REPORTERWisdom Exchange

Winning Strategies in Turbulent TimesFebruary 18 and 19, 2009

Inside

Tough times are rightfor sparking innovation 4

Experts paint economic picture and forecasts 6

Workshop Exclusives: Lean and green 8 Managing finances 10 Securing financing 12 World markets 14

The economic world has changed tremendously since the last Wisdom Exchange held in Ottawa in February 2008. These are, as this year’s theme so aptly states, turbulent times. The Ministry organizes the Wisdom Exchange to provide a forum where CEOs, presidents and business owners can meet, share best practices and discuss the latest trends with each other and leading industry experts. Many of you are facing tough challenges, and rethinking how you do business. One business strategy explored at this year’s Wisdom Exchange is “going green.” There are tremendous oppor-tunities emerging and experts believe that going green will fuel a fundamental shift in our economy. “Thinking green” is very much top-of-mind for the Ontario government. In February 2009, Premier Dalton McGuinty announced the Green Energy Act (GEA): A Vision for the Future. The GEA is a bold series of co-ordinated actions designed to enhance economic activity and reduce our climate impact. If passed, it will sup-port a variety of climate-positive

initiatives, such as creating a projected 50,000 new green jobs. You can access the proposed act through www.greenenergyact.ca. Many Ontario companies have already found success by going green. The Ministry has brought together the experiences of early adopters in a new report called Think Green. This report includes highlights from a roundtable discussion by leaders of six award winning Ontario firms, and profiles of innovative small and medium enterprises that have seized green opportunities and reduced costs, strengthened their brand, and generated revenue. It also provides advice from environmental experts on how companies can begin their green journey and reduce their firm’s carbon footprint. It can be accessed at www.ontario.ca/sbcs(click: Leading Growth Firm Series). Our government’s highest pri-ority is to help Ontarians through this recession and build a stronger, more competitive economy. Our five-point economic strategy will help businesses both in the short and long-terms. We’re building roads, bridges and public transit to help move products and people more efficiently, investing in a smart electricity grid that will

be more reliable and better able to accommodate renewable energy, and investing in education and training so that your workers have the skills and knowledge businesses need. With support from the Ontario Government, there are new programs and initiatives to help Ontario businesses grow and prosper. Four examples are: Canadian Manufacturer and Exporters (CME) SMART Program: Helps small and medium-sized manufacturers in Ontario improve their productiv-ity so they can compete more effectively in the global economy (www.cme-smart.ca). Export Market Access (EMA): A Global Expansion Program designed to assist small to medium size organizations to access and expand their growth in new foreign

markets (www.exportaccess.ca). The Next Generation of Jobs Fund (NGOJF): A five year, $1.15 billion strategy to help innovative companies grow and create well-paying sustainable jobs for today’s workforce, and the next generation of Ontario’s highly skilled workers (www.ontariocanada.com/ontcan/en/nextgen_main_en.jsp). Advanced Manufacturing Investment Strategy (AMIS): The $500-million program provides repayable loans, interest free for up to five years, to encourage companies to invest in leading-edge technologies and processes (www.ontariocanada.com/ont-can/en/progserv_amis_en.jsp). I would like to thank all of the speakers, presenters, workshop moderators and panellists, and attendees for contributing to the success of this year’s Wisdom Exchange and for taking time from your immediate business pressures to look ahead. I am confident that the high-lights captured in this report; as well as our Think Green publication will provide you with ideas and practical information as you continue to chart a successful course.

Message from the Honourable Harinder S. TakharMinister of Small Business and Consumer Services

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Company turnaround:COM DEV takes it to the top

Tough economic conditions. Declining public confidence in markets. Job layoffs. The top news stories of 2009 are familiar to John Keating because they were the same headlines back in November 2002, when he took over the helm of COM DEV International. At that time, the company was at one of the lowest points in its 25-year history. Today, COM DEV is riding a five-year wave of success that has seen revenues grow from $88 million to $210 million, the share price quadruple and market capitalization increase by 500 per cent. What strategies shaped that remarkable turnaround? In a lively presentation that mixed passion, humour and hardnosed business insights, Keating gave an insider’s account of the changes at COM DEV on the opening night of the Wisdom Exchange. “When I took over, we had problems,” he admits. “We were running a $1-million operating loss. We were deep in debt. Employees were demoralized. We were nearly bankrupt. But if you get anything from what I say tonight, I would like you to hear a message of hope,” he said. “Even in the most difficult times, you can get through it. It’s not easy. It takes hard work. But you can get through it.” COM DEV International is a world leader in the design and production of space hardware. Based in Cambridge, Ontario, COM DEV manufactures components and subsystems for satellites used for commu-nications, space science and remote sensing. More than 80 per cent of all commercial communications satellites ever

launched have COM DEV components onboard. COM DEV has supplied equipment to over 700 spacecraft – more than any other company in the world. Founded in 1974 and headquartered in Cambridge, Ontario, it now has about 1,200 employees in Canada, the U.S., the U.K. and China, serving commercial, military and civil markets. Satellite components combine equal parts precision and rug-gedness. They must be tough enough to withstand extremes of vibration, pyrotechnic shock, cosmic radiation and heat

fluctuations. They must be reliable. Once satellites are launched, there are no service calls, no repairs, no replacement parts. All the components must be perfect. Anything less could put at risk an investment of several years work and millions of dollars. This demands rigorous engineering and design systems, exhaustive testing and analysis, extraordinary manufacturing precision and quality control, and a spotless corporate reputation. Launching a satellite is a very expensive, essentially one-off project with relatively

CEO John Keating combines a message of hope with sage advice.

