THE CORPORATE REPORT ARCHIVE – LAWRENCE CREAGHAN

STAR ALLIANCE: MEETING THE NEEDS OF THE GLOBAL TRAVELER

Rupert Duchesne
Vice-President, Marketing, Air Canada

German Canadian Chamber of Industry and Commerce, Montreal, June 10, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

Let me begin by saying that my perspective on air travel is not so much as an airline executive but much more as a customer. I joined Air Canada eight months ago. Before that I was an international consultant and a very frequent flyer. In fact, I was a top-tier member of two frequent-flyer plans. As a result, my approach to airline marketing is very much influenced by my perspective as a customer.

So, these days when I go to airline meetings, I tend to ask a lot of the questions, which you probably ask yourself. Why is this so complicated? How many points can you get? Why can’t I get from here to there? How long is the connection? Who gets access to this lounge? And so on. It is questions very much like these that sparked the first discussions leading to Star Alliance, the new worldwide network of Air Canada, Lufthansa, United, SAS and THAI.

Before Star Alliance was formed, I think a lot of air travelers wondered about the actual benefits of airline alliances. According to Airline Business Magazine, there are 363 airline alliances in the world today involving 177 airlines. Seventy-two new airline alliances were formed last year alone.

So we had to ask ourselves: what could Star Alliance do that the other 363 airline alliances couldn’t? Or to be more precise, we had to ask our customers what Star Alliance could do that other alliances couldn’t. That was the starting point for the alliance: defining the needs of the global traveler. It’s a question that is deceptively simple.

The airline industry is truly unique among global industries. There is no doubt that alliances and global ventures are being formed in virtually every sector from banking to breweries to telecommunications. The difference is that most customers are still local customers. Your telecommunications company may have signed a deal with a Japanese telecom but it is a deal, which is largely invisible to you when you dial your phone.

In the airline industry, a global alliance has to earn its stripes every time you get on an airplane, anywhere in the world from Frankfurt to Victoria. It’s a case of “Think global. Act global.”

Airlines also operate in a highly regulated environment, which still plays a large role in determining the abilities – or inabilities – of any one airline to serve international markets. In many cases, this antique web of bilaterals has constrained an airline’s ability to offer the kinds of service that customers want. The Canada-US Open Skies Agreement is a perfect case in point. For 25 years, North Americans were saddled with a highly regulated and inconvenient bilateral agreement. Air Canada was allowed to serve six US cities with scheduled service. You couldn’t even fly nonstop from Ottawa to Washington. It wasn’t allowed. Today, two years after Open Skies, Air Canada has launched 38 new services to the US

There’s also the question of cost. These days airlines simply can’t afford to go it alone when it comes to international expansion. The cost of adding new aircraft, facilities and setting up operations in international locations is prohibitive and uncompetitive. Cost and risk sharing new international services through an alliance can be one economical way of quickly growing an airline network and offering the most choice to customers.

The final challenge for any customer-friendly alliance is the visceral nature of air travel. In other words, air travelers react quickly and unequivocally to the quality of their air travel experience. The stakes are much higher when it comes to an alliance. If we boast about a “seamless connection” and you end up waiting five hours and can’t get into the alliance lounge or earn points, the value of the alliance instantly goes down. In other words the merits of an alliance have to be both evident and consistent to win the approval of customers.

That’s why our first moves in the formation of Star Alliance were based on research. We asked international travelers a few good questions. In fact, we basically asked people like you to build the perfect global alliance. We asked what you wanted and what aspects of international travel were most important.

Some of our findings were blindingly obvious. Global travelers asked for:

• A better choice of worldwide destinations

• Smooth connections and that elusive ‘seamless travel’ experience

• And, perhaps most importantly, consistent recognition, service and comfort

More subtle was the fact that international travelers want the best of both worlds. They don’t want to give up their national brands in favor of some generic global brand.

To deliver on those expectations any international alliance would have to ensure:

• Schedule harmonization so that connections are convenient and simple

• Policies and procedures which are similar so there are no surprises

• Compatible reservations, customer service and frequent flyer operations

• Compatible levels of premium and economy service and comfort

• Close proximity of facilities and counters at airports

• Staff trained to recognize and treat alliance member airlines’ customers like their own best customers

For the most hardened global traveler, I think it really boils down to recognition through personalized service. And two components of this are points and lounges. Those certainly were my top-of-mind concerns before I became an airline executive. And, as you will see, points and lounges are a big part of Star Alliance.

Star Alliance is designed to capitalize on the individual assets of five individual airlines to offer a truly global service to customers. And I think we’ve succeeded in doing that. Star Alliance represents an entity of 210,000 employees operating a high-quality airline service in 106 countries.

As a frequent international traveler, when you choose Star Alliance, you get:

• Global access to our extensive network of 578 cities in 106 countries

• Frequent flyer reward and recognition that allows customers to earn mileage points for travel on any Star Alliance flight and credit those miles to their elite-level status with the Star Alliance carrier of their choice

• Reciprocal access to over 175 lounge facilities around the world for qualified customers

• Smoother connections and easier transfers as the Star Alliance airlines move their facilities closer together wherever possible

That’s our opening gambit. When we start talking about the vision for Star Alliance, you can begin to see why this particular group of airlines stands out among the world’s 363 alliances. By working together, Star Alliance carriers can improve service when delays occur by taking the initiative to protect passenger bookings and re-accommodating them when necessary.

And one-stop reservations, passenger and baggage check-in will significantly simplify the travel experience for all our customers, regardless of which Star Alliance partner they fly. Furthermore, in the future we want to add more flights, more destinations, simplified ticketing and reservations procedures, easier connections, better baggage and ground services and more schedule choices – to name just a few of the projects already in progress.

At the same time, our research has told us where not to take Star Alliance in the future. It is not our intention to merge our airlines or to develop identical product offerings. Our research tells us categorically that customers enjoy the identity of each flag carrier. Instead we will focus our energies on the benefits of operational synergy such as:

• Co-locating in airports

• Joint purchasing of selected supplies

• Sharing technological innovations

Our goal is to maximize performance and efficiency. There will be no separate management for the alliance. Instead, working groups have been formed when and where necessary to make hands-on decisions quickly and efficiently.

It’s a dynamic process and it’s not a closed system. In fact, we will be adding Varig Brazilian Airlines in October and we will invite other compatible airlines to join in the months ahead.

There are two key reasons why I think Star Alliance is going to differentiate itself from the average airline alliance and be uniquely successful. One is the shared vision of the airlines’ leaders – like Lamar Durrett of Air Canada and Jürgen Weber of Lufthansa. These are individuals with a very similar vision of what an airline should be in the 21st century. They are on the same wavelength when it comes to technology, cost saving, service and customers.

The airlines themselves enjoy a similar profile in their respective home markets. As a result, this alliance will avoid some of the traditional pitfalls of alliances. It’s not based on fear. It’s based on opportunity. There’s no equity stake or accompanying financial wrangling or board representation. There’s no brand gap among the members. There’s no weak partner or dominant player. It’s truly based on common interest and goals.

The other reason which makes me believe in the future success of Star Alliance is the track record of the member airlines and the cooperative relationship which has already developed among the members. In this respect, Star Alliance represents an evolution. Air Canada and Lufthansa are a great example of this evolution and a microcosm of what good alliances can achieve for customers.

In March 1996, Lufthansa and Air Canada announced a comprehensive alliance. In June 1996, the two airlines began code-share flights between Germany and Canada resulting in an unprecedented level of service for travelers. Air Canada and Lufthansa combined to offer joint daily, nonstop service from both Vancouver and Calgary to Frankfurt. Lufthansa operates daily nonstop flights to and from Vancouver, on which Air Canada sells seats using an Air Canada code. Air Canada operates daily nonstop flights to and from Calgary, on which Lufthansa sells seats using a Lufthansa code.

In addition to the increased frequencies, the new service allows customers to accumulate and redeem points on either carrier’s frequent flyer program (Air Canada’s Aeroplan and Lufthansa’s Miles and More) and benefit from one-stop check-in between any Air Canada/Lufthansa connection.

Last July, Air Canada and Lufthansa launched daily code-share service to Athens from Toronto, Calgary and Vancouver via Frankfurt. And in October, Air Canada and Lufthansa launched twice-daily, nonstop code-share service between Toronto and Frankfurt and consolidated airport operations in Terminal 2 at Toronto’s Pearson and Frankfurt Airport’s Terminal 1. This summer, we have added four new nonstop flights for a total of up to 11 flights per week operated in cooperation with Lufthansa. And we’re launching two new nonstop flights a week on the Montreal-Halifax-Frankfurt route – the only scheduled carrier offering this service.

It means that, since 1995, we have doubled the number of seats in the Canada-Germany market. The frequency and choices of service are definitely helping to grow the natural two-way trade and travel links between our countries. Our revenues on the Canada-Germany market are up by 34% over 1995. And we see more growth in the future.

Open Skies is helping us develop Vancouver, Toronto and Montreal as true North American hubs for international travelers. Air Canada now operates more than 1,100 flights per week on 65 routes, crisscrossing the Canada-US border. That’s more nonstop service between Canada and the US than any other carrier or alliance of carriers. That’s good news for North American-based business travelers and good news for European and Asian-based business travelers who have better access than ever to points throughout North America.

The expansion of Canada-Germany air services by Air Canada and Lufthansa is indicative of the tangible benefits an airline alliance can produce for customers. That track record bodes well for customers in terms of choice and service. It also bodes well for Air Canada, Lufthansa and the future of Star Alliance, as we work together as partners to generate service and choice on a scale that is unprecedented in the industry.

It’s a question of keeping ahead of the competition and exceeding customer expectations. In that respect Star Alliance is an excellent blueprint that will give airlines like Air Canada and Lufthansa a competitive edge now and in the next century when it comes to serving you, the customer.

CONSOLIDATING THE FUTURE OF MONTREAL: AIR CANADA’S STRATEGIC VISION

R. Lamar Durrett
President and CEO, Air Canada

The Board of Trade of Metropolitan Montreal, October 29, 1996
Published in The Corporate Report No. 20 (January 15, 1997)

The countdown to airport consolidation has started and my message is simple. We have just 120 days to prepare for the return of international flights to Dorval airport. That means the members of the Board of Trade, along with airport authorities, all levels of government and airlines like Air Canada, need to come together and work together to make this a success.

Since the announcement was first made by Aéroports de Montréal there has been a lot of debate, a lot of hand wringing and a lot of second guessing. One crucial element seems to have taken a back seat in all of this. This is good news for Montreal.

I think Peter Yeomans, the Mayor of Dorval, has captured the essential importance of this development. He said that the sound of planes taking off and landing is “economic music.” In that case, you can be sure Air Canada will not be playing second fiddle to anyone, even though we’ll be operating the youngest, quietest jet fleet at Dorval.

We view airport consolidation as an opportunity and I can tell you we intend to do our utmost to make this decision a long-term success for air transportation in this region. We will be looking at Montreal for strategic growth and hubbing some of our international flights here where there is good origin and destination potential. New links between international destinations and domestic and trans-border networks at Dorval can now be pursued.

Air Canada will consider daily flights to Frankfurt as well as several weekly flights to Tel Aviv and eventually Beirut. Adding these points to our existing services to London, Paris, and Zurich will begin the process of rebuilding Montreal into a legitimate North American transfer point.

A dramatic increase in long-haul international service such as this will generate the traffic feed necessary to drive more service to the USA and consolidate our position as the leading trans-border carrier. In fact, I can easily envisage Air Canada adding more US cities, like San Francisco.

A consolidated Montreal airport will be well positioned for the future. That’s because many of the traditional North American hubs now find themselves overcrowded or overused. There are no new North American airports-with the exception of Denver-so facilities are at a premium.

I also believe airport consolidation will enable Montreal to draw traffic to points connecting throughout North America. All this bodes well for Montreal in the 21st century. It becomes a new alternative for international air travelers because the inconvenience of two airports and a 45-minute connecting drive have suddenly been eliminated.

Travelers and shippers alike will be taking a second look at Montreal. As air travelers yourselves, you know what you look for in an airport. Convenience and ease of connections are big factors. That’s true in Singapore. It’s true in Frankfurt. And it’s true in Montreal.

A split airport operation has resulted in missed opportunities and sluggish growth. Airlines, including Air Canada, will not be diverting flights to Montreal from other cities.

These days, more than ever, Air Canada shareholders are interested in profitable opportunities and routes. We are constantly adjusting our operations on that basis and that inevitably means some fine-tuning and pruning – like the Montreal-Atlanta route which did not meet expectations.

Some critics have said that the Dorval decision is good for Air Canada. My response is a definite “Yes!” But it’s only good news because we happen to have 7,000 employees here. And we’re about to add more new, well-paying jobs at our maintenance facility in Dorval, which will bring in more third-party maintenance work from international airlines.

It’s only good news because our head office is here. It’s only good news because we have invested millions of dollars in one of the world’s best jet aircraft maintenance centers, not to mention an Aeroplan center, and a reservations office.

We spend $850 million a year here. And we buy Quebec goods and services. About $35-million in fuel alone and $65 million a year for support services and local products. Then there are big-ticket items like our 24 new Canadair Regional jets, which we acquired when we went shopping up the street at Canadair.

Jacques Auger of ADM has said that Mirabel was on the road to losing half of its international flights. Recently LOT announced their departure. They lost Canadian, Alitalia, TAP and Lufthansa. But they never lost Air Canada.

Besides our track record and our investment dollars, we also bring some other assets to the Dorval decision.

• We have the newest and quietest jet aircraft. Air Canada has set a new standard for corporate responsibility when it comes to operations in and out of Dorval. From the Canadair Regional Jet to the Airbus A320s, A340s and 319s, our new jet aircraft meet or exceed Stage 3 requirements-which are the toughest noise standards in the world.

• We are upgrading facilities at Dorval airport through a $20-million program to build more convenient facilities for customers connecting from national to regional flights.

• We offer the best selection of flights: the most daily non-stops to the US, the most flights to New York, the best Florida service and the only daily non-stops to Los Angeles.

• And we have new routes like the Montreal-Washington nonstop service. Since January of this year, that service alone has generated 34,000 passenger trips. That’s incremental business for this city and a new economic link to the US.

Compared with any other airline, Air Canada brings a lot of assets to the table. We have a vested interest here in our home town as well as a track record of building flights and frequencies.

Now as we look ahead, I believe the success of the move to Dorval will depend on three factors:

1. Respect for due process and a need to minimize any disruption caused by the transfer.

That means following the processes in place that allow for discussion, the input of citizens and residents, and a transition plan which addresses the key issues and, as much as possible, eases the transition for employees affected.

2. An integrated plan for infrastructure to accommodate the consolidation.

That means proper road access, rail access, facilities, airport terminals, runways and parking – in short, a mini-infrastructure program which, in itself, is good news because it will create jobs and reintroduce construction cranes on the Montreal skyline. In this effort, I take the occasion to commend Jacques Auger and his team at ADM for getting the ball rolling and looking ahead at the elements needed to revitalize the Dorval facility.

3. The cooperative support of business and government to view this as a business opportunity and act accordingly.

This is the key. The Mirabel-Dorval situation has lasted 20 years. The implementation of a turnaround strategy has been long, hard and difficult. It is only natural that there are issues which need to be resolved in a constructive and comprehensive way.

This decision will help increase passenger volumes. It won’t happen overnight but it will happen. By increasing passenger volumes, the Montreal regional economy benefits-and that’s good news for everybody. One economic rule of thumb often used in the industry says that for every one million new passengers who fly, about 6,000 new and indirect jobs are created, with $900-million in economic activity.

But it doesn’t happen by itself. It takes a good plan and a good team. Fortunately, we have those ingredients here and we have an excellent team of involved business people, politicians and a forward-thinking airport authority.

Someone who really knows about airports and air travel is Serge Losique, president of the Montreal World Film Festival. Mr. Losique is known for his strong opinions and for expressing them openly. He’s also a good customer of ours, a great business partner and well-informed on how the world works. So I think it’s fitting to give him the last word on the consolidation of Montreal’s airports. In a recent article in La Presse, he said that it amounts to “actually saving and relaunching an international airport for the benefit of Montreal and Quebec.”

In a nutshell, that’s the challenge we face. So let’s work together to make sure that April 1997 doesn’t mark the end of an era – but the beginning of one. A new era for a revitalized North American airport and one that is ready, willing and able to bring business back into Montreal.

OPPORTUNITY KNOCKS: TRANSLATING THE NEW CANADA-US AIR TRADE PACT INTO BENEFITS FOR THE MONTREAL REGION

Hollis L. Harris
Chairman, President & CEO, Air Canada

The Board of Trade of Metropolitan Montreal, March 7, 1995
Published in The Corporate Report No. 12 (June 15, 1995)

They say in the airline industry, Timing is everything, and frankly I cannot think of a better time for me to discuss with you the new Canada-US bilateral air services agreement. That is especially true since I just returned from launching Air Canada’s new service between Toronto and Atlanta. After years of negotiations, we suddenly have an agreement, and I suspect that it is of intense interest to you, both as air travelers and as business people – and with good reason.

Bilateral trade between Canada and the US is big business – worth more than US$200 billion each year – and it is especially vital to the Montreal region, as a very close neighbor of the US. Since the implementation of the Canada-US Free Trade agreement, bilateral trade has grown more than 20%.

In the long term, I believe this new air trade agreement will exert a similar dramatic impact on the airline industry. In simple terms, this agreement means that, with a few restrictions, airlines on both sides of the border are free to offer point-to-point, across-the-border air service to anywhere they want.

That could have a huge impact on the local economy: on trade, business development, convention business, tourism, hotels, special events and so on.

According to Aéroports de Montréal, Montreal could see as many as 1.4 million new seats per year. On paper, that sounds pretty good, but it’s important to remember that open skies – by itself – does not automatically deliver benefits.

Some cities will do their homework and capitalize on open skies, some cities will lose out. Indeed, if there is one single message that I would impart to you today, it would be that Montreal and Montreal businesses need their own “open skies” strategy, to maximize this opportunity.

I am also here to say that Air Canada is ready, willing and able to act as both a facilitator and a partner for Montrealers and Montreal businesses, those who are aiming to get the most out of open skies.

We have already made our intentions crystal clear. While Canadian Airlines waits for American Airlines to put together a schedule, Air Canada is aiming at opening up 20 new routes between Canadian and US cities, in the next 18 months. Needless to say, that includes some key Montreal routes. Within 60 days we intend to link Montreal and Washington.

Soon we will announce launch dates for Montreal-Cleveland, Montreal-Atlanta and Montreal-Orlando. That will add up to hundreds more Air Canada seats flying in and out of Montreal each day. Also, we intend to make sure there are lots of people in those seats.

What are the chances for success? Very Good! Montreal is well placed to derive some tangible benefits from open skies. The city enjoys good proximity to dozens of US markets. The city is ripe for economic growth. The airport is able to handle the extra business.

Most of all, Montreal enjoys great potential in terms of tourism, convention business and trade. Moreover, we have a low Canadian dollar to tempt Americans. On top of that, you have an aggressive and committed partner in Air Canada. To put it simply, our vision of open skies is good for Montreal.

Our open skies strategy is based on the people, products and planes in Montreal. As proof, I invite you to look back over the past 12 months. Last year, Air Canada and Bombardier teamed up to unleash a great Canadian product – namely the Canadair Regional Jet – onto the air services market in North America.

With 50 seats and a quiet comfortable cabin, this new, short-haul jet is a harbinger of additional, frequent, more convenient and more rapid short-haul jet service. In total, we have ordered 24 Canadair jets.

Equipped with these versatile jets, we didn’t waste any time opening the skies in Montreal. Last December, we doubled the number of flights on the Boston-Montreal route. We went from two turboprops each day to four nonstop Canadair jet flights. Our employees – both in Montreal and Boston – are delighted to have this service to compete with Delta. Customer reaction has been excellent. Customers clearly like the convenience and timing of more nonstop trans-border services. But the economic benefits don’t end there. Our order of Canadair regional jets was great news for the Montreal economy since Bombardier manufactures the jet.

And, two months ago we announced a $5 million contract with Bombardier Regional Aircraft Division for the pilot training for our regional jets. A total of 240 Air Canada pilots will be trained to fly the jet at Bombardier’s training center in Montreal and the contract runs until September 1996.

Then there was our joint announcement with Aéroports de Montreal (ADM). Together, we announced a $20 million agreement which will upgrade Dorval and Mirabel.

The agreement calls for a variety of initiatives, which include:

• The replacement of PTV buses at Mirabel with walkways

• New lounges and more convenient facilities at Dorval for customers connecting from national to regional flights

• And a new Maple Leaf lounge at Dorval Airport

Above all, we are investing in these airports to make air travel on Air Canada more convenient and more comfortable. We also expect to generate more revenues because of this additional investment.

That’s not just good economic news, it’s tangible evidence of Air Canada’s strategy to offer services and products in this province which are mutually beneficial for Montreal and for Air Canada.

That’s why I consider Montreal to be a microcosm and a model of how a well-executed agreement could boost air services and the economy of this city. That is true with the right airline and, as you may expect, I think Air Canada is the right airline to get the job done.

In fact, my second message to you today is that while Air Canada has a lot to offer in the open skies sweepstakes, we certainly appreciate and solicit your support over the coming months.

There is no doubt that over the next weeks and months, many airlines will be visiting Montreal. Many airlines will be talking about Montreal. Many airlines will be making promises to Montreal.

Only one has signed a long-term agreement like ours with ADM. Only one is as committed to the Canadian jets built here by Bombardier. Only one has a workforce of over 6,500 employees in Montreal directly and also generates 11,000 spin-off jobs. Only one spends over $1 billion each year in this area. And, that one airline is Air Canada.

Simply stated, we have a lot to offer – not just now, but in the future. That’s due to the simple economics of airline services.

It goes like this:

When a foreign carrier starts service into Montreal, about 30% of the revenues earned will be reinvested here, 70% of the revenues are siphoned off to the US or another foreign country. Therefore, when Air Canada offers service on the same route, 70% of the revenues are reinvested right here.

Of course, a new bilateral agreement has pushed trans-border air services into high gear. I’m sure many of you are probably wondering if Air Canada can really deliver the economic benefits I’m talking about and if we can compete with all those large US airlines. It’s a good question, and I am here to tell you that I am confident Air Canada will prosper under open skies.

First of all, I believe the new bilateral agreement will help create that all important “level playing field” which will ensure that every air carrier gets an even chance to compete.

That’s why there are transitional periods built into the agreement which allow for a phase-in of new US services at Montreal, Toronto and Vancouver. It is a mechanism which ensures that service, quality and competition is the determining factor in open skies – not sheer size or hub muscle.

Second, Air Canada is building a fleet of aircraft which is eminently suited to opportunities generated by the new bilateral agreement. We have positioned Air Canada’s fleet to be one of the youngest in the world with orders for:

• Six Airbus A340s to replace our older 747s plus 2 A340s on short-term leases, plus 3 options

• 25 Airbus 319s to replace the DC-9s, plus 10 options

• 5 extended range Boeing 767s and two more 767s on short-term lease

• And, of course, 24 50-seat Canadair jets with options for 24 more

In 1995 alone, we will be taking delivery of 19 aircraft, just as the opportunities under the new bilateral agreement open up. The timing couldn’t be better. Moreover, I see tremendous flexibility with this fleet on trans-border markets. It is an open skies fleet.

The Airbus A319s and the 50-seat Canadair jets in particular offer us tremendous ability to adjust capacity to meet market demand on a seasonal basis, to serve more routes with low frequency or serve fewer routes with high frequency.

And we can hold on to our DC-9s, if necessary, to ensure that we have enough aircraft to meet demand on trans-border routes.

Third point: many observers are saying that the airlines which are best positioned to take advantage of the new Canada-US opportunities are the ones which have already forged good relationships and alliances across the 49th parallel.

In this respect, Air Canada has once again done its homework by forging excellent working partnerships with Continental and United.

Fourth, and perhaps most important, I believe we have the staff, market experience, and reputation which can only be an asset as we start new services to new markets.

Certainly, people are questioning how Air Canada will compete with giants like American and United or the low-cost carriers like ValueJet.

In fact, our marketing strategy to US air travelers is already well-known. It is inscribed on the Statue of Liberty down in the New York harbor: “Give me your tired, your poor, your huddled masses yearning to breathe free, the wretched refuse of your teeming hubs.”

American’s Chicago hub, Delta’s big Cincinnati hub, Delta’s mini-hub in Boston, Delta’s plane changing center in LaGuardia. We will by-pass the hubs.

I’ve taken some poetic license with that, but I think you get the idea.

Our strategy for success is as simple as the difference between direct and nonstop flights. As frequent flyers, I know people like yourselves prefer one plane, one flight and no stops. Travelers in the US are like you. They are getting plain tired of being shunted along endless “milk run” services and through inconvenient hubs.

Air Canada is coming into the market with more nonstop services, new aircraft, a great reputation, the best on-time performance in North America and great value for money.

Perhaps, most importantly, we finally have a track record which shows that we can make money.

In fact, our 1994 results speak for themselves. Thanks to the efforts of our people, Air Canada has just recorded its first profit since 1989. The $129 million net profit in 1994 is a $455 million improvement over 1993. The $244 million operating profit is the most ever achieved in Air Canada history.

We have turned the corner and turned the airline into a moneymaking operation and that’s the key indicator of our future success.

The plan for this year is simple. We will keep costs down, grow revenues from new markets and get a fair price for our product. We will press ahead with our open skies strategy and put 19 new aircraft in Canada’s skies. Seven of those 19 are for international destinations.

We will count on your solid support for our applications to the federal government to serve new international routes like: Montreal-Brussels, Montreal-Frankfurt, Montreal-Vietnam and maybe even Montreal-Mexico City.

Most of all we will work to ensure that Montreal gets the full benefit of new air services and, together, I believe we have a lot of good news to look forward to in 1995 and beyond.

1984–1994: A SWINGING DECADE

Jacques Bougie
President & CEO, Alcan Aluminium

The Canadian Club of Montreal, September 12, 1994
Published in The Corporate Report No. 9 (December 15, 1994)

You will see that I have entitled my remarks today “1984–1994: A Swinging Decade.” Those of you who grew up in the fifties or sixties, will of course know what “swinging” means – the latest in all kinds of fashion, jet-setting away in the fast lane, or being one of the beautiful people. Well, I hate to disappoint you. As far as Alcan and aluminum is concerned – and you will not be surprised that this is what I am going to focus on today – swinging has a different connotation, swinging like a pendulum, from being Canada’s most profitable company in 1988 to three years of losses – from 1991 to 1993 and counting. I want to talk about some of the lessons we have learned in that period and how we have adapted our strategy and our organization as a result of these lessons. They have in them, I believe, some pointers for Canadian industry as it heads into the turbulent seas of global competition.

The world aluminum industry

Let me start with a brief outline of the world aluminum industry, in which Canada is the third biggest producer nation, after the USA and the CIS (the former USSR). In the decade following the Second World War, it was among the fastest growing of the new material industries, growing about 7% a year – that is doubling in size every decade. This continued until the oil shocks of the late seventies, when like a lot of the rest of the world’s industries, growth slowed down abruptly.

Aluminum grew in that period by taking over products from traditional materials, replacing wood and steel in windows and siding, replacing copper in electrical cable, substituting for steel in beverage cans. In the latter case it did so with such success that in the US 100% of all beverage cans are made of aluminum. Americans consume a can a day for every man, woman and child – almost 100 billion cans a year. And the recycling of those purchased cans through the industry’s remelting and rolling facilities, back into filled cans and on to the supermarket shelves again, takes, on average, only six weeks.

Somebody once said that aluminum was the second dullest industry after cement. I suggest that this track record of development and expansion gives the lie to that and there’s more to come, as you’ll hear later.

Aluminum is a capital-intensive business, certainly at the primary aluminum (the raw metal) end. The typical unit of smelting capacity (that is put in by individual companies around the world) costs about US $1 billion and takes about three years to build. Upstream of that are necessary investments in alumina refineries that process the ore – bauxite – and those again typically cost about US $1.0 billion to $1.5 billion and take three to four years to build.

Now aluminum is a commodity business, that is to say that, in its primary ingot form, it is anonymous and easily traded around the world via metal exchanges. Like most commodity businesses, it is subject to cyclical swings in demand, in different countries. However, as in the last rolling world recession, overall world demand continues to grow. Producers can normally plan their investments with some confidence, in the light of overall world growth forecasts.

What was not foreseeable was the abrupt arrival in these relatively predictable Western world markets of a formidable chunk of production capacity from outside those markets. I refer, of course, to the CIS aluminum industry, which is in fact very largely located in Russia, and which, for ease of understanding, I shall refer to as the Russian industry, even though Tajhikistan and Kazakhstan also play a part.

With the collapse of the Soviet Union, the internal markets that had previously absorbed that country’s aluminum output also dried up. Primary aluminum ingot is a highly fungible (interchangeable) material and a very efficient terminal commodity market for it exists in the form of the London Metal Exchange. The obvious route to dispose of the continuing Russian production, and for them to earn much needed hard currency, was to export it. Russian exports climbed very steeply – from about 200,000 tonnes per year in the late 1980s to over 2 million tonnes in 1993, a tenfold increase. This is equivalent to suddenly adding about 15% to Western world capacity – an addition which, if it had occurred under normal Western market conditions, could have been seen coming for three to five years at least and would have required a total investment of about $20 billion. In effect, a major industry, operating under the conditions of a command economy – indeterminate costs, few environmental controls, no requirement for shareholder returns – was suddenly dropped into the Western market economy.

The consequence of this abrupt and abnormal bouleversement of the world aluminum supply-demand balance was to drive world prices in 1993 down to their lowest level ever, in real terms. The reaction by individual companies in the West has been to cut back on their production. Alcan has certainly done that at its facilities in Brazil, Australia, the UK and the US, as well as here in Canada. Even the Russians have been persuaded, by five Western governments, to cut back their production, though with their domestic consumption still falling steeply, whether this will result in a reduction in their exports remains to be seen.

Alcan’s management actions

Inside the company, we have also made some very effective cuts in our own production costs. Comparing 1993 with 1990, while our sales volumes in tonnes were up by 5 per cent, our annual costs were lower by US $1 billion, of which the major part was due to direct management action. Unfortunately this was not sufficient to offset the reduction in sales revenues, which fell by $1.5 billion between the two years. The encouraging aspect is that in the last few months, the market prices have risen somewhat, in response to production cutbacks and strong demand all around the world. However, these price levels are still far from stable.

One thing that we have learnt from all this is in today’s world we have to learn to expect the unexpected – and not only to expect it, but also adapt to, and live with, the unexpected. Fundamentally, for most businesses, this means having the lowest cost possible. This is the only insurance you have against the unexpected, and even this may not protect you from a year or two of pain if, as in our case, a new arrival among the competitors is playing by quite different rules.

Exciting growth prospects over the next decade

I said earlier that the aluminum business had a development record that is very far from dull. Looking ahead, there are some exciting growth prospects over the next decade. While North America is at a relatively mature stage in its consumption of aluminum, growth in Europe is continuing and will accelerate as conditions improve in Eastern Europe, and in due course Russia. Currently, and for some time to come, it is the Asian region that is showing dramatic growth. Japan will be emerging from its current difficulties and again be a major consumer. In the southeast Asian countries, growth remains at around 8% per annum. Above all, China, with double-digit industrial production growth in the last few years and with its population of more than 1.2 billion, is a vast untapped market. Alcan’s association with China goes back to the 1930s, and we have had in China a joint-venture operation with the government’s nonferrous metals corporation, C.N.N.C., and our Japanese partner since 1986. With its innate mercantile instincts and increasing state support for economic growth, China is an exciting prospect for us as it is for many other companies. China, and indeed the whole of the southeast Asian region, is a prospect which Canadian business should be taking very seriously.

A recent statement by a prominent Deutsche Bank economist pointed out that more than half of world economic growth in this decade will occur in the Asian region. This means that by the year 2000 the NAFTA economy will be substantially smaller than that of the Asia-Pacific region. In our industry, one-third of the whole world’s incremental consumption of aluminum to the year 2000 will be in Asia. Our experience is that to do business in Asia one needs to build relationships – and that takes time. If we in Canada are to participate in the growth in Asian markets, it is vital to take the first steps now, or risk being left behind in the race.

As far as end-use markets for aluminum are concerned, probably the most exciting prospect is the automobile. The use of aluminum in the automobile has been growing steadily over the past ten years. Some of you may not be aware of where aluminum is being used. You may be familiar with it in engine components such as pistons, cylinder heads, transmission housings. But do you recognize it in wheels, radiators, even the canisters for your car’s air bags? These applications are already established and will steadily grow. But the big breakthrough, the real excitement, is in the prospect of making the entire body structure of aluminum – not just the doors, the trunk, lid and hood, but the structure itself. This can save 400 pounds in the weight of a typical midsize car, with resulting economies in fuel consumption and reduced exhaust emissions, not to speak of the corrosion resistance that aluminum offers as well as the metal’s recyclable value at the end of the car’s life.

This prospect is nearer than you may think. At Alcan’s annual shareholders’ meeting last April, we had on demonstration an all-aluminum version of the Ford Mercury Sable, one of 40 which have been built for testing using Alcan’s technology for the structure. We have had a ten-year research program, costing $100 million, to develop alloys and joining techniques, including adhesive bonding, which allow car manufacturers to use essentially the same manufacturing process for aluminum as they use currently for steel, thereby avoiding the millions of dollars to retool.

Alcan’s technology was from the beginning aimed at high-volume production of middle-of-the-road cars (if I may use the expression!) rather than small-volume production of specialty vehicles. It is in the mass-produced models that the real volume market lies that we should see developing over the next ten years. By the year 2010 the world auto industry could consume as much as three times the aluminum it does today. The additional shipments to this market alone could require the equivalent of the output of thirty to forty additional world-scale aluminum smelters, although by that time a growing part of this would come from recycled aluminum.

The lessons of the swinging decade

This, then, has been the pattern of the aluminum industry over the past ten years. Growth slowing down in the 1980s, compared with earlier decades, then being sideswiped since 1990 by the fallout from the collapse of the Soviet Union. The industry has been struggling with this abnormal supply situation even though demand growth has been maintained over the multi-country recession of the early 1990s. The demand outlook for the next decade is promising, particularly in the automotive market, where ten years of development work is beginning to pay off.

How has Alcan changed in this swinging decade? In the early 1980s, concerned about the slower growth in our traditional markets, we set out to explore new businesses that would bring added growth and profit. We did so by developing new technologies related to our mainstream business and seeking new markets for the products that emerged. At the time this appeared a logical approach, building on strengths we already had and not simply making acquisitions on a purely financial basis.

Ten years or so later, the success rate has turned out to be dismal and we have learned a number of lessons the hard way. Diversification, even into technologically related fields, is not easy. The time scale is very long and the success rate is low. In many cases the technology was developed successfully, but building bridges to the market proved to be the biggest problem and in some cases the market just did not exist – what we had was a product looking for a market! In addition, there is always the problem of managing small businesses within the context of a large company organization. Fully-owned subsidiaries face competition from single-minded, low-overhead entrepreneurs. They will inevitably carry some of the large company baggage of administrative procedures, despite the best efforts to relieve them of it. Further, the people skills and attitudes required in a small semi-independent business are different from those of a large, capital-intensive operation. Someone once described it as the difference between driving a Mustang and a 40-ton truck! Finally, as the cash availability from the Alcan parent became progressively tighter with decreasing earnings, both financial support and management enthusiasm for continued nurturing of these businesses was in increasingly short supply.

By the early 1990s, certainly by 1992, two things were causing Alcan’s management to take a long, hard look at where it was going. One was the extreme pressure on earnings caused by the Russian situation I have described. Despite the cost savings we were achieving, we were not keeping pace with the fall in sales revenues, even though we were increasing sales volumes and market share in a number of markets. The other was a view that we were heading for a possibly protracted period of disinflation, if not deflation, and that, in common with other raw material producers, we would have to live with world prices that would still be cyclical, but fluctuating about a lower average level than in the past.

Accordingly, we undertook an intensive study, first the market outlook and probable prices, sector by sector, and country by country – a massive undertaking – and then of the viability of each of our businesses in the light of that scenario. For the benefit of investors present, we did this by comparing the net present value of forward earnings for each business (we have over 125) with the capital employed in that business. I will spare you any further detail, but suffice it to say that it gave us an objective indicator of businesses that were potentially wealth-creating, those that were wealth-diluting and those that were actually wealth-destroying.

Overall conclusions of study

The study threw up two important overall conclusions. One was that aluminum is a good and growing business to be in, provided that a company is a really low cost producer. The second is that Alcan does have the assets, the technology and the market position to succeed in the new and tougher kind of market that we were seeing out ahead.

In the light of these findings and the analysis of our businesses, we announced a management reorganization and a revised set of strategic priorities at the end of last year. Again I will not go into details, but these essentially boil down to four key elements:

1. Be the low cost producer

2. Focus on areas of comparative advantage, particularly in primary aluminum production and rolling

3. Spin off businesses offering little long-term shareholder value and redeploy the proceeds

4. Develop high growth market opportunities, particularly in the automotive sector and in Asia

I’m happy to report that we are moving successfully in all these areas.

This, then, has been the swing in Alcan over the past decade. A diversifying response to the slow growth prospects in the mid-1980s, a cyclical earnings peak towards the end of the decade, followed by a downward trend of prices and earnings, driven by accelerating Russian exports since 1990, and now a strategic regrouping around the core parts of the business where we are strong worldwide. In the course of navigating the business rapids of the last ten years, there are a number of trends we have seen that are, I believe, important to anyone facing international competition. Let me conclude by mentioning a few of them.

Trends in international competition

Conventional wisdom has it that high-tech businesses are less vulnerable to competition than commodity businesses. In our higher-tech businesses we thought there was a greater protection offered by in-house technological advantages, until we observed that with the increasing scope and penetration of information technology, process control can easily be made cheaper and more accessible. This results in what I might call “creeping commoditization,” pulling down individual walls of technological advantage and reducing the kind of price premium that such advantage used to command.

A second feature is that global competition is able to harness offshore sources of low-cost labor, whose productivity can be leveraged by the same transfer of technology that I have just mentioned.

A third observation is that global competition, sooner or later, leads to a minor number of large suppliers dealing with a smaller number of large customers, squeezing out minor suppliers, who, in order to succeed, have to identify and supply niche markets.

The one common defense against all these trends – “creeping commoditization”, low-cost offshore labor and staying as one of the large suppliers or becoming a successful niche supplier – is to ensure rapid and continuous improvement in all facets of the business. Focus on the customers’ needs and benchmark your way to and benchmark your way to become the best – nurture innovation and people involvement. How often have you heard that? But I can tell you from personal experience that it is a must, and it does indeed work.

Finally – as if this weren’t enough – we have to do all this in the context of changing social values. We are all captives – and beneficiaries – of the concept of sustainable development. The conservation of our resources, the environmentally correct operation of our manufacturing processes, the design and liability for our products – they are all part of today’s management mix.

Another vital human concern, not yet as far advanced in public debate, is that of the social implications of the emergence of this new technology. Technology is being successfully harnessed to produce more with fewer people. Alcan around the world today has 11,000 fewer people than it did in 1990, and yet had record output in 1993, a picture repeated in countless other companies. Evidently, new businesses are being created, often based on new technologies; this is a partial solution to unemployment caused by increased productivity, though it poses massive problems of movement and training of people. But we are facing a serious structural unemployment problem. It will be addressed at the forthcoming World Summit on Social Development in March next year, and we shall hear a lot more about this difficult dilemma in the months and years to come. It may well have the kind of direct impact on our people policies and priorities that the environmental revolution has had on our operating practices over the past few years.

Change in global context

I have talked about the swings over the past decade that the aluminum industry and Alcan have faced. What I have really been talking about is change, and change in a global context. As has been said in another connection, “Being a global company is a journey, not a destination. Being global means continuously monitoring the horizon for competitive opportunities, and our internal operations for better ways to do things. It means being secure enough to accept diverse cultures and opinions and mature enough to manage the creativity and innovation they ignite. Finally being global means being in flux, on an ongoing odyssey, accepting change as a constraint and ambiguity as a shipmate.” I believe that this sums up very well the world we live in and the response that it calls for. It is not necessarily comfortable, but it is exciting. What is more, it is the kind of world in which I believe, and I intend, that Alcan will flourish.

MANAGING CUSTOMER NEEDS ACROSS THE AMERICAS

Alain J. P. Belda
Vice-Chairman, Alcoa

The Association of American Chambers of Commerce of Latin America, November 18, 1996
Published in The Corporate Report, Edition No. 20 (January 15, 1997)

In talking about customer needs, I am going to concentrate on issues of particular concern in South and Central America and the Caribbean. Let me make it clear that I’m referring to the concept of customer needs in its broader definition, including shareholders and other stakeholders as well as our industrial customers. Many are customers in the usual sense that they buy our products and services, but they are also customers of government policies. Their needs involve expectations, challenges, successes, and failures, and that is what I want to deal with today.

In raising such issues, I am conscious of an old English saying: “Foreigners do not tell jokes on the Queen.” Having lived 40 years of my life in Brazil, a Brazilian national by choice and a Spanish one by birth, I do not consider myself a foreigner. So please grant me the license for any appropriate irreverence.

Our company has operated in the Central/South Americas and the Caribbean since the early 1920s. We have, at replacement cost, about US$3 billion invested and around 25,000 employees. Our major operations are in Brazil, from where we manage our South American businesses. We also have plants in Mexico, Jamaica, Surinam, Colombia, Peru, Chile and Argentina. We produce alumina, aluminum, rolled products, extrusions, castings, plastic caps, PET bottles and automotive wire harnesses, for domestic and export markets.

Our investment decisions have been based on the potential of Latin America, its vast natural resources, and the prospect of developing significant internal markets, specifically those of Venezuela, Mexico, Brazil, and Argentina.

Our ultimate goal has been to achieve an important share in the internal markets of Latin America. This has been attained, but of a market much smaller than we had expected – in fact, a market that has not physically grown in the last 15 years.

Our bet was that, over time, the governments of this region would discharge with competence the role of promoters and defenders of economic and political freedom – which, we believed, would result in economic and market development, driving growth in local consumption and exports of alumina, aluminum, and fabricated products. Pretty simple.

We did not expect perfect free market economies – God knows how many of those there are around the world – but we did expect, in some reasonable time frame, sound economic development. We believed it was possible to grow these markets and to achieve developed economies, growth in per capita income, and rising consumption patterns, if not immediately, if not soon, at least in this century!

We invested on this expectation. We did not cut corners on environmental responsibility, safety, education of our people and customers, technology, or quality. We knew the political and economic risks we were taking as we made these investments. We were aware of the historic context of this region, of having political policies in conflict with economic freedom and the workings of a market economy.

This problem, we felt, was at the source of the gap in GDP per capita between the countries of Latin America and the US. We were convinced that this would change, given the opportunity in the 1960s of a booming world economy and the effort at the local level of encouraging exports and developing a competitive local market-mainly in Brazil, Argentina, and Mexico.

Unfortunately, this gap has continued to grow rather than close, and it has worsened as a consequence of developments in the last 15 years. Roberto Campos once wrote an article stating that there are some countries “that never miss an opportunity of missing an opportunity.” We as a region missed the opportunities presented to us in the natural resource export cycle of the previous century and did it again in the import substitution cycle of this century.

We failed on both cycles to develop our internal markets, which was the driving force in the great development of the US. What we have seen is a history of unfulfilled promises. A gap between words and actions. A lack of political commitment and managerial ability to implement. A gap between the vision, developed or copied from abroad, and the necessary adaptation to local reality. As a whole, we were not prepared politically, collectively, or individually to pay the price required. Or maybe we paid the price too many times-without results.

The fundamental requirements – efficiency in the internal markets, removal of infrastructure constraints, promotion of internal savings and financing of consumption – were defeated by internal politics, the elite’s self interest, incompetence, and government competition with the private sector for resources. The bottom line has been that we failed to create an internal market and a competitive non-export industrial sector.

The last debt crisis finally ended the import substitution model which had lasted well beyond its usefulness. Trade has been liberalized, and we are at last forced to compete against imports. We seem finally to have curbed our addiction to inflation, and we are beginning to talk about the real issues and opportunities available. Will we understand this time that you cannot have a fixed exchange rate if you do not subordinate monetary policy to that fixed rate?

The options are quite clear: either give up monetary independence and fix the rates, or fluctuate the rates and have a flexible monetary policy. Will we be successful this time? Will we be ready to adopt the discipline required? Will we create an environment where there is less reluctance to invest, to develop technology, to finance consumption? Will we face the fiscal policy issues, the social security issue, the health and education issues required to provide a minimum of competitiveness? Will we create a strong local market and an agile, competitive export sector? Will we provide a stable economic environment that will promote all of this?

If we are to meet these challenges, we had better prepare-because it is not going to be easy. The developed world will make our job harder. Tolerances are tighter, demands for quality are greater, time is essential, costs are under greater pressure, and technology and design are as important as cost and quantity.

In a liberalized world economy – or in a managed trade economy – major players in the developed world will protect their own jobs and industries with ever more ingenious non-tariff barriers. There will be no room for giving in to local pressure groups, as we have done so many times before, at the cost of implementing half-baked policies that result in sub-optimum performances.

So where does that leave our customers? From the time Alcoa started to invest in Latin America and the Caribbean, we have practiced the same values by which we operate worldwide. These values include attention to safety, environment, quality, integrity, and respect for employees. There are no concessions made in these areas.

We require from our investments financial performance in line with the cost of capital, as this is the source of employment stability and of growth. We operate locally with the same quality standards that we use in any of our worldwide plants, and we treat our local customers in the same way we treat global customers such as Ford, Tetrapack, Valeo, Coke, and Pepsi.

We offer access to our design centers and technical labs, our worldwide contacts, and our knowledge of opportunities and applications. We have embarked on a new business process, based on JIT, total waste management, and supply chain management. We believe this will create competitive advantages for us and for those whom we supply. This is in line with the expectation of a much harder competitive market, and our intention is to provide a competitive edge for customers who are dedicated to the growth of the local market.

Where will Alcoa be as these events unfold? We will be where we have been. It has been a profitable venture, albeit disappointing in terms of our own expectations. We will continue to bet on Latin America, believing that the local governments will eventually restrict themselves to their fundamental roles and will do so with competence.

We will continue to believe in the competence of our people. We have plenty of evidence of that. We have Brazilians running plants in China, Europe, and North America. We have Mexicans in North America and in Europe. And in Brazil we have just been awarded the quality recognition equivalent of the Malcolm Baldridge Award in the US. Given the opportunity, our people consistently excel. Here in Latin America, we have achieved higher levels of productivity, deployment of quality tools, people involvement, and safety than anywhere else in our system.

We will be here – ready to invest for local or export markets, in our established fields of expertise or in others where opportunities are available based on our knowledge of the area and its people. Above all, we are confident that the time has arrived when it will be possible to realize the real wealth of these countries, their internal markets, their people.

INVESTING IN EXCELLENCE: A COMMITMENT TO EMPLOYEES, QUALITY AND CUSTOMERS

Daniel P. Burnham
President, AlliedSignal Aerospace

Aerospace Industries Association of Canada, Ottawa, September 18, 1995
Published in The Corporate Report No. 14 (October 19, 1995)

Let’s start today with a bit of good news: after a long and gloomy dark spell, the future prospects for our industry are brightening. The signs of the eagerly awaited recovery are clear: the total value of all the Airbus and Boeing orders announced last spring at the Paris Air Show was something like three times the total value of the orders announced at the Show in ‘93. This past quarter, the unfilled order backlog for US commercial transports increased for the first time since 1990. Nineteen ninety-four was the best year in a decade for business aircraft. And, the airlines are slowly but steadily improving their profitability.

But it’s still not time to call out the brass band and start the celebrations. Our industry still faces sobering challenges across all the markets, defense and commercial: government spending everywhere is being held in check; the commercial airlines balance sheets are still a shambles; terrible excess capacity – especially among the airframers, forcing awful price wars; and, new markets seem to grow only in fits and starts. All of us have to navigate through this difficult air space. To succeed, we must continue the hard work to fix our flaws before they cripple us, and to identify and build on our strengths. The worst possible thing would be to take undue encouragement from today’s positive trends and revert to the old ways of doing business. The gallows (not Gallois) have not been dismantled. Those of us at AlliedSignal Aerospace think we’ve filed the right flight plan for our future by keeping a heading aimed straight at Total Quality. Our flight plan’s key elements: satisfying customers; eliminating defects throughout our processes; a profound belief that things must always change, and for the better; and motivating proud employees. You might call our overall strategy “Investing in Excellence.”

Investing to satisfy customers

The most important things we’re doing are making investments to better satisfy our customers, and working to transform customer relationships into partnerships.

We know that “time” now drives every market. We’ve got to have an insatiable itch for speed. Everywhere, we’re adopting process mapping and time-based measures. And we have to keep moving from being a function-based organization to becoming process-based.

At all our major facilities, we’re reconfiguring factory lines for lean manufacturing, incorporating the just-in-time principles of continuous flow and pull production. Once we pick up a product, we don’t want to put it down till we ship it to the customer. We’re investing millions of dollars worth of peoples’ time – in kaizen teams and in a passionate focus on eliminating non-value-added activities that slow our speed – in Toronto, as well as Arizona, California, Kansas, Connecticut and New Jersey. Our benchmarks each year are a 6% improvement in productivity and a 20% improvement in lead time year over year. Lean production can pay dividends right away. At one plant in Maryland, productivity was up 25% early this year, work in process was reduced 80%, and fill rates nearly tripled.

Achieving lean manufacturing is an essential part of satisfying customers, and so is maintaining and extending process-based quality by practicing kaizen. Continuous improvement means the status quo is never acceptable. Or, as former President Ronald Reagan liked to say, “status quo” is just Latin for “the mess we’re currently in.”

In the spirit of partnership with our customers, more than 60 of our own Total Quality teams are joint teams with customers – with all the airlines, every major airframe manufacturer, and even government agencies. I like to think we’re in a unique position in this industry because we supply nearly every segment – OEMs, small manufacturers as well as large, repair and overhaul, and avionics to the after-market.

Major customers of our Canadian operations include the government and the international airlines, as well as fellow companies like Aerospatiale, Boeing, Bombardier, P&W Canada, McDonnell Douglas, Airbus, British Aerospace and Liebherr-Aero-Technik. Here as elsewhere, we know we sure haven’t achieved 100% customer satisfaction yet, but we’re working hard to improve; we occasionally stumble, but we will keep on improving.

The easier we make it for customers to do business with us, the more of their business we’ll win. That’s axiomatic. What this increasingly means is integrating our products into systems, and systems into solutions. Today, vendors and suppliers are willing to play a greater role in working on designs at the system and subsystem level. That includes teaming up with airframe builders and sharing in the responsibility of helping develop new aircraft from the ground up. We share development risks as well as investment costs.

I know that Bombardier, for example, is using an international team that includes Learjet, DeHavilland and Shorts Brothers and us to develop the new Lear 45. Close teamwork with trusted suppliers leads to healthy savings in cost as well as speeds up time-to-market.

Our 777 Air Supply and Cabin Pressure Controller Team in Toronto recently received a splendid letter from Boeing praising them for exemplifying the qualities AlliedSignal strives to demonstrate: Integrity, Teamwork, Speed, Innovation, Performance. The Toronto Air Supply and Cabin Pressure Controller Team, Boeing wrote, “paved the way for a very successful Flight Test Program and 777 Certification.”

Investing in quality

Everybody in the world, of course, talks quality; there are over 6,000 books in print with “quality” in the title. Our task is to make sure we’re among the people who don’t just talk about it, but do it.

One of the most important things we’ve done is adopt a bold campaign of universal employee education in Total Quality. All 40,000 of our people – including the more than 1,400 here in Canada – have been taught the basics of Total Quality in a four-day program aimed at developing the problem-solving skills of employee teams empowered to make changes happen. Doing this helped us jump-start a TQ mind set throughout the company.

Twenty-five hundred Total Quality teams are in action throughout AlliedSignal Aerospace attacking problems and making improvements at many levels. Tomorrow there may be thousands more. Among many rock-solid achievements, they’ve already cut wheels and brakes repair and overhaul turnaround times to a typical average of six days – down from one month.

Now, we’re continuing to press ahead with increasingly ambitious quality goals and more sophisticated quality practices to make these kinds of results routine. This year we’re scheduling another wave of four-day Total Quality Leadership training sessions to give every one of us more advanced skills to apply to our individual organizations and day-to-day work teams.

Also, we’ve been working to earn ISO 9000 certification for all 44 of our facilities. Both our Montreal and Toronto operating units already are approved to ISO 9001. We’re not just committed to Total Quality but energized to achieve it. Of course, we realize that while we may be trailblazing in ISO certification, we know certification is just the beginning. The tough job of maintaining the systems in place at each site is just getting under way, which means we’ve got to keep ourselves motivated.

In addition to ISO 9000, we’re also adopting AQS, an Advanced Quality System that encompasses statistical process controls as well as variability reduction. And, we’re convinced of the power of six sigma defect reduction to help us make defects a rare and almost unheard-of event. Pursuing six sigma is our way of setting a lofty but achievable target – a 50% annual reduction in defects is our internal benchmark – a goal that also gives customers very high expectations for our product quality.

Already the majority of projects we’ve selected for 50% defect reduction this year are right on target to achieve it. In Toronto, for example, our System and Software Development engineers have cut software defects to just two per one thousand lines of code, twice as good as their 1995 goals. And they’ve boosted productivity 75% higher than their target for the year. Now they’re implementing an automated electronic System/Software Engineering Environment to reap further quality and productivity improvements.

To meet the ultimate challenge of becoming defect-free in all our processes, we’ve devised a corporate wide program of “Operational Excellence.” Reducing variation isn’t new, but Operational Excellence will focus on a product as it flows through the entire engineering, manufacturing, and servicing processes, not just when it’s ready to ship. We’ll track defects at each stage and reduce scrap all along the route. We expect the higher yields and lower inspection and rework costs to pay handsome financial dividends. In fact, AlliedSignal Corporation will save over $1 billion annually with this program.

Investing in change

We also expect, and are actively preparing for, continuous change in the future. “Operational Excellence” is not a short-term program. Neither is the idea of “Investing in Excellence.” AlliedSignal’s in it for the long haul.

But any strategy that hopes to achieve success must include something more than just a combination of techniques. True business success doesn’t derive from a simple formula, nor do a set of predetermined policies automatically lead to prosperity. There’s something else that’s needed: an attitude, a sense of organizational and personal self-confidence, a feeling of competitive urgency, in short, some sort of vital spark that can ignite performance. It’s this “spark” that separates companies that are determined to keep changing, to keep becoming more distinctive and more successful, from those that are content with merely reliable practices and steady but unspectacular achievement.

At AlliedSignal Aerospace, we try to convey a sense of controlled panic within our organization because, all around us, customers are demanding ever-higher levels of quality and competitors are making dramatic progress in delivering them. Each plateau we arrive at, someone else has led the way or is right behind. So, we need to keep changing, keep raising our standards, setting new targets and bolder goals.

Investing in our employees

So, in addition to investing in state-of-the-art quality processes and training, we’re also changing the way we lead our employees. Instead of managing through hierarchical layers, we’re now solving problems and revamping processes through cross-functional teams of employees from different disciplines and reporting relationships. Instead of just tapping managers’ brains, we’re asking for ideas from every single employee on how to do his or her job faster, smarter and more economically.

People are excited to be asked. They feel a great sense of satisfaction when they see that not only is management serious about change, but also willing to implement their ideas. Building proud, capable, self-assured, forward-thinking employee teams is the best way we know to fulfill our vision.

We’ve upgraded our supply of talent. First, by confronting the tough reality of having more layers of employees than the business could support. But becoming world-class involves a good deal more than census cuts. Over the past few years we’ve hired more than 3,000 professionals around the world to lead us on the path to distinction. We did this in the face of a depression throughout our markets: industry revenues were declining 10% per year (we were declining at 4% – though we’re growing about 8% this year). We reduced our salaried payroll by a total of 10,000 – but still we hired these 3,000 from companies in and out of the industry, and from the top universities in the world. To move forward quickly, bold strides like this were essential.

I can recall several years ago, soon after getting my present assignment and just as the industry was starting into its long slide, I happened to be in Toronto for a plant tour. I asked one of our young tour guides how she thought the Canadian workforce would cope with the changes that seemed inevitable if our company was going to remain competitive. “No problem,” she replied, “We’re up for it.” At the time, I thought her remark was a bit presumptuous since, historically, you know, Canada has a reputation of being a conservative nation. But, as I stand here today, I’m pleased to say that this young woman was quite right!

Canadians are certainly “up for it.” In fact, it’s been my experience that Canadians are clearly leaders in the change process! Our more than 1,400 Canadian Aerospace employees are among AlliedSignal’s most productive around the globe. In 1995, they’re already on track to exceed $150 million US dollars in sales revenues – 85% exported. Our AlliedSignal Canada facilities span the country from the Atlantic to the Pacific and are growing in number, and our work teams here cross sectors, business units and national borders with ease.

Realizing a return on our investments

The kinds of changes we’ve made to earn customer kudos, quality certification and employee support are fundamental, not superficial; pervasive, not incidental; enduring, not fleeting. Have they made a difference? The answer is a resounding yes. Do they carry a cost? The answer is also yes. Investing what’s needed to train employees in quality and then both implement their training throughout the organization as well as upgrade individual processes costs us in the tens of millions of dollars annually. Investments of that magnitude must have specific and tangible results.

And, make no mistake, the payoff has been handsome. Overall our structural costs have declined by 30%; working capital turns have increased by two; the cycle times have been reduced by one-third. We consistently set records in profitability, regardless of the economic cycle.

But the most eloquent testimony to the power of the kinds of changes we’ve made is in our win rates, which have risen substantially. We track them with a rolling three-quarter average, and for some recent periods we have won as much as 80% of the available business, double the past. Our Canadian win rates have been a direct result of strategic partnering with the government of Canada.

It is important for Canada’s leadership to continue its strategic investment environment – despite funding uncertainties at the government level – in order to keep the aerospace industry growing in Canada. Your investment R&D tax credits have been the best in the world. That’s reflected in all of our companies wanting to do business here. We hope tax credits and strategic investment can be maintained, so that the best companies aren’t tempted to move elsewhere.

Globalization: the challenge of the 1990s

So where do we go from here? Well, one of our major corporate strategies at AlliedSignal is growth through globalization. Not only seeking major new markets like India and China, but also serving the entire global demand for selected products through individual company centers of excellence, or “world product” mandates. We prefer when our products are built in just one place, to productively meet the demanding requirements of AlliedSignal customers wherever they are located.

Our Canadian manufacturing facilities have prospered on a strong foundation of building a world product mandate for the electronic controls for environmental control systems. Now, they have these mandates for power management and generation systems, as well as for ice detection and protection systems. This year, they’ve scored a worldwide hit with our Electro-Thermal Ice Protection System, which is already going on board nearly 170 Scandinavian Airlines, Swissair and Continental Airlines MD-80s. And for the new Boeing 777, they’ll produce 300 pressure/temperature/flow sensors and the air supply cabin pressure controller. And our Canadian support operations enable us to contract for the repair and overhaul of aerospace products from over 160 international OEMs.

For all of us in the aerospace business today, our market is global and so is the competition. In the future, I believe we’ll increasingly find our mutual success tied more and more to global opportunities.

The market challenges and traumas of the last few years have presented us with an opportunity to become a lot better at our business than we were. Our challenge now is to keep our hard-won edge. We must remain uncomfortable with the organizational structures we’ve put in place and keep investing in our workforce. Even with the quality gains we’re making, we’re still a long way from reaching the quality levels of the very best in the world, like Toyota and Motorola. And we certainly can not become complacent in our relationships with our customers. In today’s competitive environment, customers are much too valuable to take for granted.

THE INTEGRATION OF TECHNOLOGY

Richard C. Notebaert
Chairman & CEO, Ameritech

Wall Street Journal Technology Summit, New York, October 6, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

It is a genuine pleasure to join you this afternoon – and an honor to be among the prestigious group of industry leaders The Wall Street Journal has gathered for this two-day summit. I couldn’t help but notice that I am the only speaker on the agenda who leads what used to be known as an RBOC. Maybe that’s because our ranks are shrinking! Or perhaps, as someone suggested to me, my inclusion on the program might be in recognition of the place companies like Ameritech have held in the heritage of this industry.

Indeed, we do take pride in our century-long tradition of delivering outstanding communications services – as well as what that has meant to the progress and prosperity of this nation. To tell you the truth, though, we spend very little time thinking about that. Instead, our attention is riveted on the future, and especially on the far more aggressive role we intend to play in the 21st century as compared to the contributions we made in the 20th. Our objective comes as little surprise to many of you. But I suspect at least a few members of this audience reacted to what I just said with a fair degree of skepticism. After all, you’ve read the opinion pieces declaring us so out of touch we’ll never know what hit us. You’re familiar with the conventional wisdom that we’re saddled with a decrepit infrastructure. And then there’s the charge that really makes me smile – that we move so hopelessly slow we might as well accept eating dust as our destiny.

Of course, if you’re a competitor of mine, I’d just as soon you accepted all that nonsense as reality. In fact, you should just feel free to take a little after-lunch siesta and I’ll wake you when I’m done. But for those of you who intend to leave this conference with a comprehensive understanding of where this industry is headed, let me offer a bit of insight into our view of that future. Where I can, I’ll represent the entire segment – the incumbent local exchange carriers, or ILECs, if you will. Of course, the examples I’ll share are necessarily from Ameritech – first, because that’s what is most familiar to me, and second, because I truly can’t think of any other company with a better story to tell!

First of all, we get it. We understand that customer requirements for communications solutions are exploding. That these solutions are integral to how our customers do business and to how successful they will be in the competitive global marketplace. And that these solutions hold enormous potential for those of us who look at this business through the eyes of the customer – and then respond with flexibility and technological savvy. If that sounds a bit too theoretical, let me share some information that’s a good deal more concrete. On the network investment side, we’re putting our money where our mouth is. Just four years ago, in 1994, we spent US$1.9 billion on our in-region infrastructure. This year, we’re spending US$2.9 billion, in a combination of wireline, wireless, internet, long distance, new advanced broadband for cable and more. That represents a significant spike in our investment. And an extraordinary commitment to serving customers.

What’s more, those customers are indeed reaping benefits. Take new services. Unlike many of our counterparts and competitors, Ameritech only talks about new services when they are actually available. That’s our policy. So there will be no scoops here – no hype about possibilities still on the drawing board. Instead, let me mention two products that we’ve rolled out just in the last 30 days. Take Ameritech Privacy Manager, a breakthrough service that stops most unidentified telemarketing and other unwanted calls. When a call arrives with Caller ID designations like “unavailable,” or “blocked,” the caller is asked to record his or her name before the call rings into the home. When that happens, the customer is told who is calling and then has the option to take the call, reject the call, or play a pre-recorded message asking that his or her name be added to a “do not call” list. (By the way, that is a legally binding request.) The best news is that in tests of this product, we learned that seven of ten unidentified callers refuse to give their names. That means 70% of unwanted calls no longer interrupt our customers! The phone never even rings. And is that something customers care about? Well, they ordered more Privacy Manager in the first two days than our sales projections for the first two weeks!

Or take Ameritech’s AutoVAN service that connects business customers to the Automotive Network eXchange or ANX. The ANX is an extranet that enables the Big Three automakers to share email, files and computer-aided designs with their suppliers – a far better solution than the proprietary and redundant network connections that suppliers had to maintain in the past. Now Ameritech AutoVAN provides the connectivity, equipment and service that suppliers need to access the ANX network. Suppliers can buy router service, using either frame relay, SMDS or ATM access at speeds ranging from 56 kilobits per second to T3. And simplicity is not this product’s only advantage. It also offers outstanding security for the proprietary information shared between the players in this highly competitive industry.

AutoVAN illustrates the direction companies like Ameritech are headed. We are focused on offering new services that meet real customer needs. And we understand that those needs increasingly require innovative data applications. In fact, for Ameritech, 1998 has become something of a watershed year. For the first time, half of the traffic we carry will be between computers instead of people. And if data traffic continues to grow at its present rate, the percentage is predicted to grow to something like 99% of all network traffic minutes by the year 2010.

We get it. Those who work on the data side of our business are people on a mission. They constantly raise the bar on cycle times as they stay on target to generate US$1.5 billion in data revenues in 1998. They build relationships that offer insight and experience into virtually every technology that comes down the pike. As one example, Ameritech has surpassed AT&T as the largest carrier reseller of Cisco equipment – and we are the only carrier with both Bay and Cisco certified data expertise. Most of all, our people live for the implementation of data solutions – wherever customer needs demand them and regulatory impediments can be overcome.

Our people celebrated the University of Michigan’s decision to offer Ameritech ADSL connections to 20,000 off-campus students and faculty members. In one of the nation’s largest commercial deployments of ADSL, this academic community soon will have a remote link to the university’s data network that provides access to the internet and a host of other resources at speeds 50 times faster than standard modems would allow.

And they take great pride in Chicago’s Network Access Point, or NAP, run by Ameritech to enable ISPs to exchange their internet traffic. Thanks to sound technology decisions made when the National Science Foundation awarded us this responsibility back in 1994, we run the world’s largest ATM NAP – one that carries more than 8 terabytes of information a day, and that doubles its traffic every six months.

But increasing volume is only part of the story. Ameritech’s NAP architecture has been copied by other facilities around the world. And the success of our NAP – as well as the key role we play as the first carrier to be invited to join the Internet 2 consortium – has led to additional responsibilities. For one, the National Science Foundation selected the Chicago NAP as America’s international hub, officially known as the Science and Technology Advanced Research Transit Access Point, or STARTAP, and commonly referred to around Ameritech as NAP 2. Now international internet traffic that is bound for any of the vast American research and education networks is exchanged in Chicago. We have connections in Singapore and France, Japan and the Scandinavian countries. I’m even told we have built quite a brand presence in Israel.

And the momentum continues. Ameritech’s NAP also provides connectivity between the high-performance data networks run by various branches of the US government. In the past, networks like those operated by the Department of Defense or the National Institute of Health spanned the country but were not interconnected. Then, about six months ago, we began to remedy that situation by providing connections for the networks run by our first two federal government customers, NASA and the Department of Energy. Now, don’t wake any of the naysayers who may have taken me up on the offer of a little shuteye. But I trust the rest of you understand that incumbent providers are hardly clueless. And that we are aggressively reinventing our networks and ramping up our expertise. We’re determined to improve the delivery of existing services and to effectively deliver what customers will expect from us in the future.

After all, our fundamental skill-set is the integration of technology. That’s a key component of the long and successful heritage I mentioned earlier. Our predecessors moved from an operator-centered environment to one based on direct dialing. More recently, we moved from an electromechanical to electronic facilities, then we successfully transitioned from analog to digital capabilities. Putting ATM in our network is hardly a revolutionary concept for us. It is simply a logical step in a long-standing evolutionary process.

That process is sharpened by the extraordinary talent that has joined our business from outstanding organizations like Sony, Procter & Gamble and American Express. With 30 years at the company, I’m something of an anomaly. Today, five of the seven members of my senior management team, 64% of our business unit presidents and more than 40% of our product managers have joined Ameritech from careers outside our industry. And their arrival has sparked incredible synergies, as the technical and service expertise of career employees joined forces with strategic, financial and marketing skills honed in leading competitive businesses.

That workforce does not fabricate products. It integrates technologies. But first we understand them. We look long and hard at these things that don’t quite mesh with our architecture. We watch their development and assess their potential benefits to our customers and our company. We work with them through partnerships or venture capital investments. And if we introduce them, it’s at the appropriate time, when their reliability, quality and price points make them desirable to customers.

We’re perfectly comfortable with this thoughtful approach to the future, but it tends to bother those who would like us to put a stake in the ground and declare our preference. “Is it going to be IP over ATM?” they ask. “What’s your commitment to SONET? How will ADSL factor into the future scenario? Will you introduce cable modem to those customers passed by your broadband cable plant?” When someone tries to pin us down, we explain that we are “technology agnostic.” In other words, we are far less concerned about choosing a technology than we are with achieving effective solutions for our customers. That’s because, in our view, most customers of the future will not give a rip about the technology running under their applications.

I concede that today’s early adopters do have a great deal of technological savvy – they’ll ask for the platform they want by name and then give you the specific parameters they expect it to meet. But once solutions have migrated to a larger market, that kind of sophistication will no longer determine customer decisions. They’ll be driven by reliable, high-quality solutions. And that’s what drives our technology decisions as well. So we get it. And our fundamental skill-set of technology integration is serving us well. But can we move fast enough? That’s always the question. And there are actually a number of ways we could frame the answer.

The simplest, of course, is just to say: yes, we can. The fast-paced culture we have built over the last few years has enabled me to talk to you today about brand-new services, impressive data revenues and responsibilities including federal government data connectivity and international internet traffic. These are hardly stories told by a sluggard.

A variation on the answer might be: yes, but sometimes we might seem slow. That answer would point out that statistics often fail to reflect the whole story – especially when comparisons are drawn between a large incumbent provider and a startup with no plant or customers. Say both organizations start down the same track at the same time, with the startup building new plant and the incumbent changing over its assets. Who will reach their goal first?

I’d probably bet on the startup to be quickest to 100% completion. But the incumbent who is only at 20% implemented by that same point may be delivering benefits to many times the number of customers that the startup is able to serve. Can we reasonably point at the incumbent’s progress and say they’re moving too slow? I don’t think so.

And finally, there’s the answer to the question that shouldn’t even be a factor in America’s free-market economy: that to far too great an extent the speed at which America embraces the digital future – and the contribution companies like mine can make to that objective – lies not in our capabilities, but in the hands of policy makers.

There are scores of regulatory decisions that are slowing the process in favor of micro-management rather than speeding it to foster the delivery of services the public wants and needs. Of those, the FCC’s ambiguous response to our 706 filing is only the latest. For those of you who are not familiar with that filing, 706 is a provision in the Telecom Act that requires the FCC to remove regulatory barriers to the deployment of these advanced services. We had anticipated early on that regulators would order data applications to be delivered through a separate subsidiary, so we set our business up that way several years ago. Therefore, that so-called breakthrough portion of the FCC decision was no surprise to us. But we also anticipated – based on tremendous demand from customers for high-speed data capabilities, as well as preliminary opinions expressed by some of the commissioners themselves – that the delivery of data services would be subject to some long distance relief. That clearly was the best way to jump-start investment in this critical area. But no dice. Anti-competitive forces once again made their case for the status quo. And let me offer just a glimpse of what that looks like.

In our headquarters state of Illinois, there are 14 LATAs. Fourteen! That’s more than even California has to deal with. Say that Sears, which is headquartered in suburban Chicago, wants us to provide advanced data capabilities between its offices throughout the state. Here’s the FCC’s solution: build separate network facilities in each of these 14 LATAs. Then negotiate with inter-exchange carriers to hand off these connections across the 13 LATA lines. Then work up a business case based on these ridiculously wasteful and expensive hoops we’ve jumped through, and somehow go to the customer with a cost-effective solution.

It can’t be done. Couldn’t be done before the 706 decision and can’t be done now. The FCC had a chance to look through the windshield and move America forward on that fabled information highway. Instead – once again – they kept their eyes locked on the rearview mirror. And once again, they put the brakes on anything that resembled forward movement. We can only hope they will remedy this when they revisit the 706 issue in February.

Frustrating? Yes. For us. For our counterparts and business partners. For those who understand the potential that companies like ours have to spur America’s global competitiveness and economic growth. And especially for customers who have real needs that we could fill in a heartbeat, if this nation’s regulatory environment were more about vision and less about market manipulation.

But if we’ve learned one thing from the heritage of service I mentioned at the outset of my remarks, it’s tenacity. Now combine that with our broad technological competencies, our substantial financial and human resources, and the enormous strides we’ve made in marketing savvy and competitive spirit. Then place all of that on the foundation of our absolute passion for looking at this business through the eyes of customers – and our uncompromising determination to do whatever it takes to serve those who count on us – and have, for generations. We’re excited about the future and the part we’re going to play in it.

WHAT GLOBALIZATION MEANS TO CANADIAN UNITY

Angus Reid
Chairman & CEO, Angus Reid Group

The Speakers Forum, Toronto, May 8, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

Globalization has been with us for a while now, and it continues to gather force. It is, of course, primarily an economic phenomenon. The global economy features reduced trade barriers and sophisticated new information networks that create ever-increasing volumes of international commerce and investment; worldwide competition brings down prices; production tends to move toward pools of cheap and efficient labor; and so on.

But globalization is also a cultural phenomenon. The homogenization of the world economy also creates pressures to homogenize values – you are, to some degree, what you buy. And values, in turn, define nations. Nations have traditionally wrapped their borders around discrete and recognizable patterns of thought and behavior. Without nuances of political or social differentiation based on traditions and values, it becomes increasingly difficult to make a case for the nation-state.

This is of particular interest to Canadians. After all, our closest neighbor, that last great superpower, is the fountainhead of the cultural onslaught that is taking bites out of traditional values around the world.

Canadians have always been more vulnerable to American influence than citizens of more distant countries, which is one of the reasons that there is a smaller gap between typical Americans and typical English-speaking Canadians than there is between Americans and most other peoples. We Canadians like to think we can spot the differences immediately, but anyone who has traveled internationally knows that the world has trouble telling Yankees and Canucks apart.

Of course there is the argument that Canadians may actually be less vulnerable to psychic takeover than are other nations these days, simply because Canadians have always had to struggle to hold onto their identity, whereas more distant nations are only now discovering that, in a figurative sense, they have also become America’s next-door neighbors.

That’s an interesting argument. It suggests that we Canadians have been inoculated for years, making us more resistant to the bug that’s going around. But one set of numbers that we gathered for our World Monitor clients suggests that this just isn’t true. In a poll that the Angus Reid Group conducted in 32 countries, based on the opinions of 17,761 respondents, we asked whether it is the responsibility of national governments to reduce the difference in income between the rich and the poor.

In most countries, a decisive majority of respondents agreed that it was the government’s responsibility. Germans, for instance, were 75% in favor, and urban Brazilians came in at 83%. At the other end of the scale, only 28% of Americans felt the government has a role to play in lessening the economic disparity of its citizens. Can you guess which nationality came closest to the Americans? Canadians, at 52%.

This still represents a considerable difference in attitudes. Nevertheless, it is worth noting that Canadians, who have been most influenced by the Americans over the century, now think much more like their neighbors than do the citizens of other countries. With the new ease of international communications and increased US economic leverage, will trends in US thought start to pervade more far-off countries as well?

The next question is whether it really matters if societies become interchangeable. After all, Margaret Thatcher used to argue that societies were a non-issue; that only individuals count for anything. Which isn’t that different from the dominant message spilling out of the United States, home to Horatio Alger.

Certainly there is truth to the adage that we humans tend to relate pretty well as individuals, but as soon as we start separating into groups, we tend to divide into “us” and “them.” Which can, of course, lead to finger-pointing, which can ultimately lead to the throwing of spears and missiles.

Pierre Elliott Trudeau has been forever suspicious of nationalism, particularly nationalism based on heritage and entrenched beliefs. His affection for Canada as a nation always seemed to be based on his perception of it as a collection of liberal-minded people rather than as an identifiable tribe.

Yes, there are good arguments for spreading common values, and the Americans are experts at making them. On the other hand, Canada, the United States and their allies have fought and won two tough wars in the last 60 years against tyrants who planned to make the world as homogenous as they could, in their own images: Hitler’s Third Reich, featuring national socialism; and the Soviet Union, featuring communism. Wouldn’t it be ironic if the United States played a major military role in defeating such ideologies of sameness twice – then led an economic march to sameness?

Can’t happen, the Americans will tell you, because their national values are based on the spirit, and the rights, of the individual. Hmmm. If the whole world thought like Americans, would the world be a more individualistic place? Interesting question.

The question at the top of all this musing I am doing, however, is “What does globalization mean to Canadian unity?” So I had better address it. I think our polls indicate that, in terms of the traditional unity worry – relations between Quebec and the Rest of Canada – globalization may actually be performing as a bonding force.

Separatist sentiments have for decades burned passionately in the souls of many Quebecers, most particularly in those of young Quebecers. But wonder of wonders, in a poll we completed in June in Quebec, 44% of Quebecers between the ages of 18-34 said they would vote Liberal, compared to 41% who said they would vote for the Parti Québécois. That isn’t an overwhelming margin, but it does put the majority of the youth vote in the federalist camp for the first time in two decades.

This could always turn out to be a short-term phenomenon. Unemployment is high in Quebec, however, and young Quebecers see as clearly as anyone else that – like it or not – if you don’t look outward in the modern economy, your long-term chances of economic success are likely to suffer. The Parti Québécois can argue all it wants that, since nationhood isn’t as important as it once was, a Quebec nation would do about as well as a Canadian nation on the huge international playing field.

Nevertheless there is a sense of inwardness about the separatist message that doesn’t jibe with the new marketplace. Céline Dion may not be the passionate young Quebecer that Gilles Vigneault was, but is she roundly denounced as a sellout in her home province? Among a minority, undoubtedly, but most Quebecers adore her.

In short, for those many Canadians interested in not having a gaping hole in the middle of the Canadian map, globalization could well prove useful at keeping Canada intact ad mare usque ad mare. On the other hand, will what remains intact continue to be something special, the United Nations’ perennial No. 1 place to live? Or will Canada succumb to the endless erosionary pressures that the waves of globalization bring with them?

There was an intriguing line in the Ottawa Citizen this summer in a book review by Wayne Grady, author of The Quiet Limit of the World. He said: “If we all live in a global village, nobody lives anywhere.”

Will Quebecers reject separating from something special, called Canada, in the 20th century, and end up being part of nothing special, still called Canada, in the 21st century? After all these years of disputes over nationhood, wouldn’t that be the ultimate irony?

ADVANCES IN COMMUNICATION TECHNOLOGY AND THEIR IMPACT ON CONSUMERS

Harold Greenberg
Chairman & CEO, Astral Communications Inc.

The Board of Trade of Metropolitan Montreal, November 28, 1995
Published in The Corporate Report No. 16 (February 29, 1996)

As people who know me will tell you, I am not a shy person. So get ready, because I am going to use some dirty words in my address today: words like culture, protection, vision, leadership and profit. I also want to talk about a new word in the language of a new world. “Convergence” is the new word. It means uniting telephones with television, computers, cable, satellites, publishing and entertainment.

Through satellites, cable and the telephone, we can now pay our bills, view what we want on TV, when we want it, send or receive messages anywhere in the world, and even go shopping electronically.

Bringing all these signals of information and entertainment into the home is what you’ve heard called the information highway. It’s really a superhighway, and it’s turning the world into a supermarket of almost instantly accessible programming. This is fantastic. Soccer from Europe, theater via satellite from London, films from France and, of course, anything and everything from the US.

There are now over 130 communications satellites in space, with more appearing every month – and their footprints are getting bigger and bigger. A new Tokyo satellite will serve Russia, China, Indonesia, and include English-speaking Australia, and New Zealand. A European satellite will cover every country from Finland in the north, to Spain and Italy in the south. Cultural borders are disappearing.

I don’t have a crystal ball to predict what the new communications environment will be or where the development of new media will lead. One thing is certain, though: the 21st century will be an exciting time on the information highway. Canadians have to act quickly or become, as our children would say, roadkill on the information superhighway. However, if we take up the challenge, Montreal could become a hub of the converging communications universe.

Keep in mind that despite a technological revolution, creative content will remain paramount. Like consumers everywhere, Canadians want to be educated and entertained. But unless we are creating programs that people here want to watch, technology will just allow foreign programming to leapfrog over our national boundaries.

Beyond our borders, our English- and French-language producers have gained international respect. If our communications industries are to prosper, we will have to continue to make programming that will enchant the rest of the world.

As former Chairman of the Canadian Culture Community Communications Industries Committee, I fought to keep cultural matters out of the North American Free Trade negotiations, because a country that loses its ability to express itself is no longer a country.

As a board member of Partnership pour le développement économique de Montréal, I want the Federal Government and the Government of Québec to do more to prevent the information highway from becoming a one-way street that promotes the American way of life. It must encourage our Canadian creative talent. Supporting the communications industry will also protect Canadian jobs.

You will recognize as business people that cultural industries are not some obscure activity that benefits just a few intellectuals. In Canada, culture and communications is the ninth most important industry, one of the fastest growing sectors, and it employs some seven hundred thousand people, directly or indirectly. The development of content for domestic and international markets is already a major source of employment and economic growth. This is of particular importance for us here in Montreal, where the communications industry already generates revenues of one and a quarter billion dollars a year and employs twelve thousand people.

I doubt that many people understand the size of this business and the number of people who work in it. In Canada, our industry touches people’s lives every day, and contributes more than $25 billion, or 4% to the gross domestic product.

We must create and produce our own programs, with content that embodies thoughts and opinions which reflect our national realities. Naturally, I am not suggesting we restrict foreign companies from doing business in Canada. Ottawa has reviewed limits on foreign investment in communications industries in a bid to raise more capital, but Canadians will still maintain majority ownership.

The economies of scale and the proximity of the larger, more integrated US industries have always represented difficult challenges to the survival of the industry in Canada, be it English or French.

In the 1970s, Canadian-content rulings for radio spawned a dynamic recording industry here. In the 1980s, efforts by the Federal government through Téléfilm’s Broadcast Fund and SOGIC, a provincial government investment agency, helped increase Canadian content on Canadian TV. Quebec has its own locally produced programming of French TV, and it is by far the most popular type of viewing. The industry here has succeeded in creating its own star system, and its own supporting press which reflects Quebec’s interests and sense of humor. In English-speaking Canada, US shows continue to grab ratings. But we still maintain an expanding Canadian production industry that can and does compete with the best on US television here and on the American networks.

Direct-to-home television, the “death stars,” as they are known – satellites and other pervasive technologies that beam programs across borders – must continue to meet Canadian content regulations and cultural needs, or they may spell the death of Canadian content. If we allow ourselves to be flooded by hundreds and hundreds of American channels, offering thousands of American programs, our content will simply be drowned out.

We are about to go from a world of broadcasting to narrowcasting and perhaps even microcasting. The exchange of information and programming will be dictated almost solely by individual taste and need. Fiber optics, digital compression, and more and more satellites will deliver any one of hundreds, perhaps thousands, of programs to consumers when they want them. Your TV, linked to a personal computer, tied to phone and cable, will be like a cultural supermarket: aisle after aisle, packed with various kinds of programming. It’s imperative the supermarket shelves display quality Canadian programming.

Can we compete with Americans who spend millions of dollars on an hour of TV, tens of millions of dollars per hour on a feature film? To do it, cultural policy supporting the industry will have to be strengthened by the Federal and Quebec governments. We must spur our governments at all levels, including the municipal, to provide the type of industry support that is taken for granted in some other countries. We’re not talking charity; we’re talking good business.

Our programming provides a glimpse of Canadian talent to the world. And despite some of our shortcomings, we are the envy of a lot of countries which see that we continue to exist and flourish just north of what a noted journalist recently called the American elephant – the world’s largest producer of programming content.

We have been able to overcome the dominance of American TV by our knowledge of our marketplace. As Canadians, as Quebecers, as Montrealers, we can point with a great deal of pride to our outstanding achievements in the communications sector. We don’t have to look far beyond the walls of this hotel to find examples of world-class communications enterprises. I am talking about companies which took root here in Montreal and which now command stellar reputations in North America and around the world.

To name a few: BCE, Bell Canada, Nortel, Teleglobe, the National Film Board, SoftImage, Cogeco, Vidéotron, CFCF, Discreet Logic and – one I am particularly proud of – Astral Communications. And there are scores of individuals who have made their mark, including Norman McLaren, Denys Arcand, Claude Jutra, Leonard Cohen, Frederick Bach, Norman Jewison, the Héroux and Fournier Families, André Lamy, Robert Lepage and many others.

We have been leaders in cable, broadcast TV and specialty services, as well as developing state-of-the-art technologies. We have been innovative in the distribution of technology and programming to the world. Canadian communications companies are financially involved in North America, Europe, South America and Asia.

Look at SoftImage, Discreet Logic or Alias. Started by Canadian entrepreneurs not so long ago, they have become leading-edge developers of software to service the international video and film markets. Their products have been used to create 2D and 3D special effects in Aladdin, Jurassic Park, The Mask and Forrest Gump.

My own company has become a leader in entertainment and our Broadcasting group has become Canada’s largest provider of pay, pay-per-view and specialty television services. Over the years, we have become a catalyst between the creative community, technology and delivery of programs to the consumer. We contribute to the creation of films, video and interactive multimedia programming for audiences here and abroad. Right here in Montreal, we now operate the most advanced dubbing studio in the world.

When we established Astral Multimedia to finance, develop, create and distribute educational and entertainment-oriented, multimedia programming for world markets, it was an extension of our philosophy of creator to end user. We have just begun to market a program entitled “Man in the Sea,” an interactive encyclopedia of the marine habitat and human life underwater. We are currently working with creative teams on nine other multimedia projects, under development with partners in Canada, the US and in Europe.

We recently acquired a major interest in Ottawa-based Artech Digital Entertainments Inc., a leading developer of computer-based games, interactive broadcast software and multimedia entertainment. Their products are used throughout North America by Sega, Nintendo, Corel, Viacom and Fox. We operate the largest Canadian-owned, release-print laboratory and provide technical services to Disney, Warner, Fox, Paramount, and Universal. Astral has long-standing partnerships with TF1, Europe’s largest private television network, France 2, the most popular of France’s publicly-owned networks, and recently signed an agreement to participate in the worldwide production of multimedia fiction, animation and documentary programs.

We also just established a joint venture called Mediatoon with Éditions Dupuis, one of Europe’s largest publishers. Our new venture company will develop, finance and distribute programming to supply the international demand for children’s animated programming. Right now, we are financing and developing the animated series Spirou & Fantasio, Flash Gordon and Quasimodo, as well as a second series of Tales of the Wild films, based on the adventure stories of Jack London. Our acquisition of programming now extends to multimedia, online products as well as CD-ROM.

Astral’s affiliate, The Movie Network, provides $1 million a year through FUND (the Foundation to Underwrite New Drama for Pay Television) to assist Canadian writers and producers in the development of original scripts and concepts to be made into movies. Our network, Premier Choix: TVEC, has a similar program.

We are very proud of our industry’s vision for the future and we play an important role. But we and others can do more and should be doing more. Federal and provincial programs to support and promote programming need a shot in the arm.

The Federal Government’s Information Highway Advisory Council has recommended increased tax credit incentives for Canadian producers of content and investors to support new products. I support these incentives. I remain convinced that the protection and promotion of creative properties is a generator of wealth and can help revitalize Montreal.

A skilled, flexible and well-educated work force provides an important competitive advantage for any national economy. If we believe that cultural communication and entertainment represent an important industry, we will need trained workers. So we must place greater emphasis on education, training, and apprenticeship programs in the communications arts at the CEGEPs and universities in Montreal. We are planning an advanced training program to develop the work force needed to implement and provide the expertise.

Times are changing quickly and industry and government have to change with them. And we have to change along side the consumer. Pick up any US trade paper and you will see ads from Disney, Fox, Warner and Dreamworks for trained animators. Over 50% of the animators at Disney come from Canada. Let’s work to keep them here to build our industry.

The consumer will want to be informed, educated, and entertained. He or she will want these things conveniently available, affordable and of high quality. To satisfy the 21st Century customer, and compete with interactive news, education, movies-on-demand, home shopping, video games, major events and general online communications, all of us will need vision and imagination.

We must realize that technology is nothing if it does not contain the programming to attract people’s attention. As Montrealers, we have to understand how we can take advantage of the situation and become an important part of the communications universe here and abroad. I’ve lived here all my life. I know that Montrealers can compete with the world when it comes to quality cultural products, and we can do that while preserving our own sense of self, our own identity.

In terms of population, we live in a small country so we may need a little help; government and business will have to work closely with the consumer. If we want to avoid being roadkill on the information superhighway, we need to demonstrate new vision and leadership.

Now, before you get rid of me, I want to talk a little bit about vision and leadership. This great city, Montreal, has rarely been without either. And it’s rarely needed it as much as it needs it today. I believe it’s time we talked about how passionately we feel about this city. My city, and that of my parents, and my grandparents. There are five generations of us here.

There is something unique about Montreal. Regardless of heritage, background, nationality or language – and in Montreal we speak a variety of them – we work together and we create a dynamism that transcends partisan interests.

Montreal has been a leader in the development of research and technology. You only have to look around this room. We’re sitting with people from Vidéotron, GTC, Teleglobe, Bell Canada, Northern Telecom, and of course Astral. They’ve all taken important leadership positions.

The fate of this city lies in our ability to continue being leaders. When I leave this room today I want people to say, “You know we’ve got a lot to fight for. Sure, the environment over the last couple of years has been tough. But let’s use our energies positively.”

Why don’t we concentrate on getting things done, on enhancing the lives of individuals who want to be able to stand on their own two feet, who want to make this a better world? My humble beginnings only gave me the desire to improve myself in this wonderful city, in this wonderful province, in this wonderful country. That is the thing I would like each of you to think about most of all. When you want to succeed badly enough, you are not afraid to speak out and take chances. You are not afraid to voice what’s in your heart, and what’s in your mind.

I’m thinking about our children. There’s going to have to be constant training programs, updating of technology and knowledge so that our children can perform in an environment that’s progressive and positive. The danger of not doing that means we will be second class. I don’t think anybody in this room believes that as Montrealers we’re second class to anybody.

I’m a Montrealer. I believe in this city. I believe in the people. I believe in vision. I believe in the people sitting around the tables here who have done so much.

And I say this to you – people of the Board of Trade – to the political people who are here, and I said it to the Committee for the redevelopment of Montreal, of which I am a member: we must bring back the vitality that we had here. We’ve got to bring back the pizzazz. And my personal belief is: we can do it!

PLAIN TALK ABOUT THE FUTURE

C. Michael Armstrong
Chairman & CEO, AT&T

Internet World, New York, October 8, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

My aim today is to put forward some plain talk about the internet, AT&T’s role in it and our future with it. It took radio 30 years to reach 50 million people. It took 13 years for TV to do the same. But the worldwide web reached twice as many users in half the time. Today, more than 100 million of us have logged on to the internet, and experts project there will be more than 300 million internet users around the world by the end of the year 2000.

What are these technological trend lines telling us at AT&T? Let me start with a tale of two purchases. A colleague of mine bought a new car recently. He did all the things a smart car buyer’s supposed to do. He checked out the features. He went over all the options. He shopped around for the best price. And finally he bought the car. The only thing he did not do was visit a dealer showroom. At least not until he was ready to pick up the car. Everything else he did over the internet. The second purchase I have in mind had a slightly higher sticker price than the one on the window of my colleague’s car: AT&T’s acquisition of TCI, the nation’s second largest cable TV company.

What’s the connection between my colleague’s new car and AT&T’s purchase of TCI? What made both possible is that the world has accepted a new standard, IP, or internet protocol.

The IP standard gives the telecom industry a technological freedom that didn’t exist just a few years ago. If a television signal, a phone call and a computer file are all digital, there’s no reason to confine them to separate lines. IP technology is literally erasing the boundaries between television sets, telephones and computers.

TCI will give AT&T a path into almost one third of all American homes. But more than that it will give us the ability to exploit the convergence of TV, PC and telephone to create a whole new generation of communications, information and entertainment services. It will also remove one of the biggest obstacles to realizing the full promise of the internet. Bandwidth isn’t the only problem on the internet. The on-ramps are a real bottleneck. Accessing the internet through the local telephone connection is more like what the computer industry used to call “the wait state.”

High-speed broadband access over TCI’s upgraded cable plant will be a very different experience. It’s instant “on” and always on – no need to dial up and wait for connectivity. Consider the capabilities a digital cable pipeline will provide the typical family. The cable box on your TV will not only let you order pay-per-view movies, it will be a virtual communications center. When you come home, you will be able to turn on the TV, the PC or the telephone to retrieve all your messages: email, voice, chat room or fax. Or if you’re on the road, have them read to you over your wireless phone as the network translates text to voice automatically. The cable box will also give you access to the internet at speeds a hundred times faster than today’s modems.

And the same cable that brings TV and internet into your home will give you as many telephone lines as you would like: one for mom and dad, one for the kids, one for the fax and one for the PC. Each with its own distinctive ring. Those of us with daughters have a particular appreciation for that! You will take as many lines as you need and pay only for what you use. Have a visiting mother-in-law? Point and click to provision another line for her own phone number and message center. Need caller ID, call waiting or call forwarding? It’s packaged in a simple, single, low-cost feature set.

Now imagine what bringing that amount of IP bandwidth to people’s homes will do for business. First, it will fuel electronic commerce, already a $20-billion industry, growing at a compounded rate of 16% a month, according to Ernst & Young. Second, it will fuel a boom in telecommuting and working at home, because people will have the same high-speed access to information they have at the office. Experts say the number of home offices may triple by the year 2000, up from 20 million ten years ago.

But business is not done just in major metropolitan areas in the United States. Being a global leader means taking IP global. That’s why we joined with BT to build a global IP network linking the 100 largest economic centers of the world. Our global IP network will offer applications such as intranets that are truly global and truly secure. Global calling centers that bring customer contact systems together on a single IP platform. And new communications and information services that keep the traveling executive always connected.

Powerful global services like these can have a major impact on a company’s global reach and bottom line. One of our customers, a media conglomerate with 7,000 employees in 70 countries, has already achieved 40% more reach with a 30% reduction in network cost, thanks to its new virtual private network. Another customer, an electronic trading company, reduced its transaction cycle time by 90%.

Our global IP network will share a common architecture with BT’s networks in the UK and Europe, and with AT&T’s in North America. It will be built to open standards because we want the same creative energy developing applications for our network that has already led to the phenomenal growth and success of the net. It will be a carriers’ carrier, attracting all kinds of third-party value.

At AT&T, our goal is to become a leader in providing communications services delivered over the internet. We start from a strong foundation. We are one of the top ten business ISPs, and we’re driving to be number one. Our business IP line growth is 200% a year, and we host over 8,000 websites. Our AT&T WorldNet® consumer business is the largest pure ISP in the country, with 1.5 million customers, and it’s growing faster than the market.

We were the first major long distance company to launch an IP voice service. It’s called @phone. We introduced it in Japan last year, and it’s growing 20% a month, offering service across Japan and to 130 countries. This spring, we introduced IP voice here in the US. All told, we are one of the largest providers of IP telephony in the world. And we intend to maintain our leadership in voice-over-IP. In fact, today, we’re announcing that AT&T is the first major company to offer global “clearinghouse” services for ISPs as well as telephone authorities. Our clearinghouse members will avoid the time and expense of negotiating and managing agreements with other ISPs and telephone authorities to handle their calls.

What is the significance of this clearinghouse announcement? I think it is twofold. We are the first major company to announce being an IP carriers’ carrier. It is good news for both consumers and businesses. As a result of this, rates will come down. Our clearinghouse will handle all the routing management, payments, billing and administration involved in establishing and operating phone-to-phone IP telephony and other communications services to 140 countries. Fifteen companies are already moving traffic through this newly announced clearinghouse.

But real leadership needs more than a commitment to just keep on building. We have to improve the very nature of IP. To do that, we will do for IP what we’ve already done for the telephone. We will make it safe, reliable and secure. That’s why we have focused our 2,000-person research and development organization squarely on IP technology, platforms and services.

One of the first products of that focus is a software platform for advanced services. Probe Research calls it “Java for the public network.” It’s been adopted by Carnegie Mellon and other institutions as an important building block of the next-generation “Internet 2.” And it’s designed to stimulate creativity and innovation going forward. With background functions like authentication built into the platform, software developers can work on the fun stuff. Today, we are also announcing a new Interoperability Lab, a place where software and hardware developers can work together to assure consistent implementation of standards. It will be a test bed for the industry, initially focused on unlocking the potential of internet telephony.

Our third announcement today is a multimillion-dollar commitment to establish an Internet Research Center with the University of California’s International Computer Science Institute at Berkeley. The new center will develop architectures for strong, reliable, real-time IP services.

Investing for leadership costs money and takes time. We’re investing billions to shape the future of IP. Our network investments, the TCI merger and our global venture with BT are just some examples of that and just the beginning.

So far I’ve talked about AT&T’s money. Now let’s talk a little bit about your money. (By now, you should have more of it in your pocket.) The whole idea of the Telecommunications Act of 1996 was to give consumers the same choice in local phone service that transformed the long distance market more than a decade ago. There are more than 500 competitors in long distance. That’s why long distance prices have come down 55% since 1984. It’s why demand has skyrocketed. And it’s why we’re all investing billions of dollars in expanding long distance network capacity.

But the situation in the local service market could not be more different. In fact, the proposed mergers between Bell Atlantic and GTE, and SBC and Ameritech, threaten to create a Ma Bell East and a Ma Bell West, controlling more than a third of all homes in America – 55 million phone lines. And the Bell monopolies know how to exercise that control. The fees they charge for the privilege of having your long distance call travel through their local network are so far above the cost of putting calls through that they constitute a tax – a hidden tax levied on consumers, through higher-than-necessary long distance rates.

How much higher? By most estimates, six times higher than cost. Over $10 billion that consumers must pay in their long distance prices, and that long distance carriers, acting as bill collectors for the Bell companies, have to turn over to them. And now some of the RBOCs are talking about applying these inflated access charges to IP telephony. The fact is that would choke this industry and stifle innovation. It should not be allowed to go forward. Because once the local monopolies get their noses under the tent they will not stop there – extending access charges to ISP connections is the next logical step. It’s unjustified. It’s unwise. And to anyone who knows anything about innovation and competition, it’s incredible.

The internet has flourished because it has been free of taxes and regulation. Free to innovate and grow organically, the net leaped from 100,000 to 40 million hosts in just nine years. The internet started this year with about 400,000 electronic commerce sites. That number is growing by 20,000 to 25,000 sites a month. Online investing alone is growing at a compounded rate of 40% a month. The internet has become the hottest business location in the world. The local monopolies are a threat to this networked economy.

We ought to be ending excessive local access charges, not extending a monopoly practice that already costs American consumers and businesses over $10 billion a year more than it should. We don’t need any new laws to give Americans this tax reduction they deserve. We just need the political will to get it done.

Please let me make clear that by taking local access charges down to cost we’re not talking about eliminating universal service, the commitment we have to bringing affordable phone service to rural areas and low-income consumers and to help link schools and libraries to the internet. What I’m talking about is eliminating the hidden tax every consumer and business customer pays to local phone companies every minute of every phone call, every day. Simply stated, the tax should come off. Monopolies should not be allowed to get bigger. And the market for local phone service should be opened to real competition.

My message today is threefold. First, for AT&T, it’s IP, and today it is central to our business, mission and vision. It will have the reliability, security, service level agreements and quality of service you need and expect. Second, we are making a multibillion-dollar bet on the future of IP technology. We have invested in our network, we will merge with TCI, and we will build a global IP network with BT. And we’ve focused our research and development resources around IP technology and systems. And third, monopoly access charges will kill the introduction of new services such as voice-over-IP. Monopoly control stifles innovation.

It doesn’t have to be that way. Bell monopoly mergers should be denied, and the local phone market opened. And consumers should collect that multibillion-dollar tax reduction due them from excess access charges by local phone companies.

This morning we’ve talked about both threat and opportunity. The threat is letting a few local telcos set the rules of the game and deny us choice of companies, services and prices. This is an industry that has thrived on independence and freedom. The question now is whether decision-makers, both public and private, have the wisdom to discern the alternatives, and the will to choose the right path.

NON-TARIFF BARRIERS: A NEW THREAT FOR EXPORTERS

Paul E. Gagné
President & CEO, Avenor

The Canadian Club of Montreal, November 28, 1994
Published in The Corporate Report, Edition No. 10, February 15, 1995

Few Canadians fully realize how much their prosperity depends upon the forest sector. Many believe the forest sector to be a sunset industry, having lived its best years and not having much to look forward to. I couldn’t disagree more.

The importance of the industry

First let me briefly illustrate the place that the forest sector occupies in our economy. In 1993, pulp, paper and lumber companies had annual sales of $40 billion. That included $22 billion in net exports, making it by far the nation’s largest contributor to Canada’s positive trade balance.

To put it in perspective, that is three times more than the entire automobile industry’s net exports of $7.6 billion in 1993. In fact, the forest sector net exports almost equal the combined exports of Canada’s three other leading trial sectors: energy, metals and automotive.

In terms of jobs, the forest sector accounts for the direct and indirect employment of almost one million people or one out of every 12 jobs in Canada. And many of those jobs were occupied by highly-skilled, technically-sophisticated personnel.

I am talking about teams of biologists, environmental specialists, highly qualified foresters, process control engineers, computer specialists and so on. Their average annual compensation and benefits was over $56,000 in 1993, some 12.5 per cent above the Canadian average.

The forest sector has a huge manufacturing output and an enormous impact on employment. It is the direct lifeline of some 350 communities across this country.

In recent years, the Canadian industry has taken major steps to aggressively address its competitive position in world markets. It has invested large amounts of capital to modernize and expand its production capacity, shut down dozens of economically obsolete paper machines and taken unprecedented measures to reduce costs and increase efficiencies. This has resulted in the first major reduction in real operating costs in recorded memory while continuing to raise the level and consistency of product quality.

And even in a difficult year like 1993, when we were still in the recession, forestry companies in Canada injected $2.6 billion into capital spending to improve plant and equipment.

In addition, both the industry and the unions have joined forces to develop a truly effective human resources strategy. Today’s employees work in a more technically-sophisticated environment, have to deal with increased computerization and must have more direct communication and interaction with customers. They face new, difficult challenges and need improved training.

In order to find solutions to these problems, we have conducted an in-depth analysis of the human resource challenges in the pulp and paper industry.

One of the key recommendations coming out of the study was to create a new Industry Forum involving companies, unions, governmnents and industry experts across the country.

Announced in Ottawa last August at a nationwide press conference, the Forum was set up with the objective of bringing people together to identify training and human resource development issues, while building a new partnership between management and labor.

The Forum will address the need for better, more focused technical training in the industry, computer literacy, as well as ongoing education and development. This will be done at the national, regional and local levels.

With this background, it is pretty clear that issues affecting the forest industry are important to the Canadian public, governments and to the entire business community.

Growing Threat of Non-Tariff Barriers

An increasing threat to our exports and to the wealth creation potential of the industry is the emergence of non-tariff trade barriers. More than 80% of Canada’s pulp and paper production is exported, making free trade an issue of vital importance to the industry. We find it encouraging that, as result of the GATT Uruguay Round of trade talks, remaining international tariff levels will begin to fall on July 1, 1995.

We are also pleased that the 9.2% tariff on many of our products exported to Europe will be phased out over ten years. Mind you, we would have preferred that the phase-out period be shorter. In fact, Canada and the United States proposed a five-year period to reduce the tariffs to zero, but unfortunately that was rejected.

The next big challenge for GATT is to decide on how to deal with the trade impact which results from the implementation of more and more environmental measures by governments around the world. Industry experts refer to this as the “Greening of GATT.” Our industry strongly believes that trade and environmental concerns are compatible and that environmental progress can be achieved within existing international trade laws.

Closer to home, we are also pleased that, as a result of the North America Free Trade Agreement, pulp and paper trade between Canada and the United States is now completely duty-free. This is a factor of prime importance for the Canadian industry. Exports to the United States account for more than 59% of our pulp and paper production.

Free trade is not simply good because it preserves and opens up new markets. The removal of artificial barriers to protect local interests means that we all have to work harder to remain competitive. This leads to improved productivity and reduced waste. It encourages research and innovation.

Free trade forces us to focus even more on customer satisfaction. It leads to better products, better service, a healthier industry and eventually, a wealthier society worldwide.

We therefore view the ongoing removal of tariff as beneficial for both the Canadian industry and international trade. But it is also increasingly obvious that protectionism dies hard.

We are seeing a growing array of less tangible barriers taking shape under legal, ecological, and environmental guises.

Tariffs, although harmful to trade, have the advantage of being clear, visible targets that can be individually addressed and negotiated downwards.

Let me give you some specific examples of non-tariff barriers in each of these three areas.

The countervailing duty repeatedly placed on Canadian softwood lumber by the United States is one, and it illustrates the capricious use of legal recourse. This is an issue which is now more than ten years old and Canada’s position has been repeatedly and consistently upheld by Canada-US bilateral committees established under the Free Trade Agreement to settle such disputes.

Still, there continue to be attempts by American industry to reduce imports of Canadian lumber, and some $700 million in duties paid out by Canadian producers remain frozen in the United States.

Another example is the European Union’s eco-label program. As part of this scheme, the European Union develops criteria which it then uses to determine whether a product is environmentally preferable enough to be awarded the eco-label.

Not surprisingly, as currently drafted, the criteria for paper products will favor EU products over imports. As we see it, the eligibility criteria for this scheme were developed without third country participation and without proper and sufficient evidence. The scheme also requires that all products and their manufacturing processes comply with EU health, safety and environmental regulations.

The bottom line is that even when a Canadian product demonstrates superior environmental performance and complies with all Canadian regulations it will likely not be eligible for the European label.

Recycled fiber content in newsprint is another area in which European legislation could very well be detrimental to free trade. Because Canada exports most of the newsprint it produces, it has limited domestic access to recycled fiber. And this is true, despite the fact that our country now recovers half of the newsprint consumed in Canada.

If the European Union passes its proposed legislation, it will effectively restrict the access of Canadian newsprint to the European market.

These are just a few examples of non-tariff barriers facing our industry. As a minimum, such barriers must be based on sound scientific grounds and the rules must be the same for everyone – a level playing field with uniform parameters.

The Response of the Canadian Industry

The Canadian forest industry has a long history of supporting free trade and is continuing to take major steps to ensure that international markets remain open.

Two and a half years ago, the Canadian Pulp and Paper Association took action to present the case of Canada’s forest sector to European customers and governments. Various environmental groups had been portraying the Canadian forest industry around Europe as environmental delinquents and the Association responded by establishing a permanent presence in Brussels.

It was important that our European contacts understand that the Canadian industry spent some $3 billion between 1898 and 1993 on measures to protect the environment. It was vital to point out that Canada is now the world’s fastest growing market for recycling and the largest importer of recyclable paper.

It was also crucial that they perceive the Canadian forest industry to be a leader in sustainable forestry based on scientific principles which we want to see internationally accepted by our trading partners.

To get this message across, our Brussels office has developed a structured, broad-based communications program. The office has arranged missions to Canada for European customers. It has organized a series of workshops on Canadian forestry practices which have been made available to the major users of our products.

Visits by Canadian forest ecologists and forestry academics to European research institutes and universities are also part of the evolving information program. As a result, we have begun to address the widespread misunderstanding of Canadian forest management practices and we are making good progress in keeping the European market open for our products.

We are seeing similar issues emerge in other parts of the world and we are now taking action to resolve them before they evolve into a crisis.

One of the greatest threats to market access for our industry is the current confusion surrounding forestry practices, including those in Canada.

It was with the full support of the forest products industry that the Canadian Government pressed hard for a concrete global commitment to sustainable forestry at the RIO Conference in June 1992. Since then, we have initiated a project with the Canadian Standards Association to develop appropriate standards for sustainable forestry in Canada.

The CSA is the country’s best-known standards writing organization. It is an important Canadian link to ISO, the International Standardization Organization. We want the CSA’s standards to subsequently coincide with those that the ISO would develop for international use.

To carry out its mandate, the CSA will obtain input from a broad range of people interested in forest management. I am talking about consumers, environmental groups, government officials, academics, forest industry representatives and so on.

Its first task will be to set these objective standards. Once this is done, the goal is to establish a process through which companies can apply for certification by external auditors.

The Canadian forest industry welcomes independent audits of its forestry practices. We believe we already do a good, if not excellent job and we want our performance to be recognized for what it is.

We are anxious to have a similar process at the international level through ISO. We are convinced that it is only through objective, science-based standards worldwide that we will eliminate the use of environmental issues as a pretext for protectionism. We want solutions that promote both a healthy environment and vigorous international trade.

Industry Outlook

Before closing, let me take a moment to talk about the outlook for the forest industry.

We have just entered a period of strong recovery following three very difficult years, mainly felt in North America. Given the limited new capacity additions and driven by a strong upswing in the world economy, the outlook for the industry is very good over the next few years.

Looking well beyond the current business cycle, long-term prospects for the world forest industry are excellent. World consumption of paper and paperboard recently passed the 250-million-tonne level. Based on forecasts published by a major research firm, Resource Information Systems Inc. or RISI, world demand will double to 500 million tonnes within the next twenty years.

Canada accounts today for nearly 10% of the world’s combined paper, market pulp and paperboard production. To maintain our share of growing world demand will be a daunting task, but growth prospects for the industry remain bright.

We are also aware that our industry must bury once and for all its image as a sunset industry. The Canadian Pulp and Paper Association has already taken steps to deal with this problem. We are making real progress, but much more remains to be done.

As I said at the outset, in addition to being one of Canada’s largest industries, we are a major and increasing user of new technology. Our industry is energy efficient and is playing a leadership role in protecting the environment. Our fiber resource base is renewable and our products are recyclable.

One thing we must learn to do is work more effectively with governments and unions to remove the remaining barriers to achieving optimal competitive performance.

Given Canada’s heavy export orientation, it is critically important that we continue to work closely with our stakeholders to maintain full access to international markets for our products.

We know the stakes are high and we are determined to win.

FINANCIAL MARKETS AND THE CANADIAN ECONOMY

Gordon G. Thiessen
Governor, The Bank of Canada

The Board of Trade of Metropolitan Montreal, January 19, 1995
Published in The Corporate Report No. 11 (April 15, 1995)

I propose to address the main part of my remarks today to some of the questions and concerns I have heard expressed about the implications of financial market pressures this past year for economic developments in Canada. Are these market pressures mainly the result of international forces? Do they prevent monetary policy in Canada from responding to the needs of our economy?

First, however, I want to give you a brief summary of the Bank’s assessment of the economy and a report on our success in meeting our inflation-control objectives.

Price stability and the economy

The Bank’s commitment to controlling inflation, and to establishing price stability in Canada, has begun to bear fruit. The decline of inflation in Canada to rates of 2% or less during the last three years has encouraged businesses to control costs and has provided a more predictable climate for making business decisions to invest in productivity enhancements. As a result, businesses have been able to take effective advantage of a depreciation of the Canadian dollar to improve their international competitiveness.

The strong export performance of Canadian firms over the last three years provides concrete evidence of this improvement. And exports have been the driving force behind the recovery and the current rapid expansion of the Canadian economy.

These developments have been the source of the good economic news in Canada over the past year. And as employment has started to pick up, consumer confidence has improved and stronger consumer spending has started to contribute to the economic expansion.

Recovery has also become more widespread across the country. Initially expansion was most evident in British Columbia and Alberta, and economic activity in Quebec and Ontario, which had been hard hit by the recession, was slow to revive. However, the expansion broadened last year, and activity picked up significantly in both Quebec and Ontario. The 230,000 jobs created in these two provinces in 1994 gave particular impetus to consumer spending.

However, I believe the changes that have been going on in our economy are more fundamental than just contributing to the recovery from a period of slow economic activity. The productivity increases, the emphasis on cost control, and the adjustments that Canadian businesses have made to achieve these improvements are signs of a more basic change to the Canadian economy.

It is almost impossible to overstate the importance of productivity increases, because they are the main source of increasing incomes for Canadians over time. All these developments are laying a strong foundation for future economic expansion in Canada and provide grounds for taking an optimistic view about Canada’s economic prospects.

The economic and financial terrain is not, of course, without hazards. Of particular concern to many Canadians recently have been the increases in interest rates and the downward pressure on the Canadian dollar. It is the influence of these financial market developments on the Canadian economy that I wish to turn to next.

The general question about financial market developments that I would like to address today is the influence on Canadian markets from developments in the United States and elsewhere in the world. Does that leave any room for monetary conditions in Canada that are different than in the United States and for a made-in-Canada monetary policy?

Financial market integration and monetary conditions

Financial markets have without doubt become more integrated internationally in recent years. This integration has existed between markets in Canada and the United States for a long time, and has been particularly close since the 1950s. Canada has been a user of foreign savings throughout most of its history. And we have benefited from our access over the years to foreign financial markets – not just those in the United States but also in Europe and Japan.

The competition provided by large international markets means that both Canadian savers and borrowers are much more likely to get the best rates and conditions on their investments or their loans.

However, because of this integration, financial markets in Canada are influenced by events abroad. In other words, interest rates in Canada are not completely independent of what happens elsewhere in the world, and particularly of what happens in the United States. But that does not mean that the Bank of Canada cannot follow a monetary policy aimed at price stability in Canada, and in this way contribute to the good performance of the Canadian economy. Our recent experience can be used to illustrate this point in more practical terms.

An issue that the Bank of Canada has had to face over the past year is the difference in the situations of the US and Canadian economies. The US economy has moved to the ceiling of its capacity to produce, and ongoing increases in spending have raised the risk of upward pressures on inflation. As a result, the US central bank has been acting to tighten monetary conditions by pushing up interest rates.

In Canada, our recovery has been somewhat slower than in the United States and our inflation outlook has remained highly favorable. In these circumstances, there was not the same need to tighten monetary conditions as early in Canada. Still, US interest rate pressures contributed to an increase in our rates in Canada.

But I do not want to leave you with the impression that the interest rate increases in Canada over the past year were entirely due to developments in the United States. In ideal circumstances, interest rates in Canada would have gone up, but they would have gone up by less than in the United States to reflect our lower inflation rate and the greater margin of unused production capacity in the Canadian economy. Instead, interest rates here have tended to rise by more than in the United States. Why was that?

It was mainly because there was a great deal of concern and uncertainty during the year about the fiscal situations of both federal and provincial governments in Canada, given their past difficulties in meeting deficit reduction targets. Political uncertainty related to the September 1994 Quebec provincial election and to the upcoming referendum interacted with and added to the fiscal concerns.

When interest rates are rising generally around the world, debt service costs increase and the financial situation worsens for heavily indebted borrowers like our governments in Canada. If there is already uncertainty about the will of governments to deal with their fiscal problems, rising international interest rates will add to the concerns of savers and investors who hold government debt.

Each time interest rates go up, potential purchasers of government debt are likely to see an increased risk that heavily indebted governments will resort to inflation to ease the burden of servicing their debts and that persistent depreciation of the currency will follow. There are lots of places where Canadian and foreign savers and investors can invest their money, and they have been willing to invest in Canada only at substantially higher interest rates that include increased premiums to compensate for these risks.

In other words, concerns about the fiscal situation can raise questions about the ability of monetary policy to deliver monetary stability. Such concerns have not only undermined the confidence that savers and investors need if they are going to accept smaller interest rate increases in Canada than in the United States, they have in fact contributed to larger rate increases in Canada.

To understand how the Canadian economy has been able to cope with these higher interest rates, it is important to recognize that monetary policy works through the exchange rate as well as through interest rates. In 1994, the impact on the economy of the higher interest rates was offset to a large extent by the decline in the Canadian dollar. Therefore, the pressures on our interest rates from US actions to tighten the stance of their monetary policy and the increased risk premiums because of fiscal concerns did not prevent the continued expansion of the Canadian economy along a path that was consistent with the Bank of Canada’s inflation-control objectives.

Although the economic outcome of the past year was generally favorable, this combination of high interest rates and a weak Canadian dollar is by no means ideal for the Canadian economy over time.

The high rates will have the effect of discouraging future investment that can contribute to improving productivity and rising incomes. They also add to debt service costs for all debtors, but particularly for governments, given the size of their debts.

Similarly, the decline in the Canadian dollar also involves costs. It raises consumer prices and thereby effectively lowers the standard of living of Canadian consumers. Exchange rate depreciation also carries the risk of encouraging upward pressure on inflation if households then seek compensating increases in their incomes.

Moreover, a temporarily weak currency can distort decisions by businesses, as it did in the mid-1980s in Canada. And when the currency recovers, these businesses are often unable to cope. While a currency decline is sometimes helpful to an economy when it has to adjust to difficult circumstances, it is not, for the reasons I have just mentioned, a costless miracle tonic.

What can monetary policy do in these circumstances?

There is a commonly held view that the Bank of Canada has the capacity to set interest rates in Canada at whatever level it wishes. So why has the Bank not used this capacity to counter these unwanted pressures on our interest rates in financial markets?

The reality is, however, that the Bank of Canada cannot arbitrarily set interest rates. We have an important influence on very short-term money-market interest rates, but our influence beyond that on other short-term rates and out to longer-term rates is indirect. It depends on how savers and investors see our actions affecting inflation and the external value of the Canadian dollar. If the Bank is seen as encouraging inflation and an associated downward trend in the value of the Canadian dollar, the result will be higher interest rates.

That is why the proposals that you sometimes hear for the Bank to push down interest rates and stimulate the economy still further so as to help government solve its budget problems would not work. Actions by the Bank to force interest rates lower would require us to pump more liquidity into the financial system. Such actions would raise worries about inflation and a declining trend in the Canadian dollar. This is a recipe, not for low interest rates, but for higher rates and for more pressure on government debt service costs and deficits.

However, by strongly promoting price stability, the Bank of Canada provides an important underpinning to the expected future value of the dollar and thus to lower interest rates than would otherwise be possible.

In summary

I would like to underline that uncertainty about economic policies is a common theme when one looks carefully at the reasons for recent financial market pressures in Canada. Whether the pressures arise from the influence of US developments on Canadian financial markets or from the risk premiums demanded by savers and investors that have pushed up interest rates, our situation can be improved by strong, credible policies in Canada. In the case of fiscal policy, that requires budgetary actions to put government deficits and debt onto a more sustainable track.

As for monetary policy, the best contribution the Bank of Canada can make to more stable financial markets with lower interest rates is to pursue a policy aimed at price stability. The more credible that policy is, the better the anchor it provides for financial markets.

So let me reiterate: the Bank of Canada is completely committed to price stability. You should count on that commitment in making your economic and financial decisions.

DOES CANADA NEED MORE INFLATION TO GREASE THE WHEELS OF THE ECONOMY?

Gordon Thiessen
Governor of the Bank of Canada

The Board of Trade of Metropolitan Toronto, November 6, 1996
Published in The Corporate Report No. 20 (January 15, 1997)

The Bank of Canada is a public institution that must be accountable to Canadians for its actions. That is why I and my colleagues at the bank welcome opportunities to explain monetary policy and to talk with audiences all across Canada. I believe that our economy functions better, and monetary policy is more effective, if people know what their central bank is up to and why. But the Bank also needs to be well informed about the economy in all parts of the country and about the public’s views and concerns regarding monetary policy. And when views differ, Canadians should expect us to explain the differences and respond to them.

Today, I propose to discuss some of the ideas you have probably heard about recently: that the Bank of Canada has worked too hard to reduce inflation and that we could use more inflation to grease the wheels of the economy. The suggestion is that the Bank, with its focus on bringing inflation down and keeping it down, is largely responsible for Canada’s sluggish pace of economic expansion and stubbornly high unemployment rate during the 1990s, especially when compared with the United States. Moreover, in this view, a monetary policy that emphasizes price stability will somehow always be too tight to allow the economy to achieve its full potential in the future. The conclusion that follows is that Canada would be better off if the Bank relaxed its stand on inflation control and allowed the rate of inflation to rise above the current target range of 1% to 3%.

You will not be surprised to hear that I do not agree with this one-dimensional explanation of the economic problems of the 1990s. And I certainly do not agree with the proposal to relax our inflation-control targets. This country has come a long way in restoring the credibility of its economic policies and improving its prospects for the future. I can think of no quicker way to undermine the progress we have made than to start backsliding on inflation control.

But before I address this issue further, I want to give you my understanding of economic developments during the first half of the 1990s and to explain why I see things shaping up rather well for Canada in a future with low inflation.

I believe that the reasons for the overall lackluster performance of the Canadian economy in the first half of the 1990s are much more complex than the simple explanation that monetary policy has been too focused on reducing inflation.

This explanation ignores some important economic realities that many Canadians have not been able to ignore in their daily lives. It certainly downplays the importance of the major transformation that our economy has been going through since the beginning of this decade. This transformation has caused a lot of stresses and strains among businesses and households. It has been the source of uncertainty about future job security and has led to an undermining of consumer confidence. But, as I will explain, these are temporary problems, and we are building the base for a more prosperous future.

The fact is that Canada had no real choice but to make these difficult yet very necessary economic adjustments. By the late 1980s, the Canadian economy was on a path that could not be sustained over time. Inflation was not under control, and expectations were that it would rise. Those expectations encouraged a surge of speculative activity, particularly in real estate. Many individuals and businesses were spending a great deal of their time and resources, and were accumulating debt, trying to maximize potential gains from inflation, rather than looking for ways to increase efficiency, productivity and competitiveness. Largely because of this, Canadian firms were slow in responding to the challenges of the technological changes and increasingly open and competitive markets that were transforming the world economy. US firms began this process of change much earlier and were well advanced by the end of the 1980s.

The business sector was not the only area of the Canadian economy in need of an overhaul. Through the 1980s and into the early part of the 1990s, Canadian governments continued to run large deficits that were adding to our public debt at a faster rate than the economy was growing. The ratio of government debt relative to the size of our economy doubled between 1980 and 1990.

And because governments were absorbing such a large share of domestic savings, we as a nation were borrowing more and more from abroad. As a result, our foreign indebtedness was also rising rapidly.

Holders of Canadian debt, both foreigners and Canadians, began to worry about our ability to carry these large debts when the speculative bubble in Canada burst in 1990-91. With real estate and other asset prices falling and with productivity not expanding sufficiently to boost incomes, debt-service costs became very burdensome for many borrowers. And lenders started to demand that our interest rates include risk premiums to compensate for these concerns.

This situation was clearly untenable. If we delayed dealing with these problems, savers and investors placing their funds in financial markets would demand more and more protection against the risks involved in lending in Canada, in the form of higher interest rates. We had a taste of this in 1994 and early 1995. This kind of market response effectively leads to a decline in our living standards, since we end up paying an increasing share of our national income to service our debts.

In both the private and public sectors, the needed adjustments were late in coming. Because Canadian firms started later than their US counterparts, the process of restructuring has been more intense and disruptive than in the United States. Needless to say, for many businesses, restructuring has meant layoffs. Similarly, in the public sector, the cutbacks necessary to restore fiscal health have been larger and more sweeping than if action had been taken earlier.

With these two major structural adjustments taking place back to back in the first half of the 1990s, the recovery of the Canadian economy has been slow. And the short-run disruption associated with these changes has naturally focussed attention on the costs of restructuring, which are direct and immediate, rather than on the underlying longer-term gains.

I do not want to minimize the short-run costs to Canadians of this major restructuring we have been going through. But I believe it is important that we not lose sight of the benefits. So I now want to remind you how much we have already accomplished and to assure you that we are indeed beginning to see light at the end of the tunnel.

The response to the problems we were facing at the beginning of this decade has been remarkable – a real success story. We have made some rather dramatic economic adjustments in this country. Canadian firms have invested in new technology. They have become more productive and more outward-looking. And with these improvements, they have been able to take advantage of a favorable exchange rate to break into new external markets and to expand their market share. Low inflation has contributed to this transformation by encouraging better cost control and providing a more stable environment for sound decision-making. While inflation came down rather more rapidly than the Bank had anticipated in the early 1990s, it has remained relatively stable, within a range of 1.5% to 2%, for most of the past four years.

The restructuring of the public sector is also proceeding apace. Deficits are being brought down at both the federal and provincial levels. However, what investors really care about is the level of government debt outstanding relative to the size of our economy-the ratio of debt to gross domestic product. Next year, this ratio should decline and, on the basis of federal and provincial budget plans, it should continue downwards in the future. This is important. Such a decline is needed to restore fully our financial health.

With the business sector’s success in exporting and the reduced borrowing needs of Canadian governments, we have recently eliminated the persistent deficit in the current account of our international balance of payments. This means that, as a nation, we are no longer building up our indebtedness to foreigners.

As I said earlier, there is no doubt that the changes involved in these economic adjustments have meant a great deal of anxiety and uncertainty for Canadians. Jobs have changed, and many jobs have disappeared. There has not been much inclination among households to spend, especially on big-ticket items such as housing and cars, and this is understandable in the circumstances. In a sense, our economy has not been running on all cylinders – it has been propelled largely by exports.

But because of the fundamental improvements in our economy that I have described, the risk premiums that had earlier raised our interest rates have been coming down, and our currency has been firm. In these circumstances, the Bank of Canada has been able to lower short-term interest rates. Most interest rates are now lower in Canada than in the United States-from the short end all the way to terms of almost 10 years.

I believe that it is only a matter of time before this monetary easing encourages a resurgence in household spending. Indeed, some indicators of consumer and housing activity have a more positive tone to them. And the private sector continues to create new jobs, more than offsetting the ongoing cutbacks in public sector employment. While the improvements have been slow in coming, and our unemployment rate remains high, the economic outlook is favorable. We will soon see signs of the payoff for the difficult restructuring decisions taken in both the private and public sectors.

With this perspective on the economic events of the last six years, we may ask ourselves what would have happened during this period if the Bank of Canada had pursued a monetary policy that was more tolerant of inflation. Would economic progress have been greater? Would the costs of adjustment have been smaller? Absolutely not!

Inflation masks the need for adjustment. With more inflation, we would have ended up with greater economic uncertainty, higher interest rates and a slower process of adjustment in both the private and public sectors. And higher interest rates would have made it even more difficult to cope with our accumulated debts. All in all, we would not be looking at an economy with the sound foundations that ours has today-that is, a strongly competitive business sector, markedly improved fiscal and external positions, and the lowest interest rates in over 30 years.

You may agree that monetary policy was correct in aiming to bring down inflation from the peak it reached at the beginning of the 1990s, but you may still worry about the future. Would the economy work better if monetary policy was less concerned with inflation control and more accepting of some ongoing inflation? There are at least two questions here. One is whether the Bank’s focus on low inflation leads to a monetary policy that fails to support the growth of incomes and employment in our economy. Another question is whether, at very low levels of inflation, the economy is deprived of a lubricant that helps it run more flexibly and smoothly.

Let me respond first to the question of whether monetary policy is too narrowly focused on price stability, at the expense of incomes and job creation. Not the way I see it. In fact, when the Bank takes actions to hold inflation inside the target range of 1% to 3%, monetary policy operates as an important stabilizer that helps to maintain sustainable growth in the economy. When economic activity is expanding at an unsustainable pace, pressing on the limits of production capacity and threatening to push the trend of inflation through the top of the target range, the bank will tighten monetary conditions to cool things off.

But the Bank will respond with equal concern, by relaxing monetary conditions, when the economy is sluggish and there is a risk that the trend of inflation will fall below the target range. A case in point is the easing of monetary conditions in Canada over the past year. While there is always some lag in the impact of monetary policy on the economy, what this approach does is provide monetary support that, over time, will help economic activity and employment to grow at their potential.

This is a very important point. The potential for the economy to grow over time can change, depending on such things as investments in technology and increases in productivity. A monetary policy focused on inflation-control targets ensures that the central bank will not inadvertently make systematic misjudgments about how fast our economy can grow. If the growth potential has improved, the resulting increase in the production capacity of the economy will tend to put downward pressure on inflation. This will encourage the Bank to ease monetary conditions to support faster growth in activity and employment and prevent inflation from falling below the bottom of the target range. The reverse is true if potential output is growing more slowly than we realize and inflation is tending to rise.

The second question I want to deal with is whether we need some inflation to grease the wheels of our economy. At any one time, there are usually some sectors of the economy that are having to adjust to difficult circumstances. The ability of firms in these sectors to make the needed adjustments will be improved if there is some flexibility in their labor costs. The argument for a moderate amount of ongoing inflation is that it presumably helps to provide that flexibility. Although employees may strongly resist rollbacks in their compensation, they will accept an effective decline in wages due to inflation, so the thesis goes. If labor costs cannot be reduced, employers will be forced to cut jobs instead. The conclusion drawn from all this is that without the lubricant of some inflation, our unemployment rate will be high and our economy will never perform as well as it should.

However, inflation will work as a lubricant only if it fools people into believing that they are better off than they really are. But our experience during 20 years of relatively high inflation in the 1970s and 1980s is that Canadians soon figured out the changes in the purchasing power of their wages and salaries, after accounting for inflation. Employees who were willing to accept an increase of only 2% in their wages at a time when inflation was 4% were well aware that this meant a cut of 2% in their purchasing power. Why would they not be able to figure out just as easily that a wage cut of 2% with no inflation amounts to the same thing?

There is, in fact, every reason to expect that people’s behavior adapts to circumstances. In a low-inflation environment, employees are likely to come to understand the need for occasional downward adjustments in wages or benefits in struggling industries, just as they accepted less than full compensation for inflation in such industries at times over the past 20 years. To assume otherwise implies that people are permanently irrational. This strikes me as a poor premise on which to base monetary policy.

Our economy has shown remarkable flexibility in adjusting to the major transformations I described. There is no reason to think that we need to rely on the misperceptions and unfairness created by inflation to get the flexibility we will need to cope with future change. Let us be clear. What our past experience teaches us is that inflation creates uncertainty and instability-not the conditions for durable growth and job creation.

In conclusion, let me say that I have heard no persuasive arguments for changing the economic policies that have helped to bring about the recent improvements in the foundation of our economy. Certainly any sign of a reversal in monetary policy could quickly undo some of these improvements.

I am convinced that the Canadian economy is on the right path. The benefits of the economic transformation we have undertaken are on the way. We just need to stay the course.

THE NEW WORLD ECONOMY

Lloyd C. Atkinson
Executive Vice-President and Chief Economist, The Bank of Montreal

North American Business Outlook Conference, Montreal, May 5, 1994
Published in The Corporate Report No. 7 (August 15, 1994)

I’m going to do something a little unusual. I could of course spend a great deal of time detailing my outlooks for the three economies Canada, the United States and Mexico. But I think what I would prefer to do, and what I’m going to do, is raise myself a little bit above that to try and get a lay of the land for the new world economy in which, I think, we find ourselves and what that world economy is going to look like, because I think it’s going to be dramatically different from almost anything that we have seen before.

We are going to be confronted with new kinds of challenges in this world economy, and these new kinds of challenges themselves present significant opportunities, but they also constitute, in my view, considerable risks.

We’ve already heard a great deal about the huge reforms that have taken place, particularly in Mexico, reforms that are really nothing short of remarkable. We hear in the economics literature these days about things like “the East Asian miracle.” Actually if you scrape below the surface there’s really no miracle at all. Essentially what it constitutes is the adoption of appropriate economic policies. But of course we are seeing that visited again and again in the case of Mexico. It is the correctness of the economic policies that holds out the greatest prospect and hope for huge change and improvements in economic standards and living conditions, and that is in fact what you are witnessing today in Mexico. My guess is that we will see more countries in Latin America, led to a considerable extent by Mexico, moving in that same kind of direction. And one day we may stand up here and remove the name “North,” and merely talk about “American,” and when we talk about “American” we won’t mean just the US, we’ll mean South America and North America as well.

But in order to talk about this new kind of world economy in which we find ourselves, let me emphasize that I think there are going to be three fundamental characteristics that constitute the challenges as well as the opportunities.

First and foremost, although there has been a huge amount of concern recently over whether or not inflationary pressures were going to re-emerge in the United States, my guess is that all of this concern is a focus on yesterday’s problem. My general feeling is that we are going to be moving into a period of basic price stability in most of the major economies of the world, and that is going to have profound implications. It’s going to have profound implications for the way in which companies do business, the way in which governments operate, and it holds out, it seems to me, the prospect for sustained, strong growth that is also non-inflationary. I will come back to that in a moment.

Secondly, I think that we are also in the midst, given the kind of restructuring that’s going on in virtually every single sector of virtually every economy in the world – I think that we are in the midst of a revolution, a technology-driven revolution, if you will, whose effects potentially are as profound as the Industrial Revolution itself. And it carries with it the social turmoil, which I believe is reflected in the huge concern that exists globally over jobs. I also think that if we in the industrialized world in particular (but the world economy in general) embrace the changes that are required to adjust to this revolution, we have the potential for improved living standards the like of which we have never seen before.

And finally, it is because of the dynamics of what is taking place, in terms of the overall preoccupation that exists on the part of central bankers for inflation, and this technology-driven revolution, that I think we also see a risk that arises, and that is a risk to the global trading system itself. And the peculiar risk takes the form of what many now want to characterize as “social dumping” that it could be, and has the ingredients within it to be, one of the most blatantly protectionist kinds of forces unless, of course, we are able to drive a wedge, and to understand the dynamics of what is taking place.

The challenge is big, but I will try to be brief, and try to give you a sense of where we’re going.

In order to focus on this whole question of inflation and the preoccupation with inflation, and the difficulties that this presents, let’s just review very, very briefly some recent developments, particularly in the United States.

The catalyst for the most recent turmoil was on February 4. Alan Greenspan, chairman of the US Federal Reserve, walks out of the Federal Open Market Committee meeting (the Federal Open Market Committee is the policy-making arm of the US Federal Reserve) and announces that monetary policy is going to be tightened. The Federal Funds Rate, which had then been trading at about 3%, got boosted to 3.25%. And at that time, Mr. Greenspan was very careful to point out that although at this juncture there was no evidence of any kind of inflationary pressures in the United States, in point of fact monetary policy had to move from a non-neutral stance to something more neutral, to stay ahead of the curve, to stay ahead of the emergence of inflationary pressures.

He had hoped, of course, that this would have a calming effect on the markets, and it had exactly the opposite effect. In fact, what it did precipitate was fear that perhaps there was a lot more inflation building in the US system than many people had imagined. And in consequence we saw deterioration in bond markets. We saw deterioration in stock markets as well.

March 22 saw a repeat performance by Greenspan: he walks out of the Federal Open Market Committee meeting and announces yet another tightening in monetary policy. We now move the Fed Funds Rate to 3.5%. Again bond markets, stock markets deteriorate. And again the focus comes back on inflation in the US system and the difficulties that that’s going to present. On April 18th, another repeat performance: now we’re sitting at 3.75%, and I don’t think we’ve seen the end. I think we’re going to see the Fed Funds Rate move up another quarter at least, and we may even see it move to 4.25%, or higher!

And this, I think, is going to be critical to understand: that the US Federal Reserve is prepared to move interest rates up to whatever level is required in order to ensure that growth in the US economy does not advance at anything stronger than its potential, and in order to ensure that any inflationary pressures that may be building in the system do not, in fact, emerge.

Now, what is it that a lot of people are focusing on in the United States? Well, you’ve got an unemployment rate that sits at about 6.5%. The overwhelming number of economists in the United States would conclude that the inflation-free rate of unemployment in the United States is between 5.5% and 6%. So while there’s still “some slack,” it’s not huge, and of course we’ve been witnessing declines in the unemployment rate, which is one reason to be concerned. Secondly, the focus is on capacity utilization. It currently sits at about 83.6%. Importantly, it’s rising. Historically, when capacity utilization rates got near 87%, then we would typically find bottlenecks and temporary delivery delays, and that’s the stuff which provides opportunities for companies to raise prices and make them stick.

There was a slowdown in the first quarter this year. Everybody expected it: cold weather and the Los Angeles earthquake, which, of course, put the kibosh on growth. The real question in the marketplace is: will we see a resumption of that very strong growth? Second quarter, third quarter…indeed, going into 1995.

Now, most forecasters expect that growth is going to slow down to some more moderate pace. But there’s a huge dispute over whether it’s going to slow down to 4%, plus or minus a little, or to a growth rate that constitutes the US potential the US potential probably being about 3%, maybe a little less. The critical thing here, the thing we should keep in mind, is that if growth were to emerge and remain solidly above potential, the US Federal Reserve would raise interest rates in order to try to squeeze growth to the potential.

But there’s one thing and this is very important there’s one thing that I think the financial markets have also ignored. First and foremost, there has been a huge improvement in productivity growth in the US economy. We’re also seeing it, by the way, in Canada and we’re seeing it in Mexico. In fact we’re seeing it in several parts of the globe. The latter half of last year, of course, productivity growth was very strong, a lot of attention has been given in the papers to it. But if you look at the last three years, productivity growth in the US economy has exceeded 3% on average in aggregate. We haven’t seen numbers like that since the 1960s. If you go back in history, productivity growth averaged 2.5% to 3% annually throughout most of the 1960s. In the 1970s, it slowed to maybe 1.5% and in the 1980s, it was completely stagnant. Now we are seeing the resurgence of productivity growth, and quite strong productivity growth.

And here, I think, is the important point: although we have seen to date virtually no acceleration in direct labor cost pressures, when that is combined with strong productivity growth, unit labor costs in the United States end up advancing at an almost zero pace. It’s essentially been flat. No evident, clear-cut signs of inflationary pressures and as long as US productivity growth remains relatively robust, which I think it is likely to do, in the midst of this technology-driven revolution, then even if there is some modest kind of increase in wage costs, it’s going to be negated to a considerable extent. But again, to come back to the point: if growth were to continue at too robust a pace and if you were to see the emergence of inflationary pressures, the Federal Reserve would shut it down.

But what is true of the US Federal Reserve is true of central bankers generally. There was a time when, particularly on the part of the G7, you could always count on the Bundesbank to be steadfastly anti-inflation. And then, of course, that enthusiasm for zero inflation spilled over to what we call the “Bundesbank of the North,” the Bank of Canada. But it is also dominant as well in virtually every one of the G7 countries.

I don’t know anybody who can read any of Alan Greenspan’s testimonies without coming away with the conclusion that this is one of the staunchest anti-inflation central bankers in the G7 today! Even in the midst of a worsening recession in France, Banque de France is being made into an independent financial institution and assigned essentially the same price-stability mandates as the Bundesbank. And at a time when we’ve seen Mexico go from an inflation rate of over 100% to inflation rates that are now comparable to those you find in most of the industrialized countries (indeed if anything the inflation rate continues to move down), and at a time when Banco de Mexico is itself not only one of the most professional but also staunchly anti-inflation central bankers around I think that fundamentally we are moving into a period of time that is almost without precedent, certainly in the last 20 years. There is almost zero tolerance for any acceleration of inflation in the industrialized world.

And if, in fact, we go back and look at the reasons why we have had the business cycles that we have had in the post-World War II era, with the exception of some identifiable events like OPEC in the 1970s, virtually every single one of the business cycle swings was the consequence of changes in economic policy, and changes in economic policy induced by focusing alternately on inflation, on the one hand, and then on unemployment, then on inflation, then on unemployment.

To the extent that we seem to be moving into an era of essential price stability, and I do think it is an era, then I think we also have the potential for a much more stable economic environment over extended periods of time. There’s no particular reason why the kind of recovery that we have seen in the United States can’t continue for several years in an environment where basically you do not have the possibility of inflationary pressures.

The second force is, of course, this technology-driven revolution. We know what this is all about. Many people have attempted to talk about it in the context of the so-called “new economy.” We hear a great deal about “paradigm shifts.” We hear from Tom Peters in Liberation Management: A World Gone Bonkers. (He also argues, by the way, that if the world has gone bonkers, management has to be bonkers to deal with it!) We hear about the “re-engineering of the corporation,” and so forth.

But if you look at this particular revolution, technology-driven as it is, and try to step back and look at the economic forces at play, strip aside all the language, and try to ask ourselves where this technology revolution has had its most profound impact, it’s had its most profound impact, in my view, in two particular areas.

Number one is in terms of bringing down transport costs. In the past twelve years, unit transport costs globally have been cut in half. We see, for example, supertankers dramatically larger than what previously existed. You see it in aircraft. You see it in huge improvements in the efficiency of engines. You see it in the decline in fuel costs. You see it in containerization, in the technology that is utilized at ports and docks huge declines in transport costs.

Even more important has been the second: namely, the huge decline in communications costs. That dramatic decline in communications costs has enabled companies today to locate production virtually anywhere in the world, and to coordinate that production and delivery with relative ease.

And it has also enabled companies in the developed world to access workforces anywhere. The workforce that is relevant to large numbers of companies today is no longer the local workforce. It is the global workforce.

It was Paul Kennedy who wrote the book The End of History. Well, it may not be the end of history, but it may be the end of geography, as we understand it. And this, I think is important, because if you step back and think about the decline in communications costs and the decline in transport costs, both of these constituted barriers, sometimes prohibitively high barriers, to the movement of goods, services, people and capital. These barriers are crumbling. Just like tariff barriers, quotas and trade restrictions in general.

In consequence of this technology-driven revolution, we are looking at a new world economy that is intensely more competitive than almost anything we have ever seen before.

Now, as I indicated, this technology-driven revolution has associated with it two side effects. One, of course, is that in order to adopt, or adjust to, the technology that is available, we have seen massive restructuring taking place in virtually every single sector of virtually every one of our economies. And this has entailed, in many instances, massive layoffs of workers. We have seen huge numbers of workers being sacked in this kind of environment, because of what is now permitted by the technology that is currently available. Even today, in the US economy, with a 6.5% unemployment rate (a rate Canadians can only pray for), you have Gallup polls indicating that 28% of the workforce are fearful that they’re going to lose their jobs in the next three years.

This is part of the social turmoil that, in my view, is associated with this technology-driven revolution. If we embrace the changes needed to adjust to it, we have the potential for huge improvements in our living standards.

CANADA’S FISCAL CRISIS DEMANDS BROAD PUBLIC CONSENSUS

Matthew W. Barrett
Chairman & CEO, The Bank of Montreal

The Public Policy Forum, Toronto, April 15, 1993
Published in The Corporate Report No. 3 (September 30, 1993)

Canada’s fiscal crisis is seen as the challenge of our generation. Forging a broad-based public consensus is seen as the essential step to meet that challenge.

As a proportion of GDP we are the number one foreign debtor nation in the world – an unenviable distinction. For some of our government borrowers, a Triple-A credit rating is a thing of the past, and that means they are already paying interest rate premiums to entice foreign lenders.

It seems to me that it’s not particularly useful to put the blame on any one political party, or government, or group. In fact we’ve spent far too much time placing blame for the problem rather than finding solutions.

Throwing bricks at people never struck me as a very helpful form of persuasion. On the other hand, I’m not suggesting that we merely sympathize with our political leaders. We have to work with them.

Politicians are constantly under pressure from everybody – from groups with needs to champion and causes to espouse. Very few proposals involve spending less money. Think about it. Business people like you and me call for restraint except for the university or hospital or cultural fundraising drive that we’re involved with at the moment.

So, for whatever reason, the cards have been stacked against anyone trying to seriously cut the deficit. So we have to shuffle the deck.

The Public Policy Forum’s concept of broad private sector involvement in national decision making offers considerable hope. Never has it been more important than today that the leaders in our country public and private sit down and start talking in a sober way about the fiscal crisis, and agree on a course of action to fix it.

We have to agree on common standards and a common language. And we have to work from a common base of facts.

The first order of business clearly should be to seek a broad agreement that we do, in fact, have the challenge of our generation to confront, and that the situation calls for dramatic and collaborative action.

And let’s face it, pain is unavoidable. To achieve a broad-based consensus, it will be important to demonstrate that the burden is borne fairly, and that the public recognizes the sacrifices are worth making for our future. After all, achieving such a consensus is the acid test of leadership.

Coming up with the details of a deficit elimination plan will require a broad consultative process one conducted in the open, with representatives of all of the groups whose support will be necessary.

Many strategies have been put forward for bringing the deficit under control. Whatever their individual merit, they at least help to throw light on the problem.

Many of you already know my views, which I offered a couple of months ago. I’d like to see:

• No increase in our overall tax burden, or in government program spending for five years

• An easing of monetary policy, sufficient to raise growth to at least 4% a year in real terms

• And a national training and education program with clear, measurable goals

In addition, we will need to re-think the social contract for Canada. Perhaps we need a contract that focuses on the subsidy of people – not business, not commodities, not jobs, and not geography.

It is essential that however we tackle our problems, there will be a need for balance and empathy by all the various stakeholders in our society.

Business must restructure, yes! But at the same time it must demonstrate that it cares about the casualties of economic restructuring, as well as the goals. And it must keep in mind that successful restructuring shifts a burden, at least temporarily, from the company to society at large.

Labor must continue to promote the interests of its own constituency, yes! But at the same time it must balance it with a continuing concern for productivity and the ingredients for competitive success. And in particular, labor leaders owe it to their constituents to make sure they have the fullest possible understanding of the implications of the new globalized economy.

To sum it up quite simply, I would say business has to think more like labor, and labor has to think more like business. Maybe we will even see the day when labels like “business” and “labor” no longer apply. When we see ourselves as interdependent partners with the same goals, the same destiny.

And finally, government. Political leaders everywhere know that the world has changed. An election year presents a timely opportunity to put before the public policy options that take account of the new realities. This takes courage. But I think Canadians are in a mood to buy into long-term solutions, if they are given the straight goods.

I would hope that people will ask no more of government than they provide the infrastructure and economic environment that makes good business possible, and thereby generate sufficient revenue to ensure the preservation of the social programs that are a defining and differentiating part of the Canadian ethos.

Canadians are proficient in the art of compromise and it has generally served us well. But the search for compromise should never be an excuse for taking no action at all. Let’s do the things now that we have to do while we can still shape our own future. Let’s make certain that the solutions to our problems are “Made in Canada.”

ARCHITECTS OF OUR FUTURE

Matthew W. Barrett
Chairman & CEO, The Bank of Montreal

Bank of Montreal Annual Meeting, Calgary, January 15, 1996
Published in The Corporate Report No. 16 (February 29, 1996)

These are not ordinary times in Canada – they are not ordinary in economic terms, and they are not ordinary in political terms. I am increasingly uneasy about our national condition. Unemployment too high. Widening disparity between haves and have-nots in society. Economies in transition that show only fragile growth, failing to generate sufficient wealth to maintain traditional levels of social support. Today’s youth facing the prospect of a life not as promising as that of their parents’.

It is not a comforting picture. Yet as I cast my mind back over 1995, and as I scan the landscape of these opening days of 1996, it is not these problems which rank as the highest priority, important though they certainly are. It is our national unity crisis, made right here in Canada, that looms above all else.

It is my concern that if we do not confront it with vigor, if we do not make real progress toward its resolution in the next twelve months, all our other problems, challenging enough in themselves, will become worse by orders of magnitude.

Some will say that anyone focused on the constitution is out of touch with the real, everyday concerns of Canadians. We hear that everyone is fed up, frustrated with never-ending wrangling. Skeptical of anything they hear from so-called “elites.” Resistant to any use of the dreaded C-word by our leaders who should, it is said, be concentrating on “jobs and the economy.”

And they are right, to a point. But there is more to it, I submit. Much more. Let me ask you to briefly suspend disbelief while I try to make the thankless case that far from discouraging politicians from tackling the national unity issue, we should be urging them on.

Let me take you back to the night of last October 30. We all remember it – the night when Canada almost died. In a voter turnout of 90%, very nearly half the people of Quebec voted to leave Canada. As the results trickled in with excruciating slowness, it was stunning to realize that we were on the brink of a crisis for which the country seemed totally unprepared. How is it possible, I wondered, that one of the most civilized and prosperous societies on the face of the planet could come so close to self-destructing? Can so many people in Quebec really believe that separation is worth losing their birthright to Canadian citizenship, and risking profound economic damage? Can so many people outside Quebec believe that while the loss of Quebec would be regrettable, its consequences wouldn’t really affect them or where they live? If Quebec separates, is it certain the rest of Canada would hold together, when the dam of inertia, habit, and custom broke? And when every region and province scrambled to better its position in a Canada with radically new political dynamics?

These and many more troubling questions came to mind as the see-sawing results flashed on our TV screens. Like the millions and millions of Canadians throughout the land who want the country to stay united, I was hugely relieved at the end of that long, long night. Relieved – and deeply grateful that we had another chance to put our national house in order.

Surely, after coming to the edge of the cliff, we will set aside historical grievances and entrenched positions, and open our hearts and minds to new ideas that can preserve a Canada of economic opportunity, social justice and individual freedom. Surely, I felt, we will finally stop this national game of “chicken” before we all end up wrecked in the ditch.

As the weeks since October 30 have passed one by one, my optimism has slowly waned. What I hear are seductive voices calling us back to “jobs and the economy.” Even the incoming premier of Quebec is saying as much. And the polls suggest the public agrees. I don’t agree. I am a banker. The economy is my turf and I know how important it is. But I also know that except on the most superficial level, the choice between the economy and the constitution is an illusion. Over any length of time, economic prosperity and political stability are simply inseparable. And never mind the future – our failure to resolve our national debate is already costing us dearly, all of us. It costs us every time we buy a can of orange juice with deflated Canadian dollars.

Every time anyone in Canada takes out a loan, they pay an interest rate premium for political uncertainty. If you live in Quebec you pay an additional premium for political uncertainty. And if you think this is an unsatisfactory state of affairs, ask yourself how we will be doing if we go back to sleep on the question of Canada’s future for a year – and then wake up, to find that another Referendum has been triggered and we still have no alternatives and no contingency plans.

And we need alternatives. Without them, there are several reasons to fear that in a third round, the partisans of independence would carry the day and force all Canadians into an economic crisis.

At Bank of Montreal we were analyzing the probable results of separation even before the Referendum was called. Such analysis is routine in our business. Confident of a decisive vote for Canadian unity, we thought the exercise interesting but somewhat academic.

Our confidence was misplaced. Our analysis, in retrospect, would prove more relevant than we ever imagined. Let me tell you about the bullet we dodged by a hair’s breadth. If breakup occurs, expect at a minimum:

• First, a sharp rise in interest rates of as much as 3% to 4%. We could see mortgages at 12% or 13%. The cost of paying interest on our public debts would swell so much we could wave good-bye to any thought of eliminating our government deficits.

• A fall in the dollar to as low as 68.5 US cents. We would pay more for everything we import, and spend much more of our incomes on servicing our huge foreign debts.

• Economic growth would falter across Canada. It is possible that the more vulnerable parts of the country would be pushed into recession. In the special case of Quebec, there is the prospect of a fall in GDP of as much as 7% in the first year of independence alone.

• Worst of all, for at least the following five years, high interest rates, population movements, capital outflows, and reduced capital inflows would bring economic growth for all of Canada well below the average rate of growth if the country stays together. In that regard, we estimated the total growth foregone for all of Canada at between $150 billion and $200 billion. That equals at least $20,000 for every family of four. And that would be a permanent loss.

These are sobering numbers. Quebec particularly hard hit, and a serious hit for the whole of Canada. I am not advancing these figures to bully Canadians into doing something they don’t want to do, still less in order to defend the status quo. Far from it. For me, these potential outcomes are a compelling argument for all of us to overcome fatigue, set aside politician-bashing, and work together for bold and innovative change.

Let’s come out of this post-Referendum denial. We can no longer afford to be disengaged or tuned out. We have to accept the true seriousness of the risks we are running. Only then will we call on our political leaders to act before it is too late.

And I know our leaders will respond if we do. As good politicians they have an ear to the ground for public opinion. We have already seen them respond to public opinion on debts and deficits. I am convinced they are seized of the seriousness of our governance problems.

April 1997 will bring the First Ministers’ Conference on constitutional renewal. Nineteen ninety-seven will probably also see another Quebec Referendum, and very likely a federal election as well. It seems obvious to me, therefore, that we have to act now, calmly and constructively, with cool heads, well before these contests are joined. Fifteen months, when Canada could be lost or won, is not much time. It is enough time, though, I believe for Canadians to agree on the broad lines of a renewed federation, which will serve us well in the 21st Century.

Here are some thoughts on how it might be shaped. We clearly need to reassess and reassign the myriad activities of modern government. Our goal should be a leaner, tauter federation, with far, far less duplication, far more transparency, and sharper accountability.

Surely the time has come for devolution to the provinces of many of the functions Ottawa has assumed over the last half-century. Indeed bringing government closer to the people whenever possible is both desirable in principle and consistent with the broad social trends of our time. I also believe there are areas in which it makes sense for Canada to strengthen the central government. To cite just two examples: we do not need ten sets of trucking regulations; we do not need the absurd internal barriers to trade which make us the most balkanized federation in the world.

We do need a federal government that has the powers and revenues to act when our collective interests and national identity are at stake. A central power able to ensure that Canada becomes a single market, in which agreed high standards of health and education are preserved. And, since a nation is more than economics – a renewed and vigorous cultural life. And above all, we need a Canada that can always speak with a single voice and be clearly heard in an ever-more crowded, clamorous, and changing world. At the same time we must give equal priority to the legitimate and growing interests of different regions in a vast and excitingly varied country. An obvious example is the need to redefine and enhance the role of the Western provinces and ensure their rightful place in a renewed Confederation that matches their size, population and economic clout. Today, when Alberta and BC are among the most prosperous members of Confederation, the willingness of the West to innovate and experiment can stand all Canadians in good stead. In Canada’s story this is a time for the West, a chance to take the lead in forging a more broadly-based union than the Canada we have known.

If we can do these things, I believe we will have gone a long way toward building a Canada to which Quebecers, Albertans, British Columbians, indeed all Canadians will be proud to belong. So what I am proposing is not just a plan for accommodating Quebec, but one with room for all of Canada.

So, can we find the courage and the energy to renew our efforts? I believe we can. Can we find room within the larger Canadian nation for the uniqueness of Quebec? Can we find room for the vitality and economic weight of the West? I believe we can do those things too. But the past years have taught us that while putting forward proposals is one thing, making them a political reality is something else entirely. No one wants to tread the road that took us to Meech Lake or Charlottetown.

That is why we should welcome voices being raised across the country to propose imaginative ways out of the constitutional labyrinth. I would urge all Canadians to think seriously about fresh ideas such as a constituent assembly or an extraordinary commission, and to weigh carefully any proposals that our governments may put forward in the next few months.

Whatever mechanism chosen to reach a consensus, it must have the legitimacy of a formal mandate from our governments. It must involve people who give credibility to the process. And it should be practical and inspiring to create political momentum – to convince Canadians to provide nonpartisan support for our Prime Minister and our provincial premiers as they enter this defining round of constitutional renewal.

If we can think creatively and generously, we can survive this crisis and go on to prosper as we never have before. We have so much going for us: our tremendous reservoir of natural resources and the growing value we add to them; our access to three oceans; the largest economy in the world on our border; our skills in designing, building, and financing infrastructure essential to modern and modernizing economies; our increasing prowess in the “Transforming Economy,” with the highly skilled, knowledge-based jobs it creates.

Few countries anywhere can match such a range of assets. For us the ongoing transformation of the world economy is not a threat but an unmatched opportunity. Canadians are seizing that opportunity by becoming better international traders, able to compete in providing high-quality goods and sophisticated services to any market in the world.

Behind our international success lie the major structural changes we have achieved in our economy at home. Yes, of course we have problems to resolve. But think too of what we have already accomplished. We have tamed inflation. We are bringing order to our public finances. We are opening our economy to a widening range of trading partners. We are achieving far greater levels of cooperation among government, business, labor and universities. Witness Team Canada in China last year and in Southeast Asia today. And all these strengths are in turn backed by the risk-sharing inherent in the broadly diversified economy of a major state, and Canada’s long tradition of civility, tolerance and mutual help.

So, in 1996 we see Canada at a crossroads: one road leads to potential greatness; the other to self-inflicted decline. Which will we choose? Over the next few months, you and I and all Canadians by our words and deeds will answer the question: Is Canada worth saving?

The world looks on, amazed that the question can even be asked in so fortunate a country. And we are most fortunate of all in this, that no external force is compelling Canadians to choose one road or another. We will be the architects of our own future.

This freedom to choose is why I have made these remarks today. My purpose is simple: to play a small part in building public support for our leaders as they grapple with these complex issues.

If we succeed in reforging our union together, our success will not be a panacea. But it will end the sense of helplessness and hopelessness that too many of us feel today. And I’m convinced the recovered self-confidence of that moment of success will spill over into every part of Canadian life. And the Canada we leave our children will be a stronger, richer country, and a blessing to them and to the world.

CANADA’S RECOVERY: THE SHORT AND LONG OF IT

Dr. Tim J. O’Neill
Executive Vice-President & Chief Economist, Bank of Montreal

The West Island Chamber of Commerce, Montreal, November 7, 1995
Published in The Corporate Report No. 15 (December 31, 1995)

The economic recovery in North America slowed this year compared to 1994. After two years of above potential growth, some moderation was anticipated. While the easing off was about right in the US – it appears that the “soft landing” has been achieved – in Canada, the economy slowed too sharply for comfort.

For 1996, the outlook for Canada is much brighter, with growth expected to bounce back to 3.5% on a fourth quarter-over-fourth quarter basis from an expected weak 1% in 1995. Two factors are critical to the anticipated renewal of recovery next year – a sustained rebound (already underway) in the US economy and a continuation into 1996 of the interest rate declines already achieved this year. We expect both of these to occur.

Nevertheless, there still remain short-term risks to the Canadian outlook, mainly governments’ fiscal agenda and political uncertainty. Though it is important to focus on these, it is also worth looking at longer-term structural changes. The restructuring of Canadian industry, and the increasing integration into a global economy have longer-term implications for Canada’s economic performance.

US economy on the rebound

The US economy slowed in 1995 primarily because of the successive rounds of tightening the Federal Reserve engaged in through 1994 and early 1995 when the Fed funds rate rose from 3% to 6%. The impact was mainly on consumer spending, especially auto sales. The marked decline in exports to Mexico, resulting from the economic impact of the peso crisis, also contributed to driving US growth down to an annualized 1.1% in Q2 from 2.7% in Q1 and 5.1% in the fourth quarter of 1994.

A key to the extent and pace of the US rebound is the household sector. Renewed strong employment growth, reasonable real income growth, still high consumer confidence and reductions in mortgage rates provide a solid foundation for sustained growth in consumer spending.

Rising consumer debt, historically low savings rates and limited pent-up demand for durables will, taken together, dampen the expansion of household spending. Combined with a more moderate pace of investment spending, it is expected that US GDP in 1996 will expand at “soft landing” pace – about 2.5%. Inflation pressure appears unlikely to be a problem for the rest of this year or next. We expect CPI to track around 3% over the next 16 months. Even though the unemployment rate is at, or slightly below, what many economists argue is the “full employment” level, there has been no evidence of inflation-threatening wage increases. Growth at potential implies that the unemployment rate will not decline further, but instead move up slightly to 5.8%.

In the absence of major imbalances in the US economy – no housing market bubbles, financial services sector problems or overly stimulative or restrictive fiscal policy – the glide path to the soft landing has been relatively smooth. What are the potential bumps on the runway that may disturb this pleasant picture?

On balance, the risk may be higher that the US rebound will be too strong than too weak – i.e. growth continues at or near the pace in Q3, which bounced unexpectedly to 4.2%. Inflation would therefore be at risk to accelerate forcing the Fed to tighten policy. However, monetary policy operates with a considerable lag. A surprisingly strong rebound which caught the Fed off-guard, could, in the current full employment environment, push up inflation rates (and inflation expectations) sharply. This could necessitate more extensive and faster tightening by the Fed than would be required if they could move preemptively. It could also call into question that most precious commodity of central bankers – credibility.

Canada’s rebound: the short-term view

A moderate rebound in the US will revive Canadian exports but will not push them to 1994 growth rates. In fact, the role of exports in Canada’s economic performance over the last two years displays just how unbalanced the recovery has been.

Exports and business investment were the basis for the fast-paced growth of 1994 and their slackening the cause of sharp slowing in 1995. Consumer spending has not provided sustained stimulus to the recovery and the reasons are obvious. With virtually no real disposable income growth in five years, virtually no net employment growth in the first half of 1995 and still high real interest rates, there has been no support for consumer confidence or a spending surge.

However, just as the undesirable increase in interest rates in Canada through 1994 and into early 1995 put a damper on domestic spending, the decline in rates that began this spring will encourage it in 1996. Short-term and long-term rates will be 0.5% or more lower by the end of 1996. The 90-day treasury bill will be about 5.5% and 30-year government bonds below 7.5%. This will combine with the spur to jobs and aggregate income from increased exports to encourage household expenditures.

Given the weakness in the economy earlier this year, the Bank of Canada has clearly been inclined to easing monetary conditions as it lowered its policy-signalling overnight call loan rate 7 times by a total of 175 basis points (1.75%) from early May to late August. Though the Quebec Referendum campaign put a temporary halt to any further moves, the positive reaction in financial markets to the narrow NO victory and, in particular, the strengthening of the Canadian dollar, have provided a basis for the Bank of Canada to resume its easing.

Short-term risks to the outlook

While the positive response of financial markets to the Referendum outcome is not surprising, the narrowness of the vote may cause some dampening of enthusiasm. Any elements of continued political uncertainty – e.g. political leadership in Quebec, prospects for a further referendum, administrative or constitutional changes to federalism – are likely to have some influence on Canadian exchange and interest rates. However, it is reasonable to expect that market focus will shift to Canada’s strong fundamentals including long-term political stability, increasingly competitive industries and a sustained low inflation environment. A fundamental policy area towards which attention will be directed is fiscal policy.

With the referendum over, markets will now likely turn attention to the next round of federal and provincial budgets. On the provincial side, the willingness of the new Ontario government to turn campaign promises and early spending cuts into sustained fiscal restraint will become clearer. The Quebec government will have to address its serious debt/deficit problem or risk added negative reactions from investors. From a financial markets perspective however, the next federal budget will be the most important one. Even with slower growth than projected, the deficit target for this fiscal year should be achieved and even surpassed because interest rates have also been lower than forecast in the February 1995 budget.

Markets will be looking for continued commitment to fiscal restraint by the federal government. The mini-meltdown of financial markets that occurred in January of this year would likely be exceeded if the federal government were to display a weakening of its stated resolve to maintain and extend the path of deficit reduction irrespective of changing economic circumstances. Having started the process of building fiscal policy credibility, this budget will be critical to sustaining that momentum. While fiscal restraint implies an adverse direct impact on aggregate demand in the short term, the reduced interest rate risk premium that accompanies it will provide both short- and long-term benefits to the Canadian economy.

The longer view on Canada’s economy

A focus on short-term expectations and challenges can blur our view of the longer-term economic adjustments taking place. Often those adjustments look so complex and varied that it is difficult either to perceive patterns of change or to clearly evaluate their consequences.

Changes in the broad distribution of output and employment by major industry sector provides initial insight into this issue. From the late 1940s to the 1990s, the share of GDP in the goods sectors’ – primary resource industries, manufacturing, construction – fell from 42% to 34%, with the net decline about equally split between manufacturing and primary goods production. The corresponding rise in the service sector share of GDP was spread across each of the main private subsectors – trade, financial services, business and personal services. The adjustment in employment shares is even more dramatic. From over 60% of employment, goods producing industries contributed just over 25% of the jobs by the early 1990s. The big “winners” in services sector employment were the government and the community business and personal services categories. Only the latter increased its share of GDP.

Three critical forces behind this broad structural change have been trade liberalization, the relative decline in traditional industries and the increasing technological/knowledge intensity of production.

Trade liberalization – GATT rounds, the Auto Pact, Canada-US Free Trade Agreement and NAFTA – has steadily increased both the contribution of exports to GDP in Canada (now over 30%) and the share of those exports to the US (now 80%). The composition of trade has also been changing, especially since the signing of the US-Canada FTA. Exports to the US have expanded faster in those categories liberalized by the agreement. In particular, the expansion in non-resource-based manufacturing exports (e.g. office, telecommunications and precision equipment) and in higher value-added, resource exports (e.g. specialty papers and petrochemicals) to the US has been greater than growth in more traditional categories.

The increasing integration of the Canadian economy into the North American and global economy has several potential consequences. While interprovincial exchange will not decline dramatically and quickly, trade will expand more than proportionately in a north-south direction thus weakening the domestic inter-regional linkages. Pressure for policy harmonization, especially with the US, will increase. Tax structures, regulatory regimes, product standards, government procurement policies and business subsidy programs are examples of areas in which international harmonization is either the subject of negotiation or is being forced by market pressures. This will also make the elimination of interprovincial trade barriers a more compelling issue to resolve.

The relative decline in the importance of the traditional resource sectors has been dramatic. The combined share of total employment generated by agriculture, mining, forestry and fishing has fallen in the last 50 years from almost 30% to less than 6%. The most dramatic change has occurred in agriculture but all the main commodity producers have been subject to shrinkage. A key factor in this diminished role for the resource sectors has been the secular decline in relative commodity prices – since the early 1960s they have fallen by 40%. While this is a worldwide phenomenon, for a Canadian economy tied so long internally and externally to the natural resource base, this constitutes a major component of restructuring.

One specific implication of this decline is important. Most resource-related activity (extraction and processing) takes place in rural Canada. The secular decline in employment shares has meant that job growth in many single-industry towns has been, at best, stagnant. Where firms have downsized or departed altogether, it has proven difficult for the local areas affected to attract or grow new businesses to replace the lost jobs. The likely continuation of pressure on the traditional industries means that rural, small-town Canada is more vulnerable to long-term job and income loss than larger urban areas with more diversified economies.

A third element of the structural change is the increasing knowledge and technology intensity of production. All economies are experiencing this shift. In Canada, it has been estimated that employment in high-tech industries increased at three times the rate of job creation in low-tech industries between 1975 and 1991. The growth in high knowledge-intensive industries was four times that of low knowledge-intensive sectors over the same period. As well, employment in the high knowledge-intensive industries appears to be less cyclically sensitive. Job growth was only modestly dampened for that group of industries in the 1981-82 recession and in the 1990-91 recession, employment grew strongly.

Combine this with the fact that average income levels and job retention experience improve significantly with increased education and skills attainment and you reach a familiar conclusion. Investment in human capital is both a critical component of long-run growth and a key to individual economic success. Technological change, the capacity for which is affected by the quality of the labor force, is also a critical contributor to economic expansion and individual achievement.

What may be less obvious are the policy implications of this element of structural adjustment. We have traditionally looked to the public sector purse to fund education and skills development and to provide support for research and development of new technologies. The attack on debt/deficit problems at federal and provincial levels of government has already restrained funding and more of that is likely to occur. As well, debate about the quality of public investment in these areas and about the appropriate role and level of private involvement has been engaged.

In fact, all the components of adjustment mentioned have relevant policy and political implications. One obvious area is social policy. Since economic restructuring inevitably generates gain for some and losses for others, social policy can provide a cushion for the latter group. However, social policy not only is influenced by economic events, it also becomes enmeshed with economic policy in at least two specific ways.

First, there is already a debate about the extent to which income support programs may, while ameliorating the pain of a constantly restructuring economy, also inhibit effective labor market adjustment. Proposals for reforms to the unemployment insurance (federal) and welfare (mainly provincial) programs – more restrictive eligibility requirements, lower benefit levels, “workhorse” programs – embody elements of that concern.

Second, if knowledge is increasingly viewed primarily as the basis for economic power for society and for individuals, education and training policy essentially become economic policy areas. The result is an increased focus, in discussions of education/training reforms, on effectiveness of program design and delivery, on measurement of performance or “outputs” and on the appropriate division of public and private share of the costs.

Another much broader area in which structural adjustment is relevant is that of the division of powers between federal and provincial governments. While hardly a new subject on the Canadian political scene, interest is clearly much higher in the wake of the narrow referendum result. But Quebec is not the only province with a desire for greater decentralization of powers.

The elements of structural change will influence the debate in several ways. The loosening of economic bonds between provinces and regions within Canada will have the tendency to loosen other bonds as well. On the other hand, the pressure for inter-country policy harmonization implies a national government with sufficient policy scope to negotiate any such changes.

While there will continue to be a need/desire to assist those adversely affected by structural change, there is a legitimate debate about whether functional administration and program design is better done at a national or a provincial/regional level. One key element of the debate will be about the proper balance between national standards and responsiveness to unique “local” problems. For example, provinces now have control over education and may want to extend that to manpower training. Education and skills development have both national and local impacts. However, the mobility of labor within a country makes it difficult for provincial governments to directly influence the local impacts. Hence, the issues will be whether national standards are necessary to optimize the economic benefits of education and training and what role a national government should play in establishing and enforcing them.

