Speech by Mr. Stéphane Achard, Senior Vice-President Business Markets, Fédération des caisses Desjardins, before the West Island of Montreal Chamber of Commerce

Montreal, September 18, 2007

Productivity and innovation: the essential ingredients of growth

Ladies and gentlemen,

Good morning and thank you for inviting me to speak to you today. It is always with a great deal of pleasure that I meet with business people to talk about subjects that concern us all. This morning, we will talk about productivity and innovation, two ingredients that are essential to the growth of our businesses.

On the topic of productivity, and given the early hour, some of you will certainly remember that only a few years ago it was rare that conferences or talks were given so early in the morning. The norm was to sit down to a rather copious luncheon, generally with a nice bottle of wine, listen to a speaker and then make your way back to the office sometime in the mid-afternoon. The rest of the afternoon was probably not so great in terms of productivity.

In those days, few people would have dared to call a meeting for 7:30 a.m. However, times have really changed and for the better, I think. In terms of this kind of conference, which, we can agree, is not a fundamental sector, we have innovated and we are more productive. I just couldn't pass up the opportunity to make that analogy.

Even if both subjects I want to talk about this morning are, to a certain extent, related or complementary, I would like to start out by talking about productivity. This is because I think it is the more delicate and more controversial subject.

Indeed, how many times have you heard critics say that "productivity" is only a pretext to increase profits without having to work hard to innovate? And how many times have you heard entrepreneurs reply that improving productivity is essential to survival in a world where markets are wide open and more competitive?

Of course, and in general, the positions of the two groups cannot be reconciled. On one hand entrepreneurs are accused of not taking into account the social, human and environmental impacts in their quest for productivity. On the other hand, entrepreneurs defend their position by bringing up the traditional economic arguments involving the costs of labour, production and raw materials.

Historically, concerns about productivity are nothing new. I am convinced that the builders of the pyramids had to deal with some very complex problems. You might say that the use of a labour force largely made up of slaves facilitated the task for them, and you would be right. Nonetheless, our modern engineers are still in the dark about certain achievements from ancient times. The builders in the Middle Ages also had to improve their production methods to meet demand. Already at that time, people used to work in teams or in a chain, and the team members used various means to improve their production methods.

Ancient Egypt is a little far from our preoccupations and our civilization. But maybe we should take a closer look. Do you think that the cotton plantations in the Southern United States would have been as productive if they had not been based on slave labour? Or, maybe they still had to innovate in order to remain competitive. You see how the two subjects tend to intersect.

Closer to home, at the beginning of the industrial era, Frederick Winslow Taylor revolutionized these same methods by making it possible to adapt the human being to the imperatives of productivity. Taylor, an American engineer who lived from 1856 to 1915, established what he called the scientific organization of work. He instituted a fundamental division between the management that conceives and the workers who execute. He added to that a division of the work of the workers into parcels and by specializing them to carry out very specific tasks.

This approach was used for a long period of time, and it is my opinion that it contributed to giving bad press to the concept of productivity. Indeed, optimizing work pace had the effect of placing the improvement of production basically on the human being. In our time, the notion of productivity still carries with it the remnants of a negative connotation.

When communities see a business close its doors and move production to countries with low salaries under the pretext of productivity, they may for react emotionally or even aggressively. Can you really blame them?

But in fact, just what is this concept of productivity? It would probably be useful to agree on a definition to avoid misunderstandings. According to Statistics Canada, "productivity measures the efficiency with which the resources (the inputs) are used in the course of economic activity." Finally, a clear definition, right? Well, I am not so sure, especially since, when I look at the Statistics Canada productivity glossary, I find no less than 35 definitions of terms related to productivity. Of course, several of these terms are related to the contributions of workers to the productivity of an industry or of the country concerned. That no doubt explains why, when it comes to productivity, labour questions take up such space.

If you like, let us then leave the theoretical definitions for now and concentrate on the figures related to our productivity and the economic context that gives us no choice but to look after it.

In a speech given recently to the Association des Professionnels en développement économique du Québec, the CEO of Investissement Québec, Mr. Jacques Daoust said that from 1990 to 2004, the productivity gap between Quebec and its neighbours had grown wider. Between Quebec and Canada, it rose from 4.1% to 5.2%; between Quebec and Ontario, from 8.5% to 10.4% and between Quebec and the United States, from 15.8% to 16.4%. This is not good news.

Of course, we can rail against globalization, we can be dismayed when businesses close and companies move, we can demand protectionist measures and many other things. I don't think that will help anything. I prefer to work on seeking concrete and, especially, durable solutions.

