Facts and figures for SMEs in Canada

In Canada, SMEs are considered the backbone of the economy. Collectively, the number hits one million SMEs, over 75% of which are called micro-enterprises, each employing less than 10 people. Yet, only a small minority of companies, around 4% to 7%, experience sufficient growth to make significant contributions to overall job opportunities (Herman & Williams, 2013). More than half of small and medium-sized companies are concentrated in Ontario and Quebec, followed by Alberta and British Columbia. Meanwhile large companies only form around 0.3% of total Canadian businesses represented by 2933 enterprises concentrated mainly in Ontario (CS, 2016). In 2011, SMEs employed 63.7% of the private sector employees, which account for 6.8 million people across Canada. SMEs managed about 79,000 jobs, and over a period of 10 years - 2001 to 2011 - SMEs were responsible for 53.9% of all job opportunities in the private sector with 51,507 firms in the manufacturing industry, accounting for a total of 4.6% of total Canadian SMEs (BDC, 2013). Then in 2015, the Canadian SMEs within the private sector were responsible for over 80% of the private sector employment, with the majority of employees working for small businesses, constituting 70.5% (8.2 million), while medium-sized businesses employed 19.8% (2.3 million). In total, SMEs employed 90.3% (10.5 million) of the private sector workforce, populating around 95% of net job opportunities, signifying the important role SMEs play in employing Canadians across the country. The majority of these Canadian small and medium-sized businesses are service oriented. As of December 2015, and of all employer businesses,

916,527 (accounting for 78.5%) operate in the service-producing sector, with around a quarter of the Canadian businesses – 251,451 (21.5%) – operate in the production sector (ISED, 2016).

The growth of these SMEs can be considered an evidence of economic vitality due to their obvious major role in generating wealth in Canada, as in many other countries, where the majority of businesses (99.8%) are SMEs (CS, 2014). Moreover 71% of the jobs within the private sector over the last 10 years can be linked to SMEs’ activities, thus it is obvious the importance to maintain SMEs as a strategic pathway for maintaining the economy and enhancing its growth. The measures taken for this purpose usually include reducing administrative burdens, reshaping tax policies that allow for growth and facilitate the access to financing as in most cases SMEs have very limited access to financial assets. Other than the business environment, that also plays a major role, the growth of SMEs depends on multiple factors and although SMEs differ with industry, location, origins and target markets, they all have common points that allowed some of them to be far better than others. The desire for growth is not the main determinant, although in 2015 a literature summary by HEC (École des Hautes Études Commerciales) from Montreal Center for Productivity and Prosperity, published by Louis Jacques Filion, states that the main foundations for corporate growth are its leaders and their commitment. Yet a business needs many capabilities to grow, other than a skilled management team and leaders. The business itself has to be able to meet the challenges of growth, which is not solely linked to qualified personnel, as the company has to have a good understanding of their target market and their clients’

needs in order to adapt and innovate. In addition to the company's leaders, ability to capitalize on advanced equipment and technologies acquired for innovation is needed, in a sense of introducing new products and services, or by upgrading the businesses’ processes and models. It is no secret that the business's financial capacity is also an important measure, and sustaining growth requires abundant resources to be able to generate sufficient cash flow and make operations more profitable. Finally, successful growth does not only depend on internal factors but the outside environment of the business where it operates. This includes the increased demand for the products or services, the access to qualified workforce, having a good supplier network and research centers within range.

A study was conducted by BDC (Business Development Bank of Canada) in which in-depth interviews with leaders of 25 firms across Canada, most of which being SMEs experiencing marked growth (Ratté, 2015). The interviews were followed by a designed questionnaire for a survey of 1,015 SMEs, allowing for a comprehensive picture of what the growth means, and a list of strategies that have been proven effective for those companies aiming to help a greater number of SMEs decide which path to pursue for growth. Subsequently the entire country would benefit, being SMEs the main Canada's economic

engine. The study concluded that the three dimensions of growth are revenue, profits and jobs, so for a business to be considered growing it has to experience an increase in revenue, profit or workforce in each of the last three years, without having any decline in these areas (Ratté, 2015).