The long-term structural adjustments in the Canadian economy are clearly creating pressures for the rearrangement of the public sector. Deregulation, downswing and reallocation of responsibilities – to the private sector and to other levels of government – are the key manifestations of that. Just as economic restructuring carries with it adjustment costs so too will the restructuring of government. However, the secular changes in the Canadian economy have also enhanced its competitive strength and provided a sounder foundation for long-term growth in economic activity and living standards. If the changes to the public sector increase its effectiveness in delivering services to Canadians, it will only reinforce those benefits.

WHAT HAS WORKED FOR ME

Peter Munk
Chairman & CEO, Barrick Gold Corporation

The Ninth Annual Investor Relations Conference, Toronto, May 27, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

I’m honored to address the Annual Conference of the Canadian Investor Relations Institute. I have followed CIRI’s development through Belle Mulligan, who is one of our key executives at Barrick and one of my senior colleagues.

I have much in common with investor relations professionals. We both stand for the need to enhance shareholder value and we focus our efforts on achieving this goal. It is largely because of our mutual objective that I agreed to come here today.

I’d like to tell you about a dinner I attended several months ago in New York. It was a governmental affair involving a large group of people. I was lucky enough to sit next to a gentleman whose name I had heard but whom I had never met before. While the evening was long and boring – like many of these functions – I was fortunate to sit next to somebody who taught me a unique lesson, which I would like to share with you.

The man’s name is Walter Shipley. At that time he was Chairman and CEO of Chemical Bank, based in New York. Shortly before I met him, Chemical completed the acquisition – although publicly it was called a merger – of Chase Manhattan Bank. This took place just a few months after Chemical had acquired Manufacturers Hanover (Manny Hanny).

Now all of you know that if there’s a field in which creativity is rather limited and there is very little room to distinguish one’s performance from one’s peer group, it’s among the senior banks. The very connotation of being a bank chairman implies that you’re not the kind of risk-taker who is prepared to go out on a limb.

Banking is a very narrow field. Your cost of product is determined by federal regulators and the prime rate. Your profit margin is so leveled off by competitors with the same cost and overhead structures that there’s really little room to make your bank stand out from the competition in terms of profit or cash flow margins. And yet, after 75 or 100 years of existence, Chemical Bank, one of the 10 most senior banks in New York State, was able to acquire – through the use of its paper – two of the most important banks in the state. Chase Manhattan was the flagship of the Rockefeller empire, reaching back to the very foundation of American capitalism. Chemical had been there for 120 years.

I asked Walter Shipley how on earth he was able to accomplish these acquisitions. Why Chemical, rather than any of the other banks? And why hadn’t Chase bought Chemical, rather than the reverse? He gave me an explanation that I will never forget.

“It was very simple, Peter,” he said. “I was appointed Chairman of Chemical at the same time as my colleague was appointed Chairman of Manny Hanny. Through some good fortune, I was able to communicate with my investors better than my competitors communicated with their shareholders. Perhaps I sounded better or made better speeches, or maybe investors simply thought that I could do a better job. In any case, Chemical’s shares got a bit of an edge in terms of multiples in relation to its peer group. Meanwhile, Manny Hanny, which was the same size as Chemical, made a couple of mistakes, including overexposure to the real estate sector.”

As a result, the stock market turned sour on Manny Hanny, which meant that it had a lower multiplier factor. Its financial ratios were somewhat lower than peer companies. Recognizing that Chemical had a better multiple and he could progress in his business by rationalizing overheads, Walter explored the possibility of bidding for his competitors.

He pitched the potential of overhead reductions effectively to investors. He told them that he could rationalize branches to offer good customer service while incurring much lower costs. At the same time, through the sheer size of the combined operations, he would achieve more liquidity and therefore a better share price. Since he was able to sell the story, he was successful in his bid for Manny Hanny. Within a year he had accomplished all of the things that he’d set out to do. Chemical became a bit of a darling of the stock market and Walter was the fair-haired boy in the banking sector.

Chemical enjoyed a truly significant edge. For each dollar of Chemical’s earnings and cash flow generated, its stock was given a higher rating. So Walter took another look at his competitors and identified Chase as an attractive target. Ultimately, the only concession made to Chase was to call the resulting transaction a merger. However, not one Chase executive remained with Chemical. The board of directors totally changed as well. The one major constant was the retention of the Chase name.

Guess who really reaped the benefit? Chemical kept a brand name that represents enormous value internationally. Today Walter Shipley runs the most powerful banking conglomerate in America, with a global reputation as the only one to break out of the tight-laced US regulatory system and realize phenomenal growth.

I tell you this story because your professional lives revolve around enhancing shareholder value; just as mine does. You can’t work with the public’s money and not work for the people who give you the money. We have a common interest. But I have never seen more tangible proof of how important the things we all work for can be as a business tool and how crucial incremental improvements in share value can be.

A 10% increment can mean the difference between becoming the winner, or the loser and victim. That’s a hell of a difference. I’m not saying that your profession has exclusive rights on enhancing shareholder value. That may be your perspective; in fact, I hope it is. But my perspective is that before you can enhance shareholder value you have to do one thing: perform. And that’s my job. Without performance, talk of enhancing shareholder value can be simple puffery.

How is performance achieved? It’s very simple. You perform by applying the standard tools of generating and creating a business success; by implementing a strategy that’s logical and doable. You employ the very best people. There’s no requirement that to succeed in the gold business, you have to be a gold miner; or that you have to succeed as a banker to be in the banking business. What you do need is a fundamental understanding of business and a sound strategy. Very often that strategy becomes more valid if it’s designed by an outsider who is able to see the forest for the trees, rather than by someone who has spent a lifetime on the inside and gets lost in the minutiae and the details.

Furthermore, it’s absolutely vital to employ highly aggressive operational methodology and a very conservative financial approach and maintain a strong balance sheet. You also must focus. Whether you want to win a tennis game, be a mountain climber or succeed in business, it can be very tough. You can’t hope to succeed unless you bring every ounce of your energy – the totality of your ability to focus – to the single primary goal that you set for yourself. Focus is vital.

In addition, you have to learn to share. You can’t have top people around you – the best people pulling in the same direction as you are – unless you’re prepared to treat them as partners. The days of simple wage earning are gone.

There’s nothing wrong with dilution. What is wrong with having 10% of a billion dollar pie? Isn’t that better than having 20% of a $400 million pie? It’s much better to create a bigger pie and share it, both in terms of dollars and emotions. You can share your joys and you can share your problems. And you can’t argue the fact that four or six or eight people are much more able to see difficulties ahead than an individual is.

Ultimately, you must learn not to confuse gambling with doing business. Too often in Canada we have seen the tragedy of major international corporations that became big and important because they kept on rolling the dice. As long as the dice came up okay, then everything was great. But the moment things turned against them, the game was over. That’s not doing business. Business means taking risks while covering your down side sufficiently so that when something goes wrong, you can still be there the following day. You may be somewhat damaged, somewhat hurt, somewhat more humble – but you’ll still be there, trying even harder. If you roll the dice and disappear, you were gambling, not doing business.

I apologize that we don’t have much time today, but even if we did, I couldn’t give you the secret for success. If I had one, I’d be as rich as Bill Gates and believe me, I’m not. All that I can tell you is what has worked for me and what I hope works for you. But having talked about these successes and about the fundamentals of performance, I then turn to you, because communication – getting a story across to those who, after all, provided the money to do the job – is absolutely vital.

You can’t expect people to buy your shares rather than your competitors’ if they don’t understand what your company does. Clarity, understanding and confidence – which can only come through good communication – are key components of that process.

There’s one more important thing that I must tell you. All of you – and this unique profession that you represent – have a very important role to play beyond the obvious one. It’s clear from what Belle Mulligan has told me that you have something to contribute far beyond the normally perceived function of an investor relations person. Just think of the chairman of the board of Chase, or the CEO of Manny Hanny, or in my case, Peter Allen of Lac. Lac had been in the gold business for probably a generation before it was taken over by Barrick, yet it disappeared.

Imagine what might have happened if the people at the helms of these other corporations had established relationships with their investor relations people that enabled them to obtain crucial feedback. I’m not talking about conveying a company’s story to investors or analysts; I’m reversing the equation.

What if Peter Allen’s top IR person had told him about a fundamental or emerging change in how investment community looked at Lac? What if the head of Chase had been told that its shares, relative to each dollar earned, were valued lower than Chemical Bank’s? If these executives had received such feedback, if they had understood what caused these changes, there is a 50% chance that they could have done something about it. And in my case, if Peter Allen had obtained such input, maybe he would be standing here today as the person in charge of the largest gold company outside of South Africa.

Feedback makes a very fundamental difference. Without it, those who run businesses don’t get the nuances – the daily changes in attitudes of investors and analysts. In each and every one of our businesses, slight changes, any of thousands of details, can affect investors’ attitudes. That is where investor relations people can become really important. You can make the difference between belonging to an average, a losing or a winning corporation.

Provide feedback; get that information to your top people. Because unless you tell them, they will not know. Unless they know, they won’t be able to change. And if they don’t change, they may be heading down the path to oblivion. You can fulfill an enormously important function.

That’s one of the reasons I came to talk to you. Increasingly, the kind of business evolution that will sustain our continent’s economic viability and success will depend on the public capital markets. As we create corporations that perform for investors, more money will flow in, providing the fuel we need to move to the next stage of growth. That is how we will maintain the whole free enterprise system. You are a vital component, but only inasmuch as you fulfill your true role – becoming the ears, the eyes and the feel of those responsible for running and making the decisions in the corporations of our future.

HOW CHANGE IN TELECOMMUNICATIONS BENEFITS YOUR BUSINESS

Don Calder
President & CEO, BC Telecom

The Vancouver Board of Trade, May 27, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

It’s a great time to talk about telecommunications. It’s an industry that’s in the news almost daily. An industry that’s undergoing tremendous change – change that’s impacting you and your business dramatically. Today, I’ll talk about how telecommunications is changing, what’s driving these changes, and what all this change means to you and me.

I said telecommunications is in the news a lot. Let’s take a quick look at some recent headlines. A few weeks ago, the big news was that Telus, one of our national partners was talking with AT&T Canada, one of our competitors. They were talking about forming a “business combination.” Less than two weeks later, those talks were off, but they’ve raised a lot of eyebrows. In the meantime, another one of our competitors, Call-Net made a bid for Fonorola, a player in the long-distance market. And just last week, MetroNet, one of our competitors in the local telephone market said it’s buying Rogers Telecom.

And, of course, this “merger mania” isn’t limited to the Canadian telecommunications market. Consider WorldCom’s acquisition of MCI. WorldCom and MCI are both giants in telecommunications down south. By merging they’re creating one of the largest corporate marriages in US history.

What does all this mean for you, our customers? I believe it’s good news for you. You see, these changes will make the market even more competitive. And competition breeds innovation, choice and customer focus.

What does it mean for BC Telecom? First of all, like all players in the market, we’re having to work harder to win your business. And like all the other players, we, too, are looking for economies of scale. So we can spread the cost of developing new products and services over many customers. That’s why our relationship with GTE is so critical. It’s also what drove the creation of Stentor – and continues to drive our commitment to a national organization. It’s what drove Telus and AT&T into their discussions. It’s what drove MCI and WorldCom to do the same, and so on.

I want to emphasize, however, that despite all the change swirling around us, the critical ingredient is you, our customers. Right now, we’re talking with our Stentor partners about: how we can serve you better, how we can help you compete and how we can help you win. Each member of the Stentor alliance is committed to ensuring you get the best service we can deliver at competitive prices – no matter what happens in our business environment. Certainly at BC Telecom, our focus continues to be you – consumers and businesses here in British Columbia. We’re going to meet all of your telecommunications needs here and around the world.

So, that’s my summary of current industry events. A lot of shakeups. A lot of change. Let’s now look at some of the things driving this change. First and foremost, it’s you. Your need to reach your customers, employees, and suppliers wherever they are in the world. Your need to lower your costs. Your need for creative solutions.

Of course other factors are also at play. They are competition, technology and regulation. Let’s look at each one briefly. First, competition. There are now more than 100 companies vying for your long-distance business, and four companies offering wireless service. There’s no doubt about it, competition is a huge factor in telecommunications today.

What about technology? The internet provides an excellent example of the power of technology. It’s transforming every aspect of business today. You might have seen a recent article in The Vancouver Sun. It said that by the year 2002, the global market for electronic commerce is expected to grow to US$300 billion.

The impact of the internet can also be seen in everyday life. I’d be interested to know how many Canadians sent Mother’s Day cards by email this year. At BC Telecom we’re committed to ensuring you have access to the latest internet technology. Two years ago, we unveiled Sympatico. It’s now the largest internet service provider in BC with approximately 70,000 customers. And just a few months ago, we launched BC TEL MultiMedia Gateway. It provides high-speed internet access. More than that, it allows internet service providers to deliver content at higher speeds. For example, Sympatico High-Speed Zone offers BCTV newsclips and sports highlights.

So far, I’ve touched on competition and technology. What about regulation? I’m pleased to say our regulator, the Canadian Radio-Television and Telecommunications Commission (CRTC), is working hard to keep up-to-speed. The CRTC’s new approach is well suited to our current environment.

Here are two examples. First, the CRTC is making it possible for us to bring the price of local telephone service closer to its actual cost. The CRTC has allowed us to increase prices for local service gradually as we continue to hold the line on our costs. So, we’re finally on track to seeing all forms of subsidy for local service disappear. You see, as business customers you still subsidize the amount residential customers pay. What’s more, long distance subsidizes local. And urban customers subsidize rural customers. That doesn’t make sense in a fully competitive environment.

Tomorrow, the CRTC begins a hearing in Prince George to look at how to serve Canadians in high-cost remote areas. The CRTC will ask:

• If services to rural and sparsely populated areas should continue to be subsidized?

• If so, which services and which areas would qualify?

• Where should the subsidy come from? Right now, as I said, it comes – in part – from you, as business customers in major urban areas.

• Finally, how should the subsidy be distributed?

The results of that hearing will be of interest to all Canadians.

A second example of how the CRTC is helping to move the industry toward full competition can be seen in a recent decision. It says we can now package and advertise our wireless services with some of our other services. This is something we’ve been pushing for, and you’ve been telling us you want, for a long time. Thanks to this decision, we’ll be able to create personalized offers for you. We’ve already put together an offer that combines long distance and internet service. We’re waiting for word from the CRTC about a couple of other new offers. And we’ve got a team of marketing experts looking at other ways to take advantage of this marketing opportunity. I believe, in the future, you’ll be able to choose the mix of services that works best for you, your family or your business. More to come on this.

So, that’s what’s behind the headlines: increasing competition, dramatic change in technology and evolving regulation. So, what does all this mean for you? How are you benefiting as business people? You’re benefiting because we at BC Telecom are more committed than ever to our three objectives:

• To be a market leader

• To partner with our customers

• To be easy to do business with

What do I mean by a market leader? I mean we are continuing our proud tradition of striking out ahead, taking calculated risks, being the first to offer new services. For example, we were the first to offer consumers a telephone that sends and receives email. We were also the first to launch an interactive website which provides local news and information exclusively in Chinese. Last week, we launched our new Sympatico website for Indo-Canadian internet users. The site includes a wealth of community news, entertainment listings, restaurant reviews and public service announcements. It’s called Jal, which means “web” in Hindi.

As well, we were the first to offer high-speed data service to business customers. High-speed data translates into increased efficiency and cost savings for your business. Some of the businesses using our high-speed network include:

• Brokerage firms and credit unions like VanCity Savings and Pacific Coast Savings

• Customers in the forest industry, like Slocan Forest Products, Doman Industries and Western Forest Products

• School districts in Surrey, Burnaby and Coquitlam

• Municipalities like the City of Richmond, the District of North Vancouver and the City of Kelowna

I’m pleased to say we recently expanded our high-speed data network to 13 new communities. The latest additions are Terrace, Cranbrook and White Rock. This means that 90% of BC businesses have access to high-speed network capabilities. That’s what I mean by leading the market.

The second part of our vision is to continue partnering with our customers. We want to be your partner. We want to help you succeed. For example, we’re working with municipalities around the province to create “Smart Communities.” We have agreements in place with Victoria and the district of Maple Ridge among others.

We’re also partnering with British Columbians who produce films, TV documentaries and innovative new media programs. Recently, we established the BC TEL New Media and Broadcast Fund. We’ve set aside $10 million for this fund. And the response to our fund is extremely positive. We’ve just cut the first check. It’s gone to a BC producer named Raymond Massey. His project? A made-for-TV film called West of Sarajevo. We’re thrilled to be a partner in this creative endeavor.

Here’s another example of partnering. Two weeks ago, we signed a memorandum of understanding with the Simon Fraser Health Region, which serves people in New Westminster, Burnaby, Port Coquitlam, Coquitlam, Port Moody, Pitt Meadows and Maple Ridge. We’ll link together 57 health agencies in these communities to help the Health Region achieve its vision of having one medical record per patient.

This will mean that with the click of a mouse a patient’s complete medical history can be accessed in any emergency room even if the patient has never been to that facility before. Medical staff will know instantly the last time the patient visited his or her doctor, the results of lab tests taken many months ago, and so on. It’s going to make a significant difference to the delivery of healthcare in the region.

A third example of partnering has to do with the “year 2000.” We’ve been working on our program since 1996. We’re determined to make the century date rollover a “business-as-usual” event. Yet, according to Statistics Canada less than half of Canadian businesses have a year 2000 program in place to address this critical business issue. We recognized an opportunity to partner with you and we jumped on it. In April, we distributed more than 200,000 brochures to businesses around the province. And, today, I’ve brought copies of the brochure for you. They’re at the back of the room. I strongly encourage you to take one back to your office when you leave today. And ensure you will be ready for the year 2000.

As I said, in addition to leading the market and partnering with customers, we want to be easy to do business with – whether it’s on the phone, in person, by email or over the internet. Last September, we made it possible for university students to order their telephone service, long distance and Smart Touch features over the internet. Plans are in the works to enable all of our customers to do the same thing. Not only that, we’re working to develop ways you can pay your bills online as well.

How are we going to achieve our objectives? We’ve started by changing the way we approach our business. Today, we approach every aspect of our business from your perspective. We’re focused on your needs, on understanding them and then designing products and services to meet those needs.

Consider our relationship with Rainmaker Digital Pictures. Rainmaker is a Vancouver-based company. It specializes in post-production for films and TV shows. Shows like Millennium. The people at Rainmaker told us they need to get daily film takes to Los Angeles. Right away, every day. By courier, it takes about eight hours. Instead, Rainmaker uses our MovieRoute service to convert film and TV scenes into light pulses and then transmit them over our network to Los Angeles in real time. That keeps Rainmaker at the forefront of its business and it helps BC’s film and TV industry to be efficient and grow.

Of course, while we’re changing the way we approach our customers, we’re not changing our commitment to investing in this province. This year alone, we’re investing more than $570 million to maintain and expand our network. For example, we’re continuing to invest in our growing Sympatico internet service. This year, we’ve extended Sympatico to seven more BC communities. Now, 85% of British Columbians have local access to Sympatico. And, as I said earlier, we’re expanding our high-speed data network.

These investments benefit the entire province. For example, because of the scale and scope of our network, British Columbia’s call center industry is poised for growth. As you know, call centers are changing the way many customers and businesses interact with each other. The call center industry is growing rapidly across Canada. It spans all sectors: financial, software, healthcare, consumer services and businesses of all sizes. It’s also creating jobs. Jobs for knowledge workers. Quality jobs. Jobs in all parts of the province.

Businesses like yours can locate your call centers almost anywhere in the world. We want you to choose British Columbia. BC already has a lot going for it:

• A highly trained, multi-lingual workforce

• BC Telecom’s network

• World-class training facility at BCIT

And now, thankfully, the provincial government has eliminated the sales tax on toll-free calls. I believe this will be a boon to the call center industry because the use of 1-800, other toll-free numbers and the internet is the lifeblood of the call center industry. And you’ll be pleased to know a group of business people from across the province is working with the government on a new program. A sales and marketing program to attract more call center business to our province.

We’re also talking with the government about introducing training incentives to make BC an even more attractive place to do business or set up a new call center. I encourage everyone here today to add your voice to this issue. Today, about 30,000 British Columbians work in call centers. We want that number to grow. Right now, a number of companies are considering setting up call centers here. It could mean more than one thousand new jobs.

As you can see, call centers are important to BC’s economic future. The development of the call center industry is just one of the ways in which the telecommunications industry is changing and one of the many changes that benefit you. As I said at the beginning of my remarks, it’s a great time to talk about telecommunications. It’s an exciting industry and what I find most exciting is that telecommunications is an economic enabler. My business is helping your business succeed.

POSITIONING FOR CONVERGENCE

Jean C. Monty
President & CEO, BCE, and Chairman & CEO, Bell Canada

Investment Dealers Association of Canada, Mont Tremblant, Quebec, June 29, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

Allow me to start with a quote: “Today…we have extended our central nervous system itself in a global embrace, abolishing both space and time…Rapidly, we approach the final phase of the extensions of man…when the creative process of knowing will be collectively and corporately extended to the whole of human society.”

I challenge you to find a better description of cyberspace, the realm created by the internet. And yet these words were written more than thirty years ago, long before the internet, by one of the century’s most daring thinkers. They were written, of course, by Marshall McLuhan. Small wonder that today’s wired generation venerates McLuhan as their patron saint.

“Extending our central nervous system itself in a global embrace, abolishing both space and time…” When McLuhan wrote, he was describing the extension of electronic man: copper wires and radio waves, as exemplified in every home by the black rotary phone and black-and-white TV. Shortly after McLuhan died, the computer also took up residence in homes. And while its capabilities were impressive at first, little did we suspect the genie waiting within.

So far, so good. Three devices, three industries marching along parallel tracks: the telephone, the TV and the computer. Then, sometime in the early 1990s, someone let the genie out. World-shaping events sometimes descend in a thunderclap, like the start of the Nuclear Age. More often, they sneak up on us, to change society from within, like the steam engine in the 19th century and the internet today.

Spawned by the computer industry about twenty years ago, the internet was at first an esoteric tool for US military researchers. Today, it’s entered the public consciousness, and is exerting a powerful magnetic force on other industries. Telecommunications and television are converging on the internet, and as they draw closer, they lose the defining marks that make a telephone different from a TV and a computer. Fundamentally, this is because phones and TVs are entering the digital universe, the computer’s own backyard. This is a good thing. For digital technologies are the democrats of high-tech, converting all images, texts and data to equal and identical bits.

At Bell Canada, the infrastructure has been digital for a few years now. With data traffic now greater than voice traffic, the main switching and trunking systems are currently being optimized for digital data transmission. As for television, by November of this year, the major American networks will begin digital broadcasting in the 17 largest cities in the US. In Canada, a report by a federal task force, “Canadian Television in the Digital Era,” recommended encouraging television stations to begin digital broadcasting in Montreal, Toronto and Vancouver by the end of 1999. This represents the start of the final fusion, or convergence.

I was invited here today to speak about the state of the telecom industry. But as you can see, I keep straying into the once-foreign territory of computers, television, multimedia and entertainment. Perhaps it’s time the telecommunications industry shed its prefix and swam in the greater ambiguity but larger potential of “communications.”

At BCE, we’ve already taken significant steps toward becoming a communications company. Bell Canada is putting together a national network to provide comprehensive services to business customers. Bell has also increased its stake in CGI, Canada’s largest computer integrator, and in MPACT Immedia, which specializes in electronic commerce. Every 24 hours, $3 trillion – an amount greater than the economies of most nations – moves over electronic networks. Electronic-commerce is growing fast, perhaps by a factor of 10 by the year 2000, and we want a share of that growth.

Similarly, Nortel’s recent acquisition of Bay Networks increases that company’s internet expertise. Bell ExpressVu, our direct-to-home satellite service, is just the first step to providing a greater choice of entertainment and information. We are now the sole owner of our very own satellite company, Telesat. And Sympatico, our internet service provider, is the Canadian leader. Just as national borders are yielding to free trade, the lines that once separated industries are dissolving. The winners will be those who already command outposts in neighboring industries, and who can offer fully integrated solutions.

As it now stands, total world telecom service revenues are US$650 billion. When you include telecom equipment and computer software, the figure reaches US$1.5 trillion and is expected to at least double in the next decade. Three fundamental forces are driving this industry: obviously, the internet, which I’ll return to shortly. But also wireless technologies, and the linked forces of globalization and deregulation.

In developed countries such as our own, wireless technologies have undoubtedly changed the way we work and play. However, to grasp this technology’s true significance, you must travel to less developed nations. There, you’ll find that people don’t take basic phone service for granted, as we do. For these nations, a modern pole-and-wire infrastructure would be a major economic driver, but also a major expense to build. With the advent of wireless systems, all this has changed, virtually overnight. A wireless infrastructure requires a much smaller investment, and can be operational within weeks of license approval. Where people typically waited months, even years, for a telephone, now they can buy a mobile handset and activate service in a single day.

Small wonder that worldwide, one new telephone subscriber in six gets a mobile phone. Within a few years, we could see as many wireless, as fixed, wireline networks. This is why Nortel, one of the world’s top three providers of digital wireless technology, is enjoying record revenues. And why Bell Canada International, which invests in wireless networks in developing economies such as Colombia and Brazil, is experiencing record growth.

The other factor, which I mentioned earlier, behind the so-called “golden age” of telecom is deregulation from explosive technology advances and the globalization of markets. Partly this is because governments now realize that markets are more effective mechanisms for shaping the industry’s future. And partly because, frankly, they have no choice. No one does. The industry is changing too fast, and in too many countries, to be regulated. The rules become obsolete even before the ink dries.

This doesn’t mean that I’m advocating a regulatory vacuum. Rather, I’m suggesting that government can be a force of stabilization rather than direction. National governments can help by establishing fair, competitive trading environments within their borders, particularly in today’s integrated global economy. For as deregulation spreads, each government finds it must follow suit, or risk being left behind. The result is fierce competition, greater investment, and innovation – benefits that accrue to each nation’s industry, economy and end users.

Now let’s return to the internet and see what the genie is up to. At current growth rates, it’s estimated that the number of internet users worldwide will increase from 90 million in 1998 to 200 million by 2000. It’s expected that worldwide internet commerce revenue will amount to $1 trillion yearly in the next century. It’s not surprising that data now accounts for more than half the traffic moving over the public network, and is growing ten times faster than voice. By the year 2000, data will account for nearly 80% of all backbone traffic. What does this mean for telecom carriers? A great deal, both technologically and culturally.

On the technical front, it’s important to remember that telecom infrastructures were primarily designed to carry voice, not data. As data networks continue to grow in size and capacity, voice is becoming just one among myriad other applications, which may include video-conferencing, internet, television and multimedia. With the primacy of data, the challenges are coming thick and fast.

Challenge number one: the industry must complete its transition from the first generation of digital systems to the second, represented by asynchronous transfer mode, or ATM, and the superfast gigabit routers. The essential benefit of ATM and routers is that they’re data-friendly. In the democratic spirit of digitization, it can carry my picture just as easily as my voice and the printed text of this speech.

Challenge number two: these networks will demand new access routes for users to overcome current bottlenecks. The chief bottleneck is the so-called “last mile” to homes and businesses, now connected by copper wires or coax cable. What are the options? One, spend untold billions retrofitting the existing copper-wire infrastructure with fiberoptic strands. Two, find new entry points, such as satellite transmission. Or three, implement solutions that widen the last mile into a “virtual” highway, thus giving new life to our copper infrastructure.

One such solution is the 1-meg modem, introduced by Nortel last year. Seventeen times faster than a 56K modem, the 1-meg modem provides always-on connection, so there’s no need to dial-up each time. What’s more, the modem prompts you when there’s an incoming call, so you can put the internet on hold. In future, you’ll even be able to receive and make phone calls while surfing the internet. And all this over an ordinary copper line.

But that’s just the hardware. There is much more to come, such as Connected Capital Region, a Bell Emergis project now being planned in our capital city. Connected Capital Region offers advanced communications packages tailored to the small home office, consumer and business markets. The packages will include Sympatico internet access at very high speeds as well as the traditional, long-distance service and email. We also intend to offer advanced services such as video conferencing, and integrated one-number voice and email solutions from Nortel, in addition to entertainment packages and home management features.

Challenge number three: move the industry from its current focus on dialtone to webtone. This is a challenge Nortel set for itself during the past year, promising to deliver the same robust, reliable, scaleable and secure internet access we’ve come to expect from dialtone.

Webtone has several implications, particularly in the kinds of technologies being developed. As the internet continues to grow, attracting most data traffic over its networks, internet protocol, or IP, is becoming the de facto standard. IP is the fundamental platform for webtone, and for all future communications solutions, such as the 1-meg modem I’ve already talked about.

If you were in this part of the world last January, you’ll recall the ice storm. You might also recall that throughout those days, as Montreal was brought to its knees by a failing electric power grid, as one service after another collapsed, the telephone system remained standing. This is telecoms cultural legacy: bulletproof, rock-solid stability.

Now contrast this with data networkers, who typically measure downtime in hours per month, sometimes weeks. They may boast of getting a system up and running again in four hours. When billions of dollars are coursing through the network, this is a recipe for disaster. We’ve all experienced the frustration from the failure of the Interac payment system at some point in time. But we can’t afford failures when we move billions of dollars form Tokyo to Paris.

For a telecom carrier, downtime is simply unacceptable. In our world, the goal is always 99.99%. Of course, consumers have paid a price for dependable dialtone, namely a limited number of services, such as call display, call forwarding, conference calling, and a few others. Now, however, telecoms are entering a new era. We’re following the genie’s trail into a universe of almost unlimited choice and interactivity. Like it or not, we’re being infected with this world’s freewheeling, unpredictable and wide-open spirit. The question is which carriers can combine the rich choices of networkers with the dependability of telecom? And which will survive the coming shift in culture?

Computers do have some way to go, but then they’ve also traveled a long way in a short time. In less than two decades, they evolved from giant, water-cooled mainframes to desktops whose power dwarfs their predecessors. This phenomenon is explained by Moore’s Law, which states that the computer’s price/performance ratio doubles every 18 months.

Similarly, the price/capacity ratio of network bandwidth is also advancing at an exponential rate. Here’s one dramatic example. Using the time value, with 1950 technologies, it would have taken 158,000 years to transmit the entire contents of the Library of Congress or 88,000 books. With 1980 technologies, it would have taken 661 years. By 1992, our bandwidth capacity had reduced the time to 53 days. Today, we can transmit the Library of Congress holdings in less than 20 seconds. Here is another way of looking at this example using the dollar value. In 1975, it would cost one dollar to transmit the content of one book in one second. Today, in only one second, we can transmit 160,000 books at a cost of under one cent per book.

Gigabits have now given way to terabits. One terabit is equivalent to all the voice traffic in Europe. This mushrooming capacity, with its economies of scale, also signals a marked cultural shift. We’re seeing that as backbone bandwidth becomes cheaper and more plentiful, the industry is refocusing its values on service speed, service management and user value – in other words, on the customer. And as bandwidth doubles with regularity, new multimedia applications are gobbling up the extra capacity. Parallel to this phenomenon, we are also seeing the cost of transmission services going down dramatically.

In fact, our appetite for bandwidth is insatiable, and is largely responsible for the birth of a new industry. Here’s what the future looks like. As choices proliferate, customers will be able to connect directly, or through a specialized intermediary, to access video, photos, text, audio and multimedia. These intermediaries will be major consumers of bandwidth, buying it from telecom, cable and satellite carriers, or, in future, from local multipoint telecommunications systems.

This sharp divergence between who builds and maintains the networks, and who creates and supplies the services, is at the very heart of the information highway. With ATM technology, as with the internet, anyone can now create and market any service on the public network. Where does that leave telecom carriers? It depends on how smart they are, how flexible and quick to learn. I know that at BCE, we want to remain in the driver’s seat. We want to be part of the convergence of technologies, not victims of the divergence between networks and services.

To do this, we must learn to do business in the global village, where information and knowledge are the new legal tender. This is why Bell Canada has increased its stake in CGI and MPACT Immedia, and why Nortel purchased Bay Networks. These acquisitions are about buying experience in turnkey solutions, flexible management and a computer culture. We want know-how that complements our business, to produce enriched, integrated services.

BCE isn’t alone in this, of course. Cross-pollination is occurring everywhere. Telecom carriers are importing computer culture to ease their transition to the communications industry. At AT&T, chairman Michael Armstrong comes from IBM, while British Telecom CEO Sir Peter Bonfield was formerly with the computer consulting giant ICL. Can we survive convergence? This depends on our ability to change cultures and become providers of solutions that integrate computer technology, telecommunications, and entertainment services.

I can tell you it’s not easy to know what lies ahead. We have no Marshall McLuhans to guide us. Of course, if you know of one, you might tell him there’s a nice job waiting at BCE. I’ll even throw in a cell phone. No, we don’t know exactly what lies ahead, except one thing: competition, and lots of it.

We’ve had a small foretaste of long-distance competition between Bell Canada, AT&T, Sprint, and Fonorola, but there will be much more. Increasingly, telecom companies want to provide total services to customers: voice, data and video communications, mobile and satellite communications, internet access, and, increasingly, radio and video broadcasting on demand. They need to develop a scope of services for customers.

These carriers are in a strong position to shape the industry’s evolution, because they control the networks. But they’re not alone – remember which industry let the genie out. When Microsoft bought the internet-on-TV manufacturer WebTV, invested in the cable company Comcast, flirted with TCI, another cable distributor, and launched its Teledisc mobile satellite project, it was declaring the same intention as telecom carriers: to be more things to more people, at more times and in more places.

This explains why telecom companies are constantly drawn into new partnerships. And it explains the emergence of fully integrated worldwide communications networks. The prototype of this kind of super-operator is WorldCom, which does business directly in some fifty countries. Former national monopolies are even now trying to achieve the same critical mass through mergers, acquisitions or investments. One example is the cross-purchase of shares by Deutsche Telekom and France Télécom, and these companies’ investment in Sprint.

These ex-monopolies have realized that the very concept of a captive territory for a given carrier is vanishing. In its place, we’re seeing local hubs in major cities, linked by international backbones. We’re witnessing the emergence of a world communications market dominated by a small number of players who can bundle a complete range of services. BCE wants to be among this select group. And, serving these players will be myriad small high-tech companies with expertise in developing cutting-edge solutions for any given sector. Bell Emergis is an excellent example of this kind of high-tech company, and Connected Capital Region an example of what’s possible.

Ultimately, telecommunications will continue to play a pivotal role in world markets. If anything, that role will be expanded. Wireless technologies, deregulation and trade globalization will make sure of that. But above all, and increasingly, the internet will enable more and more economic activities to interact transparently across borders. Consider the possibilities when we finally perfect voice synthesization and voice recognition, handwriting recognition, automatic translation and touch-screens.

This is both scary and exhilarating. Scary for some, because we’re entering the unknown. Exhilarating for most, because the internet has the potential to unleash unprecedented understanding, prosperity and value for all humanity. And yet, what is it? It is simply a protocol but is much, much more. It could be the missing link in the way we live and play. The internet has no offices, shareholders or employees. It obeys no national laws, and is therefore answerable to no one.

If you wanted to see the internet, you couldn’t, because it exists in no single place. And yet the genie is out there, somewhere, and it works. Marshall McLuhan was absolutely right, because the internet resembles nothing less than a global mind – not a brain, which can be weighed and dissected – but a mind that can make our wishes come true.

CANADA 2000: LOOKING FORWARD AND OUTWARD

L. R. Wilson
Chairman, President & CEO, BCE Inc.

Annual meeting of the Canadian Chamber of Commerce, Calgary, Sept. 19, 1993
Published in The Corporate Report No. 4 (December 15, 1993)

Our business is very much a business of the next century. We are an integral part of what has been called the new information economy. The revolution in communications technology and information processing has provided us with new challenges and new opportunities.

To succeed, we have determined that we must concentrate on our core expertise and compete globally. We are embracing change as critical to our survival.

Indeed, we cannot survive except as a company with a global outlook. Three-quarters of Northern Telecom’s revenues now originate outside of Canada. Our investments in Mercury Communications in the UK and Clear Communications in New Zealand have launched BCE into international telecom services activities. And BCE companies now publish telephone directories in 12 countries, from the Caribbean to India.

The establishment of Stentor and its alliance with MCI, as well as our participation in the Financial Network Association, further testify to our determination to increase our ability to serve international customers in Canada. Similarly, Northern Telecom has entered into alliances with international companies such as Matra Communications in France to enhance its ability to deliver products globally.

These ventures build on the business we know. We are expanding on the basis of a sound foundation of experience and expertise. We are pursuing new opportunities and challenges which are important not only to BCE but, we believe, to the Canadian economy as a whole. Our activities bear directly on the competitiveness of a wide range of Canadian-based industries.

Central to our progress is a major commitment to innovation. Over the past decade, we have spent $9 billion on research and development and we intend to keep spending more than a billion dollars a year over the next decade. At the same time, in our telecommunications service companies, we are investing heavily in these new technologies, new equipment and the delivery of new services. In 1992 in Bell Canada alone, we invested $2.7 billion. Finally, we are determined to sell and to source new products and services on a worldwide basis, adapted as need be to local circumstances and requirements.

While we are committed to change and to the globalization of our business, we are also resolutely determined to grow BCE as a Canadian company. Today, BCE has assets of some $45 billion, revenues of over $20 billion and a net income of $1.3 billion last year. With some 300,000 shareholders, we are the most widely held firm in Canada; 86 percent of our shares are held in Canada and 98 percent of our shareholders live in Canada. In 1992, we paid $540 million in Canadian income taxes and a billion dollars in other payments to Canadian governments. Our Canadian workforce in 1992 numbered 85,000 people who together earned wages and salaries of $4.6 billion. BCE is the largest private employer in the country and the largest investor in R & D in Canada, public or private. In short, we have a large stake in this country, and the country has a large stake in us.

Reflecting on BCE’s experience over the past few years and on our aspirations as we head into the next century, I would like to offer some thoughts which may have wider application – application not only to other Canadian firms, but also to the country as a whole.

Let me declare my bias at the outset – I think that Canada is the greatest country in the world. I feel immensely fortunate to have been born and raised here, and to have had the opportunity to live and work in three provinces – Ontario, British Columbia and now Quebec. I am proud to be a Canadian, and I’m sure that all of you in this room today are too. But I don’t believe we should let our pride deter us from asking difficult questions about our future, or blind us to the realities of the challenges we face. I worry about how we can continue to enjoy one of the most prosperous and rewarding societies on earth – a society in which all Canadians can raise their children and grandchildren to enjoy the same opportunity. And I don’t mean rewarding only in the material sense, but also in the broader sense of community and lifestyle.

Unfortunately, there are an increasing number of Canadians who are concerned that the Canadian dream is becoming an impossible dream, if not for them, at least for their children and grandchildren. Why is that? Well, measured in constant dollars, the average incomes of many Canadians have declined over the past decade and a half. After three decades of steady growth, our standard of living, on average, has been stagnant since 1980.

A large part of our unease, however, stems from a nostalgia for an era that is gone. We regret that the circumstances and institutions that have long sustained us as individuals and as a society appear to have disappeared. And by continually looking over our shoulders, we are failing to see the opportunities that are unfolding before us. In the words of Dian Cohen and Guy Stanley:

“As a community, we have eyes only for the old economy, not the new one. For all their imperfections, we loved the good old days. We knew what made us rich (wheat, trees, energy). We knew what to expect (expansion, growth, steadily improving standards of living). We shared a common vision of our society (our values were tied to material growth and the accumulation of wealth). But appealing as that old world was, it no longer exists. And unless we recognize the present era as a transition, not a dip in the old economy, we will be left with an empty shell. Let’s say it up front: this “recession” isn’t going to end. It isn’t going to end because it isn’t a recession.”

This is a hard truth. It is a particularly hard truth for those whose livelihood, whose identity, whose self-worth were inextricably tied to the values and institutions of the old economy. But we must face up to it. Only then can we begin to appreciate not only why we must be prepared to change the way we look at today’s problems, but also the extent to which we must transform the institutions and activities that make our society work.

We have been standing still in recent years because the industries of the past are no longer growing while the industries of the future have not yet been properly and fully defined. A number of goods-producing industries are now the growth industries of yesterday. Their ability to generate wealth and jobs has peaked. They will continue to be a part of our future, but not as the engines of growth.

Our industrial economy has now matured to the point where we need fewer and fewer people to produce the same quantity of goods. We also need fewer people to manage our industrial firms. Others around the globe can now supply us with some of our traditional products more efficiently and more cheaply than we can. And information processing technology has reduced the need for clerks and administrators.

The people no longer involved in producing goods are now providing services and increasing the knowledge base of our society. The skills and training that underpin the efficient delivery of those services, however, are different, and therein lies the problem. There is a profound mismatch between what society now needs and the kinds of workers available. The mismatch in skills is both a personal tragedy and a societal challenge. Just ask unemployed steelworkers in Hamilton or fishery workers in Newfoundland.

Our ability to take advantage of new industries and new opportunities requires adjustment and change in the lives of individuals as well as in the institutions of society. This, I believe, is the central challenge we face as a country today. We need to transform ourselves from a winner in the industrial economy to a winner in the new information economy.

I am confident that we will meet this challenge. I have profound faith in our ability to rise above our current difficulties and ensure that bright future for our children and grandchildren. But I do not believe that we can achieve that future without some tough choices and painful sacrifices. The philosopher Alfred North Whitehead once said: “The first step of wisdom is to recognize that the major advances in civilization are processes which all but wreck the society in which they occur.”

Canadians today are perplexed and troubled by these changes. Some of these changes emanate from circumstances beyond our immediate control, from the technological and other developments that have created a tough new global economy, an economy which provides individuals, firms and countries with very little room to hide. We are not alone in facing this tough new environment. Other nations face similar or even tougher challenges. What matters is how well prepared we are to accept those challenges.

Here the story becomes a little more difficult. In part because of the complacency bred by past success, in part because of the hole we have dug in the past few years as we tried to spend our way out of the difficulties created by these new realities, we appear to be less prepared to face the future than some others.

What evidence is there to support that statement? Every year the World Management Forum publishes an exhaustive annual review called the World Competitiveness Report. It rates the economic performance and potential of the world’s most important economies. In the last few years, we have been slipping. A few years ago, we were fourth and then fifth. Last year we slipped to eleventh. This year? Perhaps you might care to venture a guess.

I am not suggesting that we accept the judgment of the Forum in all respects. Its methods are curious and its criteria subjective. Nevertheless, its assessment of Canada contains a very painful truth. We rate very high on those criteria which spell out the cards that we have been dealt by nature, history and location. Our resource base, our human capital and our geographic location all suggest that we have a favorable future. In short, we have some very valuable assets. But when it comes to those criteria that describe the extent to which we are prepared to make the best of those assets, we slip way down. Two criteria in particular always disturb me greatly – outward and forward orientation. The Forum is convinced that we are not prepared to look seriously beyond our borders and beyond tomorrow.

The Forum points to a truth that most of us know very well but have not done much about. Canadians do not like change. We tend to be risk averse. Our corporate sector has too many managers and not enough entrepreneurs. We look to governments for solutions rather than to ourselves. In short, the challenges we face as a nation are not matters of endowment or capacity but of attitude, will and application.

This is good news. These are matters which we can do something about.

Our famous talent for self-denigration and self-doubt should not be allowed to obscure a fact obvious to the rest of the world – Canada is a very fortunate land. If we carefully manage our natural endowments, they can provide us with a bright and prosperous future.

But we cannot be complacent. There is no guarantee that we will be able to maintain our enviable standard of living forever. We have inherited our current prosperity. We must earn our future prosperity.

Canada is thus at a crossroads. Our past successes are affecting our ability to make some fundamental adjustments in the way we organize our society and get on with our future.

For a lot of Canadians, when we face problems, we turn to government for the solutions. That has been the Canadian way. But that is precisely one of the things that needs to change. Our reliance on government as our guardian angel and guiding light may in fact be one of our greatest liabilities.

It is tempting to become nostalgic and insist that our politicians and bureaucrats were more capable and that government did things better in the good old days. Perhaps so, but that is not the question. The point is not whether we have hardworking, dedicated, capable people in government – we do – but whether today, government is the best place to tackle all of the problems we face.

Because its growth has been slow but steady, many of us may not fully appreciate the extent of the growth in government services and programs in the past thirty years. The total government share of the economy – federal, provincial and municipal – has nearly doubled since we celebrated our centenary.

We are an over-governed country.

Think about it. We have now reached the point where about 50 cents of every dollar spent in this country, is spent by some government body.

In addition to too much government, we have too many levels of government. While I believe in competition, we certainly don’t benefit from competition between governments leading to duplication and overlap. In the nation’s capital, for example, snow is removed by four different levels of government – the city, the region, the province and the federal government. If they got together and let out one contract to a private firm, I am sure it could be done better for less money.

In a 1990 CBC/Globe and Mail poll, a stunning 86% of Canadians believed that if government worked properly, it could solve most of the problems Canada faces. That is a profoundly worrying statistic because it betrays a psychology of dependence that flies in the face of reality. We are paying increasingly more for government services and receiving less. And the reason we are not getting value for our tax dollar is because governments are not able to adjust quickly enough to new realities.

What then should governments do to adapt to the new realities? Let me explore two avenues which I believe are essential to dealing with the challenges of the 21st century. First of all, governments need to get back to basics and concentrate on the activities and responsibilities that can best be undertaken by them. Second, governments need to change the way they do things so that they can do them better. Let’s take these two themes and try to put some flesh on the bones.

To begin, governments must accept what a lot of us in business have learned the hard way. In the heady days of growth in the 60s, 70s and 80s, we and they took on board a lot of fat; both of us got into activities that we couldn’t very effectively manage. Like business, governments now need to concentrate on their core functions, and let the private sector assume greater responsibility for those things which it can best deal with.

Additionally, governments must accept that they can achieve some of society’s objectives more effectively as partners rather than as sole agents. We need to see a lot more cooperation and rationalization and a lot less competition between levels of government. We need to see a much greater willingness on the part of government to share responsibilities with other sectors in society. This will allow governments to do what they were created to do, and what they can do best.

Let me comment on just three of these core functions.

First, governments must ensure a healthy economic environment, one that favors saving and investment and encourages and rewards initiative and risk-taking. The ingredients for such an economy include a stable currency, sound monetary policy, and a fiscal policy that rewards entrepreneurship and initiative and ensures the availability of capital. In short, governments must provide a healthy and stable macro-economic framework.

In the Canadian context, that means more common cause between federal and provincial levels of government to reduce deficits and eliminate duplication and competing programs. We need to intensify fiscal reform efforts aimed at making Canada a better place in which private capital can invest and do business. We need a simpler and more coherent system of taxation. Otherwise, the underground economy will continue to grow to the detriment of the country as a whole. We need governments that can live within reasonable means and pay their bills.

We borrowed heavily in the 1980s – privately and publicly – to finance fast cars, fancy dinners, and fun-filled vacations. Now that the roof is leaking and we want to send the kids to college, we find that the cupboard is bare. We must face this reality. And to some extent, I believe that we are.

Governments at all levels are now scrambling to reduce expenditures. They know that taxpayer concern has reached the boiling point. As a taxpayer and a business executive, I can only applaud these efforts. But I am afraid that too much of this paring and trimming is taking place without the fundamental changes in assumptions and mindsets that are required to bring government into closer harmony with the requirements of the new economy.

Of course, the best way to tackle the deficit is to get the economy growing so that it generates more tax revenue and governments are required to pay less in income support. A shrinking or stagnant economy provides us with a double whammy – government revenues drop while government expenditures grow. That is why the 1980s were such a tragic decade. We forgot the lesson Joseph taught the Pharaoh three millennia ago. During the seven fat years of 1982–1989, we not only did not put anything away for the lean years, we also borrowed to spend and consume even more. We didn’t invest for the future – we had one heck of a good time! We are now in the lean years and there is nothing in the barn to make up for the poor harvest.

We must put our financial house in order so that governments will be able to ensure the kind of stable macro-economic environment we need for investment and growth. As individuals and as business men and women, we must be prepared to accept the costs involved. We must accept that there are no magic solutions.

The second critical area of government responsibility is the management of a regulatory environment which fosters – not hinders – competitiveness. In spite of attempts at deregulation initiatives over the past seven or eight years, the regulatory requirements placed on businesses by all levels of government continue to consume too large a share of the resources of small, medium and large firms alike. While some of these requirements may once have served worthy objectives, many have failed or outlived their usefulness, while new requirements often serve questionable needs.

Of course we need regulations and regulatory bodies to ensure orderly competition, but governments at all levels must seriously consider the burdens which regulations impose on the wealth-creating sectors of the economy, and recognize the extent to which they undermine our capacity to compete abroad. Total deregulation is not the answer. We have to differentiate between effective, useful regulation and the kind of regulation that flows from political and bureaucratic imperatives.

And, if there’s one area of government activity in which BCE and its companies have had a lot of experience, it’s regulation!

Again, the message for all of us is a simple one. If we want government to be less of a burden, we must be prepared to live with less government. We must accept that government regulation is not always the answer. We must be prepared to accept greater personal and corporate responsibility for our actions and for the well-being of society.

Third, governments must ensure that we continue to make key infrastructure investments – not only involving renewing the infrastructure of the past, but also building the infrastructure of the future. In our industry, for example, we believe that government can and should facilitate the development of telecommunications “super highways” that will allow businesses and individuals across the country to participate fully in the information age.

There are numerous examples of governments around the world finding innovative ways to renew basic infrastructure components. In Great Britain, for example, the privatization of what were formerly considered natural state monopolies has spurred massive foreign and private capital into such areas as telecommunications, water distribution, electricity, and soon, rail transport and highways.

Our governments must also create the mechanisms for the development and installation of state-of-the-art technologies in infrastructure initiatives. These are investments that will, in the long run, give Canada and Canadian businesses a global competitive advantage. Surely there is no more important business development issue than ensuring that Canadian firms secure this competitive advantage now.

And we can help gain that advantage by becoming constructive partners with government, willing and able to invest and share risks and responsibilities in building the human and physical capital for a prosperous future.

But it is not enough for governments just to concentrate on doing the right things. They must also do them better. We desperately need more effective government.

Governments have to learn how to harness the power of modern communications technologies and organizational structures now being successfully implemented in business.

Today, we need a dust-shaking revolution in our public institutions, one that concentrates on results and outcomes and incorporates much more flexibility in choosing the appropriate means.

Government must get rid of its “program mentality.”

Our governments are still imbued with a “one size fits all” approach. Billions of dollars of transfer payments and program expenditures go to Canadians who really don’t need government assistance. We seem stuck on paying everybody rather than targeting those who truly need support. We can, and must, find a better way.

The problem is not one of people but of leadership. Most politicians and public servants are responsible, talented, hardworking, dedicated people who are often even more frustrated than the people they serve. They would like to do better, to take greater pride in their work and we must continue to help ensure that they do.

There is evidence that many of our governments are moving in the right direction. They are learning that the issue is not how to do more, but how to do less and do it better.

I have said a lot about what governments should do. Blaming government for all our problems is easy – but clearly wrong. Unfortunately, it tends to be very Canadian. Let me take the few minutes I have left to suggest some of the things that we business men and women must do. If we are to be listened to, we must lead by example – we must get our own houses in order and show that we are ready to make the necessary sacrifices both as individuals and as businesses.

The demands of the global economy have placed tremendous pressures on all of us. Every business in this room, I am sure, is restructuring and economizing in order to survive. This is not a matter of us being “hard-hearted” capitalists ruthlessly seizing opportunities where responsibilities are small and shedding them where they are large. It is a matter of survival.

But the stresses and strains of adjusting to a more competitive global economy have led to a range of social problems. That should not be surprising. What is surprising – indeed unhealthy – is the deep conviction that government alone is responsible for these problems and the expectation that only government can resolve them.

Of course, government assistance for people affected by change is critical. It is necessary for governments to invest in training and retraining. It is right for them to provide bridging financial support. Adjustment can be hard on individuals.

But we as businesses must be prepared to play a more important role in helping to solve these problems. Putting social problems caused by difficult business decisions on the back of governments is abrogating our social responsibility, and more importantly, limiting our involvement in the resolution of these problems. We need to support our communities – and here I do not mean simply financial support.

However, the most important contribution we can make in helping to cope with the adjustment problem will, of course, be our very success in competing in the global economy, thereby creating rewarding jobs over the medium and longer term.

During the 1980s, we in the business and financial communities, became obsessed with financial engineering and “get rich quick” schemes. We spent much of the decade taking profits by replacing real equity capital with debt – what a great example for our governments!

The factors that make a firm, an institution or a society competitive are not short term. They are built into its values, its organizational structure, its vision, and the quality of its people.

All of us must invest more in our human resources – in particular our education system – in order to ensure that future generations are healthy, curious and knowledgeable and that they have the skills and understanding to adapt to the challenges.

I will say it once again – Canada is a great country. I say that without reservation or qualification. While we have made mistakes over the past decades, both in business and government, you and I also know that it’s time for all of us to do something about fixing those problems. We can and we must. In the words of Winston Churchill, Canadians “have not journeyed all this way across the centuries, across the oceans, across the mountains, across the prairies, because they are made of sugar candy.”

Yes, it is a global economy and a global village. But this land is our land to look after for the benefit of generations yet to come. That means that each and every one of us, man or woman, worker or job-seeker, from the east or the west, the north or the south, must take more responsibility for our own lives and for our future.

We need leadership and vision to keep this country moving ahead – and we desperately need it now. We must all look in the mirror and determine how best each and every one of us can contribute.

Let’s get our act together and help Canada meet the challenge.

TELEPRESENCE: THE CHALLENGE AND THE OPPORTUNITY OF THE FUTURE

L. R. Wilson
Chairman & CEO, BCE Inc.

Address to shareholders, Montreal, April 30, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

One hundred and seventeen years ago, the Bell Telephone Company of Canada was formed here in Montreal. One hundred and two years ago, the company now known as Nortel was created here in Montreal. Fourteen years ago, BCE itself was incorporated here in Montreal.

Montreal is more than our headquarters city. It is our home. The BCE group has deep roots in this city. We are committed to this city. BCE and its operating companies – Bell, Bell Mobility, Bell Canada International and Tele-Direct, as well as Teleglobe, in which we have a significant equity interest – are all based in Montreal.

Our presence in Quebec includes 15,000 employees at Bell, 3,300 at Nortel, nearly 1,000 at Bell Mobility and 700 at Tele-Direct. All told, the BCE group employs more than 20,000 men and women in Quebec, making us one of the largest private sector employers in the province.

If Montreal, has critical mass in telecommunications – and it has…if it is globally-competitive in telecommunications – and it is…I’m proud to say that the BCE group of companies has played a leading role in its development. In fact, BCE companies are a large part of the reason Canada is a world leader in telecommunications. Across the country, the BCE group provides jobs for 73,000 Canadians, with an annual payroll of $4 billion. BCE companies spent $2.5 billion on capital expenditures in Canada last year, and another $1.1 billion on research and development. Fully 20% of Canada’s private sector R&D is conducted by Nortel, about $80 million of it right here at our Nun’s Island research facility.

We are equally committed to contributing to the communities in which we live and work. Last year, the BCE group of companies provided $25 million in donations, educational grants and other community sponsorships. Bell Canada was the corporate sponsor of a CD-ROM, distributed to schools throughout Ontario and Quebec, that marked the 150th anniversary of the birth of Alexander Graham Bell. Nortel has established a chair in telecommunications here in Montreal at McGill University. And together, Nortel and Bell are co-sponsors of the Governor General’s Performing Arts Awards, which recognize Canadian artists for lifetime achievement and contribution to the cultural enrichment of Canada.

It is important to emphasize that while Canada is our home, our market is the world. Nortel, for example, now has a presence in some 150 countries and territories. Bell Canada International is located in North and South America, Asia and Europe. Tele-Direct operates in the Middle East, Asia, the Caribbean and the United States. Bell Canada and Bell Mobility are both among North America’s leaders in wireline and wireless communications.

Following its creation in 1983, BCE’s corporate direction included diversification into businesses outside of telecommunications. In the 1990s, we have refocused all of our resources on our core strengths within telecommunications. There are good reasons for this. Deregulation, privatization and rapid technological change in the 1990s have created enormous opportunities for growth in this industry.

It is BCE’s good fortune to operate in an industry that has virtually unlimited opportunities in the years to come. 1996 was a year of solid achievement with improved results in all operating areas.

Let me briefly review the numbers. Revenues were a record $28.2 billion, up almost 15% over 1995. Net income was $1.15 billion, an increase of 47% over 1995. That resulted in earnings per common share of $3.40, up 52% from 1995.

Return on equity (ROE) rose to 10.6% in 1996, a major improvement from 7% the previous year. We nevertheless believe that our ROE is still not adequate to sustain the company’s growth. Our longer-term target is to boost our return on equity to 15%.

BCE’s stock price rose from $47 at the end of 1995 to $65 at the end of 1996, providing shareholders with a 38% growth in the value of their investment. This in addition to a cash dividend of $2.72, making the total return of 44% for last year.

In fact, since our reorganization as BCE in 1983 to the end of 1996, the compound annual total return to a BCE shareholder was 14.4%. While most of the share price improvement came in the last two years, we nevertheless beat the TSE 300, in terms of total return, in 9 out of the last 14 years. We must continue to do that.

The primary factor in BCE’s improved financial performance in 1996 was the turnaround at Bell. Bell’s earnings contribution increased to $714 million, from $502 million in 1995, reflecting significant revenue growth, coupled with greater cost efficiencies associated with the company’s transformation program. Bell also reached an important milestone in 1996, achieving positive free cash flow for the first time in more than 50 years.

But Bell still has a challenging road ahead. Bell’s long distance market share dropped to 69% at the end of 1996, and the company will be facing the introduction of competition in local telephone service next year, about which I will have more to say later.

The worldwide explosion in network capacity, both wireline and wireless, driven by new technologies and regulatory liberalization and privatization, propelled Northern Telecom to record revenues of $17.5 billion this past year, up almost $3 billion over 1995. Nortel’s order input increased by 28% to $19.3 billion. Net earnings rose 32% to $844 million.

Nortel is well positioned to capitalize on the continuing growth in this industry. Reflecting this, Nortel’s orders in the first quarter of 1997 were up 35% over a year ago.

The continuing explosion in the demand for wireless services led to a 34% increase in subscribers in 1996 at BCE Mobile. At the end of the year, the company had more than one million cellular customers and almost 400,000 paging customers. 1996 revenues were up almost 20% to $926 million, while net income rose 25% to $64 million.

The year 1996 was another successful one for Bell Canada International. The highlight was the merger of its United Kingdom operations-Mercury and Bell Cablemedia-into a new company known as Cable and Wireless Communications. BCI holds a 14.2% interest in the new company with projected annual revenues of £2 billion, or about $4.5 billion Canadian. Operating across Great Britain, the new company will be among the first in the world to offer integrated communications services, including local and long distance telephone service and cable television. This new company has been trading on the London and New York markets since Monday of this week. BCI’s stake has a value today of more than $1.4 billion.

BCI also saw continued growth, well above expectations, in its cellular operations in Colombia. As well, 1996 featured the launch of cable television service in Brazil and cellular networks in China and India.

Tele-Direct reported a 12% increase in earnings to $56 million based on revenues of $556 million. In order to assist advertisers in reaching their customers in the electronic world, Tele-Direct is actively exploring the use of new media such as CD-ROMs and the Internet.

Turning to the first quarter of this year, BCE continues to report good progress, with earnings of $261 million or $0.76 per common share, compared with $254 million or $0.74 per share in the first quarter of 1996. Excluding one-time gains, earnings for the quarter increased 16% from $0.56 per share last year to $0.65 per share this year.

So, at this point, 1997 looks promising. But this is an industry constantly in flux – a virtual kaleidoscope of challenges and opportunities. I would like to focus now on some of these key issues and how we are dealing with them.

One of these, obviously, is the rapid pace of technological change. Just as we saw the power of computers increase exponentially over the past 25 years, so too are we witnessing exponential growth in the transmission capacity and efficiency of our networks, and consequently, in the range and quality of services we are able to offer.

Consider, for example, the astounding growth of wireless communications. Just five years ago, Bell Mobility was a fledgling service. Today it has one and a half million customers, growing at the rate of more than 30% annually. Another venture, Comcel, our cellular affiliate operating in Colombia, has grown from a standing start to 185,000 customers in just 33 months.

Consider, too, the emergence of the Internet as a mass communications medium. Until very recently the obscure domain of academics and computer whiz-kids, the Internet has suddenly become mainstream, and is estimated to connect some 40 to 60 million computers around the world. In fact, we are only beginning to glimpse the potential applications of this new medium.

Still, there are big challenges ahead. Today, most of what you access on the Internet is virtually free. But realistically, how long can that last? Already, Internet usage is clogging voice networks not designed for hours-long data connections. The big unanswered question is, where will the revenues come from to support the required network improvements and the development of mass-appeal applications that will really begin to exploit the potential of this embryonic information highway?

These are questions BCE companies are grappling with as we push back the frontier of technology and telecom services, whether through new products from Nortel to deal with the Internet overload on public telephone networks…or Bell Mobility’s aggressive investment program to be Canada’s leader in the new PCS digital cellular technology…or Bell Canada’s commitment to dramatically increase its investment in new software and service development, which will become the basis of Bell’s business in the 21st century.

A second key issue is the regulatory framework. As we have emphasized repeatedly, the regulatory rules under which Bell operates have simply not kept pace with the changes in our industry.

It is remarkable, for example, that Bell today does not have the same freedom to compete here in Canada that foreign-owned companies like AT&T and Sprint do. Originally, our regulators believed that new, embryonic competitors needed some initial advantages to compete with the big incumbents like Bell Canada. But that rationale has long since disappeared. It is simply ludicrous to claim that AT&T, America’s largest telephone company – a company about eight times the size of Bell Canada-qualifies as an embryonic competitor, needing special advantages to compete in Canada.

Consider, for example, the implications of coupling local service competition with Bell Canada’s obligation to provide universal phone service at prices that in most communities do not cover costs. During the monopoly era this obligation was financed by a complex web of internal cross-subsidies-particularly from business customers to residential customers, and from urban to rural subscribers.

What will happen when competitors enter the game? Obviously, they will want to go straight to the most profitable communities and customer segments, undercutting the source of the revenues that companies like Bell have relied on to provide low-priced service everywhere.

Clearly, competition and the obligation to serve at prices below-cost are incompatible. Something will have to give. If service and pricing obligations continue to be imposed on the incumbent companies by government, then companies such as Bell must have access to the revenues needed to meet those obligations.

One thing is certain: finding the right formula to assure the benefits of both competition and of fairly-priced service for everyone, will test the wisdom of our regulator, as it is testing the wisdom of regulators in the United States and elsewhere around the world. Moreover, the new rules will have to provide adequate incentives for companies like Bell to invest in new network infrastructure, technologies and services. The directors of Bell Canada and BCE simply cannot be asked to authorize new investments which have no prospect of generating a profit.

A third key issue is the globalization of telecommunications and the new business opportunities that a global outlook creates. To date, this has obviously had the greatest impact on Nortel, which has successfully made the transition to a full-fledged global leader in communications equipment.

Last year, 90% of Nortel’s revenues came from outside Canada. More than half its revenues are generated in the United States, about one quarter in Europe. And the growth opportunities in the Latin American and the Asia Pacific regions are enormous.

Bell Canada International has also been highly successful in seizing the opportunities that globalization presents. From $10 million invested in one company in 1989, BCI now has investments of approximately $1.5 billion in nine companies on four continents, including several of the world’s most promising emerging markets, namely China, India, Brazil and Colombia.

The global reach of BCI is already paying off: gains totaling some $390 million after tax over the past five years, and a market value of current holdings estimated to be substantially in excess of our net investment.

The fourth key issue affecting our industry today is the ascendancy of the customer. This is partly a consequence of competition and partly a consequence of the proliferating choice of services that technology makes possible. The bottom line is that all BCE companies are today focused on their customers as never before. And those customers understandably want the most sophisticated services at the lowest possible price, regardless of regulatory constraints or technical limitations.

So, how are we responding? Obviously, we’re investing in innovation and trimming our costs to be able to offer BCE customers a value proposition second to none. That’s fundamental. More specifically – and to cite just a few examples – Nortel has reorganized its R&D function to move innovation right into the business units so as to maximize direct feedback from the customer. That’s the way to ensure solutions that are relevant and timely. Nortel regularly assesses customer satisfaction quantitatively, and has established this index as one of its most important performance criteria, linking it directly with management compensation.

Meanwhile, Bell Canada, has reoriented itself to be a customer-facing organization as part of its fundamental transformation from a “technology-push” to a “market pull” corporate culture.

One final example: Bell Mobility has been focused intently on customer acquisition and retention. Its success is indicated not only by the extremely strong customer growth to which I referred earlier, but especially by its exceptionally low rate of customer turnover or “churn,” where Bell Mobility has one of the best records in North America.

The fifth issue facing BCE as we go forward – and it really encompasses everything I’ve just reviewed – is the challenge of attracting capital in today’s telecommunications industry. To succeed, we obviously must be able to raise capital, on reasonable terms, to facilitate new technology platforms as well as research and development that will lead to the products and services on which our future will depend.

Fortunately, BCE has a strong balance sheet, with significant capacity to raise additional capital in conventional markets. We also have the potential to raise new funds for strategically important purposes by accessing capital markets at the individual operating company level. In short, we are confident that we have the necessary financial “dry powder” to take advantage of the opportunities that lie ahead.

What does all of this mean? Is BCE well-positioned to exploit the potential growth within this industry? Let me take a few minutes to explain to you why I believe the answer is definitely “Yes.”

A paradigm shift is occurring in the telecom service sector. Voice-based services, that have sustained the first 120 years of this industry, will be supplanted by multimedia services incorporating voice, video and data. In fact, in 1996, data traffic surpassed voice traffic on Bell’s network for the first time, and Bell is responding by transforming its infrastructure with next generation technologies, which bear engineering acronyms like ATM and ADSL.

We believe that the future of telecommunications will be to enable telepresence – that is, mobile, interactive, high bandwidth, multimedia capacity. This will revolutionize the service economy by allowing vastly more efficient transactions and interactions, independent of space and time. The challenge and the opportunity for us is to deploy new network capabilities and to create the value-added services that will generate new revenues to provide an appropriate return for the risk capital involved.

To manage profitably amidst the turbulence of telecommunications today, we must embed in all of our companies an ever greater capacity to adapt continuously by shaping and exploiting change. It is our good fortune to have the scope and the resources to do that. Nonetheless, resources are never unlimited so we have had to assess where the greatest opportunities are likely to lie.

There is no doubt that in the near term, at least, the biggest growth opportunities belong to equipment suppliers like Nortel. But it is also true that the equipment suppliers cannot prosper indefinitely if their customers, the telecom service providers, do not also prosper. Here the adjustment to competition in the face of lingering regulatory constraints poses some genuine challenges. But in the longer run, we believe that new services will drive the industry forward.

So we have asked ourselves: does BCE have the resources, the financial capacity to “play to win” on a global scale in both the equipment sector and the services sector? Or do we have to think about disposing of one segment to support a “play to win” strategy in the other? We have concluded that we do have the capacity to pursue a balanced and coordinated growth strategy to “play to win” in both segments, and we intend to do that.

Consider these strengths:

• At Nortel, we see very positive trends-such as the growth in demand for wireless and data products-sectors in which the company is exceptionally well positioned.

• BCI is also well positioned in important new growth markets, and has an enviable track record of creating value.

• BCE Mobile’s top-line growth prospects in percentage terms are the best in the group, and we will do what it takes to remain the leader in the Canadian wireless communications sector.

• Tele-Direct is the leader in its field in Canada, has good international growth prospects, and has delivered exceptionally dependable cash flow and earnings.

• Bell is of course the bulwark of our communications services capability. It has the customer base, the Bell brand and the marketing and technology know-how to succeed. What’s needed is even greater focus on innovation leading to new growth areas, and that is why Bell will soon be launching a major new R&D initiative to generate leading-edge telecom services.

We believe that we should be able to continue to achieve results that will provide shareholders with an excellent return on their investment. We are dedicated to continuing improvement in shareholder value. With almost 400,000 common shareholders, BCE is the most widely held company in Canada. BCE, and Bell Canada before it, has not missed a dividend payment in 117 years. Last year, dividends reached $860 million, most of it reinvested in Canada by Canadians.

We are also dedicated to leadership in management and corporate governance. We have an outstanding management team. We now have a smaller, highly effective board of directors. Officers and directors of the BCE group are encouraged to become sizable shareholders in the company for which they work.

It is important that we recognize the profound extent to which the success of BCE companies has depended in the past, and will continue to depend in the future, on our roots in Canada. These roots have anchored and nourished our development as a corporation. It is because of the very vastness of the Canadian geographic space that Canada has developed world leadership in telecommunications. It is because of the very limitations of the Canadian economic space that Canada has developed world leadership as a trader.

I have often said that BCE’s success is important to Canada, and that Canada’s success is important to BCE. At the same time, more than a third of our assets and over half of our revenues are now related to our international operations. While this growing global presence serves to mitigate the risk of any storm which might adversely affect Canada, economically or politically, BCE is deeply committed to helping Canada prosper in the emerging Information Age.

With our ongoing capital program and investments in new ATM and ADSL technology at Bell Canada, with new PCS services at Bell Mobility and with investments in new satellite services at Telesat and ExpressVu, BCE companies will invest in excess of $5 billion in Canada over the next two years. I might also note that BCE is a very significant supporter of general public services in Canada-in 1996, our companies paid taxes to federal, provincial, and municipal governments in Canada totaling $1.5 billion.

Because of the interdependence of BCE and Canada, I would like to conclude my remarks with a few thoughts on our country and its prospects for the future. The pride that we have in this company is the same pride we share in our country. In both instances it is based on the achievements of people, their vitality, ingenuity and their determination to succeed-as well as their sense of community. The determination to prevail and the instinct to help, witnessed recently on the Red River and last year in the Saguenay, tells me that there is more, much more than geography that defines us as Canadians.

Both Canada and BCE are held in high regard by the world at large. I often wonder why we don’t see ourselves as others do-as a country blessed by Providence and circumstance, as a people with unparalleled opportunity to prosper and to achieve our ambitions. In the world of international trade, all of those attributes add up to the Canadian trademark. There is tremendous goodwill in the Canadian brand name. It is one of the most admired and respected in the world.

People around the world like doing business with us. We are seen as reliable partners, as suppliers of superior products and services, as ingenious entrepreneurs, and as good and decent people from a fortunate land. So we need to do two things about that-first, stop selling ourselves short, and then stop taking any of this for granted. A country exists first and foremost in the hearts of its people. It is up to all of us to keep it whole.

I believe that we as Canadians have great reason for optimism in our future. We have come through a difficult transition in the way in which we view the role of our governments. And our governments-federal, provincial and municipal-in turn are making difficult decisions that are allowing them to put their financial houses in order.

Canada today is a strong country, with economic prospects brighter than at any other time in the past 25 years. BCE is part of that strength and that promise-committed to Montreal, to Quebec and to Canada.

These are not divided and incompatible allegiances. They are the source of our strength-BCE’s strength-and the strength of the communities in which we live and work. We can’t restore the Canadian dream unless we can find some way to bring Canadians closer together. We need a vision for the next century, not a remedy for the last one. When I talk to young people, that is what I hear. They seek a successful future nurtured by hope, not grievance and inspired by confidence, not cynicism.

We all need a shared sense of purpose, and a winning spirit. It works for BCE. It can work for Canada. Winston Churchill once said “Canadians have not journeyed all this way, across the centuries, across the oceans, across the mountains, across the prairies, because they are made of sugar candy.” Canadians are not made of sugar candy. Nor are the men and women of BCE. Combine Canadian values and Canadian determination with a global vision under strong leadership, and I am confident that BCE and Canada will achieve even greater successes in the new millennium.

A LEADING ROLE FOR CANADA IN 21ST-CENTURY CYBERSPACE

L. R. Wilson
Chairman & CEO, BCE Inc.

The Canadian Club of Montreal, November 10, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

I am honored, as always, by the invitation of The Canadian Club of Montreal, which throughout this century has fulfilled the mission of The Canadian Club movement: “to deepen and widen the regard of Canadians for the land of their birth or adoption and to increase their interest in matters affecting the welfare of their country.”

When I last had the privilege of this platform, five years ago, I spoke about the external challenge of globalization and the internal challenge of Canadian unity. And while those challenges are still with us, my choice of title for today’s remarks, “A Leading Role for Canada in 21st-Century Cyberspace,” indicates that much has changed.

Consider that five years ago the internet was the esoteric preserve of a group of university researchers. Today, perhaps 10% of Canadian households, along with tens of millions of others all over the world, are connected to the net – depending on it routinely for email, for access to a global storehouse of information, for purchasing books and plane tickets and for interacting with like-minded people all over the world through internet chat groups. Clearly, something big is happening here.

This new medium of interaction is called cyberspace. It is a medium where the constraints of time and distance have largely disappeared – a medium where interaction takes place through electronically encoded bits of information flashing at light speed through the millions of computers and communications linkages that constitute the global internet. Admittedly, a pretty abstract notion, but one that is already beginning to have a big impact on our lives, and we are only at the dawning.

In these remarks, I will be talking about the new frontier of cyberspace and the telecosm. And while cyberspace is already becoming a household word, what on earth is the telecosm?

The telecosm is a term coined by the technology guru George Gilder, to represent the linkages in cyberspace – the telecommunications networks that began 120 years ago with the telephone system, but that now also connect tens of millions of computers around the globe. In short, the telecosm is the “road network” of cyberspace.

Today, I want to give you a sense of the exciting and revolutionary things that are happening in cyberspace and the telecosm, a domain that is central to the future of the BCE group of companies. I want to talk about how Canadians can seize what is an historic opportunity to become a world leader in shaping the possibilities of cyberspace and the telecosm for the betterment of society.

First, we will need some background to appreciate what is driving this burst of change and excitement in telecommunications. The microchip, together with the plummeting cost of telecommunications capacity, are the key technological drivers. The performance of microchips relative to their cost doubles roughly every 18 months – a regularity that has been dubbed Moore’s Law, after the co-founder of Intel Corporation. This phenomenal rate of productivity growth translates to a hundredfold improvement in a decade, and a 10,000-fold improvement in just 20 years. And even after 30 years, the Moore trend shows no sign of letting up.

To appreciate the economic significance of Moore’s Law, imagine that it applied to car manufacturing. Within ten years, today’s $50,000 luxury vehicle would be down to $500. Within a further ten years, you could buy it for pocket change. Or suppose that the airline industry followed Moore’s Law. If it cost $2,500 to go to Paris and back today, your children could count on paying 25¢ for the same trip in the year 2017!

The amazing economics of the microchip have been driving the computer industry for the past 30 years, during which information processing capacity, relative to cost, has increased one million-fold, making it possible to pack the power of a 1960s mainframe computer into a hundred-gram cell phone today. The conversion of the telephone industry to digital technology in the 1970s, following the leadership of Northern Telecom, brought the microchip to the communications industry, and with it the revolutionary economics of Moore’s Law.

At the same time, the backbone transmission systems of the telephone network were being converted to optical fiber through which voice and data signals are transmitted as pulses of laser light. In recent years the capacity, or bandwidth, of communications networks has been increasing, relative to cost, at a pace even faster than Moore’s Law.

Ten years ago, the biggest single intercity trunks in Canada could transmit digital information at the rate of 565 megabits per second, sufficient to support 8,000 simultaneous voice calls. Today, those trunks run at 10,000 megabits per second and can handle 130,000 simultaneous calls. The latest equipment being installed by Nortel can carry 250,000 simultaneous conversations along a single pair of optical fibers the width of a human hair. The next generation, which is already in the pipeline, is a 160-gigabit fiber, which would be able to transmit the text of 35,000 full-length novels every second.

The key point is that much of this phenomenal increase in capacity is achieved simply by changing the electronics and the lasers that feed existing fiber infrastructure. So, to quadruple the capacity of, say, a modern transatlantic cable, you basically have to change the gadgetry at each end to produce four colors of laser light, rather than just one. Thus the capacity of our communications channels continues to increase much faster than the cost. That is why you may have heard it said, with only slight exaggeration, that “distance is dead.” It means, for example, that the underlying economic cost of sending a message across the Atlantic is really not that much different from sending it from Montreal to Quebec City. And in both cases, that cost is continuing to fall rapidly. The fact that this is not yet fully reflected in end-user prices is due to the regulated system of tariffs that were put in place when domestic telephone service was a monopoly and the international service a cartel.

Now all that, too, is about to undergo a sea-change every bit as revolutionary as what we are witnessing in technology. In Canada, competition in long distance service was introduced formally in 1992. Two months from now, beginning in January, 1998, most of the world’s telephone services will be thrown open to competition. At the same time, competition in Canada is being expanded to cover local service as well as long distance. So technology and competition are now interacting and mutually reinforcing one another in the telecommunications industry – technology making new forms of competition possible, and competition creating powerful incentives for further technological innovation. Nortel’s recent announcement of a way to use existing electric power lines to carry phone and Internet traffic into homes is a case in point.

To summarize: what is revolutionary is that the computer has become fused with the telecommunications network. The result is the Internet. All information, whether voices, or moving images, or symbolic text, has converged into a single digital medium. The performance of this intelligent global information network is doubling roughly every 18 months. And finally, all of this is being propelled by competition. That is why we can talk about the new frontier of cyberspace and the telecosm. And like all frontiers, it presents us with challenges and opportunities.

The opportunity for Canadians was boldly set out in the recent Speech from the Throne, where the federal government committed to “make the information and knowledge infrastructure accessible to all Canadians by the year 2000, thereby making Canada the most connected nation in the world.”

Information is the vital substance of the knowledge-based economy. The government’s goal flows from a recognition that the power of information to enrich a society depends on the extent to which its citizens are connected – connected among themselves and with the rest of the world.

From what I have described earlier, we can see that today’s electronic connections are primitive compared to the possibilities that are now emerging. It is no exaggeration to say that we are at the dawn of an era that will transform human society on a scale comparable to earlier transformations brought about by the printing press, or by the Industrial Revolution. I believe we are at a juncture not unlike that which Canada faced on the eve of the construction of the transcontinental railway. We can allow ourselves to be swept along by the tide of events, a tide which is already gathering prodigious energy around the world – or we can take responsibility for shaping our own future. That is our challenge.

The opportunity – the visionary objective – is for Canadians to be leaders in colonizing the new frontier of cyberspace and the telecosm. More concretely, the goal is for Canadians and their communities to become interconnected through a 21st-century communications network that will carry pictures, sound and data at a speed to suit the situation, and to develop the applications of this capability for the betterment of our society.

The Internet is the prototype of this new capability. But it is still in its infancy, much like the highway system in Henry Ford’s day. And while the telephone, the television, and the personal computer are the devices that today connect us electronically, the future information highway will also be connected to any number of new specialized and personalized appliances: medi-alert devices, home security systems, small portable video terminals and others we still cannot imagine. We will access the information highway intuitively and seamlessly. This connectedness promises to enrich everyday life for all citizens, young and old alike, and no matter where we live.

Let us consider a little more precisely what this vision of connectedness might mean for Canada. What concrete benefits might it bring? Consider first what the goal of making Canada the world’s most connected nation would mean for the economy. Creating the information highway and developing the applications that will take advantage of it – applications in healthcare, in education, in electronic commerce – promise to be the biggest global growth industry of the next century. Those businesses and nations that take the lead will have a big advantage as providers of the expertise and systems that the rest of the world will be eager to acquire. The key point is that to position ourselves as leaders, we in Canada have to put the underlying infrastructure in place at a scale that permits significant new services to be developed and tested here.

At the same time, a world-leading information infrastructure would make Canada one of the world’s most attractive locations for investment, since a high-quality communications system is a key requirement for all of today’s knowledge-based businesses. In the words of the Information Highway Advisory Council, chaired by former McGill principal David Johnston, “Information and its manipulation through communications networks and computers is becoming a key strategic resource that determines the competitiveness of firms and nations.”

Consider next what connectedness can mean for public services like healthcare and education. With sufficient bandwidth, communications will be able to put you there “virtually,” thus allowing you to be telepresent, rather than having to be physically present in the classroom or in the doctor’s office.

Indeed, telemedicine offers some of the best ways to lower the cost and to increase the accessibility and convenience of healthcare services. Many of the pioneering applications are being developed in Quebec, involving, for example, collaboration between Bell and a network of hospitals to transmit diagnostic images such as X-rays and mammograms over high-bandwidth lines to specialist centers. Similarly, a Bell interactive video link allows doctors at the Hospital for Sick Children in Toronto to direct examinations, make diagnoses, and provide follow-up care for children at the Thunder Bay Regional Hospital. And Telemedisys, an entrepreneurial firm based here in Montreal, is pioneering the large-scale use of devices and systems that allow people with certain critical conditions to be monitored while they go about their normal daily lives.

Consider too what being connected to a high-bandwidth multimedia network can mean for training and lifelong learning. Given the critical importance of acquiring and updating skills, our goal must be to provide affordable access to high-quality learning materials, available to people when and where they want them, and tailored to individual needs. Applications of telelearning are already beginning to proliferate. For example, Queen’s University offers MBA courses where students from St. John’s to Whitehorse are linked visually via high-speed phone lines to “virtual” classrooms. But the potential for this kind of instruction is barely tapped. Meanwhile, the federal and provincial governments, in cooperation with the Stentor group of phone companies, Telesat and others in the private sector, are well on their way to completing the SchoolNet project, which aims to connect all 16,000 schools in Canada to the Internet.

Consider as well what a modern vision of connectedness can mean for communities, for businesses, and for the interaction between citizens and their governments. We know that community development and business success in a knowledge-based economy will depend on immediate access to the best sources of information worldwide. That is the idea behind the Community Access Program, an initiative led by the federal government in partnership with other governments and the private sector. The objective is that by the end of the year 2000 every community in Canada with a population of over 400 will have public Internet facilities installed, making at least some access to cyberspace and the telecosm available to the vast majority of Canadians.

This, in turn, will set the stage for a revolution in the delivery of public services. The notion of government in cyberspace may seem a little forbidding at first, but over time it promises not only to revolutionize the efficiency of service delivery, but also to enable entirely new forms of interaction between government and citizen.

I have given you but a glimpse of what connection to cyberspace and the telecosm can mean for our economy, for our communities, for our access to healthcare and lifelong learning and for more efficient and responsive government. These benefits would themselves justify a national objective to make Canada the most connected nation in the world. But there is more.

Connectedness is a vision that can inspire our young people who, as we all know, take to the new information technology like ducks take to water. We can only marvel at their instinctive understanding. This is the enabling technology through which young Canadians will express themselves in myriad ways in their future. A lot have already demonstrated world-leading capability to develop the hardware and software of connectedness. Unfortunately, too many of them have had to realize their potential in the United States. We are going to have to change that.

Finally, there is another message that will resonate in this room: connectedness as a unity builder. A connected Canada would enable an unprecedented degree of “virtual” contact between citizens who are now isolated from one another by geography or by culture. The email phenomenon, for example, is a relatively primitive foretaste of what will be possible. Moreover, if we Canadians fail to create our own model of connectedness, we will inevitably inherit models being developed elsewhere, particularly in the US. And while we must complement our own capabilities with the best available abroad, I believe that a Canadian-developed information highway is a sine qua non for 21st-century nation-building.

To make Canada the most connected nation in the world is a challenging and visionary goal. It catches the flood tide of a revolution in technology that may occur once in a lifetime. It is a goal worthy of a projet de société – a national endeavor uniting citizens, the private sector, and governments to launch Canada into the 21st century in a position of leadership.

But is this a realistic objective? Fair question. It is okay that our reach should exceed our grasp. But not by too much. I, for one, believe that the goal of making Canada the most connected nation on earth is realistic. It is achievable if we commit ourselves. Consider these reasons why Canada is so well positioned.

In the first place, Canada is already one of the world’s most well-connected nations. Our telephone network is virtually 100% digital, a proportion unmatched by virtually any other nation, including the US. In fact, no other G7 country has a better combination of telephone, cable TV and personal computer penetration.

Consider too that our vast distances have always motivated Canadians to excel in the technologies of connectedness, making us pioneers in telephony and satellite communications. This fundamental motivation is reflected in Canada’s outstanding business capability in telecommunications, where companies like Nortel and Newbridge are acknowledged world leaders and where international firms like L.M. Ericsson have chosen to steadily expand their presence here in Montreal.

In the critical skills of software, content development and financing, Canada has world-leading capability, ranking only behind the US. Our universities and community colleges are seen as a world-class source of qualified people in most of the relevant disciplines. In fact, Canada is prime recruiting territory for companies like Microsoft. Our challenge is to give our talented young people more opportunities here at home.

But we are not without visionary competitors for leadership in cyberspace. Japan, for example, has set a goal to bring fiber-optic bandwidth to every home by the year 2010. In Malaysia, the prime minister has taken personal leadership of an extremely ambitious project to create a “multimedia super corridor” that seeks to make Malaysia a leading test bed and development center for the information highway of the future. And of course the United States is counting on the enormous innovative capacity of its private sector to automatically assure a position of global leadership.

Yet I would argue that Canada possesses a unique collection of special advantages. Our proximity to the US allows us to take advantage, before other countries, of the leading-edge developments originating there. At the same time, our bilingual and multicultural character sets us apart from virtually every other country, giving Canada a unique advantage in developing systems and content for the vast new world markets that global connectedness will create. Particularly noteworthy would be the opportunity for Quebec to lever Canada’s capability to pursue its leadership in the Francophone world.

Finally, Canada is big enough and already sufficiently advanced to develop many of the key applications of connectedness so that we can function as a global “living lab.” But we are still small enough that if we set our minds to it, we can get our act together to make it all happen.

So how do we make it all happen? The first thing to admit is that nobody has a detailed road map. The frontier of cyberspace and the telecosm is as uncharted as the New World was at the time of Columbus. Indeed, the future is to be created, not discovered. What we do know is that a projet de société to make Canada the world’s most connected nation will have to enlist the vision and skills of the entire society.

The primary responsibility will rest with the private sector and with individuals themselves. For government, the essential role is to provide leadership, the point of focus around which all of our diverse perspectives and ambitions can collectively converge. Clearly, government must also foster a supportive regulatory and policy environment. Equally important, governments at the federal, provincial and local levels will be counted on to be lead customers, using their enormous purchasing power strategically to create demand for new telepresence services in such fields as healthcare, education and information dissemination.

The primary responsibility of the private sector will be to marshal the skills, the innovation, and the financial investment to create both the infrastructure and the applications of connectedness. This is not without its difficulties. So let me take a few moments to outline some of the dilemmas facing would-be investors and to indicate how I believe these dilemmas can be addressed.

Within the telecommunications and information technology industries, almost everyone embraces the vision of a global society connected by an Internet of high and dependable capacity, an information highway that can eventually deliver the experience of telepresence to virtually every citizen. The reality, unfortunately, is that there is still no concrete business model to support this broadly-shared vision.

A big part of the problem is that people have been conditioned to believe that the Internet should be free, or nearly so. That perception is of course self-limiting. Obviously, it has to give way if the Internet, which will be the foundation infrastructure of connectedness, is going to attract the investment needed to sustain its development and global expansion.

There is a second, and related, dilemma. The investors who are being counted on to build out the infrastructure of the information highway – and people are looking primarily to the telephone companies to put up the cash – are still waiting to see evidence of the mass applications that could support a commercial return on investment, since the telcos no longer have the regulatory assurance of an adequate ROI. The catch now is that until the right infrastructure is in place, potential mass applications in areas like electronic commerce, desktop video-conferencing, delivery of government services, and so forth, cannot be implemented on a large scale and thus proven out financially. So a stalemate of sorts has developed, in which infrastructure is waiting for applications, and vice-versa.

You might say that to break the stalemate somebody simply has to take a leap of faith – that if you believe in the vision, just build it and they will come, as Kevin Costner was urged to believe in Field of Dreams.

But we are forced to play on the field of reality, where life is not quite as simple. Let me explain. Because technology is evolving so rapidly, any big bet today is almost certain to be obsolete tomorrow. Meanwhile, no one, except possibly Microsoft, has enough market power to set standards. So everyone has to remain flexible, placing smaller bets on a broad range of technologies and building out the new infrastructure incrementally.

Competition is another key factor in the mix. And here it is a double-edged sword. On the one side, competition motivates innovation and tends to drive down prices, thereby fostering broad access to the information highway. The flip side is that competition also imposes heavy financial pressure on companies and forces management to focus most of their energy on today’s core businesses rather than on tomorrow’s unproven opportunities. This is not to complain about competition. Indeed, competition is what keeps our industry dynamic and focused on the welfare of customers. But it is simply a fact that the discipline imposed both by competition, and by the returns being demanded by capital markets, has enforced shorter time horizons on the private sector.

The inhibitors I have just described will not ultimately stand in the way of our connectedness vision. But they will condition the way in which it can be achieved. It is unlikely, in my view, that the next-generation infrastructure for the information highway will be built in a single stroke as one grand mega-project. The uncertainties are simply too great for that to be a prudent course. Instead, a more incremental approach is needed that advances across a broad range of technologies, both wireless and wireline.

Having said that, we can already identify the key requirements for the next major stage in the evolution of the information highway – the next course-setting toward the goal of making Canada the world’s most connected nation. Without getting into technical detail, we need a much faster Internet connection for homes and small businesses, one capable of supporting a reasonably high-quality video image on a PC screen.

Second, connecting to the Internet has to be made dead simple, so that accessing the information highway can become as habitual and intuitive as consulting a phone directory. This means in practice a connection that is “always on” and ready to access – no need to turn on a PC and wait – but does not tie up your phone line, or Bell’s switches, in the meantime.

Finally, and most important, this faster, simpler connection must be cheap and widely available so as to stimulate rapid take-up. In short, we need the cyberspace equivalent of Henry Ford’s original strategy for the automobile industry. Once the possibilities of connectedness begin to be understood by everyone, new applications will multiply and the investment needed to further upgrade the infrastructure should be readily forthcoming. A self-reinforcing cycle would be set in motion.

Although we aren’t quite there yet, particularly in terms of the cost of a speedy Internet connection, I am confident that the technological issues can be dealt with. In fact, Bell Canada and the other Stentor companies have begun the commercial roll-out, in limited areas, of a technology called ADSL (asymmetric digital subscriber line), which will provide vastly faster Internet access over ordinary phone lines that are “always on,” but doesn’t tie up your voice service. The challenge will be to get the cost down more quickly.

In that regard, Nortel recently announced a new Internet access technology called the 1-meg modem. It has the required performance characteristics for the next step of Internet evolution, and promises to be much cheaper than present alternatives.

Right across the spectrum, companies in the BCE family are developing the technologies and services to promote the connectedness objective. For example, Bell Canada and its Stentor partners, using equipment from Nortel, Newbridge and others, are well underway with the investment that will produce the next-generation, cross-country multimedia network using a new transmission method called ATM (asynchronous transfer mode). Meanwhile, Nortel’s St-Laurent plant – which is to be the centerpiece of the company’s $275 million expansion in the Montreal area – has produced half the Internet backbone transmission equipment in North America.

On the applications side, we are making large investments in Internet content development in both official languages, through MediaLinx, which provides content to the Sympatico Internet service. And recently, Bell Canada created a major new division, called Emergis, that will be partnering with entrepreneurs and researchers to develop the network software needed to power new applications of connectedness.

I want to emphasize, as well, that we should not think of the connectedness objective just in terms of wires and PCs. We are really talking about telecommunications in all its dimensions. This also includes exciting new wireless possibilities: for example, the digital cellular service that we call PCS (personal communications systems), the satellite-based services of Telesat, encompassing both entertainment and data, as well as a variety of other fixed wireless services just emerging from their development stage but which significantly increase the technological possibilities.

The issue is not whether all Canadians will eventually be connected to cyberspace and the telecosm. The only question is when, and on whose terms. We can either be leaders, or be followers. But we can’t opt out. If we are to be leaders – and we can be – the rewards in terms of investment attracted, jobs created, and services provided will be enormous. If we lag, others will surpass us, for time is of the essence in this business.

The Government of Canada has committed to make Canada the most connected nation in the world. We in the BCE group of companies embrace this vision and are therefore committed to play our part in positioning Canada for leadership in what I believe will be the most important arena of social and economic development in the 21st century.

COMPETING FOR THE FUTURE

John McLennan
President & CEO, Bell Canada

The Canadian Club of Montreal, May 15, 1995
Published in The Corporate Report No. 13 (August 7, 1995)

In the global quest for prosperity, Montreal has what it takes to win. The telecommunications industry plays a particularly important economic role here in Montreal.

Bell Canada’s head office has been here for 114 years, and, along with our sister company Northern Telecom, and our research arm Bell Northern Research, we have played and will continue to play a crucial role in promoting Montreal as a thriving, prosperous city – and as a great place to do business.

My key message today is that prosperity is earned, not inherited. The world of the future will be one of our own design, one crafted through the complex interweaving of critical choices that are made today.

Today, Canada is at a particularly critical fork in the road with respect to its telecommunications industry. As I will shortly discuss, the issues are complex, but the options are remarkably clear.

There are several key decisions – all to be made this year – that will determine the competitive position of this province’s existing manufacturing and service industries, as well as the future prosperity of the new growth businesses of tomorrow.

A strong telecommunications industry is the backbone of an information-age economy, and the decisions of which I speak daily are the bridge to Canada’s economic future.

While we all have our own views about how we prepare for the future, I want to tell you about mine. The title of my speech, “Competing for the Future,” is borrowed from a currently-popular book with the same name, written by two prominent US academics, Gary Hamel and C. K. Prahalad, who have offered timely prescriptions about thriving in the changing markets of tomorrow.

The first reason I like this title is because it manages to pose, in a few short words, the most critical challenge that faces our country and that faces my own company, Bell Canada. We have to learn how to survive and thrive in an environment of high uncertainty, where technological advances associated with the movement of information have irreversibly changed the rules of the game.

These advances have become the greatest levelers in the world economy because they have negated the natural advantages that used to be conferred by geography, natural resources and the size of the domestic market. This means that as the importance of the information economy grows even more rapidly, the distribution of prosperity will depend less on a country’s proximity to its export markets.

National prosperity will depend more on its ability to attract and keep firms whose core competency is creating and distributing information, of any kind, over tiny bursts of light, down long glass fibers to customers anywhere in the world.

For Canada, we will have to earn our future prosperity. Proximity to the United States will no longer be sufficient to ensure that we have a high standard of living. Our businesses will have to meet and beat the best in the world. We will be in a battle for something far more important than just market share. To earn prosperity, we must become leaders in taking advantage of technological breakthroughs, especially in the converging world of computers and communications. And I have every confidence that we will win this battle.

Being a leader means spotting new opportunities and converting them into businesses. It means leveraging your assets to serve more customers in more ways. It means approaching markets with coalition partners, using selective entry into new lines of business as a way to accelerate learning about customer preferences. And it means focusing every achievement toward building a new advantage directly, for your customers, and indirectly, for your country.

Success will also depend on a regulatory and political climate that supports domestic companies as they strive to become strong global players.

The second reason I called this speech “Competing for the Future” is because the answer to the challenges we face is also contained in these few short words. That answer is competition. Competitive pressure is the engine that will drive the changes needed to ensure that Canada has a voice in shaping its own destiny.

The great US industrialist Andrew Carnegie said that competition was hard on the individual, but best for society. It has certainly changed Bell Canada in ways that could not have even been foreseen five years ago.

We are taking the steps necessary to remain Canada’s flagship telephone company and become more customer-focused, cost-competitive, and innovation-driven – qualities I feel are going to be the key success factors for the top firms of the future.

I am pleased to say that our customers are telling me that we have become far more customer-focused, responsive, innovative, and competitive than ever before. But we are beginning to encounter serious roadblocks to the kinds of changes we need to make to maintain our momentum.

We cannot continue to rob Peter to pay Paul, by being forced to maintain cross-subsidies from long distance to local service that distort the true cost of today’s telephone services. We cannot create the jobs this country so urgently needs if we are prevented from serving customers in new lines of business. We cannot commit billions of dollars necessary for new investments if we do not have a hope of earning a fair return for our shareholders. We cannot compete for the future carrying the burdens of a regulatory system that has met the objectives of the past but has not evolved to reflect the new realities of a competitive marketplace.

These are difficult and complicated issues…and there are no easy answers. It is these policy issues that the government and the CRTC will decide this year.

Some of the rhetoric around these issues has become cloudy, and perhaps even a bit misleading. I would like to set the record straight so that everyone will understand what is at stake. My message is simple and straightforward. These decisions are not about abstract concepts like ideal market structures or sustainable competition, even though that’s how these questions have come to be framed. They are about choosing the quality of life for the people who live in this country. They are about deciding whether we want to be involved in creating the markets of the future, or are we content simply to be consumers of someone else’s technology. They are about building opportunities here at home for our brightest and best – our children – instead of saying goodbye as they leave this country to begin more exciting and rewarding careers in the US, Europe or the Far East, with companies who are the architects of change – companies whose vision and daring naturally inspire the hearts of the young.

Framed that way, the answers are easy. Choose the future. Allow companies to have a chance to be great on a world scale. Rely on competition to deliver prosperity. Trust the customer’s judgment.

And above all else, always give people choice.

Let me explain why I believe so strongly that this is the right way to go forward.

Today Canada has a small but important position in the emerging global economy based on the movement of information. Through the work of the telephone companies and innovators like BNR, Northern Telecom, SR Telecom, Mitel, Newbridge, Corel, Softimage, brand new Canadian companies, this country has established credibility and developed valuable competencies in information exchange technologies, particularly in telephony and switching systems. This has paid off handsomely for Canada. Not only have we exported this technology around the world, many businesses have built their advantage on the ready availability of high quality, reliable telephone service.

Canada has one of the highest telephone penetration rates in the world. Canadians love to talk on the phone. They are among the best talkers in the world and aren’t we fortunate this has been built on infrastructure developed in Canada, by Canadians and for Canadians. We then sold this technology around the world. This is indeed a great success story.

Among the world economies, measures like the number of telephone lines per 100 people correlate highly with prosperity as measured by per capita GDP. Given what I’ve just said, it should come as no surprise that we enjoy a high standard of living in this country. Nevertheless, I believe that if we concentrate on this kind of measurement to set public policy, we’re missing the point. Why? Because high quality telephone lines and reliable service are just the price of admission today.

What will matter to the markets of tomorrow and to the customers that we hope to serve will be the added value that our affiliations, alliances, and specialized expertise bring to their business. In other words, intellectual property matters more than the size of your customer base.

These customers want networks that deliver increasing functionality, because they already expect and receive fast, efficient service. They want carriers that can deliver all their information needs at a very competitive price. More services put through the same infrastructure means more value for customers.

Customers want value. Consequently, the indices of success that were prevalent in the old economy will not work any more. The new key success factors will be technical leadership, R&D intensity, a corporate culture emphasizing service, the resources made available from alliance partners that bring a global reach and flexibility.

It will also come from the intangible advantage of insight that makes it possible for a carrier to spot, create, enter and satisfy new customer demands in smaller and smaller niches.

It is crystal clear that competition is the dominant logic, organizing world economic activity and determining the allocation of prosperity.

But technological change has forever altered the time line. In the past, once prosperity had been earned, a nation could almost surely rely on being prosperous for at least a generation or two. Today, the situation is entirely different. Now prosperity is like a trophy awarded to a winning team. It remains with the team only as long as they are the best in their class. It is not forever. It is earned on the competitive playing field every period…every inning…every quarter. Most important of all, it is earned through competition.

The implications are quite clear. Any effort to limit competition limits our access to prosperity in a global market. And frankly, by international standards Canada is too small a market for us to afford the risk of forfeiting an opportunity to earn prosperity, through competition, whenever we can.

In the context of the important decisions to be made about Canadian telecommunications, about our standard of living, and about our collective ability to earn our share of world prosperity, I think it is important and timely to clarify the true meaning of an important word that has strayed from its original meaning during the past few years. I’m speaking about competition. Competition is a process, not an outcome. It is a process that has as its principal purpose the creation of value for customers through the provision of choices in contestable markets. Successful competition is marked by the entry and the exit of firms from markets. Firms should enter if they believe they can win customer loyalty by creating superior value. Firms should exit if customers have decided they failed to create this value.

For competition to work, competitive success can only be determined by customer choices:

• Not by regulations seeking to build the ideal market structure

• Not by sheltering firms that customers don’t like

• Not by specifying a magic number of firms that have to be in a market for it to behave according to some abstract textbook rule.

Throughout my business career, I have learned that companies earn their right to exist only by delivering value to customers. If they are not doing so, based on customer choices that are freely made, then it is contrary to the customer’s interest that these firms be kept alive by the government.

That means public policy about the future of telecommunications should not be made to support the weakest competitors in the market, those that are creating the least value for customers. Instead, telecommunications policy should encourage free and open access to markets, with each company’s shareholders taking the same risks of failure and success as any dépanneur, retailer, or gas station – businesses that provide jobs to Canadians and tax dollars to the government, but don’t require protected status to do so.

Trust the customer. Let the customer decide who best creates value.

From Bell’s perspective, we have made some difficult choices that were necessary for us to survive in an increasingly competitive global economy. However, we are not immune to the consequences of regulatory decisions that are made about us or our industry.

For years, many people in the business community and in government have believed that Bell was invincible. They felt that we were too big to be affected by decisions that left us our obligations but made it harder to earn the revenues needed to fulfill them. If it were ever true, it is certainly true no more. We are a business like any other and we are exposed to the same market forces.

But we are a regulated business and without regulatory approval we cannot always take the actions that we must to grow, to serve customers, and to become the world-class player in this new information economy that Canada so urgently needs.

Our vision is simple. We want to be the carrier of choice to Canadians for all types of information, wherever they go, whatever they wish to do. We want to follow and support Canadian firms as they tackle new markets abroad. We want to provide new services to Canadians at home, such as multimedia and telemetry, and deliver better value in existing services, like cable television, than Canadians are receiving today. We want to sustain research and development activity at the leading edge of telecommunications technology, creating the jobs for our children in the markets of tomorrow.

But to realize these ambitions, and to successfully compete for the future, public policy decisions must be made that favor of customers, choice, and competitive markets. My concern is that if public policy continues to support companies that do not create value for customers, Canada will wind up in the worst possible position:

• We will have little ability to influence the direction of technological advancement to serve our national interests

• Extensive cross-subsidies from profitable services to unprofitable ones will continue to weaken us. The only beneficiaries are those companies which customers have chosen not to support

• The giant international telephone companies will be the ones deciding what kind of telephone service Canadians receive, and as a result will wield considerable influence without any reciprocal obligation to grow Canada’s stock of intellectual capital

The three measures I’m recommending should be considered as an integrated program to expand the range of customer choices. They are all based on a clear, unambiguous concept of competition that affirms customer sovereignty, rejects special treatment of any kind for anyone, and welcomes new entrants into markets. First, the barriers that prevent competition between different sectors of the information exchange industry must be dropped immediately, so that customers can make more choices between suppliers. In practical terms, this means that telephone companies should be allowed to enter new businesses such as transmitting cable TV signals. Our local telephone business is already open to new entrants, including cable companies; there must be reciprocity. Bell agrees with the Federal Director of Competition Policy that any delay in implementing this type of two-way competition is not justifiable.

Mr. Addy said that the cable industry was unable to demonstrate that it needed or deserved protection in the form of a head start, a kind of unbalanced competition that would let cable keep its own monopoly at the expense of cable customers while entering the local telephone service business.

We have heard a lot about something our competitors are calling “sustainable competition.” They would like to have you think that smaller companies need competitive favors in order to succeed. But history has proven time and time again that the size of a company has nothing to do with success. There are many examples of small companies making it big. Take Microsoft, for example. It was a very small company when it was formed by Bill Gates just 21 years ago. And Softimage, which I mentioned earlier, also started small. Dynamism is what matters, and we should not fool ourselves into thinking it does not.

Let there be no mistake about the alternatives from which the government must choose: more choices and better service for customers, or a continued monopoly for the cable companies.

Second, we need price reform in telephone services. Prices must be set by market forces. This means aligning the price of local services with its cost. It means decreasing the cross-subsidies to local services from our shrinking pool of long distance revenues.

Third, policy decisions should be made with a clear understanding of Bell’s true competitors, and with a thorough appreciation of the consequences to our economy if we don’t support and make it possible for our own flagship firms to compete effectively.

When I speak of Bell’s competitors, I’m not talking about Unitel, Sprint Canada, or the 150 or so other resellers and facilities operators, or even the cable TV industry. I am talking about the leading telephone companies of the United States and Europe. In fact, the US telephone giants are already here. They have a beachhead in Canada. Don’t get me wrong. I welcome competition. I only want to have the same ability to compete as my opponents. A recent article in Business Week asked who will be the first global phone company. Needless to say, Bell Canada wasn’t on that list, and that bothers me.

Call this hubris if you like, but the fact remains that it’s becoming increasingly apparent that more and more of the decisions that matter about telecommunications will be made by large, successful international carriers. These decisions will be reflected in international standards, which services get priority in terms of R&D investment, and of course the price that business and residential customers pay for service. And if Canada isn’t at the table when these decisions are made, if we’re not influential because our domestic telecom industry has been hollowed out, or is too small, too weak, or too shackled to have any clout in our own market – let alone abroad – then the direction and speed of our nation’s economic development will be determined elsewhere, by people who aren’t responsible to Canadian regulators or to Canadian customers.

We will become distributors for somebody else’s technology rather than masters in our own house. And that’s not good enough for our customers, and it certainly isn’t good enough for me.

The danger is that we won’t have a seat at that table even though we have the necessary skills, the ability and the drive to succeed.

Our quest to compete for the future must begin with sound decisions about competition made here at home. Bell has already chosen competition as the best way to create value for its customers and to attract prosperity to the communities we serve. The choice for the future lies now with our government and with our regulator. As they deliberate, I encourage them to be bold and realistic. They should also be optimistic, because the changes I believe we need will also unleash a flood of entrepreneurial spirit that will astonish Canadians with its vigor and intensity.

I believe that Canadians can compete for the future, and win. We deserve the chance to try.

PACKAGES OF VALUE

John McLennan
President and CEO, Bell Canada

Canadian Advanced Technology Association Conference, Toronto, May 6, 1996
Published in The Corporate Report No. 18 (June 30, 1996)

In an environment with the kind of upheaval that is commonplace in the technology industry, it’s simply not enough to have a good idea or product. You also have to know how to market and sell, how to find partners and how to project your idea into markets you never thought you could reach on your own – all in times of growing uncertainty.

It’s extremely challenging, to say the least, to identify the home-run products of tomorrow, so it’s vitally important that we create the kind of environment where we can have as much innovation as possible. I don’t offer any easy formulas to hit home runs. However, I know one thing for sure – to be successful, we must be out in front of the rest of the world in serving customers. And I am absolutely convinced that in communications services we have to make critical business decisions that will decide our relative competitive position in world markets sooner, rather than later.

Today, I’d like to give you my perspective on the evolving communications industry, then briefly review some of the critical elements of our strategy. And I’d like to close with a few words on the government’s role in building the new environment for innovation and continuous creation of customer value.

It is no exaggeration to say that we live in an era of constant flux. In my own industry, every day brings news of change. But amidst all the noise and confusion, I think you can distill two trends that will have profound implications for the kind of environment that is emerging.

The first trend is technological change, particularly relating to digitization and new modes of transmission. Here I am referring as much to software as to hardware. The critical factor is that the digitization of information – accelerated by quantum developments in computing power – has created a brand new field that is chock-full of opportunities and risks.

But technology is only half the story. The other half involves markets, and of course competitors in nearly every aspect of the communications business. With the recent passage of the US Telecom Act, which removed the last few regulatory barriers preventing customers in the US. from enjoying the full benefits of competition, things have accelerated to near fever-pitch levels.

The move toward open markets and increased competition has taken on the dimensions of a truly global trend, as other countries in the world follow the US lead. Canada is right in thick of this global trend. So we are left with a situation where we must chart a course across very rough seas. There is no turning back. What we do know is that we must make the journey.

Let me suggest a way that we can make sense of the complexity and begin to steer our ships toward the markets of tomorrow. Let’s begin with the two change agents I spoke of earlier: technology and competition. Conceptually, these forces can be positioned on two axes, one indicating the pace and intensity of competition, and the other indicating the extent to which we are able to create new customer value from technological change. Broadly speaking, we can imagine four evolving scenarios for the future, depending on whether competition and value creation are high or low.

The first scenario has both at low levels. Let’s call this “slow and steady.” I think this is where we are today. It presumes that it’s going to take a very long time to make the required investments in broadband, that competition from the US does not spill over the border, that the Internet has been over-hyped and that the computers now sitting in nearly half of all the homes in Canada revert to being just word processors or platforms for games. To say the least, this is a bit unrealistic, though it is possible if regulatory inertia is brought about by government policy that is deliberately indifferent to the opportunities associated with other, more complex futures.

The second scenario, where competition is intense and value creation is stagnant, has been described as a “war of attrition.” Here the Internet continues to grow at a chaotic pace, but compelling new applications are slow to emerge. Capital is constantly being redeployed, often at cents on the dollar, and the safest investment is felt to be an expansion of capacity. This is somewhat like the communications equivalent of an arms race, with the most disappointed player of all being the customer, who won’t see very much new value created, even though the industry will sound very busy.

The third scenario is one with modest competition but high value creation. We call this “info-heaven.” This scenario is one in which government policy focuses on maximizing investment in the value-creating side of the industry rather than seeking an all-out arms race. You wouldn’t see overbuilding or all-out price wars, because competitive positions in this kind of market environment would be decided by a company’s success in R&D, striking the right alliances, and deploying service – in other words, by delivering value to customers.

The fourth scenario can be described as “cyber-complexity.” This is a future where vigorous competition is coupled with gung-ho value creation. It’s a big-win, big-lose scenario. This could come to pass if government chooses to maintain a two-track policy of promoting both investment and competition, where a flow of services across the border with the US would be complemented by a strong commitment to an environment that gives us a chance to grow an indigenous Canadian information industry.

So what will the future be? Well, depending on where you are in the industry, and depending on which markets you serve, it could be any of these scenarios. What is clear, however, is that “slow and steady” is unlikely. If that’s where we are now, I can guarantee you it’s not going to last.

If you’re in a war of attrition, you’re probably working on strategies to move north, by focusing on value creation. If you’re in info-heaven, you’re probably readying yourself for increasing competition. And if you’re in cyber-complexity, you’ve probably already called your office twice during this talk to see what’s new.

Speaking as a leader of a communications company, obviously info-heaven would be a nice place to be. I might even be able to go home and have a full night’s sleep for a change. I am sure that a war of attrition is a long-term loser for everyone – starting with the customer, then with the investor, the employee and finally the companies involved.

Here’s the point: our future will be decided to a great extent by decisions and risks that are made right here in Canada. I say this is because I think the future will look more like cyber-complexity than any other scenario. And Canada can be a big winner in this kind of world.

That brings me to a discussion of Bell’s strategy. Our approach focuses on creating maximum value for the customer. On this issue, there’s a lot to be done at Bell, but we’re making progress. Although this is not the time and place for a laundry list, I would like to leave you with just a few examples.

In the last year or so, we have undertaken a very successful trial of our new voice-activated dialing technology developed in Canada by a team at Nortel. This technology – which will soon become a service – allows you to place telephone calls by speaking into the receiver the name of the person or business you are trying to reach. No more pressing buttons or dialing numbers. Just tell the telephone who you want to reach, and it does the rest. At the same time, we have conducted an equally successful trial of the new Vista 350 telephone set with Call Mall – an interactive electronic shopping and information service, in London, Ontario. And we’re gearing up for two extensive multimedia trials in London and Repentigny, pending CRTC approval. These trials will give us valuable experience in how to offer packages of service that include cable TV, telephone services, high-speed PC access, and video-on-demand offerings such as movies and educational applications. That’s the short list.

In all of our service development work, our goal is to be the world leader in value creation for customers within each of the main structural elements of the information industry: transport, interface and content.

Transport is Bell’s traditional business, and it is right at the center of the new Bell. In fact, moving information is our main core competence, and it will be a solid platform for future expansion. Transport will include the networks, switching, AIN, voice processing capability and many proprietary capabilities that we will use to differentiate us at the network level.

Surrounding the transport core will be a layer that we call the interface. We will wrap an interface around our transport technologies in much the same way that an operating system like Windows is wrapped around a PC. Our interface will be designed to enable powerful custom applications to be written by our customers, and for our customers by us, or by a new generation of communications software developers – many of whom could and should be Canadians.

Some of the development work will be done in collaboration with firms such as you’ve heard from at this conference. And some of it will be funded, developed and owned by Bell Canada. The kind of applications that we hope to develop will be navigational tools for the information highway, interfaces for electronic commerce, privacy and copyright protection agents, communications profile managers – any kind of customer-facing software you can imagine, that lets customers derive value by driving traffic through our networks with user-designed interfaces.

Content is perhaps the hottest area in the information industry today. And Bell is going to have a place in it, at first in a limited way, primarily through partnerships with customers and industry experts and through alliances. And we are developing an ability to talk with entrepreneurs so we can collaborate effectively. Becoming good at this is an important priority for us.

Another important part of Bell’s near-term success will result from our growing ability to bundle and package solutions for each of our market segments. We want to be able to design packages of value for you with little or no regulatory or government restrictions. For example, we’d like to bundle local service, long distance, interactive services, wireless – whether cellular, paging, or PCS – add in 400 minutes or so of long distance, plus an email address for each of your kids, and sell you the whole thing at a package price.

We have to make considerable changes if we are to become the kind of organization that can deliver value in this manner. Right now, there is major effort underway within Bell to dramatically increase efficiencies and redesign how we serve customers, under an umbrella program called business transformation. But this is just an intermediate step. Business transformation is part of a larger reconfiguration plan that will enable us to thrive in cyber-complex markets.

One thing is for certain: I don’t want to lead a franchise company, one that is dependent on technology purchased from others to survive. That’s a poor future for Bell, and one that is wholly inconsistent with the heritage of service and technological innovation that we, and Canada, so proudly claim.

In this context, I have only two recommendations for the government. The first is that Canada must develop its fair share of new communications know-how right here in this country. We have the skills. We have the people. We have the ambition.

To its credit, the government recognizes the strengths and potential of the Canadian industry. In fact, recent government decisions have put us in a much better position to invest for the future. And we intend to do just that.

But this country also has the world’s number one telecom powerhouse immediately to our south. It may be tempting to forego innovating and let others do it, particularly when AT&T has said in Maclean’s magazine that they have their resources and sights set on our home base.

Well, this doesn’t mean we’re all going to roll over and play dead. Instead, I want to go head-to-head with AT&T. With Sprint. With any global competitor who wants to come in here and take our customers. But we must have an environment that gives us the same freedom to compete as AT&T now enjoys. That brings me to my second recommendation, and it involves industry structure. The only thing we seek is the chance to earn our customers’ business. The opportunity to create value for customers. The ability to put our packages of value on the market and let the customer choose. Without restrictions. Without the cross-subsidies that we’re presently forced to pay. Without having to wait weeks or months to bring new services to market because the existing regulatory structure forces us to file tariffs.

Some of these restrictions were designed five years ago to protect small Canadian startups from the size and market position of the telephone companies. Others were designed more than 25 years ago, long before convergence made the old barriers both irrelevant and counterproductive. Quite simply, these barriers and restrictions are dead wrong for today. This is a view that I know many of you share. And I want you to know I appreciate your willingness and efforts to call for change in a public way. But we’re not there yet.

If global companies like AT&T have the right to compete in ways that I can’t, even though we’re both offering similar products, then that’s simply not acceptable.

The reality is that borders cannot stop the transfer of technology. Borders cannot prevent the arrival of powerful global brands. Borders cannot delay the movement of know-how, and literally billions of dollars of resources.

The best course of action now is to create an environment in which all of us are motivated to take the risks necessary to be a leader. And we can only do that in an environment designed to encourage customer choice, innovation, and a growth industry that generates jobs for Canadians in all sorts of new and interesting market niches.

There are not many formulas for instant success, but as Stephen Leacock said, “It’s amazing how hard work improves your luck.” I know that you understand this. We also know that success never happens by accident.

This is a very exciting time to be in the communications industry. I, for one, wouldn’t miss it for the world. In the months and years ahead, I look forward to working with all of you to make our dreams a reality – for our customers, for ourselves and for our country.

SUCCEEDING IN A CONSTANTLY CHANGING WORLD

Louis A. Tanguay
President and CEO, Bell Canada Innovation Center

HEC Network, Montreal, April 24, 1996
Published in The Corporate Report No. 18 (June 30, 1996)

I would like to discuss the following subjects with you today:

• The transformation of companies

• Jobs today

• The impact of new information and communications technologies on workplace reorganization in a knowledge-based economy

Everything is being reexamined

Over time, any organization, whether in the private or public sector, develops a characteristic frame of reference for its operations. This is what makes it unique and gives it a personality. This frame of reference includes the company’s values, its way of organizing work and developing its products, its market approach and its concept of strategic alliances: in short, its overall way of doing things.

Often, the reason for the problems experienced by companies that have been very successful in the past is that their frame of reference is no longer consistent with current reality, despite the fact that all the company executives are quite aware that you can’t wait for problems to arise before questioning your way of doing things.

In his book Managing in a Time of Great Change, Peter Drucker writes that when a company reaches its goals, it’s not time to celebrate, it’s time to think.

In today’s world, everything is changing constantly, and changing radically. Markets evolve. So do technologies, employee values, and workers’ sources of motivation. Competitors from all over the world attack markets that only a short time ago seemed secure. Customers have an unprecedented variety of suppliers to choose from.

Even in a field like ours, where technology and regulatory matters are constantly evolving, competitors can suddenly appear from outside without even having to worry about investing in networks. The configuration of the telecommunications industry is changing from day to day, and progress in technology provides the most innovative people with a chance to stand out from the crowd.

In this context, we can’t be content to wait and see what happens. If we’re to go on providing ever-better solutions for our customers, we must consistently stay one jump ahead of change. In concrete terms, this means adopting operating modes and production processes that are more and more flexible and effective.

To achieve this faster and better than our competitors, we must attract and keep the best employees, encourage them to continue learning faster and better than our competitors’ employees, and give them all the freedom they require to meet our customers’ needs.

The danger is that a company’s frame of reference might deteriorate before anyone notices and reacts in time. Drucker suggests two preventive measures to avoid this. First, he advocates reviewing every product, service, policy, and distribution channel every three years. The review would include asking the following question: if we were not already involved in this area, would we decide to go ahead?

You understand as well as I do that what’s involved is a basic reexamination of the company’s very mission. But in a company like Bell, three years without change is too long. We must constantly question everything we do. A large number of the services we offer today didn’t even exist three years ago. In a field like ours, letting three years go by before undertaking a thorough reexamination would be a sign of paralysis. That’s why everything has to be constantly reviewed, even while we’re in the midst of implementing the three-year transformation plan for our company and its processes.

The second preventive measure suggested by Drucker is to take a serious look at what’s going on outside the company, particularly with respect to non-clients. It’s a fact that companies know their customers from all aspects, but are often ignorant about potential customers with whom they aren’t doing business at the moment.

This is the sort of reexamination that can enable a company to detect any flaws that are starting to develop in the organization, and change what needs to be changed before serious problems arise.

The right kind of change

Change is fine, but it has to be the right kind of change, and it has to be done properly. According to a study by Arthur D. Little of 350 major companies in the United States, the results of major upheavals in companies are often disappointing. The study shows that only 17% of the managers queried claimed to be satisfied with the changes made, while 40% said they were clearly unhappy with them.

Peter Scott-Morgan, the author of The Unwritten Rules of the Game, claims that most failures in cases where companies were very careful in implementing change resulted from the fact that they neglected to take into account the informal rules that govern everyday activities in companies.

Let me give you an example. When changes are successful, it’s frequently because of the quality of the teamwork and increased cooperation within the company. But the principles behind the company’s compensation policy (and compensation is still one of the most powerful incentives) often continue to favor individual performance and reward only individuals rather than teams. In such cases, it’s easy to predict that the company will have to face resistance to change which is likely to prove more powerful than the best intentions in the world. It wouldn’t be surprising if, instead of seeing an improvement in teamwork, the company sank deeper and deeper into the most destructive kind of individualism, while everyone went on claiming to support change.

If the various messages being conveyed do not converge in the same direction, particularly when change is involved, human beings tend to revert to the good old rules and traditional ways of doing things. And when we attempt to introduce further changes, we must not be surprised to come up against the cynicism of employees who have lost faith in management’s ability to deliver the goods.

John Dalla Costa, a consultant with a great deal of experience in implementing change in companies, writes in the book Working Wisdom that employees are much more resistant to the poor management of change than to change itself. Badly managed change makes employees lose confidence in one another, the company, and the company’s senior management, and this in turn makes the company lose confidence in them.

Nevertheless, despite all the difficulties it involves, we can’t hesitate to make the changes that are necessary, but we have to pay at least as much attention to the way things are done as to the changes themselves. In the current context, failure to act is suicide.

As I said earlier, at Bell we’re in the process of completely transforming the company. We’re focusing all our activities on a single target, namely the greatest possible satisfaction of our customers’ needs. We literally want to delight them. We’re going to make their lives easier by cooperating with them in developing global solutions to their needs. Our marketing team is committed to offering a new product or service every month.

We also want to work in closer partnership with our customers. We want to become an essential part of their chain of values, to the point where we become their strategic allies in conquering their markets. We’ve come a long way from the days when we were content just being a supplier of telecommunications products and services. But even if those days seem far away now, all these changes have come about very rapidly. To succeed in the new path we’ve marked out for ourselves, we essentially have to design a new company based on different ways of working. We’re reviewing all our processes. Everything has to be on the table: there are no sacred cows!

Whatever the area, the same question must be asked: what’s the best way of actually getting the job done? To come up with the best answer to that question every time, we have to be prepared to change everything.

Networking

As companies concentrate all their efforts on their core activity, the ability to network becomes an indispensable advantage. Today, companies tend more and more to grow by making strategic alliances. To offer Bell’s customers global solutions, we are forming alliances that may even involve former competitors.

All the players will be seeking the forces they need to complement their own expertise, wherever they can find it, to meet their customers’ needs. For example, we recently entered into separate agreements with CGI and IBM to help us offer the very best in development and management of large computer networks. As you are well aware, the synergistic development of telecommunications and computers is the driving force behind information technology. If we want to offer our customers the best global solutions, we must look to our partners for knowledge and skills that complement our own.

Today, economies of scale belong to production and management of so-called convenience resources. Providing access to these basic resources at the lowest possible cost is our entry fee to compete in the race, but it’s also much more than that. It’s part of the added value demanded by our customers, which we must provide if we’re to distinguish ourselves from the competition, and which comes from offering global solutions that meet their specific needs.

We must succeed in setting up the best possible organization to create the greatest synergy, to improve our reaction time, and most of all to innovate faster than our competitors. In a world where nearly all companies are concentrating on their core activities and customers are asking for global solutions, the need to integrate resources produced internally with those obtained externally presents a new challenge. The means of meeting this challenge must be new too. To succeed in this we are changing our organizational methods from top to bottom and increasing our strategic alliances.

Traditional jobs are giving way to a new kind of partnership

Amidst all these changes, relations between the company and the people who make up its workforce are changing at the same rate – fast!

During the past century, we’ve lived in a society where relations between companies and their human resources were based on the employer-employee relationship. Today, the company increasingly uses human resources that, while being at its service, are not – strictly speaking – part of its personnel.

The company’s workforce now includes subcontractors, consultants and specialists who are grouped into teams with employees (in the traditional meaning of the term) to carry out a specific mission, which may involve finding a solution to a production problem, developing a new product or reviewing a process. Once the work has been completed, the team is disbanded and its members, employees and others, must be ready to offer their services again, in the company or elsewhere, to take up new challenges.

This kind of relationship represents a considerable change in the relations between the company and its collaborators. In turn, employee motivation, the feeling of belonging and loyalty to the company present new challenges. In this type of organization, managing no longer means giving orders to a lot of employees who carry them out. In many cases, senior managers whose decisions have a profound influence on the company’s future have only a handful of employees reporting directly to them. But this doesn’t prevent them from managing major projects.

In companies like ours, in which the strength of the organization is based on employees’ knowledge and skills and their ability to create added value from information, what’s required is no longer simply to define employees’ tasks and check the work they do. We have to find ways to offer optimal conditions to enable our teams to be as productive as possible, which in our case means making information more productive. This kind of work environment is much more focused on creating new wealth than on trying to control costs without changing our work methods. It’s much more demanding but also much more stimulating.

Individuals are adapting thanks to new technology

All these changes affect more than just the company making the changes. Individuals must also adapt their career paths to the new realities. We can no longer think simply in terms of the next promotion on the company’s organization chart, in an essentially linear progression. And that’s another change.

To succeed in our career path, we must now take a look at the knowledge, skills and expertise we have to acquire so we can offer our services to meet real needs that haven’t been met. And I’d add that this may be inside the company or outside it. We can no longer simply acquire qualifications to fit essentially unchanging job descriptions, as has been the case in the past. Instead, we must try to detect not only today’s needs but also tomorrow’s, and identify the means of meeting them. We must not hesitate to suggest projects. Teams are formed and good opportunities arise around projects that head the company toward the future. Increasingly, making a career will be synonymous with going from project to project.

In his excellent work entitled Job Shift, William Bridges describes the increasing speed of technological development as the main engine of the workforce transformation. The traditional work organization, with fixed hours for everyone and barriers between different functions, has been broken down simply because technology now makes it possible to do so. The new rules of the game free individuals to the point of making them the work unit that is the most productive, favorable to innovation, and dynamic, according to John Naisbitt in Global Paradox.

One of the reasons that individuals are so vitally important to a company is that the most important raw material is intelligence, supported by knowledge and connected to universal access to information. What constitutes the extraordinary power of these three essential elements today is their great mobility. Also they can be connected, and if you’ll allow me to use the expression, multi-connected, to create a synergy with practically unlimited potential.

When you talk to managers in companies that have already been through the transformation, you quickly realize that they are no longer managing a workforce. They are managing individuals who are connected, on the one hand, to information and, on the other hand, to colleagues spread out just about everywhere in the world. And this is due to telecommunications, and more particularly to the information highway, making it possible to globalize the economy and give individuals unprecedented work capabilities. In the information society, individuals can have in their offices, cars or homes, and even in their airplane seats, the kind of access that only a short time ago was reserved for only the largest companies. This enables the most competent individuals to be members of large research and work teams whose scope is worldwide, while utilizing easy-to-use equipment at a relatively reasonable cost.

The technological progress that has produced the information highway gives a completely new meaning to the concept of the critical mass essential to the development of any major business. A company doesn’t need to concentrate its experts in a specific location to provide them with the equipment they need to work. To complete a project, a company can even call upon virtual teams whose members can be located anywhere in the world and can belong to totally different spheres of activity. Technology and the information highway provide the necessary links. And this represents a genuine revolution.

One of the major changes brought on by technological development, one that most profoundly affects companies, is that the instruments required to do the work now belong to the individuals who use them, and these individuals use them to acquire the knowledge that is the company’s most important raw material. In this context, the company frequently needs its experts more than they need the company. This is a complete reversal of the game rules.

Exciting times

I think these are exciting times, full of challenges and great potential.

The greatest successes will be achieved by those who make good use of their access to knowledge and are capable of providing the best added value. This goes for individuals as well as companies. Moreover, the most successful companies will be those that enable their human resources to develop (and this includes employees and collaborators of all kinds), since the companies will be able to benefit from this development to enrich their own knowledge base. This is the path on which Bell is committed to move forward with all its employees and collaborators.

TELECOMMUNICATIONS REVOLUTION: ARE WE READY YET?

Derek H. Burney
Chairman & CEO, Bell Canada International

The Canadian Club of Ottawa, April 15, 1994
Published in The Corporate Report No. 6 (June 15, 1994)

When I served in places like Japan and Korea, I used to suggest to visitors that they write their impressions after about six weeks. After that, it only gets more complicated.

It is somewhat in that sense that I am here today volunteering views about the “telecommunications revolution” after only 15 months of heavy immersion – the point of maximum liberty and high subjectivity for me – with all the latitude that implies both for me…and you. If you detect a particular emphasis directed at government, you can attribute that to my longer record there prior to entering the private sector.

I promise, at the outset, not to use or try to explain terms like asynchronous transfer mode. For one thing, the acronym ATM probably has a very different meaning for most of us.

Unless you have been frozen in the Rideau Canal over the past winter, you have heard and read countless reports about the revolution that is going on in telecommunications. It has been called the information highway or the electronic superhighway – some are even calling it the info pike, the infobahn – or simply, the web. Those of a more cynical persuasion deride it as the super “hype”-way.

In any event, an explosion of new technology is transforming our industry. Telecommunications networks are becoming faster and more intelligent and their carrying capacity is increasing exponentially. The ability to send and receive massive amounts of voice, video, data and graphic information simultaneously over the phone lines is changing the way we communicate and what we communicate. And advances in satellite, cellular, and wireless technologies are changing how we communicate.

Similar developments in the computer, broadcasting, cable and consumer electronics industries have led to a convergence of technologies. Industries which once had little in common are developing overlapping capabilities and offering competing services.

This convergence is creating unprecedented opportunity to develop and offer new services. The result is a global revolution in information, one that could change our lives as significantly as the industrial revolution, or the invention of the automobile or the telephone.

Ray Smith, the head of Bell Atlantic, has remarked that the convergence of technologies means that “your computer will speak, your TV will listen and your telephone will show you pictures.”

It is, in effect, a social revolution that could affect virtually all aspects of our lives from the way we learn and work to the way we relax – in short, the way we live.

The Revolution Is Real

Why is this happening now? Primarily, because of technological innovations which enable audio, visual and data information to be transformed into digital form and transported in vast quantities along fiberoptic trunk roads, or highways.

No one can really predict what shape the industry will take or what services ultimately will sell. What we do know is that industries that used to be separate are now converging. What we also know is that the rapid convergence of technologies needs a parallel convergence in policy and regulation – encouraging open, universally accessible, interconnected networks by many different service providers.

Now all this may seem a bit baffling for societies still struggling to set the clocks on their VCRs. I confess that my sons taught me the VCR technique and, more recently, because of the business I am now in, I used the same support system to master many of the new services available from my new telephone – call answer, call display, speed dial and all that. (“The smarter the phone, the dumber the user feels.”)

You may not think that is all that impressive, and it isn’t, even for someone who can recall the day when a real operator asked, “Number, please.” The message is that those who taught me and others like them are increasingly the customers of today and tomorrow. They are thriving on the new technologies and services and that is the promise of the future where customer choice will be king.

All this to say that perhaps the most fundamental challenge for industry is to develop products and services which are first and foremost user-friendly, practical in purpose, simple and convenient to use.

There will not be a single device – an all-purpose gadget that serves all communications and entertainment needs. As John Tyson of BNR recently observed, industry is obliged to identify and develop the product or service that will shape the customer’s perception of value. More may come in the form of machines that recognize and respond to human voice commands – a modern extension quite literally of the operator asking, “Number, please.” We may even have the means to converse and translate in real time in two or more different languages – who knows, a possible solution to a perennial Canadian challenge!

Consider some other possibilities:

• Canadian students studying Australia in social studies could link up with their counterparts in Melbourne and learn firsthand about life down under

• Doctors in remote communities faced with a medical emergency could get immediate diagnostic help from specialists in hospitals hundreds of miles away

• It could become routine to do business with customers in Stockholm or Tokyo, relying on video conferencing from your office or home rather than airports and jet lag

• And of course, there is the promise of an unlimited selection of movies delivered directly to our televisions, without the trip to the video store in the middle of winter

Many of these scenarios are already beginning to unfold:

• For example, film students at Ottawa University are watching movies from the NFB, using personal computers located on campus. They are part of a video-on-demand trial that Bell is conducting with Carleton and Ottawa University, the first of its kind in Canada. A second phase of the trial, planned for this summer, will bring video-on-demand to 200 homes in Mississauga.

• Grade 12 students in Riverton, Manitoba, a farming community 120 km north of Winnipeg, are now studying calculus with a teacher in Arburg, 30 km away. Their local high school is too small to hire its own calculus teacher and it was faced with the prospect of closing down and sending its students to a regional “super high school.”

• The Riverton School chose instead to set up a two-way video link over fiberoptic cables with the school in Arburg. The students get the math they need without lengthy daily bus trips and a rural community has saved its local high school. Unfortunately, I can’t say that it has made calculus any easier to learn.

• In a trial that Bell is conducting in London, Ontario, doctors at three local hospitals will be able to exchange images from CAT scans and magnetic resonance imaging examinations over a high-speed network called LARGNet.

The electronic transfer will allow doctors to make a diagnosis without waiting for originals to be sent from another hospital where a patient may have been sent for an examination. For patients, that means a faster diagnosis and fewer return trips to the hospital to find out test results.

The Relativity Factor

The revolution is global and the stakes are high. In the United States, Vice-President Al Gore is challenging industry to broaden its concept of universal service to include classrooms, libraries, clinics and hospitals. He predicts that telecommunications will be America’s largest export and the world’s No. 1 business by the end of the decade. The American Administration and Congress are leading a vigorous debate for policy and regulatory change.

Why? To ensure that America takes full advantage of the emerging opportunities. The US is and will likely be the most dynamic market for new technologies and new services involving investments of more than $200 billion over the next 10 years.

In Japan, the government has committed $250 billion to build a national information infrastructure by 2010. As part of that effort, it is deregulating its cable industry and promoting the convergence of telecom and cable markets.

These initiatives in Japan, the US and elsewhere are designed to ignite private sector investment. And they will. Governments that create a hospitable environment for investment from private industry inevitably reap the benefits of innovation, new technologies and increased employment.

The United Kingdom has one of the most open regulatory environments for telecommunications in the world. Cable distributors there can also provide a complete range of telecom services, including local and long distance telephone service.

That is why Bell Canada International is investing in the UK. Our cable franchises will provide cable and telephony services to 60% of the Greater London Area and parts of southeast England. The UK market is highly competitive but it is also experiencing rapid growth, with investment in cable expected to top £6 billion by the end of the decade.

BCI is also investing in cable in the United States. Late last year, we reached an agreement to purchase a 30% share in Jones Intercable, the eighth largest cable operator in the US. Jones has 55 cable systems serving 1.3 million subscribers, 60% of whom are served by fiber technology. This provides the capability to carry interactive multimedia and telephone services in the future.

But we are also taking a stake in several of Jones’ other enterprises, in education, computer networking and film production. Jones is considered a pioneer in delivering university courses by cable TV with a 24-hour education network, reaching more than 25 million American households.

We are positioning ourselves globally in a substantial manner. Five years ago our investments outside North America stood at $12 million. Today the total exceeds $1.5 billion.

We are making these international investments because those markets are open to us (ironically, in many cases, more open than our own) and because we want to broaden our expertise and capabilities in new technologies. We are learning more about what customers want and how to offer those services most efficiently. The experience gained abroad can help us climb the learning as well as the earning curve and enable us to develop better services here in Canada, if and when we have the opportunity to do so.

But this can only happen if Canada creates an environment that is conducive to investment and innovation in telecommunications.

Unfortunately, that is in question today.

Are We Ready?

In an era of limited public resources, the telecom lever may well be the most powerful tool available to stimulate growth and competitiveness. Our ability to employ people in satisfying, high-paying jobs and to improve our standard of living will depend heavily on our competitive capability in the high-tech, knowledge-intensive industries of the future.

But it will not happen in a policy vacuum or with a regulatory framework designed for a very different age and a different pace of change. Success requires more than rhetoric, (certainly more than speeches) and yes, more than consultations or hearings.

Regrettably, our record to date has been too much one of debate rather than direction, of seeking dialogue rather than decisions. Process often becomes a substitute for purpose…and not just in telecommunications.

Canada has been the only country that obliges the regulatory agencies to act as a proxy for leadership and policy-making by the government. In my view, it is the role of our elected representatives to shape policy and the task of appointed regulators to implement those policies.

The Government Role

I recognize the complexity for government and within government in tackling issues with a multitude of public policy implications.

I recognize too the purpose and value of broad-based consultations intended to condition, as well as influence, public policy. After all, I spent thirty years as part of that system.

The words in the Throne speech were encouraging and the advisory process being established is welcome but, ultimately, more is needed and choices do have to be made.

From governments at all levels we need a measure of leadership to bolster efforts by the private sector to build an information highway and to accelerate the deployment of advanced broadband networks. This would connect Canadians better to one another and to the new global economy.

Canada should not become, by default, a ramp running off someone else’s super highway.

Canadians should be able to obtain information and communicate with one another and the world easily, reliably, securely and cost-effectively in any form – voice, data, image or video.

To that end, what is needed is a regulatory and policy framework that encourages private sector investment in telecommunications here in Canada.

Speaking frankly as one who now deals with underwriters, analysts and shareholders, I have to say that the perceptions of investors about our regulatory regime are running in the wrong direction. And investors, including, specifically, Canadian investors, do have other choices these days.

Canada needs rate rationalization and real, as opposed to micro-managed, competition moving us closer to pricing, which reflects market realities.

Our regulatory regime should be a catalyst for innovation, not a constraint.

The industry does not want government subsidies or government expenditures. Surely a novel plea, these days.

We would welcome policy support for a more favorable R&D environment as well as continuing support for Canadian companies in their efforts to compete internationally. (At the risk of preaching for my former parish, let me acknowledge that this is one area in which we do well!)

Knowledge and skills are the keys to our future, competitive advantage. “Software,” as Bill Gates observed, “is like a natural resource except that its source is not in the earth but the human mind.” That reality should guide broader public policy and influence priorities at all government levels. It means specifically more focus on education and training with policies and programs serving needs not entitlements, aimed at motivating the best from our youth and not the latest trend or impulse of political correctness.

Did you know that telecommunications is the only high-tech sector in which a Canadian company ranks among the top 10 global firms? It is also probably the only one in which a Canadian firm has the size and scope to be a leading world player.

Did you know that one company – Northern Telecom – accounts for 20% of all industrial R&D expenditures in Canada? That same single company recruits one-fifth of all this country’s M.A. and Ph.D. graduates in electrical engineering and computer science. An asset, I suggest, worth preserving and worth nurturing if we intend to be more than a spectator observing success elsewhere.

Industry’s Role

By now, you might well ask, what can we expect from industry itself?

Industry should work together and with government to build the necessary networks and to ensure that they are compatible with those of our competitors. Canada’s information highway will be “a network of networks.” It is incumbent upon us all to make sure that we build the bridges and interchanges necessary to create a seamless national network.

Our objective must be to give Canadians greater choice by opening up the avenues for communication and competition, not restricting them with artificial walls.

Industry must also make the investments in research and development that are needed to develop new technologies.

We will look to government for direction, not handouts.

We will invest in both technology and the people behind it, and we will continue to fund the long-term objectives – not just the short-term returns.

And, I think we are doing just that.

Bell Canada and its Stentor partners from British Columbia right across to Newfoundland recently announced plans to invest $8.5 billion over the next 10 years to deliver the information highway to Canadians.

We will upgrade our local, regional and national networks to create a “Canada First” coast-to-coast broadband network that will give Canadian businesses and consumers access to a wide range of enhanced services.

We are also creating a new multimedia company to develop new services and applications for the information highway.

And we will establish a venture capital fund of up to $50 million to assist companies developing multimedia applications and products for the information highway. Good news, I suggest, for the creative talents of Canada.

This information highway will be accessible and affordable to all Canadians. Equally important, it will establish an information infrastructure that is open to all service providers, including our competitors. It will provide opportunities for all businesses to develop and offer their services and products to Canadians.

This will mean jobs, an average of 12,000 jobs across the country for the next 10 years. It will also lead to many more jobs in a brand new multimedia industry.

This initiative will place Canada in the vanguard of the “telecommunications revolution.” It also represents a significant vote of confidence in the future Canadian economy.

Conclusion

In summary, let me say that Canada pioneered the first wave of the telecom revolution – the digital wave in the 1970s. We cannot afford to sidestep the second wave. I believe that Canada’s future prosperity will depend in large measure on our commitment as a country to build a Canadian information infrastructure.

Our industry is taking a major step in that direction.

Private investment in core Canadian strengths such as telecommunications is the best answer to high unemployment, sluggish growth and eroding public finances. Building on these strengths generates jobs and new areas of expertise. It produces new services and opens new markets.

Our industry does not need government funds or protectionist barriers to compete in the telecommunications revolution. But we do need to know what course the government is setting for telecommunications in this country.

We need a policy and regulatory framework that will attract investment and stimulate innovative research. And we need to know what emerging markets will be open to us so that we can make appropriate investments.

Investment in new technologies always involves risk. We are taking that risk because we do not want to forfeit the leadership that Canada has developed in telecommunications.

Technological convergence has opened unprecedented opportunities for our industry domestically and globally. If we are to seize them, our industry’s determination must be matched by well-focused government policy that encourages investment and initiative and allows us to compete at home as well as in global markets.

What is needed is a partnership between government and industry – leadership and a sense of purpose from government; tangible commitments and investments from industry.

We know we need to work constructively with government to sustain that leadership. That is precisely what we want to do. We believe that is how we will win the revolution. We believe that is how Canada will make the most of the opportunities.

MULTILATERAL CARTS AND CANADIAN HORSES: PUTTING FIRST THINGS FIRST ON CANADA’S INFORMATION HIGHWAY

Derek H. Burney
Chairman, President & CEO, Bell Canada International Inc.

The 13th International Trade Law Seminar, Ottawa, October 19, 1995
Published in The Corporate Report No. 15 (December 31, 1995)

It is always a pleasure to return to Ottawa and renew some old friendships. Thank you for inviting me. Being present among so many distinguished members of the legal community does give rise to the temptation to dig into my repertoire of lawyer jokes. But, as a former diplomat, I will refrain from doing so. That’s because Thomas Jefferson once said it is the trade of lawyers to question everything, yield nothing and to talk by the hour. Will Durant countered on your behalf by noting that the art of diplomacy is to say nothing, especially when speaking; that diplomacy is the fine art of telling half-truths and the finer art of telling half-lies. And Mark Twain added his own verbal abuse of the poor diplomatic corps by saying that the principle of diplomacy is the principle of give and take. Give one and take ten.

These observations led me to the conclusion that the professional most susceptible to abuse must be the government lawyer involved in international trade negotiations. For surely the ideal trade negotiator is someone who questions everything and yields nothing; who talks by the hour while saying nothing; and who, in the spirit of give and take, gives one and takes ten. (At least, that’s what Simon Reisman always told me.)

As for Konrad and his legal colleagues in the public service, let me acknowledge, in a more serious vein, the important contribution they have made, and continue to make, in the advancement of Canadian trade policy, in particular, their role in the search for impartial adjudication, equitable enforcement and the resolution of disputes. It is important work; it is tough sledding; and we are lucky that professionals of high caliber are committed to the task.

As you know, I was involved in trade negotiations in a past life. But I never was a lawyer and no longer am a diplomat. So I am not going to talk for an hour today. And I hope to say something meaningful in the time available.

Canada is currently involved in WTO negotiations to create rules for basic telecom services. Hence the suggestion that I speak today about the international telecom rules, which BCE believes would best serve Canadian interests.

Unfortunately, that would be a very short speech. For it is a regrettable fact that BCE has not really been able to develop a comprehensive position on the current negotiations. Not unwilling, but unable. Unable to do so because, just as foreign policy is an extension of domestic policy, so too must international telecom rules be a consistent extension of domestic telecom policy. And BCE is simply unable to take a considered stand on the current international negotiations until we know more precisely where we stand in Canada.

We all know the expression “putting the cart before the horse.” It is not a prescription for progress, unless you desire to make rapid progress downhill, and injure the horse. Yet I fear that is exactly what we risk doing in the vitally important sector of telecommunications – the nerve system of modern economies, one which has also been a core Canadian strength for over a century. Canadian negotiators and Canadian telecommunications firms are currently laboring under a major handicap – the absence of a modern, domestic policy and regulatory regime, which will give Canadian firms the chance to be competitive with foreign giants both at home and abroad.

Notice I said foreign giants. Because size is a relative term. In the small Canadian pond, Bell may indeed look like a big fish. Our regulator even called us a Leviathan. But in the North American lake, Bell is only the 10th largest telecom when measured by revenues. And it is only the 25th largest in the global ocean, from a revenue perspective, given our weak currency.

Indeed, to appreciate our national position, consider this sobering fact. In a truly borderless, unregulated world, 100% of current Canadian long distance traffic could be accommodated within the existing excess capacity of the giant American carriers. So perhaps you can understand why Bell Canada has always known that its real competition here at home was not called Unitel or Callnet, but AT&T and Sprint. Companies which have been able to grow hugely because the American domestic market is so huge, and which view the Canadian market as a northern extension of their home turf.

Not only are they welcome to enter Canada and compete with Canadian carriers in all telecom markets, but Canadian domestic telecom policy gives these US giants regulatory incentives in the form of lower contribution payments, which not only subsidize their participation in the smaller Canadian market, but also require the incumbents (the Canadian telephone companies) to absorb this subsidy in keeping residential local rates below cost. These discounts were intended to stimulate competition by “Canadian” firms. But good intentions do not always generate good policy.

What other country in the world would subsidize the entry of large foreign multinationals at the expense of its own Canadian industry? What underlying Canadian policy objectives support such unusual treatment of foreign entrants?

So Burney, you ask, if that’s the kind of world we live in, what should the new Canadian regime look like? How can we ensure that Canadians enjoy the benefits of competition while fostering competitive Canadian firms? How can we ensure that Canada is not just a spur line on the American information highway?

Here’s how. First, we need increases in local rates, which eliminate distorting cross-subsidies. The Canadian industry must be allowed to operate in a system where the rates we can charge are better aligned with our costs, both in terms of what the end user pays for the service, and what long distance providers pay for the use of infrastructure others have paid for. That is not the case today.

Let me give you a concrete example: The cost of local service in Metro Toronto is $30; yet the allowed residential rate is almost half that – $17. For years, this imbalance was offset by the high margin on long distance. But, with competition, the margin on long distance is eroding, leaving less and less to support local service. This is not rocket science.

And when the CRTC finally acknowledged the need for rate restructuring almost a year ago, the government intervened and postponed the decision. This meant a lost year for the telcos – a prolonged period of uncertainty for planners and strategists already grappling with revolutionary changes to the technology of the telecommunications industry.

How important is this revolution? Well, The Economist recently characterized it this way: “The death of distance as a determinant of the cost of communications will probably be the single most important economic force shaping society in the first half of the next century. It will alter, in ways that are only dimly imaginable, decisions about where people live and work; concepts about national borders; patterns of international trade.”

I suggest that, for too long, we have been building a telecom house on sand, with one regulatory distortion inevitably requiring another and then another. It is time, I believe, to lay a solid and reliable foundation in Canada. Second, convergence must be allowed, starting now. Canadian telephone companies – all of them – should have the right to offer a range of services over their networks now, just as cable TV companies have the right to offer telecom services over their networks. Why? Two reasons. Because we won’t be able to finance investment in new broadband networks, new services and new technologies if we can’t generate a reasonable return – something Bell Canada is not doing right now. And because real competition does provide choice for users and consumers while encouraging innovation.

Why is the government role relevant? Well, again, to quote The Economist: “The pace (of convergence) will be set not just by technology but by the interplay of regulation and competition. Governments can delay the revolution; they cannot prevent it. If they try, they will merely fail more spectacularly later.”

There is a difference – a big difference – between sustaining competition (a new euphemism for protection) and stimulating competition. We need more of the latter and less of the former from government. As Ian Angus said recently, it is hard for anyone to argue that AT&T needs protection from Bell Canada.

Third (and in a similar vein), in this increasingly wireless world, all Canadian firms with the bona fides to participate should have equal access to spectrum to provide new wireless services. There is no valid reason for the Government of Canada to handicap existing Canadian cellular operators, when to do so will leave the personal communications field to giant American firms like AT&T – firms with both the desire and the ability to absorb Canada into one seamless, wireless web controlled from the South.

Given the intense competition, which already exists between the Canadian cellular companies, why not allow these Canadian firms to develop a full range of wireless services, so we can effectively compete with our powerful foreign competitors.

Fourth, not only should firms be allowed to deliver a broader range of services over broadband networks, but companies should be allowed to market services in bundled packages which maximize the value and convenience for customers. Innovative packages of voice, video and data services using both wireline and wireless technologies, and tailored to meet the needs of each user, are not just allowed but encouraged in other countries.

Finally, let’s recognize that the key to ensuring competition in this rapidly changing sector is competition law – not outdated regulations or theoretical policy models designed to protect specific firms from competition. Let’s recognize that you won’t make the weak strong by making the strong weak.

Those are the broad parameters for a modern Canadian telecom policy – the way to put the Canadian horse before the multilateral cart in 1995:

• Rational local rates

• Convergence now

• No subsidized entry for foreign carriers

• No artificial handicaps for Canadian wireless operators

• Allowing the bundling of services tailored to meet the needs of Canadian customers

• A reliance on competition law to ensure fair competition

We are not advocating complete deregulation. Nor are we trying to thwart competition. What we need is a healthy balance between regulation and competition. Because, right now, we have the worst of each: irrational pricing, which undermines “sustainable competition” and antiquated regulations being overwhelmed by technology. We believe the market-based domestic framework, which I have just described would give Canadian firms the chance to be successful here at home and abroad in the years ahead. It would allow us to avoid being swamped by the wave of change coming in the form of US telecom policy reform. And it would also allow our negotiators to make international progress, when it is in our national interest to do so. We would be able to define and calibrate our negotiating objectives, both from the perspective of the access we as Canadians want in foreign markets, and the access we are prepared to grant foreign firms here at home.

Above all, we should avoid making unilateral concessions to foreign-based competitors until we define and refine objectives of equivalent value for Canadian firms. That is the heart of my message from a BCE perspective – and from my day job at Bell Canada International.

Let me turn to some more personal views on this issue, based on my past experience in trade negotiations on behalf of Canada, and my more recent experience in the telecom sector.

My first observation relates to the importance of recognizing the limits of law in international commerce, with the collision of cultures and the clash of economic and political interests. In other words, what you see on paper is often not what you get on the ground.

On the one hand, what may appear to be a clear legal obstacle restricting access can often be overcome in fact. Ask AT&T, which apparently has found a legal way to hold a stake in Unitel far larger than Canada’s statutory foreign ownership limit. On the other hand, there are also occasions when a clear legal right of access turns out to be meaningless in fact. This can occur when the primary barrier to entry is economic – not legal. It occurs when one is unable to have the legal right enforced on a timely basis, as, for instance, in New Zealand, where there is no regulator to enforce interconnection rights.

And it can also occur when one is unwilling to engage in the corrupt or “flexible” business practices, which are regrettably rampant in many parts of the world.

In fact, one can make a good case that such practices are often the biggest barrier to participation in many emerging markets today (and some that emerged a long time ago). The Foreign Corrupt Practices Act in the US sets a tall standard for North American companies. Unfortunately, it is neither an international nor a commonly accepted standard. The Americans themselves have difficulty on this front. You may have noticed Secretary Brown’s recent complaint that US firms lost almost $50 billion in foreign contracts due to questionable practices.

The bottom line? In those countries with different ethics on how to do business, a lack of rules is rarely the problem. The rules already exist, but they unfortunately have the same authority as the lofty constitutional provisions of the former Soviet Union. So raising the bar in terms of multilateral disciplines may be a Pyrrhic victory for Canada.

My second observation is this. During the past quarter century, it has become increasingly difficult to achieve meaningful agreement at the multilateral level. Now I know this borders on heresy to the Gattologists, but I am trying to be objective and I suggest the trend is due to many factors:

• The growing number of participants, driving the point of agreement towards a lower and lower common denominator

• The inherent constraints of the MFN principle, with countries willing to grant access to their most favored trading partners only at the level they’re willing to grant their most feared competitors

• The movement from issues involving the MFN principle to the much more sensitive issues of national treatment and non-tariff barriers

Put another way, with most of the easy trade issues resolved long ago, multilateral agreements are becoming as much a way to legitimize and codify existing national practices as they are a means to liberalize further trade and investment.

A third observation. It is undeniable that Canada’s influence in shaping the multilateral agenda has waned with each passing decade. Of course, we still have influence; and we must continue to exercise it as best we can to tame the raw power of the economic giants. But, in a very real way, multilateral negotiations have become a bilateral exercise between the two great customs unions known as the United States and the European Union; between the fifty states of America and the fifteen states in the European Union. Whether we like it or not, the objectives of other parties are now generally achieved when they coincide with the interests of the US, or Europe, or both. The conclusion of the Uruguay Round was proof positive. And, so far, the preliminary jockeying on telecom services reflects the same trend.

What this has meant and will continue to mean for Canadian negotiators is that they must concentrate their leverage on the markets and issues which are most vital to Canada, seeking to complement where we can those with similar objectives but more influence. We are not Americans. We do not have the ability to walk softly and carry a big stick. We are Canadians. So we have to keep skating and stickhandling.

In the telecom sector, for example, Bell Canada International does not need or want the elimination of all investment barriers in all countries. Frankly we have no real interest in uniform, global reciprocity. We will leave such aspirations for global hegemony to others. Some of the national markets of greatest interest to BCI are not even participating in the current multilateral negotiations.

The truth is, the current patchwork of national rules has not really thwarted our ambitions. Indeed, BCI has been able to gain access to the places we really want to be, like the US, the UK and New Zealand, Colombia and Brazil, China and, hopefully, India. If anything, our problem with the status quo is not a lack of rules. The problem we often have is with the manner in which the rules are administered or the proclivity of some to change the rules after the license fees are collected.

What we need, and what I suspect other Canadian telecom firms operating internationally need most of all, is neither new rules nor no rules, but vigorous support from our government when existing rules are being flouted.

Regarding investment and foreign ownership restrictions, we obviously have concerns about the manner in which the hard reciprocity rhetoric in Washington is translated into implementing legislation – one reason in particular why we are firmly opposed to unilateral concessions on this issue by Canada.

Another investment issue of concern to BCI does not relate to the terms of market entry at all. Rather, it is the treatment of capital and profits once invested or earned. Our ability to repatriate capital or avoid retroactive measures. Fair market exit rules. We could definitely use some multilateral disciplines in this area and I suspect the need goes well beyond the telecom sector. Oh, I know this is a perennial discussion item at the OECD and the WTO but frankly we would welcome some teeth to go with the talk.

Finally, we are not confident that the WTO has the capacity or expertise to focus on the core issue of telecom market access – the timing and methodology of interconnection rules – the detailed terms of entry to each national information highway. As all international trade negotiators know, the devil is in the details; and as all domestic telecom regulators know, the subject of interconnection in one country is devilishly difficult, let alone in one hundred.

How much will a new entrant have to pay for distribution? How will the underlying costs of a network be allocated? How are disputes to be settled? These are the type of domestic regulatory issues, which will determine the real value of multilateral rights and obligations for telecom services.

Now, I don’t want to leave the wrong impression about the WTO. We need the WTO; and we should do everything we can to support a dynamic multilateralism which advances our national interests, especially its capacity to resolve disputes. As well, we should always remember that there are risks, as well as opportunities in bilateralism or regionalism, particularly when based on the concept of hard reciprocity. But, if you put my four observations together, and combine them with the continuing domestic uncertainty, I believe one can make a solid case that Canada need be in no rush to create new international rules for basic telecom services. That we may in fact have little to gain, and possibly much to lose, if we race to the finish line in Geneva – a “give ten and take one” situation.

So let’s be careful out there. Let’s first put our own house in order. Let’s not give anything away. Let’s make sure that any concessions we make are exchanged for meaningful and relevant concessions of equivalent value. Let us not sign an agreement for agreement’s sake. Let us not be the Boy Scouts of international trade, in the sense of being altruistic or high minded. But let’s be Boy Scouts in the sense of living up to their motto: “Be prepared.”

Today, I have used the imagery of horse and cart to make my point about Canadian Telecom policy. So let me close by sticking to this equine theme. I believe that the corporate horses in the BCE stable – Bell Canada, Northern Telecom, BCI, Telesat, Bell Mobility and Bell Northern Research – are the thoroughbreds of Canadian telecommunications, with excellent bloodlines and a proven track record. And we have a bit of Northern Dancer in us, having sired a number of other champions outside the stable, like Newbridge, Hummingbird, Mitel and Corel.

I don’t think there is any doubt that companies like those I have mentioned are the best bet for Canada in the global telecom race. And we are confident in our ability to run with the best in the world, especially when some of the handicaps are removed. In the coming months, particularly if and as our government charts a new domestic policy, we hope we will have that chance.

ALL THAT JAZZ: SUCCESS IN THE MULTIMEDIA INDUSTRY

Marcel Messier
Vice-President, Bell Emergis

Fédération de l’Informatique du Québec, Montreal, February 18, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

Since my company, Jazz, is closely involved with the media industry, I’d like to begin with a story about some actors – hundreds of them. You saw them on the screen in the hit movie hit Titanic. But these actors never turned up on the movie set in Mexico. They never drew a paycheck. And they weren’t members of the Screen Actors’ Guild. These actors are computer-generated characters. They were added to the turbulent scenes that occur after the iceberg has struck. They are blended seamlessly with the real characters – who got very, very wet. These new-age actors are part of what makes movies like Titanic so successful. And so expensive. A significant part of the $200 million spent on this “most expensive movie ever” came after the filming was completed.

There is a great deal of money to be made in the multimedia industry. And many people are bringing forward creative ideas that they hope will reap great returns. But let me be up front with you. Too many of these ideas lack commercial viability. And the time for experimentation is over. We can no longer develop content for content’s sake. Spectacular but useless web-page graphics are also a thing of the past. The time has come for commercial applications. There’s money to be made on the net. And the message I have for you is this: only by developing the right business model can a company prosper in today’s competitive, fast-paced multimedia industry.

I’ll use Jazz as an example, because we’ve worked hard to develop and refine our business model. And while we’re a young company, we’re confident we’ve got it right. We’ve designed a commercial model that works. I’ll tell you about this business model by examining the four guiding principles we’ve followed. My goal is to clarify the principal strategies you must undertake to build a viable multimedia enterprise.

Understand your target market. First, you must identify and fully understand the needs of your target market. Ask yourself, is there a target market? How big is it? What is the nature of this market? And, if you’re working in the multimedia industry, your target market is probably a “community of interest,” that is, individuals or organizations grouped together to exchange information for personal, professional or commercial reasons. A community of interest is a self-created grouping defined by the volume of information it exchanges. It is an attractive business opportunity to the extent that the information it exchanges can be digitized. While a traditional market tends to behave as a single entity, communities of interest are dynamic and interactive. And to serve such a market, you must understand it, commit fully to it and immerse yourself in its culture. In short, to reach this kind of market, you must commit enormous time and human resources. But the results can be well worth the effort.

Early in our planning we saw a huge opportunity in the media production industry. It had a pressing and unserved need. Not many years ago, only a few companies were involved in animation, special effects or video production. The companies that did exist were concentrated in a few key locations. But during the last decade this market has exploded – both spatially and in dollar value. The post-production market in North America alone now generates some $17 billion annually.

This community of interest includes animators, computer graphics specialists, film studios, advertising agencies, media labs, screenwriters, in-house facilities, content suppliers and corporate clients. Typically, these individuals and companies work on collaborative projects, with tight deadlines and the need for multiple approvals. The logistics and the costs, in both time and money, of this cooperation can be staggering. Video and audio tapes have to be shipped across town, across the country or around the world. Faxes, phone calls and emails are exchanged in an often frantic effort to coordinate the creative activities.

We knew there had to be a better way, particularly since more and more content is now digitized. We also knew that as broadband capacity increased we could move volumes of data that once would have been nearly impossible to transmit. We saw our mission clearly: helping this community work together.

We got to know our target group. We found out what their needs were. They helped us design the product that would best suit them. Here’s what they told us:

• They wanted intuitive interfaces. For the most part, these are creative people, not computer technicians.

• They wanted the ability to work collaboratively on the same video or audio sequence from many places.

• They wanted to be able to send enormous files, without the frustrating waits that internet users are all too familiar with.

• They wanted a comprehensive address book as well as email and ecommerce options.

• They wanted the highest level of security.

• And they wanted clear and precise, project-oriented billing.

We listened. We responded. The product we began to design was Jazz.

Develop strategic partnerships. Identifying and targeting a community of interest is only the first step in creating a successful commercial model. The second step is finding strong strategic partners and creating a framework in which all parties can work together. You don’t want to do your own thing and then find a partner say, “Look at all I’ve done. It’s worth millions of dollars. Why don’t you pay me for it?” You have to get your partner from day one, so that you’re in it together.

Partnerships are critical in the multimedia business. After all, a multimedia solution requires a three-way convergence among telecommunications providers, computer specialists, and content developers. Jazz needed knowledgeable partners right from the start. Our business involved too many areas to risk trying this venture alone. In launching a high-tech business, there rarely are second chances. We didn’t want to put a product in the marketplace and find out it wasn’t what the industry wanted. So it was important that at least one of our partners came from the community of interest we were serving. We wanted to ensure a close connection between the service we offered and the needs of the community.

We were fortunate in the complementary knowledge that came together to form our company, Jazz Media Network. The three founding partners include Richard Cormier, who had been head of Buzz Image Group. Richard, who is now CEO of Jazz, has an unsurpassed knowledge of the media industry. Next there is Teleglobe Media Enterprises, with its strength in multimedia computing. And the third partner is Bell Canada, with its great expertise in telecommunications. We also wanted to build a structure that was open and responsive, and at the same time highly professional. We have 40 people in Jazz, which keeps bureaucracy to a minimum.

Let me add that in developing Jazz Media Network, we benefited from the expertise and philosophy of our parent organization: Emergis. Emergis was launched by Bell Canada in July 1997. Its goal is to bring together telecommunications companies and leading-edge software and computer-technology firms. Bell knew that achieving this goal required a new and more open structure. So it created a Silicon Valley style campus corporation, and called it Emergis.

Emergis now has a solid core of 450 people, and works with many small and medium-sized businesses. It has facilities in Montreal, Ottawa and Toronto. And it provides an excellent home base for Jazz. Our links with Bell make clear that we have the backing of a telecommunications giant. At the same time our open structure and size give us the freedom and flexibility of a small, highly entrepreneurial firm.

Build a superb product. Knowing your community of interest and getting the right partners are important. But the third step is also necessary for success, and that is: building a superb product. Customers live in a climate of financial austerity and fierce competition. There is no new money for the network. Each new project must be able to prove it can be self-financing, through gains in productivity. If you can help a customer achieve these goals, fine. If not, you’re wasting their time and yours. You have to strengthen their bottom line. If you do, your own will improve.

With Jazz, we’ve developed a product that is very user-friendly with an easy-to-use software interface. It also has tremendous strength. The service rests on a high-speed, secure broadband network. With transfer speeds of up to 270 megabits per second, Jazz allows individuals in different locations to share full-resolution, non-compressed digital video streams. The 270-mbps rate, by the way, is close to 10,000 times faster than the average 28.8-kbps modem in use today.

We’ve created this virtual private network through agreements with various telecommunications suppliers. But we remain responsible for its integrity. We’ve made this network secure by using a variety of protective measures. They include firewalls and authentication services. Unlike the internet, Jazz is a private network. No one logs onto this network unless the server positively identifies them and authenticates their digital signature.

But the network is only a foundation. We’ve also created a remarkable variety of digital tools that facilitate collaborative work. The Jazz mediaboard, for example, provides a shared workspace for video clips and images. Each participant has their own colored digital “pen” for interactive notations. The interfaces are intuitive. They’re powerful but easy to learn.

Jazz has other strengths. The address book offers subscribers access to an ever-expanding client base. It puts subscribers on the desktops of prospective partners. Jazz provides advanced email and ecommerce features. It’s cross-platform and cross-application. And we support this service with a help desk that is always open. Above all, we’ve created a product that will save subscribers time, money and effort. We’ve created a billing system that allows all participants to monitor costs. It enables design houses to bill costs back to their clients. We also offer different levels of service. Participants pay a very affordable subscription fee, and then purchase most services on a “pay-as-you-play” basis.

And we have no real competition. That’s another reason we’re confident of success. Our commercial model stands out because we saw a need, then developed the product. As Harold Geneen, former CEO of ITT, said: “You read a book from the beginning to the end. You run a business the opposite way. You start with the end, and then you do everything you must to reach it.”

Build your organization. Finally, the successful commercial model has one more component: an organization designed for growth. Here are the elements of ours. To begin with, we’re thinking big. In the case of Jazz, it was clear that it had to cover the whole of North America and Europe very quickly to be able to achieve critical mass. We couldn’t serve a studio in Los Angeles properly unless we had links to New York, Montreal and London. How many projects have died because, after an initial enthusiasm, the partners held back. In business, you don’t win by halves. You have to target a goal and take the necessary risks to achieve it.

Another element of our winning strategy is a determination to maintain a quick reaction time as well as great flexibility. Everyone understands the need for speed. The saying “Better late than never” has been revised to read: “Better never than late.” Movement along the information highway occurs at a dizzying pace. One technological generation follows rapidly on the heels of another.

Flexibility is equally important. We must always be able to alter our course to respond to the needs of the customer. A poorly targeted product will cost far more in time and money than a readjustment made while in progress. You have to be able to redo your business plan, adjust your implementation strategy and modify your technological options.

Still another element of our winning approach lies in finding the right balance in our team. The multimedia industry is an intellectual property industry. Intellectual property is created by people who are very different and often quite individualistic. So it’s important to choose and manage these individuals with great care. At Jazz we work hard to achieve a common vision, a good dynamic, and a balance between the strengths of the various creators, technical people and marketing specialists. You need to make sure revolutionaries and administrators can coexist on the same team.

Let me close by underscoring my message: the right business model is the key to success in the dynamic, competitive multimedia industry.

At Jazz we think we have that model. It emphasizes four principles:

• Identify and understand the needs of your target market.

• Find partners and create a framework for working together.

• Build a superb product.

• Develop a winning organization.

This model, I’d emphasize, is one that has relevance beyond Jazz. I see it working in the healthcare field and other areas.

As for Jazz, the value of our plans should be clearly evident in the months ahead. The Jazz Media Network moved to its commercial phase at the beginning of this year. So we have a lot of growing to do. And I’m sure we’ll face many challenges. But I’m confident we will meet those challenges and flourish. Jazz has embarked on an exciting venture, and I’m pleased to have been there at the start. Jazz provides a model of what can be achieved in the future.

Nicholas Negroponte says: “As one industry after another looks at itself in the mirror and asks about its future in a digital world, that future is driven almost one hundred percent by the ability of that company’s product or services to be rendered in digital form.” There will be many more Jazzes – targeting many more communities of interest, including publishing, education and healthcare.

THERE ARE NO LIMITS: PCS AND A NEW NATIONAL COMPETITIVE ADVANTAGE

Robert A. Ferchat
Chairman & CEO, Bell Mobility

The Empire Club, Toronto, October 19, 1995
Published in The Corporate Report No. 15 (December 31, 1995)

Last weekend, I was in a shop to pick up some roses for my wife. While I waited for the flowers to be wrapped, I browsed through a rack of posters along one wall. In addition to the usual dolphins and tigers, there was one called Kids’ Letters to God. The first of the eight or 10 letters on this poster really caught my eye. “Dear God,” the child wrote. “Who draws the lines on the map between countries?” The answer, of course, is both simple and profound: we do. We establish our barriers. We set the limits.

It reminded me of the first time I drove with my children into the US at Detroit, many years ago. My son, in particular, was nervous because I’d made a big deal about “crossing the border.” In the middle of the Ambassador Bridge, I announced that we’d just crossed the border into the US. My son, bewildered, said, “But Dad, there’s nothing there.” He was right, of course. The border that I was trying to impress him with is nothing but an artificial construct. It is a barrier, a limit we have placed on ourselves.

We are much taken up with borders in Canada today, trying to find new ways…or give new life to old ways…of dividing ourselves from one another. I’m thinking, initially, of Quebec as we approach the referendum within two weeks. But I’m thinking, too, of other major schisms in our society that seem to be widening and hardening as we leave this century that was, as we all know, supposed to belong to Canada. Race, sexual orientation, the haves against the have-nots, immigrants against those born here, First Peoples versus the sons and daughters of European settlers, us against them, me against you.

