The Canadian dollar is flirting with par, again as in April this year. Some economists are looking for an eventual rise to a $1.15 against the US dollar. A worldwide currency war is in danger of breaking out. Regardless, the loonie is being driven up by the worldwide commodity boom in oil, gold, metals and other natural resources..
What does this mean for small and medium-sized businesses in Canada, and in particular for Canadian manufacturing?
The number of manufacturing jobs has been in great decline since 2002 when not sector employees 2.3 million Canadians. As of September this year that number has been reduced by 580,000 jobs according to economics professor Stephen Gordon at Laval University in Québec City. That’s right, we have lost more than one in four manufacturing jobs.
Furthermore, the primary losses occurred before the 2008 recession began. The decline in manufacturing may seem to coincide with the rise of our Loonie, but is the rising dollar the real culprit?
In the last decade, our resource based exports (oil, gas, metals, pulp, potash, etc.) have doubled from 1/3 to 2/3 of our export revenue. Canadian manufacturing has been the fall guy. (The Loonacy of parity: How a strong dollar is weakening Canada, Globe and Mail, Oct 16 2010) Not a good thing!
So what does this mean to you and I, in terms of the everyday running of our businesses … this downward spiral of manufacturing jobs alongside of a booming natural resource sector?
First, only a few of us are leveraged off a resource -based client. To gain that leverage we might have to reinvent ourselves. That would be a good thing, but how? More on that below.
Second, the confounding effect of a rising Canadian dollar needs to be managed. The rising Loonie may not be cutting into our exporting margins quite as much as we assume. Our company’s net currency exposure depends on what proportion of our revenues and expenses are priced in foreign dollars. Management begins in the analysis of the underlying variables:
- We can align our revenues and expenses in the same currency. This seems obvious to us at first but it does take real work to accomplish such. Purchase or lease in US dollars. Leasing gets around the inability of Canadian firms to borrow in US dollars. We can also find other ways to insulate against currency fluctuations. Most of us won’t or can’t do currency hedging so we need to innovate on our expense side. Figure out raw materials. Restructure or relocate labor costs when that is possible. Sometimes imagination helps, sometimes it doesn’t. Asking employees for ideas works quite nicely.
- Realize that the rising buck gives us more purchasing power and with it more opportunity. Our money certainly goes further to buy machinery and technology. However, we need to make sure such purchases are innovative enough to make clear differences to the bottom line. And perhaps, for the first time in a long time, we might want to go hunting for acquisitions. Mergers and acquisitions can broaden our customer base and geographic scope. More importantly, we need to discover how very many US businesses want to be taken over right now. Many are desperate for the financing and loans that our Canadian banking system affords us and not them. Others can’t take the heat and would love an exit strategy. Swapping shares may be the easiest way to preserve our precious cash and lower our opportunity costs.
- Canadian output per worker in the manufacturing sector has been increasing more than three times as fast as our economy as a whole! This is due to two factors primarily: (1) targeting stronger, more profitable sectors & markets, and (2) focusing on innovation – - both in generating our own, and utilizing that which is beyond us. Our own innovation is the best. However, we gain a great deal of leverage by acquiring outside innovation through direct purchase or by joint venture. This brings us to our third point.
Third, innovation can make a huge difference to the relative price of labor (which is entirely or heavily Canadian domestic for most of us) compared to the cost of capital goods which most of us find to be an imported cost. A high wage environment means we need to learn how to make best use of our labor forces. We need to shift quickly away from simple labor to sophisticated knowledge-based work. This kind of production and manufacturing focuses on higher value, higher innovation goods. New techniques, methods and employee-suggested inventions is at the basis for larger market share and higher margins.
So, to cope with the rising Canadian dollar, we can realign our revenue expense ratio, we can utilize our increased purchasing power, and most importantly we can increase our output through innovation. Innovation is where we can make the most headway in both market share and margin. However, almost every one of us is an under-performer when it comes to innovation. What can we do about that? The first step is nearly always to work on modifying or strengthening our in-house culture.
Here is what needs to be done to develop a culture of innovation:
- Realize we are living in an ever-changing business world that is moving at a higher speed than we care to imagine. This requires humility … and not one of us have enough of that. What humility does is allow us to reinvent ourselves. Reinventing ourselves comes from our willingness to change. Most of us want to self justify rather than jump into our ever-changing world. There is always pain in change. So we decide which pain we will have.
- Realize, that we as senior-most manager lead by what we sponsor – - we model the way by our example. We can never delegate change or innovation. What we put our heart into is where our followers will go. Reinventing ourselves – - in small ways or big – - starts with you and me. What we sponsor changes our culture..
- Setting up a reward system for making a positive difference in work processes, outcomes or creative ideas is the foundation stone for building a culture of innovation. Often the best reward is a combination of open, “gushy” acknowledgment along with the opportunity to further develop the idea or process in question. Secondarily, most workers are more highly motivated by intangible rewards (public praise, plaques, a dinner, tickets to an event, a getaway trip, being sent in an unusual way to represent the company, etc.) than tangible rewards in some monetary form. Showing respect and appreciation are the highest forms of praise. In time, our reward system becomes an imbedded part of our culture..
- Build a decision meeting system that asks for input. What seems to inspire our workers more than anything is this: knowing what they say and do makes a difference. In addition to stimulating innovative ideas, allowing staff at all levels to take part in the decision-making process will facilitate transformational leadership development for the future of our company..
- If we allow our followers greater freedom to make decisions, then we are enabling them to experiment with new ideas in a safe environment and we thereby challenge them to learn new ways of thinking. (Some prudent caution with this is of course warranted: the authority to make decisions should be offered in a progressive manner, so workers are not overwhelmed and can maintain creative momentum.) With newfound ability to add to the company’s work processes, they are most likely to begin interacting in ways that supports innovation and ultimately influences the future course of the way the company does business. .
- We need to learn to generate greater trust and encourage information exchange in a way that flows openly and evenly. In most organizations the natural tendency is to guard information and operate in self-protection mode. As our reward system kicks in and praise is distributed fairly, both trust and openness will begin to rise. Developing candid trust, honesty, frankness and fairness is hard work but reaps huge benefits after time. We need to go to great lengths to avoid the appearance of favoritism or exclusiveness. Above all, we need to be friendly, accessible and approachable..
- We usually need to change our vision and mission statements to capture hearts. Too often, they are meaningless to our everyday activities. Further, it is not unusual for them to not capture essence of our company. Good statements succinctly describe what is unique about our service and what is special about our people. When the vision and mission of our firm truly gets inside the minds and hearts of our staff, everything changes. Collaboration and cooperation emerge and innovation follows. .
The bottom line is that we need to realize the best ideas are going to come from the “skin” of our organization. That skin is where purchasing, sales, facilitators and service people meet users and suppliers. Those people operate with the frustrations, problems, pains, desires and hopes of those who would like to see change in us. When we can respond to the sensitivity of our skin, we can begin to identify all sorts of opportunities to innovate to improve the lives of our suppliers, clients and customers. Wouldn’t that be nice?
When these best ideas are developed and implemented, particularly by the people who generated them, we will usually see the rest of our workforce becoming inspired and on fire to continuously look for ways to cut costs, save time, produce more … and generally improve work processes and out comes in unexpected ways. The momentum generated, from such people that we have so empowered, can set us to be fully committed to our vision and mission, and on a course of ongoing innovation and improvement in both process and product. If, as and when that empowerment becomes a part of our culture of innovation, LOOK OUT! The value of the Canadian dollar won’t matter one bit.
Coming Soon: Incremental versus Disruptive Innovation