long lead times. Project leaders need to be sure that their suppliers will be around to deliver the components. Back in 2002, that was not necessarily the case for COM DEV. Word was starting to get around that they were in trouble. “We had just burned through $250 million on a failed strategy chasing the wireless market,” Keating recalls. “We had a poor reputation among analysts. They thought we didn’t know what we were doing. We needed to refocus and rebuild the company.” It was a five-year journey. Like many other manufacturers, COM DEV had to deal with dramatic appreciations in both the Canadian dollar and materialcosts. On top of that, two of their best customers – Boeing and Lockheed – stepped away from the commercial space marketplace. In addition, the Canadian govern-ment reduced spending on space by 40 per cent. During that same time period, both the U.S. and Canadian governments introduced counter-terrorism-related export controls that had a direct impact on satellite technology. Today, COM DEV technology is loaded aboard satellites used by scientists to monitor environmental changes, by telecommunications networks and broadcasters, and by governments for search and rescue and borders security missions. COM DEV’s dramatic increases in revenues, share price and market capitalization are only the financial measurements of the company’s turnaround. The payoff also shows in better products and shorter product cycle times, the creation of 600 new jobs and an increased capacity to contribute to the community. Keating outlined COM DEV’s four-point strategy for a success-ful turnaround:

Strategic thinking and hard work rescue company

1. Get out of the wrong business and into the right one:

“We were in a number of busi-nesses, some of which had nothing to do with our core competencies” says Keating. “We had to decide: could we be number one in this niche? If not, we had to exit. “Even the process of defining our core competencies took longer than we thought,” he says, “including a number of false starts.” It was discovered that COM DEV’s core competencies were not manufacturing microwave filters and specialized electromechanical switches. In the end, COM DEV focused more on their expertise in designing perfect components for the space environment. How did the business grow? They minimized the risk by growing incrementally out from their customer base and focused on market adjacencies: selling new products to their established customers and selling established products to new customers.

2. Understand the operational leverage model:

“This is absolutely key,” explains Keating. “Every new dollar of revenue generates a dispropor-tionate increase in profitability. But, even in very difficult times, you’ve got to be prepared to make investments.” Operationally, this translated into a drive to increase revenues as quickly as possible while managing overhead costs, especially general and administrative expenses, to keep expenses down and revenues up. The increased operating profit allowed COM DEV to re-shape the company. During the turn around, COM DEV invested $64.2 million in capital and facilities, $18.7 million in acquisitions and improved its cash position by $33.1 million.

3. Sell things that people want to buy:

“It may seem obvious, but it’s not always the case,” Keating

points out. This is especially true in the high-tech field, where scientific advances can inspire new features that technicians like but customers don’t value. COM DEV ran into this during its foray into the wireless market. It developed satellite components to support high-definition microwave transmission years before people were ready for it. Keating is a big believer in products developed through “market pull” not “technology push.” He says not to waste precious investment dollars on things that people won’t buy and recommends a four-question

filter to screen any new product proposal. “Only if these four questions can be answered clearly and persuasively is a product worth developing,” he says.• Why do customers need it?• Why would they buy it rather

than make it themselves?• Why would they buy it from us

instead of someone else?• Why would they buy it now?

4. Be Lean, coupled with operational excellence:

“If you want to beat the competition, you really do have to be better than them,” said Keating. “Lean is so much more

than trying to be more efficient. Lean is a whole order of magnitude greater than that. It isn’t easy. It’s hard work. But it pays off.” COM DEV’s Lean strategy includes the following key points:• Demand that the organization

continuously improve• Provide the necessary people,

tools and support• Remove MUDA (waste) from

the organization• Become process-oriented • Manage risk carefully• Set targets and monitor

performance Viewing the company in its larger context in terms of its contributions beyond the bottom line, to include what it contrib-utes to society, is a powerful source of commitment for employees, investors and other members of the community. “Fundamentally, what we do at COM DEV is make the world a better place,” Keating emphasizes. “This is very, very important and something I’m really passionate about. Success all comes down to people.” If you treat your people well and they are proud of the work they do, then they will be happy to come to work and that enthusiasm is transmitted to your customers and suppliers who will be happy to do business with you. The effect is to create a virtuous cycle with mutually reinforcing positive feedback loops. Keatings conclusion: “If you have the right people who really care about the company, who care about making good products, who care producing things that make the world a better place, then that’s what really works. That’s the secret.”

Company turnaround:COM DEV takes it to the top

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Keynote speaker John Keating shares strategies for COM DEV’s remarkable turnaround at the Wisdom Exchange opening dinner.

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To paraphrase Charles Dickens, it could be said that, for innovators, these are the worst of times, these are the best of times. Business media pundits everywhere will tell you just how bad things are and why they are likely going to get worse. But Scott Anthony thinks that these are exactly the right economic conditions innovators need to launch truly great, breakthrough products. As proof, he points to the hugely successful companies that emerged from the last three major downturns in the U.S. economy: Google, Best Buy, Southwest Airlines. And earlier downturns: FisherPrice, Kraft, Microsoft. Anthony is President of Inno-sight, a consulting, training and investment firm that works with Fortune 500 companies, start-ups, non-profits and governments to

improve their ability to create innovation-driven growth. The firm has offices in Massachusetts, Singapore and India. During a high-energy presentation, Anthony delved into some of the key lessons CEOs could learn from successful innovators. He believes that there are patterns, systems and strategies that can be used to effectively manage the innovation process. “Innovation is not some mysterious Zen magic,” says Anthony. “Anybody can be a successful innovator if you learn how to do it.” The innovation imperative grows more pressing every year. A recent Innosight/Forbes magazine survey showed that:• 79 per cent of organizations

feel the business environment has increased the need for transformation

• 78 per cent feel their organization recognizes the need for transformation

• 66 per cent feel their organization has committed itself to transformation

“Continuous innovation is the new normal,” Anthony says. “Keep in mind that there are entrepre-neurs in India and China who want to swim in your profit pool.” Innovating successfully at anytime is a tough challenge. Anthony cited the track record of Procter & Gamble, a company Innosight has worked with extensively. P&G has launched a long list of hugely successful new products – Pampers, Febreze, Crest Whitestrips – P&G acknowledges that in the industry, 80 to 85 per cent of new brands and products fail. However, the rewards of successful innovation can be spectacular.