What a debilitating and enervating litany! Would it not be better if we listened to our children, whether they’re writing to God or talking with their parents, if we accepted the fact that it is we, ourselves, who put those barriers in place? And if we put them there, surely we can take them down and move on. That’s my message today. There are no limits – except those that are self-imposed.

We are the reason Sir Wilfrid Laurier’s glorious vision for Canada in the 20th century has not yet come true. We can also be the reason it will come to pass, if not in the next four years, then shortly after. The choice is in our hands.

As Pogo said, “We have met the enemy and he is us.”

Much of the debate over Quebec in recent weeks – and I suspect in the coming weeks as the outcome of the referendum gets increasingly problematic – has centered on what Quebec and Canada stand to lose should the Oui side prevail. Uncertainty would push the dollar down, interest rates up. Capital would seek more secure climates, job creation would dry up. Canada would be out of the G7. Interprovincial trade would be disrupted. And on and on.

As valid as those observations may be, they make me think of a bicycle rider on a path in the woods. Ahead he sees a big rock. There’s plenty of room on both sides to go around, but because he focuses only on the rock…and not the open space…he hits the rock. So let me focus on the open space for a few minutes, and talk about what we have to gain by moving beyond our artificial divisions.

This is a country that nine Canadians in 10 – including nine Quebecers in 10 – agree is the best in the world. A country that year after year ranks at the top of the United Nations’ human development index.

This is a country that has the world’s most strategic geography, with privileged access to the world’s richest market – the United States – plus frontage on both the Atlantic routes to Europe and the Pacific Rim.

This is a country that 30 years ago exported only one-seventh of its output. Today we export one-third and we are heading for 40% by the end of the century. Seven years ago, we signed the Free Trade Agreement. Since then, our merchandise exports to the US have doubled to $200 billion a year.

And Quebec has been a key contributor to all that, including the signing of the FTA. Firms based in Quebec are among the most aggressive in seeking international markets – in going beyond today’s artificial national borders and creating jobs and wealth here at home. Names like SNC-Lavalin, Bombardier, Alcan, DMR and, yes, BCE, including our company, Bell Mobility. Leaders in Canada’s outward-bound, forward-looking business climate.

These organizations – and hundreds and thousands of other Quebec businesses of all sizes – are focused on the open spaces, not on the rock. My sense, as an Ontarian who works in both Quebec and Ontario every week, is that Quebecers as individuals feel the same. Their concerns are first and foremost human concerns:

• Will I have a job?

• Will I have good health care and superior education for my children?

• Will I have an opportunity to create a better life for myself, my family and my community?

An SOM poll last August for Le Soleil and The Gazette found that sovereignty is a priority for only 6% of Quebecers. Contrast that with 52% who are concerned about employment, and 20% about health services. On October 30, Quebecers will vote. Our hope must be that they will choose to continue to build the bridges, to break down the barriers that keep us from realizing all the opportunities within our reach.

For the next few minutes, I’d like to focus on just one of those opportunities, just one of the open spaces. The industry in which I’ve spent most of my career – telecommunications – is dedicated to eliminating barriers between people. And today, it represents an opportunity of truly astounding potential, particularly within the limitless world of wireless: cellular phones, pagers, mobile radio, air-to-ground, and soon mobile satellite.

It’s interesting to note that Canada’s world leadership in telecommunications is traceable not only back to Alexander Graham Bell. In the wireless world, Cape Race, Newfoundland was the western terminal of Marconi’s first transatlantic radio transmission. And Canadian-born engineer R. A. Fessenden was the first person to broadcast human speech and music over radio almost 90 years ago.

Given such a legacy, we see an unprecedented opportunity to build a world-leading wireless industry here in Canada, with all the benefits that come with it, from job and wealth creation to a better quality of life for all Canadians.

Canada today has more than two million cellular users, and half a million people who subscribe to paging services. You can also make and receive phone calls, or exchange data, aboard Air Canada flights.

Next month, we’ll be launching mobile satellite service that will extend coverage across North America, including up to 400 kilometers offshore. And in a few years, through the Iridium project – a constellation of 66 satellites – we’ll cover the world.

The industry worldwide is growing at dizzying rates – by 40% or so a year in Canada, 50% in the US, 60% in Western Europe and more in some less developed countries that see wireless as a way to get service to their citizens without the expense of traditional wireline networks. The OECD predicts that by the turn of the century half or more of all telephone calls will involve at least one mobile party.

Canada has an enviable position in the field of first-generation wireless communications. Bell Mobility, for example, together with its partners in Mobility Canada, has invested more than $2 billion in the last 10 years to create wireless networks second to none. We operate the longest uninterrupted cellular corridor in the world – from Windsor, Ontario to Sydney, Nova Scotia.

The Yankee Group, an American industry watchdog, says the Canadian cellular networks – developed by Mobility Canada and Cantel – are superior to those in the US in three critical dimensions:

• The coverage was extended to a greater percentage of the population more quickly

• The quality of service is better

• The cost to the consumer is less – our customers pay on average 4% to 22% less than Americans

With a record like that, it’s no surprise that in our first 10 years of existence at Bell Mobility, more than 20 countries have come to us for help with their systems. In fact, we helped build the cellular system in Bogota, Colombia in just two years – an extraordinarily short time in this business.

The opportunity facing us today, apart from managing the 40% growth in the core wireless businesses, is managing the second generation of wireless, known as Personal Communications Services, or PCS, at 2 GHz. PCS at 2 GHz will allow us to combine voice, data and video in a device no larger than today’s cellular phone.

I can imagine myself, for instance, on a whale-watching trip off Vancouver Island, or on the Saguenay River. I’ve programmed my PCS handset to send all calls elsewhere – except the critical ones. One of those critical ones is a call about our new television ad. The agency sends me the video which I view on my handset miles from shore, make my comments and send them back with the push of a button. Another tough day at the office.

Or imagine health related uses. Wouldn’t it be better, for instance, to have my vital signs monitored and transmitted to the hospital even while I’m at the theater, or the mall, rather than stuck in a hospital room. Freedom for me…and less cost to the healthcare system. Wouldn’t I want paramedics to have wireless access to my history while we’re riding in an ambulance?

Think of how we could revamp the health industry, reduce the enormous costs of institutionalized care, and still have at least the same level of care, if not better.

The potential uses for PCS are limitless, in every field. Wouldn’t it be better to have my PCS network tell me where traffic jams are, in real-time, and plot alternative routes during rush hour? Wouldn’t it be better to be able to monitor my home security system from the road? Or check on my teenage grandchildren – by wireless video? That’s part of the opportunity of PCS, the extraordinary range of life-enhancing applications that will be coming to market in the next decade.

The other part is the chance to create a Canadian PCS industry so that the world looks to us for the products and services that will make their lives better. As Germans are known for excellent cars, as the Japanese for quality consumer electronics, why not Canada for PCS?

The benefits are real and speak to our fundamental concerns as human beings. For example, should Mobility Canada receive a license for enough spectrum to fully develop PCS, we would invest $2.6 billion over the next 10 years to build the network. The results of our investment alone – not counting the spending by up to five other companies who will compete in the PCS world – are significant: 105,000 skilled jobs, an expansion of 0.3% in the economy and a reduction in the public debt of $6.9 billion.

Our vision of PCS and Canada’s role is clear: apply the talents of Canadians to develop applications to improve our quality of life at home and to serve the world with our expertise. No single organization will do all that, and that is one reason we welcome the increased competition that PCS will bring, with the entry of at least half a dozen new players all seeking to develop applications that serve Canadians and the world.

But, as we’ve seen in the computer business, the dominant applications and their designers won’t emerge exclusively from Bell Mobility or Cantel, or AT&T, or Sprint or any other major player. They’ll come from small and medium-sized businesses that may not even exist yet, or if they do are unable to focus on the killer app, finding it hard to get capital, enter markets, or manage their growth. And if small and medium-sized enterprises are the source of PCS applications, they are also the foundation of the industry.

It’s in that context that the members of Mobility Canada have proposed a $135 million PCS Advancement Fund, in addition to our spending, to build the network and conduct our own R&D. Some $35 million of the fund will finance pre-competitive research by public research laboratories across the country. The rest, $100 million, will be earmarked for the entrepreneurs to get them started on application development. Our commitment goes beyond dollars to include offering entry into national and international markets, and management expertise to enable them to handle the tremendous growth we predict for them.

There are no limits to what can be accomplished with such a model rooted in a country such as ours. Our multiculturalism, our openness to Asia and Europe, our geographic and demographic diversity, our economic vitality, the level and quality of our education…all these become even more valuable assets in a wireless world.

Think of what our expertise could do to meet the needs of others:

• The Russians who struggle to cope with long distances and a harsh climate

• The Irish with their tiny domestic market

• Singapore with its insistence on technological excellence

• Chile, faced with building a network from scratch in a challenging environment

There truly are no limits to what is possible if we move beyond the self-imposed barriers, the rock in the middle of the path, and focus on the vision, on the possible, on the open spaces.

As I said earlier, the arrival of PCS in Canada coincides with the arrival of a much more competitive environment. Industry Canada is now making decisions to allocate six blocks of spectrum among more than 15 applicants. Many of these applicants have strategic shareholders who are giant multinationals. Nothing wrong with that, as long as our own Canadian-based multinationals have an equitable shot to compete.

We want Canada to be more than just another market. We want it to be the world capital of the PCS industry. We believe the work we’ve done to date, plus our plans for the future can give Canada an indisputable strategic lead in this field and provide our country with yet one more means to be a powerful force in the global economy.

The only thing that might get in the way are the limits we place on ourselves – the lines we draw between provinces, the schisms we invoke between groups of people, the competitive hobbles we might put on our own businesses in an increasingly competitive world.

We have many choices to make in the next few days and months, choices that will affect us for generations. My choice is for a unified country that looks outward and ahead, unfettered by the attitudes and habits of the past. My choice is for a community of interests that, rather than focusing on our differences, speaks to the fundamental needs of people: economic well-being, security in all its dimensions and a strong sense of self-worth.

My choice is for the future. There truly are no limits.

BIOCHEM PHARMA: THE FIRST 10 YEARS

Francesco Bellini
President and CEO, BioChem Pharma

Annual meeting of shareholders, Montreal, June 5, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

Nineteen ninety-six is an important year for BioChem because it marks our tenth year of operations. During the past 10 years, we have made truly remarkable progress. I would like to spend the next few minutes reviewing some of the company’s accomplishments and looking forward to the future.

We should all be very proud of BioChem today. Our beginnings are humble. We became a public company in 1986 with a share offering of $13 million. At that time, we had five employees. Today:

• We are truly an international company, with more than 1,000 employees. We have offices or manufacturing facilities in Canada, the US, Italy, the UK, France, Germany, Switzerland, Argentina, Japan and Singapore. We also sell our products through a complementary worldwide distributor network.

• We have three divisions: vaccines, diagnostics and therapeutics, dedicated to the discovery, development, production and commercialization of innovative products for the prevention, detection and treatment of human diseases.

• In 1995, we achieved a major milestone with the approval in the United States and Canada of our first therapeutic discovery, 3TC, an important new treatment for HIV infection and AIDS. And we have a promising research pipeline.

• With a market capitalization of over $3 billion, we are now the sixth largest biopharmaceutical company, by market capitalization, in North America.

• Last year, we were the third most actively traded stock by volume and by value on the Montreal Exchange. And this trading is only about one-tenth of our activity on NASDAQ, the US exchange on which we are listed.

• In February, we completed the largest biotechnology follow-on equity offering in history, raising gross proceeds of $251.8 million.

• And finally, we have now achieved profitability, with net profits in each of the last two quarters.

You can see that we have come a long way. In fact, if you had invested $10,000 in BioChem in 1986, your holding would be worth more than $500,000 today.

And we have accomplished everything with very little of the shareholders’ money. Unlike many startup companies, which are in a continuous cycle of raising money and then spending it on operations, we have been able to finance most of BioChem’s growth using the revenues the business has generated. At the end of 1995, we had spent only $19 million of the money raised to create a company worth more than $3 billion today.

I believe that our current financial and competitive situation is impressive. But there is another – much more important reason – why we should be proud. After less than 10 years of operations, our discoveries are making a real difference to people with unmet medical needs.

Our first therapeutic discovery, 3TC for the treatment of HIV infection and AIDS, was approved for sale in the US and Canada near the end of 1995. It has since been approved in Switzerland, Australia and Brazil. In April, 3TC was recommended for approval in Europe. We anticipate receiving European marketing approval in the very near future.¹ At the time of its approval, more than 15,000 people in Europe were taking 3TC as part of a compassionate use program. We expect approval of 3TC in most markets by the end of this year.

In Canada, 3TC is marketed by BioChem in partnership with Glaxo Wellcome. Elsewhere, 3TC is marketed by Glaxo Wellcome.

Based on IMS retail sales data, 3TC total weekly prescriptions in the United States now exceed sales of AZT. This is true even though sales of AZT, the world’s largest selling AIDS drug, have grown 50% in the last year.

Many experts in the field believe that, increasingly, treatment of persons living with HIV is likely to begin earlier in the infection and will include combinations of therapies. Because 3TC is safe and effective, and works well in combination with other drugs, we believe that it is becoming the cornerstone of HIV combination therapy. Today, other company’s clinical trials involve more than 20,000 people using 3TC in combination with other anti-HIV products.

I know that I speak on behalf of all of the employees of BioChem when I say that we are very proud to have discovered this important new medicine, which is making a difference to people living with HIV infection and AIDS.

And we were all honored last month when the 3TC research team was awarded the Prix Galien Canada, Canada’s most prestigious award for pharmaceutical research. The team’s work, and its result, are a reflection of the dedication and culture found at BioChem. I would like to take this opportunity to again congratulate the 3TC team on behalf of the Board and the shareholders.

Now let us look to the future. For any company to succeed, it must have a pipeline of promising products in R&D. We think we have a very impressive pipeline for a company of our size. We expect our next significant marketed drug to be lamivudine, a once-daily oral treatment for chronic hepatitis B infection. Lamivudine is currently in Phase III clinical trials around the world. It is expected that the Phase III trials will be completed in the Far East this year and that Glaxo Wellcome, our partner for the development and commercialization of lamivudine, will file the first marketing applications next year.

The World Health Organization lists hepatitis B as the ninth leading cause of death worldwide. According to this organization, there were approximately 350 million people chronically infected with the hepatitis B virus in 1994. The majority are located in Asia and the Far East with approximately 7 million in North America, Europe and Japan. Chronic hepatitis B is a leading cause of liver damage, with progression to cirrhosis or liver cancer in 20 to 30% of cases, resulting in an estimated 2 million deaths per year. The only drug currently approved for the treatment of chronic hepatitis B is effective in a relatively small group of patients, and its side-effects are significant.

We also have a number of other interesting products in our therapeutics and vaccines research and development pipelines.

In therapeutics, our research is concentrated in four areas. In addition to our antivirals program, which resulted in the discovery of 3TC and lamivudine, we also have programs in cancer, pain control and thrombosis.

In the pain area, we are working with our partner Astra of Sweden on pre-clinical development of BCH-2687, a new generation analgesic to treat inflammatory pain. A pre-clinical compound from the cancer program is BCH-4556, for the treatment of prostate, renal and other cancers. Clinical trials are expected to begin on both compounds in the second half of the year.

In the thrombosis area, we announced a collaboration in July 1995 with US-based Warner-Lambert, to discover and develop orally active anti-thrombotics. Promising compounds have already been identified.

We also have longer-term antiviral research programs aimed at the discovery of new treatments for hepatitis C, and for HIV infection and its complications.

To optimize the resources dedicated to the antiviral and cancer areas, we have signed a number of collaborative research agreements with other companies and research institutions since last year’s annual general meeting. For example, in the antivirals area, we have entered into a collaborative agreement with Oncogene Science, a US biotech company, for the discovery and development of drugs for hepatitis C and novel approaches for HIV. In the cancer area, we have formed a collaborative relationship with the Beth Israel Hospital at Harvard University. This leading-edge collaboration is focused on discovering therapeutics that will interfere with the blood supply that nourishes tumor life and growth. The total resources devoted to this collaboration account for about 10% of BioChem’s therapeutic R&D budget.

We have also in-licensed several compounds in various stages of development to add to our therapeutic product offerings in Canada.

Our vaccine division has also made considerable progress. Last year, we announced the construction of a new $30-million, 118,000-square-foot state-of-the-art vaccines production and administration facility in Ste. Foy, near Quebec City. The construction is ongoing and progressing as planned. Commercial production is scheduled to begin in 1998.

Since we announced our plans, we have made significant advances in the development of new vaccines. Our most advanced new vaccine is an influenza vaccine under development using cell culture technology. This new process is expected to produce a more effective vaccine. Costs would be reduced, and production times shortened from about six months to two. This would greatly increase our ability to respond to demand. The new influenza vaccine is expected to enter clinical trials this year.

Through our relationship with the Vaccines Research Unit of the Laval University Hospital Center in Quebec City, where we support a group of 17 scientists, we have significantly expanded our vaccines research program. We now have two recombinant protein vaccine candidates in pre-clinical development. The first targets Neisseria meningitidis bacteria, a common cause of bacterial meningitis. The second protects against Streptococcus pneumoniae bacteria, the most important cause of bacterial pneumonia and pediatric ear infections. It is anticipated that clinical trials for both of these vaccine candidates will begin next year.

Existing vaccines against these bacteria have limited effectiveness in children. In both children and adults, existing vaccines only protect against certain strains of the bacteria. By contrast, our vaccine candidates appear from preliminary tests to have the potential to protect against all known strains of the bacteria. If these vaccine candidates work in humans as they do in animals, we believe they will be true breakthroughs in the prevention of bacterial meningitis, bacterial pneumonia and pediatric ear infections.

We will now continue with our diagnostics business which was profitable last year, with an after-tax profit of $5 million on total revenues of $158.5 million, compared to a loss of $10 million at the time of the Serono Diagnostics’ acquisition in June 1994.

In 1995, we introduced in the US and Europe new hematology analyzers. The new analyzers are faster and more highly automated than their predecessor.

The diagnostics division also entered a new market in 1995, when it began the commercialization of Allertech, a fully-automated analyzer for allergy testing. With this new product, only a blood test is required to detect allergies. Complicated and uncomfortable skin testing is no longer needed.

During 1996, we expect to introduce a new, low-maintenance hematology analyzer, called Spirit, for low-to-medium volume laboratories. We also expect to launch the Personal Lab, a smaller version of the Labotech immunology analyzer, for use by small volume labs.

As the diagnostics division increasingly focuses on higher margin products such as the Labotech and our new product offerings, we expect to see increased profitability there.

As you can see, BioChem is well positioned to move into the future. Our pipeline is excellent, and our financial situation is very solid. Both of these put us in a strong position for future growth and profitability.

We will continue to look for opportunities, both internal and external, to expand our product pipeline and our international marketing presence. In this way, we can grow the company and continue to contribute to the advancement of healthcare.

BioChem has been profitable for the last two quarters. We expect this trend to continue.

Although I have said this before, it is worth repeating. We would not be where we are today without the efforts of our dedicated employees. We are fortunate to have some of the best young scientific minds in the business focused on discovering and developing drugs, vaccines and diagnostics for unmet medical needs. We also have an experienced marketing team and other support staff who have helped to make our business what it is today. All of our employees are proud to be part of a team contributing to advancements in healthcare.

Recently, we have added further depth to our management team with two appointments. First, we recently appointed Dr. Claude Vezeau as president of our vaccines division. Claude brings to BioChem almost 15 years of experience in senior positions in the pharmaceutical industry. Second, Charles Tessier has been appointed as the company’s vice-president, legal affairs and corporate secretary. Charles held a similar position with a major international information technology services firm for 8 years prior to his appointment at BioChem.

As we complete our ten years of operations, we should all be very proud. BioChem has achieved an outstanding record of innovation. We are changing the way HIV infection and AIDS are treated, we are innovating in the treatment of hepatitis B and we are developing innovative new vaccines. In these ways, we are making important contributions to the advancement of healthcare around the world.

We anticipate that 1996 will be our first profitable year, overall. We expect the growth of 3TC to continue throughout 1996 and beyond. Eventually, lamivudine will be commercialized for the treatment of chronic hepatitis B infection. Our vaccines group will pursue the development and commercialization of its new vaccines. The diagnostics division will also continue to be a steady contributor.

We are proud to be where we are today, but the best is yet to come.

¹ 3TC was approved in the 15 member states of the European Union on August 8, 1996, under the name Epivir.

SETTING THE RECORD STRAIGHT

Laurent Beaudoin
Chairman & CEO, Bombardier Inc.

The Board of Trade of Metropolitan Montreal, October 3, 1995
Published in The Corporate Report No. 14 (October 19, 1995)

I am going to take advantage of this platform to build upon my speech in Quebec City on September 21st and to set the record straight about what I said and meant.

A snippet of my remarks has been quoted extensively out of context and interpreted in a malicious manner. I was made out to have said that I was choking in a Quebec too small for me. What I said in fact was that Quebecers have achieved, and can continue to achieve, great things in a Quebec which is a part of Canada.

Some people were displeased that I expressed publicly my support for the NO campaign. It is as if only politicians, artists, intellectuals and union leaders have a right to express an opinion on the separation of Quebec from Canada. Whenever business leaders exercise their freedom of expression to oppose the separatist option, they are subject to personal attack, unkind words and even insult.

Some YES supporters who scarcely a moment ago used the Bombardier name to illustrate what Quebec is capable of achieving now want to strip us of any credit and deny our unquestionable success. These people want to muzzle the business community. They refuse to debate the substance of the arguments we are putting forward because they know they will lose on our ground. They would like the population to believe that our stand against Quebec’s separation is motivated solely by our personal interest.

But business enterprises are the Quebec economy. We provide jobs and we know what we are talking about in these matters. The same cannot be said for those who, in the past few days, have accused Bombardier of having benefited unduly from government subsidies and for having lived in tow of government. Let’s consider the facts.

During the past 10 years, our company has invested $1.626 billion in R&D and in new product development in our three operating sectors in Quebec. The federal and provincial governments have contributed $269 million to these investments, of which $211 million is fully repayable by our company. The other $58 million was in the form of R&D tax credits, resulting from the $350 million or so that we have invested on this score.

Moreover, during this same 10-year period, Bombardier has made capital expenditures of $632 million in buildings, tooling and other equipment. The contributions received in relation to these capital expenditures were $41 million, of which $28 million came from the federal level and $13 million from the provincial. These amounts came from programs offered to all enterprises making similar investments.

If you add up our Quebec investments, the total is $2.258 billion of which barely $99 million has come by way of non-repayable support from the two government levels. How have we applied this money? To create wealth for Quebecers and Canadians. Through job creation, certainly, since the number of employees we have in Quebec has risen from 8,600 in January 1986 to 12,700 today. In 1994, we paid $540 million in wages and salaries to our employees.

Please understand that I am speaking out against those who attack Bombardier and its success – a success due to thousands of Quebecers, most of whom are Francophones – because I dare state my opinion on the consequences of Quebec’s separation from Canada.

It would be much easier for me, for my family and probably for Bombardier if I said nothing and just stayed home. But I don’t believe that I have the right to remain silent. As I see it, business leaders not only have the right, but they have a responsibility to make their voices heard on issues of such importance. Let there be no doubt that the economy of Quebec, the future of our enterprises and the jobs of our workers are on the line in the referendum.

I cannot remain silent because, in the event that Quebec were to separate, our employees and all of those footing the bill could blame me for not having shared my views and apprehensions with them. It may be convenient to maintain a sort of political neutrality during the referendum campaign as if we were in a normal election. But in this campaign, Canada itself is on the line, as are political and economic structures that we have contributed towards building and a standard of living we have worked hard to achieve.

In addition to expressing my views publicly, I have done so within our company. I did it to ensure that our managers think about the future of Bombardier and of the risks that separation would bring. I have encouraged those who believe they will have a more secure future if Quebec remains as a part of Canada to support the NO campaign.

As you know, companies are not allowed to make financial contributions to either side under Quebec’s electoral laws. But our managers have a right to do so as individuals, like any other Quebec residents. We have urged them to give their financial support to the NO campaign if they share our view.

As for our Quebec workforce as a whole, we wanted them to be informed of our position by making copies of my Quebec City speech available to them since the only information they had about it were the very short excerpts contained in media reports.

There hasn’t been any arm-twisting and there won’t be any. No one has been denied their job at Bombardier for having identified with the YES campaign and no one will in the future. As was made clear during Mr. Johnson’s visit to our La Pocatière plant, freedom of expression is alive and well at Bombardier.

But management will not be prevented from making the case that separation is a strategic issue and that our managers have a right to be made aware of this fact, as with any other strategic issue. Indeed, separation is a risk for our company as well as for a number of other Quebec-based companies. We base this conclusion on the very concrete experience of Bombardier. Therefore, I’m going to support my arguments by referring to some of the milestones in the development of our company over the past 30 years.

From its very beginnings, the company founded by J. Armand Bombardier exported its products. Already in the 1960s, a large proportion of the snowmobiles produced in Valcourt were sold in the United States.

By the way, let me reassure those who like to invoke the memory of J. Armand Bombardier. I knew Mr. Bombardier well, certainly much better than those who would speak in his name, and I am convinced that he would be very proud of the company which bears his name.

In 1974, our company diversified into mass transit equipment. Contrary to what has been stated, our first contract, which was for the Montreal subway, valued at $118 million at the time, was obtained after a tough battle through a bid process, and only because we were the lowest bidder that met all the conditions of the tender. This contract was extremely important, since it enabled Bombardier to enter a new industry sector. We had to wait until 1988 for a second order from Quebec for 24 suburban train cars valued at $24 million.

The third and most recent contract was obtained in 1992 for the commuter train for the Montreal/Deux-Montagnes line, which will soon be inaugurated. This is a more crucial order, not because of the amount – some $100 million – but because it gave us the opportunity to develop commuter cars at the leading edge of technology, entirely with Quebec engineers and workers. This new technology will support the export of commuter cars produced largely in Quebec, where they will create or maintain many jobs. This order was obtained following tough negotiations with the Quebec Transport Ministry in a very open process.

Between 1974 and 1995, out of revenues totaling some $3.6 billion generated by our Quebec plants for mass transit equipment, only about $250 million were from Quebec contracts. This shows clearly that export markets were essential to Bombardier’s development in this industry sector.

Our company has become the largest North American manufacturer of mass transit equipment over the past 22 years. This has been a Quebec success story and we have been successful largely through the commitment of our employees. I want to make this point publicly. Nevertheless, and I repeat, without the support of the federal government’s export financing programs, we would not have developed as we have.

Take, for example, the New York subway contract, which we won in 1982 against much more powerful Japanese and French competitors. At the time, this was the largest export contract ever awarded to a Canadian company. Although we were the lowest bidder, we would never have obtained this $1-billion order without financing from the Export Development Corporation. We would never have been able to create and sustain 1,500 jobs in St-Bruno and La Pocatière. However, in this sector as in the others, Bombardier has not received favorable government treatment. We simply took advantage of programs offered to Canadian industry as a whole, particularly export financing programs similar to those offered to our competitors in their own countries.

I would like to go back to the aerospace sector because, here also, I was misunderstood. Let’s start with Canadair. Once again, I must correct those who claim there was no bidding process when Canadair was privatized and that the sale of the company was a gift from the federal government to Bombardier. This is all false.

The Canadair privatization was conducted through an international bidding process. It was brought to the attention of 150 potential buyers around the world. There were 25 expressions of interest. Six offers were submitted, leading to the selection of two proposals, our own and that of Canadian Aerospace Technologies. The latter company was a consortium formed by a member of the Dornier family, well known for its involvement in the German aerospace industry, and Montreal financier Howard Webster.

The Canadian government decided that Bombardier offered the better financial terms as well as guarantees for the management and development of Canadair. It is universally recognized that this was an excellent choice. Since the acquisition in 1986, Quebec has built an international reputation in the world of aerospace.

We have achieved great things at Canadair in less than 10 years. We have launched four programs representing an investment of more than $1 billion for new aircraft development. We have contributed to the creation of Master’s programs in aerospace in our universities. We have provided Quebec Francophones with an opportunity to demonstrate their capabilities as managers and executives in a sector where we had very little presence. Canadair’s workforce has doubled, growing from 4,000 to 8,000 highly qualified employees, without counting the thousands of jobs created by our Quebec subcontractors and suppliers.

Because of the technological and economic spin-offs, aerospace is seen by the world’s great powers as one of the most attractive industries. It’s a sector long dominated by the Americans. The European industry was unable to achieve significant penetration, particularly in nonmilitary applications, until the creation of the Airbus consortium. Along with government assistance totaling several billion dollars, this consortium brought together the resources of Aérospatiale of France, British Aerospace, DASA, a Daimler-Benz subsidiary of Germany, and Casa of Spain.

The Europeans also felt the need to join forces in regional aviation. They created ATR, which brings together Aérospatiale of France and Alénia of Italy. Just recently, British Aerospace joined the consortium because it was unable to go it alone in this market. In the Netherlands, the government sold half of its interest in Fokker to Daimler-Benz because it no longer wanted to absorb the huge losses and development costs. Yet, the Netherlands is a country of 15 million people with a GNP of US $330 billion. That’s 2.5 times the economy of Quebec and two-thirds that of Canada. And we have one more competitor, Saab-Scania of Sweden, which is mainly involved in the manufacture of military aircraft. Its position in the civilian sector is marginal.

All I said in Quebec City, and I repeat it today, is that it’s already difficult for a nation the size of Canada, supported by the provinces, to provide the backing required by an export industry such as aerospace. It would be even more difficult for a new Quebec state, which inevitably would be smaller in relation to Canada as it stands today.

Let me be more precise about the kind of support I mean. On the one hand, there are risk-sharing programs between governments and private industry related to new product development. As I noted earlier, in the past few years our company has launched four ambitious development projects at Canadair requiring risk investment totaling nearly $1 billion. The governments of Canada and Quebec have accepted to share up to $150 million of this risk, including the sums earmarked for the Regional Jet. All of the balance has been financed through Bombardier’s resources. The advances received from governments under shared-risk programs are fully repayable, including capital and interest, when the programs are deemed successful.

The second type of backing which is absolutely essential for the export of major capital equipment, whether commercial aircraft or subway cars, is the financing provided to those who buy our products. Three factors weigh in their purchase decision: price, product quality and financing. For the first two factors we manage very well, thanks to the capabilities of our employees. For the third factor, and this applies as much to a giant such as Boeing as it does to us, not a sale is made without matching financing terms to those offered by competitors.

In a world of intense competition, where things happen very quickly, I hold the view that we don’t have the means, not for a single moment, to deny ourselves tools such as the EDC, which Canada has placed at our disposal. Not when these tools have been instrumental in our success and in that of other Quebec enterprises similar to our own. That’s what I meant when I said that Canada was at the lower end of the scale of countries with the size to support industries such as transportation equipment and, even more tellingly, the aerospace industry.

Up to now, ladies and gentlemen, I have presented a few stark economic realities, and I have attempted to do so as evenhandedly as possible. Against such realities, they have come up with the counter-argument that small countries, Switzerland in particular, are home to several large-scale multinationals. But Switzerland, a multilingual federation located in the heart of Europe, offers extremely attractive conditions for the head offices of multinational companies:

• A very favorable tax environment for enterprises and their employees

• A historically very low cost of capital achieved through an interest rate structure that is always among the lowest in the world

• One of the most stable and reliable currencies in the world

In my opinion, and in the virtually unanimous view of every expert on the subject, these are not the conditions that will characterize Quebec the morning after separation.

I now come to the third major field of activity for Bombardier: snowmobiles and watercraft. This is a very different case. Firstly, this is a business we started from scratch. Founded in Valcourt, it took root and developed with a motivated and competent local workforce. Today it is prospering, employing 2,700 workers on a permanent basis. The success of this business bears testimony to the most energetic and positive aspects of Quebec entrepreneurship.

Companies operating in this sector don’t need specific government programs to support their business. But here as well, the separation of Quebec could have nasty consequences for our company and for the industry. Our main market is the United States. Under the Auto Pact – we export our snowmobiles – and under NAFTA our watercraft, to the US market, both duty-free. This is an essential condition for our success in the US.

A separate Quebec, which is not party to the Auto Pact or NAFTA, would have to negotiate its membership with Canada and the United States. Our American competitors, Polaris and Arctic Cat, would be delighted to stir up their Senators and Congressional representatives to modify the agreement for their benefit and for that of their workers. A protectionist Congress could lend a sympathetic ear to their arguments and establish entry conditions that could make us much less competitive in this market. There are therefore real risks for us and for the jobs in Valcourt which depend to a large extent on the American market.

Of course, the conviction of Bombardier management that Quebec’s separation is a risk that could prompt lower operating rates for enterprises, compromise their future and put thousands of jobs on the line is based on our experience rather than on theory.

I know that a great number of Quebecers are aware that the prospects I have evoked are realistic. I also know that many continue to believe that we would be spared most of these problems through the new partnership that the leaders of the YES campaign will want to negotiate with the rest of Canada. They would like us to believe that it would be simple and easy to negotiate the terms of such a partnership when Quebec would be independent. Make no mistake about it: the partnership proposed by the leaders of the YES campaign is a clever trick that suits their purpose, but is in fact a proposition without any political or economic foundation.

How are we to believe that Canada would grant the privilege of Canadian citizenship to seven million foreign residents, which Quebecers would become, representing one-third of its own population? How are we to believe that a separate Quebec could continue to use the Canadian dollar when recent experience in Czechoslovakia shows that even under the most favorable conditions, the common currency lasted less than six weeks? How are we to believe that after having broken up Canada, while claiming that two levels of government are one too many, we could force a third level of government on Canada in which Quebec, a foreign country, would have a virtual veto on decisions affecting Canadians? How are we to believe that our American and Mexican partners in NAFTA would accept special arrangements between Quebec and Canada which would not apply to them? If Quebec wanted to join NAFTA, it would have to meet all of the rules governing such agreements.

The proposed partnership can only lead to disappointment for those who really believe in it. The risk is that it would be nothing more than another step, the point of no return, on the road to a unilateral declaration of independence.

I did not want to present all of the arguments against separation in my speech. Instead I chose to present concrete examples based on some facets of our company’s experience that are less understood. I could have chosen to speak about the disastrous consequences of this option on Bombardier and on many other Quebec enterprises in terms of taxation, debt, monetary stability, interest rates and other aspects of our economy in a separate Quebec.

I will conclude by restating my deep conviction that business leaders have a duty and a responsibility to speak up and to bring out those factors, drawn from their experience, which lead them to reject separation. We owe it to those who would be harmed by separation in their jobs, in their standard of living, in their personal growth and that of their family. They are mainly people whose jobs are tentative: young workers, managers and professionals who have yet to build their future in Quebec.

My position in the referendum debate has never been that Quebecers are not capable of great achievements since Bombardier provides a good illustration of what Quebecers can do within the Canadian federation.

I observe with pride how in our company, Quebec Francophones are asserting themselves in the game of international competition in Wichita, Kansas; in Belfast, Northern Ireland; in Toronto, Kingston and Thunder Bay, Ontario; in Bruges, Belgium, and in Mexico, as much as they do here in Quebec.

Why not continue to assert ourselves through our capabilities? Quebec’s separation would not solve any of the urgent problems of our society but it would add new ones. It would deprive us of political and economic arrangements which, despite their imperfections, have contributed strongly to the development of enterprises and of Quebec society.

I invite Quebecers of all political persuasions to build together on these formidable achievements. We have proven that we are capable of great things. We must stop wasting energy on a separation plan which divides us and pits us one against the other.

I address you on these matters as a Quebecer. Proud of my roots, I feel at home in this great land we have built together and which is our own – our country, Canada.

EUROPE’S NEW DIGITAL ECONOMY

Sir Peter Bonfield
Chairman & CEO, British Telecom

Conference on Converging Technologies, London, September 8, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

I thought that to start off, it would be worth asking ourselves what Europe’s new digital economy really means. After all, people like me spend a lot of time talking about globalization. So does it actually make any sense for us to be talking about Europe’s new digital economy at all? Why not the world’s new digital economy? Why drill down just on Europe? Well, I think there is a story to tell here. But we have to be clear what we’re talking about.

Sometimes in business we can be a bit too territorial. Quite a few recent deals have been talked about very much in terms of the companies origins – for example the BP-Amoco and Daimler Benz-Chrysler partnerships were characterized as Europe meets US deals. But of course we all know that the firms involved were already international operators. And to take another example – entirely at random, of course – BT’s proposed partnership with AT&T is focused on the communications needs of major multinationals, companies who are part of a global supply chain. Their customers get the same products or services whether they’re in New York, New Delhi, New Zealand or Newcastle. So why should global multinationals get or expect any less from their suppliers? They want those suppliers to be citizens of the world as well, offering end-to-end services to consistent standards worldwide.

So is that it, then? Are we saying there’s no such thing as Europe’s new digital economy? Should we call off the conference? Well, of course not. Stay for lunch at least. Because real places do still matter. The more footloose major companies and capital become, the more towns, cities, countries and regions need to compete to attract them all, trying to be the best launchpad into cyberspace. And Europe will stand or fall by how well it can compete as a location in the global economy.

It will be judged on its attractiveness as a market, on the skills of its workforce, on its regulatory and political environment, its supplier companies, its ability to generate new and innovative businesses and its general economic performance. And underpinning much of all of that is the quality of its physical infrastructure, including, of course, its telecoms.

So, how’s it doing so far? Well, if this were an end-of-term report, my general comment would be: improving, but could do better. After all, Western Europe now has more than 370 million consumers and a larger slice of the trade cake than either the United States or Japan. And if you count in Switzerland and Norway, total GDP comes to about US$8.5 trillion, almost exactly the same as the US and Canada put together. Yet there are differences between Europe and North America – particularly in the areas of communications and digital technologies. I guess the conventional wisdom is that North America leads Europe. And in many areas that’s still true.

Look, for example, at internet access. The forecasters say it will be mid-1999 before annual expenditure on the internet in Western Europe reaches the level achieved in the US in 1996. Yet by 2001 the two markets are expected to be neck-and-neck, as many of the small and medium-sized enterprises in Europe – which far outnumber those in the US – go online. What about mobility? Here Europe has already overtaken North America, in terms of the total number of mobile phone users – and the gap is predicted to widen in Europe’s favor. In Finland, to give just one example, more than half the population now use mobiles. And there’s also the small matter of US$200 billion – which is the expected size of the European telecoms market by 2000/2001. So we in BT regard Europe, just as much as the US, as the place where the action is in the digital economy. All of which means that if you’re interested in growth opportunities – and just for the record, I certainly am – you can’t afford to ignore Europe. So having established that we do have a reason for being here today, I’d like to ask: what are the drivers that will enable Europe to build on its successes?

Well, let me pick out three trends I’ve spotted over the last few years which I think are healthy ones. Firstly, there’s been the European emphasis on the whole idea of the information society – where there is a stress on what technology can do for people at home and at work – rather than simply on the technology itself. Secondly, the tradition of cooperation because, by definition, whenever Europe achieves anything it achieves it by working across national borders. And third, getting the market to work properly – making sure Europe has a deeply rooted climate of competition.

In 1993–4, I sat on a group convened by the European Commissioner Martin Bangemann. Even then, we took as our focus the information society, rather than the information superhighway. Making technology work for us, rather than the other way round. It was always about the people rather than the plumbing. And I think it is this kind of attitude that is going to stand Europe in good stead as the digital world develops. Look, for example, at the use of IT and telecoms in health services for remote diagnostics, something which the EU has made a major research priority.

We’re starting to see videoconferencing between hospitals, smart cards that record heart patterns, specialist care online. Soon many routine consultations could well take place via TV or PC. The economic impacts are potentially very significant – both in terms of the growth of our businesses but also, crucially, on government health budgets. Education is another area that will undergo a tremendous transformation. We’re moving from the idea of education as something that happens behind a closed classroom door to the concept of a wired-up classroom without frontiers.

Another potentially explosive growth area for Europe is the wealth of applications associated with digital TV. BT will be a player here through our consortium, British Interactive Broadcasting. Now I think one of the major effects of digital TV will be to drive growth in internet usage in the home – a market where Europe lags behind the US. My belief is that once people start to use interactive TV for entertainment, they’ll move on to use it for shopping, then for banking, for education, then for the internet and email. It will be the gateway to the internet for techno-skeptics and technophobes. And on the business side, there are grounds for optimism that Europe will make up ground in electronic commerce. According to CIT, 10% more European companies than US ones think their e-commerce ventures have been successful.

The likely reason for this is that European firms are entering e-business further down the evolutionary path. They’re waiting to see how it can best benefit their businesses and then going straight into more sophisticated applications. I welcome, too, the way that the European Commission is working to clear the obstacles from the electronic trade routes – grasping various nettles on tax, security and other problem issues. And this, then, takes me on to the theme of cooperation. Because, as well as having a distinctive vision, Europe has also demonstrated a capacity to work across national boundaries to make that vision a reality.

Perhaps the prime example was the development of GSM. This was a long saga of negotiation and diplomacy – but one which showed that with determination, Europe can reach agreements that give it a world lead. And if Europe is to make up ground in areas such as e-commerce, then it will be largely due to its capacity to reach agreements and to turn its linguistic, cultural and geographic diversity into an asset rather than a liability.

Of course the latest result of cooperation has been the agreement to liberalize telecom markets this year – a real triumph for Europe. We have seen most of the domestic markets open, with licenses awarded, and regulators up and running. I should add that BT’s joint ventures are determined to make the most of these new opportunities and we’re keen to work with the European Commission to ensure that we do get full competition across the board.

That in turn leads us to the broader theme of competition itself. I think 1998 has shown how creating a competitive climate delivers benefits for consumers and helps Europe compete in the global market. It’s been commonplace to blame the shortage of broad band in Europe on protected markets, high interconnect charges and differing national standards. Now, post-liberalization, it’s a different story. Broadband networks are springing up all over Europe. As an example – picked again entirely at random – BT and its partners are currently building the largest-ever pan-European network, 19,200 miles of fiber connecting 200 points of presence and optimized for data transmission at 160 gigabits per second. But the next challenge in enhancing Europe’s competitiveness is to develop the right regulation for the digital economy. And indeed, the EC is already working on this. In our view, regulation has to be tight enough to outlaw unfair competition, but light enough to promote investment and innovation. Old style regulation, based on the 20th century sectors of telecoms and broadcasting is simply not adequate for the 21st century’s converged industry. So in response to the Commission’s paper BT proposes a model in which regulatory bodies do not try to focus on all stages in a single technology – such as TV or telecoms – but on individual stages common to all the digital technologies.

We propose separate regulation for four markets: consumer equipment, distribution networks, service provision and content creation. Looking at it geographically, we’re not arguing against having national regulators – but we are arguing for consistency between regulators. In Europe, BT would also support a center of best practice within the Commission to provide benchmarks for national regulators. We also feel that the Commission’s proposal for an international charter setting out benchmarks globally is a step in the right direction. “One size fits all” is impracticable. One style fits all is reasonable. The goal of regulation must be the interests of the consumer. Those interests are served by promoting everything that makes for competition and innovation. And that can mean consolidation as well as proliferation.

But although there may be fewer players, there will be even fiercer competition. Let me tell you that for BT, as a participant in joint ventures with experienced local partners, we are giving European incumbents more of a run for their money than we could have done alone. European companies, like BT, must compete vigorously on this global stage to ensure that our customers get access to low-cost infrastructure and world-beating products and services that will enable them to compete effectively.

This is good news for the European economy. And because there will be healthy and vigorous competition at the global level – and we anticipate it will be stiff competition – the real winners will be European businesses and European consumers. So, globalization, innovation, consolidation. Regulation has to recognize these huge shifts in the industry. Nicholas Negroponte of MIT said in 1994 that if Europe wishes to remain at the vanguard of culture it must step off its high horse. New ideas do not necessarily live within the borders of existing intellectual domains. In fact, they are most often at the edges and in curious intersections. Well, I think Europe has got that message. In Britain we say a week is a long time in politics – well, four years is more than a lifetime in this industry. And since Negroponte’s words were written, Europe has demonstrated a new radicalism. It has opened telecom markets, built on its GSM achievement, made strides in digital TV, and put its best brains together in R&D programs which will open new doors.

The question you will be discussing shortly is whether today’s buoyant European market represents a false spring, or whether there is a fundamental change in Europe. My answer is that there is a fundamental change – and one which is distinctly European. It’s about letting digital technology flow into all areas of life. It’s about cooperation across borders. And it’s about creating a competitive environment for business.

Europe’s digital economy is a new creature and has a lot more growing to do. But however it develops, it must be a converged, interconnected economy and it must demand a converged and all-embracing response from governments, regulators and companies. European economies must continue to support innovation and investment in growth areas, and ensure that vibrant competition in these areas is allowed to flourish. Or to put it another way, the winners in the digital economy, whether companies, countries or continents, will be those who can put the pieces together. And I firmly believe Europe is well placed to achieve this.

REINVENTING MONTREAL

L. Jacques Ménard
Vice-Chairman & Chairman of the Executive Committee, Burns Fry Limited

The Canadian Club of Montreal, April 11, 1994
Published in The Corporate Report No. 6 (June 15, 1994)

I have come to talk to you about the revitalization of Montreal – that movement of renewal we all hope for, but which seems to be so long in coming. I, for one, am optimistic: I believe that we, meaning business people in particular, have the means to get things rolling again without relying on outside intervention from government or anyone else.

First of all, where do we stand? Contrary to popular opinion, the economic decline in Montreal is relative, not absolute. This was confirmed in a 1993 study, Recherches sociographiques, by professors William J. Coffey and Mario Polèse. In fact, the number of jobs in Montreal rose from 800,000 in 1961 to 1.4 million in 1991. That is an increase of almost 75%. From such a standpoint, at least, it would be a mistake to talk about an absolute decline in the city, even though 1993 statistics indicate a reduction of about 25,000 jobs, compared to 1991.

According to the INRS, Montreal lost 9,000 factory jobs, or 4% of the total, between 1981 and 1990. We should also note, however, that during the same period, Pittsburgh lost 43% of its factory jobs, Buffalo lost 30%, Cleveland, 36% and Milwaukee, 23%.

Still, compared to other large cities, Montreal has lost economic ground. Why is that?

The prosperity of a city is generally dependent on the size and vitality of its region. And one of the major reasons for the decline of Montreal can be found in the loss of its original “hinterland,” if I may call it that, to the benefit of Toronto, in particular. In one generation, Montreal’s economic base has shrunk; and as a result, the city’s services industry has been considerably reduced.

The difficult times we have been through have forced us to adjust to the new economic situation. Montreal’s industrial structure is now far less vulnerable than that of other major North American cities, including Toronto: the automobile industry and other heavy industries are still an important part of Ontario’s economic base.

We have also made significant progress in building an economy based on information. Local achievements in telecommunications, biomedicine, the bio-food sciences, pharmaceuticals, computer and financial services and new materials are just a few outstanding examples. Quebec has also made headway in manufacturing, in such fields as aeronautics, aerospace, transportation equipment and other industries where the ability to compete depends essentially on the optimum management of production-related information.

Taking this as our starting point, then, how do we get the whole machine moving again? How can we trigger the widescale renewal everyone longs to see? Let us deal with the medium and long term first. To begin with, we are going to need a vision of Montreal that can inspire people to action and make them feel like rolling up their sleeves.

As the great American author Emerson wrote: “Every great movement in the history of the world is the triumph of encouragement. Nothing great was ever accomplished without enthusiasm.” I know that an enthusiastic vision of Montreal – one that can mobilize people – already exists. I would point out, for example, the exceptional work recently done by the Task Force on Greater Montreal, chaired by Claude Pichette.

Its final report (Montreal/A City-Region: Task Force on Greater Montreal, December 1993) reveals a number of areas around which consensus has developed, including the concept of the city-region, which calls for a completely different organizational structure than currently exists.

The Montreal region cannot hope to progress unless it adopts an operating structure that can efficiently meet the needs of its 3.3 million inhabitants, who live in 102 municipalities, 12 regional county municipalities and one urban community. And that is not counting the five administrative regions created by the Government of Quebec. This has multiplied by five most of the administrative expenditures made in the Montreal area, in addition to systematically frustrating every attempt at the most basic kind of joint action called for under the circumstances.

We simply do not have the means to support five employment development corporations, five economic promotion agencies, five tourism promotion bureaus, five health agencies, et cetera, all in the same region.

The inability to get organized has cost the Montreal region dearly so far. The members of the Task Force on Greater Montreal brought clear, independent thinking to their work. Now it is time for our elected officials to show leadership and vision and make the necessary changes. But we cannot stand idly by while waiting for them to agree among themselves.

The Montreal business community is adjusting to new circumstances. The joint statement by local chambers of commerce in response to the Pichette report is an important indication of how far the community has come in recent years.

Allow me here to stress the urgency of taking action. It is true that, unlike other major North American cities, no major alarm has sounded here to send us hurrying to our combat stations. The City of Montreal did not wake up one morning to find its securities rejected on capital markets; we have suffered no earthquakes or other disasters that might have had us all pitching in together. Things have simply deteriorated quietly and gradually, and the process has been all the more insidious because it has taken place over a long period of time.

We did not even blink when the unemployment rate in the Montreal area reached – and then surpassed – that of almost every other urban center in North America. And that is one alarm we should have paid attention to.

If we cannot maintain a broad enough base of economic activity, then high-profile, prestige institutions, whose costs spiral ever upwards, will be unable to continue operating as they do today. Soon, only large, thriving cities will be able to afford them. We must ensure that Montreal is one of those cities that can support a first-class symphony orchestra, renowned research institutes, major league sports franchises, a world-class stock exchange and other such institutions. The same goes for our civil infrastructures.

If we do not take real action quickly, our overall standard of living will continue to decline, until ultimately we find ourselves without the myriad social and cultural institutions and services that we have taken for granted for decades. As a securities broker, I am concerned that the market share of stocks traded on the Montreal Exchange has dropped from 20% of the total value of shares traded on all Canadian exchanges in 1992, to 15% in the first quarter of 1994. This is but one example among many – all disquieting signs of fatigue that should inspire immediate action.

Once again, it is instructive to see what is happening elsewhere.

There are other North American cities that have also experienced periods of decline. And there are those that have enjoyed a virtual renaissance. Those that have share one thing in common: a large part of their recovery is due to the fact that an important nucleus of business people made a serious commitment to the economic renewal of their region. Which recently led La Presse journalist Gérald Leblanc to comment that, in the pursuit of their own success, our business leaders have forgotten to look after the fortunes of their own city.

Last year, Leblanc visited Atlanta, Minneapolis, Boston and Detroit, and he said the most striking difference between those four cities and Montreal is in the role played by local business.

He noted that, as part of the operation surrounding Atlanta’s bid for the Summer Olympics, the city set up a $12 million fund called “Go Atlanta,” to which 500 companies contributed. In Minneapolis, the business community created a fund to help children in disadvantaged areas, because the future starts with children. In Boston, academics in the city’s prestige universities, such as Harvard, for example, are working closely with business people to ensure the city’s future. In New York, it was the New York City Partnership that helped the city out of the serious financial hole it was in during the early 1980s. And a similar approach has been used in Chicago, Tampa, Pittsburgh and other cities.

In all these cases, local business communities have assumed the responsibility for getting things moving again. And they have succeeded.

On that note, I would like to hail the proposal made last fall by Bernard Roy, Chairman of the Board of the Chamber of Commerce, that a special Council of local business people be created, all of whom would exert influence throughout their networks in order to promote development in Greater Montreal. I think we should all respond enthusiastically to such appeals when we are called upon.

Some of you may wonder what effect individual gestures can possibly have on a situation that sometimes seems out of hand. Just remember that all those individual gestures, when put together, can have an enormous impact. It is the kind of potential we must never underestimate.

Right here in Quebec, we have a wide variety of expertise recognized around the world; despite our difficulties, we still have considerable resources.

More than ever, I believe that the most pertinent question now is: Why have we not yet seen any noticeable movement towards economic and community renewal in Montreal?

In the medium and long term, we know – as business people – that we will have to focus on a number of priorities – in particular high technology, employee training and the development of foreign markets – if, indeed, we intend to realize the vision we have of Montreal as we approach the millennium. I will not go into that now, since many others have already discussed the subject in considerable detail.

We also know that the best way to contribute to economic growth is to run our businesses aggressively and imaginatively, thus creating as many jobs as possible. We can also promote key projects that would have a major economic impact, such as the proposed high-speed train linking Toronto and Montreal.

Some companies have already contributed to the renewal process: Imasco, for example, has created not only jobs (1,400, in fact) but also 400 small businesses, through its 5-year sponsorship of a local community agency in Saint-Henri. Of course, such broad-reaching action is not within the means of everyone.

Still, there are things we can and simply must do. Over and above the pursuit of our basic business objectives, we must, as business people, use the specific powers and levers at our disposal more effectively and bring them to bear on the current situation.

I am talking specifically about the assistance we simply must provide to the thousands of people who are out of work due to corporate restructuring right here in Montreal. I say this not only as a business person, but as a concerned human being.

These men and women include skilled laborers, white-collar workers, former executives and eager young people who ask nothing more than to find work as quickly as possible and contribute to their community.

We are all beginning to feel the effects of major social phenomena, such as the aging of the population, for example, which is going to create a heavy demand for personal service and special or semi-special care for the elderly. Why not recycle some of the available labor force into this type of activity? Yes, it may involve making some necessary changes in the way work has traditionally been organized, but new ideas about what constitutes a job are already leading to changes in the workplace. As a matter of fact, a quarter of the working population is now employed in what we label “non-traditional” jobs, including freelance work, job sharing, part-time jobs and other creative variations on the standard entrepreneurial model.

In other large, North American cities where a movement of renewal has been triggered, experience has shown that the revitalization process and new economic activity are usually generated by local business, not by government.

In Montreal, we are beginning to see some action in certain neighborhoods where business and community groups have been working together for four or five years. This kind of initiative is born of the energy and imagination of people from various backgrounds. Fortunately, government is beginning to understand the phenomenon and adapt. For example, more flexible programs are being developed and other assistance is being provided to encourage local development projects.

Some experiments, like those organized by RESO in the southwest part of Montreal, and Pro-Est in the east end, are producing tangible results. Other parts of the city would certainly benefit from similar action. Last year, nearly 400 residents in the southwest used RESO’s job search assistance program and 60% of them found work, despite the very difficult circumstances in the region. We should be inspired by results like that.

We should also see our own companies as local organizations that can make a difference. I firmly believe that each of us can do something to inject a little optimism into the prevailing mood of gloom and, in our own way, help spark the renewal of our city. It is our turn to act. What do you think would happen if, for example, every company in Greater Montreal with 50 employees or more took in one intern or trainee? It would not be all that difficult.

And yet, that commitment alone could quickly create more than 3,500 jobs on the Island of Montreal, with all the related economic and social benefits.

Organizations like Fondation Ressources Jeunesse could help, too, as could university placement offices in the area. Considering the tremendous social and economic benefits, government could also contribute, if only to the degree that it already pays into existing social programs. After all, it makes far more sense to subsidize training programs that will result in gainful employment, than to pay out unemployment insurance or welfare. In fact, a number of retraining and reintegration programs already exist and could be adapted to accommodate internships.

In many fields, the additional training these interns would receive – simply by dint of the fact that they are working – would give them valuable skills that other companies might want to use.

Let me tell you what we are doing at Burns Fry in Montreal. For almost one year now, we have had five interns working for us. They are mentored directly by our investment executives, who supervise them as they gain valuable experience. After 12 or 18 months, if the intern shows promise, he or she will become a full-fledged trainee in our regular training program. That training is all the more effective, because the person has already had some practical experience and has shown a certain aptitude. We benefit because we get to train exactly the kind of young people we need for our own expansion plans.

Another thing we could do is give all those freelancers out there a break. Corporate restructuring has forced many competent people to pursue careers on their own. Who among us does not know at least one such person who is now looking for work? Again, I am not talking about creating unnecessary jobs. It is simply a question of taking advantage of the often impressive qualifications and experience these people have. All they need is an opportunity to regain their confidence and possibly set themselves up in business as independent consultants.

A recent feature in Fortune magazine discussed the inevitable decline in the number of traditional management positions in large corporations. It noted that, with increasing frequency, work is going to be done by experts hired for short periods of time to carry out a specific task. Career planners in the United States confirm that half the jobs that will be available ten years from now do not yet exist.

Accentuated by the consolidation we are seeing in every sector of the economy, these serious trends have already begun to change the face of Montreal. They affect not only laid-off workers, but also young people seeking entry on the job market. And they largely explain why Montreal, with its generally low-mobility labor force, is afflicted by such a high unemployment rate, which we cannot seem to bring down.

Given our current circumstances, we, the business community, must make every effort to break the vicious cycle. The creation of a significant number of job openings for interns or trainees, and the employment of competent freelance workers are among the means at our disposal. But there are other things we can do, too.

We could emulate countries like the United States, where there is a long-standing tradition of supporting local business. The Montreal region has an abundance of quality suppliers who can be of great assistance to us; unfortunately, because of circumstances and traditional purchasing policies that are rarely questioned or updated, we do not even know who those suppliers are, much less give them priority consideration.

Globalization is forcing us to look to markets around the planet. That is a fact. But it does not mean that we should stop paying attention to our local economy. On the contrary: if we want to be globally competitive, I think we have to build unshakable solidarity here at home and help each other become the best in the world, each of us in our own field.

The countries we admire for their economic strength (and sometimes even their patriotism) are doing exactly that. The Americans have always put such economic wisdom into practice. Not only do they not hide it, they are completely open about it. “Buy American,” they proclaim, loud and clear. Why is it that we seem to be so uncomfortable with the concept here in Quebec?

We should be encouraging the kind of action being taken by the Société de promotion Qualité Québec. Why not develop our own networks and find local alternatives to purchases made outside the area, whether consciously or not. Such purchases range from goods and services as we normally understand them, to listed securities, pension fund management services, and so on. Price and quality being equal, why shouldn’t we give our own people a chance? Of course, this may require a serious change of habits and a shaking up of established practices, starting with our own businesses.

Ultimately, the worst mistake would be to believe that individual gestures are not important enough to be worth the effort.

Parochialism, cry the critics. Protectionism, they say. I say, not at all. The more we encourage local suppliers, the more likely they are to become our customers.

Reinventing Montreal starts with reinventing our way of doing things. Only business people can activate the process, because we have at our disposal the most effective levers of change. But let us not kid ourselves. There’s nothing saintly in what I am proposing: in the end, we are serving our own best interests.

Of course, we should not anticipate a smooth ride. We can expect more corporate restructuring in Montreal, and the consequent loss of more jobs.

But we must not let that discourage us. Montreal can become a vital and energetic city once again…provided we stand together and take immediate action.

This city has always been full of people who have outdone themselves in every field of endeavor. There is no reason the situation should be any different today. Nobody will ever make me believe that Montreal lacks the resources to pull itself up: if we work together, as they have done elsewhere, we are bound to succeed.

To sum up, then, a minimum of three things need to be done right away:

• Create a core group of business people who love this city and are ready to take up the challenge by making a personal commitment to get the renewal process started right now.

• Take on interns and hire independent consultants.

• Support local institutions and enhance our network of suppliers by seeking out local goods and services of equal value and equal price.

We can start right away, without waiting for outside help from either government or Providence. The decision is ours to make.

We have the means, and goodness knows we have the motivation. Solidarity and pride will make it work.

NORTHERN RENAISSANCE: PERSPECTIVES ON CANADA’S ECONOMIC PERFORMANCE AND GLOBAL COMPETITIVENESS

Thomas d’Aquino
President & CEO, Business Council on National Issues

Council of the Americas, New York, February 11, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

The title of my presentation, “Northern Renaissance,” captures the significance of the improvements in Canada’s global competitiveness in recent years and reflects a general consensus among member chief executives of the Business Council on National Issues. The council consists of 150 chief executives of leading Canadian enterprises and concerns itself with strategic issues of national and global relevance. Member companies currently administer in excess of C$1.6 trillion in assets, have an annual turnover of approximately $600 billion and employ about 1.5 million people.

By the end of the 1980s, the general consensus in Canada was that our competitiveness was on a dangerous slide downwards. The World Economic Forum, which at one time had ranked Canada fifth, marked us down to sixteenth by 1994. Professor Michael Porter, in a landmark study carried out in 1990 in conjunction with BCNI and the Canadian government, warned that we had to pull up our socks.

And pull up our socks we did. With the benefit of a free trade agreement in place with the United States, and eventually the incorporation of Mexico, a tough battle against inflation, aggressive restructuring of Canadian companies, a long-overdue battle to bring public-sector finances under control and a stronger market orientation on the part of governments, the tide was reversed. In 1997, Canada was back up to fourth spot in the WEF rankings, with the prospect of doing even better this year.

After several years of export-led growth, domestic demand in the form of consumption, housing and business investment has become the key engine of economic growth. According to a survey taken by The Economist in January, Canada will have the strongest economic growth in the G7 in 1998. The survey suggests that growth will be slightly lower than in 1997 – at 3.6% in real terms. I believe the forecasts to be overly optimistic. The Asian financial crisis will temper Canada’s growth prospects closer to 3%. As a result of the Asian financial crisis, roughly 34% of global GDP is in difficulty (including Japan). This will result in lower demand for products, commodities and services. Approximately 8% of Canadian exports go to Asia. However, more than one-third of exports from British Columbia and 23% of exports from Saskatchewan go to the region.

Commodity prices have plunged, already affecting some of Canada’s major exporters. A significant slowdown in US growth would have an important impact on Canadian exports. Canada’s improving economic performance has been bolstered by an advantageous exchange rate in relation to the United States. While this advantage has contributed very significantly to Canada’s outstanding export performance, it does not account for all of the improvements in productivity growth.

When the Canadian currency is compared to its purchasing power parity level, we estimate that it is undervalued by at least 10 cents. The dollar has recently been under considerable pressure, due to the flight to the US dollar, the decline in commodity prices and the deterioration in the current account. After reaching an all-time low, the Canadian dollar has appreciated 2.5% in a short two weeks against the US dollar. Also, the Canadian dollar has appreciated against other currencies.

The story on inflation is very positive. After almost 20 years of inflation levels ranging from 5% to more than 12%, Canada can now claim to have one of the best inflation records in the industrialized world. Canada’s inflation has stayed below 2% since 1992 – six years. Monetary conditions continue to be extremely accommodating with an inflation performance superior to the United States.

Canada’s output gap is expected to close further in 1998. Canadian interests rates and the current level of the Canadian dollar have combined to offer easy monetary conditions. Canadian short- and long-term interest rates have declined dramatically over the past two years. The current Canada-US T-bill negative spread is at about 66 basis points. Canada has among the lowest short-term interest rates among the APEC economies, as well as in the G7 and the OECD. Canada’s yield curve out to 30 years remains below that of the United States – a significant achievement in the face of the recent flight to quality as a result of the Asian crisis.

Wage performance for the Canadian manufacturing sector has improved dramatically. Canada has among the lowest wage bills in the OECD, not just with respect to time worked, but also including benefits. Germany topped the list in terms of wage bills in 1996, followed by Switzerland, Denmark, the Netherlands and Japan. Canada’s manufacturing sector unit labor costs, when compared with those in the United States, give us a decided advantage. Looking ahead, strong cost performance is expected to continue, as overall wage and cost pressures remain subdued in Canada.

A recent study published by KPMG management consultants concludes that location-sensitive business costs for a variety of industries are lower in Canada than in the United States. (Other cost components include land, construction and income tax credits for R&D investments.) Restructuring, reinvestment and enhanced productivity have combined to improve the profitability of the Canadian private sector. After reaching post-Depression lows in 1992, profits have recovered, but still remain below the long-run average of about 10% of GDP on a before-tax basis.

Canada’s businesses have invested aggressively in productivity-enhancing machinery and equipment. Total real machinery and equipment investment in Canada as a percentage of GDP has increased from 5.5% to more than 10%. Expectations are that this form of investing will continue to outpace the level of economic growth throughout 1998. These expectations also reflect record levels of business confidence, mostly due to a very positive environment for investing and doing business in Canada.

Canada invests heavily in its education system – a crucial component of competitiveness. The equivalent of 7.1% of GDP (both public- and private-sector investment) is allocated to spending on education from grades one to seven. This is the highest in the OECD. Still, Canadians are far from complacent about the education system. There is strong and growing support across the country to extract better results in student performance, particularly in the context of globally competitive skills. And the evidence indicates that we may have some way to go. Canadian students in the eighth grade achieved average scores just above the country mean in the Third International Mathematics and Science Study.

On the jobs front, the news is getting better. Measured in the long term, specifically from 1970 to 1995, Canada has had the best job-creation record among the G7 countries. In 1997, Canada and the United States registered an increase in employment of 2.7% – again, tops in the G7. More than 363,000 new jobs were created in 1997, and next year more of the same is expected. But unemployment in Canada today remains high, at 8.9%, due to rigidities in the labor market, uneven geographic performance (Quebec and the Maritimes are not doing well) and the effects of recession and restructuring.

There is a fundamental complementarity between information technology and human capital. In the development of an index connecting basic national characteristics with the level of information technology, the following factors were deemed important:

• Enrollment in university

• The quality of scientific research institutions

• Sufficient power-generation capacity

As indicated in the World Economic Forum’s 1997 Global Competitiveness Report, Canada ranked first in technology potential. One Canadian advantage is a positive environment for private-sector research and development. The pluses are:

• A generous tax treatment

• A highly qualified and skilled work force

• A low-cost structure for R&D – overall researcher costs are quite competitive internationally

• Strong institutional linkages

• A high quality of life

Canada is perceived by foreign-owned multinationals as an attractive place to conduct R&D. According to the Conference Board of Canada, spending intentions by foreign-owned companies are matching intentions by Canadian-based companies.

And yet, as analysis by the OECD and Statistics Canada suggests, Canada has an innovation gap. There are several factors, which have contributed to this innovation gap. The most important are:

• Overall private-sector R&D spending remains low as a percentage of GDP, despite the fact that Canada has several R&D champions

• General use of technology is less in Canada than in the United States, our main competitor

• The same holds for diffusion and adoption of advanced technologies in strategic economic sectors

• And the private sector is experiencing growing skills mismatches

In its latest survey, the Conference Board of Canada concluded that private sector R&D expenditures are expected to continue at a high pace. However, many companies still have to implement formal processes as well as innovative practices. Canada must improve its productivity performance if it is to achieve both sustainable long-term economic growth and rising standards of living over time.

With its strategic geographical location, its multicultural makeup and its diversified trade links (WTO, NAFTA, FTAA, APEC, EU), Canada provides very attractive access to the world’s richest and most dynamic markets in America, Asia and Europe. Proximity and easy access to the United States are huge advantages for Canada. From Vancouver and Calgary, about 30 million people can be reached within two days’ drive. From Montreal and Toronto, more than 110 million people can be reached within one day’s drive, and more than 170 million people within two days’ drive. Also, an “open skies” policy has considerably facilitated business travel between Canada and the United States.

The Economist Intelligence Unit recently rated the business environment of several countries using market potential, tax and labor market policies, infrastructure, skills and the political environment as indicators. From 1997 to 2001, Canada ranks as the third best country in the world in which to do business. The Canadian private sector also is becoming increasingly recognized for its management expertise, efficiency and service orientation. For example, the World Economic Forum last year ranked Canada third in terms of quality of corporate management. Finally, according to a Deloitte & Touche study, more than 10% of the world’s 200 fastest-growing firms are Canadian. Three Canadian companies actually placed among the top 15 globally.

The Economist Intelligence Unit just last week released a new index of relative business costs in 27 economies, based on indicators such as wages (both direct and indirect), corporate taxes, perceived corruption levels, office and industrial rents, and road transport. Germany was the most expensive, followed by the United States. Canada ranks eleventh, ahead of Singapore.

Further, in a 1997 study carried out in conjunction with Canada’s department of Foreign Affairs and International Trade, KPMG analyzed the costs of doing business in seven countries. (These costs were based on both location-insensitive and location-sensitive factors.) The study concluded that Canada is the lowest-cost country in which to do business. Notably, Canada holds a significant cost advantage over European countries in terms of initial investment costs and has the second-lowest labor costs.

What are some of the other positive factors of Canadian competitiveness? Quality of life, clean air, safe streets, good schools and respect for the rule of law are clear advantages. These helped Canada achieve No. 1 one ranking according to the United Nations Human Development Index of 1993, 1994, 1995 and 1996. Toronto and Vancouver were ranked by the Corporate Resources Group of Geneva as the two best cities in the world in which to live and do business. Other assets are a sophisticated infrastructure, a skilled labor force, a competitive corporate tax environment, a less litigious environment than in the United States, a shrinking public sector and a tradition of political stability.

Other than high unemployment, what are Canada’s two most pervasive economic problems? They are high levels of public debt and high levels of taxation. Let’s look at the debt problem first. On a national accounts basis, combined federal-provincial debt stands at 67% of GDP – second only to Italy among the G7 countries. On a public accounts basis, which includes important off-budget liabilities, the combined public debt stands at about 100%.

The situation, however, is changing. Our foreign indebtedness as a percentage of GDP is in decline, and this year the federal government began paying down its debt load. Canadian governments have taken major strides to roll back deficits. So successful has the assault on deficits been that The Economist recently labeled Canada a “fiscal virtuoso.” The federal government is far ahead of its fiscal targets. Canada has gone from the second-worse deficit balance in the G7 to the best in just three years. The federal government has posted a small surplus over the past 12 months, the first in more than two decades. Barring an unforeseen shock, the government should post a small surplus again this fiscal year.

Federal and provincial deficits have declined 95% over the past five years. Several Canadian provinces are in surplus. Some have offered tax cuts in the coming fiscal year. Both Ontario and Quebec have committed themselves to balanced budgets within the next three years. More good news: total government outlays including federal, provincial and municipal, are falling quite fast, from a high of just over 50% of GDP in 1993. This is due in part to fiscal constraints and in part to a stronger market orientation on the part of Canadian governments.

Among the consequences of runaway debt and deficits and increased government outlays are higher taxes. Canada has among the highest marginal tax rates on personal income in the industrialized world. The average top marginal tax rate is about 53% and is applied at the relatively low threshold of C$66,500. Fortunately, several provinces have lowered and will continue to lower their personal income tax rates in the future. Still, Canada’s high marginal tax rates will continue to be a drag on consumer demand, on domestic growth and on employment. They are already having a negative effect in terms of retaining and attracting managerial and professional talent.

Canada has turned around its current account situation over the past several years, registering a surplus last year. However, significantly higher imports, due to a much-improved domestic environment and massive inflows of productivity-improving machinery and equipment have squeezed Canada’s merchandise trade surplus down to $21 billion for 1997. This has led to the deterioration of Canada’s current account.

But the situation is still far better than in the early 1990s. The total stock of foreign direct investment (FDI) into Canada since 1984 has increased from about $85 billion to $180 billion in 1996. This represents an increase from 19% of GDP in 1985 to 23% in 1996.

From both a flow and a stock perspective, the United States continues to be the dominant source of inward FDI, with a 68% share. European Union members are also major investors in Canada, including Britain, with an 8% share, the Netherlands with a 4% share, France and Germany with a 3% share. Japan likewise has a 3.6% share. Finally, the distribution of inward FDI has shifted away from resources toward services, as well as food, beverages and tobacco, chemicals, electrical and electronic products, construction and communications.

In the past decade, the Canadian private sector has dramatically increased its presence abroad, and has become a major global investor. The total stock of Canadian direct investment abroad since 1984 has more than doubled, from $57 billion to more than $170 billion in 1996. Trade and investment liberalization have improved the outward orientation of the Canadian private sector. As a result, Canada is developing its own homegrown multinationals. In fact, three Canadian-based multinationals rank in the top 15, if one takes into account the average of foreign assets to total assets, foreign sales to total sales and foreign employment to total employment: Thomson Corporation No. 2, Seagram No. 4 and Northern Telecom No. 12.

Export performance continues to be a bright star in the Canadian galaxy. Since 1991, exports have more than doubled. Merchandise trade, as a share of GDP, stands at 35%. Almost half of Canada’s private-sector output is exported. In 1997, Canadian exports will reach and could surpass $300 billion, representing about 7% growth. However, because of a surge in imports, the trade surplus in merchandise goods will decline to $21 billion.

Looking forward, agencies such as the Export Development Corporation forecast that Canada’s exports will moderate from its record growth levels, but will average about 7% for the next several years. According to the World Trade Organization, world trade in 1996 grew 4%, down from rates of between 7% and 8% in the mid-1990s. Nevertheless, Canada maintained its ranking as a top global exporter of merchandise goods – seventh in 1996, with a 3% share. The challenge for the private sector will be to maintain and enhance its outward orientation in the face of increasing export competition from the Asia-Pacific. Taken together, international trade in goods and services, including exports plus imports, represents a whopping 71.5% of total economic output, the highest among the G7 countries.

Improvement in total trade between countries is one of the most important indicators of integration between countries and of successful free-trade agreements. On both, the Canada-United States Free Trade Agreement has worked as predicted a decade ago. Total trade between Canada and the United States has doubled, from $192 to $405 billion in 1996. Trade between the two countries now exceeds more than $1.1 billion per day. United States imports at a single crossing in Ontario exceed the totality of United States imports from Japan. In 1996, Canada registered a merchandise trade surplus of $40 billion with the United States. Our overall balance, including services, was also in surplus in 1996.

Growth in bilateral trade between Canada and the United States has been stellar since the FTA and NAFTA came into effect. Canadian exports to the United States in economic sectors liberalized by the FTA grew by 139% from 1988 to 1995, while exports to sectors not liberalized by the FTA grew 65%. Proving that trade theory works, the same can be said for Canadian imports from the United States. In several cases, the export performance is stunning.

Canada’s export growth to all countries over the past decade has been quite broad, touching all major sectors of the Canadian economy. High value-added sectors such as machinery and equipment, motor vehicles and parts, and industrial products have performed quite well. Canada continues to rely upon exports of energy and natural resources. However, as a percentage of the total, exports in these sectors are declining. Canada holds the largest share of the import market to the United States. Countries of the European Union and Japan follow closely behind.

Arguably, Canada continues to enjoy one of the highest levels of political stability in the developed world. The Canadian federal structure, over time, has proved to be immensely flexible in accommodating political change. An independentist government in Quebec is seeking the secession of Quebec from Canada, with an economic partnership supplanting the existing relationship. A significant majority of Quebecers reject outright independence. It would appear that nationalism in Quebec, for the moment, has ebbed and is in decline. Based on past experience, we are convinced that the current stresses in the Canadian federation can be managed to achieve a positive result.

How would I sum up this assessment of Canada and its prospects? I would have to say we are quite optimistic – but not complacent. What are the key priorities ahead? Some of the obvious ones are:

• Balance the books. Develop budget surpluses, help the public sector achieve greater efficiencies, promote privatization and deregulation, begin to pay down public debt and reduce taxes, and generate more and better-paid jobs.

• Achieve further improvements in corporate productivity. Increase investment in R&D, improve adoption and diffusion of technology and accelerate the shift to higher value-added goods and services.

• Adjust education and training efforts to reflect the global realities of a knowledge-based economy.

• Expand the depth and reach of global Canadian businesses, and improve market share in fast-developing economies.

• Promote political reforms that add further to Canada’s competitive advantage as a stable and effective democracy.

Achieving strong results in each of the above will make Canada a true force to be reckoned with in the 21st century.

SMALL BUSINESS: BEYOND THE RECOVERY

François Beaudoin
President & CEO, Federal Business Development Bank

The Board of Trade of Metropolitan Montreal, October 25, 1994
Published in The Corporate Report No. 10 (February 15, 1995)

To address the challenges facing “small businesses beyond the recovery” let’s examine the recovery we are experiencing. To paraphrase an old saying, “Recoveries aren’t what they used to be!”

Indeed, many owners and managers of small and medium-sized enterprises or SMEs, as we like to call them, are asking whether we are really experiencing a recovery at all.

Judging by the number of requests pouring into FBDB for expansion financing, I can definitely reassure you. Yes, there is a recovery going on. Of course I’m speaking from a general viewpoint, which sometimes differs from the viewpoints of operators of small businesses. Some of them have been heard saying: “Oh, really, there’s a recovery? Would you please show me where it is?”

To say the least, the current recovery has been surprising and unique. It is not following the usual scenario where everything goes “back to normal” across the board.

We are living a different kind of economic recovery, emitting different signals from what we have been used to. But it is a recovery full of unparalleled opportunities for our SMEs. Today, we are witnessing the roll-out of a new economic order characterized by market globalization and driven by technological evolution. SMEs are being called upon to adjust to deep and fundamental transformations occurring, not just in our economy, but all around the world.

To illustrate what I mean, allow me to compare this recovery to a sort of high-speed expressway – or to borrow a popular term, an economic superhighway, one which leads to new prosperity. Today I would like to highlight three routes or ramps leading onto this new superhighway to which SMEs must have access.

The First Access Ramp: Exporting

The first access ramp I’d like to tell you about is exporting.

Markets are opening very rapidly. Over the past ten years, foreign sales for Quebec alone soared from $15 billion to $32 billion.

Indeed, exporting is the major force behind the recovery. Some economists would even go so far as to say that without exporting we would still be in a recession.

But our exporting is still very limited in scope. In fact, our exports are limited primarily to two sectors: cars and lumber. Eighty-five per cent of Canada’s exports are generated by only 900 businesses – but just think – there are more than 900,000 small businesses in Canada! This fact may go a long way towards explaining why some small business operators do not feel the effects of the recovery.

It may well be that we are an exporting nation, but we are still not a nation of exporters. Exporting is not yet an integral part of our entrepreneurial genetic makeup and it’s time we did something about it.

A recent study by the Caisse de dépôt on the measurable effects of the Free Trade Agreement showed that companies already involved in exporting prior to the agreement profited most from free trade.

Those that limited their activity to the domestic market have been hit the hardest by its stagnation and by foreign competition. The long-term danger is clear and we must act now.

To get SMEs onto the exporting ramp, I believe we must act on at least two levels. First, it is important to remember that SMEs are often run on intuition, that “sixth sense” which serves as a guide. Now our experience with SMEs clearly shows that intuition can be trained and horizons broadened. Many small businesses avoid exporting simply because it represents the unknown. And yet intuition, coupled with a minimum of training and knowledge, makes a powerful combination that I like to call “educated intuition.”

To prove my point, I’d like to tell you about an FBDB project that began about four years ago. We call it the New Exporters’ Program. Through this program, we work closely with about twenty SMEs. In addition to providing the practical information they need to succeed in a given foreign market, an FBDB counselor specializing in exporting works with each business to develop its market penetration strategy. Each program covers a ten-month period and often culminates in an overseas visit which allows the participants to launch export activity.

Since 1990, a total of 278 businesses from all regions of Quebec have participated in or are currently participating in the New Exporters’ Program. And it works! A program completed in the Eastern Townships is a fine example. In less than two years, participants saw their exports jump from $2 million to $8.5 million! A new program was recently launched, this time, to help SMEs take on the Mexican market. The Federal Business Development Bank is very proud of helping to develop this type of “educated intuition.”

At FBDB, we believe that there is not sufficient financing available to meet the needs of SME exporters. Each stage of business development has its own needs, and exporting requires specialized financing for areas such as pre-shipment, foreign receivables, client building and market development. Financial institutions must address these needs if Canadians are to access the economic superhighway.

The Second Access Ramp: The New Economy

The second access ramp to the economic superhighway is the new economy.

The term new economy refers to those industries related to computers, health and pharmaceuticals, telecommunications, and scientific instrument and equipment fields.

The new economy ramp has been around for a long time. It explains why many businesses were able to avoid the economic slowdown of the recession and travel a significant distance along the economic superhighway. In Canada, over the past ten years, there has been a net gain of 816,000 jobs in new-economy-related industries of which 170,000 are in Quebec. It is interesting to note that the telecommunications industry alone currently employs more people than the forestry, furniture, textile and pulp and paper industries combined!

It is important to understand that new economy businesses form an elite group, which plays a strategic “spearhead” role in this growth sector. That is why it is critical to support our new economy entrepreneurs. All nations are in a fierce battle in this arena. Each country wants its players firmly placed in the stronghold of the new prosperity.

How can we help new-economy enterprises?

One common characteristic of new-economy SMEs is their enormous need for capital to finance research and development. The tangible assets typical of traditional-economy businesses (buildings, equipment, inventory) have been replaced in the new economy by intangible assets such as knowledge and human capital. To meet the needs of these SMEs, FBDB has developed what it calls the Venture Loans Program. This type of loan offers SMEs financing for development projects without relinquishing ownership. Within two years, our venture loan portfolio is fast-approaching the $30 million mark.

It is often thought that venture capital is the solution for new economy entrepreneurs. However, the venture capital industry generally concentrates its activity in projects over $1 million. It, therefore, targets businesses that are already beyond the startup stage and promise a medium-term increase in share capital.

To give SMEs in the startup phase access to capital we must go further than venture capital. In our opinion, the solution lies in a new form of financing that we call patient capital. Patient capital acts like equity, but the payback is spread over a longer period of time and could eventually take the form of profit sharing.

The Third Access Ramp: Working Capital

The third access ramp to the economic superhighway is working capital.

This ramp is important to all SMEs. Without sufficient working capital, SMEs risk running out of fuel on the superhighway to new prosperity! An adequate line of credit to finance ongoing operations is often lacking.

Indeed, the recession has been hard on profits. Many SMEs had to tap into their reserve funds or reach deep down into their own pockets in order to survive. This means that, for many SMEs, assets are at their lowest. But assets are like a rearview mirror – they show you what is behind you – and are the result of past performance, not a measure of potential! And I don’t need to tell you that if you want to get onto a highway you’d better not be looking in your rearview mirror.

How can we help SMEs to get onto the working capital access ramp? This is a priority for all financial institutions. Banks and credit unions are already looking for ways to go beyond the formulas of tangible guarantees and equity. Some have begun to introduce qualitative criteria into their loan decision-making process. But the needs are great. In order to fill them, a concerted effort is required.

For example, FBDB recently launched its Working Capital for Growth Program for businesses that have identified new opportunities for growth or expansion. The program offers SMEs a supplementary loan to top up lines of credit offered by their bank or credit union. We offer this loan using traditional financing ratios for receivables and inventory. It is a complementary source of financing and an example of concrete action taken to respond to the SME need for working capital. This modest initiative has clearly been successful, proof that the need is real. FBDB intends to go much further in this area by consulting with all involved parties.

Conclusion

I believe it is important for us to understand that dynamic SMEs are essential to our prosperity and competitiveness as a nation.

What is waiting for small and medium-sized enterprises on the other side of the economic recovery? I hope I have convinced you that this recovery is filled with a host of business opportunities for SMEs. To seize these opportunities and embark on the economic superhighway which leads to a new prosperity, SMEs must be able to navigate on three access ramps – exporting, the new economy and working capital.

However, the success of SMEs in these three areas depends on the united efforts of all economic and financial players.

As for FBDB, we are committed to making these issues our top priorities for the economic prosperity of Quebec and of Canada.

IS HELPING SMALL BUSINESS SOUND BUSINESS?

François Beaudoin
President & CEO, Business Development Bank of Canada

The Canadian Italian Business and Professional Association, February 13, 1996
Published in The Corporate Report No. 17 (April 30, 1996)

There is no doubt today that whenever the general public thinks about the business world, they perceive small business as being at the top of Canada’s economic “Hit Parade.” The sheer volume of media coverage on the subject, coupled with an outpouring of downbeat articles about the challenges being faced by larger businesses, has ensured the national prominence of small business. Great efforts are being made by all sorts of people and institutions – political, academic and business – to help small business. To advance its perceived best interests. On the financial front, there has been a substantial expansion of the chartered banks portfolio of loans to small business from $20 billion in 1985 to $28 billion ten years later.

Obviously, Federal government guarantees under the Small Business Loans Act have also significantly helped: loans of under $250,000 dollars to small business have jumped by 205% between 1993 and 1994. That’s from $1.5 billion to $ 4.7 billion dollars. In addition, there has been considerable growth of the venture capital industry over the last five years. Clearly, it has taken strides towards meeting the growing capital needs of small business. Total capital under management by the venture capital industry has leapt from $3.2 billion in 1991 to $5 billion in 1994.

Among all the initiatives taken to help small business, those of the Business Development Bank of Canada surely represent a unique contribution. For over fifty years, BDC has been the only coast-to-coast Canadian bank dedicated exclusively to small business. At BDC, small business is our only business. We are the only national financial institution, and one of a mere handful in the world, to help entrepreneurs through a unique blending of conventional lending and venture capital, management counseling and training services.

Our mandate is to take the higher risks often associated with supporting small business while remaining a profitable organization. Over the last six years, BDC has loaned more than $4 billion to small business without costing the public purse a single penny. The Bank’s new mandate, enacted last July, widens our role as a vital complementary player to private sector financial institutions. This shows considerable political will to assist Canada’s small business. Our lending ceiling has been raised from $3.2 billion to potentially $18 billion, once our equity reaches the new maximum prescribed by law. Obviously, this maximum will take a number of years to reach, but it does give us the room to maneuver and the ability to support demand for small business financing.

Clearly, a lot of people right across Canada are putting in a lot of effort and committing a lot of resources to help small business. But perhaps there is a question, which we, as a society, have neglected to ask ourselves: “Is all this well-intentioned effort worth it?” Or, as the popular expression would have it, are we barking up the wrong tree? Would everybody’s time, money and best efforts be better deployed in other fields of endeavor? It is an intriguing question that bears more detailed scrutiny.

On the “pro” side of the argument is the fact that small business now accounts for a full 57% of Canada’s Gross Domestic Product. Small business has become Canada’s number one job creator. After posting a spectacular 49% growth in employment for fifteen years, small business has held the line for the last five years. For the same period, all other sectors have shown a steady decline in employment levels. The increasing opportunities in small business have unleashed an impressive surge of entrepreneurship. Each year we at the Bank actively assist over 75,000 of Canada’s brightest and most innovative individuals, people who are truly knowledgeable in their chosen fields of expertise. We know just how determined they are to run their businesses efficiently and to grow. Clearly, small business must be the way of the future.

On the debit side of our argument, we have to ask ourselves: is small business more effective at creating jobs than at creating permanent growth? Has the small business explosion really been nothing more than a re-division of a shrinking economic pie between more players? It’s a valid question, given the high failure rate among small businesses and the often precarious employment opportunities they offer. Only 50% of small businesses survive beyond their fifth year. Many more fail before their tenth birthday. As well, a significant proportion do not survive their first generation owners.

Which brings us to the next question: instead of expending so much effort on small business, shouldn’t we be helping larger corporations? We must acknowledge the multiple roles that, by virtue of their very size, only larger businesses can effectively play. I am referring here to the corporate world’s leadership in fields such as research and development, workforce training, the setting of industry standards, and so on – all those things that require true clout to have significant impact. After all, the balance sheet, established creditworthiness and sheer staying power of larger corporations have always afforded much-needed stability and momentum to the economy as a whole. The fact is, bigger players were and still are needed to keep the economic playing fields in good shape.

The simple truth, that small business frequently relies upon larger business for growth, is too easily forgotten. Small business does not exist in isolation, and in many cases depends upon the good health of larger corporations. Major corporations have always been excellent incubators within which future entrepreneurs learn and hone essential management skills. Major corporations are also one of the most important sources of work for small business, through subcontracting and outsourcing.

Major corporations play an important role as taxpayers, “enjoying” higher rates of corporate taxation. They also play a unique social role through their sponsorships and charitable works. Yet while we continue to sing the praises of small business, little has been heard on behalf of larger businesses. Were they just a passing phase, whose time has come and gone? Will we only recognize their vital role too late, when we have lost the momentum, the ability and the will to launch and sustain large corporations?

For the ten-year period up to 1989, Canada’s larger businesses exhibited a modest yet sustained growth of 19%. Since 1989, globalization has revealed some of the weaknesses of our economy. Before globalization, it was fairly easy to be big and nimble in a protected marketplace. When it floats in zero gravity, even the biggest dinosaur can look amazingly agile. Only when exposed to the new economic reality did we discover the ill effects of prolonged weightlessness. As a result, we saw a tidal wave of downsizing, right-sizing and re-engineering that led many to wrongly conclude that Corporate Canada had a serious and probably permanent disability.

All had to undergo a crash diet. Many did not make it! Between 1989 and today Canada lost over 260 businesses employing more than 500 people. And some of these businesses were once very large indeed! In the same period, 1,500 businesses employing between 100 and 500 people have disappeared. That’s close to 2,000 larger corporations that are no longer in play to exercise their stabilizing and vitalizing influence on our economy.

So what lies ahead of us? Are we, by default, building an economy totally dominated by small business? We must avoid the pitfall of drawing conclusions from a snapshot in time, while forgetting the rest of the movie and the overall plot. Small is good in that it offers hope for system renewal, but clearly it is the journey, not the overall destination.

Surely what Canada needs is to create more large corporations. Companies big enough to hold their own on a world stage. Companies also big enough to generate prosperity in our local markets, a prosperity that numerous small companies can participate in. Most likely, these larger corporations of tomorrow will emerge from the ranks of the smaller businesses of today. That is the main reason we need to be helping small business.

Our challenge here is to boost the performance of promising players. We need to improve their prospects for growth and enable them to achieve their full potential. The strategic direction we ought to follow is surely a steady process of small business enhancement and development. This is the only viable way to enable Canada to field enough large corporations.

The good news is that there are fast-lane sectors of the economy in which small companies can move to become larger very quickly. Even during the last recession, companies in those sectors posted healthy growth. I’m referring to knowledge-based enterprises which spearhead the so-called New Economy, companies in pharmaceuticals and health services, telecommunications and computers, scientific instrument and equipment. I’m also referring to those companies that have taken full advantage of Free-Trade and NAFTA, and expanded their horizons and sales efforts beyond the domestic market and into world markets.

In a world context, Microsoft is probably the most outstanding example of a knowledge-based enterprise that has grown at exponential rates. In Canada we have similar examples, and they have names like IMAX, Softimage, Ballard Power and Newbridge. When it comes to export-oriented companies, examples that come to mind include Blackcomb Skiing Enterprises, which attracts no fewer than 1.5 million skiers every year to Whistler, a great number of which come from abroad. Or Wrebbit, a 3-D puzzle manufacturer with a unique product which exports more than 85% of its production.

So to answer my original question: is helping small business, of itself, sound business? If we support small business just for the sake of small business – as an end in itself – it will cause us to lose sight of the overall game plan, which is to allow as many companies as possible to develop into larger corporations. It will also greatly disperse our finite resources and thereby leave Canadian companies, and the Canadian economy, forever vulnerable to cherry-picking by stronger competitors.

But as long as we target the right players and provide them with the right tools, my answer is a resounding yes! Helping small business is sound business. It is sound business from an economic standpoint. And it is sound business from a social and human standpoint. A climate in which small business can blossom and grow, where it is positively encouraged, is our best hope for harnessing all the drive, all the talent and all the enthusiasm of the upcoming generation.

This is what the Bank’s new mandate is all about. We have the tools, the focus and the ability to make a difference. We have it within our grasp to become a catalyst for positive structural change. We’re making good business out of helping small business – and that’s our only business.

BEYOND THE BANK MERGER DEBATE

François Beaudoin
President & CEO, Business Development Bank of Canada

The Sainte-Foy (Quebec) Regional Chamber of Commerce, January 13, 1999
Published in The Corporate Report No. 27 (June 30, 1999)

In the 1970s, US Secretary of State Henry Kissinger opened an important press conference by saying something like: “In a few minutes you can ask me all the questions you want. But first, let me give you the answers!”

This reminds me of the dynamics surrounding the whole debate about bank mergers. In one sense, these mergers were the conclusions the chartered banks had reached following a thorough consideration of the impact of globalization on the financial services industry in Canada and around the world.

The problem is that few people really knew the starting point of this whole line of thinking. Consequently, few people came to the conclusion that it is really necessary to allow our big banks to merge.

Yet Canadian bankers were sincerely convinced that they had to take this radical step to continue offering Canadians top quality services at competitive prices over the long term. After talking to many of them, I know they thought it was as much in the interests of the Canadian people as in the interests of their shareholders.

But the message didn’t get through. And one of the groups opposed to these mergers was small business. After Paul Martin’s negative response, everyone dug in their heels. For many people, the matter is closed.

The truth is that the finance minister said: “The government will not consider any new proposed merger of the large banks before the new strategic framework is in place.” I think it would be useful today to take a few minutes to put all these issues in perspective.

One positive result of the debate about mergers is that it highlighted the particular set of challenges small businesses face. Although small business drives our economy, it is still the most vulnerable sector when the financial services industry is going through a period of drastic change.

Other players, like large organizations, have many alternatives when it comes to financing. They can count on foreign banks, among other sources. A company like Bell Canada, for example, has several foreign financial institutions in its financing syndicate.

The consumer also has alternatives. With regards to savings, for example, banks are not the only solution. Today, mutual funds are an increasingly popular and accessible alternative. Bank machines, telebanking and electronic services have virtually become the norm for everyday banking transactions. For their borrowing needs, consumers can now turn to institutions other than banks to obtain lines of credit and residential mortgages. How many of you here have been solicited in recent months to accept a new credit card offered by some new player in the field? So there’s no lack of choice.

For small business, however, the scenario is quite different. I’m not telling you anything new when I say that Canadian entrepreneurs still find it difficult to obtain financing. The number of players serving the small business sector has dropped in recent years, with (among other things) the withdrawal of the insurance and trust companies. The need to facilitate access to capital is even more urgent for knowledge-based small businesses and those outside major urban areas.

One interesting point: although more small businesses are created per capita in Canada than in the United States, a smaller percentage of our small businesses reach maturity. This higher mortality rate may be attributed to the fact that small Canadian businesses can count on fewer sources of financing than small US businesses.

From the viewpoint of globalization, the quality and diversity of sources of access to capital are important advantages to ensure that small businesses are competitive. In this sense, the high concentration of the financial services industry in Canada is a potentially serious handicap for our small businesses.

In Quebec, the industry is even more concentrated, because of the dominance of Desjardins and National Bank in small business financing. If we look at the loans under $1 million in the portfolios of these two institutions, Desjardins has $10.6 billion and National Bank $3.5 billion. Far behind them are Royal Bank with $1.9 billion, Bank of Montreal with $1.4 billion and BDC with $1.3 billion.

So it’s not surprising to find that a large number of entrepreneurs viewed the proposed mergers as a solution to the banks’ problems, not as an answer to the needs of small business. On the surface, these mergers would seem to reduce the number of major players in the financial services industry. If forced to choose between the status quo and the prospect of seeing the number of big banks reduced from five to three, small business leaders naturally prefer the alternative that maximizes the number of sources of capital. But the problem is that the status quo is probably not an option. Globalization and the growing use of technology will profoundly change the reality we know today.

Although Paul Martin said no to the proposed mergers in his December announcement, an important part of his message concerned his intention to launch Canada on the path to fundamental reform of its financial institutions. This is very good news for small business.

In Paul Martin’s own words, the new strategic framework should “promote economic growth and job creation, satisfy the needs of consumers and small business, help Canadian institutions establish a strong international presence, and enhance competition by letting both Canadian and foreign newcomers in.”

This type of reform could be described as historic. It is an opportunity to define the kind of financial institutions that will help us prosper in the third millennium. It is an extremely important reform. Financial institutions play a vital role in our personal lives, in the lives of our companies, and in the life of our whole country. They share our secrets, our hopes and our challenges on a daily basis. They are the guardians of our wealth and important sources of access to capital.

At BDC, we believe this reform should proceed promptly if Canada wishes to develop a framework to contain and, to a certain extent, control the rapid evolution resulting from the globalization of markets and the explosion of technology.

Above all, we believe that the particular interest of small business should have a major, even predominant, place in this reform. Because small business drives our economy, actions that benefit small business automatically serve the best interests of all Canadians.

We must seize this unique opportunity to adapt our banking system to the needs of our small businesses, to help them become even more dynamic and prosperous. Specifically, there is an urgent need to set up structures to serve small business in the new millennium. Our small businesses must continue to prosper. Access to capital, in all its forms, is vital.

One approach would be to create a new type of bank dedicated to small and medium-sized businesses, offering financing, venture capital and consulting services. This point of view, mentioned by Royal Bank and Bank of Montreal in support of their proposed merger, has a great deal of merit and should be taken into consideration.

This new type of bank would have a clear mission and an explicit social responsibility, and would offer small businesses such advantages as a greater choice of lending institutions, qualified, stable staff, innovative services and more diversified types of capital.

At the present time, BDC is the only bank entirely and exclusively dedicated to serving small business. But we don’t view this as our private domain – quite the contrary. We think there should be other small business banks. We are proof that serving this segment of the market makes good business sense. BDC is a profitable commercial institution that doesn’t cost Canadian taxpayers a cent. We make a profit and pay dividends to our shareholders, that is all Canadians. Last year, our profits were $45 million and the dividend was $6 million. The financing BDC has provided to Canadian small business has more than doubled over the past five years.

We are also emerging as a leader in the Canadian banking industry, having successfully developed innovative products and services which have been picked up by other institutions, to the great benefit of our entrepreneurs. With assets on the order of $5 billion and a network of 85 branches, recently extended by BDC Connex, the first virtual branch offering a full line of commercial lending services in Canada, BDC is playing an ever-growing role in the small business sector. Our range of services includes not only traditional financial services but a venture capital division and a group of specialized consultants as well. BDC is also in the process of creating a new kind of banker: small business specialists. Our training programs are among the most advanced in the world.

BDC is a typically Canadian solution: a formula we have pushed to a performance level unparalleled anywhere else in the world. In all modesty, we can say that we are attracting a following, and many countries are trying to imitate us. However, we must realize that we cannot be all things to all people. The needs are enormous, and so is the potential market. Therefore we are not looking to protect our niche, but to share it. We are paving the way and cultivating this niche so that others may occupy and enlarge it. And in doing so, we are helping Canadian small business.

NEW OUTLOOK FOR THE BDC

Patrick J. Lavelle
Chairman, Business Development Bank of Canada

The Financial Post Conference on Public Sector Commercialization, June 4, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

I am not here to tell you that the government has decided to privatize the Business Development Bank of Canada. The Bank is very much a part of the government’s strategy to combat the absence of capital available to Canada’s small- and medium-sized businesses in high technology, expert-oriented companies. What I can tell you is that we want to do it on a gap-filling, commercial basis, taking into account our mandate to accept more risk than the private sector and not lose money in the process.

The BDC is not a new institution. It has been around for 51 years. Originally part of the Bank of Canada until 1974, and then on its own after that. While it has played an important economic development role in Canada, it has often been ridiculed as just another federal bureaucracy that spends taxpayers’ money doing what other non-government agencies can do better. It was known as “FUBDUB” and many other epithets when it was this country’s lender of last resort.

Thanks to the policy of the present government, particularly Industry Minister John Manley, the bank has been resurrected and is in the difficult process of being transformed into an efficient, but high-risk, lender to Canada’s high-tech, knowledge-based, growth-oriented companies.

The bank has been running one of Canada’s most successful venture capital funds over the past several years, something that is not well known outside the venture capital community.

With an initial investment of $50 million, the bank has invested in close to 100 companies and produced good results, sometimes on its own and, on many occasions, in cooperation with other private sector- and labor-sponsored funds. The point being that changing the focus will be difficult, but not impossible.

The BDC is a small bank with about $4 billion in assets, placing it about 25th among Canada’s financial institutions. While the bank has had its share of red ink in the early 1980s, it has been on a full-cost-recovery mandate since 1984. This year the bank will declare a profit of $31 million, its best financial performance ever. We expect the profit and return on equity to improve in the future, despite our venture into what is considered a more risky area of business. That is, lending without collateral or lending on knowledge instead of things.

In fact, the bank has a very aggressive corporate plan which will increase its lending to at least $5 billion by 2001, while further removing it as a recipient of government largesse. Last year, we removed the $3.2 billion lending ceiling. The only government funding came as a subsidy to our business services arm.

In the last federal budget, the Minister of Finance announced that the bank had issued $50 million in preferred shares to the Government of Canada carrying a 6.8% dividend. The bank has also given up the government guarantee on its hybrid instruments and consistently betters the Government of Canada rate on its short-term borrowings.

At this stage, the Department of Industry provides the Business Development Bank with a $15-million annual subsidy to support our business services side. This subsidy has been declining as the bank’s management attempts to reach full cost recovery, but it has stalled at 57%.

We are currently reviewing this aspect of the bank’s services with a view to providing more cost-effective, niche-oriented business services and ending the subsidy as quickly as possible. This is not a privatization strategy, but an attempt to convince taxpayers and clients that we are open for business and a financial services institution dedicated to filling efficiently and effectively the public policy role given to us in 1995 by Parliament.

It also serves to recognize the pressures on Crown corporations to be more business oriented by adopting private-sector management practices, personnel policies and restraints. We are doing this through reorganization, early retirement programs, and changing compensation expectations so that they are based on performance rather then on seniority.

What does all of this mean to the small business community of Canada? How does it place more money in the hands of entrepreneurs in knowledge-based businesses? How does it offset the perception, if not the reality, that the commercial banks have cut the small business community adrift?

The BDC, by its mandate, is a gap-filling bank. We are not supposed to compete with the commercial banks, but lead the private financial sector in areas where they are reluctant to go or find it too risky because of the profit motive and the need to continually increase shareholder value. If we are not able to fill this role, then the very existence of the bank would be called into question.

The BDC has been asked to take on more risk by courting the knowledge-based sector, while providing equal access across Canada to raise its funds on the markets without government guarantees. We are supposed to do all of this and be reasonably profitable. This is a conundrum which adequately reflects the pressures confronting all financial Crown corporations.

As the country’s lender of last resort, the old FBDB had to put up with a lot of abuse because previous governments never enforced the bank’s public policy role. This is not too dissimilar from what I found when I was Deputy Minister in Ontario with responsibility for the Ontario Development Corporation. The now-defunct ODC did not function as part of government’s policy agenda no matter how hard we tried to change it. It fulfilled its role as a lender of last resort and as a result when the Harris government killed it, it was unlamented.

One could assume that the BDC would have had the same fate if the Chrétien government and the Small Business Committee of the House of Commons hadn’t rediscovered it as a means of providing more outlets for small business lending. This is, of course, where the crunch is, but the banks, regional agencies, and the Small Business Loans Act have helped alleviate, if not cure, the problem.

Simply having the outlets isn’t the solution. A few years ago Canada was a country without much in the way of venture capital. Today, of course, the country is awash with venture capital funds, many of them making more money on interest than on returns from their investments. Money is obviously not the problem. Risk, cost of capital and access to capital remain the problems facing the small business community, particularly outside the metropolitan areas.

This year, the BDC has had the most successful year in its 51-year history. It will have provided about a billion dollars in new loans, which is about a 24% increase over last year. And, we will have achieved a profit of $31 million, or almost 1% of invested capital. A great majority of those loans were less than $100,000. We also took a significant turn in responding to uncollateralized clients by introducing new programs, such as venture loans and patient capital. These companies represented about 17% of the portfolio and 33% of our new loan authorizations.

The bank has also reached out to develop strong working relationships with other Crown corporations, regional agencies and the commercial banks. We have just put in place a National Director of Aboriginal Banking to further our interests in dealing with Aboriginal entrepreneurs across Canada. We have working agreements with the Royal Bank and are in the process of negotiating with other commercial banks to increase lending in the knowledge-based sector.

Have we completed our transformation? We are just at the beginning. Once, change for the bank was virtually unknown. Today, like other sectors of the economy and life in general, change has a momentum that can’t be stopped. Expectations are high both at the political and economic level. Keeping a low profile and out of the way won’t do.

Crown corporations and regional agencies are reeling from change. Privatization has claimed institutions in recent days, such as the Canadian National Railway. The regional agencies are in the process of revolutionary change, which has already altered their profiles and policies, and the financial Crowns in every province are being closely monitored by their governments.

Senator Michael Kirby, Chairman of the Senate Banking Committee, has just issued a report calling for mergers among the financial Crowns and the creation of a holding corporation which would attempt to end duplication in various activities that are common to them all.

The report raises as many questions as it answers, but it is not a report that will go away. Nor should it. The research for economies of scale, better targeting, better service to the client base, more efficient manpower policies and elimination of duplication are every bit as relevant in the public sector as in the private one.

The financial Crowns have all improved their performance over the past several years, but no one has suggested that they can’t go further. What will their mandates be in the future? Will the private sector eventually fill the gaps that these institutions are now filling? Will governments eventually eliminate regional development policy in favor of market or macro policy? I am not brave enough to try and answer those questions, but answers are needed.

These are challenges facing the bank and other creatures of government policy, and the debate over the Kirby report will help focus these issues. In the meantime, the government is pursuing an activist approach to governance issues, which reflect the changes taking place in the private sector. A good deal of work on approach to corporate governance has already been done by the Crown Corporation Secretariat at the Department of Finance.

Peter Dey, the man who headed the committee which developed the report “Where Were the Directors,” states quite emphatically that directors of Crown corporations have the same duties and responsibilities as directors of public companies. This may be a revolutionary thought, but it is quite correct.

At the bank we established a corporate governance committee of the board last year. The committee has been active in assessing the role of directors and the CEO. We have established a succession planning procedure and have initiated an evaluation process for directors. All of this is very much in the spirit of improving the relationship between the Crown corporations, the government as principal shareholder, and, of course, the public.

Will these initiatives lead to broader changes? I hope they do, because taxpayers, as shareholders, have the same rights as shareholders in any public corporation. That is, to be assured that directors and management are operating in the broad national interest with due regard for shareholders – the Canadian public.

The most important changes taking place at the bank are among the 1,000 employees who work there. Neither true public servants nor private sector employees, they are somewhere in between. For compensation purposes, they are treated as public servants and have seen their salaries frozen for the past four years. While the public may applaud this restraint, it does cause difficulties in a commercial environment.

As we try to reorient the bank, the compensation issues are having to be dealt with. This process is ongoing and the board of the bank is determined to introduce pay for performance as a significant part of base salary for all employees. This year, we have already put in place an early retirement program and have stepped up recruiting to bring young and vigorous talent into the ranks.

We are a small bank, a government-owned institution, but that does not mean we cannot function on the leading edge of banking activity and innovation – all the more reason to do so. In fact, that is our goal. And in a very short period of time we have made some meaningful strides. We have increased the visibility of the bank, installed an ombudsman, stripped away a level of senior management, and recruited new and talented employees both in the senior and junior levels. We have set strict cost objectives and have reorganized to provide greater access and less bureaucratic red tape. But more importantly, we have established meaningful goals that relate directly to the mandate given to us by Parliament.

The true test will be the response of Canadian entrepreneurs, many of whom have a negative preconception of dealing with a government institution. This isn’t realistic in these times. My own sense is that the bank’s clients are already seeing changes and keeping a close eye on what we’ll be doing next.

CAE’S APPROACH TO GROWING INTERNATIONAL SALES

John E. Caldwell
President & CEO, CAE Inc.

The Financial Post Conference on Canadian Defense & Aerospace, November 2, 1995
Published in The Corporate Report No. 15 (December 31, 1995)

Under the banner of “Strategies for Staying in the Game,” I’ve been asked to spend a few moments to share with you some of the reasons for our success in the international marketplace. Specifically I would like to discuss niche markets, leveraging core competencies and strategic acquisitions. With your permission I will also talk a little later about strategic divestitures.

To begin, CAE is a diverse company. In total, we have twelve operating companies with facilities in eight countries. Of our total staff of 5,700 worldwide, approximately 4,000 reside in Canada. Although best known for our simulation product lines, we are in a host of other businesses including marine, energy and air traffic control. Through our Edmonton company, CAE Aviation, we are also in aircraft repair, overhaul and modification. We have companies specializing in engineered products for the forest product, pulp and paper, railway, petrochemical, food processing and automotive industries.

Despite the diversity of our markets, all CAE companies share certain common strengths:

• We are market leaders

• We are leaders in technology

• Our products and services provide extremely high value added to our customers

• We are international in scope

• Furthermore, each business shares a common growth strategy

Niche Markets

Let me now talk a little bit about niche markets. CAE’s philosophy, in fact our entire business – is based on pursuing and dominating niche markets.

We focus on international markets. We are very proud that we currently export 85% of our products to more than 45 countries worldwide. The markets we pursue have these characteristics:

• High barriers to entry

• Product differentiation is primary through technology and where CAE has an opportunity to establish industry standards

• Relatively small but sophisticated customer base

• No competitor has a large relative market share

• High potential for sustained growth

Typically, the markets we pursue are in the range of $50 million to $500 million in annual revenue. We have found that by achieving a leading market position, which we define as at least double the size of our nearest competitor, we can achieve higher margins generally with low downside risk.

To grow within our existing markets, or to gain a foothold in new niche market, we work consciously to leverage our core competencies and technologies. In a recent exercise at CAE Electronics in Montreal, our Canadian simulation company, we identified over one hundred core competencies.

Broadly speaking, we define our core competencies as:

• Creation of real time alternate environments

• Delivery of complex individual technical solutions to exacting specifications

• Interfacing computer technology with the external environments

• Managing and processing information

• Visualization

• Control of dynamic systems

• Networking of separate, highly sophisticated systems and

• Managing relationships with large organizations

Over the years, as we expanded and further enhanced our core capabilities, we have been able to not only develop sophisticated products, we have been able to leverage our skills and technologies into either broadening product lines in existing markets, or to enter entirely new markets.

Let’s use flight simulation as an example. We built our first full-flight simulator in 1952 under contract with the Royal Canadian Air Force. In 1955, we developed and sold our first commercial flight simulator. Back then, I am told, our people estimated the total market for commercial simulation devices was four – not annually – for ever!

Today the annual market is about 25 to 30 devices. In 1990, the market actually reached 72. Currently, CAE has about 75% of the world commercial simulation market and a growing share in military simulation.

Leveraging our core capabilities, we have migrated full-flight simulation technology:

• Into flight training devices, which are lower cost, less complex simulators that exactly replicate the aircraft characteristics, but do not have visual or motion systems

• We have developed evacuation trainers, which replicate commercial airline fuselages and allow airline cabin crews to receive regular training in cabin safety and emergency evacuation procedures

• We have developed maintenance simulators to provide high-level training to aircraft technicians

• We have migrated our technology into computer-aided training systems, which are high level classroom training systems enabling students to see how aircraft systems operate in real time on a desktop computer

We’ve also developed extensive capabilities within the area of oceanic air traffic management. We recently developed two Oceanic Flight Data Processing Systems for use in monitoring and controlling the North Atlantic airspace – the busiest non-radar controlled airspace in the world. Based on the success of these systems, the Airways Corporation of New Zealand chose CAE to develop the world’s first APS-based Oceanic Air Traffic Control System.

Combining our expertise in air traffic control and simulation, we are currently developing an airline flight planning system which will allow our airline customers to determine the optimum route to minimize fuel and tariff costs in real time.

But perhaps the best and most recent example of leveraging our skills to develop products for niche markets is MAXVUE, CAE’s world leading visual simulation system. It has literally revolutionized the commercial simulation industry, providing superior performance at about 35% lower cost.

With continued R&D, we also have a new, enhanced military version of MAXVUE. It will be featured in the EH-101 Merlin helicopter program, which was awarded to CAE last year by the Ministry of Defense in the United Kingdom.

Looking further out, we will continue to migrate all of the above capabilities into new emerging technologies destined for new markets.

Two exciting areas we are currently examining are in the use of simulation as a diagnostic tool for sophisticated process control and a fascinating application known as virtual prototyping.

Finally, let me provide you with another slightly different example of leveraging technology.

Through our robotic and visual capabilities developed in a number of space programs, we are developing a unique aircraft, paint-stripping robot that uses – of all things – good Canadian wheat.

It works by blasting wheat starch as a medium at high pressure, to remove paint from the aircraft without damaging the metal and composite surfaces. Given changes in environmental legislation which will no longer permit the use of solvents in paint removal, this application has particular value for both commercial and military markets.

Acquisitions

Part of our growth strategy includes acquisitions. We continue to acquire complementary businesses to take us into new markets, or to gain access to important international commercial and military markets.

In the past year alone, CAE has acquired three new businesses within our Aerospace and Electronics group, plus two new businesses within our Industrial Technologies group of companies.

Our acquisition strategy is highly targeted and categorized into three distinct concepts. First, we seek to acquire businesses with complementary products that share a similar customer base. Secondly, we acquire businesses with synergistic technologies and capabilities which address new markets. And, we also seek to purchase businesses we characterize as portfolio investments. I would like to share with you examples of our acquisition strategy as it applies to our simulation and control systems business.

We have recently established the CAE Electronics Group, which consists of five companies in five different countries. The concept behind the CAE Electronics Group is a team of companies which provide products and services, which are complementary and not overlapping, and allow us to leverage our strengths in every market we pursue.

While the notion of an Electronics Group may seem new, it actually dates back to 1961 – the year we formed CAE Electronics GmbH in Germany. The original purpose of setting up this company was to provide support for CAE simulation products in Europe. As this company evolved, it developed further capabilities in simulation modification and upgrades, communication systems and has developed a number of products on its own. GmbH is also the key customer interface with the German military. In fact, CAE today is, by far, the leading simulator supplier to the German military in large part due to strong local marketing strength, combined with joint program efforts between Montreal and our Stolberg operation.

As we looked to further expand our business, particularly in military simulation, it became clear we had to overcome a number of hurdles:

• We required strong local effort

• We needed to satisfy stringent local content or offset requirements

• And often it is necessary to provide in-country product support

With this in mind, we set out to develop certain new markets which were relatively large and attractive. The most promising were the United Kingdom and Australia. Accordingly, over the past year we were able to acquire CAE Invertron, CAE Australia and most recently CAE MRAD also in Australia.

CAE Australia also specializes in a number of complementary capabilities and product lines including simulation and rail control systems.

CAE MRAD is a world-leading supplier of integrated sensor simulation products and systems primarily used in testing and training applications for the military.

CAE Invertron in the UK not only brings added expertise and a number of complementary product lines to the Electronics Group – including artillery, battlefield simulators and target recognition systems – it also enables CAE to meet local content requirements needed to compete for most defense contracts in the UK.

We had already made inroads into this market earlier in fiscal 1995, when CAE Electronics was awarded an $89 million contract to provide five training devices for the EH-101 Merlin helicopter program in the UK. We have also recently been awarded a second program, which we will announce shortly.

Through the acquisition of CAE Invertron, we’ve developed a new CAE business that should generate anywhere from $50 to $75 million in revenue per year in the UK.

We also have an interest in the long-term niches in the US defense market so we have maintained a business in the United States, albeit small, to allow CAE to pursue certain well-defined programs and provide us with a window on this very large market.

To summarize, the profile of a CAE Electronics team member is:

• A business that is successful and viable in its own right

• A leader in its market and a center of excellence for specific products and services

• An organization that provides the group with local market capability, local content and ongoing product support capability

As these acquisitions demonstrate, CAE is pursuing specific opportunities in the military marketplace. We plan to further expand our portfolio of military businesses.

We also made divestitures, most notably CAE-Link in the United States. This decision was based upon these conclusions:

• The US defense market was in structural decline

• The outlook simulation and training sector was not encouraging…in fact, there are no major programs forecast until at least the year 2000

• With the industry in over capacity, consolidation was inevitable

• CAE had to either be a buyer or a seller

• Given the prospects, the level of risk and little upside potential in revenue and margins, we decided that divestiture was the best alternative

Conclusion

At CAE, our goal is not only to stay in the game but to win and to ensure we are not only a successful Canadian company, but a successful international company as well. Our strategy of pursuing niche markets – both by leveraging our internal capabilities and pursuing strategic acquisitions – is allowing us to do precisely that.

INVESTING IN OUR FUTURE

Jean-Claude Delorme
Chairman & CEO, Caisse de dépôt et placement du Québec

The Canadian Club of Toronto, April 18, 1994
Published in The Corporate Report No. 7 (August 15, 1994)

A consensus is emerging that Canada needs a new economic vision to meet the challenges of new technologies, emerging competitor nations, and a global marketplace for goods, services and capital. It reflects a new business imperative that compels us to identify and nurture the industries and companies of the future, to value knowledge as a treasured resource, and to link capital with opportunity.

Corporate Canada has a role to play. It must ask itself: what are the tools, talents and techniques needed to succeed? What are the prerequisites of success in the new economy? Where must society demand superior performance and superior results to keep our economy competitive? How do we create a business climate that matches innovation with investment?

As Chairman and Chief Executive Officer of one of Canada’s largest investment funds, I believe a good part of the answer lies in the ability of our capital markets – the investors and the pension funds who act as agents for them – to facilitate new avenues to economic growth.

I believe financial intermediaries such as pension funds can foster sustainable wealth by identifying Canadian enterprises with the greatest potential for growth over time. The challenge is to recognize the urgent need to balance expectations of short-term profits with a greater concern for corporate performance over time.

I’m speaking of a new paradigm for an era when companies are paying the price for too much short-term thinking in the past – in lost market share, lost leadership, and lost opportunity. This framework must go beyond a preoccupation with fast results, immediate turnarounds, and a propensity to pursue the investment flavor-of-the-month. It addresses a significantly different concept, in which the providers of capital and users of capital act less as adversaries and more as partners in enterprise.

Harvard professor Michael Porter has called investment capital the key determinant of competitive advantage in the new economy. It’s a question of allocating it where it can do the greatest good – for investors and companies alike. Professor Porter says that companies must constantly innovate and upgrade their competitive advantages in both physical and intangible assets, to compete internationally. He argues that conflicting agendas between investors, financial intermediaries, and company management often inhibit the flow of capital to investments with the greatest potential for profit over time. He describes pension funds as major conduits for the movement of capital from company to company, but points to the limitations of their focus on near-term appreciation.

From my perspective, I believe pension fund asset managers like the Caisse have a vested interest in looking beyond the short term. We must recognize the significance of the role we can play in the creation of sustainable wealth and in shaping our economic destiny.

This investment strategy is entirely consistent with the goals of pension plan sponsors, because investing is a two-way street. The capital we channel to industry helps build stronger, more competitive companies. In turn, a more vibrant corporate sector contributes to national economic growth, further increasing returns to pension funds and enhancing opportunities for wealth creation.

As one of Canada’s major institutional investors, the Caisse is in a position to appreciate the scope of the Canadian capital market system, its sophistication, and its capability to contribute to solutions.

According to the World Competitiveness Report, among 28 industrialized nations, Canada ranks second in availability of capital, third in financing costs, fifth in quality of financial services, and sixth in capital market efficiency.

Canadian business benefits from a large, available pool of investment capital. A nation of savers, we’ve socked away nearly $400 billion in pension and mutual funds. These investment pools are growing by leaps and bounds. Pension funds have grown 16% annually and now represent $290 billion. Mutual funds, as we know, continue to be a hot item. They are now a $115 billion proposition. Institutional investors now represent more than 65% of the shares traded on the Toronto Stock Exchange. The situation is much the same on the Montreal Exchange.

But directing capital to where it is most needed – for the short term and the long haul – is easier said than done. Money – and profit – are powerful motivators. Conventional wisdom says a bird in the hand is worth two in the bush. Investors are no exception. In an era of sound bites and nanosecond decisions, financial consumers want instant gratification.

Pension funds, by their nature, are entrusted with funds for long periods of time. Nonetheless, they are under relentless pressure to demonstrate performance, usually based on short-term profits.

What does all this mean for investment trading decisions? It’s worth noting that the average period of holding shares has substantially declined in recent years. According to the Toronto Stock Exchange, in the past ten years, the value of transactions of TSE 300 companies relative to their float on the TSE has doubled, from 28% to 56%. Put another way, this means more than half of the shareholder base in the float of TSE 300 companies, in aggregate, changes each year.

Don’t get me wrong: vigorous trading in securities is essential to ensuring the liquidity of investments and the integrity of our financial system. Speculation, arbitrage, risk taking are among the defining characteristics of an efficient capital market. I’m suggesting that due regard to the medium and long term be added to that definition, because it makes good investment sense.

The short-term results syndrome is not without its effect on company executives as well. They are too often compelled to focus on immediate and achievable targets in the name of shareholder value maximization. They recognize that losing investor confidence will restrict their options for raising capital under favorable terms in the future.

In the face of trade globalization and liberalization, executives are quick, and rightly so, to restructure and rationalize to restore competitiveness. But in doing so, is there not a greater risk that focusing too much of our attention on short-term profits causes them to lose sight of the investments required for long-term viability?

Are we satisfied that executive compensation practices are not geared unduly to short-term performance, to meeting quotas and cutting costs, to choosing the expedient over the fundamental? Isn’t this short-term bias reflected as well in capital allocation decisions within companies that rely on quantitative models of net present value, internal rates of return, and payback periods? Don’t these models fall short in assessing long-term investments since future income streams, no matter how promising, are heavily discounted?

How can these methods quantify the payback on soft assets – such as research and development or professional training? You can’t put knowledge on a balance sheet.

It’s interesting to note how Canada’s rate of spending on research and development stacks up against other countries. In 1990, only 1.4% of our gross domestic product went to R&D. That’s only half of what’s spent in the United States, and much less than the 3.1% Japanese companies devote to it. Is it any surprise that Canada imports 97% of all technology we use in this country?

Private sector investment in human resources – through professional development – also falls short. Only 15% of Canadian companies have training budgets. On-the-job skills development is a mere one half of one per cent of total payroll.

Knowledge-based industries – from biotechnology to microelectronics – are high-stakes businesses. Just ask a pharmaceutical company president about the ten years and $200 million it takes to bring a drug to market.

In a knowledge-based economy, the greatest potential may lie in companies with investible ideas. Can short termism make room for such ideas? Perhaps. But I believe that lengthening our perspective and broadening our framework improves our chances of generating ideas more supportive of the longer term demands of the new economy. Furthermore, at a time when so much discussion is taking place on corporate governance, it is timely to suggest that effective corporate governance should be understood to extend beyond the mere notion of corporate controls.

Professors Leighton and Thain of the Western Business School, in their landmark series, speak about new directions for corporate governance. They argue that the role of corporate directors is to add value and to bring perspective to companies as both trustees and consultants.

If the debate on corporate governance is to be productive, it must generate a revised approach to corporate management and reinforce the partnership spirit that must exist between business executives and investors.

Sound corporate governance practices should focus the attention of both management and boards of directors on the need for systematic reevaluation of the corporation’s strategic direction, in the light of competitive challenges and shareholders’ interests.

It follows, in my view, that directors must also contribute to setting the corporation’s strategic agenda, and ensuring that short-term objectives are balanced with long-term opportunities.

Certainly this message is well understood in other countries. New international competitors – in Asia and Europe – are prepared to think…and invest…beyond the next fiscal quarter. They understand the need to balance short, medium and long term.

Look at the dedicated capital approach in Japan and Germany, for instance. In Japan, suppliers and customers cement their relationships through keiretsu – interlocking business groups that are part holding companies, part operating companies, and part investment trusts. Seventy per cent of the shares on the Tokyo Stock Exchange are owned by keiretsus.

German businesses rely on close relationships with their bankers, who are long-term investors in these companies and serve on their boards.

This cooperative model – combined with a national will based on history and culture – has allowed companies to focus on the longer term, to achieving market share dominance, leading in technology, and investing in the people and processes that will shape the next decade and beyond.

I don’t mean to suggest that these models can be transplanted. They can’t. However, if these foreign models cannot be transplanted, the spirit behind them should nevertheless inspire our own behavior. Indeed, we are challenged to find a domestic solution fully adapted to our culture. I believe the answer lies in looking beyond the existing business relationship between investors and companies.

I’m speaking of the need for a more dynamic link between capital and business – an investment partnership that compels investors and companies alike to temper our obsession with short-term profits with a more patient, measured focus on medium to long-term performance.

Investment partnering is an essential feature of the philosophy of La Caisse de dépôt et placement du Québec. It implies a stable and durable association that better aligns management with owners.

As any portfolio manager, we are judged on our returns and on our ability to match assets to liabilities in each of our funds. Our goal is to optimize financial returns on the funds entrusted to us. No other strategy could support the Caisse’s mandate more effectively than one which is characterized by the notion of partnership.

With more than $47 billion of assets under administration, the Caisse manages a well diversified investment pool of Canadian and international bonds and stocks, real estate, mortgages, cash, and less conventional products such as derivatives.

The Caisse is a particularly active investor in the Canadian equities market. We have a stake in more than 250 Canadian companies. Some of you may find it surprising that we have more money invested in companies with head offices in Toronto than in Montreal. In fact, we are among the largest shareholders in many of Canada’s leading companies. To cite just a few examples: the Caisse has more than $450 million invested in Seagram’s, close to $300 million in the Royal Bank, over $200 million in Imperial Oil, close to $200 million in Moore Corporation, $150 million in Nova, and slightly less that $100 million in the Molson Companies.

Suffice it to say that the Caisse is a major player in the Canadian economy. Our portfolio of Canadian equities represents four per cent of the market capitalization of the Toronto Stock Exchange. We are also a global investor, with 12% of our investments in the United States, Europe, Asia and Mexico.

I believe our investment strategies, both traditional and innovative, have yielded good results over the years. In fact, our returns over ten years are approximately 12% a year. In 1993, the Caisse earned net income of $7.7 billion, and achieved an overall return of 19.7%.

The vast majority of the Caisse’s equity transactions – more than 95% – are traditional market investments in companies – usually well capitalized and publicly traded.

We exercise our role as investment partner with these companies through vigorous and open dialogue with management. We keep abreast of their business strategies and seek to go beyond the company-speak, corporate jargon, and cliché references to restructuring, realigning, and re-engineering served up by corporate spin doctors.

We ask about realistic and meaningful plans and timetables. Where does the company see itself five years from now? What investments is it making in innovation and staff development? How can the company redefine the market before the market redefines the company?

In addition, approximately 4% of our assets represent negotiated investments made outside the organized capital markets. Our partnership role in negotiated investments is closer, usually achieved through board representation, shareholder agreements, and consultation that we believe helps nurture the success of tomorrow’s companies.

Our focus is typically on emerging industry leaders that embrace innovation, both internally and externally…through breakthrough technologies or products…investments in lifelong learning…and enlightened leadership.

Although the Caisse has been practicing investment partnering long before the concept of relationship investing became fashionable, we are not alone in recognizing its merits. In fact, the $71 billion California Public Employees Retirement System (Calpers)…as well as Lazard Frères & Co., Dillon Read & Co., and US billionaire Warren Buffett have all adopted similar approaches, and none seems to have regretted it.

Neither have we, and the returns on our investments confirm our confidence in this approach. For example, on an annualized basis over the past ten years, our negotiated investments with Quebec-based companies have earned 370 basis points more than the TSE 300 index return.

Beyond the financial results, there are other benefits that serve to consolidate the long-term viability of companies with which the Caisse is associated. As investment partner, we add value through networking, joint ventures, strategic alliances, and financial engineering. The scope of our international network links investee companies with opportunities, such as new markets, products, or methods, both domestically and internationally.

In recent years, the Caisse has committed some $350 million to such networks, through investments in 36 joint ventures and pooled funds with other institutional investors in Canada, the United States, Europe, Asia and Mexico. These investments allow us to benefit from over $6 billion in additional capital pools, and to leverage the expertise of seasoned fund managers worldwide.

A significant part of our assets are invested in promising sectors such as information technology, biotechnology, communications, the environment, and aerospace.

As we move toward the new economy of the third millennium, it is essential to cultivate new technology-based enterprises that will create a more sustainable industrial base in a changing global economic landscape.

As we seek to redefine our role in this economy, we ask: What can we do together to optimize our ability to meet the emerging challenges?

Although the business community – including the users and providers of capital – cannot be expected to provide a complete answer, I believe success must be a common goal. Shakespeare wrote quite appropriately, “Men and women at some time are masters of their fates. The fault, dear Brutus, is not in the stars but in ourselves.”

Becoming masters of our own fates will take a quantum leap in faith from everyone. Short termism negates our confidence in the value of patience and persistence to contribute to the financial viability of business ventures.

I suggest there is an urgent need for a new investment ethos – for a new spirit of enterprise – because no one wins if the long-term profit potential of our industrial base is not realized or is sacrificed to short-term profit taking.

Nothing short of a new investment philosophy, grounded in a broader perspective and focussed on the longer term, will enable us to reap the benefits we can legitimately aspire to in the new economy.

I am talking about a new perspective shared by business executives, entrepreneurs and investors, that acknowledges our collective ability to reconcile the goal of profit optimization with the byproduct of economic growth and wealth generation; to harmonize financial and economic objectives; and to recognize that the strength and vigor of our economy and our standard of living depend largely on the vitality of the business sector.

This objective requires a broader perspective that cannot be reconciled with short-term goals. Speculators may get rich in a vibrant economy, but vibrant economies are not built by speculators.

The new ethos acknowledges that patient capital will be rewarded through partnerships with management, leading to greater dialogue, and, we believe, better returns over time.

It calls upon directors to help ensure management excellence by contributing their expertise and assuming a greater role in defining strategic orientation with management.

For their part, pension funds remain patient investors, confident that their patience is justified by meaningful corporate plans and strategies. In turn, it empowers senior management to pursue medium to long-term strategies, secure in the knowledge there is a stable shareholder base and a consensus on desired outcomes.

Investment partnering links business with capital and entrepreneurs with investors. It acknowledges that patient capital is not complacent or blind capital, given to an investee company with carte blanche. Rather, it is watchful capital, accompanied by a shared vision of what a company should and can become.

It represents an investment in our future that offers the greatest promise of sustainable wealth for everyone.

WE HAVE THE CAPACITY TO DO MORE AND DO IT BETTER: 30 YEARS OF FRUITFUL PARTNERSHIP

Jean-Claude Scraire
Chairman & CEO, Caisse de dépôt et placement du Québec

The Board of Trade of Metropolitan Montreal, October 17, 1995
Published in The Corporate Report No. 15 (December 31, 1995)

In January 1966, Claude Prieur, the Caisse de dépôt et placement du Québec’s first President, was working in a modest office in the old Canadian National building on McGill Street in Montreal. He had no staff and barely a pen and a few sheets of paper paid for out of his own pocket. Even in his wildest dreams, he could never have imagined that the Caisse would have total assets of $48 billion thirty years later.

I am pleased and proud to be here today. This meeting, attended by so many of our economic and financial partners from Quebec, Ontario, the United States, Europe and Asia, is the first of a series of activities marking the 30th anniversary of the Caisse. I would like to wish a special welcome to our guests from the United States, Asia and Europe.

My remarks today will focus essentially on the Caisse, its thirty years of activity and the years ahead. I will also take this opportunity to discuss:

• The importance of social cohesion for a society’s competitiveness

• The problems of debt and deficit, which still stalk today’s economy, as always

• The capacity of Quebec society to support its citizens’ choices

• The assurance that pragmatism and professionalism will remain the prime considerations for businesspeople in Montreal, Toronto and elsewhere

Quebec’s economic strength

In the past 30 years, Quebec’s economic structure has adapted very well to meet the challenges of the coming decades. High value-added sectors, such as chemicals, plastics, metals, transportation equipment, and electrical and electronic products have joined more traditional sectors on the markets. These industries, as well as aerospace, pharmaceuticals, communications and information technology, provide us with some of the world’s most efficient companies. They contribute directly to the strength of Quebec exports. In 15 years, the high-tech component of our exports has climbed from 12.6% to 27%.

From 1983 to 1993, Quebec exports have experienced particularly vigorous growth and their value has more than doubled. Quebec, at the heart of one of the world’s most dynamic markets, the 100 million consumers of the Northeast of this continent, today sells more than 40% of the goods and services it produces outside its territory. In 1994 alone, Quebec’s international exports increased by 21%. This year, they will show similar growth, despite a sluggish economy in the United States, by far our biggest customer. I am proud to mention, especially since we have the honor of having the recently nominated US Consul in Montreal, Eleanor W. Savage-Gildersleeve, with us today in her first official function, that Quebec ranks eighth among the leading economic partners of the United States, with $40 billion in trade annually.

Quebec businessmen and women, whether in New York, Los Angeles, Hong Kong or Paris, are successfully confronting international competition. Thanks to the talent of our workers and the tenacity of our business leaders, we have been tested in international markets and proven our ability. Our companies are taking on the challenge of foreign competition with flair, ingenuity and determination.

Imprimeries Quebecor, the second largest commercial printer in North America, became one of the leading printers in Europe this year thanks to major acquisitions in France and the United Kingdom. We could also talk about Vidéotron in the United Kingdom and more recently in the United States, and the Groupe Jean Coutu, already the second largest pharmacy chain in New England.

Several examples of success speak for themselves. Today, with financial institutions and major firms with deep roots in Quebec, from the Mouvement Desjardins to Hydro-Québec, our major banks and Groupe Transcontinental G.T.C., Cascades, SNC-Lavalin, Teleglobe and Vidéotron, as well as Bell, CAE, Falconbridge, Noranda, Alcan, Domtar, Bombardier, Zellers, Reitmans, Provigo, Métro-Richelieu, Pratt & Whitney, Northern Telecom and many others, Quebec can look forward to the future more confidently than ever. The Caisse has been associated with all of these companies in various ways over the years.

Our financial market is well organized and efficient, ensuring a large part of the financing not only for local enterprises but also for foreign companies coming to Quebec. The Montreal Exchange, with more than $450 billion in Quebec, Canadian and foreign securities, is now the 11th largest in the world. It is efficient and innovative, especially in derivatives. Most of the world’s major financial firms, from Merrill Lynch and Morgan Stanley to Citibank and State Street, including Yamaichi, Banque Nationale de Paris, Republic National Bank of New York, Société Générale and many more, are active in our market and have developed important ties with our institutions and companies. This national and international network now offers efficient access to financing on international markets for the growing number of firms which have the need and the capacity.

Quebec’s per capita GDP compares favorably with that of Germany. In terms of productivity levels, Quebec would rank among the G7 countries, before Japan and the United Kingdom.

We also have weaknesses, as we all know. This is why we must go even further and do even better. We aren’t the biggest or the strongest, but we aren’t the weakest or the smallest either. We have results that are worth being proud of. They show that together, we can succeed with strength of will, self-confidence, a touch of boldness, vigor, effort, hard work and excellence. The Caisse is happy to have made its contribution.

Quebec has the necessary financial and economic capacity to take responsibility for its development choices. This strength is the result of individual efforts and a broad willingness to work together.

The Caisse portfolio

The existence of the Caisse is the expression of a bold and determined act of will 30 years ago. Today it manages a bond portfolio of $24 billion. Specialists know that public debt traded in the form of bonds is the backbone of the capital market. This reality was one of the key reasons for creating the Caisse: to assure Quebec society and its government of stable public sector securities, based on fundamental analytical factors, and guarantee these securities a liquidity and cost that conform to market realities.

The current portfolio of the Caisse is optimally positioned to fulfill our responsibilities to our depositors, the Government and the Quebec economy, as well as to stabilize markets and seize business opportunities. The Caisse has played this fundamental role efficiently for 30 years under all kinds of circumstances and will continue to do so more expertly than ever, while providing its millions of depositors with high yields.

We have mastered modern investment instruments which allow us to move tactically and strategically. We have a high level and potential of liquidities to assume our responsibilities according to market volatility. The same is true for the main financial players in Quebec and Canada, with whom we are working in joint ventures, in cooperation or in business dealings.

Our equity portfolio provides nearly $14 billion to Canadian and Quebec companies. We invest in over 250 corporations, including the major banks and leading companies. The Caisse is more than a major partner in the marketplace: it is also the biggest shareholder in Canada.

For the Caisse as well as for other fund managers, it is important that pragmatism and professionalism remain prime considerations for business leaders in Quebec, Ontario and elsewhere. I would like to share with you my quiet certainty that business executives will continue, over the next few weeks and in all circumstances, to manage their firms in the best possible manner, consistent with the quest for profitability and the bottom line. This is in the nature of their responsibilities, and what the financial markets demand. It would be an insult to the professionalism of businesspeople in Moncton, Toronto, Calgary or Montreal to think for one second that they could neglect the interests of their companies and shareholders by turning their backs on markets and profitable business.

It is up to the provincial and federal finance ministers to provide the most positive, receptive and favorable environment and framework for business activities and growth. It is thus their responsibility to keep a hand on the economic rudder, and not only keep a close watch on deficits, the debt, interest rates and exchange rates.

The challenges of Quebec society

Any modern society has to face many challenges, competitiveness being far from the least of these. As you know, competitiveness takes on many forms. I would like to quote from the 1995 World Competitiveness Report, which notes one aspect particularly relevant to our concerns: “Today, enterprises seek to develop structures which are adaptive, resilient, cost efficient, and which interface easily with the environment and their customers. The same applies for countries. The role of enterprises obviously remains central to a country’s competitiveness. But modern societies will, in addition, have to efficiently manage their structures – public administration, education, research, social care system, etc. – while preserving the enthusiasm of citizens and the value system they care for. They will also have to master the capacity to reform themselves quickly. Ultimately they should aim to become competitive societies, balancing globality and proximity, wealth creation and social cohesion, and managing change while preserving a stable value system.”

Social cohesion requires respect for identity, values, maintenance of an economic and social model – of which the Caisse itself is one manifestation – and the selection of priorities that conform to these values. In our society, cohesion demands a constant concern for increasing the role of women in various fields, including business management. It requires us to review our methods so that we can integrate a large number of young men and women between 18 and 35 years of age, who are being kept on the margins of the economy and out of jobs for which they often are prepared.

One other question is central to social cohesion. The question of Quebec and Canadian political structures has remained essentially the same for 30 years. The true meaning of this question’s permanence is as follows, in my opinion: it is a problem that will not fade away on its own, which therefore must have real causes, a problem which calls for a solution. Denying that the problem exists is no solution. The problem of Quebec and Canadian political structures is a matter of substance. It therefore requires an appropriate solution, not a minor change, as the Bélanger-Campeau Commission on the future of Quebec concluded.

This means an appropriate solution, that requires creativity and imagination, realism and ambition, self-confidence and common sense. It requires open minds. There are several cases in the world where nations and societies have adopted models of government, systems that respect the identity, values and aspirations of each, ensuring their internal cohesion, while they work together through shared resources and powers. The European model is one example.

I am convinced that you, as businesspeople from Montreal, Quebec and everywhere in Canada, also know that our economies and societies will be more competitive internationally once we have decided to face the problem and apply an adequate solution, quickly, efficiently and rationally, with respect and generosity for each other.

Government deficits and debt are another concern related to the competitiveness of our society, both in terms of the growth of wealth and social cohesion.

The last federal budget contained measures, some of which took effect this year and others of which will come into force in 1996, to reduce the 1995 deficit to $32.7 billion and next year’s deficit to $24.3 billion, an additional reduction of $8 billion.

The recent annual report of the International Monetary Fund indicates that the directors of this organization asked the federal government to do more: “They stressed the need for a faster and more front-loaded fiscal consolidation effort during the current cyclical upturn,” the report stated, adding that the announced measures “would still leave federal debt and interest payments at high levels.”

My concern in this regard is that our management of the Canadian debt, the federal and Quebec deficits, is not as good as it should be. If this does not change, not only will it be needlessly expensive, but it will soon undermine our social cohesion and, through this, the competitiveness of our society.

Andrew Coyne, in an interesting article in last Saturday’s Globe and Mail, pointed out that even the members of the European Union, all of them sovereign States, have a better understanding than Canada and the provinces of how their debt decisions impact on each other.

Quebec citizens essentially rely on their government in Quebec City to look at the big picture and make fair and rational choices based on their values and priorities. Choices on which they can agree in solidarity and which can ensure social cohesion. The Canadian and Quebec political structures would benefit from an adjustment to this reality and to our objectives of improved competitiveness, for both Quebec and Canada.

Thirty fruitful years

The Caisse, like Quebec, has come a long way in thirty years. Today, its $48 billion in assets make it the leading manager of public funds in Canada. Through its assets, expertise and network of businesses and partners, it is part of the circle of major financial institutions in North America. Its influence not only covers the North American continent but extends to Europe and Asia.

The mission of the Caisse, as we can never say too often, is to seek return on investment. The size of the funds we manage leaves no doubt that our objective is profit. Since its creation in 1966, the Caisse has obtained over $45 billion in investment income. Over the past ten years, its average yield has been 10.6%. Year after year, the Caisse realizes financial results which compare favorably to the market as a whole, and it has the capacity to do more and better. After 30 years, we can proudly say that the Caisse has lived up to its founders’ expectations.

In a context of globalized economic and financial activities, the years ahead promise to be fertile with new business opportunities and demanding but stimulating challenges. Return will remain our primary concern. The excellence of our team of professionals ranks first among the necessary ingredients for success. This is an advantage that we already have and that must be carried forward. I take this opportunity to underline the determination, commitment and constant efforts of each member of the Caisse to meet our objectives. The Caisse and all of its components must combine a touch of boldness, action and prudence with a high degree of innovation, expertise, flair and agility to seize promising opportunities, whether these be new markets, new financial products or new companies.

We will rely on ever better first-hand information that is serious and credible regarding the entire globe. We have become an investment multinational: our success and our results, like yours, increasingly depend on how we read world trends and understand the specific characteristics of national economies, and our ability to anticipate the challenges of the future with rigorous professionalism. At the same time, we must identify, analyze and seize opportunities regarding productive companies. This requires both the right information and the ability to use it.

Benefiting Quebec companies

For the past three decades, the Caisse has been an active yet patient partner of enterprises of all sizes, from every sector and every region of Quebec. The Caisse Private Investments Group portfolio currently consists of 192 investments, with a market value of $2.7 billion. By associating with dynamic firms and establishing privileged long-term relationships with them, we seek to encourage their growth. Our financial return is excellent. Over the past 10 years, the average return on investments held by the Caisse in Quebec companies has been 11.4% per year, compared to 9.2% for the TSE 300 index, a difference of over 200 basis points.

Doing even more business and doing it better

This high yield and the favorable impact of these investments on the economy have led to the decision to increase our volume of participating investments. The Caisse Private Investments Group thus plans, as I said in Quebec City yesterday, to invest another $1.3 billion in companies over the next two years.

To achieve these objectives, we created five investment subsidiaries aimed at specific market niches, by company size or by sector of activity. These decisions will allow us to participate even more and more effectively in the dynamic growth of profitable and innovative enterprises.

Our reading of the current situation at the national and international levels suggests a number of promising avenues that we intend to take:

• Support the development of entrepreneurship and encourage the creation of new businesses that will enrich the industrial and commercial fabric and provide employment to Quebecers. It is important to identify, understand and support the J. Armand Bombardiers of today, the Charles Sirois and Daniel Langlois of tomorrow, the next Cirque du Soleil or Robert Lepage of our cultural industry and the Marie St-Pierre, Michel Desjardins or Simon Changs of fashion.

• Favor sectors with high potential like technological innovation, telecommunications, health, biotechnology and information technology.

• Invest in small, medium and large companies, the engines of our economy, that penetrate the export markets; for this purpose, we will address the questions of financing product sales and financing infrastructure products; we also want to bring the Caisse closer to the various communities that make up modern Quebec.

• Participate financially in the establishment of foreign companies in Quebec and assist Quebec companies in their efforts to expand into foreign markets.

• Consolidate our gains and support productive enterprises in more traditional sectors, which nevertheless occupy a major place in economic activity.

• Finally, contribute to the vitality and growth of Montreal as a financial center.

The challenge faced by all of us, whether individually in our companies or together in our societies, is to see farther and look a few years ahead. This also means aiming higher, identifying our hopes and setting our objectives high enough. We are living through a fascinating period in human history, filled with changes and difficulties, but also with opportunities and challenges.

Our capacity to grow and build together derives its source and inspiration from the actions and will of men and women from here and from elsewhere who are building Quebec every day. It is also supported by the special contribution of our financial institutions and all businesspeople.

Our job is to map out, anticipate and conceive the future. Each in our own way and according to our role in the world economic chain, we must shape and mold this future in order to build the society of today and tomorrow, a society that is ever more efficient, dynamic, balanced, rich and fair.

I invite you to join in a renewed solidarity to achieve the growth of wealth and social cohesion. A modern solidarity open to the world. A solidarity that calls and reflects on every one of us. A renewed solidarity that demands that we do more and do it better. We certainly have the capacity to do so.

CANADIAN TELECOMMUNICATIONS: THE TRANSITION INTO TURMOIL

Juri Koor
Chairman, President & CEO, Call-Net Enterprises

The Canadian Club of Montreal, January 29, 1996
Published in The Corporate Report No. 16 (February 29, 1996)

Quebec has a special place in the corporate heart of Call-Net. This was one of our original long distance markets. We maintain a large office in Montreal. This is where we have one of our major switching centers. And we have linked Montreal through our own fiberoptic circuits to Ottawa and Toronto…and the United States.

Montreal is also in the foreground of our strategic thinking because of our investment in Microcell, which is headquartered here. This company won a federal license last month to build a digital wireless telephone service across Canada.

Today, I want to talk about the status and future of telecommunications in Canada. This is an industry going through extraordinary change. Extraordinary in two respects. The speed of change. And the scope of change.

It wasn’t long ago that we all lived in a tidy world of regulated monopolies, duopolies and oligopolies. Indeed, “Regulate, regulate, regulate” has very much been the mantra of Canada since John A. Macdonald’s national policy at the birth of Confederation. And regulation made sense through much of our history, because of the geographic east-west nature of Canada…the sparseness of our population scattered over such vast distance…and the smallness of our economy relative to the Americans.

To bind our people together, the utilities were given the exclusive right to form economic mass and reap rewards for shareholders in return for advancing public policy. Duopoly railways. Duopoly airlines. Oligopolistic broadcasting. An oligopolistic banking system. A monopoly telephone system. More recently, a duopoly cellular phone system…and a monopolistic cable TV system.

Quite clearly, transportation and communication – of people, of ideas, of money – are central to our national purpose. Now our common cry – well, for most of us – is “Competition, competition, competition.” But with competition has come a chaos set in motion by the energies of unfettered market forces. And the big winners – every time – have been consumers. They have won with lower costs, better services, and more choices. This has certainly been the case in long distance.

But competition has a down side for those who move in a short period of time from the mindset of a monopoly or a duopoly. In the case of the telcos, the return on equity to shareholders is no longer guaranteed. For another, management has to do something quite unusual – manage the business through a period of disturbing change.

The other – and grim – downside is that competition forces monopolists and duopolists to lay off staff. The economic reason is simple. Monopolies and duopolies breed inefficiencies, low productivity, and indifference to economic reality. The human toll is tough to take. Through this period of change, the telecom industry is making massive staff reductions. Sprint Canada is one of few major companies to expand staff. We added 400 people in 1995. Today we employ more than 1,200 people from coast to coast.

For Canadian businesses and consumers, however, competition heralds good news. During the past three years, the cost to you of long distance services should have declined by 30% or more. If you are not enjoying savings of that scale, you are likely paying more than your competitors for an essential cost of doing business.

Another consequence of competition in a previously closed industry is the sudden euphoria of new investors – followed punctually by dashed dreams. When long distance was opened to competition in 1992, dozens of companies emerged to fly the free market banner. Today, most of them have disappeared. Many went bankrupt. Others were taken over. Call-Net, for example, acquired five competitors in three years. Our most recent acquisition was last summer. The reason that so many new competitors ultimately wilted is because they lacked financial resources, product lines, technology and management expertise.

So what’s the look of the industry today? In 1991, Bell and the provincial telephone companies owned virtually 100% of the market. In 1992…the CRTC stated that it expected new competitors to win 30% of the market over 10 years. That would leave the former monopolists with 70%. We are talking, by the way, about a market that generates revenues of $8 billion a year. It is also growing by 3 to 4% a year.

Today, nearly four years later…Bell and the other former monopolists still have about 84% market share. New competitors have about 16%. To put that in perspective, the next largest long distance companies after Stentor are Sprint Canada and Unitel. We each have about 6% market share. There are also two other national competitors, as well dozens of small regional and niche players.

So…after four years of intense competition…the long distance sector has made half the market transition that the CRTC anticipated. In the United States, where there is a longer history with competition, new competitors have won about 45% of long distance revenues.

The industry and most telecom observers have always believed that opening long distance to competition would ultimately result in one viable national alternative to Bell and the other telcos. All along, everyone expected Unitel to be that alternative. Today, minds are changing, in view of the unexpected achievement of Sprint Canada, which is now the number one alternative to Stentor. But then again, the race is far from over. Many more surprises could emerge.

A fundamental question is: who will control the industry? We should have the answer fairly soon, because we at Call-net have asked the CRTC to rule on this issue. It is a vital issue…so let me provide some context. In 1993, when we were still a very small company in an industry of giants, and competition was only a few months old, we realized that to grow we needed access to advanced technology with brand identity.

The US telecom firms had the leadership in technology and the experience with competition. Stentor came to that realization first and signed a deal with MCI in the fall of 1992. It bought US technology. Many of the advanced products Bell and the other telcos offer today are MCI-related products and are run on MCI data bases.

Then, in early 1993, Unitel signed a deal with AT&T for US technology. Call-net followed about a year after Stentor in the fall of 1993. We bought both Sprint technology and brand identity. I should emphasize, however, that many of our products for residential customers and small business are Call-net innovations with the software developed here in Canada.

Why were these three alliances formed? To reduce risk. To reduce technology risk, market risk, operational risk and ultimately financial risk. All three transactions with US carriers happened in full accord with the ownership and control provisions of the Telecommunications Act.

Now those provisions are, in our view, being tested by AT&T’s absorption of Unitel. Unitel, as you know, has been in the Canadian telecommunications business for more than 100 years. In 1993, it was owned by three major corporations: Canadian Pacific, Rogers, and AT&T. At that time, its ownership and control conformed with the Telecom Act.

In 1995, it essentially went bankrupt. CP walked away from its historic investment. Rogers wrote off $500 million. And AT&T wrote off its investment. Last September, AT&T struck an ownership deal with three Canadian banks…the banks which own Unitel’s $700 million of debt. The banks have no telecommunications expertise. They know it and, according to recent reports are looking for a quick exit from the Unitel deal.

In the meantime, AT&T has taken control of Unitel. One of its vice presidents is the CEO and the US company is providing operational, management and consulting services. That, in our view, adds up to “control in fact” under the Telecommunications Act. And that is illegal. Federal law says that non-Canadians cannot have “control in fact” of a Canadian telecom carrier. We have asked the CRTC to check all this out – and to enforce the foreign control provisions.

What happens if the CRTC allows the AT&T deal to go ahead? That, we believe, will officially open hunting season on the Canadian telecom industry. Sprint, MCI and other large US telecom companies – joined no doubt by the best of Europe and Asia – will charge over the border in a new round of ownership and management alliances. There is no way they will sit by and watch AT&T march across Canada unchallenged.

Believe me, we at Call-net will not get trampled in the stampede. We have worked hard to grow as a Canadian enterprise under Canadian rules. If the Canadian control rules do not apply to Unitel, then we will be forced to change how we do business in the best interests of our shareholders.

Foreign control in the telecom industry is, then, an important issue for regulators and the government to resolve in the context of Canadian nationhood. In the meantime, despite the chaos and strains created by transforming a monopoly industry into a competitive one…I am pleased to say that we are evidence that a new player can survive.

Listen to these numbers that track our progress. In 1992, we had revenues of $83 million. For 1995, we expect approximately $450 million. That is more than five times the revenues of three years ago. Yet, as I mentioned, during that time, product prices have plummeted by more than 30%. We have also gained the confidence of capital markets. In 1992, we went public with a $30 million equity issue. We have since visited capital markets successfully four more times. In total, we have raised over $450 million. And we know we have the capacity to raise further substantial sums of money because we have created a viable and sustainable business…small though it may be by comparison with the multibillions of Bell.

What is the future for the industry – and for us? A lot depends on whether the CRTC allows AT&T to absorb Unitel and treat Canada as the 51st state. A lot depends on whether competition stays alive. Or will the Stentor companies drive competitors out and regain the comforts of the past? That would be good news for Stentor’s investors – and a disaster for Canadian business and residential customers.

A lot also depends on how the Canadian industry ends up forging new alliances. Will the Stentor alliance fragment into two or three national companies? Or will some of the telcos form alliances with cable firms and other carriers?

The next two or three years will see a turbulence that will undoubtedly provoke even more chaos.

Satellite-to-home television. Digital wireless telephone systems. Local telephone service competition. All of this will pit telephone monopolists against cable monopolists…and both groups against upstart competitors like Call-net.

Change of this magnitude will inevitably breed chaos. And chaos breeds opportunity for the clearheaded, the focused, and the well capitalized.

The area of biggest chaos right now is the Internet. You’ve all been inundated with information. The real challenge is separating the hype from the substance. This room is full of business managers and professionals. I ask you: how many of you spend more than five hours a week on the Internet? Five hours a month? Five hours a quarter? Any time at all? And how much are your firms prepared to invest seriously in the Internet?

If you unplugged all the kids having fun on the Internet – and all the serious subscribers who use it for research – what’s left that is commercially viable? Or is acceptance of the Internet a generational thing, like ATMs and telephone banking? Many observers think 1996 will be the year of implosion for the Internet. We shall see.

For us at Call-net, the immediate challenge is to determine how we carry our enterprise forward to create the greatest value to our shareholders. Should we continue to acquire long distance competitors? Not that there is much left to acquire.

How should we build on our investment in Microcell? Should we expand into new sectors? For instance, we are investigating the value of setting up a local telephone company. Or should we consider merging our business with a company that has strengths in other sectors to match our strengths in long distance?

Yes, this is strategic thinking time. Our minds are focused on the best interests of our shareholders. Chaos breeds opportunities. But opportunities only make sense if they create shareholder value.

Another factor that will influence the future of telecom is the role of the CRTC. The federal commission was for most of its history responsible for regulating the rate of return that the monopoly telephone companies could earn. That process enabled the telcos…along with other utilities…to stand first among industries in the returns they consistently delivered to their shareholders.

We believe that the CRTC exists today to champion a competitive marketplace. How far, though, should it go in supporting new competitors? In our view…as far as is necessary to ensure that new competitors can survive profitably…and that broadly based competition is sustainable.

But doing that is not easy. We have seen disturbing incidents of CRTC decisions being overruled by the federal cabinet. It is difficult for the industry to divine government policy when the CRTC moves in one direction and the government appears to be going in another. We believe that it would be useful to the telecom industry, and to the CRTC, for the government clarified its policy priorities for the next few years. This is important because of the magnitude and the velocity of change occurring in the industry. It is also important because applicants before the CRTC are asking for approvals in areas where the government has not yet established policy. We want to know the rules and their durability so that we can plan our business strategy.

Overall, the Canadian telecom industry stands on the edge of rapid change. Call-Net and Sprint Canada have been through the chaos in one sector. Against all odds, I hope we have succeeded.

The battle for capital, for customers and for revenues will continue to be fierce and bloody as competition spreads to new telecom sectors. I ask you, is there any industry in Canada that offers such excitement?

CORPORATE SUCCESS, SOCIAL FAILURE AND CORPORATE CREDIBILITY

Buzz Hargrove
President, Canadian Auto Workers Union

The Canadian Club of Toronto, February 23, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

In the January 1998 issue of our “national newspaper’s” business magazine, the lead editorial began with the assertion that, “Rarely have so many had so much to feel so good about.” As if to quickly pre-empt the slightest debate or dissension rearing its uncomfortable head, this was followed by an article headlined: “Get over it.” Apparently any complaints couldn’t possibly have anything to do with the real world, but were rooted in our national character, which was conveniently defined as “pessimistic and wary” and “incapable of rolling with the good times.”

This glib response to what is actually going on in our country reminded me of a more honest statement made by a Brazilian general in the 1950s. Asked how things were going, he replied: “The economy is doing great but, unfortunately, the people in it aren’t.”

For the corporate sector, these are indeed heady times, the culmination of economic and political victories won over the past two decades. The stock market graphically highlights and symbolizes these triumphs. While family incomes stagnated over the past two decades, stock markets accelerated at rates no one ever imagined were sustainable. Over the 20-year period since 1977, during which the incidence of dual earners increased by 23% and family hours of work increased significantly, real median family income went up, in total, by all of two-thirds of 1%. Meanwhile, someone with the money to invest in the TSE 300 could have sat back with a nice glass of wine and watched his investment over that same period – on average and after inflation – more than quadruple!

A few commentators, not at all typical, but nevertheless still part of or tied to the business establishment, have recently expressed concern over both the ideological and inegalitarian excesses inherent in the business-led restructuring. Billionaire George Soros put this into a post-Cold War context in a highly publicized article: “I now fear that the untrammeled intensification of laissez-faire capitalism and the spread of market values into all areas of life is endangering our open and democratic society. The main enemy of the open society, I believe, is no longer the communist but the capitalist threat.” (Atlantic Monthly, February 1997)

Peter Drucker, America’s most well-known business guru, felt compelled to assert: “We are learning very fast that the belief that a free market is all it takes to have a functioning society – or even a functioning economy – is pure delusion.” (Wired Magazine, October 1996)

The sponsors of the 1996 World Economic Forum, addressing a “who’s who” of international corporate and political leaders, opened with a self-interested warning: “A mounting backlash…is threatening [to disrupt] economic activity and social stability in many countries…This can easily turn into revolt…Public opinion will no longer be satisfied with articles of faith about the virtues and benefits of the global economy. They want action…” (International Herald Tribune, February 1, 1996)

At the most recent World Economic Forum, a group which The Financial Times (February 1,1998) dubbed a “self-styled revolutionary group of young business leaders” warned that “Europe’s socio-economic system is failing the populace.” And Business Week (January 26, 1998), editorializing on the crisis in Asia, warned: “So far an Asian backlash has targeted corrupt politicians and crony capitalists. But angry nationalism is growing and the backlash can easily shift to anti-Americanism or even anti-capitalism.”

Here in Canada, David Olive, at that time editor of The Globe and Mail’s “Report on Business,” but speaking in a very non-Globe-and-Mail way, bluntly asserted: “There may be a CEO or two under the mistaken impression that only politicians hold office at the pleasure of the community. A reminder: capitalism exists by popular consent…the mindless repetition of efficiency mantras and…enhanced shareholder values will not prevail should the public decide that the economic system no longer operates in their interest.” (The Globe and Mail, April 1996)

The question being raised in these comments – the question that will be the central political question of our time – is what are the implications of the corporate sector’s triumphs? The emerging issue is where the corporate agenda – now largely implemented – is taking us. Will it be challenged in any sustained way? What will be the basis of that challenge? How deep and far might such a challenge go?

To some, the economic parallel is to the period leading up to the Great Depression, when economic imbalances threatened the collapse of the system. Our times, like those, are characterized by an extreme polarization of incomes, exhaustion of savings and growth of consumer debt, excess capacity in a wide range of industries, over-valuation of stock markets, national austerity programs, international financial instability and competitive devaluations, and the self-defeating and contradictory attempts of each country trying to solve its own “domestic” problems through exports to others trying to do the same thing.

There is, however, another parallel to that earlier period to be raised – one obviously linked to the economy but which goes on to question, as happened in the thirties, the corporate elite’s credibility, competency, and leadership role in our society. In the 1920s that elite was – like today – riding very high. Autos and electronics were emerging as mass-production sectors full of new possibilities, and the “captains of industry” were national heroes. When the Depression hit, people turned to these same heroes – because of their past leadership and experience – to be their saviors through the difficult times. But when the economy worsened, and the advice and leadership of the captains of industry proved not just ineffective but harmful, people quite suddenly and massively turned against them. After all, if the captains of industry were given the credit for the good times, they should also be held responsible for the bad. As Rubens Ricupero, secretary-general of the United Nations Committee on Trade and Development (UNCTAD) recently noted, “the 1920s and 1930s provide a stark, and disturbing, reminder of just how quickly faith in markets and economic openness can be overwhelmed by political events.” (The Wall Street Journal, September 16, 1997)

The economic and social crisis that subsequently emerged within capitalism was ultimately alleviated by a set of policies and structures which became known as “the welfare state.” Ironically – or perhaps predictably – it is the corporate-led dismantling of that previous solution to a fundamental social crisis, which is now recreating the conditions for a new crisis. The welfare state had emerged out of series of linked historical events: the loss of credibility of capitalists and capitalist solutions during the 1930s, the determination to limit the radical movements that were the response, the war and the strong bias for equality whenever people fight and sacrifice for democratic principles, and the postwar competition with the Soviet Union for global moral leadership.

What that postwar period represented was a form of “class compromise” or a “social contract” to legitimate and stabilize capitalism. Social conflicts – many of them very significant – continued, but at the end of the day there was an acceptance that while corporations would run the economy, restructure it, and increase trading relationships, the general population would have jobs, feel protected through economic change, and share in the benefits achieved. Whatever hardships working-class families had, there was an assumption of uninterrupted generational progress – sons and daughters would end up better off than their parents.

In the quarter-century after the war, Canadian workers saw unemployment fall and stay relatively low. Working-class families achieved steady and dramatic increases in their standard of living. A progressive coalition lobbied for and won new social programs like Medicare and the Canada Pension Plan. And we saw inequalities eased and a measure of security generalized. By the late 1960s, however, the postwar “consensus” was showing its first signs of unraveling. Two things in particular had changed. Europe and Japan had reconstructed their economies and become serious competitors globally. And at home, the working class, buoyed by secure times and social programs that provided entitlements independent of the market, had become more confident and less amenable to corporate and market discipline.

With profits under pressure and workers resisting discipline, the corporate sector found the welfare state was no longer affordable, nor acceptable. Radical change was necessary. By the mid-1970s, the Business Council on National Issues was established in Canada, mimicking a similar organization in the United States. Corporate Canada was organizing itself and mobilizing to change ingrained expectations, structures, and the direction of Canadian society. Over the next two decades, business was remarkably successful in both political achievements and the limited reaction against them. Before this assault began, those of us on the other side had assumed that social programs were untouchable – the relevant debate being only about how they could be expanded and deepened to include new rights. Few of us would have believed that steady double-digit unemployment rates could be sustained without riots in the street, or that the gradual but consistent move to greater social equality could be reversed.

That the corporations were so effective reflected not just their resources and power, but the real gains people had previously made within capitalism. Whatever frustration and resistance there was to the new pressures for cutbacks and restraint, people ultimately hoped that this was temporary, and they reluctantly accepted the austerity as part of hanging on to the greater part of what they already had. Without an effective opposition, corporations had free reign. The ideological implications of the collapse of communism and Eastern Europe’s rush to jump on the capitalist bandwagon, reinforced corporate confidence and corporate aggressiveness reached new heights.

The new world, business told us, was tougher, but the pain would be short-lived and well worth it – the restructuring of the economy and of society was an investment that was part of building for the future. The cold shower of unemployment forced on workers was the unfortunate cost of getting inflation under control, but ending inflation would make us competitive, keep the dollar strong, and set the stage for steady progress. Weakening unions would remove barriers to job creation. Free trade would close the productivity gap with the US, bring more and better jobs, and secure our social programs. Deregulation would be a boon to consumers, privatization a blessing to taxpayers. Getting the deficit in shape would protect future generations.

Well, it’s been almost a generation now and people are starting to do their own accounting – and starting to demand some accountability. With echoes of the 1930s, people are looking around at this new world and asking what past sacrifices were for, and what happened to the benefits promised. The success of the corporations in winning their agenda has set the stage for a test of what their leadership has meant for the rest of us. Have, as The Globe and Mail declared, “so many [rarely] had it so good?”

In the previous 25 years, between 1946 and 1971, real per-capita income in Canada had more than doubled. In the 25 years since, and in spite of the acceleration of technology, the painful restructuring, the longer hours and harder work, it’s gone up by only a fraction of a percent per year. In fact, in the decade 1986-1996, the real median family income actually fell – the first 10-year period this had occurred since the years spanning the Great Depression more than half a century before. And the social programs which were formerly an example of our achievements as a country, are today seen by our business and political elites as “problems” that, although affordable without deficits in earlier periods when we had less collective wealth and productive capacities, are today inexplicably considered as being “beyond our means.”

Behind the stagnation in the average material standard of living lies a stunning growth in the unequal distribution of what we get. Some have in fact never had it so good, and this is clearest when we listen to their complaints. Richard Todd, writing in the magazine Worth (December 1997), reports a conversation with a retiree in Florida: “All I know is that it seems to take another digit these days. There are lots of people around here…who retired a few years ago with two or three million, thinking they were set. Now they feel poor.”

Alan Binder, the American economist who formerly worked under Alan Greenspan, the head of the US Federal Reserve, recently commented that, “When historians look back at the last quarter of the 20th century, the shift from labor to capital, and money and power up the income pyramid is going to be their number one focus.” (The Toronto Star, July 20, 1997)

Internationally, the impact of 30 years of accelerating globalization has included a rising gap between rich and poor. The ratio of the top 20% of the world’s population to the bottom 20% was 30 to 1 in 1965. Latest numbers show it to have doubled to 60 to 1. Half of the Asian population – 1.5 billion people – make less than $500 per year. A 1997 United Nations report warned that, “Evidence is mounting that slow growth and rising inequalities are becoming more permanent features of the world economy.” (UNCTAD, September 11, 1997)

In Canada, overall income equality is today worse than at any point in the past half-century. And unlike the past, inequality is now increasing even during upturns: between 1993 and 1996, the top fifth saw real family income increase by some $4,600, while the bottom fifth – averaging a little over $17,000 in annual income – actually experienced a decrease in income.

Child poverty in our country is worse today than when the federal government sanctimoniously began its “War on Child Poverty” at the end of the 1980s. In Metro Toronto, so long a model for other North American cities, one in three children now lives in poverty. In Ontario, payments to single mothers are being cut to pay for tax cuts heavily biased to the well-off in society (to generate the monies for Harris’s tax relief for someone earning $250,000 per year, you have to apply the welfare cuts to five families led by single mothers with kids). For people on welfare, “incentives” are about having less, for executives, “incentives” are, conveniently, about having more.

The Financial Post (December 20, 1997), commenting on the expansion of the million-dollar club in Canada, advised: “Wanna get rich? Be a player, not an investor.” The red-suspender crowd, busy “playing” the market and often producing nothing except the occasional turmoil, takes the occasional break to pass on a different kind of advice to workers, lecturing them to work harder.

The extent of the inequality in our society – and the hypocrisy that is its constant companion – is most evident not so much in the tax breaks but in the mind-boggling corporate salaries themselves. CEO compensation in Canada increased by $190,000 or 32% in the three-year period 1992-95 (according to a study done by accounting firm KPMG). Just the increase by itself represented four times the total annual income of the average family. A bank president now makes more, in his first two days of work after the Christmas break, than a clerical worker makes year-round.

As for all the talk about efficiency, there is nothing less efficient than unemployment; yet we tolerate some 1.5 million Canadians denied the chance to be productively employed citizens. Today, two consecutive months of under 9% unemployment has economists raving about our fantastic success. To put this in context, in the 30 years after the war, the unemployment rate never went above 7.5%.

Young people today represent the most educated potential workforce ever, but they’re having a tougher time getting jobs, and the average pay they get is below the pay for comparable age groups with less education 20 years ago. The hype about new opportunities in high-tech obscures the real problems the next generation will face. In the United States, for example, with its powerful high-tech base, jobs related to computer systems will in fact grow very rapidly. But projections through 2006 suggest that such jobs will still only represent about 2% of total job openings, and will be far exceeded by job openings for occupations like cashiers, or cooks and kitchen staff, or retail clerks, or waiters and waitresses.

The Canada-US Free Trade Agreement, business confidently stated, might mean a slight loss in sovereignty, but would bring us the more important benefits of higher productivity. Now, recent analyses show, the Canada-US productivity gap in manufacturing has worsened and widened. As a Wood Gundy study put it, in classic understatement: “In the eight years since the Canada-US Free Trade Agreement was signed, Canada’s productivity performance has failed to live up to expectations.” (Occasional Report No. 19, September 2, 1997)

Corporate success in changing the political climate held out the payoff of attracting more foreign investment. And foreign direct investment did in fact, increase dramatically over the years, doubling in money terms over the past decade – but the outflow of direct investment tripled.