The International Productivity Monitor (IPM), a Canadian institution based in Ottawa to which highly-reputed researchers contribute, published, in its spring 2007 edition, an analysis of Canadian productivity comparing it to that of six OECD countries. A certain number of observations and lessons came out of that analysis that I would like to share with you. I am very comfortable talking about this, especially since I share most if not all of these observations. And I would like to reassure you right away, these results move us away from the old notions and the old prejudices according to which productivity must essentially fall on the shoulders of the labour force, which would thereby be exploited.

Lesson #1: Competition and productivity are closely linked. Research has shown that the countries that have opened sectors of their economies to national or international competition have made major gains in productivity. Here, I am well aware that it is the sector in which arose the greatest upheavals in the labour market, bringing about the reactions that we have seen with respect to globalization and the quest for productivity. Fortunately, everything is not based on open markets alone, and even less so on markets that are open on a one-way street.

Lesson #2: Recognize the importance of human resources. Not in the sense of a labour force whose cost needs to be minimized, but in the sense of a capital whose skill must be maximized through higher education. We see that countries that have wisely invested in higher education have gained increased productivity. Having world-calibre institutions of higher knowledge, able to attract and retain the best teachers and researchers, is a winning strategy. This is what they do, for example, in the United States and also in Ireland.

We must also not forget that we are the neighbours of the United States where, according to the International Labour Organization, workers are the most productive in the world, if you believe the September 17 issue of TIME magazine. You can always say that it's nice to be productive when 45 million people have no medical coverage, but that doesn't change the facts.

Lesson #3: Being open to technological progress in the world can substitute for a lack of pure innovation. Indeed, the ability to stay abreast of technological advancements and assimilate them helps develop leading-edge industries without having to be in the forefront of innovation.

Lesson #4: It is better to have institutions that are less rigid; there should be less regulation and more flexibility. We can agree that it would be unthinkable to work with no rules or regulations, but we can also agree that too many, and especially too rigid, rules are obstacles to productivity. You only have to look at the impact of certain collective agreements, especially in the public sector, to be convinced of this.

Of course, the remedies deriving from these lessons are not necessarily panaceas. In terms of deregulation, the IPM has shown a distinct penchant in favour of the disappearance of supply management organizations, for example. On a continental scale and for a small player like Quebec, this is not necessarily desirable in the short term. This is a proposition to be handled with care.

However, when it comes to human capital, how can we disagree, for example, with a better use of the skills of immigrants? Or with teaching more people basic skills? This means that measures to prevent school dropout or to promote the recycling of older citizens looking for jobs should be implemented. And it should go without saying that it is absolutely necessary to bring our institutions of higher learning and our universities to the highest possible level of excellence and keep them there.

In the case of adopting new technologies, SMBs are a priority target. For Quebec, where the industrial base is increasingly founded on SMBs, this is of major importance. We need to develop programs leading to the introduction of techniques for excellence in SMBs. The IT and Communications sector is still very promising. However, Canada has not caught up to the US in terms of ITC investments.

With respect to the rigidity of institutions, the IPM has looked among other things at the interprovincial mobility of the labour force. Since recognizing professional skills is of provincial jurisdiction, in Canada there are internal obstacles to mobility that are sometimes more complicated than issues involving relations between sovereign states. Here again, it is maybe not desirable to implement sudden changes with no preparation, but the subject is worth thinking about.

But more concretely, what about the reality of our businesses? Of course, we have several large, world-class businesses that often started off as SMBs. I am thinking among others of Bombardier, Québécor, Transcontinental, Cascades, Groupe Jean Coutu and the Cirque du Soleil. I do not believe their management needs any lessons. Innovation, productivity and globalization are concepts that are well-known to them.

However, in La Presse newspaper on July 19, 2007, under the headline "Canadian SMBs don't dare export", reporting on words spoken by the president of UPS Canada, La Presse journalist Laurier Cloutier traced a rather unflattering portrait of our SMBs as far as their lack of enterprise on the globalization front. According to Pat Stanghieri, also from UPS Canada, "the great majority of Canadian SMBs do not dare leave the comfort zone of their local market."

In my opinion, this is a dangerous game. Not only does a company who stays with its domestic market risk diminishing its potential for innovation as well as its productivity, but it opens the door to foreign competitors who come in and take over its local market. Fortunately, Quebec did not wait around for a signal from Canada. It already exports 44% of Canada's high technology, but 44% of a small total should not be enough for us. We still need more but there are several factors working against us.

To make the picture even gloomier, the La Presse newspaper of Friday September 14 reported that we are increasingly becoming a "country of importers". Since 2003, we are in a trade deficit, i.e. we are importing more than we are exporting. And it seems that this is structural. The increases in the dollar, the price of oil and the lumber crisis are all factors contributing to this situation.