Three years ago, Gillette introduced Fusion, the first disposable razor with five blades. Prior to the product launch, they invested $500 million in R&D and then another $500 million in marketing. Within four weeks, Fusion captured 55 per cent of all new razor sales in the U.S. Within two years it surpassed $1 billion in sales, the fastest rise to the billion-dollar sales mark in Gillette’s history. Cisco Systems also reaped the rewards of making a bold move in uncertain times. During the Asian financial crisis of 1997, while most of the economies in the region were shrinking, Cisco invested heavily and expanded their presence in the region. Within a year, they had gained Number One market position in almost all the Asian countries and have never lost that market dominance.

Juggling mindsets

One of the dilemmas that innovative CEOs struggle with is that the skills most valuable in managing an established, successful business are very different from those needed to drive the innovation process. Managing a complex, ongoing business requires precision, predictability and controls. The innovation process calls for risk- taking, fluid systems and the ability to thrive within an environment characterized by uncertainty, ambiguity and diversity. Holding these two very different mindsets simultaneously is a tough juggling act. Anthony recommends setting up two distinct business units within the company: one focused on making the core business as strong as possible through lean techniques and other

Believe it or not – the time is rightto launch breakthrough productsThe innovation process should always be in high gear – even during economic downturns

Scott Anthony’s message is that economic scarcity is the best time for innovators.

strategies; the other with a mandate and resources to focus on driving the innovation process effectively and efficiently. Nevertheless, CEOs need to accept that it will be an ongoing juggling act. “The core business will constantly pull at the new business unit for attention, for resources. It’s as reliable as gravity,” explains Anthony. “After all, the new business is risky. It gives you headaches. The established business is what you know how to do successfully.” Existing corporate cultures and structures can also hinder, unintentionally or not, the innovation process. An example? Sony dominated the portable music market through the 1980s and 90s, first with their Walkman and then the Discman, but totally lost the market when MP3s came along. Why? Anthony recalls a Sony executive as saying about the then-new music format, “I don’t really like hard disks – they’re not Sony technology. As an engineer, they’re not interesting.” Secondly, at the time MP3s were first entering the market, Sony had a music division that was dead-set against supporting the development of any technology - such as the MP3 format - that could be used to pirate their music. Today, Apple owns 85 per cent of the MP3 market through it ubiquitous iPOD, which coincidently was launched in 2001 just as the tech bubble burst and a major recession rolled out across the U.S. When it first arrives on the scene, disruptive technology usually has at least one core problem. The MP3 music format didn’t have a good business model until Apple started selling music at 99 cents per track. Cell phones 20 years ago were the size of a brick and needed a briefcase-sized battery pack. When personal computers first came on the market, they were sold as mail-order, do-it-yourself

kits largely for recreational games. It took visionaries like Bill Gates and Steve Jobs to sense the poten-tial of these little 8K wonders. “Successful transformative change involves re-imagining the business,” says Anthony. “Aim to disrupt the market. Do things differently, not just better. Break the rules. Change the market mindset.” Develop a new way that helps people get a necessary job done more quickly or more easily, Anthony suggests, as Intuit did with its QuickBooks software for small business. QuickBooks helped small- business owners who lacked accounting skills to manage their businesses. As Anthony relates in the book, The Innovators Guide to Growth (Harvard Business Press), prior to QuickBooks, the prevailing assumption was that software for small businesses had to include accounting features. But small- business owners didn’t care about, nor did they understand, those features. They just wanted to make sure they didn’t run out of cash. The result was that QuickBooks was the first accounting software with no accounting in it, and it became the market leader within a month. In Anthony’s model, innovation is a repeating process with market

assumptions and strategies being tested continually, and new insights gained. These are worked into a new set of assumptions, strategies and — as quickly as possible — product prototypes. “It’s critically important to con-stantly ask questions. In fact, the worst assumption you can make is that you are right,” he says. “More than 90 per cent of successful new ventures start off following the wrong strategy.” That’s why it’s integral to approach innovation strategically. • Ensure your core is in control. • Gain a clear understanding of

your core.• Create a clear game plan. • Allocate resources to achieve

your objectives. Anthony is a strong believer in accelerating the prototype process and getting your innovation into the hands of customers as quickly as possible. Then watch their reactions and see how they actually use it. Often, he explains, customers can’t tell you in advance what they want from a new technology until they use it. To back up this assertion, he quotes Meg Whitman, President and CEO of eBay from its start-up phase of 30 employees in 1998 until 2008: “It’s much

better to put something out there and see the reaction and fix it on the fly. ‘Perfect’ is the enemy of ‘good enough.’” Quality is a relative term, Anthony emphasizes. A $100 digital camera that plugs directly into the USB port of a computer will not have the same quality lens as a $5,000 professional model. But it’s good enough if all the customer wants is to upload a few snapshots to Facebook – and that’s good enough to win market share. It takes a certain level of mental strength to drive a continual process of launching new products and exiting old. Anthony recommends that, to strengthen their innovation muscles, executives should deliberately seek out new ideas and information: for example, attending a conference in a totally different industry. Or by writing 10 questions that impose or remove constraints: for instance, what if gas was $10 a gallon? What if gas was free? These kinds of exercises can help break mindsets and open up new avenues of innovation. And given the recent gyrations of the market, these off-the-wall questions may not be all far-fetched as they might have seen in calmer conditions. To respond directly to the current downturn, Anthony advances a number of strategies including:• focusing on a few innovations

that have the highest potential• focusing on product features that

appeal to value-oriented customers• mitigating innovation risk

through partnerships Anthony is convinced that these really are the best of times for innovators and that the current economic scarcity will fuel a wealth of new breakthrough products and services. “It turns out that deep pockets and big teams are actually innovation killers,” he says. “Scarcity is an entrepreneur’s advantage.”

Believe it or not – the time is rightto launch breakthrough productsThe innovation process should always be in high gear – even during economic downturns

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Scott Anthony says that innovation is not some Zen magic.

