'Zombie' firms killing Canada's productivity, says Deloitte

21 November 2018 Authored by Consulting.ca

Mature, low-growth (‘zombie’) companies are sapping the productive potential of Canada as the business world is buffeted by the forces of continued globalization and startup-driven tech disruption.

Canada’s slow-moving businesses need to adapt or die – otherwise the country’s status as a great place to live and work could risk being buried, according to a troubling report from Deloitte. Big Four consultancy Deloitte studied more than 700 Canadian businesses to parse out their future-focused attitudes and practices in ‘The infinite organization: Realizing lasting success,’ a report which aims to provide guidance to business and government leaders.

"Business is changing – and what it takes for Canadian companies to succeed is also changing," commented Duncan Sinclair, Chair, Deloitte Canada and Chile. "This report points to a new reality, which is that attitudes and behaviours that made companies successful in the past will not be the best or most reliable predictors for success in the future.”

Canadian firms can’t rely on the strategies that used to work for them in the pre-Industry 4.0 era, since tech disruption and accelerating globalization have essentially changed the game. According to the report, the shifting of economic power to Asia Pacific countries means that Canada’s continued reliance on the US as a trading partner might leave its businesses in a difficult position.

For mature companies, scale and market position are also no longer the advantage they used to be, with new technologies and digital offerings allowing smaller firms to challenge larger competitors more easily than ever. What’s more, competition can now come from anywhere, with tech allowing companies to diversify into previously unrelated industries (e.g. Google and Apple into automotive tech, Amazon into banking and healthcare).Canada’s mature companies face a stark choiceFurthermore, consumer expectations are higher than ever, with customers expecting instantaneous satisfaction, tailored services, and easy and seamless interactions with businesses.

As such, a well-prepared company would appear to be a spry, global, firm with innovative ideas and products, great customer experience, and effective integration of emerging digital technologies.

Instead of having a plethora of innovative, growing tech startup companies – like, for example, Israel – Canada has a business environment characterized by older, underperforming firms. Over 40% of Canadian businesses are ‘mature’ (over 15 years old), up from just over 30% a decade earlier – meaning that a rising proportion of Canadian firms are past their ‘most dynamic years.’ Deloitte reports that 44% of Canadian firms aged 10 years or older had stagnant or negative three-year revenue growth rates between 2009 and 2016.

One of the reports more concerning findings was that 16% of Canadian public companies were what the OECD calls 'zombies' – mature businesses that continue to operate despite not having enough earnings to cover the interest payments on their debts. Deloitte says that these ‘living dead’ firms divert talent and capital away from more productive firms, while hindering the growth ability of younger, dynamic businesses. Canada’s ‘zombie’ proportion was 60% higher than the OECD average of 10%.

“Canadian businesses today face a critical choice: make do with the status quo and risk succumbing to steady decline, or reinvent themselves and kick-start a new cycle of growth," Sinclair added.The five essential behaviours for lasting successDeloitte recommends five areas of attack for Canadian firms looking to adapt and thrive in the evolving business landscape. For one, companies should disrupt with resilience – allocating funding to continually develop and test new ideas. Companies should also look for new ideas outside their sector or region, while collaborating with startups, incubators, and academics.

The report also suggests the pursuit of tough decisions – zooming out to tackle risk, disruptors, and trends, and zooming in to seize opportunities and quick returns. Meanwhile, companies should be ready to place ‘small bets’ on new opportunities while keeping their long game strategy in mind.

Companies should also nurture their roots, investing in their people (with a strong work culture and environment) and in new technologies that effectively enhance their value proposition. Firms should also pursue data collection and the meaningful insights held therein.

Firms should look to drive purpose and impact, denoting a clear purpose and using it to drive innovation, employee engagement, and decision-making. That means understanding what make the company great and what sets it apart from competitors.

Finally, Deloitte says that companies should assert global leadership, getting out on the global stage at the highest level to fend off worldwide competition. That means embracing opportunities for collaboration with various parties, including governments, to co-develop products and services. Deloitte says, however, that employers should continue to invest in local talent in Canada despite the imperative of ‘going global.’

"By cultivating the five essential behaviours, businesses can course-correct immediately while ensuring we are collectively establishing the foundation for a prosperous, thriving Canada in the future," added Mike Nethercott, Leader of the Future of Canada Centre. "This report shows that Canadian business leaders are facing a challenge but also an opportunity, and we are confident they will rise to that challenge."

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