws remain respectable, but need to be updated.

In particular, he suggested, "high-tech or knowledge-based industries are occupying an increasingly large proportion of Canada’s and the world’s economy. Antitrust laws must adapt to this change to ensure that old paradigms do not prevent needed change and the efficient functioning of markets in these industries …. If Canada is to develop its potential in the new millennium, its antitrust laws must properly account for innovation and change."

He recommended three changes to Canada’s competition legislation. First, it should require the Commissioner of Competition to consider efficiency savings as a factor in deciding whether or not to challenge a merger. Second, to ensure that Canadian firms can achieve global scale, the law should make it clear that efficiencies are to be counted wherever they occur, and not just in Canada. Third, the importance of efficiency gains on the ability of Canadian business to compete internationally should become a relevant consideration in any merger evaluation.

"Our current law and policy is close to being at the forefront of policy developments globally, and has been so for the last 15 years. But we must ensure that we stay with the pack, if not one or two steps ahead of it. These changes are designed to help Canada grow, adapt and become more productive through the application of enlightened competition policies," Mr. Hunter concluded.

"Time and time again, companies would really like to have expanded across Canada, but the regulatory impediments have overwhelmed the arguments for greater efficiencies of bringing Canadian firms together to enable them to compete globally," said Paul Tellier of Canadian National. "Because of the large number of obstacles, attitudes and deeply entrenched suspicions, a lot of businesses have been driven south."

"The big challenge for us is growth," said Stephen Snyder, President and Chief Executive Officer of TransAlta Corporation. "We can’t grow east or west. It’s difficult even to grow in our home province, because of concerns about market power. So we were forced to go international, but with at least one arm, if not one leg, tied behind our back."

Canada’s regulatory policies and attitudes are still geared to the old idea of a closed economy in which competition came primarily from within. They continue to hang over both the profitability of individual companies and the reputation of Canada as a place to invest and to do business.

"People think everything is fine, that Canada is in great shape, that we are number one in the world and everybody loves us. Yet we are standing on quicksand," said Ronald Mannix, Chairman of Coril Holdings Ltd. "Complacency is our greatest enemy."

"It’s like a baseball game. We’ve got two strikes against us. Another strike and we’re out," said Pierre Brunet, Co-Chairman and Co-Chief Executive Officer, National Bank Financial Inc. "The bad news is that we are not doing enough to create an atmosphere that is helpful for investment. And before we see a stronger dollar, we have to build up the country’s strength and pride."

"There is a lack of understanding of how important critical mass is to being competitive globally," said Robert Brown of Bombardier. "Fragmenting your effort only makes you weaker. Dynamic critical mass is essential to growth and profitability. We don’t have these qualities in our companies in sufficient numbers."

"To have a competition policy that punishes growth is totally ludicrous in this globalizing world — unless you simply do not want to have global champions," said Jean Monty, President and Chief Executive Officer of BCE Inc.

KEEPING OUR HEADS

The one constant in all of the strategies being pursued by successful enterprises worldwide is the organization of activity along functional rather than geographic lines. Companies are replacing national subsidiaries that provided a full range of products to particular countries with business units that provide particular products or services to customers across entire continents or around the world.

In this process, Canada has the potential to win new and expanded continental and global mandates, both from Canadian and foreign-owned corporations. At the same time, however, the head offices of some Canadian subsidiaries are disappearing or seeing their size and responsibilities diminished. The traditional branch-plant subsidiary is a dying breed.

Canada’s objective is not simply to attract the legal head offices of global corporations. Rather, it must focus on being the most logical and profitable place for any company to perform high-value work. This includes the executive positions that are part of operational head offices, but other well-paid jobs as well.

When it comes to head office functions and jobs, Canada may be on the brink of a major exodus. A 1999 BCNI survey asked member chief executives to estimate the probability that their own functions would leave Canada within ten years –and 40 percent of those responding, heading Canadian-based companies and foreign-owned subsidiaries alike, rated that probability at 50/50 or higher. An exodus of top-level responsibilities on such a scale would have a wide range of serious consequences for Canada’s economy and its communities.