During the 1950s and 1960s, Canadian capitalism, and capitalism more generally, built a base for stability that rested on three specific legs. It had demonstrated that it could deliver the goods in terms of a material standard of living. It could (in spite of the reality of owners and workers, rich and poor) argue with credibility that capitalism provided the democratic spaces, via unions and parliament, for everyone to influence outcomes. And it could rally people around a common national project and vision – in Canada’s case, that of maintaining our independence from the United States, and building a kinder, gentler capitalism on our share of the continent. Today, each leg of that base has been seriously damaged and the base itself is starting to wobble. Today, the message, at least for most of us, is less about the system delivering the goods and more about austerity, restraint, and the erosion of social programs ranging from education to healthcare and unemployment insurance to public pensions. Workers can work harder, their employers can be more successful, but – and downsizing and outsourcing are only one example – the link between overall economic success and the guaranteed sharing in that success is weaker than ever before.

In the workplace and in society at large, the expansion of international economic links is directly related to the contraction of democracy. Globalization, we’re told, imposes pressures that neither unions nor governments can challenge. So here too, a former asset of capitalism, its compatibility with a relevant and working democracy, is undermined. The message, as someone explains to the knight in the feudal comic strip The Wizard of Id, is: “Remember the Golden Rule – them that has the gold, rule.”

In this context, any vision of what we are or what we can do is narrowed to the restricted world of corporate bottom lines and competitiveness. Margaret Thatcher publicly acknowledged this, proudly proclaiming – in response to criticism about the direction of her policies – that “There is no such thing as society.”

What we are left with is a world not just devoid of hope, but which depends on the very loss of any hope, and the resultant passivity, to sustain itself. It may leave most people living in fear, insecurity, cynicism and therefore demoralized and temporarily demobilized. What it cannot do is unite, move, excite, or expand on what human beings can jointly construct. It represents the end of community and, as Thatcher said, any meaningful sense of “society.”

This reduction of society to the economic, and the collapse of any vision to a transparently class vision, is particularly blatant in the business sector’s latest project, the MAI (Multilateral Agreement on Investment). What that proposed treaty essentially argues for is “protecting” investors from the democratic intervention of the community. It elevates investor rights to a status that is beyond citizens and their governments. At the same time, there is total silence about any corresponding responsibilities of investors. In a sense, this simply reflects the inherent logic of capitalism. Milton Friedman, the ideological father of modern laissez-faire, once said that “Business as a whole cannot be said to have responsibilities. The doctrine of social responsibilities is a fundamentally subversive doctrine.”

At one level, I can agree that under capitalism, the business of business is, and perhaps should be, business. I’ve never believed that we should expect corporations and bankers, going about their business and responding to competitive pressures, to act socially responsible on their own – in fact, that’s precisely why, in any society that sees itself as more than one giant factory, we so clearly need rules and regulations to direct business in a way that incorporates social and democratic needs.

The point is that business and society are always interrelated. What business does always impacts on society. If we pretend otherwise and leave business “alone,” then the “business” of society is also reduced to “business.” The deregulation of business and investment will simply translate into the regulation of citizens and communities by business and through the market. As a Globe and Mail (November 25, 1996) editorial approvingly put it: “In politics there is no left or right anymore, just arithmetic.”

In the past, governments were a buffer between business and the people in a dual sense: they provided programs to offset negative impacts of the economy, and, at least as important, represented something to blame for problems, a group that could occasionally get turfed out with the hope of change. The Mulroney government is a clear example of the latter. The frustration of Canadians with so much of what had been happening to them in the 1980s wasn’t directed at the corporate sector that Mulroney was so intently catering to, but against “government” and especially Mulroney himself. And so Mulroney was rejected, only to be replaced, with no break in continuity, by an administration self-righteously critical when in opposition, but once elected, committed to the closest imitation and even acceleration of Brian Mulroney’s policies.

But as business successfully discredits a role for government in addressing the inadequacies and excesses of the markets, government responsibility for our problems fades and that responsibility is shifted to the real source of power, the corporate sector. A few years ago, David Rockefeller remarked that “We [the transnational corporations] are now in the driver’s seat of the global economic engine. We are setting government policies instead of watching from the sidelines.” (CCPA Monitor, 1996)

What Rockefeller dared to state is now increasingly sensed by those being ruled. Business may be “winning,” but its failure to turn those same victories into a better life for ordinary people is slowly starting to raise questions about the corporate elite’s legitimacy and even competency to play such a dominant leadership role in society. How come we reward corporate executives and bankers so well, and leave them with so much power over our lives, when they deliver so little? Where are the jobs? Where are the social programs the BCNI promised in the run-up to the free trade election? Where is the security? What exactly is Canadian about “Canadian business?”

Over the last 15 years, the rate of asthma doubled among children and hospital admissions due to respiratory illness of children increased by 40%. What is the connection between our refusal to regulate the environment – the air we breathe, water we drink and soil our children play in – and the assumption that economic progress should include a steady improvement in public health?

How much is enough? In reporting that the Toronto Dominion’s chairman received stock options worth over $40 million, the reporter saw this as “a startling example of how rewards now include immense personal wealth, not just the power, prestige, private elevators and comfortable pensions with which previous generations have had to be content.” (The Globe and Mail, December 16, 1997)

Why, as author Doug Henwood asked, do governments in crisis borrow from the rich instead of taxing them and then pay them interest for the privilege of not being taxed? If the point of getting the deficit and inflation under control was to restore investor confidence, how come our dollar fell to the lowest levels in history after the deficit and inflation dragons were slain? Is there a link between the fact that since 1989 Canada’s deficit fell faster than any other G7 country, while our growth ranked last?

Is the international economy out of control? Why does money flow from those who need it to those who don’t? How did the International Monetary Fund get it so wrong in Asia so soon after the financial disaster in Mexico? Didn’t the IMF assure us a short time ago that “There is no doubt that globalization is contributing enormously to global prosperity” (World Economic Report, 1997), in the very same report that glowingly cited South East Asia, just months before it collapsed, as a model of development?

What about the bankers who echoed the IMF by investing all that money in Asia – did they know what they were doing? And where was all the corruption everyone now emphasizes, when “Business Canada” visited the region without even a whisper of any criticism or when we hosted the APEC Conference and actively silenced Canadian students daring to speak the truth?

How come no one cares much about the ordinary Joe’s mortgage problems but when the banks make a mistake, as they did in Asia, we’re so quick to bail them out and so comfortable using the ordinary Joe’s tax monies to do so, while also putting the squeeze on all the ordinary Joes in the Third World? Isn’t it interesting that, for all the talk about getting government out of our lives, when the big guys are in trouble it is governments they look to for help? I don’t know where this all takes us, but I do know that there is a frustration out there (and not just in Canada) that most of business has been too distant to notice and too arrogant to address.

In the US, The Washington Post (December 10, 1997), commenting on the defeat of Clinton’s attempt to fast-track the extension of NAFTA into Latin America, declared that “No longer do Americans take it for granted that an open economy makes everyone better off.” A columnist in The Los Angeles Times (December 28, 1997), considering the response to financial bailouts in both the US and Japan asserted that “the ordinary citizenry, in both the United States and Japan, is starting to figure out the abusive political economics involved.”

A New York Times poll (March 5, 1996) showed surprising numbers of people identifying themselves as “working class,” blaming “the economic system” for layoffs, and calling on the government to do something about layoffs. The strikes in France of 1995-96 were significant, not just for the support they had from workers, but the overall national support they had in spite of the inconvenience they caused. Reporting on one poll, the writer summarized: “Gone was the optimism of the mid-80s, especially among young people, who now said they distrusted private employers. There was a loss of faith in business.”

Canada, the protests across the country over the last few years, the recent “Days of Action,” and the Ontario teachers’ strike revealed a mood of resistance that no one anticipated. The Canadian banks have been embarrassed enough – and nervous enough – to respond with an advertising blitz to “educate the public.” But the patronizing use a small fraction of our own money to “re-educate” us into accepting a status quo that has failed us, is more likely to ignite anger than gratitude.

The ultimate response from business and its spokespersons to all of this is that at the end of the day “there is no alternative.” This may work for a while. It has worked so far. But I can’t imagine that it’s sustainable. It essentially admits that capitalism has no solution to our problems and so seems to condemn our current system, rather than defend it.

Capitalism has, historically, demonstrated many of the potentials of what humans can achieve. I happen to believe that what we have today isn’t the end of that story of human and social development. If the best we’re offered is that “there is no alternative,” then I suspect people, and especially young people, will eventually rebel as pent-up anger and frustration accumulate over the system’s inequity and hypocrisy, its failure to mobilize human potential, its steady erosion of any scope for actually influencing our lives, its increasingly irrational and fragile – and its general – small-mindedness. Any comfortable complacency is dangerously misplaced. At some point, the message a frozen status quo forces on people is that they “have no alternative but to radically change the system.”

I’m certainly not making any predictions about if and when this might occur, or, if it does, what form it might take. But if it does happen, I certainly won’t be surprised – and neither should anyone in this audience. For those of us in opposition to current trends, the immediate issue is to maintain and strengthen the checks that keep alive values and priorities broader than “competitiveness.” For others not quite on the same wavelength, there are still reasons for sensitivity to such concerns, whether out of self-interest over longer-term stability, or out of a genuine concern for what is happening in our society.

If anything is clear today, it is that a meaningful democracy demands institutional counterbalances to corporate power in the workplace, the community and in society as a whole. Among other things, this implies the deepening of unionization as well as more effective and active unions, opening up the increasingly monopolized media and communications, and greater thought to making all levels of government more accessible and responsive as instruments for addressing the needs, and developing the rights, of all its citizens.

IF I WERE PRIME MINISTER

Paul M. Tellier
President & CEO, Canadian National Railway

Annual meeting of the Canadian Chamber of Commerce, Calgary, September 21, 1993
Published in The Corporate Report No. 4 (December 15, 1993)

You have asked me to speak about our general political situation from an insider’s point of view, as if I were the prime minister. Allow me to say that I am a bit overwhelmed by this intimidating task. I have no doubt you will understand my reasons.

First, I have been privileged enough, having worked directly for three prime ministers, to observe the job from very close range and to understand it, hopefully, better than most Canadians. I have also come to know the difficult and complex character of the function. It calls for the wisdom and courage of the leader, the skills of the diplomat, the vigor and instincts of the politician, the understanding and compassion of the decision-maker and the indomitable will of the winner. The fact that we are in the midst of an election campaign also renders my task difficult. And finally, having had an extraordinary opportunity for seven full years to advise the former prime minister you may feel that I haven’t perhaps made the most of it.

Therefore, please bear with me, as I speak more in sorrow than in anger!

There is one further observation I wish to make at the outset, about excellence in politics. There were days when excellence in Canadian politics could only be attained through compromise. Times have changed and I am afraid that excellence in our political economic and social situation will owe more to policies that call for bold, vigorous and comprehensive actions.

There is another way to put it. In the next few minutes, I will sometimes be stating the obvious, putting forward some pretty “motherhood” proposals. Nevertheless, I am quite convinced that these proposals would appear most radical to a great number of Canadians. That is an indication of how difficult it will be to travel the road that lies ahead, and to develop a consensus about anything in this country.

Now what would be my priorities if, God forbid, I were prime minister? The following, not necessarily in this order:

1. I would ensure full protection of medicare.
But don’t get me wrong. I am not saying that we should not reduce the cost of the program. Quite the contrary. I’m saying we must uphold, promote and protect the cornerstones of the program, the five key principles of universality, portability, comprehensiveness, public financing and public administration. They have become, as they should, part and parcel of our system of social values.

To paraphrase some famous last words of the Royal Commission on Broadcasting: “The rest is housekeeping.” In this case, housekeeping calls for a great deal of attention, infinitely more control than in the past, a formidable dose of imagination and a steely will to recruit the provinces’ help and that of the medical professions in containing the costs of the program.

We all know that old ways will not breed new and different results. So this is a tall order that calls for strong convictions, good communications and superb management skills.

2. I would strive for a balanced budget.
This would be a very tough achievement, particularly since this goal should be pursued strictly through a reduction of government expenditures. We all know why this is so:

• Total tax revenues in this country now equal more than 37% of GDP

• That is about 10% more than in the United States, higher than the OECD average, and well above the levels in countries such as Britain, Japan and Germany. So there simply is no more room to maneuver.

The alternatives to raising taxes have been the focus of many government reports and initiatives, task forces and briefs. They include:

• A freeze on new spending

• A freeze on new or higher taxation

• A freeze on reductions in transfer payments to the provinces, or to individuals

• Elimination of many government programs and much greater productivity in many others

We have no choice:

• Our debt-financing costs are already high

• A significant part of our debt is foreign-held

• Our current account deficit is on the rise

• Our credit ratings are under pressure

We are in a bind. Not only aren’t we doing enough about it, but we are also failing to tell the story as dramatically as it should be told.

3. So, I would also have to reduce the size of the public sector.
This may sound surprising given my previous incarnation. My main regret as the former top public servant is not to have advised deeper cuts. The huge size – 20-some departments and more than 300 corporations, councils, boards, agencies and other institutions – is a massive drain on the federal budget, never mind the economy, and in more than one way. Unfortunately, government bodies sometimes have a tendency to feed on spending. As these bodies multiply, control of expenditures becomes more and more difficult. It nurtures over-regulation, which affects competitiveness and stifles competition. (More on that in a moment.)

One other thing about the public service: we must do away with its right to strike and replace it with more flexible means to maintain stimulating working conditions. We should have a good hard look at binding arbitration.

Don’t get me wrong. Most public servants are often overworked, underpaid, highly motivated and very professional. I am saying that there are too many of them and that we must do away with excess weight.

4. I would foster competitiveness.
I would do this in two ways. First, through what some call “framework policies” to help build a proper business environment:

• Through strenuous efforts to do away with interprovincial barriers, which, according to your own estimates, cost any four-member family approximately $1,000 a year, and the country $6 billion per year, or 1% of Canada’s GDP

• Through “sunset laws” or mandatory annual deregulation reports to the Commons

• Through reform of the Unemployment Insurance system, with the twofold objective of returning it to its original purpose as an insurance program and bringing it under stringent control

And second, I would foster competitiveness by investing in infrastructure:

• In our physical infrastructure – our roads, our bridges, airports, and our high technology communications systems

• And most important, by investing more effectively in our human infrastructure – our people

To do this, the federal government needs policies to revamp this country’s education system, taking into account, among numerous factors, the following:

• The general weakness of our secondary education system

• The redundancy or duplication of many university programs across the land and within provinces

• The fact that Canadian industry spends less than half as much on training its employees as American industry does, a fifth as much as is spent in Japan and an eighth as much as in Germany

• But most important, the fact that to maintain our standard of living, our economy has to become knowledge-driven

5. Then, if you will allow, I would fix the transportation system.
There are two key factors needed to do so. The first is deregulation, to bring about greater freedom to the industry. The second is government and public support so that the industry can use this freedom in the most responsible way. The timid Canadian deregulation, as compared to that in the United States, has pitted our industry against fierce and barely sustainable competition. The main goal is to do away with the over-capacity that is inflicting tremendous losses to the entire sector: road, air, railroad, water and high-seas transportation. If the new prime minister were to agree to what is suggested here, there is no doubt in my mind that senior management at CN would rapidly succeed in turning the situation around.

6. I would reassess and reposition Canada’s foreign policy.
Two of the traditional pillars of our foreign policy, the UN and NATO, are being shaken by recent world events. The UN is painfully trying to adapt to the post-Cold War era. It is quickly losing credibility while seeking a new and useful role. Its lack of effectiveness in Somalia and Bosnia has been shameful.

While strongly pursuing its bilateral interests, Canada must return to the very foundation of its foreign policy and promote the reform and strengthening of the UN.

The case of NATO is no different. It is in search of a role, perhaps more politically encompassing and less military. Here again, the debate is ongoing. Is the political West a concept of the past? Does the future of the Alliance lie in an expansion to the East? Or, as Foreign Affairs puts it, “Should the West go East?” We must play a key role in these debates.

7. I would use every possible means to help improve media quality.
Despite its best effort, I consider that the quality of our media is not up to the importance of our needs.

• It is generally longer on freedoms than on responsibility.

• It is often more entertaining than informative.

• It is overwhelmingly attracted to perceptions, as we seek to grope with realities.

• It is more eager to publish opinion pieces than factual reporting. And it is big on gossip, small on context.

• Although potentially one of the most powerful institutions in a democratic society, it is also one of the least accountable.

I am not advocating regulation of any kind. But government must go out of its way to help the public contribute to a stronger and better media. It should support training. It must encourage every effort to strengthen press councils and journalistic foundations. It must debate and challenge the media and, if warranted, facilitate the establishment of media-watch foundations. All of this can be done in the fullest respect of what the media considers its sacred trust. Finally, I would expect a number of you to become active members of press councils and foundations and to support them financially.

8. The driving forces.
There are two inescapable conditions to drive home such a program or, for that matter, any program of the sort. They have just as much to do with context as with content. I would devote tremendous energy and enthusiasm to what I consider two of the most imperative challenges facing this country:

• Restoring credibility to the Canadian political process

• Convincing my fellow citizens that Canada is a wonderful idea, a fabulous country, worthy of their energy, deserving of their passion, and open to their ambitions

Ethics is the key to restoring credibility to the political process. And ethics is being undermined by opportunism, ambition, the quick fix, a taste for money and social climbing, and occasionally, some pressure groups and lobbying tactics. It is falling victim – temporarily, one hopes – to the clash of changing value systems.

The lack of ethics is evidenced daily in the political process, the business sector, the education system, the professional services, social programs, the fiscal burden and sometimes, most unfortunately, even the affairs of church and justice. This is, in my view, one of the most corrosive problems of modern Western societies.

We must turn the tide. If programs and policies will help, we should adopt them. But attitudes and behavior will go a longer way to restore ethics not only to policy-making but also to the content of policy. The government must become the unfailing proponent and practitioner of these attitudes.

The driving force of my program: love of country.

Canada is a worthwhile ideal. It calls for the best from all of us: generosity, tolerance, a sense of sharing, a taste for adventure, a longing for excellence. It is also, or should be, a permanent and exhilarating exercise in nation building.

Any credible opinion poll will reveal that deep down, in all parts of Canada, bar none, love of country supersedes regional loyalties.

We must build on that rock. Love of country is nurtured by knowledge of country. We must devise policies, which will give our children opportunities to travel and experience the breadth and range of Canada. We need to develop national and international exchanges and to encourage every Canadian to visit the National Capital once in a lifetime.

We must promote the very values that are at the core of Canadian life. We must extol the wealth of our cultures, the variety of our social fabric, the complementarity of our regional economies, the stirring beauty of our geography, the wonderful privilege of our way of life.

To all Canadians, we must show the flag of this vibrant country.

In these endeavors, I wish our new prime minister courage, wisdom, strength, the best of luck, and your important and energetic support!

CN’S RECOVERY

Paul M. Tellier
President & CEO, Canadian National

The Board of Trade of Metropolitan Montreal, November 8, 1994
Published in The Corporate Report No. 10 (February 15, 1995)

In 1850, CN’s predecessor, the Grand Trunk Railway, was already established in Point St. Charles, with shops covering an area of 30 acres. And the first railway ever built in Canada, the Champlain and St. Lawrence, linked Saint-Jean on the Richelieu River, not far from here, to the St. Lawrence River as early as 1836. Today, Montreal can still boast, and rightly so, of being the railway capital of Canada, as the country’s three major railways moving freight and passengers are headquartered here.

CN is today a major economic force in the Montreal area and elsewhere in Quebec. We contribute $1 billion to the Quebec economy: $500 million in salaries and benefits, $300 million in purchases, $100 million in taxes and $100 million in pension benefits.

Thirty percent, or 8,000, of CN’s 28,000 employees are employed in Quebec, and of these, more than 7,000 live right here in Montreal, which has been home to our headquarters since 1923. Roughly 30% of our Montreal employees are professionals. And approximately 68% of CN’s management staff is based in Montreal. The company ranks 25th among Canadian corporations, with revenues of $4.2 billion.

A number of you are CN customers or suppliers, and the future of CN may have direct consequences on the success of your own businesses. I know that many of you, like millions of other Canadians concerned about our national railway and rail transportation in general, are wondering about the future of one of the largest and oldest employers in this city.

Today, I would like to tell you, in the most direct and honest way I can, about Canadian National’s situation when I took the helm two years ago, and about the radical recovery plan that we have been working on since then to ensure the long-term profitability of the corporation.

We had to quickly find solutions to several pressing problems, including:

A management philosophy:

• That was focused more on deliberation than action

• That had little innovation or initiative

• And that was very hierarchical and inward-oriented

Fixed costs that were too high:

• Too many employees, accounting for 48% of our labor costs in Canada and 40% in the US

• Under-utilization of our network, 45% less than in the US

Finally:

• Inadequate customer service

• Strained labor relations and rigid collective agreements

To solve these problems, we have taken some aggressive measures, among them:

• A senior management restructuring beginning in January 1993 and including the elimination of five vice-presidencies

• A reduction in the number of management levels. Where there used to be 11 levels, there are now no more than five levels between the executive level and any employee, which has considerably improved internal communications and the decision-making process.

• The elimination of 11,000 positions over three years, announced March 1, 1993. Now in the second year of the program, we are right on target, and 70% of the announced cuts will have been made by the end of this year.

• The rationalization of our network through the sale or abandonment of money-losing feeder lines, which, in many cases, could be more efficiently and economically run by short line railway operators.

We’re not out of the woods yet, but I am very proud of the progress we have made so far, and I am very encouraged by our financial results for the first nine months of this year. Compared to a loss of $41 million during the first three quarters of last year, CN has recorded a $186 million profit for the same period this year. Our net income for the third quarter was $95 million higher than for the same quarter last year. I am confident that this trend will continue and that we will record a very impressive profit this year.

Productivity is also up by more than 7%, which is the equivalent of a $70 million reduction in expenses, and this is another source of pride for all CN employees. Although these results are insufficient to ensure long-term profitability, they clearly indicate that we are on the right track.

As you have probably guessed, this dramatic recovery – a $227-million turnaround in just one year – did not happen on its own. It is, of course, not only the result of the improved economic situation in North America in general, but also of the sustained and dynamic efforts that have been made over the past two years. We shall continue to make these efforts with the same degree of determination until we are sustainably profitable.

Over the next few years, we will also be faced with other serious problems that will require forceful decisions. Our two biggest priorities for the time being are improving competitiveness and controlling costs.

To address our first priority, improving competitiveness, our efforts will be dictated by the laws of competition, notably by the new forces which have considerably changed and which will continue to transform the international marketplace.

Canadian National is the largest railway in Canada and the sixth largest in North America in terms of freight volume. We serve approximately 15,000 customer locations and move roughly 130 million tons of freight yearly over an average distance of 1,300 kilometers. CN hauls one half of Canada’s wheat, coal, and potash exports, a value of $7 billion, and some $40 billion worth of other export products, or 30% to 40% of the shipments of Canadian manufacturers. These include pulp, newsprint, aluminum and cars.

The efficiency of our services thus directly impacts on Canada’s balance of trade and on the success of thousands of Canadian exporters who depend on low-cost, on-time delivery of their goods.

For many years now, Canada’s various levels of government have put considerable effort into expanding our access to world markets, particularly our largest market south of the border. Canadian businesses have, for their part, reoriented their strategies in order to benefit from the new possibilities opened up by global trade liberalization.

To adequately serve our customers and help boost Canadian exports in this new competitive environment, Canadian National must offer the most reliable, efficient, and economical service possible, which is the fundamental objective of our overall recovery plan.

Our second priority, reducing costs, is an important factor in improving our competitive position. Between 1983 and 1993, weekly salaries paid by Canadian railways jumped by 66%, one of the highest increases in Canadian industry. Average weekly salaries of railway employees are also considerably higher, by more than 50%, than their counterparts in the trucking industry, our direct competitor. And despite a significant increase in productivity, our collective agreements are, in many instances, so rigid that they hinder our efforts to develop greater versatility among our employees.

To achieve these two immediate goals, we have developed and begun to implement a strategy that includes the following:

• Reducing costs by $100 million over each of the next two years

• Converging all our activities towards a customer-driven focus

• Investing heavily in intermodal transportation services

• Building a new tunnel under the St. Clair River, which will shave 12 hours off the Toronto-Chicago trip time

• Implementing a new $100-million information system that will allow us to track customer shipments at all times and at all locations on the network

• Completely realigning our marketing approach

Many of these initiatives require the close cooperation of our employees and their representatives because they directly affect traditional CN work methods and are aimed at instituting a new customer-oriented culture. We hope to avoid the futile labor confrontations that have hurt us so badly in the past and develop a new cooperative and trusting relationship with our unions, based on our mutual interest in the long-term survival of CN.

We particularly hope that this approach will enable us to negotiate new collective labor agreements that will give us increased flexibility in the assignment and optimum use of our workforce.

The success of our financial and operational recovery efforts, along with new growth in the railway industry, lead me to believe that, among all of the options available to us, privatization is the best solution for CN, its employees and its customers.

In just two short years, we have demonstrated that we can put CN on the road to sustainable profitability and offer leading-edge service to our customers. I am determined to make CN the most efficient and economical rail system in Canada.

I am pleased by the federal transport minister’s decision to assemble a parliamentary task force, which is currently studying the possibility of privatizing CN North America and the feasibility of employee ownership. In my opinion, this latter option would be an excellent way to build a more solid partnership with our employees.

I am also pleased that the task force will allow all individuals and groups interested in the future of CN to voice their opinions and suggestions, and I strongly encourage the Chambre de Commerce de Montréal to take part in the task force’s activities. I, for one, firmly intend to continue expressing and implementing my profound conviction that we can transform Canadian National into a company that all Canadians can be proud of and rely on.

CN is a national institution with close ties to this country’s history. It has played an important role in the economic security of several generations of Canadians. I am constantly reminded of CN’s glorious past and its contribution to the prosperity of countless Canadian families every time I meet people who tell me that they are second or third-generation CN employees.

It is out of respect for this heritage and in order to continue the work of the thousands of men and women who have given their best over the years that I am determined to make CN the best railway in Canada.

CLEARING THE TRACK: PREPARING CN FOR A NEW ERA IN RAILROADING

Paul M. Tellier
President & CEO, Canadian National

The Vancouver Board of Trade, September 12, 1995
Published in The Corporate Report No. 14 (October 19, 1995)

The fortunes of CN and Vancouver are intimately intertwined. With an ocean in front of you and five railways at your back, you have become the third highest tonnage port in North America, and the highest tonnage port on the West Coast. Vancouver does not measure its success simply as a major Canadian city. You must be a major Pacific Rim city: the best, in my view, of any on the West Coast of North America.

Vancouver is most critical to the success of CN. We earn about $700 million in revenue from goods we ship to and from this city, everything from grain and forest products to coal, sulfur, potash and intermodal. Almost three-quarters of these products are bound for Asian markets. You are the link to the booming markets of the Pacific Rim. For CN, Asia begins here. Like you, CN must also look beyond parochial borders to measure itself. We cannot rest on our laurels as the largest railway in Canada. We’re a North American company, with 38% of our traffic moving across the border with the US. Our customers compete in a global economy, and to help them compete, we must strive to be among North American leaders in providing low-cost, reliable rail transportation.

And in this regard, CN is about to embark on a new era in its 75-year history. This is the first occasion I have had to speak to an audience about how we have been preparing for the future, and Vancouver is one of the best places in the world to share these thoughts. This is, after all, perhaps the most outward-looking city in Canada. Here, at the edge of the Pacific Rim, you contemplate the economic prospects on the eve of a new century – a Pacific century.

Before I describe for you what we have done to prepare CN for privatization, let me first say a word about why competitive railways are important for you. Vancouver’s Pacific gateway loses a great deal of business to the competition in the United States. Even Canadian shippers – especially intermodal shippers – use American ports of entry like Cherry Point and Seattle/Tacoma. In fact, over half the intermodal containers from Asia destined for Eastern Canada enter through American ports and use American railways.

There are a number of reasons why. One of the most important is the quality of the American rail system. Since 1980, when the United States deregulated its rail industry, American railways have made the investments and the strategic decisions necessary to renew and revitalize.

For years, the Canadian rail system has operated at a significant disadvantage. The regulatory playing field has been tilted against us. This not only affects the railways themselves. It affects the shippers who need efficient, cost-effective, reliable rail transportation to compete. Canada’s railways need the flexibility to make the tough decisions necessary to renew and revitalize our networks. Otherwise we’re not going to be able to compete effectively with the Americans – and neither will Canadian shippers.

Let me give you one example of how Canada’s regulatory framework creates problems. Our line abandonment regulations make it exceedingly difficult to sell feeder lines to short-line railways. Our core network carries 92% of our total volume, but includes only 39% of our total trackage. We must divest some of our light-density feeder lines. Many could be run at a profit by short-line railways.

But the regulatory environment in Canada makes it so difficult to divest lines that, where the American railways have converted more than 20,000 route miles to short lines over the past decades, Canadian railways have converted less than a thousand.

Significant regulatory reform will enable CN to complete our program of restructuring. We need changes to the regulatory environment to cut costs and improve efficiency. We need the freedom and flexibility to provide customers with the low-cost, reliable service they require to compete. We must be allowed to earn our cost of capital.

I am very pleased that the minister of transport has introduced regulatory reforms that will help us approach parity with the competition in the United States. Regulatory reform is good for the Canadian railway system. And it’s good for Canadian shippers who need a modern, efficient railway network.

The minister understands this. He deserves the support of Canadian industry in his efforts, and I hope that the business community in Vancouver will see the importance of his regulatory reform to the future of this city.

The regulatory reforms have been long overdue. They come at a time that corresponds with the end of one chapter in CN’s history, and the beginning of a new one. The old chapter began at the end of the First World War when several Canadian railways were amalgamated into one Crown corporation, the longest railway network in North America. The new chapter will see us build upon the strengths of the past 75 years.

We will, of course, continue to be the only railway to serve Canada from coast to coast. And we are determined to continue to be a source of competitive strength for our customers in a global economy. Above all, we are dedicated to completing our turnaround strategy of reform and renewal. The strategy has three core objectives:

• Reduce costs

• Improve customer service

• Target capital spending to support the goal of developing a low-cost, highly reliable railway

To implement the strategy we have reduced employment by 11,000 – one third of our workforce. We have shrunk our management layers from eleven to five, and our regional headquarters from five to two. We have signed new agreements with our unions that give us more flexibility to build a workforce for a modern, efficient rail industry. We have signed strategic alliances in the transportation industry, so that, together with trucking firms and other railways, we can offer door-to-door delivery throughout North America. We have improved customer service by offering scheduled service on some routes. We expect to implement fully scheduled service across the network by the end of next year.

Our targeted capital spending has included building the most advanced computer railway system in the world, as a first step in managing scheduled service. It has also included $40 million to handle double-stack container traffic to and from the lower mainland and the Port of Vancouver. We built our Vancouver Intermodal Terminal, which we are now expanding with an additional $4 million. Our intermodal volume increased by 77% since we opened the new facility in the fall of 1992. So far in 1995, we’ve enjoyed a further 25% increase in volume. We are also an active partner in the development of the new $226 million container terminal at Deltaport to be opened next year.

The three-pronged strategy – cutting costs, improving service, and targeting our capital spending – has yielded results. On the strength of our turnaround, CN achieved the best profit improvement in the North American rail industry in 1994 – from a loss of $79 million in 1993 to a net profit after tax of $245 million in 1994. Our productivity shot up 8% and we cut our operating ratio to below 90%.

This is the situation at the end of one chapter in CN’s history. It is a chapter that leaves the company in a stronger position than at any time in our history.

In last February’s budget, the Government announced its intention to sell CN. In preparation for the initial public offering, we announced two weeks ago our plans to restructure the company’s finances. They include:

• First, a write-down of $1.3 billion in CN’s balance sheet assets, based upon a re-evaluation of the book value of our network in Eastern Canada

• Second, a reduction of more than $1.4 billion in CN’s long-term debt

The restructuring leaves CN with a debt-to-capital ratio of about 40%, which sends a strong signal that CN is poised to take its place with a solid financial footing among the private-sector railways of North America. The restructuring is good for the company. Above all, it’s good for shippers who count on the future of a viable rail industry.

We are reducing our long-term debt by $1.4 billion. We are accomplishing this by the sale of non-core assets and transferring to the Government various commercial real estate assets, including Toronto’s CN Tower. This gets us out of the real estate business and enables CN to focus on our core business: running a financially sound railway. In the parlance of the industry, it makes us a pure rail play.

CN’s privatization helps us get on with the job of competing in the North American economy. We’re getting ready to go toe-to-toe against the Class 1 railways in the US.

The proceeds of the sale of CN will go to the Government of Canada. This is the context in which Canadians should examine the Government’s decision to reduce CN’s debt. This is a sound business decision. The Government is counting on earning back what it has paid – and more – from the proceeds of the sale, and Canadian taxpayers will be further ahead as a result.

Unlike the sale of Air Canada in 1989 or Petro-Canada in 1991, the Government will not retain any holdings. We will become a private-sector company, straight and simple. Furthermore, the Government has not placed any restriction on foreign ownership of CN, as it had with its previous offerings of Crown corporations. Our restructuring program was announced together with the financial results for the first six months of 1995. The operating figures show that our revitalization is well on track. Without the write-down and other special charges, CN’s income statement would have reflected a growth of 14.2% in its operating income for the first six months. Traffic levels rose by 3.4% and revenue increased by 2%. Most importantly, labor and fringe-benefit costs decreased by 6.1%. This saving of $50 million reflects our efforts over the past three years to cut 11,000 jobs from the payroll.

The company’s operating ratio improved to 89.1% for the first six months, compared with 90.3% for the first half of 1994. We were able to make this improvement in spite of the effects of the nine-day work stoppage last March. This shows improvement, but it is not yet to the performance level of Class 1 railways in the United States. We are starting to close the gap, and that is why, as part of the announcements made two weeks ago, we gave notice that the new, privatized CN will tie management compensation to performance. We also announced that all of CN’s employees will have the opportunity to participate in ownership of the company. CN’s share-purchase plan will help eligible employees obtain equity in the company that they have helped to build.

We’re proud of our railway. We know its value to our customers. These customers range from coal and forest products to grain, fertilizers, and chemicals, petroleum and automotive products to intermodal containers. These customers have grown to count upon our ability to deliver throughout the continent, thanks to our strategic alliances. They value our reputation as one of the safest railways in North America.

I am confident in CN’s future. I believe in the future of railways as profitable, durable businesses. I believe that railways are in business for the 21st Century. I believe that railways are part of the competitive strength of any Canadian business that relies upon efficient, cost-effective transportation.

CN’s success in the private sector will depend upon four key ingredients:

• A reasonable and stable labor regime

• A sound capital structure

• A good, profitable business plan

• A fair regulatory environment

We have addressed the first three ingredients. We hope that the Government will soon provide the fourth. Our restructuring, combined with the anticipated reform of rail regulations, clears the tracks for CN’s future. We’re looking forward to what that future holds. And here, at Canada’s gateway to the Pacific Rim, I can feel the pulse of Canada’s trade with the world, and I know that our railway and your city will be partners for many years to come.

48 HOURS: A COMMUNICATIONS CASE STUDY

Paul M. Tellier
President & CEO, Canadian National Railway Company

The Canadian Public Relations Society 1998 Conference Montreal, May 25, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

AS YOU MAY be aware, public relations owes much of its origins to the rail industry. At the turn of the century, railways in the United States turned to the first modern communications professional, Ivy Lee, to help turn around public perception of their safety record. At the time, the railroad policy was to refuse information to the public about rail accidents. Lee persuaded management to try transparency: facilities for the media, distribution of information for the public, access to the site for reporters. Many railroaders considered this to be “reckless indiscretion.” Later they had to admit it produced fair comment. Lee was on his way to building a legend as a public relations man, and railways were on their way to a new era of communications.

Four strategic principles that Ivy Lee laid down seem as relevant at the end of this century as at its beginning.

• First, align yourself with the public interest

• Second, flow your communications from the executive level, and insist on the support and contribution of managers

• Third, maintain open communications, particularly with the media

• Fourth, build relationships with all stakeholders

Today, these premises seem self-evident to your profession. When you look back over half a century of your organization, the basic principles remain the same. The challenge is still to deliver the right message to the right people in the right order at the right time. And yet, the environment has changed. Modern public relations is subject to the same forces that have created a global economy. Time is compressed. The number of audiences is expanding. More must be done, and done faster. And the speed and reach of communications makes the penalty for failure higher. It is very difficult to counteract misinformation. Correcting wrong information is next to impossible when it is stored in electronic databanks around the world. But when communications is done right, it can also sustain its own momentum.

Today I would like to provide you with a case study that involves two recent announcements by CN. The first was the CAD$3-billion merger signed last February with the Illinois Central Railroad – IC. The second, a combined announcement of a marketing alliance between CN, IC and the Kansas City Southern Railroad, and an access agreement with Kansas City Southern. The announcements took place at a time when railway mergers have been very much in the news in the United States. The industry is consolidating. At the beginning of the 1990s, there were seven big American railroads. There will soon be only four: two east and two west of the Mississippi.

Concerns have been raised about these mergers. To avoid being stalled or sidelined, we had to make sure that our message was well understood by customers, regulators and our peer railroads in North America. This brings me to the first principle I mentioned earlier: align yourself with the public interest. We had to demonstrate that our merger and alliances were in the public interest. We had to convince the various stakeholders using a simple story line. We explained that the CN-IC merger was the perfect fit at the perfect time. The perfect fit, because the two railways complement each other end-to-end, meeting in Chicago. The perfect time, because it gives customers the opportunity to take advantage of growing north-south traffic patterns. The CN-IC merger is about growth. It combines strength to strength in the two railways, and is driven by the needs of our customers. We knew our merger and alliances were in the public interest because they promoted competition. The challenge was to ensure that these simple messages formed the basis of our story line.

The second principle is to flow communications from the top. This idea has been around for a long time. In practice, however, it too often results in executives reciting lines produced by their communications professionals. I believe the process must go further. Modern CEOs must be intimately involved with the messaging. They must be able to speak with the conviction of the head and heart. They must apply their own values and perceptions to the story line. They must provide their unique understanding of the issues.

Getting our merger and alliance messages right and delivering them to the right audiences required the commitment of the most senior people. In fact, the night before the alliance with IC and KCSR was announced, I sat in a room in Washington with my colleagues, the CEOs of the other two railroads. Together, we three produced the key messages we were to deliver the next morning. We had the advice of public relations professionals. We had the help of a facilitator. But in the end, it was up to the three of us to boil down the communications package to these simple, positive messages each of us could state with conviction. First, the alliance provided greater reach for our customers, from the Atlantic to the Pacific to the Gulf of Mexico. Reach that gave our customers access from Montreal to Mexico City. Second, the alliance reinvigorated the industry by providing more competition. And third, it created more capacity in the industry, and less complexity for our customers. These messages were supported by detailed communications for customers, media, and government officials, as well as extensive Q&As. This backup material came from professionals. The key messages came from the top.

The third principle is to maintain open communications. Openness and transparency should be more than communications strategy. They should become a core value for a corporation. The speed of modern communications technology places tremendous pressure on open communications – and on the need for discretion until the time is right. If you don’t get your message out quickly to all your target audiences, someone else will beat you to it. Their spin will be different than yours. You’ll be left with a communications nightmare, simply to clean up the misinterpretations. And so, in the case of our two announcements, we made sure that, beginning on announcement day and carrying over to day two, we talked to all our target audiences. We talked to them in person. Among the calls made in the first 48 hours following the announcement were conference calls to both CN’s and Illinois Central’s employees. We also made a 1-800 number available for employees who had particular questions. This is in keeping with the fourth principle: build and maintain relationships with stakeholders.

To illustrate stakeholder relations, let me give you an idea of the rollout plan for the announcement day of the proposed IC-CN merger on February 10, 1998. That morning, we finalized all press material and I met with my executive committee at 9:00 a.m. here in Montreal. In the afternoon we issued a media advisory. At the close of market, we placed calls to selected government officials – both elected and non-elected – in Canada and the US. When the stock markets closed at 4:00 p.m., we issued our news release by fax and on our website, and we called the relevant stock exchanges. Our televised press conference with Montreal media took place at 5:00 p.m., followed by a conference call for US and other Canadian media. The call attracted journalists from New York, Washington, Chicago, Memphis, New Orleans, Vancouver, Toronto, Edmonton and Montreal. We reached all the people we needed to reach.

Then from 6:00 p.m. until 8:00 p.m., CN and IC public affairs professionals and customer account managers were on the phone to key contacts in both Canada and the US. We talked to all key customers, all levels of government in both countries, union leaders, and media in Canada, the United States and overseas. That night I flew to New York City. By 5:30 the next morning, we saw that we had two articles in The Wall Street Journal, and we had made The New York Times, The Financial Times of London, and every major daily in Canada and the United States.

By 6:30 a.m., I was in the New York studios of CNN for a live interview. At 8:45 a.m. we were briefing financial analysts and taking questions from those in the room and those connected on an open phone line. Immediately afterward, we moved to breakout rooms for one-on-one meetings with major shareholders. By 11:30 a.m., I was on a conference call with the top 200 officers at CN to discuss the merger and again take questions. That afternoon we flew to Washington, where we met with senior officials. Then in the evening we flew back to New York. The following morning we held one-on-one meetings with major shareholders. Over the noon hour, I was in the offices of The Wall Street Journal explaining our position in detail. That afternoon we met with the bond rating agencies.

That was the rollout for the merger with Illinois Central last winter. The announcement last month of the alliance with Illinois Central and Kansas City Southern followed a similar agenda. The major difference was we initiated our rollout in Washington.

Was our rollout strategy successful? The first indication that it worked was the positive response from the stock market. The second indication was the positive response from CN and IC employees and our customers. And the third indication is that the media have universally reported positive stories about the merger and alliance that use our basic messages and story line. These stories continue until this day.

The final test will be whether we have achieved the momentum that will see our projects through the regulatory process in the United States. This will take another year. But in the meantime, I am confident that we used communications to our best advantage. We took control of the messaging. We stuck to the messages.

What lessons can be drawn from our experience?

First, because information today moves at blinding speed, the rollout of an announcement must cover all key audiences within a very short time. We touched all our bases within 48 hours.

Second, the messages must be distilled into their very simplest form – their essence – and must be communicated in a compelling story line.

Third, announcements are not regional or national any more. They’re global. It matters what The Financial Times of London reports. It matters what the investment communities across the continent think.

And fourth, perhaps my most important message today, communications must engage the most senior levels of the company. Without their full commitment and cooperation, the message will not be delivered in a credible way.

Communications is not an afterthought to a transaction – a way to explain it to outsiders. In the 1990s, communications has become the transaction. Needless to say that a business story cannot be told effectively unless it is based on impeccable logic, good economics, and rational arguments.

A TRADING COMPANY IN A TRADING NATION

David P. O’Brien
President & COO, Canadian Pacific Limited

The Canadian Club of Montreal, February 19, 1996
Published in The Corporate Report No. 17 (April 30, 1996)

The prosperity of Canadian Pacific remains closely linked to the prosperity of Canada. My job is to ensure that CP continues to prosper, and so help Canada to prosper. As an energy, transportation, real estate and hotel company, CP reflects conditions throughout the Canadian economy. Our revenues and profits are directly impacted by public policy decisions on taxation and trade, monetary policy and currency exchange rates, regulation and deregulation, privatization and investment regimes.

Canadian Pacific has had links to Montreal since its founding in 1881. It used to be said that you could come to Montreal on a CP passenger ship, stay in a CP hotel such as the one in which we’re meeting today, send a telegram via CP telegraph, and take a CP passenger train or plane to your next destination. The story is even told of a tourist checking out of a CP hotel who asked the time in Vancouver and was told: “It’s 11 a.m., Canadian Pacific Time.” His rather startled reply, “Good heavens, don’t tell me you own that here, too.”

CP Limited is a very different company today. If you arrived on a CP ship today, you would be a crew member of a cargo vessel coming into our thriving container terminal in the Port of Montreal. You’d be a welcome guest here at the Queen Elizabeth. Out your hotel room window you could see several modern Montreal office towers owned by our Marathon Realty subsidiary, including 1250 René-Lévesque (the tallest office building in Montreal), l’Édifice La Laurentienne next door and Place du Canada. You could walk across Place du Canada to the new Molson Center, built on CP land.

Though CP Rail is moving its headquarters to Calgary, the Eastern Operations will be consolidated at Windsor Station. The separate Eastern Operating Unit will have as its mandate to turn a money-losing operation back to profitability. Among the issues that need to be addressed are duplicate infrastructure with CN, high labor costs and high levels of taxation. A railway runs on capital investment. It has to earn the cost of capital in order to justify the hundreds of millions of dollars of new investment that it requires each year. Our railway has not been doing that.

Ian Sinclair, a former chairman of CP Limited, was known for his directness and his focus on business issues. As he told an annual meeting in the mid-1970s: “The principle that business cannot remain healthy without adequate returns remains as valid as it was nearly a hundred years ago.” The reorganization of CP Rail System has been ongoing for the last five years. Its management structure has historically been hierarchical, even militaristic. We’ve reduced 12 layers of management to a maximum of six and we’re focused on productivity and efficiency across our network.

There have been two issues that have plagued the prospects of Canada’s railways. One is chronic over-capacity, especially in the East. Too much track and other infrastructure for too few customers and too few goods. The other is the issue of public versus private ownership. The question of CN’s privatization has been around since its Grand Trunk days in the First World War. As long ago as 1919, the great CP Chairman Sir Edward Beatty observed: “Nationalize in haste, repent at leisure.” It was not until 1995 that CN was finally privatized, so government clearly repented at leisure over the last three quarters of a century, and at a great cost to the Canadian taxpayer.

But today I say to Paul Tellier: welcome to the private sector, congratulations on a job well done in taking CN’s share issue to the equity markets, and we look forward to healthy competition now that CN is subject to market disciplines. The one issue that privatization did not resolve was the continuing problem of over-capacity in the East, and both CN and ourselves will need to examine how to rationalize the Eastern network in the most sensible fashion.

The issues for both railways are competitiveness and productivity, and in a North American context. Deregulation and the market forces of free trade are very much in play in the railway business and our other businesses as well. That’s not just an issue for Canadian Pacific, but for Canadian business as a whole. Canada has doubled its merchandise exports to the United States in seven years under the Free Trade Agreement and the NAFTA, from just over $100 billion in 1988, to over $200 billion in 1995. Quebec more than doubled its exports from $16 billion to $33 billion. Ontario exports rose from $56 billion to $109 billion. In the critical automotive sector, exports of passenger cars to the US virtually doubled from $16 billion to $31 billion in three years alone from 1991 to 1994.

These numbers will continue to grow. When I graduated from what is now Concordia’s Loyola campus and entered McGill law school in the early 1960s, Canada exported only one-sixth of its output. Today, our country exports more than 35% of its GDP, and the value of trade is forecast to exceed 40% of output before the end of the decade. Canadian Pacific is a trading company within a trading nation. About 55% of Canadian Pacific Limited’s revenues are derived from trade. About 70% of CP Rail’s revenues are generated in the US or from moving goods destined to export markets. In value, the goods carried by CP Rail and CP ships are worth about $25 billion.

In volume, PanCanadian Petroleum now exports about half its natural gas production and fully 66% of its crude oil output of over 140,000 barrels a day. PanCanadian’s exports to the US have more than doubled under free trade. And Fording Coal exports virtually all of its shipments of some 12 million tons of metallurgical coal. At CP Hotels, Canada’s largest hotel chain, over 40% of the business is from non-domestic visitors. It has always been that way. Sir William Van Horne, who pushed the railway through the Rockies to the Pacific, knew this when he said: “If we can’t export the scenery, we’ll import the tourists.” Across the board, CP is doing things that are contributing to the economy, contributing to the ability of Canadian industries to compete and flourish in world markets, and creating value for Canada and Canadians. So a healthy Canadian Pacific is indeed synonymous with a healthy Canada. But like Canada, Canadian Pacific has had to adapt to changing circumstances.

The last 10 years have been demanding for CP, but we are better positioned today than any time in recent memory. We are proud of our history, but focused on the future. We’ve transformed ourselves from a broadly based conglomerate overseeing disparate groups of businesses into a more narrowly based company focused on transportation, energy, real estate and hotels. During the Sinclair era, CP diversified into a wide range of businesses. During the decade that Bill Stinson has been our Chairman and CEO, the business has been transformed again as economic realities required that we focus on our strengths.

In the last few years, we’ve got out of the airline, forestry, steel, metal mining, food processing, telecommunications and trucking businesses. We’ve also significantly reduced our exposure to real estate, where we are now focusing on Canada’s three largest cities: Montreal, Toronto and Vancouver. Equally important, but less obvious, are the measures we have taken, including huge capital investments, to bolster the competitive positions and prospects of our remaining businesses. This has been the more hidden component of our restructuring.

We’ve built a family of strong operating units by focusing on competitive strengths, low-cost operations and improved productivity. Today our subsidiaries all have solid management teams, strong financials, leading competitive positions in their industries, and solid strategies in place to prosper in a world of free trade and globalization. And, we are now focused on building shareholder value by getting more out of what we’ve got. What we’ve got, in transportation, energy and real estate and hotels, is one of the strongest business portfolios in the Canadian economy, with assets of $16 billion, sales in 1995 of about $8 billion and operating income before unusual items of $1.2 billion.

In the transportation segment, CP Rail and CP Ships are well positioned to profit from trade liberalization and globalization. CP Ships is a niche player, focusing on the Port of Montreal as its North American gateway. And what a niche player it is! It has tripled its capacity and cargo, so far in the 1990s, to become the largest container carrier between North America and Western Europe and one of the most profitable shipping companies in the world.

Similarly, in the energy sector, PanCanadian Petroleum and Fording Coal are poised for significant growth in the remainder of this decade and into a new century. PanCanadian, where I spent five years as CEO before joining CP Limited just one year ago, is one of the premier growth companies in the Canadian energy industry. It has doubled production in the last four years, becoming the second largest producer of crude oil and natural gas in Canada, and ranking second only to Imperial Oil with a market equity value of over $6 billion. To put it in context, Petro-Canada has a market value of $4 billion, some 50% less than PanCanadian. Just the additions to proven reserves in 1995 alone were equal to the total reserves of Canada’s fifteenth largest oil and gas company. With proven reserves equivalent to more than 900 million barrels of oil, PanCanadian is positioned for significant long-term growth.

Fording Coal Limited is Canada’s largest producer of metallurgical coal for export. Fording ships over 12 million tons of coal annually, almost all of it on CP Rail, to the Port of Vancouver. Most of Fording’s export production is to Japan and the Pacific Rim, but it also has growing markets in South America, Europe and the Mediterranean. Fording hallmarks are cost competitiveness, sustained profitability and strong growth. It has more than doubled its productivity in the last 10 years, and production is increasing at a rate of 10% to 15% per year. As one of the most cost-efficient coal producers in the world, it has sustained increasing profit levels despite generally declining coal prices.

Just last month, Fording finalized plans to build the world’s largest wollastonite mine and processing plant in Mexico at a cost of more than US$100 million. Fording, through its NYCO subsidiary in the US, is already the world’s largest producer of wollastonite and has a dominant position in the high-end of the market. You might ask, what is wollastonite? It’s a mineral with a unique crystal structure that is finding rapidly growing uses in the plastics industry, like the plastic trimmings on your car.

PanCanadian, and particularly Fording, aren’t as well known as they might be here in the East. That’s understandable. They don’t operate here. But believe me, we know their value in the CP portfolio, and we know their potential in a world that demands increasing amounts of energy, and in a world of ever-growing export markets.

CP Hotels has invested hundreds of millions of dollars in upgrading our heritage hotels and resorts across Canada, including the Queen Elizabeth and the Château Frontenac here in Quebec. On the resort side of the business, we’re involved with Intrawest in the development of a 308-room conference hotel at Mont Tremblant that is scheduled to open in time for the 1996-97 ski season. And we shouldn’t forget the Château Montebello, described by CBS News anchorman Dan Rather, when it hosted the G7 economic summit, as “the world’s largest log cabin.” All in all, our hotels play an important role in Quebec’s tourism industry.

In summary, Canadian Pacific Limited and its six operating companies – CP Rail, CP Ships, PanCanadian, Fording, Marathon Realty and CP Hotels – represent a strong business portfolio and the market is starting to recognize this in our share price which has risen some 33% since this time last year. When you look at CP’s results, and at our business plan, you get a pretty good picture of the Canadian economy, and a pretty good idea of where it’s going. In some ways, Canadian Pacific is a mirror of the Canadian economy. Canada’s prosperity means our prosperity. And our prosperity means not only profits for our shareholders, but good jobs for thousands of Canadians.

The shareholder value of companies like Canadian Pacific is determined by many things. But at the end of the day, the value of any company is closely related to the prospects of the country in which it is located. That is the bottom line. Canadian Pacific has existed for almost as long as Canada itself. We’ve changed, adapted and transformed ourselves, especially in the last few years. By facing reality, by focusing on our strengths, we’re now positioned for growth. We need to do more of that in Canada, in Quebec and particularly in this city of Montreal – face up to the reality of our situation, address our structural weaknesses and focus on our strengths. The prosperity of Montreal, Quebec and Canada depend on it.

A reality check may not always be politically correct. But political correctness is often far from reality. Only by acknowledging the facts of our situation can we address the challenging issues we face. One undeniable fact is that some of our economic problems have been decades in the making, and they won’t be resolved without pain or in a short period of time. Politicians at all levels must face the problems head-on as our economic strength more than any other factor will determine our future. One thing is certain: as corporate citizens and as private citizens we are all in this together.

SEPARATING PULP FACTS FROM PULP FICTION: A GOOD-NEWS STORY AMONG CANADA’S RESOURCE-BASED INDUSTRIES

Lise Lachapelle
President & CEO, Canadian Pulp and Paper Association

The Canadian Club of Montreal, September 18, 1995
Published in The Corporate Report No. 14 (October 19, 1995)

It was exactly one year ago today that I joined the Canadian Pulp and Paper Association. In this, my first year, I have learned a lot about the industry, and in the process have gotten rid of a number of misconceptions. Today, I would like to share with you some thoughts about this first year. I would also like to give you an insider’s idea of what the future holds for the Canadian pulp and paper industry. It would be easy to quote known statistics:

• Sales of nearly $50 billion in 1995, according to our data

• $3 billion in profits

• 1 million workers directly or indirectly employed

This industry is, by far, the number-one contributor to Canada’s trade balance, with net exports of over $25 billion last year. More than 350 communities across Canada depend on our industry.

This is a far cry from the image that many people had or have of this industry, myself included. If you still think of lumberjacks chopping trees with axes or riding logs down a river, it’s high time to update your thinking! This folklore has little in common with the forest industry of today. But some fascinating contradictions remain. Of course, it is still a natural-resource-based industry, but it is increasingly making use of high technology.

Since 1989, the industry has been updated. Some $14 billion has been invested in replacing old machinery and incorporating state-of-the-art technology. You may say that we had no choice if we wanted to maintain our leadership as a world pulp and paper exporter. I agree. But these investments had other positive impacts. Forest and paper workers have become more efficient; faster, more accurate decisions are made and accident prevention has been maximized.

For example, thanks to our information technology investments, we can calculate the best way to cut a log to maximize use of the material and minimize waste. We use everything: to manufacture paper products, we recover chips, shavings, sawdust and all sawmill residues. Satellite surveillance systems make it possible to optimize forest management and harvesting methods. High-speed computers are also installed in feller-slashers to facilitate their operation. Automatic mill process-control systems translate into improved quality and higher productivity. Data communications enable Japanese customers to monitor production of their pulp without leaving their offices in Tokyo.

This industry is as old as Canada and yet it’s way ahead of most industries in the global marketplace. We already sell to tough markets in Japan, China, Asia and Latin America while other Canadian industries are just starting to knock at the door. Eighty per cent of what we produce is sold internationally to nearly 100 countries around the world. That’s why, and let me repeat myself here, forest products are the number-one contributor to Canada’s trade balance, to the tune of $25 billion last year. That is the equivalent of all other manufacturing sectors combined.

This is also an industry which has faced the most critical environmental challenges of any industry and has responded swiftly and effectively. We spent billions of dollars to successfully reduce effluents and keep toxins out of our rivers and streams. And if there’s one thought I would like to share with you today, it’s this: the pulp and paper industry is cleaning up its act big time! In fact, these days when I talk to our mill operators, they often complain to me about other polluters in other industries who are ruining their environmental efforts! That’s what I call a turnaround.

In short, ladies and gentlemen, this is an industry which will surprise you in the next few years. Canada’s pulp and paper producers will be leading our resource sector in the next century in terms of products, environmental initiatives and marketing. Our industry’s current renaissance can be explained by a very simple fact. We are increasingly on the same wavelength as our customers, be they across the street or on the other side of the world. More than ever, our business is driven by our customers’ needs and preferences. Over the years, we have changed our forest management practices, our pulp manufacturing processes, and our range of value-added paper and board products. Our customers’ influence is particularly evident in the diversity of our products. Psychologists may call this a multiple-personality phenomenon.

Our customers do have multiple personalities. As well as being businesspeople, they are environmentalists. Heads of companies, they are also tourists. As consumers, they also worry about conservation. When they buy forest products, they want the best quality at the best price. But they are also interested in where the product comes from, what species of trees we use, where the trees were cut and how many. They want to know what we are doing to regenerate Canada’s forests.

I can already tell you that the industry is very careful in its annual fiber consumption. Harvesting is limited to one quarter of 1% of the total area of Canada’s forests. In fact, on the whole, as many Canadian trees are destroyed by forest fires and insects as are harvested. Reforestation is the other important element. For every tree cut, at least one is generated. We have been doing this for decades. This data is certainly not new, but we have taken for granted for too long that the public was aware of what we were doing. This was obviously not the case: our efforts have often gone unnoticed. Nevertheless, the statistics are impressive: Canadian forest products companies plant more than 800 million seedlings annually. This restocks half of the area harvested every year, and natural regeneration takes care of the other half. This is tremendous, but we still don’t think it’s enough. In fact, our ongoing concern for the sustainability of this resource has led us to push for concrete standards for forest management practices. We’re working on this now through the Canadian Standards Association here in Canada and the International Standards Organization internationally. Once these standards are established, it will mean you and I – and every one of our customers around the world – can buy our products with confidence and assurance. Why? Because you will know these products come from forests which are being managed sustainably.

We’re doing all this today because we want our industry to be in good shape tomorrow. Some will say it is self-serving. I don’t disagree, but let us concentrate on the results rather than on the motive. Customer concerns are also reflected and addressed in the industry’s pulp and paper mills. Between 1989 and 1996, pulp and paper makers will have invested $6 billion in pollution-reduction measures. This investment was made in spite of downturns in the economy and rock-bottom prices for our products – and worth every penny. You may remember reading about furans and dioxins in the newspaper. You don’t hear about them much anymore. Why? Because we have virtually wiped them out through new technologies and practices.

I’m anxious to see the pulp mill of the year 2000. I know the research and testing we are doing now will ensure that those mills will be environmentally-friendly, using much less fresh water and much less energy. The Pulp and Paper Research Institute of Canada (PAPRICAN), which is our industry’s research and development arm, has begun a five-year $40-million program to develop a closed-loop technology that minimizes pollution during the manufacturing process rather than attempting to minimize the impact of toxic substances at the end of the pipe. With regard to products, our industry has also made great strides in adapting its product lines to consumer preferences in the year 2000.

You will remember that not long ago, a paperless society was predicted. Many people believed this, including some papermakers who feared that theirs was a sunset industry. Fortunately, the predictions were wrong. Due to the development of new products and the creation of new markets, the sun is shining stronger than ever on the paper industry. This can be attributed to the demand for new products. Think of the new fax paper, computer paper, self-adhesive papers, carbonless copy paper, and so on – none of which existed five years ago. As for the Information Highway, here again all sorts of dire predictions have been made. A recent North-American study calculated that every day in North America, 1 billion documents are generated, with an average of 19 copies! You have surely noticed, as I have, the proliferation of books and magazines dealing with the Internet. Instead of decreasing, paper consumption has doubled in the past 20 years and is expected to double again by the year 2010. Developing economies in Asia and Latin America will spearhead this increase in demand, with an annual growth rate which is expected to be as high as 10% in the coming years. What we are now discovering is that the role of paper is not declining, it is simply changing because it is now used in ways that could not even be imagined only a few years ago.

In reality, this is an industry of opportunity. Companies that can satisfy customer preferences will find plenty of business in new and developing markets. Every day brings a new challenge. At 7 a.m., you want the ink to stay on your morning newspaper rather than on your hands. Half an hour later, however, environmentally-conscious consumers want companies to be able to de-ink newsprint more easily for recycling. Our industry is currently working flat out to meet the consumer demand for recycled paper. Right now, more than 60 mills in Canada use recovered paper to satisfy a portion of their fiber requirements – in some cases 100 per cent – and $1.2 billion has recently been invested in recycling and de-inking facilities. We used 4 million tonnes of recovered paper in 1994. Quite simply, we can use as much as we can get our hands on. But we need the raw material from consumers to make it work.

I recently wrote a column in the Montreal Gazette where I pointed out that Canada has the distinction of being the largest importer of recovered paper in the world. Last year, we imported 1.8 million tonnes of waste paper. That’s because our country, with its relatively small population, simply doesn’t consume enough paper to generate a stream of recycled fiber sufficient to meet the demands of our producing mills. Compounding the problem is the fact that, while many communities have introduced ambitious recycling programs, many have not. It’s a problem which hits close to home. Right here in Montreal, our own Miron Quarry dump is 34% filled with paper. That should not be. It is a problem we need to address with more aggressive recycling programs all across Canada.

As the industry becomes more responsive to consumer preferences, environmental or otherwise, it continues to benefit from an economy which will also be rewarding for Canada. We are optimistic about our industry’s ability to compete in the global market. The question is how to maintain and even increase our competitive edge.

We know that we have to perform as well as our competitors in Indonesia, Brazil and Chile. That means that, like them, we have to control our costs and increase productivity in our mills. We must invest in research and development and learn to use new technology. Our objective is to improve productivity and provide the means to manufacture more high-value-added products and enhance our environmental performance.

We know that we have to continue to push for free trade in both our established markets and emerging ones. Right now we face tariffs of up to 70% in some countries. This is one of the reasons why the Canadian Pulp and Paper Association is actively promoting free and fair trade agreements for all pulp and paper products.

We have demonstrated our concern for the environment by making a firm commitment to sustainable forestry. This is precisely what we are working on now through our support for the development of ISO-type forest management standards to be applied in Canada and worldwide.

But to achieve our various objectives, we need your understanding and support. Canada’s pulp and paper producers have gone through some difficult times. I will be the first to admit that in past years we have been too introspective, too defensive, too insular and too polarized with respect to our critics and environmental issues. We shouldn’t have to force people to choose between the economy and the environment. That attitude has to change – and it is. In its place, we find an industry which has never been more open to the interests and concerns of all consumers at every phase of its operations.

We don’t tell people how the forests should be used. The people of Canada make those decisions as they should. Public participation has become the hallmark of forest management across Canada and particularly here in Quebec. When we harvest timber, our five-year plans are open for public review before approval by provincial foresters. If we were in Rimouski, instead of making a speech, I could show you how we harvest fiber in 1995, how we preserve the forest, protect wildlife and fight soil erosion. And I could prove to you that we are just as concerned as you are about the future of Canada’s forests. The very success of our efforts to prepare tomorrow’s forests depends on how well we keep the public informed about what we are doing and why. We also have to make people understand that we do listen to their concerns.

Our biggest challenge is effectively communicating our progress to the public. But this challenge also constitutes a tremendous opportunity for dialogue. At stake are one million direct and indirect jobs in Canada’s forest industry. Whether you’re an economist or an environmentalist, that’s a huge chunk of the economy. We’re working hard to maintain those jobs in Canada and keep earning revenues here in Quebec and across the country.

Our progress to date has improved our competitive edge both economically and environmentally. Our actions support our belief that only sustained, continuous environmental and economic improvement will bring long-term success. And it is with this conviction that we look forward to success in the next millennium.

SPACE: THE GLOBAL VILLAGE

Mac Evans
President, Canadian Space Agency

Conseil des Relations Internationales de Montréal, April 4, 1995
Published in The Corporate Report No. 13 (August 7, 1995)

The Canadian Space Agency is an important laboratory of dreams…but it is more than that. By all accounts, it is a strategic sector of the Canadian economy as we move from a resource-based economy to one that relies increasingly on knowledge and innovation to create wealth. Presently, the space sector in Canada sustains more than 3,500 high-skill jobs in all areas of the country, of which Montreal has an important share. In the years ahead, I have every reason to believe that the number of firms involved in space-related activities will grow, as we provide greater opportunities for Canadian companies to forge new partnerships with us.

This year is a pivotal year for the Canadian Space Program. It marks the boundary between the old and the new: the Long-Term Space Plan I begun, almost 10 years ago, and the Long-Term Space Plan II, approved by the federal government in June, 1994. It is a decisive moment in the history of the Canadian Space Agency: after several years of planning, preparation and negotiation, we are now beginning to operationalize our programs and turn the blueprints into reality.

In the broader context of the Canadian Space Program, we shall see the two fundamental principles that have governed Canada’s space activities – meeting national needs and developing an internationally-competitive, export-oriented industry – taken yet a little further.

I have been involved in the Canadian Space Program for more than twenty years. And, at no other time during this period has one year, 1995, been the showcase of so many Canadian achievements in word-class technologies. Consider for a moment the milestones Canadians will witness over the course of the next ten months: Radarsat, Canada’s first remote sensing satellite will be launched in September; MSAT, scheduled for launch later this year, will provide instant, portable communications to Canadians anywhere in Canada; STS-74, astronaut Chris Hadfield’s mission on board space shuttle Atlantis, with a launch date of October, will be Canadian technology used to dock the American orbiter to the Russian Space Station Mir.

These highly visible events, events that will command considerable attention, events that reflect the dreams of a generation of dedicated men and women, events that translate into economic growth. In this fashion, we will build on a dream and pursue a strategy that began more than thirty years ago – some of you will recall the launch of Alouette I in 1962 – making Canada the third country to orbit a satellite. And so, this year, we will push back the frontiers of space still a little bit further.

I come now to the international dimension of space activities. I will use the International Space Station as the program that best represents the international cooperation required today to carry out space activities, and the major role Canada is playing in helping make this monumental venture a reality.

I am persuaded, as indeed are many others, that the great turning point of contemporary history, is the end of the Cold War, ushering in a new era of cooperation among the peoples of the world.

For nearly 40 years, two superpowers, two opposed political systems, two technologically different economies, governed and imposed their will on space. There is no doubt that the ideological paradigm that held dominion over the world shaped the terms of reference of the Space Age for nearly half a century. That is now history. A new paradigm has emerged, characterized by partnerships on a world scale, and is exemplified by the International Space Station.

The notion of having a permanently inhabited laboratory in space reaches deep into the psyche of humankind. It began to take shape in 1984 when the United States invited Canada, Japan, and ten member states of the European Space Agency to participate in the single largest international scientific endeavor ever undertaken. In 1993, the United States invited Russia to join the International Space Station Partnership.

Over the years, the focus of the orbiting platform has changed. There have been no less than five design changes. At first, it was to serve as a stepping-stone from which far-off space missions could be launched. While learning how to live and work in space for long periods of time remains a strong element of the program, the Space Station will now also serve as a laboratory that offers a very unique research environment where there is no gravity, and in which experiments can be carried out that will help us better understand earthly phenomena. We already foresee that experiments done by astronauts living on the Space Station will yield a better understanding of diseases like osteoporosis, or of the causes for the kind of muscular atrophy that here on earth strikes victims of cystic fibrosis and, in space, affects astronauts.

The station will comprise crew quarters and advanced laboratory modules. Canada will provide the Mobile Servicing System, a new-generation Canadarm – that will be used to assemble and maintain the station.

When I think of the International Space Station and how it came to be, I am reminded of the challenges and potential of space today.

With the fall of the Berlin Wall, George Bush spoke of a new world order…to which some cynics replied “a new world disorder.” But the kind of collaboration and teamwork we have seen in establishing the Space Station clearly shows the potential and possibilities for international cooperation and understanding.

This is not to say it is not without challenges.

Although I wasn’t able to attend when CORIM hosted Major General Romeo Dallaire last February, I would guess that in his speech on “Lessons to be Learned from the Rwandan Crisis,” he would probably have mentioned that, as head of the UN peacemaking forces, he encountered the same sorts of difficulties the international space team has to contend with. These are the difficulties you must deal with when you choose to get an international team to do a job.

As you can well imagine, the level of collaboration required to accomplish something like the Space Station did not come about easily. Issues went back and forth. Which language should communications be in? Each country has its own legal framework. Which legal system would apply, if for instance, a Japanese astronaut hits a French astronaut with a Canadian wrench, albeit a robotic one, in the American module? Will we use imperial or metric measures?

Who has final say in taking decisions? And that is the most fundamental question – the safety of the crew depends on it. In the end, someone has to be in charge.

Every partner in the International Space Station brings a particular expertise, a different angle from which to tackle the common problems. Everyone is valuable. The United States, because of its commitment to, investment and experience in space, has been chosen to provide the leadership an undertaking of this magnitude requires.

I said earlier that the International Space Station is the largest science and technology project ever undertaken. And Canada has a wealth of experience in space science projects of an international nature. Indeed, every space program we have had has been conducted with other partners. Our experience has served us well and it will continue to stand us in good stead.

Canada has been particularly effective in ensuring that we not only contribute to the building of the Space Station but also profit from it. Building the space station is not like building a skyscraper. Its various modules have to be put together here on earth, transported into space and then all assembled – very much like a giant Mecano set. Whereas for your skyscraper you might use a crane to do the assembly, in space we will need an effective, proven robot.

While Canada’s experience with the Canadarm would seem to make it the obvious choice to provide this technology, securing our role was no small task. The issue was not whether Canada would remain a partner but rather who would be in charge of the robotics. Several countries offered various proposals to meet the space robotics requirements. Canada countered by capitalizing not only on its proven past experience with the Canadarm but also by demonstrating its continuing adaptability, to meet requirements throughout each of the Space Station design changes. Thanks to this adaptability and experience, today Canada is the lead agency in robotics for the space station.

I would add that Canada is providing an essential component of the station. Without Canada’s robotic system, the orbiting laboratory would not be assembled.

Despite all these difficulties, the Space Station is on its way to becoming a reality. The first components are scheduled to be launched in 1997. With this unprecedented project we are breaking new ground in how we live and work together…and to get there, we have had to agree on a whole new management regime by consensus, which may well become a model for future multilateral partnerships.

And perhaps this is the point to be made: international cooperation is no longer a luxury, it is increasingly necessary for the successful achievement of major projects.

Limited budgets, more and more technologically sophisticated projects…these factors and many more conspire to increasingly push us towards one another and force us to work together.

This new interdependence does not, however, mean that national interests – particularly economic interests – are forgotten. Canada has recognized that it cannot afford to go alone, but also that to sustain its dynamic economy, it must continue to invest in space technologies whose applications will have strong economic returns.

There are three major new initiatives that will become a reality this year. I think they illustrate well how, using international cooperation, Canada will be securing a prosperous future for itself.

In September, the eyes of Canadians will be fixed on the launch of Radarsat, Canada’s first remote sensing satellite and the Canadian Space Agency’s first satellite. Like the Space Station, this, too, is an international project, one we have undertaken with the United States, who, in return for a share of the data, is providing the launch vehicle that will put this unique Canadian satellite in orbit some 800 km above the Earth.

With Radarsat, we intend to launch a global business in selling satellite data to decision makers all over the world. Radarsat is a global system that will benefit Canadians to be sure, but all of mankind as well.

The data applications of Radarsat are far too numerous to fully list here, but let me point out some fields that will be enriched by Radarsat data: ice reconnaissance, coastal surveillance, shipping, ocean research, environmental monitoring – think, for a moment, of the potential sales of Radarsat data to industry as it strives to efficiently manage our agricultural, oil, gas and forestry resources. I believe that Radarsat will be a primary example of Canada moving into the new economy.

The same could also apply to MSAT. Here, using a French launch vehicle, Canada will put a powerful communications satellite into space that will also ease our entry into this new economy.

What this new satellite will permit us to do, is to ensure that MSAT phone users will be able to receive and send calls from anywhere in North America instantly. In areas of Canada already covered by cellular-phone networks, a ground-based grid will ensure hook-ups at lower cost. In areas that are remote – the Arctic, the mountains, or a sea hookup to the satellite will be done with the flip of a switch.

And finally, a few words about Chris Hadfield’s mission on board the shuttle Atlantis when it lifts off the pad at the Kennedy Space Center in October 1995. This mission, one of the most technically-challenging missions ever undertaken by NASA’s shuttle program, will see a Canadian operate the Canadarm for the first time in order to put in place the docking adaptor that will allow repeated shuttle missions to Mir. Major Hadfield will also be the first Canadian to enter the Russian space station.

Once again, Canadian technology – the Canadarm and the Advanced Space Vision System – will bridge two cultures in a show the world will witness, much as it did during the Hubble repair mission in which the Canadarm played such a critical role.

A Canadian coined the phrase first: we are living in a Global Village. In fact, we, in the Canadian Space Program, may well exemplify Marshal McLuhan’s prophecy. From the very beginning, everything we have done in space has been based on international cooperation. Whether it be building the Space Station, flying an astronaut, launching a satellite, using space as a laboratory to build better crystals or understanding the causes and the effects of ozone layer depletion, the exploration of space must be a cooperative adventure. The new ground we broke some thirty years ago may well have served as a model for the kind of international partnerships we are witnessing today. The Global Village has extended its frontiers to space.

Our task at the Space Agency is to continue to lead the way. The example of international cooperation we have in space is an example to emulate in our building of a peaceful, sustainable, Global Village. I can think of no more appropriate end to my remarks than this quote by Tennyson: “to seek, to strive, to find, and not to yield.”

RETOOLING FOR THE NEW ECONOMY

Donald V. Fites
Chairman & CEO, Caterpillar

Business Week CEO Summit, Washington, September 24, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

Business Week magazine, as you may know, has predicted that the path leading from the new economy of the 1990s to the 21st-century economy will likely be a bumpy one. I believe there’s much to be shared during this summit that may help smooth that way for all of us.
The subject of my remarks today was advertised as “Retooling for the new economy: The case of Caterpillar,” with a subtext of “How a capital goods manufacturer, operating from a largely US manufacturing base, can remain the global industry leader.” That’s a big assignment – with a 10-minute time limit – so let’s get right to it.

Every company’s success is predicated on its culture and experiences. Not surprisingly, Caterpillar’s history is rich with fact and folklore – with stories of our participation – throughout the decades of the 20th century, in the world’s larger-than-life construction projects. Less talked about, but much more important, is the contribution our products make to the world’s economic well-being through many of the things each of us takes for granted every day, such as electricity, water, transportation, energy, food and commodities. I’ve lived through over 40 years of those experiences with Caterpillar – residing on five continents – and while it is tempting to share some amazing stories with you, time just will not permit that. So let’s fast forward to the present – and put some dimension to who and what we are.

Caterpillar has posted record profit in 16 out of the last 18 quarters. 1997 sales totaled US$19 billion, with exports from the US of $6.1 billion – and with a profit of close to $1.7 billion. Our results so far this year are no less outstanding. During the first half of 1998, we achieved record sales of over $10 billion and a record profit of nearly $900 million. We expect that well within 10 years, we will be a more-than-30-billion-dollar company – and by the year 2010, more than 75% of our total sales will come from countries outside the United States – and that our US exports will reach over $10 billion.

We are, and intend to remain, the global industry leader and world’s number one manufacturer of construction equipment, mining equipment, forestry equipment, natural gas engines, diesel engines and industrial gas turbines. We’d like to add agricultural equipment to that list sometime in the future. We are globally successful and globally competitive primarily from a US manufacturing base. We are one of this nation’s largest net exporters. Although we expect sales outside the United States to be in excess of $15 billion a year, early in the next century, the majority of our manufacturing assets – some 70% – are, and will remain, in the US. Our facilities are capital-intensive and high-tech, and most of the individual products we build per year usually number in the hundreds, not thousands. It doesn’t make economic sense to duplicate manufacturing operations for many of our products. And from a political-risk standpoint, in our opinion, the US remains the best place to invest.

But in today’s world – and certainly in the world of the 21st century – hard assets can be copied, and indeed often are, in shorter and shorter periods of time. Manufacturing and technical expertise can be studied – and duplicated. For that reason, we believe the real key to Caterpillar’s future success lies in distribution. For many industries, I would strongly suggest that in an increasingly global economy, it is distribution that will separate the winners from the losers. Let me elaborate. Caterpillar’s distribution system, which is a well-established worldwide network of independently owned dealers, is usually cited as our most distinctive competitive advantage. Why? Because each one of our dealers – almost 200 of them – provides real value to our customers.

Dealer employees – some 80,000 of them – are well skilled in providing services to users of our growing product line. With more than 1,200 facilities worldwide, Cat dealers are well positioned and equipped with the latest tooling and diagnostic equipment. Their machine and parts inventories provide high levels of product support. And that’s important, because in our business, overall product life-cycle value, not initial price, is usually the deciding factor in a customer’s buying decision.

Our products have to perform in all types of conditions, be reliable and be designed so they can be economically repaired. All these factors contribute ultimately to residual value – a key ingredient in the product life-cycle equation for customers. We don’t need to be the low-cost producer. But we must be the high-value producer in the eyes of our customers – who make their buying decisions based on the features and quality of the product we manufacture and the value-added services which our dealers provide.

Cat dealers around the world create a significant competitive edge for us – and we view each other as partners. We expect them to provide superior sales and after-sales services. They expect us to provide them with consistently high-quality, state-of-the-art products. To make sure we can hold up our end of this bargain, we’ve invested billions to bring our factory systems and processes into the realm of high technology and, in doing so, changed the focus of our manufacturing operations from push to pull – from building inventories that customers might order to building products that customers have ordered. We streamlined material flow, pulling through in-process material. Huge high-rise storage facilities – which were thought to be vital to operations – became obsolete. Logistical control of in-process material became the heartbeat of our operations.

Best product value success also demanded, and will continue to demand, flexibility of labor and maintaining an effective, well-trained workforce. We had to articulate to our employees – and, as it turned out, to the nation in general – that in order to provide high-paying, high-tech jobs in a global economy from a US manufacturing base, companies such as Caterpillar must have labor efficiency and labor flexibility.

So just to be allowed on the global playing field, all of our products and services must offer high quality and optimum performance. But to be the continuing world leader in the industries we serve, distribution, in its broadest terms, will be the key. And it will be harder and harder to hide any weaknesses. In a borderless, global marketplace, our credo is that if you’re not competitive everywhere, you’re not competitive anywhere.

Some argue that the internet will make obsolete all traditional distribution channels. We don’t buy that, certainly not in terms of our overall distribution operations. In our business, not all products are created equal, nor are they supported equally once they’re in a customer’s hands. Our customers value quality, performance and lowest total cost per unit of work. We wouldn’t have it any other way. The internet is changing, and will continue to change, the way (and the speed at which) we communicate and the amount of information we have available. How we use that information to add value to our distribution is the critical question.

There will be change at Caterpillar – significant change. Our current greatest challenge involves the evolution of Caterpillar into what we’ve termed a high-velocity company. By that, I mean a company capable of responding to customer needs with speed and accuracy – faster than our competitors. We’ll create competitive advantage by real-time, global online linkage of customers and our products with Caterpillar dealers, with our internal operations and with our suppliers.

Our high-velocity vision includes dealer salespeople linked worldwide by their ability to immediately access complete information. To determine product selection. To quote the right configuration and attachments. To know availability. To provide financial and credit terms. To offer product support programs. And to complete life-cycle-costing studies. Rental options, used equipment and other product alternatives will be readily accessible and considered.

Our machines and engines themselves are a primary component of this high-velocity vision. They will, for example, monitor their own vital signs, diagnose their own performance, and even predict their own problems before they occur. The result for our customers is the reduction or elimination of machine downtime and repair costs – and an increase in their realization of value that is directly reflected in their bottom-line success.

We’ll accomplish our high-velocity objective by continuing to stress a flexible, results-oriented corporate organization: one that pushes responsibility and accountability down, nurtures a culture which gives employees ready access to information, allowing them to make well-informed decisions – and rewards employee performance with excellent compensation.

To put it plainly – as we usually do in Peoria, Illinois – Caterpillar intends to remain the global industry leader we are today – by being the high-value producer from a largely US manufacturing base, even as we see sales outside the US growing to reach as much as 75% of our total. Engineering excellence, manufacturing flexibility, financing skills, and outstanding quality will be prerequisites to play in the major leagues of the global economy. But superior distribution will ultimately separate the winners from the losers.

SETTING THE STANDARD IN THE AUTOMOTIVE INDUSTRY

G. Yves Landry
President & CEO, Chrysler Canada Ltd.

The Calgary Chamber of Commerce, February 28, 1996
Published in The Corporate Report No. 17 (April 30, 1996)

Chrysler Canada is the fourth largest company in the country, ranked by 1994 revenues of some $15.6 billion. In 1994, Chrysler Canada produced a record 695,000 cars and trucks in our three assembly plants. In fact, we set the Canadian industry standard by having the best production-to-sales ratio. We build nearly three vehicles for every one we sell in Canada.

While buying some $7.2 billion of goods and services from Canadian suppliers in 1995, it was basically a year of major adjustment for Chrysler Canada as we launched our third generation of minivans with the massive investments and downtime that it brings about. We’re on track now, and we are poised to break new records in 1996 and beyond.

As you can well imagine, we’re very proud of the role our company plays in the Canadian economy, and that’s why we often say, “At Chrysler Canada we’re not just building cars and trucks, we’re building Canada.”

While the automotive industry has played a major role in the lives of Canadians, the continued success of the Canadian auto industry cannot, and must not, be taken for granted by either management, labor or government. These last few years, the North American automobile industry has lived through an important and essential transformation to ensure its survival with the import growth and the damaging North American production over-capacity of the late 1980s, the global markets, the recession, a stagnant domestic economy, free trade and a market that is brutally competitive. The domestic auto industry was in trouble, and we had to do something.

We had to take our cue from these recent events. We had to learn from the past so as to influence the future. We had to become far more efficient and competitive. We had to seek excellence and competitiveness.

Being competitive is a way of thinking and doing things. And this was at the origin of a true cultural revolution at Chrysler. It started a few years ago. Since 1987, our corporation has literally reinvented itself. We have completely restructured our company. We’ve reduced our annual fixed cost base by some $4 billion. We have lived through a quiet revolution in our ways of developing and building cars and trucks, in our ways of thinking and doing things. And it all started with a renewed commitment to total quality and continuous improvement. Our biggest challenge was to find a way to bridge the gap between the company and our unionized workers. We had to give the workers their self-esteem as car builders. We had to create a proper environment for their willing, and hopefully enthusiastic, participation.

The process of quality is the willing participation of the workers. It’s a function of the soul. It has to be given. Only then came the realization that we also had to change. Perhaps more than our employees. We had to come down from our ivory tower. We had to create a climate that encourages participation. We had to learn how to listen. We had to measure progress and recognize the most deserving employees. We had to assess employee and union input on the basis of what made sense, instead of did it fit within the established rules. We had to cut plant bureaucracy and give more authority to our workers. That is empowerment.

It was really all part of building a new modern labor/management relationship. For 25 years, until 1990, we could never negotiate a new contract without a strike. Whether declared the industry target or not, inevitably a work interruption would follow. I give credit to the C.A.W. and the workers to have understood there was no need for this in the competitive atmosphere of the nineties. We had to form a new partnership built on candor and open communications on all issues. A balanced approach which deals with the legitimate concerns of both business and labor and includes a thorough consultative process with those involved. And we did. The barriers came down, and all this contributed greatly to bringing us much closer to our workforce and resulted in a healthier and more stable relationship. The results: we’ve been strike-free (including the 1990 negotiations) with major improvements in quality, productivity and production costs, and a reduction in lost time, accidents and W.C.B. claims.

There are still many issues (philosophical or otherwise) that we will continue to disagree on. And that will probably never change. What’s important is to avoid going back in time to the confrontational practices of the past, and to understand that the long road to total quality is a never-ending process.

Another key element of our restructuring has also been Chrysler’s new platform team approach to vehicle design. Which brings all the disciplines associated with vehicle development together at the genesis of the vehicle to radically shorten lead time, reduce costs and ensure world-class quality. We have literally knocked down walls to improve communications between our people, and they work in the finest research and development facility in the world: the Chrysler Technology Center, now the benchmark for the whole industry.

Since the early 1990s, with our four platform teams, vehicle development can be done at lower cost, faster and with higher quality thanks to:

• Reduced development cycle time

• Reduced engineering development costs have given us a definite competitive advantage in the marketplace and the impressive list of awards and recognition that we have received these past few years, including what we call the triple crown of automotive awards for our Windsor-built minivans:

1. The 1996 Motor Trend Award

2. The 1996 Automotive Journalists of Canada Award

3. The 1996 North American “Car-of-the-Year” Award

No new product has ever made such a clean sweep of all of the top three US, Canadian, and North American awards. What’s equally remarkable is the fact that, in each case and for the very first time, these prestigious awards went to a minivan instead of a car, which underscores just how car-like Chrysler minivans have become.

Yes, what a difference a few years can make. Pretty soon Bramalea Plant’s “LH” cars – the Intrepid, the Vision, the Concorde – will be the oldest vehicles in the lineup, and all this was accomplished in a little more than three years. This is probably why Jim Kenzie (of The Toronto Star) wrote that now-famous line: “I have driven the future and it has a Chrysler badge on the hood.” I really like Jim Kenzie…

To build what people want means always being closer to the market. To have gone from a five-year development time to a three-year development cycle is great, but not enough to meet the challenge of the years ahead. At Chrysler, we believe that you either lead, follow or get out of the way. And our intention is to build on what was accomplished to date and reduce cycle time and development costs further. We simply want to be more responsive to our customers’ needs, wishes and demands. We simply want to considerably reduce our margin of error and to become less vulnerable to our competition. That is why we are looking at new, unique software technology to extend our CATIA (Computer Aided Three Dimensional Interactive Application) computer system capabilities to virtual reality.

Computerized design is key to Chrysler’s goal of 24-month launches. By 1998, we’ll be there. The new software technology, known as the digital manufacturing process system, allows Chrysler to simultaneously design, construct, simulate and validate every manufacturing process on the computer. That includes designing a factory setting to determine if the vehicle can be assembled properly after it’s designed. We simply want to get to the factory and the market sooner. In our industry today, manufacturers need to be nimble and agile to react to the changes all around us. The race will always be to the swift. To put it simply, it’s building what people want, when they want it. It’s listening to your customers.

What has changed Chrysler the most in recent years is our commitment to partnerships. Partnerships with our employees, with our workers and with our dealers. Also of critical importance to us at Chrysler, a partnership with our suppliers, now part of our extended enterprise. This is the key to developing new products, innovations, creativity and the new technologies.

The teamwork required for breakthrough improvements is now spreading throughout our company. There’s a new sense of trust, respect, openness and candor within the organization. It’s all there now, and that’s how we’ve gone from a company whose first name was “struggling” and whose middle name was “beleaguered” to a company that many now say could end up being the hottest car company around.

Well, welcome to the new world. A new world indeed as we are now entering in the latter half of the 1990s. It simply means that no matter how much you’ve already done to restructure your business or enterprise, it will never be enough.

A new world indeed, that can perhaps be best described as follows. Every morning in Africa, a gazelle wakes up. It must run faster than the fastest lion or it will be killed. Every morning in Africa, a lion wakes up. It must outrun the slowest gazelle or it will starve to death. Every morning in Africa, whether you are a lion or a gazelle, when the sun comes up, you had better be running. Words of wisdom for each and every one of us as we are preparing to face the challenges of our times.

Change is everywhere. Worldwide changes involving industry, governments and countries as well. Dramatic events that are changing the face of the world. A world where the rapid, accelerated development of new technologies, (particularly the information technologies) has pushed us into what many now recognize as the third industrial revolution. It simply is a reality that none of us can escape. One could argue that change has always been with us. What’s different today is the exponential rate of change, and it affects every one of us.

Looking ahead, forging the link between industry and education is, I firmly believe, absolutely essential to fulfilling our collective mission of preserving our economy and our way of life in this country. A link between business and educational institutions (as challenging as it may have been in the past), is an absolute necessity if we are to prepare our young people for global competition. If we are to equip them with the required skills and confidence to deal with technology-driven changes throughout their working lives.

From the perspective of industry, which has suffered a sea of change, stepping up to the harsh realities that confront, and indeed threaten, our very existence, we are often taken aback by the slow pace of change and reluctance to restructure and re-engineer the educational system. The needs are well-known and the concern is that too few of the fundamental changes required have been enacted.

Productivity, a religion in our board rooms, must not become heretical on campus. Nothing is fixed in time. Tenure must never become the reason and/or the justification to force-feed a curriculum no longer adapted to our needs, instead of the new disciplines that should be immediately implemented. As well, there’s just not that much money and resources to go around and this applies to universities and other schools of higher learning.

Tradition must not preclude and/or delay a philosophy of change and continuous improvement.

• The reality is that most schools will rapidly hit the wall on tuition increases (an absolutely counterproductive scenario) when access to higher learning is so essential to the development of a skilled, competent and cross-functional workforce.

• The reality is that slashing the cost base of these institutions is the only key to their financial survival, at the same time as they combat the temptation of always spending more than they take in.

In short, the educators must return to their previous roles as the change-makers of society so as to foster the development of the change-makers we require for our economic survival as we approach the millennium.

Common sense says that we have to remove waste and redundancies, that we have to eliminate any and every activity that does not bring added value to the Canadian economy. Too many Canadians are being supported – directly or indirectly – by subsidies and transfers the country can no longer afford. For all of us it’s a straightforward question of affordability.

Canadians pay more for education per capita than any other industrialized nation, but do we have the results to show for it? Competitiveness is critical to the very future of our country and our institutions big or small. We need a new partnership between industry and education.

We must all work together – governments, industry, and education – at improving the performance and accessibility of our learning systems, and to strengthen the links between schools and the workplace.

Together, we have to meet the aspirations, beliefs, requirements and, yes, the approval of our younger people, as they are now preparing to become the major stakeholders in the Canada of tomorrow. Too many young people continued to leave school with insufficient preparation for the new knowledge-based jobs. Many Canadian engineers and technicians can’t find related work in their chosen disciplines, while many industries, to this day, are recruiting candidates in Manchester, England, reputed for its skilled training programs and apprenticeships.

That is why reforming education may not be enough. What we need is a revolution. The demands of the workplace are basically outpacing reform in our educational system. Somehow industry must provide the stimuli and the justification required for education to embrace fundamental change. And once it’s done, to make changes at a faster rate than is currently the case.

It is generally acknowledged that Germany has the best vocational education system in the world. Why can’t we benchmark that system, learn what makes it so good and use that information to help reinvent our vocational education?

Business and educators also need to take the lead in changing the way we think about jobs in this country. Working together, we must find ways to show parents and students the value of careers that don’t necessarily require a college degree. We need to legitimize the school-to-work track, the tech-prep approach, and remove the stigma associated with pursuing a course that does not lead directly to university.

Vocational schools, universities and industry must face up to this new reality of the changing skills and demands of today’s new high technology and the readiness we must all have for continuous education and retraining beyond our acquired schooling and experience. The new reality is that we all have to go beyond the conventional – come down from our little ivory tower – and become better team players. Universities must provide a better all-around general education for all their graduates, and prepare them for greater adaptability to perpetually changing needs and job demands.

Graduates will have to demonstrate greater versatility in a job or profession that may force them to recycle their career more than once. The reality is that a new curriculum is urgently needed for our times, and this may require university professors to also recycle their careers accordingly, and will likely bring about a more collegial, team-oriented, cross-functional approach to university teaching.

Business and education must also join in meaningful research and development activities in Canada, especially research. It’s the key to competitiveness, growth and high-value jobs for this country. It’s the retention and the perpetuation of this high technology that will become the true wealth of nations in the years to come. It’s really the importance of intellectual property. The status quo is not an option for Canada.

At Chrysler Canada, we have worked long and hard to forge our own link in this vital arena (a considerable challenge given the North American domestic industry’s concentration of research involving suppliers at the very genesis of vehicle development).

The answer to our Canadian R&D needs and aspirations had to be in the niche and complementary areas of research. While we were already doing credible and important automotive research (with our 100+ engineers and technical people) in alternate fuel development and engine design, clearly that was not enough. We had the capability to do much more. We needed new projects to keep our technical people interested, innovative and challenged. So we set out to bid on various corporate research projects, including simulation.

Developments on the local scene then helped us along. Dr. Ianni, the President of the University of Windsor, had just laid the groundwork for future cooperative efforts with industry by investing and enhancing the stature of the University’s engineering faculty. The rest is history. On October 4, 1994, we publicly announced the University of Windsor/Chrysler Canada cooperative Automotive Research and Development Center in Windsor, Ontario – the first of its kind in Canada – as well as the establishment of a Chrysler Canada endowed chair in design and mechanical engineering. It’s a good beginning. The important aspect is the linkage with the University. It’s the exchange of knowledge. It’s the co-op students that will benefit from the apprenticeship.

Among many other initiatives, we are lending our support to the Canadian Automotive Institute and the C.A.R.S. Council, to help train our future managers and leaders and to help forge the link with the universities and vocational schools. This will provide youth internship programs for our future technicians and service managers.

At Chrysler Canada we simply wanted to do something. We simply wanted to initiate the process with our cooperative R&D venture. We simply wanted these beginnings to be an example for others to follow, and we did! However, we quickly realized that such a pioneering automotive R&D joint venture with the academic sector in Canada, urgently required us to study role models that really did not exist domestically. We set out to implement a procedure that has paid off handsomely for Chrysler during the early 1990s, benchmarking the best in class, wherever it might be.

So we decided to assemble a team comprised of Chrysler Canada, together with representatives from the University of Windsor, St. Clair College (from the vocational sector) and the federal Department of Industry.

The benchmarking team first identified world-class centers of excellence involved in similar joint ventures with industry in France, Germany, and England. And after undergoing several in-depth training seminars on the benchmarking process before departing, the team visited the specific institutions in Europe last October to understand how they had forged the link between industry and the academic sector.

While the report from the team is not due until later this spring, I can tell you that the team (and yours truly) were most impressed with what they had seen. In fact, it was quite an eye-opener. The team noted that the links between industry and the academic sector are particularly well-established and developed in Germany, where organizations such as the Fraunhoffer Institute of Stuttgart in the South, and Aachen in the North are producing world-class technicians and engineers with hands-on industry experience – and at a rate which we can only dream of in Canada.

Germany produces highly employable and immediately productive graduates. Graduates who, I can assure you, are much sought after by industry. Graduates who do not end up driving taxis or flipping hamburgers with their degrees. I’m optimistic that we will be able to adopt or adapt some of these models and practices for our own domestic needs. And in so doing, we will have again forged a link in Canada that we feel can serve as a model for others to follow.

At Chrysler Canada we are committed to our industry. We are committed to Canada, this unique country of ours. I say “unique” in the sense of what Canada truly represents for each and every one of us. There’s no question that the very fabric of Canada has been challenged. It has also been challenged as a country, these past few decades, economically, culturally and politically. And I think it’s fair to say that our national debate continues to be nothing but a rehash of old ideas, old politics and old ways of doing things. On Monday, October 30, 1995, we came within a whisker of losing our country.

There’s no doubt the recent referendum has imposed a profound psychological and economic stress upon us as a nation. Suddenly, we realized that we can’t take our country for granted anymore. I guess it’s all about our true desire to live together as Canadians at a time when our country is uniquely positioned to benefit from the global economy in the new millennium. If we allow this nation to be broken, we will have squandered the greatest heritage in modern times. And for what? Egos, half-truths, parochialism, semantics, and yes, also petty politics and in some cases pure demagoguery.

Some of this was also evident in the days following the referendum as well, when many diverse and different political agendas became apparent from one end of the country to the other. Not surprisingly, there has been evidence of a lot of frustration on both sides since the referendum.

I would urge our political leaders to take a step back from the brink and truly assess the ramifications of the current spate of threats and counter-threats over the potential partitioning of Canada and/or Quebec.

Stating the case once and then holding fast and ready for rebuttal is fair game. Making it a belligerent campaign may end up as a self-fulfilling prophecy. Surely if recent world history has taught us anything, it is that countries are seldom, if ever, held together for any length of time by threats or use of force. Our national leaders should be making the case for Canada based on its positive attributes, not through confrontation.

It is time to seek the greater purpose and the balance necessary to a true understanding of the hearts and the minds of Canadians. To my way of thinking, there’s nothing fundamentally wrong with the Canada of today, if we make the collective effort required to address the challenges of our times.

So let’s not get mixed up in nostalgia for the past. We have to deal with the realities as they have emerged, and set about shaping them for our future, now. We have to look beyond our borders. We have to redefine ourselves. We have to open the windows and let the breeze come in. We have to start with a clean slate without being afraid of admitting our past mistakes. We have to substantially reduce our domestic debt burden and strive even more diligently to get our economy moving, create jobs and attack poverty, which is becoming a real issue in this country.

We must do so without jeopardizing who we are and what Canada stands for, and this has to be much easier than suffering anew the anguish, the uncertainty, and possibly the cost of dismantling our country. And for what, again may I ask?

We need a new vision of Canada as part of the global village we live in. We desperately need to break away from the old impasses. We need a redesign of our structures and institutions, not the usual patchwork. We need decentralized structures, not Balkanization. We need empowerment of the provinces in their areas of jurisdiction, not the waste and redundancies of duplication. We need a new sense of partnership recognizing the diversity of our cultures and the distinctiveness of our societies.

In Montreal, on October 27, 1995, we all witnessed a vivid demonstration of what Canada is all about: empathy, generosity and sensitivity. Quebec heard Canada – and Canada heard Quebec.

By now we should know what we don’t need, and we sure don’t need another round of public hearings and consultations. We also know that all of us Canadians need to stay strong together and make sure we get our share of the global opportunities. The truth is the rest of the world is moving on!

Politics is what got us into this. It seems only reasonable that politics should get us out of it. To our elected political leadership in Canada, the Senate, and the provinces I say: the people of Canada want their country back. And they intend to keep your feet to the fire until it’s done.

And you know what? I believe that the people of Canada have a clear idea of the changes it takes to fix the problem. I believe the people of this country, including Quebec, are ready to evolve and move on, together.

Are the politicians ready? Do they understand the people? I believe the time is ripe for a new understanding because I believe the expectations will continue to change in the years ahead. And it’s not unusual either! That’s life in the modern world. Take, for example, our neighbors to the south. You don’t think Washington ever gets requests (if not demands) from various states every week, every day? But they stay strong and united. Why should it be viewed differently here?

Look farther away, in Europe. The profound changes that each European country must implement in order to face the challenges of a united Europe. It’s all about change, but more importantly, it’s about a positive attitude towards change. Nothing more, and nothing less. This goes for all of us, including the media – who unfortunately prefer to put an edge to the news with sensationalism and drama.

As Victor Hugo said, “What little time it takes to change so many things!” We just need to do it. We’re looking ahead to a world without borders. Barriers are coming down. We must seek and forge within our midst that great national alliance for a new prosperity and be fully prepared to give of ourselves in order to deserve it.

THE LEARNING ORGANIZATION

A.L. Flood
Chairman & CEO, CIBC

Annual Couchiching Conference on the Challenge of Lifelong Learning in an Era of Global Change, Geneva Park, Ontario, August 7, 1993
Published in The Corporate Report No. 5 (March 15, 1994)

I am a banker by vocation. My business is the provision of financial services for millions of Canadian consumers as well as companies, institutions and governments, both here and abroad.

My working life is the reality of the marketplace. That reality is dynamic and challenging. It is shaped by fluctuations in interest rates and exchange rates and by changing customer needs, by changes in the regulations that govern my industry and by the vagaries of politics, by tides of monetary policy and the demands of my stakeholders.

My competitors are more numerous and aggressive by the day. All of us exist in an economy which, as you also know, isn’t growing very fast. The market for financial services these days seems all too limited. CIBC and its competitors have identified where the pockets of potential are – and we’re all going after them.

I say all this not in an attempt to win your sympathy. After all, who would ever consider a banker a figure worthy of sympathy? I say it to reinforce the fact that I am a pragmatic businessman.

So while my talk today may seem theoretical, it is about reality, a reality that is on our doorsteps. I want to talk about the need, or perhaps I should say the imperative, to develop learning organizations in our society.

That’s because I believe that learning organizations represent one of the best opportunities we have as a nation to gain a competitive advantage in the global economy. I also believe that learning organizations represent a true partnership of mutual advantage between companies and their employees. They are pivotal if we are to seriously address the kind of market realities that I mentioned earlier, the realities that affect the economic lives of all Canadians.

My remarks here will concentrate on three themes. First, I plan to argue that even though my topic is ostensibly about training, it’s not training – but rather learning – that’s going to enable us to cope with the kinds of fundamental economic and workplace changes we’re all now experiencing.

My second theme, which runs implicitly through my remarks, is that learning is now so essential for career success, corporate survival and national prosperity that it no longer makes sense to relegate it to certain institutions or to particular periods in one’s life. That’s what we’ve tended to do in the past. Learning is now everybody’s business – the business of schools, colleges and universities, of government, of labor, of the individual employee and, most important for my purposes, learning is the business of business.

My final theme involves some of the ways business can make learning its business. In developing this point, I’ll be looking briefly at some forces that have compelled companies to adopt the learning imperative. Then I’ll move to a more detailed look at the learning organization itself – its principles, its culture, its structure and its approach to employees, customers, and other companies.

To begin, I want to emphasize that learning organizations are not primarily training organizations.

I say that because our traditional idea of training – a company instructor teaching specific skills to groups of employees in a specific place – has at times proven less than effective in helping employees cope with today’s complex, challenging workplace. Its scope is frequently too limited, its methodology sometimes too inflexible. The relevance of its subject matter is too often temporary.

Mind you, I’m not suggesting that training is obsolete. Even organizations with complex educational requirements – and I include my own company in this number – find that traditional training methods work quite well in some situations – the teaching of certain kinds of computer technology such as hardware operation and systems use, for instance.

But today, competitive companies are discovering that training is only a part of workplace education – one of several paths employees must take to acquire the kinds of knowledge and skills so crucial for corporate success, customer loyalty, and career achievement.

Hence, my emphasis on learning rather than training as a cornerstone of the modern organization. Learning is qualitatively different from training.

It’s more comprehensive in scope. It’s ongoing, not finite. And it is active, rather than passive – something done by rather than to the individual. In a workplace setting, this means learning is driven by the individual employee – not by an instructor, not by a fixed curriculum, not by the company. The employees are in control. They control the pace of their learning. They select the tools that best enable them to acquire the knowledge and capabilities they need and want. And because they are in control, they are more motivated. Their learning is more efficient, more effective, more satisfying.

Finally, where training is often geared to a specific occupation, learning builds portable skill-sets or competencies. That means that as an employer, I give you an opportunity to develop not a particular skill but a competency which will allow you to adapt to change, to master not one job, but a series of jobs over time. As an employee, your responsibility is to make the most of that opportunity.

Those are some of the broader differences between training and learning. And I find these differences very illuminating when it comes to the way we look upon training in this country.

It’s become almost a cliché in Canada to observe that – aside from efforts of large corporations – we don’t do a lot of training. According to the Canadian Labor Market and Productivity Center, the private sector in 1991 did an average of 14 hours of formal training per employee – up from nearly seven hours per employee in 1988. An improvement, yes, but still well below the 170 hours the Swedish worker typically receives and the 200 hours the average Japanese worker receives.

Furthermore, it’s frequently noted that the kind of training that many companies do perform is not necessarily the kind of training that maximizes their own competitive capability or that of their workforce.

For example, the Canadian Labor Market and Productivity Center states that the bulk of Canada’s training is in orientation and occupational health training.

And the Economic Council of Canada reported, before its demise, that most private sector training is heavily concentrated among well-educated, highly-skilled male employees.

We also know that the problematic nature of labor market forecasting makes it difficult to determine which skills will be in demand and when – which also undercuts the effectiveness of traditional kinds of training. And finally, there’s the familiar observation about how rapidly skills become obsolete, another reason why conventional training sometimes falls short.

Understandably, all this provokes concern. But I would suggest that the frequent lament over Canada’s training effort – especially our low level of training relative to that of other countries – is misdirected.

For example, simply counting the number of training days the average Canadian receives doesn’t tell us very much. It’s a useful planning tool, because companies need to know the number of training days their employees take when drawing up employee work-schedules and budgets.

But the mere quantification of training into hours or days or weeks is not particularly helpful in measuring the depth and degree to which knowledge is acquired in an organization – or in how effectively that knowledge is being used. Nor does it reveal how much self-directed learning is going on in the company, whether – and how – more training enhances productivity, and whether it contributes to customer satisfaction or leads to career fulfillment.

So I think we have to ask ourselves whether more training – as it’s traditionally practiced and measured – is the answer. I don’t think it is.

For me, the issue is not that we don’t do enough training. It’s that we don’t do enough to help individuals acquire knowledge in an ongoing, systematic way. We don’t do enough learning, in other words. And this is where the emphasis ought to be – on learning: and particularly, on learning within and by the private sector organization – the learning organization.

I’m talking about a very specific concept here. I define the learning organization as a corporation in which every process, procedure, structure – and every employee – is dedicated to constant learning – learning that advances individual careers as well as the corporation’s business goals.

There’s a broader social dimension as well. Organizations dedicated to learning are powerful tools for advancing the wider objectives of national prosperity, competitiveness and the development of a highly qualified, flexible workforce.

If learning organizations are to develop, however, both parties – employer and employees – have to be active participants. Building such organizations is an act of shared responsibility – a partnership – in which a company undertakes to provide the tools and opportunities while the employees at all levels supply the commitment and effort to learn continuously.

Twenty or thirty years ago, all this would have been alien to corporate management. North American companies might even have been called learning-proof organizations. They were rigidly hierarchical and conformist in their structures and attitudes. Senior managers had the ideas, middle managers implemented them and workers carried them out.

While appropriate and successful for its time, such a structure doesn’t work today. We recognized at CIBC that the old hierarchical model has become a barrier to fully capitalizing on the creativity and talent of all our employees. At the same time, it precludes learning from outsiders, because it tends to confine relationships with customers and suppliers primarily to a transactional level – the buying and selling of goods and services. As a result, you don’t get two-way learning relationships that create highly marketable, value-added products and services.

The same was true of the way we once looked on our competitors. Some businesses were guilty of corporate arrogance, and this often repressed the impulse to learn from other organizations, even if they were market leaders.

Those days of splendid isolation are over. The information explosion, deregulation, intense global competition, the shift from a resource-based, manufacturing economy to an information-based, knowledge economy: all these factors have forced companies out of their shell into a world where learning and the ability to learn are the new signatures of competitiveness and success.

Companies have discovered that to survive in this world they must be radically more efficient and productive. To do this they’re restructuring their management and investing heavily in information technology.

They have fewer employees, and they are being asked to do more and different things in new ways. Employees have to be more adaptable – emotionally, intellectually, professionally – than ever. Careers aren’t static – they evolve.

For employers, the challenge is equally great. The benefits of applying knowledge are so substantial and the penalties for not applying it so harsh – that companies are being compelled to use the intellectual and creative capabilities of all their employees.

In fact, it’s more than just releasing individual capabilities. The most successful companies will be those that unlock the creative energies latent in employee teams and outside groups such as the customers, suppliers and competitors.

How do these things come about?

For individuals, organizational learning means changing attitudes and assumptions, what human resources experts refer to as mental-models or mindsets. Whatever you call them, they are not easy to change.

Let me give you some examples. The expectation of a lifelong, secure job, the assumption that learning only happens in school, equating one’s identity with a job – all these beliefs are entrenched in our society, and all of them are obsolete.

The critical step in building a learning organization is to encourage people to adopt different mental models that better reflect competitive and workplace realities. It’s equally important to inspire employees to repeat the process over and over, because those realities are constantly changing. Unless employees become comfortable adjusting to change, they won’t be able to cope.

How is this done? It entails, first of all, moving people away from the mindset that says organizations are fully responsible for their careers.

A more effective approach is to form a partnership for mutual advantage. At CIBC, we tell employees that they own their careers, that they are responsible for updating their skills on an ongoing basis, and that they have a great deal of control over their own success.

I think it’s the job of the learning organization to help people make that transition. Learning organizations provide employees with the tools to identify and develop competencies. Then you have a reasonable chance of achieving individual goals as well as corporate goals.

There’s a variety of tools available. Self-directed and multimedia tools, feedback mechanisms and competency models are just a few.

We use such tools at CIBC to help our people build and use competencies. But what CIBC does is not so much the point. The point is that while individuals are responsible for their own careers, the organization is responsible for providing the best possible support structures.

A learning organization also embodies an attitude, an atmosphere. The desire to learn can be found in individuals, teams, processes, systems and structures. Learning is the central cultural value of the organization. In this environment, innovation is not just encouraged, it’s celebrated. Change is avidly sought rather than avoided.

I’m not talking about a utopia. I’m talking about an intelligent response to changing market realities, something that’s achievable provided that you plan it systematically and work constantly to sustain it.

One way to get it is through recognition and encouragement. A learning culture rewards breakthroughs and initiative.

Another way is through the implementation of exacting standards designed to promote continuous innovation. 3M does this through a policy mandating that 30% of annual revenues must come from products less than five years old. Whenever Sony and Mitsubishi bring a new product to market it is assigned a sunset date. As its sales mature, its replacement is under development.

All this stems from the learning organization’s dialectic, what business and management expert Matthew Kiernan calls creative contention. All ideas and processes are subjected to constructive debate and skepticism before they are implemented. For example, Honda will place engineers from unrelated areas of the company on its design and development teams. The purpose is to challenge prevailing orthodoxies by introducing a variety of innovative perspectives.

Corporations can use this method to evaluate their most fundamental assumptions about the marketplace. One of the best examples I can think of is what Royal Dutch/Shell did on the eve of the OPEC oil crisis in the early 1970s. Some of its senior planners detailed scenarios that suggested startling alternatives to the cheap oil conditions that most Shell managers assumed would last indefinitely.

When the price of crude skyrocketed, Shell was prepared. And by 1980, it had gone from being the weakest of the seven major oil producers to one of the strongest.

But there’s more to learning than just questioning assumptions. Equally important, a learning organization must be tolerant. It celebrates success, but it must also be able to cope with failure. Companies that punish failure or honest mistakes dampen innovation, experimentation and motivation. It’s not just a matter of tolerating mistakes. Companies have to know how to learn from mistakes and failures in a systematic way.

That means taking a hard look at a botched project or a stillborn initiative. It means developing mechanisms whereby information about mistakes – and successes – can be easily stored and retrieved for the benefit of the entire organization. The technology is there to do this.

Yet I suspect that few companies have such systems in place. That’s unfortunate, because all of us have made mistakes, and all of us need to learn from them.

At CIBC, we have made our share of mistakes. And we learn from them. Recently, we put in place an automated internal job-advertising system called the Staffing Network.

It’s a very sophisticated system that allows any employee to access all CIBC job vacancies throughout Canada simply by dialing one number on a touch-tone telephone. It’s all part of our philosophy of empowering our people to take charge of their own career development.

Anyway, the system communicates to the user through a computer-generated voice operator. The problem was, when we piloted the system we did not adequately test the sound quality of the computerized operator. So when the Staffing Network was launched company-wide, employees were greeted by a computerized voice whose pronunciation of English was somewhat less than perfect. There were certain words that it just could not quite get the hang of. Vancouver proved particularly difficult. It came out Van-cover.

We’ve since corrected the problem, and the system sounds a lot better. And when it says Vancouver, you know it’s talking about the city and not something you throw over your recreational vehicle.

But aside from this, we learned that our pilot projects needed to be subjected not only to tough internal evaluation but to demanding analysis by external sources as well. Which leads me to probably the most valuable feature of the learning organization – humility. I believe that learning organizations are humble organizations in the best sense of the word. Indeed, humility is the very soul of learning – because in order to learn, we have to admit to ourselves that we don’t know everything, that we aren’t perfect.

Consider the practice of benchmarking – learning from the best. That’s an essentially humble activity – an admission that we can benefit from the wisdom of others. Many companies are now developing relationships with outside firms, including competitors, who are industry leaders in a particular business. They meet with other firms, study the process in question and then apply what they’ve learned to their own operations.

These kinds of informal arrangements are becoming more common. There’s benchmarking; strategic alliances with competitors and non-competitors alike; closer partnerships with suppliers; and an emerging concept known as selling alliances, where two or more companies combine forces to jointly market their products or services.

True learning organizations are moving beyond the old idea of competitive advantage over business peers toward what I call collaborative advantage. Today, no company can afford the luxury of isolation, arrogance or false pride. You learn whenever, wherever and from whomever. You are truly humble.

And that goes as well for the way companies relate to their customers.

It’s not good enough any more to treat customers in an arrogant, arms-length, transactional manner. Customers are a diverse group. Many have special needs, sophisticated business requirements and demand highly customized products and services. These are all learning opportunities, and smart companies know this.

Hence the importance of developing closer learning dialogues with customers – relationships in which organizations listen and learn, identify customer expectations, and anticipate needs, even when customers don’t have a clear idea of what those needs are. Some companies take the concept a step further and look upon customers as co-producers in the development of products and services.

However you describe it, aspiring learning organizations have to adopt a range of methods for learning with and from the customer.

That means looking at products from the customer’s point of view.

It means using technology to diminish – not amplify complexity, such as we’re seeing now with on-screen VCR programming and on-screen problem identification in photocopy machines.

It means establishing forums to teach customers about the benefits of new products and services.

It means adopting plain language when writing instruction manuals, financial statements, warranty documents, insurance policies and, yes, credit card billings.

It means helping the customer learn.

This is where the broader economic and social dimensions of the learning organization start to emerge.

Michael Porter of Harvard has said it. The Canadian government’s Steering Group on Prosperity has said it. So have others.

A technologically literate, discerning and demanding consumer population is a major factor in national competitive success.

Learning organizations help develop such consumers by helping them to learn more about products and services and by providing them with a range of outlets for communicating their expectations about those products. In doing so, learning organizations do a lot more than advance their own competitive agendas. They help advance Canada’s competitive agenda and the quality of life of its people.

Empowering people to take charge of their own careers and destinies; encouraging people to question and challenge outmoded assumptions; releasing the tremendous creative potential that’s latent in employee teams; developing systematic processes to learn from mistakes without penalizing those who make them; instilling a climate of trust, humility, innovation and the celebration of success; looking at what’s outside oneself – the customer, the supplier, other organizations – as opportunities for the mutual exchange of knowledge, not simply as sources of revenue, or as equipment providers, or as competitive threats.

All this is what learning organizations do and are about. It’s what CIBC is about as well.

From our new learning facility – our Leadership Center scheduled to open later this year – to our 14 employee development centers located across Canada, to our deployment of one of the most advanced and comprehensive employee career development programs in the business, to our total commitment to learning from and with the customer – and more, CIBC has made learning its business.

And I can see no reason why the principles and practices of learning that I’ve described today cannot grow and thrive in all kinds of institutions.

Think about it. Schools, colleges, universities; governments, labor, and special interest groups; customers, companies and citizens – all of them cooperating, sharing information, exchanging ideas and expertise, and united in a common goal.

That goal is to fashion Canada itself into a learning society – a society where every resource, every institution and every individual sees learning not just as an end in itself, but as a powerful and irresistible force for global competitive success, national prosperity and human fulfillment.

CANADIAN FINANCIAL SERVICES IN THE 21ST CENTURY

A.L. Flood
Chairman and CEO, CIBC

The Metropolitan Toronto Board of Trade, October 28, 1996
Published in The Corporate Report No. 20 (January 15, 1997)

When I joined the Canadian Bank of Commerce in 1951, banking was a fairly simple business. You knew your customers by their first names. You saw them in your branch virtually every week. Their banking needs were fairly straightforward: make a deposit, withdraw cash, obtain a loan, write checks, and maybe once in a while ask for a money order or buy some foreign currency.

We recorded their transactions in huge ledgers by hand and at the end of each month, spent hours balancing and reconciling entries. The process repeated itself, day-after-day, month-after-month. The arrival of the ball point pen was considered a major technological breakthrough.

All this was carried on inside ornate, rather imposing structures. The big vault was in plain view, a symbol of security. Those large fortress-like counters with tellers locked in their cages gave further assurance of security. And if that wasn’t enough, we kept a gun in a desk drawer.

Symbolism aside, all these things were tangible. You participated in each transaction as it took place. And the process could run several minutes while entries were made, pass books were filled in, initialed and stamped. You could see and touch the ledgers where the transactions were recorded. Of course technology has changed all that.

Today, fewer customers go into a branch. Millions of transactions are done electronically, completed in microseconds and stored as bits and bytes in computing centers, hundreds or even thousands of kilometers away.

The simple savings and checking account has exploded into a range of savings and investment products that number in the thousands, allowing you to place investments in virtually any country or currency. Payments can be made by telephone, computer and ultimately by smart card.

In corporate banking, technology and globalization have pushed out the boundaries. An individual running an enterprise now has ready access to global markets unheard of a decade ago. A borderless financial system is evolving.

These days, that trader in red suspenders is as likely to possess a doctorate in mathematics and an MBA. The mathematicians have added new capability to measure, segment and distribute risk, opening a whole new era in financial engineering. A typical deal these days can connect investors and issuers from opposite ends of the world, with a bond issued by a Canadian but with the principal denominated in Yen and the coupon in Australian dollars. The underlying transaction can be hedged by options and futures which can be adjusted instantly on a 24-hour basis.

Competition is tougher than ever. Today, more than 4,000 companies and 500,000 employees compete vigorously for your financial services business in Canada. In addition, through the advancement of communications and technology, Canadians have access to a broad range of non-Canadian financial institutions located around the world.

I believe we are on the brink of a fundamental transformation in the financial services industry. The changes that will occur over the next five to ten years could well set the pattern for the industry and its place in the world to the middle of the next century.

New technologies and entrepreneurial creativity are bringing tremendous new opportunity. There is now and there will be more choice and more competition than ever before for Canadian consumers and Canadian businesses.

But this new technology also ushers in a period of potential risk-risk to the stability and security of our financial system-qualities we have come to take for granted. There is also new risk to personal privacy and to Canadian jobs. Ultimately, it could affect the ability of Canadians to control their own economy.

On the other hand, if we manage this change well, there will be tremendous benefits for consumers and for Canadian business. More competition will bring even greater choice and lower prices. There will be new, better paying jobs for Canadians. Canada can continue to be a financial center of excellence in North America. Canadians will continue to distinguish themselves in world markets.

My concern, however, is that new technology is moving the market beyond the reach of our regulatory system. In fact, our current regulatory structures may actually inhibit the ability of Canadian companies to respond to foreign competitors right here in our home markets, not to mention expanding in markets around the globe.

What is needed, and needed soon, is not just incremental tinkering at the edges. What is needed is a fundamental rethinking and re-engineering of the regulatory system. We must recognize that a strong yet flexible regulatory system that delivers high quality, competitively priced financial services can be, must be, an important global competitive advantage for Canada.

Let’s take a look at some of the trends. There is massive consolidation of the financial services industry around the world, not just in commercial banking, but in insurance, investment banking and funds management. Canadian banks, insurance companies and investment funds are all becoming relatively smaller in world terms. Ten years ago CIBC was the 45th largest bank in the world. Today we are 66th.

As today’s headlines tell us, the lines have blurred across the traditional businesses of banking, trust, insurance and securities. Investment funds are buying trust companies, credit unions are becoming banks. Insurance companies are bidding for investment companies. We’re seeing joint ventures between banks and investment funds. Everyone wants to get into deposit taking-to compete for the excess cash held by investors. Everyone is moving into everyone else’s business. Yet we are all governed in different ways by different financial services regulators. We are even taxed in different ways and at different rates.

Interest in the Internet is booming and everyone is trying to find ways to sell things on it, including financial services. Offshore sellers are not restrained by political boundaries or regulatory jurisdiction, let alone traditions of privacy or ethical business practices. Some people could be seriously hurt. We have already seen US and Canadian regulators attempting to shut down illegal and fraudulent telemarketing operations in North America. Transactions on the Internet are anonymous and difficult to trace.

We are also seeing a host of new demands from retail stores, from investment dealers, insurance companies and fund managers for direct electronic access to the payments system, which is overseen by the Bank of Canada.

The payments system is little known and understood. But it is the way payments other than cash get made in Canada. The system processes some 11 billion transactions a year totaling more than $2.3 trillion. That’s checks, deposits and electronic transfers among individuals, governments and business.

Most of those exchanges are completed overnight because the banks, trust companies and credit unions that are members of the payments system are well known to each other. There is high confidence they will stand behind each transaction. By comparison, in the US, it can take up to two weeks to process a check because thousands of participants are involved. Adding hundreds of new members also raises difficult questions about privacy and security of deposit accounts. And how do we ensure there is no unauthorized access to your bank account if the access is direct by computer, telephone or smart card? We will have to work with the Bank of Canada to resolve these issues.

There is a lot at stake here for Canadians and non-Canadians alike. The financial system is at the heart of every economy. Because of its central role in transferring funds, allocating risk, and securing economic opportunity, the efficiency and stability of that system is a major factor in the long-term quality of economic life.

I am pleased that the Government of Canada is establishing a special task force to examine these issues. I appreciate they will not have an easy job. Nor do they have a lot of time. But this task force represents an opportunity for all who understand the link between a strong domestic economy and a sound and efficient financial system to bring their expertise to the debate. Until now regulatory change tended to follow, rather than anticipate, marketplace developments. We don’t have that luxury today.

It is time to set aside the struggles over turf that have characterized the debate so far. Canada needs its financial players to focus on the needs of consumers and on the strength of our financial system. Canadian consumers must be allowed to choose among competitors for their business. And we must ensure that that choice is made with confidence in the system.

At CIBC, we want to be a significant contributor to this debate. We are completing an analysis of the issues we believe are critical to the success of both the Canadian economy and the financial services sector. We will present our proposals to the task force in the coming months.

Let me outline the broad principles upon which I believe we must rebuild our regulatory system. First and foremost, Canadian consumers and businesses must have confidence that our system is safe, secure and stable. The role of the industry as the intermediary between those who borrow and those who save and invest is something that Canadians now almost take for granted. We must ensure that nothing is done-or fails to be done-to shake that faith and confidence.

Second, Canadians need a financial system that is open, efficient, responsive and national, serving all Canadians regardless of place of residence, level of income or size of business. It must protect the privacy of individuals and guard against irresponsible and unethical sales practices.

Third, we must simplify and harmonize the regulatory system. The regulatory process should oversee specific activities, rather than classes of financial institutions as it does now. In other words, everyone in the deposit taking business, or the mutual fund or insurance business, investment or lending business, should face one group of regulators, one set of regulations, one way of doing business. The old approach has tended to perpetuate separate factions and virtually guarantees infighting.

Finally, our industry must be globally competitive, able to connect Canadians to an expanding world of economic opportunity, giving them firmer control of their financial dealings and access to new and better jobs. That will mean allowing Canadian financial institutions to become larger to expand into global markets with our customers.

But part of our challenge in achieving this vision is uniquely Canadian. It’s the legacy of a federal-provincial system of jurisdiction for financial services. There are currently 85 different federal and provincial agencies that we deal with in the normal course of doing business at CIBC. Consider for a moment how your own business could function within this regulatory maze, each with its own rules, reporting requirements and often conflicting demands. It is completely unsuited to the era we’ve entered, to a financial services universe characterized by electronic and globalized commerce.

There is an old story about writers from four different countries being asked to compose an essay on elephants. The American’s was titled Raising Elephants for Fun and Profit. The French writer provided a treatise on The Love Life of the Elephant. The British contribution was Elephants and Empire. And the Canadian paper? Elephants: a Federal or Provincial Responsibility?

I understand the reluctance on the part of some provincial governments to cede control to another jurisdiction. But I would hope that we could develop Canada-wide standards that, while administered in each jurisdiction, would be accepted nationwide.

National agencies do not have to be federal. Provincial regulation does not have to be different from one province to another. In a modern system, it is not an intrusion on jurisdiction to insist on identical rules and procedures. Reporting requirements can be harmonized and centralized for many functions, with multiple regulators accessing identical reports. Information technology can be much more extensively utilized.

I believe we now have a choice. We can simply let this technological wave and the competition it is bringing, roll over us and live with the consequences-both good and bad. Or, we can make the more prudent-and in my view essential choice-of re-engineering our financial services and regulatory systems to reap the full benefits of this accelerating change, while avoiding the most serious pitfalls.

Canada has built a system that is the envy of most countries in the world. There are strong Canadian financial institutions and our markets are open and vigorous. The sector counts for one-sixth of Canada’s GDP. Many of our largest and best known financial companies compete successfully in global markets. A third of all bank earnings are generated in foreign markets. Eighty-five percent of the jobs are here at home. And the jobs in financial services are increasingly more skilled and better paying.

This strong and successful industry did not arrive by accident. It was due to enlightened lawmakers and regulators, working in partnership with the business community, who had the vision to encourage innovation, flexibility and competition while maintaining the underpinning of stability in our financial system.

Canadians have built a vibrant economy based in considerable part on a strong financial sector. Together we need to ensure that one of the real strengths of the Canadian economy, a successful financial services sector, moves forward confidently into the 21st century. In the era we now are entering we need a vision that will carry us forward not just for a few years, but for several decades.

The issues are complex. Many participants in the industry hold strong views. But the difficulty of what lies before us should not deter us. Great challenges have never deterred Canadians in the past. They should not now.

Our vision of the future is not held exclusively by the banks, trusts, insurers, non-bank lenders, investment dealers, credit unions or fund managers. This vision must be developed by all participants with the support of our governments. Our objective should be to ensure that our financial system remains strong and globally competitive, meeting the needs of individual Canadians as well as Canadian businesses, large and small, competing at home and abroad.

It’s one way to help ensure continued growth in the Canadian economy, enhance our standard of living and create challenging jobs for our children and grandchildren.

BREATHTAKING CHANGES IN STORE FOR BANKING

Holger Kluge
President, Personal and Commercial Bank, CIBC

The Regina Chamber of Commerce, June 26, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

I’d like to take you on a journey into the future. It’s the year 2000. The scene is a Saskatchewan prairie. A local farmer is planting canola, using global positioning – whereby the tractor’s onboard computer receives a satellite image of the field and then uses that information to perfectly position the tractor over each row to prevent overlap in seeding. Suddenly, the computer’s alarm goes off inside the cab. Flashing on the screen is this message: “Bumper Canola Crop Harvest in Argentina. Prices Expected to Drop Sharply.” After scanning the story for details, the farmer quickly logs onto his futures trading program and electronically executes a contract for a put option as a hedge against the expected price decline. He also tells the computer to alert him again – or beep him at home – if there are additional developments. He then turns off the program and resumes seeding.

Now let’s move to the year 2010. A woman is coming home after a day’s work. Her house is locked. But she doesn’t carry keys. All she does is state her name into a voice recognition device on her front door. The system confirms her identity, unlocks the door and lets her in. Once inside, she activates her computer by smart card, which transfers her password into the machine. She pulls up some financial records in her investment portfolio, reviews them, prints out the ones she wants, and then transfers $1,000 from her checking account onto the smart card. She then electronically transfers $300 from the card into her son’s account. He’s away at university and seems to be constantly short of money. Later that night, she reserves the film “Bridges of Madison County: Part IV” to watch at 10:00 p.m. on her interactive TV, and pays for the purchase simply by having the price debited from the cash that was “stored” on her smart card. While waiting for the movie, she logs onto the Internet, connects to her favorite cosmetics shop – in Vancouver – and orders a gift basket to be sent to a sick friend in Atlanta. Again, the value is debited from the card. By now it’s 10 o’clock. The movie automatically comes on her TV. But she’s tired of Clint Eastwood and doesn’t like Meryl Streep, so she reprograms the TV to run the film with Brad Pitt and Demi Moore in the starring roles.

Our third journey takes us to the year 2020. There are no such things as savings or checking accounts anymore. Instead, there are “wealth accounts,” which enable people to turn all kinds of assets – homes, pensions, stocks and bonds, vintage cars, antiques, coin collections, and other items – into “liquid” value without ever having to sell those assets.

Such accounts will be kept continuously up-to-date by computers that carefully monitor the appreciation or depreciation of all items in the portfolio. Their value will be instantly tapped by the next generation of smart cards, called “wealth cards.” Using these cards you’ll be able to buy, say, a new sports car by simply drawing on the wealth built up in your summer cottage.

Wealth accounts will also be used for investment and borrowing. On the investment side, artificial intelligence programs will allow people to create customized financial strategies – automatically buying, selling and allocating investments according to their own investment goals and risk tolerance. In effect, the wealth account will operate as their own personalized mutual fund. As for credit, large amounts of it will be easily obtained, secured by the value of all the assets held in your wealth account. The account will be the collateral.

No, I haven’t been watching reruns of “Star Trek: The Next Generation.” But I do watch what’s happening in financial services. And I can tell you with certainty that examples like this will be commonplace in the future.

This afternoon I want to talk about that future, specifically in the context of my own profession of personal, or retail, banking. It’s an industry that’s going through radical change, right before our very eyes. What’s driving this change? How are banks responding? What impact will this have on customers? What will banking be like down the road?

Let’s start with the forces behind the change – competition, for instance. There was a time when banks used to compete largely against one another. Things were fairly simple then. We were open five hours a day, five days a week. Branches were our main and – until recently – our only distribution outlets. We were more product than customer focused, which meant we saw the branch primarily as a product pipeline. And we tried to be all things to all people, which meant we ended up serving customers in more or less the same way – much like a post office or a public utility. That was the old paradigm.

Now let’s take a look at what’s happening today. Just imagine for a moment that you own a successful retail operation – say a boutique that sells bathroom accessories here in Regina. Your shop has been very profitable for the past 30 years and is well known to people in the community. But then suddenly, many of your clients start demanding that you stay open after hours, or on holidays. Or they call you up, wanting to purchase products over the phone or computer. What’s more, a new competitor arrives in town – The Body Shop. This global giant decides to open a 24-hour “virtual boutique” to enable people to buy products over the phone or Internet.

If you were such an owner facing such challenges, you would have to respond quickly and decisively or you’d eventually go out of business, wouldn’t you? It’s much the same in banking. Competition is changing the way we do business at a much faster pace than many bankers would like to admit.

Just last week, for instance, the giant Dutch financial service company ING announced plans to open a virtual bank in Canada this December. All its services will be available electronically – no bricks and mortar. So when you look at bank competition, it’s not just banks versus banks anymore. We now compete with everybody – from credit unions and insurance companies, to mutual fund firms, to large foreign-based financial players.

We also compete with what I like to call “nothing-but” companies – aggressive, cost-efficient and focused niche players that do nothing but mortgages, nothing but credit card processing, nothing but financial planning. None of these companies are banks. For example, in the US, the largest mortgage lender is no longer a bank, it’s a mortgage specialty firm called Country Wide Mortgages. The largest credit card provider is not a bank – it’s a credit card firm. The largest financial services company is not a bank – but you get the picture.

And soon, we also could be competing with software companies like Microsoft and Intuit, online browsers like America Online and Prodigy, and even phone and cable companies – all of whom are capable of providing customers with the ability to shop the world for the best value in financial products. These competitors are challenging banks in almost every one of our core business lines – the payments system, investment products and services, customer relationships, and in our traditional mainstays of loans and deposits.

Clearly, a new paradigm is emerging. We don’t yet know what the end state will look like. We only know that competitively, it will be as different from the old model as a computer is from a typewriter. Banks must change as a result.

The second force transforming banking is technology – again, with massive implications for the industry. Look at what’s happening in the payments area. It’s now possible to load cash electronically onto a smart card and send it to – or receive it from – anyone, anywhere in the world. Soon, everybody in this room will have smart cards. You’ll be able to store and send not just money, but all kinds of information including business data; personal financial information; vital statistics like birth dates, addresses, SIN numbers – any kind of information you decide you want to transmit. You’ll be able to do it instantaneously and securely. And you’ll be able to do it conveniently – over a phone, a computer or interactive television, over the Internet, or from one banking machine to another.

Or look at computers. The technology now exists to eliminate all time-delays when using a PC. By the year 2000, for instance, there will be virtually no wait time when logging onto the Internet – just like there’s no wait time today when you pick up a phone to make a call. What’s more, these machines will be of a caliber and capability almost beyond imagination. Internet capability will be standard. Processing speeds will be even faster than they are now. Transmission capacity will grow exponentially.

But that’s not all. Thanks to ongoing developments in bandwidth technology, the capacity of a cable line to your house will increase by 1,000 times. That means live-person images and complex graphics will soon be sent or received by computers in the blink of an eye. Today, such visuals often take minutes to appear on-screen – an eternity for anyone who’s used a PC.

Technologies like these are creating something truly unprecedented. For the first time in history, individuals will be able to buy virtually any product or service, perform any transaction, give and get any kind of information, and simultaneously talk to – and see – anybody they want to, all in the space of seconds, all without having to leave their home, their office, their backyard, their car or even their tractor.

This is all going to have an enormous influence on the way banks operate. The way we deliver products – including the role of branches – will change dramatically. Employees will need to learn sophisticated new skills: tax planning, database marketing and financial planning, to name a few. New and dynamic approaches to the customer will also have to be developed.

A key challenge will be to find more effective ways of maintaining close personal relationships with customers who will increasingly be dealing with us only through electronic means. And then there are your needs as customers. More so than competition and even technology, this factor is the one most profoundly affecting the way banking will be conducted in the future. Most of you are leading increasingly complex and even frenzied lives – juggling workplace, family and financial responsibilities. You’re not just time pressed; you’re time starved. So when many of you have to do mundane and repetitive tasks – and there are few things more mundane than most bank transactions – you want speed, simplicity, availability and ease of access. In a word, you want convenience.

Most of you here also have needs that go beyond convenience. Certainly one of the most critical needs is to obtain a financially secure future for yourself and family, which is an increasingly challenging goal. You’re concerned about job security, the stability of Canada’s social safety net and about the increasingly high cost of educating your children. Many of you are baby boomers. And although you probably hate to admit it – as we all do – you’re aging. So you’re also concerned about financing your retirement.

If you are boomers, many of you have paid down – or have almost paid down – major debt such as mortgages and are starting to accumulate wealth. Despite this, I’ll bet most of you probably feel you’re not saving nearly enough to retire on – especially when you take into account growing health-care costs, the prospect of caring for elderly parents and perhaps even inflation. And it doesn’t help matters when you hear some experts saying that the average 45-year-old planning to retire in 20 years will need well over a million dollars to do so. Given these circumstances, the pressure to make the right financial decisions throughout your life is immense.

Collectively, these factors are creating another powerful demand among customers for expertise, solutions and quality financial advice. Going forward, these advisory needs will be even more pronounced – especially as more people move from debt acquisition into wealth and investment building.

Convenience and advice – these are the paramount customer needs of today. The implications, for banks and all companies, could not be more clear. Satisfy those needs. And satisfy them when, where, and how the customer wants. The question is: how will banks do that – especially in the face of unprecedented competition and the need for constant technological innovation? Our response at CIBC is to literally build a financial services company of the future.

A key part of this effort is under way right now here in Regina, where we’re building a state-of-the-art, $27-million telephone banking center. CIBC already has close to 500,000 telephone banking customers; and by the year 2000, we estimate 50% of all bank transactions will be done over the phone, compared to 15% today.

This facility helps us respond to that accelerating demand. When fully operational, it will – along with its sister facility in Halifax – handle more than 30 million phone calls a year, serve customers 24 hours a day, seven days a week, and enable them to obtain over the phone every service currently offered in a branch – including electronic cash. It will also have the best-trained staff in the industry, professional management and advanced technology to provide you – our customers – with fast, convenient and highly professional financial service.

Another piece of the bank of the future is being tested in St. Catharines, Ontario where we’ve completely redesigned employee roles as well as the physical layout of all of the district’s 14 branches. Our goal with these initiatives is to do something no North American bank has yet been able to do. That goal is to simultaneously provide fast, convenient, transaction banking for all our customers – and quality financial advice for customers with more complex needs, delivered the way they prefer. As a result, our customers will encounter a banking experience completely unlike anything they have known to date. Let me give you a taste of what that experience will be like.

Let’s say it’s sometime in the next decade and you enter a CIBC branch. The first thing you will notice is that they are smaller, more automated, more accessible and staffed by courteous, well-trained professionals. Branches will also be more efficient to run – which from our perspective means we’ll be able to maintain and even enlarge our presence in the communities we serve. That’s important, because we know that many of our customers want branches and like the personal touch they provide.

Once inside the branch you’ll notice several things: more electronic banking capability. More professional service. And dramatically reduced waiting times – an average of 15 seconds or less for basic bank transactions compared to four to five minutes today.

Suppose you want to use a banking machine. You won’t need a bank card. The machine will know who you are by your voice or by scanning the retinal patterns in your eye. Or we can provide you with a laser-device which enables you to beam your access code directly into the machine.

You have a smart card, but yesterday your elderly aunt wrote you a check (she likes tradition) and you want to deposit it. So you simply touch the “deposit” icon on the ABM screen and put the check into the machine. During the process, the screen displays the check’s image – verifying the transaction. If you want, you can immediately receive cash for that check down to the penny. If it’s a US note, the machine will give you US cash – or the equivalent in Canadian money, whatever you prefer. Afterwards, you can examine all your CIBC accounts – self-directed RRSPs, mutual funds, GICs, life insurance whatever – which also can be displayed on screen. The screen can even be reduced, allowing you to simultaneously view several accounts for comparison purposes. For hard copy, just touch the print icon.

Finally, as you’re about to go, this message appears on the ABM screen: “You’ve asked us to remind you that your son’s birthday is next week and that he enjoys football.” Grateful for the information, you hit the “tickets” icon and place a voice-order for two seats at the next Roughriders game. The order is automatically sent to the box-office, where the tickets are held for pick up. The price is then debited from your account – or you can again use your smart card for payment. Those are just a few of the scores of transactions you’ll soon be able to perform on any one of our ABMs – including buying travelers checks, mutual funds, or transferring money anywhere in the world.

Now let’s move further into the branch. You won’t see any counters or other structures that formerly acted as barriers between staff and customers. They’ve all been removed. You won’t see much paper, either. That’s because we’re eliminating paperwork and other administrative tasks that used to prevent employees from devoting their full attention to the customer. And you won’t hear a lot of phones ringing, because we will have diverted routine phone traffic to our call centers in Regina or Halifax.

What you will encounter is a spacious, efficient, responsive and highly professional environment. There might be a lounge area with video monitors providing investment information, some sales offices, a seminar room for financial planning lectures and workshops, a computer room for Internet users, an interactive TV facility, maybe a CD ROM library, perhaps even a coffee and sandwich bar. Who said banking can’t be fun!

The employees in these facilities will be highly professional individuals. Even basic services like account openings and mortgages will be handled by people with well-honed technology and interpersonal skills, extensive product knowledge, and a keen understanding of your needs and goals. If you have more complex financial needs – like tax and estate planning, debt allocation, asset management, or retirement planning – the employees you deal with will possess even higher level skills. All will be accredited financial advisors, with broad expertise in areas such as small business, investment strategy, financial planning, team building, relationship management, even foreign language skills – reinforced on a regular basis by both in-house and external training. They’ll also be supported by state-of-the-art technologies and a range of specialists from across the bank.

Suppose it’s 10 years from now and you’re a local exporter planning to ship product overseas. Picture your financial advisor here in Regina meeting with a group of these experts by interactive TV – a foreign exchange specialist at CIBC offices in New York City, one of our trade finance experts in Hong Kong, and a CIBC insurance professional in Toronto – all of them working in real time to develop the right strategy to help your business prosper.

So when you meet with one of these advisors, you will in effect be dealing with a microcosm of CIBC – the capabilities and expertise of the entire bank, brought to bear on meeting your unique personal and business needs as those financial needs evolve and change over a lifetime. What’s more, those of you who don’t want to meet in person with an advisor or with other bank employees will be able to obtain exactly the same levels of service electronically.

We will have video kiosks that enable customers to consult with “live” financial consultants hundreds, even thousands, of miles away, day or night, to do everything from residential mortgages to buying stocks to estate planning. You’ll be able to access us as well through interactive television, through screen phones, by computer and over the Internet – and again, receive the same level of service you’d get at a branch. Better, in some cases, because technology lets us reach more customers with products and services which before only the wealthy could afford.

Let’s say it’s early in the next century and you have a variable rate mortgage. One day our economics department issues a report stating that further devaluation of the Mexican peso is imminent and interest rates could rise sharply as a result. Within minutes of receiving that information, financial advisors will be able to send it electronically to all variable-rate customers along with a recommendation to lock-in. Soon, thousands of customers will receive this level of expertise as a matter of course – one of the hundreds of advisory services we’ll be able to provide thanks to technology. I say “soon,” because we’re building the foundation for these capabilities today. Both of our telephone banking centers give us a solid platform from which to launch a full range of the most up-to-date electronic banking services.

We’ve also established a Web site on the Internet. It’s the first site by a financial institution to use Java technology, eventually enabling us to provide high-quality, interactive computing capability to customers who want to bank with us online. At the same time, we’re exploring initiatives to enable customers to bank and shop over the Internet as securely as if they were at a store or bank machine.

And to position ourselves in the emerging world of electronic cash, we plan to launch our smart card initiative, Mondex, in partnership with Royal Bank, later this year in Guelph. The system will allow customers to load Mondex cards with cash from pay phones, personal computers, ABMs or their bank accounts – even from other persons.

I cite these examples, ladies and gentlemen, not so much to highlight CIBC’s accomplishments as to underscore what I believe will be the salient characteristics of successful banks and banking in the future.

• Banks will continue to operate in a highly competitive environment against a growing list of tough and energetic rivals – many of them supported by well-trained staff, low overheads, strong product expertise, economies of scale, technological savvy and large advertising budgets.

• To compete in this environment, banks will increasingly deliver only what has value – products and services that customers want and need, not what banks want to sell. Those who try to be everything to everybody will not succeed.

• At the same time, the sheer variety of players now crowding the domestic market will create opportunities for strategic alliances. Expect to see, therefore, more partnerships between banks and software companies, banks and cable firms, banks and phone companies, banks and data processors. Expect as well to see Canadian banks and other financial institutions – such as European and US banks, and even insurers – joining forces on mutually beneficial ventures.

• Technology, of course, will be a hallmark of the successful bank, and this will have a major impact on how banks operate. Branches will remain important delivery mechanisms. But their heyday as the only access point for the customer is over. Increasingly, they will be complemented by a host of electronic delivery and payment alternatives.

• Technology will also be used to maintain links with customers who no longer choose to use branches as their primary point of contact with the bank. In this regard, innovations such as database marketing – which enable us to develop very precise profiles of customer needs and preferences – are invaluable.

• While technology will be important, the signature of the successful bank of the future – as we have seen – will be its employees. Increasingly, therefore, you will see banks investing substantially in helping employees develop new skills and capabilities. We’ve already made major investments in this area at CIBC, and plan to do even more as part of our effort to prepare our employees for new kinds of work and employment.

• The bank of the future has an equally important responsibility to the communities it serves. We’re successful because you’re successful, not the other way round. This is why we are committed to maintaining and renewing our nationwide branch network even while some other North American banks are cutting theirs by as much as 50%. It’s also why we’ve built our telephone banking center here in Regina: a $27-million investment in the community, with the prospect of as many as 500 new jobs coming into the area representing a total of $15 million in annual payroll. In the future, you will see even more of these major local investments taking place across Canada – certainly from CIBC. We are a nationwide bank – not just a Toronto bank. And we will increasingly demonstrate that fact to the communities we are a part of.

• But the most important feature of the successful bank in the future will be its ability to focus totally on you, the customer. The best banks will be those that make things easier and more convenient for you and your family, that provide integrated financial responses to your most complex financial needs and that deliver solutions for your financial concerns and help you attain a secure financial future.

• The best banks will also be those that know how to make banking fun for their customers. Ever watch a child or teenager use a CD-ROM program or a video game? They’re excited. They’re enthralled. I think we’ll see more of this kind of excitement and fun brought into banking, especially as technology allows us to interface with customers in much more direct and imaginative ways.

• Finally, I hope and trust that Canadian financial service companies in the future will continue to be profitable, robust and successful. Because without profits very few of the innovations and benefits I’ve talked about today will be available to Canadians. Or, if they are available, it will be foreign-based suppliers providing them.

In summary, global competition, technology and changing customer needs are revolutionizing the world of banking – making my profession markedly different from what it was 20 years ago.

Banking will be more competitive, yet at the same time there will be more opportunities for cooperative arrangements among competitors. It will be more technology intensive, yet also more personal and more responsive. It will be more supportive of employees as they adjust to the new world of work; be more responsive to the investment needs of communities; and be a lot more fun for customers. The bottom line is that banking is about people employees, customers and the residents of the communities we serve – people like you.

If we want to be successful in your eyes, we have to respond, adapt and shape ourselves to the constant ebb and flow of our demands, our attitudes, our concerns, our needs. You are in control.

What is the bank of the future? The bank of the future is not us. The bank of the future is you.

BUSINESS CHALLENGES AND THEIR LINKS TO INTERNAL COMMUNICATIONS

Jacqueline Beaurivage
CEO, CIBC Trust

Strategic Communications Conference, International Association of Business Communicators (IABC), Calgary, September 25, 1997
Published in The Corporate Report No. 24 (May 30, 1998)

I must say it truly is an honor – and a somewhat daunting prospect – to be asked to provide my thoughts from a CEO’s perspective on the importance of communications in today’s organizations to a forum of communicators.

Generally, as the CEO of a trust company, I’m invited to speak on truly thrilling topics such as “Successfully Implementing the Modified DEITS Methodology for AIMR Compliant Account Level Performance,” or “Innovative uses of CHAID Analysis to Predict Beneficiary Investment Levels to the Year 2005.” Needless to say, when I went looking for material from my recent speeches to use here today, I came up a tad short!

In 490 BC, a Greek soldier named Pheidippides ran 24.85 miles from a battlefield at the site of the town of Marathon to Athens, bringing news of a Greek victory over the Persians. Legend has it that Pheidippides delivered his momentous message, “Niki,” meaning, “Victory!” – then collapsed and died!

Communications have come a long way since Pheidippides’ historic run. Contrast that communication method to today: where massive amounts of information are available at your fingertips through the internet to a world in which we leave each other more than 12 billion voice mails a year. To a world in which over 2.2 billion people watched Princess Diana’s funeral on television – almost half the entire planet.

Every day, we’re all bombarded with thousands of messages, through dozens of different channels. As professional communicators, you must relate to the opening lines of Charles Dickens’s A Tale of Two Cities: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity…”

We’ve all experienced the frustration and disappointment of miscommunication. The simplest things can go wildly wrong if communications messages don’t connect. One of my favorite examples of “missed messages” is a true story of a man with a simple quest: buying a birthday cake for his wife. As is often the case in our time-crunched lives, guess what? He had left it to the last minute and needed the cake that very evening.

“No problem,” thinks our hero. “I’ll just call the local bakery and order it right now.” And here’s how the conversation went:

“Sam, it’s Mark. I need a cake. It’s Susan’s birthday – today!”

“No problem, Mark. What do you want me to write on the cake?”

“OK, in the middle write: ‘Happy 40th Birthday, Susan.’ Then write: ‘You’re not getting older’ on top, and ‘You’re getting better’ on the bottom.”

“OK, no problem. It’ll be ready at five.”

A greatly relieved Mark speeds off to Canadian Tire to complete the rest of his “to-do” list. Later that evening, the celebrations are in full swing and Mark proudly opens the cake. And there on the cake, for all to see, is his message to Susan:

“Happy birthday Susan –

You’re not getting older on top,

You’re getting better on the bottom!”

If such a simple task can go awry, imagine the potential for mixed messages, misinterpreted signals and missed communication in the world in which we live today. The tower of Babel goes digital.

It would be almost impossible for me to overstate the importance of the communicator’s role in business today. As CEO, I look squarely to you to do two things: build belief and create confidence among the employees of the organization.

Let’s stop for a moment and consider the business landscape in which today’s communicators practice their art. Every day, there are new breakthroughs in digital and electronic communications, making it increasingly easier for people to send and receive messages of increasing complexity. What this often means, however, is less time to reflect, consider, ponder and form opinions. Viewpoints are often provided for us “pre-packaged” – what I call “bubble-pack thinking.” And with so little time, it’s sometimes easier for us to accept what’s already served up on the platter. The danger in this is that listeners become numb to messages, making it even more difficult for communicators to reach their audiences and break through.

These challenges come at a time when good communication is absolutely critical to the success of organizations. Trite but true, the world is changing at an escalating pace. In order to keep up, businesses need to constantly reinvent themselves. Never has the Chinese proverb been more true: “To do nothing is to fall behind.” Or as someone else said to me recently, “If you’re not on the steamroller, you’re part of the pavement.”

As businesses undergo their metamorphosis, employees can feel disenfranchised, confused and downright cynical. And you can imagine how it feels to be a customer of someone who feels this way! Companies are realizing that communicators are the key to successfully facilitating change. In the early 90s, for the first time ever, companies spent more money on computing and communications than the combined sum spent on industrial, mining, farm and construction equipment. The way we do business has changed forever.

I said earlier that I look squarely to my communicators to build belief and create confidence among employees as businesses move through constant change. To build belief, you must help your CEO paint the vision of the future, graphically, so it resonates with employees. To move forward, employees must see a destination. To create confidence, you must accept your role as chief change agent within your company.

To illustrate the importance of both roles, let me give you a brief case history of CIBC Trust. We’re a national company, with 300 employees located in 16 branches from Victoria to Halifax. When I arrived at CIBC Trust as a newly minted and eager CEO, I found a company in turmoil and disarray. I was its third CEO within an eight-month period. A major strategic change had been announced six months earlier, but there were still far more questions than answers about how that change was going to be implemented. Staff were demoralized and our turnover rate was stretching toward 35%. Add to this picture the fact that our major revenue generating product had been discontinued, and that we had no substitute revenue generator ready to go…not a pretty picture.

A year later, I’m happy to say that we have the fastest growing new investment service in the marketplace, a rejuvenated and revitalized staff with confidence in leadership up from 50% last year to over 70% this year, a 65% increase in profit and a return on equity that’s improved from 8% to 31% in one year. Life is much different at CIBC Trust today than it was a year ago. And much of our success is due to our deliberate and strong focus on employee communications. Feedback from our employees confirms this.

As CEO, I see my role as setting the strategy and direction for our company. Someone recently asked me what I did, anyway, and my answer was: “I cut pathways through ambiguity.” (Needless to say, I got a fairly blank stare back.) But that in itself is not sufficient. I need help from my communications team to bring our strategy to life.

At CIBC Trust, we employ a number of different communication vehicles to energize our employees to action. We hold Town Hall meetings monthly. We also publish a monthly newsletter. And we have an employee council that operates like the “United Nations” of our company. I’ll touch on these and other CIBC Trust vehicles later in my presentation. My point is that the communicator plays a critical role in painting the picture for employee action, encouraging and reinforcing new behaviors and sustaining the change process.

A lot has been written in recent times about the importance of painting a tangible corporate vision. At CIBC Trust, our corporate vision is a simple one: “CIBC Trust creates financially confident Canadians by providing innovative investment and estate management solutions.”

The importance of a vision statement which captures the imagination and invests our working lives with true meaning – a purpose bigger than ourselves – has been the subject of much academic and business focus. Your role in creating the words that paint the vision in Technicolor is well recognized. A great communicator imbues a vision with life, engages the emotion and sets the stage for change. A great communicator builds belief.

I believe that your second great role, creating confidence, is as important as building belief. Creating confidence in your organization requires you to become your company’s chief change agent. To create the kind of change that businesses like CIBC Trust must execute today requires both vision and action. You must have both to succeed.

I liken navigating change to leading an expedition through the Grand Canyon at night. You know roughly where you want to go, but it’s dark. You’re going through rugged terrain, and the CEO – the expedition leader – probably only has a rough idea of the right path. Who will follow, unless they can see for themselves that the next step will not send them plunging over the edge into an abyss?

The communicator’s messages are like a light that allows everyone to see the road ahead and move forward in the same direction. And as we all step out toward a new future, we know that all too often the path will not be straight. As communicators, you must help redirect the expedition onto a new path, ensuring that the people don’t lose heart along the way. Communicators must create the confidence that, even though the journey may be long, and switching paths may be required, the ultimate destination can be achieved.

In order to light the way, a great communicator uses flashlights, floodlights, penlights, spotlights, “thought lights” – whatever it takes to convey a consistent but varied set of messages and themes. Newsletters, memos, conferences, Town Hall meetings, special events, reward and recognition programs must all be pressed into service in shaping new mindsets, creating action and moving the company forward.

At CIBC Trust we use all of the above. Plus: each time we achieve a significant milestone – be it sales targets, improvements in our employee survey results or launching H. R. and business programs – we take the time to celebrate our achievements and mark the milestones along our change journey.

As chief change agents, communicators must adopt many “personae” to tirelessly build new beliefs. Guiding the way to the future, and using many tools to change world views and constantly reinforce key messages requires skill and dexterity. I often think of the communicator as the many faces of a masquerade. Your role is multifaceted, because there is no one “right” way to enlist both the hearts and minds of employees towards change. As a master shape-shifter, I can think of at least 10 different personae which you all play – and you can probably think of even more. You have to be a business partner, a storyteller, a yenta, a talk-show host, a court jester, a shaman, a cardiologist, a juggler, a coach and a psychic advisor.

First and foremost, you are a business partner. As a communicator, it is vital that you understand your company’s business objectives. Your effectiveness, and even your credibility, depend on you understanding your business. At the same time, you must help your CEO understand the economic importance of communication. Be very explicit about how your communication programs add value and create action and results. And let’s face it: in today’s environment you score extra points for being high on creativity and low on costs. Let me give you an example.

A simple but effective idea at CIBC Trust is what we call our “Wall of Progress.” It’s a wall where we’ve put up posters that track our progress against our specific business targets. Each business target is represented by a thermometer. And each month we update the thermometers, so everyone knows exactly where we stand. We also post inspirational quotes and samples of new marketing materials, various contest results and so forth. It’s “cheap and cheerful,” but it works.

Another way to hammer home your importance as a business partner is to point out the hidden productivity costs of unaligned employees and “non-subscribers.” Customer satisfaction hinges on employee satisfaction. Uninformed employees tend to be far less productive and more confused. This inevitably trickles down to the customer. And that hurts your business.

As a communicator and a change agent, you must also be a good storyteller. Your company’s personality is shaped by the stories that are being told. Find people who are examples of the changes you want to create and make heroes out of them. For example, we have a program under way at CIBC Trust related to converting clients out of a particular discontinued product and into new products. We’ve created a super-hero called the “Converterator” out of one of our investment consultants who’s doing a particularly bang-up job.

Spread the news of success through the deliberate use of folk tales illustrating changed behaviors. You don’t have to be Shakespeare to record human accomplishment in your company. All you have to do is document and share successes. People often forget information, but they always remember a really good story.

When it comes to communications, being a yenta is a good thing. A yenta thrives on gossip. In times of change, the company’s rumor mill is working at a frenzied pitch. That means an entire company full of yentas. Sometimes small amounts of misinformation can snowball into widespread panic. It’s something I refer to as the “Jurassic Park syndrome,” making dinosaurs out of DNA. In times of change people take a tiny little bit of information and create a huge rumor around it.

You can use the grapevine to your advantage by being both a rumor buster and a rumormonger. Being privy to rumors means you can clear up misinformation fast and replace speculation with fact. That’s rumor busting. As a rumor-monger, you can actually use your organization’s informal networks to “leak” information people may need time to reflect on. We’ve done this quite successfully at CIBC Trust, and have found that by the time the message is “formally” announced everybody has had a chance to think about it and feel like they’re on the inside track.

As a talk-show host, you need to find interesting ways to deal with tough issues head-on. Besides the scandalous topics, what draws people to talk shows is that everyone has the opportunity to participate, and that many different views can be expressed. Never be afraid to probe and dig for real understanding. That’s the only way true dialogue can take place. So, be Oprah, be Phil, be David! As a communicator, you must always ensure communication is a true dialogue – omni-directional. As Richard Armour put it, “It’s all right to hold a conversation, but you should let go of it now and then.” It’s important that you foster a participatory culture where challenging each other for a better outcome is accepted.

At CIBC Trust, we address tough issues head-on, whether through our own Grapevine Line, employee focus groups, our “What’s happening around here anyway?” email box, employee fireside chats and a multitude of other omni-directional communication vehicles.

Right along with your role as yenta comes your role as court jester. If you are privy to the rumor mill, you are in a prime position to keep your CEO informed about “what’s happening out there.” It’s a little-known fact that the role of the court jester was not merely to amuse the court. Rather, the role of the court jester was to tell the king what others didn’t have the courage to say. As a modern day court jester (minus the funny hat and pointy shoes, of course), it’s your job to be absolutely balanced in reporting news. After all, the loudest factions may not always represent the entire kingdom.

Don’t be afraid to use humor to get your message across. Humor is very powerful. As someone once said, “Humor is the shortest distance between two people.” At CIBC Trust we often use humor to communicate important messages. Last year, we spoofed “The X Files” to share our business plans with employees. They got the message!

A shaman is a medicine man, a sorcerer, a seer, a witch! Every culture has its own version of the shaman. As your company’s shaman, you use ceremonies, rituals, and events to help others “see” the future. You create the welcome illusion of stability in a sea of change, by bringing consistency to communication patterns and routines. For example, once a month at CIBC Trust we have the Town Hall meetings that I have already mentioned. They are held on the third Monday of each month, and always follow the same agenda.

While the actual theme and content shared at the meetings change from month to month, the routine meeting itself has become a fixture in our working lives, something employees look forward to and depend on. For the price of pizza and an hour and a half of our time each month, we communicate key business messages in a fun setting. Town Hall has become one of our communication rituals. As shaman, you must also heal the change-weary by seeking out pockets of fatigue, cynicism and disbelief and applying your antidotes.

The company heart is the specialist domain of the communicator. As company cardiologist, you must constantly monitor the heart of your organization with a variety of feedback mechanisms. One of the ways we do this at CIBC Trust is through our Employee Council. This group of employees represents all facets and geographical areas of our company and provides feedback on our various initiatives. They also let us know if communications are cascading to them. Never is the heart more stressed than during times of extreme change. The emotional well-being of your organization is dependent on good communication.

No doubt juggling is an aspect of your role that you’re all too familiar with. But the reality is that during change there are multiple, and sometimes conflicting, priorities. You need to help your organization develop the flexibility to change direction quickly and live with chaos rather than wasting energy trying to wrestle with it. Inevitably, one or more balls (or knives) may fall. But don’t panic. A good juggler simply stops, gathers up his tools and starts again. The Japanese definition of success is: “Fall seven times, stand up eight.”

This brings me to your role as coach. It probably comes as no surprise to you that managers spend 78% of their day communicating. All too often the remaining 22% is spent searching for the right information to communicate. To free up this 22%, and to ensure that the 78% is time well spent, communicators must put key information at the fingertips of managers. Not only does this make good business sense, but it will also win you the affection and accolades of your company’s managers.

As a coach, you must develop a team of people who value communications just as much as you do. To make that happen, you must coach managers to embrace their role as communicators. It’s also important for you to coach your CEO. CEOs, in general, are logical activists. We inhabit a fragmented world where pragmatism and action reign supreme. Your CEO will rely on you to ensure the logic and the emotion of change are both connected and attended to.

Last, but not least, is your role as psychic advisor. While you may not be clairvoyant, you need to constantly ask yourself: “What could go wrong with this plan?” In case things don’t turn out the way you expect them to (and that will happen), have a contingency plan. As a psychic, you need to be open-minded and aware of what is happening, both in your organization and in your industry. Don’t be afraid to bring in new ideas from outside the company. As a communicator, anticipate the challenges ahead and creatively turn them into opportunities.

As I said at the outset, it’s hard for me to overstate the value and importance of an excellent communicator. I hope I’ve shed some light on what those talents are, from your CEO’s perspective, and how we look to you as the “chief change agent.” Your true value to your CEO and your company is through your ability to build belief and create confidence.

As a business partner, you must know your company’s strategy, business goals and plans, and build your communications program to directly support those business objectives.

As a yenta, you must harness the power of the informal communications network and make it work for you.

As shaman, you must be the link between the past and the future. A reminder of how much progress has been made and where the journey is leading.

As company cardiologist, never abdicate your role as keeper of the company’s emotional well-being. Ensure that the “double connect” between head and heart is solidly intertwined.

My final advice to you is to lead by example, thrive on change, demonstrate resilience and never, ever lose your sense of humor. And when things get tough always remember: you’re not getting older on top – you’re getting better on the bottom!

INTERNATIONAL DEVELOPMENT: EVERYBODY’S BUSINESS

Huguette Labelle
President, Canadian International Development Agency

The International Finance Club of Montreal, January 21, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

Economic reform and political liberalization are part of a process of irreversible global change. Governments everywhere are giving up all or part of programs long seen as their exclusive jurisdiction and leaving them to the private sector. In this new environment, international development is no longer solely a government responsibility, and private enterprise is no longer on the fringes of the development process. In fact, international financial flows from private corporations to developing countries-mainly the countries in transition-are three times as large as from official sources.

I believe that all segments of society can contribute something to international assistance. One way or another, that contribution benefits us all, and I would like to take this opportunity to explore that idea in some detail. I will start with the international environment and then examine why cooperation in this area is important. I will then look at the importance of international development to the countries concerned, how it benefits Canada’s economy, and the opportunities it offers for our private sector.

Not all business people will become involved in international development or form joint ventures in developing countries. In our era, however, events in these countries affect us all. Globalization is not a cliché. It is a reality.

Globalization has broken down borders. We see this in the proliferation of international business and financial ties, made possible by revolutions in transportation, information and communications technology. Until recently, the 1960s were considered the golden age of world growth and business expansion. Today, that is no longer true. Between 1985 and 1994, the ratio of global trade in relation to GDP grew three times faster than in the previous decade.

But growth needs security-and security may be just as important to a country’s prosperity as the economic aspects of globalization. A nation’s real security no longer depends on the barrel of a gun, if it ever did. Security is increasingly expressed in human rather than military terms. The Human Development Report released by the United Nations Development Program in 1994 defines security as follows:

“…human security is a child who did not die, a disease that did not spread, a job that was not cut, an ethnic tension that did not explode in violence, a dissident who was not silenced. Human security is not a concern with weapons – it is a concern with human life and dignity.”

Crime, including drug trafficking, political instability, environmental degradation and disease has cross-border impacts. The results of poverty, including social and economic instability, are a familiar sight on our television screens and they are felt in many aspects of our lives. Economic exclusion leading to insurrection, as in Chiapas, Mexico, has implications for the Canadian banking sector. We are touched by famine in Africa or conflict in the Middle East. Disease can often take a greater toll than war itself. Tuberculosis kills more adults than AIDS, diarrhea, and malaria-and it is returning to North America: some 2,000 new cases are reported in Canada each year.

So, we have two pictures of globalization. We have the economic picture, with the tremendous opportunities that arise if the billions of people living in the developing world are integrated in a meaningful way into the global economy. Then we have a view of the consequences if they are not integrated. The difference will be due to our failure to realize that development in those countries has a direct bearing on the security and general well-being of all of us.

Which of these two pictures best represents our future reality? The answer will likely depend on our response to the opportunities and threats created by globalization.

As you will see, I believe that when effectively executed, international development could ensure that the benefits rather than the problems associated with globalization flow across the porous, almost nonexistent borders of our global village.

My message in this regard is simple, and the news is good. Development assistance works.

• In the past three decades, the mortality rate among children under five has decreased by half.

• Last year, there were 2.5 million fewer child deaths than in 1990.

• In 1990, 75% of the world’s population had access to drinking water, and 71% to adequate health services.

• The number of literate adults has increased by more than a third since 1970.

• Thanks to the “Green Revolution,” grain production has increased by 131% in the last 20 years, and the number of developing countries that are able to feed their population has doubled to almost 50. Bangladesh, China, India and Indonesia have gone from famine to food-grain self-sufficiency.

I certainly do not wish to give the impression that this progress has been achieved solely by development assistance. Aid is vital, of course, but it is only one of many parts of the equation. Trade and investment are also key elements. Most important, however, are the efforts of developing countries themselves-the sacrifices they have made, the resources they have mobilized to achieve sustainable economic reform, to bring about significant change in their governance structures and to ensure that economic growth goes hand in hand with social equality.

Development is a never-ending task. A fifth of the world’s population – a billion human beings – lives in absolute poverty on only a dollar a day. Some 600,000 women die each year during and after pregnancy and childbirth. In sub-Saharan Africa, the maternal mortality rate is 980 per 100,000 live births. In Canada, the ratio is only 6 to 100,000. In round figures, this means a rate of about a thousand women die in childbirth in developing countries compared to only a half-dozen in Canada, an industrialized nation.

In many countries, whole segments of the population – women, youth, ethnic minorities – are left out of the development process. We know that marginalization, economic exclusion, and total destitution, leading to despair, are often root causes of social unrest. We know that they heighten ethnic conflicts that threaten our stability. They also threaten the expansion of global trade, which we expect to bring greater prosperity.

As business leaders, you all know that stability is the main condition for foreign trade. One of the major objectives of CIDA’s programming is to promote stability by reducing poverty, supporting economic growth, social equality, respect for human rights, and democratic forms of government. Through bilateral programs and in cooperation with the IMF and the World Bank, we are working to help developing countries create a stable, predictable environment favorable to private sector development. The objective is to lay the foundation for sustainable growth and to ensure that its benefits are equitably shared.

Although the United States remains Canada’s single largest trading partner, economic partnership with developing countries can be vital for the future prosperity of Canadians. The share of the world’s output produced in developing countries is now about 34%. The share produced in the US is about 23%. The developing countries’ share is expected to increase further as growth in Asia and Latin America continues to move ahead of that of developed countries. Developing countries are expected to account for 38% of the growth in world output between 1995 and 2010, compared to 22% in the 1980s.

In terms of markets, in 1995, about 100 million people in China, India and Indonesia had an average income roughly equivalent to the average income in Spain. According to The Economist, by the year 2010, 700 million people in those three developing countries are likely to enjoy that level of income. Exports of Canadian goods to the developing world have been growing by an average of 11.7% per year. During the seven-year period from 1989 to 1995, they increased from just under $6 billion to just over $12 billion.

Canadian companies can generate business profits while helping developing countries to achieve their development aims. They can establish, as many are now doing, profitable ties with countries like the “tigers” of Asia, which are already showing signs of less dependence on foreign aid and achieving impressive economic growth. Team Canada’s success in the region is a very recent example of what can be done.

In many other countries, Canadian companies can also lay the groundwork for beneficial, long-term partnerships that are likely to pay particularly high dividends once these countries have made the transition from poverty to development. To this end, they must keep informed about positive changes occurring in these countries, without waiting for the media to confirm their success.

For example, in Africa, traditional wisdom in some business circles has been that you should not do business in countries with names beginning with the letter Z – in other words, avoid the countries of sub-Saharan Africa. When we do think of good future prospects in developing countries, our minds turn to the “tigers” of Southeast Asia. Africa, especially Sub-Saharan Africa, is dismissed as a region of crisis, poverty, and failure – a lost cause.

Of course, there is good reason for concern about the fortunes of Africa. Yet, a completely pessimistic evaluation obscures positive efforts being made by Africa’s people to improve their lives. There are large areas of peace and stability. Once thought an impossibility, regional cooperation is growing. A new generation of African leaders is emerging. There were 30 elections in the last five years. The most famous one, of course, marked the end of South African apartheid and brought Nelson Mandela to power. Last year alone, Canada provided support for 10 elections in Africa.

A decade or so ago, poor economic policies and deeper structural weaknesses, combined with a lack of resources and a heavy debt servicing burden, contributed to a pervasive economic malaise in Africa. Today, following significant debt relief and with further special assistance from donors, the financial situation is turning around.