In the same study issued by the BDC to identify initiatives for strategies that make the most significant contribution in achieving growth objectives, the BDC presented 12 business strategies to 25 business leaders and asked them to rate the level of importance of each on a scale from 1 (Very Important) to 4 (Not at all Important). The results came out as follows:

1. Be a client-centric business: Nearly 99% of leaders in the study mentioned that having a good idea of clients’ needs and the way to satisfy them was very decisive in terms of business growth, reforming or modifying their product based on the client's needs and meeting their expectations.

This strategy was unanimously supported without regard to the degree of growth, location, and size. An example of the latter strategy adopted by a Canadian company is Stemmler’s which is a family business located in Ontario for the production, distribution and retails of meat products, with a main strategy based on meeting customers’ needs suffering from health problems, food allergies and sensitivities while maintaining its commitment to quality and taste;

2. Build your talent pool: It was found that the leaders of growing SMEs pay special attention to managing human resources where 85% of them give priority to train employees while 72% prefer to hire more qualified people. Investing in workforce training seem to be more important for SME leaders that have ten million SME or more in sales, have at least five employees, and were located in Quebec. As for the other 72%, they were mainly leaders of businesses with 20 or more employees, have two million or more in sales and were located in Ontario. On the other hand, having a strong team of managers is the strategy that leaders of SMEs of strong growth and more than five employees focus on. An example of companies that utilized this strategy is “FCV Interactive” led by Johann Starke in British Columbia. For the years 2014 the company's profits rank 155 in the “Profit 500” ranking. FCV was highlighted as one of the fastest growing Canadian businesses with generation of many jobs, in both Canada and the United States, were two hundred people were recruited in ten years. For Starke, having a solid team that he trusts is what makes him feel comfortable, as a key success for the company, because for him, his amazing team of managers are the ones that come up with the ideas that enabled this company to push back the limits he initially has set;

3. Stay on top of your game, innovate: Not surprisingly, eight out of ten respondents (81%) stated that the success of their companies is linked to their ability to innovate. They also stated that

innovation went parallel with their understanding of the clients’ needs in order to adapt accordingly. Similar to the latter two categories, innovation is one of the strategies that respondents have checked regardless of their company's level of growth, size, or location. An example of a company using innovation as a key success for their growth is Compass Compression Services, which is a fast-growing manufacturer of natural gas compressors that also process equipment for the oil and gas industry. The company has also expanded internationally and by growing its service division with revenues increasing by 40% every year for the past six years. Compass president John Forgeron states that thinking outside the box is the driver to their growth as the market is changing in conditions. Yet Canadian SMEs face a multitude of obstacles and hurdles. The obstacles to business growth that are most cited by Canadian SMEs are rising input costs and unstable demand. This causes some concerns that revenue will not be sufficient enough to allow for expansion, to grow and thrive. Many other enterprises report attracting and retaining workers as a major challenge, especially in SMEs where qualified employees are needed. On the other hand, over half of the medium-sized firms report employee recruitment and retention to be a major growth obstacle. Thus, growth obstacles are not uniform across the country and regional circumstances exist. Firms are most likely to report labor shortages and difficulties in attracting and retaining workers in places like Saskatchewan and Alberta, whereas Ontario firms cite the changes in demand and increased competition as the major obstacles.

Overall, concerns about input prices, government regulations, and maintaining cash flows are significant throughout the nation (RBC, 2014).

4. Invest to be the best: In many cases, growth is dependent on the amount of invested resources in the firm and for that, 3 out of 4 SME leaders reported their focus on amplifying production capacity through investing in facility expansions or new equipment. Around the same number of entrepreneurs considered investment in high-end technology to be the factor enabling their sustained growth. It might be worth noting that companies based in Ontario (81% of companies interviewed) focused on adopting state-of-the-art technologies. An example of a company adopting this strategy is Sport Systems that manufacture and install sport facilities. This company does business with over 30% of Ontario's school boards and has increased its sales in the US and started taking major new customers in the Middle East. Sports systems consider everyone to have an equal chance, but to succeed you have to do it right and their strategy was handling anticipated growth by having an Enterprise Resource Planning system (ERP) that allow employees to have all the information they require at their fingertips, making it easier to identify

costs and manage inventory. The company also replaced the old computer-assisted design system by a new 3D software that has increased the company's efficiency in handling operations.

