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Achieving Growth in a Low-Growth World

27/05/2016


The Canadian economy, like its global peers, simply can’t find a higher gear. Slumping commodity prices and the sharp downturn in the oil sector have dramatically slowed Canada’s natural resources industry and the impact can be felt across the country—from retail to automotive and everything in between. The situation isn’t likely to turn around any time soon: The Organisation for Economic Co-operation and Development (OECD) forecasts Canada’s economy will grow 1.4% in 2016 and 2.2% in 2017. In such an environment, is it even possible for Canadian companies to achieve meaningful growth for themselves?

In a word — yes.

Despite stubbornly low growth in the wider economy, enterprising private companies can find ways to strengthen their competitive position and grow their businesses. There are opportunities to be seized by companies with realistic expectations, a well-crafted business plan, solid financial management and a willingness to invest and take smart risks. Growth takes the right strategy, the right people, the right financing — and the vision and flexibility to pursue more than one route to the goal.

The many paths to growth

No matter the industry, today’s competitive environment is one of constant, rapid change. Rising customer expectations place more and more demands on companies. New technologies emerge to disrupt traditional business models. Investors and lenders grow warier, making funding harder to come by. For business owners, this shifting, volatile landscape means that there’s no longer a clear path to growth. Instead, owners need to embrace a multi-pronged approach to achieving growth that takes into account a range of important factors.

Shift your business strategy

Canadian companies aren’t generally low-cost producers, which makes competing on price virtually impossible — or a risky race to the bottom. And many sectors are struggling with the commoditization of products and even services, shutting down another source of competitive advantage. This means Canadian companies need to play to other strengths and find new ways to create value and differentiate themselves in a crowded market.

For many, this may entail adopting a highly customer-centric strategy that focuses on building an intimate understanding of customers’ needs, wants and pain points — and positioning themselves as a true partner in their customers’ success. Investing in delivering a superior customer experience and outstanding customer service can be a powerful way to stand out, build loyalty and drive superior revenue growth. Others may rethink their business model—such as moving away from direct manufacturing to assembly, for example, in order to respond more nimbly to customer needs.

Bring in real builders

Talent is a powerful growth enabler, yet one that’s often overlooked. That’s a shame, because there’s a lot of talented people out there looking for a new adventure in their career. Companies should look for opportunities to bring on builders with the talent, experience and ambition to take the business to the next level. Some of these builders may at first glance seem too big for a mid-market enterprise, but owners shouldn’t be put off by this. In fact, owners should capitalize on their new hire’s vision, drive and fresh perspective—and allow them to pursue the growth opportunities they see.

Invest in productivity to boost growth

Technology’s relentless advance is upending or disrupting business models in every industry. Digital, mobile, big data and analytics, 3-D printing — these and other technologies have already changed the rules in sectors from retail and distribution to transportation and manufacturing and beyond. Investing in new systems, technologies, machinery and equipment is enabling companies to be more efficient, flexible, productive and competitive.

Unfortunately, too many Canadian companies — large or small, public or private — fail to invest in new technology that could improve productivity, unlock new business opportunities, and free up vital cash for reinvestment in the business. Yet ongoing investment in new technologies and equipment is a hallmark of companies that achieve sustained, above-average growth. A timely strategic investment in technology can turn today’s successful, run-of-the-mill business into tomorrow’s industry disruptor — with the powerful first-mover advantage that brings.

Capitalize on currency

Traditionally, a low Canadian dollar has been a boon for Canadian businesses, especially manufacturers and other exporters. However, it may still be a few months until the loonie’s recent decline begins to have a measurable impact on companies’ sales. Beyond a potential sales boost, savvy companies should also make strategic decisions to further exploit the falling Canadian dollar.

Companies should look at all aspects of the supply chain and operations and make sure they’re gain the maximum advantage from current foreign exchange rates. Firms that can arrange to pay for inputs and other costs in Canadian dollars — yet sell goods in U.S. dollars — can achieve a quick improvement to the balance sheet. Companies with customers and operations in the U.S. or other markets may find that shifting production and sales to those markets provides a valuable hedge against rising costs.

Make smart acquisitions

In a low-growth economy, acquisitions offer a way for companies to accelerate growth well beyond what can be achieved organically — at least, when those acquisitions are strategically aligned, well planned and well executed. The next few years are likely to see significant mergers and acquisitions (M&A) activity among Canada’s private companies, for a couple of reasons. In the oil sector, small and mid-sized firms will need to consolidate to create businesses strong enough to weather the downturn and emerge stronger on the other side. As well, a large number of Canadian business owners are expected to retire in the next 10 to 15 years and many will end up selling their business instead of transitioning it to family members.