There has also been a remarkable improvement in the quality of economic management in much of the continent. There are successes in economic reform – in Ghana, Mozambique, Uganda, and Tanzania, to name only a few. The black market in foreign currency is disappearing in many of the countries taking reform measures. African countries are ridding themselves of import quotas and licensing systems, longtime impediments to doing business on the continent. The World Bank projects the average growth among sub-Saharan African countries at 4% over the next four years, up from virtually zero growth during the past five years.

These are the kinds of success stories which make involvement in international development rewarding. They give us grounds for hope that globalization will end up benefiting every country.

Canada’s development assistance is delivered by thousands of Canadian men and women. We work as a team with an impressive array of partners: businesses, institutions and non-governmental organizations and associations. CIDA needs their support, their enthusiastic involvement and their expertise to carry out its mission. Their expertise is topnotch, often precisely in areas where CIDA is very active.

Thus, there are naturally immediate benefits in terms of jobs for Canadians, since our programs have resulted in contracts for 2,000 Canadian businesses, 50 universities, 60 colleges and a very large number of volunteer organizations. A significant share of Official Development Assistance (ODA) funding is spent on domestic goods and services.

Our businesses and institutions have also secured major contracts due to our membership in international financial institutions, such as the World Bank. Between 1991 and 1995, contracts awarded to Canada’s private sector totaled an estimated $366 million a year.

But the Canadian assistance program’s most important contribution to our prosperity is not expressed in figures and immediate benefits. It is a long-term contribution. CIDA projects are an international showcase that highlights the know-how and expertise of Canadian companies.

For example, an estimated 65% of Canadian companies involved in the agency’s environmental projects secure new contracts overseas as a result of their initial efforts. Two firms that implemented a CIDA thermal power plant project in Port-au-Prince, Haiti, obtained $14.8 million in funding from the World Bank. One of these firms has its head office in Quebec. Thanks to a line of credit in Peru, aspects of our communications technology have become the de facto standard in that country. This has allowed Canadian companies to bid for contracts in the communications sector.

I want to emphasize that it would be both presumptuous and inaccurate to suggest that these companies owe everything to CIDA. Their success must, of course, be attributed mainly to the quality of their goods and services. It must be recognized, however, that doing business in a different cultural environment brings risk and time factors into play. CIDA considers these aspects in implementing its projects. Some of our most profitable investments have been in countries with a very high risk factor. A company spends three to five years meeting its obligations under an ODA contract. It often takes that long to become familiar with a country’s corporate culture and establish the network that is essential to doing business.

So, basically, there are two ways in which CIDA can provide practical help to companies interested in contributing to, and benefiting from, the international cooperation process.

The first way is by exposing companies to that large, dynamic and often-neglected market known as the developing world – one in three Canada Export Award winners received prior financing from CIDA.

The second way is by opening doors. In a general sense, because of the very nature of its work and its networks in developing countries, CIDA is a valuable resource for Canadian firms. The Official Development Assistance program provides Canada’s main official point of contact with some 50 developing countries. It opens doors for Canadian businesses by increasing familiarity with Canadian products, technology, standards and procedures in the developing world. And, Canadian businesses stand to benefit from the reputation Canada has gained through our assistance program in the developing world.

While international development is a difficult task, it is quite possible to succeed. All segments of Canadian society can contribute something to international assistance. This is an endeavor that calls for partnership. Partnership must likewise be the basis of our future prosperity. We at CIDA are prepared to work with you. I am sure that if you accept my invitation to join us, everyone stands to gain considerably – you, Canada and the world.

EXPANDING OUR HORIZONS

Douglas Ivester
Chairman & CEO, The Coca-Cola Company

NSDA International Soft Drink Summit, New York, October 28, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

Our company has suffered a tremendous loss – the loss of Roberto Goizueta, someone who was our leader, our guide, and our friend. And our industry has lost a great statesman and a real champion. Roberto remains an inspiration to me and to all of us. And he always will be.

And on a personal note, I just want to say “thank you” for all the congratulations and good wishes I’ve received from folks all across this industry in the last couple of days. It certainly means a lot to me. And to that end, I’m happy that in my first public function as chairman and CEO, I could be here with all of you.

I know you were promised “an extraordinary group of speakers” at this event. I started to feel a little pressure from that, until I realized the promise did not say “extraordinarily good.” Just “extraordinary.” And I guess any time you get people from the Coca-Cola system, and PepsiCo, and Cadbury Schweppes, and Triarc and Procter & Gamble – in the same room – that is an “extraordinary group.” So anything we actually say is a bonus!

But since you were promised something “extraordinary,” I thought I would try and do something that fits the description. I’m going to step away from what soft-drink conferences, too often, tend to be: a parade of speakers (including, on occasion, me), each vowing to be the one to “win” the future. I thought I would talk in broader terms today about where our industry might be headed.

Some time back, as president of The Coca-Cola Company, I did some research on other people who held that same position. And I found something one of them said, which meant a lot to me. It was 1906, and the president of The Coca-Cola Company was Asa Candler. The business was doing pretty well back then. The company had just completed another record year. And Asa Candler said this: “There is nothing to mar the prospect of the future, excepting the feeling that, after a number of satisfactory years, we must be near the end of our prosperity.”

Mr. Candler realized the credence that people tend to place in the most pessimistic observations. Even back then, back in 1906, people were already starting to predict that this industry had gone about as far as it could go. Mr. Candler realized that was a faulty mindset: a damaging attitude, one that could quickly become a self-fulfilling prophecy.

Mr. Candler was ahead of his time. He would feel right at home today, when it’s hard to pick up the paper without seeing where another expert has decided that consumer companies have had it. They say, “It’s been a nice run, but they can’t keep this up.”

What I always wonder is, why not? Why can’t we keep this up? Just look around! The world has more people, in more countries, with more access to communication, and more desire for a quality standard of living and quality products than ever before. In fact, in the next 30 years – all of us can remember back 30 years; it’s just a short time ago – in the next 30 years, the world will add another 2.2 billion consumers. The world population in 2027 will be over 8 billion.

Today, more than ever, more people all over the world have more disposable income. In 30 years, the world’s per-capita purchasing power will be over $15,000. That’s two and a half times today’s level. And even today, our industry sells a product people need every day, liquid refreshment, at a price that is significantly less expensive than other name-brand products, like athletic shoes or cars or computers.

Still, we sell relatively little of our products. You’ve all heard us explain how the Coca-Cola system sells only 2 ounces of the 64 ounces of liquid refreshment people need, on average, every day, all over the world. Two ounces. And the Coca-Cola system is roughly half the soft-drink industry.

So, if the industry sells twice what we do, that still leaves our industry with 60 ounces to go after. Put another way, we’re only tapping 4/64ths of the opportunity! I’m a former CPA, so I can tell you that is precisely – not enough!

I say to my colleagues and competitors alike: as strong as our industry is today, we’re only tapping a small portion of the opportunity out there. Our horizons are more vast and far-reaching than they have ever been. It’s about mindset: the consumer’s mindset and ours.

All over this world, right now, people are drinking coffee and beer and tea and water and milk and a hundred other things. Sometimes that’s the mood they’re in, and that’s okay. But how many times are they drinking something else because we failed to reach them – either in their hearts and minds, or in their cars or jobs or neighborhoods?

The average person in this world drinks two servings of commercial soft drinks a week. Just two. Fifty-four times a week, they’re drinking something else. And yet, we keep butting heads in the same aisles in the same stores. We keep fighting over the same old landscape. The same piece of ground, when there are broad new vistas yet to be explored. We just have to expand our horizons.

I read a story recently, and the writer swore this was true. You remember last summer, when the Pathfinder spacecraft was sending back those astounding photographs of Mars. NASA built a website on the Internet and let people look at the photos on their computers.

Well, one Internet junkie got an idea. He downloaded a panoramic, 360-degree picture of Mars off the official NASA site, showing Mars in every direction. And he put it on his own Web page, which he labeled with the name: “Pathfinder Mission Control.” Then he put a heading across the top of the screen, saying “Pathfinder – Active Camera Control.” And he waited.

Soon the word got out. And sure enough, he watched as people would sit for long periods of time, looking at his website, panning from one side of the screen to the other, believing they were operating a camera 50 million miles away. They thought they were exploring Mars, when they were really just looking at the same picture, over and over again!

That’s an instructive tale from the computer age, but I think it’s instructive for our business, too. Our industry has more than a century of proud history behind it. But all too often, we seem to be basing our decisions and our thinking on looking at the same picture over and over again. We have to expand our horizons.

There’s one other interesting thing about that Mars mission. There are only two places the Pathfinder cannot see. It cannot see over the horizon. And it cannot see what is immediately under it. We know, in our business, that we have to get out and explore if we want to see what’s over the horizon. And we also know there is vast, untapped opportunity right here under our feet. We know how consumption patterns differ from city to city, right here in the United States.

And it’s not just a matter of converting a Pepsi town or a Coke town or an RC town. It’s a matter of growth across our industry. Finding opportunities to sell our products to consumers, at a time or a place where they’re not enjoying one now.

At our company, we strive to see not just the many places Coke is, but all the places Coke is not. That culture is part of our company. Like Roberto always said, “We are discontented.” And we are. We know there’s vast, untapped opportunity out there. And, to be candid, that’s what has driven our business for 50, even 100, years.

The pioneers of our company had little way of foreseeing the mobile and prosperous suburban culture that was just beginning to take hold in America. They had little way of seeing the opening of China and Russia, the economic revolution of Latin America, or the rise of an enormous middle class in India. But they knew how to expand their horizons.

And they had faith in the opportunities they saw, and faith in the vast opportunities to come. And that’s why they began investing boldly, pouring millions and millions of dollars of investment into the Coca-Cola system around the world. That strategy continues for us today. And fortunately for us, the result is a pretty powerful business system, decades in the making, doing business in nearly 200 countries, from pushcarts on the Jakarta roadside, to the cafes of Rio, to supermarkets here in New York.

It’s a system of unique reach and scope, capable, we think, of enabling us to truly take advantage of the opportunities before us, as long as we don’t let others define our mindset for us. As long as we expand our horizons. As long as we keep looking for those new opportunities.

And from the pursuit of those opportunities comes, I believe, the single most dramatic and powerful facet of this industry we work in: the immense generation of business and jobs and benefits that accompanies the soft-drink industry, everywhere we go.

You may have seen a story in The New York Times, a couple of years back, right after our system went hard and fast into East Central Europe. A team of economists at the University of South Carolina determined that for every job inside our new operations there – filling cases, taking customer orders – ten new jobs were created outside our system, supporting our business.

That surprised us. We knew a lot of jobs were involved, selling our products, furnishing us with trucks or advertising. But we didn’t know the scope of it. As more studies were conducted, in other places, we saw the same effect, time and again. Our system was having a direct impact, not just on people’s thirst, but on their lives. That’s the energy level generated by the engine of this industry.

I saw that kind of impact myself, on a recent trip to South Africa. I was out in the market, in Soweto, and I met a man named Solly Tshesane. Solly started a business with a small “spaza shop” next to his home, selling Coca-Cola and a few other things. He took the trouble to invite me into his home, and tell me how much selling Coca-Cola has helped him and his family. Today, Solly has not one, but three shops. And through promotions with the local Coca-Cola bottler, he has quadrupled his sales.

This great industry we’re in can have that kind of impact on a larger scale, too. Some of you may have heard of the Zhongfu Company, in China. They’re traded on the Shenzhen Stock Exchange: $200 million in assets, and they employ about 2,600 people.

Zhongfu started in the early 1980s, when a group of Chinese fishermen decided to form a small company, making plastic bags and straws. Soon they approached their local Coca-Cola bottler, and began supplying goods. They bought second-hand equipment from Japan, and started making PET bottles for us. They make labels, closures. And just about everywhere we have gone in China, they have set up a factory right nearby. Those fishermen, and their company, now supply more than half of our packaging for the entire country. Doing business with Solly Tshesane or the fishermen of Zhongfu always reminds me that every day there’s something more at stake than cold numbers on a Nielsen report. It’s this: millions of people are depending on us.

And honesty compels me to admit it’s not just the Coca-Cola system. It’s the impact of this industry, whose products are so universally welcome, whose business is so universally transportable. Wherever this industry goes, people depend on us. Customers who sell our products. Suppliers who serve us. The shopkeepers and restaurant owners who find name-brand soft drinks to be among the very strongest drivers of traffic and profits. Literally millions and millions of people on this planet are dependent upon this industry to provide for themselves and their families.

That’s an immense impact. It makes our industry a hugely important economic force, through the people we hire, the taxes we pay, the investments we make, the supplies we buy. And it brings with it an immense responsibility.

We have a responsibility – to our shareholders, to our colleagues, to all the people depending on us – to keep growing this industry. We know we have only begun to tap into the opportunities for this industry worldwide. And we know that the status quo is never good enough for very long. We cannot stand still, even if we want to. The track we are on runs two ways, and we either drive forward or we roll back.

I believe this industry is driving forward. I know my company is, and I believe it should be true for all of us. We must hold fast to that mindset of growth. We must capture the opportunities that are out there. We must go after those other 60 ounces.

We must do a better job of being more convenient, more relevant, more valuable to the consumers who depend on us every day, for a basic human need and a simple human pleasure – refreshment.

Let’s expand the horizons of our businesses, and the horizons of our thinking. There is too much at stake for us to slow down, and no reason we should want to. Because this is a pretty wonderful business to be in. Of course, we all compete for consumers, and I want my company to capture that growth I’m talking about. But at the end of the day, this is a great, great industry, with opportunity and room for all of us. If you remember anything I’ve said today, remember that.

This industry has tremendous opportunity to serve more of our products to a world that really doesn’t drink many soft drinks, if we expand the horizons of our thinking. And that will mean tremendous benefits to the thousands of communities and millions of people depending on us.

This is a great industry, one abundant with promise and possibility for all of us. The possibility of making a difference for our customers. The possibility of making a difference for our communities. The possibility of making a difference for the people who have hired us. The possibility of making a difference for each of us.

COMPAQ AND THE NEW WORLD OF COMPUTING

Eckhard Pfeiffer
Chairman & CEO, Compaq

PC Expo, New York, June 16, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

We at Compaq know that our success comes from one source – our customers. We also know that in this highly competitive business, we must continuously earn your trust and confidence. To that end, we are committed to provide you with innovative products, like the ones you will see on display at our booth here at the Javits Center…to deliver the most rewarding buying experience…and to constantly improve our ability to meet your computing needs.

It is this last point that is really at the heart of what I want to talk about today: how Compaq is evolving to meet your rapidly changing needs. I want to discuss our vision of a new world of computing, our decision to acquire Digital and what the combined company will be able to do for you.

Success in our industry is a constant process of invention and reinvention. How could it be any other way in a world that is changing so rapidly – where the market rules that seemed clear one day appear to be out of date the next? Where product life cycles continue to shrink from years to months and even to weeks? Where computing has moved from the small scale of local area networks to the planetary scale of the internet?

In this interconnected world, customer expectations have never been higher. You expect to be able to access the information you need quickly and easily, from any place at any time, using virtually any computing device. You expect vendors to deliver more power at a lower cost and to make it easier to buy, operate, integrate and service their products. You expect the information infrastructure to be reliable and available 24 hours a day, 365 days a year – whether you’re talking about the network itself or the systems that support your online bank, online bookstore or online grocery store.

In this environment, Compaq determined that we needed to do more for our customers. We wanted to take the attributes that had made us successful – industry-standard platforms, strong partnerships, useful innovation and customer responsiveness – and apply them to the full range of computing, from the palmtop to the data center.

Compaq has developed significant enterprise strengths over the past few years. But we also needed capabilities that we could not build easily or quickly. So earlier this year, Compaq announced its intention to acquire Digital Equipment Corporation – one of the premier suppliers of enterprise solutions and services, and one of the pioneers of inter-networked computing. As most of you probably know, Compaq completed the acquisition last week after Digital shareholders voted overwhelmingly to approve the merger agreement.

This is an historic moment for Compaq as well as for our customers and the industry. It brings together two companies with proud traditions of technology innovation and industry leadership. With its minicomputers, Digital defined the computing paradigm of the 1970s and much of the 1980s. With its industry-standard personal computers – including the first PC server – Compaq defined the computing paradigm of the 1980s and 1990s. We now see an opportunity to set the standard for a new world of computing:

• One that expands on our vision of standards-based computing

• One that builds on the combined strengths of Compaq, Digital, Tandem and our strategic partners

• One that promises you more choice, more power and more freedom than ever before

Our goal is really very simple: to empower customers by taking computing to new levels of flexibility, simplicity and efficiency. We will do this by offering a broad portfolio of web-enabled clients and servers, global life cycle services and best-of-breed partnerships with ISVs, channel partners and technology suppliers.

We will also strengthen our customer partnerships through:

• Focused, global account management

• Industry-leading service and support

• A commitment to sell the way you want to buy, whether it is through our extensive network of resellers, by phone or over the internet

What will differentiate Compaq from our competitors is our ability to innovate with industry-standard solutions to help you achieve real value from your IT investments faster and more reliably and to respond more quickly and effectively to customer needs. And when I talk about customers, I mean all of our customers, from a family investing for the first time in a personal computer to a small or medium-size business that wants to sell its products on the internet, to a large global company that is implementing Windows NT across the enterprise.

The foundation for the new world of computing we envision is one that Compaq has been building and reinforcing since we introduced the first industry-compatible portable computer 16 years ago – that is, standards-based computing.

I’ve been thinking a lot about that first Compaq product during the last few weeks. I don’t know how many of you remember it. Its nickname was the “luggable,” and for a very good reason. It weighed 28 pounds – 7 to 8 times heavier than today’s lightest notebook computers. It was also about as rugged as they come. For people whose machines would not boot up, the tech support people had a unique solution: hold the computer about three to six inches above the floor and drop it. Try that with your Thinkpad!

Well, both Compaq and the industry have come a long way since then. In 1997, standards-based platforms represented 70% of hardware spending worldwide. By the year 2001, that number is expected to exceed 75%. Industry standards are behind two of the most important trends in computing – the emergence of Windows NT as a strategic, enterprise operating system and the expansion of the internet into every corner of the world.

The continued enhancement of Windows NT – particularly with the upcoming release of NT 5.0 – is helping push standards-based computing higher and higher into the enterprise. The standards that define the internet make it possible for hundreds of millions of people to communicate, collaborate and conduct commerce on a global scale, regardless of which platforms they use.

Until now, the criticism of standards-based computing was that it could not deliver the performance, scalability and reliability of systems based on proprietary architectures. Through our E2000 architecture, we are addressing that issue. During the next two years, Compaq will deliver high-performance, Windows NT-based systems that will support the most demanding enterprise needs. But it is clear that the vast majority of enterprise customers will continue to have mixed environments. They will use PCs and mainframes, Windows NT and UNIX, and they will look to their IT partners to help them integrate these diverse computing environments.

With the acquisition of Digital and the continuing evolution of Compaq’s enterprise strategy, we are expanding our vision of global, industry-standards leadership to encompass every level of computing. To us, industry-standards leadership means not only providing industry-standard products, but also making those products work seamlessly with the rest of your IT environment. It means providing industry-standard solutions that protect customers’ IT investments, while enabling them to take greater advantage of standards-based platforms throughout the enterprise. And it means having the vision and the skill to take emerging and leading-edge technologies and make them standard as quickly as possible – expanding the power and the reach of industry-standard platforms.

As a result, you will enjoy:

• Wider choice and flexibility

• Faster return on your IT investments

• Greater agility in adapting to a dynamic world

• Increased security and confidence

• Uncompromising quality and value

One of the most important ways that we are delivering these benefits is by working closely with partners to deliver comprehensive enterprise solutions. With the acquisition of Digital, we have enhanced our ability to provide customized solutions for key markets like finance, manufacturing and communications. But many of our customers – big and small – are looking for packaged, high-volume solutions that they can implement quickly and efficiently. This is an area where Compaq has an opportunity to change the competitive landscape.

Two strategic inflections have emerged over the last decade. The first was standards-based platforms. The second was the replacement of custom applications with packaged applications from companies like SAP, Oracle, Microsoft and others. International Data Corporation projects that 72% of all new enterprise applications purchased this year will be shrink-wrapped.

Today, we are approaching a new inflection point based upon tools, information and methods that will simplify implementation of industry-standard applications. In fact, I foresee a day when enterprise applications will work almost as plug-and-play modules. An information manager will take the software module, plug it in to his information infrastructure and see an immediate return on the company’s investment. It may be hard to conceive of today but it is going to happen.

Compaq is turning its knowledge and expertise into repeatable, volume-based solutions that we will make available to customers through Compaq’s large reseller network and dedicated websites. Next month, for example, we will introduce an enterprise extranet that will standardize the knowledge and best practices we have collected around planning, designing, implementing and managing enterprise solutions. This knowledge will be available to channel partners and, ultimately, customers in the form of tools and enablers that will help them plan more effectively, deploy more rapidly and operate more efficiently.

Today, we are also announcing a new service for small and medium businesses called Compaq Online Services. This global initiative is designed to meet the needs of small and medium businesses for quicker access to online sales opportunities and more efficient ways of doing business. In partnership with industry leaders like UPS, GTE and Microsoft, as well as key internet ISVs like INEX, Visto and E-Stamp, Compaq Online Services will provide instant electronic commerce solutions, electronic postage, secure, real-time delivery of electronic files and 24-hour access to back up and restore services.

These services will be available soon through our SMB Solution Providers, as well as through another innovative, internet-based program we call Club Web. Club Web is a community of providers that offer internet solutions in a coordinated manner for the benefit of our customers. Basically, it’s a one-stop, online store stocked with products and services offered by Compaq partners. The primary purpose of Club Web is to connect customers with providers such as web developers, internet service providers and resellers who have special skills in planning, implementing and maintaining our internet solutions.

What these examples demonstrate is the internet’s power as a tool not only to provide information but to deliver an even more valuable commodity – knowledge. Our goal is to help customers turn information into knowledge and knowledge into a competitive advantage. The combination of Compaq and Digital gives us a broad range of web-based solutions for electronic commerce, internet service providers, corporate intranets and customer relationship management.

Earlier this year, Compaq introduced the industry’s most flexible and comprehensive electronic business solutions. These solutions build on our e-commerce and firewall servers as well as our key relationships with leading applications providers. The highly scalable and reliable systems delivered by Digital and Tandem are particularly important in the 24x7 environment of internet commerce, where downtime means lost business.

Compaq is also the leading supplier of solutions for internet service providers. Seven of the top eight ISPs have standardized on Compaq for their NT-based web-hosting services. And Digital is number two in the ISP market – with a more than 15% share. Compaq also plans to build on Digital’s AltaVista franchise, which includes one of the leading search engines on the worldwide web. Just last week we announced a new line of consumer PCs with buttons that provide direct internet access, including a link to AltaVista. We believe this will help establish AltaVista as one of the most popular sites on the web.

One of the most important synergies between Compaq and Digital – one that matters a lot to our customers – is services. Some observers have suggested that the only reason Compaq bought Digital was to get its service organization. That was not the only reason, but it is true that service is a significant part of the value equation. Customers have told us over the past few years that they want to deal with fewer vendors, and they want those vendors to be more accountable for the products and solutions they provide. After all, when you implement a complex enterprise solution, you want the assurance that you will have the support you need to get it done quickly and efficiently.

With the acquisition of Digital, we now have one of the premier service organizations in the world working even more closely with our customers and partners. The combined company has more than 5,000 IT architects to guide customer implementations, as well as 3,000 UNIX engineers and 700 NetWare-certified engineers deployed around the world. Overall, we have more than 25,000 service professionals who can deliver support and availability services, systems integration and operations management in more than 100 countries. And we have a worldwide network of channel partners with whom we are working to jointly implement integrated, multivendor, life-cycle solutions.

Our goals are to lower customers’ total cost of ownership and reduce risk by offering service solutions which incorporate industry standards, and by driving innovation in service creation, tools and delivery. We will also help you achieve your business objectives more rapidly, more cost effectively and with greater predictability. Building strong customers relationships also means giving you maximum flexibility in doing business with Compaq – how you want, where you want and when you want.

With the acquisition of Digital, we now have a world-class team of 10,000 sales and marketing professionals who work directly with major customers. We also have the largest network of channel partners in the industry, who offer value-added expertise and solutions. In addition, Compaq has fundamentally changed its core business model so that we can meet – and exceed – your expectations. These changes include new manufacturing methods, an optimized supply chain and reduced channel inventories.

Why is this important to you? Because it enables us to meet our objective of doing business more efficiently and that means lower product prices and improved product availability. Last week, for example, we announced a new program called “Compaq Built for You,” in partnership with leading retail chains like CompUSA, Office Depot and Computer City. This program allows customers to self-configure a selected group of Compaq PCs in the store. Once the customer has configured the system he wants, he pays the retailer. All orders are then custom-manufactured by Compaq and shipped either directly to the customer or to the retailer. It’s your choice. As of today, Compaq Built For You is available in about 100 stores. By the end of August, we will be up in 2,000 stores. And by Christmas we will be configuring customers’ computers in 4,000 stores across the country.

We are also enhancing the ability of customers to purchase products over the internet, both from Compaq and our worldwide network of retailers. In fact, Compaq and its resellers today sell more than $6 million dollars a day over the internet – and that is even more than Dell.

We are proving that Compaq can bring together the widest array of products and services, combined with the extensive capabilities of our resellers, to offer you the best value in the industry. How you buy is important but what you buy is just as critical. With the acquisition of Digital, Compaq has one of the broadest product portfolios in the industry – from handheld PCs to the most powerful enterprise servers.

Since this is PC Expo, let me start with PCs. Now that we have completed the acquisition of Digital, we will merge the two companies’ PC product lines. This will give Compaq the most extensive and competitive line of desktop and networked PCs in the industry. According to first quarter numbers from International Data Corporation, Compaq remains the number one desktop PC company in the world. I am particularly pleased that Compaq regained the number one position in portable PCs in North America – in both the commercial and consumer segments.

What that should tell you is that we are determined to maintain our position as the number one PC company worldwide. And we will do it by continuing to offer standards-based, innovative and easily managed desktops and portables that integrate seamlessly into your enterprise environment.

To those in the audience who are Digital customers, I want to assure you that we are not taking your business for granted. We intend to earn your trust and confidence. Although we will move the Digital PC line to Compaq-branded products, we will do so over a period of time that allows you to make the transition at your own pace. I believe our customers will be well-served by this combination. Our desktop businesses are very compatible. Both companies lead the industry in reducing cost of ownership by providing the best managed PCs. We lead the Windows NT market for desktops. And Compaq is Microsoft’s only lead partner for the early deployment of Windows NT 5.0 in corporate environments.

That leads me to my next point: our commitment to Windows NT. As I said earlier, Windows NT is one of the most important trends in industry-standard computing. And Compaq is committed to advance Windows NT as an enterprise operating system. This is another instance where Compaq and Digital have tremendous synergies. We can now deliver the widest range of Windows NT systems and solutions in the industry, from portable computers to Digital’s high-end AlphaServer systems.

Our strong partnership with Microsoft, as well as our own experience deploying Windows NT throughout Compaq, puts us in the best position to help customers implement NT solutions. Through advanced technologies like clustering and ServerNet – the system area network developed by Tandem – Compaq is also improving NT’s performance, reliability and scalability. Compaq already owns the performance benchmark for Windows NT systems with more than 27,000 transactions per minute. By the year 2000, we expect to deliver clustered NT systems that deliver 500,000 transactions per minute.

Through Digital’s AllConnect and Affinity programs and Tandem’s “Best of Both Worlds” program, Compaq also offers industry-leading NT interoperability with Digital UNIX, OpenVMS and NSK. This will help protect your IT investments while enabling you to take greater advantage of industry-standard technology. Finally, Compaq’s new services organization has more than 2,000 Microsoft-certified engineers around the globe to help customers deploy Windows NT-based solutions for the enterprise.

One question I often get from customers is about Compaq’s commitment to Digital’s 64-bit architecture, including Alpha, Digital UNIX and OpenVMS. The answer is easy. Compaq will continue to invest in this high-performance, 64-bit platform because it represents the future of computing. Alpha gives Compaq leadership with a 64-bit architecture at least two-years ahead of Merced – which, I should add, will also be an integral part of our product portfolio. We see Alpha as an extension of Compaq’s current product line and as a strategic platform for power-hungry applications like data-warehousing, high-performance technical computing and internet commerce. We also see an opportunity to establish Alpha as an open industry standard, building on Digital’s licensing agreements with Intel and Samsung and its proposed agreement with AMD. I think it is important to note that Microsoft is using Alpha as the development platform for 64-bit Windows NT.

We also see significant opportunities to deliver customer value with Digital UNIX, which is widely regarded as the leader in 64-bit UNIX. It is also the most Windows NT-friendly UNIX on the market. Digital has attracted several partners to help develop Digital UNIX for Merced. This gives us an opportunity to establish Digital UNIX as the standard for 64-bit UNIX on Alpha today and on Alpha and Merced in the future. In addition, we will continue to partner with SCO to offer UNIXWARE to the 32-bit Intel volume market

I also want to reassure customers who rely on Digital’s OpenVMS operating system, as well as on Tandem’s NonStop Kernel, that we will continue to support and enhance these products. They are important to us because they are important to our customers, who depend on them for the most demanding, business-critical computing. But we also plan to exploit the technologies behind these operating systems to provide greater reliability and scalability in our industry-standard platforms.

I have covered a lot of ground today, so let me conclude by summarizing our vision for the new world of computing.

First, we believe that this new world will be built on open, industry-standard technology. Anywhere there is standards-based computing, Compaq wants to be the driver, whether it’s in your home, your business or your car.

Second, we will build on our leadership in business-critical computing. This will enable us to accelerate both new and existing technologies into industry-standard platforms and to deliver even more scalable and reliable systems.

Third, we will lead in delivering global service and support. This will give our customers a single point of accountability, as well as a lower total cost of ownership and reduced risk.

Fourth, we will focus on solutions that build on our leadership in enterprise platforms, our expertise in key markets, our service capabilities and our partnerships with industry-leading companies.

And finally, we will build even stronger relationships with you, our customers. I hope you will look at Compaq not only as a computing company, but as a strategic partner whose mission is to give you what you need, when you need it and how you want it, at the lowest total cost.

Welcome to the new world of computing.

THE LATEST DEVELOPMENTS IN THE CREDIT UNION SYSTEM

Bill Knight
President and CEO, Credit Union Central of Canada

The Conference Board of Canada, Ottawa, February 26, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

In this period of upheaval, uncertainty and restructuring within the financial services industry, the one certainty, from my point of view, is time – yet even the way we measure time has changed.

For example, who would have thought when I agreed to speak today that (1) my backdrop would be one of the most significant mergers in the history of the Canadian financial sector, and (2) that President’s Choice was not only my favorite Colombian coffee, but my financial services competitor! Time has become a serious measurable – more than ever before. Of course, these changes only reflect broader trends in the financial services sector:

• New entrants: ING Direct, Wells Fargo and, coming soon, Rabobank.

• Virtual banks: Citizen’s Bank and Mbanx were the first. But now 18 months later, a “nice to have” delivery channel has become a “must have.”

• Increase in merger activity. Toronto Dominion Bank purchased Waterhouse Investor Services in the US. Two excellent offers were made for London Insurance Group. National Trust was purchased by Bank of Nova Scotia.

All of these are backdrops to the recent merger announcement. When the Royal/Bank of Montreal merger was announced, I found it interesting that Matthew Barrett, Bank of Montreal’s chairman and CEO, claimed the new bank would “punch above its weight.” Quite frankly, dealing with heavyweight competitors is nothing new for credit unions. We have continually punched above our weight by beating our big competitors in customer satisfaction surveys and by providing financial services in communities where banks and others have long since thrown in the towel.

Many Canadians are wary of the “big bank” idea, particularly in the west, our bastion of strength. That’s the point that Canadian central has made to the federal government, which must now deal with the competitive impact of a merger of this size. As I see it, the federal government is torn between the rights of the consumers and the might of large financial institutions fighting for a share of the global pie.

The important thing from our viewpoint is that a process endorsed by the financial services industry has been under way to help the government respond to the need for change in the sector, as well as the need for “fairness” in regulating financial institutions. That process is the Task Force on the Future of the Canadian Financial Services Sector, which is expected to present its final report this September. Finance minister Paul Martin has quite appropriately, in my view, decided not to comment on the new bank merger proposal until after the task force report has been delivered and public consultations have been held.

If you look at the events of the past year, I think you’ll see a pattern – one of accelerating change and fundamental shifts in how our industry is structured. In fact, in one of this year’s publications for credit unions, we used a graphic of an oncoming freight train to illustrate trends for 1998. To us the reality is: either get on the change train or get out of the way. And believe me, there is even more change to come.

Canadians and Canadian financial systems have been leaders in how we adapt and use transaction-based technology. In fact, Canadians are the number-one users of electronic delivery systems in the world. Last year, Canadians used Interac Direct Payment four times more than their US counterparts.

But as Bob Merton, last year’s Nobel Laureate in Finance Economics, has said, “in the future all banking will be information banking.” If true, then financial institutions in countries such as the US and France hold the competitive advantage. They are well ahead of us in both the R&D and the development of information technologies. These information-based systems of data-warehousing, data-mining, and neural networks enable these institutions to better find and know their customers.

Canadian consumers are demanding seamless delivery of services. We in the credit union system have met that need through our connection to the communities we served. Individual members defined their needs and the credit unions did their best to meet them. The rankings we have achieved in customer satisfaction across this country is a testament to that. But it will not be enough as we move our national system forward in the future. To achieve the knowledge base required we will need cutting-edge information technologies. This is the fundamental challenge – not just to credit unions – but for all Canadian financial institutions. So it is in that context that I am going to talk about the credit union system. Where we are, and where we are going.

Today I’ll give you an idea of what our competitive environment looks like, how the legislative environment fits into that picture and how Credit Union Central of Canada is working on legislative, structural, and competitive issues on behalf of credit unions. Along the way, I’ll tell you where Canada’s credit unions are headed, and how we intend to get there.

Let me very quickly review some credit union statistics, so you can better understand our market positioning. Canadians have much to celebrate about the success of the credit union movement. Nine provinces from Eastern, Central, Western and Pacific regions of the country are home to 886 credit unions and caisses populaires, which serve 4.2 million members and have combined assets of $46 billion.

The province of Quebec has a long and proud cooperative history. This history has left a legacy of 1,280 caisses populaires which serve 5.1 million members and have assets of $54 billion. These caisses populaires are affiliated with an autonomous organization called the Desjardins Group. Credit unions and caisses populaires are cooperatives. Our customers are “members” who own shares in their local credit union. Democratic decision-making and responsiveness to communities is at the core of who we are and what we do. Together, nearly 10 million Canadians are members of a financial services cooperative. That’s about 1 in every 3 Canadians.

As I mentioned earlier, the credit union system’s bastion of strength is western Canada. Let me illustrate this with market share statistics. In residential mortgages, BC credit unions hold 16.5% of the market. Saskatchewan credit unions hold 20% and Manitoba credit unions hold 17.5%. In the area of personal loans, BC credit unions hold 9.6%, Saskatchewan credit unions 26.2% and Manitoba credit unions 14.7%. These are the numbers. Now, what about the story behind them?

The credit union system has three tiers: the local level, where individual credit unions serve their members, the provincial level and the national level. At the local level, Canada’s credit unions provide a full range of financial services – savings and deposits, loans and mortgages, checking, and a host of other services. Like their cooperative counterparts all over the world, Canadian credit unions are member owned and directed. All members share in the success of their credit union, all profit remains in the community and money is put to work locally. A member-elected board of directors oversees the credit union, while qualified staff assure efficient day-to-day operations.

The second tier is at the provincial level. The nine provincial centrals that belong to Credit Union Central of Canada provide support to local credit unions in areas such as training, technology, and asset-liability management. Because credit unions are regulated provincially, government relations are a key function of a provincial central, as is its liaison role with the provincial deposit insurance organization. Credit union deposit insurance varies from province to province. In fact, credit union deposit protection is more comprehensive than that offered by the Canada Deposit Insurance Corporation in a number of markets.

Now for the national level of the credit union system. The major financial cooperatives are:

• Credit Union Central of Canada, which I will talk about in a minute.

• The CUMIS Group, which markets insurance services to credit unions and other financial cooperatives through a network of offices across the country. In 1996, The CUMIS Group had consolidated assets of $585 million.

• The Cooperators Group Limited is the largest Canadian-owned property and casualty insurance group. The Cooperators is owned by more than 30 Canadian cooperatives and has a revenue stream of $1.5 billion.

• The Cooperative Trust Company of Canada works in partnership with credit unions to provide trust and estate products, mortgages and registered retirement vehicles. At the end of 1996, Cooperative Trust had corporate assets of $955 million and total assets under administration of $7.6 billion.

As for Credit Union Central of Canada, we are the national credit union finance facility and trade association. A key role for Canadian central is maintaining a vigorous government relations presence. As you know, Credit Union Central of Canada is regulated federally as are the majority of our provincial centrals. The institutional differences in the credit union system have been recognized through separate federal legislation, the CCA Act and a dual regulatory structure.

When revisions to the financial services regulatory framework are discussed, they have a direct impact on credit unions. We are not immune to the realities of the financial services sector. We need to be efficient. Working together, we must strive to keep our operating costs down and our prices competitive.

To put it bluntly, the current number of credit unions and caisses populaires – 886, excluding Quebec – is probably unsustainable. Credit unions, like other financial institutions, are finding it essential to protect margins, achieve significant economies of scale, cope with escalating technology requirements and ensure topnotch member service. My view is that we will see 300 to 400 full service credit unions in the future. In reality, the top 10 or 12 credit unions hold 35% of the system’s assets.

Sound strategic planning and open communications are driving credit union M&As. In Toronto, for example, Metro Credit Union has announced a merger with Jet Power Credit Union. Changes are taking place at the provincial level as well. The centrals of Alberta and Saskatchewan are jointly offering a number of services to credit unions. In BC, four new structural models are being considered, including a cooperative bank that would unite credit unions in the province. Manitoba is looking at a regional model for organizing that province’s credit union system, and is also examining the feasibility of a Prairie Central which would include Manitoba Central, Saskatchewan Central and Alberta Central.

Restructuring is happening at the national level, too. At Credit Union Central of Canada, we recently reduced our board of directors from 18 to 12. We also streamlined our democratic process and realigned our board composition to more closely reflect the regional distribution of credit unions across the country.

Ultimately, you can expect the credit union system to seek more dominant national positioning. In order to remain a strong and sound alternative for Canadian consumers, the credit union system must look at new ways to provide services. In our submission to the Task Force on the Future of the Canadian Financial Services Sector, we said that the credit union system must be able to create a service supplier with full business powers and the ability to serve credit unions right across the country. A national service supplier, perhaps a national cooperative bank, could assist in providing the economies of scale necessary for the efficient development of competitive products and services.

Of course, we need the enabling legislation to accomplish that goal. Our task force submission is just a first step. Fortunately, the task force and the federal government want to strengthen competition in Canada’s financial services market. That creates opportunities for the credit union system – opportunities that we cannot blindly pass over in the next few years.

Another opportunity we have taken advantage of is outsourcing and co-sourcing. Financial institutions now see the competitive arena in terms of products and customers, not processing and paperwork. So co-sourcing and outsourcing are now a fact of life for financial institutions, especially when development costs are high (as is the case for electronic transactions) or when transaction volumes are dwindling (as is happening with checks).

Recently, Credit Union Central of Canada awarded a five-year, $100-million contract to CGI to provide financial switching and telecommunications services. These services support Interac shared cash-dispensing and point-of-sale direct payment services. The deal should result in millions of dollars in savings, as well as enhanced services to cardholders.

We’ve also outsourced the computer services management associated with clearings between centrals. At current volume and activity levels, annual savings should be in the $500,000 range. We’re awaiting regulatory approval to outsource our liquidity management as well. Credit Union Central of British Columbia has been contracted to fulfill this important function, which includes clearing, settlement and payment functions. Credit Union Central of Canada will, however, retain responsibility for setting policy regarding liquidity and will continue to represent the credit union system with the Canadian Payments Association, Bank of Canada and the Interac Association.

For check processing, two of our provincial centrals have combined their operations and one has outsourced the function. As the number of paper-based transactions declines, it is no longer necessary to maintain check processing operations in each province. In an increasingly complex marketplace, efficiencies must be realized. Management energies need to be concentrated on major initiatives. I expect the co-sourcing and outsourcing trend to continue in the Canadian credit union system. Our improvements in the way we do business will only strengthen the product we offer.

One of our most recent initiatives is an alliance with Stentor, including discounts on all long distance voice services in the credit union system. To get the deal, we made a joint application to the CRTC with Stentor, asking for a change in the definition of a single customer. Our persistence paid off. The contract should deliver about $6 million in savings to credit unions over three years.

To achieve our goals in the delivery of wealth management services, we recently formed a company called Credential Asset Management. This company will manage the credit union system’s transition to third-party fund sales, with a focus on a select group of 100 mutual funds that are well known and have a strong track record.

Credential Asset Management is part of the Credential Financial Services Group, which includes our well-known Ethical Funds. These funds use a set of criteria to pick investments which are both financially sound and ethically acceptable. Ethical Funds offers a total of eight mutual funds and has passed the $1.5 billion self-directed mark in assets.

Third-party mutual fund sales and RSPs are expected to be important growth areas for credit unions. New technology is being implemented to make our systems more efficient and allow credit union members to see their fund balances on their monthly statement from the credit union.

The new opening for credit unions in wealth management is not just due to demographic changes in our customer base, but results from sophisticated customer demand for seamless integrated servicing of their total financial needs. Currently, Canadians hold millions of active accounts in traditional financial institutions. If we add their relationships with mutual fund companies, brokerages and insurers, we see the maze of relationships that the customer constantly negotiates. Consumer demand is for integrated services and we are responding.

Delivering an excellent wealth management service is Canadian central’s number one priority. Of course, wealth management isn’t all we’ve been working on. We are very excited to be a participant in Mondex, the smart card system that was launched in Guelph, Ontario a year ago. Credit Union Central is participating in the launch through Guelph and Wellington Credit Union Limited, a 9,000-member credit union. At the one-year anniversary mark, there are now 560 merchants and 11,500 Mondex cardholders in Guelph. More than $2 million in electronic cash has been issued and over 8,000 people from around the world have visited the Mondex Center in Guelph. Virtually every major Canadian financial institution has signed on with Mondex, which is 50% owned by MasterCard International. Credit Union Central of Canada has taken a 2.5% equity position in the company, which gives us an opportunity to share profits and represent credit union interests.

MemberDirect OnLine Access is another initiative of Credit Union Central of Canada. The product is based on the very successful PC and internet banking product developed by a credit union in British Columbia. MemberDirect is currently undergoing modifications to ensure compatibility with credit union banking systems, and will be launched in the Atlantic region this spring.

Citizens Bank has attracted quite a bit of attention in the past year. It was formed by Vancouver City Savings Credit Union and is federally chartered. A branchless electronic bank, Citizens Bank has made corporate ethics and social responsibility a major focus of its strategic positioning. For example, the bank offers the Shared Values Index Linked Term Deposit, linked to an index of 22 companies chosen from the TSE 35 Index for their record on six major social and environmental issues. And for every $1,000 put in this term deposit, Citizens Bank contributes one dollar to a fund that backs nonprofit groups chosen by members.

When I became president and CEO of Canadian central in 1995, I said we would change to meet the needs of the system in a dynamic environment, and deliver, on a timely basis, services, products, government relations and advocacy. In 1996 and 1997, I challenged the organization to change more and deliver more. Now in 1998, I’m saying: accelerate the pace of change and deliver beyond expectations.

Where is the Canadian credit union system going? I think our vision says it all: a Canada-wide network of responsive individual credit unions that is committed to enhancing the financial future of its members by providing financial services of superior value to its members in a highly competitive environment, leading to a growing market share.

To accomplish that “growing market share,” we need to develop our market niche and build on our strengths. We are indeed punching above our weight…and we know we can’t win the fight by beating the banks on costs but we can certainly beat them on service and individual member relations.

We do have a secret weapon: service quality. Three independent studies – the Goldfarb Report, the National Quality Report and a study by the Canadian Federation of Independent Business – have shown that credit unions rank very high in this area. I like to think of credit unions as small, tough, agile competitors. We’re survivors. Over our history, the odds have often been against us. Time and time again, we’ve pulled through.

At a time finance minister Martin must decide on the merger, and chairman McKay of the task force must make fundamental recommendations in a fast-changing marketplace, the Canadian credit union system is building a 100% Canadian-owned domestic alternative for consumers. We are going out of our way to make their jobs easier.

I’ve given you just the highlights of what the credit union system is up to. You can expect even more good things in the coming year.

THE EMPOWERMENT OF WOMEN IN THE WORKPLACE

Françoise Bertrand
Chairperson, Canadian Radio-television and Telecommunications Commission

Canadian Women in Communications, Ottawa, February 17, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

I greatly appreciate the opportunity Canadian Women in Communications is giving me on this special gala evening to share a few thoughts with you on the empowerment of women in the workplace.

First of all, I would like to point out that I strongly believe not only in the convergence of the communications industries, but also in the convergence of men and women in organizations as a means to strengthen the latter and make them more versatile. The agreement between this belief of mine and CWC’s mission is a crucial element in my support of the association as well as the reason why I am here tonight.

I share CWC’s vision, stated in the Strategic Planning Report, of an organization aiming, among other goals, at providing programs and networking opportunities in this era of convergence, and at providing the breadth of cross-sectoral contacts that will facilitate moving within sectors.

In our field, on a two-year comparison, statistics show that in the broadcasting sector the representation of women in the upper-level management category was slightly above 15% in 1995, compared to 13.1% in 1994. In the telecommunications carriers sector, the representation of women was 18.1% in 1995, compared to 16.2% in 1994. These statistics consistently show an increase; we are moving in the right direction, but it is clear we must sustain our efforts in order to ensure that competent and talented women get a fair chance to reach the top steps of the corporate ladder.

We should also be alert to the fact that, in our industry, when women reach senior executive levels they seem to be confined to certain areas of expertise, like regulatory services for example. Even though I meet a lot of people, I have encountered very few female vice-presidents, finance or technology. In the private and public sectors, key positions are still filled by male incumbents.

As well, at some CRTC hearings, many all-men panels present their case before us. And this, despite specific encouragement from the commission that companies respect employment equity legislation. Well, hopefully back in their organizations, their workforce is more diverse than their delegations lead us to believe.

We all know that success stories do not happen overnight; that in building their careers, men and women alike experience ups and downs, and sometimes dramatic setbacks, but still carry on to reach their goals. If all of us in this room were able to do it, how can we help the younger generation reach their goals? In an era of convergence, globalization of markets and ever evolving trends, how can we, as men and women working together towards the same goal, help shape the workplace for today’s and tomorrow’s knowledge workers?

I guess you pretty much know the answers as well as I do. But let me emphasize a few points which, in my opinion, play a key role in the creation of a more convergent workplace:

• Sharing our strengths

• Mentoring

• Facilitating the creation of networks

• Accepting and valuing differences

• Shattering the glass ceiling

Sharing our strengths basically means providing those surrounding us with something deeply authentic and true about ourselves to connect with. It can be leadership style, flexibility, interpersonal skills, a specific ability, in short, a strength that is our own. Authenticity and honesty are the key words here.

When people are in the process of building their careers, they need self-confidence to overcome their feelings of doubt, anxiety and uncertainty. Since we have gone through these uneasy moments in our lives and probably still do at times, we could, as role models, help those who need it to build their self-confidence.

This is a crucial element for us women, because we haven’t necessarily been brought up to think of ourselves as being able to achieve, to make things happen. Women usually won’t try unless they feel they are absolutely perfect. We are often our own harshest critics, pointing out our flaws or mistakes sometimes even before they are noticed.

There is one thing I have learned over the years, and that is to save myself the pain and agony of feeling “inadequate,” “unauthorized” or “unable.” Which does not mean that I never made mistakes or that things always worked out as I had planned, but I sure gave myself the right to try. When I was faced with the unknown or with difficulties, although I experienced fear, it never paralyzed me. My curiosity, my desire to try new things was always stronger and compelled me to action.

As for mentoring, any successful woman will agree with me on the importance of finding one or several mentors for ourselves and, in turn, becoming one for others. It is extremely important to be able to rely on a mentor. This is the person in whom we can confide and to whom we can turn for advice, motivation and honest feedback. The mentors I had guided me through some paths I hadn’t thought of exploring or had felt were out of my reach. They inspired me and supported me.

Another vital support is the network, or for that matter networks, of contacts who can help develop a career. Each of us has his or her own network. Over the years, we have expanded it and worked it as a two-way street, both taking from and offering back something to our contacts. For some, it’s easy to build these types of relationships; for others, it seems an overwhelming task. I’m sure we, in this room, can facilitate the process for someone who has difficulty in creating a network by being responsive and readily agreeing to sponsor, teach, inform, nurture, advise or connect.

The “old boys’ network” has been there for a long time. Women have also learned to build their networks but we need to keep working at it. We need to help the younger ones learn how to use this precious tool. Most important of all, we need to remember we are not talking “mutually exclusive” or segregated networks: men on one side, women on the other. These work relationships will be enriched through diversity. An integrated network which includes women as well as men, provides more powerful feedback and broadens the scope of experiences. Which brings me to my next point.

Differences can be related to culture, religion, race, skills, age, etc. I’ll focus on gender-based differences. I am often asked if I am in favor of having more women in upper-level management positions, or if I advocate their promotion in key positions. Of course my answer is “Yes,” but with some nuances.

Hiring more women at senior levels does not make an organization better or worse, but it helps it reflect reality more faithfully and enables it to draw upon its diversity. I’m convinced we must accept and value others, regardless of their gender. One good reason for this acceptance is that in our professional and business worlds we need to have the opportunity of gathering information from a variety of people whose skills, resources and experiences will enrich us and open up new perspectives. Furthermore, the challenges we have to face have led us to set up multidisciplinary teams in which both female and male members, through their specific contributions, help our organizations meet increasingly demanding goals.

The workplace is undoubtedly evolving, but we still must be very careful not to loose what we have gained. With the downsizing and flattening of organizations, the budget cuts and the minimal recruitment policies, younger women may not find themselves equally represented at the higher levels of the hierarchy. Despite these obstacles, all of us in this room must do all we can not to end up with worse statistics than the ones we presently have.

I have kept one last rock in my pocket, just to have the fun of shattering the “glass ceiling.” I’ll be blunt: it never existed for me. I have always refused to see it hanging over my head. Maybe the experience has been different for some of the women here tonight. It doesn’t mean we cannot carry a positive message across to young women.

The way I see things is that, in spite of numerous studies proving the glass ceiling to be real even in very progressive organizations, if women agree to be stopped by barriers, they will hinder their own progress on their career paths, and will prevent themselves from moving forward and accomplishing what they intend.

What I’m talking about here is not magical. I’m saying that women need to make something positive out of a would-be stalemate situation. They need to break away from it and not carry the burden in their mind that a particular obstacle is so big it prevents them from achieving their goal. They have to pause, look at the big picture, put things back in perspective: if one door is closed, there might be other doors that are open. Above all, they must free themselves from feelings of hopelessness, and must find some comfort. It helps raise the ceiling and make it disappear. I know it sounds hard to believe. But it’s worth trying and, as one researcher titled her study, they might find themselves “walking on broken glass.”

In closing, I would like to congratulate tonight’s award recipients. Your skills, long hours of work, perseverance and sense of humor have brought you to this point in your career. In your own personal way, as women, you have contributed to change, either drastically or subtly, the workplace in the “converging communications industries.”

In this process, I am fairly certain you were supported by other women as well as by men. The CWC is precisely the type of organization where individuals, regardless of their gender, can be supportive of one another. In looking to the future, we must continue working together to improve the work environment for the younger generation and attain some, if not all, of the convergence objectives.

By expanding its leadership and enhancing its already strong profile, CWC is directly contributing to the empowerment of women. We all know this cannot be accomplished single-handedly. We need combined, shall I say “converging” efforts. Since tonight men and women gathered here in nearly equal numbers to celebrate the achievements of female colleagues, I am sure you will agree with me that if we pursue our unfailing collaboration and keep up the good work, we will contribute to shaping a more stimulating, thus more successful, workplace.

SET SAIL FOR 2000 AND BEYOND: THE FUTURE OF FINANCIAL SERVICES

Edmund Clark
President & CEO, CT Financial Services

Canadian Payments Association National Conference, Halifax, Nova Scotia, June 17, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

I’m not a futurist, and I am well aware of the pitfalls of making predictions. Others have tried and failed. In 1949, Popular Mechanics magazine predicted that the computer of the future would weigh no more than one and a half tons. That would be one heck of a laptop!

US inventor Alan Kaye said, “The best way to predict the future is to invent it.” That’s harder for associations and regulators, but it is very much the route financial services companies have to go to prosper. But whatever the future brings, it will have its roots in challenges we currently face.

We used to say, “Nothing is as constant as change.” Today I think we should say, “Nothing is as frequent as change.” And if you think the pace of change is fast now, my message is: fasten your seat belts. We’re in a free-for-all, where the rules that once sustained an orderly financial services system are being applied to brand-new, never-before-encountered situations, and where the universal supplier is being usurped by channel and product-specific players.

As it see it, there will be three main influences on the future of financial services: new competitors, disintermediation and technology.

In the simplest terms, any industry goes through predictable cyclical stages:

• The major players mature

• Products become commoditized

• New players emerge to capitalize on niche opportunities

• Consolidation of the new players takes place

A good example is the mortgage industry in the United States. Deregulation of banking led to the creation of hundreds of mortgage companies offering specialty services at competitive prices. As competition increased, margins were squeezed. And now there’s consolidation, as the players look for economies of scale.

In Canada, we’re seeing a huge variety of new competitors enter the financial services market. A few years ago it would have been unthinkable for a GE Capital to buy Eaton’s debt, or for a Dutch-based bank – without any physical presence in our country – to expect to win customers here.

Single-product specialists have also emerged and they’re cleaning up. Mutual funds are a prime example. You just need to look at the last RRSP season. Every time you turned on the television, you saw a mutual fund pitch. As a potential buyer you’d have been hard pressed to make a choice, because no one presented a compelling customer proposition.

Mutual fund balances have skyrocketed, but before we in the Big Seven financial services companies congratulate ourselves, we should take a closer look at the statistics. Yes, collectively, the Big Seven added $28 billion in mutual fund balances in the last two years. But the real news is that independent mutual fund specialists added $68 billion – almost three times the banks.

Banks are losing share of the customer’s wallet to non-bank competitors. The fact that the big financial institutional funds outperformed the independents didn’t matter. What attracted the buyers was the delivery channel.

A major contributor to this mutual fund growth is the surge in the number of independent financial planners. They’re capitalizing on an almost insatiable consumer demand for help in navigating through all the investment options available today. That’s the kind of competition we’re having to adapt to. Recognizing this trend, Canada Trust has invested heavily in the development of a competitive financial planning and investment counseling capability. One outcome is a sophisticated multidimensional assessment system that helps us really get a grip on customers’ investment needs and risk profiles.

As a result of the flood of cash to equities, bonds and mutual funds, fixed-income investments such as GICs and term deposits have dropped substantially, while on the other side of the balance sheet, consumer borrowing is growing rapidly.

This, in turn, is forcing a major shift in the fundamentals of banking. We used to take in deposits and lend them out at a profitable spread, but in 1996 the GIC market shrank by over 3.5%, while retail assets grew by over 8%. More loans plus fewer deposits makes for a funding gap that has to be filled somewhere other than the balance sheet. The options include lowering liquid asset balances, buying wholesale deposits, or securitization.

If this pattern continues over the next few years, banking institutions in Canada will be looking for off-balance-sheet funding of about $25 billion a year. That’s about the amount of new debt the federal government raised in the early to mid-1990s.

One thing we don’t need is to have to compete for funding with the federal debt agency. I can understand that the agency had some political appeal when we were running a $42-billion deficit, but in the three years it has taken to set up, the deficit has shrunk to a very achievable future vanishing point. The agency no longer has any economic reason to exist. Its sole “contribution,” if I can use that word, will be to raise the cost of debt for itself and for other borrowers. And it will interfere with the creation of efficient capital markets – which runs counter to the government’s own philosophy. So my message is: if you were to change your mind on this one, Ottawa, the financial services industry would applaud.

Canada Trust sees disintermediation as an opportunity. We have a portfolio of over $22 billion in residential mortgages and we were the first to encourage investment dealers to syndicate and create a fair and deep market for NHA-mortgage-backed securities. We were the first to package the securities to indemnify the investor from the impact of flexible mortgage options such as blend and extend. The securities are guaranteed and can be treated as equivalent to Government of Canada bonds. As we found on a recent road show, there is a large pent-up demand for this type of product.

There’ll be two by-products of securitization. Earnings momentum will slow down because the cost of funds is greater than normal. But since less capital is required, returns on equity will improve and will become the most important profit measure into the next century.

This entire scenario puts banking institutions into what the Chinese would call an “interesting” position. The fact that we are being affected by disintermediation both coming and going will fundamentally alter the way we manage our business for as long as this phenomenon lasts. Capital requirements will be lower and the search for funding sources will be a constant challenge. Meanwhile, we’ll be up against more and different competitors with thin balance sheets and none of the solvency, liquidity and capital limitations of a 20th-century banking institution.

Does all of this mean that companies with non-balance-sheet transactions will have the upper edge? I don’t believe so. There will always be products that require a balance sheet. RRSP loans come to mind. Their duration is too short for securitization.

History has taught us that periods of fragmentation are generally followed by consolidation. A balance sheet is great protection from cycles in capital markets. The winners will be the ones with the staying power. That’s where being a banking institution is an enormous advantage.

The ultimate winners in all of this change are the customers. They are also the biggest beneficiaries of technology, the third and probably the most visible change factor. Technology has done for customer services what Marilyn Monroe did for subway gratings: created a whole new set of expectations.

We have only ourselves to blame, and Canada Trust is more guilty than most, since we started the ball rolling with “8 to 8” operating hours. Now our customers expect us to be available around the clock and to recognize them whether they come to us via a branch or an electronic channel.

We’ve made a practice of being a leader in alternative distribution, and we’re getting some recognition for that. Not only were we the first out of the gate with Internet banking in Canada, but just two weeks ago our EasyWeb service was named the Best Foreign Bank Online Program by the Online Banking Association of America. I’m really proud of our people for that achievement.

Notwithstanding the high level of media interest, we’re still only seeing the very narrowest, most pointed end of the Internet’s potential for transactions and self-serve information. However, I am convinced there is an explosion waiting to happen. The technology already exists to use a smart card to download electronic cash through the Internet, and this may well be one service that will kick-start mainstream acceptance.

And despite the emergence of other virtual banks, studies continue to show that Canadians want to bank with a company they know and that has a physical presence in their neighborhood. Right now, by far the most useful and most used electronic services are still ATMs and telephone banking. Canada Trust’s EasyLine telephone banking service was the first introduced by any large Canadian financial institution. From a standing start in 1992, today it serves well over 2 million callers a month. It is one of the most popular and most comprehensive services in Canada.

Until as recently as last month, there were lots of people ready to declare that these new channels would make branches obsolete, but the rumors of their demise are greatly exaggerated, as Mark Twain would have said. A recent Wall Street Journal article pointed out, with some astonishment, that while the number of banks in the US had dropped by over 40% since 1986, the number of bank branches has grown by 15%, and the number of transactions through all delivery channels has also increased. We’ve given our customers a lot of options and they’re using them – all of them.

If you want to pay a bill today, you have eight choices. You can pay by preauthorized debit, or by check, or go to the company and pay in person. You can go to a branch, pay at an ATM, or by telephone, through direct banking or the Internet. Customers do all of those things. They switch from channel to channel, according to their needs and convenience, and even if they use electronic services, the still come into a branch as well.

What’s happening is they are segmenting themselves by product and channel. Some choose self-serve, some full-serve and some a combination of both. As an industry, we’ve delivered real customer value and choice. And when the Internet makes comparison shopping a matter of a click of a mouse or a few keystrokes, we’re all going to have to work even harder to get their attention and keep their loyalty.

The expectation is that customers will go to the provider of the greatest perceived value. A recent poll suggests consumers would move their insurance policy from one institution to another for savings of as little as $25. Technology makes it much easier for customers to make a switch. They don’t have to go into a branch, face a teller or feel obliged to explain why.

Now that you can get cash back on your debit card, your local grocery store is almost as much a bank as your bank. That’s yet another competitor!

So a major preoccupation of all financial services companies into the next millennium will be to develop new strategies to meet consumer expectations. Information will be one of the keys, and the Internet is a potentially information-rich channel where we can build relationships through education and advice. We’re becoming financial Sherpas for the vast majority of customers who need help negotiating through investment and financial planning options.

At least part of our future relationship with customers will depend on how well we understand them. Technology can tell us what kinds of products individual customers buy and the right moment to market a new product. It has helped move customer segmentation from an art to a science at the most microscopic level. We are developing customer segments of one, with marketing and pricing packages targeted to the specific needs of each individual.

Technology is also bringing great challenges to the Canadian Payments Association. Debit cards, Mondex, LTVS and electronic funds transfers are changing the face of value transfer. The new single-channel competitors are already seeking access to the payments system. The lamb is asking to lie down with the lion. To paraphrase Woody Allen, it’s the CPA’s job to see that the lamb doesn’t get much sleep. You have to determine how to govern the newcomer’s access in order to protect the financial system and the consumer. You are going to be inundated with demands for access as technology breaks down even more of the barriers. This is logical and fair, provided new members don’t bring additional risk to the financial system or to consumers.

Safeguards are essential. We need a level regulatory playing field that ensures all members meet the same capitalization, liquidity, solvency and deposit insurance standards that currently apply to banking institutions. Ensuring that will bring about a huge amount of regulatory process. As I said at the beginning: “Fasten your seat belts!”

To sum up: the banking industry is under siege as never before since the Medicis. Competition has never been more diverse. Not only will there be multi-product and multi-channel universal players like Canada Trust, but we’ll compete against single-product, single-channel specialists. This all adds up to a more complex environment for us and for the consumer. But we’re not whining. What’s good for the consumer is ultimately good for all of us, and I have absolutely no doubt we’re up to the challenge. After all, the banking industry has always prospered, despite the Great Depression, LDC debt, the recession of the early 1980s and the market crash of 1987.

It will be an interesting future: challenging, demanding and, as the century progresses, probably quite different from anything we can imagine today. As John Maynard Keynes said, it’s better to be roughly right, than partially wrong. I hope I’m at least partially right.

GETTING INTIMATE

John M. Cassaday
President & CEO, CTV Television Network

Canadian Cable Television Association Convention, Edmonton, June 4, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

Two of the more difficult things in life for me are to hit a three iron in the general direction of the hole, and to respond to a flattering introduction. So let me simply say thank you.

I realize I’m only here today as a make-good for getting bounced around like a distant signal at last year’s convention. You may recall I got bumped from keynote speaker to the coveted continental breakfast slot.

Having said that, it’s kind of ironic that I’m invited back this year to talk to you, once again, about customer service. This past year at CTV we were fortunate enough to secure the Beatles special. That was the good news. The bad news was that in our enthusiasm to sell it, we sold it to both Ford and General Motors at the same time.

This is akin to trying to be on good terms with a telco and cable company at the same time. Not good. Needless to say, one of the two automotive companies has been absent from our service this year. We’re working our way back. In fact, I’m trying so hard, there is a high likelihood I’ll be driving an American car when my current lease expires in September.

On reflection, it can only be the size of your speaker budget and not the credentials of your speaker that has resulted in me returning to address you again in 1996.

The title of my speech today is “Getting Intimate.” It’s got kind of a Victoria’s Secret ring to it, but it’s really just a cheap trick to get your attention. I hope I have succeeded.

Before I begin, I must confess that I’m somewhat embarrassed to face J.R. Shaw today. You see, I have a confession to make. J.R. invited me to join him on an upcoming fishing trip. I declined. I told him I had previous plans. That was only part of the reason. You see, last year Phil Lind invited me to go hunting with him and a few of his colleagues from Rogers.

Several hours into our trip and well off the beaten path we got lost. After driving around aimlessly for quite a while, we came across a farm house where I was sent to the door for directions. The farmer was very cooperative, but was very distressed. You see his mule which had served him loyally for 23 years was sick and needed to be put down. He could not do it himself and begged me to look after it for him.

Well, I went back to the car and put my best game face on and asked Phil Lind for my gun. I told Phil the farmer had been so rude to me I was going to teach him a lesson and shoot his mule. Off I went to do the job. With Phil’s cable pals behind me, I went face to face with the mule, shot the mule and started heading back to the car. With my new incredulous cable friends in tow, their mouths dropped in disbelief, but next thing you know we hear three more shots ring out. We turn and saw Phil running back to the car. Phil’s yelling: “Let’s get out of here, I got his horses, too.” Well J. R. that was enough outdoor cable bonding for me and that’s the real reason I’m not going fishing with you this year.

Last year I talked about consumers and some of the things I thought cable operators could do to respond to their needs.

Today I’m going to top line the three supertanker consumer trends we discussed last year, remind you of the five-point plan I presented for cable companies with a future, and then finally review the four secret strategies of customer-intimate companies.

On the consumer side, I talked about Toffler’s “Theory of Demassification,” the massive decline in socialization and the resultant bunker mentality that has emerged among consumers. Faith Popcorn refers to this phenomenon as cocooning. “One size fits all solutions” just aren’t going to work any more with these consumers.

In polling a number of you prior to the convention, I asked you to tell me the most frequent complaint voiced by your subscribers. You told me it was not being able to select the services they want. This represents a classic demassification response. They want the right to choose what’s right for them individually.

The second trend I discussed was virtually a polar response to the first trend. I referred to it as the Uniformization of Culture. It’s ironic that while we all individually head off to the video store, we all walk out with the same few titles.

The third trend I discussed was the loss of trust in the political class. Angus Reid first introduced me to this notion. He refers to the political class as big institutions and government. My message here is, no matter how big you are, you are small in global terms. So if you want to satisfy today’s consumer, get personal.

These trends are as important today as they were then.

I then laid out a five-point plan for cable with future:

1. Develop a business plan from a customer perspective.

2. Communicate well with your customers and employees.

3. Compete on value not on price.

4. Enroll your employees in your vision.

5. Have some fun.

Considering this list again, you are probably saying to yourself two things: “I know why they refer to him as straightforward (another way of saying not very insightful),” and secondly, “I hope we’re not paying John a whole lot for this presentation of the obvious.”

But you know, most stuff that works is pretty obvious. Like buy your wife jewelry and not exercise equipment for Christmas. Now I should have known this but…

What I would like to do this afternoon is just drill a little deeper on one of the themes we talked about last year. I want to talk more in detail about the importance of having a customer orientation or a service orientation to compete effectively in our new competitive environment.

Now that you are in a customer service frame of mind, sit back, relax and ask yourself two questions:

1. What do we want to be famous for?

2. And, second, which is a tough one, “If my company disappeared tomorrow would my customers miss me?”

The framework for my talk today is borrowed, well all right stolen, from a Fortune book excerpt “How Market Leaders Keep Their Edge.”

The authors (Trenchy and Weirsema) concluded that today’s market leaders know they have to redefine value by raising customer expectations in the one component of value they choose to highlight. The three disciplines of value they identified are:

1. Best price/operational excellence (WalMart, Costco, Dell).

2. Best product/product leadership (J&J, Nike).

3. Best solution/customer intimacy (Cable & Wireless).

Their research proved that a company cannot succeed by trying to be all things to all people. Focus on one area where you believe you can win. Not at the complete expense of the others, but with an eye to focusing on one area so that you can honestly address the question I raised earlier: “If my company disappeared tomorrow, would my customers miss me?”

In assessing the cable industry, I believe it is the third discipline, customer intimacy, that represents the high ground. So that is where I’ll focus my comments.

So what are those four secrets of the customer-intimate company?

First, target specific customer segments.

Hotels and airlines are, of course, interested in all travelers. As you are interested in all subscribers. Their focus, however, is on the business traveler and there seems to be no limit to the lengths they will go to satisfy them. Virgin Atlantic certainly got my attention. In one ad, they promise free chauffeur service and complimentary shiatsu massages. Swiss Air is offering draft beer for Business Class this summer and apologizes that they cannot yet offer spit-roasted whole buffalo on board, but you get the feeling they are working on it.

British Airways now offers bedrooms in the sky. They had their front cabin redesigned by a yacht designer. They now have fully reclining seats in First Class. A First Class ticket from New York to London is about $6,500 versus $3,700 for Business Class. They are now upping the ante and replacing the existing toilets in First Class with porcelain.

Cable & Wireless knew they couldn’t compete against AT&T, Sprint or MCI. They are attempting to differentiate themselves by focusing on a small-to-medium-size business with monthly billings of $500 to $15,000.

The second secret of customer-intimate companies is that they give customers more than they expect.

Copy from a Four Seasons ad tells you what to expect. Consider the impact, or significance, of the words they have chosen from a customer perspective.

• Defining the art of service.

• Call your travel counselor – not agent.

• Polish your shoes with a virtuoso touch.

• Overnight cleaning and pressing.

At American Express, they not only help you re-engineer your company’s travel program, they even send the engineer. American Express has a full-time agent on site at CTV and she does an incredible job.

At CTV the key to our growth is attracting and retaining new customers. For Altamira, we developed a one-hour special prior to the end of RRSP season called “The Money Game.”

“The Money Game” offered a great environment for their message, an engaging, interactive concept that tested consumers’ money management skills. We hosted Altamira for a luncheon prior to the air date, screened the show and organized a pool estimating the calls to their 1-800 number. I won with my guess of over 5,000.

Two weeks ago we had another new advertiser, Andersen Consulting, sponsor a new brand we’ve launched featuring Eric Malling called “Maverick’s.” “Maverick’s” is a show focused on catching people doing things right from a public policy perspective. Eric Malling appeared at four client functions with Andersen Consulting where they used their involvement in the show about the turnaround in New Zealand to cement their ties with several government bureaucracies across Canada.

I’m on the Board of Canadian Airlines. They’ve lost $300 million in the last 15 months, but they’ve just introduced Second Cup Coffee on Board at an incremental $200,000 over the cost of their prior blend. Again, to give customers more than they expect.

The Toronto Raptors gave Torontonians comedy, dance, video, drama, music, and, oh yeah, a basketball game at home games this season. They won only 22 games this year and lost over 60, but the Raptors had the third highest attendance in the NBA and everyone went home happy from the SkyDome, win or lose.

The third secret of customer-intimate companies is that they give their front-line people the power.

In one of their ads, Delta Airlines says, “Maybe it has something to do with the way we served them.” There’s a message here not only to the business traveler but also to all Delta’s front-line people. What is Delta telling their employees?

• We served seven million more people than any other airline.

• We’re best in the J. D. Power Survey.

• We’re best in the Robb Report.

• USA Today says we’re the best.

They are saying, “Keep it up, folks!”

At CTV we host a golf tournament with Young & Rubicam. Our intention was to visit a different course each year, but we keep going back to Innisbrook in Florida. They manage our golf event like a Prime Ministerial Tour. Four players off Course A. Six players off Course B. No problem. Bags are on the cart with the correct partner, right course. Leaving early? The bags are at your pickup point. Every time. Never fail. The front-line people are truly in control.

At Videon in Winnipeg, a service technician found one customer’s problem was not the cable but the TV. She was elderly so the technician, on his own time, took her shopping for a new TV.

Fundy Cable is training all their front-line people with a program called “Creating the Wow.” The object is to get a “wow” response from customers.

Knowing your customers’ wants and needs is a full-time job. When you have contact with customers, ask them what makes them unhappy. Make a list, then make it right. Don’t stop until all the bad stuff has been corrected.

Gordon McGovern, the former president of Campbell Soup, started “Campbell in the Kitchen.” He created a nationwide panel of consumers and visited their homes to gain insight into their eating habits and problems they had with food. He encouraged all of us, that worked for him, to do the same.

Randal Coleman, a former Rogers employee, and I believe now, president of Singapore Cable, developed a service called “Video House Call,” a one-way video linkup allowing the customer to see the service representative while they speak to each other on the phone. Prior to moving to Singapore, his St. Paul system was rated as one of the world’s top 20 service companies, putting it in the same league as Four Seasons and Swiss Air. His belief in service extends to letters that arrive at his desk. He responds within 24 hours.

And, finally the fourth secret of customer-intimate companies is: “They don’t just do things right, they do the right things.” So here we learn it’s not enough to execute superbly, but we must ensure we are doing the right thing.

There’s one recent ad that got my attention. “The fact that my company is smaller says nothing about the size of my ideas.” This is Lotus talking not about themselves but about their customer.

The ad tells the customer that because applications in Smart Suite are completely integrated, your people are actually working together better. They’ll be creating professional correspondence, financial statements, sales representations and so on. In other words, doing things right but also doing the right thing – in this case by integrating all the system solutions. I think Lotus understands their customers.

Several weeks ago I was visiting a major information highway company where they told me they did not have cable. Why? Too much money. It was going to cost $36,000 to hook them up. The cable company was doing things right. They had negotiated with the client and finally agreed to do it for $18,000, but still no hookup while both parties were doing things right by negotiating in good faith, they weren’t doing the right thing which was to examine all of the opportunities to partner. As partners, instead of focusing on an $18,000 hookup, they might have focused on the opportunity for a $1.8-million or even an $18-million business partnership?

Saturn invites purchasers to their showroom for dinner and education on car care. They create a unique and personal bond between the customer and the car. They need to, because the latest category killer in the US is car superstores. No salesperson. Car inventory and prices are on the computer. Find what you want and go to the cashier.

Sears has done a good job over the years on customer loyalty programs. Customers who spend $1,000 per year and who have shopped in four departments and visit the store more than six times, get a thank you letter from the manager, free gifts, free gift wrapping at Christmas and other special services.

In Canada, Zeller’s Club Z is world class. They’ve got a huge membership and they use their list better than most. For example, they targeted customers who had purchased toys in the past year with direct-mail coupons, and doubled their toy business.

The business of doing the right thing is a lot about what George Bush called the “vision thing,” and the smart money seems to be on cluster marketing or building. AT&T seems to be leading the way. It offers long distance, cellular, Internet access, satellite TV and local service all under the AT&T brand and all billable to AT&T.

The key here for a carrier like AT&T, Time Warner, TCI, Shaw, Rogers, Videotron or all of you collectively who have the capability of bundling services, is to find and market the consumer benefit. Low-cost or free services must offset the high-cost services in the bundle. Success depends on how much extra you can deliver.

U. S. West, the smallest of the Baby Bells, has spent more than $15 billion buying up cable companies to deliver Internet on cable. Through Continental Cable in Boston, U. S. West has installed 6,000 cable modems. This fall in Atlanta, U. S. West will compete against Bell South to deliver both local phone service and data access to its cable subscriber.

The strategy of all these companies is to get out of the box. Doing the right thing not just doing things right. So again this year no great insight. Just a lot of examples of companies developing intimate relationships with their customers.

This speech would not be complete without a couple of comments on the recent CRTC Specialty Channel Hearings. First of all, I believe we at CTV have two services in News and Sports that will add value to your product offering. We have a strong brand with CTV and we will cross promote the services aggressively across CTV, NCN, WTN, S³ and N¹.

Second, I believe price is an issue, but it is an issue we as an industry can deal with. At the recent CRTC hearings, I used a few illustrations of widely purchased consumer products at $5 and more to make the point that it is value not price that consumers rely on for purchase decisions. A month of TV Guide, a number of Bell Home Services, including Speed Dial and Call Forwarding, and a six-pack of Kraft dinner are all examples of products that consumers buy for $5 or more. If we can’t package a tier of new content and get as much as Bell gets for Call Waiting, something’s wrong with us.

Finally, we believe if we are successful in securing our new services, that we should work together to launch these services. A 24-month cooperative marketing program, advertising, loyalty programs, mall displays, call centers. Let’s do them all and let’s start planning in September when we learn of the outcome of the CRTC deliberations.

Everybody likes lists and I love making them up, so here’s a list of “Ten Things You Can Do Tomorrow” to begin developing an intimate relationship with your customers.

1. Use your trucks to communicate with your customers. They still scream utility. They should scream entertainment, value and fun.

2. Set up a team devoted to finding new ways of opening dialogue with your customers.

3. Start a club (or clubs) to involve subscribers in your company.

4. Start a loyalty program for your premium customers. Interactive, Internet, telecommunications are the keys to enhanced profit. Probably 20% of your subscriber base will represent 80% of your incremental profit. Find them now. Enroll them.

5. Start cross-marketing. If they buy the Family Channel, they probably have kids. I bet Zellers would love to talk to those customers.

6. Create a customer database.

7. Empower your front-line employees. Train them on selling skills, give them the task of selling new services, fixing a billing problem, dispatching a truck. Whatever it takes to deal with a problem or opportunity on the spot.

8. Call a customer.

9. Sell on value, not price.

10. Do what you say you’ll do. On-time installation must be guaranteed.

In closing, allow me to leave you with one more recent ad that caught my eye: “Competition is a lot like cod-liver oil. First it makes you sick then it makes you better. Competition is good. It’s how companies stay hungry, humble and focused. It’s how products get better, faster, cheaper.” Competition is coming, and becoming the most customer-intimate company is your route to continued success.

NET EFFECT: DEBUNKING MYTHS OF THE INTERNET

Michael Dell
Chairman & CEO, Dell Computer Corporation

Internet World, New York, December 10, 1997
Published in The Corporate Report No. 23, January 31, 1998

What you’ve just seen here today represents everything that’s wrong about how people view the internet. I’m here to tell you what, in my view, is really going on.

About two years ago, we began using the internet to further develop our business. Our objectives are to make it easier to do business with Dell, reduce the cost of doing business for all parties and enhance customer relationships.

When we set out, many people said we couldn’t make it on the internet. They were some of the same people who said the direct business model we pioneered would never work, and that we could never sell servers direct.

Today, analysts estimate Dell will be an $11-billion company this year. We’re selling more than $3 million per day over the internet. And we’re doing it on Dell servers. Much of what people told us about doing business on the internet turned out to be myths – and our biggest opportunities.

I’d like to look closely at four of these myths:

• First, that the internet is a niche, US phenomenon

• Second, that the internet and e-commerce are a fad

• Third, that the internet is limited to marketing and simple financial transactions

• Finally, that the internet will level the competitive playing field

I’d like to share what Dell has learned about the internet, and ask you to consider the competitive advantage it can bring you if you view it as an integral part of the way you do business.

Let’s start with the myth that the internet is a niche, US phenomenon. According to Forrester, there will be 33 million households online in the next 12 to 15 months. The Economist suggests there are 50 million internet users worldwide, and that this number is doubling every year. Hardly a niche!

When we look closely at the profile of these users, we also find they cover a broad spectrum of age, gender and economic categories. For instance, a recent poll found that 42% of netcruisers make more than $50,000 per year, and roughly half have at least some college education or an advanced degree.

Our own survey revealed 31 million Americans are on their second or third PC, and that the majority are comfortable with the internet. These users aren’t just Generation X-ers: 27% are aged 35 to 44, 8% 55 to 64.

Many also associate the internet with niche startups. In reality, the internet is now part of the business mainstream. According to IDC, Fortune 500 companies with a web presence went from 175 in 1996 to 400 in 1997. Sixty-five percent of US businesses with 50 or more employees either plan to use the internet, or already do so.

The trends outside the United States are similarly powerful. For instance, 45% of German companies and 28% of French companies plan to use the web. Find me a business not on or planning to get on the web, and I’ll show you a business that’s out of touch with the future. There are already 4.2 million consumers online in Europe. In Japan, internet users are set to jump from 5.3 million in 1996 to 18.6 million by 1998.

The internet is an effective way for Dell to scale its business globally. Users can access more than 40 localized versions of www.Dell.com, including 17 country-specific sites in Europe and 16 in Japan and the Asia-Pacific region.

On www.Dell.com, we have seen international commerce ramp from zero to 17% of our overall internet business in just six months. Forty percent of the more than 100 premier pages we have with large corporate customers are for companies based outside the United States. We’ve launched 200 more premier pages in the past two weeks.

Visitors to www.Dell.com around the world aren’t just kicking tires. During the third quarter, roughly 50% of our product sales to consumers, one of our fastest-growing businesses, originated over the internet. More than 6,000 of these consumers have built their own websites at www.Dell.com.

More than three-quarters of our Dimension PC sales to consumers are powered by Intel’s Pentium II processor, providing the performance needed to surf the Net. Global internet usage will continue to increase as PC penetration and acceptance of the strategic value of technology increase. In the next 10 to 15 years, it is possible that all of the developed world will use PCs and have access to the internet.

As this, in turn, increases the pace of e-commerce, so our second myth, that the internet and e-commerce are a fad, will continue to be dispelled. IDC estimates that electronic commerce will jump from $8.5 billion this year in the United States to $155 billion in 2001, from $720 million to $30.6 billion in the Asia-Pacific region and from $1.1 billion this year to $25.9 billion in western Europe.

You may have heard a few months ago that Dell was selling about $1 million per day on the internet. Now sales through Dell’s internet site have reached a $1-billion annual run rate. Over the past few weeks, Christmas buying has resulted in several $6-million days.

Buyers range from knowledgeable consumers to small businesses, or large companies and government agencies purchasing everything from our newest Pentium II desktops to $30,000 Dell servers. Dell Europe is now running at $7 million per month in internet-based sales.

The momentum we are seeing leads us to believe that this is anything but a fad. It’s more like an evolutionary shift in the way products will be evaluated, bought and sold in the 21st century.

And success is not limited to PC vendors. The Net version of The Wall Street Journal has signed up 70,000 paying customers. Audionet has over 300,000 active viewers and listeners. Through its web-based system, General Electric will do more than $1 billion in transactions with suppliers around the world this year. Detroit Edison, a large Dell corporate-account customer, has converted 100% of its purchasing to the internet.

The net effect will be a transformation of industries and buying habits, as more people use the web for researching purchases and then buying online.

Dell and the companies I have just mentioned are turning other myths on their heads, proving that there is money to be made on the Net and that it can be a safe and productive place to do business. But while revenue generation is the most visible aspect of business on the web, the underlying operational efficiencies are equally important. The internet is a fundamental agent to dramatically reduce costs of ownership and increase competitive advantages for both supplier and customer.

At Dell, we consider our biggest customer wins with the internet to be in the areas of service and support, though this doesn’t get the public attention that commerce milestones have – yet.

Online service tag lookup allows 80,000 service and support items to be sorted and presented to individual users, based on their system model. We have customized the service and support area of www.Dell.com so that each customer who visits the site is automatically presented with the information that pertains to their particular system.

We accomplished this by providing online access to the same technical reference materials used by our telephone support teams, effectively allowing every Dell customer to become their own help desk on a 24/7 basis. This has resulted in reduced phone traffic and freed our people to work on higher-value activities. New services available at www.Dell.com include a self-diagnostic tool, which includes more than 100 troubleshooting modules that interactively walk customers through common problems.

We’ve also improved our telephone response time and used the internet to provide order tracking and electronic mail links to our account managers. Visitors to www.Dell.com can track purchases, using services similar to those offered by Federal Express. And we can maintain customer-level discounts in more than 40 different online stores. The net effect is increased efficiency of our people and our direct business model.

People are 40% more likely to buy if they have visited www.Dell.com. Twenty thousand visitors a week visit the Order Status area of www.Dell.com to check where their system is in the delivery process. We estimate cost savings of $8 through Order Status for every call we don’t take. In fact, to enhance the program, we now allow customers to register for Order Watch at the time of order. This allows us to proactively send them an e-mail message at the time their system is shipped. And if they use the Microsoft Internet Explorer 4.0, we can deliver a message regarding the status of their order right into their PC, through the Dell active desktop channel (called “The Dell Channel”). This interactivity is appreciated by our customers and provides cost savings to Dell.

Dell is customizing web pages to allow customers to reduce their costs, too. Our premier pages helped one customer reduce their procurement staff from 16 people in four locations to a single centralized staff of four. This customer cites annual savings of 15% of their PC purchasing costs. Another customer estimates that Dell’s electronic commerce links have helped them save approximately $2 million per year.

As you can see, Dell views the internet as much more than something to be limited to simple financial transactions and marketing, the third myth. People who do so are missing the point. It is not just a business adjunct or marketing tool, but rather an integral part of business strategy.

For Dell, the internet is a competitive and business necessity, and part of the fabric of our business model. To do this, we had to marry core transaction systems with electronic commerce. We harnessed internet technology as a central ingredient in our IT strategy. We develop applications internally, with a browser front-end, and then give them to customers and partners. This enables us to reach across a range of legacy systems and databases, without adding cost or complexity, providing us with a unique competitive advantage.

Let me give you an example. The benefits of the internet extend throughout the supply chain, changing the way we work with partners like Oracle, 3COM, Microsoft and Intel. We can move to truly collaborative R&D models, openly share information and work together in real time.

For example, design of our new Latitude notebook family was accomplished by engineers in the United States and Asia, using the internet to keep a common set of notes and allow around-the-clock development. By making the same information available to critical partners, we were able to close the information loop.

We can also engage our customers in our product development, giving them the same level of access to critical information as our people have. A recent internet-based gathering of some of our platinum customers allowed a very geographically dispersed group to simultaneously preview and react to a product plan proposal.

To support this level of interactivity with our customers, we are building our IT infrastructure around scalable, clustered Dell servers and internet technologies. We’re not the only ones doing this. For instance, Audionet is broadcasting this keynote today on a network of 700 Dell servers. These servers deliver more than 60% of all domestic internet broadcast traffic to hundreds of thousands of viewers every week.

Dell’s direct business model, enhanced by the internet, is trading physical assets like stores and inventory for information assets, allowing us to be the fastest-growing company in our sector and delivering returns on invested capital greater than 150%. We are turbo-charging the efficiency of the direct model and taking it to new levels.

This leads us to the fourth and final myth: that the internet will level the playing field. The internet can be used to improve speed and efficiency for all types of companies, but those best positioned are those that have pre-established, direct links with their partners, suppliers or customers.

This is especially true when it comes to transactions between very large businesses. Business-to-business commerce is not a single event but a long-running transaction involving multiple levels of the supply chain. For companies that broker goods and services through agents, the internet often simply replaces another form of contact at one of these levels. For instance, a call to find a reseller is replaced by a query online. Multi-tiered distribution models add layers and complexity to customer-supplier relationships, increasing time and costs, and reducing opportunities to collaborate.

For companies already dealing directly, the internet is not a replacement mechanism but a way to extend relationship along multiple levels. For instance, we are able to increase the ease of doing business with Dell and lower the cost of procurement and ownership by delivering critical information directly to user and corporate help desks. By doing so, customers such as Ford, Boeing and Shell can participate in the development of our products and services, place orders, review the status of orders and delivery information, and access our support tools globally in the same way our own technical support teams do.

Information delivered through the internet forms the basis for competitive advantage. For this to occur, businesses must stop trying to retrofit their businesses to fit the internet. Rather they must make it an integral part of their business models.

At Dell, we have already set the bar high to achieve this goal. We expect to conduct 50% of all customer transactions online within the next couple of years. To reach that goal, we have set an objective to make the internet our first point of contact for all customers. For companies that do reach that goal, the internet will improve the speed of their businesses and provide a unique source of competitive advantage.

As Dell works to deliver the benefits of the internet, we look at our business as more than simply the building and selling of products and services. Our business is the delivery of increased competitiveness and business value. By refocusing on how we can collaborate through technology and direct relationships, we will be better equipped to deal with the future of our rapidly changing world. To do this we need to make the internet experience better and more valuable, transform organizations to leverage the capabilities provided by the internet, and finally – think big.

BUILDING ON OUR STRENGTHS: THE COMPETITIVE CHALLENGE OF THE PAPER AND FOREST PRODUCTS INDUSTRY

Stephen C. Larson
President & COO, Domtar Inc.

Association des MBA du Québec, Montreal, November 9, 1995
Published in The Corporate Report No. 15 (December 31, 1995)

I’m pleased and honored to be included in your program today. Pleased, because I always welcome the opportunity to meet and exchange views with other business leaders. Honored, because this is probably one of the first few times in weeks that so many Montrealers have turned out to hear a non-politician.

At any rate, the invitation to address your luncheon meeting today was timely, in that this is the first opportunity I’ve had to speak publicly since the release last August of our company’s revised corporate strategy.

That strategy essentially entails focusing our resources on what we do best: building on our strengths. And it is that theme which I’d like to develop for you over the next few minutes – the need to identify and build on our inherent strengths as a company, and as an industry whose competitiveness will increasingly be measured by tough, global standards, especially as we have entered an era of competition without boundaries.

I’d like to start by outlining the importance of paper and forest products to the Quebec and Canadian economies – and stressing the urgent need for the industry to enhance, not just maintain, its competitiveness on world markets.

By just about any measure you care to use, the paper and forest products industry in Canada is huge. It directly employed some 242,000 people in 1994, and indirectly supported more than one million additional jobs across the country – some 7.3% of the national workforce. They’re good jobs, too. Workers in our industry received average compensation and benefits in excess of $59,000 last year.

Sales for 1994 totaled $44 billion – including $32 billion of exports that made our industry the country’s largest generator of foreign exchange. Capital expenditures for 1994 totaled $3 billion. And the industry contributed $8.7 billion to government coffers in the form of taxes, stumpage fees and other payments.

So the industry is indeed a big factor in our economy. But size alone is no guarantee of success. And we’ve certainly encountered our share of hard times in recent years. For decades, paper and forest products producers basked in a relatively protected environment where demand was strong, markets were well-defined, natural resources plentiful and environmental regulations less stringent. Not surprisingly in such circumstances, the industry grew complacent and slow to adapt to changing business and social developments.

As you well know, however, successive shock waves which hit over the past decade have served to jolt the industry into reality.

First, there was a belated, but necessary awakening to the fundamental need to protect the environment and adhere to the principles of sustainable development. Governments and the industry – somewhat reluctantly at first – moved to embrace new environmental standards.

Compliance with these standards required expenditures which – relative to other industries – have been nothing short of astronomical. Between 1994 and 1996, Domtar alone will have invested approximately $300 million in environment-related projects.

The industry really has cleaned up its act – as well it should. A recent report published by the OECD was very flattering on our national environmental performance and confirmed a very positive trend. However, such massive environmental expenditures, which by the way have negative financial returns, stretched the financial capability of many companies at this time.

Meanwhile, the historical competitive advantage of the Canadian pulp and paper industry – abundant supplies of low-cost fiber – was being challenged. Producers in the southern United States, where trees grow faster, and new players from South America and Asia – also fiber-rich and with access to low-cost manpower – were penetrating markets heretofore considered the “preserve” of the Canadian industry.

Then, in the early 1990s, we were hit by the “one-two punch” of a cyclical industry downturn which coincided with the worst recession in 50 years. Demand dried up, and prices for paper and forest products plummeted. Selling prices for key products such as pulp and newsprint plunged 50% to 70%. Virtually the entire industry was awash in red ink.

Many gave the Canadian industry, and Eastern Canada in particular, up for dead. Financing was extremely difficult to come by. And governments began to overtly shift their economic-development policies towards the so-called “new economy,” shying away from what were dubbed “sunset industries.”

The fact is that our industry was teetering on the brink of collapse. But, as the old saying goes, there’s nothing quite like the prospect of hanging in the morning to concentrate the mind. With few other options available to them, most companies resorted to wholesale restructuring in order to pull back from the brink. Older and less-productive facilities were shut down. Tough cost-cutting measures were introduced. And layoffs were everywhere. The result of these drastic actions was impressive. The radical restructuring has dramatically changed the basic cost structure of our industry.

As markets recovered, industry members rang up $2.5 billion in combined profits for 1994 – a welcome change from losses of $200 million in 1993 and $1.4 billion in 1992. And, as you’re no doubt aware, 1995 is turning out to be an even better year. Domtar recently reported record third-quarter and year-to-date results, with net earnings of $256 million for the nine months ending September 30.

Needless to say, the mistakes of the early 1990s were very painful. And I can assure you that Domtar, like pretty much every other player in the industry, is working very hard to prevent their reoccurrence. The need to continuously restructure, re-engineer and redesign has now become a normal, if not routine factor in our business life.

However, it seems that just as one issue is resolved, another materializes in its place. A relatively new concern for those of us operating here in Quebec is the availability of our basic resource – trees.

The laudable efforts of industry and government to ensure sustainable development have created implicit limits on the availability of woodlands with cutting rights. Only three or four years ago, would-be investors in our industry were being enticed by the promise of generous timber allocations. Now, it is generally conceded that there is hardly enough unallocated fiber left to support the building of a single new greenfield kraft pulp mill in the entire Province of Quebec. Domtar is doing everything possible to reduce the total consumption of its valuable and finite fiber resources. An acknowledged leader in the recycling of both office waste and old corrugated containers, we are also working to devise ways of improving yields – such as making more pulp and paper with fewer fibers. And we’re exploring a number of alternative fiber sources.

Yes, there still are obstacles for our industry to overcome. And it’s true that our business remains subject to cyclical ups and downs. But, having won the basic fight for survival, we’re able to tackle these other concerns from a position of relative strength.

On balance, our industry has a lot of strengths on which to build:

• As I just noted, fiber resources here – as elsewhere – are finite. But in relative terms we remain fiber-rich, especially in Quebec

• We also have considerable potential for the further modernization of our mills and for additional productivity enhancements

• We operate in close proximity to major US markets

• We have access to a reliable, competitive transportation system

• We have a highly skilled and hardworking labor force

• We enjoy a well-deserved reputation for high-quality products

These are advantages which provide us with a solid base from which to build.

As I see it, the future challenge – for Domtar, for our industry, and for the broader economy – is to actively focus on value creation that can facilitate growth. This will be the new determinant for competitive advantage. With NAFTA in place and a continuing trend to even wider, global trading patterns, the competition these days is not limited to the guy down the street, or in the next province or in a neighboring state. We compete without boundaries and investors invest without boundaries. As I see it, today’s challenge is clearly one of “competition for value” – value for shareholders, customers and employees alike. So where is that “best value provided?” And how?

Well, it can be achieved through a combination of four factors:

Number one: we must keep our costs down. Our industry is capital-intensive, and therefore subject to substantial financing costs. For instance, Domtar has reduced its net debt-to-capitalization ratio to 38% from 58% in 1991. This compares pretty well to 34% for Union Camp, 31% for Willamette and 38% for Weyerhaeuser. But it’s important that we maintain access to capital at rates which don’t place us at a disadvantage to these US rivals.

Labor is another important component of the cost structure. Here again, we’ve got to be competitive. We’ve already made excellent progress in this regard, thanks in part to a new awareness by our partners in the labor movement that they, too, must contribute to improved competitiveness in order to safeguard jobs. However, we’ve still got some way to go.

And despite impressions to the contrary, the Canadian industry’s costs in areas such as power and fiber resources are higher than those of some competitors. For instance, power costs are lower for some US producers because of their easier access to co-generation. A direct competitor to our Windsor fine papers mill even generates revenue from the sale of power! Who would have thought that power costs would not be competitive in the land of hydro-electricity?

Simply put, we must continue to improve our overall productivity. This is largely a function of how effectively we manage our respective operations. For instance, at Domtar’s world-scale communication papers mill in Windsor, Quebec, we’ve managed to increase our productivity, measured in units of output per man hour, by more than 50% since 1991. Windsor is proof positive of how a determined team effort can bring about dramatic improvements in operational efficiency. However, we also need an appropriate business, economic and taxation environment – one that enables us to compete on a level playing field with rivals south of the border and overseas.

We still have work to do on improving our competitiveness, both as a company and as an industry. For instance, softwood kraft market pulp – a benchmark product – is produced in Chile for US$340 per ton, compared to US$425 in the American South and US$500 in Eastern Canada. Costs on the BC Coast are about at US$560.

But value creation is much more than just a question of low costs. The second major determinant I’d like to mention here today is people. When we assess our strengths, it’s the determination, ingenuity and motivation of our people that help us differentiate ourselves from the competition and deliver quality products at competitive prices. The organization of a company and its ability to rapidly develop the human-resource component will be critical.

At Domtar, we’ve experienced firsthand what can be done through proper motivation and utilization of our human resources. Over the last few years, we have built what is arguably one of the most innovative labor-relations environments in our industry. We have signed long-term collective agreements with most of our unions, which will allow us to build more cooperative relationships while providing customers with an assured source of supply. We have begun to develop incentive compensation programs based on the concept of Economic Value Added or “EVA.” And we have teamed up with universities in Quebec and Ontario to offer new, customized training programs that are helping to accelerate the process of cultural change within the organization, getting rid of old hierarchies and beliefs and speeding up the pace of idea execution.

I don’t think I’ll get much argument from this audience about the value of proper education and training. And I can tell you that our efforts in this regard really are paying off in bottom-line results. As a recent headline in the Globe & Mail‘s Report on Business noted, Domtar workers involved in our training programs have identified cost-saving and revenue-generating measures which so far this year will add $20 million to our profits.

The cost of this training? Roughly $1.5 million to $2 million, including the wages paid employees during the week-long sessions. So those savings represent a pretty rich return on investment. And the training is going to provide the sort of know-how that will make us more competitive for years to come! That’s turning our intellectual resources into value!

A third key to improved value creation, that new phase of competition, is innovation. Without it, sooner or later, our products, processes and mills will be outdated and – eventually – out of business. And this drives to the heart of competition, the delivery of value to our customers. Canada has long lagged other major trading nations such as the U.S., Japan and Germany in terms of the proportion of GDP that is funneled into research and development. That’s not a healthy situation.

At Domtar, we’re absolutely committed to innovation. We know that our competitors in Scandinavia and in the U.S. are forging ahead in R&D. And despite cutbacks elsewhere in the organization, we’ve been able to maintain the Domtar Innovation Center in the Montreal suburb of Senneville – one of the largest company-owned R&D facilities in our industry.

I’m pleased to tell you that our efforts in this regard have paid off. Recent Domtar innovations include Crystal Pulp, a world first in papermaking technology that enables us to recycle old corrugated containers into high-quality printing and writing papers. This patented process is up and running successfully on a commercial basis at our Cornwall fine papers mill, and we’re going to be expanding this process in other parts of the world.

But our R&D efforts are by no means confined to the laboratory or limited to the development of new products. Teams are working throughout Domtar’s various business units, devising ways to improve our productivity and processes. Innovation is not and should not be limited to the development of new products. We are driving service innovation, marketing and sales performance, and effective utilization of information technology. Innovation should be a state of mind. It should be omnipresent – particularly at the organizational level of your company.

Number four: our top priority at Domtar – and one which certain of my head-table companions will no doubt endorse – is to rebuild shareholder value. Domtar’s major shareholders have been patient and supportive. It’s time now to focus on providing them with a decent level of return.

It is within that context that Domtar’s thinking in terms of strategy for the next few years was done. Those same external factors that forced the cost restructuring I mentioned earlier are now pressuring us to reexamine our business portfolio – a focus on value and a focus on sustainable competitiveness. Fiber is the defining element of our revised strategic plan. Essentially, we intend to build on our strong, integrated business system of competitive, value-added operations for the production and marketing of lumber and pulp, fine papers and packaging. By maintaining a certain level of integration, we’ll be able to leverage our fiber resources and to deliver unique value.

In keeping with this strategy, we announced this morning the sale of our Gypsum Division, operating primarily in the U.S., to an Atlanta-based buyer, for $350 million U.S. Although a good, profitable business, the division simply did not strategically complement our competitive strengths.

So, to summarize, I believe that future competitive positioning will be determined by those companies that deliver “value creation” through:

1. Sustainable cost competitiveness

2. Human resource development

3. Product and service innovation

4. Strategic focus

Outlook

I hope I’ve succeeded in providing some insight into the initiatives Domtar is taking to prepare for the future – a future that will, no doubt, continue to test our ability to respond to rapid changes in markets and the economy.

The performance of our industry over the next few years will continue to depend upon world economic conditions, in particular, the health of the U.S. economy.

Forecasters anticipate modest, overall economic growth at the global level, with the Far East leading the pack at a robust 8% average rate for the 1995-99 period and the U.S. in the 2 to 2.5% range.

We expect the demand for paper will grow relative to general economic activity and that the market share of recycled paper will continue to rise, although virgin fiber will still be very much in demand.

Given Domtar’s expertise in recycling technology – and its secure hold on some 16 million acres of timberland in Quebec and Ontario – this is a scenario that seems tailor-made to our strategy of becoming a North American market leader, particularly in fine papers and packaging.

We’re confident that, as a well-managed, Quebec-based entity, Domtar is well-positioned to meet – and beat – its rivals in the global marketplace.

Conclusion

The future for Domtar – and for that matter, most other Quebec and Canadian companies in our industry – clearly lies in defining ourselves in the global marketplace. Borders are vanishing, creating new opportunities and new challenges.

To successfully meet these challenges, the paper and forest products industry requires a full partnership between government, industry and labor to help fully realize its growth potential:

• We need a clear strategy to protect and enhance our crucial fiber resources in order to provide a secure base to our industry

• We need a business environment which is conducive to building global competitiveness, stimulating investment and rewarding initiative

• We need a concerted, team approach which will enable us to harness Quebec’s very considerable know-how and to ensure that those other strengths I’ve talked about are maximized

The next phase of competition for value will inevitably result in both winners and losers. I’m confident that Domtar, and many other Canadian forest products companies, will be successful in meeting this challenge.

WHAT GETS MEASURED GETS MANAGED

H. Virgil Stephens
CFO, Eastman Chemical Company

Conference on Value Based Analysis, June 6, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

It seems that Economic and Market Value Added Concepts are getting a lot of press these days. Indeed one of the problems that investors and managers have in the financial world is that there are so many metrics. It is sometimes confusing to know which ones are the right ones to use as a primary measure of value creation.

It is against this background that I think this conference adds value. I happen to believe that the concepts of Economic Value Added, or Economic Value Created as we use the terms at Eastman, is the one best metric to focus both the internal investment decisions as well as the investment decisions of portfolio managers.

Having said that, I should also say that as I think about the concept of Economic Value Added, there are two sayings that come to mind. First: “There is nothing new under the sun.” The concepts of EVA have been around for years. It has taken different forms: Return on Assets, Internal Rate of Return, Return on Net Assets, Return on Capital – all compared in some way with the concept of a Cost of Capital. Financial theorists have known and discussed for years the need to earn a return that is greater than the expectations of the capital providers in order to create economic value. So the concepts of Economic Value Added are not new.

The second saying is: “There is no Silver Bullet.” Adopting EVA by itself will not make you rich. The fundamentals of creating value still rest with the basics – finding needs in the marketplace, providing innovative products and services to meet those needs, and effectively and efficiently marshaling resources to provide those products and services. (Just basic blocking and tackling to use a football cliché.) To carry the football cliché further, it is my belief that EVA is the scoreboard which will give you feedback as to how well you are playing.

What is new about the application of EVA as popularized by a major consulting firm, and what has made it a focus within Eastman, is the alignment of EVA with how people get paid. While EVA concepts have been around for a long time, and while theorists have recognized its validity, it takes getting paid based on the results to really get the attention of the decision makers. If the decision makers within a company were paid based on sales revenue, net earnings or any host of other measures, that is where the attention was focused no matter how much lip service was given to the validity of EVA concepts.

Last month I gave a talk similar to this one to a symposium in Tokyo jointly sponsored by the Mitsui Life Insurance Company and the University of Michigan. There were about 500 people in attendance at the symposium representing major Japanese corporations. Mitsui Life has endowed a program at the University of Michigan to promote financial research. Each year a symposium is conducted bringing to the Japanese business community some basic concepts of the financial research. In 1995 the symposium was about corporate governance and this year it was about EVA. I believe the two are very much connected, and the concepts are of interest to the Japanese.

Why? Well my speculation is as follows: the Japanese business community did not pay a lot of attention to its shareholders and focused on market share development. As long as the Japanese stock market was growing, the shareholders were happy almost irrespective of the fundamentals of the companies in which they invested. But once the stock market bubble broke, fundamentals came into play, and now corporate governance is a hot issue in Japan. We believe the answer is this: what is new is the alignment of compensation systems with EVA.

Adopting EVA by itself won’t make you prosperous. Real success is dependent on the fundamentals. Once a company correctly identifies the needs in the marketplace…and follows up by putting in place the right strategies…the right products…the right innovation…using people and resources in an efficient way…then, the way to keep score is by focusing attention on EVA. We believe EVA is the right metric to use as long as you have aligned people’s interests and compensation along with it. Then you get the right balance.

Capital can flow freely throughout the world, and capital will seek the optimum return for the risk taken. The Japanese business community is recognizing this fundamental law of economics. So corporate governance – paying attention to the shareholders – and now EVA – recognizing the need to earn a return that at least equals the reasonable expectations of the shareowner are concepts that are being introduced into the Japanese business community. It will be interesting to see how they use these concepts.

We at Eastman have found the concepts of EVA useful in evaluating our performance and in determining which opportunities have the best potential to add value.

Before I tell you about our EVA journey and how we use the concept, let me tell you a little bit about Eastman Chemical Company. Eastman is a global company with 1995 sales of $5 billion. We make a wide range of chemicals, plastics and fibers that our customers use to produce thousands of consumer products.

Prior to 1994, we were a division of Eastman Kodak Company. At the beginning of 1994, we were spun off from Kodak, and have been a separate independent publicly-held company for almost two and a half years now. Eastman is the world leader in plastics for PET containers, a major supplier of cellulose acetate fiber and a leading supplier of raw materials for the coatings industry. We also make many specialty chemicals and plastics.

Our products are in many items you use everyday…as packaging for soft drinks or water bottles, in cigarette filters, as the base for adhesive tape, in photographic film, in coatings on your automobile or furniture, or as a bleach activator in a detergent. Our products can be found in your toothbrush handles, painting in your homes, as food preservatives, automobile parts, electronic components…lots of different areas.

Now, why is EVA important to Eastman? The reason is perhaps the most important thing I will say about EVA today: what gets measured, gets managed. Therefore it is very important to carefully select what gets measured. That is especially true if the pay system is aligned with the measurement.

EVA has been the result of an evolution of thinking that has taken place over the past 50 years or so at Eastman. Employees want to know how they are doing. Years ago when financial information was kept very close to the vest, about the only thing the vast majority of employees had to go on as to how the company was doing was the measured quantities of product being shipped. “We shipped more pounds of product this year than last year, we must be doing better.”

Well obviously a pound of one product was not necessarily as valuable as another, and so over time sales revenue came to be a common metric to see how well most employees saw we were doing. Closely related was a view of how much market share were we obtaining: the bigger the market share the better we must be.

Then earnings information because more widely dispersed, and that became for a number of years the primary metric of performance. But it didn’t take too long for managers to realize that to grow earnings all they had to do was invest more capital and get bigger. Over time the return on that additional capital was not always sufficient to attract new capital, and so cash flow became a major driving metric.

Today, on this evolutionary journey, we find that EVA is the best comprehensive measure for seeing how well we are doing. We want to grow businesses that are earning more than the cost of capital, drive efficiency into all of our operations to increase the spread between the return and cost of capital, and fix those businesses that are not earning the cost of capital.

Here is how we calculate EVA. We do it two ways, and get the same answer either way. Basically it is a matter of taking operating profit after taxes and deducting a capital charge for the use of both the debt and equity capital. Eastman’s EVA for 1995 was $346 million. That number also prominently figures in the statistical highlights of our annual report. Another way to calculate EVA is to subtract the company’s cost of capital expressed as a percent from the return on capital and then multiply that spread by the capital employed during the year, and again you see the EVA calculation of $346 million.

Either calculation is simple, and for us that’s part of the beauty of it. We have tried not to complicate it by going through some of the adjustments the “purists” would have you do because we want any one of our employees to pick up our annual report and be able to make the computation. We are convinced that we are driving the right behavior by the method we use, and we believe that any complicating adjustments would likely lead to mistrust in the system. In other words, we believe in keeping it simple and by doing so getting the right behavior. Sometimes I think complexity is what sells consulting services.

Now that we’ve looked at how we calculate EVA…let me explain how we use the concept. First of all, it is the primary report card for our business organizations within the company. Not earnings, not sales, not cash flow, but Economic Value Created.

Another way we use EVA at Eastman is to calculate bonuses for all our 17,500 employees around the world. Each employee – everyone of us – has given up 5% of our pay at risk in a program we call the Eastman Performance Plan. Employees can receive a payment once a year that is determined by the company’s return on capital minus the cost of capital – key components of EVA. The payout can vary from zero to 30% of an employee’s annual salary, with the first 5% of that payment going into an employees ESOP account. For 1995, employees received the top award, 30%.

Tying the EVA measure to employees’ compensation has been an important step in educating employees. You can imagine the level of interest when employees have such an earning potential. If you could listen to conversations in our company’s laboratories…on the plant floor…in offices…you would often hear lively discussions about how certain decisions or practices will affect Eastman’s return on capital.

We also rely on EVA as a specific focus for our top 600 or so managers who have pay at risk beyond the 5% that all employees invest…up to an additional 35%. Annual performance goals are established, and the performance against those goals determines how much, if any, of the “at risk” pay is earned back and/or any bonus. Fifty percent of the annual performance plan goal is based on absolute EVA dollars.

EVA is an important tool in analyzing investment or divestiture opportunities as well. For example, we recently acquired two small companies. Looking at EVA and Eastman’s ability to create value with those companies was a major factor in the decisions to make those acquisitions.

Likewise, we have recently divested ourselves of three businesses. Those businesses were not earning the cost of capital and not likely to anytime in the foreseeable future. So we determined that the capital those businesses were requiring could be put to much better use in other investments.

I’d like to share with you what I see are the benefits and the potential drawbacks of using EVA. The potential drawbacks are really only cautions…nothing that should prevent you from using EVA. One of those potential drawbacks is that too much of a focus on one year’s EVA, just like too much of a focus on one year’s earnings, can cause you to be too shortsighted on the short term. If you really want to make the numbers look good, drastically cut your maintenance program or your investment in training of employees and so forth. Of course – if you ignore those things for very long – you won’t have much of a company left. So you must discipline yourself to make these type of investments for continuing long-term success.

One more caution…EVA is not a very good measure for a developing or new business. There is almost always a period of time when you invest more in a new business than you’re getting out of that business. Here it is important to set some milestones and watch progress against those milestones. One such milestone might be the amount of negative EVA you are willing to invest over some finite period of time. One must look to the future…to some point where you expect that business to create enough value to make up for the first lean years.

Now for the benefits Eastman is experiencing by using EVA. First of all, it’s changed the environment in which we make management decisions. We find that tradeoffs don’t always have to be made at the top of the organization.

One business may find that the best way to increase EVA is to make sure they never deplete their inventory, and therefore increase their capital investment in inventory. Another business may find just the opposite – the best way to increase their EVA is by reducing capital invested in the inventory. The point is that these decisions may be different from business to business. And the trade-off decisions can be made where the best knowledge exists – as contrasted to a blanket corporate-wide decision to reduce inventories. The corporate charge is to grow EVA. The strategies and tactics used to do that may be quite different for one of our businesses as compared with another.

Second, EVA has led to changed behavior in our company. And a unique thing about Eastman is that EVA has contributed to changed behavior at all levels in our company. We have more people thinking about return on capital in their decision-making processes than we’ve ever had before.

Finally, EVA has been critical in aligning employee interests with those of our shareowners. Employees understand if Eastman creates value for shareowners outside the company…they, who are shareowners inside the company…share in the rewards.

As I said at the beginning, EVA concepts are not new. What is new…is that in recent years, we’ve integrated EVA into the company’s overall metric system so that everyone can tie into it. And we have aligned our compensation systems with EVA.

In 1993 we began pilot testing EVA as a key financial measure. In 1994 we adopted the concepts as Eastman’s primary metric and aligned our compensations system throughout the company with this measure. Our goal is to never have a year in which we earn less that the cost of capital, and in more normal times to earn at least 5% points above our cost of capital.

First, if you remember nothing else I’ve said about EVA, remember this: what gets measured, gets managed. And I believe EVA is the right metric to manage toward. Benefits of EVA include measuring value created by our business organizations, calculating bonuses for employees, and analyzing investment or divestiture opportunities.

You must resist the temptation to think only short term when using EVA or any other metric. EVA is probably not the best measurement concept to use for developing or new businesses.

Eastman Company has benefited from EVA in changed behavior. EVA has aligned employee interests with those of our other shareowners.

EVA by itself is not our salvation. It is just the best scoreboard we know of to see how well we are performing the fundamentals. So, while EVA is not a silver bullet, it is the measurement system that we believe best delivers on how well we are performing.

THE INFORMATION SOCIETY, CORPORATE RESTRUCTURING AND CHANGES IN THE WORKFORCE

Isabelle Deschamps, P. Eng.
Associate Professor, Technology Management, École des HEC de Montréal

Réseau des diplômés HEC, Montreal, April 24, 1996
Published in The Corporate Report No. 18 (June 30, 1996)

Trends in corporate restructuring, such as horizontal management, multidisciplinary teams, clusters and virtual corporations, are nurturing job flexibility and new focuses of intelligence within organizations. Human resources management must be more menu-driven and involve a greater degree of improvisation. The Peter Principle is dead. Long live the “continuous competency improvement principle!” Managers must say good-bye to prestigious titles and promotions, and fine-tune their skills as facilitators, learners and keyboard operators. Will companies, still reeling from the after-effects of rationalization, be able to envision and achieve the new collective goals demanded by the knowledge age? Will they see the hidden costs? Who will be excluded and sacrificed? Will we collectively be able to demonstrate the necessary open-mindedness and mutual respect?

What is the current and future impact of the information society on corporations and workers? At the moment, no one qualifies as an expert on this vast, ambiguous and chameleon-like issue. Many engineers like myself have thrown away their calculators. Administrators have lost all their illusions and given up looking for miracle cures. And so-called experts and most management researchers, though aware of the progress made in their fields, are also disturbed by the collective burnout threatening our organizations, societies and competitive systems. As a result, everything remains to be seen, but nothing as yet is clearly visible. On the basis of my observations and my interpretation of the findings of various experts, I will attempt to identify the major challenges of the information society. I will offer a critical overview of current developments in the hope that this will give you pause for thought – because you, collectively and individually, are experiencing and shaping these transformations.

The information society

The first piece of the puzzle, the “information society,” is a very outmoded notion. We are now in the knowledge age. Knowledge is a mature and sophisticated form of information; it is the result of the manipulation, integration, adaptation, improvement and application of information. Today, much more is needed than merely explicit, codified and transmissible knowledge, i.e. knowledge that can be integrated into information systems. Today we must master the implicit, intangible knowledge that rests with the individual: know-how, foresight and interpersonal skills.

The term “information society” is therefore not restricted to the progress made by information technologies. On the contrary, the knowledge age has created the buzzword now on everyone’s lips: the learning organization. This is the link between the first piece of the puzzle and the second: corporate restructuring.

Corporate restructuring

Corporate restructuring, as the second piece of the puzzle for management for the millennium, constitutes one of the cornerstones of the learning organization. The new organizational arrangement everyone is seeking involves nothing less than a new way of positioning strategic intelligence. Without exception, senior executives, junior staff and production operators alike are potential custodians of knowledge, and so in a position of control. How do these principles translate into reality? To use a fashionable comparison, let’s say that companies have gone from a Ford-type organization, through a “Made in Japan” Toyota-like model in the 1980s to a neural-based structure (which, by the way, does not have an official name, as no one has yet mastered the recipe).

• The Ford structure, based on hierarchy, functions, divisions and products, fell from the hit parade in the mid-1980s. This model is a bit like an Elvis song: while it was once all the rage, there is only a handful of loyal and nostalgic fans left.

• The Toyota model, on the other hand, still has a lot of ardent supporters. This wave of restructuring, which was based on the “just-in-time/zero-defect” principle and called lean manufacturing, broke sales records on all continents – just like platinum albums by Madonna or Céline Dion. Unfortunately, it also brought with it a swell of fanaticism, encouraging the rise (and fall!) of gurus who profited more from the whole adventure than did their clients or followers.

The neural organization, the last in our series, is like California wine 10 or 15 years ago: it still has to prove itself. Experiments are currently being carried out, here and abroad, by such companies as DEC, Kodak, Air France, Bull, Philipps, IBM and Rubbermaid. Different varieties are now undergoing “taste” trials:

• Horizontal (flat or process-oriented) corporations

• Corporations organized by project and/or multidisciplinary and multifunctional teams

• Networked or cluster corporations

• Modular or virtual corporations

Which organizational models should we choose?

All these forms currently coexist, often within the same company. There are as many models as there are industries, clients, strategies and firms. However, there are not really any optimal solutions, but rather hybrid, made-to-measure ones.

The challenge of corporate management here, where there are no clearly laid-out structures and ground rules, is to say goodbye to top-down planning. Managers must adjust in real time and be “plugged into” what’s going on below and outside. Running a company is not like operating a movie theater, where a prerecorded film is shown to a passive audience. Instead, night after night, companies must put on a play, with employees who feel the stress of a live performance, before an ever-changing and extremely demanding public. In certain very active sectors, the ground rules and players are changing so rapidly that it feels like an evening at the Improv!

Where improvisation and creativity rule, the management skills required are resoundingly different. This brings us to changes in the workforce and wholesale transformations in managerial job descriptions.

Changes in the workforce and the human resources management revolution

The workforce is the third and last piece of the renewed management puzzle. The “automated” and alienated employee whose performance could be “programmed” is now a thing of the past. Taking his or her place is an independent, responsible, flexible and competent individual capable of taking risks and working as part of a team.

Consequently, the celebrated Peter Principle is dead. Systems that generate incompetence through the obsessive pursuit of status must give way to those in which each individual is perfectly aware of his or her own skills and limitations; where people are encouraged to recognize their mistakes and where everyone, regardless of job title, is open to coaching and to continuous individual and collective improvement.

Job management will be transfigured. The Peter Principle is giving way to versatility and hyper-flexibility. In order to make the most of employees and their individual skills, human resources management will offer menu-driven services. Work contracts, evaluation, compensation and career management will all be personalized. Who will be the first affected? Managers, professionals or employees?

Goodbyes to be said and new lessons to be learned

I feel sorry for each of you here, because as corporate managers and professionals you are the ones who will be affected first by these new organizational structures and new definitions of “employment,” “employee” and “employability.” For example, you can forget about:

• That promotion to department head you were hoping to get two years from now

• An impressive-sounding title on your business card

• Prestige, a huge office with corner windows and your own secretary.

Here, instead, is what you can expect:

• You’ll be called a developer or coordinator, rather than a manager

• You’ll have to type your own letters and take your own calls and e-mail messages

• You won’t need an office any longer, but you will need to keep your computer network access code with you at all times

• You’ll be spending more time getting your mind in shape than you spend now at the gym keeping your body in shape

• You’ll probably be retired early, because of technological or cultural redundancy

The future is uncertain for many managers and specialists, and you’d be wise to make a move before someone does it for you. Some experts are asking (you as well as themselves): as managers and professionals, are we ready to take the leap?

To conclude…

Am I too critical or cynical about what the information society has in store? I don’t think so. I only hope that the pendulum will swing the other way long enough to give us some breathing space. We are still suffering the fallout from the massive rationalizations brought on by the Toyota era. We haven’t given ourselves much time to heal. Instead, we’ve jumped headfirst into numerous and often fruitless efforts at establishing a neural, flat, network or virtual organization. Are we inevitably condemned to modifying our structures every six months?

I’ll close by quoting Louart, a French researcher, who says that “structures are imagined by the players involved in them who simultaneously construct and are influenced by them; they are the stage settings for collective projects.” So where, then, is the key to our common future? Can we change only our organizational structures – our stage settings – to improve the story line? Or should we change the actors? If so, who will be cut from the cast? And if we wish to avoid such cuts, should we, and can we, change our collective goals?

One thing is certain, and here everyone agrees: we must stop camouflaging the problem and deluding ourselves. We must refuse to hide the costs of unemployment brought on by downsizing or health costs created by stress. We must stop denying the long-term effects of pollution from tons of buried hazardous waste. We must be clear-headed, and realize that the information and economic revolution has a price. We must also admit that certain groups, individuals, companies and countries will pay a higher price than others. There will be winners, but many losers as well. What portion of the managerial elite will be eliminated? Will craftsmanship go by the board? Will the brain drain continue? Will an entire generation of young managers and professionals be sacrificed?

This leads me to the following questions, which in my opinion constitute the greatest challenges of managing knowledge in the 21st Century:

• Knowledge is power, but is it will-power?

• Will we be capable of being open-minded and forming the necessary partnerships?

• In endeavoring to break down structures and barriers, will we not be erecting new combat zones?

• The information society is a sign that we are collectively more intelligent, but are we (and will we be) more respectful of one another?

PUBLIC RELATIONS: THE DRIVING FORCE IN GLOBAL COMMUNICATIONS TODAY

Richard Edelman
President & CEO, Edelman Public Relations Worldwide

Canadian Public Relations Society Conference, Montreal, May 25, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

I would like to congratulate the Canadian Public Relations Society on its 50th anniversary, which you’re here to celebrate at this conference. To reach this jubilee year means that you must be doing a lot of things right. I wish you all the best for the next fifty!

Let me share a quick personal account of my early recollections of this fair city. Thirty-one years ago, my family traveled here to Montreal for Expo 67. Because of the huge influx of visitors and overbookings, all five of us ended up in one room at The Queen Elizabeth Hotel. I knew a bit of French from grade school but found it sorely lacking. I remember the people – helpful, kind, proud to be part of it all.

It was my first trip outside the US, and it was historic in every way. There was Old Montreal – there really are some places in North America where history matters. And I remember the food, too. I imagine I’m not the only tourist who still thinks one of the best parts of my first trip to Montreal was a visit to Schwartz’s for a smoked meat.

And parallel to those wonderful, old-world values, was the sweeping modernity of the 1967 world’s fair. Habitat, touch-tone phones, the visual, the architectural, the technological wonders – the amazing new shapes of things to come. We could almost feel the world changing around us as we breathlessly took it all in.

I am reminded, too, that in that summer of Expo 67, there were some very far-out sounding ideas and phrases coming out of Canada that suddenly seemed to gain world currency. Marshall McLuhan was on the cover of Time and we began to hear that we live in a “global village” where “the medium is the message.”

“Global village” – mysterious, prophetic words at the time. Yet today almost commonplace. While other words and ideas we took for granted have fallen out of favor. What public relations firm would recommend calling an international exposition “Man and His World” in 1998? Yet the “global village” is not only a nifty catch phrase, it’s the reality of the world we live in today.

Now, I’d like to tell you how we at Edelman see the future of our business in light of those changes, how it might evolve and how we might have to change to meet that ongoing evolution. No matter what happens, I believe public relations will remain a vital service function, in the sense that we add value to a client’s business by selling a service to them. But the services we sell, our professional disciplines and skills in anticipating and effectively responding to trends that affect our clients, are operating at much higher levels of intensity than ever before. And that is due to the way the world has evolved since I first visited Expo 67 over 30 years ago, and especially in the 20 years since I joined my father’s firm straight out of Harvard Business School. In the global village of that time, we were still a cottage industry. Today, public relations is a worldwide force.

The way to get a handle on what the future holds for the public relations industry is to try to agree on the major trends that will affect our clients, and how we shall have to respond. At Edelman we can see three major trends evolving into the early part of the next millennium – trends that will influence and shape our clients’ businesses and their behavior around the world. These trends are:

• First, the continuing impact of technology and the degree to which it influences the business of journalism and our business of public relations in consequence.

• Second, the changing role of human resources in the post-merger financial transaction period, and the power of communications to influence morale, productivity and, ultimately, business competitiveness.

• Third, the increasing globalization of our economies, as free trade and more open markets become the world norm.

In today’s dynamic marketplace, we have an empowered public that enjoys virtually instant access to a plethora of media. And this phenomenon is still in its infancy. The recent triumph of capitalism reinforced a new culture of investment in equities. Today, fully 45% of Americans are investors in the stock market, either as individuals or through mutual funds. This has caused a demand for transparency and immediacy of response from companies. In effect, companies are now subject to the same demands for information from individuals as they are from Wall Street analysts. This is no longer a closed game – everybody’s in the game and they all want a level playing field.

The results of free trade are clearly evident in the healthy economies of the US, Canada and Mexico. In the past decade, trade between Canada and the US has more than doubled. It now clocks in at well over $1 billion a day. Other parts of the world are following suit. The push for a single currency in Europe is a direct result of feeling left out of the new economic prosperity pushed by trade. Meantime, Procter & Gamble will have over $1 billion in sales in China this year. And that’s just the tip of the iceberg.

In the context of these trends, the public relations industry is now more influential in the communications business than it has ever been. Indeed, PR is now the driving force behind much of global communications and, as a result, much of the global economy, too. And I think this trend will continue well into the future. There are a number of factors responsible for this that I will now briefly outline.

We’ve all watched the move towards globalization in business. The media owners have led this trend. Rupert Murdoch’s empire stretches around the world, with StarTV in India and China, Fox in the US and Sky in Europe. Pressures toward vertical integration are tremendous, so that NBC is no longer a network but the beginning of a chain of properties including cable (CNBC), online (MSNBC) and international (Superchannel).

The goal of media companies these days is “repurposing of information,” a buzzword for tweaking and recycling the same digitized bits for repeated use on air or online. CNN/FN.com, the internet version of the CNN financial news channel, has 17 full-time “repurposers” whose only job is to expand on television stories by piecing together wire service and file copy.

Yes, I just said the “I” word. The popularity of the internet is now driving the news as well. Reporters for the online edition of Time magazine file stories four to five times a day, instead of just once a week. This immediacy was once the exclusive province of news services like Reuters and Dow Jones. Now it’s everybody’s game.

That the Clinton-Lewinsky story first broke on the internet has dramatically changed the behavior at the major dailies. For the first time, we saw the online editions of The Wall Street Journal, The Dallas Morning News and others run big stories before the morning papers hit the streets.

With 24-hour business news outlets like CNBC and CNN/FN, plus their online cousins in mainstream print, the pressure to file immediately is enormous. There is now a fashion for single-source reporting and, more disturbing yet, stories based solely on attribution. “According to The Wall Street Journal,” seems to be the lead for an increasing number of articles.

The deadline pressures of this minute-to-minute news cycle also raise the odds of “piling on.” Pack journalism, where reporters jump on a bandwagon, is far more prevalent. Given the new mores of the mass media, any victim of inaccurate reportage will quickly find that he or she is chasing a target down a very steep hill.

The news business is also being subjected for the first time to strict profit targets. The impact has been greatest in the television arena. Cost of goods has had to come down as audiences are dispersed among cable, web and other entertainment options. And TV news, compelled to make the same margins as its entertainment cousins, is no longer seen as a public trust.

The result has been to start banking on low-cost product. News is one-fifth as expensive to create as entertainment. News is owned by the networks and not subject to arbitrary syndication rules limiting the number of showings. In a world where one episode of E.R. will cost $13 million and an hour of news can be produced for $400,000, you can easily see the economics at work.

This cost of goods issue has led to a merging of news and entertainment, or “newstainment.” Cheap to produce, easy to promote, shows like Dateline are now on four times a week. The newstainment shows have a certain “cops and robbers” feel to them. Ordinary “little” people, consumer groups, crime-busting attorneys-general are the good guys. The bad guys are inevitably big business and insensitive government. Lots of hidden camera work, stock file footage, and ambush interviews are the stuff of newstainment.

Combine trends like these and it is not hard to see why the public relations industry is more in demand than ever before. Our service component is actually a seismic component, tracking the world rhythms and ready with a response when the newsquake comes.

Let me say a few words about Edelman Global Technology. Technology companies are among the most sophisticated users of public relations, and we serve some very high-tech clients indeed – Ericsson, Fujitsu, Microsoft, NCR, Texas Instruments, to name just a few. So we know the information systems business, and our global technology is grounded in that kind of expertise – computers, software, semiconductors, networking – and lifted by the surrounding capabilities of a full-service agency.

Edelman was the first agency with global email, and our interactive solutions and Crisis Preparation & Response (Edelman CPR^SM) are geared to crisis situations of any order of magnitude. Gone are the days of task forces meeting during a crisis to plot out the daily message for the media.

Today Edelman can create a home page, focus the issues and work the worldwide web to enhance knowledge about the situation, while at the same time gather information and increase response speed – calibrated by audience and given in minutes. And that’s what communications is with the public today, the service we PR professionals know how to provide best.

The newest area of the PR industry is in practice development, which is to say what we do each day. Our firm began in the marketing communications arena. We have since added several skill sets, including interactive, crisis management, government affairs, financial relations, business marketing, event marketing, consumer public relations and corporate reputation management.

The fastest growing players in the PR industry have been the specialist firms, especially in the information technology and healthcare sectors. In the previous generation of PR firms, industry specialists were spawned in investor relations, crisis management and government relations. Now, in the IT and healthcare segments, there is much more pressure for multiple offices, while in financial, crisis or government, single-city players can still thrive.

Again, it seems to me that the internet revolution is a tremendous opportunity for the PR business. And this opportunity has to do with content creation. It can be said that the 50-year period after World War II was the television era. Companies seeking to sell products had a magic vehicle – mass-market advertising on network television. The ad agency thrived in this context as creator of a single piece of tape with engaging characters communicating the emotional support to deliver consumer purchase.

Unfortunately, the TV magic is just not working any more. Evolution of newer media like web, cable and direct-broadcast satellite have splintered audiences and raised the cost of network buys. Which is why today’s patients need public relations. We are the discipline that can provide rational and emotional support to purchasers. We have always marshaled third-party support for claims. We provide credibility and immediacy. We target the outlet and customize the story. We can respond effectively within even the shortest news cycles. And that makes us “the content creators for the 21st century” – the driving force in global communications today.

Let me give you a couple of examples. For one of our drug company clients, we created a website for patients with multiple sclerosis and their families. Password protected, the site is a private place for 20,000 patients to talk about their problems. We create content, including online shows with physicians, postings of the latest scientific papers, and interviews we do with doctors and patient advocates. We have created a community that stretches across America. And we have done well in doing good.

For another client, faced with a possible unfair exposé on Dateline, we have prepared a complete online response mechanism. We created a digitized video library of sound bites from corporate executives, credible academics and industry leaders. We have a complete list of email addresses of financial analysts, reporters, government regulators and elected officials, plus the employees. We are ready to respond within minutes of the proposed Dateline piece to block the media piling-on effect I described earlier.

At the same time, we are improving internally – giving our own people the benefits of our enhanced communications skills. Not long ago, we turned our research techniques inward and surveyed ourselves. We found Edelman had work to do in human resources and the workplace. So we came up with Edel-U, arguably one of the best training and development programs anywhere. I think we have every reason to be very proud of this achievement.

Given the move toward web-based communications, what sort of people will be working in the PR business in the years to come? I don’t believe we will necessarily employ former journalists. We will be communicating directly with employees, the financial community and customers. We need to bring in people with a broader array of skills, from change management and money management to consumer marketing and design. And we can team our practice area experts with writers and communicators to create the most effective end products.

And where, you may ask, will all this happen? Where does geography mesh with industry and practice? There will continue to be agencies in a single geographic location, like some of the excellent firms here in Montreal. There will also be global players such as Edelman, serving single clients in multiple locations. The pressure will be on the national firms to prove the benefits of “particularité,” as the French would say. Our philosophy is to “Act global, think local.” We believe local offices executing a worldwide strategy must have the leeway to deliver a given set of messages using the spokespeople or events that suit their market best.

We in the PR industry have an unprecedented opportunity in this new world of personalized, addressable communications. We can talk directly to the end users of information, in addition to working as intermediaries for the media. Our task is to continually find new ground to make this work.

Think for a moment of the power of direct communications and the new responsibilities of today’s PR executive. There is no longer a screen between our materials and the public. It’s not only the media that use the web as a resource. So do consumers, regulators and other stakeholders. We must recognize this change and insist on higher standards for all our work.

We must, however, clearly distinguish between our materials and those presented by the media. We are in the advocacy business, after all, and our product is more “advertorial” than editorial. So there must be clear branding with either the client’s name, products or services, or that of the PR firm. Subterfuge and front organizations cannot be tolerated any more. But with CEO and executive commitment, the communication can be, and will be, more relevant, more productive and more profitable for all concerned.

The PR industry will be asked to perform more and more on the global stage but to what end? As we are today meeting in Montreal, the notion of “particularité” has a very important significance. If we are simply implementing global programs without sensitivity to local market conditions, it is clear that we will not be effective for our customers. Though creativity can be globally inspired, there needs to be a “bottom-up” approach to execution.

Edelman’s own Michael Morley summed this up in a memorable online chat to one of his readers: “Every effort should be made to integrate the various functions at the corporate communications level – ads, sponsorships, PR, etc. It is harder at the product marketing level which in any case is less likely to be coordinated from a central point. But integration of all functions should be the goal in each individual market.”

I stress this “particularité,” because I believe in the power of public relations. I am convinced that a well-conceived strategy executed thoughtfully and thoroughly can move public opinion anywhere on earth.

Transparency is the order of the day as we continue to play a critical role in policy development and implementation. Our work has the power to educate, the power to inspire and the power to sell. But in the wrong hands, PR can distort facts, create fear and deepen cultural divides.

I have high hopes for our profession as a positive force. I believe we should see our profession as the bridge between our clients and all of their publics. We can also be their conscience and their motivating force, not mere apologists. We have the ability and the power to be real agents of change.

And I trust that in facing up to this responsibility, we can also recognize the immense opportunities for us as the energizers and content providers in global communications today. Let’s work hard to ensure that the content we provide is universally profitable – that in the global village, public relations continues to deliver a world of good.

EICON TECHNOLOGY CORPORATION: CONNECTING NICHE TO GLOBAL MARKETS

Peter Brojde
President & CEO, Eicon Technology Corporation

The Montreal Board of Trade, December 7, 1995
Published in The Corporate Report No. 16 (February 29, 1996)

Ten years ago, Bell Labs announced a development that would come to play a vital role in the explosive growth of the personal computer – the one-megabit chip. The US National Science Foundation was trying to build a communications network that would eventually become known as the Internet, and Eicon shipped its first intelligent X.25 communications card. In 1995 we are shipping the first multi-access card to support X.25, frame relay and ISDN (Integrated Services Digital Network). NEC has announced a one-GIGABIT chip and we routinely access our email systems and corporate LANs from hotel rooms in another continent.

Transition from mainframe, terminal-based computing to networking

In just ten years we have seen a transition from mainframe and terminal-based computing to the networked enterprise. This is the modern organization that both uses and produces enormous quantities of information in a variety of locations that are linked by a communications network – which is where Eicon comes in. Our traditional products connect PCs to remote host computers, called the Host Access market. As computing becomes more and more network-centric, we offer new products for the emerging Network Access market. These products connect PCs from remote locations and they connect application servers to corporate networks.

Our markets have been changing constantly in our ten to eleven years of operation. We have had to extend our original core competence many times, in order to keep ahead. What hasn’t changed in the last ten years for Eicon Technology is our vision of connecting people to information. We are more entrenched than ever in the business of ensuring that organizations have transparent, cost-effective and reliable access to information wherever it is located. However, to respond to the constant challenges and changes of the connectivity and personal computer market requires never-ending adaptation and innovation.

Today I will talk about some of the factors that have worked for us in achieving success in our changing global marketplace, and I will comment on the impact that operating out of Montreal makes on us.

Total perception by a customer

A fundamental question for us has been whether to emphasize product quality or service quality. The answer, of course, is that there is no answer, that you cannot choose – they are inseparable. Product quality and service quality form the union which supports value-based pricing in the market place.

Service quality is not simply how quickly we can fix a customer’s problem but it is also the total perception of us by a customer. This perception is based on the quality of our salespeople, our support staff, our marketing collateral, our product documentation, our ordering and billing process; in fact, on the quality of everything we do. The customer’s view of us is dynamic as competition attacks our market position and as customers’ expectations grow. There are very few markets where there is no competition and it is a fact of life that the competitors will get better. And so must we.

Every company that discovers a niche market will start with 100% dominance. With time, however, market share declines with the entry of competitors. The product features that once were unique become generic through the introduction of competitive products. Market share declines less dramatically when the company operates in captive markets. The only way to continue to dominate the market is by maintaining the loyalty of the existing customer base by providing superior customer service. And what do you have to do to earn customer loyalty?

We are all familiar with the typical customer survey which ranks customers from 1 to 5, from extremely dissatisfied to very satisfied. Those who are extremely dissatisfied we call terrorists and those who are very satisfied we call apostles. An apostle will tell 3 to 4 other customers how good we are. A terrorist on the other hand will tell 9 to 10 others. Reality is, in fact, worse than this, because for every customer who complains there are 26 who don’t. If we look at the spread for the zone of defection – these are the customers who will move to a competitor very easily; and your so-called “satisfied” customer is in the zone of indifference which still means they could be poached by a competitor.

At Eicon we have the motto that every employee must act at all times with the goal of having only apostles – only number fives. So the next time you receive the results of your customer satisfaction survey remember – a “satisfied” customer is not good enough. If you are going to turn your customers into apostles then you must get close to them. Eicon products are sold and supported worldwide in 70 countries via a network of distributors, system integrators and OEMs.

As you can see we have sales and support offices around the world. We perform the majority of our product development at our head office in Montreal and it is here that we manufacture our products for the American and Asia-Pacific markets. We have established manufacturing and research and development facilities in Dublin, Ireland, and in Stuttgart, Germany, to better serve our European customers.

We sell location-independent computing and we have implemented location-independent management. If you sell worldwide you must be prepared to operate worldwide. Our vice-president, sales is based in London, England, and our vice-president, marketing is based in Dallas, Texas. They, and the other members of our senior management, meet weekly to review strategic issues, usually with several members on the phone. To do business worldwide you must be ready to travel and you must have excellent internal communications.

Montreal helps us address worldwide markets

Montreal does help us address worldwide markets. A subtle but critical factor is multiculturalism. Montreal is a very cosmopolitan, multicultural city and our workforce is a reflection of this. In a recent survey, we found over 40 languages spoken fluently by our staff. This makes it easy for us to deal with other cultures, as we work with our international customers and our international partners. For example, if you go to Ireland, you will be more successful if you can adapt and do business the Irish way. Certainly the bilingualism of Montreal costs us in some ways, but a benefit comes in working with customers on their terms, making it easy and pleasant for them to do business with us.

So one of the lessons we have learned is how to leverage our multicultural base in Montreal. From the very beginning, Eicon has focused on exports. More than 95% of our revenues are from exports and we were proud to have recently received our third Canada Export Award, a lifetime award which I believe is telling us not to apply again. In fiscal 1995, over 60% of our sales came from Europe. Selling into 70 countries hedges our bets against problems in one particular region. The other hedge for Eicon is the number of different industry sectors into which we sell. We sell everywhere – banking and finance, transportation, insurance, retail. If one sector is in decline, we can normally see another advancing strongly.

Later in my presentation, I will make a case for a strong local economy. This is our contribution. Exporting brings many obvious benefits to the local economy.

Stay in the forefront of technology

In the information industry it is essential to stay in the forefront of technology. Emphasis on R&D is a critical component of our growth strategy, in order to meet the needs of our customers and to maintain our competitive advantage. In 1992 and 1993, Eicon’s research and development expenses represented 17% of our sales. This has accelerated to 20% in 1994 and to 23% in 1995. We typically target to reinvest upwards of 20% of forecasted revenues on R&D. These levels of investment are necessary to meet the challenges of the highly competitive PC connectivity marketplace. I can imagine that the same is true for many other sectors. For Eicon it is essential that the cost benefits of doing R&D in Montreal are continued, and that the federal and provincial Investment Tax Credits, for example, are not eroded.

Sometimes investment in your own R&D is not enough. The situation with ISDN illustrates this. When we anticipated the potential growth in ISDN usage we realized that we could not develop all of the required technology in time.

The next choice is, of course, to acquire what you need. In December 1994, Eicon acquired G. Diehl ISDN, a leading German manufacturer of PC-based ISDN products. This acquisition was strategic in that it gave us a strong position in the rapidly growing market for ISDN products. Such a position would have taken us several years to build if we had relied solely on internal resources. While it is good to develop everything in-house, sometimes a strategic acquisition is the right thing to do.

Another choice to consider is some form of partnership. An example of this for Eicon is ATM (Asynchronous Transfer Mode). Like ISDN, if Eicon tries to do it all alone we will probably be too late. In this case, we elected to enter into a partnership with other companies whose core competencies complement our own. Consortium EPAC, supported by the Quebec Government with financial support coming via FDT (Fonds de développement pour la technologie), comprises four Montreal organizations – Eicon, Positron, AIKS and CRIM. Positron is a telecommunications company with expertise in campus-level ATM systems. Their strategy of selling to the telcos complements nicely Eicon’s focus on the data communications end user. AIKS brings expertise in electronic commerce. CRIM plugs us into the best of local university research and some of CRIM’s own areas of excellence. Each partner has great strength in his own market niche, but through working together we can offer a complete end-to-end solution which would be impossible for any one of us working alone.

What are the elements needed for a good partnership? Real synergy is essential. Eicon searched for a long time to find partners whose technology, strategies and markets truly complemented our own and we feel very fortunate in the excellent fit we have found with Consortium EPAC.

Support from government and other public bodies helps a lot. The formation of our consortium was encouraged and supported by the Quebec Government through the FDT and by CRIM. There are other ways to get support. One example is Innovatech, which has provided support for many partnerships here in Montreal. The support needed is both facilitation by bringing together potential partners and guidance in actually creating alliances. Financial support is certainly welcome to deal with the additional costs that do come when several organizations work together.

A critical factor for Montreal itself is that we must have a sufficient critical mass to support a broad range of industries, so that such partnerships are indeed possible here. This means we need a strong and stable local economy.

To summarize the key points I have made:

• You must stay alert, flexible, constantly vigilant, for market evolution – in the information industry we can never relax.

• Do not choose between product quality and service quality. Insist on both. And remember that a satisfied customer is just not enough – you must strive to get a five on your customer satisfaction survey. You must stay close to your customer, and if you export heavily this means your customers are around the world, which means that you need to be around the world.

• You must invest heavily in R&D. Sometimes your own investment is not enough, or will not be quick enough. In this case, stay alert for the possibility of a strategic acquisition. A third option is to look for partnerships. But to be successful you must find a real synergy with your partners.

And what does this mean for Montreal? In our business multiculturalism is a vital ingredient to our international success and should be encouraged. We must ensure that the financial benefits of performing R&D here are not diluted. We need a strong local economy, this helps to create the critical mass where there will be enough good companies locally to support the creation of good partnerships. A strong local economy also helps to attract and keep excellent people. For a company like Eicon, our real assets are our people. Right now it is just too easy for our competitors, elsewhere in Canada and in the US, to tempt away our best people. We need to keep top quality people in Montreal to ensure our success. We certainly cannot afford to lose them.

And finally, to do all this we also need political stability.

THE INFORMATION IN YOUR MEDICINE

Thomas Trainer
Chief Information Officer, Eli Lilly and Company

The CIO Summit, Toronto, November 19, 1996
Published in The Corporate Report No. 20 (January 15, 1997)

I came to Lilly from a shoe company less than two years ago. I still have a lot to learn about the healthcare field. Maybe that’s why I sometimes wonder about things that most people take for granted.

For example, when and why did the word “patient” come to mean someone who has a health problem? Voltaire once said, “The art of Medicine consists of keeping the patient in a good mood while nature does the healing.” In Voltaire’s time, I suppose the best you might hope for was to outlive your illness.

Needless to say, the progress of healthcare in the 20th century has made us less willing to wait for cures. Yet we have waited entirely too long in the late 20th century for information technology to emerge as a leading force for improving healthcare. This despite the fact that not having the right information at the right time is a costly problem-for patients as well as health care professionals.

Doctors and nurses typically spend only 30% to 40% of their time actually giving care. More than half their time goes toward administrative activities – shuffling paper, recording information, retrieving information. During a typical clinic visit, some 30% of existing information about a given patient is unavailable – hidden in another file somewhere. We can only guess how often this results in incorrect diagnosis and ineffective treatment.

Studies have also shown that about half of all patients in North America, Europe and Japan fail to comply with their doctors’ orders when taking prescription medicines. Maybe they didn’t understand the instructions. Maybe they can’t remember. Or maybe they just can’t take the medicine for some reason, but the doctor does not have that information.

Regulatory approvals for new pharmaceutical drugs can take anywhere from one to three years, depending on the country. When a regulator asks for additional information, the process stops until the company can extract just what the regulator wants from the clinical trial data. For a major drug, any delay can cost the pharmaceutical company millions of dollars a day. And that doesn’t begin to count the cost in terms of patient suffering.

Surely, with so much at stake, our industry would have recognized long ago the importance of adopting new and better ways to manage information. In Canada and elsewhere, information technology is now our best hope for raising quality and accessibility of healthcare while lowering overall costs. But the truth is that this industry is five to ten years behind the leaders in innovative use of information technology. Fortunately, this situation is changing rapidly. Today, I am going to focus on the experiences of one part of the healthcare industry-pharmaceuticals-and one company within pharmaceuticals. Because I believe that Eli Lilly’s experience demonstrates that IT’s transformational power will be no less remarkable in healthcare than it has been in travel, finance, communications and other industries.

I will focus my remarks around three main themes. First, that despite some very big changes under way at Lilly, the key to success in our business is still innovation. Second, that modern information technology is a critical capability at the frontier of pharmaceutical innovation. And third, that the growing information content of the pharmaceutical business-the information in your medicine-is the key to delivering greater value to our customers.

Eli Lilly is a company as old as the ethical drug industry, founded on the notion that scientific research and guaranteed quality could improve human health and earn the confidence of doctors and patients. In fact, one of our most important contributions historically has been in the area of diabetes – and it all started when insulin was discovered right here at the University of Toronto.

Lilly has seen many changes over the past 100 years, but rarely more dramatic than over the last two years. Lilly acquired PCS, for example, the largest pharmacy benefits management company in the US. This subsidiary is an information technology powerhouse that serves one out of every four US residents. Now we have created a similar business in Canada called Rx Plus, and it already connects with more than 90% of the nation’s pharmacies.

We also added a company called IMS, which provides information support systems to physicians’ offices and is approaching 100,000 doctors online. We have moved full force into new IT-based research technologies known as combinatorial chemistry and bio-informatics. Using computers, we are able to create tens of thousands of molecules that exist only in silicon, and rapidly screen them against biological targets. All of this before the substance is ever formulated in a test tube.

The IT world talks about the convergence of computers and communications, hardware and software, carriers and content. In the pharmaceutical industry, we also talk about convergence-of biogenetics, combinatorial chemistry and more traditional pharmaceutical technologies, along with information technology.

But we still make money the old fashioned way: through pharmaceutical innovation. That word may conjure up notions of a laboratory scientist inventing new drugs from rare plants of the rain forest. But discovery is only the first step in the innovation process. The drug’s clinical effects must be proven. It must be reliably manufactured and successfully brought to market. Only when all these elements come together can we call it innovation.

Let me put it another way. The pharmaceutical industry prides itself on the progress of the past 100 years. Yet in all that time, we essentially have produced a thousand drugs that act against about 150 molecular targets. The human genome contains at least 100,000 genes. How many of those might yield practical targets? Whoever finds out – and can engineer medicines to precisely hit those targets – will win big in the next century.

So the mission of the IT function is clearer and more critical than ever: to enhance the company’s ability to discover, commercialize, produce and market new drugs that solve human problems.

To put it another way, in today’s highly competitive pharmaceutical industry, you are what you know. IT’s job at Lilly is to help create a worldwide learning organization-one that can:

• Sweep in new data, from proprietary as well as public databases, anywhere they exist in the world

• Convert that raw data into information that has meaning for our work

• Share new information rapidly and effectively with collaborators inside and outside the company, so that information can be transformed into real knowledge for Lilly

• Act quickly on that knowledge to be a winner in this fast-moving marketplace

• Take everything you learned along the way to cycle it back through the organization

Knowledge is the greatest and, in the long run, the only sustainable competitive asset in our industry. The job of the Lilly IT organization-like the nerve cells and synapses of a highly developed organism-is to link people who have knowledge. Easy to say, hard to do.

IT is explicitly mentioned in the Lilly corporate vision statement as one of a very few core competencies that are vital to the company’s future. But it wasn’t always that way! Many of you will identify with this. It’s a story marked over the years by fragmented decision making for computer and communications systems, an infrastructure that kept falling short of growing demand because it was disconnected from its business customers, and the inability to get the economies of scale that Lilly should command.

IT investment decisions traditionally were made in a manner which sub-optimized the needs of the entire enterprise. With multiple budget owners located in various Lilly divisions, we continued to invest in redundant infrastructures and development methods. Decisions were made without sufficient understanding of their company-wide implications.

As a result, until recently, Lilly’s total costs for IT went uncalculated and unknown. I am quite convinced that we were paying at least a 20% premium for inefficiencies due to such sub-optimization. Fortunately, Lilly is making the changes necessary to solve these kinds of problems, and we are beginning to enjoy the benefits that come of integrating IT strategy with the business model.

Let me give you some examples-current and future-of this integration and the promise it holds. Lilly research colleagues around the world (some who work inside the company, but many who work for our business partners) must collaborate effectively by operating off the same information resources. “Discovery Without Walls” is the term we use. It means that the fundamental research tools of the future will be databases and powerful broadband networks.

For example, there are now at least a dozen public databases around the world containing the information that is being produced by a massive research program to map the entire human genome. Making this knowledge publicly available to all researchers is roughly analogous to declaring that the earth’s entire mineral resources are open to all comers-but you’re on your own when it comes to mining the valuable stuff.

Ultimately, all of this collaboration must still lead to molecules that are potential medicines, and finding out which one works best for a specific purpose. Productive chemists will be able to screen not 60 or 70, but 10,000 compounds a year with the support of informatics, robotics, miniaturization and computer-based molecular modeling. The high potential molecules then move on to product development, testing and registration.

At every step in the pharmaceuticals value cycle, there are new opportunities for IT intervention that will change the pharmaceutical industry. I mentioned earlier how costly it is for patients as well as drug companies when promising new medicines are delayed in the regulatory approval process. Let’s look at a new Lilly drug called Zyprexa for the treatment of schizophrenia. This illness strikes about 1% of the world’s population. In Canada alone, the direct medical cost of treating schizophrenia runs to $2.3 billion a year, and the total costs are much higher. So to address this need as quickly as possible, Lilly conducted trials of its new drug on 3,200 patients worldwide.

In a period of three weeks, we submitted applications in 21 countries. If you’re not familiar with the pharmaceutical industry, it may not be immediately apparent that this is a huge undertaking. Every country has different requirements. Given the complications of approval processes around the world, how could Lilly possibly manage applications in 21 countries at the same time? And how is it that last month, in the space of just a few days, we received approval to sell the drug in Canada, the USA and 15 European countries?

It was only through a modularized database that can be managed to fulfill regulatory requirements in many different countries, through the use of CDs to replace thousands of volumes of paper, and through a worldwide information-sharing platform that allows rapid follow-up to questions from regulatory agencies.

Lilly Canada was one of the pioneering locations in the development of these capabilities. There are more examples. We are automating the control of all production lines to enhance the quality and cost of Lilly medicines. Regulatory agencies and our own quality programs require extremely careful record keeping on every batch of drugs.

On the sales and distribution side, the Lilly field sales organizations in Canada and elsewhere are being turned into networked road warriors. IT is changing sales and marketing in other ways too-with computer-based health-economic models that the salesperson can carry into the decision maker’s office to demonstrate the long-term cost effectiveness of our pharmaceutical products versus other healthcare approaches.

Of course, the Internet is emerging as an exciting and promising channel for educating patients and encouraging good health practices-despite restrictions that regulatory agencies try to put on the Net. Lilly is creating interactive disease information sites on the World Wide Web, aimed at patients, their doctors and families. Twenty-four hours a day, visitors can view educational videos, test their knowledge with interactive games, ask questions of experts and download files on the disease that concerns them.

The Information Age may be coming late to healthcare, compared with other industries. But once that happens, nothing is ever the same. The more information intensive pharmaceuticals become, the greater the value they deliver to patients. Traditionally, our product has come wrapped in information. In some countries, only the healthcare professionals ever see that information. In other countries, it is provided to the patients-who throw it away because it’s hard to understand and sometimes even scary.

Increasingly, however, the information is the product. It may look like a pill. But it is really the culmination of all we have learned through the pharmaceutical value cycle, from discovery to clinical expertise, to health-economics studies and actual patient use, even including the measurable improvement in patient conditions.

It is this kind of information intensity that holds the greatest promise for truly managing a disease, through treatment that is centered on the patient and those points of intervention that achieve the best results. Centered on the patient. You can register on the Internet with companies that make chocolates and other gift items, and each year they will send you an electronic reminder just before your wedding anniversary. A patient suffering with diabetes has to take his medicine at a precise time, following a precise procedure. A personalized reminder of that information, at just the right time, could be as important as the medicine itself.

Furthermore, if we were taking full advantage of all the information that exists about allergies or other medications that an individual patient is taking, adverse reactions could be reduced enormously. When a Canadian patient covered by Lilly’s Rx Plus service fills a prescription, the network can instantly alert the pharmacist if there is a potential problem.

For another patient suffering from AIDS, the most promising treatments today are the so-called drug “cocktails” that combine the new drugs called protease inhibitors with older medications. These combinations have produced remarkable improvements for large numbers of patients. But the chemistry in one patient’s body can be very different from the next patient, and the virus itself can be different. So the doctor experiments with multiple prescriptions and varies the dosage levels, trying to find the right combination that will drive down the virus level for this individual patient. Now instead of the doctor seeing the AIDS patient once a month or even once a week during this experimentation process, suppose that they could be in hourly contact through telemedicine hookups. And suppose that the mix of medicines could be adjusted at any time thanks to electronic monitors and new mechanisms for dispensing variable doses.

You don’t even need to look at dramatic situations like these to see the possibilities. Traditionally, clinical trials have focused on effectiveness and safety, but they produced relatively little learning about dose-response curves. We have looked for the dose at which a substantial majority of patients will enjoy the benefits of the medicine without unacceptable side effects. But if differences in size, age, gender and other conditions do matter, then we must conclude that nearly everyone who takes medicine gets a dose that is either above or below the optimal level for that individual. If we can generate and track more detailed data – yielding more sophisticated evaluation of how the drug acts on individual patients – we could actually begin customizing medicines for each patient on a routine basis.

What we really want, of course, is to manage the disease, not just the medicine. Take atherosclerosis (the accumulation of fat deposits in the arteries) for which Lilly is doing a lot of research. The risk factors are well known: gender, cholesterol levels, smoking, high-blood pressure, diabetes and obesity. But we also know that genetics represents the single most important risk factor – three times as high as any other. When we think about treatment centered on the patient, what could be more individual than treatment tailored to your own DNA map?

There is an analogy in the field of marketing. From the 1960s through the 1980s, companies raised their skills for addressing aggregate markets to unparalleled heights. But not until the 1990s was true one-to-one marketing possible. Everything from bank services to blue jeans is now being designed to fit a specific individual. In healthcare, too, it is knowledge of the individual patient that offers the best potential, not just for managing disease, but for preventing it in the first place. The ultimate technological convergence will focus on the individual.

So let’s go back to the beginning. The first point I have tried to make today is that innovation, more than any other factor, will continue to be the engine of success in the pharmaceuticals business. The mission of the IT function at Lilly is to enhance the company’s ability to discover, commercialize, produce and market new drugs. Knowledge is our greatest asset, and the job of the IT organization is to link people who have knowledge. That is my second point-and it’s why Lilly’s business model includes information technology as a critical core competency. And third, the information content of pharmaceutical science is enormous and still growing. That information intensity is what holds the greatest promise for managing human disease.

Voltaire was right. Then and now, it is nature that does the healing. But now we know more than ever before about how to help nature do its job. If we can take all that we know today…and apply all that we know through better management and better use of information technology…the patient will have every reason to be in a good mood.

SEX IN THE SNOW: HOW WELL DO YOU KNOW WHO YOU’RE TALKING TO?

Michael Adams
President, Environics Research Group

International Association of Business Communicators, Toronto, March 25, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

As some of you may be aware, I recently published a book on the evolution of social values in Canada, titled Sex in the Snow. It is not an autobiography – it is a metaphor. For some of us, a metaphor is as close as we get to the real thing these days. Moreover, I didn’t bring any graphic photos today, so you’ll have to use your imagination.

A friend of mine recently did a search on the Internet and found another entry for “Sex in the Snow.” It’s a cocktail with the following ingredients: shooter, 1/2 measure Triple Sec, Malibu and Ouzo. I kind of like the idea of a cocktail, although being a child of the 1960s I might aspire to something slightly more potent, you know, more along the lines of an intellectual Molotov cocktail to stir things up a bit.

The snow represents what is most enduring in Canadian values: our unassuming civility, our tradition of nonviolence, and our dedication to social justice and “the level playing field.” The sex represents the hedonism and demand for autonomy that distinguishes the recent evolution of social values in this country.

Understanding your audience and how to motivate it has never been a simple task. But today, trends in contemporary society expressed in changing psychographics make it more important than ever to avoid marketing simply on the basis of demographics, or just as naively, assuming that Canadians are simply Americans without the citizenship.

We are living at a time when history and geography are compressed, and what was once a sedentary society respecting borders – both geographical and demographic – has become nomadic. The pace of change seems to be permanently stuck on “fast forward” and there is a new sense of the interconnectedness of people and events around the world. Due to advances in communication technologies, nomads are no longer only those who actually move from place to place, but also those who travel virtually, creating networks, projects and communities with people they have never met, who live in places they may never visit.

Well-documented “demographic” changes have often been eclipsed by even more significant “psychographic” changes, and affluence, education, travel, media, globalization and new communications and information technology have allowed Canadians to transcend traditional demographic categories to define and redefine themselves in new ways.

As I see it, autonomy, hedonism and a spiritual quest for meaning describe a constellation of trends that are among the most significant in Canada today. The stereotype of Canadians as respectful and reserved, and not very imaginative, has never been less true. During the past quarter century, Canada has been transformed by a social revolution, not the Marxist revolution my classmates hoped for in the late 1960s, but a more or less peaceful revolution in the structure of authority in our society. The status associated with once-cherished institutions such as churches, legislative bodies and professional élites has gone into steep decline. Established authority has had its legitimacy questioned in every sphere.

How did this happen? To give a summary of what were, in fact, complex social forces, I like to start with Time magazine’s April 1966 cover story which posed the provocative question, “Is God Dead?” Of course, Nietzsche and others covered this story a century ago, and the philosophical question of God’s mortality is really a more fit subject for theologians and philosophers than pollsters. However, the sociological meaning of religious retreat, especially in Canada, is one that 25 years of polling research inspired me to address in my book Sex in the Snow.

Canadians are increasingly giving up on traditional religious dogma in favor of a less guilt-ridden spirituality. Few, for example, now believe in the existence of a Devil or hell. So if exorcising guilt was the main motivation, maybe Time got it wrong – perhaps it’s the Devil who is dead, and we have become God.

In many ways it is this development that heralded the erosion of Canadians’ Judeo-Christian view of the universe. Fear, guilt, and conforming to other people’s expectations were often the greatest factors sustaining church attendance numbers and motivating Canadians to behave according to the dictates of religious strictures and other people’s rules.

It seems to me as a researcher-and as a Catholic Baby Boomer who went through this process of rebellion – that the symbolism of killing God was important for boomers and the culture they were about to dominate. After killing “The One True God” and thereby risking the fate of eternal damnation in the fires of hell, the slaying of lesser gods became much less intimidating, if not inevitable.

After killing God, you question your father, your teachers, your doctor, the politicians and your boss. Among the eighty values tracked by the Environics’ 3SC Social Values Monitor, those of particular importance to boomers are: rejection of authority, rejection of order, control of destiny, pursuit of happiness to the detriment of duty, sexual permissiveness and equality of the sexes. Because of their preponderance in the population, and the appeal of their world-view, the values of the boomers were not only passed on to the next generation, but penetrated the consciousness of earlier generations as well.

The boomers marked a transition from conformist values to the values of personal autonomy. Now, the post-boomers are blazing trails from individualism to a sort of post-individualism where experience-seeking connections are more important than the mere assertion of autonomy and personal control. And these new connections and communities are increasingly being formed on the basis of values, rather than on the basis of ethnic or demographic identities.

In the socio-cultural research Environics conducts, the values of Canadians are explored through the measurement of a number of trends plotted on a socio-cultural “map.” The construction of this map is a multistage statistical process, using as its raw material the approximately 2,600 interviews we conduct annually as part of our 3SC Social Values Monitor. We at Environics also conduct 3SC research in the United States. Similar research is conducted in each of the other G7 countries, with the exception of Japan.

In this country, a representative sample of Canadians is asked approximately 250 questions about their fundamental values or beliefs, their personal characteristics, and their lifestyles. Once these data have been collected, and computer analyses completed, the questions are grouped into approximately 80 “trends.” The trends are placed on a “map” through factor analysis of correspondence. In this way the values (or trends) appear in proximity to the other values with which they are most highly correlated.

In general, trends appearing near the top of the map are correlated with a more conformist, traditional world-view: order, authority, discipline, the Judeo-Christian moral code. Those at the bottom reflect a more modern perspective that accepts individual differences-and that questions and often rejects, traditional values. Trends on the left side of the map correspond to a more outer-directed, social orientation to life, where one’s cues tend to be defined in relation to the opinions of others. Those on the right reflect a more inner-directed, individualistic stance, in which the most salient factor is one’s own point of view.

Other authors have recently written about the growing rebelliousness of Canadians, most notably Peter Newman in The Canadian Revolution: From Deference to Defiance, and University of Toronto political scientist Neil Nevitte in The Decline of Deference. And in our research at Environics, we also have tracked the overall movement of Canadian social values to a more modern and individualistic world-view.

But of course not everyone has celebrated this boomer legacy in our culture. In Sex in the Snow I try to show how some Canadians, including many boomers, continue to defer to authority, whether familial, governmental or religious, while others have genuinely rebelled. Moreover, while it is true that in general older Canadians are more deferential to authority than are younger Canadians, there are significant differences even among people of similar ages.

By the early 1990s, the social values research we have been doing at Environics over the past decade led us to speculate on two points: first, that increasingly Canadians were undergoing the personality equivalent of digital compression, that is, a growing desire to cram as much experience into their lives as possible, including the experiences of others who are of different regions, or even of different sexes and races. They are no longer willing to defer gratification till the next life, or even much later in this one.

Second, we speculated that this desire, combined with a media-rich environment that allows people to construct their own idiosyncratic world-views from an ever-expanding range of sources, might result in the decreasing importance of demographics in determining Canadians’ social values and behavior, resulting in values fragmentation even among people who are of similar ages and with similar demographic characteristics.

So three years ago we did a special analysis of our database on social values, dating back nearly 15 years. This analysis revealed that while demographic characteristics continue to play an important role in determining the social values of Canadians, the influence of ascribed demographic characteristics, like age and especially sex, is declining. It also shows that social consensus is now breaking down in Canada, and whereas formerly divisions were largely based on the different demographic characteristics of Canadians, now Canadians are dividing into new “tribes” based on different configurations of social values.

This segmentation revealed some truly remarkable findings, one of which is that the process of social fragmentation is continuing in Canada in important new ways. My guess that there would be more diversity among younger Canadians was substantiated, but we were a bit surprised to find, among those aged 50 or older, a small but very modern group that defies the stereotype, the Cosmopolitan Modernists. These people tend to be quite different from the large majority of their age peers; even we were somewhat taken aback at how different they are.

We were also surprised to find that a group we have labeled Autonomous Rebels, who are the “defining” segment of the baby-boom generation, comprise only about one-quarter of its total. And finally, we found an even greater diversity among the youth tribes than we had anticipated; they are literally all over the map, although the average for their generation is in the lower-left “experience-seeking” quadrant, where one might expect to find it.

• Among older Canadians, there are three tribes: the Rational Traditionalists (54%), Extroverted Traditionalists (26%) and Cosmopolitan Modernists (20%).

• Among boomers, there are four: the Autonomous Rebels (25%), Anxious Communitarians (20%), Connected Enthusiasts (14%) and Disengaged Darwinists (41%).

• Finally, among the young, and despite their smaller numbers, there are no fewer than five tribes: the Aimless Dependents (27%), Thrill-seeking Materialists (25%), New Aquarians (13%), Autonomous Post-materialists (20%) and Social Hedonists (15%).

As you can see, the average position of each generation conceals the existence of significant diversity in terms of social values, particularly among the young.

Despite this growing fragmentation, Canadians continue to harbor values that differ significantly from those of Americans. For any of you who doubted that Canadians are different from Americans, I urge you to read Sex in the Snow, because we are.

For analysis of American social values, Environics plots the socio-cultural profile of the US on a North American map of values. The North American map has different axes, because the trends are correlated differently in the US.

• In the upper-left quadrant, Ideals and Individualism, are persons, groups and markets that have attained the classic, mostly material, version of the American Dream and have then integrated this affluence with liberal, personalized values.

• In the upper-right quadrant, Faith and Frustration, are those whose outlook can be characterized as one part faith in a higher order and institutions, and one part frustration at what they see as the erosion of the ideals they hold dear.

• In the lower-left quadrant, Hostility and Hedonism, are those whose values can be characterized as “hard-edged hedonism.” Many in this quadrant have lower levels of education and socioeconomic status. Short of resorting to crime or vaulting into professional sports, the Dream is completely inaccessible to them, and obviously so.

• In the lower-right quadrant, Structure and Status, are those whose orientation to life is characterized by rigid moralism, discipline and doing what’s expected. Like the denizens of the Hostility and Hedonism quadrant, people in the Structure and Status quadrant tend to be from the lower socioeconomic echelons of society. Despite this, they continue to revere an American Dream they only see realized on their television screens.

On the North American map the average Canadian is located in the upper-left Ideals and Individualism quadrant, whereas the average American is in the lower-right Structure and Status quadrant. This means that the average Canadian is stronger than the average American on the values of individuality and refined (or idealistic) hedonism; the average American is stronger on values that are conformist or moralistic. Interestingly, the values of Canadians most closely approach those of coastal Americans-Boston and New England, San Francisco and Seattle.

A poll Environics conducted for CBC/The National last year illustrates some of the differences. Though only Kansas City and Winnipeg were polled, the differences are representative of differences between Canada and the United States in general, with Canadians being more egalitarian and less violent, with a greater acceptance of nontraditional types of families.

• When asked whether everyone who can’t get a job should be entitled to welfare, less than half of Americans agree, whereas two-thirds of Canadians agree.

• Only one in five Americans strongly agrees that people living together should be regarded as married, half the proportion of Canadians who strongly agree. Furthermore, one-third of Americans are strongly opposed to the recognition of common-law marriage, whereas only one in ten Canadians are strongly opposed.

• Only one in ten Canadians strongly agrees that it is okay to own a gun for self-protection, less than a third of the proportion of Americans who agree. And fully half of Canadians find it completely unacceptable to own a gun for self-protection.

• Finally, only one in five Americans strongly agrees that they would be happy if a family member married someone from a different race, the same proportion who strongly disagree. In Canada, more than ten times the proportion would be happy rather than unhappy with an interracial marriage in their family – 45% versus 4%.

In the briefing session on the poll, these findings led the television host Hana Gartner to quip, “Now I know what differentiates Canadians and Americans: Canadians lie to pollsters, and Americans tell the truth.”

It is my opinion that, although economic integration continues apace, there has been much less socio-cultural assimilation of Canada by the United States than is often feared. We may watch the same movies and TV shows, but in important ways, Canadians and Americans live different sorts of lives. Moreover, I predict such assimilation will not take place for many generations to come, if ever. Though our economic axis has become north-south, our cultural axis has become, like our population, cyber-nomadic. Whereas television was initially a force that helped create mass society and popular culture, the new technologies of VCRs, satellite TV and the Internet all contribute to a socio-cultural fragmentation of mass society in favor of personal choice and empowerment. Common ideals and even “common sense” are increasingly hard to maintain, and the American national motto – e pluribus unum or out of many, one – has turned out to be a tragic joke.