"First, you tend to support the communities where you hang your hat. That is the natural gravitation," said David O’Brien, Chairman, President and Chief Executive Officer of Canadian Pacific Limited. "The other is that you have a view of the world that is fashioned to some degree by where you live. And that affects to some degree the decisions you make about where to locate your business functions."

"If you’re raising money, I don’t care what it’s for, it’s a lot easier to raise money if the CEO is there," said James Arnett, President and Chief Executive Officer of Molson Inc. "Every time you lose a head office, you lose funding for the arts and other forms of community support. It’s a brain drain and it’s a brain drainer. The best people tend to end up in a head office or want to get into a head office."

"I think head offices are very important," agreed Paul Desmarais Jr., Chairman and Co-Chief Executive Officer, Power Corporation of Canada. "I think Quebec is learning that slowly. Head offices have left the province and it has changed this place dramatically. It’s a question of capital and decision-making. It’s a no-brainer. It’s obvious you want them here."

Head offices also are critical in spawning the next generation of growth businesses. This process is well documented in the high technology sector. McKinsey & Company has noted, for instance, that the companies once known as Northern Telecom (now Nortel Networks Corporation) and Bell Northern Research have created three generations of spinoffs involving either direct investment or people.

The first generation created 37 companies including JDS Fitel (now JDS Uniphase) and Skystone Systems, since sold to Cisco. The second generation created 21 more companies including Mitel. And the third generation added another 24 companies including Newbridge and Corel. Many of these companies in turn have spawned further spinoffs. Together they have created a meaningful high-technology hub in the Ottawa region.

Head offices can provide a significant hand up to growing companies across industry sectors. Montreal-based CGI Group Inc., for instance, has grown rapidly into a global player in computer services. But President and Chief Executive Officer Serge Godin noted that the presence of global players in the same city gave his company a crucial leg up into international markets.

"One of the companies in Canada which dealt the most with CGI when we started was Alcan. Because they were here in Montreal, it was easy. We were meeting frequently, having lunch in the same restaurants. We were able to create a relationship over the years, and they have become one of the largest clients we have today. If Alcan were not based in Montreal when we were still a small company, we would not have had the same access."

"We could say that the economy is going very well, but we are losing our head offices. It’s damaging, highly damaging. When we have a head office somewhere, we have a relationship with the community, we have friends. A decision to move a head office is almost always a terminal act. It’s not going to come back," Mr. Godin concluded.

The process leading to a head-office move tends to be gradual, but builds momentum over time. Within NOVA Chemicals, for instance, the Pittsburgh regional office gained in size and responsibility as NOVA grew its American business and found itself unable to persuade the key American executives it recruited along the way to come to Calgary. By 1999, the vast majority of its customers and of its investors were in the southern and eastern United States, and it simply made more sense to consolidate all of its head office functions within an hour’s flight of those two key groups.

"You’ve got to go where the customers are and you’ve got to go where your employees are. Senior management has got to be able to inter-relate with their employees, make an impression on customers and sell stock," said Jeffrey Lipton, President and Chief Executive Officer of NOVA.

Regina-based IPSCO Inc. had similar motivations in deciding last year to establish its operational headquarters in Chicago. "IPSCO has, and will continue to have, a long-standing commitment to Saskatchewan," said Roger Phillips, President and Chief Executive Officer. "This change was driven by the increasing scale and maturity of our operations in the United States."

With facilities in five provinces and seven states, and with about three-quarters of its assets south of the border, Chicago became the logical nexus for the steelmaker’s operations. Quick access by scheduled air carriers to its plants, customers and relevant government centres was a critical factor in IPSCO’s decision.

And in the case of a major transnational company such as Nortel Networks, a substantial southward shift in responsibility has come about because of a steady stream of internal transfers driven by the company’s need to retain key talent. Nortel President and Chief Executive Officer John Roth has noted that by late 1999, only 28 of the company’s top 400 executives were still based in Canada — even though most of them are Canadians and at least 150 of the jobs that have left could be done just as effectively in Canada.