According to Michel Magnant, political scientist and Executive Director of Montréal Stratégique, Quebec should, like other provinces, establish a Competition Council. Magnant, the author of an article published in the Devoir newspaper on August 7, 2007, traces a thought-provoking portrait of our economy. He draws attention to the sale to foreign interests of strategic enterprises such as Falconbridge, Molson, Domtar, Biochem-Pharma and Seagrams and mentions the possible sale of Alcan and BCE.

Like other stakeholders and analysts, Magnant insists on competition and efficiency as well as on the upgrading (revalorization) of jobs and employees. He preaches boldness and pride, the complete opposite of pity and withdrawal. He proposes to call upon the new major tendencies of young people: technology, entrepreneurship and tradesmanship, while seeking responsible globalization that will maintain socio-cultural and environmental protection. How can you disagree with that?

And to conclude on productivity on a note of hope that will maybe even seem a bit strange to you, I will propose an example of a way that will probably seem to you to go against all logic. In the "Votre argent" column in Journal de Montréal's July 25 issue, there was the story of a Chinese entrepreneur who set up business in Granby.

"It is the world upside down," said the reporter. While the majority or the totality of our textile entrepreneurs either closed or moved away, here was the owner of a sock-manufacturing business, moving to Quebec.

The entrepreneur's reasoning was simple: Take advantage of the Free Trade Agreement to reach the U.S. market without any quota problems or customs to pay. A transaction that would have taken him 45 days from China only required 24 hours from Granby. Mr. Baojia Dong, who, by the way, speaks neither French nor English, was laughing all the way to the bank, if you'll forgive the expression. Let's add that this transfer to Quebec caused 80 layoffs in one of his factories in China. It is indeed the world upside down.

So why are our companies closing or moving away, while a Chinese entrepreneur in the same industry moves to Quebec? Are we missing something? Are we too fixated on the gross costs of labour? Or is the case of Mr. Dong just an exception and we should leave it at that? One thing is for sure, I would not have wanted to gloss over this case and not ask you to think about it. Because I think it is worth thinking about.

But I also don't want to leave without talking about innovation, the other essential aspect of development and even about the survival of our enterprises in a world that is open and extremely competitive.

How many companies that were prosperous in the past but did not know how to adapt to the new realities are now defunct? And this can go back very far in time. The last 100 years have seen the passage from steam to diesel, wooden shipbuilding to metal shipbuilding, piston engines to jet propulsion, typewriters to word processors to PCs, from diode tubes to transistors to electronic chips. Companies had to keep up with the technologies or fall by the wayside.

The list could go on endlessly and we could name names, but that would not really be useful. The important thing is to know, and especially to admit, that the key to survival is innovation. And when I say "survival," of course I mean a lot more than that. I mean development, growth, profits, and market share. Just to survive is not enough unless you can get by on very little and you are willing one day to disappear off the map.

For SMB owners, innovation is very often (too often?) the way out in a market where our competition is no longer the guy across the street, it's more likely to be a person or company whose existence we don't even know about. One fine day, to our great surprise, a good client tells us they are going elsewhere because they found something just as good or better, for less money, in China, India or Romania.

There is an example that is very interesting and very relevant since it's about a high-tech company in the communications field. The example is Apple. You will certainly remember that in 1985, the board of directors of the company founded by Steve Jobs actually showed their founder the door. Twelve years later, in 1997, that same Steve Jobs regained the reins at Apple and made of it the enterprise we know today: a leading-edge company in the field of Internet and communications. This was achieved mainly by what The Economist magazine headlined on its cover on the June 9 issue as: "Apple and the art of innovation."

Ah, so innovation is an art. Let's see how the artist in question, Mr. Steve Jobs, succeeded in breathing life back into a company with one foot in the grave, that everyone said was finished and for which very few analysts were recommending a "buy" ten years ago. There are four reasons for his success.

The first has to do with being open. Too many companies, entrepreneurs or senior management are allergic, if not hostile, to what does not come from within their own ranks. However, innovation is not the exclusive domain of anyone and Apple, like other innovative companies, recognized this fact which should, however, be obvious. Apple was able to marry its ideas to technologies that were designed elsewhere, and then dress the whole package up in the Apple manner, i.e. with style and elegance.

The second reason has to do with how the products are used. You have all heard the expression "user-friendly," right? In French, we say "convivial". Isn't this a central characteristic of many, if not all, of Apple's products? How many of us would nearly tear our hair out when trying to understand how to operate an electronic device, when the instruction manual looks more like a telephone directory!