It is truly ironic that Canada, a country that historically accommodated and even celebrated differences, has actually ended up creating a culture where a broad range of values unites us, and differentiates us significantly from Americans. On the other hand, the United States, in its drive to create a melting pot that disparages cultural and linguistic diversity, has, in fact, developed into a country of mutually exclusive identities and many warring factions. They have become a nation of god-fearing Darwinists, we have become a collection of relatively tolerant social democrats.

In fact, despite tribal differences, French and English Canadians have far more in common with each other in terms of values than either group has with the Americans. Notwithstanding the Quiet Revolution in Quebec and the Values Revolution in Canada as a whole, Canadians themselves are not revolutionaries: they are rebels and reformers. And in spite of our growing intimacy with American commerce and culture, Canada remains a distinct society on the northern half of the North American continent.

WHY MONTREAL IS THE PREFERRED LOCATION FOR GLOBAL HIGH-TECH LEADERS

Lionel M. Hurtubise
Chairman of the Board, Ericsson Communications Inc.

The Montreal Board of Trade, October 24, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

Before I engage today’s theme of “Why Montreal can become the choice of high-tech leaders,” I would like to take a minute to recognize the fine work which the Board of Trade undertakes year after year. Certainly, many of us in this room have come to know each other through the board’s many meritorious gatherings.

Now, let’s take a look at why Montreal can be considered a preferred location for high-technology leaders. In the era of globalization, it is very important to study Montreal in an objective manner, and re-examine this city’s competitive advantages as a privileged site for investors the world over.

Obviously, when we speak of globalization of markets, the multinationals cannot allow themselves to maintain facilities whose activities are redundant. In the past, trade barriers required that companies be located in certain regions of the world, in order to have access to the markets in those regions. Today the barriers are coming down and companies can cover different world markets from just one spot. And so, when a company desires to establish a new marketing, manufacturing or R&D operation, it must find a region that has all the necessary infrastructures to support continental or worldwide activities, relative to a specific line of products. Which is why it is important to take a close-up look at Montreal and measure its competitive advantage compared to other locales for investment.

I would like to stress at this point that while I will be referring to Ericsson quite frequently throughout this talk, my sole aim is to use the Ericsson experience as an example of a successful Montreal initiative. Given the fact that Ericsson is present in 130 countries worldwide and has R&D facilities in some 23 countries, the company is in many ways a microcosm of the world.

We are constantly competing with all of the other Ericsson locations for the much-coveted mandates we are undertaking here. I can assure you that each one of the other R&D sites would enthusiastically welcome the opportunity to procure some of the responsibilities which have been bestowed upon us here in Montreal.

Before I get into any detail relating to our reasons for investing and reinvesting in the Montreal region, I think it may be constructive for me to give you a brief overview of Ericsson, and exactly what it is we do here. Believe it or not, when we first came to Canada, people thought that we manufactured washing machines.

First let me talk about our parent company, which is headquartered in Stockholm, Sweden. With 100,000 employees in 130 countries around the world, and annual sales approaching $30 billion, L.M. Ericsson is the world’s leading supplier of telecommunications equipment, and one of the three leading manufacturers of mobile phones.

In terms of market share, L.M. Ericsson currently commands over 40% of the world market for cellular systems, which is twice that of its nearest competitor. The company fully expects to continue this tradition of growth. There are presently 140 million wireless subscribers worldwide. And by the turn of the century this number is expected to exceed 600 million. Currently, more than 4 million new users subscribe to wireless systems around the world every month.

As I am sure you can imagine, this sort of growth creates tremendous challenges for Ericsson’s marketing and product development teams. Our commitment to R&D is well known, and has been the catalyst for developing the company’s global leadership position in wireless communications.

The company has always invested heavily in technological development. Twenty percent of its total sales go back into research and development. In 1996 alone, the company invested nearly $4.5 billion worldwide in its R&D activities, which are conducted in 23 countries by approximately 18,000 engineers. One of these R&D centers is Ericsson Research Canada, which was established here in Montreal in 1986.

The Ericsson presence in Montreal dates back to 1953. At that time, the company’s activities were a modest affair of sales and after-sale service. Things have certainly changed! In 1991, Ericsson Research Canada obtained three world-class R&D mandates which were given to us by the Ericsson head office in Sweden. In fact, when we started in 1986, the Ericsson Research Canada team consisted of fewer than 50 people. A few years later, the number of employees had increased tenfold, in order to meet the demands of our industry.

I am pleased to be able to tell you that Ericsson Research Canada today, here in the greater Montreal region, now has 1,000 people in our organization, 20 times more than we had scarcely 10 years ago. Our engineers are designing software for use in wireless telecommunications systems being used by more than 25 million people around the world, including nearly 1.5 million Canadians. Ericsson Research Canada can be proud of its accomplishments and its contribution to the growth of the greater Montreal region. At present, the office space we occupy in the Montreal region is over 350,000 square feet, and we have just recently celebrated the opening of our third building on Décarie Boulevard.

More important, and to my thinking even more significant, is the fact that our employees, who are after all our most valuable asset, better represent Ericsson’s rapid growth and expansion than the number of square feet we occupy. It is this remarkable pool of knowledge, first and foremost, that has helped our R&D activities to grow with such impressive success.

I am proud to announce that Ericsson in Montreal is the sixth largest among Canadian companies for its R&D investments, according to the Canadian Corporate R&D Database, and second largest in the telecommunications industry. In 1996, our investments in Montreal reached $137 million.

I am often asked: “In an economic climate that includes perceived political instability, as well as language and constitutional debate, why would Ericsson choose to invest so heavily in Quebec?” I say: “Why not?” At Ericsson Research Canada, our goal is to provide the Ericsson family, and by extension our customers, with world-class research and development, resulting in world-class products. Clearly, we have been able to do so in Montreal and there are many good reasons why.

When we consider the reasons to continue investing in Montreal, and the reasons why a once-small R&D unit was able to gain global responsibilities, we must recognize three critical factors. These include the availability of highly skilled technical personnel, proactive government approaches to business and Montreal’s superior quality of life.

Before I explore these issues in greater detail, let me take you through a brief overview of the events that led to our tremendous growth. Twelve years ago, when Cantel began to launch its cell-phone network, it chose Ericsson as the principal supplier for that network.

In 1986, thanks in part to Cantel’s encouragement, Ericsson opened a small R&D center in Montreal, as part of its commitment to Cantel. Over time, we have acquired more and more autonomy to conduct quite different development projects. In 1990, the winds of change in the company reached Montreal and changed our destiny forever, when Lars Ramqvist became CEO of L. M. Ericsson, and brought out his own vision of the future.

This vision was based on three key points.

• Allow greater autonomy to local companies like Ericsson Research Canada.

• Increase competition among the various subsidiaries with a focus on their expertise and profitability.

• Pass out more mandates to local companies situated nearest to important customers and markets.

In a whirlwind of activity, we won three world mandates in the face of stiff competition from other Ericsson technology centers. We also celebrated our 44th anniversary in Canada, expanded our facilities and now stand poised to take on greater challenges.

Now that you have a better idea of Ericsson’s evolution, I will take a few minutes to address each of the factors I mentioned earlier that have contributed significantly to our growth.

Availability of highly skilled technical personnel. When we consider the success of Ericsson in Montreal, we must first and foremost recognize our tremendously talented and dedicated staff.

We have learned to appreciate that Quebec’s information technology industry relies upon a large pool of well-educated and highly skilled researchers that are trained in the finest educational institutions. Moreover, Quebec’s engineers and researchers have become renowned for their productivity and creativity. This is especially significant when we consider the importance our parent company has placed on technological leadership.

Costs in Quebec are extremely competitive with those of other countries due to high productivity, very low annual employee turnover (less than 2%) and an excellent R&D tax credit system.

Over a short period of time, we were able to show our corporation the outstanding technological competence of the engineering personnel available in Quebec. It truly turned out to be an untapped resource.

The fact that Quebec offers a large pool of engineers is extremely important. One of the reasons Ericsson actually started establishing R&D centers outside of Sweden was because of the eventual lack of engineers in our home market. The demand for engineers in Sweden became too great for the population base of the country. Therefore, over the years, the company set up R&D sites in countries that possessed advanced telecommunications know-how and were close to strategic markets.

Proactive government approaches to business. Besides the clear availability of qualified manpower, Quebec can rely upon ongoing support on the part of government at all levels. The foresight and business acumen of the government created an environment that has allowed us to prosper.

Our partners in government have supported Ericsson ever since we arrived in Canada, and they have played a very important role in our growth. In fact, it was partly the government that attracted Ericsson here. Quebec has become one of the most profitable places in the world to do research.

Exceptional quality of life. The third point I’d like to mention today is the exceptional quality of Montreal’s lifestyle. It goes without saying that a happy employee is a productive employee. Consequently, Montreal’s attractions are very important to us. Montreal is a city where living is a pleasant experience, and families arriving from Sweden and the world over truly appreciate its quality of life. In fact, our annual surveys of Ericsson employees in Montreal show one of the highest satisfaction rates of any Ericsson facility in the world. What’s more, the Montreal company is proud of an annual turnover rate of less than 2% of our employees.

Ericsson employees have always considered Montreal a dynamic place that’s pleasant to live and do business in. The cost of living in Montreal is low and people can find a range of dwellings at affordable prices.

Montreal enjoys a diverse cultural life and offers, as it were, a European lifestyle in the heart of North America. This is an aspect of life in Montreal that our employees really appreciate.

What has our experience in Quebec been to date? It goes without saying that our experience in Montreal to date has been excellent. Within the company we have become recognized as a very creative development center. As a matter of fact in 1996, Ericsson Research Canada was recognized as “best in class” for patents and François Sawyer, one of our engineers, received the Ericsson-Worldwide “Inventor of the Year” award.

Although I’ve been speaking of the reasons that lead Ericsson to invest an reinvest in Montreal over the years, it would negligent of me not to take a bit of time to cover a few of the problems Montreal is facing. I hope the fact that I’m talking about these here today will be useful in finding potential strategies to improve foreign investment in Quebec.

Attitude to Anglophones. People from other countries have a perception that Quebec does not like Anglophones. This is probably due in large part to certain of our laws on education and language. For example, at Ericsson, given the company’s rapid growth, we have had to bring in a great many people from out of the country in order to speed the technology transfer from Ericsson to our young engineers from Quebec. Without qualified outsiders who come to Quebec, we would not be in a position to train local engineers in Ericsson’s particular technology.

But the complexity of the rules for admissibility to English-language schools, and the perceived reticence of the government in terms of making public certain aspects of these rules, have contributed significantly to the prevailing perception.

I recently read the report of the “Task Force on the Revitalization of the Montreal Region” which was presented by Brian Levitt at last fall’s Economic Summit. The report is a collection of opinions from leaders in the business world, analyzing the particular challenges and opportunities in the Montreal region.

For those of you who haven’t read the report, I would like to cite the following section. And I quote: “The business leaders we interviewed recognize the legitimacy of legislation to promote French in Quebec. All, however, said that such policy and its implementation should not be a handicap to Quebecers on the international scene. This policy framework must be adjusted to the new reality. If the policy ignores the role of English in international business and does not acknowledge the predominance of unilingual Anglophones in the US and the rest of Canada, Montreal will be unable to withstand the competition of other large North American cities to attract strategic activities which are the basis for employment growth. If Montreal wishes to successfully compete with other large North American cities in the business arena, it will have to take whatever measures are necessary so that it not only is, but is perceived to be, a city that is accommodating towards North Americans who do not speak French and who are considering coming to work in Montreal. . . . Montreal should also ensure that its accommodating nature is made well known throughout North America.”

I think that the Government of Quebec is meeting this major challenge by stating that it wishes to counter the negative perceptions about conditions in life and the workplace for allophones and Anglophones. The government should develop strategies to break up these rumors and erase these exaggerated perceptions.

As businesspeople, we should also be helping to head off the exaggerations and mistaken interpretations being carried to the rest of the world. Just how these perceptions originated, or when they originated does not matter. What matters is to stop them – now.

Educational cutbacks. A second issue I would like to address here relates to the status of higher education in Quebec. I recently read with dismay that the Computer Science Department at McGill could only accept one half of eligible students. Similarly, the Université de Québec à Montréal could only take approximately half of its eligible students, and I presume that the other Quebec universities are facing similar circumstances.

If indeed Ericsson Research Canada is a microcosm of the world, then we must acknowledge the fact that there are many employment opportunities for people with the right kind of training. Therefore, with unemployment so high, it seems to me that something is amiss.

Let me start by re-acknowledging the fact that the remarkable pool of knowledge and talent available in Quebec is the number-one reason for Ericsson’s growth in Montreal. With that said, there is another issue which must be raised concerning the strategies which have been adopted by our governments to attract business to Montreal and Quebec.

More particularly, I would like to underline the entire array of fiscal incentives, including both direct and indirect subsidies, which our government has traditionally made available to industry. Certainly these measures have been very instrumental in the establishment and development of a number of small and medium-sized businesses as well as affiliates of international firms, including Ericsson.

Above and beyond these measures, however, I would argue that today, governments should pay as much attention to supporting and investing in our institutions of higher education. R&D tax credits are excellent incentives. However, the most important incentive for today’s leading firms, especially in high technology sectors competing for a share of global markets, remains the pool of knowledge normally available through educational institutions that are renowned for the quality of their teaching staff, exceptional students and state-of-the-art facilities.

I would therefore suggest that our governments start questioning their traditional approach to attracting business, and that they consider complementing their current industrial development strategy with an action plan based on furthering the development of our colleges and universities. Make no mistake: without the required pool of local talent, knowledge-intensive industries will go elsewhere.

I would like to conclude my talk by saying once again why we think Montreal can be the preferred locations for today’s high-tech leaders.

The availability of highly qualified engineers and technicians is the most important factor in the rapid development of Quebec-based high-technology industries, and the consequent involvement by Ericsson in this development.

The excellence of Montreal’s lifestyle, the proven technical abilities of our engineering team, Canada’s proximity to American markets, the low personnel turnover rate, as well as the support of our governments and tax incentives for R&D have contributed to the growth of our own center.

All the elements are still in place here in Montreal. However there are signs that these special advantages are perhaps on the point of disappearing. Which is why we must correct this false perception of unfriendliness towards Anglophones and ensure that our centers for advanced training are the best in the world. We must make sure that Montreal remains the preferred location for global high-technology leaders for many years to come.

RUSSIA: THE WILD CARD IN NICKEL

Øyvind Hushvod
President & CEO, Falconbridge Limited

CIM-Mineral Economics Society, Toronto, January 15, 1999
Published in The Corporate Report No. 27 (June 30, 1999)

After the thawing of the Cold War with the former Soviet Union, and the opening up of China to foreign investment, people in “the West” were quick to see the huge potential for business in these regions. That initial excitement has now given way to caution. Expectations have become much more realistic. As we learn more about each other’s structures and practices, however, the time may come for Western companies to take larger direct interests in the region.

In the meantime, the mining industry watches as the influence of China and the CIS (Commonwealth of Independent States) on Western World markets grows. The commodities affected range literally from A to Z, from aluminum and copper to diamonds and zinc. My remarks today will focus specifically on the nickel market.

Although China and the CIS are often categorized together as command-economies or former command-economies, that is where their similarity ends. With respect to their impact on the nickel market, the two are very different. Over the past ten years Chinese nickel consumption has seen reasonable growth. Production has just barely kept pace, leaving the country’s trade balance more or less neutral today.

The CIS has had quite a different history. While output of nickel has fallen considerably since the dissolution of the Soviet Union, consumption has completely collapsed. Between 1996 and 1997 alone, Russian exports increased by over 60,000 tonnes, tipping the Western World market from a supply-demand deficit into a moderate-sized surplus. In the mid-1990s, the nickel industry began referring to such exports as the “Russian wild card” because of its unpredictability. Now, we have little choice but to adapt to this threat of a large, relatively price-insensitive, competitor.

Nickel consumers would likely argue that those exports filled a gap in the market. For Western World producers to have filled this gap, they would have had to spend significantly on additional capacity. For those of you unfamiliar with nickel, a few statistics may be helpful. The global market is roughly one million tonnes a year. At current prices, this equates to about US$4 billion dollars. By far the largest end-use of nickel is the stainless steel industry, accounting for about two-thirds of consumption. The next largest is high-nickel alloys at about 12%.

In 1988, world production of nickel was about 900,000 tonnes. Of this, the CIS accounted for 31% and China 3%. By 1998, CIS production had fallen to 22%. China was more or less unchanged at 4%. While the fall in CIS output from 31% to 22% is large, what is far more serious, and dramatic, is the collapse of consumption. In 1988 Russia accounted for 23% of world consumption. By 1998, its share had plummeted to only 3%. China actually doubled its consumption from 2% to 4% over the same period.

Bringing this data together highlights the differences in the development of the nickel market in each country. Chinese production and consumption have grown more or less in tandem. As importers of 7,000 tonnes in 1988 and an estimated 2,000 tonnes in 1998, their impact on Western markets has been minimal. The Russians, meanwhile, have been extremely influential on Western World markets. In 1988 they exported 68,000 tonnes. By last year this had tripled to 200,000 tonnes.

Only two countries in the Commonwealth of Independent States produce nickel: Russia and the Ukraine. Last year, the Ukraine produced less than 1,000 tonnes. Furthermore, the vast majority of CIS consumption takes place within Russia. My remarks today will focus exclusively on Russia.

A closer look at Russian nickel consumption reveals its close correlation to the collapse of the Soviet Union. The decline in demand from both the military and general industrial complexes – as well as the shift from a command-economy to market-economy – have taken their toll. As I mentioned earlier, production has not been as severely impacted. After declining in the early 1990s, it stabilized between 1993 and 1996, and has enjoyed a sharp recovery in the past two years. By contrast, consumption has not been restored. The net result has been that the volume available for export has risen sharply, from 155,000 tonnes in 1996 to 217,000 tonnes in 1997, and 200,000 tonnes this past year.

Although my remarks today focus on the primary nickel market, I’d like to spend a few moments discussing the scrap market. Not only does Russia supply new nickel units to Western markets, it also provides nickel-containing stainless steel and alloy scrap. Statistics indicate that scrap exports increased by over 75% in the past three years, equivalent to at least an additional 15,000 tonnes of contained nickel per year. In China, the Jinchuan Nonferrous Metals Company is the dominant producer of primary nickel, accounting for over 85% of national output. With the completion of an expansion program in 1992, its capacity doubled from 20,000 tonnes per year to 40,000 tonnes, though it took several years to finally ramp up.

Consumption has gone through cycles, but the trend has been upward. The domestic supply-demand balance has required China to be a very small net importer, but the volume has been so small in recent years that its effect on Western markets is negligible.

So what is the impact of China and Russia on the nickel market? With China’s minimal influence, we’ll just focus on Russia. In 1988, Russian exports accounted for 11% of the nickel units available to Western World consumers. Ten years later, it had grown two and a half times to 27%, more than one quarter of the supply.

It is possible to be even more specific about the impact of these exports on Western markets. By deducting Russian and Chinese net exports from the annual supply-demand balance, you can see what the market would have looked look like without their presence. Every year since 1988 would have seen deficits. At first glance, this is enough to make any producer leap for joy! But by looking at the cumulative total of these deficits, it is apparent that such a string of consecutive shortfalls could not have occurred.

Over this 11-year period, Western World consumption would have exceeded supply by almost 1.4 million tonnes. This is about two years of Western World production at today’s levels. There wouldn’t have been enough inventories anywhere to make up for such a large imbalance. The result would have been higher nickel prices – but at what long-term cost to demand?

Higher prices would have encouraged substitution by consumers. Higher raw material prices for stainless steel mills would have driven up prices for their final product. This, in turn, could have stunted the impressive 5% per annum growth rate experienced by the stainless industry over the past 15 years.

Eventually the higher nickel prices would have attracted investment in capacity, but the damage to markets could have already been done. Many would also argue that the logical choice of supplier to meet the growing demand for nickel by the West was, in fact, Russia.

Since they already had idle capacity at their existing facilities, it was probably among the cheapest sources of additional nickel for the market. So while the exports from Russia have, at times, been disruptive to Western markets – and possibly to the profits of its producers – you can argue that we would have been worse off without any exports at all.

Perhaps there could have been an ideal level of exports from Russia. Let’s say there was just enough to allow the market to be exactly in balance. Over this 11-year period, the cumulative supply of nickel to Western World markets would have matched the cumulative consumption. If we simply assume that Russian exports had not increased in 1997 and 1998, and instead had remained at 160,000 tonnes per year, the markets would have been in balance. Western World inventories at the end of 1998 would have been close to what they were in 1988. Stocks of nickel would be nearly 100,000 tonnes less than what they are today. It is possible to quantify the impact of these theoretical inventory reductions on nickel prices.

On a “pinch-point graph,” where each point would represent the level of stocks and price at a particular time, say a calendar quarter, the points would not be tightly clustered, and a line could be drawn through them. The relationship between inventories and price, suggested by this line, is logical. The lower stocks are, the higher the price of nickel is. The slope of this line suggests that as inventories fall by the equivalent of one week’s worth of Western World consumption, the nickel price would rise by a little over 7¢ per pound, all other market variables being equal.

Under the scenario where Russian exports were capped at 160,000 tonnes, it was calculated that inventories at the end of last year would have been about 100,000 tonnes lower than what actually occurred. This 100,000 tonnes of stock is the equivalent of five and a half weeks of consumption. Five and a half weeks of inventories, multiplied by a 7¢ per week increase in price, equates to roughly a 40¢ per pound higher nickel price.

Using the pinch-point graph to estimate what prices would have been had inventories been lower at the end of 1998 is a blunt tool. We must assume that other variables in the market would not change. For instance, market sentiment can have a significant impact on prices. At a given level of inventories, if the outlook for the future is for a market deficit, then prices will tend to be high – or above the trend line.

At the same level of inventories, if the forecast is for a market surplus, then prices will be much lower – or below the trend line. It is impossible to predict what market sentiment would have been if inventories were 100,000 tonnes lower. In any event, the 40¢ per pound figure is a rough estimate.

With the collapse in its domestic consumption, Russian exports now represent a substantial percentage of the supply of nickel to Western World consumers. Their impact on the market has grown accordingly. In contrast, Chinese supply and consumption of nickel have grown in tandem, leaving the net trade of primary nickel in and out of China in balance.

As with any additional supply to a market, prices would have been higher without the recent surge in exports to Western markets. However, without any exports at all from Russia over the past decade, we may have been worse off overall. The extremely low inventories would have caused sustained higher prices and encouraged consumers to substitute out of nickel. Higher raw material costs for the stainless industry would have driven up the selling price of stainless steel. It also could have damaged the impressive long-term growth which that industry has enjoyed.

Looking ahead, the Russians appear to have substantial reserves – certainly enough to maintain their significant influence on the market. But they are in great need of capital for everything from plant and equipment to working capital. In China, expansions by the metal refiners have left them with the strong potential to become short of feed. As demand grows, these refiners may find themselves in the international markets in search of intermediate feeds.

In the coming years, there is no doubt that Russia and China will continue to influence the metal markets – and that their influence will only grow in the future.

CUSTOMERS FOR LIFE

Bobbie Gaunt
President & CEO, Ford Motor Company of Canada

Retail Marketing Conference of the Retail Council of Canada, Toronto, November 6, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

Although Ford of Canada is not a retailer, our success is almost entirely dependent on the success of retailers: the 1,600 Ford and Lincoln-Mercury dealers across Canada.

When you think about it, we as manufacturers have much in common with the retail industry. For example, competition. Relentless, sometimes even irrational, competition. Everywhere you look, new stores are popping up in new locations, with new ways of attracting new business and serving the new business as well as their loyal customers. To survive, old stores, the established brands, have to continually reinvent themselves.

It’s the same story in my business. Take the small-car market. Today’s consumer has the choice of no fewer than 35 different models, from 11 different companies from three continents.

Which is why you’ll find the highest concentration of marketing incentives in the personal-vehicle segment of the car market. Low interest rates, rebates, special lease deals, free this and free that – you name it, and chances are someone is offering it. It’s the automobile industry’s version of Scratch and Save.

We call it Car Wars and you call it Store Wars. Either way, it demands that we both have to work harder to touch the right nerve buttons that win and build customer loyalty, since building on the loyalty of customers we have today is far less costly than acquiring new customers. It is critical to the long-term success of your business and mine that we generate passion for our brands and, by doing that, earn customers for life.

Seasonality is another reality that has relevance to both of us. You are in the early stages of your best time of year, of course, and we in the auto industry are just into a new model-year. For us, it’s 1998 already.

Frankly, I hated to see the 1997 model-year end. Ford of Canada’s vehicle sales rose by 12%, and the industry as a whole had its first year-over-year increase since 1984. We think the economic recovery will continue in 1998 and industry sales will grow even further. The fundamentals are in place: low inflation, low interest rates, eliminated or greatly reduced government deficits, the strength of Canada’s export trade, led by the automotive Big Three. And continued consumer confidence that will help, in fact, modify the seasonality factor.

Another reality of the 1990s that our two businesses have in common is the pace of change, which at times is breathtaking. All of you know, far better than I, the impact change has had on the retail industry. In the auto industry generally, and for Ford specifically, the winds of change continue to gather speed.

To put this in perspective: Ford of Canada has an enviable place in history. When it was founded 93 years ago by a group of young Canadian entrepreneurs who joined forces with a young Henry Ford, it marked the beginning of a revolution that is still driving the pace of change and reinventing the world of trade and commerce today. In a word, it’s globalization, a concept that began when Ford of Canada became the first Ford Motor Company operation to be established outside of the United States. Today, the familiar Ford oval appears on cars and trucks sold in more than 200 countries and territories worldwide.

I have just completed a six-month assignment that brought me into contact with a group of Ford men and women from around the world. Our mandate was to examine the changes taking place in our business, and others, and make change work for us as we enter the 21st century.

As you know, this is the greatest buyer’s market in history. It has even been called the customer revolution. The intense competition I spoke of earlier is providing more and more choices among high-value products and services from around the globe. Not everyone will survive.

Some companies – even familiar companies – will fall by the wayside in ten years or less. Others will survive through joint ventures, partnerships and mergers. The companies that win, and therefore remain in business, will do so by making things better, faster, with higher value, less cost, and with more convenience, affordability and appeal for the customer. The real winner, in fact, will be the consumer.

Successful companies will be leaner, with fewer layers of management and minimal bureaucracy – thank goodness! And they will be global in vision, while retaining a strong focus on meeting the needs of their local market. At Ford, we’ve called this process of reinventing the company “Ford 2000.” Simply stated, we have consolidated our regional automotive operations into a single, global organization to increase economies of scale and share the best practices throughout the company. Our vision is to be the world’s leading automotive company.

We’re now designing and building vehicles for the world, but with a strong focus on local customer preferences and needs. With fewer basic platforms but a greater array of models, we can provide our customers with the vehicles they want at affordable prices in all key markets of the world.

Ford 2000 enables Ford of Canada’s sales, service and marketing staffs to have greater input, from the early stages of vehicle design to the final sign-off for new cars and trucks – cars and trucks that more truly meet the wish list of our Canadian customers. Everything we do – everything – must optimize the quality, value and timeliness of providing our products and services for our customers, or we shouldn’t be doing it.

Ford 2000 is a long-term process, but we’re already seeing strong gains in quality, productivity, customer satisfaction and reduced costs, all of which are building our vehicle owner’s loyalty to Ford. Our strong worldwide financial results and the shareholder value we are building reflect the progress we are making.

Well, what are the ingredients for our success of recent years, particularly in Canada? Even before I arrived on the Canadian scene, Ford of Canada had rung up some very impressive results. When many companies were downsizing, we were investing for the future – $6 billion and 2,000 new jobs since 1990 alone, at Canadian plants that are now selling their vehicles and engines to global markets.

We have also outperformed other Ford operations around the world by increasing market share for five consecutive years, winning overall Canadian truck sales leadership last year in the process. And our customer satisfaction scores also outpaced the rest of the Ford world. So the first thing on my agenda when I arrived six months ago was to figure out away to do even better.

After 25 years in sales, service, marketing and dealer relations with Ford, I’ve pretty well decided that the most successful companies are those with the most successful relationships – relationships based on enduring and unqualified commitments to each other. Today, I’d like to share a few examples of what I mean by enduring, unqualified relationships.

The first relationship I’ll describe is the one we share with our employees. Whatever we have achieved as a company is a reflection of their spirit and dedication. Before we invested the $6 billion, we had extensive discussions with the Canadian Auto Workers union about the kind of working relationships we would need in our Canadian facilities to compete in the 1990s and beyond. The result was what we call modern operating agreements, which dealt with how the modernized plants would be staffed, how the employees would be treated and how the work would be organized.

We have also brought salaried employees closer to the decision-making process through greatly expanded education and training opportunities, meaningful dialogue about their roles in achieving the company’s objectives and greater empowerment in the execution of their responsibilities. As a result, we are creating an environment for our employees which encourages and enables “out of the box” thinking and an entrepreneurial approach to their work.

Another relationship essential to our success is the one we enjoy with our retailers, the independent businessmen (and businesswomen, I’m happy to say) who represent the face of Ford in the Canadian marketplace. No one has ever bought a car or truck directly from Bobbie Gaunt – although I’ve certainly worked hard to get people interested. But people do buy cars every working day from Ford and Lincoln-Mercury dealers and their staffs, who contribute to the well-being of their communities with their purchasing power and their volunteer involvement in many worthwhile causes.

They are the true entrepreneurs of our business, who represent the final link in a great chain of events. A chain that begins with an idea, the design of a new product, and involves the investment of billions of dollars and the creation of thousands of jobs to bring that product to the marketplace.

Everything is on the line when the transport trailers arrive at hometown dealerships and potential customers drop by to see what’s new from Ford or Lincoln-Mercury. So you should not be surprised to hear that I spend a lot of time out of my office and in the marketplace, talking with and listening to our employees and to our dealers, their employees and their customers. I have learned to be a particularly good listener over the years – to be a successful retailer, you must be a good listener.

Let me touch briefly on a few other key relationships essential to Ford’s success story in Canada. Ford of Canada spends more than $5 billion annually, with about 3,000 Canadian suppliers who produce everything from seats for our Windstars to the paper on which this speech was written. These are the companies, large and small, scattered across Canada, but primarily based in southern Ontario, that depend on the health of the automotive Big Three to sustain and increase their employment and accompanying purchasing power. Together, Ford, Chrysler and GM buy more than 93% of the $21 billion in parts sold by Canadian parts suppliers each year.

Along with the men and women who work in our plants, the employees of our Canadian suppliers and dealers ring your cash registers – often – and therefore help sustain and, hopefully, increase employment in your places of business.

And that brings me to the domestic automobile industry’s relationship with Canada and the standard of living enjoyed by Canadians today. Directly or indirectly, one in seven Canadians owes his or her livelihood to the Big Three domestic auto industry.

Although we compete fiercely in the marketplace, the Canadian Big Three – Ford, GM and Chrysler – have agreed that fairness must be the driving principle of international auto trade. But fairness is a two-way street. Canada has one of the most open vehicle markets in the world, with only modest tariffs and no non-tariff barriers. With the growing worldwide excess capacity in vehicle production, offshore vehicle exporters have an open highway to Canada – something like traveling Highway 407 but with modest tolls. At the same time, the North American Big Three and their Canadian parts suppliers are roadblocked by a maze of tariff and non-tariff barriers in their efforts to sell their world-class vehicles and parts in the home countries of these exports.

You and every Canadian should be vitally interested in achieving a fair “two-way” street in global auto trade, because it will affect you and the retail industry, since the ultimate outcome for Canada is jobs – either more, or less.

Another relationship, and one that I have a strong personal commitment to, is with the environment and how we will leave it for our children and grandchildren. The environment is back in the news. In my opinion, it should always be in the news as a reminder of the enormous responsibilities we have to future generations.

I think it’s safe to say that Ford is a leader in the sale of vehicles powered by alternative fuels, since we’ve put more than one million alternative-fuel vehicles on the road, and get 95% of the market – 95% of a market does qualify one as an industry leader!

Did you know that our largest car today is more fuel-efficient than the smallest car we made in the 1970s? And that today’s vehicles use technology that has reduced ozone-related emissions by 96% since the late 1970s? Even when a vehicle’s useful life is ended, 75% of its content is recyclable.

As part of an industry-wide “Project for a New Generation Vehicle,” Ford is developing a 2,000-pound family car that’s 40% lighter than a comparable current model and will get about 80 miles to the US gallon. A prototype is already being driven around our test track for evaluation purposes, and I’m planning to get behind the wheel myself very soon. There’s an important Canadian aspect to this car, which we call P2000. One of the advanced power trains being considered is a hydrogen fuel cell under development by Ballard Power Systems Ltd. of Vancouver.

While this new-generation vehicle has great potential for the future, you don’t have to wait for a homegrown environmentally sensitive car. The natural-gas model of the Ford Crown Victoria, rated as the cleanest internal combustion passenger car ever certified, is built right here in Canada at our St. Thomas Assembly Plant. (I have my order book with me, for any of you responsible for fleet purchases!)

Environmental enhancement extends to our plants, as well. The Oakville Assembly Plant, which builds Ford Windstar vans for the world, was the first assembly plant in North America to achieve ISO 14001, the international environmental standard. Three other Canadian Ford plants have since joined this select group. The three Rs – Reduce, Re-use, Recycle – have become a way of life at all of our plants.

The final relationship that determines our success and the way we do business at Ford – no surprise here – is the one we have with our customers. Come to think of it, considering that we sold our first car 93 years ago, we’ve been working at relationship marketing for five generations. And I’m not sure we’ve perfected it yet. Fortunately, neither have our competitors.

In the 20 or so different positions I’ve held in the past 25 years, marketing – in all its dimensions – has been the most prominent. Today, what we marketers seek to establish and maintain is an emotional connection or relationship between our customer and our products and services. For example, the kind of emotional connection that the Ford F-Series pickup struck inspires. “A good-looking, tough truck, a comfortable workhorse.” That’s how F-series, which happens to be Canada’s best-selling vehicle, car or truck, is positioned in the marketplace.

Since I have arrived here, we have begun fine-tuning the positioning of our Ford brand in Canada. It began by understanding our target customer. Essentially, our customers want to deal with companies that are stable, genuine and caring towards people. They need to feel they can trust and count on a company, its products and its people to deal with life’s challenges. At Ford, our goal is to develop a relationship which satisfies these emotional needs, and as you can see, there is more to it than building great vehicles and providing transportation. As marketers, it’s a real challenge.

This emotional connection is not unlike the one developed by Henry Ford when he introduced the $5 day for his workers, appointed hometown dealers who knew customers by name, and whose company still bears the name of the founder and his descendants.

First, we need products that meet or exceed the customer’s expectations. All communications, including advertising, must be consistent with the promise of the nameplate and primary brands. Ford, as the primary brand, must obviously connect to basic community values.

Today, healthcare issues are one of the most basic community values. Most recently, we chose CIBC’s “Run for the Cure” for breast cancer research for major sponsorship. I was personally involved by hosting a breakfast meeting, and also participating in the run.

We have also been associated with Manitoba flood relief support, the World Curling Championships in Canada, the Pan American Games, a major historical folk art exhibition in Quebec, a private-enterprise effort to serve breakfasts to deprived children, centers for the performing arts in Toronto and Vancouver, a camp for cancer-afflicted children and their families, and many other causes, each of them improving the quality of life for Canadians.

We are giving something back to the communities in which we do business. And so are Ford and Lincoln-Mercury dealers in ways too numerous to mention. Together, we are demonstrating with our dollars and our time that we care about our customers and our neighbors. We are reconnecting emotionally with our customers and our communities, through our financial and volunteer support for the things that matter to them, and the quality of products they have told us they want.

Research suggests that as the differences between product quality and marketing offers among the major automobile companies become more or less equalized, consumers will be looking at other purchase motivators. I believe strongly that by nurturing the relationships we have established with our dealers, our suppliers, the communities in which we have had a presence for many years, and staying concerned with the economic well-being of Canadians and with their environment, we are strongly positioned for the marketplace of the future.

THE CONTINUING IMPORTANCE OF BRAND

John Smale
Chairman, General Motors Corporation

The Canadian Congress of Advertising, Toronto, May 16, 1995
Published in The Corporate Report No. 13 (August 7, 1995)

I’m delighted to be here. I always enjoy being around advertising people. And it’s always a pleasure to be in my native homeland. In about a month, Phyllis and I will be heading to our summer place in McGregor Bay. I hold your country in great affection. Indeed I wish we had some of your values in the States.

But, while I could give a very heartfelt speech on the joys of being in Canada, that’s not what has brought us together today.

The Continuing Importance of Brand

I saw recently in Advertising Age (April 17, 1995) that the Joe Boxer Corporation, which markets underwear, now puts its Internet address on all products. They’ve also put up outdoor advertising inviting customers to “contact us in underwear cyberspace.” According to Ad Age, Joe Boxer’s Marketing Vice-President says they’ve received a huge positive response. Everyone from Jesuit priests to teenagers wrote them. I cannot imagine what insights a Jesuit priest might bring to a discussion on underwear, but the Boxer people seem quite happy.

But, in spite of the happiness of some and the great hopes of others, I, for one, would not want to predict where all this technology will lead.

I just saw in Business Week (May 1, 1995) that MCI is now running a super-Internet kind of service for scientific computing. It’s 10,000 times faster than the 14.4-kilobit modem on your home computer.

To put this, and what you were discussing this morning, into perspective, let me quote someone from the 19th century, the American writer Henry David Thoreau, who said in 1844, “We are in great haste to create a magnetic telegraph from Maine to Texas. But, Maine and Texas, it may be, have nothing important to communicate.”

Isn’t that, perhaps what all this comes down to? No matter what the medium, no matter how fast its bits and bytes come blazing into peoples’ homes, what is the message that we advertisers have to communicate?

After all, technology is only the means, not the end. So, while we are urging advertising agencies to get with the future, I’d like to say, fine. But don’t become so distracted by all the gee-whiz potential that you take your eyes off the whole purpose of all this…the brand. We shouldn’t be worrying so much about new channels. We should be trying to find new and better ways to persuade.

To be honest, I have to admit that I stand before you today as a brand fanatic. I feel about brands the way Mark Twain felt about bourbon – too much is barely enough. Over my career, I’ve been involved in trying to develop brand awareness for everything from soaps to Sevilles.

In all the old war movies on television – and it doesn’t matter what war it is – at some point, a soldier who is carrying the flag will start to go down and before the flag touches the ground, another soldier grabs it and carries it onward. The brand is the flag. The brand is what you stand for and what you should not let touch the ground. It goes onward carried by many hands over many generations.

Brands and the Auto Industry

Now to those of you who are saying to yourselves, “Oh, no, he’s not going to talk about brands is he? What can he possibly say that hasn’t been said a million times?” Well, what can be said is that the importance of brands isn’t yet understood fully in many industries…the automobile industry being a prime example.

On the whole, automobile advertising has been awful; it has been wasteful; it has been unfocused and ineffective in creating brand equity. This has nothing to do with technology. And, new forms of media will not correct the problem.

The advertising industry has not educated auto manufacturers as to the importance of brand equity; it has let the auto industry operate decade after decade without an appreciation for the power of brands. I spent some forty years at Procter & Gamble. And I know firsthand the power of brands. And, I know firsthand advertising’s great contribution.

Let me give you a way to think about the value of brands. P&G has some 686 million shares of stock outstanding. Given today’s stock price of about $71 per share, that translates to a market capitalization of about $48 billion US. The book value of P&G’s tangible assets, that is, our property, buildings, machines and so forth, is only about $6 billion. The difference between $48 billion and $6 billion is the equity of our brands and that’s all it is. It’s the value of the name Tide, and Crest, and Pampers, all around the world.

P&G could rebuild factories should they be destroyed. It could rebuild its laboratories. But, without the equities represented by our brands, we’d be finished.

So, with the background of that kind of personal conviction, let me talk about a few areas where I see great opportunity to apply traditional brand thinking to automobiles. And, as you will hear later, the new management at GM plans a new marketing approach to Detroit’s old ways.

Number One: We can greatly increase the brand equity not only of car divisions, such as Buick or Dodge, but the brand equity of individual car lines within the divisions. This observation applies to the whole industry. But, since I’m Chairman of GM, let me use a GM example, and let me go back thirty years so that I don’t hurt anyone’s feelings.

Back in 1964, Chevrolet – to illustrate the theme “Chevrolet stands alone in ‘64,” whatever that was supposed to mean – hoisted a convertible and a female model to the pinnacle of a towering red rock out in the middle of the Utah desert. They broke the car into three parts, lifted the pieces by helicopter and then reassembled it all up on top. A production crew member accompanied the model and stayed out of sight under the car during the aerial filming. After the shoot, the crew member and the model were stranded for eight hours when high winds prevented the helicopter from bringing them off.

It would have been better, it seems to me, if Chevrolet’s marketing team and the agency’s creative team had been the ones stuck up there for eight hours. Maybe they would have had a chance to discuss what in heaven’s name this commercial had to do with building Chevrolet’s brand equity and the public’s trust in the product.

But, it’s not just a matter of what divisions like Chevrolet, Mercury or Dodge stand for, but what the individual car brands represent. Let me run a tape for you. See if you can figure out what’s going on here.

[SHORT VIDEO SECTION]

Now, what you saw was the audio of certain car commercials put down over the video of other car commercials. There’s absolutely nothing distinctive about that advertising – nothing establishes a unique “reason for being.” You could essentially run the same ad for different cars. Think about it the next time you watch an automobile commercial. That’s the way it has been in auto advertising for much too long.

So, Number One: There must be a commitment to understanding what brand equity is, and then to building that brand equity.

Number Two: Great gains can be made when the automotive industry recognizes that brand equity and advertising are long-term investments. Most auto advertising succumbs to the Model Year Syndrome. We spend millions of dollars building customer awareness and establishing a brand and the advertising idea behind it, and then when a new model is introduced throw it all over the side – call the product by a different name – and start over.

This is the general industry practice. And it’s one that most advertising people find hard to believe. Would P&G change Tide’s name because it had an improved product to market? Lever – Dove’s? Phillip Morris – Marlboro? But, the automotive industry is quick to abandon brands. Remember Ford Fairlane? Remember the Dodge Dart or the Dodge Daytona? Or, the Chevrolet Monza? The Pontiac 6000? The Oldsmobile Tornado? The Mercury Montego? And on and on. I could list about forty brands, introduced and then abandoned.

Why in heaven’s name would you spend literally hundreds of millions of advertising dollars over several years trying to establish a brand and then abandon it? If the brand is to have any real meaning for the customer, and therefore become an asset to the company, it must be nurtured for the long-haul.

A brand is an investment of advertising dollars. Letting a brand die in favor of a new one is throwing money away. We shouldn’t abandon one name and start a new one just to signal that we have an updated product. That is simply lazy creative thinking. Yet, the auto industry, which invests massively in its products and advertising, nonchalantly abandons its previous brand identities. The industry needs to support brands, not promote yearly fads.

Number Three: Consistent support provides great rewards. Auto companies haven’t given to the individual brands the amount of advertising they need to sustain themselves for the long haul. What happens is that everyone concentrates all the energy and money on the launch of a car and then the support simply dwindles away over the years. Or, if sales get soft for one reason or another, one of the first things they do is cut advertising support.

You can’t build brands that way. Nobody can. Advertising spending behind good copy is an investment that builds and builds in value. It should be about the last thing to sacrifice. Advertising’s most important responsibility is to build consistent brand equity.

Let me show you what, done well, it can mean by running a very short video clip that was put together a few years ago for a P&G meeting of brand people. Quietly, to yourselves, see how many of the following brands you can name from the pieces of logos, parts of packaging and selling ideas on the tape.

[SHORT VIDEO SECTION]

The answers are: IBM, Levi’s, Dunhill, Heineken, American Express, McDonald’s, Mercedes, Marlboro, Coca-Cola and Toblerone chocolate.

These are examples of products that have achieved brand equity in the minds of most consumers. Their universal recognition is the result of consistency. Now, in the years ahead, why shouldn’t the Chevrolet Lumina or the Pontiac Grand Am have as clear and continuing a brand image as Levi jeans or the American Express card?

It requires consistency. Charmin ran Mr. Whipple for twenty-one years. The Marlboro ads have been around for forty years. Why can’t the same principle be applied to auto advertising?

Well, of course, it can. Chevy Truck’s “Like a Rock” theme is great. It creates a distinctive brand image. And, it’s been on the air for several years. Saturn’s done a superb job focusing on an idea, not a product – a pleasant and hassle-free process of car buying and ownership. In fact, some Saturn commercials don’t show the car at all, only the idea that is the basis for the car. It’s that idea that is becoming Saturn’s brand equity. And, that will last year in and year out no matter what the current product looks like.

Something revolutionary to auto industry marketing and advertising is now taking place, at GM, at least. GM, with the help of Ron Zarrella, our new head of Marketing, is giving top priority to building the equity of our brands. He is applying what we know about marketing and advertising from other industries to cars.

The fact of the matter is that fundamentally there’s little difference in the brand management of Crest or Cavaliers. And, GM is reorganizing itself to take advantage of this opportunity in the auto industry. We’re even in the process of developing brand managers who will be responsible for a brand’s continuing image and equity. And, without any question, this will change our auto advertising in the years ahead.

Much of this is work in progress. GM hasn’t yet made the final determinations for the mission and character of each division. Nor do we know within a division what each individual brand will represent. There are overlaps and duplications in our product mix that must be addressed.

But with Jack Smith and the rest of the new team, exciting things are starting to happen at General Motors. I believe in the years ahead, you’ll see some wonderful advertising coming out of our company.

In closing, let me just say that advertising’s excitement lies not just in new technology and new ways of reaching people; it lies not just in the cyber-hyper stuff. It still, in the final analysis, involves the challenge of building a brand that consumers come to trust. And, all the new technology is no replacement for this.

In fact, I believe with all the new media, the role of the brand will become even more important. People cannot absorb meaning and messages at the speed of light. Advertising’s job is to help people absorb and understand.

Ladies and gentlemen, I wish each and every one of you the greatest success in that endeavor. Thank you for inviting me, and thank you for your kind Canadian hospitality.

NEW CHALLENGES IN THE CANADIAN AUTOMOBILE INDUSTRY

Maureen Kempston Darkes
President & General Manager, General Motors of Canada Limited

Association des MBA du Québec, Montreal, March 8, 1995
Published in The Corporate Report No. 12 (June 15, 1995)

Today I would like to share with you General Motors’ perspective on what we believe is the most critical issue for both business and government in Canada in 1995: leadership. How taking leadership in a highly competitive industry like ours is necessary to meet and exceed the customer’s expectations. And how leadership by our federal and provincial governments is required in this country to ensure our continued economic growth and prosperity.

As 1995 continues to unfold, the Canadian economy is recovering, and performing at its best level since 1988. Though we’ve seen some volatility in the dollar and in interest rates recently, improving labor markets, strong export performance and high levels of business investment should provide the momentum to sustain economic growth over the next two years.

Canada has been fortunate to have had a strong export-led recovery, which will continue to stimulate real GDP growth – it’s projected to grow by almost 3.5% in 1995. Low inflation and higher employment levels should boost real incomes over the next few years and real consumption growth is forecast at 2.8% in 1995, its best performance in 5 years.

These factors, combined with an aging Canadian vehicle population, should contribute to modest growth in new vehicle sales in Canada for 1995. Canadian industry sales are anticipated to reach about 1.3 million units.

To sustain investment levels and to maintain a positive trend in sales, I believe that we need to work together and continue to encourage governments across this country to create a positive business environment. It is essential that we support governments in their efforts to reduce spending. The debt has grown to 100% of GDP, and it’s costing us over $150 million per day just to pay the interest.

It’s a drain on all of us in the form of high interest rates and taxes – in our businesses through payroll, property and corporate income taxes – and to us, and our customers, personally, through extraordinarily high personal income taxes and consumption taxes.

We’re encouraged that the federal government in last month’s budget made positive steps to get our national debt under control by committing to reduce the level of the annual national deficit. And we are pleased to see the government move in this direction without increasing personal income tax rates or general consumption taxes.

Taxes in Canada today are a real impediment to domestic economic growth. Our customers tell us that the tax content in vehicles can be a key factor in postponing the purchase decision. On average, taxes account for more than 16% of the manufacturer’s suggested retail value of the vehicle. For comparison purposes, it’s only 5% in the US.

Governments at all levels in Canada must continue to aggressively pursue decreases in spending to target balanced budgets – even surpluses in times of prosperity – to allow us to reduce the overall size of the national debt and the money we spend on debt service costs annually.

Reduced government spending and balanced federal and provincial budgets will allow for the reduction in personal income and consumption taxes, restoring Canada’s economic health as well as reducing our dependence on the strength of our export markets for our own economic performance. At the same time, governments must recognize the competitive pressures faced by businesses today and focus on creating a climate that fosters investment.

For example, Canada has always enjoyed a strong transportation infrastructure. This has been critical to the success of the auto industry. Since the Auto Pact was negotiated in 1965, the auto industry has become rationalized across North America, resulting in a tremendous increase in jobs and investment for Canadians. In fact, today almost half a million Canadians are employed in our business.

Now,over 85% of the cars and trucks produced in our plants in Canada are shipped to the US market and the vast majority of the products we sell here are imported. General Motors alone accounts for over 10% of Canada’s total manufacturing shipments, and is the country’s largest exporter at $14 billion annually.

That’s why we’re so concerned about the federal government’s plan to ban the use of replacement workers in federally regulated industries. We need to be assured of secure rail and truck transportation and customs infrastructures.

With our rationalized, just-in-time industry, a strike by railway workers, truckers or customs officers could begin to shut down GM’s operations across North America within four hours. We need to balance our labor law legislation to ensure that Canada has the infrastructure required to support the billions of dollars that have been invested to create jobs in this country. I believe that business, labor and government must work together to ensure that our public policy supports investment and jobs in Canada.

Now back to the auto industry. While sales in January and February have been somewhat soft, for 1995 we are anticipating continued growth in vehicle sales.

We expect US vehicle sales will also increase and approach 15.6 million units in 1995, which bodes well for auto manufacturing in Canada, as more than 85% of our Canadian production is exported to the US.

At GM, our vehicle lineup for 1995 consists of almost 50% all-new models or products featuring significant design improvements, and we believe that these exciting new vehicles will address the needs and expectations of our customers in Quebec, and in all of Canada.

Quebec is a significant part of our manufacturing base with our assembly plant in Boisbriand accounting for 2% of Quebec’s GDP alone. Quebec is also a key market for us, representing more than 25% of GM’s total vehicle sales in Canada in 1994. That’s why we’re excited about new products like the GEO Metro and Pontiac Firefly subcompacts – vehicles we believe are very well suited to the needs of our Quebec customers.

As the only true economy cars built in Canada or the US, these newly designed cars offer customers numerous standard features including driver and passenger-side air bags, and meet all 1997 side-impact standards – and they have retained their title as Canada’s fuel economy leaders.

Trucks are assuming a major role in the Canadian market. GM’s truck sales in 1994 were up 18% over 1993. Within that market, the sport utility market is important, and for 1995, GM Canada is very well-positioned.

Our new Chevrolet Blazer and GMC Jimmy compact sport utilities and the new four-door Chevrolet Tahoe and GMC Yukon full-size sport utilities, which are now arriving at dealer showrooms, are great products for this 4x4 market.

And sales of our Ste-Thérèse-built Chevrolet Camaros and Pontiac Firebirds did extremely well across North America, with over 90% of the production from the plant shipped to the US for sale last year. In addition, 7,500 units were shipped overseas to niche markets in Europe and Japan in 1994. Like all of our facilities in Canada, Ste-Thérèse is dependent on strong trade relationships like the Auto Pact and NAFTA for its viability.

Leadership in the automotive industry means more than just offering new products, and it goes beyond the actual sale. It’s about providing customers with features and programs that make a real difference in their total ownership experience, and that’s what’s important to us at GM.

And it’s about taking a leadership role in the development of technologies that further vehicle safety and human health. GM has always had a strong reputation for product innovation and we are redoubling our commitment to offering our customers leading-edge technologies.

Today, safety plays a much greater role in the customer’s selection of a new vehicle. GM is recognized as a safety leader within the automotive industry, and our approach to safety has three dimensions: crash avoidance, crash protection and driver behavior.

To help avoid accidents, we offer antilock brakes on all our vehicles. And in the event of a frontal collision, air bags are available on all our 1995 model-year passenger cars and pickup trucks to help protect the occupants.

To lead in the safety area, it’s necessary to bring together such diverse disciplines as biomedical science, vehicle dynamics, systems engineering, crash energy management, human factors and driver education.

Our biomedical labs are continually making advances to protect human health. This helps all car makers – and all drivers and occupants. For example, GM developed the crash test dummy which is used by vehicle makers and governments around the world to measure vehicle crash protection. And we are the only manufacturer to develop a pregnant dummy, to further our testing on the proper use of seatbelts by mothers-to-be.

Last year GM passed a major safety milestone when a 1995 Chevrolet Cavalier became the 10,000th GM vehicle to undergo a full-scale barrier crash test. In 1995, GM recorded its one billionth test mile driven.

General Motors safety researchers crash more cars and trucks than any other manufacturer in the world – up to 500 vehicles every year – in an continuous quest to improve the crash-worthiness of vehicles and to enhance occupant safety.

About 25% of the tests run annually help ensure that GM vehicles meet Canadian and US motor vehicle safety standards – the rest are for product development purposes.

Our engineers and scientists are developing a series of new leading-edge, in-vehicle safety technologies. For example, we’re developing near obstacle detection systems (NODS) which use short-range, wide-beam radar to search for people or objects within 20 feet of the car, but out of the driver’s field of view. They will provide an audible and visible signal to alert the driver to the presence of the hazard.

With the assistance of our Hughes Aircraft and Delco Electronics divisions, we’re also developing a night vision system. The system’s infrared sensors, (which have been used by the military for many years) scan the road and roadside ahead, detecting objects, which are processed into a visual image, that can be presented to the driver on a television-like screen located in the instrument panel. At night, the system can detect obstacles beyond the range of the car’s headlights, enabling the driver to take early defensive action.

One system already available on some GM vehicles is the head-up display, which allows the driver to read instrument panel information without taking their eyes off the road. The system uses the windshield to reflect a digital speedometer reading, turn signals and low-fuel warning into the driver’s field of view. The image is presented in such a way that the display appears to hover in midair above the car’s front bumper. This is particularly helpful to older drivers who wear bifocals, as it eliminates the struggle to read the instruments through the lower lens, which has a short focal length.

And leadership in the industry also involves training people to understand and be responsive to the customer. For example, our 4,700 retail sales people participate in over 500 training sessions across Canada annually, to help them match the customer’s needs with the right GM vehicle.

And to ensure that our 14,000 service technicians across the country are kept abreast of new products and technologies, we provide over 35,000 person-days of training annually.

Now providing an outstanding ownership experience today goes beyond warranty. It means being available to help the customer whenever they need you. With this in mind we launched our 24-hour roadside assistance program, the first offered by a major manufacturer and one of the most comprehensive owner satisfaction programs in the industry.

You may not have considered your car phone as a safety device, but when you use it to access roadside assistance, which helps customers deal with such irritants as running out of fuel, locking the keys inside the vehicle, needing a tow, getting a flat tire, or just needing directions on their journey, it becomes just that.

Since its introduction on our 1993 model-year vehicles, we have received over 240,000 calls for roadside assistance, with half of them for information purposes only.

Now, leadership in the industry also means reaching out to our customers with innovative new products and services. The GM card is an good example – introduced in June 1993, Canada’s first automotive credit card generated the largest response to a credit card offer in Canadian history, and became an immediate success.

The country’s only no-fee, bank-issued Visa card, it features an earnings program designed to save GM customers hundreds, even thousands of dollars, toward the future purchase price or lease down payment of a new GM car or truck.

Today, GM cardholders are redeeming their card earnings at the rate of 100 per day – we’ve eclipsed the 25,000-redemptions milestone, and there’s already been more than 1.5 million GM cards issued.

And leadership also means looking ahead, to anticipate and respond to the needs of our customers of tomorrow. GM is committed to designing vehicles with flair that incorporate leading-edge technology, much of which is being driven by the explosive growth of computing power and the expansion of information and communications technologies.

In fact, it’s already happening. Gary Dickinson, President of our Delco electronics subsidiary, says there’s no other device that we use in our daily lives which has more electronic control than the automobile – not even the personal computer. Today’s automobile has more complex electronic control systems than the spacecraft that took man to the moon. We know that, because GM built many of the systems that helped make that happen, too.

Just think about it, almost everything in a vehicle today is electronically controlled – the engine, transmission, emissions, fuel consumption, brakes, air bags, and security. And soon that list will be longer. For example, I’m sure you all know someone who has locked their keys in the car at some time. What if you could go to the nearest telephone, call a number, enter a private code, and have a signal sent to instantly unlock it – or if your vehicle were stolen, you could call a number, dial in your code, and a signal could be sent that would locate your vehicle and instantly disable it.

Soon you will hear people using the term “smart cars.” Time magazine referred to them as vehicles that will “literally think for themselves, diagnose their own problems, and compensate for their drivers’ frailties and failures, while ensuring a safer, more comfortable ride.”

By the end of the decade, a new generation of interactive electronics will enhance the lives of our customers and the list of features reads like an engineer’s “wish list” – a keyless entry system that will preset the driver’s seat, mirrors, steering column, and audio and climate control systems to the driver’s personal preference. Then insert the passive entry key fob into a slot in the instrument panel and your code – and only your code – will start the car. Voice command will set the navigation system, climate control, and radio, while adaptive cruise control maintains a safe distance and speed between vehicles.

And when digital communications technology allows us to link up with the intelligent highway system of the 21st century, hands-off driving at highway speeds will be possible, allowing the driver and passengers the opportunity to use the extensive communications and entertainment capabilities of the vehicle.

But back to the present for a moment. Today we are also using technology to help protect our environment. On environmental issues, the auto industry is a real success story and GM has taken a leadership role in reducing emissions from our products and processes.

For example, I’m sure you would be interested to know that vehicle smog-causing emissions have already been reduced by over 95% from uncontrolled levels in our vehicles. 1987 and older vehicles account for only a quarter of the vehicle miles traveled today, but generate fully two thirds of the hydrocarbons and half of the oxides of nitrogen emissions from motor vehicles.

In fact, as newer, cleaner vehicles replace older, higher polluting ones on our roads, emissions from motor vehicles are projected to decline significantly by the end of this century. And GM has increased the fuel economy of our fleet of vehicles by over 125% over the last decade and a half.

Clearly accelerating the removal of older vehicles from the road will generate the greatest environmental improvement in the shortest time.

At GM, our objective is to continue to bring Canadian consumers the best available environmental technologies in the most affordable way possible. For us, the issue is not whether the environment will be improved – but rather, how we will continue to make improvements. What we need to do is bring sound science and sound economics to the discussion.

In North America, much discussion has focused on electric vehicles as a potential answer. No company has invested more resources in the development of an electric vehicle than General Motors.

But here in Quebec, as in most of Canada, electric vehicle technology today does not yet meet the needs of customers. At cold temperatures, battery charging losses increase substantially – resulting in a substantially reduced driving range. Instead of an optimum distance of 100 miles at 30 degrees Celsius before recharging (which typically takes 8 hours), at zero degrees Celsius, we have seen the distance range drop to all of 12 miles. And electric vehicles are currently expected to cost about $27,000 more than a comparable gas-powered vehicle.

This raises real questions about the viability of present electric vehicle technology in the Canadian climate as well as the availability of the recharging infrastructure required.

My message is this – environmental issues are complex issues. Science and economics must lead our efforts to improve the environment. We need a comprehensive package of alternatives that meet customer requirements. Market-driven – not government-mandated approaches – will have a greater chance of success.

At GM, the environment will continue to be a key priority and we will take a leadership role in bringing leading-edge technologies to our customers.

Our goal is to be the world leader in the provision of transportation products and services and as we look ahead, we have the product programs in place, and we’re developing the cutting edge technologies of the future.

Through leadership in every aspect of our business, we’re committed to ensuring total customer enthusiasm for our products and services. We believe 1995 will be a very good year for our customers.

GLOBALIZATION OF THE AUTO INDUSTRY

Maureen Kempston Darkes
President and General Manager, General Motors of Canada Limited

The Canadian Club of Montreal, April 15, 1996
Published in The Corporate Report No. 18 (June 30, 1996)

Today I would like to focus my remarks on Canada’s automotive industry in general and General Motors in particular – and talk about where we’ve been, some of the challenges we face and what lies ahead.

In our competitive business, survival has depended upon creative and unrelenting efforts to cut costs, increase productivity and seek new market opportunities, while maintaining a keen focus on the customer.

Canada is the ninth largest automotive market in the world, with sales approaching 1.2 million vehicles annually. Today, the Canadian automotive industry provides close to 500,000 direct and indirect jobs, and accounts for approximately 5% of Canada’s GDP.

In 1995, over 2.4 million vehicles were manufactured in Canada, twice as many as the number of vehicles sold here. Now, over 85% of the cars and trucks produced in our plants in Canada are shipped to the US market and the vast majority of the products we sell here are imported.

Exports have become the single largest contributor to Canada’s economic output, and the automotive industry continues to play a major role. Automotive exports represent over 30% of Canada’s total manufacturing exports, and General Motors of Canada alone accounts for over 10% of Canada’s total manufacturing shipments – and is the country’s largest exporter at $18 billion annually.

With operations from coast to coast, General Motors of Canada employs 35,000 Canadians in a wide spectrum of activities, and our 900 dealers nationwide employ an additional 35,000 Canadians. For all these GM people in Canada – and for GM employees around the world – the real focus is creating customer enthusiasm for our products and services.

In GM Canada’s assembly plants alone, we have a vehicle manufacturing capacity of over one million vehicles per year and we are producing some of the most popular cars and trucks in North America, such as the Chevrolet Lumina and Monte Carlo and Chevy and GMC full-size pickup trucks. At our nearby Boisbriand plant, we produce the sporty Pontiac Firebird and Chevrolet Camaro for the world market.

In our quest for continuous improvement, there’s virtually no function, process, system or policy in our company that hasn’t been examined and analyzed during the last few years to see how it could be improved and made better. Today General Motors has turned the corner, and we are focused on winning.

Our strategy to achieve customer enthusiasm has three basic elements: competitive cost structure, product innovation and a full product lineup of differentiated products with something for every customer. Let’s spend a few minutes looking at each of these elements.

To deliver value to the customer we’re reducing our costs through the implementation of lean and flexible manufacturing processes. Our Canadian car assembly plants have been leaders in the implementation of lean manufacturing processes to eliminate waste and increase productivity in our operations. By way of example, our Ste-Thérèse plant was able to improve productivity by almost 8% in a yearly comparison, and at the same time make improvements in quality. Our Oshawa plants also made significant improvements in these areas.

The results we’ve been achieving have been documented by those who study the industry. The most recent J. D. Power initial quality survey results, for example, reflected a number of successes for our Canadian plants. Both the Chevrolet Lumina/Monte Carlo and the Buick Regal plants in Oshawa were among the top ten highest-quality plants in North America (in all 42 plants surveyed). And our new Lumina had the best-ever quality at startup, for a General Motors vehicle (0.73 defects per vehicle). Though we still have work to do to be best in class in each segment, we have made some tremendous gains in quality.

Five of the all-new cars we introduced in 1995 recorded significant improvements in quality, based on the J. D. Power survey. This is unprecedented in the industry. The Chevrolet Cavalier and Pontiac Sunfire are good examples of what’s happening at General Motors today. When these new products were introduced in 1995, the J. D. Power survey results showed a 20% improvement in their quality versus their predecessor models. The Cavalier and Sunfire are currently the number one and two best selling cars in Canada, and we believe they will remain that way throughout 1996. The feedback we are receiving from our customers tells us that they like what we’re doing

Another way we are reducing costs is through our global sourcing process. With worldwide purchases of over US$70 billion, General Motors Corporation is developing alliances with the world’s highest-quality and lowest-cost suppliers, wherever they are located.

The foundation of our global purchasing process is quality, service and price. By matching suppliers, wherever they are located, with their local GM purchasing organization, we can facilitate entry to a world of opportunities for our suppliers. For instance, General Motors of Canada consumes over $8 billion of parts from North American suppliers annually. By the way, that includes more than 500 major Canadian automotive suppliers. And since May 1992, when our worldwide purchasing program began, Canadian suppliers have succeeded in earning over $6 billion of net new business from GM.

Now creating customer enthusiasm also means taking a leadership role in product development. For example, we’re developing new safety features and technologies such as “run flat” tires, which are designed to allow continued drive-ability as well as protection from loss of vehicle control when you encounter a “flat tire.” Even though the air escapes, the stronger sidewalls allow these tires to travel up to 100 kilometers in this condition.

And we are developing a water-repellent or “water beading” windshield, which will eliminate the possibility of a driver being suddenly blinded by an unexpected splash of water. It’s worth noting that this feature was near or at the top of survey responses that asked vehicle purchasers which new technologies they would like to see in the future. Our 1996 Cadillacs already offer an instant-on windshield wiper system, which uses infrared sensors to detect rain on the windshield and then automatically start the wipers.

For personal security, there’s a “panic button” feature which allows the driver to draw attention to the vehicle by pushing a button on the remote key fob. Once activated, the horn will sound, the doors will lock, the windows will roll up, and the headlamps will flash. This feature, which our female customers tell us is important for them, is now available on some of our 1996 models.

A feature that combines safety and security benefits will allow a vehicle’s computer, in conjunction with its cellular phone, to automatically call the local emergency services – even the driver’s personal physician – if there were an accident serious enough to activate the vehicle’s airbags.

But product innovation isn’t just about developing state-of-the-art technologies. It’s about bringing exciting vehicles to market. General Motors produces more new vehicles than any other automotive company in the world. During 1996 GM will introduce more new vehicles than we have in any year since 1980.

An example is our new-generation minivan, which was developed jointly by our North American and international operations. The all-new Chevrolet Venture and Pontiac Trans Sport debuted earlier this month at the New York auto show, and will be available in Canada this fall.

At GM we are redefining our product development process. When fully implemented, we believe it will be possible to launch one new vehicle every month – at least that’s what we’re shooting for over time. We’ll leverage our product innovation strength to provide a vehicle for every purse and purpose. And to be truly successful we will differentiate our brands and take laser beam aim at the spectrum of market niches that are developing in an increasingly fragmented market. The marketing vision we are developing is a strategy that will enable us to “hit the mark” in every market segment we choose to enter.

Rather than building vehicles which come close to meeting the needs of a large number of customers, by leveraging our brands and clearly differentiating our products, we will be able to more finely segment markets, and satisfy specific customer needs. Each car line and truck line brand will be positioned to meet the needs of a specific group of customers. From a broad perspective, here are the roles we see for a few of our brands:

• Chevrolet is for people who love their cars more for practical than emotional reasons. They expect new-car quality, reliability and durability that provides them with a sense of security and personal safety. For Chevrolet buyers, an overriding factor is affordability.

• Pontiac will appeal to people who love to drive – driving enthusiasts who demand confidence in their driving experience. They’re youthful in age or attitude, energetic and they want exciting designs and outstanding performance.

• Oldsmobile is for highly discriminating, forward-thinking individuals who demand exceptional quality, innovation and engineering content.

• Buick is for individuals who want a premium vehicle with enduring style, superior comfort, convenience and substance.

• And Cadillac is our prestigious flagship brand. Cadillac’s vision is to regain its place as the “standard of the world,” competing directly with Mercedes, BMW and Lexus.

Now in addition to the equity of our division and vehicle line brands, we must also capitalize on the strength of our retail partners – our GM dealers. Our national dealer network is more involved than ever with our marketing divisions in all areas that impact the retail side of the business.

Our dealers provide us a strategic advantage and we will continue to leverage the strength of this partnership to assure that we continue to have the best retail distribution network – and most valued franchise – in the industry. We know that customers expect a superior purchase and ownership experience, and General Motors is committed to exceeding their expectations. We still have work to do, and we know that we cannot create customer enthusiasm without the strength of the best-trained sales and service people in the business. Our dealers are committed to providing our customers with this level of expertise.

Earlier I spoke about some of the new technologies we’re developing for our vehicles. But I would also like to talk about how we are using technology to help protect human health and the environment. When it comes to environmental issues, the auto industry is a real success story. In fact, no other industry has such a strong record of reduction in emissions. At GM, the issue is not whether the environment will be improved, but rather how we will go about making the improvement. We believe that sound science and sound economics must lead the discussion.

Since the early 1970s automakers have worked hard to reduce emissions from motor vehicles. Today, smog-causing emissions of hydrocarbons, and oxides of nitrogen are reduced by 98%, and 90% respectively, from uncontrolled levels, on all 1996 vehicles.

As newer, cleaner vehicles replace older, higher-polluting ones on our roads, Environment Canada projects that emissions from motor vehicles will be the only source of these pollutants which will decline through the end of this century. The average age of vehicles on our roads in Canada today is greater than 7 years – meaning the average vehicle emissions technology is two generations out of date. A significant fact is that 1987 and older vehicles, which lack the latest emission technologies, account for only one quarter of the vehicle miles traveled today, but generate fully two thirds of the emissions from motor vehicles. Clearly accelerating their removal by avoiding policies which delay the natural retirement of these older vehicles will generate the greatest environmental improvement in the shortest time.

Now, even with the significant progress that has already been made, there are other technologies under development. Between now and the year 2001, automakers will be introducing new pollution control technology across North America, which will be incorporated into all vehicles sold in Canada. This technology – known as onboard vapor recovery and enhanced evaporative emissions – will reduce smog-causing emissions from new cars and light duty trucks by a further 50%. Alternative technology vehicles also offer some opportunity to reduce emissions. A partnership approach among automakers, fuel providers, utilities, governments and major fleets is required to bring these vehicles to market and allow the customer to use them effectively.

Automakers have offered to do their part by making a variety of alternative technology vehicles available between now and the turn of the century. These would include electric, natural gas, ethanol, methanol, and propane vehicles. Protecting the environment is a key priority for General Motors, just as it is for our customers. You can be assured that we will continue to work to bring leading edge technologies to Canadians to promote a cleaner and healthier environment.

Indeed the future holds numerous challenges and opportunities. Our goal at General Motors is to consistently exceed our customers’ expectations and be the world leader in the provision of transportation products and services. We’re developing and implementing the cutting edge technologies of the future – and we’re focusing all our resources and talents to better serve our customers. Because customer loyalty and customer enthusiasm are the foundation of our long-term success.

THE WELLCOME QUEST FOR NEW MEDICINES

Sir Richard Sykes
President and Chief Executive, Glaxo Wellcome

The Empire Club, Toronto, October 2, 1996
Published in The Corporate Report No. 20 (January 15, 1997)

Over the past two decades there have been enormous advances in a number of fields of science and technology, many of which have had an impact on the way in which human diseases are diagnosed and treated. The last few years have also seen very significant changes in the way that healthcare is delivered to our communities. Healthcare providers, whether public or private sector organizations, are only now coming to terms with some radical changes in the societies they serve. These changes will have an impact not only upon the providers but also those industries such as the pharmaceutical and diagnostic industries which supply them.

The brand-name pharmaceutical industry is an international industry serving a global market. We must produce medicines for the world and be able to sell them to the world. It is also a market that is highly fragmented with many players and even Glaxo Wellcome, which is the largest company in the world industry, only has about 5% of the market. This is why we have seen a process of merger and acquisition over the last few years and this will be a continuing feature in the years to come.

The brand-name pharmaceutical industry has a strong tradition in science and technology, emerging originally from the chemical industry. It is an industry that has become successful because of the preparedness of the companies to invest very significantly in R&D. The processes of drug discovery and development are costly and take many years before any return on investment is seen. Our success is therefore critically dependent upon what is done in our laboratories and also upon our ability to gain protection for our inventions through patents in the major territories of the world in which we must sell our products and services.

We must be focused in our R&D, pursuing the central aim of finding significant new medicines for the common diseases of mankind. The industry has also shown an ability to respond to a changing environment. Firstly, in the field of science, with a move away from chemistry as the driving discipline, to the biological sciences, and now into biotechnology as well as the molecular and cellular sciences.

The industry is also having to adapt to major changes in the marketplace worldwide, leading to changes in the demand for our products. In sophisticated societies like Canada, people have come to expect a high standard of healthcare provision. To a large extent this is due to the success of the health services themselves and the efforts of the pharmaceutical industry. Over the last 40 to 50 years we have seen the virtual eradication of many life-threatening infectious diseases through the use of immunization and effective antibiotic treatment. Polio, smallpox and tuberculosis are three such diseases.

This has created the expectation that those responsible for our health services should be able to diagnose and treat the diseases of our time-the malignant and degenerative diseases-effectively. Patients therefore place greater demands on their healthcare providers and expect state-of-the-art facilities and investigations.

The most significant pressure, however, arises from demographic change. Again this is attributable to improved healthcare – the population of most developed nations is aging. A new spectrum of disease is emerging – diseases of the elderly, such as arthritis, senile dementia and Parkinson’s disease, are assuming greater prominence and are placing an increasing burden on the community.

An inevitable consequence of this demographic trend is that there is a decreasing ratio of those who are earning compared with the retired, reducing the revenue available to fund public sector health services. Unemployment is another factor putting pressure on social security budgets.

The rate of increase in costs of delivery of healthcare has forced healthcare providers worldwide to seek to reduce their costs. Patented pharmaceuticals, though only 2.4% of the overall Canadian healthcare bill, are a target. This is putting pressure on the industry to seek new approaches.

What is emerging in the industry are two views of the way forward: investment in science and technology to create significant new medicines, or investment in the means of provision of existing medicines to ensure continued revenue from old medicines. At Glaxo Wellcome, we believe that the first view is the better one, both from the point of view of the development of the industry and also because unless companies take this approach there will be a virtual cessation in the advance of therapeutics into the difficult fields of medicine that now present our most formidable challenges.

We must understand what the world of medicine – the patients, the doctors and the providers of funding for healthcare – is looking for from the industry. New drugs to cure, or at least modify, serious common diseases will only come from an approach to drug discovery which is based on understanding and rational design of novel molecules. It is a move away from “me too” medicines towards totally novel classes of medicines and therapies. Therefore if it is to remain successful, the pharmaceutical industry must:

• Concentrate on drug discovery for the major diseases

• Focus on understanding disease process

• Identify novel drug targets effectively

• Maintain efficient processes for worldwide drug development and registration

As a company, Glaxo Wellcome is strongly committed to fighting disease. That commitment naturally extends to the increasing diseases of the elderly, as well as established targets like cancer, AIDS and respiratory disease and older diseases like tuberculosis which are threatening to make a comeback as resistance to existing treatments builds up. Our commitment is graphically demonstrated by the fact that in 1996 we are investing £1.2 billion in the research and development of new medicines. Within Canada itself we are spending some $50 million per year on R&D, about 13% of sales revenue.

Glaxo Wellcome R&D funding creates high-quality research positions at universities, hospitals, and research facilities in Canada-Canadians developing and refining pharmaceutical products for use in this country and around the world. The largest of these projects is the Glaxo Heritage Research Institute at the University of Alberta that was established in 1992 and continues to be supported with more than $750,000 annually in operating grants.

The difficulties we face, and the major challenges that lie before us are, however, fortunately only one side of the picture. The other side is the unprecedented opportunities we now have, through harnessing science and technology, to understand disease processes and identify targets for the therapeutic intervention which may produce cures. The explosion of biological knowledge is giving us an understanding of the cellular and molecular basis of disease which means that we are now able to target our search for new treatments much more effectively than in the past.

Advances in electronics and computing have provided robotic methods of carrying out tasks many times more efficiently than was hitherto possible. This is opening the way to high throughput screening for drug discovery and even speeding up chemical syntheses.

Combinatorial chemistry, for example, enables us to identify new molecules much more efficiently and effectively than we could even a few years ago. In California, Affymax, now part of Glaxo Wellcome, has machines that can make 100,000 molecules in a single day, whereas a chemist might make one a week. That is an enormous productivity gain, a real paradigm shift.

Let me briefly discuss some of the developments that are emerging from the human genome project-itself a product of the enormous expansion of our capability in molecular biology and biotechnology. Clearly this program will lead to the development of methods for replacing or removing harmful genes in patients. But of potentially greater significance is the contribution it is going to make to the development of new medicines.

The human genome project is an immense task of identifying, mapping and sequencing the 100,000 or so genes that make us what we are. Once these genes are identified and synthesized, the next step is to discover their molecular products and define their function. Then we will have new insights into various diseases and see new ways of treating them.

Through genetics we have come to understand the cellular and molecular basis of the disease, a process we hope to repeat for other conditions. From this research came the possibility of inserting the normal gene into the lung cells of the patient. This is gene therapy. Even 10 years ago it was thought to be an unlikely possibility, but it is now a reality, although it is still in its infancy and there are many difficult problems yet to be solved.

Developments in information technology can also facilitate the delivery of cost-effective healthcare through disease management. A disease management system is a communications network involving those responsible for treating and monitoring the patients. This allows the flow of data from the clinical centers – hospital clinics, wards and laboratories, GP offices and also pharmacies – into the data management system of the disease management supplier.

The data will include diagnostic information, treatment regimes used, information on patient responses and compliance and any adverse reactions. All information input into the system is analyzed and updated, and an outcomes analysis leading to best practice guide for the particular disease and patient type is fed back to the clinical centers. In addition, the doctors will be provided with up-to-date records concerning a particular patient. Thus the Disease Management System is nothing more than the provision of access to the cumulative “wisdom” and practices of those handling the patient problems, and permitting this to be applied more widely in the most cost-effective and clinically effective manner.

In the case of asthma, for example, it is being found that by using disease management, expensive hospital admissions, particularly in emergencies, have been reduced, with the emphasis being moved to the primary healthcare area. The extent of use of medicines in the moderate to severe patient groups has been reduced, with an increase in drug use in patients with the milder forms of the disease. Overall the cost of treating asthma effectively has been significantly reduced. Here in Canada, Glaxo Wellcome is supporting the formation of Community Asthma Care Centers in selected hospitals across the country. These Centers provide treatment, self-management skills and education support for asthmatics and their families.

From the few examples I have given, it is clear that there is enormous potential in science and technology to bring about improvements in the delivery of healthcare, the treatment of patients and the provision of better medicines.

However, effective delivery of healthcare requires the development of partnerships involving governments, the healthcare professions and the academic/scientific community, as well as the pharmaceutical and other healthcare industries. We must all be prepared to recognize each other’s contribution and our mutual dependence.

The role of government is crucial, not least in creating an environment in which innovation is encouraged and rewarded. This is vital if the full potential of the exciting advances in science and technology which I have described is to be realized and if further such advances are to be made in future years.

Governments have a duty to foster innovation by ensuring that inventions receive proper patent protection. Many of the major advances in medicine in recent years have emerged from the laboratories of the pharmaceutical industry-but none of them would have happened if the companies concerned had not had the assurance of a limited period of market exclusivity before copy products became available. This is more important than ever today, as the costs of research and development continue to escalate.

Once a patent is established, it takes an average of 10 years and anywhere between $300 million and $550 million to deliver a new pharmaceutical product to the market. Glaxo Wellcome, like other brand-name pharmaceutical companies, expects the standard 20-year patent protection offered all other products in the Canadian marketplace. The first 10 years are spent developing our products, leaving only 10 years of effective patent-protected sales. European countries, the United States and Japan offer 14 to 18 years of effective patent protection for pharmaceutical products.

Glaxo Wellcome is committed to maintaining a strong presence in Canada but must be assured that policy support for the company’s initiatives will continue. Canada must provide a positive environment for pharmaceuticals. Without the 20-year patent protection available in just about every other developed country in the world, Canada can expect to fall behind in terms of investment in bricks and mortar, as well as the Canadian-based research and development of pharmaceutical products.

Linkage regulations were passed in conjunction with Bill C-91 and require generic companies to prove that they are not infringing upon the patent of a brand-name company before a notice of compliance is issued for the generic version of an innovative medicine. Linkage regulations are essential for effective patent protection, and every research-based company, including Glaxo Wellcome, will be forced to review its investment strategies should full 20-year protection disappear from Canada.

Efficient and effective approval processes are also critical to the successful launch of new medicines. In most countries, brand-name pharmaceutical companies can expect to wait a year or less for review and approval. In Canada, while there has been considerable improvement, it still takes 18 months for a new drug to be approved by the Health Protection Branch for sale in Canada.

But that is not the only waiting time for new medicines in this country. Each province then goes through a separate approval process to list new products on its formulary. Creating a more efficient approval process would benefit the patients, by speeding up access to new medicines, and would reduce administrative costs for government and the industry. It would certainly make the 20-year patent protection time frame even more competitive internationally.

Strong patent protection and efficient approvals of new drugs are therefore essential components of the business framework within which pharmaceutical companies operate. But governments also participate more actively in the pharmaceutical marketplace, either directly as purchasers or, more indirectly, through their reimbursements to patients for the cost of their medicines.

This role inevitably gives governments a short-term interest in cost containment, which can conflict with its longer-term interest in the health of the research-based pharmaceutical industry. I am well aware of the need for governments to exercise restraint in their spending, but if the squeeze is applied too hard to the industry, research budgets will inevitably be reduced and much needed new treatments will take longer to arrive.

Like all brand-name pharmaceutical companies in Canada, Glaxo Wellcome has held the line on prices for its patented products-which increased a mere 2.1% between 1987 and 1994. That is well below the rate of inflation. Patented medicines reflect only 2.4% of healthcare products and services costs.

Glaxo Wellcome has a major role to play in helping to keep the cost of healthcare in check. This means we are working with doctors, hospitals and pharmacists on new, better and more cost-effective ways to use medicines.

In June, Glaxo Wellcome launched an 18-month pilot Asthma Clinic at Centenary Health Center in Scarborough. The clinic is focused on helping patients better understand and learn to control their asthma. The goal of the pilot is to reduce emergency visits and overnight care that currently account for hundreds of thousands of dollars in expense to Centenary each year. Better educated patients and cost savings will work hand-in-hand to save money. For Glaxo Wellcome, this is an opportunity to take an active role in improving health outcomes in patients.

Canadians are expecting healthcare solutions, not a reduction in healthcare services. Glaxo Wellcome is actively working with healthcare providers to find and implement effective solutions.

Next week, Glaxo Wellcome will be officially announcing, along with Sunnybrook Health Sciences Center, the Glaxo Wellcome/Sunnybrook Drug Safety Clinic. This clinic will diagnose, treat and conduct research on adverse drug reactions. Unique in Canada, the clinic would not be able to exist without a strong collaboration between the private and public sectors. Again, the goal is to improve patient outcomes while creating opportunities to reduce healthcare costs.

I believe that the advances in science and technology which I have described provide great opportunities for the pharmaceutical industry and government to work together to bring better and more cost-effective healthcare to people in Canada and throughout the world. Glaxo Wellcome looks forward to playing its part to the full in this vital task.

MONTREAL’S FATE AND OURS

Robert K. Rae, Q.C.
Co-Chair, International Practice Group, Goodman Phillips & Vineberg

Premier of Ontario (1990 – 1995)

Urban Development Institute, Montreal, March 25, 1997
Published in The Corporate Report, Edition No. 21, June 30, 1997

Some people – with differing motives – express the wrongheaded view that Montreal’s, and even Quebec’s economic and social pains are Ontario’s and Canada’s gain. Some look at the contrast between Toronto’s and Montreal’s economic growth since Expo 1967 and say that Toronto gained because of Montreal’s losses.

No doubt there is a superficial truth, in looking at individual investment decisions, that when a company moves from one jurisdiction to another there is a loss on one side of the ledger and a gain on the other. But looking at this issue over the longer term, Montreal’s prosperity is important for Canada and for Ontario. We benefit when you benefit. We gain when you gain. And the reverse is true as well. We lose when you lose.

I referred to 1967 because, in many ways, it marked the end of an era, although at the time we saw it as a possible beginning. Canada’s economy in the 1940s, 1950s and 1960s grew at an unprecedented, steady pace. Unemployment was low. Government debt, which had been unusually high in 1945, was steadily reduced in almost every year after the end of the war as governments ran surpluses. The Pearson government in Ottawa introduced the Canada Pension Plan (and the Quebec Pension Plan), Medicare and the Canada Assistance Plan. The gap between rich and poor was narrowing, and the parents of the Baby Boom generation could look with pride at their improved prosperity since the end of the Second World War.

But like Icarus who flew too close to the sun, we have since that time paid the price for our hubris. Now, in 1997, much has changed: we have less of a national economy and have become much more of a group of regional economies connected to the globe. Government debts have grown to the point where they risk preventing a capacity for innovation in the public sector itself. And not just governments have become highly leveraged – individuals and companies as well have been going heavily into debt in order to maintain their standard of living. The gap between rich and poor has widened. Those able to participate fully and effectively in the global economy have done well. Those whose lack of necessary skills and education prevent them from climbing on the job escalator – both young and middle-aged – face a future on the very margins of our society. These are not exclusively Canadian or Quebec problems. They are faced, in varying degrees, by every industrial country. Like sailors, we cannot change the weather or the direction of the wind. But we can change the direction of our sails.

The story of the last 25 years is one in which all Western societies have had to come to terms with slower growth, rapid technological and social change, and a deeper understanding of the connection between our economic and political institutions and prosperity.

I speak to you today as a “recovering politician” who has had to learn some of these experiences the hard way. My time in government was one where I confronted two strongly held ideologies – on the right and on the left – which to a considerable extent are still at work today. The left ideology insists that sovereign governments, committed to greater equality of outcomes, can use the state to steer the economy and society in the direction the elected majority wants. In its most revolutionary form, of course, we know through bitter experience the results of this ideological approach. But short of Leninism there are still those who, in the name of equality, preach higher taxes, bigger governments, more intervention, more social engineering, more laws and more regulation.

The Quebec version of this ideological enthusiasm has the added component of a nationalism that crosses the border from linguistic and social pride into the excesses of intolerance and bizarre outbursts about “ethnics and money.”

The right-wing “revolutionaries,” as they call themselves in Ontario, are no less misguided. They govern in the name of a theory, and in the spirit of ideological fervour. They prefer to tear everything down and “start all over again.” They start from the premise that “nothing is working.” They have no respect for what has gone before or been tried before. In the case of metropolitan government, for example, they have reached the curious conclusion that creating a single centralized bureaucracy and administration for 2.5 million people and then downloading and off-loading services like housing, welfare, and long-term healthcare, will save money and reduce the tax burden.

It will do no such thing. It will produce more costs, higher taxes, and less investment in the city core. Unless the plan is drastically changed, it will not produce more prosperity, which is surely the object of the exercise.

Frances Fukuyama, a creative and thoughtful American sociologist, has recently written a book called Trust. In it he quite rightly points out that prosperous civil societies can better thrive when we better understand the scope and limits of markets and governments, and, even more important, when we understand that social virtues and values are keys to this prosperity.

I believe that a deeper appreciation of the values implicit in federalism itself will help us to restore prosperity in Montreal, in Quebec and in Canada. By federalism I do not mean the status quo, or whatever versions have been practiced or imposed in the past.

Federalism simply means that we recognize the importance of having different governments do different things; that those tasks that can best be performed locally and regionally are done so locally and regionally; that no sovereignty is absolute; and that, indeed, in an era of globalization, absolute sovereignty and centralized political and economic power are increasingly anachronistic.

Federalism implies a deep respect for pluralism, for realizing that different communities will choose to govern themselves differently, but that a respect for minorities is exceptionally important in this context, precisely because however distinct, no society is homogenous or unicultural or unilingual.

So long as there is political uncertainty and less deep social, economic, and political trust than there should and can be, we can only conclude that we are not sailing properly. Anyone can sail in good weather. But our weather is not good, and so we must improve our skills.

The leadership for these changes must come from Ottawa and all the provinces, including Quebec. A family in which one of its members is constantly seeking a divorce is not likely at the same time to be investing in a new house or a new car. The best thing to happen would be to avoid a referendum on separation altogether. The conclusion that negotiations should start now, and not later, is inescapable. All governments have to recognize that the creation of stronger trust is an essential precondition for prosperity.

The principle of trust also speaks to the importance of partnership between all the players in the modern economy. We are, as a country, profoundly reliant on our continuing access to world markets. We always have been, but never more so than today. Nearly half our GDP depends on exports – up from 35% only five years ago. We cannot afford long strikes, deep divisions, inefficiency or a disregard for productivity.

Old models of irreconcilable divides between “us” and “them” have to be thrown away. Through their pension plans, both public and private, working people have a profound stake in the health of our economy. Quebec’s Solidarity Fund is an important model for the rest of the country and is a demonstration of what can only be called “democratic capitalism.”

Our commitment to the democratic values of community and solidarity necessarily affects the nature of our economy, but it does not exist in midair independent of the economy. Governments should not do too little. But we do pay a price when they try to do too much. We have all had to learn the lesson that there are more good ideas than there is money, and that governments that tax too heavily, that borrow too much, or that allow interest rates to soar choke off prosperity. Neither envy nor greed are virtues likely to lead to intelligent social and economic policy.

There is no one big ideological “answer.” There are better approaches. Devolve as much power to local governments as possible, but insist on coordination. And governments, in turn, should devolve as much power to individuals in the community as possible. Governments steer better than they row. Focus whatever tax relief can be afforded on the lowest paid, and give people every incentive to earn, work and learn. Reduce the work week and working time. Reward patient capital. Discourage speculation if it reemerges. Don’t punish success, but give every incentive for private generosity. Don’t reduce taxes to the point where the public sector can no longer provide decent healthcare, vital infrastructure investment and education.

THE CFO AND PUBLIC POLICY

H. Stephen Grace, Jr., Ph.D.
President, H.S. Grace & Company

Forbes Chief Financial Officers Forum, Rio Mar, Puerto Rico, February 10, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

Today I am putting before you a very simple message, and that is that we, as senior financial executives, can contribute significantly to the resolution of today’s fiscal, social, and public policy problems. We can do it in a manner that utilizes our strongest skill sets and we can do it in a manner that benefits not only ourselves but our employees and our organizations.

Now that’s a broad, sweeping statement to make. Each of us could be saying to ourselves, how in the world could we do that? How do we contribute with all of the things-work pressures, time constraints-that we face? Well, as we look today at the work of a group of over 50 senior financial executives, a group of our peers, what we’ll see is not only the significance of their work for the recipient organizations, but we will also see clearly the powerful impact that this work has had on these individuals, their fellow employees and their organizations. So there are two areas of focus: first, we will look at the contributions that were made and how we used our strongest skill sets-our financial management skills, in making these contributions; and second, we will to look at the depth and breath of the benefits that flowed back from these activities.

In 1993, the New York Chapter of the Financial Executives Institute established a small, informal committee to investigate what would represent a totally new area of activity for the chapter. The mission of the committee was quite simple, and that was to determine how we could use our financial management skills to help make New York City a better place in which to live and work. The committee consisted of Frank Borelli, chief financial officer of Marsh & McLennan, Mike Esposito, then chief administrative officer of Chase, Tom Jones, executive vice-president of Citicorp, Bob Roath, then controller and now CFO at RJR Nabisco, and myself. We set about looking at the types of assistance we might offer, those organizations to whom we might reach out and, very importantly, what would be the attitudes of our members toward undertaking this type of activity.

One of the first tasks we undertook was to create project guidelines. The guidelines defined where we were, what we had to offer and how we were going to offer it. They represented a very important first step. Each project would be well defined and directly applicable to our skill sets. The projects would be brought to closure within relatively short time frames-a very important requirement. We were not going to enter into undefined, open-ended commitments to organizations-that was not what we saw as our role relative to what we felt we were able to deliver.

Also, projects would be jointly determined. And, the projects would offer assistance in the achievement of missions or goals, not in defining missions and goals, nor in evaluating performance. We weren’t coming in putting a gun to someone’s head about how they or their fellow organization members were or were not achieving their respective missions. We certainly felt that the defining of missions and goals and the evaluation of performance were important issues, but our belief was that, if individuals wanted to undertake those activities, they should do this on an individual basis by becoming involved in an organization, learning how it operated, and then participating in that type of definitional and guiding work. We, as an organization, were simply looking to use our financial management skills to assist these organizations in the achievement of their missions and goals.

Regarding the last couple of guidelines – no financial assistance – we were all already called upon for every dollar we and our organizations could give. That’s not where we were coming from. And we were not going to compete with nor replace consulting firms. They have a role and an important role. Again, we were simply going to utilize our skills.

As we turned to identifying those organizations whom we might assist, very quickly the scope of the organizations broadened from simply government-related entities to include nonprofit and, importantly, certain programs of religious institutions which we felt benefited the City of New York and the environment in which we lived and worked. Faith Whittlesey, former ambassador to Switzerland and currently president of the American Swiss Foundation, pointed us toward the Archdiocese of New York’s School System. Faith is not a Catholic but, in effect, said, “Those people make a critical contribution to New York by educating a wide range of students and, even more importantly, in many areas of the city they are the only source of continuity and stability out there.”

Interestingly, as we broadened our scope of activities from its initial focus-government entities-as we moved into the non-profits, and even into certain programs of religious institutions, our board’s approval was unanimous. Their feeling was that we needed to expand from solely government entities; we needed to move into the non-profits. The board was right saying that’s where we needed to go and put our financial and business experience to work.

At this point, without being patronizing to my good friend Tom Volpe, the project actually entered into what I call the “Volpe Era.” Tom had been strongly involved from the start in this initiative and, even before he took over as chapter president, was driving this activity forward, looking at the organizations to whom we needed to reach out. It was Tom who created the relationship with Carl McCall, the state comptroller. He also created the relationship with David Caputo, the president of Hunter College. We’ll talk later about the projects we did with both of these entities. Tom has never ceased looking for and finding organizations we could assist with our skills.

At the same time we were establishing relationships with several organizations, we were passing on other organizations that had been brought up for consideration. In many cases, these were outstanding organizations which had a great deal to offer the city, but there simply wasn’t a fit between our skill sets and their needs. We, as a group, did not have something to offer them in terms of our financial skills; however, many of these organizations were recommended to our members-that they consider participating in these organizations on an individual basis. Again, throughout this process, we were continuing to attempt to read where our members were with regard to these activities and, very early, member feedback began to surface. And there was continued strong support from the chapter presidents-I’ll come back to this.

Let’s take a moment now and examine some of the projects undertaken-what we did in connection with these projects-in order to demonstrate the nature of the contributions that were being made. Carl McCall, comptroller of the State of New York, and his first deputy Comer Coppie, an outstanding individual in his own right, and the other deputies (a great group to work with) basically said to us, “Look, we’ve got some challenging issues with regard to our payroll system. It was originally developed in 1970, it’s outdated, with everybody saying it’s on the verge of collapse. However, we’re talking about a major expenditure, $20 million to $40 million, to put a new system in place. We’d like you to give us some assistance by sharing your experiences with the various aspects of payroll systems.” In other words, they were not asking us to build the system, but only to share experiences with them that would assist in visualizing their alternatives and options.

When you think about it, what better group could Carl McCall and Comer Coppie have come to? We are out there living with payroll and human resource issues every day. So what did we do? How did we address this project? Frank Gatti of The New York Times put together a team that included The New York Times Company, Marsh & McLennan and The Interpublic Group of Companies, all of whom approached the problem differently – three different approaches to the issues. One firm’s systems combined the human resources and payroll elements, the second one kept them completely separate, and the third had created a system that was a hybrid. So, in a full day of meetings, the state comptroller’s staff got a detailed briefing from these three companies on what worked and what didn’t work in each of their systems-their foresight, their hindsight, the issues they felt they faced going forward and, very importantly, how they built a business case to justify the expenditures they had made for their respective systems.

Interestingly, but not surprisingly, all of those in attendance at the meeting felt that a great deal had been accomplished. A great deal had been learned not only by the comptroller’s staff but by all of those in attendance. Equally interesting was the fact that, subsequently, the legislature appropriated $5 million to begin the work of designing and implementing a new payroll system, after having twice turned down requests for funding. Whether or not our discussions contributed to the decision to fund will never be known, nor it is particularly important. What is apparent is that, as a result of the sharing of experiences, the comptroller’s staff was able to come back describing completely neutral, objective advice that had been given regarding the issues involved in the design and implementation of a new system and how these issues could be addressed. They were also able to build an effective case for a non-revenue producing expenditure.

Just as interestingly, we can see how this project fit right into the project guidelines we had developed. Here was a well-defined project which required certain preparation, but which was basically completed with one full-day meeting. The project team continues to stand ready to address various issues and questions which arise from the comptroller’s staff as they move forward, but basically the project was brought to completion in the sharing of information and expertise.

The second project for the state comptroller was internal control. They, in effect, said, “Our interests are twofold: we want to fully understand the issues associated with internal control and we want to examine how internal control can be marketed in a large-scale organization.” They went on to say they wanted to do it not only for their own operation, but for other government entities in New York State, and to put together a manual that would be available to other government entities both within and outside the state. We assembled a team-people from Philip Morris, Equitable, NYNEX, and my colleagues at Zolfo Cooper-who could offer their experience with a wide range of “troubled companies.” Several meetings occurred, spaced over a number of months, with major presentations by the various groups, and today a manual is in the process of being put together. At the start of the initial meeting the comment was made that this may be the first time that senior members of government and private industry have ever sat down together to address this type of issue. There it was, happening – a meeting which may have indeed been a first. And it was natural for us to step in and undertake this defined project, within its relatively short-term time frame. We made our contribution, experiences were shared among all of the parties in a series of meetings, and the state comptroller’s team was well prepared to move into the preparation of a manual which the total team agreed to review at a later date.

The risk management project for the state comptroller was interesting. The state comptroller came to us and said, “You know, we’ve got a problem with our firemen and policemen. We self-insure and, of course, those people experience a large number of injuries on the job with permanent disability in a number of cases.” They went on in general to say, “We know we can do better and we believe we can benefit here also by sharing experiences and would like to discuss that.” We reflected on this matter, saying to ourselves, “This seems to be slightly different from what we had in mind.” At the same time, it did appear that we could assemble a team, and we did-people from Reliance Insurance, Colgate-Palmolive and Equitable.

What happened in the subsequent meetings among the state comptroller’s officers, the firemen state union leaders and our companies, was amazing. We marveled at it ourselves. Because the state self-insures in many areas, it does not have the benefit of insurance carriers coming to assist them, demonstrating ways to reduce the incidence of injuries and, even more importantly, offering insight when an injury occurs as to how to get the injured person to the right type of care initially, and, subsequently, how to assist him or her throughout the rehabilitation process. To say these disability and rehabilitation issues were of concern to all parties involved is an understatement. The state comptroller’s office, and also the state leaders of the firemen’s union, jointly made clear the seriousness of the firemen’s plight. They pointed out that, while many people may think that a fireman getting disabled and subsequently receiving almost 100% of his salary for the rest of his life would seem to have it made, this was far from the case. Both New York State and the union were well aware of the facts and cited statistics to prove that these individuals have a higher divorce rate, and their psychological state is known to be much worse. The bottom line is these union members were being seriously damaged by the entire situation.

So what we had was both the union and the government jointly looking at ways to address a very serious issue. At the same time, here were our people saying, “Wow! We can help. We know this business. We understand how you get your hands around people when they’re hurt, how to get them to the right medical care, and how you work with them through the rehabilitation stages.” You could just see it right on the faces of these executives that they could assist in improving the well-being of the firemen. And they were saying, we must do this, we have the ability to contribute and the opportunity is right there in front of us. Clearly a situation where all of the parties were winners. Yet once again, a well-defined, short-term project. It happened in the form of a series of meetings, the assistance was provided, and everyone moved on.

I’ll come back to some of the other projects for the state later. Hunter College president David Caputo knew he wanted industry input in the areas of information technology and management practices. In the case of information technology, he wanted an outside assessment of the technology, not only in the classroom, but also with regard to servicing the university as a whole. Our chapter’s Information Technology Roundtable took on this project and we’ll see in a moment exactly what Caputo had to say about those results. In summary, very positive benefits flowed to the university. The Corporate Advisory Council, a slightly different type of body, requires a longer term of involvement. Our members can step on and off of the council as their other requirements mandate. Here, Caputo was seeking our advice, not only from a curriculum standpoint, but also with regard to the management of the institution. Again, a natural for our group to share views, to provide ideas drawing on our depth in particular areas.

When you look at our work for the Archdiocese of New York School System and simply scan the projects undertaken, you can see their interest in discussing things such as purchasing procedures, cash management procedures, record retention procedures, some pension fund administration details, policies and procedure manuals-all of which were like water off a duck’s back to the group of us. We are addressing matters like these literally all of the time. They are subjects with which we live, which we grew up with as we moved through a range of managerial responsibilities, and they are naturals for us to address by putting together small teams, stepping in and making our respective contribution. They are not, however, matters in which the archdiocese has expertise.

The enrollment projection model for the archdiocese represented a slightly different type of project. A very interesting situation-they came to us and, in effect, said, “You know, we’re trying to develop a model to project enrollment on the secondary level and we could use some of your experience.” So the controller of one of our companies assigned a team of actuaries. What a natural thing for these actuaries (who build models all the time) to undertake! They stepped in and before we knew it the archdiocese was telling us the model had been used in their decision to buy a new facility. Furthermore, the enrollment at that facility had gone up 100% in one year and they are expecting it to increase another 100% the subsequent year. In other words, a fourfold increase in two years. Additionally, the Archdiocese of Chicago had become aware of the model and asked the Archdiocese of New York if they could get clearance for Chicago to use it.

Clearly the work being performed was benefiting the recipient organizations, but what about our people? Just take the enrollment projection model project. The controller was telling me his actuaries were literally “on the moon” after undertaking the development of the model. Here they were, using their strongest skill sets, able to step right in and make a contribution to people who, as the actuaries put it in their own words, have a mission. Whether the actuaries were Catholic or not, they saw people out there educating the youth of New York. And these actuaries saw their ability to assist these people in a very valid, worthwhile mission. And they made it happen!

The relationship has continued. The actuaries call the school periodically and offer assistance with the school’s database-natural areas in which their skill sets can be utilized. Nothing defined, nothing required, but a high-quality, ongoing relationship which is reflective of the flow of benefits coming back to our members and their employees.

The second area of focus has to do with the benefits flowing back to us – not only the financial executives, but also our fellow employees and our organizations. I don’t think there’s any stronger commentary that can be made about these benefits than our own chapter members’ comments. At the start of my remarks, I said we were very concerned about what our members’ responses would be toward these activities, because all of them are time constrained, facing tremendous work pressures. We all know and understand that is the world in which we live. What would be their response?

Just look at these comments: “I’m been a member for over 10 years. This is the most important thing the chapter has ever done.” When that member made that statement to me, I remember thinking how I feel that we do a lot of important things; yet he thinks this is the most important thing we have ever done. And he was certainly an individual who had been closely involved with leadership of the chapter.

Another member said, “We cannot just have monthly meetings at which we eat and talk. We must do something worthwhile.” A third person, a very thoughtful individual involved for many years as a leader of the chapter, said, “I have been participating in board meetings for years at which we discussed membership and programs, now we are addressing important topics.” The final comment, and a very pertinent remark, was made by a very senior person at one of the largest companies in the world: “We must do this work.” So you say to yourself that our members are seizing upon these activities in a manner that is clearly telling us something.

It’s this level of response that surprised us. The biggest surprise we had was the way the group of members seized upon the need to do this work. So you ask yourself, what’s driving this depth of commitment, this interest in undertaking the right amount of this work, not casting aside your other responsibilities, but incorporating it along with them? And I think at least part of this drive can be explained by looking at certain writings over the centuries.

You go back to Aristotle, some 2,300 years ago, in Book II of The Politics. He’s arguing against Plato and Socrates, by the way, who said in the perfect state everything should be held in common, nothing should be owned individually. Aristotle gives a number of reasons why he feels this concept will not work. But he says the major reason is because you deprive man of his greatest pleasure, and that is giving of himself. Apply this to our chapter members: what are our people giving? They’re giving their two most precious commodities in actuality, because money is probably not one of their most precious. Their most precious gifts are probably their time and their energy, because they already have so many calls on them.

Look at Immanuel Kant. He says the two things that awe him most – and if you’ve ever read Kant, it’s an amazing exercise just to undertake the effort, and here he is not saying he’s the greatest thing that ever walked the earth – he says that there are two things that awe him the most: the starry heavens and the moral law within. He says that there is a moral law operating within us.

Pope John XXIII says it slightly differently. He talks about a common effort of free individuals for the good of society and he says, “It is…the fruit and expression of a natural human tendency, almost irrepressible in human beings-the tendency to join together to attain objectives which are beyond the capacity and means of single individuals.” Very powerful remarks-all three quotes. You look at these and there is a direct linkage to what is going on with our members, to those benefits flowing back.

We’ll come to Carl Jung in a few moments. He makes a very important statement about what happens when the moral law is not observed by people. But let’s step in another direction for a moment and consider the commentary that has come from the recipient organizations.

State comptroller Carl McCall says, “Our working with the Financial Executives Institute has shown us that business and government are facing similar issues and that when we come to the same table and work through these things together it benefits us. In each of these projects, FEI’s input has been a valued part of the decision-making and implementation process and the results show the first steps toward improved efficiency and effectiveness.” Right there our role is set out. Our input has been a valued part of the decision-making and implementation process they undertook. We are not there to define their missions or goals but only to assist in the achievement of those missions and goals.

We go next to the comments by Monsignor Tom Bergin, Vicar of Education. “The good sense and practical approaches to our work provided by the members of FEI placed our management of education in a different light. As a result of discussions we were able to redesign approaches, husband resources and result in cost savings.” Hunter College president David Caputo, speaking regarding the review of technology undertaken: “The efforts of the Technology Round Table resulted in critical recommendations being made which have been incorporated in the formulation of a reorganization plan put out to the Hunter College community.” And, just one last comment from the superintendent of schools: “School administrators approach things from a different vantage point than businesspeople, but having interested people from business look at our work and suggest approaches has enabled us to plan better.”

Notice what is happening here, again. We’re not getting involved in running those organizations. We’re simply coming in with our skill sets. And what can be seen, of course, is that when you do this the leverage is tremendous.

We had a very interesting meeting in New York recently with one of the state senators, a well-known individual and leader. He has been dean of social sciences at one of the universities, done a great deal of work in education, religion, tremendously aware of what’s going on in the entire service sector-government entities, non-profits and the programs of religious institutions. One of the other people in attendance was a leader of the Orthodox Jewish School System. What was immediately apparent to the senator was that many of the same things we have done for the archdiocese could be applied right across the board for a wide range of school systems. In most cases, we probably have 70% of the work already done, with only small modifications required for the different entities. We can leverage directly on the previous contributions made-aiding these institutions by utilizing our skill sets to give them more time and resources to focus on the achievement of their missions and goals. The senator could see this tremendous opportunity for further contributions growing right out of the initial set of projects performed.

Let’s just come back for a minute to Carl Jung, to one of his most often quoted statements, where he talks about all the patients he has treated over the years. “Among all patients in the second half of life – that is to say, over 35 – it’s safe to say that every one of them fell ill because they had lost that which the living religions of every age have given to their followers and none of them has really been healed who did not regain his religious outlook. This of course has nothing to do with a particular creed or membership in a church.” A very powerful statement. This man doesn’t say these people are ill because they didn’t come see him or they didn’t follow his methodology. He says something quite different. And it seems to me he’s saying, just as Kant says, there’s a moral law that is there within us, and if people don’t recognize it and hook into it, they’re going to experience serious problems.

Again, trying to assess what’s driving our people, let’s look at Mother Teresa’s Simple Path. Many of you may have seen this. My understanding is that a Muslim gentlemen was the first one who actually printed it. Of course Mother Teresa is known all over the world, but she says her life is guided by this “simple path.” “The fruit of silence is prayer.” She says she starts her prayers in silence so she can hear God speak to her. The fruit of prayer is faith. The fruit of faith is love. And it is the last two that I think are particularly important-the fruit of love is service, and the fruit of service is peace. People who meet her say Mother Teresa has an air of peace about her that is unrivaled. There is a peacefulness that she gets, and she is clear on its origin-it stems from her work. You look at this situation and you look at the response of our members to our activities and, even though our activities pale in comparison to the work Mother Teresa and her followers undertake, you can begin to sense the origin of the benefits which flow back to our members from properly balancing and integrating these activities into their working lives.

A close examination of these activities has revealed that another level of benefits exists relative to these types of activities and these benefits also flow in both directions. The work performed by the chapter member not only impacts the recipient organizations directly, it actually goes beyond that. The work also boosts the people that are running those organizations. Think about it for a minute. We’re out on a mission, a tough job with limited resources and suddenly a group shows up and says they are here, they have some skills, and they would like to assist us in the achievement of our mission. We have got to feel good about that. And we can see exactly this quality of feeling in the comments of McCall, Bergin and Caputo as an example. In turn, these feelings, these sparks that are stimulated in the leaders of these organizations by the work of our members, flow directly back to the members.

Another powerful example of the benefits flowing back to our members and their employees arose in connection with one of the state comptroller’s projects that I did not review in detail with you. It was in connection with the accounting systems update project and the controller of one of our team members told a fascinating story. She said that when I selected my team to make the presentation at the joint meeting, those staff members chosen to be on the team were highly complimented that they had been picked to make the presentation. Furthermore, they were proud to be there to interact and share their knowledge. And she said they came back from the presentation feeling they had learned a tremendous amount. Think about what has happened there. The impact on these employees and, in turn, their organizations is both exciting and powerful. The controller provided the contrast when she said, in effect, “You know the funny thing is that we are continually trying to present quality in-house professional development programs, but often these do not seem to go over very well. But I assign my employees to this type of project and they come back with an added degree of camaraderie, a new level of esprit de corps they’ve learned from the experience, and they’re fired up regarding the continued performance of their jobs.”

So you see the impact of these projects, again flowing directly back to these senior executives and their fellow employees and clearly benefiting their organizations. It could almost be termed a reinvigoration process.

Right here, I must interject one other important fact that comes directly out of this work. That is, if our members with all of their work pressures and time constraints feel there’s a need for these activities to be a part of our working lives, then what about the retired members of our society? Our chapter members’ lives are so jammed and yet these members are still saying we have to do this work. There is a value associated with it. There is a reinvigoration that appears to be associated with it. And rather than individuals being drained as far as being able to do their actual jobs, they come back from these activities charged up, with an added zest for their work, and an increased respect for their organizations.

What about the retireds? What about the value of integrating a balanced amount of these activities into their lives? As our employees are moving toward retirement, we have opportunities to steer them in the directions of these activities, make them aware of the benefits they can bring to others and the benefits in turn they will experience. In other words, we can create the channels. And, of course that’s what we’ve actually done, yet we didn’t realize that at the outset. We created the channels by which our members, using their skill sets, could face off against some of the problems obstructing or hindering these various institutions in the achievement of their missions and goals.

When you think about the retireds that are out there, the potential is almost unlimited. At a time when many say we are faced with an ever-expanding morass of societal problems, we have these legions of retireds. Never before in the history of mankind has a country been blessed with such a pool of individuals who, for the most part, are healthy, intellectually capable and financially secure-who could face off against these societal problems. We, as senior financial executives and as members of senior management, may be able to play a critical role in building the bridges and cutting the channels that will allow this talented pool of retired citizens to move across and face off against these problems. What enormous progress could be made if these untapped resources could be matched up against the problems. And if anyone can match these resources against the problems, we can do it because we do it all the time in our work. And does everyone win? It is clear – powerful wins are there for all involved.

Let me conclude at this point by asking that you carry with you the words of Margaret Mead that I think are particularly pertinent, relative to the opportunities that we have in front of us. I quote: “Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.”

THE DANGER OF COMPLACENCY

Daniel Branda
President & CEO, Hewlett-Packard (Canada) Ltd.

The Canadian Club of Toronto, April 22, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

For Hewlett-Packard or any company or country to be successful, it must play to its strength – which means both the private and public sectors must be pointed in the same direction. Let me tell you what I mean. On a recent trip to the Far East where I visited Hong Kong, Taipei and Singapore, I had an opportunity to meet with other HP people representing places like Vietnam, Malasia, Thailand, and the Philippines. One message was extremely clear. In every case, these governments recognized that the fastest way to improve the long-term prospects of their citizens was to invest in information technology usage in government, industry and the education system.

In other words, they are committed to becoming strong players in the knowledge-based society toward which the entire world is moving. It’s something which HP is familiar with worldwide.

Let me tell you a little bit about us. The name Hewlett-Packard may, no doubt, be a familiar one to many of you. After all, it’s been around for 57 years. But few people know much about the company behind the name.

John Young, our former chief executive, once remarked that “HP is proof that an elephant can dance.” Bill Hewlett and Dave Packard probably didn’t realize when they started making test and measurement instruments in a garage in Palo Alto, California, in 1939, that they had spawned a giant. Since then, HP has grown into a bona fide multinational. Its 1995 revenues totaled US$31.5 billion, which was generated through the efforts of 104,000 employees, 1,600 of whom work here in Canada.

When people hear the name Hewlett-Packard, they usually think printers. We are indeed the world’s leading supplier of laser, inkjet and color printers. But these products are merely the tip of a large, multi-layered iceberg.

We produce and market some 23,000 products and services that include consumer products like PCs, palmtop PCs, and sophisticated handheld calculators. As well, we produce test and measurement instruments which sense and analyze everything from drugs in an athlete’s blood to the quality of microwave transmission. We are a world leader in stethoscopes, cardiac ultrasound imaging systems, atomic clocks and much more.

HP’s size and diversity bring us face to face every minute of the day with the competitive realities of global markets. A year or two ago, we came up with a visual metaphor that we could use to convey the turbulence of these markets. Our choice was a whirlwind. And what a whirlwind it’s turned out to be!

It’s no exaggeration to say that the most far-reaching revolution in the history of information is currently underway. That’s because this revolution is about much more than a single new invention like the printing press or the telephone. In fact, several technologies which for years were assumed to be quite separate from one another – computers, telecommunications, information handling, consumer electronics and broadcasting – are now swirling together to form the metaphoric whirlwind I just mentioned.

At the same time, each of these technologies is itself being reinvented. The performance of computing devices is expanding exponentially even as their size keeps shrinking. In communications, there is a rapid movement from analogue to digital systems. Vast new information networks, most notably the Internet, have emerged. These advances are opening up new horizons across a wide field of human endeavor. The revolution has scarcely begun. Only the most imaginative and courageous would dare guess how devices such as the computer, the printer or the TV set will evolve over the next decade or two – and how consumers and businesses will use them.

But some trends are gradually becoming clear. One is a growing demand for these technologies to be packaged in versatile, low-cost, easy-to-use “information appliances.” New applications are opening up as these devices are linked to one another in innovative ways. We expect that printers will soon be attached not only to computers but to other consumer-electronics products such as televisions, VCRs and photographic equipment. In the office, multifunction devices are appearing that blend the capabilities of printers, scanners, copiers and fax machines – not to mention computers. In the future, these devices will be taken for granted as toasters and microwaves are today.

The rapid convergence of different technologies has translated into fierce, unremitting competition on a scale never before experienced in our industry. For a start, the number of players has increased dramatically. Established companies that previously operated in quite separate fields now tread on each other’s toes in the rush to find products that will grab the consumer’s imagination. And then there’s a horde of agile newcomers who are able to nip the heels of even the biggest players by finding innovative and lucrative niches in areas such as software and network systems.

The advantage that a company gets from bringing a successful new product to market is therefore much more fleeting than it used to be. Consumer expectations are constantly rising, quickly making new products obsolete and increasing pressure to develop newer and better ones. We at Hewlett-Packard used to assume that a new product had a life cycle of three to five years. Today, the average life span is only about 12 months.

Competition has been intensified by a dramatic compression of the product development process. In the past, product development moved in clear, sequential stages like a relay race in which the baton gets passed from one runner to another. A more appropriate analogy today would be a hockey game, where the puck gets passed frequently among players in a very interactive and (hopefully) collaborative way. This enables new products to be devised and brought to market much more quickly than in the past.

Competition no longer respects national frontiers or time zones. I’m reminded of John Donne’s famous line: “No man is an island, entire of itself.” What applied to ordinary people in 17th century England applies equally to countries today. Falling trade barriers and stunning advances in communications mean that few, if any, countries are immune from the pressures of the global marketplace.

Any business hoping to succeed in the global marketplace has no choice but to be truly global itself. HP aims to be just that. Our computer manufacturing division, for instance, operates in 10 different locations in four countries. Its employees work in five different languages and operate in six time zones – whose business hours don’t overlap.

Electronic mail and phone voice-mail break down the barriers imposed by time and geography. Shared databases and terminals enable our plants to collaborate on design and production. The extent of our worldwide data network and the volume of daily traffic it carries are truly enormous. The network serves 400 sites and transmits 3.4 billion characters of information each month.

We do more than 500,000 electronic data interchanges a month with more than 3,000 external partners. We also send 21 million electronic mail messages monthly, and at times I think I get them all.

These networks and devices enable the organization to operate seamlessly 24 hours a day. As the sun sets on one location, our engineers, manufacturing, marketing and sales people can pass a problem or project onto their colleagues halfway around the world. And they can do so instantaneously.

These capabilities and the flexibility they provide are simply logical extensions of a corporate culture that prizes nimbleness and responsiveness to the marketplace wherever it might be located. They enhance our ability to move with our markets, a strength that has contributed significantly to our success over the years.

The need to design, produce and sell on a global scale means that investment decisions can also no longer be compartmentalized by country, or even by region. Competition among producers for the consumer’s dollar is matched these days by competition among countries for the investor’s dollar. As a result, global companies such as ours base almost every major investment decision on proposals from several different countries around the world.

The decision where to locate a new plant or a new research facility is seldom a simple one. Labor costs in China or India, for example, may be compared to the tax advantages of Singapore, Ireland or Puerto Rico. Depending on the level of sophistication required in research or product engineering, the decision may also include consideration of broader issues such as access to universities, and other sources of advanced knowledge and skills.

Where does Canada fit in this competitive arena?

The information technology sector already makes an important contribution to this country’s economic well-being. According to Industry Canada estimates, IT makes up about 6% of Canada’s total gross domestic product. Our industry employs some 312,000 talented people, excluding the 35,000 who are self-employed. Exports of manufactured information technology goods exceeded $16 billion last year, while software sales contributed another $1.3 billion to the balance of payments.

However, the IT industry’s role cannot be measured only in terms of output and exports. We are a substantial consumer of goods and services produced by others, ranging from plastics and metals to legal, marketing and advertising services.

This economic growth is vital to Canada and – trust me – the industry didn’t get there with a focus on cost reduction alone. We have never taken our eyes off the need for strong and sustained investment in R&D. And if you look at HP specifically, we invest about 8% of our global revenue in R&D. While here in Canada, over the past three years, we invested at a rate of 20% of our manufacturing revenue per year. The fact is, Canada has to fight harder than many other countries – such as the US, Japan, Germany or the emerging powerhouses of Asia – for its share of the investment pie.

Hewlett-Packard’s sales in Canada make up barely 3% of our worldwide revenues. Promoting a major investment in this country on the basis of how it would position us in the domestic market is a nonstarter. In order to invest in Canada, we need to demonstrate that products made here are worthy of a global mandate.

Since I arrived in this country three years ago, I’ve been struck by the numerous strengths that Canada possesses to attract investment in the information technology field. In research and development, a crucial part of our business, Canada is regarded as a highly cost-effective competitor with the US.

According to the Conference Board, Canada has one of the most advantageous R&D environments in the world. HP’s own studies indicate that engineering talent costs about 35% less here than in the US. The amount of R&D that we are able to buy for one dollar south of the border costs just 52 cents here.

The quality of Canadian talent is also impressive. According to data compiled in 1993 by the National Education Standards of Los Angeles, Canada’s top engineering schools are every bit as good as the top 25 in the US. The University of Toronto, McGill and McMaster rank among the top six in North America in electrical engineering. The U of T holds the number three spot in computer engineering. It’s almost conventional wisdom that Microsoft hires more computer science grads from the University of Waterloo than from any other university in the world.

Canada also offers an excellent infrastructure, ranging from modern telecommunications and transport networks to an attractive lifestyle. The public policy environment, a crucial part of any investment decision, has become increasingly supportive in recent years.

Tax credits are a critical reason for Canada’s competitiveness in research and development. The North American Free Trade Agreement has led to an explosion of exports to our partners. Deregulation of telecommunications services is stimulating both competition and collaboration in the information technology field, as well as helping users to cut costs.

The recent budget reflected recognition of our industry’s contribution to job creation and economic growth. We welcome the creation of Technology Partnerships Canada, a $150-million fund to enhance the competitiveness of high-technology companies, especially if it is targeted at entrepreneurial, export-oriented companies, and also used to promote linkages between small and large players.

The program is an excellent example of the kind of cooperation and partnering between government and business that can produce long-term benefits for the economy. We endorse both the program and the concept strongly.

Even more welcome is the drive by Ottawa and the provinces to put their fiscal houses in order. Balanced budgets should help keep down interest rates, which in turn should enhance Canada’s overall growth potential and its long-term competitiveness in international trade and investment.

We at Hewlett-Packard are doing our bit to build on these strengths. HP Canada celebrates its 35th anniversary this year. Since our formation in 1961, we have developed a highly-trained workforce of some 1,600 people. In the past four years alone, our annual sales have almost doubled to over $1.2 billion, and our employment is up 20%.

One tangible measure of our success is that HP Canada has competed for – and won – five global product mandates in the past 10 years. These mandates stretch across the entire product development process – from research and development, through manufacturing to marketing. Four of the five mandates fall into the fields of telecommunications and networking, which HP Canada has chosen as its specialties. Each unit has been kept compact to preserve its entrepreneurial and competitive spirit.

We are especially proud of HP Canada’s success in the international marketplace. Our overall exports have soared by 40% over the past three years. And our R&D operations in Canada are almost totally dedicated to world markets. More than 96% of the products and software they design and develop are exported. These achievements would not have been possible without the fruitful partnerships that we have forged with many local businesses, in particular software suppliers. Many of these small and mid-sized Canadian companies have carved out a strong reputation far beyond this country’s borders. Their presence assures investors in Canada of a world-class supplier chain during a product’s life-cycle. And cooperation between foreign investors and local suppliers creates enormous benefits for the domestic economy. The more competitive Canadian suppliers are, the more business we can push their way, enabling all of us to expand, create jobs and contribute to the country’s overall well-being.

Several years ago we established an International Procurement Office here to help us find world-class Canadian companies and to promote their products and services to HP divisions based outside the country. The office serves as a highly efficient sales channel for these companies into the heart of HP’s worldwide operations. It has helped them to rapidly develop offshore markets and gain invaluable international experience. The qualities we look for include the use of technology, the implementation of total quality management, a demonstrated responsiveness to customers, a record for on-time delivery, financial stability, sound business planning and excellent personnel programs. A lot of Canadian companies meet these criteria, and we are benefiting from what they have to offer.

Reaching out to outside suppliers is an important part of the way HP does business. Not even the biggest companies today can afford to engage in complex production processes alone. Whether the process is driven by customer input, or the need to match or better a competitor’s new product, outsourcing can make an invaluable contribution towards improving the quality of our products, and the speed with which we are able to develop and supply them. One of HP Canada’s five world mandates, for sophisticated electronic switching products, involves no manufacturing or assembly capability within the company at all. We develop and market the products, but they are put together entirely by an outside supplier.

We also never forget that HP is an integral part of the communities where we do business. I have already mentioned the world-mandate for technology and the HP procurement program. In addition, we actively recruit highly qualified graduates of excellent Canadian universities, and provide financial support for those institutions’ basic research capabilities.

And our co-op programs let us reach out to young university students and even into high schools, giving these students valuable work experience. In addition, we focus a large component of our donation budget at the primary school level.

The relationship has been mutually beneficial.

However, neither companies nor countries can afford to rest on their laurels. It helps occasionally to look back on history. Remember the fate of the Spanish Armada? The Invincible Armada – as it was known – sailed from Spain towards England in 1588 with huge, three-story tall galleons. The 9,000 sailors and 16,000 infantry on board were ready for the traditional strategy of man-to-man combat, with ships side-by-side. But the British changed the rules. They had smaller, more agile ships. And they had cannons that could shoot from a distance. We all know the outcome of the battle. Spain’s control of the seas was over, and England became the new ascendant power.

The danger of complacency is as real today as it was on the high seas four centuries ago. Change can quickly and without warning turn winners into losers, whether they be companies like Hewlett-Packard or countries like Canada. In both cases, we can’t afford to ease up in our drive to remain ahead of the pack. As far as HP is concerned, we continually seek ways not only to build on existing strengths, but to develop new ones.

It seems to me that Canada faces the same type of challenge. Several areas spring to mind where vigilance will be needed to protect gains made in the past few years. Keeping costs under control must remain a high priority. We in the business community are especially encouraged by Bank of Canada governor Gordon Thiessen’s determination to hold the annual inflation rate within a 1 to 3% band.

For the first time in more than two decades, all the provinces as well as the federal government now appear committed to nursing the country’s public finances back to health. They should be encouraged to sustain this commitment at every opportunity. But by themselves deficit reductions (and in the private sector, downsizing), won’t take us where we need to go. A company’s vision and a country’s vision must be built on long-term growth.

In an economy as open as Canada’s, where exports have recently contributed over 40% of total output, it’s imperative that government and business continue to encourage a high level of productivity. Progress made in deregulation, removing protectionist barriers and training workers, to name just a few, will help determine to what extent Canada is able to maintain its competitive edge into the 21st century. And I want to emphasize that business needs to take a leading role in retraining the workforce and moving to lifelong learning. It is as much our responsibility as others. Quoting Eric Hoffer: “In times of drastic change, it is the learners that inherit the future.”

We’re enthusiastic, even excited, about our future in Canada. If we can each play to our strengths, HP’s investment in this vibrant and attractive environment is bound to grow for years to come.

STRATEGIC PLANNING AT HEWLETT-PACKARD

Paul Tsaparis
Vice-President & General Manager, Computer Organization, Hewlett-Packard Canada Limited

Business Outlook Conference, Toronto, October 8, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

I’m pleased to be able to share Hewlett-Packard’s perspective on strategic planning. It’s at the heart of our business, after all, and we take it very seriously. But that wasn’t always the case.

Back in 1938, Dave Packard and Bill Hewlett got together to form a company. A simple coin toss decided the company’s name. That’s right – if it had been tails, I’d be talking to you about the Packard-Hewlett approach. And the planning process was so casual that the minutes of HP’s first official meeting stated: “The question of what to manufacture was postponed to a later date.”

Hewlett-Packard has come a long way since that first meeting. And so has our strategic planning. Today I’d like to share with you the five key strengths that have made our strategic planning process a force driving Hewlett-Packard’s remarkable growth.

The first strength of our planning process is vision. Our strategic planning is guided by a clear vision of what Hewlett-Packard is and where we’re heading. This broad sense of direction focuses our many product groups and divisions. It helps explain the sustained success we’ve had since our inception.

In fact, since the mid-1950s, our revenue has increased by 20% a year, year in and year out. And profits have kept pace. We entered the Fortune 500 in 1962 and have steadily climbed that list. We moved into the top 50 in 1988. And last year we ranked number 16.

We’ve continued to grow in the 1990s. In fact, between 1992 and 1996 we more than doubled our revenues, while increasing the number of employees by only 10%. These figures are not the result of chance. They reflect the importance of our core principles in all that we do, and particularly in our strategic planning.

This vision is communicated in several ways. In part it reflects what we call the “HP Way.” This is a set of five values enunciated by our founders. They are: trust and respect for individuals, commitment to high-level achievement and contribution, uncompromising integrity, teamwork, and flexibility and innovation. These core values are the foundation upon which we do everything. They’re our guideposts – our anchor in the storm.

Our planning is also guided by more specific long-range goals. These are called Hoshins. Hoshin is a Japanese word meaning “a shining piece of metal that points the direction” – in other words, a compass.

Lew Platt, our president and CEO, has two Hoshins. The first is to achieve the number-one position in customer loyalty and satisfaction in all businesses and geographic areas. The second is to ensure HP’s leadership as the “Best Place to Work” for all employees.

These Hoshins are not hollow pronouncements. They’re deeply felt business objectives that cascade down through the organization. Each business unit translates the Hoshin into terms that reflect its own mission. So for HP Canada, Platt’s first objective becomes this Hoshin: we want to be perceived by our customers and partners as a leader in information management. His second objective sounds very similar at HP Canada. Our Hoshin is to make HP Canada a “Best Place to Work” for all employees.

Senior management also guides the individual units in still another way, with long-term strategic planning. These projections, which might look three, four or five years into the future, help the individual groups make their own plans. The fact that we have vision and foresight, that we are able to actually see what’s going to happen and then act upon it, enables us to move ahead of the market.

Let me give you an example. During the 1980s, HP looked ahead and saw that open computing systems would be the way of the future. Most companies still relied on proprietary equipment, so how did we know what was ahead? We looked at the market, and began to see flattening growth in proprietary systems. We also listened to the customer. The customer might be saying, “The cost of computing is way too high.” Or they might say, “We don’t like the fact we’re locked in to a specific supplier.” We take such comments very, very seriously – even when they’re not our customers. And we change.

We also looked at our competition, and saw that they were strong in proprietary systems. No one had emerged as a leader in open systems – yet. We would claim that new, high ground. And we did. We were among the first to shift to open systems. We leapfrogged many other suppliers, and were the leader in market growth from the early 1980s to the early 1990s. Today we’re number one in the UNIX marketplace, and number one in client-server based computing. We went from being a spectator in the computer business to being a leader. All because of our foresight – and planning.

Today we see another wave of technology moving forward. It’s the emergence of Microsoft and NT. And with it, the commoditization of technology. So we’re responding by moving away from pure products toward a much more customer-focused organization. We do this not because we’re passionate about riding each new wave of technology – we do it because we listen to our customers. They set our direction, our course.

In all the ways I’ve described, a sense of vision is critical to our strategic planning process. The Book of Proverbs states that “Where there is no vision, the people perish” (Proverbs 29:18). We might add that without vision, companies perish, too. And with vision, companies can stay ahead of the market as HP has done.

The second strength of our strategic planning is that it’s decentralized. And it’s hard to imagine it otherwise. Hewlett-Packard has nearly 112,000 employees in 110 nations. Our marketing reaches even more places. We sell over 87,000 products and services in 250 countries. No central office could manage detailed projections for all these far-flung units. HP was committed to decentralization even when it was a small company with only a few offices. That was long before the concept became fashionable.

Our product divisions are fully functioning global businesses with their own research and development, marketing, administration, sales and support. They form the nucleus of Hewlett-Packard, and are the primary drivers of its growth and profitability. So our planning is multi-business. It’s computers, services, and test-and-measurement equipment.

The results of this decentralized approach have been impressive. To give you an example: it wasn’t our executives who decided HP would enter the printer business. This proposal came from the ranks, from someone with a brilliant idea. Working out of a strip mall in Boise, Idaho, this individual and a small team of colleagues helped build a division that today brings in 40% of HP’s revenues. So planning takes place everywhere at HP – in strip malls, in basements, in offices – anywhere that HP can be found. In fact, there’s no such thing as a planning department at Hewlett-Packard. We’re all planners.

Decentralization also means that some divisions make great leaps, while others learn from them. In the 1970s, our Japanese subsidiary instituted new quality-control measures. They brought the failure rate on printed circuit boards down to 10 per million. That was 400 times better than the failure rate at our other divisions. They also taught valuable lessons to every other HP unit.

Decentralization also leads to “global product mandates.” There is competition among the HP units to see which groups will take the lead in particular products and services. During the past ten years HP Canada has won five global product mandates. Four of the five are in telecommunications and networks, areas of great strength for us.

So decentralization has a huge role to play in our planning process. But there are also other qualities that come into play. The third strength of our planning process is that it emphasizes innovation. This commitment shapes all our plans and our devotion to research and development. And it’s been one of the keys to our success in the rapidly changing world of high technology.

If you’ve seen some of our recent ads, you’ll recall our fondness for the metaphor of the whirlwind or tornado. It seems a good description of the turbulent pace of change that marks virtually every product and service area we’re involved in. But we don’t view turbulence as a negative. As the ad says: “Instead of merely managing chaos, why not capitalize on it?” And that’s exactly what we do. Instead of getting battered by change, we harness it, and do the same for our clients.

Innovation is the way we achieve this leadership through change. In 1995, more than half our revenue came from products introduced during the last two years. We once assumed that a new offering had a life cycle of three to five years. Today the average life span is 12 months. Our policy is to render our own products obsolete, not to wait for the competition to do so. We challenge our own assumptions, and cut prices on ourselves.

New products mean a heavy emphasis on research and development. We rank fifth in spending on R&D among US-based companies. Globally, we devote over 7% of our revenues to R&D. Last year that meant outlays of $2.3 billion on innovation.

And here in Canada the percentage spent on R&D is still higher. Last year we invested 20% of our manufacturing revenue in development. And virtually all those products are ones that are sold on the world market. So innovation is a mainstay of our strategic planning process.

The next and fourth strength of our planning process is that it’s responsive to the needs and expectations of our customers. This quality, like the others I have mentioned, is crucial to our success. We’ll continue to grow only if we go beyond simply satisfying the needs of our clients and work to delight them. But as with the other concepts I’ve introduced, “delighting the customer” is no mere slogan at HP. It is a goal that’s deeply felt and deeply embedded in our planning process.

It’s here that I’d like to talk about the Ten Step process that lies at the heart of much of our planning. If you speak to an HP employee and ask how plans are formulated, Ten Step is sure to enter the conversation. It’s the process every unit follows in formulating its plans for the coming year.

Ten Step demands that we be responsive to our customers. This approach calls on us to find out what the customer needs and expects, and how the competition is addressing those needs. And that’s where much of our effort is focused.

Completing a Ten Step plan, which every product group does each year, demands market research. We have to understand how our customers run their day-to-day business, and what their strategic concerns are.

I thought at one point about elaborating the entire Ten Step strategic planning process – complete with charts and graphs. But I remembered the Conference Board’s advice: “Don’t take the audience through your planning process.” So, let me just give you an example of how we used the Ten Step to turn our personal computer division around.

Several years ago, we weren’t even on the charts as a maker of personal computers. We ranked a dismal 27th in North America. Our units were rugged. They could fall off a workbench and keep functioning. But they were priced 30% above the market and few people were buying them.

Clearly, we had to listen more closely to our customers, as I mentioned earlier in my remarks. We had to respond to their demands. And what our customers told us, as part of the Ten Step process, was that price mattered. Many consumers view computers as boxes, with only a slight premium attached to quality. It’s what has been called the commoditization of technology.

So in 1992 our PC unit resolved that our computers would sell for no more than 5% above the lowest-priced models on the market. That decision meant revamping manufacturing and distribution. Our PC division addressed those needs.

And the results have been gratifying. This summer we moved into third place in PC sales, ahead of Dell, and just behind IBM and Compaq. Personal Computers now account for 14% of our revenues. All because we listened to the customer and responded. Responsiveness is key to our Ten Step process, and it’s key to our success as a company.

The fifth strength of strategic planning at HP is that it’s constant. It’s driven by the calendar and by events. And this too has been a secret of our success. As a result of this approach we’re always in a planning mode. We’re never far removed from the needs of our customers or from the development of new products.

Regular planning meetings are the “pulse” of Hewlett-Packard. Because we’re involved in planning year round. Innovating or listening to customers isn’t something we do sporadically. It’s part of our schedule.

I should note that planning at HP can also be event-driven. Event-driven planning occurs when internal or external forces bring into question the assumptions that shape our activities. No group or division has to wait for a set meeting time to respond to new customer demands or the actions of a competitor. Planning is a way of life at Hewlett-Packard.

We reinforce this planning process by measuring, at each stage, the progress made toward our objectives. We also reinforce this planning by linking employee compensation – another regular activity – to results.

I’d like to conclude by leaving you with my one message: a key reason why Hewlett-Packard has consistently been so successful is that its planning process has so many strengths. It is guided by a vision, decentralized, innovative, responsive, and constant.

Despite our best efforts to peer into the future, we at Hewlett-Packard have no crystal ball. We don’t know exactly which products the market will demand. But we do know that the pace of change will remain rapid, and the competition in all our product areas, intense. We know that maintaining our pace of growth in the years ahead will be challenging. Growing the company has been a demanding undertaking ever since Dave Packard and Bill Hewlett made that coin toss some 60 years ago.

And that’s why our planning process is far more than a coin toss. It’s a rigorous, ongoing, and universal activity throughout our business. It may even sometimes get boring. But it works. And when we speak to other companies about HP they leave saying, “That’s a well-run company.” We execute very well. There’s not a lot of glamour in very good execution, but it has meant a tremendous amount of business success for us.

Our strategic planning process is a microcosm of the way we run the entire company. Great execution. Great results.

THE FUTURE OF COMPUTING

Paul Tsaparis
President & CEO, Hewlett-Packard Canada

Address to Internet World ’99, Toronto, February 3, 1999
Published in The Corporate Report No. 27 (June 30, 1999)

Today I would like to share with you my views on the future of computing and how we are working at HP to create the digital society of the future. During this time I’d like to explore three new trends that are changing the world of information technology. These developments will bring with them many changes in how we work and how we live our lives. These changes also represent possibilities. For example: opportunities to reach more customers directly, to deal more efficiently with suppliers and partners, and to lower the cost of doing business. In many cases, these opportunities will become necessities as IT changes the very rules of business. So let’s look at this digital society.

You might ask what’s causing all this. It’s certainly true that everything digital is getting cheaper, thanks to declines in the prices of semiconductors and other digital components. More importantly, we’re seeing the power of connected computing in creating the emerging digital society, which is giving us a world where just about everyone and everything is going to be connected. The World Wide Web as we know it is just the first step in giving the world an easy-to-use way to link all types of electronic information and, more recently, even devices, whether these are computers or cars or surprising things like vending machines on the web. The rate of change challenges even our ability to think about it.

Here are a few examples of what I mean. Some years ago, the idea that we might someday have a computer in a lock was generally considered a fantasy. And now what do we have? Every room in most hotels has a microprocessor, which shows how the fantastic can become routine in just a few years. Likewise, I can foresee the day when wireless communication devices costing pennies will become common. Once this comes about, think how they might be used. Perhaps every piece of clothing that you own will come with one. This will enable intelligent clothes washers to automatically adjust themselves with knowledge of the fabrics they are washing. Everyone here knows how this world of connected computing is changing business. But it’s also changing education, investment, entertainment, the media, recreation, government – in fact, most facets of modern society.

Let me pick just one example, government. Community Storefronts is an initiative that enables small businesses, charities and social service nonprofit organizations across Canada to operate secure internet sites for electronic commerce transactions. Fourteen demonstration centers are set up across Canada, mostly in rural areas, where local businesses offer unique and safe online shopping opportunities to the world. Community Storefronts will encourage Canadian small businesses to adopt the use of electronic commerce transactions, and is demonstrating to consumers that electronic commerce provides a safe way to shop.

Who’s involved? Community Storefronts is the result of partnerships between the federal government and private sector companies. Industry Canada collaborated with leading-edge electronic commerce service providers: GE Capital Information Technology Solutions, TouchNet Canada, Strategic Profits Inc., Royal Bank of Canada, Open Market, and Hewlett-Packard.

When I stand back from the steady stream of announcements in our industry, what I actually see emerging is a digital society – one where most people, most things, and most activities are linked digitally, one where any thing or activity that can go digital, will go digital. So what are the three key technology trends that are creating this digital society? In my remaining time today, I’ll look first at the internet, at how it is changing the way people and devices access and share information. I’ll also say a few words about technology HP is developing to upgrade the internet to be a business-class tool. Next I’ll look at the world of computer systems, at the impact that low-cost mass-produced technology will have on computers, and at some new ideas HP has for designing computer systems. Finally, I’ll spend a few minutes looking beyond the PC and will say a few words about new types of digital devices and information appliances.

I think that these new devices will be very important to this audience because they will be the key to connecting many more millions of people all over the world to your businesses. These new devices will be critical because they will bring easy, low-cost access to all people. This is essential for the creation of a digital society.

First, let’s look at the internet. The internet became so popular because it provides a universal gateway independent of applications, operating systems, or hardware architecture. The explosive growth occurred when the key elements for creating a mass market came into place – low-cost PCs, the easy-to-use Mosaic browser, consumer-oriented online services, and a growing volume of content chasing an ever-growing number of online consumers.

Because of this combination we’ve seen a dramatic increase in internet usage. According to a recent IDC study, the number of people across the globe accessing the World Wide Web rose from 14 million in 1995 to nearly 100 million this year. As much as the internet and the World Wide Web have changed computing so far, we really haven’t seen anything yet. At the end of the desert war in North Africa, Winston Churchill said, “Now is not the end. It is not even the beginning of the end. But it is perhaps the end of the beginning.” I believe that is in fact where we are today with the web and the internet.

The internet is rapidly becoming the backbone of enterprise computing and the basis for global commerce. When I look into the future of electronic commerce, this is what I see: Any product that can be transported in digital form will be. That includes books, photographs, newspapers, video and audio CDs, games, radio programs, and more. The list is endless. In fact, a radio station in California has a strategy to become the premier jazz music station around the world, and there’s no reason it can’t be. And of course when you listen to radio over the internet, there isn’t any static or distance limitation.

For physical goods that cannot be transported over the internet, you’ll be able to source them and order them via the web. And you’ll be able to pick these goods up from local distribution points on the way home from work or have them delivered by a parcel delivery service.

These changes have already begun and Canada is well situated to take advantage of them. A 1998 World Telecommunications Development Report indicates that Canada ranks second only to the US in the number of internet users per 10,000 inhabitants of the G7 nations. Additionally, the Global Competitiveness Report, published in 1998, indicates that Canada ranks first in the world in knowledge workers.

Now let’s look at the volume or amount of online commerce as measured in dollars for just Canada. In a study in June of 1998, IDC Canada forecasted that by the year 2002, Canadian internet commerce revenue would be $13.3 billion. Of that number, $11.1 billion will be business to business while $2.2 billion will be consumer to business.

Because the internet lets companies easily cross borders, it is worth looking at the global number, which is $525 billion in internet commerce by 2002. These growth rates represent revolutionary change because much of this growth will displace existing forms of commerce, and these changes will present challenges to business, trade unions and government.

The old adage about what makes a business successful – location, location, location – may no longer apply. But if you’ve been watching the internet stocks lately, it’s now the location of your icon that’s important. We’ve seen how that can result in a phenomenal PE ratio and stock price.

As you can see, the internet brings with it great possibilities as a business tool, but we won’t get there overnight. The original design of the internet did not conceive of the applications and scale of activity we have today. So we have to take the internet to another level and give it the reliability, security, and quality of service that you need and expect in the other elements of your information systems. At HP’s research laboratories, we have teams working on software to improve the quality of service available over the web. It is the ability to control quality of service that will give you a business-class internet.

Today, I’d like to tell you about four of our projects in this area. The first of these is software for HP systems to prevent web server overload. These overloads tend to happen at critical times, such as times of financial turmoil. For example, in the steep stock market decline experienced in the US in October 1997, a surge of customer transactions brought severe overloads to servers at a number of major electronic brokerage houses. Most customers suffered delays while many others could not execute their trades at all.

When ordinary web servers experience heavy overloads, they randomly drop requests in the middle of user sessions, frequently causing users to leave the site and not be able to complete their transaction or purchase. At HP Labs we have something we call “Admission Control” technology that is designed to mitigate this situation. The basic concept is quite simple: by actively managing server load, this tool enables web servers to deliver both higher throughput and predictable quality of service to business transactions. It works by creating the idea of a session – a user doing a task. This concept doesn’t exist on traditional web servers.

Here’s how it works. As each new data request is received, the software first decides if it is part of an existing user session. If so, the server completes the request. If the data request involves a new user session, the software determines if the server can handle it. Once a session is in progress, the server will always have capacity to deliver a predictable response time.

We have also developed software that lets companies create user classes. By dividing users into different classes, companies can ensure that their best customers get the best website performance. Think of it as a frequent-flyer program for websites. With this software, an online trading firm could tell its customers with the largest accounts that their stock trades would get preferential treatment. This would even hold true on days with high levels of market activity. Those with smaller accounts receive the traditional “best available service.”

This software will also let companies create classes of service. In this case, the preferential treatment is not based on who you are but instead on the service or activity you are doing. For example, the software could give priority to orders coming in from the sales team on the last day of a financial quarter. The current generation of this technology is now available from HP as our web quality of service technology. Its aptly named Web QoS. Also, HP and Cisco are working together to expand the idea of web quality of service so that it integrates networks and servers. The aim is to improve the end-to-end quality of service.

In mid-September, HP and Cisco announced the first step in this longer-term effort – an intelligent way to dynamically balance internet traffic in clusters of HP servers. We are continuing to explore other ways to improve quality of service through the integration of server and networking technology.

Next, let’s look at virtual business communities. As internet commerce evolves, businesses will use the internet for all forms of complex commercial transactions. This is a great deal more complicated than the traditional consumer internet shopping cart experience. For this to occur, we’ll need to create new types of secure environments, something we call “virtual business communities.”

First, we are designing these communities to be easier to establish and more flexible than today’s EDI technology allows. This will allow small and medium enterprises to fully exploit the potential of electronic commerce. An example of this type of virtual business community is the website for the 1998 World Cup. HP supplied the information technology for the World Cup, and in partnership with banks, credit card companies, logistics companies, and a catalog sales company, created a site that for a few months was one of the most popular on the web.

This was a temporary virtual business, a group of companies rapidly assembled for a few months. The website for this virtual business even set a new world record of 74 million hits in one day. You didn’t hear much about this website in the news – which is good news – because it worked flawlessly.

Closer to home is our work with Royal Bank of Canada. In September 1998, Royal Bank and Hewlett-Packard implemented VeriFone’s end-to-end secure internet payment solution. This provides their consumers and merchants with the highest level of security offered for internet payment today. Royal Bank was the first live SET implementation in North America. SET is a standardized internet protocol, which provides the capability to authenticate merchants, banks and cardholders participating in the transaction, while providing the data encryption to enhance confidentiality and payment integrity.

But we are not stopping there. Right now, we are developing the next generation of technology for virtual business communities. Several key technologies are at the heart of this next generation. First is a platform for explicit management of security, workflow, and privileges within the community. These are critical because the real frontier in security today isn’t key length. The real problem is managing who has what privileges. Next are a set of commercial-grade payment protocols and multiparty security protocols that are required for commercial transactions. Together, these technologies are just a sample of what we are developing to create the business-class internet that you can count on.

Now I’d like to move on to my second key theme today – the future of computer systems and how the low-cost, high-volume components from Intel and others – are leading to a fundamental change in the world of information technology. Not only is this leading to lower costs but paradoxically because of the very high volumes, this business model is enabling much larger R&D investments, enabling even more rapid progress.

At HP, we started looking at this issue in the early 1990s and came to some very important conclusions. If you look at the world then – and certainly at much of the information-technology world that we have today – you see that really there are two computer industries: the PC world and the systems world. The PC world is characterized by very low-cost products, widespread distribution, and, in general, less-sophisticated capabilities and less performance. At the same time, there is the computer-systems world, which is characterized by large systems that run in corporate environments and which power the digital infrastructure around the world. These systems are large and powerful and have very scalable architectures with sophisticated software.

However, by looking at technology and economic trends, it was clear that a new economic model for computing was emerging, particularly with respect to the hardware platforms. We realized that, given the effect of these mass-market technologies, we could see a new model emerge. This is our view of how computing will evolve, propelled by powerful economic forces. In the future, rather than having two distinct worlds, I believe that a merged world will develop, where we have one architecture family that is leveraging billions of dollars of investment by Intel and by its partners, including HP, investments that provide common building blocks that can be used in many different ways.

HP and Intel have been developing a strategy of two architecture families since 1994: the IA-32, a 32-bit architecture generally referred to as the x86, and its big brother, the high-performance 64-bit architecture, the IA-64, which can still run all existing IA-32 applications. Combined, this architecture family can reach from the lowest-cost home PC to the top of the data center. The low end will look much like today’s PC industry – that is, industry-standard platforms with a high degree of standardization, each company innovating around this standard. Above that are what I call enhanced platforms, which have features and performance beyond what PCs offer. These more advanced systems offer high-powered graphics and in servers, better availability, scalability, and I/O (input/output).

And at the very high end, we’ll have what I call “premium systems.” These are the systems that are designed to meet the most demanding requirements of high-end applications in terms of availability, performance, scalability, and providing smooth growth paths for companies having large investments in their IT infrastructure. These systems, again, will be built on top of many of the same building blocks that are used in industry-standard platforms.

We believe that at the low-end to midrange servers, the NT family of operating systems will be used. At the same time, servers running enterprise-class UNIX will primarily be focused on the midrange and high-end servers. In the midrange, customer requirements will drive the choice. On top of all of this is the software that you really care about the most, applications and the key middleware to enable e-commerce, internet applications, and the software to allow smooth inter-operation across both NT and UNIX. In addition, we are developing these systems for the workloads of the future.

The emergence of the internet and of web applications built upon it has major consequences for system design. We can expect at least factor-of-10 changes in system loads and bandwidth requirements as more web content goes from static to dynamic and as electronic commerce becomes commonplace.

Because of these new demands, we are developing our next-generation systems with a new approach. Instead of using a processor-centric design – where the central processor is directly involved with memory and I/O – we are developing systems that distribute intelligence across several subsystems, such as memory, communications, and I/O. These operate in parallel to remove work from the central processor.

The Intelligent I/O initiative (I2O) was an HP Labs project that we helped drive to become an industry standard. It will allow both hardware and software vendors to create value-added systems. For example, ones with high-speed compression or encryption of I/O, all without changes to the operating system or microprocessor. More recently, HP teamed with IBM and Compaq to propose an advanced server I/O spec called PCI-X, which promises up to a six-fold increase in overall server I/O performance.

Last, I’ll say a few words about information appliances and other new types of digital devices that have begun to emerge. Yes, the PC will still be with us. But these new categories of devices won’t much resemble today’s PC either in form factor or business model. In fact, they’re more likely to resemble a cell phone than a PC.

Both Intel and Microsoft will be key suppliers for these new categories. However, the business model will be different. At the very essence of this new category is diversity and specialization, not standardization – or more accurately, standardizing at the network level, not at the platform level. By information appliances, I mean devices that are primarily portable and that are designed to improve the way we communicate, capture, store, process, and use information.

These are not general-purpose appliances, but instead are designed for specific tasks, which is the key to simplicity. The underlying principle is that people should be free to focus on the experience or the task, not on the tool. I mentioned earlier that these new information appliances will connect many more millions of people to the computer systems and networks you manage today. In some cases, your employees may use these devices to access information while they’re away from their desk. Other times, your customers may use these devices to access your website, to buy your goods or services. Simplicity, low cost, portability, and connectivity are the keys to creating a digital society where information is accessible by ordinary people all the time.

Let me introduce you to HP’s first information appliance – the HP CapShare 910 – announced late last year. We named it CapShare because of this device’s ability to capture and share information. One industry commentator referred to it as “the data sponge.” This device is about the size of a portable CD player, and it lets people capture, store, and share paper documents quite easily. With a free-form swiping motion, you can capture up to 50 letter-size pages in black and white from almost any document. You can then use the device’s built-in infrared beam to send what you’ve captured directly to a printer or to a PC for emailing or faxing. Despite all the technology inside this device, it masks that complexity and requires that users press only a few buttons like “capture” and “send.”

For most travelers, laptops can sometimes be overkill. Walk down the aisle of an airplane, and you’ll find most laptops being used for only a few functions: email, word processing, a calendar, and of course, solitaire. These tasks hardly stress the over-engineered capabilities of typical laptops. But they do use up their batteries.

If you’re like me, your flight usually lasts hours longer then your batteries. Help is on its way. On February 1, 1999, HP introduced the Jornada 420 palm-size PC. It is the first Microsoft Windows CE-based palm-size PC with color and one of the first products of its type to have designed-in support for integrated paging services. This palm-size PC offers single-handed access to email, personal information and real-time business data for on-the-go professionals.

HP is working on a wide range of information appliance technologies. Our view is that information appliances will someday become even more ubiquitous than the PC. For this to happen, though, there must be an industry standard that lets these devices communicate directly with each other and with printers and PCs. This ability to connect is what makes the device valuable, and we need to be able to do this without the complexity normally associated with networking – no configuration, no special drivers.

HP has created such a universal communications standard – called JetSend – that HP freely licenses to others. Thus far, many leading electronics makers, including Canon, Panasonic, Minolta, Xerox, and others, have licensed JetSend. The CapShare 910 uses JetSend to make its communications simple.

During my talk today, I’ve discussed the emerging “digital society” and looked at three key technology areas where HP is driving forward to bring about this new digital world, this new digital society, where each day more people, more information, more computers, and more devices are linked digitally. This new digital world will have a large affect on all of us – how we live, how we educate our children, how we communicate and how we do business.

We are all living in a time of unprecedented change that will alter society in the same way as the Industrial Revolution did. These changes will reorganize how and where we work, the meaning of national and regional borders, how we conduct business, and the nature of government. Today, in HP Labs, we are pursuing breakthrough technologies to help create that digital society and the tools and services that you will use to build it.

THE EVOLUTION FROM MULTINATIONAL TO GLOBAL

Jean-François Leprince
President, Hoechst Marion Roussel Canada

Pharmac 98, Toronto, October 6, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

As most multinational pharmaceutical organizations grow, each one faces a distinct challenge in transforming its collection of parallel, loosely connected structures into a more homogeneous, yet decentralized, global organization of the future. To evolve from multinational to truly global organizations, pharmaceutical companies must begin to manage their geographically diversified businesses in an entirely new manner. Globalization is the result of a new way of thinking that in turn generates a different modus operandi.

What are the factors and forces that have stimulated this different way of thinking and operating? The evolution presently occurring at Hoechst Marion Roussel is an example of how the transformation from a multinational to global organization affects not only the way we do business, but the way we think about doing business. Our move from multinational to global is not driven by our desire to achieve further geographic differentiation, but is stimulated by our conviction that we need to manage the geographically diverse business that we already possess differently.

To explain where Hoechst Marion Roussel is going, first let me tell you where we’ve been, as our strategies, processes and structures are not independent from our history. When I consider most of the other companies, Hoechst Marion Roussel truly is a multinational, multicultural company. In 1995, Hoechst acquired Marion Merrell Dow from the Dow Chemical company, along with a minority stake held by Roussel UCLAF. Marion Merrell Dow emerged from the union of Merrell Dow Pharmaceuticals with Marion Laboratories of Kansas City as the Hoechst Marion Roussel we know today. Just over three years after the merger, we are a CAD$8 billion global pharmaceutical company headquartered in Frankfurt, Germany, with 36,000 associates worldwide, 1,500 of them in R&D. With some CAD$1.4 billion planned this year for research and development – about 17% of sales – we rank among the top players in R&D.

What are the reasons for, and what is the purpose of this change? The socioeconomic and healthcare environment of most countries in which we operate is rapidly becoming more homogeneous. Freedom of movement of active principles, intermediate and finished goods is stimulated by the slow but steady realization of larger markets such as the European Common Market. This generates an attractive global procurement policy and manufacturing that is less geographically isolated. We are beginning to see the possibility of the formation of a cross-geographic distribution system. As well, the differences in regulatory standards across geographic boundaries are rapidly diminishing, especially in the assessment of efficacy, safety and quality of drugs. Promotion – a practice traditionally characterized by different approaches and methods – is now being similarly regulated in different countries. Additionally, we are experiencing a decrease in import barriers with the elimination of import laws and duties and the harmonization of regulatory requirements. More transparency or openness in the procedure for establishing prices is also being put into place in many countries, albeit with difficulty. Countries are rapidly eliminating price incentives linked to the establishment of manufacturing facilities.

A rapid change is taking place in the customer profile as well: as governments undertake major efforts to achieve healthcare care cost containment coupled with increased patient access to prescription drugs. In the past, the three customer functions of selecting among alternatives, paying for the product and consuming the product were exercised by three distinct customer groups, namely: the prescribing doctor, the government (or the third-party payer) and the patient, respectively. Today, new government regulations are complicating this picture. The freedom of prescribing grows more limited with the establishment of formularies at multiple levels. The power to select among alternative therapies is transferred from the prescribing doctor to committees in charge of formularies.

The introduction of patient co-payment policies makes the patient more sensitive to the economic aspects of therapy. Similarly, policies like those recently enacted in Germany, making physicians financially accountable for over-prescribing increase the economic sensitivity of the prescriber. Government attempts to mandate generic or even therapeutic substitution increase the level of competition for medicines in a particular market. The emerging scenario is one which characterizes the customer as having different needs and interests.

For pharmaceutical companies to survive, let alone thrive, much will depend on their ability to identify these diverse customers and satisfy their needs. Thus customer value becomes the touchstone by which each activity, project, program, process, functional or departmental component of the organization is judged. As these profound changes occur in the healthcare scenario around the world, a deep and far-reaching shift begins to materialize in the way pharmaceutical companies such as Hoechst Marion Roussel view themselves. The organization’s vision of itself as a value delivery system and the implementation of this vision in the practice of “partnering” bring about a paradigm shift in the organization’s way of thinking and operating – from a reductionist to a holistic view. The fundamental tenet of the reductionist view is that optimizing the individual components of the organization leads naturally to optimization of the whole.

The holistic view, on the other hand, dictates that optimizing the entire organization requires integrating its component parts. The reductionist believes that the structures – those being the departments, the functions, the geographical entities – represent the backbone of the organization. How and where things are done will be dictated by the nature and location of such structures. With the holistic view, processes dominate the structures, dictating how the structures operate. Because interdependence is so critical to the holistic view of the company as a system of interconnecting parts, the processes tend to be horizontal, crossing functional, departmental and geographic boundaries. The holistic view also brings about a fundamental change in the decision-making process. The culture of unified commitment is produced only if those functional groups that are charged with implementing the decision are also involved in the participatory, analytical phase – thus developing a sense of partnering across the organization.

Let me now describe to you how this shift from a reductionist to a holistic view of the organization affects our strategies and implementation in the fields of research & development and manufacturing. The survival of research-based pharmaceutical companies requires the continuous market introduction of products that satisfy unmet medical needs in an economically efficient manner. Therefore the objective of development is to establish a product’s “superiority” over existing therapeutic options, or its clinical efficacy versus existing therapeutic options or versus no treatment. Innovation is the key to success.

At Hoechst Marion Roussel, we have a new strategy, a new structure, a new leadership and a changed mindset. Since the merger, we had managed the research and development departments separately, and it was traditionally known as R&D. As a company, we trailed our best competitors in effectiveness and efficiency. Now we’ve created a new structure and called it Drug Innovation and Approval. DI&A represents what we really do as a seamless organization. We identify targets for drug discovery, lead compounds and rapidly develop them and submit them to regulatory agencies for approval to deliver to patients. As a global organization, under a single leadership team, our charter is to significantly improve our decision-making process, productivity and innovation, and to reduce our cycle time within the value chain. Many companies, including ours, are finding themselves with too many manufacturing plants and an overall excess of manufacturing capacity. This situation is the direct consequence of the industry’s reaction to two stimuli: the pricing policies of countries willing to grant higher product prices in exchange for investment in the country – usually in the form of a manufacturing plant, and secondly, the desire of the companies to organize each major country as a self-contained unit, typically led by a country manager with direct responsibility for a human resources department, sales and marketing, medical, finance and manufacturing. Typically, manufacturing would serve the needs of that country, with marginal exporting activities.

Since the time of the Hoechst Marion Roussel merger, we have begun implementing a different strategy. The number of manufacturing plants is reduced and divided into two classes: strategic and tactical sites. We believe that this global reorganization of our manufacturing activities allows us to harvest the benefits of the economies of scale and the concentration of specialists. It also allows us to rapidly scale up technical improvements to the full manufacturing level – a process which has been frustratingly slow in the past, owing to the need to adapt technologies to the different hardware in each manufacturing facility.

Furthermore, cost accounting, forecasting, planning and scheduling are more easily integrated. Materials procurement, which is decentralized at the strategic sites, is more efficient and economical. These changes all translate into opportunity for Canada. With a combination of high quality and low cost, Canada’s research and manufacturing are in an ideal position to benefit from globalization. The R&D performed here is being used around the world. Manufacturing sites which were used for national production only are now getting international mandates. But with these benefits come obligations. Competition for resources and investments is high. Companies have a wide choice of options available to them. They are looking for specific conditions: effective intellectual property protection, open market access, effective regulatory bodies, government-supported research and positive tax policies, which are favorable. So for Canada to be competitive, it must score well in all these areas.

A cultural shift is occurring in our industry. It is a shift brought about by powerful external forces that results in increased international homogeneity, and by an attitude that places customer satisfaction as the objective of whatever action the organization performs. This customer orientation, in turn, brings to light the concept of “stakeholders” and the necessity of partnering as a modus operandi. Ultimately, it brings about the vision of the organization as a whole, comprising many interdependent parts. Those of us who will be able to apply this holistic, globalized approach, without suppression, but rather with stimulation of a localized sense of ownership, will find themselves ahead in what will certainly be a fiercely competitive game.

BIG CHAINS ARE ESSENTIAL TO THE SURVIVAL OF QUALITY NEWSPAPERS

Peter Y. Atkinson
Vice-President & General Counsel, Hollinger Inc.

The Canadian Club of Toronto and the Empire Club, Toronto, May 21, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

When I accepted the invitation to address you today, my initial reaction was to discuss the issues involved in media concentration, without getting too wrapped up in newspaper publishing generally and Hollinger in particular. However, it didn’t take too much reflection to cause me to conclude that Hollinger’s role in newspaper publishing in Canada is a major issue and nothing would be more interesting than to deal with that topic directly.

Hollinger’s dominance of the Canadian newspaper publishing industry is a recent development. A year ago today, we owned only approximately 20% of the voting shares of Southam. With three newspapers in Quebec, eight in British Columbia, one in PEI, the recently acquired Sifton newspapers in Saskatchewan and some small newspapers in Ontario, Hollinger’s newspaper interests in Canada were relatively small in comparison to Thomson Newspapers and Southam.

All of that changed on May 26, 1996, when, in a surprising development, Power Corporation sold Hollinger its shares in Southam, thereby taking Hollinger’s interest in Southam to over 40%. With that came effective control, which became absolute control when Hollinger increased its ownership interest in Southam above 50% last December. The addition by Southam of 15 daily newspapers in Ontario and the Maritimes during the summer and fall of 1996 substantially increased Southam’s newspaper holdings and with it Hollinger’s interest in newspaper publishing in Canada.

These changes provoked considerable controversy which included a lawsuit from the Council of Canadians, a two-part critical analysis by the CBC (itself hardly a stranger to media concentration), and sporadic agitation in favor of laws to limit newspaper ownership. The knee-jerk reaction, from some quarters, was that Hollinger’s investments represented a terrible development in Canada – that Hollinger could be counted on to produce shoddy right-wing opinion pieces devoid of community content and of limited utility in fulfilling the important functions expected from the newspaper industry. It has certainly been a surprise to many of these critics that none of their dire predictions have proved to be true.

There is no doubt that the fears surrounding newspaper concentration are perfectly legitimate. An independent and vigorous press plays an important role in reporting the news and providing a critical commentary on matters of public interest, thereby helping to ensure the maintenance of a free and democratic society. As one leading jurist remarked more than 50 years ago: “The widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public.”

The philosophic underpinning for any reasonable discussion about newspaper concentration is therefore clear. But does it follow, so easily as some would contend, that newspaper concentration is antithetical to these principles? Or is there a basis for concluding that in today’s congested media environment, newspaper concentration may in fact enhance the maintenance of a free and vigorous press?

In considering these issues, one must avoid a sentimental or wistful approach. The technological revolution is in full swing. Few people sit in easy chairs after dinner reading and discussing stories from their newspapers while children do their homework or read stories by the fireplace. Generally speaking, many Canadians awaken to the radio and may often watch some television before leaving for work. Some are able to read the newspaper and magazines while traveling to and from work or at some other time during the day. On returning home, it takes some patience to sort through the ever-increasing pile of advertising flyers jammed into the mail slot. During the evenings, many people watch television. Internet surfing has become an addiction.

In all of this, we are bombarded by advertising messages. At one time most of this advertising came via your newspapers. Today only a small portion of it comes that way, yet advertising is the lifeblood of the newspaper; the survival of the industry depends upon it. If newspapers are to survive and flourish, they must maintain and enhance their share of advertising revenues.

Approximately 80% of most newspaper revenue comes from advertising; only about 20% is derived from circulation. When you purchase a newspaper, you are therefore paying only a fraction of the cost of that product. Advertisers have a myriad of choices and radio and television, magazines, ad mail and other vehicles, including the internet, regularly vie for the same advertising dollars. Small circulation newspapers have greater difficulty in obtaining national advertising revenues which are critical to the survival of the newspaper industry in Canada. Large newspaper chains are more attractive to advertisers. They offer a variety of services and can afford significant ad departments to plan and implement a strategy which gives the chain a fighting chance to attract significant advertising revenues. There is no doubt that small newspapers in particular have not been able to compete effectively in the highly competitive market for advertising.

Large newspaper groups can achieve economies of scale through newsprint purchases, technology cost sharing and the more effective utilization of staff resources. Achieving cost savings on newsprint is particularly important since newsprint prices are generally volatile, yet they are key to the profitability of the newspaper industry.

Some small newspapers or even larger family-owned proprietorships have also faced serious succession planning problems, which in some cases have militated towards a sale of the business. Aging of the presses and a general reluctance to face substantial capital expansion, for which financing may be problematic, have also contributed towards the tendency to sell. An inability to deal with labor issues or productivity problems has also contributed to the disposal of some of these assets.

If the newspaper business for the past many decades had been a profitable one, few companies or families would have taken flight from it and many more entrepreneurs would have been attracted to it. It is an exciting and purposeful business, but its attraction has faded as incomes have eroded. The fact is that for too long, circulation has decreased. Over the past five years average daily circulation has decreased from 5.65 million newspapers a day in 1991 to 5.2 million in 1995. Over the same period, advertising revenues have declined at a rate of about 2.9% per annum. All of the hallmarks have therefore been present to support a general restructuring of the newspaper publishing sector. Newspaper concentration in Canada has occurred for reasons which are entirely commercial.

Individuals and groups who are the most passionate concerning the issue of newspaper concentration generally do not marshal their arguments on the basis of the contemporary business and social reality. They approach this issue from an anti-business bias and with the unrealistic sentiment of another era, when multiple-owner newspapers were dominant and when newspapers were the primary source of news and commentary. They do not seem the least bit interested in the observation that circulations continue to erode, advertising dollars are going elsewhere and costs are generally escalating. Their arguments tend to be more theoretical and philosophical and are certainly very dated. Usually they anchor their submissions around two historic Canadian commissions concerning media concentration. Without apparently grasping the significance of the fact that the reports of these commissions have been ignored by the legislators, we continue to be told that the Davey and Kent reports constitute a prima facie demonstration of the institutionalized evil of newspaper concentration.

The “Report of the Special Senate Committee on Mass Media,” sometimes known as the Davey Report, was issued in 1971. While its terms of reference were “to consider and report upon the ownership and control of the major means of mass public communication in Canada,” the senators who formed the committee made no secret of their attitude as evidenced by their declaration at the outset of their report that “The purpose of this committee was not to ascertain whether concentration of media ownership is a good thing or a bad thing. Of course it is a bad thing.” But notwithstanding this candid admission of a preconceived bias, the committee was able to see some of the virtues of what they called, in their report, “chain ownership.” The following statement in their report is quite instructive:

But suppose there are fewer and fewer owners: is this necessarily a bad thing? There is a lot of evidence to suggest exactly the opposite. Chain ownership has rescued more than one newspaper from extinction. Chain ownership has turned a number of weeklies into dailies. Chain ownership has financially strengthened some newspapers, so they’re better able to serve their employees and communities. Chain ownership may in some cases have resulted in a decline in editorial quality; but there are also instances where chain ownership has upgraded it. In other words, there is simply no correlation between chain ownership and editorial performance.

Indeed, the senators went so far as to concur with the general thrust of the argument I am advancing here today. Toward the conclusion of their report they stated: “Indeed, our best hope for more daily newspapers seems to lie with chains; only corporations with access to large amounts of capital can be expected to sustain the high risks, and the long initial period of non-profitability.” Even in 1971, when newspaper circulation was higher than it is today, concentration was recognized as inevitable and perhaps even essential to the lifeblood of the newspaper industry.