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Latest statistics provide insight

While it sometimes seems that executives are drowning in data, finding accurate information that can generate insights and guidance can be a challenge. To help fill that gap, two of Canada’s leading executives joined forces for a Town Hall presentation on what was happening in the economy and how executives were responding to the unprecedented levels of global change. First up was Jayson Myers, President and Chief Economist of the Canadian Manufacturers and Exporters (CME), who has been recognized by the firm Watson Wyatt as the most accurate economic forecaster in Canada. He was followed by John Fursey, the Canadian Leader, Financial Services Sector, IBM Global Business Services. Fursey led the Canadian component of IBM’s recently completed 2008 Global CEO Study: The Enterprise of the Future. Myers quickly sketched an overview of the current economic

conditions in Canada. It was a reminder of why economics is called “the dismal science.” The picture was not pretty. “What we’re witnessing is financial deflation on a global scale,” Myers explains. At one time, analysts thought that if financial risk was spread broadly, it would be more sustainable. Instead, what happened was that the collapse of the mortgage-backed securities undermined the foundations of portfolios worldwide. A domino effect started and couldn’t be halted. Asset values, the bedrock on which everything stands, are highly uncertain.

Forecasts

What we have, Myers believes, is a global recession – centred on the U.S. – that will be deeper and last longer than the current consensus forecasts. “What we are facing is new,” he says. “Past statistics are not a reliable basis for forecasting the future.” Financial stability is a prerequisite for economic recovery, but there

are risks ahead: more financial turmoil, uncertainty over China, Canadian dollar appreciation and other unknowns. Even before the financial crisis erupted last fall, Myers notes, Canada’s manufacturing sector was suffering. Between 2002 and 2008, exports rose 12.7 per cent in current dollar terms, but this masked that they actually fell by 6.9 per cent in volume. Similarly, exports to the U.S. in the same period increased by 0.8 per cent in value but fell 15.8 per cent in volume. Excluding oil and gas, exports to the U.S. between 2002 and 2008 fell 17.8 per cent in value and 18.4 per cent in volume. Total manufacturing sales have also suffered. Between December 2007 and December 2008, manufacturing sales nationally dropped by 9 per cent, slightly more in Ontario (9.4 per cent) while NewBrunswick and Newfoundland/Labrador suffered punishing declines of 30.5 and 31.4 per cent, respectively. The result is an economic landscape in which challenges loom large:

• thin profit margins• weakness in key markets (housing,

automotive, industrial equipment, capital projects)

• higher levels of risk and uncertainty around receivables, currency and pricing volatility

• meltdown in customer demand• financing difficulties Nevertheless, Myers’ data shows that many business leaders remain cautiously optimistic in their outlook. While two-thirds of executives report a decline in new orders over the past three months, the same percentage expects a return to 95 per cent of normal levels (or better) within three months. And there are opportunities for companies with cash and investment strengths, Myers points out. Some competitors will either fail or be ripe for acquisition. New customer demands will emerge, opening up possibilities for new product and market development. “Ontario’s advantage,” he says, “is in the ability to customize and specialize, especially in niche production. Those strengths fit well with these times of

A picture emerges from accurate data

Featured speakers John Fursey (left) and Jayson Myers (right) discuss harsh realities of today’s economic conditions and forecasts.

A picture emerges from accurate data

Featured speakers John Fursey (left) and Jayson Myers (right) discuss harsh realities of today’s economic conditions and forecasts.

changing customer needs and demands.” Customer-driven change was also the focus of the 2008 IBM Global CEO Study (ibm.com/enterpriseofthefuture). More than 1,100 CEOs were interviewed face-to-face for this, the third edition of the examination of changing attitudes in the boardroom. It focused on how organizations worldwide are addressing:• new and changing customers –

changes at the end of the value chain

• global integration – changes within the value chain

• business model innovation – their response to these changes.

“CEOs see significant change and opportunity ahead,” notes John Fursey. “In response, they are radically changing their business designs.” In 2008, 85 per cent of CEOs worldwide reported that they were expecting significant change within the “More than two-thirds of CEOs see this as a positive opportunity to differentiate and are taking innovative steps in response,” explains Fursey. “Most Canadian CEOs see corporate social responsibility (CSR)

as an opportunity and not a threat.” For many organizations, the impact of all these pressures is driving greater global integration so they can more easily exploit opportunities, capabilities, knowledge and assets wherever they may reside. It is also leading to a rethinking of business models to sharpen the focus on creating greater customer value.

Achieving a balance

One of the challenges CEOs face in making major changes during a downturn is balancing the

need for cost reductions with the potential return on necessary investments. “Cost reductions can’t be done in a vacuum,” Fursey cautions. “You have to look at the role that a particular business function plays in the business model, look at the customer value it creates and ask: What is the optimal way to create that value?” With the pace of global change escalating in a time of tighter budgets, a new perspective is needed. “It’s not about asking how can you do the same thing at a lower cost,” he advises. “It’s about doing things differently.”

External Forces Impacting the Organization

Interestingly, people skills top the list in Canada by a long shot! Source: IBM Global CEO Study 2008.

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Workshop Exclusive Lean and Green

Lean times bring a wealth of new green business opportunities

Rob Coleman, Moderator

Philip J.A. Ling, Panelist

David Henderson, Panelist

Editorial Director, Environmental Group

CLB Media Inc.

Partner, Vice-President, Technology

Powersmiths International Corp.