In the light of the multi-leveled issues facing SMEs and with limited resources, their fastest way to boost productivity and economic growth is via innovation. Innovation is often thought to be synonymous with high-end technology, but innovative behavior in business encompasses a range of practices that include both technological inventions and operational optimizations. According to the CCA (Council of Canadian Academies), innovation means “new or better ways of doing valued things” (CCA, 2009). The word innovation is not purely synonymous with invention, although invention is a necessary precursor for innovation. The Oslo Manual (OECD, 2005) reflects the current international consensus that defines innovation and the multi-sectorial implementation that encompasses product, process, organization, and market innovation as follows:

 Product innovation: New products that include goods and services that have additional value typically foster more revenue because their novelty means less cost competition than standardized products. Research and development or even the aggregation of pre-existing technologies can be sources of product innovation that can meet customer demands better;

 Process Innovation: Product manufacture and delivery here are tackled to either reduce cost and/or enhance convenience for the end-user. Examples in this process include global supply chains, and internet-based shopping. A significant example of Canadian process innovation is the “Steam-assisted gravity drainage”, a method for bitumen recovery oil sands;

 Organization innovation: In short, organization innovation aims to convert creativity, technology, and knowledge about customers into profitable innovations through integrating capital management, technology management, and strategic management into innovation-supportive structures;

 Market innovation: This includes entering high-growth markets like China or India, thus new geographic targets, or by how the market is addressed (e.g. using the internet).

Similarly, a survey on Financing and Growth of Small and Medium Enterprises in 2014 performed by Statistics Canada also divides innovations into product, process, organizational and marketing categories. In the 2007 survey conducted by Statistics Canada about 5 SMEs of Canadian SMEs were

being innovative (firms that spend 20 SMEs or more of their total expenditures on R&D were considered so). Of these firms, 10 SMEs were wholesalers or retailers, 14 SMEs were professional services firms and 24 SMEs operated in knowledge-based industries. The target population in the 2014 survey was the private sector of SMEs employing 1 to 499 people and generating over 30,000 dollars in revenues per annum in 2014. The survey data shows that over 41.7% of small businesses and 58.3% of medium-sized enterprises applied at least one type of innovation. Despite representing 97.9 SME of all employer businesses as previously mentioned, these small businesses accounted for nearly 27 SME of total R&D spending, while medium-sized businesses, which constitute 1.8 SME of employer businesses, accounted for about 18 SMEs of all R&D spending. This signifies that the availability of resources to spend on research and development is directly related to the size of the enterprise. Moreover, it is particularly noteworthy that SMEs spending on R&D has been in consistent dreadful decrease over the course of 2011–2013 in total, with the manufacturing industry being the most-innovative among others (61.5 SMEs), followed by wholesale trade (50.5 SMEs) and professional, scientific and technical services (45.0 SMEs). Transportation and warehousing, and construction, were the least innovative businesses, with only 31.0 SMEs and 36.4 SMEs respectively, within the last three years period (CS, 2014). Several recent reports as well emphasize on the innovation down drift in Canada, as the Global Competitiveness Report, which is an influential annual publication issued by the World Economic Forum, which states that Canada has had the soundest banks in the world for the last seven years (Schwab, 2014). Yet, this global leadership is not translated into leadership in competitiveness nor innovation as the same report says that, Canada ranks 15th in global competitiveness, down one spot from the previous year and five spots from the WEF’s (World Economic Forum) 2009-2010 ranking, indicating a five-place retreats in five years (Schwab, 2014). Management and managerial skills are other reasons for the failure of Canadian SMEs. Almost half of the Canadian firms to go bankrupt is mainly due to their own deficiencies rather than due to problems being generated externally (Newton, 2001). Management skills are a critical driver of an SME’s innovative capacity as they rely on management as a source for their innovation more than large firms do. Therefore, management skills’

importance in the small business sector can be underestimated for a literature review on management development issued. In 2006, a study confirmed that small firms require specialized management programs for them to survive, grow and reduce the incidence of failure in addition to improve their performance (Rya, 2006). Organizations that are committed to foster an innovative culture have to develop leadership capacity throughout the firm. They need to invest for understanding the required skills for developing the leadership necessary. Leaders within an innovation-focused organization need

to have vision, flexibility, entrepreneurial skills, risk tolerance and commitment to developing human capital. This organization acquires true leadership that can support individual creativity that would result in sustainable growth for both the workers and the organization. Components of entrepreneurship (which can be defined as the mindset and process to produce and develop economic activity by blending creativity and innovation with management within either new or an existing organization) are business disciplines and individual initiatives (Ahmad & Seymour, 2008).