One wonders why critics of newspaper concentration take so much comfort from this report. In 1971 the internet did not exist, television was far less developed and newspapers were much more dominant and important across the country.

The well-known Kent Commission Report was less able to recognize the merits of newspaper concentration. Unlike the Senate report which preceded it, the Kent Report demonstrates little concern for the commercial aspects of newspaper publishing. Newspaper concentration was so great a preoccupation to this commission that it went so far as to recommend the implementation of a Canada Newspaper Act to prohibit significant further concentration of newspaper ownership and, in some cases, to force divestiture of existing newspaper holdings. Little consideration was given to whether such legislation could be within the constitutional jurisdiction of Parliament, and no apparent weight was given to the rights of current newspaper owners.

The most recent assault upon newspaper concentration dealt with Hollinger’s acquisition of a controlling interest in Southam. Many of you will recall that last September, many months after Hollinger’s announcement that it had acquired a large block of Southam stock held by Power Corporation, the Council of Canadians launched a court proceeding against Hollinger and the Director of Investigation and Research under the Competition Act. The Council of Canadians took the position that the director had an obligation, either under the Competition Act or by virtue of the Charter of Rights and Freedoms, to consider future editorial diversity and that he should have refused an advance ruling certificate on the basis that editorial diversity of Southam newspapers would suffer under Hollinger’s control. The Council therefore sought an order setting aside the advance ruling certificate.

While the Council of Canadians went on at great lengths about the rights of Canadians to the Council’s notion of editorial diversity, at no time were Hollinger’s rights to free speech and freedom of expression even apparently considered by the Council. So here we had a public advocacy group who were absolute strangers to a $300-million transaction trying to upset it on the argument that a government official should have the power to prevent a newspaper merger if he or she did not think they would like the anticipated content of the future merged newspaper company.

It is hard to understand how the Council of Canadians, which purports to represent democratic values, could support such a ludicrous legal concept. Their case did not get off the ground and was recently dismissed by the Court because the Council was not diligent in seeking judicial review on a timely basis and did not, in any event, have standing to attack the advanced ruling certificate. The Council may have felt they achieved some public interest advantage by bringing a newspaper concentration issue to the courts. Yet public support for legislative action has not coalesced and there is little evidence of a feeling that much has been lost by the Council of Canadians not being given the opportunity to attempt to savage a perfectly valid and legal commercial transaction.

Returning briefly to the Kent Commission, of course their startling recommendations were not implemented and the analysis in the report is now quite dated. But there is one statement in the report which was prescient and is germane to today’s discussion. It is reminiscent of the sentiments expressed in the Davey report. It reads as follows:

Competition for the time and attention of newspaper readers and the dollars of newspaper advertisers is emerging in a number of forms: the extension of cable TV services to include pay TV, the growth of television received direct from satellites; increasing numbers of home video players using disc or tape; the spread of small computers into homes; and the development of videotex systems by television, telephone, or cable networks to provide print information on request on home television screens. All these forms of competition now are developing rapidly. Together, they clearly have the potential to affect newspapers, starting in the second half of this decade. The effect could become critical in the 1990s.

That effect has indeed become critical in the 1990s. It apparently accounts for the rationale adopted by Thomson Newspapers to sell large portions of their newspaper enterprise in order to pursue information technology on a large, and apparently, very profitable scale. Fear of the future and the high costs of publishing no doubt were major considerations which motivated the Sifton family to sell their Saskatchewan newspapers to Hollinger. A similar phenomenon must have precipitated the recent sale of the London Free Press. And in our company’s acquisition of Southam we witnessed yet another large company – Power Corporation – with a historical interest in the newspaper business, deciding to liquidate its investment and redeploy the proceeds in what appeared to them to be more profitable ventures. Single owners in St. Catharines, Kingston and many other important communities have also decided, in the last decade, to exit the newspaper business.

It is true that, as a result, Hollinger has become a very substantial newspaper owner in Canada. A great deal of controversy has attended this development. But can you name any other company so interested in and focused on newspaper publishing? As the stock market value of Southam dropped like a stone, I doubt that many of you rushed out to buy it. I don’t say that as a criticism, but the general lack of interest in newspaper stocks does reflect the sentiment that this is not exactly a growth industry. Do you suppose Thomson Newspapers would have sold so many newspapers to us if other energetic bidders were available?

Let me assure you that Hollinger did not make these very large investments with a view to shutting down newspapers or destroying their quality and thereby destroying our markets. Hollinger made these investments in the hope that through efficient management and improvements in editorial quality it can secure similar success as has been achieved in the United Kingdom, the United States, Israel and Australia and which, to the surprise of many is already very evident in Ottawa, Montreal, Hamilton, Calgary and Vancouver and in many of our other Canadian publications.

Eleven years ago, Hollinger acquired control of London’s Daily Telegraph newspaper. At that time its presses were virtual antiques, the newspaper had lost much of its market share and was all but bankrupt. Today a world-class printing facility produces over 1,100,000 copies per day of one of the world’s truly great broadsheets. A few months ago, and for the second time in three years, The Daily Telegraph was named the United Kingdom Newspaper of the Year by the Press Association in recognition of its professional and competitive achievements. The same story was repeated in Australia, where the bankrupt Fairfax newspaper company was restored, by Hollinger’s initiative, to its previous glory and profitability. Similar success has occurred at the Jerusalem Post and will shortly be even more evident at the Chicago Sun-Times where new presses are about to be installed. Hollinger’s community newspapers group in the United States repeatedly wins important journalism awards and is a major contributor to the company’s success. There is no reason why parallel results cannot be achieved in Canada.

Nowhere would we be more pleased to see similar progress than in Canada. Our company’s controlling interest in Southam and our ownership of numerous other Canadian newspapers carries with it great responsibility, but also presents an exciting opportunity. Southam is the preeminent daily newspaper in 33 major Canadian markets, including Vancouver, Montreal, Ottawa, Edmonton, Calgary, Hamilton and Windsor. Over the past few decades these important franchises have languished somewhat, mainly due to the fact that they generally have produced less than exciting and stimulating editorial products. As our chairman stated in one of our recent annual reports: “It will be a laborious task and is far from a sure thing, but we believe that managed efficiently, edited imaginatively, written professionally and backed by intelligent technological applications, the newspaper, and especially the Southam newspapers, can flourish.”

One of the leading examples of our attempt to rekindle the spirit of newspaper professionalism is in Southam’s total revamping and re-launch of the Ottawa Citizen. Mr. Black has repeatedly stated that the former Ottawa Citizen was something of an embarrassment; our nation’s capital must have a newspaper worthy of its city and its country. The transformation has been huge, the editorial product is immensely improved and the response to date has been overwhelming. Southam has been besieged with journalists who want to take part in this venture. Readers are responding and circulation is surging.

Prior to the re-launch, readers complained that the Citizen was too “thin” – there simply was not a consistent and substantial editorial product. The major observation today is that the paper is quite substantial, the in-depth analyses are very long and there is too much to read, combined with a fear that something will be lost if it is not read in its entirety. Surely this is the formula for a successful newspaper: one that carefully distinguishes news from commentary, that includes a separate section for national and international news and commentary together with a section for community news replete with interesting and lively articles, opinion pieces and editorial comment. In short, a newspaper which, for a variety of reasons, people want to read. If someone as eminent as Robert Fulford can speak positively about this newspaper, we know we are on the right track.

Re-energized and recently redesigned, the Montreal Gazette is now playing a very important role in the Quebec issue in a manner never before imagined. An expanded community section, an enlarged business report and a larger “letters to the editor” section are among the many improvements to that newspaper. After an absence of many decades from newspaper publishing, Mordecai Richler has become a regular contributor to The Gazette’s new Sunday magazine.

I must also add, in relation to Quebec politics, that it is a matter of great pride and satisfaction to us that it was our Quebec City newspaper, Le Soleil, which exposed Jacques Parizeau’s referendum treachery through Michael Vastel’s electrifying story published on May 7. His report caught fire immediately. It transformed the election campaign and caused Messrs. Bouchard and Duceppe to bumble and then run for cover while the unbelievable Mr. Parizeau, suitably exposed, eventually issued a bombastic denial which only served to confirm Mr. Vastel’s original indictment. This is the kind of reporting which we applaud and of which we expect you will see more in Hollinger newspapers.

The Vancouver Sun, Calgary Herald and Hamilton Spectator are following the example set by the Ottawa Citizen and the Montreal Gazette. Emphasis is being placed on the quality and depth of journalism and each newspaper is refocusing upon its role in its community. Additional journalists are being hired, circulations are improving, and there is a basis for optimism about the future of newspaper publishing in Canada.

The success of the makeover of the Ottawa Citizen, the Montreal Gazette and the many other changes throughout the system have demonstrated that in Canada, as elsewhere, there is a great appetite for lively, informative, diverse and well-written newspapers. These developments have been exciting for all Southam employees; we hope it leads to a much greater desire on the part of Canadian journalists to produce truly first class products, in every respect. We expect it will also cause our competitors to improve their editorial products and that a new level of competition will ensue, to the benefit of all Canadian newspaper readers.

One cannot expect The Globe and Mail to ignore these developments since we compete with their newspaper in virtually every major market in Canada, except Toronto. The Globe will have to reassess its editorial product or face the potential loss of market share in Ottawa and elsewhere. Sun Media also must reconsider its position since we compete aggressively with it in many major Canadian cities. Our re-emphasis on community news cannot be a welcome development for the Sun chain.

In the final analysis, the Council of Canadians and other Hollinger critics should relax and try to be more objective and realistic about newspaper publishing in general, and about Hollinger in particular. Newspaper publishing is a business. In order to improve the results of the business, revenues must increase; there is a limit to what can be achieved through cost-cutting. To increase revenues we will have to improve our newspapers. If we do that, circulation will increase and, more importantly, we will become more attractive to advertisers. We have already started that process and have every intention of continuing it. Over time, Canadians will see a real improvement.

As Conrad Black stated during his address to the Metropolitan Toronto Board of Trade several months ago: “We have pledged to improve the quality of the daily written press in this country and we will redeem that pledge.”

MANAGING UP TO POTENTIAL

Conrad M. Black, P.C., O.C.
Chairman & CEO, Hollinger Inc.

Annual meeting of shareholders, Toronto, May 29, 1996
Published in The Corporate Report No. 18 (June 30, 1996)

The public aspects of the Southam affair are too well known to require a long telling here, but some of the less public ones should not be glossed over entirely.

As Mr. Radler and I have said at previous annual meetings and on many other occasions, we invested initially in Southam because of its similarity to the pattern of our other metropolitan newspaper investments such as London, Fairfax in Australia and, more recently, Chicago. Southam possesses splendid natural franchises which had suffered from a variety of well-known and not uncommon management misjudgments. In summary, manpower levels became unsustainably top-heavy, ill-considered investments were made in fundamentally unprofitable businesses having little to do with the core of the company’s newspaper operations, unwise commitments were made to unsuitable production facilities, the recession came and newsprint prices skyrocketed.

From 1985 to 1995, a period including Southam’s best and worst recent years, the average margin figure for earnings before interest, taxes, depreciation, and amortization (EBITDA in common parlance) was under 11%, oscillating between 2.6% and just over 15%. This is a serious under-performance for franchises of the quality of Southam’s and we reckoned that profitability and product quality could be sharply improved as the business cycle turned upwards. The corresponding Hollinger margins were 19.7% in 1994 and 16.6% in 1995, despite soaring newsprint prices and the London price war.

Through the nearly 30 years that David Radler and Peter White and I have been in this business in this country, it has been our impression that Southam management long accepted inadequate returns for the shareholders, published generally undistinguished products for the readers and received exaggerated laudations from the working press for the resulting lack of financial and editorial rigor.

When they became concerned about unusual activity in Southam shares in 1985, Southam management made a share exchange with Torstar which was ultimately judged, after litigation from the federal and Ontario governments, an illegal transaction, oppressive to the shareholders.

They then rejected Torstar’s advances, though it was a company whose evident expertise in metropolitan newspaper publishing could have been extremely useful to Southam, especially in the early 1990s, when Southam’s operating income collapsed and nearly $400 million of extraordinary write-downs were taken, extricating the company from overmanning and ill-considered investments.

In exasperation, Torstar sought an exit from this arrangement, having been ring-fenced in a spuriously misnamed shareholders’ rights protection plan, which was in fact designed to oppress shareholders by denying them any access to a premium bid for their shares and to entrench management no matter how egregious its mistakes. Torstar sold to us in late 1992. Our suggestions for cutting excessive costs and improving the titles in the hands of the readers required only a couple of months to motivate the elements who had tormented Torstar to recruit Power Corporation as a counterweight to us. When the initial proposal for a large sale of treasury shares to Power was narrowly rejected by the directors as disadvantageous to the company, we had no difficulty achieving a satisfactory agreement with Power Corporation. This was another fine company with a useful background in newspapers. Not the least irony in these events is that Southam issued a large number of shares to Torstar from fear of a phantom hostile shareholder. When Torstar sold to us, Southam issued another large block of shares to Power Corporation, who also sold to us. If Southam management had been a little more courageous, it might still be a family-controlled business.

The obdurate rump of continuing Southam directors succeeded in discouraging or purging several of the independent directors who had wished to cooperate with Torstar and Hollinger. They then confected the theory that Hollinger had forfeited any right to buy newspaper assets in Canada without offering them first, at our cost, to Southam. No matter that the Thomson company assured us that Southam was not an interested bidder and that Mr. Ardell assured me that he valued those properties differently than we did. Nor did it matter in their calculations that Mr. Sifton sought us out and offered his Saskatchewan properties exclusively to Hollinger and expressed a desire to associate specifically with this company and to take Hollinger shares in partial consideration for his company.

Nor did it seem to occur to them that we have our own shareholders to answer to and serve. We did not think you would thank us for handing over all possibilities of growth in our business in Canada to a company we owned 19.5% of and from which we received, to the audible consternation of a number of you, a 1% dividend return on our initial investment of $260 million.

In furtherance of this preposterous concept, this cabal of Southam’s old guard intervened to render impossible the fulfillment of the Hollinger-Power Corporation understanding in which they had tacitly, and in some cases explicitly, acquiesced: that André Desmarais would become permanent non-executive Chairman, I would become Chairman of the Executive Committee, and Hollinger and Power would each name a Vice-Chairman of Southam.

When Paul Desmarais, recognizing the impossibility of this situation, proposed that Mr. Ardell, the Chief Executive Officer, devise a plan for exchanging our shares for some of the smaller Southam newspapers, Mr. Ardell promptly made a proposal acceptable to us and to Power Corporation and argued in favor of it to the independent directors. He was not of the view, as has subsequently been suggested, that such an arrangement would reduce Southam’s earnings per share. And we were not aspiring to take over the whole company, just to get a better return on our investment in it. Mr. Ardell was rebuked by the leaders of the independent directors and told to focus on operations, and Mr. Desmarais and I were told in writing not to deal with the chief executive officer and the management of Southam, in which our companies had invested half a billion dollars, other than through the chairman of the executive committee. Any attempt by Mr. Desmarais or me to have substantive discussions with Southam management was described by Mr. Cliff in his letter to us of May 9 as an attempt to “dictate” to the management, I quote, and Mr. Cliff designated himself as the “only one conduit to management.”

The same elements had already ensured that Hollinger directors of Southam would receive only fragments of board materials, with which it would be impossible to perform our duties as directors. Under the hackneyed rubric of corporate governance, the cascade of provocations, as Mr. Atkinson described it in the correspondence on the issue, was clearly going to continue.

In these circumstances, where an unrepresentative group with only a minimal shareholding, most of whose members were complicit in the catastrophic misjudgments that caused the evaporation of Southam’s retained earnings over the last six or seven years, were making the life of management impossible, oppressing the principal shareholders, and in our judgment, however fine their motives, disserving all the shareholders.

Mr. Desmarais and I agreed that one of us had to restore order in the company, and in these unhappy (but not unpromising) circumstances, he preferred to be a seller rather than a buyer, though he and his colleagues will, for a time, helpfully remain on the Southam board.

We will, today or tomorrow, requisition a special Southam shareholders’ meeting at which we will replace the most consistently unreasonable Southam directors with distinguished individuals uninfected by the negative culture that has afflicted that company.

I don’t think there is much suspense about the outcome of that meeting, but I want to emphasize this is not a question of personal antagonism. The outgoing directors are not unworthy people, but they have proved incapable of working constructively with us. Since we are now effectively in control of Southam, we think their places should be taken by equally independent people who can work constructively with us.

I am sorry to impose upon you so lengthily on this subject, but in response to concerns that have been raised by Southam employees, shareholders of both Southam and Hollinger, and legitimately interested commentators, I want to set people’s minds at rest on a number of points.

We do not plan or expect large reductions of the workforce beyond what the Southam management has already forecast publicly. As Mr. Radler has said, anything beyond that among editorial or production personnel should, as nearly as we can determine, be managed by attrition.

We believe expenses can be reduced in other ways, including consultancy fees, some areas of executive duplication and some categories of capital expense and newsprint consumption. Contrary to the suggestions of some observers, our business is built entirely on the foundations of efficient management of quality products. It is galling to read lamentations about Southam quality under our influence when the Southam chain, despite significant improvements at many titles, produces only a handful of pieces a month that would be suitable for publication in some of our better periodicals, such as the London Spectator. Yet there are many talented journalists at Southam who will flourish with a little encouragement. We pledge to try to create the environment that provides this encouragement.

In every metropolitan newspaper we own or influence, including The Daily and Sunday Telegraph, The Chicago Sun-Times, and Quebec City’s Le Soleil, the editorial quality of the newspaper has, by general consent, improved under our control. One of the few areas where we have been able to assist Southam management was in supporting Bill Ardell when he engaged Gordon Fisher as vice-president, editorial, where he has already had a positive effect. No competent journalist or reasonable reader need have any fear of our impact on Southam.

Similarly, the suggestion of a tendency on our part to editorial bias is another canard. In the strenuous campaign for a new parliament and prime minister in Israel, the Jerusalem Post, which this company ultimately owns, simultaneously published comment and even cartoons for and against both major parties, rigorously separated comment from reporting, and did not give a partisan editorial endorsement.

The Daily Telegraph is a renowned pillar of the British Conservative Party, but has frequently taken issue with the Major government and has published signed comment pieces from many prominent opposition figures, including the last three leaders of the Labor Party.

The only way to build and maintain a great newspaper franchise is to earn and maintain a reputation for fairness, liveliness and insight. We have seen at The Observer in London, for example, the consequences of operating a newspaper for the service of the proprietor’s vendettas. The consequence has been the reduction of The Observer from a 100,000 circulation lead over our Sunday Telegraph nearly ten years ago, to a Sunday Telegraph circulation today nearly 200,000 greater than The Observer’s.

It is only the integrity, literacy, and intelligence of the Daily Telegraph that has enabled it to maintain a lead of nearly 400,000 over The Times despite The Times’ cover price 10 pence lower and 30 pence lower on Saturday. Even in our own newspapers we never ask or accord more than equal time for our views.

Expressions of concern have been uttered in recent days about our impact on Canadian Press. David Radler and I, as former directors of Canadian Press, regard it as still a potentially important Canadian institution and in that spirit we will review the subject with Southam management, who have become skeptical about continued Southam membership.

Similarly, we are convinced, as Montreal natives, of the ultimate viability of the English language community of Montreal and its media outlets and will, at the appropriate times, review with Bill Ardell his tentative decision to defer the installation of new presses at the Montreal Gazette. We have had very satisfactory experiences with our new press facilities at Le Soleil in Quebec City and Le Droit in Hull.

In editorial as in commercial matters, we believe in local control of the newspapers, as was demonstrated in the somewhat inelegant handling of the demanning that recently occurred in our Saskatchewan newspapers. This step had to be taken, and would have been taken by any serious proprietor, including the vendor. Had we been the domineering meddlers we are occasionally taxed with being, the issue would have been handled with more finesse. While this fact may scandalize some members of the working press, Hollinger is the greatest corporate friend Canadian working print journalists have. We are, as far as I can see, practically the only buyers in Canada of daily newspapers, as Thomson, Rogers, and Power Corporation take their distance from them. In nearly 30 years in this business, we have rarely sold and never closed a daily newspaper. We are not completely uncritical of the working press, anymore than they are uncritical of us. There is nothing wrong or sinister in that, but we believe in newspapers and will do our best for the Southam newspapers, financially and editorially.

We understand concerns about concentration of media ownership, but newspapers do not have the media market share they did prior to the rise of a practically unlimited variety of television channels and the emergence of alternative electronic media. There is an enormous variety of media sources of information available to people throughout this country. Public credulity cannot be abused without damaging the value of the newspaper franchise, and even in Prince Edward Island the circulation of our papers, the only dailies in the province, add up to only 26.7% of the population of that province. In no other province does that percentage reach 15%, and in Canada as a whole, despite having in Hollinger and Southam combined about 40% of Canada’s daily newspaper circulation, our grand total of newspaper copies sold is only 7.2% of the Canadian population. No serious assertion can be made that this constitutes a threat to free or varied opinion formation in Canada.

Some shareholders have expressed concern that we are about to overburden this company with debt to bid for the Southam shares we do not now own. I had thought that Mr. Radler and I had made it clear that we envisioned an offer of stock, common and convertible, from our American company, calibrated to attract Southam shareholders while adding to our earnings per share. We do not intend to exceed, in equivalent value, the price paid to Power Corporation, $18, and those Southam shareholders awaiting a bonanza from the present confusion are likely to be disappointed. We expect to make such an offer, but we are not prepared to have it adjudicated by the present group of independent Southam directors, who have treated us and other large corporate shareholders with such unwavering suspicion. We expect to proceed as soon as the composition of the Southam board has been reformed, but we feel no compulsion to eliminate the minority completely, nor any reason to pay more per share for any shareholding than we have already paid for the largest block.

Our US company, Hollinger International, had a very satisfactory underwriting in February, and those who participated in the equity side of it have enjoyed a 40% capital appreciation in three and a half months. We will build, as necessary, upon our successful market performance on the New York Stock Exchange and our access to US capital markets to ensure an appropriate balance of debt equity, and cash flow throughout this group. Anything, including Southam shares, that we buy with our own stock from our US company or elsewhere, will be at least as underpriced as the stock issued in consideration for its purchase. We will incur neither uncomfortable debt levels nor material dilution of earnings. There has been the customary flutter from rating agencies. They are right to monitor the situation and, as at comparable points in the past we will move swiftly to allay their concerns. The privatization of the Telegraph and the Southam purchase from Power Corporation exceed cash on hand by US$600 million. One half will be consigned to long-term debt, a quarter to common stock and a quarter to convertible stock. This is quite manageable and the concern that has been orchestrated about it in the press is quite spurious.

Since our last annual meeting, the Daily Telegraph has safely emerged from the fierce price and circulation war in London with its market preeminence intact and in some respects enhanced. This has been the most intense period of newspaper competition that has been seen in any major western market since the famous battle between William Randolph Hearst and Joseph E. Pulitzer in New York 100 years ago. London cover prices have risen twice in the last year, our circulation margin over The Times, which initiated the price war nearly three years ago, has not declined at all in the last year.

In sum, News Corporation has spent about £100 million in Times losses and reduced the Telegraph’s circulation lead by about 40%, but has been unable to narrow the gap beyond that. Readership figures in England are, as they are elsewhere, a subject of considerable debate, but they indicate that in the immense publicity generated by the price and circulation war, the Telegraph has successfully concluded the long-standing problem of an aging readership. We have carried nearly 90% ABC 1 readers into a younger average age of reader in what is rivaled only by the New York Times and Los Angeles Times as the world’s largest circulation broadsheet daily general newspaper.

The Guardian has recently joined us as a printing customer and talks with Express Newspapers for sharing certain overheads are at an advanced stage. These factors, with strengthening advertising revenues, declining newsprint costs, and a reasonable possibility of further recovery in cover prices, make the pending bid for the Telegraph minority, in the opinion of your directors, timely and advantageous, while entirely fair to the Telegraph shareholders. We are offering one £ more for each Telegraph share than we contemplated a year ago, but in that time cover-price increases, reduction of news agents’ handling fees and the end of coupon promotions have added about 30 pence of pretax annual profits per share, so we consider this offer as favorable to the offeror as last year’s would have been.

The consolidation of Telegraph and Southam income, which we expect to achieve soon and without offending Canada’s foreign media ownership rules, should raise our US company’s 1997 EBITDA to over, and possibly substantially over, US$300 million. This company’s share of that income, supplemented by our own newspaper income, presages unprecedented prosperity for Hollinger Inc. when the present acquisitions have been assimilated and the group is appropriately reconfigured.

The status of our Fairfax investment, as has been remarked in the annual report and elsewhere, will be clarified shortly after the new government of Australia’s committee of inquiry into media ownership gives its recommendations, probably in early 1997. Fairfax is a superb company, and a level of ownership that would enable us to consolidate Fairfax results would be a magnificent addition to the asset base of this company.

We are not, as we have made clear, prepared to remain forever in a suspended state where control of Fairfax is ambiguous, unconsolidated equity earnings are subjected to excessive accounting reserves and where we only have dividends to show for our Fairfax investment that are not factored into EBITDA numbers. We have an unbooked, tax-favored capital gain on this investment of over $200 million. Either we will realize that gain, recover our investment and sharply reduce borrowings, or build our investment into an unassailable position of control. Either would be a perfectly acceptable outcome and the burgeoning cash flows of this company’s affiliates will easily assimilate raising our stake if Australian public policy is redefined to facilitate such a step.

A new editorial team and culture at the Chicago Sun-Times has sharply strengthened the content of that paper and has been rewarded with a steady rise in the newspaper’s circulation as it has moved from the tenth to the eighth largest circulation daily newspaper in the US. We are committed to moving the Sun-Times to modern printing facilities, as we have done or are doing in many other large cities including London, Sydney, Quebec, and shortly, Vancouver.

After a long period of uneven management and under-capitalization, The Sun-Times is responding well to the implementation, under David Radler as publisher, of our strategic plan. The Sun-Times already has the largest readership in the metropolitan Chicago area, and we are confident this franchise will successfully divide the splendid Chicago market with its only competitor on a less one-sided and substantially more profitable basis than in the past.

The suburban newspapers around Chicago, including the Daily Southtown, bought from Pulitzer last year, and the community newspapers we own in 28 states in the US continue to provide Hollinger International with a very lucrative and reliable source of gradually rising cash flow.

In the course of 1995 and early 1996 Hollinger Inc. acquired or contracted to acquire 26 daily newspapers with a circulation somewhat above 500,000. We are confident these newspapers will prove to have been purchased at enviably low multiples of future profit and cash flow. The multiple of subsequent years’ operating profit that we will have paid will compare favorably to the range of acquisitions with which we have built this company.

I would be remiss if I did not comment on the return of this company’s head office to Toronto. Now that he has retired from politics, I can tell you the amazing fact that, whatever our political differences, my personal relations with Bob Rae are very cordial. I paid him the courtesy of believing that he might, as he said he would, impose intercorporate dividends. That specter is lifted, and now that Ontario has a government devoted altogether to an incentive-based economy, it is appropriate for us to return officially. This is of course a symbolic matter, but the symbolism is not entirely unimportant.

Hollinger Inc. and Hollinger International are rivaled, if at all, only by Gannett in the western world as the premier quality newspaper company and are surpassed, narrowly, in circulation only by Gannett and News Corporation. Despite our rise to this comparative eminence in only nine years, we are not helplessly addicted to the purchase of newspapers. We believe that the value, adaptability and profit potential of our titles will become steadily more obvious as we consolidate this unique collection of assets and manage it up to its potential.

We are among the world’s most technologically advanced newspapers and have the busiest internet website in Europe at the Daily Telegraph and parallel positions in Chicago, Jerusalem, and a number of Canadian and Australian centers. Our work with databases, especially in London, is also extremely sophisticated, and was a powerful resource in our circulation gains in London during the price war, despite the lower cover price advantage there of our chief competitor.

We are steadily expanding our capacity to monitor, adapt, and utilize technical applications of our franchises and are confident of our ability to diversify gradually and sensibly into related fields.

The corporate landscape is replete with the wreckage of companies that were prematurely over-committed to transitional technology or recklessly over-borrowed. We will not be joining them. We intend and expect to build on strength to higher absolute and per share profitability.

By the autumn we expect, after the Southam controversy has been resolved, to present a final corporate structure for these newspaper assets, which have necessarily been untidily acquired. By removing or reducing minority shareholdings with common and convertible equity, by managing up value and taking advantage of declining raw material costs, we are confident that real underlying asset value will emerge and that the patience of shareholders through price wars and newsprint price spikes will be rewarded.

THE NUTS & BOLTS OF FEDERALISM (OR ALL ROADS LEAD BACK TO THE MONTREAL/OTTAWA FEDERALIST CORRIDOR)

Thomas E. Kierans
President & CEO, C.D. Howe Institute

The Canadian Club of Montreal, January 27, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

It is indeed an honor for me to be invited to what has been an institution in Montreal since 1905. This is my first foray, but my father was something of a staple here as a speaker between the late 1950s and the early 1960s. He was so much so that Laird Watt, then the vice-president and program convener, looking forward to his forthcoming series of 13 speakers, asked Eric Kierans whether he would be good enough to backstop him on every one of them. (Sometimes people get sick and it is embarrassing when they can’t show up.) So my father, then even younger than I am now, responded, “Of course, no problem.” The following Monday morning he got a call in his offices at the Montreal and Canadian Stock Exchanges. Laird said, “Eric, no problem. The speaker is coming today.” It finally dawned on my father that he had committed himself for 13 consecutive weeks. As he told me the other day, those were the 13 toughest speeches he never gave!

A quick comment about today’s title, which is certainly provocative enough. Originally, I had intended to lash my friend Paul Martin for his languid approach to the debt and deficit issue. I would have done this, of course, while remaining deliberately obtuse to the political considerations constraining the minister. But between the invitation and today, a number of developments intruded.

The first was Mr. Parizeau’s open letter in which he talked about “the nuts and bolts of sovereignty.” It is from there that I have taken my preliminary title. The second was that one of my colleagues, John Richards, published a piece through us late last year. Titled “Language Matters,” it argues that the resolution of our unity problems lies in devolving language and cultural issues to the provinces. (I did not agree with him, but that is neither here nor there. The piece was well-reasoned, peer-reviewed, timely and of academic quality; so I published it.) The reaction – from the C.D. Howe’s Montreal constituency – impressed upon me the extent of the incredible backlash here against October 30, 1995. This is the point that I would like to develop specifically today.

Finally, in conjunction with reading Quebec columnists who are Quebecers, such as William Johnson (I must interject that I, for one, miss Joan Fraser’s more flexible approach), I am reading columnists from outside of Quebec. They seem to me to be becoming part of the problem and not part of the solution. I decided that I, as an outsider, would try to provide an outsider’s perspective as to what are, in my judgment, increasingly surreal, sterile, corrosive and economically costly divisions among Montrealers. I stress my position as an outsider because I wish it to be juxtaposed with that of other outsiders. This is a crucial point.

We have outsiders who are cheering on a process of polarization in this province and in this great city. They are offering a misleading impression of support from the rest of Canada, thereby misleadingly expanding the potential or apparent options for federalists living within the Province of Quebec. Montrealers can, and will, either polarize within their community or seek to resolve their differences about the next referendum through civil processes. In making that choice, they should not be misled by some outsiders who are willing to hold your coat, but who will not be here nor represent anybody outside of Quebec, in the event of a hypothetical decision by Quebecers to separate.

So, this brings me to the three subtexts of my remarks, today. The first is “The Nuts and Bolts of Federalism” or “Clashing Visions,” as I view them. The second is “All Roads Lead Back to the Montreal/Ottawa Political Federalist Corridor.” The third is about “The Rest of Canada in the Event of a Hypothetical ‘Yes’ Vote.”

The political equivalent of the sectarian slaughters most recently witnessed in former Yugoslavia is clashing visions within a federation. Each side is principled, each is politically determined and ruthless, and each forgets the purpose of federalizing (as opposed to creating a unitary state in the first place). That purpose is to achieve the flexibility to accommodate differences. There are differences of identity, and differences in the selection of instruments to achieve goals ranked differently in each region. When you have clashing visions within a federation combined with a winner-take-all mentality, you have a recipe for breakup and breakdown.

Classical federalism is about flexibility. It is about a clear division of powers and a respectful approach to amending that division. Quasi-unitary federalism is about (in our case) a centralized nanny-state. It knows what’s best for all Canadians, about national rights and entitlements of citizenship, about individual rights subsuming collective rights-regardless of identity and regional preferences. Quasi-unitary federalism requires deep, deep central pockets to bribe, cajole and goad, to paper over enduring fault-lines. It treats its partners in federalism as junior.

(Now, let me stress that, as always, I am saying the same things in Montreal as I do from coast to coast, but I am also speaking as an individual. The C. D. Howe is a far more complex organism than the person who runs it and selects and publishes its contributions – as I made clear with the John Richards’ “Language Counts” case.)

When Mr. Parizeau had his famous epiphany on the “road” to Banff, boarding the train a federalist and leaving it a separatist, he was probably right about the rest of Canada (TROC) – at that time! He was not right before or after. He was right only at that moment in time.

So let me take you to the nuts and bolts of federalism. From Mr. Parizeau’s point of view, and indeed of most Quebecers, French and English, TROC is a monolithic institution in which everyone wants to march to Ottawa’s drum. For long before his epiphany and increasingly after, this is not so!

Let me take you back to the Dominion Provincial Conference (1944), when the federal government was understandably flush with the successful management of an enormous and incredible wartime effort. What it wanted to do was to keep the revenues rented from the provinces for the duration to create a quasi-unitary federation. Officials were completely under the spell of two British (unitary state) peers: Beveridge and Keynes. Beveridge proposed a state-insured cradle-to-grave system for UK citizens. Keynes argued that you could manipulate macro-fiscal policies to eliminate recessions. Of course, Canada then, like all countries, feared another Great Depression. Ottawa was, thus, captivated by these notions. But they were centralizing notions.

It is sometimes thought – certainly I thought it when I was growing up in this city – that it was Duplessis alone who threw his body in front of that train. The reality in 1944, although Monsieur Duplessis was certainly articulate and forceful, was that Ontario, Nova Scotia and British Columbia were as violently opposed to this vision of our federation as was Quebec. Until then, our federation had been defined by the British Privy Council of the House of Lords (The Maritime Bank case, 1905). Until then, our federation was about a respected and meaningful division of powers among sovereign entities, each within their own spheres.

So the 1944 conference ended in failure. But not so much a failure that the Canadian federal public servants desisted. They believed they had discovered a new “spending power.” With that, they proceeded to fashion, mold, bribe and cajole. To be fair, they also implemented some initiatives which were popular and well worthwhile at the time.

This is why, in flexible federalism, the pendulum should be allowed to swing. The division of powers should be amendable, but only in a way that respects the sovereignty of those contracting into the federation in the first place!

I was a very young man when Mr. Duplessis died, when Premiers Sauvé, Lesage and Johnson took over and the “Quiet” Revolution began. But the tension that came out a growing number of French Canadians in the Province of Quebec choosing to mark their transition from a pre-20th-century society to a contemporary 20th-century society in a fashion that would be managed by a Quebec City government, not a federal government, was incredible. Here emerged the “clashing visions.” And here, of course, was the birthplace of Mr. Parizeau’s epiphany.

Only slightly delayed was the evolution of Mr. Trudeau’s vision of a bilingual and bicultural Canada, sustaining Francophones everywhere in Canada, and based on his serious reservations about Quebec nationalism. It is indeed ironic that many of the views dividing us today came from a federal government with a dominant Quebec caucus and a Francophone prime minister.

Then there was the tragedy of the patriation of the Constitution and the implementation of the Charter of Rights without the approval of the Quebec National Assembly. In a true federation, the participants in amending the constitution are the federal and provincial governments, and the respective legislative assemblies. Relying on the support of federally elected Quebec MPs in the face of opposition by the provincial government and the Quebec National Assembly is, de facto if not de jure, a violation of the spirit of our federation. Not long thereafter came the failure of the Meech Lake Accord – possibly the worst tragedy we have ever absorbed.

The question remains: what is federalism? Does Ottawa realize, after 58 years of pushing on the Beveridge/Keynes points of view, that it is long overdue for the pendulum to swing again toward classical federalism, and that Ottawa is not part of the solution to disunity, but part of the problem?

Classical federalism mandates that the surpluses accruing to federating in the first place, will never be as great as the surpluses accruing to choosing a unitary state. But you still get surpluses, and the surpluses are more than you would have had by not federating. It is not about, and cannot be driven by economics or by economists’ measures of efficiency for delivering particular programs.

First, economists can’t even measure the hypothetical efficiency of centralized, mandated and prioritized deliveries. Second, the differences that sustain us within a federation are far more important than whatever efficiency measures or surpluses might accrue to a unitary or homogenized state.

The second point of classical federalism is the division of powers, which should be clear and respected between equal (in their respective spheres) and sovereign entities.

The third is the notion of collectivities and individuals, and the recognition that the realities of Canada’s dualism can best be achieved with a federal, not a unitary, state.

It is essential that I expand on this third point. It goes to the heart of the irreconcilable conflict between Mr. Trudeau’s conception of Canada and mine. The equilibrium point between individual and collective rights differs among the great liberal, pluralistic democracies of the world. That point may be driven by differing preferences between groups, or by the perceived role of the state in the economy; or by libertarianism. Whatever! Within a federation formed with the specific and pragmatic considerations as was ours, there is no common, equilibrium point! Therein lay the disaster of patriating and entrenching a common Charter of Rights and Freedoms without the concurrence of the Quebec National Assembly. (I might point out, however, that this was hardly the will of a homogeneous group of federalists from the rest of Canada. It was driven, against the wishes of a number of premiers, by a Francophone Quebec prime minister and his Quebec caucus.)

The final point, to which I have already alluded, is the pendulum! Times change and needs change, but the respect and care with which you make changes to any division of powers within a federation remain essential.

To this day, much of Ottawa still promulgates two canards. The first is that classical federalism is decentralization. That is a code word for libertarianism that labels classical federalism with a kind of right-wing ethos. The reality is it is none of these. The reality is that it is not as if Ottawa didn’t have more than enough to do today with guaranteeing an internal trade union through the guarantee of the mobility rights and qualifications and the right to work – in any province – for each individual, for all Canadians; through the guarantee for those individuals of access both to the standards and accessibility of all social services already afforded previous and permanent residents in their new locale, although these may vary from locale to locale. In addition, Ottawa has huge macro-economic responsibilities.

The second canard stresses that Ottawa now spends much less as a percentage of GDP than the provinces do, totally ignoring the difference between administrative derogation and respect for the constitutional divisions of power. Mr. Parizeau’s epiphany was, therefore, wrong before he experienced it. I now argue it is wrong today.

Mr. Trudeau’s vision is that of a Canada that no longer exists. I offer four examples. Between 1974 and 1984 the Province of Alberta went through hell. More hell than the Province of Quebec could claim to have gone through any time since 1867. Fighting the National Energy Program imposed a huge economic and financial burden on Alberta. Albertans established a fundamental precept of federalism by struggling to establish once and for all that resources lie within the sovereign domain of the provinces, that the surpluses accruing to those resources belong to the citizens of the province and not to the country as a whole.

Another example is British Columbia. Take Vancouver today. We know what the numbers are for French and English language speakers in the home in Montreal. But, how many of you know the numbers for Vancouver? In Greater Vancouver, 44% of households have English as their first and preeminent language, 32% have one Chinese dialect or another!

A third example is today’s New Democratic Party and the awful lesson that Mr. Rae learned in his few short years in power, when Ontario’s deficit was running amok. For the first time, the NDP was forced to look at the transfers that were being extracted from Ontario, on a per capita basis, to support Atlantic Canada. He realized that these transfers, extracted in numerous ways by Ottawa, had become so excessive that Ontario, in the aftermath of the Free Trade Agreement, couldn’t afford them! More to the point, he came to realize, despite his NDP ideology, that there is a limit to transfers, a limit to generosity and a limit to egalitarianism. So, Ontario, too, has changed in a very great way.

On the top of all of that, Ottawa is broke. Some accommodations are not only necessary, but long, long overdue.

Mr. Parizeau’s view, continually articulated within Quebec, that there is a homogenous “rest of Canada” out there, is completely out of date. It may have been right at a point in time, but it was mostly wrong before and it is totally wrong today. At long last, the pendulum is moving back to classical federalism.

Nevertheless, Ottawa is engaged in new spending powers. Labor market training is an example. Indeed, now Ottawa is expropriating and finding imaginative new revenue sources to fund these new powers. Instead of setting premiums to keep “whole” UI (as some our age would call it) or the Employment Insurance fund, Ottawa is now cyclically adjusting premiums to constantly kick up surpluses – positive surpluses Ottawa can then use in terms of setting standards for labor markets training. (And God knows what the next budget will bring in terms of a childcare initiatives.) All of which notwithstanding, I think these are spastic reflexes reminiscent of another time.

Premier Savage and Premier Tobin railed against the brilliant political economist Tom Courchene, last August, when he published his views for dealing with the twin crises of our Canadian federation today: (i) Ottawa doesn’t have the gold and the provinces need flexibility, and (ii) transfers are excessive. So, Premier Tobin bragged that “they” threw Courchene from the train on the way to Jasper. And Premier Savage argued before the Empire Club in Toronto (of all places), that Courchene was wrong because “fairness is the only way to deal with this family situation” (read the problems of federalism today) and that equalizing everything vis-à-vis each and every transfer to Atlantic Canada is the only answer! (And Mr. Parizeau continues to believe TROC is homogeneous!)

The really interesting point is that Premier McKenna said very little. Mr. McKenna understands the very negative influence carried by these excessive transfers to Atlantic Canada. He understands very well that, from Ontario to British Columbia, the costs of these transfers are straining the federation’s spirit of generosity. He understands very well that his province must change, not just to survive, but to restore individuals’ initiative to work and to prosper.

The bottom line is that Canada is too diverse for “one-size-fits-all” types of policies, and Ottawa is too broke to bribe acquiescence. Mr. Parizeau was wrong before and he is wrong again. The time for a return to classical federalism is upon us.

Now, I am well aware that Quebec’s Anglo/Allophones prefer the Ottawa versus the Quebec City mantle to support “their” rights. And I am well aware that committed separatists have long since given up on the restoration of classical federalism as a means of preserving identity, much less Quebec City’s authority. And I am well aware that the essence of Canada’s duality, which is a fact, can now only be meaningfully recognized within the Province of Quebec and at the diminishing federal government level. Therefore, I am well aware that, if there is to be a combination among all federalist moderates, painful adjustments in perceptions/expectations are in store for the anglophone/allophone communities here in the Province of Quebec.

Which brings me to my second point: “All Roads Lead Back to Montreal/Ottawa Federalist Political Corridor.” I guess that, before October 30, 1995, I would have said that TROC and Quebec were on parallel courses (although why even then, I don’t know, given that Mr. Chrétien turned down Mr. Johnson before the last Quebec election on labor market devolution, indicating Ottawa’s stubborn, obdurate staying power). As I saw it, the Quebec classical federalist train had left the station in, let’s say, 1965. TROC’s classical federalist train hesitantly departed in, let’s say, 1980, at the time of the first referendum and in the year of the National Energy Policy. And I saw TROC’s train rapidly overtaking Quebec’s train!

In any event, I don’t think that anymore. I think that what Allan Cairns, the dean of Canadian political scientists, has said, is true. Post-October 30, 1995, what happened post-Meech Lake in the Province of Quebec, happened in the rest of Canada: “Something snapped!”

Well, what snapped? Two things, really. It is one thing to hear the outrageous remarks Messrs. Bouchard, Parizeau and Landry were making about the rest of Canada during the referendum. It is one thing to hear that in the heat of political discourse. When you wake up the next morning and think that perhaps the majority of Francophone Quebecers believe it, it is entirely another. This is not to say that the move back to classical federalism in the rest of Canada will stop. It is merely to say that it makes it that much harder to blend Quebec’s agenda with that of the five provinces west of Quebec (perhaps six, including New Brunswick to the east).

The second thing that snapped was that, until then, “all” of us outside and many inside Quebec believed we could rely on Ottawa to manage this issue, in terms of holding the country together. I certainly thought this and I was prepared to pay the price, in terms of dollars and of Ottawa not prioritizing my issues. But that snapped too! Obviously we can no longer rely on Ottawa. So now what? Well, either we rely on the federalist provincial governments to intervene (although Ottawa is doing a marvelous job of excluding them), or we begin to contemplate the possibility of a breakup.

Once TROC begins to contemplate the possibility of breakup (at present, most Canadians are in a state of denial), things could begin to unravel very quickly. There are two reasons. First, because TROC believes, rightly or wrongly, that it has displayed generosity of spirit in this energy-sapping, economically debilitating dispute between Ottawa and Quebec, allowing for differing interpretations among the “have” and the “have-not” provinces (essentially defined here as Ontario and all of the West, and Atlantic Canada). Once the generosity evaporates, so will the federation. Second, because concern and intellectual firepower would shift quickly from holding the country together to avoiding or minimizing the transition costs associated with Quebec’s separation. Once this process begins, the “unthinkable” will very rapidly become a self-reinforcing proposition to “get on with it.” The rest of Canada must now, for the first time, allow for the possibility (not the probability) that Quebec may not wait for us to catch-up to “their train,” at least on a collegial basis.

What a pity! Few people in Quebec understand how much Canada has changed since the early 1960s, when all of this really got started. I think most people know the extent to which economic, financial and commercial power has shifted from Montreal to Toronto. But I think few understand the extent to which economic power has shifted from Toronto to Calgary and to Vancouver. And how few recognize that political power still rests in the Montreal/Ottawa federalist political corridor. The West knows that it has been shortchanged, politically, but Ontario has yet to “tumble” to it! Most of you will know that, in Ontario, the federal Liberal party elected all but one seat, yet, today, Ontario doesn’t even have an Ontario “lieutenant!” But, BC sure knows.

The results, despite Team Canada, are very straightforward in terms of policy responses to the globalization of trade and investment. Fundamental social policy and economic policy shifts cannot be properly accommodated by government policies at the national level, so they are being missed. As Courchene points out, province by province we are becoming either north/south economies or parts of international regional economies. Yet social policy issues, calibrated by Ottawa, are extended on an east/west “one size fits all” basis. This is done without the concomitant national funding or a tariff-protected “breadbasket” to fund such policies, except that which is imposed on egalitarian principles and hidden transfers.

For transfer payments, as I indicated with Ontario and Atlantic Canada, there are limits to generosity. But, as Mr. McKenna has come to understand, there are limits to this initiative. It is one that is good for federal and Atlantic politicians, but it is not, in the end, good for people. These issues are not really being dealt with either.

Finally, I must observe that generosity in terms of constitution making has almost evaporated in Canada. You know, there is little wonder! I’ll tell you an anecdote, which I was told publicly firsthand. It is generally assumed in Quebec that Canadians outside of Quebec know nothing about Quebec. This, in fact, is not true. It is my experience that sophisticated Canadians outside of the Province of Quebec know much more about Quebec than sophisticated Quebecers know about TROC. This was never shown more, in my experience, than after October 30, 1995, when Mr. Chrétien appointed Mr. Dion minister. He went rushing off, among other things, to talk about partition, but more specifically to talk about generosity and the “distinct society.”

Generosity has never been lacking regarding Quebec’s “demands” until after October 30, 1995. The failure of the Meech Lake Accord was not a function of any lack of generosity, it was a function of bungled politics, pure and simple. But Mr. Dion spoke about generosity and the distinct society in Calgary, on a particular day. He pleaded with his audience to find within themselves the generosity to recognize Quebec as a distinct society. A very prominent Calgarian stood up and said, “Mr. Minister, you speak of generosity and this I understand, but,” (and this man has proved on many occasions that he does understand), “Mr. Minister, we are still reeling from the National Energy Program, something that we don’t think would have happened if we had a proper Senate and an elected Senate. Can I ask you where you come from on that subject, sir?” To which, Mr. Dion responded, “We are not interested in that.”

Well, the next time the Montreal/Ottawa political federalist corridor sends someone out to the rest of Canada to “explain” Quebec, it should take care to send someone who also understands something about the rest of Canada. Generosity cuts both ways.

Which brings me to my final chapter “The Rest of Canada and a Hypothetical Yes Vote.” Let us not be deceived by hysterical Rest of Canada’s commentators as to what will actually happen. The name of the game, in the event of a hypothetical “Yes” vote, will be straightforward: avoiding/minimizing transition costs. They (TROC) have no interest in partition. The economy will be in turmoil, the capital markets will be crashing, unemployment will be skyrocketing, and the United States will be dealing with a crisis on its borders that will make the last Mexican crisis pale by comparison.

I am not saying there is going to be a “Yes” vote in the next referendum. I am saying the rest of Canada must now begin to think about it. Now, rationally, to avoid or minimize transition costs. The rest of Canada should lay out its deal beforehand so Quebecers can know what they are voting for. In return, Quebec should commit to a clear question beforehand, a supervised vote and a second ratifying referendum to preclude bluffing on either side. This would only be rational for Quebec politicians if they think they will win. And frankly I think Ottawa – after the last mess – owes it to the rest of Canada.

But given the distrust between Ottawa and Quebec City, Ottawa’s commitment to its Ottawa/Montreal federalist political corridor, and perhaps a legitimate concern (though not to me) that this approach would create a self-fulfilling prophecy, this will not happen.

On the other hand, I don’t believe for a second there is going to be a Unilateral Declaration of Independence for two reasons. I regard this ridiculous debate about the separation of the rule of law and democracy as a chimera. They are two sides of the same coin. They are inseparable. Quebecers are law-abiding people. I believe that, given a clear question and an unambiguous response from Quebecers, the rest of Canada would move immediately to put a deal for a second referendum to Quebecers – perhaps to all Canadians.

As Mr. Parizeau wrote recently, the principal issue in the rest of Canada would be the division of the debt. It would not be partition! What might a hypothetical deal look like? Think about access to NAFTA and minimizing the costs of transition. Access to NAFTA is TROC’s call, not Quebec’s. In the event of a clear “yes” vote, Quebec will become the “demandeur,” just as Canada was in the FTA negotiations. TROC will want to minimize its transition costs, and the United States will insist on a stabilization of its capital markets and economic interrelationship(s). Thus, the “deal” will contain a US-brokered, guaranteed appropriate division and amortization of the debt. This deal, for both democratic and economic reasons, will ignore the partition issue.

Think about the use of currency – that would be Quebec’s decision, but not control over monetary policy. Think about a free trade agreement with Canada within NAFTA – yes, but not a customs union; and no subsidies, no transfers. Think about minority rights – these would be set out in a second referendum, within Quebec, and would be a Quebec issue. The rest of Canada would not be there.

Think about the aboriginals. The rest of Canada cannot waive its obligations to the aboriginals. I would envisage an internationalized treaty with the rest of Canada having paramountcy and Quebec having concurrency. Arrangements about costs would be negotiated on an ongoing basis. Finally, after one year, dual citizenship would lapse and residency requirements would prevail.

So, to conclude, why would an outsider come to Montreal and make such provocative assertions? First, for sure, I will be nailed for creating a self-fulfilling prophecy. Second, I will be nailed for selling out minority rights, at least as these were seen by Mr. Trudeau in 1982.

Why then? First, I don’t think Quebec will separate, either in a hypothetical referendum No. 1 or No. 2. Second, those who are not part of the Montreal/Ottawa political federal corridor are frustrated with this standoff and Ottawa’s domination of it. They feel, correctly, that there should be contingency planning. Finally, why not just try and tell the truth, or the reality, as I see it?

This polarization of the debate within Quebec is a sadness, but it is not the rest of Canada’s issue. What is the rest of Canada’s issue is the support given by rest of Canada’s commentators to that polarization. Therefore, in the event of a crunch, do not be deceived. The rest of Canada will be indifferent to the partition issue. It will be interested only in minimizing the cost of separation. And Keith Henderson notwithstanding, Quebecers unhappy about the outcome of this hypothetical vote would only be able, in the aftermath, either to rely on the majority to preserve democracy, the rule of law and minority rights, or to vote with their feet. Personally, I would trust the majority in a separating but law-abiding and sophisticated democracy, not operating in a vacuum, but under the scrutiny of the entire civil international community. Either way, the rest of Canada should come clean, up front, about this outcome.

Since October 30, 1995, constitutional generosity has been evaporating rapidly, if it is not already gone in the rest of Canada. “Something snapped!” Priorities are shifting. Examples of that are Ontario and per-capita transfers to Atlantic Canada, and British Columbia. When Mike Harcourt was premier I remember him telling me that British Columbia’s concerns were for Cascadia, the Pacific Rim, and teaching Sanskrit, Mandarin, Japanese, and English as a second language – not bilingualism and biculturalism.

Generosity is a two-way street. I have already talked about that. It is not a Montreal/Ottawa federal political corridor issue. Does anybody care about what Alberta wants out of this federation? They should.

So, by way of a wrap-up, let me say this. The Ottawa/Montreal federalist political corridor just doesn’t get it. The argument about Mr. Trudeau’s vision of Canada is an argument about a Canada that no longer exists. Quebecers/Montrealers must not permit themselves to be misled by an Ottawa living in a time warp or by shrill commentators in the rest of Canada who will not be there when you need them. It is your community and it is your choice. You will act accordingly. But give moderation and rapprochement a chance! If not today, at least for when opportunity presents itself! Don’t burn your bridges!

You will remember President Bush speaking, in his last campaign, of “the vision thing” and how, in the last referendum, the federalists were unable to articulate one. Well, here is one: flexible federalism restored with due respect accorded to the sovereign participants to the transaction.

EXECUTIVE ELOQUENCE: A SEVEN-FOLD PATH TO INSPIRATIONAL LEADERSHIP

Judith Humphrey
President of The Humphrey Group

The Board of Trade of Metropolitan Toronto, November 25, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

Everyday in corporate boardrooms, this scene is repeated over and over again: an executive walks to the front of the room, turns on the overhead projector, and begins a narration that bores both speaker and audience.

The same scene is repeated in external conferences, although perhaps with more panache. Speakers with impressive titles walk to the podium on a much larger stage, the lights flash, visuals come to life on the big screen, and the speaker begins a narration that bores both speaker and audience.

As the head of a firm that provides speech coaching to executives, I have worked with hundreds of business leaders who know that something is not right with this scene. In a situation that should be one of their best leadership opportunities, they feel uneasy and frustrated by their lack of impact.

Take the situation I observed, when asked to observe a CEO at the podium. It was felt I could help this newly-appointed chief executive officer become a stronger leader. It seemed like an excellent opportunity to assess the new leader’s strengths and possibly work with him.

The CEO droned on for almost an hour. Although he was known as a bright individual, he came across as dull and without clarity of thought. In a dutiful fashion, he worked his way through mounds of material. No aspect of his company’s technology offering was left untouched. No corporate stone was left unturned. No visual left out. The audience was restless and unmistakably disappointed. Eventually people began to leave, even while the executive was still talking.

Sadly, this new CEO had missed out on a wonderful leadership opportunity. He lost out on a chance to inspire his audience – including many potential customers – with management’s vision of where his company was going.

What goes wrong? Why do executives often speak too long, say too little and lose their audience? I’ve found that it’s not lack of motivation. Nor is it lack of ability. The truth is that great speaking is an art that must be developed through learning and practice.

Indeed, today executives need to be more inspirational than ever. They must deliver ideas and beliefs that excite the minds and hearts of their audiences. Leadership is not conferred by title. It is achieved every time an executive moves an audience. In today’s competitive world, customers, employees, management, boards and shareholders must be turned into believers.

Today I’d like to discuss the art of eloquence. I’ll draw upon observations of public speakers and the knowledge that we in The Humphrey Group have gained from working with many leaders over the past decade. My message is this: executives who want to motivate audiences can do so by following seven steps.

Step 1: Begin with commitment. A speech must begin with a serious commitment on the part of the executive. No speech or presentation will be successful unless the speaker has a deep desire to reach a particular audience. This deep involvement should be demonstrated in several ways.
Accept speaking engagements only when you think you can make a difference. You have to feel a sense of purpose, of urgency, a sense of your own leadership. What’s your motive?

If possible, write the speech or presentation yourself. Many great speakers – Abraham Lincoln, Winston Churchill, and Martin Luther King, for example – wrote their own speeches.

Or work closely with a speechwriter. John F. Kennedy worked very closely with Theodore Sorensen, his speechwriter, and they were a creative, forceful team. In guiding your speechwriter, make sure the speech captures your thinking. After all, you’re going to have to bring it to life at the podium.

I’m impressed by the willingness of many top executives to prepare their own remarks. And I’m equally impressed by the results. Many of the CEOs and senior executives we coach spend valuable hours writing their own speeches. When I set up The Humphrey Group, one senior banking executive asked if we’d design a speechwriting course for him. That way he’d be able to prepare his own remarks or guide a speechwriter. This course has become a mainstay in our executive program.

In fact, a CEO told me that he could not in good conscience pay one cent to have his annual meeting speech written for him. He preferred to invest in our Executive Speechwriting Program which would show him how to write that year’s talk, as well as the ones that would follow. The result was a great, deeply felt speech.

Step 2: Know your audience. The second step in developing an inspirational leadership style is having a strong sense of your audience.
The best speakers tailor their remarks for the individuals they will address. They mentally switch places with their listeners, and ask themselves, “What do I want to hear from this speaker?”

Good speakers find out as much they can about their audience. If you are delivering an internal speech, conduct interviews to test your ideas. Those exchanges might uncover objections to your ideas. You’ll also be alerted to questions that many of your listeners might have.

An appreciation of the outlook of the audience should lead you to adopt the right tone. Don’t preach to or bully your listeners. Rather your talk should inspire and motivate them. But it should do so because it respects the feelings, experiences, and intelligence of the audience. An executive who says: “I give orders…others listen and do what I say,” will not find many receptive ears in the audience.

I’m amazed at how often speakers concentrate so fully on their own “agenda” that they forget the audience’s perspective. A company that has been going through rough times, for example, needs a positive approach from their leader. Her sense of urgency should be translated into a positive, motivational message, not a critical one that could demoralize the troops.

Step 3: Develop a clear message. The third step in becoming an inspirational leader is developing a strong, clearly-defined message. Corporate executives are asked to speak because of their vision. Knowing their subject is not enough. They must have something clear and convincing to say about it. When Lou Gerstner joined IBM he developed a forceful vision: IBM must lead big companies into the brave new networked world. This message has been articulated by management at all levels, and it has given IBM its direction.
Too many corporate speakers ramble on, lacking coherence or direction because their address is without a central argument. As a result, they come across as having nothing – or, paradoxically, too many things – to say. Such speeches are literally pointless, as is the act of listening to them.

Canadians look to prime minister Jean Chrétien for a coherent message about Canada’s future. Few find it. This lack of a vision was particularly disturbing during the key months leading up to the 1995 Quebec referendum. Political leaders must help people understand and believe in their nation’s future.

President Clinton began office with a weak message. “We must reinvent America” was the anemic theme of his first inaugural speech. Hence many feel that he has lacked leadership – and his accomplishments fail to reflect a coherent vision.

How do you develop a message? Begin by realizing that you must focus. Churchill said, “A speech is like a spotlight: the more focused it is, the more intense the light with a smaller area covered.” A message that’s too general will sound superficial. “We had a great year” is not a message to inspire the troops. But John F. Kennedy’s message in his first inaugural speech was clear and forceful: “Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, to assure the survival and the success of liberty.”

Corporate messages come in many forms. One CIO we worked with had a terse but powerful message to his troops: “We’re at war.” Whatever your main idea, state it boldly in your introduction. For example, the speaker might say: “If there’s one message I’d like to leave with you today, it’s that . . .” That single argument should shape the entire speech. And it should be restated in the conclusion.

Once you grasp the importance of a clear message, its power quickly becomes apparent. A Hewlett-Packard executive told me that the concept of message is enabling him to achieve much greater leadership at staff meetings. He used to open quarterly sales meetings by asking each regional sales executive to provide an “update.” Now he asks them to summarize their results in a sentence and then elaborate. And he closes each meeting with a summary of these results – and a statement of his vision.

Finally, remember that a message is important even in the most informal talks. Even if you are speaking for four minutes, addressing an informal luncheon, or handling questions and answers, you should set forth your main idea. Otherwise your remarks will be a jumble.

The very last words of your speech should be a “call to action” in which you urge your audience to act upon your message.

Step 4: Build a persuasive structure. The fourth step toward inspirational leadership is developing a persuasive structure.
To begin with, the structure must support the message. Too many executive presentations or speeches simply ramble on, from topic to topic. When a structure elaborates an idea, it takes on an excitement, and energy. It has a pulse to it.

Take the speech given some time ago by the CEO of TRW to investment analysts. His message implied a strong, powerful structure: “There’s just one message I have for you today. It’s that there are nine excellent reasons for recommending our stock.” The structure would then consist of nine points or “reasons” why the stock should be seen as a “buy.”

Most speeches can be structured by one of five common patterns.

First is the one we call the “Four Reasons” speech – although it might be the three reasons or nine reasons speech. It’s a clear, powerful format.

Second is the “Ways” speech, which demonstrates the ways or areas in which the main idea can be shown to be true.

Next is “Problem and Solution.” It’s a good way of first addressing a problem and then showing how you’ll solve it. It’s great for customer presentations.

There’s also the “Process” or “Chronological” model. You discuss a sequence of steps. This talk with its seven-fold path to eloquence follows that model.

Last is the “Present Situation/Future Outlook” talk. Annual meeting speeches often take this approach. You tell your audience that while this year’s results were good, we will restructure to make the future still brighter for the company.

Step 5: Use language of leadership. The fifth step in becoming an inspirational speaker is choosing words and expressions that underscore your leadership. Several imperatives accompany this one.
Be genuine. So many speakers fail to inspire their audiences because they speak an artificial language. Even when putting forth his best programs, Brian Mulroney’s language betrayed him. His sentences were too long, his words too abstract. Audiences have trouble believing a speaker who uses such prose.

Be clear. Avoid the jargon that’s all too common in presentations. If language is a reflection of the speaker’s mind, then what can we deduce about the minds that produced the following: “I can approach others to leverage our capabilities and maximize yields on our investments.” Or: “We are an industry of provisionaries of networks…” Or: “We must place the funnel as equal to, or even more important than, account-based cleanups.”

Eliminate clutter. Too many speakers fill their talks with unnecessary clutter – often to buy time while they’re thinking. Expressions such as “to be honest,” “I have to admit that,” “you know,” or “um,” are verbal junk. Eliminate this verbiage, and you’ll sound more polished and clear-minded.

Be confident. Your language should exude confidence. Be very sparing in your use of qualifiers such as “I think,” “I guess,” or “hopefully.” If you have to guess or you’re just hoping for a certain outcome, rethink your approach.

Too many executives – especially female executives – use language that undercuts their message. Be careful not tell your audience: “I just have two items to discuss,” or “It’s only my view, but . . .” As well, emotional language conveys weakness and undercuts leadership. Be very sparing in the use of expressions such as: “I’m unhappy about the way things are proceeding,” “It would be greatly appreciated if you could . . .” or “I want to thank you with all my heart.” Such language works better in the home than in the office.

The words executives use should reflect their leadership. Language should be genuine, clear, free of clutter and confident.

Step 6: Make yourself the visual. Visual aids are the bane of corporate presentations. They’re uninspiring, and too often dull, cluttered and difficult to decipher. More significantly, they upstage the speaker and make that individual appear to be less of a leader. My advice? Use visuals only when they are absolutely necessary.
Think of yourself as the best visual. Have your audience focus on you – your energy, your conviction, your inspirational qualities. Don’t confine yourself to the sidelines. Be the focus of the audience’s attention.

I once heard about a presenter who wanted to impress his audience with the best, most colorful, state-of-the-art, glitzy visuals. At the end of the talk, a number of people came up to ask for a business card – not his, but the individual who had created the graphics!

I’ve worked with enough executives to know that some corporate cultures insist on visuals – at least in presentations. If you must use them, avoid word slides. You want your audience listening to you, not reading while you’re talking. Project a simple corporate logo if you need an image. Some material – an organization chart, a network diagram – can be presented visually. But if you do, keep your visual simple. No one should have to study or decipher an image to determine what you’re showing.

Step 7: Let your delivery style show your leadership. Seventh, and finally, your delivery style should affirm your leadership, not undercut it. A compelling style combined with a good text will allow you to achieve your goal: inspiring and motivating your audience.
Here are some guidelines for developing a leadership presence when you speak.

Use gestures sparingly. Most executives think they’re more inspirational if they move a lot. But keep the words of Peter Ustinov in mind: “The secret of acting is to reduce everything to absolute stillness. If you are absolutely still, when you move it registers; if you move the whole time, nothing registers.”

Stand tall. Leadership is best expressed by a tall, aligned body, with feet squarely planted on the floor. Whatever your height or sex, imagine yourself on a string (hung from the ceiling), and lift your body accordingly. It’s amazing what this will do for you. Why don’t speakers naturally do this? Some executives think they’re too tall, so they slouch. Others show their discomfort with speaking by making themselves smaller. They hunch over. Resist the temptation to make yourself small or cozy. Your audience will not be inspired.

Look at people. It’s amazing how rarely executive speakers look at their audiences. Many look above the heads of the audience, others graze the room with their eyes, and still others bury their eyes in their speech or visual aids. Remember, people listen with their eyes. They may hear the words with their ears, but they think about what you’re saying when your eyes are locked with theirs. So look at the audience when you are about to say something, and when you complete your thought.

And really look at people, one at a time. Remember, there are two kinds of animals: predators and prey. Predators have their eyes in front of their head, prey have them on the side of their head. So, use your eyes to take control of the room. Jean Monty, the president of BCE Inc., has incredible eye contact. Even when he steps out of an elevator, he takes control with his eyes. He owns the space, and people feel that he does.

Pace yourself. Speak with lots of pauses. Too many people rush. But consider this: when does the audience think? Not while you’re speaking, because they can’t think about an idea until it’s delivered. They think during the pauses. But if there are no pauses, they won’t think. They won’t be moved. They won’t act upon what you say. The degree to which you want to involve the audience is reflected in the length of your pauses.

Use a tone that inspires. Find a tone that’s close to your best conversational voice, and make sure it’s full of leadership.

The single most common tonal problem we come across in coaching executives is the artificial tone of someone whose voice says: “I am giving a speech.” In other words, they’re more conscious of themselves than they are of their message. That’s deadly, for if you are not involved in your message, how can the audience be? Listen to yourself on audio tape or video. See how you react to your own voice. Do you sound real?

Avoid a tone that’s too loud, too brash, too bland, too sweet or too didactic. So many executives are still unconsciously caught up in “male” or “female” stereotypes that undercut leadership. The voices of men can be too strident and arrogant, or dull and controlled. The voices of female executives are frequently too soft, nice, or pretty. Executives need a tone that has both power and warmth. Carol Stephenson, president and CEO of Stentor Resources Center Inc., is a good example of such vocal strength.

Your voice should also reflect the material you’re delivering. Convey the excitement and conviction that’s in your text. Present your bold structural statements with more emphasis than your supporting statements.

Conclusion
These are the seven steps to inspirational speaking. In numerology, seven is the number closely associated with inspiration. Certainly there is no greater goal for a leader than to inspire an audience – whether that audience is a CEO, a room full of shareholders, a group of customers, or employees.

The question is: can everybody be inspiring? The answer: if they believe they can, and work at it, they can. Consider the great speakers of history. They applied themselves to crafting their remarks. Winston Churchill fainted out of fear at one of his first public speeches. But he got better. In fact he became one of the world’s greatest statesmen, because he had a mission. And executives have a similar mission in their companies.

John Caldwell, president and CEO of CAE Inc., once told me: “The reality is, you’ve got to set a direction for your company, and then you’ve got to help people get on that bandwagon.”

This ability to move the hearts and minds of employees, customers, and other stakeholders is the primary role of senior executives. To achieve this goal takes concentration, desire, and hard work. But when you achieve this leadership, it’s worth it.

“Where there is no vision, the people perish,” we read in Proverbs 29:18. But where there is vision, people flourish. And that is the work of the inspirational leader.

HYDRO-QUÉBEC AND THE BUSINESS OF ENERGY

Richard Drouin
Chairman & CEO, Hydro-Québec

The Canadian Club of Montreal, May 9, 1994
Published in The Corporate Report No. 8 (October 15, 1994)

As business people, you want to know that any partner supplying an essential input is sensitive to your needs. You want to know that you will receive prompt and effective service, that costs are being controlled as the market demands and that a prudent financial position is maintained at all times.

Customer Service Is Our Highest Priority

You may see us in the news for all sorts of reasons. But for most people the most important fact about Hydro-Québec is still that when you flick a switch the lights go on. So let me begin with a reminder that customer satisfaction is at the heart of our mission – and a reassurance that this is the focus of our energies.

The last time I spoke to the Canadian Club, in 1990, was a period in which you may have had doubts about this. There had been power outages and major strikes. Our employees were not happy, and our customers were not happy with the way they were being treated. For the first time in history, customer satisfaction had fallen below 50%. Out of all the numbers we generate in a year of operations, customer satisfaction is the one we give the highest priority to. We were shocked into action.

We identified problems. We set measurable indicators of performance, we made them public…and we’ve lived up to them! We report on each of them. In fact, there are few companies, public or private, that have to make such detailed performance reports.

We restructured the company to put more people on the front line. And that front line was reorganized to deliver efficient service. Telephone systems were upgraded, and communications with our customers were improved. Some of our customer brochures are now produced in 13 different languages. There was a new emphasis put on motivating people on the front line, listening to their suggestions, and acting on them.

As for the network itself, top priority was put on investing to reduce power outages. Maintenance programs were set up, and a quality program was initiated that employees bought into.

Last year, after several years of steady climbing, we reached an average level of 93% level in customer satisfaction, a fitting reward for all the hard work done by the people at Hydro-Québec.

More Value For Your Money

Our customers also need to get the most out of every watt of energy they buy. For some industrial customers, energy accounts for more than 25% of production costs.

At Hydro-Québec, our rates are among the lowest in North America: for every $100 charged to a user in Montreal, a Toronto user would be billed $160, and a user in New York City would be billed $360.

Beyond very competitive rates, our customers can also take full advantage of advanced electro-technologies. We make no secret of our belief that electricity is a vastly superior form of energy for almost all industrial processes. It offers lower production costs, flexible production, better product quality, a healthier work environment and improved energy efficiency.

Our Electro-technology Implementation Assistance Program is designed to help industrial customers stay at the forefront of these technologies. Our customers can benefit from our worldwide leadership in the field, the know-how of our engineers, and the expertise of our electrochemical and electro-technology laboratory, LTEE.

While we are encouraging the use of electricity, we are certainly not encouraging its wasteful use. In fact, we are actively working to increase energy efficiency in Quebec. Our goal is to reduce future growth in energy demand here by 9.3 billion kWh per year by the year 2000 – roughly the current residential consumption of the Island of Montreal. The industrial sector will provide the largest part of these savings – and enjoy the lower energy costs that result.

For example, the Building Analysis Program, for commercial, institutional, and industrial buildings in Quebec, provides a free energy efficiency analysis which includes advice on the most appropriate and lowest-cost rate package. It can be the doorway to any number of Hydro-Québec energy efficiency improvement programs, ranging from lighting systems to electric motors.

I can assure you that the benefits of our assistance programs are mutual. Energy efficiency programs allow us to measure the benefits of deferring the construction of new generating facilities, with their massive upfront financing requirements.

Financial Performance

How are we doing financially? Last year we had results which we considered satisfactory: sales of $7 billion, and net income of $761 million. As a citizen of Quebec, you are a stakeholder in Hydro-Québec’s net shareholder equity of almost $11 billion.

According to a 1993 report from RBC Dominion Securities, Hydro-Québec is “a net asset to the province’s overall credit rating.” And, if I may quote further: “…management has set appropriate financial targets for the future, supported by a strong financial position, and a consistent earnings record.”

To ensure our financial performance, Hydro-Québec has been forced to reduce costs and rationalize its structure just like any corporation in a competitive marketplace. Expenditures on wages and benefits are being reduced, and we are downsizing our workforce by 2,000 for the end of 1995.

Future Growth

In the coming years, we will face a number of significant new challenges. The growth of demand for electricity will not be as great as it has been in the past. We are projecting 1.5% per year demand increases to the year 2010, once we factor in the savings that will come from energy efficiency programs. Our neighbors have similar projections: 0.9% for New York, 1.4% for Ontario to the year 2003, and 2.1% for New England to the year 2008.

To fill Quebec’s needs, we are giving priority to improving existing installations, to get more capacity from them. But new installations will still be required, and Hydro-Québec continues to favor hydropower as the most economical and best solution overall. Construction has just begun on Sainte-Marguérite 3, a project that will be commissioned only in 2002.

We are also looking to private producers to meet some of this demand through small hydro facilities and through co-generation.

And with slower projected growth, Hydro-Québec intends to develop a new momentum – and use the expertise of its people and its partners in Quebec industry – through international ventures.

Our best-known international venture is, of course, selling electricity outside Quebec, with other provinces and with the United States. At the moment, however, the North American electricity market is in a state of flux. As The Washington International Energy Group puts it, “… utilities have become exceedingly cautious about supply-side obligations. Solicitations have been canceled or deferred, contracts renegotiated, startups delayed and some contracts bought out.” From recent experience, this is a situation I can readily confirm!

There is, nevertheless, a natural fit between our electricity networks. Between Quebec and the Northeast United States, for example, there is a seasonal variation in peak demand period. In New York City the peak period is in the summer, with air-conditioners and a larger tourist population – while in Quebec the peak comes in winter, with electricity used extensively to meet our heating needs.

Looking at the Northeast region as a whole, two-thirds of the hydropower is in Quebec. Just as Norway, with its tremendous hydraulic resources, acts as the “battery of Europe,” we can see Hydro-Québec’s reservoirs serving a similar role in the Northeast of North America. We could import power from neighboring utilities in their off-peak periods, storing and banking water power and sending it back into their networks during high-demand periods.

The regional planning mechanisms that might allow this to happen are still emerging. In the meantime, even though major long-term contracts are more difficult to land, a very lively spot market is emerging. Last year, our short-term sales in the United States grew by 145%. We see this kind of trade growing in the future. It makes profitable use of our off-peak capacity, and does not require any new construction.

Looking beyond our present markets, many areas of the world are now undergoing fantastic economic growth. China, India, Indonesia, and other countries are reaching long-awaited takeoff points. Energy is crucial to this economic growth and hydraulic generation is the preferred source of energy, wherever feasible.

We are now going beyond our well-established role as a consultant in international markets, to become an investor, builder, and operator. One of the new partnerships we have established to do just this is the Asia Power Group, with Ontario Hydro and Power Corporation. Established in the fall of 1993, the group is already looking at a number of very interesting projects in the Orient.

Another international growth area we are pursuing is the marketing of Hydro-Québec technology. Close to 2% of our revenues have gone to R&D over the years, and we intend to get the maximum benefit from this investment.

Over the past 10 years, for example, we have developed a lithium-polymer battery, which is now one of the front-running technologies in the race to develop a viable electric car. In association with 3M and Argonne National Laboratories, we have won a two-year contract with the USABC consortium and the US Department of Energy – the largest ever granted by USABC – to further develop this technology. USABC includes the Big Three car manufacturers: GM, Ford, and Chrysler.

We’ve also played an active role in the Quebec-European Hydrogen project, which is advancing an energy technology that may be crucial to the 21st Century.

But even though we are diversifying and expanding our field of activity in marketing technology and in building and operating foreign plants, the core of our mission has not, and will not change. The net result of these ventures will make our company stronger and better able to offer the superior service and competitive rates you expect from us.

NEW PRODUCERS AND NEW PARTNERS

L. Jacques Ménard
Chairman, Hydro-Québec

The Canadian-American Business Council, Washington, DC, November 21, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

I’m honored by the invitation from the Canadian American Business Council, which, in only a decade of existence, has performed an important public service in stimulating the dialogue on trade between our two countries, which share the world’s largest trading relationship.

And I’m delighted to be in Washington, one of the world’s great capitals, truly a shining city on a hill. I must tell you, though, wearing my other cap as chairman of the Montreal Expos, that major-league baseball is not moving to North Virginia from Montreal any time soon – at least not if I have anything to do with it!

It’s a significant coincidence that the CABC was founded in 1987, the same year Canada and the United States concluded the Free Trade Agreement, later expanded to include Mexico and become NAFTA. Since the implementation of free trade in 1989, Canada has more than doubled its exports of goods to the United States, and the US has virtually doubled its exports to Canada. Free trade has clearly been a win-win for both countries. When trade in services is included, two-way trade last year approached $500 billion, or more than US$350 billion. That, of course, is about US$1 billion of bilateral trade every day of the year.

The Québec business community was among the strongest proponents and staunchest supporters of free trade. And Québec has been one of the prime beneficiaries. As Secretary of Commerce Bill Daley noted in a speech to the Montreal Board of Trade in August: “Québec alone is the United States’ sixth-largest trading partner, with two-way exchange totaling approximately US$50 billion.”

One of the largest growth areas in bilateral trade is energy. Canada now enjoys liberalized access to US markets, in return for guaranteeing security of supply. Both Canada and the US have achieved significant trade and policy objectives in regards to energy.

Security of supply is, of course, an historic concern for the United States, going back to the energy crises of the 1970s, and the shocks from the tripling of oil prices by OPEC in 1973, and again in 1979. The availability and affordability of Canadian energy helps alleviate those very legitimate concerns of the US.

There has been a recent and equally significant development: the deregulation of electricity markets in the United States with Federal Energy Regulatory Commission regulations 888 and 889, which will soon result in the most significant restructuring of the electricity industry since the New Deal era of Franklin Roosevelt. Electricity is a $200-billion-a-year industry in the United States, and $55 billion of that is right here in the Northeast.

For Hydro-Québec, one of North America’s largest utilities, the deregulation of the American market represents a tremendous opportunity, an opportunity arising at the end of one century, to be realized at the beginning of the next.

Since its founding in 1944, Hydro-Québec has managed its growth, for the most part, by meeting the needs of its internal market. In this respect, its history and development have been like most other utilities in the United States and Canada. Along the way, with sales of $8 billion and assets of $53 billion, it has become one of the largest energy companies in the world. Our objective now is to become a diversified energy company, serving the continental as well as the domestic Québec market. Earlier this year, Hydro-Québec acquired Gaz Métropolitain, the largest distributor of natural gas in Québec.

Outside the NAFTA market, the demand for electrical infrastructure is increasing dramatically, particularly in Asia and South America. Clearly, infrastructure is essential to drive economic growth in these fast-developing markets. As we progress, our international arm, Hydro-Québec International, which by and large has focused on consulting and technical assistance in the past, will increasingly become an owner of power generation, transmission and distribution infrastructure abroad, in partnership with local interests equipment manufacturers, engineering consortiums and world-scale financial investors. To that end, we’ll be investing $1.2 billion in equity alone in Hydro-Québec International over the next five years.

Given the usual leverage ratios of partnership equity to project debt, we’re looking at participating, over this period, in $8 billion to $10 billion worth of infrastructure projects outside North America. Now that’s not huge by world standards, but it’s a good start for us. And we’ll try to win our fair share of the business that’s out there, in a very competitive market where the financial stakes are of course very, very high.

So we are on the lookout for new partnership opportunities in North and South America and worldwide with companies that have similar ambitions to ours, and to enhance relationships we already enjoy with major players, such as Enron, here in the US.

Speaking more broadly, we are also doing a better job of managing our costs and earning a better return on investment for our sole shareholder, the Québec government. Looking down a five-year road, we’re forecasting a net profit of nearly $2 billion in 2002, nearly half of which will be returned to the shareholder in the form of dividends. Over the period, we also expect to increase our return on equity, currently a modest 6% this year, to a more acceptable level of 12% or so.

Hydro-Québec may be a government-owned utility, and it will continue to assume its paramount public service responsibilities in the future; but it is also governed more than ever today by private sector financial discipline, particularly as regards operating efficiency and the need to earn an appropriate return on capital, which is deployed at acceptable levels of economic risk.

The United States plays an important part in the strategic plan we tabled with our shareholder a month ago. As most of you know, we just last week received authorization from the Federal Energy Regulatory Commission, to sell electricity directly to wholesale customers, including private utilities and industrial users in the United States, at market-based rates. This means we don’t need to deal with intermediary utilities or energy brokers at the border.

For example, in the near future we will also be selling natural gas to New England, where it will be used, among other things, to drive electric-turbine generating stations. Hydro-Québec has long been a major supplier of hydroelectricity to New England, so in this sense we are simply widening our energy business in this market.

But hydroelectricity has always been, and remains, the mainstay of our business. New and abundant sources of energy, which Hydro-Québec can offer, are clearly important to Americans and to the sustained growth of the US economy.

Up to now, Hydro-Québec’s US strategy has been to be a temporary presence, selling the surplus generated by our own capacity. From now on, we intend to be a permanent presence. Resource development planning, in the future, will take into consideration sales to neighboring markets, in both Canada and the United States.

Despite producing more than 25% of all the world’s electricity, the United States needs more energy than it can supply from its own output. That is the main reason why, for both the residential and industrial consumers, electricity is three times as expensive in New York and Washington as it is in Montreal. Hydro-Québec is the low-cost producer and supplier in eastern North America. Remember that, the next time you look at your local utility bill.

Hydro-Quebec exported some 14 billion kilowatt-hours to other Canadian provinces and the United States in 1997, and we intend to step up our export sales in the next five years. Between now and the year 2002, Hydro-Quebec will export a further 6 terawatt-hours, mostly to the United States. A terawatt-hour is 1 billion kilowatt-hours, the equivalent of the electricity requirements of 2 million homes, or all the homes here in the Greater Washington area, for instance, for a month.

One of the last public appearances of the late Robert Bourassa was his address to the CABC two years ago, when he again referred to the export vision that motivated the construction of the James Bay energy projects during his first term as premier of Québec in the 1970s. In his view, the future was something to be built, not arrived at, and his perspective on the vast economic potential of hydroelectricity has been vindicated by the liberalization and deregulation of American export markets.

Hydro-Québec is almost unique among North American electrical utilities in that nearly 95% of our power is produced by hydroelectric stations. In the US, by comparison, only 10% of electricity is from hydro power. More than half of America’s electricity is still sourced by coal, and nearly one-quarter comes from nuclear power.

Hydro-Québec’s current installed capacity of 36,000 megawatts, including our share in Churchill Falls, is fully half the rated hydroelectric capacity of the entire United States.

About half the hydro capacity in the US is privately owned, about one quarter belongs to the United States Army Corps of Engineers and most of the remainder is generated by the Interior Department’s Bureau of Reclamation and by the Tennessee Valley Authority, which built Roosevelt’s idea of economic reconstruction through public works, a vision that helped see America through the Great Depression of the 1930s.

Deregulation represents an opportunity for American consumers, both residential and industrial. And it represents a social opportunity for America to purchase more of the cleanest and safest hydroelectricity. Hydroelectric consumption results in a significant decrease in emissions that contribute to global warming. It is also a renewable resource, and so when we think sustainable development, hydroelectricity comes readily to mind.

Global warming and the greenhouse gas effect are very much on the public agenda as we approach the Kyoto Conference. The fact is, compared to other conventional sources of electricity, hydroelectricity is far and away the most environmentally friendly. For example, coal-generated electricity results in nearly 50 times as many atmospheric carbon dioxide emissions as hydroelectricity. Oil-generated electricity creates about 20 times as many CO₂ emissions as hydroelectricity. And at source, of course, hydroelectricity causes practically no emissions at all, whereas coal, oil and even natural-gas generation result in substantial CO₂ emissions.

Because of the dominant position of hydroelectricity in our home market, Québec has the lowest level of carbon dioxide emissions in Canada: 7.8 tonnes per person, half the Canadian average.

When we consider emissions avoided because of imports of Canadian hydroelectricity to the United States, we are looking at the equivalent of annual emissions from 5.3 million automobiles, or all the cars in the city of New York.

So the easier availability of hydroelectricity as an affordable and clean energy alternative is certain to be one of the benefits of deregulating electricity markets in the United States.

For industry, that means more producers in the US marketplace and, as a result, more competitive markets. For consumers, it also means more choice at lower prices, lower prices than in the past for products they buy, and lower utility costs at home. It also means new thinking, away from the complacent mentality of the regulated monopoly, toward the competitive mindset of the market.

Look at the difference this has made in the telecommunications industry in America since the breakup of AT&T in the early 1980s. The RBOCs, the regional Bell operating companies, have all experienced huge growth. The competitive long-distance companies are flourishing. Washington-based MCI, a startup long-distance company less than 15 years ago, is the US$37-billion prize in the biggest takeover in corporate history! And AT&T still remains a dominant player in the American telecom industry.

That is the kind of sustainable development we are looking at in the energy industry. In the new century, with open access to markets, international producers such as Hydro-Québec will be able to offer competitive and environmentally friendly services through local partners. New producers and new partners. And all Americans will benefit from deregulation.

Of course, I could give you many examples of industries that have, to a large extent, been restructured to the benefit of consumers and industry in North America. Financial services, trucking, and railroads come to mind, and also civil aviation. But if you are looking for a good model for the deregulation of the huge electricity industry, you need look no further than natural gas, and no further afield than Canada, which deregulated this sector in 1985.

We now have, in North America, an almost seamless trading sector in natural gas. Before the product was produced by one company, transported by another, and distributed by a third. Now it no longer matters who does any of the above, as long as it comes out at the other end of the pipe.

Canada has more than doubled its exports of natural gas to the United States in this decade. Hydro-Québec’s affiliate, Gaz Métropolitain, will be importing American gas for distribution in Québec. As these things move through the pipeline, it is entirely possible, and indeed likely, that Gaz Métro will in turn be re-exporting American gas to the United States.

Another market which is continental, indeed global in nature, is the capital market. In terms of investments, financial tools can be used interchangeably from one country to the next. Hydro-Québec has been a significant borrower on US capital markets for many years, and we will continue to be a player as we move forward with a $13-billion expansion program over the next five years – to be financed largely through the reinvestment of cash flow from operations, but also, significantly (40% or so) through new financing in the marketplace.

Under this program, which of course includes capital expenditures for maintenance, some $8 billion is earmarked for new projects, including the partial diversion of rivers into existing basins, new power generating plants and transmission facilities, all of which have been a source of some political and environmental controversy in the past.

But these criticisms will hopefully be mitigated in the future because, from here on in, any new project must meet three tests. First, it must be financially profitable for Hydro-Québec. Second, it must pass a reasonable environmental assessment. Third, it must obtain the approval and partnership of the local community – in other words, it must be socially acceptable. With these three criteria in place, Hydro-Québec hopes to move ahead with sustainable development in a deregulated marketplace.

Deregulation of the natural gas sector in Canada was kick-started by producers. Deregulation of electricity in the United States, as with many other examples of industry deregulation, is market-driven. The producing regions are moving into these larger markets beyond their own mandated backyards, and even beyond interconnected regional grids, through energy swaps and other storage and take-back arrangements.

To illustrate this point, I am pleased to announce that Hydro-Québec and Constellation Power Source of Baltimore, Maryland have just concluded an important agreement for a substantial quantity of electricity storage services, one-third of a terrawatt-hour, including the delivery of energy directly to the eastern interconnections of the United States.

This transaction is the result of a request for proposals for storage capacity launched by Hydro-Québec in August 1997. For Hydro-Québec it is the first operation of its kind, and it has been made possible through an energy swap. By 2002, Hydro-Québec is targeting annual revenues of $40 million to $50 million in energy-storage activities of this kind, simply because of the huge storage capacity of our reservoirs.

I believe we are moving toward one truly continental market in electricity. Restructuring of the market will not occur overnight. This is not an event, it is a process. But I think it will unfold more quickly than is generally believed in the community at large.

One day, in the not too distant future, the North American electricity market may become as seamless as the natural gas sector. At Hydro-Québec, we are looking forward to that day. We are planning for it. We are counting on it. And we are counting on new partners and new customers here in the United States and, increasingly, everywhere in the world.

GLOBAL AIR NAVIGATION: THE PIECES ARE COMING TOGETHER

Pierre J. Jeanniot, O.C.
Director General, International Air Transport Association

Third Global Navcom Symposium & Exhibition, Montreal, May 23, 1995
Published in The Corporate Report No. 13 (August 7, 1995)

This is an important year, the year when the satellite-based CNS/ATM – that seemed such a distant dream 10 years ago – will start, in a modest fashion, operating for real. The pieces of the world air navigation mosaic of the 21st century are now really starting to come together!

There was once a man who bought a home-study course based on a book called “How To Make Your First Million Dollars.” He read the book, did the course, applied all the ideas – and promptly made a million dollars.

He then called the sellers of the study course and said, “I’ve made my first million dollars. I like making money, so, can you please tell me how to make my second million dollars.” I sometimes think the international airlines are asking the same question.

A few weeks ago in New York I reported a 1994 net profit on the international scheduled services of IATA airlines of US$1.8 billion. The first net profit since 1989. Call that the airline’s equivalent of our home-study hero’s first million.

What might happen during 1995?

We expect traffic to increase by 8.5% and capacity by 7.0%. Yield is not expected to change but unit cost might fall by a further 1.5%. As a total cost interest charges are assumed to be unchanged. The result would then be an operating profit of $9.0 billion US and a net profit of $5.5 billion, still 2.5 percentage points below an acceptable profitability target.

Unfortunately, there is no self-fulfilling prophecy about those 1995 data. This year is only five months old and there is still much scope for things to go wrong, financially speaking, that is.

There really is some doubt as to how to make that second million! But I would be tempted to say, to paraphrase a well known slogan, “It’s the over-capacity, stupid!”

Make no mistake – the airlines need that second million. In actual fact they need several billions of net profit year after year. Consistent profitability is essential to improve balance sheets weakened by five years of losses. We need to build up our reserves, raise some new equity, buy new aircraft and equipment, and regain the ability to pay dividends. The airlines have to make profits, year after year to rebuild their creditability.

Remember, airline competition is not confined to market share. Airlines also have to compete for funds. For the moment the big question is whether airlines can keep their capacity growth down to 7% or less. Nothing, except perhaps a fuel crisis, has greater potential to destroy our good progress towards decent profitability than a return to excess capacity.

For the longer haul, however, it comes down to a question of costs. Look after capacity, in relation to traffic, and the yields will look after themselves. But in the increasingly competitive airline world, future profitability will, increasingly, be a matter of managing our unit costs. This year, we are looking at a further unit cost reduction of 1.5% from the 1994 level.

How do we do it? Well first, we have to be much smarter with the costs that are within our control, beginning with our product distribution costs which have now soared to 20% of total expenses. At the same time, we have to gain better control over a range of other costs, which up to the present we have tended to accept. In both cases the industry will have to:

• Develop a clearer definition of our operational requirements

• Maximize the use of technology

• Work with suppliers and other partners to make it happen

Which costs are we looking at? The ones that come to mind are the direct operating costs of flying aircraft and the costs of the infrastructure needed for those operations.

For too long, air navigation supply has been subject to the whim or central budget constraint of individual governments, often acting in isolation.

If you include a jigsaw puzzle on your Christmas shopping list, you expect certain things for your money. First, that you get the number of pieces stated on the box, for one price known in advance. Secondly, the pieces are finished to the same standard, made of the same material, are of the same thickness. Thirdly, the pieces are fully interlocking and fit together to form the picture which appears on the box.

Now, consider international air navigation. We have to accept the fact that it is a jigsaw, if only because the very origins of international air transport are rooted in the concept of national sovereignty. Every piece of the jigsaw could be an individual Flight Information Region, with its own dedicated navigation and communication systems. But if today’s world air navigation pattern were to be offered to you as a jigsaw puzzle to buy for Christmas would you in fact buy it? Perhaps, more to the point, would you even wish to receive it as a present? And if you did receive it, it might well feature in January’s first garage sale!

We do not have the luxury of being able put today’s air navigation in a garage sale. Rather, we have to replace the pieces, hopefully several at a time; hopefully, adjacent pieces, while retaining parts of today’s picture, however imperfect it may be.

This is where FANS – Future Air Navigation Systems – comes in. With the implementation of FANS, however, perhaps there should be fewer pieces. This would imply a reduction in the number of Flight Information Regions, where sovereignty is not compromised and where the use of shared facilities, for example Ground Earth Stations for SATCOM, is the best means to provide economic air navigation and communication services for both ATC service providers and airspace operators alike.

How do we go about achieving that? Well, we need a comprehensive kit which should include:

• A set of plans to provide the correct road map

• The right tools to do the job

• A vision of where we are going

The first set of tools are the plans. The conceptual plan was delivered by ICAO. Now we are looking at concrete plans to transition to FANS.

At IATA, we have developed User Driven Plans for global application, but specific to local situations and requirements in each of IATA’s six regions. These plans are taking account of airspace characteristics, traffic densities and the quantity/quality of navigation facilities, and further provide a detailed step-by-step transition where each step is justified by the achievement of genuine operational and economic benefits. In each case, the objective has been a plan which reflects the end users’ interests – the airlines – in terms of safety, priority, cost effectiveness and operational efficiency and, vitally, would achieve the support of the appropriate civil aviation administrations.

The plans are being used by IATA in ICAO Regional Planning and Implementation Groups and with key states. Initial planning has been completed on a regional basis.

It is becoming evident that as “FANS” implementation moves forward, there is a potential risk of fragmentation – misaligned pieces of the jigsaw if you like – in light of the different options and transition paths that are emerging in the various regions.

So, we think there is an important role for IATA, ICAO and others to ensure a coordinated global transition. In the short term, we will play a proactive role in promoting inter-regional coordination and a flexible approach to systems implementation on the part of ATC providers and the airlines.

In the medium term, we will encourage the development of technical solutions that would accommodate the different approaches to systems implementation. This would include all aircraft types and produce operational benefits as investments are made.

The second set tools are those needed to ensure that we get the economics right. Cost/Benefit Analysis (CBA) tools are essential to demonstrate the net benefits of FANS and to guide the implementation scheduling to allow initial savings to fund the next steps in a process of progressive implementation.

I am very encouraged to see the growing interest in and acceptance by the aviation community, of cost/benefit concepts. Much of this was initiated by the FANS Committee. Building on this, ICAO has produced a cost/benefit manual.

In ECAC, valuable work has been done to develop CBA principles that reflect the particular planning and operational characteristics of the area. IATA has contributed directly to the refinement and development of both these CBA initiatives, through its work on cost/benefit methodology. This work has focused attention on such complexities as:

• The effect of transitional costs, associated with the phased implementation of CNS alternatives

• The ability of FANS CNS/ATM systems to accommodate demand that cannot be absorbed by means of status-quo technology

• The impact of reduced aircraft delay associated with the various FANS alternatives

All these must be properly addressed when we look at the numbers. Such planning and analysis is invaluable for putting the Communication, Navigation and Surveillance elements in place. We must not forget that C, N and S are the tools. The real benefits come from improved Air Traffic Management – the ATM.

I would like to highlight the international airline industry’s vision of the future Air Traffic Management System, which has been defined by our Air Traffic Management Task Force. It is the “Free Flight” concept that is gaining momentum.

The air should, in theory, provide the most freedom of movement of any transport mode. Jean-Jacques Rousseau wrote: “L’homme est né libre, et partout il est dans les fers.” To paraphrase that in English, one might say of air transport: “Aircraft have the freedom of the air, except the freedom to determine their route, altitude and speed.”

“Free Flight” describes a safe and efficient operating capability, under instrument flight rules, in which the operators have the freedom to select their path and speed in real time. Each aircraft flies a dynamic, optimum flight path, making full use of onboard performance management systems. Position and short-term-intent information is provided to the air traffic management system, which performs separation monitoring and prediction functions. Ground intervention then occurs only on a “by exception” basis, to resolve any detected conflicts. We must, however, be realistic when looking to implement “Free Flight.” There must be full support for it from the ATC community. We have already taken some initial steps to create a dialogue between IATA and IFATCA on this issue. Furthermore, it is clear that implementation of “Free Flight” will have to be gradual and will be influenced by regional priorities and the achievement of real benefits.

One of the early lessons of FANS implementation is that it cannot be done alone, it needs CAAs working with operators, communication providers and manufacturers. Of course all of these different stakeholders have their particular interests, coming at the problems of global implementation from different directions. But we all share a similar goal, to see FANS implemented in a timely and cost-effective manner.

Until recently all of these different interests had no common “home.” We think they need one, and therefore, I am pleased to announce today the formation of a new coalition – the FANS Stakeholders’ Group (FSG). A new coalition, and the diversity of its founding members reflects the vital need for day-to-day consultation and cooperation, as FANS implementation gets under way.

The FSG will be based here in Montreal, the logical location for close collaboration with ICAO. The founding members are: Air Transport Action Group, ARINC, Inmarsat, IATA, International Business Aircraft Association (IBAC), International Coordinating Council of Aerospace Industries Associations (ICCAIA), International Council of Aircraft Owner and Pilots Association (IAOPA) and SITA. These members will work closely with ICAO and with CAAs around the world. Their goal is the timely, coordinated and cost-effective implementation of the ICAO FANS CNS/ATM systems on a global basis. Through their expertise, FSG members will assist governments, ATS providers and airlines. That assistance will include: financial expertise, technical support, training and procedures development.

That’s one more link forged, we think, in the chain of progress leading to “Free Flight” and another tool to help construct the mosaic – a 21st century mosaic resulting in a unified global air-navigation system, delivering benefits to the world, while respecting national sovereignty.

The pieces are really coming together. Standards are emerging from ICAO and other organizations. Financial analysis tools are available. Transition plans, reflecting operator requirements, are being finalized and integrated into the ICAO Regional planning processes. The vision of the future ATM environment is now clearer, but much work still lies ahead, to refine the technical aspects. I don’t need to remind you that all this “talk” and “study” and “analysis” is quickly becoming reality. Look at the new investments airlines are making in SATCOM. Look at the South Pacific, where operational use of FANS is literally weeks away. Look at the growing interest in ADS and GPS augmentation trials. Look at the excitement that FANS is starting to generate in Russia and India.

The jigsaw pieces of the new world air navigation picture are starting to come together. The pieces are different. They embody new technology, the technology of today. Geographically, they are bigger pieces, reflecting the global scope of the new technology.

One very important thing remains, however, to ensure that all the geographic and technical pieces interlock. And that, of course, is one of the main reasons why IATA and ICAO have been organizing Global NAVCOM for the past three years.

This will be the last of the “global” events. Starting in 1996 we will focus on individual regions. It is in the regions that the implementation work is now starting to take place.

SAFETY IS NO ACCIDENT

Pierre J. Jeanniot
Director General, International Air Transport Association, Montreal

APEC Transportation Working Group Aviation Seminar, Vancouver, April 16, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

When I started in aviation, flying was still somehow considered dangerous, but sex was generally considered safe!

I am pleased to see so many of you here, today. The fear of many conference organizers – on attendance – can be encapsulated by the words of Orson Welles. Once, lecturing in front of a very small audience he said: “I’m a director of plays, and also a producer of plays. I act on the stage, and in movies. I write and produce movies, and I write, direct and act on the radio. I’m a magician and a painter. I publish books. I play the violin and the piano.” Then he paused and added: “…isn’t it a pity there’s so many of me, and so few of you.”

Civil Aviation may not have on its payroll many magicians, painters, violin players or movie actors, but it does have a collection of individuals with differing but equally worthy talents. Individuals who work in such a way as to ensure that the corporate whole is greater then the sum of its parts.

My main contention today is that we are going to need a lot of dedicated worthy talents working together to provide the safety and security levels which will be needed tomorrow. I am going to talk about safety and security. I am also going to talk about aviation infrastructure. To some people there may be, at first glance, a dichotomy here. But there is none. Expanding civil aviation cannot grow safely and securely without planned, coordinated, steady additions to both the quantity and quality of its basic infrastructure, on the ground and in the air.

I am fond of saying that “Safety is no accident.” But this obvious statement also implies the continued highest levels of foresight, planning, involvement and commitment, from everyone in the industry. No accident, literally zero accidents, is what we in IATA are aiming for as an ultimate goal. But to get to that goal we thought it realistic to set up some intermediate milestones.

And so, we have an initial objective: to reduce the annual aircraft hull loss rate by 50% by the year 2004. Let’s attach some numbers to that objective. Our target is to remove nine or 10 hulls per annum altogether from the crash statistics, and that means saving a lot of lives, passengers and crew – every year.

This is certainly not an objective which can be achieved by airlines acting in isolation. Neither can it be achieved, for example, merely by regulatory action. The key is a partnership approach. The only way that we can achieve a substantial reduction in accident rate is through partnership of airlines, governments, airports, providers of navigation services and, of course, aircraft manufacturers.

We can and indeed we must act together in order to achieve this goal. As significant partners in this undertaking, you have a range of opportunities to exercise and fulfill your respective and collective responsibilities and obligations.

Effective safety oversight by regulatory authorities is an essential foundation. Along that line, it is vital that you give the International Civil Aviation Organization Safety Oversight Program your full support, and that means giving it the required resources.

Accident prevention is the key!

We must focus our attention on:

• Improved collection, analysis and exchange of incident/accident data

• Rationalization of safety databases

• Establishment of voluntary, non-punitive, confidential incident reporting schemes

• Increased use of digital flight data recorders for detecting and correcting unsound operational practices

• Significantly reducing controlled flight into terrain (CFIT) accidents: these, invariably, are not survivable

• Mitigating the effect of human factors, which are a contributing element in the majority of accidents

Your respective economies, and others, can be the essential instruments to foster and enable action in all these areas. Let me illustrate. Any voluntary reporting scheme typically requires administration by an entity independent of the regulatory or accident investigation authority. Sources must be protected. In this case, the need for enabling action, I believe, is clear.

Then, widespread use of flight recorders in accident prevention is unlikely to occur without the various authorities taking a decisive role in fostering it. And a reduction in CFIT accident can be achieved if appropriate legislation is enacted to require that ground proximity warning devices be fitted on aircraft engaged in domestic operations, including on commuter size aircraft.

IATA has deeply rooted involvement in human factors. As far back as 1975, we devoted an entire technical conference to human factors, and we have been active in the field ever since. The contributions of some of our member airlines to applying human factors in the training of flight crew is truly pioneering.

Human factors, or HF, is not a subject that concerns only what goes on in the cockpit! It is even broader than the corporation that operates the aircraft and, as I have implied, it embraces all the components of the air transport system.

For example, the subject must embrace HF in air traffic control, security at airports and, importantly, in the design, implementation and operation of CNS/ATM Systems. Human Factors, applied to organizational/institutional mechanisms is a contemporary, important addition to our arsenal of knowledge thanks to Professor James Reason. And we are pleased to observe that HF is now increasingly recognized as an essential, specific component of accident investigation.

Aviation operates in a multicultural world. There have been suggestions, perhaps occasionally assertions that there are cultural characteristics involved in Human Factors. I believe that it is important that this area be explored professionally, with respect, in an atmosphere devoid of any emotive cultural sensitivities, so that compensating measures can be developed, if indeed this dimension is of significance.

I said earlier that there is no dichotomy between the notion of more and better infrastructure and enhanced safety.

If one thing proves that proposition, it is Future Air Navigation Systems. When ICAO approved the FANS concept in 1991, it ushered in a new era to the global air navigation and air traffic management system. This new system, now called CNS/ATM (Communications, Navigation, Surveillance and Air Traffic Management) is, as we all know, based on satellite technology.

Communication satellites provided by Inmarsat are now in regular use by aircraft. The introduction by Japan of the MTSAT communication satellites will enhance total systems availability in parts of Asia/Pacific. A Global Navigation Satellite System – GNSS – based on the United States Global Positioning System – GPS – and the Russian Federation’s Global Orbiting Navigation Satellite System – GLONASS – is being developed.

The GPS constellation and GLONASS are now operational. Their services are already in the early stages of aviation use in the US, Canada, Australia and other countries. They are in prospect for the Philippines, about to be demonstrated in China, and in regular use in Fiji domestic airspace.

GNSS will provide significant improvements in relation to conventional radio navigation installations. It is more accurate than the systems currently in use, and also provides a universal time reference, essential to the future air traffic management system. When combined with air/ground data communications systems, the GNSS will provide an excellent basis for automatic dependent surveillance – ADS – in all airspace. This means that in oceanic or remote areas where it is difficult to locate conventional ground aids – and the Asia/Pacific region has an abundance of both – it will be possible for ATC centers to monitor the progress of aircraft, and enhance safety within that airspace.

In such areas, satellite communication facilities will provide a direct link between the pilot and ATC, with a greater degree of reliability and clarity than is possible with the current HF voice services. This, in turn, will improve safety. Furthermore, the use of GNSS in conjunction with inertial navigation or inertial reference systems can eliminate some types of blunder errors. These are normally associated with improper initialization of inertial systems.

The ground infrastructure in support of satellite communications includes Ground Earth Stations – GES. Only a limited number of GESs are required to provide full coverage, and as we do not wish to pay for facilities that are not essential, IATA advocates greater cooperation among our economies to share those costly GESs.

Safety is, of course, paramount. But the progress initiated by GNSS and the future possibility of eliminating ground navigation installations will provide for significant improvements in the regularity, efficiency, and economy of air transport, as well as enhancing safety. It’s nice to be in a win/win situation.

There is yet another benefit. Ground-based aids currently used for non-precision approaches provide relatively coarse guidance to pilots. For example, in general they do not provide important information such as distance to touchdown. By providing more accurate guidance, together with distance information, GNSS will increase safety margins during non-precision approaches. As on another bonus, the ground navigation equipment to support GNSS-based precision approaches is expected to be less costly than traditional ILS equipment or the newer MLS equipment. And so, it will be possible to provide a GNSS level of service at more airports, thereby improving overall safety. GNSS also has the potential to support airport surface guidance systems.

All these features of GNSS, particularly for the non-precision approach capability, the potential for significant safety and cost benefits should be of great importance for Asia/Pacific, which will enjoy the world’s highest future traffic growth, and will represent more than half the civil aviation world by 2010.

All aviation systems must provide accuracy, integrity, availability and continuity, and to provide those things, both GPS and GLONASS require varying degrees of augmentation. Inmarsat will be providing the transponders to support augmentation with the launch of Inmarsat III communications satellites, starting this year. This will enable the United States to introduce its Wide Area Augmentation System – WASS – from 1998, and a similar European Geostationary Navigation Overlay Service – EGNOS – from 1999. In the Asia/Pacific region, a service provided by the Japanese MTSAT is expected to be available in 1999.

We need a worldwide augmentation system. And with a view to achieve this, I am making a strong plea for your economies and others to cooperate while these systems are still in the development stage. It would be intolerable if international airlines had to carry different equipment standards because of a lack of such coordination.

A key feature of GNSS is its potential to support operations from en-route to Category III precision approach and landing, and surface guidance at an enhanced level of safety. Although the more demanding operations will require augmentation by ground, space or aircraft systems, GNSS has the potential to provide a seamless navigation guidance system. Separate systems for different phases of flight will no longer be needed.

GNSS is global in scope, with the space systems provided by only a few agencies. This means that the various authorities will be less involved in the acquisition, installation, and operation of ground-based infrastructure. At the same time, efforts will need to focus on developing operating and certification procedures, as well as new air traffic management techniques to safely and fully exploit the capabilities of GNSS.

A number of states, including some in Asia/Pacific have, as I mentioned, already implemented GNSS operations. IATA has been very supportive of such actions. Through regional and global cooperation, the benefits of their experience can be shared, safety enhanced and implementation speeded up.

GNSS is going to give us more airspace capacity. This is urgently needed in Asia/Pacific. Capacity improvements derive from reductions in aircraft separation standards, and such reductions involve ever present and important safety considerations. Understandably these give rise to particular concerns on the part of pilots and air traffic controllers.

We look forward to the constructive participation of pilots and air traffic controllers associations in the processes, thus paving the way for achieving safe, progressive and timely reductions in aircraft separation standards.

With the implementation of CNS/ATM systems, further efficiency and economy can be achieved if neighboring areas jointly provide air traffic services over larger geographic areas. Dr. Assad Kotaite, president of the ICAO Council, has consistently delivered this message during his official visits to states in Asia/Pacific and other regions. We in IATA strongly support this goal and I would urge you to take a very serious look at the advantages which could result from your participation in larger air traffic regions. Indeed, we would suggest that there are better ways for states to exercise sovereignty than by fragmenting airspace and the responsibility for the provision of ATM.

What we are aiming at, ultimately, is Free Flight. Some prefer to call it “Dynamic Flight Planning.” This is a term used to describe a safe and efficient operating capability in which operators have the freedom to select an optimum flight path in three dimensions, plus time. Air traffic restrictions would only be imposed to ensure separation of aircraft, prevent capacity being exceeded or otherwise ensure safety.

Safety may be paramount, in airline operations. But if that subject is always going to be number one, another subject is rapidly making its way up the ladder: the environment. Increases in airspace system capacity and efficiency, such as those offered by CNS/ATM, will be beneficial for the environment because aircraft emissions will be cut compared to operations under traditional systems. Additionally, much has been achieved to date with the introduction of quieter aircraft, and the elimination of their noisier predecessors.

But progress in the air should be matched by progress on the ground. And so it is essential that steps be taken to ensure effective land-use planning in the vicinity of airports.

The airlines, through improved procedures and expensive fleet renewal, are making every effort to further improve the industry’s environmental performance.

Following a worldwide wave of aircraft seizures in the late sixties, IATA established a Security Department under the IATA Technical Committee to address the security needs of the airline industry. It recommended industry policies, devised procedures to protect against acts of unlawful interference involving civil aviation, and worked to protect airline customers, personnel and property.

For IATA, “Safety and Security” is the number one corporate goal.

Specifically, our prime security related objectives are to:

• Promote implementation of secure, cost-effective and customer-friendly passenger and baggage reconciliation systems

• Ensure that any national legislation on the implementation of bombproof aircraft containers is cost effective

More recently, the attention of the IATA Technical Department has been focused on:

• Developing and promoting a “one stop” security check concept for passengers and baggage

• Promoting cost-effective designs for airport and aircraft security, including aircraft equipment, with particular emphasis on hold baggage screening

For 20 years, under the IATA Intensified Aviation Security Program, task forces have visited and discussed security matters at airports around the world, and encouraged the corresponding governments to ratify the Tokyo, Hague and Montreal Conventions as well as implementation of Annex 17 to the Chicago Convention.

This program has resulted in improved aviation security at many international airports. The Civil Aviation Administration of China benefited from such an IATA survey team visit in April. An IATA Aviation Security training course is conducted annually in Geneva, Miami and Singapore. This course trains security personnel to an international standard to enable them to develop, implement and manage the measures and programs required by airlines and states.

ICAO is working on a standard Airline Security Training Package called STP/123. Once completed, STP/123 will be available to carriers through their governments in the official ICAO languages: English, French, Spanish, Russian and Arabic.

Code-sharing is increasingly fashionable throughout the aviation industry, and IATA has a working group to study the security implications. This group will work closely with ICAO in the development of security guidance material and will involve ACI, The Airports Council International.

Security threats can also arise from sources other than bombs and hijacking. A secure flight is also a calm flight. In 1993, carriers reported an increase in crimes on board aircraft during flights. Crimes such as indecent and physical assaults, drunkenness and theft. Unfortunately, there was a lack of adequate legal jurisdiction in several countries, and we thus asked our legal counsels and ICAO’s to study the problem.

A resolution on the subject was adopted by our AGM last year in Kuala Lumpur. This resolution called upon member airlines to urge their governments, if they have not already done so, to ratify, adhere to and fully implement the 1963 Tokyo Convention and the security standards of Annex 17 to the Chicago Convention. It also called upon states to take all steps necessary in order to enable the exercise of full jurisdiction over all offenses committed outside their airspace on board aircraft operating to and from their territories.

We will submit the resolution to ICAO with a request that ICAO press all the states to incorporate appropriate provisions in their criminal codes.

I am sure that you will agree that your citizens and those of other countries, our passengers expect positive action aimed at ensuring their well being as air travelers.

In June 1995, a historic meeting took place in Washington, DC. It was the first gathering of the Transport Ministers of the 18 APEC economies.

The ministers called for:

• Policies that significantly improve a region-wide transportation system through strategic investment in infrastructure

• Work to promote further development and mobilization of capital to finance transportation infrastructure projects, recognizing the need for both public and private resources

• Facilitating the most efficient movement of people and goods in the region by adopting and using appropriate modern technologies

• Development of transportation systems that help reduce congestion

It should come as no surprise to you that, in my view, for Asia/Pacific the decisions must pay particular attention to the international cooperation needed for the air transport system. Aviation is forecast to make a US$850 billion economic impact and provide 15 million jobs for Asia/Pacific by the year 2010. We all need a safe, secure, efficient system. A system which can support the continued expansion of the Asia/Pacific economies. This can all be achieved, provided a properly coordinated vital infrastructure investment is made. So that together we can look to future years when air transport can offer an Asia/Pacific operating environment which is safe, secure, convenient, cost effective, and which promotes maximum economic growth.

THE 21ST CENTURY: TAKE YOUR PLACES FOR THE AIR TRANSPORT AGE

Pierre J. Jeanniot, O.C.
Director General, International Air Transport Association

The Board of Trade of Metropolitan Montreal, December 9, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

The more I travel to the four corners of the world, the more I enjoy getting back to Montreal, my hometown – and IATA’s hometown.

Our vast world offers, of course, many exciting and diverse opportunities to locate a business and to enjoy a good quality of life level. But to my mind, very few, if any, can match the combination that Montreal, Quebec and Canada offer. A combination that may perhaps need some fine-tuning – but certainly not dismantling.

We may be just at the start of winter in this fine city. But some signs of revival are giving us hope that economically speaking, spring may be underway. Perhaps the light at the end of the tunnel is just that, and not another oncoming, crushing train!

To talk of aviation is also to talk about Montreal, the destiny of this city having been intimately linked over the past 50 years with the evolution of aviation – more particularly, civil aviation.

A number of world forces are continuing to reshape the airline industry. But the airlines are certainly no strangers to the concept of globalization of the market, since the aviation industry was one of the catalysts at the origin of this phenomenon.

Civil aviation is still very much an industry about the future, an exciting future which will play an important role in defining the new century. Very few industries can anticipate annual growth rates averaging 6% to 7% over the next 20 years and look forward to a doubling of their markets every 10 to 12 years.

But to achieve our growth potential will require much more than a continuously healthy world economic climate. There are some important issues which our industry must address and resolve if we are to take full advantage of this growth opportunity.

In a similar vein, Montreal will not be able to fully capitalize on the opportunities generated by aviation in particular, and market globalization in general, unless a number of fundamental issues restricting that growth are addressed.

Let me start by giving you a snapshot of the state of the international aviation industry, of which more than 95% is now represented by IATA.

Unfortunately, the IATA airlines’ record profitability of 1995 was not sustained in 1996. A net result of US$3 billion on international scheduled services was achieved against the background of the highest ever passenger load factor and a fall in net interest charges. But, critically, yields declined six times as fast as unit costs, causing a decisive rise in the break-even load factor. US$3 billion represented just over 2% of operating revenues. The airlines need to do much better than that to be an attractive investment.

In theory the prospects for improved financial performance are good. Traffic growth remains buoyant, driven by fundamentally favorable economic conditions. Record load factors are being achieved. And indications are that unit costs continue to fall. Once again, the crucial question is the ability of the industry to take advantage of good traffic growth in order to improve average yields.

What about 1997? The outlook for the current year is that traffic will grow by 7.5% and capacity by 5.3%, so load factors will increase yet again! But yield is forecast to go down once more by 0.5% and unit costs to rise by 0.7% and thus the break-even load factor will go up again. Interest charges are also due to rise as a result of increased new aircraft delivery. The result would be an increase in net profit from US$3 billion to US$4.5 billion. A similar result is currently forecast for 1998.

As we start a new year, there is a growing “fin de siècle” feeling in the air. What will this new millennium bring? We know that we are in the middle of an industry restructuring, a shakeout which still has a few years to run. Everyone is scrambling to extend their market reach. We have code-shares, route swaps, alliances, cross-equity holdings and outright takeovers.

For more than 50 years, air transport has been organized for the most part through a bilateral process based on the Chicago Convention. Failure to adapt this convention to meet current world forces has driven the airlines to bypass the process through alliances and code-sharing.

Alliances and code-sharing are now very important facts of airline life. If your own government’s bilateral doesn’t let you fly passengers or cargo on a route that interests you, then you can create a partnership with somebody who can fly it. That is one of the most basic forms of alliance. No one airline flies everywhere, but most airlines offer a global product provided they can achieve such presence without massive additional investment and cost.

In recent years, alliances have made a significant contribution to the airlines’ efforts to simultaneously increase revenue and reduce costs. The alliance process has been very dynamic. We see a strengthening of some alliances and a weeding-out of others, but in general there is a greater determination to make alliances more productive.

Alliances are not mergers, and allied airlines simply act as a “virtual” large airline only in specific dimensions while retaining their identity and independence in many other dimensions. But there is no doubt that as we approach the new millennium, most (if not all) airlines will have become partners in one or another of the half dozen or more of the global alliances presently in the making.

In parallel with their efforts to extend the reach of their products, airlines are also looking closely at the products themselves, and in particular most carriers have redefined and improved their business-class services during the past few years. Now, during improved economic conditions, there is evidence that new first-class products are also increasingly in favor, particularly on the longest hauls.

The desire to be perceived as a truly global airline is also driving some carriers to move away from their well-established national identities. Let me illustrate by reference to British Airways, one of IATA’s largest and most successful members. It has a very large natural market base of 57 million people and its home base is the largest international hub in the world. Yet it has discovered that 60% of its passengers are not British – and that this proportion will be likely to grow quickly as it extends its world reach through subsidiary companies and alliances. What affinity do those people have with a prominently displayed British flag on the tail?

Rightly or wrongly, British Airways concluded there was none. And so the flag has gone, to be replaced by various “world” tails. People have different views on that very symbolic change. But if sentimentality is evoked as a reason for retaining the flag rather than hard commercial reasoning, it is certainly mistaken.

Operating an airline is not about national prestige. It is about bottoms and seats. Passengers are primarily interested in value for money: good service, punctuality, good connections and safety. If national flags suggest all of that, then national flags are good things. If they do not, they are, at best, irrelevant. The British Airways departure from the traditional national flag carrier image will be followed closely and, if successful, is likely to be emulated by other carriers and alliance partners.

A new millennium lends itself to predictions, so let me be the first to announce that the year 2003 will be the year of delivery of the world’s first Very Large Aircraft. The engines developed by all three major suppliers for the Boeing 777 can satisfy the basic power requirements. There are some minor details that I am not at liberty to disclose for the moment: the month of the first delivery the builder and the launch customers, for instance! But everything else is settled.

The development cost of the Very Large Aircraft varies, depending on who is talking. Boeing could continue to stretch the 747 all the way back and such a stretch could give the world a “small” Very Large Aircraft quicker than any other solution. There are other solutions with Boeing, and of course Airbus will also be a prime contender.

Not every large airline will want a Very Large Aircraft. But airlines with mass originating markets and traditional hubs are natural candidates to sign up. It is going to take two large carriers on each continent, with a combined initial order of about 100, to get things moving. And in spite of the current Asian crisis, I stick to my prediction of 2003 for the first delivery.

Another important area of opportunity for airlines is to respond fully to consumers increasingly at ease with the new technologies. It comes down to more direct links between airlines and their customers, both individual and corporate. There will be an increasing transformation of agents into consultants. At the same time, the airlines will make greater use of direct distribution to cut out non-value-added cost.

The sales and distribution process will have become more diversified as we move into the next century. But more diversity does not necessarily entail relatively more cost, provided the information channels which already exist are exploited properly.

So I will give you another number for the same date: by 2003, in Western Europe and in North America, 50% of all business trips will be done by electronic ticketing, or so-called “ticketless” travel.

I indicated earlier that there are some important issues which our industry must address to achieve fully our growth potential. These are: improving our safety record, improving passenger flows through airports, adequately containing the aviation industry’s environmental impact and continuing to reduce our operating costs.

First and foremost: safety. While we may have the best safety record by far of any transport mode, our continued efforts to improve this record will determine how the traveling public perceives us and whether they will want to fly.

Would anyone here be prepared to accept witnessing one air accident a week by the year 2010? It is a situation we are likely to face, with our traffic volume doubling every 10 years, unless we tackle the problem of our static accident rate. Of course we cannot accept such a vision of the future.

So as an interim measure, we aim to halve the accident rate as measured by hull losses by 2004. This is IATA’s most important strategic objective. The credibility of our industry is at stake. But this is not an objective which the airlines can achieve uniquely by themselves. It will need cooperation of airports, airframe manufacturers, air-worthiness authorities and air traffic control providers. We are now well on our way towards achieving unity of purpose by the entire industry on this crucial objective.

The next issue we need to focus on is how to improve the passenger’s air travel experience, from buying the ticket to leaving the airport. Of course we need to continue to improve our ability to distribute our products more efficiently and more economically. But more importantly, we need to improve our ability to get passengers on to airplanes without a continual exchange of pieces of paper – repetitive and unnecessary inspection of passengers, their hand luggage and their credentials.

Thus we need to examine the further application of smart cards and ticketless travel, as well as to encourage customs and immigration authorities to boldly harness the new technologies to simplify and speed up their clearance processes. After all, what is the point of flying somebody 900 kilometers in an hour only to have them stand in line for an hour waiting for a passport stamp?

The third important issue which could restrict our growth relates to our stake in the environment. Society at large will rightfully and increasingly insist that our growth in operations be ecologically sustainable. Is the airline industry adequately containing its environmental impact? And are we perceived as doing a good enough job of it?

If we look at the fact that fuel consumption per passenger-kilometer has been reduced by more than 50% over the past 20 years, and that the noise footprint at airports of new-technology airplanes shows a 90% reduction, the answer to the first question has to be in the affirmative. The most important way for airlines to further contribute to environmental improvement is through the continued acquisition of the latest aircraft technology and an adequate infrastructure which prevents wasteful congestion and encourages the most fuel-efficient operating procedures.

Looking at the question of how we are perceived, it is clear that more is required to better communicate our industry’s excellent record. We must also address environmental challenges politically, when appropriate, to ensure fair regulation. And through legal means, as a last resort, when new emission or noise-related charges are discriminatory or politically motivated and not based on sound evaluations.

We have commissioned a study on operational measures to reduce fuel consumption and emissions. This will be used within ICAO as input to a special report on aviation and the global atmosphere carried out by the Intergovernmental Panel on Climate Change (IPCC).

To prevent wasteful congestion and encourage the most fuel-efficient procedures, it is essential that air traffic control capacity be modernized and expanded. To this end, IATA has made the implementation of Satellite Based Navigational Systems (otherwise known as FANS) a high priority. This is progressing well.

In the Asia-Pacific sector, an increasing number of states are cooperating to implement IATA’s “user-driven” plans as soon as possible. A FANS route has been agreed in principle between Singapore and the Turkish border. A combined Europe-Asia-Pacific Group has proposed a more efficient route network across Siberia. In the Caribbean, early introduction of the Global Positioning System has resulted in fuel/time savings of approximately 5% achieved by airlines taking part in tests. In the Middle East, FANS implementation is progressing steadily, with both Saudi Arabia and Iran having announced firm commitments to implement ground-support systems.

IATA holds an annual global conference focused on cost-benefit analyses, finance of major expenditure programs and harmonization of competing technologies. All of these successful efforts are being driven by our Technical Group headquartered right here in Montreal.

Last but not least, growth is also very much a function of making air travel increasingly affordable to an ever-greater number of people. This implies containing average yield increases well below the CPI – and to maintain profitability, average unit cost increases will have to be lower still.

Airlines are continuously building productivity gains and unit cost reductions into their growth, and airports and air traffic services providers will need to improve productivity, and also to contribute their fair share of cost reduction to the price paid by the ultimate consumers.

IATA plays an important role in assisting the airline industry in its efforts to reduce costs. For example, the full implementation worldwide of Satellite Based Navigation technology could save as much as 5% on our international operating costs, which in 1996 terms would be worth US$3.4 billion.

The services provided by IATA are very diverse, ranging from technological support in many facets of airline operations to standards setting, documentation, training, financial services, cargo and passenger services, and oversight of Product Distribution Systems. Many of these services are being provided by the nearly 350 professionals here in Montreal, including the recently moved IATA Clearing House and Currency Clearance Service.

Aviation has indeed an exciting future, provided it is able to deal successfully with a number of issues potentially restricting its growth.

What about Montreal? Having lost a long time ago its Canadian preeminence to Toronto, Montreal’s future lies in developing a greater international role. In my opinion, the successful expansion of this international role requires six conditions:

• Concentrating on leading hi-tech industries: building on existing strengths with aviation, of course, but also biotech, pharmaceutical and knowledge-based activities.

• Providing an attractive fiscal environment for those desirable industries to make Montreal truly competitive on the international scene.

• Expanding the Montreal International Dorval Airport and promoting it actively as an attractive, uncongested North American hub.

• Creating a linguistic environment which would enable any international firm to operate in the language of its choice. Geneva is an interesting case in point: its official language is French, but only one third of its inhabitants are Genevois (Suisse Romande). One-third are from elsewhere in Switzerland, mainly German speaking. And the final third are mainly Europeans. The Genevois are a linguistic minority not only within the Swiss Confederation but within their own city as well. They have found a way of remaining solidly “Swiss-Romands,” while maintaining the most open channels to the international world.

• Projecting political stability. In a federation, jurisdictional disputes are normal. But unfortunately, some of the rhetoric used by our politicians is more reminiscent of the 19th century than the 21st. Canadians and Québécois are interdependent – and increasingly interdependent with the rest of the world. Nothing can change that. Frankly, this debate is not making us look very serious on the international scene, and financial investors do not fancy this type of behavior.

• The final condition to a greater international role for Montreal is to urgently ensure adequate financing of its institutions of higher learning.

Montreal is indeed fortunate to have four major universities, which should be able not only to enhance the “gray matter” increasingly required by our Canadian and Quebec knowledge-based society, but also to contribute to our international presence.

As Chancellor of the Université de Québec à Montréal, I am very concerned that the rather extreme budgetary restrictions imposed on our universities over the past five to six years will have a very damaging effect on our international competitiveness and our quality of life.

There is a direct link between education and income. People who have a better education have a better job and get better pay. And so, I would say to the levels of government involved, quoting a former president of Harvard University: “If you think education is expensive, try ignorance.” This is the age of the knowledge-based society. Stop restricting the flow of blood to the brain! It is time to give our universities the means to be once again world-class.

A few kilometers from Geneva there is a village called Ferney-Voltaire. The man who gave his name to the place was François-Marie Arouet, better known as Voltaire. Voltaire, as you may remember, was frequently in trouble with the French authorities. So whenever things got a bit hot he would stroll across the Swiss border, about five minutes away.

Perhaps I should have been a bit more cautious with some of my remarks. It may take me more than five minutes to get back across the Swiss border! When asked to renounce the Devil on his deathbed he refused, saying, “This is really no time to be making new enemies.” I hope I still have a few friends in the audience, and I had better stop talking while that is still true!

CHALLENGES OF THE 21ST CENTURY

Pierre J. Jeanniot, O.C.
Director General, International Air Transport Association

University Club, McGill University, Montreal, Wednesday 31, March 1999
Published in The Corporate Report No. 27 (June 30, 1999)

Exactly 30 years ago, as a newly minted vice-president of the emerging Université du Québec, I had the privilege of becoming a member of “Le Club universitaire” – the then-Francophone counterpart of this institution. Since that time, as with every other dimension of our society, universities have evolved, responding to changes in educational profile requirements, globalization and, of course, serious funding restrictions. Over the years, I have had many a meeting in these venerable surroundings, which, in true university tradition, are indeed most appropriate for the kind of random thinking – or presumptuous remarks! – you may hear today.

We are coming to the end of a century of unprecedented progress for mankind. A century which saw the birth of atomic energy, computer technology, genetics and biotechnology. A century of remarkable advances in medicine, of spectacular expansion in all modes of transportation, including the start of space travel. And a century which has brought the emergence of the global information/communications network, just to mention a few advances currently reshaping our civilization.

This should provide us with a great platform to approach the new millennium, fueled with promises of exciting further progress for mankind – provided, of course, we do not get overly distracted by too many frivolous issues, such as the sight of the world’s most powerful nation totally mesmerized by something called the “Monicagate” scandal. To paraphrase Voltaire, who once remarked that “scandals should be considered as the bad fruits of a tree called liberty,” we should be more concerned about ensuring that this tree of freedom, and associated individual benefits, continues its healthy growth into this next century.

Among the many challenges we are facing at the start of the 21st century, I have chosen to single out the five I would consider as more significant and, where appropriate, identify those where civil aviation can provide a contribution.

The first challenge, and one that I believe is one of the most important of our times, is to reconcile our desire to preserve our cultural/ethnic identity, while achieving the benefits of greater economic integration, or globalization. Taking a historical perspective, globalization is not a new phenomenon, although previous attempts have mostly been achieved through force. One could consider, for instance, that the Roman Empire had achieved an economic integration of the then “known world.” Previous and subsequent empires have had to deal with the benefits of economic integration and domination…versus the costs required to control the centrifugal forces of the tribal/ethnic/cultural preservation.

Tribal identity is deeply imbedded in our subconscious and competes with the need for allegiance to the nation-state – a sometimes rather arbitrary regrouping of tribes. This is most evident in the many African conflicts, where the national borders, designed by the former colonizing countries, often divided tribes and created unstable and, as we have seen, explosive situations.

And of course, as we well know, Africa is certainly not the only place where this type of conflict has led to massive bloodshed. The recent disintegration of Yugoslavia is a grim reminder, of our inability to achieve harmonious relations between economic integration and ethnic/cultural preservation.

The desire to preserve one’s cultural identity is universal. The Scots may well agree to be a member of Great Britain – but they still want to be recognized as Scots. And the Suisse romand are certainly very devoted to the Swiss Federation – but they are determined to maintain their identity and cultural differences from the Suisse allemanique.

So what’s new? And why would this question be one of the challenges of the 21st century?

Well, for one thing, globalization of markets and the economy is a relatively new phenomenon, which is now accelerating at a very fast pace. And secondly, the global market is not just about an economic system. It will foster the development of a set of cultural values, which in fact it does require in order to prosper.

Global business alliances and networks operating in a totally free, world trade environment would achieve a freedom of action, which can interfere with the ability of nations to act in their own “best interests.” As US Undersecretary of the Treasury Larry Summers observed at the last Davos Symposium, “Is globalization not likely to lead to virtual disintegration of local structures?”

A veneer of “world culture” is emerging, and this will increasingly create a backlash, whenever it is perceived to threaten local identities. As Canadians, we are well placed to understand this particular challenge. We are on the one hand, struggling to protect our Canadian culture from total American domination and, on the other hand, finding ways to make the “Québécois” identity more secure within the Canadian Federation, while, of course, maintaining the benefits in each case of the greater economic entities.

And I would simply observe here that in spite of the frustration we have endured, as Canadians, in our attempt at achieving this delicate balancing act, we have been relatively successful compared with the rest of the world. As we improve on it, it could indeed serve as a model for other areas of the world.

Turning to aviation, the development of global airline alliances is likewise a relatively new phenomenon. This is a good example of attempting to achieve the benefits of greater integration. Here, individual airlines strive to mesh their individual networks into a seamless service to deliver the air transport product in the widest possible market. They fully retain all the positive aspects of national identity, but provide a high commonality of predictable service elements.

The very formation, even the continuity of alliances, I have noticed, can depend heavily on the personalities involved – primarily the CEOs. The old alliance of Swissair, Singapore Airlines and Delta was very much a function of the like-mindedness of their chief executives at the time – and foundered when they were no longer there. There are many more examples such as this one.

But cultural identity is more than a matter of individual personalities. It is about commonality of interests and shared beliefs. The success of airline alliances – or, for that matter, any business alliance or network – is likely to reside in their ability to develop that “global veneer” which will make their alliance successful worldwide. But in a fashion which respects, and does not threaten, the individual cultural characteristics of each partner.

Let me go on to the second of my five challenges, ladies and gentlemen, the question of whether we should regard sudden economic shocks as an inevitable part of our life.

The world’s financial market is growing at a breathtaking pace. Let’s look at some basic data. In the past 12 years, the average daily global trade in currencies has increased from a figure of US$0.2 trillion, to US$1.5 trillion – in other words, by a factor of 7.5.

In the past ten years, annual trade in derivatives has come from nowhere to reach a figure of US$18 trillion. In 1992, the amount invested by world mutual funds in emerging markets was US$2 billion. Between 1995 and 1996 it increased from US$21 billion to US$32 billion, stayed at that level in 1997, but then fell back sharply to just over US$20 billion.

The evidence for this can be seen in the (hopefully, only temporarily) wrecked economies in Southeast Asia, and the suddenly distorted patterns of trade in goods and services. For aviation, it has meant serious retrenching on the part of some of our members and, in the short term at least, the transfer of capacity to mature markets such as the North Atlantic, thus increasing price discounting in an already highly competitive market.

Aviation, at least, has this ability to move its assets around. That is not an option for the bulk of industrial activity in the emerging economies. But still aviation is highly sensitive to changes in the level of economic activity and cannot flourish in an uncertain and volatile economic environment.

We seem to have reached the stage where the size and volatility of the world’s financial sector (and the way it is being managed) is such that, of itself, it can break individual countries, indeed entire areas, almost overnight. It is said that everything comes at a price, that there is no free lunch, and that such instability is merely a minor downside to the benefits of globalization, and an open world market. But it seems to me that a financial sector should exist to serve the world economy, and not the other way round.

Can anything be done about it? Can we put in “baffles” to moderate both the speed and volume of the flow of funds? Can we find a system of shock absorbers, to dampen the oscillations of fund levels in any particular country? Individual stock exchanges cease trading, when local situations merit such action. But there is no world mechanism to stop trading. And modern experience shows that individual governments themselves cannot bet against the market with any hope of success, for any protracted period of time.

But that should not counsel despair. I would hope that the government of this country can push for some adequate proposals for the building of baffles or shock absorbers at the next meeting of the G7 Group.

We have an urgent need for a valid alternative to both the present situation and the potential widespread reintroduction of capital controls. Such reintroduction would be throwing out the baby with the bath water.

In the field of international aircraft financing, IATA continues to push for the completion of the preparatory work: the adoption of treaty instruments on the so-called High Value Mobile Assets Convention and Aircraft Equipment Protocol, or Unidroit, to unify the terms under which aircraft are bought and sold worldwide.

Over the next 20 years, total financial requirements for high-value mobile assets in our industry could approach US$1,200 billion and involve some 16,000 aircraft. If we can achieve a unified worldwide code for acquisition and disposal of these assets, it could be worth 150 basis points off the lending rate. This would translate into something worth US$7.5 billion a year: an enormous benefit to our industry and ultimately to the consumer.

I am sorry to say that our past experience does not indicate that the airlines are any better in managing the downturns of economic cycles. They are continually ordering in good times, and taking delivery in bad times! Although airlines are now getting a little smarter on their delivery cycles, we still have a fair distance to go. One thing our industry could do – and it seems to make better and better sense, as the years go by – is to have the manufacturers build absolutely standard versions of each type of aircraft, deliver those aircraft at a constant rate to a common pool and let the airlines draw on that pool for aircraft as needed. I am ready to bet that the savings generated by the manufacturers and the airlines would far outweigh the financing costs of that aircraft pool. Perhaps we should explore this a little further.

The third and one of the biggest challenges for all of us in the next century is protection of the natural environment. To some people it may remain debatable whether current rates of fossil fuel consumption and forecast rates of consumption in today’s developed countries are going to lead to irreversible warming of the earth’s atmosphere through the accumulation of greenhouse gases, with catastrophic effects on food production, desertification, and increases in sea level which threaten coastal habitation.

Debatable, if we are talking about today’s developed countries – but if you add in the populations of China and India, some 40% of the world total, at the same levels of per capita fossil-fuel consumption, which are now typical of the West, then it seems to me that the debate is over. At that point in the future, be it 2030 or 2050 or whenever, the forecasts of eventual ecological disaster become more real.

I assume that nobody is seriously proposing to China or India that they cannot aspire to Western per-capita standards of living. I also assume that physical rationing of fossil fuels does not make economic or political sense. Therefore, the search must be on for non-carbon, and probably non-nuclear, sources of future energy to replace, supplement and complement today’s traditional carbon-based fuels. The environmental challenge is in fact an energy challenge.

Of course, our efforts must be intensified to ensure that our current energy is used more cleanly and efficiently – efficiency, in particular, being the key to controlling the output of carbon dioxide, the principal greenhouse gas. Options for new energy range from the well-known solar and wind sources to the less-well-known tidal or bacterial/biological sources. In the field of carbon itself, gasification now offers a 75% to 95% conversion of the energy from unclean sources like heavy oil or coal into much cleaner energy such as carbon monoxide and hydrogen.

Where is aviation in this? Today, aviation is responsible for less than 3% of world annual additions to greenhouse gases, and less than 3% of the production of NOx-type gases. Aviation has an enviable environmental record. The noise impact (footprint) of a modern aircraft is only 10% of that of the aircraft built in the 1970s. The fuel consumption of jet engines has, on the average, been reduced by almost 50% in the past 25 years and, in time, technological improvements could make a further significant reduction achievable.

However, we have what is, hopefully, a short-term problem: to certain groups of environmentalists, those low figures do not seem to be relevant. They are doing their best to introduce new taxes, designed to reduce the actual amount of civil aviation from today’s level. Hopefully, reason will prevail, because for aviation there is no economical and safe alternative.

For the longer term, the airlines, through IATA, have set as one of their key priorities the development of the next set of environment performance goals, which will aim at reducing emissions per aircraft movement significantly over time, and identify alternative responses to environmental needs.

To ensure an orderly global approach, we supported the clause written into the Kyoto climate accord, reaffirming the importance of ICAO, our sister organization here in Montreal, and specifically its Committee for Aviation Environmental Protection, on all matters relating to aviation and the environment. In the meantime, we are going to remain vigilant, and increase our efforts to counter the negative, and often plain wrong, material which is being promoted, particularly by European environmental zealots.

My fourth challenge relates to the global information system. Some of us are fairly passive participants, others are highly active, but none of us can ignore it. We’ve moved, in a few short years, from radio, through telephone, terrestrial TV, to satellite TV, PCs, global satellite communications, the “fiberoptic community,” and the internet.

As a result, if knowledge is power, then today more and more ordinary people are becoming more and more powerful than either they, or governments, previously thought possible. Thus a relevant question concerns how this rapidly growing power to communicate, inform, challenge, trade, entertain, is to be used – or potentially, misused. How to balance freedom of speech and the right to information with the right to, and protection of, privacy?

If it is necessary to provide some sort of oversight, guidelines, safeguards, then how does one prevent this turning into surveillance, into Big Brother? Since that would prevent the flow of essential business information such as (in the case of the airlines) a passenger’s need for a special meal, or a wheelchair on arrival.

Airlines are themselves part of the global highway of interconnectability, which we regard much more as complementary than competitive. For example, it is likely that the advent of teleconferencing has created more air travel than it has replaced. Communication feeds on communication, and ultimately that communication needs to be actual rather than virtual.

Through IATA, airlines are using the connectability revolution to define standards on internet sales intermediaries, control fraud through databases of stolen or forged tickets, provide information on airport geography and flight obstacles, to provide up-to-date knowledge for our members on the state of Y2K readiness of airports and ATS facilities, and to promote the air traffic management revolution offered by satellite-based navigation.

The last of the various challenges which I suggest we must face at the start of the new millennium concerns a redefinition of the role of the state in the economy. In his book Commanding Heights, the author Daniel Yergin observes that “All around the globe, socialists are embracing capitalism, governments are selling off the companies they had previously nationalized, and countries are seeking to entice back multinational corporations that they had expelled just two decades earlier.”

An astute historian, Yergin reminds us that “…the frontier between the state and market has never been a matter that could be settled, once and for all, at some grand peace conference…it is a continuous struggle, which constitutes one of the great defining dramas of the 20th century, and is preparing the canvas for the 21st century.” He sees a “new consensus” in most of the world, consisting of confidence in market systems – but also makes the (perhaps obvious) point that the greatest threat to this new consensus would arise from massive disruption of the international financial system.

We have noted earlier that capital markets are growing far faster than the capacity to regulate them, or indeed even to understand them. And so everywhere around the world, governments are returning entire sectors of the economy to private hands and the discipline of market forces – the results generally being vastly improved competitiveness of the sectors privatized, reduced government operating deficits and a lowering of the national debt. All of which is very attractive, although there are usually significant human costs associated with the restructuring.

So far as aviation is concerned, the boundaries of the state have been changing very rapidly. Governments are busy shedding themselves of airlines, airports and ATS facilities around the world. Most airlines, at least the larger ones, are now in private hands. There is today a mixture of government ownership and autonomous corporations at airports, and a similar approach is being followed for air traffic services.

From the airlines’ point of view, we expect airports and air traffic control authorities to be cost-effective as well as operationally safe and efficient – and demonstrate good productivity improvement programs. And look after their customers, airlines and air travelers, as well as their own shareholders. We expect reasonable and equitable charges, agreed to in consultation with users, with a high level of transparency in the costs and financial data used in the charging formulas.

Thus we believe that airports and air traffic services should be subject to independent regulation, along the lines of those used in gas, water, electricity and other essential utilities that are provided on a monopoly, or near-monopoly, basis.

In the commercial aviation sector, as in many others, we see the role of governments everywhere shifting away from that of operator, and encouraging the market system. But in such a liberalized environment, governments at the same time need to strengthen their role in safety oversight. They also need to ensure that those components of the air transport system operating in quasi-monopolistic situations – airports and air traffic services – are subjected to appropriate economic oversight.

In playing a greater role in the economy, the private sector must also accept a larger social role, and be regarded as a good corporate citizen. This, I would suggest, requires that any given company be perceived as adequately and fairly rewarding all its stakeholders: the shareholder, the customer, the employee and the community.

One of the very short-term challenges of this début de siècle is to ensure that we are all properly vaccinated against the “millennium bug.” But assuming that the end of the world is not going to happen on January 1 of the year 2000, there is no doubt that mankind will achieve tremendous progress in the 21st century, provided we successfully meet the many challenges we face.

I am reminded that one of our great aviation pioneers, Eddie Rickenbacker, used to say: “Aviation is the proof that, given the will, we have the capacity to achieve the impossible.” And I would add, though, that achieving the impossible sometimes takes a little longer!

THE TECHNICAL, ORGANIZATIONAL AND CULTURAL ISSUES OF IMPLEMENTING NETWORK TECHNOLOGIES

Martin C. Clague
Worldwide General Manager, Network Computing Solutions, IBM

The CIO Summit in Toronto, November 18, 1996
Published in The Corporate Report No. 20 (January 15, 1997)

My job this morning is to talk about five things. First, I’d like to put the Internet into perspective, using both historical information and data from some research done this past summer in which we asked executives, line of business owners, and IT executives like yourselves about the kinds of business activities to which you were beginning to apply network technologies. That is, what business benefit or economic success were you hoping to generate from the use of network computing? This would also include the “intranet,” a term that seems to be coming forward in the vernacular used by many corporations around the world.

Second, I’d like to share with you what is going on in the standards world that is allowing all of this to happen. Third, I’ll spend some time talking about where we at IBM have adjusted and prioritized our spending in the product divisions, and the segments in which we are developing software and services to ensure that we hit this market squarely.

I will do this so that you will know what you can count on from IBM, as you look at your businesses and the way you will develop solutions for those businesses. Then, I’ll share with you some examples that I’ve brought with me of companies that are now using these technologies as part of their business processes to improve financial, time-to-market, and management results. I will conclude with what we would suggest you consider to do next as you begin to use these technologies.

Now first, what’s going on? The history. I travel a lot, and on the plane coming here I sat next to a CEO, and invariably, we always get to who do you work for, and what do you do? I explained that I worked for IBM and he said, “Well, you know, this is interesting because I read a lot,” he said, “and I keep hearing about the Internet and the intranet, and I want to know: is my IT function, my people, are they asleep? Have we missed something? Is this something I should be concerned about?”

I proceeded to tell him that the Internet is not new. It’s been around since 1960. It was then called the ARPAnet, and it was put together for defense and government purposes, as a way to communicate within the defense communities of the Allies after the Second World War, and designed so that it could really withstand a nuclear holocaust.

In the 1970s a few other things came along. The National Science Foundation in the United States took over Internet development and began linking universities with supercomputers. It was 1973 when the first link between the United States, the United Kingdom and Norway took place. This established a backbone of networks of very high bandwidth between countries and continents, and between the university sector in the United States.

Now, that may seem fairly interesting, or not interesting, but some things happened in that time that are having a profound impact on the way our industry does business in the 1990s. First, the university community and the government had no time and no money to hold meetings and decide what the standards would be. They embraced TCP/IP as a protocol, a base protocol, and began to build the basic messaging on top of that platform. None of them happened to have the same platforms, and none had the money to refurbish their entire platforms to one vendor, IBM or DEC or HP. So they picked TCP/IP, a protocol that ran on UNIX. It allowed them all to participate, quickly. In fact, it was perhaps the single thing that caused UNIX to grow to where it is today.

In the 1980s people began to use this network externally. It ran across geographies, across institutions-a shared network provided and funded by the government. In fact, IBM provided the operational support, much of the design and the routers that were used in the original Internet that NSF built. Some other things also happened. HTTP (hypertext transport protocol), which runs on TCP/IP, was invented as a better way to message. And then, a fellow by the name of Tim Berners-Lee came along and invented HTML (hypertext markup language), which allowed people to use the Internet with TCP/IP and mixed data types: video, audio and images, as well as data.

Then came the advent of the World Wide Web technology that began to interlace this network of networks, and people began to use it. The vendors during the same period started not only to support UNIX, but enabled their platforms to handle TCP/IP. And suddenly, out of what was not the planning of vendors, like IBM or the industry, but rather a widespread agreement among communities, an infrastructure of standards-based computing arrived that could be used by those who were hooked into that network. It unleashed an enormous amount of power and possibilities for people who could use computers, regardless of their platform, in a common format, and started people thinking differently about the problems they had to solve.

Now, what’s happened since then? Let me read you a few statistics. Most studies say that somewhere between 35 and 50 million users are on the Internet today. That doesn’t count people on an intranet, which is really a proprietary, or “inside the firewall,” use of a network using Internet technology. And, it is expected that that number will grow to 250 million users by the year 2000, a short three years away. There are 9 million hosts on the Internet, Web sites that represent corporations, institutions and governments around the world. And it is thought that that number will grow to 95 million in the year 2000.

This is fundamentally changing the way people get, give and interact with information. There are 240,000 domains, World Wide Web sites, the “dot.coms,” and that will grow, we think, to one million in the next three years. Right now there are 93,000 networks, so, this is more than just a passing fad. It will change the way we think about how we use computing technology, and the way we run our businesses.

In fact, it may turn out that one can create a business, or be a business, outside of one’s national boundaries without ever having to invest in hard assets, but only an effective World Wide Web home page and hyper text links that allow a user, or a customer, or an employee to navigate their way through your company – from anywhere.

Now what’s changed? Well, first of all, awareness. There’s a lot of hype. In fact, in the United States and Europe there is hardly a magazine that, following an advertisement, or an article, doesn’t have a URL, a universal resource locator, the address on the Web where the writer says, “Tell me what you think. Contact me. Give me some ideas on which to write. If you like my product, or want to know about my product, contact me on the World Wide Web.”

Awareness has increased. Consumer awareness of how they can touch you as a company, how they interact with you as a potential customer, is becoming part of the equation for many companies that are thinking about retaining customers and building on the relationship. It can now be done electronically.

We see companies beginning to reallocate their cost equation-displacing costs, replacing costs, gaining market, retaining market. From the simple, how do I attract a prospect? How do I sell to that prospect? How do I transact with that customer? How can I track delivery? And then, how do I follow up afterward to ensure that they’re happy with our products or services?

Now, why has this happened? There are three primary reasons. I mentioned standards. We all said that standards were important. But we, as an industry, have fought for years about what those standards would be. Would it be SNA? Would it be Ethernet? Would it be LAN technology? Would it be WAN technology? Is it COBOL? Is it PL/1? And now, it’s turning out to be hypertext standards, URLs, Java applets and browsers. Today, there are 60 browsers in the market around the world, the common, intuitive way that people can begin to navigate the available information resources and establish this communication with their customers.

Second, lower costs. Technology is continuing to yield lower costs and, therefore, lower prices. In fact, we could talk about the so-called network station, a way to take computing and pass it on to a greater number of people who might want access to this equation. Software prices have come down over the last five years, significantly, as you well know.

And the other thing that’s happened is communication bandwidth cost is coming down around the world, while bandwidth availability is increasing. The only caution I have here is that it’s not coming down equally around the world. Some countries are still maintaining a very anti-competitive or proprietary, monopolistic view of bandwidth, which I believe cannot be sustained.

We’ve seen cost come down in the United States, and availability go up. We’ve seen cost come down in the UK as onshore competitors came in. We see costs coming down in Germany at the present time, and I believe in other parts of the world, the same phenomenon will take place at an ever-increasing rate.

So, if we know the hardware will be less expensive for the function one gets, the software will be less expensive and the bandwidth will be available, whether through the PTT or through satellites and radio frequency circumventing the PTT, you have to start anticipating how you can change your delivery equation on the assumption that bandwidth will be twice the capacity and half the cost that it is today.

And then finally, universal connectivity. Access to the Internet will give access to not only your employees, and us as individuals, but it will give access to the things that we and you would like them to see.

I say, okay, sounds enlightening. It’s going to be fun. A lot of things are changing, but so what? In the study I mentioned earlier, we went to line of business executives and IT executives and asked them: “What are you going to do? What are the challenges? How might you use this Internet technology?” We conducted focus groups in Latin America, the UK, Germany, Japan, Australia and the United States. Their comments lined up in basically two categories: Internet and intranet.

On the Internet the principal activity in 1996 seems to be e-mail. Six weeks ago I was on an airplane talking to another executive and he had the same question. “Is my IT group asleep?” No, they’re not. This phenomenon has come as a result of a lot of things that have happened at one time. But he says, “I’m really frustrated. I have an easier time sending a message to my son at college on the Internet than I do my colleague on the floor above in the company in which I work.” Now why is that?

There’s a bank in New York that has eight office systems in its worldwide IT infrastructure. They can send messages to each other. That’s not a problem. But they can’t exchange documents. They can’t exchange objects. They can’t do common teleconferencing using the PC because they don’t have a common standard. Many companies we see around the world are working very hard to rationalize an e-mail system that’s based on Internet technology as a way to begin exchanging compound documents and data types across their corporations to enable them to be more productive and lower costs.

Browsing and information access is another Internet activity. Perhaps the highest priority right now is making a home page. That’s the first step. Once you establish your home page there’s an expectation of you by the public. So, before you put that page up on the Web, you have to ask yourself: what can a customer do with my home page? What is the personality I want to convey? Where can visitors navigate to? What’s available to them? Should I go back and redo what’s already been done? Many people are building home pages as a first view for the outside world.

Publishing and broadcasting is the next thing people want to do on the Internet. Knight-Ridder Information Sources says that last year they delivered 25% of their output, their service, electronically. This year it’s 50%, and they predict, because of the Internet and the access their customers have, it will be 75% in 1997-75% of their output, their business, will be delivered electronically. We already see music being distributed on the Web. Now you can view magazines and reports from consultants around the world.

And then finally, customer self-service. A good example that most of you already know about is Federal Express. They transferred the work, tracking packages, to me and you on the Internet. I can access them on the Internet using their URL. I can give them the waybill number, and they will tell me where my package is.

They are saving money in call centers. Their customer satisfaction is up. They’re handling an ever-increasing volume, because a lot of their shippers are in the corporate world and have access to the Internet. Customers can also use this as a way to communicate with Federal Express. Customer self-service is becoming a very promising application for these technologies.

On the intranet, people are beginning to reorganize their business systems using Internet technology standards as a way to enable changes to their businesses, to connect between departments, and to connect to the outside world. In some companies, kiosks, as well as desktop systems, are used to communicate with employees and to make it easier for employees to communicate with the company. Which benefits do I have? What is the status of my retirement plan? What are my options? These are ways for executives to communicate with employees on a regular basis, to keep in touch with employees, and for employees to keep in touch with management.

We also asked these executives: why are you doing this? One said: “Look, I’ve got to do this. My competitors are doing it, and I need a strategic advantage, I need to change my processes, to adjust the way I do business so that I can sustain my business model on both cost and growth in the years ahead.” Others said: “I’ve got to think of the long term. I must think now.”

I had lunch recently with executives from a company that makes appliances. We were talking about customer service, about dispatching repair people, and how we might be able to use Internet technologies to show their buyers how to fix their own machines. But what the discussion became is, in the long run, the thought process has to be altered to not only what can I do in a year, but what should be done in designing products that presumes Internet access and self service by the buyer, who may fix their own machinelike plug it in to the wall, which is one of the most common calls that come into manufacturers.

Companies like this want to compete globally. They want to get outside of where they are. In fact, a home page that’s accessible across the World Wide Web is one of the most effective ways to make yourself present and known outside of your own geographic boundaries.

If you have not navigated the Web to look at what your competitors are doing, to look at what is available and how this is taking place, you are missing an opportunity to change your thinking and how you look at your business processes.

As an example, let’s look at Levi Strauss. They are now making custom-fit jeans. Nobody touches anything. They get electronic measurements of the customer which go directly to a cutting machine. After the cutting machine, it goes to hand sewers-their marketing claim-to-fame. They’re hand-sewn, put into a Federal Express package, and sent either to the store or to the purchaser directly.

Think about it: when you buy blue jeans, they’re either just a little too long, or they’re just a little too short. They’re a little big in the waist or they’re a little tight, because we aren’t all 34s or 32s. We’re not all 29 length. So they stock the most common “best fit” sizes. With customized jeans, they have reduced their cycle time in manufacturing, which gave them cost reduction. They have reduced their inventory, and improved customer satisfaction. They’ve increased their sales, and now they can cross sell. They know exactly what size I am, what color jeans I bought, and can call me and say, “I have a shirt that goes with that pair of jeans.” They use Lotus Notes to manage the process because they must coordinate the process of measurement, cutting machine, sewing, and order tracking, to know where that pair of custom jeans is at any given time.

American Airlines’ frequent flyer program is another good example of changing the way a company does business. You all probably know about it. They were the first to have a frequent flyer program years ago. If you go to their home page there are six buttons that you can hyperlink to, and one of them says frequent flyer-the AAdvantage program. I happen to be a frequent flyer, and on my first visit to the site they asked me for my frequent flyer number. They then sent me a personal identification number in the mail. Now I can go in and inquire as to how many miles I have and how I can apply them.

Here’s a twist. Every Wednesday, in an experiment they have just finished in Dallas and Chicago, they will send their frequent flyer members in those cities a note because they have their e-mail addresses. They know which members live in Dallas or in Chicago. The e-mail note says, “We have some available seats from Dallas to San Diego, or Chicago to Bermuda. And here’s a special price.”

What is Robert Crandall trying to do? He’s famous for saying, “I’d rather have reservations looking for planes than planes looking for reservations.” He knows what his load factors are for those flights. He can price them to make money, because an empty seat equals no money. The customers feel very good about it. But very interestingly, this model is not unique now to just American. British Airways, United Airlines and USAir are all embarking on similar projects. The business is changing fast, and the unique advantage American once enjoyed will have to be supplanted by another one, to keep American in the forefront of their customers’ minds.

A catalog company set up a simple home page. It said: “Here’s who we are. Here’s what we sell. Here’s how you contact us. And, if you don’t get one of our catalogs, please register. If you register, you’ll get a catalog.” In the first month of this particular approach to business they got 60,000 new names for their catalog base, half of which came from outside of the United States in markets they had not yet entered. And, 80% of those names came from Japan, a market that they had long debated whether or not to enter.

They’d thought about it in terms of physical assets. Should they buy a company? Should they buy a building? Should they deal with a trading company? They now have 24,000 names from outside the United States of people who understand English, who like the clothes they sell. And, they have established a range and a breadth of service to get at some customers without ever physically having to be in the country.

Charles Schwab, a discount broker, now does electronic Internet trading with their customers. They anticipated that when they established this home page and this new relationship with their customers, they would work with approximately 50,000 customers in this way. In fact, they installed a 14-node SP2 to handle the trading and Internet activity. They’re now at 500,000 transactions and growing, as their customers use this as a way to contact them to do trades, to find out the status of accounts, and move money between accounts. It is a totally new electronic relationship with people who have access to Schwab from home or at work. It is a new way to do business. It’s a competitive advantage. They’re ahead of the competition. Is it sustainable? History will tell. They’ll change it, I’m sure.

Right here in Canada, one of the largest wholesale distributors of hardware and software, Merisel Canada, is giving their people a competitive edge. Here’s what they are faced with: the number of products they offer, given the prolific nature of the computer industry, seems to increase exponentially, and the same can be said for the amount of information about those products.

The company’s 250 sales representatives, who cover territory stretching from Montreal to Vancouver, need daily updates of this material. We’re talking about 28,000 separate part numbers. What they did is set up an intranet, an internal system, basically to accomplish three things: reduce the paper flow, improve the speed and accuracy of information, and differentiate competing product information. It is probably no surprise that this is a Lotus Notes-based system.

Sales reps, working both in the field from laptops and internally, access the intranet for the latest product information. Not only has the paper flow been radically reduced, but sales are also up. They have seen a 15% to 20% growth in sales since the intranet went in, and they think at least 10%, or $500,000 of the increase, is due to the improvements brought about by the intranet.

Here’s one that I’m sure you can all relate to, and one that’s near and dear to my heart-The National Hockey League. The League has started NHL Interactive Cyber Enterprises, NHL-ICE, to promote the growth and enhancement of hockey worldwide. They are using Internet technologies to deploy real-time scoring systems for hockey and store League information in digital form for use by coaches, players and fans. They are hosting an NHL World Wide Web site and they are marketing the League’s products and services, from on-line merchandise sales to CD-ROM offerings.

Imagine, a sophisticated real-time scoring system for games, providing new and enhanced information, immediately available worldwide through a vibrant Web site, and indexed to a digital library of NHL videos. This is an example of where technology will provide tangible benefits to everyone who cares about hockey.

But, here’s where technology can change the game. A technique called data-mining will take information captured in the real-time scoring system and apply mathematical algorithms to uncover behavior patterns and cycles among players. This allows coaches and players to develop strategies and player combinations.

The NBA is also using a similar system, called Advanced Scout, and they have seen results. Games have been won, because New York Knicks coaches know that when Patrick Ewing is on the low post, he is double teamed and Charles Oakley is open to take the shot from the top of the key.

TradeNet is a consortium established in Brazil made up of ten small banks that are scared to death of the majors. They got together because each was building an infrastructure. The cost was overwhelming for 10 banks to each build their own infrastructure.

So they came to IBM, in this case, and we put together the consortium, and we manage and host their site. They own the content. They own the back-end processing. But, we can guarantee them availability, response times and the ability to change their Web page on the fly. What they’ve been able to do is compete. They’re reducing their individual costs, something that they inevitably have to do. And, they’ve made it easier for their customers to do business with them.

Is home banking using this technology going to be worthwhile economically? A study by Booz Allen Hamilton said that if you walk into a bank in North America or Britain it costs US$1.03 to service that transaction. If you do it by telephone, it’s 45 cents. If you do it by home PC, basically a proprietary call, it’s 23 cents. If you do it on the Internet, it’s 13 cents. That reduces the cost of the transaction, as a function of revenue, from 60%, which it is in most banks with tellers, to 15%. That’s hard cash profit.

Now what are we at IBM doing? We have focused our energies on three main areas. This is the way we have adjusted our priorities and our spending to ensure that we can be ahead and lead in this new technology evolution. We have sectioned this into three main areas: e-commerce, e-collaboration and e-content.

E-commerce isn’t just credit-card processing. For us, e-commerce is the combination of marketing, sales, making a deal, getting the money and after-sales support, because it can all be done electronically. When you hear about e-commerce, some will tell you how much money will be transacted over the Web. That’s the financial part. But, for customer retention purposes, companies that pay attention to customers know that it costs six times more to get a new customer than to retain one. And, we know from our studies, that companies that focus with great zeal on customer service and customer retention enjoy better profits. A 5% increase in customer satisfaction yields a 25% return for companies in the financial securities and insurance sectors. In distribution and manufacturing it’s 45%. And, for banking, it’s 140%.

E-collaboration, and IBM’s sweet spot here is our Lotus subsidiary. It’s not just Notes. Notes is interesting. ccMail is interesting. It’s the collaboration of the processes within e-commerce, messaging and publishing. How can I publish on the Web? Change on the fly, which IBM did at the Olympics. It’s sales force automation, which is one of the hottest areas as companies around the world begin to empower their sales forces to complete the e-commerce transaction, detached from the firm, as they deal face to face with the customer.

E-content is business information services, and our plan here is not to compete with our customers, but to host sites against metrics of availability, serviceability and performance as they deliver, through us, their content to their constituencies. And, of course, content is how do I secure this? How do I scale it? How do I manage my Web site effectively. We learned that at the Olympics. We had 16.5 million visits to our home page sites in one day, 187 million across the 14 days of the Olympics. But we serviced that with five sites around the world. The user who signed on did not know which site was servicing them because we had synchronized all the databases worldwide. We serviced their request wherever there was available capacity. When you or your colleagues go on the Internet and you find that it is slow in its performance, you may be quick to blame the Internet. But in most cases it’s the access server that’s overloaded and can’t respond to the activity at the time.

Here are a few examples of where we’re investing our money in the industry segments. AutoNet is a very interesting system. Six banks got together and installed AutoNet in auto dealerships so that the customer can come in, buy a car, apply for the loan, and 30 minutes later have approval. This includes checking the credit record and approving the relationship with the bank, a process that used to take five days. A process that took five days because there were many missteps, problems in the process, incorrect information. Now it’s done online. The consumer picks the bank. What the customer wants to know is that he or she can have the money. What the bank wants to know is the serial number of the car, because that’s what they will put their lien against.

In distribution, we’re building virtual malls where people can site stores electronically. You can walk around them. In fact, by the end of the year in North America, you’ll be able to “push” a shopping cart, come out of the store, and go to the one next door. It is a very interesting change in the market equation for distribution in retail.

So what is our focus? We learned this from client/server, ever so hard, but I think ever so quickly. It’s an open world. That is what Internet and Web technology is about. Using standards. We are going to enable, and have enabled, in fact, all of our platforms, hardware and software, to be able to accommodate Web technology – HTML, HTTP, URLs, domains. It’s very important. TCP/IP runs across all of our software platforms.

We’re focusing on process. This is not just a play for technology’s sake. This is taking a standards-based technology, Internet technology, and applying it against a remapping of the processes that might be made possible as a result of using these new techniques. Process, to me, becomes the most important factor in determining which of these technologies you use, when and how you will use them.

We’ve developed methodologies in our consulting practices, in supply chain management, continuous flow manufacturing, order entry, customer care, call center management. We can come in and see where you are. Benchmark. Decide what you want to be. Plot out the topology of the network and then provision it with equipment from IBM, and others if you choose. And, our services and support are being fine-tuned because, as you go to content management and host siting, you have to have people who are at the other end of the phone line to help people having difficulty doing what we’d agreed to do.

We’ve talked today about effective ways to get into network computing and how companies around the world are doing just that. So what now? I’d like to spend a few moments talking about some issues that I think you need to pay attention to as you move forward into this space.

First, the technical issues. The greatest thing about network computing is that it gives you latitude. By latitude, I mean, the options are plentiful. One must pay greater attention to the business processes you are trying to support or change, than to the technology you will need to change them.

Of course, this technology requires a change in the way you approach training your people and the skill levels you will need to implement. However, and I can’t stress this enough, it’s the process change that will dictate which skills, as well as which technologies, you will choose.

Your people will need to have creative skills. They will need to be conversant with your business processes. Infrastructure will be very important, so you will need to build knowledge in that area. And, systems management will be more important than ever before. So, you need to get people from marketing, from finance, from audit, a technologist, somebody who knows systems management, and somebody who knows supply chain and distribution fulfillment together and form a team. Everybody’s involved in the electronic equation as we start into e-commerce in its broadest sense.

There are organizational issues that are also important. Some of you may have new roles and responsibilities in this space. Your people will work differently. You will be forming teams of people with the skills I just mentioned. They will be small, workable teams that focus on facilitation of processes. And, your teams may involve more people from other parts of your business than before. For example, your marketing people will become increasingly technology-savvy as you look toward electronic commerce as a network computing direction.

Another area that you need to be aware of as you restructure for e-business is the cultural issues your business will face. First of all, many of your colleagues will have new roles. For example, your call center staff will be more involved in customer relationships than ever before.

Your company will take a broader view of the relationships you maintain with the outside world. Remember, you are creating a new way for your employees, your customers, your vendors-everyone you work with-to communicate with each other and with you. You will create an expanded presence in the marketplace, an electronic face, so to speak, and you need to prepare for that by making sure you have the processes in place organizationally, culturally and technically.

And finally, we will have to define new measures of success as a result of deploying these technologies: cultural measures of employee retention rates, employee satisfaction and skill enhancement, customer satisfaction metrics of churn, retention rates, and e-commerce usage, process measures of time-to-market, process throughput, percent of returns and cost, and financial metrics of revenue growth from e-commerce, cost savings from process reduction and new electronic commerce revenues.

This is the advice I gave to one of my airplane companions. You’ve got to decide why you want to be on the Web. Everybody’s on. But the next step after the home page is the tough one. So, ask yourself some questions. What are you going to do with this? How will you change the way you market? How will you change the personality of the company? And, you’ve got to figure out which processes you are going to begin to mirror and fundamentally change.

Watch what others are doing. Today, anyone can look in from the outside world. What are they doing? You also have an opportunity to market to the outside world. Your customers and prospects can navigate through your product set or your offerings in the language in which they’re most comfortable, and in the not-too-distant future, complete the transaction they desire.

These are exciting times. Fast-paced new approaches are being tried, and uncharted seas lie ahead. The key is not to sit on the sidelines. Get on the Internet if you have not already. Establish a presence, gain real-life experiences, assess and adjust your skills. Create an Internet internally, an intranet, with linkages and security, and embed internal transactions. Provide network transactions for your customers and partners, and consider giving them access to your core processes. Experiment with customer service-related activities and build a team of competence for your changing environment.

COMDEX/FALL 1995 KEYNOTE ADDRESS

Louis V. Gerstner, Jr.
Chairman & CEO, IBM

Comdex/Fall 1995, Las Vegas, November 13, 1995
Published in The Corporate Report No. 16 (February 29, 1996)

Every now and then, a technology or an idea comes along that is so profound, so powerful, so universal that its impact changes everything. The printing press. The incandescent lightbulb. The automobile. Manned flight. It doesn’t happen often, but when it does, the world is changed forever. I joined this industry and IBM because I believe that information technology has that potential.

Now that I’ve been through our laboratories, talked to thousands of customers and even a few competitors, I am even more convinced that IT is the defining technology of this decade and will be well into the next century. I think that’s why so many of us are here at Comdex.

When you get past all the glitz, this event is really about two things: enthusiasm for our industry and a keen interest in its future. We’ll see it, hear it and feel it when the show opens in less than an hour. We’ll be bombarded by extraordinary new products and by promises – oh yes, lots of promises – of dazzling innovations that are just around the corner. You just have to find the corner. All of this makes our industry fascinating and exciting. It’s all about discovery and creating new things, new technologies, new products, new capabilities – the future.

So what do I think after 30 months on the job?

My expectations have been exceeded. This industry does have an incredible future, and I say that for a couple of reasons.

First – and this isn’t surprising to any of you – IBM researchers see no limits for at least a decade to the underlying technologies that drive our industry: processor power, memory, disk capacity, bandwidth. The trajectories will continue upward without hitting any scientific limits for at least a decade or more. I don’t need to spend a lot of time on this because there are examples of hot technologies everywhere you turn – and I know a lot of you work on them every day. But let me share with you a few of the things under development in IBM labs.