Despite their widespread user-friendly orientation, Apple likes to go even further in responding to current user needs, with the third approach. Listen to your clients, yes, but also try to plan for future needs, to stay ahead of consumer desires. The iPod is, according to The Economist, the perfect example of this capacity to anticipate wants. Launched in 2001, this product first received a very lukewarm welcome. And now look where it is.

And to finish, the fourth lesson: know how to fail wisely. I don't know if any of you remember the "LISA" computer launched by Apple in the 1980's, that was advertised as being so advanced that it was alone in its class. Well, that is exactly what happened to it. It remained alone on the shelves.

But instead of throwing the baby out with the bathwater, they used LISA as a basis for the Macintosh that later became the huge success we know today. The iPhone is also the product of a first, unsuccessful attempt to produce a musical telephone with a partner, Motorola. In both cases, we see the ability to not get discouraged, to keep the promising elements and to make the necessary adjustments. The iPhone is so popular that counterfeits were put on the market very soon after it was launched.

The Economist concludes that now, it is difficult to find a big company that illustrates the art of innovation better than Apple. And you can see as well as I do that these four rules of innovation are not very complicated.

I know that small business owners are going to tell me that their firm is not Apple. They will say that they haven't got the same size or the same means, and they'll be right. But it still remains that these four principles are not out of this world, they are even quite down to earth. It is really much more about being open-minded than it is about a catalogue of tips and techniques. All of it can be adapted to our SMBs.

According to certain analysts, and I share their opinion, there are four major lessons that we have to learn in order to succeed at innovating. Those lessons are about strategies, processes, structures and, finally, abilities. If you will allow me, I would like to examine each of these components.

With respect to strategies, we must accept the fact that it is not necessary for each innovation to be a huge success like the iPod or the iPhone. Don't overlook the possibility for progressive improvements to the same product that can generate some interesting spin-offs. Also, do not confine innovation to one single department like research and development, commonly called R&D. Other units like marketing, finance, and production can also contribute. In other words, mobilizing all the grey matter of the company is preferable to working in silos. The R&D department may resist and defend what they think is their territory. The company management has to show the leadership needed so that situations like that are cleared up or nipped in the bud.

Management processes must also adapt to the innovation culture. The manias for monitoring, detailed planning and program reviews are so many obstacles to innovation. You also need to know how to innovate in terms of management. Innovation is not only about product creation. An enterprising employee who is blamed for not respecting the rules will stop looking for new ways to do things. The company is then deprived of a creative force. Departments that are used to asking for accounts will have to find innovative methods to carry out their responsibilities. Budgets will have to become guidelines and not dogma beyond which there is no salvation. Accountants will necessarily have to make compromises.

Structures must be more flexible in order to foster relationships between the hot spots of innovation and the rest of the organization. Creating special units with a special status can on the contrary generate conflicts that will smother innovation. You have to know how to group individuals who are capable of developing new ideas, regardless of their situation in the company. Managers who are not at ease when there are no clear and definitive organizational charts will find this difficult, but they will have to adapt.

Finally, the ability to communicate is essential to exercise the type of leadership that is capable of fostering innovation. A senior manager of a large world-class company applied a communications principle that I like very much. He used to say: "You can never over-communicate."

I like this approach that makes it possible to circulate information. And I am not the only one to think this way. For example, Professor Pierre-André Julien, Bell Research Chair for World Class SMBs at the Université du Québec in Trois-Rivières recently told a reporter at the La Presse newspaper two of the indicators that he believes show that a company is doing well. He said: "When I visit a company, two indications make me think things are going well: the boss has time to talk to me, and I see employees talking among themselves." That's communication serving innovation and, consequently, productivity.

To that are added the aptitudes for forming partnerships either internally or in other sectors of economic activity. To do this, we need to be able to both accept the fact that we cannot do everything alone and also that there is no loss of honour in forming an association with a competitor, a supplier, a research centre or an institution of higher learning.

I know, some people will say that education is costly. But like the late Normand Maurice, founder of the Centre de formation en récupération (CFER) in Drummondville and nicknamed the father of recycling in Quebec: "You think education is expensive? Just give ignorance a try."

In my humble opinion, none of this is out of reach of our businesses and corporations. I introduced innovation by giving the example of Apple, but by taking care to say that all firms are not Apple.

I will conclude by insisting on the urgency for action. All the analysts agree on that point. Whether it be the OECD, Statistics Canada, the Montreal Economic Institute, or our own economic analyses, everyone agrees that there is a productivity gap between Canada and Quebec and several industrialized countries including the United States. This gap needs to be filled using all the tools available to us, including innovation.

Thank you for your attention.