This shift has not affected Nortel’s continued expansion of research and manufacturing facilities in Canada nor altered its recruitment of thousands of additional workers. The availability of skilled labour and relatively lower wages for production-level employees compounded by a cheap dollar are keeping the overall job totals growing in Canada. But the more vibrant competitive environment combined with higher after-tax salaries south of the border are pulling more and more of the top jobs out.

"The understanding of high tech in Canada is extremely low," Mr. Roth said. "You could create the environment that now exists in Boston in Toronto or Montreal. You would not be disadvantaged by the border. Nortel has proven that. We are a Canadian company but we do business as easily in the United States as within Canada. That is what free trade allowed. The problems we have are of Canada’s own making. If the governments want to have more Nortels, they have to create the right environment for them. If they do not, they are basically going to end up selling harvesting rights for Crown land."

"We need champions. We need global headquarters in Canada. They attract research, they support universities, they support community organizations and they drive economic progress," said Jean Monty of BCE. "We are still trying to work from a Montreal base, but we’re doing it out of conviction as individuals. It would be a lot easier to start hedging our bets and focus our growth in friendlier environments. Some companies have done that. That was their choice. Others like us are doing their best to build in a very difficult environment."

"What we’re talking about is our ability as a nation to compete for the mobile resources that exist, whether they be people, ideas or money," said Robert Peterson of Imperial Oil. "Where we are disadvantaged is that we are next door to the energizer bunny and he moves faster than we do. I don’t think it’s inevitable that every head office moves, but if the economic penalty for being in Canada is perceived to be too high, why would you stay?"

"The old economy has its basis in the land. The major footprint of the railway is in Canada, and it won’t move," said David O’Brien of Canadian Pacific. "Other sectors like our shipping business and hotel business are more portable. When you have hotels everywhere you can set up shop anywhere. Over time you’ll go where it makes sense to run that business, in terms of where it’s nice to live, where the business conditions are good and where you can attract good people to a head office function. Those will be the driving factors."

"Canada urgently needs to rethink where it wants to be in the new economy," said Jacques Bougie of Alcan. "If as Canadians we continue to be complacent, before long we won’t be a significant force. We will be talking about the ex-Canada, what Canada used to be. We will revert to being hewers of wood and drawers of water. We will no longer be a top-tier economy."

"If you want a country where you will be able to maintain your lifestyle and your quality of life, you have no choice but to be a major actor in the new economy. We can be a leader in lumber, in mining, in aluminum parts, and in car production. Fine. But I’m willing to bet you that all that together will represent less than 30 percent of the total value of the economy in less than ten years from now," said Charles Sirois, Chairman of the Board and Chief Executive Officer of Telesystem Ltd. "The forest will not move. The mine will not move. But the new economy can move. The new economy is driven by creativity, innovation and entrepreneurship. What should a government do? Nothing other than create the right environment."

"In Canada, we have yet to thoroughly embrace the virtue of going global," said Jacques Lamarre of SNC-LAVALIN. "The United States encourages transnational enterprise. As a result, the companies there have a strategic advantage. We need to change our domestic laws and regulations if we want Canadian companies to have a fair chance in the world market."

"There are two sides to globalization. On one side, there are strongly positive factors … improvements to people’s standard of living, the benefits of new technologies and of trade liberalization," said Edward Newall, former CEO of both NOVA Corporation and DuPont Canada. "The other side of that coin, however, is reduced control over the direction of your economy — unless you’re smart enough to realize that the only way to win is to put an environment in place that is demonstrably better than the other places people and companies could go."

Canadian enterprises are blazing successful trails toward a promising future. The big question is where their jobs will grow and where their social and economic dividends will flow. This country can surely aspire to more than also-ran status, but it cannot achieve global success without determined effort. There should be no doubt: Canada, like its global champions, should be going for gold.