Managing Director

XPV Capital Corporation

The topic was Lean and Green, but the workshop discussion quickly focused on green – and for good reason. In these lean times, the green market is heating up quickly. Around the table, participants were eager for information about new opportunities and to talk about their own experiences with green business practices. Rob Coleman characterizes today’s challenge as “how to best align your business with the green economy.” He began the session by quickly outlining two major initiatives that are expected to stimulate a wealth of green business opportunities. On the day before the confer-ence began, President Barack

Obama signed the US $787 billion economic stimulus package, which includes nearly $80 billion specifically earmarked for green initiatives, including $33 billion for clean-energy projects, $27 billion for energy-efficiency initiatives and $19 billion for green transportation. Supporters have hailed the bill as a landmark in America’s transition to a lower carbon economy. In the domestic market, Ontario’s commitment to green energy over the past few years has produced substantial results. The number of wind turbines, for example, has increased from 10 in 2003 to 589 today. More than 1,200 megawatts of wind-

generated capacity will be online by 2009, nearly doubling since 2008. The province has targeted 100,000 solar-energy systems in-stalled in households. Investments in renewable energy projects which have come on-line since 2003, or are currently under construction in Ontario, total $3.5 billion and have created about 2,700 direct and indirect jobs. Ontario’s proposed Green Energy Act (GEA), introduced by Premier McGuinty in the Legisla-ture on February 23, 2009, would establish Ontario as a leader in North America in building renewable energy, encouraging energy conversation and creating green jobs. If passed, the GEA is

intended to make the province greener, stronger, and in a better position to win and compete by making it easier to bring renewable energy projects to life, fostering a culture of conservation and attracting new investment. This will create a wealth of new business opportunities in Ontario, from manufacturing and installing commercial and residential solar, wind, biomass and biogas energy generation systems to developing and marketing innovative energy-conservation technologies. For small and medium enterprises across all sectors, green-based opportunities will enable entrepre-neurs to create new products and services for a more demanding

Lean and Green

world, reduce their own carbon footprint, and provide a gateway to new and better ways of doing business in today’s tougher markets. While every jurisdiction is moving forward at a different pace, the trend is worldwide and the potential is huge. “Green and clean technologies today are where the Internet was in 1992,” says David Henderson, Managing Director of XPV Capital Corporation. “Clean tech is now the biggest venture-capital pool in the U.S.” “The greenest action of all is energy conservation,” explains Philip Ling of Powersmiths International. “Simply by not using energy, you’re avoiding a whole stream of costs. In the U.S., where we do most of our business, energy security is a big issue. The way they look at it, every watt you are not consuming means one less barrel of oil brought from overseas.” While the math may be wonky, the sentiment is clear: conservation and increased efficiency are top priorities and offer huge benefits to business. Today, there is technology available that can dramatically improve energy efficiencies and generate immediate and sizeable returns. One workshop participant says that he installed new, more efficient motors in his Scarbor-ough, Ontario, plant at a cost of $100,000. Within a year, he had cut energy costs by $70,000 and this has whetted his appetite for more of the same. “I’m looking for a payback within 18 months,” he says. “If it’s longer than that, I can’t afford it and move on.” There are bigger-picture realities at work as well. “Globally, as countries industrialize, the two things they need are more energy and more clean water, notes Henderson. “In North America, aging infrastructure means that 20 to 30 per cent of treated,

clean water is lost during distribution.” While harsh economic realities are accelerating the development of new clean/green technologies, and the billion-dollar government subsidies will drive the pace even faster, entrepreneurs shouldn’t expect to see a repeat of the easy money days of the late 1990s tech boom, Henderson warns. “At that time, all you needed to say was that you had the next ‘killer app’ and people would throw millions at you,” he says. “Today, first you need a great value proposition and a solid business case. Then you can access financing.” Customer expectations can also be a little different in the green economy, Ling has noticed. “It’s a much more collaborative relation-ship,” Ling explains. “The whole sustainability market is all about ‘How can you help us reduce our carbon footprint? How can you help us reach our sustainability goals?’ Many see it as a continuous process, a journey with no ‘now, we are green’ endpoint.” It can also be a very demanding market, often skeptical, data- driven and hard-nosed. “You have to be absolutely scrupulous,” he advises. “If you position yourself as green, you’d better be able to pass the sniff test and prove your claims.” That fuzziness about green definitions, and the potential for customer backlash against perceived false claims, led one workshop participant to delib-erately downplay the legitimate green activities at his company. “We walked away from the ‘green’ word because there were too many spins to it. Is this green? Not green? How green? Now, we just avoid it all together.” For companies that are considering adding “green” to their marketing repertoire, there are standards, certifications and measures available to sustainable claims. A company could spend

a few hundred dollars for a simple analysis, to a few thousand, and over six figures and up for highly complex products. Companies that want to certify their green claims can contact industry- specific bodies or a growing number of general certification agencies, such as Green Seal and the EcoLogo Program. Companies can also contact their industry organizations or the Ontario Environment Industry Association to learn more about the standards in their sectors and obtain referrals to appropriate environmental marketing agencies. Confusion over definitions is understandable in such a relatively new and rapidly expanding field, particularly one in which the scientific foundation is growing and shifting constantly. As a result, “a huge part of the work – I’d say 90 per cent of our efforts – go into end-user education,” Ling says. “Terminology can be a challenge because there is such a big gap in understanding.” The regulatory and certification hurdles of a new market can also be daunting, and those emerging in the green economy are no different. The U.S. Department of Energy is as bureaucratic as the rest and the EU is no better,” one workshop participant commented. “They use regulations as non-tariff

barriers.” On the other side of the coin, for some entrepreneurs, however, these types of frustra-tions don’t dim the joys of taking on a new challenge. “In the U.S., many of the projects we get involved with have clearly defined energy-efficiency targets written into rock-solid contracts with substantial penalties if you miss the targets,” one workshop par-ticipant said. “As an entrepreneur, it’s very exciting. You step up to the plate and, if you deliver, you win big.” Winning big in the green economy is keeping hope alive for many CEOs through these tough economic conditions. Credit is tight. Orders are down. The GDP has slowed to a crawl. Cash is king. Investing to tackle a new market is a big risk. But for those leaders willing to take up the challenge, David Henderson offers an encouraging perspective. “If you look back through business history, the best companies were born in times like these: Cisco, FedEx, Microsoft,” he says. “You need to be smart and tough, and have a good product and a good value proposition. But now is a time of change and that means now is a time of opportunity – especially for companies involved in the green economy.”

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Powersmiths International Vice-President Philip Ling (left) seated beside Paul Kerrigan, President of Alpha Poly Bag Corporation, discusses the importance of energy conservation.