Smaller companies, or those with modest resources or an unwillingness to go much beyond their comfort zone, can often buy margin by pursuing tuck-under deals that more readily fit into the existing business. Companies with more resources or greater ambition can focus on larger deals — but they should take great care to avoid acquisitions simply to gain revenue. Acquisition targets must be carefully evaluated to ensure the deal is onside with corporate strategy and holds no surprises. And once the deal is done, companies must invest in ensuring the acquired business is properly integrated in order to realize the deal’s intended value.

Embrace a wider global perspective

Typically, midmarket companies think of one thing when it comes to doing business globally: selling to foreign customers. But international sales are just one aspect of being a global business — exceptional companies look at all aspects of their business through a global lens. These companies build on international sales by developing local partnerships and alliances to deliver the superior service and support that domestic customers receive, helping to build trust and reputation in promising new markets. They factor international tax, customs and duties into global supply chain decisions in a never-ending search for the best value. And they structure their operations in a way that minimizes their tax on a global basis, capitalizing on Canadian tax rules that allow them to do so while repatriating global profits tax-free. By thinking of their business as a global entity — not simply a Canadian business with some overseas customers and operations — companies can reduce costs, grow margins and set the stage for further expansion.

But what about funding?

It takes money to make money, the adage says, and achieving growth typically requires companies to find additional financial resources to fund investment or expansion. Conventional wisdom holds that there’s an abundance of funding available, with investors and lenders eager to put their capital to work. But as many companies are discovering, accessing growth financing can be difficult — and costly.

The reason? We’ve recently seen a major recalibration of relative risk-adjusted returns in the market. Up until just a few months ago, investors frustrated by the low-interest environment were willing to accept higher risk in exchange for higher potential returns. But now these same investors, stung by defaults and concerned about the impact of the slumping natural resources sector, have greatly refined their view of risks. They’re adopting stricter investment criteria, insisting on more rigorous covenants, conditions and oversight, and demanding higher returns. Investment-grade debt that yielded 8.5% in the fall of 2015 is now yielding 14%–18%. The rise in financing costs has been so sudden and so sharp that it’s left many owners reeling from sticker shock.

However, growth financing is available for companies with good track records, a healthy balance sheet, a strong management team and a solid business plan. It may just take an unexpected form, such as trading a stake in the business and a seat on the board in exchange for an injection of private equity or using setting capital equipment against an asset-based lending arrangement.

Achieving growth: Foundations for success

The economy may be stuck in a low-growth gear, but there are still many opportunities for companies to achieve strong revenue and margin growth for themselves — from acquisitions to expansion into new markets to investments in productivity-boosting technology. No matter the path or paths chosen, business owners can improve the odds of success by building a solid foundation for their efforts.

  • Build a better business plan. Dream targets and vague plans don’t inspire confidence. You need to make your business plan real. Make sure you have a clearly defined strategy and business goals — and do the market research and financial analysis necessary to show why your targets are reasonable and achievable. A business plan that lays out realistic goals and strategies will help persuade lenders, investors and even potential buyers that your company is a solid bet.
  • Recalibrate your expectations. It’s a world of low commodity prices, low demand and low growth. Your company’s path forward may involve many unanticipated twists along the way, as you evaluate your strategic options. In some cases, for example, consolidation with a rival may be the best way to help your business succeed—even if it puts you out of a job. Are you ready to make such decisions?
  • Improve your financial sophistication. Invest in upgrading the quality of your company’s financial management and reporting. Improve the tools, technologies and processes used to gather, process and manage financial data. Hiring an experienced Chief Financial Officer—especially one with a broad, multi-sector perspective—can significantly enhance your ability to provide clear, accurate and timely financial information. And the better the quality of your financial information, the better financing terms you can often get.
  • Establish a succession plan. A well-crafted succession plan is essential to ensuring the orderly transition of your business when you retire—but it’s also a valuable asset when dealing with investors, lenders or buyers. Having a succession plan in place reassures investors that there will be continuity, knowledge transfer and a steady hand at the controls of your business in the years to come. No investor wants to see a company they’ve funded suddenly fall to pieces without its owner / founder.

Your company’s growth journey can start today

Your business doesn’t have to be held back by a low-growth economy. There are many ways owners can continue to expand, grow revenues and improve margins in today’s business environment — some more straightforward than others. Those that pursue opportunities today stand to position themselves to thrive when the economy improves — as it will, eventually. A professional advisor can help you and your team map out and evaluate your growth options and develop the growth strategy that’s right for you.

If you’d like to discuss how your company can achieve its growth ambitions in a low-growth world, contact John Hughes, Senior Vice President, Private Enterprise at 416-596-1711 or [email protected]