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Workshop Exclusive Managing Finances in Challenging Times

Rick Spence, Moderator

Andrew Wilkes, Panelist

Jim Reddon, Panelist

Canadian Entrepreneur Communications

Chair, National Angel Capital Organization

Principal, Intuitive Capital Partners

Alternatives to traditional financing are available in the credit crunch

Financing is a perennial challenge for small- and medium-sized business, but the nature of the current economic situation makes past financial hurdles look puny. At a time when lenders of all stripes are taking long looks at their most credit-worthy customers, how can SMEs expand or even retain their business? There are practical and workable alternatives to traditional financing. The key for SMEs is to determine the right sort of investment or loan for their company, and approach the lender or investor fully armed with the relevant information. About half of the workshop participants were from the technology sector, with the

balance split between services and management services. Several participants shared some recent experiences that underline the depth of the problems they face. “Our company is in the best shape it’s ever been in,” stated one vice-president of a manufacturing/ technology company. “We’ve doubled our business in the past two years, and it’s even picking up more in the last two months. But out of the blue, our bank suddenly wants more than our personal guarantees; they now want liens on our homes.” Another participant noted that his bank pulled the financing for a crucial piece of equipment at the last minute. “We asked the

supplier for more time to pay, and luckily they gave it to us.” “The banks aren’t lending much these days, but they are doing long reviews of their existing loan portfolios,” says moderator Rick Spence. “Today we’ll explore some non-traditional ways to finance your business.”

Angel investors

Angel investor Andrew Wilkes started the discussion with a brief description of what an angel investor can and can’t do for a small business. He emphasized that, unlike venture capitalists, angels only invest their own money in a business.

“Venture capital is retreating from seed and early-stage enterprises,” he explains. “But angels have moved to where VCs were a few years ago, and there are about 100,000 angel investors in Canada. Angel investors are typically involved in industries they know, so it’s very important to seek out someone who understands your business.” Wilkes says that, as an angel investor, he wants to bring value to any deal he’s involved in, in terms of his financing, expertise, and contacts. “It’s really a partner you want,” he notes. “I want to work with an entrepreneur who makes use of myexpertise. I don’t necessarily want

Managing Finances in Challenging Times

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to go to your board meetings, but I do want to go to the bank with you and help you get a loan. Right now, bridge loans from angels are popular. Typically, an angel would get about 8 per cent on a bridge loan, with some equity. It’s expen-sive every time you give out equity, but sometimes you can’t expand without it.” Wilkes points out that Ontario’s SMEs are facing a unique set of circumstances in the current economy. The impact of the previously strong Canadian dollar is still being felt, and early-stage venture capital in Canada has dropped dramatically, from $1.5 billion in 2000 to $236 million in 2007. He noted that Ontario investors supply 40 per cent of Canada’s investment capital, but only 15 per cent is invested in the province.

Cash is king

“The financial liquidity crisis impacts all of us,” he says. “In this environment, cash is king. Collect your receivables, reduce your inventories, reduce and renegotiate your costs. Make an effort to make short-term cash sales. Focus on marketing spending. For example, offer a coupon discount instead of spending money to build your brand. On the upside, this is a great time to take market share. If you hustle, you’ll win.” Jim Reddon offered a similar positive view in his presentation on other alternative financing models, including asset-based lending and purchase- order financing. “Banks are not in the risk business,” explains Reddon, principal of Intuitive Capital Partners. “In the current climate, we see reduced demand, reduced consumer confidence, and a reduction in the availability of traditional credit. But there are many alternative forms of

funding, including factors, asset-based lenders and purchase-order finance providers.” Asset-based lending, where borrowers use fixed assets (machinery and equipment, inventory, accounts receivable and real estate) is becoming more popular in the current credit crunch. In the past, asset-based lending was used for loans in the $2 million to $5 million range, but is now being used for smaller loans. Interest rates for these loans are typically in the prime rate plus 10 per-cent range. The loans are typically used to finance management buyouts, expansion by acquisitions, working capital shortfalls, rapid organic sales growth, and pressure from existing lenders. Reddon also noted an increase in factoring, where borrowers get a loan based on their receivables. With interest costs now running between 1 % and 2 % per cent per month for factoring, he warned workshop participants to consider the total cost of borrowing. Administrative charges can skyrocket for a company that has receivables with numerous customers. Borrowers shouldcarefully evaluate long-terms sales when using factoring. Workshop participants were particularly interested in purchase-order financing,

a relatively new lending tool that is gaining in popularity. “Purchase-order financing is a great niche product, and very new to Canada,” says Reddon. “With a factor, the lender is financing receivables but, with purchase-order financing, the lender is giving you money for goods that either haven’t been made or sold yet. For that reason, it’s higher risk and more expensive.” Purchase-order financing can be especially valuable for companies that need money to finance production for a quick sale. “It’s usually a higher gross-margin producer, say 30 to 40 per cent, who can use purchase-order financing effectively,” he explains. “For example, suppose a rapidly growing company has an opportunity to make a potential $4 million sale in 60 days. It makes good sense for them to use purchase-order financing to expand their business. Something like that can move a company from the third tier to the second tier in their industry.” For their part, purchase-order lenders want a high rate of return (2 % to 3 % per cent per month) and a “high-touch” relationship with the borrower. The borrower should also have experienced management, reputable and insurable customers, and a reliable supply chain.

“It’s crucial that the borrower has proven, durable products with a high ‘put’ value,” Reddon emphasizes. “By that, I mean that the products have to be saleable to another customer. Since the lender is taking the goods produced as security for the loan, they have to have products that are easily sold to another customer if the deal doesn’t go through. If you are selling custom goods from Germany to one specific customer in southern Ontario, we wouldn’t want to finance you, because there is no ‘put’ value for us.” He says that a purchase-order lender has some similarities with an angel investor, since they will complete due diligence on the purchase order and evaluate the borrower’s costs on the deal. “It’s more of a partnership than the typical loan,” Reddon notes. “But it is still based on a specific transaction. “We don’t have to worry about where the company will be in three years.”

Rick Spence (left), CEO and Founder Steven Stein, Multi-Health Systems Inc. (middle), and John Fursey, partner in charge of the Financial Services Sector for IBM Global Business Services (right), exchange views on innovation and education between workshops.

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Workshop Exclusive Securing Financing for Growth

How to arrange financing in today’s topsy-turvy economy

Mike Middleton, Panelist

Managing Director, Q1 Capital

Robert Bedard, Panelist

President and CEO, BMP Group of Companies

Fernando Traficante, Panelist

Director, Next Generation of Jobs

Fund Secretariat, Government of Ontario

Deirdre McMurdy, Moderator

Business journalist, Vice President

Public Policy Forum

In business, you need money to survive, let alone to grow. That simple fact has not changed since people began forming companies. What has changed — and keeps changing — is how hard it is for companies to get the money they need to do business. These days, it is very hard indeed. That tough reality set the context for the 2009 Wisdom Exchange workshop on Securing Finance for Growth. Mike Middleton started off the session with a discussion

of the various options available to companies looking to secure financing. Middleton has spent the past eight years focusing primarily on meeting the financing needs of Canadian private companies, particularly technology companies. He touched on everything from credit cards and personal lines of credit to venture capital, angel organizations and merchant banks. He says that the current climate is an extremely bad one in which to look for venture capital, and

advised companies to look instead to more stable and traditional forms of financing, in particular what he referred to as everyone’s new best friend, the Canadian banks. “I’ll be honest: there isn’t a lot of good news out there right now. Tap into the BDC [Business Development Bank of Canada], tap into the SR&ED [Scientific Research and Experimental Development] Tax Incentive Program, but in particular develop a relationship with your banker,”

explains Middleton. “Six months ago, banks were pushing clients away. Today they are realizing that in this marketplace, there is a real opportunity, because there is really no other capital available.” Middleton was followed by Robert Bedard, who in 1984 cashed $60,000 in RRSPs to start what has today grown into a multimillion-dollar group of companies that includes Bempro Metal Products Inc., BMP MetalsInc., BMP Plastics Inc., BMP

Securing Financing for Growth

Electronics and BMP Machining. Bedard spoke at length about being positioned to make changes, saying that growth frequently depends on shifting direction, either to adapt to or take advantage of changing external circumstances. He went back to what Middleton had said about taking advantage of govern-ment funding, saying that he had used the SR&ED to obtain the funding necessary to develop many of his products. He also echoed Middleton’s advice about building a good relationship with banks, and spoke of the importance of reinvesting in the company you are trying to build. “A lot of people get into the business saying I’m going to be rich,” Bedard points out, “and all they do is put the money they make right into their pockets. Me, I put my money back into my companies. That means I always have a good balance sheet, making me well-positioned to secure loans if I need them, and able to make the right moves at the right time without wondering where the money is going to come from.” The third speaker was Fernando Traficante, who looked at the ques-tion of obtaining financing from the point of view of a government interested in helping businesses do so. He spoke of the importance of helping companies innovate, creating well-paying sustainable jobs in the process, and said it is companies that can do this that will have the easiest time securing funding. “Innovation is often the key but it has to be done well, which is hard,” he notes. “There is cash out there, but no cash for big dreams with no substance.” Traficante went into detail about Ontario $1.15 billion Next Gen-eration of Jobs Fund program over five years to support job creation /retention in strategic areas of great potential for Ontario. In order for a project to be considered, it must provide economic and environ-

mental benefits, demonstrate innovation, and create or sustain jobs for Ontarians. The Advanced Manufacturing Investment Strategy (AMIS), is open to advanced manufacturing innovators across all sectors.” Traficante explains. “Priority is given on projects that include research and development initiatives such as: industrial R&D, design, prototyping and engineering; new or advanced materials and products; advanced manufacturing processes; technology innovation; robotics/software development; waste reduction or energy conser-vation. Over a five-year period, projects must create/retain 50 jobs or invest $10 million. Companies are encouraged to apply to either program. A company cannot apply to both for the same project investment. A company can also apply for funding from other levels of government. In particular, the federal government has programs that could compliment NGOJF and AMIS funding. The three presentations were followed by a question-and-answer session during which the main themes of the day were revisited. Many of the questions centred on how difficult it is these days to obtain grants or loans, particularly

for companies of a certain size. Middleton repeated his warning about venture capital, saying that the days of people getting easy money to jump into the market with big expensive new companies were gone — at least for now. He pointed out that in 2001 there were 55 venture-capital firms in operation, and there are only a handful today. “Venture capital has been decimated in Ontario,” says Middleton, “because too many people were investing in new things they don’t understand. Now people are moving back into things they do understand, and they are taking those ideas to the bank. There are bankers out there who are entrepreneurial in nature, and they want to see these companies succeed.” Bedard returned to his point about changing and adapting to external circumstances, using his own company as an example. He realized at a certain point in BMP’s development that he needed to move the company in a more high-tech direction and, because he had positioned himself to be ready for change, he was able to make the move successfully. “I have matched many changes with growth,” he says, “because I have made sure that I have the

money in place to do so. Now we are a global company. We’re shipping to the EU and we’re shipping to China, and it’s a really good feeling to see product going in that direction, rather than from China into this country all the time.” As the workshop progressed, it became clear that there were three main points on which all the presenters agreed absolutely. The first point is that innovation is critical. It is how companies set themselves apart, and one of the best ways of attracting the invest-ment funding they need to survive and to grow. The second point involves the importance of building solid rela-tionships with banks. Bedard says that he is constantly reminding his managers to keep in touch with their bankers, letting them know how the company is doing and what it plans to do. Middleton adds that the key is to find a banker who understands your business. “Finance is no different from any other business,” he notes. “It’s all about relationships.” The third point involves being willing and ready to make the necessary changes. Bedard says that he had made his fortune by positioning himself to react to changing circumstances. He points out that, particularly in today’s climate — when the competition from low cost centres is fierce and currency uncertainties are dire — it is more important than ever to remember the words written by Charles Darwin 150 years ago: “It’s not the strongest nor most intelligent of the species that sur-vive; it is the one most adaptable to change.”

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Bad news of tough times set the context for the Securing Financing for Growth workshop, but panelists Middleton, Bedard and Traficante offered viable options and realistic advice on how to adapt.

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Workshop Exclusive Selling to World Markets

Exporters find customers farther afield

Mohan Markandaier, Panelist

CEO, Pulse Voice Inc

Peter Allen, Panelist

President, Electrical Contacts Ltd.

Brent Prior, Panelist

District Sales Manager

Export Development Canada

Ian Portsmouth, Moderator

Editor and Associate Publisher, PROFIT

Although the majority of Canadian companies choose the U.S. market when they first export, due to the close proximity and similar language and culture, it makes good strategic sense to diversify into other international markets. Not only does this reduce dependency on a single export market, but it also opens up opportunities to catapult business growth far beyond what can be achieved within North America alone. And with protec-

tionist rumblings south of the border, now is a good time to rationalize diversification. Mohan Markandaier, CEO and one of the founders of Pulse Voice Inc. – a software company providing telecom solutions – actually took the business global before national because of the challenge start-ups face in competing with industry giants like Nortel here. Born in Sri Lanka, raised in Nigeria, educated in Canada, and having worked in

Poland, he admits to an affinity for world markets because of his background. What also fuelled the decision to sell internationally first was the company’s ability to offer cost-effective solutions for call centres in smaller countries where little or no competition existed. Its first installation was in the Ukraine, followed by others in South America and the U.S., and it now has customers in 40 countries, including Rogers in Canada.

In addressing workshop participants, Markandaier recom-mended a new Ontario Chamber of Commerce/Ontario government partnership grant program, Export Market Access, to help identify opportunities abroad. With funding assistance that covers market development, the company was able to attend a trade show in the U.K. and do some proactive marketing. The result? It opened a satellite office there as a gateway to the European market and recently

Selling to World Markets

signed a partnership agreement with a telecom-solutions market provider. Markandaier emphasizes that it is helpful to use funding programs for initial market research such as attending an overseas trade show. What about red tape that can make such programs onerous? He recommends working with a contact inside government to expedite the application process. For example, he accessed helpful guidance through a Business Advisor at one of the 12 Ministry of Small Business and Consumer Services (MSBCS), Business Advisory Services Regional Offices across Ontario, and was

pleasantly surprised by the quick, 30-day turnaround for approval and funding. The President of Electrical Contacts Ltd., Peter Allen – whose Hanover-based materials engineering firm has sold in over 17 countries – cautions against making the decision to pursue a market solely on the basis of availability of government funding programs, since they could be short-lived. “Gut check yourself first on whether you really have something of value to sell in a new market and be sure you can differentiate yourself from any competitors there,”

advises Allen. “Remember that subtle cultural barriers can exist, with a preference to buy local, so that differentiation is key.” There was considerable discussion about the Canadian Trade Commissioner Service (TCS), a free resource of trade commissioners across Canada and in 150 countries who are familiar with the local business landscape and can open doors for Canadian exporters. International representation is an important part of promoting Ontario’s global commercial activities. As part of its global strategy, the Ministry of Inter-

national Trade and Investment (MITI) has international marketing centres in 10 major markets around the world: Beijing, London, Los Angeles, Mexico City, Munich, New Delhi, New York, Paris, Shanghai and Tokyo. If you’re looking for advice on exporting, the Ministry of Economic Development (MED), International Trade Branch and Investment Branch (MED), offers market-specific seminars and workshops, assistance with research and analysis, help with export strategies and marketing plans, organization of trade missions and participation in international exhibitions.

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• Make a solid commitment. Develop a plan and goal – whether that is seeking modest sales, a joint venture, an acquisition or an agent. Then dedicate the human and financial resources neces-sary for exporting. Based on his observations of exporters over many years, Brent Prior, District Sales Manager with Export Development Canada (EDC), says many Canadian companies fail to understand the time and resources required. “You are either committed or not,” he notes. “If not, you will not succeed.”

• Participate in trade shows and trade missions. These can be valuable for iden-tifying new opportunities and making good contacts. Markandaier had his best experience with this when he was part of a telecom trade show and mission to

India that included one-on- one meetings with senior

executives of Indian telecommu-nications companies.

• Tap into free resources. When entering new markets, get the lay of the land and names of qualified contacts from Ontario Marketing Centres and Canadian trade commissioners. If you engage them, there are other things they can do for you as well, says Prior. Be sure to leverage the Canadian flag by holding meetings with potential partners or customers in Canada’s embassies and consulates abroad to gain instant credibility, recommends Peter Allen.

• Be culturally aware. In some markets, such as China and the Middle East, a prerequisite to doing business is to invest in face time to develop relationships and trust and that requires patience. Allen suggests checking with the Trade Commissioner Service

about cultural protocol in new or unfamiliar markets before travelling and conducting business.

• Determine your entry strategy. Making the decision to sell directly or through a partner can depend on the type of business and the target market. Because his company has niche expertise in manufacturing contact materials for electrical circuit breakers, Allen prefers direct sales. For Markandaier’s business, it’s important to have a good partner on the ground in markets like India. Although he speaks the language and understands the culture there, his company faced intellectual property challenges and col-lection problems after opening its office in India in 2003 and began to withdraw. Now it is returning to the market with a strategic partner there.

• Mitigate the risks. Get a third party to review your contractual

agreements with foreign companies. Prior also suggests using the trade finance department of your bank to review lines of credit for any red flags, such as boycott clauses. And be sure to mitigate payment risks through bank instruments or insuring your receivables through EDC or a private insurer. He also recommends using a lawyer with an interna-tional practice to ensure you do not run afoul of sales tax obligations in the U.S. which is a problem that some workshop participants raised.

• Conduct due diligence. Be sure to check out the reputation of potential partners. You can ask the Trade Commissioner Service and also listen carefully to end-users at trade shows in other countries to get insights on which businesses they buy from and consider reputable. Those are the companies to seek as partners.

Seven ways to penetrate new markets

To contact a Business Advisor at the Ministry of Small Business and Consumer Services in your area, visit www.ontario.ca/sbcs (click: GROW-TALK TO EXPERTS)