A few weeks ago, I visited one of our major research facilities. I was briefed on a new kind of optical microscope they’ve invented. It has the potential of imaging a single atom in visible light, which would be unprecedented. I’m thinking: “What do we do with this? Where do we fit it into our product line?”

It turns out that this same technology may eventually enable incredibly dense storage devices that can pack information at densities 100 times higher than anything we can demonstrate today. That’s the equivalent of putting the entire collection of the Library of Congress – that’s 16 million books – on a diskette the size of a penny. Now, I’m not sure if anyone wants to carry around the Library of Congress on a penny, but it may be possible.

Next, they showed me two ThinkPad flat-panel displays. One was a prototype high-resolution display, the other was a color photograph attached to a ThinkPad display. They challenged me to distinguish between the two. I honestly could not tell the difference between this color photo and a color panel displaying a digital image. They went on to tell me about pixels per square inch and all that. I said: “Forget it. I need it. Just get it to me today.”

Let me tell you about one other thing they showed me. It was a speech-technology interface that didn’t just recognize dictation (we have products today that already do that). This interface understood what I was saying, it extracted the meaning of what I was asking for and delivered some information in response (something some of my IBM managers can’t do when I talk to them).

I could go on and on with examples from IBM and other companies about:

• Microprocessors with several billion or a trillion transistors

• Intelligent agents

• Transponders the size of postage stamps that will be attached to everything and everybody

But even more impressive than these individual technologies is how they’re being put to use today in new applications. Some are really “out there” – like what they’re doing at the MIT Media Lab. One of their projects is called “things that think.” The idea is to put intelligence into everyday, inanimate objects: door knobs, furniture, glasses, even shoes.

A computer in a shoe?

Actually, it’s not such a crazy idea. As I understand it, you power the computer with every step you take, and when you shake hands with someone who’s also wearing a shoe computer, you establish a low-voltage electrical connection and you instantly exchange information through that handshake – sort of a “personal area network.” (Maxwell Smart, eat your heart out!)

What happens is you download to your shoe the person’s title, what he does, where he works, phone and fax numbers – maybe a digital photo or a video clip. If you think that’s nutty, think about it tonight before you hit the sack. Try to remember the names and faces and affiliations of all the people you meet today. Empty your pockets of all the business cards you’ve collected. Then look at your shoes. Not such a wacky thought, after all. So, in terms of raw technology, our industry’s future is extraordinary. There’s no letup in sight.

Now, we tend to think about our industry in terms of faster, better, cheaper pieces of hardware and software – this product, that application. And that leads me to the second reason I’m excited about our future.

We’re at the threshold of the next major phase of computing. It draws upon many of the technologies we’ve been discussing, but one in particular – high-speed, high-bandwidth networking – which is why we refer to it as network-centric computing. Now, this term doesn’t exactly roll off your tongue, but what we call it isn’t nearly as important as what it means to people, to individual consumers, to businesses and institutions around the world, and all of us.

As you well know, this phase of computing follows two others. The first was mainframe-centric. Naturally, we at IBM can talk about this one at great length because that’s where we really thrived for many, many years.

What did that model of computing look like? A large central processor, centralized data, centralized applications, centralized systems and network management – all serving hundreds and hundreds of “dumb” terminals. This wasn’t a great model for end users because they were chained to the central IS department for computing power and applications. But the technology at the time simply didn’t support personal computing.

All of that changed in the 1980s with the microprocessor, which made possible the PC, which made possible shrink-wrapped software, local area networks and on and on. The model of computing went from centralized to decentralized and, not surprisingly, so did the composition of our industry. We went from a few large integrated companies to 60,000 niche players, and that nearly blew IBM up. I remember. I was there as a customer. I helped light some of the fuses.

So computing was democratized, and we placed the power of information technology and applications into the hands of millions of end-users and consumers. There have been a lot of advantages, but the promise of distributed computing has not been fully delivered. Our industry promised customers that they could buy all these individual pieces and put them together very easily. But that hasn’t happened. It’s harder than a lot of people thought, mostly because of system incompatibility – the pieces were never designed to inter-operate or share applications. When you try to scale these piece-part solutions up to support thousands and tens of thousands of users – as well as critical functions like heavy transaction processing and data mining – it gets very, very tough.

Client/server computing has also been far more expensive than anyone imagined. It’s expensive because of the complexities I’ve just mentioned and also because a lot of customers – especially large organizations – are waking up to the fact that they have put the equivalent of a 1985 mainframe on the desks of every one of their clerical workers with all the maintenance, backup and service costs now multiplied by thousands, and in some cases tens of thousands. I think consumers are also beginning to wonder if they’re getting full value from all of the horsepower and software capability they buy – and the industry expects them to keep buying – every nine months or so.

There’s no question that the PC solution in many situations is less expensive and more accessible to people than the mainframe era – but is it really the endgame? As I see it, that’s pretty much the situation we’re in today. Customers continue to buy increasingly powerful PCs, and they grapple to integrate them in these very complex client/server systems.

We’ve come to understand that client/server is, in fact, not a full-blown phase of computing. It’s really the leading edge of what will be the next phase: network-centric computing. There are a lot of forces propelling us to this phase.

An obvious one is the technology itself. If you look at microprocessors, memory, software, storage, you’ll see the laggard of the technology family has been communications technology. PCs and servers have become enormously powerful, but they communicate through the equivalent of soda straws. All of that is changing. Very powerful networking technologies – principally ATM (Asynchronous Transfer Mode) – will be to the next phase of computing what the microprocessor was to the current phase. I think the most profound implication of this new technology is that it will change the nature of computing itself.

If the communications link between the PC and the network is cheap enough, fast enough and has virtually unlimited bandwidth, why not migrate a lot of the functions that currently reside inside the PC to the network – the applications, the data, the storage, and even some of the processing? This is not a throwback to the mainframe era. End users will still have the user-friendly features they value in PCs. They’ll still click on applications, and response time will be just as good, if not better. And because we won’t have to stuff this new device with lots of technology, it can be much less expensive to purchase, maintain and upgrade.

Frankly, I think few end users, particularly consumers, care where the processing, storage, data movement and all that stuff takes place – whether it happens inside their tin box or somewhere in a network – just as long as what happens in front of the screen is compelling, simple to use and is the least expensive solution available. Really, that’s what it’s all about – the way it should be.

Sounds pretty good. But what will end users give up? A lot. Like having to upgrade their PCs every year to get the next fastest processor, or have that sinking feeling they’ve fallen behind the times. Instead, they’ll “upgrade” by subscribing to higher levels of computational power on the network – effortlessly.

They’ll have to give up figuring out those arcane things called operating systems – why applications run on some but not others and why applications that ran last year are slower or don’t work at all on the new version of the operating system. Instead, the network will mask that complexity and incompatibility.

They’ll give up having to buy a shelf-full of applications, swapping dozens of diskettes in and out, and repeating this delightful task when version 2.5.4 comes out in nine months. Instead, they’ll get the new version through the network – effortlessly. These applications will support collaboration and the interactive sharing of information. We already see it happening in the Notes phenomenon.

Some people, of course, will worry about flexibility and choice. The way I see it, customers will have infinitely more choice in a networked world. You can move from application to application without throwing away hundreds of dollars of software investment. You’ll be able to access more storage, memory and processing power than you could ever economically justify in a PC – or even put in a PC.

I assume that all of you have at least one PC. Most of you probably have several. Unless you’re quietly tapping on your notebook while I’m over here talking, all of those PCs are sitting idle – in your briefcase, back in your hotel room, office, in your car, or your home. Think about all that latent computing power that’s wasted, totally unused. But in a truly networked world, we can share computational power, combine it and leverage it.

So this world will reshape our notions of computing and, in particular, our notions of the Personal Computer. For 15 years, the PC has been a wonderful device for individuals. But, ironically, the personal computer has not been well-suited for that most personal aspect of what people do: We communicate. We work together. We interact. So maybe we’ll end up calling these new kinds of devices I-PCs – Interpersonal Computers. We’ll see. Now, I have to be careful here. One of the things I’ve discovered about this industry is that it absolutely thrives on hype. It just loves hype. It’s constantly prowling for the “Next Big Thing” to promote, with the presumption that everyone will instantly move to the next wave, and all that preceded is dead. It’s the most brilliant example of planned obsolescence I’ve ever seen in an industry.

The network-centric world will not replace the PC world entirely any more than the PC world replaced the mainframe world entirely. Yes, there will be fundamental changes in PCs. Many will be like the inexpensive appliances I’ve described which draw their sustenance from the network. As a matter of fact, we’re building one today in one of our labs, and we expect to be shipping it to selected customers early next year.

But let’s not lose our perspective. There will still be very powerful standalone PCs to perform applications that are not network-centric, just as mainframe demand today is the highest in history. So rest assured, I’m not here at Comdex trying to win this year’s industry Pied Piper Award.

When will network-centric computing arrive? Well, it’s already arriving – just look at the Internet, the most powerful and important of all networks. People, organizations and networks are connecting at a rate no one expected, and that pace will continue, if not accelerate.

I think we’ll see network transactions – electronic commerce – take hold very quickly. The final step – pushing the applications, operating system, storage and processing up into the network – will take longer.

A lot of people are looking for network-centric computing to pay off in the consumer space first – interactive services to the home, 500 TV stations – but we are seeing it take off first in businesses and large institutions. That’s because while I’ve talked a lot about technology driving us toward network-centric computing, technology is only an enabler of a much more powerful force: a whole new way that institutions, and companies, have conceptualized their strategic priorities. They’ve discovered a powerful new form of leverage: the leverage of organizational knowledge as a means to compete more effectively and to differentiate themselves in the marketplace.

When I talk to people about powerful networks, the discussion inevitably turns to content: who owns it, how to deliver it, who pays for it. A lot of people think of “content” as movies, music, artwork, sports scores, weather. But the most important, most valuable, most sought-after content in the world belongs to corporations and large institutions. It’s created and collected every minute, around the world: intellectual property, designs, market intelligence, supply and demand, customer trends.

The problem is, this knowledge is spread across incompatible computer systems. It’s distributed across PCs in various departments, it’s locked up in desks and filing cabinets and, yes, some of it is locked in the heads of employees. Powerful networks can unlock this knowledge and move it to the people who can use it effectively. This drives shorter cycle times and allows teams of people to become more productive and creative.

These are the kinds of concrete, real-world benefits that are convincing companies to make the necessary investments in these powerful networks. So I think the consumer will be affected, but it will happen as companies and institutions push out and build the links to reach them.

Something very significant is happening here. For the first time, the models of computing supporting businesses and institutions on the one hand and individual users on the other are coming together. They’re becoming one in the same. They’re converging in network-centric computing.

Frankly, most of the knowledge in businesses and institutions around the world resides on IBM legacy systems. That’s why one of the major thrusts of our network-centric computing strategy is to help our customers get their valuable content to the right people: to employees in far-flung locations, suppliers, partners or – and we’re seeing more and more of this – directly to the consumer. Let me give you an example.

I would argue that Federal Express today doesn’t compete on the basis of its 500 airplanes, 35,000 vehicles and 110,000 employees – although obviously those are very valuable resources. I think FedEx competes on the basis of making vital knowledge instantly available to its customers.

FedEx has put a front-end on its databases, which happen to run on IBM mainframes. That front-end enables customers via the Internet and on-line services to track their packages around the world, day or night, every step of the way. FedEx already has that information, of course, to run their worldwide enterprise. But now they’re using networks to get that information in a secure way to customers and seek differentiation and competitive advantage.

As companies use networks to push out to their customers directly, we’ll see dramatic changes in the nature of competition. Companies that stand between a supplier and a customer will be on dangerous ground.

Maybe you’re familiar with what Levi Strauss is doing. They have a Notes-based system that goes in a store. It takes four measurements from you. Those measurements go directly through the network to a factory where a custom-tailored pair of jeans are cut for you and are expressed to your house. They charge you an extra ten bucks, and you’re delighted to pay $10 for a custom-made pair of jeans.

And guess what? Levi’s has eliminated the need to have mega-retail stores stocked to the ceilings with pants of every conceivable waistline, inseam, cuffs, no-cuffs, relaxed fit, traditional fit. No huge inventories. No obsolescence. No waste. The supply chain they’ve depended on for decades – and that has depended on them – is obsolete.

The implications of network-centric computing go on and on. It will transform every business, organization and institution in the world. It will create winners and losers. It will change the way we do business, and the way we teach our children, communicate and interact as individuals.

A while ago I met with Nelson Mandela and he was telling me about one of the greatest challenges facing South Africa. One of the legacies of apartheid is that the best education infrastructure is concentrated in a few major cities. What were formerly the “homelands” have very little infrastructure. It will cost millions and millions to build it and it will take years. We got into a discussion about distance learning, about bringing teachers in cities to students in the homelands via interactive networks. I saw a light bulb light up. He’s very interested in this as a possible solution to the problem.

As the network world develops, we’re seeing combinations of networks being built and interconnected – private networks to support secure mission-critical business applications. At IBM, we’re building a lot of these for customers in industries like healthcare, pharmaceuticals, finance and travel. These applications are hosted on the IBM Global Network – which we’re rapidly upgrading to ATM capability – and customers subscribe to applications on the network.

These private networks are interconnected with other corporate networks, with public-switched networks and, of course, the Internet. We are making enormous investments in Internet products and services because we think the Internet represents the most powerful manifestation of what network-centric computing will be.

The Internet has been a wild and woolly electronic frontier. The settlers are arriving. Every day, the Internet grows, in size, in reach and importance. Every day, people add more function, more security and capability to the Net.

You may have seen our announcement at Internet World a few weeks ago. We’re putting together Lotus Notes, InterNotes, IBM network software and services. The idea is to help our customers reach their customers by securely linking their core business systems to the Internet. Notes – with its collaboration, security and replication features – is the ideal way to do that. It’s exactly what customers have been telling us they need in the Internet.

So I hope you get the idea that we’re taking network-centric computing very seriously at IBM. I’d say we’re betting much of our future on it.

We at IBM know all too well that those who dominate one phase of computing are not necessarily the ones to lead the way to the next phase. In fact, if you think about it, they are the least likely to accelerate the transition. It’s in their best interests to maintain the status quo for as long as possible – we certainly tried to do that in the mainframe era. And as we found out, when the industry moves to the next phase, the current leader doesn’t always have the right skills to lead the next one.

The skills and technologies of the PC-centric, piece-part phase are not the important assets needed in network-centric computing. What is important? Complex network management, systems management, heavy transaction processing, massive databases, powerful scalable servers, systems integration, etc.

Now, let me think: what company knows how to do all that?

Obviously, we think many of these requirements play to IBM’s strengths. They also open doors for many other companies in our industry, and for an entirely new breed of competitors, some of whom have already burst onto the scene – and some that are probably just getting started in a garage somewhere.

Now I know a lot of what I’ve been describing about this new networked world may not be new to your ears. In fact, many Comdex keynoters who have preceded me on this very stage – and perhaps a few who will follow me – have proclaimed or will proclaim the same. Some have put on multimedia extravaganzas depicting future scenarios – how we’re all going to be connected, work differently, play differently. Everything will change. Everything will be better.

But at this very important juncture in our industry’s history, I’m reminded of what Dickens wrote in “A Christmas Carol” – maybe because the holiday season is upon us. Remember when Scrooge encounters that last ghostly spirit who reveals the future? Scrooge asks: “Are these the things that will be…or might be?”

I think we’re looking at the same question in our industry. We can see the future. It’s there before us. The question is: Will it happen? I think it will, but only if we step up to certain responsibilities as an industry. If we don’t, we will not grow as quickly as we’d like, and we will not realize the potential of our technologies – no matter how impressive they may be.

All of these challenges fit under one banner: listening to the customer. I don’t think we pay nearly enough attention – or spend nearly enough money – being sensitive and responsive to customers. I think I can make that statement since I was a customer of this industry for 20 years. I’ve also led consumer-oriented companies, and I can tell you, we have a lot to learn.

I think we need to work on many things – but three in particular. The first is ease of use. This is a tough, multidimensional problem. It ranges from basic confusion over on-off switches and loading software to the way we integrate and manage complex systems. Think about it. Entire segments of our industry have been spawned from this failure. Look at the explosion in computer services. Customers are spending billions for smart people to help them figure it out, pull it together, manage it for them. Consumers, of course, run into problems all the time.

We all have our favorite examples of clunky products. But let me pick on my own company. You may recall the 1983 debut of the IBM PC Jr. We got some things right with that product, but a lot of important things wrong like its infamous “chicklet” keyboard. It was really cute. Too bad no one could use it.

Or remember this baby? The IBM PC Convertible, circa 1986. I think people called this the “lovable luggable.” At 14 pounds, I understand the “luggable” part. It had no hard drive, but it did have dual 3 1/2-inch diskette drives. Very advanced. Too advanced. There were only a handful of applications on 3 1/2-inch diskettes at the time.

I’m happy – very happy – that our company has learned a lot from those early disappointments. Today we’ve got retractable keyboards and trackpoint and voice recognition. And I know a lot of other companies are investing in ease of use. But we can and must do more – as an industry. If we expect the whole world to be connected, and if we expect to grow as an industry, we must make it easier to learn, to use, and to maintain.

The second issue we’ve got to focus on is standards – open industry standards. Ours is the only major industry I can think of that refuses to rally around standards. I really don’t understand why customers have tolerated it. Would you buy a telephone that only dialed certain area codes, or a TV that received only odd-numbered stations? I wouldn’t.

Think about the networked world that we see before us – every digital device connected to every other digital device in the world, all supporting seamless, easy access. How are we ever going to get around the problem of incompatible hardware and software systems?

I think we have two choices. We can ask customers to set aside their freedom of choice and preferences in hardware, operating systems, applications and user interfaces. Junk their trillions of dollars of investment in information technology, and all of us – everyone, everywhere – move to one architecture provided by, priced by and controlled by one company. Or we can embrace open industry standards. Open means that software from one vendor can operate on or with hardware and software from any vendor – not just one guy’s. We need to work with standards organizations. We need to openly agree on APIs, interfaces, tools and protocols – on anything the customer sees and touches in the journey to get something done.

Compliance with standards does not mean that we won’t compete aggressively or that we can’t distinguish our products. We will. But we’ll compete on the basis of innovative implementation of industry-standard technologies and architectures, on performance, features, design, service and support.

Besides, in the long run, a closed, proprietary architecture is a losing strategy. I bet you thought you’d never hear that from IBM. But having had a near-death experience, we know what we’re talking about.

Every time I meet with customers, I say the same thing. I urge them to demand compliance with open industry standards in the products they buy. And you know what? They’re beginning to listen. They understand the need for the industry to move to this level.

The third and final issue I want to talk to you about is broader than these two other issues. Our industry operates in a free space. It’s part of the reason for its success. This freedom must be honored and protected – but it also must be earned. We’ve got to come to grips with the fact that the proliferation of our technology raises some very provocative and serious societal issues. Some people feel that the Internet is getting out of control. Instead of being an information superhighway it’s a dangerous pipeline for pornography, intellectual property theft, and a serious threat to commerce and privacy.

Governments are going to be increasingly concerned with the impact of our industry on the future of the nation-state which has been the basic form of political and societal organization for centuries. People are concerned about universal access and about creating a society of technological “haves” and “have-nots.” Just last week, I read a survey in Time magazine. Nearly half the respondents said that technological change was responsible for the growing economic inequality between people. These are serious issues. There are many different and divergent views on what to do about them. Frankly, most of the solutions that are being proposed are equally troubling. They raise questions of censorship, over-regulation and, of course, the specter that the fires of innovation that drive our industry will be stamped out.

Yes, these are tough, tough questions. But we can’t shrink back from them just because they’re potentially explosive. Let me tell you why. A few decades ago, there was another “defining” technology. You may remember it: nuclear power. It too was going to change the world. It was going to make energy as cheap as water, bring air conditioning to deserts, heat to frozen tundras. Reactors would power cars and ships, airplanes and spacecraft. Inexhaustible energy. But what happened? The nuclear power industry is a dormant industry today.

Those grand visions were never realized. Why? Was it because of bad science, disappointing technology? Not really. While that industry was focused on megawatts and reactor cores, communities and governments were worried about the implications of that technology. They stopped that industry dead in its tracks.

Today our industry has grand visions. I’ve shared some of that with you this morning. And they are grand. And very ambitious. We’re talking about no less than changing the world in very fundamental ways. Yet, too often, what are we focused on? What will you hear and see here at Comdex? Megahertz, gigabits and multitasking. There’s a disconnect between our priorities and those of a lot of people and governments.

So I’d like to leave you with the thought that the time has come to step up to these challenges. Even as we continue to innovate and create, we must now also think about the broader implications of the future we are creating. We must do this as individual companies, but also as an industry. And in fact there’s quite a bit of activity already underway to address some of these issues. The Worldwide Web Consortium based at MIT is working with many companies, including IBM, on filtering technologies and content rating for parents to use. The Center for Democracy and Technology, also with the support of many companies and advocacy groups, is working on free speech and child protection. And trade associations like the Computer Systems Policy Project are working on privacy and cryptography.

I’m sure these organizations have a lot of good thinking under way, but we have to be careful not to confuse activity with results. We’ve got to be impatient, drive toward consensus. We’ve got to lead rather than be led.

We need to keep doing our part as individual companies and put our money where our mouth is. I think what AT&T is doing to bring the Internet to schools across the country is an outstanding initiative. At IBM, we’re investing millions on a program called “Reinventing Education,” which is aimed at reforming public schools with the help of information technology.

The printing press. The incandescent lightbulb. Manned flight. It is an extraordinary and rare – and humbling – opportunity to earn a place in history. I, for one, think we will. I think we will make our visions reality. I think that as stewards of our industry, we will step up to the challenges of social responsibility. We will improve the world, and the way we work, the way we communicate, live and learn as people.

That’s why as much as I’ve talked to you today about various phases of computing, I also wanted to emphasize that we must now also pass into a new phase as an industry. We have grown, we have innovated, and we have prospered at a rate unsurpassed by any other. It’s been an amazing, breathtaking ride. It can continue – and accelerate – if we remember that our future rests on how well we respond to the total needs of society and of our customers all around the world.

KEYNOTE ADDRESS TO COMDEX 95

Khalil Barsoum
President & CEO, IBM Canada

Comdex 1995, Toronto, July 12, 1995
Published in The Corporate Report No. 13 (August 7, 1995)

I want you to know up front that you won’t be seeing any animated shoot-outs or dancing rabbits this morning. And I have no intention of giving you a 50-minute lecture on IBM’s vast array of products and services, complete with detailed architecture design. However, you must also appreciate that I do carry an IBM business card. So I am not about to miss an opportunity like this…to tell our customers how much we appreciate your business. You and your businesses are important to us at IBM, and we value the trust and confidence you have in us.

One of the many exciting aspects of Comdex is that it brings us together to talk about the future, and how technology will influence our businesses and our society.

Ten years ago we could tell what technology we would have today. What we could not predict as well was man or woman’s genius in applying it – the richness, variety of use and the breadth of acceptance. I can tell you that we will see two times price-performance improvements every 12 to 18 months for the next 10 years in microprocessors; that X-ray lithography technology will allow us to put one billion circuits on a single transistor…But there is still no formula to quantify all of what people will do with this.

We can predict that the cost of storage by the year 1998 will be one tenth of today’s prices and that by the year 1999 we will be able to store all the information in a local library on one inch of magnetic storage – for less than $1,000. But we still cannot guess how far people are going to go with this capability.

My main message is that the combination of these two powerful forces – information technology and human creativity – offers endless opportunities, and especially for Canadians, because this is a time of opportunity for us, our businesses and our institutions.

To put this into context, I’d like to discuss:

• The transformation process occurring in every industry and every sphere of activity today, whether it’s in the public sector, entertainment industry or other private enterprise

• I will then assert how this transformation process is being driven by information technology and, what is really important, what this will likely mean to us, as people, in the future. And, why this offers our Canadian businesses a unique opportunity to lead in the application of technology

First, let’s discuss the transformation all industries and businesses are facing today. Transformations which are making a significant difference in how we work, how we are entertained, how we conduct commerce; how we buy and sell.

What people want, reward, and seek is deceptively simple. They want better quality, better service, at a lower cost, every time, all the time. And they demand this from everyone – from businesses to politicians.

For IBM divisions and our customers alike the emphasis has to be on the value we offer. We have all experienced restructuring and re-engineering processes. More and more we are seeing the manufacturer and consumer getting closer to one another. And more and more we are seeing the transformation of traditional intermediaries, something we call “disintermediation.”

As a result, many businesses see their value being commoditized, their roles disintermediated, and yet new values and new intermediaries are emerging.

Retailing offers an example of where companies have had to re-engineer their structures and processes to continue to compete effectively. There have been two major forces at play: a shift in focus from product to customer and increasingly strong global competition.

Let’s look at this transformation from a time-frame perspective. Think about the original corner tailor and outfitter. Fifty years ago, a man supported his entire family making suits – maybe one suit a week; special suits a little longer. Then, his business expanded, his children joined and they opened a small factory with skilled labor.

From there, the business expanded when they opened a couple of retail outlets. Next, with mass production, came a chain of stores in malls with additional lines of merchandise. And finally, the national or international chain with private labels from home and abroad.

However, with the growth, came additional responsibilities, structures and costs.

The reverse is happening now, and will continue to happen. As manufacturers re-engineer their processes and realign to best meet customers’ needs in terms of service and value for goods and services, many middle processes will be eliminated. And new ones will be created. The folks that bring you the CD-ROMs and the on-line networks are all new intermediaries.

So, as CD-ROM becomes part of the retail world, we are seeing the beginning of a transformation. The huge, chain-store mall shops will change as more and more customers order their custom-made suits direct by way of commercial networks and on-line CD-ROM. It has already begun, if you look at clothing chains like Harry Rosen.

HMV Canada is another example. This music-store chain recently opened a new store right here in downtown Toronto. It has an interactive media section where customers can see the latest in CD-ROMs and games, as well as free Internet access so customers can surf the Net – a far cry from the days when we went in to buy our LPs.

Let’s look at the electric and gas utilities. I was talking to the CEO of a Western Canadian utilities company the other day and he was telling me how the utilities industry is disintegrating. The industry has been one of the last to deregulate. This injection of market forces is resulting in a radical transformation and restructuring to prepare for competition.

Soon, in Canada and the United States, customers will have a host of utility suppliers to choose from, just as there is in the gas industry today. This competition for utilities should translate into better service at a better price and in a manner best suited to a particular customer’s needs.

Our world and our marketplace are changing very quickly. Canadian companies no longer compete only with Canadian companies. Global trade is expanding more rapidly than anyone expected.

Worldwide business continues to enjoy sustained growth. New markets opening in 60% of the countries on the planet is a sure sign that the competition is not just down the street. Because of technology, competition comes from everywhere.

And to compete successfully, more and more Canadian companies are committed to using information technology products and services to improve their international competitiveness. Our competition is going to come from places we never previously considered. It’s going to come from the developing world; from countries that could never challenge other countries before; from countries that will now be able to compete in the field of commerce, almost overnight.

Countries which today have little or no infrastructure for commerce will be able to move very quickly to develop state-of-the-art infrastructures. Without the baggage of old systems, these countries will be able to leap several generations of technology and compete globally.

Let’s look at China. In China’s financial industry, for example, they will skip checks, debit and credit cards, and go directly to chip-in-the-card products that the rest of the world has been talking about for decades and still hasn’t implemented in any widespread fashion.

The underlying force – the most important force that is creating a lot of this fundamental change – is information technology. The technology itself is the driving force in creating massive changes in global trade and competition in the marketplace.

So what does this mean to us Canadians? And how can we use the information technology at our disposal in Canada to take advantage of the transformations?

Among the other G7 countries, Canada holds a distinct leadership position in several areas. At times all of us may have complaints, but the fact is we have a world-class education system; innovative, strong and effective financial systems; a multicultural social system; an orderly and manageable-size society…Compare some of those elements against their counterpart in the US, Italy, France and the UK.

That is why everyone here has a unique opportunity. A huge growth opportunity. The chance to develop, take advantage of the best industry skills and solutions and then spin them out globally. The chance to export our unique, world-class Canadian systems and experience. The chance to implement the best global solutions, locally. We can take advantage of IT and lead the way in Canada and abroad.

This makes me immediately think of next summer’s Olympic Games in Atlanta. I say this because IBM US is bringing some of our teams down to set up and implement systems we developed first for the Calgary Winter Olympics in 1988 and then for the 1994 Commonwealth Games in Victoria.

Last year’s Commonwealth Games was the first world-class multi-sport event run on a client-server architecture and it went without a hitch. That is, the main results functions were run at the sports venues with no real-time dependency on central sites. Historically, games of this type have used big processing with big communications systems out to the venues. Our Commonwealth Games design was venue-based, with the only links to a central site for broadcasting results. Atlanta is now using this design for the 1996 Olympics, in part because of the success of the Commonwealth Games.

I’d also like to show you an education example in BC – schoolchildren today at Burnaby South High School, sitting in their classrooms at their individual PCs, are now communicating with marine biologists, underwater.

Pupils are having enriched educations. They can speak to Nobel scientists, dialogue with the best in the world. Their classrooms no longer have walls; the field is being brought into the classroom.

The effects of this technology-rich school has not been limited to the students and teachers. It has impacted the whole community. There is such a demand to place children in the school that real estate prices have climbed…parents from other schools within the district are trying to get their children in the school and as the news of the school spreads, more and more people, from as far away as Hong Kong, are trying to register their children.

There are many Canadian industries with a number of opportunities because they are regarded so highly in other countries, but let me talk about three more: healthcare, banking and telecommunications.

I have lived in enough places to tell you that the Canadian healthcare system is one of the best in the world, operated and staffed by some of the most skilled healthcare workers in the world. Universal access to our system ensures everyone the opportunity of being treated under the best possible conditions.

American, European and Asian countries are looking to Canada for guidance and partnership in establishing information technology-driven systems that will address their populations’ specific healthcare needs, democratically and at the least cost to government, taxpayers and users.

Health networks are beginning to connect government health departments to hospitals, patients to doctors, hospitals to hospitals, pharmacies to clinics. In time, people will use these networks to communicate with their physicians for home diagnostic analysis and treatment. More and more patients will recuperate at home and not in hospitals. And, the networks will avoid time-consuming, costly and repetitive analyses. All of this translates to better care at lower cost.

There are many examples…In British Columbia, the Ministry of Health wants to ensure they can provide British Columbians with an integrated health network to benefit end-users by ensuring all care providers have access to information that will enhance their service.

What this means is that 650 pharmacies will be connected across the province – 18 are already “live” and the rest will be by the end of next month – followed by the link of 8,000 physicians, and then, all BC’s laboratories and hospitals.

Statistics show that there are approximately 35,000 acute care beds in British Columbia. About 10% of these beds are occupied by elderly people who don’t need to be there.

The new system will prevent this from happening. Information technology will provide all medical service providers access to the complete drug prescription history of patients.

This project is the largest of its kind in the world. Parties in the United States, Asia and Australia are showing a keen interest in this Canadian design.

Another healthcare project, which is also receiving international attention, is a SmartCard in Quebec. The SmartCard project has an objective to develop a new approach to medical records. To allow circulation of clinical information while ensuring that personal privacy rights are protected. It’s a fairly unique project in global terms as the trial involves the largest number of patients – over 7,000 with their medical records on the card – and concentrates on the clinical rather than the administrative side of healthcare.

Banking is yet another example. Canada only has a handful of major financial institutions. By comparison, the United States has more than 10,000 banks, of all sizes. Canada has one of the fastest check-clearing capabilities in the world. Most of the country’s financial institutions are able to settle payments coast to coast, within five time-zones, on the same day deposits are made. It can take two to five days in the United States or the United Kingdom.

For example, one of our customers, the Royal Bank, is using our technology – an advanced check-image-capture and recognition system – to enable them to accelerate the processing of checks, deposit slips and other items each day. The system is one of the fastest in the world.

Canadian banks have been very successful in maximizing the leverage of information technology to create value-added customer solutions to banking needs.

A big part of this success is the fact that some of the world’s best banking skills and banking-related technology skills are right here in Canada; not just the Royal Bank, but all the other major banks as well. As a result, the Canadian banking industry enjoys a highly regarded status around the globe. We will see many foreign financial institutions looking to Canada’s advanced banking systems.

In fact, Toronto-based Footprint Software company, which we purchased earlier this year, has gained international recognition for its branch automation system – Visual Banker – and is currently installing the system in leading financial institutions throughout the world. For Footprint, this new opportunity offers more than ten times the opportunity of that in Canada alone. Visual Banker is a software program that enhances the ability to handle complex financial transactions in a simple manner. A leader in the use of object-oriented technology, Footprint will continue to provide Canadian-made, value-added financial applications for global customers.

Canadian telecommunications enterprises are also world leaders in the provision of leading-edge technology; in establishing and servicing vast infrastructures across wide expanses of territory. Mexico and China, and other countries in South East Asia, are eager to learn how Canada manages to provide outstanding services in remote locations.

New Brunswick Tel, for example, is engaged in a number of interesting projects at the forefront of the telecommunications industry. They are launching an interactive multimedia project which delivers Internet services, home shopping and education applications to an information appliance – either a TV or a PC.

Another project where NB Tel has pioneered the way is in the delivery of weather, sports and theater listings; interactive banking; and, even the delivery of targeted categories of advertising information…The Call Mall project – which is being demonstrated here at Comdex at the NB Tel Booth – uses a screen telephone, which provides the customer with both visual and audio messages.

The knowledge and skills we have acquired in Canada are an invaluable source that we can capitalize on in partnering with other countries and other organizations to export our globally competitive advantage.

We have the necessary resources to be among the leaders: a commercial stability across the country, modern infrastructures, high productivity and a well-trained work force. Canadian companies now invest more in information technology than they do in agriculture, mining and industry combined. Information technology will continue to transform all our industries and institutions, both private and public. We are now arriving at the point where we will assume that the PC is as natural to use as the telephone.

Nearly one in every two workers in Canada use computers, triple the number of users 10 years ago, when only 15% of employed Canadians worked on a computer. According to Statistics Canada, it has become more common for workers to use computers on the job than not. One in three homes and nine out of 10 businesses in Canada have personal computers.

In fact, in the time it takes me to deliver this speech, 5,000 personal computers will have been sold worldwide; 50,000 before the end of the day.

Taking all this into account, I’d like to suggest three basic rules of thumb to assume when you think about information technology’s future in the workplace:

The first is that EVERYONE IS A USER of technology. The second is the reality of INTER-ENTERPRISE INTEGRATION on a global scale and the third is that INFORMATION will increasingly DISPLACE THE PHYSICAL.

EVERYONE IS A USER is driven by the fact that technology will continue to become simpler, easy to use, practical and affordable. In fact, we have reached the point where we must conduct ourselves accordingly on the assumption that the personal computer is as commonplace and integral to our lives as the television set or the telephone.

All users will take technology for granted. Its ease-of-use will become second nature and the effort in using the technology will be negligible compared to the vast output of rewards.

Toronto’s Frontier College is now teaching literacy on our Ambra computers. They are not just teaching children and adults how to read and write; they are teaching them how to read and write on computers.

The important message here is that the new literacy of the future will not only be the ability to read and write, but to be technology-literate too. And for our children this new literacy-age is already being taken for granted; expected as a norm in our everyday lives. In 10 years, the number of active users of information technology will grow from 200 million today to two billion.

INTER-ENTERPRISE INTEGRATION, based on the principle of information sharing, will allow companies to run their operations more productively as they network directly with their customers and suppliers.

The implications here are that this networking will allow many small organizations to reach their customers on a global basis; reducing previous barriers to entry and thus allowing small businesses to compete with major corporations in both established and new markets.

Perhaps the most profound impact though of Inter-Enterprise Integration, will be what I spoke about earlier, the elimination or “disintermediation” of some layers in the value system.

An example is an insurance company in the United Kingdom, called Direct Line. Many of us still think of large companies when we talk insurance – buildings, big workforce, people constantly on the road. Traditionally insurance companies were huge and many still are. Direct Line, however, has no buildings, no branches, no agents. They have a technology-based, market-driven operation that has managed to corner a large niche – some 30% market share.

ServiceOntario is another example. ServiceOntario is a bilingual, self-service kiosk pilot program provided by the Ministry of Transportation. Users can perform several common requests on-line. They can renew their vehicle registrations, pay court fines, source personal driving records, refer to used car histories and even find commercial trucker/driver safety record information. Just think…no lineups; no limitations to service hours; no more “sorry, you’ve come to the wrong counter” after a long, long wait.

The kiosks interface with multiple government enterprises and two banks. The kiosks have menu-driven touch screens, for easy use…It won’t be long before we see several other public and private services offered at similar kiosks.

Countries from around the world have expressed interest in the Government of Ontario’s kiosk effort, which is breaking new ground in offering government services during extended business hours, seven days a week.

We will continue to focus on open solutions that allow our customers to operate effectively in an increasingly multi-vendor, multi-platform digital world.

And the concept of creating a truly open, scalable, collaborative computing environment, is what excites us so much about our merger with Lotus.

Today’s customers are increasingly finding a need for a new computing model. The computing environment must allow people to work and communicate across enterprises, and across corporate and geographical borders without worrying about things like incompatible hardware and software.

The third principal – INFORMATION DISPLACES THE PHYSICAL – has been described as the transportation of bits versus people or things.

Telecommunicating and teleconferencing makes it unnecessary for people to physically move from home to work or travel to attend business meetings. At IBM, here in Canada, 1,100 of us work on flexi-place, telecommuting from home or customers’ offices. We’ve saved costs; our people prefer it and so do our customers, because they feel they are getting better service and added value. Cost-effective, high bandwidth communications links that allow voice, data and video on the same line as well as powerful PCs have made teleworking increasingly viable to many employers.

In fact, we teamed up with Rogers Cablesystems at the end of last year to launch cableLINK, a revolutionary, high-speed computer link between corporate offices and employees working from home using PCs on Rogers Cable Service, with an interactive capability. It offers a range of high quality graphics, animation, document sharing and multimedia online applications, teleconferencing at a fast speed, and, you can still watch your favorite soap opera without being interrupted.

CAE Electronics of Montreal, which holds more than 70% of the world’s flight simulation market, has developed such advanced flight simulators using IBM RS/6000 technology that pilots are no longer required to have clocked any actual flight-time before they take to the air in a real plane. The hours spent in the simulators are so real that pilots cannot tell the difference – not in the vision; not in the motion. The experience is so real to life and involves scenarios so severe – like wind shear and engine shutdown – that some pilots have finished their experience shaken and sweaty.

Obviously images, video and audio are increasingly key to applications to make virtual reality and simulation possible.

Take the development of the digital library. Business, cultural and academic libraries see the enormous leverage in going digital. We have been able to facilitate the digital access to materials in the Vatican Library previously unseen by the general public. This is an achievement thought impossible just a few years ago.

Electronically simulated environments and applications have advanced so far that it is possible to almost recreate and adapt any experience known, whether it’s for industry, business, education, recreation or entertainment.

Think about this in your working environment. It’s simply a matter of how you handle the three basic principles I have just discussed: everyone is a user; inter-enterprise integration and information displaces the physical.

That is why I want to close by reminding you that we simply cannot forget the basic driving force – human nature. As we connect more and more globally – we must remember that the true meaning of globalization is acknowledging and understanding the unique characteristics of different cultures, their differences, their similarities.

As such, despite advancements in information technology, we will still need to understand and trust each other to do business together and form mutually beneficial relationships.

Even with information technology, living will still continue to be a sensory experience. Basic human nature won’t change.

And the digital age offers us as many options as we want.

We’ll be able to connect to our bank or ATM, or walk down the street to meet our branch manager.

We won’t need to visit the local library to take out a book. We won’t be frustrated by early closing times and limited weekend access. But we might still want to browse and feel the weight of a great classic.

Or, go to the movies to be entertained. When video was introduced, the public was told by advertisers “to go home to the movies.” The video industry is still thriving. But we still have movie theaters, popcorn, and lineups on Saturday night.

The movies at the theaters just got different. Jurassic Park. Even Forrest Gump. Neither would have the same effect on small-screen TV. The movie theaters of the future will continue to compete, as will other media: 3-D multimedia movies, moving screens, moving seats…

We will also be able to browse through “digital neighborhoods” and shop in “electronic malls” in the comfort of our homes. But we will still want to physically walk our neighborhood streets, touching fabrics at stores and getting advice from a salesperson.

Therefore, I conclude by asking you to look around. Who do you see? You might be seated beside an overachieving teenager. Or next to the person who will use IT to export our healthcare system.

The combination of human nature and information technology gives me a sense of optimism about our future as people, and more specifically, as Canadians.

QUALITY IN A NETWORKED WORLD

John D. Wetmore
President & CEO, IBM Canada

Congress on Total Quality, Montreal, October 1, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

As many of you may know, IBM has an established reputation as a provider of high-quality products and services. Over the years, as the approaches to quality have matured with the emergence of total quality concepts and international standards, IBM’s approach to quality and customer service has also evolved. What hasn’t changed is our commitment to quality excellence and our belief in putting the customer first in all that we do. In fact, in 1996 our customer service organization was recognized with a Canada Awards for Excellence in Quality – and our manufacturing plant in Bromont, Quebec has an established reputation for excellence.

The globalization of competition and the rapid growth of networks are transforming the way we conduct business. In today’s networked world, it’s more important than ever to draw upon strong quality principles in establishing and ensuring the competitiveness of our business and organizations.

Electronic or e-business is becoming the norm. Businesses and organizations around the world are turning to advanced technology solutions to help them provide products and services faster, better and cheaper. In today’s hurry-up world, it’s easy to dismiss quality as tired or as a “we tried that.” However, as we step on to the global stage, conducting our business through the internet, every moment becomes a moment of truth – with our competition just a mouse click away.

In the past, when businesses remained constant for any length of time, we focused inwardly on process analysis and metrics. Today, as we deal more and more in “web years,” which we define as three months, we need to rethink our approach.

This year’s conference theme, “Toward Unbounded Quality,” highlights the growing connectedness of our world and the increased role that quality plays. Through my remarks, I will provide you with a perspective on what this means for all organizations, public and private, and the role of the quality practitioner. I’ll start by briefly positioning what the networked world is all about. I’ll address some of the quality challenges it’s driving. And I’ll finish by talking about the impact this could have on society and our quality of life.

I’ll start with technology, as it’s clearly the defining force today. Our traditional business infrastructure was built around physical things like roads and buildings, and with media such as broadcast and print. Today, new infrastructures, built around networks, the internet, databases, and user interfaces, are creating a world where products and services are digital and markets electronic.

Driven in part by new economic markets and increased competition, a new network-based infrastructure has emerged. Today there are some 100 million people in 137 countries connected to the internet. By all estimates, that number is expected to reach hundreds of millions, even a billion, by the turn of the century. These connected users are turning to the internet to perform tasks they do today such as: shopping, banking, purchasing airline tickets, collecting research for school or marketing projects and so on. The difference is that they can now do these things 24 hours a day, seven days a week, from anywhere in the world. They don’t have to take a number, or wait in line for service.

As a result, what we are seeing is the worldwide web acting as a catalyst, boosting the minimum level of customer service in a whole host of industries. For example, it took nearly 25 years for ATMs to gain widespread acceptance. Today, you’d be hard pressed to find a bank, shopping mall or convenience store that doesn’t offer the service. A similar, but much accelerated process is once again taking place with internet banking as institutions experiment with a variety of approaches and service offerings.

The transformation of retail banking from a business based on bricks and mortar to one based on electronic networks, cash machines, personal computers and telephone is already well under way. It’s here that Canadian banks, such as Mouvement Desjardins, the Royal Bank and Banque Nationale du Canada, are leading the way. In addition to performing traditional retail banking, they are using the power of networks to provide their customers with anytime, anywhere banking.

Several years ago, allowing customers to track their own courier packages on the web was a very novel application. Today, it’s expected by everyone. The web is also redefining the meaning of service in the brokerage industry. Individual trading floors are already disappearing into global, electronic markets. A trade on the web takes place at the convenience of the customer and costs a fraction of what it previously cost for the broker’s employees to handle it. Web-based customer service provides your customers with direct access to their own accounts over the web. They become more self-reliant, freeing up your resources for use in other areas.

As quality practitioners in this new networked world, it’s important to ensure that you are benchmarking your results against the “right” competitors. Now I realize that this sounds like an old “battle cry.” However, in the networked world, it becomes a matter of survival. Let’s use the bookselling industry as an example. Amazon.com (www.amazon.com), a small virtual bookstore that didn’t exist two years ago, took the book business by surprise when it became the first to offer books, reviews and aggressive discounts via the internet. With some 3 million book titles, it is nearly 15 times larger than the world’s largest physical book store. It’s open 24 hours a day, every day of the year, and it recently served its one-millionth customer – in Japan, just one of the 160 countries it ships books to.

Large, established players in the publishing industry are now scrambling to catch up in cyberspace, a medium they probably weren’t too interested in until Amazon.com came along. Librairie Garneau, the largest Francophone book chain from Quebec, is also carving itself a place among virtual bookstores, making more than 250,000 books available to the world through a simple click.

Think about it: the benchmarking paradigm in the book industry has just changed. And the same thing is happening in all industries, as businesses increasingly move from simply conducting their business in the traditional fashion to including e-business as a major part of their strategy.

To remain competitive in the networked world, businesses and organizations must begin to anticipate the challenges associated with the new networked society. That brings me to my second topic: what will some of these quality issues in a networked society be? To answer that question, we have to take into account all the aspects that are required to make e-business real. I’ll cover several today.

A key area of concern is the actual performance of the network. In a connected world, networks will increasingly become the lifeblood of your organization and the principle means of conducting e-business. They will impact the implementation of the processes you have in place, your ability to add value to those processes and enhance the delivery of products and services to your customers.

Among the questions you need to consider are:

• How secure is it? For most people, security is usually at the top of the list. To operate competitively, you must ensure that your networks are secure against the threat of viruses and fraud. Your customers must have faith in the security and privacy of their network-based business transactions. And work is under way to help. IBM, along with a number of other consortium members, including Visa and MasterCard, recently announced the secure electronic transaction (SET) standard, which makes it possible for merchants to handle credit and debit card transactions securely over the internet.

• The reliability of your network is also important. Is it up and running whenever your customers want access? If not, they’ll find a site that is.

• How responsive is it?

• Does it provide immediate access to information?

• Is it easy for your customers to use?

• And is it scalable? By that I mean: is it able to adjust to huge swings in traffic to your site? For example, during the 1998 Nagano Olympics, the IBM site registered an average 6 million hits per day, with a peak of nearly 17 million on August 1. If you technically can’t scale up quickly during an unexpected spike, you increase the possibility of system failure. Your site could slow to a crawl. It could also refuse entry to thousands of customers.

Depending on whether you are a consumer who likes to surf the net, a company trying to do business over the net or some public service function, you would list all of these issues in some priority or other. In truth, you cannot take any of these for granted. Because in the networked world, just as the rewards are amplified and highly visible, so, too, are the defects. They have the potential to impact the entire world and show through to your customers, suppliers and competitors – immediately.

The use of advanced technology and the internet alone does not guarantee improved customer service or satisfaction. You need to also understand what your customers want from this new virtual “marketspace,” how you can deliver value, and deliver it in a timely fashion.

Another area that will impact quality in a networked world is people – what they know, how well they use technology, how quickly they learn, and how well they work together as a team. Research shows that more than 60% of the overall reasons customers are loyal have to do with issues related to relationships between customers and employees.

As you know, the average cost of acquiring a new customer is six to eight times higher than keeping an existing one. Exploiting advanced technology to improve customer service makes sound business sense. Networks can make one-on-one relationships with customers a reality by helping you tailor communications, programs and services to meet a customer’s requirements or interests. However, let me add a note of caution. While you can gain new customers faster and more cost-effectively through the net, you can also lose them just as fast – if not faster. Welcome to the 90s!

Doing business is a series of collaborative processes. It requires interaction between employees, vendors, suppliers, business partners, and more. By equipping your employees with the right technology tools, you make it possible for then to be in touch and have all the information they need right at their fingertips. Whether located in the same building, working from home, or halfway around the world, self-managed teams can work together on complex proposals, sharing responsibilities and making empowered decisions. Many companies are setting up extranet sites: networks that give vendors, suppliers, partners and customers access to important data, processes and applications that allow them to act as a true extension of your organization. Your supply chain is a classic example. By using the web to link to your inventory system, then link that to your customer ordering process, you have a supply chain that literally manages itself. Your inventory levels match demand, you save time, eliminate paperwork and increase profitability.

Another area where you have to think in new quality terms is the marketplace. From a total quality perspective, where you worry about the customer relationship, namely satisfaction and loyalty, a number of questions come to mind. What must you do differently to build and maintain customer loyalty over the electronic highway? How do you manage complaints? Monitor service levels? Or measure customer satisfaction? How do you deliver value in the virtual marketspace versus the physical marketplace? These are all critical questions.

Early adopters of the technology have demonstrated some stunning examples of success – and failure. The successes I talked about earlier. Let’s look at some of the false starts. There is something in them that we can all learn from. Take, for example, the lesson learned by a company world-famous for its wonderful animation and illustrations. Using what they knew best, they created a website so graphics-intensive that it took forever to download, discouraging many of the visitors to its site. Or the car manufacturer whose chat room turned into a complaints department without a monitor. Or the elegant chocolate manufacturer that offered its decadent chocolates for sale over the internet. But its delivery system was set up to accommodate US-only deliveries – immediately frustrating those who placed orders for delivery outside the US. (Even if you are not a global organization today, by default a public presence on the internet provides you an immediate global market presence.)

I could go on. For many of these early adopters, opening up a website was a real learning experience. When you think that just a few years ago, web pages were something for techies and academics, there wasn’t a lot of commercial experience to draw on.

On the web, performance equals customer service. And consistent performance is crucial. What this comes down to is the processes within your organization. Unless your business is run on established quality principles that address the core elements of your business – cycle time pressures, cost effectiveness, product and service delivery, and responsiveness, to name a few – you will not be successful. You’ve got to build systems that make a difference in the marketplace and provide insights on your customers or your business operations. In a networked world, success is dependent on closed-loop processes. This requires thinking end-to-end. It also requires that you link your back-end data to your front-end operations. And it means having a backup plan to handle exceptions, if anything goes wrong. A website that’s down is like a road closed for repairs. A transaction posted twice is unacceptable. And an order that never reaches a supplier is inexcusable.

One of the most successful quality principles is to focus your processes on business results. When you do, the results speak for themselves. Amazon.com grew from 340,000 customers to over 610,000 in just three months. Charles Schwab grew its online accounts to over 700,000, almost one-half of the estimated 1.5 million accounts online today.

Ultimately what we are talking about here is customer loyalty and a greater potential to impact your bottom line. It’s interesting to note that if these companies had looked to improve their businesses by looking solely at their traditional business processes, I’m willing to bet that their results would not have been anywhere near as dramatic. As quality practitioners, and as business leaders, out-of-the box thinking is critical – it’s important that we not trap ourselves with traditional paradigms and successes.

Now I’ve talked a bit about what the networked world is about and some of the implications it has for the way we do business and deliver products and services to our customers. And I’ve addressed some of the quality issues that we have to keep in mind as our organizations move to doing business electronically. I’d now like to spend a few minutes discussing an area that I personally feel is important. And that is the impact of the networked world on society and our quality of life for people around the world.

In a wired world, our organizations, institutions and businesses are more visible. And as a result, their potential impact on society is that much greater and more profound. As the users or implementers of technology applications and solutions, we must ensure that the digital, connected world we are creating is one that serves humanity to the fullest.

For some, the widespread use of technology raises some very provocative and serious societal issues. They feel that the internet is getting out of control – that instead of being an information superhighway, it’s a dangerous pipeline for pornography, intellectual property theft, and a serious threat to commerce and privacy.

Governments are becoming increasingly concerned with the impact of network computing and the free flow of information and commerce on their countries and their cultures. Others are concerned with universal access, and the possibility that we are creating a society of “knows” and “know-nots,” replacing the society of “haves” and “have-nots.” And I could go on. These are serious issues, ones that we as citizens, government and business leaders must step up to.

I am encouraged that there is quite a lot of activity currently under way to address some of these issues, including developing web information in national languages. In fact, Alis Technologies, a 110-person company from Montreal, recently signed an agreement with Lotus Development Corporation to jointly market Alis’s internet translation tools. These tools allow developers to meet the demand for multilingual capabilities in the virtual global marketspace by creating websites and programs in seven languages…French, English, German, Italian, Spanish, Portuguese and Japanese.

Additional actions include the development of filtering applications that help parents to prevent access to inappropriate sites by children, addressing privacy and security issues, and working with schools and other social agencies to ensure fair coverage of computer technology in all areas of society. As a result, what you will see is the creative, innovative application of technology to enrich peoples’ lives.

But technology can do much more than that. Think about voice, speech, and handwriting recognition and the tremendous opportunities they open up for the physically disabled, allowing them to achieve greater personal and professional independence.

Think about our education systems and the opportunities technology provides for all students no matter what their capability, putting the power to learn in their own hands. Think about distance learning and the ability to virtually link teachers in main city centers with students in rural or remote locations. Think about teleworking and the ability to move work to people, giving them increased flexibility to balance their work and home lives. These life-enriching applications are what will ensure high standards of quality for all citizens of the world.

As you can see, the new networked world is about more than bits, chips and fiber. It’s about people, businesses and our communities. It’s about active involvement by all members of the senior management team to facilitate, reinforce and lead. It’s about speed, competitiveness and commitment to business excellence. And it’s about delivering total-quality solutions.

Truly innovative uses of network computing are just coming to the forefront, especially as they apply to conducting e-business. Opportunities for enhancing and broadening your reach and delivering superior quality and customer satisfaction are there for the taking.

It’s up to all of us to find ways to ensure our global leadership and competitiveness by identifying and exploiting the new opportunities offered by the networked world. Above all, we must not forget the basis upon which our quality initiatives were developed for the physical marketplace. They will form the foundation for all that we do in the virtual marketspace.

A new world is emerging. Now is the time to identify and begin managing the quality challenges of competing in the age of the networked society.

CORPORATE CITIZENSHIP

Purdy Crawford
Chairman and CEO, Imasco

The Canadian Club of Montreal, October 3, 1994
Published in The Corporate Report No. 9 (December 15, 1994)

I’ve been asked to give you my thoughts on “corporate citizenship,” and I must say the topic makes me feel energized at this particular time and place in Canada. The challenges that our current political circumstances provide are enough to electrify any citizen who cares, corporate or otherwise! Results of the coming referendum will be momentous to Montreal and to all its corporate citizens, Imasco included.

It is a fitting occasion for me to publicly reaffirm my own – and Imasco’s – confidence in Montreal as a place to do business. Imasco’s corporate office has been here since the beginning. We find that Montreal is an excellent home base. The city has first-class communications and transportation, plus all the back-up resources a head office needs.

Besides, Montreal is a great place to live, something all of us know well. The high quality of life here has been a major factor in our company’s ability to attract and retain so many talented staff. It’s a beautiful city – safe, clean, and famous for its joie de vivre and rich cultural opportunities. Over the years, Imasco, along with many others, has worked energetically to enhance Montreal’s vibrant cultural life, to strengthen its universities and hospitals, and generally, to add to the community’s social infrastructure. Being a good corporate citizen here in our gracious home city has been a labor of love.

Corporate citizenship

What does this rather abstract concept mean?

A company’s corporate citizenship is often measured by the amount of its donations and the extent of its volunteer activities. These are two main ways a company can tangibly put resources back into the community. And this is as good a definition as any of corporate citizenship: putting resources back into the community in a way that makes it stronger.

I’m proud of Imasco’s community contributions, and if you will bear with me, I’d like to acquaint you with some of the things we do.

Like myself, many of the people who work at Imasco are enthusiastic about Montreal and are active volunteers in community causes. And as I mentioned before, the company donates substantially each year to community enterprises.

For the past 25 years, the du Maurier Arts Council has been one of the mainstays of Montreal cultural life, whether in music, ballet or theater. Recently, Imasco, together with du Maurier, contributed $700,000 to a government-sponsored restoration of the Monument-National, home of the National Theater School. This great landmark had played a vital role in Montreal’s cultural and political history during the early part of the century, but was in steep decline. Its two theaters reopened last year to much fanfare, and they are well worth a visit.

There are thousands of other, less visible examples of Imasco’s corporate giving. For instance, we recently invested nearly $8 million to develop an innovative program called the Montreal Job Creation Initiative. It helped local entrepreneurs start new businesses by providing sound business advice. Nearly 400 new enterprises employing 1,400 people were created, and 85% of these were still in business at last report.

In terms of traditional forms of giving, Imasco supports almost 400 charitable organizations in Quebec. The nearest and dearest to our heart is probably Centraide, and – given the presence of Madame DeGuire here today – I am doubly motivated to give a plug to the ‘94 Campaign. It kicked off a little over a week ago and the aim is to raise $24.5 million. The needs of the disadvantaged in Montreal are enormous, so please keep that ambitious target in mind when you make your donations.

Of course, Imasco gives all across North America – to the tune of $8 million last year – but because our head office is in Montreal, our donations and volunteer contributions are higher here than they otherwise would be. This is generally true of all head offices, not just Imasco, and it is an often overlooked benefit of having head offices as corporate citizens of Montreal.

Besides volunteer activities and donations, there are other aspects of being a “good corporate citizen.” First and foremost are the jobs – both direct and indirect – and the economic activity that businesses generate. Our own head office, like most head offices, employs individuals who command above-average salaries, and of course, they spend this money in their communities. Head offices also contract out a great deal of professional and other services, which creates more employment.

Imperial Tobacco on St. Antoine Street accounts for between 40% and 50% of Imasco’s earnings, and it employs 1,200 people who live in and around Montreal.

But, there is much more to Imasco. Besides Imperial, our operations include Canada Trust, Shoppers Drug Mart/Pharmaprix, UCS Group, Hardee’s Food Systems, and Genstar Development Company. I have often found that the scale of Imasco’s operations comes as a surprise to people. This year, Imasco was ranked by The Financial Post 500 as the third-largest industrial in Canada, based on profits. We directly and through franchisees employ nearly 200,000 people, across North America, full- or part-time.

Imasco’s profits, normalized to exclude nonrecurring items, have grown at an average of nearly 15% per annum over the past three years. In the first six months of 1994, profits were up another 33%. The underpinning of good corporate citizenship is business success and profits like these let us deliver a fair-sized chunk of community support.

With the end of communism, we now know for certain that it is only by having a prosperous and thriving private sector that, in the long run, substantial wealth can be generated and redistributed for the overall benefit of our society.

The same thinking applies at corporate level. When companies “do well,” they are able to “do good.” It’s impossible for a company to fulfill its obligations to society if it is struggling with losses. I have no compunction about admitting that at Imasco, being successful – that is, making good profits – is our raison d’être.

Now, it seems that profits are a controversial notion in certain quarters. Some believe that making good profits is incompatible with good corporate citizenship! The more a company earns, the more they accuse it of being greedy. It’s as if all those profits went into a big sack under the corporate bed, never to be re-circulated in society!

What really happens to profits?

First of all, remember that profits are after-tax earnings. By being successful in business, our company contributes enormous amounts to public treasuries through federal, provincial and municipal taxes. Heading up the list is the corporate income tax, which is based on the simple proposition that the more money you make, the more you must pay toward the public good. Imasco’s contribution in corporate income taxes alone will top $300 million this year.

Secondly, to a large extent, after-tax profits go straight back into the system in the form of capital investments and dividends, both of which stimulate spending and therefore, employment. And of course, profits feed the corporate donations I discussed a few minutes ago.

Does putting profits first mean putting secondary emphasis on the concerns of stakeholders like employees and unions, governments and communities? Quite the contrary, for it’s only by properly addressing the needs of all stakeholders that the long-term interests of shareholders can be fully realized.

But one thing is for sure: good corporate citizenship does not include making public policy. That is properly the role of the state. Let me give you the broadest possible example. At Imasco we are constantly being assailed by those who believe that if we were good corporate citizens, we would get out of the tobacco business. Never mind that, if we no longer manufactured cigarettes, somebody else would eagerly make up the shortfall!

We obviously know that a large number of people do not like the tobacco business. It is an industry that is widely criticized in the media – often very unfairly or in a biased manner, but that is not my point in raising this matter. Imperial Tobacco currently produces a product that is much in demand and that is legally sold throughout Canada. We run the business to the best of our ability, in an ethical and legal way. That is our obligation to our shareholders, and to all our other stakeholders, including society at large.

The final, and perhaps most topical, aspect of good corporate citizenship that I’d like to comment on today is the obligation I believe a corporation has to comment publicly on matters of national importance. This brings me back full circle…and draws upon that energy I spoke of at the start of my talk.

The current political situation in Quebec and Canada is in need of much energy and attention by corporate citizens everywhere.

I recognize that this proposition is not universally accepted and that when corporations speak out on so-called “political” issues, they are sometimes criticized for “interfering in matters of state.”

Baloney!

Given the fork in the road we face in the promised Quebec referendum, as a voter I want to know which path is likely to lead to greater prosperity, and what the tradeoffs are for each route. It’s the obligation of businesses to convey any and all well-reasoned economic views to the public.

Imasco has always favored a united Canada. We have never been afraid to say so, and we are as firm on this as ever. There will be a great deal of debate, countless frayed nerves, and the occasional temper lost, but when the referendum dust has settled, I believe that Quebec will still be part of Canada and that we will then be able to resume our pattern of development and shared prosperity.

There is another issue of national importance currently on the table and that is the urgent need to deal with public debt. As I am sure you are all aware, it is also a very real crisis that threatens our standard of living and the Canadian way of life.

The time for finger pointing is over, and we have no choice but to act. In Alberta and New Brunswick, courageous actions have already been taken by governments and some other provinces seem to be in the process of taking similar steps. Ottawa will soon announce its plans.

As a corporate citizen, Imasco stands ready to offer advice, support, and encouragement to our political leaders as they wrestle with our deficits. In the best interests of our country and its future generations, I urge you all to do likewise.

In closing, let me say that at Imasco we consider social responsibility a crucial and inseparable dimension to running a successful business.

Speaking personally, I can tell you that I consider contributing to a stronger society to be a privilege and one of the most rewarding aspects of my job at the head of a large and successful corporation. Business success would be hollow without the chance to do some good in the communities we live in, and depend upon.

In the end, good corporate citizenship is self-interest of the most enlightened kind. By supporting our communities, we help to create a stronger society and ultimately, a stronger market for our goods and services. No doubt about it: when it comes to good corporate citizenship, everybody wins!

ARE YOUR SHELVES WELL-STOCKED?

Purdy Crawford
Chairman of Imasco

Annual Canadian Council of Grocery Distributors conference, Charlottetown, May 29, 1995
Published in The Corporate Report No. 13 (August 7, 1995)

Organizations require nourishment to thrive – people are the competitive advantage.

Many of you know Imasco as a customer or a supplier, through Imperial Tobacco and Canada Trust. Others might think of us as a competitor, by virtue of Shoppers Drug Mart and UCS (since sold).

Two Imasco companies you may not be so familiar with, however, are Hardee’s Food Systems, the fourth-largest restaurant chain in the United States, and Genstar Development Company, which creates residential communities in both Canada and the US. Imasco was formed in 1970 to diversify the earnings of Imperial Tobacco. While continuing to develop Imperial, the company has aimed to build value for shareholders by excelling in retail distribution businesses.

Just like your businesses, the Imasco companies share a focus on consumers. The fundamentals are the same for us as for you: know your customers and provide them with the very best products and services, as ethically and expertly as you can.

In reviewing your conference literature, my attention was drawn to the attractive logo – two hands clasping in partnership, representing the relationship of the people within your organizations with the customers they serve. I will focus my remarks on the employee side of that handshake.

I believe one of the biggest challenges we face is getting our employees excited, in order to maximize the contribution they can make to our businesses.

In its 25-year history, Imasco has moved through two major stages: an initial, 16-year diversification effort, followed by nearly a decade of focusing on operational excellence – that is, running our businesses as well as we can. As part of operational excellence, much effort has been expended on enhancing our financial discipline and our strategic planning processes. We have also made good headway on the human resource front, but there is still much to do.

I believe the frontier in which the greatest challenge lies – and our next big development opportunity – revolves around people: recruiting them, training and developing them, and creatively moving them around our companies. Why do I say this? Because, all other things being equal, it is the quality of people that distinguishes the winners in any given industry. Other factors, like lean operations and technology, may be critically important. But only people produce ideas, and only people can transform ideas into business success. The most carefully crafted strategy will not work if you do not have capable people to execute it.

And human beings are behind all the other innovations that gain us competitive advantage – for example, information systems, consumer research, marketing, and so on. To be able to keep nourishing our organizations with their ideas, employees require nourishment of all kinds, themselves. I will discuss some of the ways we can meet the needs of our people so they will have fulfilling careers and be optimal contributors to our companies. And, while Imasco has a way to go in this human resource frontier, we do have many exciting projects going on, and I would like to share a few with you.

If companies follow two fundamental principles about employees, they cannot go wrong: hire the very best, and treat them well.

Both of these principles appear self-evident, but it is far easier to talk about them than to put them into practice. For this reason, we should probably not be surprised at the survey reported by the Conference Board last month. More than 90% of over 300 executives polled said that employees are the most important variable in their companies’ success. But they went on to rank people-related issues, like training and compensation, far below other business priorities. The Conference Board concluded that executives still pay lip service to the critical importance of employees to business success.

Given the overwhelming importance of people to our organizations, we need to go all out to get the very best employees we can. Sometimes we have to pay more for these people, and we all know that today’s job candidates are looking for attractive benefits. But we stand to get a considerable return on our investment. Three outstanding people can do twice as much as three average people!

The flip side of the principle of “hiring the best” is: be generous with severance. Putting it bluntly, if you find yourself employing the wrong person, it is better to pay him to stay home. As we all know, when a person is particularly ill-suited for a position, it is not necessarily his or her fault. Companies change, sometimes overnight, and longtime employees can find themselves on the outside looking in, in terms of skills and orientation. Replacing these employees with someone better-suited to the organization’s goals does you both a favor. You get on with achieving success, and they have an opportunity to reorient their careers.

We all want to hire the best possible employees, and to do so we must tap 100% of the talent pool. But again, while logical in theory, this does not always happen in practice. Unconscious prejudices and wrong assumptions can serve as blinders, preventing us from seeing talent wherever it lies. Talent knows no gender or ethnic barriers, yet we may not discern the talent potential in individuals who are not “just like us.” All hiring and promotion decisions must be based on merit. But if we successfully tap 100% of the talent available to us, diversity should be the natural consequence!

A diverse workforce can result in real business opportunities. The combined perspectives of people from different backgrounds and with different viewpoints and expectations can guide a company to entirely new markets, or help it to mine a familiar market from a new and different angle. I will mention two examples at Imasco in which diversity in our ranks has led to knowing our customers better and serving them more effectively.

Canada Trust is the only financial institution in the country that offers telephone banking services in Cantonese and Mandarin. And at Shoppers Drug Mart, astounding things happened to cosmetics sales when that female-led division began targeting a fast-growing segment they called the “time-starved, working woman.” They developed an intensive training program to elevate the product knowledge and status of the chain’s cosmeticians, and they made sure that value and convenience became a way of life. Market share began to take off, and sales have more than doubled in the past eight years, from $141 million in 1986 to $284 million at year-end, 1994.

When referring to “the best people,” I do not mean raw intelligence alone. The best employees must also have drive and intensity. And to fit into today’s organizations, where teamwork has edged out yesterday’s hierarchy, managers need considerable “people skills.” They must be skillful at persuading, at coaching, and at building consensus.

Once we have good people in place, we certainly want to keep them in our employ, and we want to get the most out of them. This requires treating our employees well. Earlier, I alluded to good salary and benefits. We must also include appropriate incentives. More and more, we should build in group incentives that are carefully aligned with corporate objectives.

But we all know that people do not work for money alone. I have been reading an excellent book titled Competing for the Future. Its authors point out that it is senior management’s responsibility to “imbue work with a higher purpose than a paycheck.” One of the main pieces of advice they give employers is to “Aim for employee excitement, not just for employee satisfaction.”

One way to get employees excited is by getting them involved in the business. By seeking and using their ideas, we can give them a stake in the organization. In everything that we do, from the CEO on down, we must give the following message to our people: your ideas are not only welcome, they are vital to our success.

A case in point in the Imasco family of businesses is Imperial Tobacco. For several years now, Imperial has been capitalizing on the tremendous knowledge and commitment of the people closest to the action in manufacturing. Through a Business Process Improvement program, teams of workers constantly look for ways to improve manufacturing processes. In one instance, they noticed they were losing valuable production time every Monday morning while waiting for the glue pots on packaging machines to heat up, having been shut down over the weekend. The team recommended that the machinery not be turned off on Friday afternoon. This one, simple idea has increased production by more than 400 million cigarettes per year – about $15 million of additional revenue!

When we capitalize on the incredibly rich resources that our front-line people represent, it is satisfying for employees, and it is great for the company.

Beyond seeking and valuing our employee’s contributions, we need to stoke their intellectual fires. Good employees will not stick around long if we stifle their development.

At Imasco, we place high importance on education and training of all kinds. Our activities run the gamut from basic literacy training for seasonal workers in our tobacco processing plant at Alymer, Ontario, to second language training at our corporate center in Montreal, and to an innovative executive development program that I will speak about in a moment.

At our corporate center, we have developed one practice that really makes a difference. We all read the business literature to one degree or another, and each week we assemble a packet of relevant readings from the previous week and circulate this throughout our companies. This is our way of ensuring that the best ideas become widely known.

In training, one important thing we have learned is when people get involved in shaping their own program, learning is much more meaningful and efficient. Increasingly, our employees determine for themselves the information they need to do their jobs effectively. For instance, to school its front-line employees in the company’s new paperless banking system, Canada Trust has crafted an individualized, multimedia learning system. Trainees sit at computer terminals wearing earphones, and they engage in simulated interactions with customers, whom they “see” on the screen. The experience is as close to real-life as can be, and trainees go through the material at their own pace, reversing or fast-forwarding, as needed. It turns out this individualized learning format lets customer service trainees cover a great deal of detailed information in a comparatively short time. In some cases, training that used to take a week is covered in one day. This is a major competitive advantage, for in banking there is an ongoing need to bring new employees quickly up to speed on the systems and products.

Shoppers Drug Mart is planning to borrow some of Canada Trust’s methods to implement a massive training initiative over the next three years. By 1997, the Shoppers system will have totally reconfigured its buying, distribution, and accounting activities. All 20,000 Shoppers employees will need training, but classroom instruction will be minimum. Self-paced modules, patterned after Canada Trust’s, will convey the bulk of the information.

My final example is our Senior Management Development Program. One of Imasco’s greatest challenges, as a diverse organization comprised of six business units, is to add value to the whole by identifying and transferring the best practices among the companies. This requires getting our executives to talk to one another.

Another major goal of our corporate center is to foster a culture of continuous learning throughout the companies. We believe our best tool in a constantly changing business environment is a positive attitude toward change and an openness to learning, and we encourage these traits in our future leaders. This was the thinking behind the creation of our Senior Management Development Program, a three-week seminar that began in 1992 and has been an annual event ever since.

Each year, managers of high potential from each of our companies are selected by their CEO’s to attend the session – about a dozen in all. They visit all our companies and are briefed directly by the CEO of each company about strengths and weaknesses and industry challenges. They also hear talks by several top business school professors. At the close of the program, teams of participants present their ideas of where the company should be headed directly to the senior executives of Imasco.

Following this presentation, a very frank debate transpires. Let me tell you, at times these managers can be quite tough on us! But we love it – it is a tremendous, highly useful exchange.

I would now like to show you a short video on this year’s program, which concluded three weeks ago. Afterwards, I will underline some important training principles embedded in the program that I believe have transfer value to companies like yours.

[SHORT VIDEO SECTION]

Besides the obvious intellectual challenge, why were the participants so enthused about the program? Three main reasons:

• First, they were able to see the big picture – to transcend the dailyness of their jobs and get a wide-ranging view of the entire Imasco enterprise. They received the most current information about each company, directly from top management, including frank admissions of problems and industry challenges.

• Secondly, they were excited by developing insights from other companies’ experiences that have direct relevance to their own professional challenges.

• Finally, they were given the chance to make an impact through developing recommendations for our top brass about where Imasco should be going. And senior management makes it very clear, from our presence there and from our receptive attitudes, that we place high value on their views.

Your businesses are likely not structured as Imasco’s, but I wager that most companies have internal structures that serve to separate and even isolate employees – marketing, finance, and so on. To add value to the company as a whole, we all need to explore how to promote teamwork across our functions and our business units. Thinking in this way, perhaps your opportunities and challenges are very similar to Imasco’s.

Our common challenge in the human resource frontier involves getting the best out of our people – through listening to them, empowering them, and not “boxing in” their talent in structures that may be convenient at one level, but confining overall.

If I could choose just one notion to leave you with about the employee side of the handshake, it would be how vital it is that our people become broad-gauged and see the big picture. I realize how hard it is for busy operators to take the time to understand all the changes in the business environment, yet it is vitally important to cultivate this wider perspective.

When people see the big picture, and when they feel their efforts are important to the company as a whole, their self-confidence will blossom. And, they will contribute their talents in wonderfully unpredictable and creative ways. On this we can stake our future success.

We are all in the business of getting our customers excited about the products and services we offer. Choosing the best employees and getting them excited about their work is our best bet for doing so.

A DAY IN THE LIFE OF INTEL ARCHITECTURE

Sean Maloney
Corporate Vice-President & Director, Sales & Marketing Group, Intel

Comdex Canada, Toronto, July 9, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

I first saw that quote, “change is the only constant,” used, referring to our industry, back in the middle 1980s. And looking at that today, it kind of feels funny to think of that being used ten years ago because the rate of change now is clearly far higher than it was then. And I think to an extent we are to blame for that, including many of you here in the audience, because our deployment of computer networks has increased the rate of change and the rate of speed, as we’ve all got wired and connected together.

Now mass customization is where we uniquely fit the requirements of our customers and tailor our products and services and deliver them on a large scale. And that mass customization requires speed of response to customer needs. Our customers want to see us being flexible and responding on a 24x7 basis to their changing requirements. That means we have to be able to analyze data and respond in an appropriate fashion.

Keeping pace with this constant demand for change in products and services is really what being in business is all about. Everybody is trying to keep pace. The more mature economies are now averaging something like 3% to 4% percent expenditure on information technologies. And countries like China are acutely aware that they are kind of underspent and they all have huge national programs to catch up.

More and more of us are also being connected. Canada is up there at the lead with about 40% or more of workers online or connected and tooled with PCs and network connections to make them more productive. That’s not just big business; it’s also small business.

And small business is becoming more and more a driving factor in the economies of North America, Europe and in Asia, with 50% or more of their economic growth now coming out of small businesses. Small businesses face their own unique challenges to deploy information technology. Information technology is just as important, obviously, for small business as it is for a large, though, of course, small businesses have tended to lag behind large businesses in deploying IT. And the reasons why they’ve lagged are because of the difficulties of deploying information technology.

Many of us who work for large businesses have seen the growing up of really substantial infrastructures with IT departments, LAN specialists, personnel productivity, application specialists and so on. Those kinds of things have been out of reach of small business. The products haven’t been affordable and getting access has been difficult and complex.

Small business needs information solutions that are scalable because, of course, those businesses can grow quickly. You don’t want to go through technological discontinuities as you flip from one network site to another. And they need to be affordable. They don’t need to have very high support costs. Just because a small business deploys IT, doesn’t mean it then needs to go and get a big IT department to support it. All of those things have been intimidating small businesses and stopping them from deploying technology.

We have had a lot of promise from our industry, and Intel is part of this and partly to blame or responsible as well, for a lot of promises over the last three years of plug-and-play and reduced cost of ownership. I want to spend some time here looking at what we’ve managed to do over the last couple of years.

I’d like to start in the small business sector by looking at a demonstration of a small business getting connected and getting wired. We have a couple of PCs up on the stage and I’m going to invite Bill Palajac to go through the process, during the course of this presentation, of getting us connected and, ultimately, onto the web. Now when I first installed a LAN about ten years ago it was a very painful process.

PALAJAC: Yes, it was. And today, luckily for me, that’s much easier with a couple of products from our In Business product line. I’ve got our 8-port In Business hub, and our internet station. I can build a local area network and get these systems on the internet in a very short amount of time.

MALONEY: This product happens to be an Intel product called In Business, designed for small business. There are a number of other products as well that are similar from other companies. How long does it take you to get a small group of PCs hooked up?

PALAJAC: Well, with modern desktop PCs, like I have here, which come pre-installed with the EtherExpress network card, it took about ten minutes to configure the OS, which already has the network protocols and network type included or resident in the OS. I just simply select those, hook them up to the port and I’m off and running in.

MALONEY: We didn’t go through that on stage, but the next phase, obviously, for small business, is getting connected to the internet. I’d like to go through that and let’s have a look at how difficult that is.

PALAJAC: Again, this is a very simple step. With our Internet Station, this simple box really does all – takes care of all the difficulty for you. I simply plug in my PCMCA modem, in this case it’s an analog modem, but this could be ISDN, and I’ll plug my phone line into that, and then I will interconnect my Ethernet hub to the internet station and then we simply just walk through my browser and run through the setup wizard and you can see it automatically comes up to my internet station. We’ll go through the setup wizard and we’ll key in all of the information that I got from my internet service provider when I filled out my registration form.

So as you can see, it found my modem. I just click, tell it which modem to use. I can have two modems in here for redundancy. We’re actually doing some bandwidth sharing as well. You can see I’ve already keyed in my E-net account, name, password – and this is the difficult part – IP address. The only IP address I need to worry about is my domain name server, and that gets me out to every other server out on the internet. Finally, the phone number I want to use to dial out to. I just simply keep walking through this wizard, and then we restart the box. We reset it, it takes that new configuration, puts it into its resident memory.

MALONEY: Okay, while we’re doing the reset here, let me just explain what’s happened. So these are two fairly recent typical PCs. They come with network connections. If they don’t, then you do plug-and-play network in back. Getting onto the network here, the physical connection, getting the LAN installed took about ten minutes in total. Then the next phase, which is getting onto the internet, we are doing right now. When you get on the internet, you contact an ISP, the ISP gives you your name, DNS address and a password, just three little things. This whole process is quite literally how you go about getting a small business onto the internet so that that small business, then, can be connected, start doing email and ultimately start doing electronic commerce. So how are we doing here?

PALAJAC: It’s rebooted the box, taken the new configuration, and it’s allowing me to go out to dial to my ISP. The box is going out and dialing. Anyone now on the local area network here can gain access to the internet via our internet station.

MALONEY: Okay. And could you go out to the internet.?

PALAJAC: We’re dialing right now. It’s going through the login script. It’s taking my user name, my password. It takes roughly 30 or 40 seconds. The phone switch here in Comdex today is a little busy, given all the traffic out on the showroom floor. You can see we’ve connected. I’ve got a few things bookmarked. We’ve got The Toronto Star here.

MALONEY: This is all real, believe me.

PALAJAC: This is live, that’s why I’m shaking.

MALONEY: I’ve told Bill if he doesn’t fix the worldwide web this morning…

PALAJAC: I’m working on it. Here we are, we’re at The Toronto Star. You can see I’m live. There’s a few little things here that I can look at.

MALONEY: Go and hit the Comdex home page.

PALAJAC: Comdex, sure. See how the keynote’s going.

MALONEY: Your chance to vote, folks.

PALAJAC: All right. Dial up and here we come!

MALONEY: Thanks very much, Bill. Thanks, we’ll come back a little later. So what you saw there was an example of a really major development over the last two years and some of those things that we’ve been talking a lot about, like plug-and-play and ease of use. Some of them are really beginning to be deployed and so more and more small businesses will start doing this. We’ll talk about the kind of compound effect that has later on.

Now, meanwhile, those of you in big business and in IT have been involved in far more complex problems for the last 30 years deploying mainframe structures that have been mission critical since the 1960s and rolling out minicomputers and then the onset of the client server. The result, as all of you know, your jobs and your roles have become absolutely essential to the competitiveness of your organizations – those of you who are in IT – and you grapple with standardizing solutions to reduce costs and to link departments across your organization to reduce the total supply chain inside your company so you can respond more effectively and satisfy those customer needs, and then, of course, go out and link up with other people’s networks and streamline their supply chains as well.

The issues involved in this are pretty significant. You have incompatible data types or data types that are complex and need sophisticated software to interpret them. You’ve then got the issues of people collaborating across those different departments – engineering, design, manufacturing, shipping logistics, warehousing, finance – all those various functions to reduce cycle times and get things more efficient. And we need to be able to come up with pretty immediate decisions from a management point of view and make real-time analysis.

Now I think the good news is that the deployment of the network and the arrival of things like the browser interface, make a lot of that easier. And we also make a case that increasing computer power, can solve many of those issues as well. What I would like to do now is to switch to the big business environment, which is the area at the back of the stage here, call Melissa McVicker up and have a look at a large computer environment.

Now what we have here on stage is a kind of pseudo big business. Imagine here that we have a bicycle manufacturing company and it has a design department, it has a marketing department, it has manufacturing and all the other facets of a manufacturing organization. And, Melissa, maybe you could explain what you’re doing here in the design department.

McVICKER: What we’re looking at here is digital assembly of a solid model. It’s a company called Solid Works. So basically we’re looking at the back half of a bicycle in 3D space. And you can see I can manipulate it and move it around in several different ways and look at the entire assembly.

MALONEY: Let me stop you there for a second, because I’m sure, like many people in the audience, I’ve seen CAD demos and used CAD for the best part of ten years. What’s different about this?

McVICKER: The key difference with this solid modeling and digital assembly is, when you’re in a design environment, you’re putting together parts from many different designers. And what this program does is allow you to bring together all the material characteristics of each of those different parts. Everything from the weight, the dimensions and things like that, so we can look at the entire weight of the bicycle for our shipping and receiving department, for instance, or the mechanical interference from one part to another. If one designer makes a change to a part, how is that going to interfere with the rest of the parts. So we’re really doing digital prototyping with this type of a program.

MALONEY: So you’re creating almost like a cyber model of how that product will flow through the whole company.

McVICKER: Absolutely.

MALONEY: How is the data stored behind this?

McVICKER: Interestingly enough, in this particular program the data stored behind this is on an Excel spreadsheet, so it’s a standard spreadsheet that people have access to. One of the things that I can show you very quickly is how to make a change to one of the parts on this particular bike. So let’s just look at the disk here, and I can easily call up all the dimensions of the disk. Again, this is stored in Excel. Make a quick change. Let’s make this 12 inches. It’s in inches, it’s not in metric. It’s made that change now on the particular part. Now if I save this and go back into the overall assembly, it’s going to ask me if I want to change this. When I say “yes”, it’s actually going through a set of complex calculations to make the change that you see right here. So it’s rendering on-the-fly.

MALONEY: That’s “rendered” on-the-fly, past tense, that was extremely quick. Maybe you could explain the hardware here.

McVICKER: What we’re using here is a dual Pentium II Xeon workstation, so it’s brand new and it takes a lot of processing power.

MALONEY: I’ll explain a little bit about the Xeon processor in a minute. So you’ve changed this cyber model on-the-fly and then from here you could see what the change in the weight of the product was, which would have the rippling effect to other parts of the organization.

McVICKER: Exactly. I can even do things like output an audio-video interleave (AVI) file so the manufacturing department can look at how things are assembled together.

MALONEY: All right, thank very much. So the technology inside there and the hardware was the Pentium II Xeon processor. For those of you that haven’t seen it in the newspaper in the last week or so, we announced the Pentium II Xeon processor just eight days ago. It was specially designed for professional workstations and servers. The Pentium II Xeon processor is on par with existing high-end workstations, but the thing I’ll draw your attention to is the estimated cost of the overall system. It’s substantially better. Something like two to three times the performance improvement, looking in terms of price performance.

Not everybody can afford or need or be justified to have this kind of high-end performance. And you’ve probably followed the discussions in the industry over the last two years and the almost kind of bifurcation or the change in requirements for processing power. We saw the debate a couple of years ago over the network computer, which promised a lot and sizzled out a little bit and maybe will come back again. It’s still kind of echoing around. We’re not sure where that’s going to end up.

We then had a lot of focus on lean clients as well and reducing the cost of computing. And it’s clear to us at Intel that there is a whole segment of the computing requirement which doesn’t need the super high-end performance. At Intel we don’t want to stop producing super high-end performance processors, but we also want to start producing architectures that are suited to people that have more simple, basic type functionality, where it may be an administration function that wants to do simple word processing and doesn’t want to do anything else, terminal replacement or whatever.

A couple of months ago we introduced the first in a series of products in the Celeron processor line. It’s a series of micro processors that have been architected for those kinds of basic functions. Now in our big company environment here, clearly not everybody can justify having a high-end workstation from a hardware cost. Not everybody can justify having the expensive software, necessarily, to run on that either.

So I’ll take you back to this environment again, we’ll show you how a simple basic PC can take advantage of this network. I’ll introduce Doug Cooper, who many of you know, is our Canadian marketing manager. Doug, maybe you can kind of pick the story up there.

COOPER: In manufacturing we need access to a lot of the same information that Melissa was showing here earlier. We need to know what the bike is going to look like, we need to know how the parts fit together right. Unfortunately I can’t get approval to have a few hundred dual processor Pentium II Xeon systems down on the manufacturing floor. So we had to come up with another solution. Here we have our 300 MHz Intel Celeron system and we’re using software called Adaptive Media. Now Adaptive Media is a plug-in that streams our VRML solid model from our Pentium II processor server over here, same kind of model as Melissa had created. And you can see I can manipulate that model in various different ways.

The other cool thing the engineering folks were able to do is using the Solid Works program you can create a small AVI file that actually shows how all the pieces are put together. If you look at the way some of these things have been done in the past in manufacturing, a lot of it involved paper drawings and a lot of meetings to get it done, things that we’ve done electronically here. In addition to that, we have access to all of the standard office tools because the same people needed to be able to do email and they need to be able to write documents and do spreadsheets.

MALONEY: And of course the other thing here is that you accessed a data model without needing to have installed the software that developed that data model, and the reason is you accessed it through the browser.

COOPER: Exactly. Now a lot of people would say this is a browser, or mostly browser software and you could do this with a much lower system. But one of the things that’s key in manufacturing and engineering is being able to collaborate, right? And we need to be able to share information. So one of the things this package allows you to do is to go in and annotate this drawing. I’ll just make an adjustment here and we’ll put in an arrow here just to point to what we’re actually pointing to. And then I can save that and update that model on our web server so that the information is available to everybody in the corporation. That’s a key advantage. So we’ve taken the connectivity and we’ve taken visual computing and we’ve applied it to improve our overall bottom line.

MALONEY: That’s great. Thank you very much. So what you see here, then, is sort of a large company environment where the company is connected, where changes in processes can be reflected and the implications of them can be seen all the way through from the engineering and design department through manufacturing, and then, ultimately, out into other parts of the company.

Now at the same time that these developments have been going on, there has been a change in the usage model on the client. We used to talk about the “killer app.” And the “killer app” really started with personal productivity. The first “killer app” or killer application was the spreadsheet, and the spreadsheet became a tool of the trade for an accountant. And then we had word processing and desktop publishing that became tools of the trade for administrative staff. So the PC became kind of an indispensable extension to a knowledge worker in the same way that a hammer was indispensable to a carpenter or a paint brush to a decorator.

But the next killer application isn’t a killer application as such, it’s a killer environment. And it’s a way of freeing up useless time that knowledge workers spend and having the computer automate those functions. We call that constant computing. In constant computing what happens is that many functions that right now use our time and effort to perform, get automated and done in the background and allow us to carry on being productive in the foreground, on-the-fly compressions/decompressions, so when we read and receive emails and send emails and access the web, information, as it comes in and goes out, is automatically compressed and decompressed. So we reduced the worldwide weight and we can access and deal with raw messages faster, at the same time have built-in virus protection with real-time scanning taking place in the background so that as we get connected to a more and more exposed and brutal world, we don’t end up having our valuable files crushed and with security taking place real-time in the background so that we know we are accessing what we need to access and doing so in a secure way, and our internet material being cached in advance so we don’t have to go out and wait for it. And, of course, finally, remote management so that all the clients can be continuously monitored to see for performance degradations or the beginnings of problems, hard drive failures or whatever.

And to explain and show that constant computing, I’d like to bring Melissa McVicker back on stage and walk through a day in the life of somebody in this big bicycle manufacturing company.

McVICKER: Well, I’ve kind of moved from the design into the sales and marketing end of the company at this point. And so you can see here on my desktop I have several different things open. The first thing on my desktop is my email system. And what you can see there is I’m actually using Microsoft Outlook as my email system. And there are quite a lot of companies that are moving to this system right now.

MALONEY: Microsoft Outlook, for those of you that haven’t used this, is kind of a next-generation messaging system that integrates a whole number of things so that you can tie in your calendar and a number of other functions.

McVICKER: One of the things that I wanted to show you is that if I did have 150 emails here, Microsoft Outlook makes it a lot easier for me to manage and control that email flow. One of the things that I can do is, if I look at my calendar, I see that I have a press event meeting today and in my in-box I have some press information. Microsoft Outlook makes it very easy for me to copy the particular email and move it directly into the meeting in my calendar, just paste it in there. And so now every time I open my calendar either online or if it’s printed, I have this information. I can also send it to all the attendees that are in the meeting, if I choose to do that.

MALONEY: Now that happens to be, actually, a very useful feature because it means you go straight into a meeting with your calendar and you’ve already got the briefing material kind of imbedded in there. It means that you are immediately pulled into an environment where you have multiple applications open. And that’s part of what I’m saying here. We’re going to get more and more pulled into an environment where instead of close application, open application, close application, open, you have a much more kind of real life open world on the PC.

McVICKER: One of the things I wanted to talk about is in your typical sales and marketing environment there’s a particular presentation that I’m working on. And as anyone knows who has ever created any kind of presentation, it takes a lot of different kinds of data in order to pull a sales and marketing one together. So here I have Excel with a significant amount of information in my Excel spreadsheet on sales, and then I’ve also pulled some information off the web where I’m looking at some bicycle exports and production for different countries.

MALONEY: Okay. Now I think that large banks of data are very familiar to all of us, as we’ve installed networks and got them going. We are tending to end up with huge data warehouses and very complex sets of arrays of data like this, and it is very, very difficult, intuitively, to see relationships between these numbers.

McVICKER: One of the things that I wanted to show you was program called Fremont, it’s by a company called Portola Dimensional Systems. And what I’ve done is taken the data that you saw in the spreadsheet from the different countries and I’ve put it into the spreadsheet and animated it. It’s a very simple process to do this. Basically I just drag it into the easy graph line. And what I can do is, we can just take a quick look at what’s happening in Taiwan. Taiwan is on the far right bar. And the interesting thing we see here is, if we move slowly through this, there was a dip in Taiwanese bicycle production and exports around about 1990 and then there’s been a steady increase. Now this we all see in a matter of seconds, looking at it this way. It would take quite a long time to get that kind of information by looking at the sales on a spreadsheet.

So what I can do (this particular program requires quite a bit of processing power so I have a Pentium II 400 machine) is move this into an AVI file and very quickly put it into my Microsoft PowerPoint. Again, we have an animated AVI file that’s showing us sales data for bicycle production. This AVI file is far smaller than what we saw in the Fremont program. I can compress this in Outlook and send it out to my sales team. So we’ve managed to get them real-time information on sales data.

MALONEY: So this is the model of how we believe clients will develop over the next few years. Knowledge workers having multiple tools open at once working together and then protected against time inefficiencies through on-the-fly compression/decompression across the network, including virus protection and background network management.

Now none of this client-side development is possible without also pretty big infrastructural developments in servers. And for a considerable period of time in our design efforts and research efforts at Intel, we’ve been looking at server architectures and how to improve them. None of the things that we see on the internet are going to be possible without much more rugged, full-tolerant, high-performance servers that can be deployed at pretty low cost.

Last week, again, we announced the Pentium II Xeon processor specifically for servers, which over the next few years is going to carry on making these high-end multiprocessing servers much more affordable, much faster, and capable of handling the loads that will be out there on the internet. Because, obviously, for Intel, many of our processors are now ending up running in a web server environment, an overwhelming majority of internet service providers, in one way or another, are using our microprocessor architecture. So we’re having to put a very special focus on getting the web transactional rates up as high as we can.

The reason for this focus on the internet is that the internet is becoming more like a utility than an application for us. It’s becoming our medium. Our medium for information exchange between our organizations, first with email and then more and more with web information, and then, of course, with electronic commerce. And the requirement for that medium is to be always on, always reliable, always responsive so the companies that exploit it can do so reliably.

Now all of us have our own internet “factoid du jour” and the facts continue to astound. This morning if you opened the newspapers or read or watched TV, you may have seen that Yahoo! made their quarterly announcements. Congratulations to them on having performed very well over the last three months. The thing that leaped off the page, to me, was that their web hits in the last three months increased by another 30%!

So this exponential rate of increase is carrying on without the slightest sign of slowing down. And it really draws a parallel to us of the way that the fax machine replaced the phone as a way of doing business. I remember when I joined Intel in the early 1980s in Europe, we had a little telex machine sitting in the back and the telex machine was how we took all our orders. And I think that was really how all businesses took orders, either by telex or letter. That got replaced more and more by the telephone, and then, in a period of about four or five years, it got replaced by the fax. And Intel, probably from the late 1980s onward, like many businesses, really got most of their orders, did most of their business through fax and phone.

And in a very short period of time over the next four or five years, all big business is going to switch from fax-based business transactions to e-commerce-based business transactions. You’ve probably seen the figures: greater than US$250 billion e-commerce by 2001. I saw Nicholas Negroponte at MIT recently estimated that’s probably already happened now. This is all happening much faster than even the hyperbole led us to believe.

So with that, what I’d like to do is go back to the small business because, of course, small businesses have to be able to exploit this and adapt to this every bit as much as large businesses. What we saw earlier on was those first two stages of small businesses, the difficulties acquiring the technology, acquiring the PCs in a cost-effective way, getting them hooked up. What I would like to do now is go through the next stage of how you get a web presence. It used to be very difficult.

PALAJAC: It was very difficult. Today, again, this is very easy. I remember I made my first web page probably two years ago and it took me well over two weeks to do, reading up on HTML and trying to figure out that ugly beast. Now I found this web wizard on Intel’s multimedia website. Through eight very easy steps I was able to select my background, import images, import some media job applets which happened to be optimized for Pentium II processors.

MALONEY: Thanks very much, Bill. So what we saw there was, finally, the small business getting connected onto the web. The comment at the beginning, many of you may have gone through it, the first time you tried to put out your own home page, it was a labor of love because you had to learn lots of esoteric stuff and Bill found a wizard on the web. There’s a kind of eight-step process that you just walk through, a freebie wizard, walking you through this process, get up on the web and then he’s up and he has a presence and he has some fairly slick little features on this home page, which look as if this company spent a lot of money developing the feature.

This small company can, very quickly, act like it’s a large company. In the instance of the demo over here in the big business where we link together all these various departments, internet and high-performance computing enables that big business to respond as flexibly and as quickly as small business.

So where is all this heading? We see really an almost unstoppable move with that investment we talked about earlier, a process of everybody getting hooked and wired – something like a billion connected PCs on this 24x7 network – exchanging information, driven and linked by millions and millions of servers that become an indispensable part of our business life and the channel and the medium with which we all communicate with each other and do business.

Intel’s response is to triple our efforts and get our architectures so that they can be suited for each one of those segments and optimized for each one, whether it’s for basic computing needs or for advanced computing needs or for servers.

Let me leave you with a vision of, architecturally, where that leaves us over the next ten years. We’ll take our existing 32-bit lines, the Pentium II processor lines, optimize them for low costs, optimize them for very, very high performance and carry on improving those and driving down the technology as we shrink into tighter and tighter geometries and get faster and faster performance. In addition to that, over the next year to 18 months we will roll out our future architecture – the 64-bit architecture – which we believe will be the backbone for the ultimate network as the internet begins to finally fulfill its potential.

We started the presentation by looking at what we need to do to keep up the pace. I think the question is how do we beat the pace rather than just staying with it. And our response is that rather than be exploited by the network, we will use computing power to tame the network and to exploit it for our own purposes.

THE DRAMATIC RISE OF INTERAC: WHY AND HOW IT HAPPENED IN CANADA

Joanne De Laurentiis
President, Interac

Payments System Strategy Symposium, Washington, September 22, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

Once upon a time a Polynesian tribe used something called the Yap stone as its coin. The larger the stone in those days, the greater its value. This particular coin must have been of significant value because it was so heavy that it sank in the ocean while it was being transported between islands. You know how it is with coins. They’re always falling out of your pockets at the most inopportune times.

Anyway, the Yap stone, for obvious reasons, didn’t last as the currency of choice. In fact, today we don’t haul bars of gold around to pay our bills. And we’re even reducing the practice of exchanging promissory notes – the things we call dollar bills. Instead we move cash around electronically. And nowhere are electronic financial services growing faster than in Canada.

Canada has one-ninth the population of the US. Yet it has two-thirds the number of electronic payments. In a single month this year, that meant 83 million online debit transactions, compared to 120 million in the US. No wonder Canada’s online debit service, called Interac Direct Payment, has reached the size of the 10 largest US direct card payment services combined.

Today I’d like to tell you the story of our success. For us, debit cards were not just about selling a new consumer technology, they were about selling a new behavior, a new attitude, a new way of seeing money – digitizing money – after untold centuries of money as a tactile reality. The message I’ll share with you is this: we acted upon a vision of what money could be and built the safest, most solid and reliable shared electronic financial network possible. This was no mere technological feat. We had to have a lot of faith. We had to believe Canadians would love debit. And our belief became a reality.

Let me take you through the history of how our Interac Direct Payment service came to be. I’ll share with you some of the initial planning, the growth and the evolution of Interac.

It all began with a vision. Interac was the collective brainchild of Canada’s major banks and deposit-taking financial institutions, nine organizations in total. In 1984 they decided to form an association to develop and operate inter-member networks. This was unique. While everyone else around the world was opting for a central switch, we built a distributed network.

This approach works for us because Canada has a concentrated banking sector. The nine founders of Interac represent 95% of the deposit and checking accounts in the country. These major financial institutions quickly set to work, and by 1986, two short years later, they had launched their first coast-to-coast shared service. That service was called Shared Cash Dispensing (SCD). It allowed Canadians to access their deposit or credit card accounts through 2,500 banking machines. To get access, consumers used a PIN and magnetic stripe access card through an online, real-time system.

The service grew rapidly. In its first month, it was used more than 170,000 times. One year later the monthly usage had shot up to 2,700,000 shared withdrawals, a 1,600% increase. In August of this year, 28,000,000 withdrawals were made at more than 18,000 banking machines. That’s about one for every man, woman, and child in a one-month period. And this represents just one-third of the total. Canadians are doing 1 billion cash withdrawals a year, most at their own bank’s machine.

By 1989, a new expanded vision began to take shape. Several Interac members had begun experimenting with direct debit technology. Their individual market pilots proved that direct debit worked technically. But they also learned that if direct debit were limited to the customers of one or two banks there would be no future for it. And so they began to explore the feasibility of a shared network called Interac Direct Payment.

The vision was a bold one. The financial institutions could have taken the easier route of tacking on a new piece of software to the system that carried their Shared Cash Dispensing service. Instead, the plan was to build an entirely new system with a large powerful capacity, one that could handle 400 transactions per second. This network would run online, in real-time, with PIN and magnetic stripe to ensure the highest possible level of security. Offline debit, prevalent in the US, was not acceptable to Canadian bankers, who are extremely security conscious.

One consultant’s early estimate for building this brand new system put the cost at between $250 and $350 million. As with any innovation, there were “yea-sayers” and “nay-sayers.” The optimists felt we could achieve success within a few years of the launch. They based this optimism on what was happening in California with the Interlink network.

Interlink in California, with approximately the same population as Canada, had achieved, in its first four years of operation, 3 million transactions a month with 8,000 terminals and 2,700 locations. And with our national banking system, the optimists believed we could achieve coast-to-coast what had been achieved statewide in California. The optimists’ view was a variation on the “Field of Dreams” premise – build it and they will use it.

Then there were the pessimists. Some senior executives were concerned that the move to direct debit was technology driven – supply driven – and not customer driven or demand driven. Their version of the Field of Dreams premise was: build it, spend a lot of money subsidizing it, and perhaps they will use it.

There was another group of pessimists, the hard-core pessimists. They questioned debit on a more fundamental level. One senior banker was reported as saying that self-service would never take off, because banking is not McDonald’s. These individuals sounded like Kenneth Olsen, the founder and then president of Digital Equipment Corporation, who said back in 1977: “There is no reason for any individual to have a computer in their home.” This group saw our foray into debit not as a Field of Dreams but as a Field of Nightmares.

Then there were the retailers who expressed concern. Canada has a hugely sophisticated and efficient payment and check settlement system. Retailers get value for checks within 24 hours. Improving on that speed seemed unnecessary, and not worth the expense. Retailers felt getting next-day value was pretty good.

Finally, there were the consumers. Some consumers suspected a plot. They thought banks would encourage them to use debit and then trap them in a cashless society, where every transaction would be tracked; where privacy would be lost; where the cost for the service would be sky high; where security of their funds would be compromised by hackers getting access to their accounts; and where their credit cards would be taken away.

These various views shaped the early vision of Interac Direct Payment. Fortunately, the optimists outnumbered or outwitted the pessimists and the experiment was allowed to run.

What kind of reality emerged? One that far exceeded our most positive expectations. We began with a pilot in the fall of 1990 and it ran for a year. Ottawa was chosen as the pilot site. It met the right criteria: it had a critical mass of shoppers, merchants and financial institutions; good banking machine penetration and use of the shared cash service; and it was bilingual.

The pilot was a success. Once consumers and retailers used direct payment, they found the service indispensable. As the pilot ended, we began making plans for the rollout of this new service. Interac Direct Payment would be national, with the same look and feel for customers across the country. We would establish early on a critical mass of retailers across all sectors, not just the cash-dependent ones like supermarkets. The pilot had taught us that acceptance by customers was driven by convenience, which translated into the need to make this new service available everywhere.

In those early years, the enormous expense involved in building the network, and the uncertainty about how the technology would evolve, led us to believe that the rollout world take five to seven years. This assumption, too, was way off the mark. Rollout began in early 1992 in British Columbia and Quebec and by the fall of 1994 it was completed. Symbolically, we chose Signal Hill in Newfoundland to complete the implementation. Signal Hill was the spot where Marconi sent and received the first transatlantic radio signal. We sent our message in the other direction, across to British Columbia. The event was as historic for us as that first radio signal was for Marconi.

Since then, the growth of direct payment has been nothing short of meteoric. From 1992 to 1996, direct payment growth was in the triple digits, both in terms of cash transactions and number of merchants. We have slowed down in 1997, with growth in transactions a mere 50% above the previous year and growth in the number of merchants at 30% above the previous year. Still pretty impressive numbers no matter how you look at them.

And as we look to the future, we have to ask: will debit affect other forms of payment? The answer is yes. When we launched direct debit, consumers said their first choice for payment was cash, their second choice was credit, their third was checks, and their fourth was everything else, like in-store credit cards. By 1997, three years after we completed the national launch of direct debit, and five years after consumers and retailers said they didn’t need it, debit had shot to the number two position, surpassing credit, which has been around for 30 years.

People are using debit everywhere. The more popular locations are grocery stores and supermarkets, beer, wine, and liquor stores, as well as drugstores, gas stations and specialty stores. Consumers say they’re hooked on debit because it’s extremely convenient. It has relieved them of the tedious task of having to worry about whether they’re carrying enough money to do the grocery shopping.

Retailers tell us they love it because it’s cheaper than accepting other forms of payment. And it has boosted impulse buying. All those fears expressed by early nay-sayers have been forgotten. The optimism paid off big time. We found our Field of Dreams, the dream of debit. Today, 11 million Canadians use debit in more than 200,000 retail locations across the country. Our target is to get the entire card-carrying population of 18 million using direct payment and 600,000 merchants accepting it.

Why did this drama take place in Canada? In looking back, I’d have to say that it was a combination of good planning and serendipity. Canada’s unique national banking system – a small number of large institutions – was already online across five time zones. Another reason was that Canadian consumers already had a love affair with plastic, with huge penetration of credit cards and banking machine cards. Direct debit followed on the heels of the same card consumers used to take cash out of their accounts through bank machines: same card, same buttons to push, same PIN.

When we move beyond serendipity and into good planning, we can look to the technology. We didn’t want to build a system that merely did the job adequately. We wanted a solid system that would deliver unparalleled security and reliability. We got what we paid for. The reliability rate of our online system for direct payment is 99%. We believe it is the most reliable network in the world, with virtually no fraud or security breaches.

An additional reason for our success was that early on we recognized the great value of building a shared network. And that putting resources behind building parallel railroads was the quickest way to failure. Our financial institutions joined forces to build one very solid railroad. As a result they could dedicate their energy and resources to selling their services to retailers and building a critical mass. Consumers would then get what they wanted – convenience. Today we find consumers are selling the service for us. One recent independent study among department stores (the sector that’s been slowest in introducing direct payment) revealed that up to four out of 10 customers are walking out without making a purchase when they are told the store doesn’t take debit.

What does the future hold? Two realities will shape the future of our network. The first is the result of government intervention. Because Interac has been so successful, players who found themselves outside its doors clamored to get in. As a result, we were the subject of an investigation by our federal competition watchdog agency, the Bureau of Competition Policy. We reached an agreement with them last year that has opened up Interac membership to acquirers who are not financial institutions. It’s been 10 months since that agreement went into effect. And, as I speak, three new members are going live on the Interac network. Their participation will introduce a new level of competition in retail electronic banking services.

The second major reality is the advent of chip technology. The next development in our debit network is migrating from magnetic stripe to chip technology. Chip technology will address the need for a broader range of consumer services and improved security. We can get neither from magnetic stripe technology. It is reaching the end of its useful life. We can get both from the chip. For example, electronic commerce is waiting to take off. Chip cards will help it do just that.

Our members have asked us to lead other card associations in getting the network chip ready. That has meant taking the Europay/MasterCard/Visa (EMV) specifications and building a Canadian interface layer, amending our operating and security rules, and upgrading our software, so that when our members are ready to migrate, nothing in our system will stand in the way.

It’s clear that our move to chip in Canada will be driven by the stored value application. The stored value application is seen as providing that revenue stream. The majority of our members have adopted Mondex and are piloting this stored value card. Three of our members are also testing the Proton Stored Value Card technology and will migrate that to Mondex sometime next year. We fully expect the pilots to be successful, leading to a wholesale move of payment cards onto chip. We think this can begin as early as the year 2000. Interac intends to move ahead carefully but deliberately, so our members can take advantage of the promise chip technology holds.

In looking back, what lessons did we learn from building our debit service? The main lesson is that when you build a business case for something with no existing model, you need courage and determination. Another lesson is that for something truly large and revolutionary you need cooperation among competitors. A third lesson is that if you build a system, make it solid. When you are transporting people’s money, safety is very important.

The final lesson is that you must deliver what you promise. And, if you do, you’ll be able to stand back and reap the benefits. Debit is giving us an exhilarating ride. It’s also giving us the confidence and know-how to manage the next evolutionary stage, the move to chip. We plan to make that every bit as successful.

I’ve enjoyed giving you a sense of the excitement and enthusiasm Canada has for debit. And in sharing our success story and the lessons we have learned, I hope I have shown you Canada’s strength in this critical area. We Canadians may not be the brashest of people, but in this case we do have a chip on our shoulder. And we’re proud of it!

GLOBALIZATION THE RIGHT WAY: MANAGING THE FINANCIAL PROCESS

Thomas Volpe
Senior Vice-President, Financial Operations, The Interpublic Group of Companies

Forbes CFO Forum, Rio Mar, Puerto Rico, February 9-11, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

The Interpublic Group of Companies, based in New York, is one of the largest worldwide advertising and marketing communications groups, with more than 400 offices in over 100 countries. IPG pioneered the concept of a holding company for multi-agency systems in the early 1960s. We leave the advertising development, content and primary client contact to our operating agencies, since they are closest to the client, the marketplace and the consumer. Our corporate group provides central services such as finance, planning, human resources, legal counsel, real estate and insurance, thereby allowing our agencies to concentrate on growing their clients’ businesses.

The Group consists of McCann-Erickson, Ammirati Puris Lintas, the Lowe Group, Western International Media, Draft Direct Worldwide and the Allied Communications Group, which includes a growing roster of marketing communications companies that go beyond traditional advertising services.

To meld this far-flung network of companies into one cohesive organization, we’ve developed a disciplined process based on management, people, systems and controls, driven by a group of senior managers at the agencies and at IPG’s corporate headquarters.

The organizational structure of our global networks reflects the balance we try to strike between centralization and agency independence. We maintain control at IPG over key financial and administrative functions, including capital and cash management, compensation, tax, financial risk management, mergers and acquisitions, internal and external reporting, audit activities, and institutional and investor relations. This helps ensure that we consistently apply a global, strategic perspective to these areas.

The key to this organizational structure and global perspective is that we are flexible, operationally decentralized, and have created a matrix of teamwork between the operating agencies and the corporate group. As part of the operational structure, clear and well-defined operating goals, which are tied to incentive compensation programs, serve as motivation for the agency personnel and the corporate groups to work together and complement each other.

We foster our high performance level by emphasizing cross-training within and among the parent corporation’s and the agency system’s management. For example, each agency CFO has worked at IPG either as a corporate controller or international treasurer. And continuous rotation among the financial disciplines adds to the executive’s experience and abilities. That means they work together as a team-among themselves and with agency personnel-to achieve our financial objectives.

Clear guidelines are particularly important in the face of changing market conditions and competitive circumstances, which can quickly and dramatically redefine client needs and spending patterns. Our challenge is maintaining a regular system of two-way information flow to stay on top of fluctuating conditions, while continuing to add value to clients’ brands and to IPG stockholders.

To meet that challenge, we use tested, well-defined monitoring and reporting systems to identify, evaluate and manage the international risks that all global businesses face: financial, business, operational, political, environmental and regulatory.

It is essential to apply consistent business policies, principles and practices to these risk exposures to ensure that they are dealt with on the same basis at the local operating level as at the corporate group level. When the operating personnel fully understand the corporate philosophy for dealing with all forms of risks, there should be few significant miscalculations or unexpected results.

There must be an unbroken line of understanding and communication from the board of directors and its committees to all levels of corporate and operating managements. At IPG, the finance committee of the board which is chaired by a corporate officer, our vice-chairman, finance and operations, meets monthly and reviews a detailed analysis of the agencies’ and corporate operations. Acting on behalf of the full board, the finance committee reviews all key financial operations, including revenue and expenses by agency and by geographic area, new business, tax accruals, repurchases of our common stock, non-core business activities, financial income, accounts receivable, capital expenditures, acquisitions, benefit plans performance, benefit costs, and other major or unusual financial transactions. It has approval authority for all mergers and acquisitions or special financing agreements within reasonable corporate limits. When exceeded, full board approval is required.

The audit committee complements the finance committee by objectively evaluating IPG’s relationship with outside auditors and the responsibilities and performance of the internal audit group. The two committees work together closely to coordinate the preparation of important financial data for our year-end statements.

The human resources committee reviews key individuals’ salaries, benefits and career paths. The committee approves the contractual arrangements for new senior hires at our existing companies and at any acquired companies. During the recruiting and interviewing process, however, the agency systems are usually autonomous, although they do get assistance from IPG’s human resources personnel.

On a day-to-day basis the finance group’s detailed, timely and accurate financial information gives IPG management the tools with which to measure performance and accountability. Every month, finance prepares the profit-and-loss results for the corporation and the separate agency systems. They complete a consolidated balance sheet report quarterly. Then they review these financial statements with the board of directors, the finance committee and outside auditors.

Complete reviews of each system’s worldwide business and financial results begin with the budget process in December. The managements of the systems then make presentations to IPG in an agreed-upon format, which includes a mission statement, business outlook and business strategy, such as new business opportunities. Every year, we give each agency system goals for revenue, profit margin, operating profit and net income growth, based on IPG objectives and historical performance, and we provide salary guidelines and head count goals. At the budget meetings, we work with the management of each unit to ensure the goals and guidelines are realistic and achievable.

We also review financial trend data on a consolidated basis with each agency’s management, emphasizing major markets and problem markets. Each review covers cash, dividends, receivables management, capital expenditure requirements and technology needs. When we finish going over the budgets with the agencies, we consolidate the reviews so we can present them to the board of directors in February, along with our corporate earnings target and our programs for achieving it.

Each April and September, IPG holds follow-up or update meetings with the systems’ managements to measure performance against budget and objectives. These are thorough and frank reviews of the agency’s business and client relationships, designed to ensure agency management is fully aware of business trends, new business opportunities, cash and capital requirements, and possible merger or acquisition candidates. These update meetings are crucial to the overall management process and enable IPG to interact with the operating and financial managers of the agencies and keep the lines of communication open, which is so vital in a global business.

Together, all of this integration between operating and corporate groups provides the foundation for a world-class financial management system. With a focus on:

• Growing shareholder value

• Enhancing client partnerships

• Maintaining excellence in performance management

• Aggressive cash and debt management

• Comprehensive risk assessment

• Conducive work environment for our employees

The treasury group’s role in these areas is critical. The treasury staff’s primary concern is managing the group’s consolidated balance sheet to optimize financial strength and the overall cost of capital. This requires capitalizing the 150 or so operating subsidiaries with the minimum amount of cash necessary to run each business. The group closely monitors banking, approving all new relationships and lines of credit to ensure our overseas affiliates select the strongest banks in their countries. Whenever possible, it uses existing international banking organizations to take advantage of economies of scale.

The treasury group also arranges back-up lines of credit from local banks, subject to parent company approval and guarantee where necessary, to provide working capital support. The parent company manages the overall funding strategy to cover growth through acquisitions and focus the attention on improving cash flow and working capital productivity.

Given the international scope of Interpublic’s operations and cash flows – $2.4 billion in international assets and $1.5 billion in international revenues in 1996-managing the foreign exchange and interest rate risks is an important function for IPG’s treasury operation. Our foreign divisions run their operations in local currency and must get parent company approval before entering into foreign exchange and interest rate trades. We actively hedge budgeted overseas earnings and identified cash flows from dividends, service fees and acquisitions-exposures that are more than $250 million. We also track net investment exposures and interest rate risks, but we hedge them less actively.

Interpublic requires its subsidiaries to remit, whenever possible, at least 80% of their net income annually as a dividend, as well as service fees at a fixed percentage of revenues. This is a formal policy that helps ensure a regular cash flow to the parent company to fund overhead, share repurchases, shareholder dividends and acquisitions. Plus, it avoids building up local capital that isn’t needed for operations.

Of course, we adjust dividend payments in certain countries for tax planning or other special circumstances. For example, if a subsidiary assumes some debt when acquiring a local company, we may want it to use the money allocated for the dividend payment to pay down its debt instead. Or a subsidiary may need to purchase some fixed assets beyond its normal requirements or respond to exchange rate movements. When these situations arise, IPG management discusses the problem with the system’s New York management. We can be flexible to some degree, but we expect each agency system to make up any missing dividend payments through its other subsidiaries.

We utilize a captive insurance subsidiary headquartered in Bermuda to fund the risks of loss from bad debts and business interruption overseas in a tax-efficient manner. An outside insurance company, which has overseas subsidiaries, issues all the policies in the local markets. We pay premiums locally, and the insurance company reinsures the risks back to the captive in Bermuda. Besides the tax advantages, the captive adds to the Interpublic cash flow through dividend payments, and controls insurance costs and risks.

Since the taxes we pay to all jurisdictions represent approximately 50% of our bottom line, tax management is a very important component of our financial performance. Often we find that issues the Internal Revenue Service raises in tax audits are intertwined with local tax concerns, so we coordinate tax planning on both the global and the local levels.

Service fees are an important cash flow to IPG, so they add to the control aspect of working capital management. IRS regulations under section 482 require US parents to receive royalties or service fees for the use of US know-how and valuable intangible rights, such as the company name. From the foreign perspective, each country insists we prove we’re transferring or offering genuine services or rights to justify the tax deductions we take for the service fee and remittance privilege. For example, Canada and Germany want detailed reports on the amount of market research we conduct for clients, time schedules for an individual’s creative work, and analysis of the time we spend gathering information.

These tax authorities are sometimes at cross purposes and require negotiations at both locations. One big concern for us is that if the IRS isn’t satisfied, it can impute to us larger amounts of taxable income than we actually receive. Conversely, local jurisdictions can deny either the tax deductibility or the foreign exchange for payment of the fees.

The audit process provides added discipline and control over individual agency financial operations. Our outside auditors and the internal audit group closely coordinate their activities. The internal audit group, based in New York and London, visits each operating entity every two or three years to conduct an operational audit, in which it examines how the subsidiary books revenues, whether they adhere to our administrative procedures, how they get bids on work and so on. Their audits supplement our outside auditors’ annual work and allow us to control our audit fees.

In addition to the operational audits, the audit group also conducts acquisition reviews, client billing analyses and a wide variety of special-purpose examinations. These special examinations give us the opportunity to broaden the experience of the audit group, exposing them to operational situations and problems.

Finally, the corporate legal department is an essential part of the governance of our global international operations. As a matter of policy, most domestic legal activities are handled in-house for obvious reasons. These activities include acquisitions, contract review, advertising clearance, employment issues, stock regulations and supervision of litigation. The department also keeps a close watch to ensure that securities laws are being complied with and that the interests of our shareholders are protected. On international matters, our legal department must work with local counsel overseeing our aggressive acquisition activities, as well as ensuring that local laws, especially regarding oversees employment issues, are being adhered to.

As you can see, the scope, size and complexity of our global operations have made it imperative for us to come up with our operating methodology. We’ve tried to design the system so that the key elements-management, employees, systems and controls-perform seamlessly, so that every operating company at each of our agency systems and the parent company contributes to IPG’s success. While our particular combination of elements may not be right for every company, striving for a healthy combination of sound leadership, reasoned entrepreneurship, independent thinking, dedication to corporate growth, insightful planning and unswerving attention to detail couldn’t hurt in the quest for maximizing shareholder value and enhancing client partnerships.

And with it all, the process never ends. Re-engineering, refining, benchmarking, the search for best practices is a continuous process of and for IPG management, not buzzwords coined by outside consultants. The process requires utilizing new technologies with creative and talented individuals that are results-oriented, multidisciplinary and empowered to act.

We have had outstanding results over the last 10 years by implementing this global process and our clients, employees and shareholders have all clearly benefited by it.

THE WORLD TODAY AND TOMORROW

Stephen A. Jarislowsky
Chairman & CEO, Jarislowsky, Fraser & Company

The Financial and Estate Planning Council of Montreal, September 19, 1994
Published in The Corporate Report No. 9 (December 15, 1994)

The world today, all told, is doing fine. Democracy and capitalism are making progress and, increasingly, mankind is learning that wars settle very little long term. Progress in Israel and Ireland may be cited; guerilla activity is dropping in South Central America; the countries which incited strife (USSR, Libya, etc.) are either at bay or are concluding that the effort is no longer worthwhile. As democracy and capitalism reflect human nature better than other forms of economics and politics, there is hope that the world is on a correct path. In both, power is diffused and so less dangerous. Idealism has proven a failure as religion and communism may have a place in heaven, but do not correspond to the reality of the human beast today.

The communications explosion is reducing gradually the mental borders. Gradually, as in many cases, deep-seated defensive attitudes must still be overcome. These initially tend to coalesce in tribalism (in Africa) or defensive nationalism (Yugoslavia, Conservative Islam, etc.). Eventually, however, I believe that roadblocks will be removed in the world and, if one only goes back fifty years, the progress is enormous. Thus, knowledge is on the march and communications are leading the world towards possibly a tumultuous period ahead near-term, but long-term one which will lead to a better world for all.

Communications though have a flip side, in that they set in motion excessive expectations on the part of the population. If everyone can see on television how good life can be, then all will want it and preferably for the asking. Similarly with entitlements: unemployment insurance, pensions, welfare, free medicine, free education, workmen’s compensation, etc. These have proliferated in all the modern nations to the point where they tend to bankrupt a nation. The public’s appetite is infinite and politicians eager to get elected, have not hesitated to make promises, which in the long run, will wreck the nation. But here also I feel that the socialistic trends are largely in retreat, as world money discipline is trans-border and in time punishes the offenders by no longer making money available, and if, then at interest rates which soon lead to disaster or curbed appetites. Many countries reached the brink and are now forced to retreat. While populations may vote in leftist governments (Sweden is the last example) rather than conservative ones to cope with the problem, the fact, as witnessed in New Zealand, is that even left-wingers learn to take relevant measures. In time, again through communications, populations regain a sense of reality.

The economic imperative of competition is another factor which slowly forces nations to regain reality. The nations that have rapid growth today are those which have a low level of wages and salaries combined with a relatively high level of education. Thus, South East Asia and now China have little unemployment and very rapid growth, while Europe and Canada have serious adjustment problems. Union power is receding all over the world as it is realized that jobs went abroad when remuneration became excessive in industries. Canada, the USA and Europe have low inflation, because wages are not rising in a real sense. As wages represent the bulk of inflation and certainly of permanent inflation, a stable or falling wage structure prevents monetary loss of value. World competition has stopped Canada’s upward wage spiral and would have done so without the last Governor of the Bank of Canada, Mr. Crow!

I see standards of living falling yet further, once Government seriously tackles accumulated and current deficits. Less money doled out means less consumption and less social security (the consequence of less-paying government programs), means a greater willingness or requirement to seek remunerative work. As this occurs, government finances will improve and greater reality will prevail. Also the push towards yet higher taxation (1% per annum more as a percentage of GNP in Canada in the last 8 years) may subside, but I would not count on that yet. In Canada we are at the end of the line. Our combined federal and provincial annual deficits equal our total savings. Thus, we are forced to increasingly borrow abroad to have productive savings on net in Canada. This cannot last and I am hopeful that this fall we will see a true start towards correction.

World economics by and large function reasonably well, as I speak. The USA-Canada-Mexico market is doing well, although the higher interest rates so far this year should lead to a slower and more sustainable pace. Canada is recovering as raw material prices are rising in pulp & paper, metals, fertilizers and natural gas, if not oil. The lower Canadian dollar is putting icing on the cake and is a boom for tourism and manufacturing.

In Western Europe there are signs of recovery especially in Germany and France, though the pace is uneven and may be hurt by the worldwide rise in interest rates.

China and South East Asia have a sustained boom; South America, if not doing well, is doing better. Japan is very slow and the old USSR nations continue to have major problems. The hiatus for many years in raw materials industries has led to tight supply in some areas, aggravated by commodity speculators. This is typical of the last part of the business cycle.

Infrastructure and commercial real estate are still suffering; the former from lack of government funds, the latter from oversupply and restructuring permitted by computer use and substitution. We are not seeing a runaway boom. Unemployment remains high, especially in manufacturing as fewer people are required both in the factory and in the office. Thus, as I observed before, there are specific skill shortages but no real labor shortages.

Industrial and office capital spending is at a very rapid pace – not to increase necessarily capacity, but to ‘de-bottleneck’; to reduce costs and to eliminate inefficiencies. The computer is becoming the workhorse of information – decision making, just as cheap electrical power replaced human brawn 100 years ago. This revolution is real, and it allows technology to be transmitted in short order to the whole world, favoring the low wage, high education areas. Thus modernization and relocation will remain major economic factors all over the world.

With this goes the national need to bring about stable climates for investment, competitive taxation and reliable infrastructure. In China, developments are at a breakneck pace and can be financed by the high savings rates. In the older high-wage countries, infrastructure is already in place but often requires major repair and upgrading. Overextended governments; low savings rates, high taxation make this very difficult.

The world financial house is a source of worry. Japan is almost the only major creditor country on earth, as such it is in a very strong position. Most other countries, including most of Europe, the USA and Canada are in a debtor position. The result is low currencies, high interest rates and high annual current account deficits. How can Japan stay on top? By having high prices and, due to trade restrictions, a workforce which in real purchasing power terms at home still has a lower standard of living than prevails in the industrialized countries of the West. Sooner or later no doubt this dam will burst under the joint onslaught of the USA and Europe to reduce Japanese trade barriers and by Asiatic, yet lower, wage competition. Meanwhile, Japan has little to lose short of major trade sanctions.

What do I see for Canada?

The present period looks good. Natural resource prices are high; manufacturing is more competitive; tourism is at a peak; and most foreign countries are expensive for Canadians vacationing abroad.

Cross-border shopping has diminished. However, wages are not making progress and taxation is excessive, no longer permitting taxable savings, despite very high real interest rates. Thus, outside of corporations, on net there is very little real wealth creation by individuals. Moreover, natural resource cycles come and go and we are in the middle or later stages of the up-cycle. By late 1995 I expect the cycle to turn downward, and it could be earlier, depending on the upward push on interest rates in months to come.

Negative for spending will be the reduced governments presence in the year(s) ahead. Government programs will need to be pared and restricted to the truly needy in order to reduce runaway deficits.

In Canada whole industries must be made healthy again, including metals, including steel and aluminum and the entire pulp and paper industry. The retail scene with new US entrants should remain cutthroat. Commercial real estate will languish for yet many years.

There will be large regional differences. British Columbia will continue to lead Canada in prosperity. Alberta’s recovery will slow down and its growth fall to the average of Canada. The Maritimes will not do well in this climate as entitlements are very important in that region and this too applies to Saskatchewan/Manitoba. The Ontario recovery will continue, based on the automobile and manufacturing. In Quebec, the fact that it is now assumed that it will remain within Canada will keep it from being ostracized by the rest of Canada.

THE MEDIA AND THE UNITY ISSUE

Roger D. Landry, C.C., O.Q.
President & Publisher, La Presse (Montreal daily newspaper)

The Canadian Club of Toronto, March 3, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

I am honored to be able to speak to you today at one of Canada’s most prestigious public forums. Your invitation has given me the opportunity to visit Toronto once again and to remark, as I always do, just how much is happening here. I must confess that, as a citizen of Montreal, a city deeply affected by political uncertainty, I am somewhat envious of you.

The fact that I, a French-speaking Quebecer, have been asked to speak about the media and the unity issue, suggests immediately how I am expected to define that issue. It is clear that among all the public debates currently under way, there is only one that is a direct threat to the unity of our country: the debate over Quebec.

Arguments are a fact of life for any self-respecting family. I would not go so far as to say that arguments keep a family together, but they do perhaps make it possible to maintain some balance between family members. In the same way, differences of opinion are the very foundation of the democratic system that we cherish so dearly. In totalitarian countries and dictatorships, dissent does not exist. You pick up a newspaper and all you read is good news. Everything is rosy!

The ancient Greeks, or more specifically, the Athenians, are said to have invented democracy. Like most Mediterranean peoples, they enjoyed open-air public discussions. The citizens of Athens gathered regularly in the public square, or agora, to debate the problems facing the city-state.

In today’s modern democracies, citizens have relinquished much of their right to speak out to politicians, whom we might define as professional, full-time debaters. The lion’s share of the action takes place in a small, enclosed agora – parliament – a word derived from the French verb parler, to speak.

During the 18th century, the news media developed alongside the revolutionary ideas that gave rise to parliamentary democracy. It was the media that gave the ordinary citizen a window on the nation’s debates. When you think about it, the media is nothing but a huge virtual agora, where the actors on the political stage-career politicians, lobby groups, the establishment and ordinary citizens-can debate the problems of the country and how to solve them.

According to this theory, it is not the media that create the disputes. The media are only, as we often hear, a reflection of society itself.

For my part, contrary to what you might expect from a newspaperman, I am prepared to admit that the media are at least part of the unity problem. Journalists who report on politics do not reflect the debate from a completely neutral perspective. They single out the most sensational remarks. That’s only natural: they can’t always just report the same old platitudes. And since they don’t always have time to double-check everything, mistakes sometimes slip through. And – let’s be honest – they are influenced by their own opinions and interests. Yes, even journalists are human.

In the 1970s, parliamentary reporters in Quebec City came up with a story to illustrate this universal tendency. Had Premier René Lévesque one day miraculously walked across the St. Lawrence, they claimed the headline in La Presse would have read: Lévesque a marché sur les eaux (Lévesque walks on water), while in The Gazette the headline would have been: Lévesque can’t swim!

The physical constraints of space or airtime are also very important. In radio and television news reports, where the average story lasts less than a minute, reporters have no choice but to limit themselves to sound bites, short, punchy statements clipped from the comments of politicians. On television, the picture often adds to the sensationalism.

News directors, editors-in-chief and assignment editors also play a major role, since they decide on the content of the newspaper or the news broadcast. They choose not only what news stories to cover but also the relative importance of each story. They have dozens of decisions to make in a day, and little time to think about them. And they too are not immune to making mistakes.

At a newspaper, there are editorial writers, columnists and commentators who each analyze the same news stories, put them in perspective, and try to interpret the meaning behind the vast range of opinions and points of view. For their part, the electronic media use public affairs programs that take the time to explore the same subjects in greater depth.

And that’s the real problem. The media put all their efforts and resources into covering the very people who accentuate the divisions among Canadians: the politicians. They invest little energy in reporting on Canadians themselves, beyond the everyday political squabbling.

In general, we are wrong to concentrate our efforts on parliaments instead of on our country and Canadians. At La Presse, we have chosen new ways to report on events across Canada by sending our journalists to different parts of the country to write in-depth articles, rather than dispatching full-time reporters to cover parliamentary proceedings in other provinces.

I would now like to look more closely at the responsibility of the media with respect to the debate on the unity issue, both the Quebec media and the media in the other provinces.

Whether here in Toronto or elsewhere in the nation, it is normal to feel aversion towards those who are bent on destroying our country, Canada. This is only natural. But there is no doubt that these feelings have a powerful impact on the tone and content of your media, which are inevitably, pro-Canada. I know of no media in English Canada going out of their way to be fair and equitable to the Péquistes. And that’s okay. It’s understandable.

However, the situation is completely different for the mass media in Quebec, where a democratically elected government has made separation its goal and where the voters split 50-50 on whether to stay in Canada or to separate. This situation forces Quebec media to demonstrate a more neutral attitude to the various people in the news and to aim for objectivity as best they can in their coverage.

During the most recent referendum campaign, Quebec media, as a whole, tried to present a balanced view of the two options. It was first and foremost a question of journalistic ethics, as well as respect for a deeply divided population.

According to a study by Denis Monière, a political science professor at the University of Montreal-and a separatist, by the way-the two main French-language television networks in Quebec (Radio-Canada and TVA) provided “remarkably balanced” coverage. Radio-Canada’s news reports apparently featured 285 YES supporters and 284 NO supporters. The average length of time devoted to the two sides was identical, differing by only two seconds. This balanced coverage of the referendum was no accident. It was practically an obsession among the media involved.

I must point out that this was exceptional. Things don’t normally happen this way. Coverage is never as unpolarized, and media attention is determined by the changing tides of current events and the unpredictable nature of the profession.

The overwhelming majority of Quebec newspapers that run editorials came out in favor of maintaining federal ties during the referendum campaign. Nonetheless, editorials had to take great care to qualify their positions. We at La Presse urged our readers to vote NO to separation, but in our minds, this did not mean we were recommending the status quo – far from it.

The very close outcome of this second referendum on Quebec sovereignty was also interpreted by the vast majority of editorialists, both in Quebec and in the other provinces, as a desire for change. A study by CARMA International, an American firm specializing in computer-assisted media analysis, found that over two-thirds of the editorials in 26 dailies across the country had concluded that there was a need for fundamental change. I’m jumping ahead a little here to the second half of my address, but I have the impression that some politicians in Ottawa are among the only ones who didn’t get the message.

So, in Quebec, we have media that generally try to provide neutral coverage and ensure objectivity, while the media in the rest of the country share the legitimate fear of their fellow citizens about the nation breaking up. Of course, when I refer to the Quebec media, you have to disregard Le Devoir, which has a hard-line sovereignist stance, and The Gazette, which is now totally devoted to the defense of the English-speaking minority in our province. In both of these newspapers, Canada-bashing and Quebec-bashing are given free rein.

I remain convinced that the media can again be part of the solution if they are provided with the opportunity to do so.

It seems that some federal politicians are not taking advantage of the opportunity that is being provided by the forthcoming federal election to include, on their campaign agenda, proposals for change that would deal with the single most important threat to the existence of our country. It would be unfortunate if politicians did not seize such an opportunity, particularly when the present government of Quebec has promised another referendum before the year 2000.

I have nothing against the so-called “Plan B.” It has the merit of getting sovereignists all worked up by attacking the shaky foundations of their platform and evoking the possibility of partitioning Quebec in the same way that Quebec could be separated from the rest of Canada. I see a certain usefulness in Plan B, provided we never have to resort to it. For that to happen, we have to keep the sovereignists busy worrying about Plan B while we work hard on Plan A.

In the same way that the federal government has finally gotten around to managing our financial crisis, it now needs to manage the political crisis, and come up with Plan A.

I am the publisher of a newspaper whose news policy is to strive to be neutral and objective, and whose editorial orientation is federalist. This is not always popular in a province where nearly 50% voted YES to separation. At the next federal election, I would like to be able to present our readers with something encouraging about the future of Canada.

A friend of mine who took part in the big unity rally on October 27, 1995 in downtown Montreal, just three days before the referendum, told me about the strange feeling he had as he walked down the middle of the street in the biting wind, elbow to elbow with thousands of other federalists. Fifteen years after the 1980 referendum, he mused, our politicians still haven’t managed to settle this problem, and here we are again in 1995, in this dreadful situation where the very existence of our country is at stake. If we win on October 30, 1995, we will have to take matters in hand to make sure there will be no third referendum.

Many of the others who demonstrated on October 27 must have had the same feeling, since this huge event spawned a host of small citizens’ movements to pick up the slack from politicians who don’t know how to deal with the crisis.

I hope I am wrong in thinking that politicians in Ottawa have an easy time avoiding this debate because Canadian opinion leaders outside Quebec have given up. We too often see people in other provinces, including leading intellectuals and think-tanks, throw up their hands and say they’re fed up with Quebec’s griping, separation is inevitable and, by George, if Quebec separates, Canada can get by without it.

We all know that is not true. Every part of Canada makes it the great country that it is. Be it BC, the Territories or the Prairies, be it Ontario or the Atlantic Provinces, be it Quebec.

Unfortunately, apart from the occasional group or individual who publicly quits, there are thousands more who sit back, arms crossed, silently waiting for the die to be cast. It’s hard to know to what extent this feeling of resignation is shared by English-Canadian opinion leaders. I sincerely hope it’s just a passing phase.

I admit that, like many other federalist Quebecers, I feel terribly isolated at this point in the debate, trapped between the sovereignists who continue to spread their propaganda, and their opponents who want to carve up Quebec or simply give up in the face of radicalism. Since the referendum, very few voices have been raised in the Canadian agora to sing the praises of federalism and to promote Canadian unity.

However, being an eternal optimist, I am hopeful that the elite in English Canada will soon return to Plan A. In fact, the only realistic solution to the unity issue lies in a revitalized federalism that eliminates the raison d’être of the Parti Québécois.

When the Alberta premier, Ralph Klein, came to Montreal in February of last year, our Canadian unity specialist at La Presse, Gérald Leblanc, accompanied him to an Outremont restaurant where he met with ordinary citizens. Over lunch, one woman told him that “Quebec just wanted to be recognized and protected.” Mr. Klein was so impressed by this little statement that he left feeling that he finally understood Quebec.

I sincerely believe that if Canadians are willing to demonstrate a little sensitivity and open-mindedness, it is possible to settle this dispute. It has already lasted far too long. I am convinced that most French-speaking Quebecers do not want to break up Canada, a country they still consider their own.

So what can we do to avoid the worst-case scenario? According to a report, professor Charles Taylor, a political scientist with deep roots in Montreal, had this to say at a seminar organized by the Business Council on National Issues: “The political system is at a standstill. Ottawa reacts intermittently, and the provinces are afraid of mistrustful public opinion. Civil society must take up the fight and bring proposals to the political arena.”

I share his point of view. I truly believe that citizens, starting with the elite, must now carry the torch of Canadian unity and put pressure on politicians to stop their long-winded discussions and dithering over the question. It is time to take action and create the necessary changes. The real solution to the Quebec-Canada impasse lies in change.

In general, despite their imperfections, the media in Quebec and across the country want to act in a responsible and ethical manner with respect to the unity issue. In the same way that the media are part of the problem today, they can also be part of the solution if they are presented with reconciliation projects. If ordinary citizens and the Canadian elite give the word to launch a movement for change in Canada, then I am convinced that the media will jump on board, because that’s our role, to reflect the concerns of the communities we serve.

After nearly 40 years of futile and destructive bickering, it is high time we settled this question. If there were to be a third referendum, it would again be French-speaking Quebec federalists who would make the difference. At this point in time, French-speaking federalists are fed up with the chronic political instability that is so damaging to the economy of Quebec, particularly that of Montreal. I fear that if there are no substantial changes by the next referendum and if they have the distinct impression of having been abandoned, then many French-speaking federalists will be inclined to vote YES, for better or for worse, to settle the matter once and for all.

If that happens, history books of the future will justly assign to Canadians of our generation the title of “quitters,” if not of cowards.

SWEET SUCCESS: THE REVITALIZATION OF LAURA SECORD

Colleen Fleming
President, Laura Secord Inc. and Senior Vice-President, Nestlé Canada

The Retail Advertising Club, Toronto, October 23, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

Before I get started about the successful revitalization of Laura Secord, I want to share some of my key findings before the project got under way.

First, you must be able to articulate the vision of where you are going. You will need to gain support from upper management for your strategic direction and financial investment. You must be able to articulate the vision to develop a team in the early stages. It’s this vision that will rally the troops.

Second, engage mentors. Even though you have a well-thought-out plan, there will be bumps along the way and your mentors will help you work through the challenges. Key players in the organization may change and they may challenge your vision. Again, your mentors will help you negotiate with these new players.

Third, appreciate the brand’s power. When I joined Laura Secord I couldn’t believe the power of this 85-year-old brand. It was as if it was part of the Canadian gene pool, or a rite of passage to become a Canadian! What I have learned is: “Big name? Big deal!” But a big name doesn’t necessarily translate into shopping if you don’t keep the brand current.

Fourth, the brand belongs to the customer. I had heard this, and thought I understood the concept. But it really came to life when I joined Laura Secord. For example, we had a store in a location for 50 years, which was losing money for 20 years. We made a business decision to close this store, and we heard outrage from the community. The customers called the newspaper, the radio and me, asking how we could close “their” store. I would try to explain the business decision, to no avail. I quickly learned we had to work with great integrity and balance our risk, as this powerful brand really does belong to the customer.

Pause for a moment and visualize Laura Secord. How do you go from this old store to a newly renovated one? Since we are so deeply entrenched in the Canadian psyche, it wasn’t until we had renovated about 30% of our chain to the new look that our customers started to notice. Today, we have renovated about 60% of our stores.

Now I do believe in using gut instinct to make business decisions but I have found that research validates and ensures that you make the right decisions. Nestlé Canada bought the Laura Secord Company in 1988 and the research I will reference was conducted in the early 1990s. We conducted formal external customer research and internal analysis. Our quality product is a core competency. It was very reassuring for me to see that the research on our product always showed our quality was never challenged and we had maintained our number one position.

We didn’t find the same results, however, in our financial story. This was doubly troubling, as Laura Secord is the only Nestlé retail company worldwide and we knew we needed to improve our financials. Our internal analysis showed we had a weak retail execution in all areas including people, real estate and design. Essentially, we had to change a packaged goods company, and all its business processes, into a retail company.

At the same time we were seeing massive change in Canadian retail. Chains were rationalizing and some, like Woodwards, were closing. We also saw the entry of the American retailers. Their excellent retail execution in terms of store design, customer service and entertainment expertise was raising the price-value equation.

Mall traffic was down. We were in a recession. Consumers were reluctant to part with their money. Many of the shops were vacant. The malls were all the same – they were not very uplifting places. Consumers were already depressed, so they stayed home. This was a major concern for us, as we were a totally mall-based chain.

Summing up: we had a strong brand recognition and a quality product, but we had a weak retail execution in a hyper-competitive market. In response to the research, we created our action plan: people, place and product.

Our mandate in terms of our people became: “better people, better managed.” Our internal research showed our shop employees were focused on product preparation, not on customer service. And understandably so, since we shipped them product that was not ready for the sales floor. The research showed our employees felt their district managers weren’t helping them. As we audited our field management, we discovered many did not have the necessary skills and training required for this hyper-competitive market. And everyone said the head office wasn’t helping anyone!

Unfortunately this situation was not easily rectified by recruiting new people. Potential employees would see we had employees in the same store for 25 years and they did not perceive Laura Secord as a progressive company.

We had a lot of work to do with our people. Our action plan included raising the benchmark and training our people to the new level. In some cases it was necessary to release individuals if they felt they could not perform to the new level. Some employees would say: “Colleen, why is my performance, which has been good enough for the last 25 years, not good enough for you?” I told them it was the consumer who had raised the benchmark, not me.

To give you an idea of the commitment required to reach the new benchmark: I spent two years approving every new hire from shop manager level, and up. If there was an opening in Lethbridge, I was there. Chicoutimi, I was there. If I did not do this, our old standard would creep back in.

While we were making many changes in terms of our people, I did make one very popular decision. I got rid of our old uniform. How could you recruit a university graduate and expect him or her to wear such an outdated outfit? I wouldn’t wear it, and I wouldn’t expect my employees to wear it.

We introduced a new look, one which allows the employee to wear his or her own black bottoms with a white top, a style which is pretty well universal in the service industry. It also allows the employee to show his or her individuality, as I believe the customer service interaction is better if people can express themselves. We provide a branded apron to identify our people as part of the team and to protect their clothing.

We developed a major customized three-year training program to upgrade our staff from shop level to head office, so as to improve our retail management skill level.

In summary: we have achieved our objective of better people, better managed as our sales per square foot have increased by 17%.

Although we are gaining lots of recognition with regards to the work we are doing on renovating our shops, I would like to share a few words of caution about revitalizing your place of business. Before you launch a renovation program, be aware that the developers will want you to take the new look to malls and locations you may not have considered for renovation. My advice is that you need to revitalize all areas of your business to ensure success. Simply renovating your stores without paying attention to the other elements will not revitalize your brand.

Our research said we were “tattered around the edges.” We had a vanilla store, which blended into the background in the mall. We were selling a brown product in a brown store. When you put us beside a Disney store, we had no stopping power. We are a premium brand and we needed a premium look.

We also needed to upgrade the functionality of our store design. The stores were designed for product preparation, not customer service. Our employees were forced to turn their backs to our customers to fill an order. We knew we had to give the store back to the product – and the customer.

In preparation for the store redesign, our research identified key brand attributes to keep. We knew our Cameo icon was integral to the brand identification. The showcase clearly separates us from mass merchandisers. And we knew we had to keep our corner locations as we had become a Canadian institution in malls across the country. We also knew we had to get rid of our large windows, as they were causing a barrier to entry into the store for the consumer in a hurry. We removed the barriers to entry in our new look. And we won the 1993 International Council of Shopping Centers’ Maple Leaf award for store design in the process. Although we are winning awards for our new look, I might add that we are already innovating and working on a new design, since consumers constantly want something new.

Product is our core competency, as we are a vertically integrated company. The research on our product showed the consumer in a hurry wanted more value. Since we are a premium product, we would not compete on price but we could add value in the gift presentation and meet the needs of our busy customers. We now offer a gifting presentation of wrapping paper for each season, complete with a ribbon and gift card. The wrapping paper adds value for the consumer and provides us with a colorful product presentation with stopping power.

We also reviewed some box sizes and SKUs. For example, our five-pound box was no longer relevant for today’s smaller families. And we had to start preparing the product so it could be “floor ready.” We wanted our people servicing customers, not packaging product.

By identifying waste we could redirect value to the customer. For example, while our Easter bonnets are fun for the employees to wear, they do not add value for the customer. Same thing for expensive graphics. While they made the store look festive, the customer doesn’t get to take them home either.

Here’s another example of how we rerouted waste into added value for the customer. A Canadian artist was commissioned to create product tins so the consumer can take home the value in a beautiful collector’s tin. So our products and merchandising now have stopping power.

Our financials are ultimately our fundamental measurement of success. With fewer stores, we have gone from a money-losing operation to one that is making a profit and we have revitalized the brand.

But what’s next? I must constantly remind my management team that the journey is not over and motivate them to fight complacency, because the consumer is always moving. Research showed us that consumer shopping patterns were changing. They were sharing their destination shopping time with power centers and strip malls. We knew we had to be in the new malls to stay top-of-mind, but it was impossible for a 700-square-foot chocolate boutique to find a home in these huge power centers.

To participate in these new channels, the Laura Secord Hallmark combo store was created in 1994. We currently have 16 combo stores in five provinces. The store banner is Laura Secord Hallmark. Two 85-year-old companies working together. We couldn’t think of a better name to co-banner with.

The 3,500-square-foot stores feature a flagship presentation of Hallmark Cards, the number-one name in cards in North America. We offer complementary Hallmark wrapping paper, Hallmark bows, and Hallmark paper products. The stores also feature collectibles and a selection of gift items from other vendors.

We also proudly present the Nescafé Café. We serve Nestlé-branded ice cream and confectionery items to further meet consumer needs. The combo stores also feature a full Laura Secord retail concept.

And the consumers love us. According to results from recent consumer research, customers are staying in our combo stores an average of 20 minutes, compared to the average stay of seven minutes for a regional mall. I can sell a lot more in 20 minutes!

The consumer is telling us the combo store enhances both brands. And we are reaching a broader consumer base. We appeal to children, men and younger females. We know we are top-of-mind, as 69% of survey respondents were repeat customers, 35% having visited the store six or more times. We are a destination store, as 84% of customers made a purchase, with 92% finding what they were looking for.

But this is not the end of the Laura Secord revitalization. We plan to expand the chain to 52 stores by 1999, for an even sweeter success all around.

FROM QUEBEC INC. TO QUEBEC INTL.

Henri-Paul Rousseau
President and CEO, Laurentian Bank of Canada

The Board of Trade of Metropolitan Montreal, May 22, 1996
Published in The Corporate Report No. 18 (June 30, 1996)

Every day, economic insecurity is gaining a little more ground: unemployment, stagnant real wages, company closings, major layoffs, young people with no hope. These phenomena fly in the face of the extraordinary jump in stock prices, the amazing growth of certain sectors and regions, as well as the incredible rise in executive compensation, particularly for chief executives. While some talk of the end of jobs, others talk of the unraveling of the social contract. Others still look back nostalgically: “It was all so easy in the 1960s.” In fact, during the Quiet Revolution, we – the youngsters that we were – wanted to change the world. Well, we were tricked, for it is the world that has changed us!

This Quiet Revolution, which culminated in the establishment of Quebec Inc., is now literally being battered by four revolutions made elsewhere. They are:

1. The integration of domestic financial markets into a single world market

2. The globalization of trade in goods and services

3. The revolution created by the convergence of information technologies and communications, and lastly

4. The redefinition of the role of the State

I would first like to review briefly the main implications of each of these shocks, and then show that all of this is forcing the private sector of the economy to adopt a new development model which I will call “Quebec Intl.,” and which will be the subject of the second part of my speech. After that, I will discuss the implications of the “Quebec Intl.” model on public policy in terms of its three components: taxation, regulations and policies for adapting to the international economy. In closing, I will suggest a few practical solutions, which I hope will help ease the difficult transition imposed by this extremely competitive world.

THE FOUR REVOLUTIONS

The integration of financial markets

The first revolution was the integration of domestic financial markets into a single world market. Today, this global market not only sets the entry conditions for borrowers and depositors, but also imposes an iron discipline on the world’s central banks in terms of monetary and foreign exchange policy. The global market also penalizes countries that are undisciplined in terms of their monetary and fiscal policies. Governments and their central banks have thus forfeited a very large part of their sovereignty.

The globalization of the trade in goods and services

The major consequence of market globalization on the trade in goods and services has been to impose international standards of quality and price on all producers, not just on those who export. In fact, if a producer wants to sell locally, he must now offer a quality product at prices comparable to those charged by his international competitors. This globalization of production has forced local producers to become as efficient as their international competitors or risk disappearing, since it makes the local market compete with the world’s best producers. For these producers to become more efficient, they must invest in new technologies, improve their productivity, train their labor force, review their work organization and control their production costs, including their unit labor costs.

Consequently, it is the workers, especially the less-specialized workers, who have been and always will be hit hard by this greater competition. Globalization has resulted in a veritable transfer of jobs, income and wealth away from the less-specialized workers in the rich countries to the less-specialized workers in the less-favored countries. The good news is that the economies of several countries, especially in Southeast Asia and South America, have caught up considerably. The bad news is that the transfer between non-specialized workers, both here and there, has significantly reduced the wages of workers from private sources here.

This trend towards market globalization cannot be stopped, since it is now being underpinned by a third revolution: that of technology.

The technological revolution

Successive waves of technological change have, in turn, gathered strength to create an environment radically different in terms of design, production, management and distribution. The new technology, and especially the convergence of information technology and communications, allows a group of individuals or companies to remote design, manufacture and distribute goods and services without having to be in the same physical location and without needing points of sale located close to their clients. A number of virtual companies exist and new ones are springing up every day. These companies require highly-specialized manpower, making knowledge the key component of competitiveness, and it is the less specialized workers who, once again, are being hard hit by the technology shock which is spreading very rapidly to the services sector. On the other hand, highly specialized workers have access to an international market that is full of opportunities and thus, by the force of circumstances, they become more mobile.

In short, the globalization of financial markets makes capital extremely mobile, with the result that it is the world market that fixes the cost of capital and it is the financial health of the borrower (company, bank or government) that establishes the risk premium to be paid to gain access to the market, both here at home and elsewhere in the world. The globalization of the goods and services markets, in turn, imposes standards of quality as well as prices on producers, forcing them to control their costs and, thereby, the wages of less specialized workers, ultimately transferring wealth between the less specialized workers in various countries. The technology revolution is making specialized workers much more mobile and less specialized workers more vulnerable. In addition, this technology revolution makes remote work extremely accessible and allows remote distribution, especially in the case of services (mutual funds) and also of goods (L.L. Bean). The Internet will only accentuate this phenomenon, and this in all sectors of activity.

In other words, the interaction between these three revolutions is making economic activity highly mobile, whereas we all dream of living in what, for each of us, is our neck of the woods.

One thing is certain: Quebecers are not alone in having to meet the challenge of this difficult arbitration between the ultra-mobility of economic activity and the relative immobility of the workforce. Ultra-mobility is hitting all regions and countries of the world at the same time. Canadians in other provinces as well as the citizens of the North and Midwest United States also face the same challenge. What they all want is to have a job right there where they live and to live in “their own country.”

In fact, it is the extreme acuity of arbitrating between the lower mobility of the workforce, and of the population in general, and the ultra-mobility of economic activity (capital, entrepreneurship, specialists, etc.) which spawned the fourth revolution: that of the role of the State.

The fourth revolution: the State in the era of ultra-mobility

In recent years, the governments of several countries, many US states and some Canadian provinces have joined forces with the private economy to make their companies and workers more competitive and more efficient at the international level. These governments decided to make their private economies less regulated, less taxed and more competitive. In fact, these governments have become competitors, not to provide incentives to companies or individuals, but to encourage economic activity, which is now mobile, to locate on their territory. Some of the measures have included reducing deficits, cutting public expenditure, easing all kinds of regulations, privatizing, outsourcing to the private sector or to the municipalities, reducing the number of levels of government, paying down the public debt and lowering taxes.

The cumulative effect of these four revolutions has been to force the private sector of the Quebec economy to meet the challenges that ultra-mobility presents. Which is why a number of Quebec companies were prompted to abandon the Quebec Inc. model and adopt the Quebec Intl. model. What is this model?

Quebec Intl.

The Quebec companies that adopted the Quebec Intl. model quite a few years ago have done very well. Some like SNC-Lavalin, Bombardier, Teleglobe, Canam-Manac, among others, spend considerable energy and resources to get to know their markets and their clients, identify and develop their comparative advantages, learn about and adopt the new technologies, take stock of and apply their competitors’ best business practices and closely monitor their relative performance indices in their markets. In other words, they have adopted international standards in everything they do. These companies are responsible for the extraordinary inroads that Quebec has made internationally in the past few years.

The ultra- mobility of economic activity and public policy

Despite these successes, not all the challenges of globalization have been fully met. In fact, a number of companies and workers will not be able to beat their competitors as long as they have not, collectively, taken the international shift in direction. Our tax system, regulatory framework and a number of our government policies were not designed for a world where economic activity is ultra mobile. So the effect of these policies is often totally contrary to the objectives that were initially and legitimately sought. First, let’s take a closer look at the tax system.

Taxation and ultra-mobility

Let me give you an example. Consider the case of two neighboring municipalities, which are identical in every respect. Let’s assume that, for the same services, the municipality of Bigger’s Better spends more than the municipality of Frugalburg and that these expenses are financed solely by raising taxes. Now let’s assume that in Frugalburg, it’s the status quo. If this situation repeats every year, it’s not hard to imagine what will happen: the higher taxes in Bigger’s Better will result in a number of citizens leaving the town to go live in Frugalburg. Demand for homes in Bigger’s Better will decline, property evaluations will suffer and, to balance the budget, taxes will have to be raised. In Frugalburg, the opposite will happen: demand for homes will go up, pushing up house prices and the market evaluation, with the result that the tax rate will decrease.

And because the citizens of Bigger’s Better are mobile, they can pick up and go live in Frugalburg, and it is this mobility that changes the tax base of the two municipalities. In Bigger’s Better, the tax base narrows, with the result that its citizens are more heavily taxed than Frugalburg’s. Who are the taxpayers of Bigger’s Better? Those citizens who are not mobile. In fact, in the medium term, they are more heavily taxed and the price of their homes is lower. It’ll even be said and written in the papers that the cost of living is lower in Bigger’s Better than in Frugalburg because house prices are lower! In actual fact, the residents of Bigger’s Better have become poorer.

This example illustrates my basic point. In an open economy where goods, services and production factors, such as capital and specialized work, are highly mobile, it is in large part the immobile factors that ultimately pay the taxes. They foot the bill directly in the form of taxes or indirectly through weaker economic activity. In other words, everything is exported except the taxes.

Ultra-mobility imposes new constraints on our collective choices, since it weakens our tax base. It also makes our “regulatory base” more fluid. Let’s take a closer look.

Ultra-mobility and regulations

At the federal level alone, there are at least 3,000 regulations that are enforced by more than 20,000 civil servants. Last year, the Quebec government adopted more than 400 regulations. Each year, it is estimated that Ottawa and Quebec together publish some 10,000 pages of laws and regulations. If you consult the guide published by Communications Quebec entitled Fonder une entreprise, you will see that of the 52 pages, thirteen list the requirements imposed by the three levels of government: zoning, permits and construction standards, operating permits, registration with the tax authorities and the CSST, collective agreement decrees, consumer protection, protection of farmland, environmental legislation, import or export licenses, labeling and packaging rules, work permits, labor code, minimum working standards, pension fund standards, and so on and so forth.

Each of these rules has its history, its foundation, its defenders and, let’s admit it, life in society places restrictions on our freedoms, including restrictions on economic freedom. However, it should be noted that the economic costs of regulations are much higher when economic activity becomes ultra-mobile. In fact, economic agents can more easily circumvent the regulations by moving economic activity to less regulated territories. Deregulation thus becomes one of the key factors in the ability of our economies to compete. The growth of the Internet and the remote distribution of goods and services will make some of our regulations more costly and more ineffective.

Policies for adapting to ultra-mobility

The competitive capacity of Quebec’s economy depends on its combined comparative advantages, such as the wealth of its natural resources, the quality of its workforce, the quality of its physical and technological capital, the vigor of its entrepreneurship, as well as on several other factors such as taxation and regulations.

The greater our comparative advantages, other than those related to taxation and regulations, the greater our degree of freedom in terms of tax and regulatory preferences. This is why the best economic policy is the one that allows our economy to consolidate and improve its comparative advantages. Education, training, the development of entrepreneurship are and will remain key factors of success. The examples of Germany and other European and Asian countries in this respect speak for themselves. Despite its extraordinary comparative advantages, Germany has radically changed its government policies to make the job market more flexible and the management of public services more efficient.

Thus we face a new and problematic aspect, which results from the fact that the governments of several of our competitors have adopted fiscal and regulatory policies that greatly favor extremely mobile economic agents and factors in order to very quickly improve the performance of their private economies.

How do we meet such challenges?

For their part, the European countries have tried and are still trying to create an economic union by guaranteeing a common minimum of social policies. They are encountering enormous difficulties, both in terms of the union and the common minimum. In North America, such political will has not gone hand in hand with freer trade. The values of our neighbors to the South in this regard differ from those of the European countries, and this precludes adopting a supranational approach to meet the challenges that globalization and ultra-mobility represent. Theoretically, there is another solution: reviving protectionist practices. But, this would obviously provoke a major economic crisis, as was the case early on in this century.

Conclusion

Our modern societies seem torn between two extreme attitudes: on the one hand, that of meeting the challenge of adapting our organizations to these four revolutions by radically changing government tax and regulatory frameworks and perhaps enjoying a larger market share of world economic activity or, on the other hand, refusing to adapt and risking a substantial decline in the standard of living. As for our governments, they face an even more acute dilemma, since the mobile economic agents are generally entrepreneurs, specialized workers and holders of capital, and thus wealthier, while the less mobile economic agents are often less wealthy and possess fewer resources.

And there is no guarantee that we will head in the right direction, since some of our fellow citizens are not convinced that such change is needed, especially since they see no net gains in it for them. In fact, in a number of cases, “adapting” has meant the loss of jobs and the loss of entitlements acquired over the years. In addition, since this competitive world is constantly evolving, the gains derived from adapting are often postponed because new competitors walk away with what should have been our gains in market share. The strategy of adaptation thus becomes less credible and the process is slowed by various interest groups.

In order to successfully meet the challenges of the ultra-mobility of economic activity, not only must we take the international shift in direction, but we must do so quickly. Our governments must therefore make our tax system and regulatory framework more competitive. But they will only receive the support of the people to effect such changes if the gains derived from a more competitive economy are more fairly distributed. This is where the leadership of the private sector will play a key role by promoting a transition that is effected as smoothly as possible. Let me explain.

Our primary responsibility as corporate executives is to maximize the value of our shareholders’ equity. Profitable and efficient private companies are indispensable to increasing our market share of world economic activity, which creates collective wealth. And in the context of the ultra-mobility of economic activity, our ability to successfully assume this primary responsibility to our shareholders is limited by the noncompetitive nature of the tax and regulatory framework.

On the other hand, governments’ ability to change the tax and regulatory framework is limited by the redistributive effects of the changes needed. So to manage our companies in order to first maximize the value of shareholders’ equity, we have a duty and an interest in developing the social role of our companies and in assuming a greater leadership role in the development of the social economy.

We know that our companies, organizations, corporations and unions are all looking for new ways of doing things and for new models when it comes to developing the social economy and expanding the social role of the company. And we also know that you can’t make a silk purse out of a sow’s ear! Managing effectively in so competitive a world means taking difficult decisions. This is why I’m making two very concrete suggestions. The first is to set up an inventory of our best private and public business practices. The second, is to adopt a benchmarking system for both the private and public sector.

An inventory of the best private and public business practices

Employer groups should assume a leadership role in setting up an inventory of the best private and public sector business practices. The experiences of the private sector would be recorded from the standpoint of the development of the company’s social role and of the social economy. This includes experiences of job sharing, profit sharing, internships, partnerships between the private sector and the world of education, corporate community volunteer programs and other contributions to the development of the social economy. The experiences of the public sector would be recorded from the standpoint of its ability to make workers and companies more profitable. One only has to think of the experiences related to users fees for public services, the reengineering of public corporations, the flexibility of the job market and so forth.

The costs of drawing up and updating such an inventory could be shared by the various private and public sector users. Such an inventory should be accessible on the Internet and would help the private sector to learn to assume its social role and the public sector to become more efficient. Since not everything is of equal importance, a second very effective tool would be to regularly benchmark how our capacity to compete is evolving.

A regular benchmark of our capacity to compete

For example, the number of companies that have the ISO 9000 certificate of quality is a key indicator in this ultra-mobile world. The ISO 9000 standard has, in fact, become a minimum standard if one is to compete at the international level. At the end of April 1996, some 100,000 companies in the world had received the ISO 9000 certification, and 511 of them are Quebec companies. This number is up sharply, and this is excellent news. Several other indicators of our ability to compete could be measured and published regularly. The angle we should adopt is our ability to attract mobile economic activity here. The main benchmarks would be:

• The competitive character of the tax regime and the regulatory framework

• The degree of flexibility of the job market and the penetration of new technologies

I believe that drawing up an inventory of the best private- and public-sector business practices, and benchmarking our capacity to compete could be two practical tools to meet the challenge that the shift in direction imposed by the ultra-mobility of the economy presents. I remain convinced that we will meet this challenge successfully.

BUSINESS AND THE ARTS: TOWARDS A HARMONIOUS RELATIONSHIP

Pierre Brunet
President & CEO, Lévesque Beaubien Geoffrion

The Board of Trade of Metropolitan Montreal, May 9, 1995
Published in The Corporate Report No. 13 (August 7, 1995)

In preparing this speech, I decided to forget my position as head of a company and I invite you to do the same, to forget your own occupation for the next few minutes. Let’s also put aside Canada’s public debt, interest rates, derivatives, the peso crisis and any other such preoccupations, to discuss a different matter that also affects us, although we sometimes tend to forget it: I would like to speak about the relationship between the arts and the business community.

This relationship is several centuries old. We know that during the Renaissance in Western Europe, merchants, traders and artists enjoyed a mutually beneficial relationship, which fostered the development of the arts and culture. Over the centuries, musicians, painters and a host of artists not only found gainful employment in the kings’ courts but were also welcomed, promoted and sponsored by the entire bourgeoisie of that era. So, as we can see, the history of the relationship between the arts and the business community did not arise out of the most recent budget cuts! Artists and business people learned to dance the pas de deux quite a long time ago…

The Arts and Business: A Marriage of Love and Reason

In Canada, the arts and business have always enjoyed a positive relationship. To begin with, the business community habitually purchases and collects works of art. Chartered banks, Air Canada and Power Corporation, to name a few well-known examples, have accumulated comprehensive collections of Canadian and Québécois art.

For some time now, the foundations created by business people have helped fund the construction of culturally-related structures…these include the O’Keefe Center in Toronto, and the McCord Museum and Saidye Bronfman Center, both in Montreal.

Companies support cultural events on a regular basis because this involvement comprises an integral part of their socioeconomic vision. Examples of this kind of support include Bell, Alcan and the Du Maurier Foundation, who sponsor the Just for Laughs Festival and the Montreal Jazz Festival.

And finally, numerous business people assist the cultural organizations with which they feel the greatest affinity by sitting on their boards. Just scan the program next time you attend a concert or presentation of any kind.

When you think about it, it is no surprise that the business world takes a keen interest in the arts and artists. We all benefit when a city, particularly a city the size of Montreal, possesses a rich, diversified and dynamic cultural life. One only has to have traveled a little to know that culture constitutes an absolutely essential component of one’s quality of life. A community that does not invest in its culture, a city where there are no concert halls, theaters or museums, is a lackluster and soulless environment.

A second reason of a very concrete nature explains why business people support the arts. Who would develop your advertising campaigns if artists did not exist? Who would help promote your products? Who would act as your spokesperson? And who would create your jingles? The business community does not hesitate to dip into this vast reservoir of talent for their own purposes.

Two years ago, a survey conducted by the firm Angus Reid for the Council for Business and the Arts in Canada attempted to pinpoint why business people consider it so important to maintain close relationships with the world of the arts.

According to the survey, where respondents were allowed to give more than one reason, 92% of corporations supported the arts because of the benefits derived, 64% because of the positive impact on society as a whole, 48% because the arts enjoy a greater visibility, and 48% because it involves a long-term relationship. Finally, 36% of corporations support the arts because a company executive already sits on the board of a cultural organization. One would have thought that the last reason cited – that of being a board member – would take precedence over the others, but it would appear that such is not the case.

Based on my own personal experience, I can assure you that a company derives multiple benefits from this involvement. Many board meetings for cultural organizations mark the beginning of profitable business relationships as well as interesting deals. The spin-offs are worth substantially more than the personal investment.

Several studies have sought to evaluate the economic impact of the arts and culture. In Canada, culture, in the large sense of the word, employs close to 600,000 individuals and is a business that generates $15 billion on an annual basis.

Institutions such as the Stratford Festival, the Royal Winnipeg Ballet and the Montreal Symphony Orchestra, where I have had the honor of acting as Chairman for the past six years, constitute excellent ambassadors for Canada. And these organizations are not alone.

When Robert Lepage presents his productions throughout Europe and the world, when Margie Gillis triumphs in China, when the I Musici ensemble is a roaring success in Asia, when Riopelle exhibits in France, and when the works of Tremblay are translated and performed in I don’t know how many countries, we all share in their success. The arts are a much more vital export industry than we can imagine.

The Arts and Business: Occasional Communication Problems

Despite a solid relationship, everything is far from being perfect in the marriage between the arts and the business world. Communication between the two is sometimes strained.

For example, business people criticize artists for behaving like prima donnas who live in a world apart. Some believe that artists are extravagant individuals who seek their own self-gratification before anything else.

And, on the other side of the coin, artists themselves are also critical of us. In the eyes of some, business people do not appreciate the problems faced by artists. They tell us that we are obsessed with money and profit; that we only think about the bottom line; that we view the arts as a luxury when, in fact, they are a necessity; that we demand that they conform to the laws of the marketplace when the true innovators – the Picassos and Gauguins of this world – all shocked their contemporaries. “To create is to be bold,” artists constantly remind us.

Of course there will always be people on both sides who will indulge in this dialogue of the deaf; however, I am convinced that they are the exception. Neither business people, nor the cultural community can afford this kind of confrontational attitude. As governments continue to retrench, we are all being forced to discover new ways of supporting the arts and of assisting in their promotion.

Before citing the challenges that face us, I would like to share a little secret with you and explain how the arts, and more specifically classical music, came to be such an important part of my life.

I was 13 years old and studying at a school where a professor, in addition to teaching French and History, attempted to share his passion for classical music with us. The poor fellow! My classmates and myself were skeptical, to say the least. In an effort to avoid being infected with his contagious disease, we listened only halfheartedly to him and his music. And still, being stubborn like all good teachers, he redoubled his efforts, increasing the fervor of his gestures and facial expressions in order to convey the composer’s profound and passionate message to us. One would have to see it to believe it as this fellow gestured and mimed his way through the rapids in Smetana’s Die Moldau or the sudden storm in Beethoven’s Sixth Symphony…I assure you that even the talents of Marcel Marceau would have paled in comparison.

Then, suddenly, after several classes of making good-natured fun of this professor, I made a discovery. I realized that his gestures and the music were in perfect harmony. This powerfully alive music ceased to daunt me. I had just discovered something new, me for whom the musical universe began and ended with Elvis, Fats Domino and Georges Brassens…

From this moment on, I learned to appreciate, to understand and, shall we say, to become enough of a music lover to renew myself through classical music whenever the extremely Cartesian world of finance threatened to overwhelm me.

Things continued like this right up until 1980, when Zarin Mehta asked me to sit on the MSO Executive Committee as Treasurer. A long-standing classical music convert and enchanted with the opportunity to become involved, I quickly became…disenchanted when I was presented with a statement of their financial affairs. What a mess! The exact opposite of how one should practice the art of business. I found myself faced with a company where, the greater its success, the greater its deficit! Expenses could not be reduced without threatening the foundation and quality of the orchestra, hence the company itself. I had to forget my neat and tidy principles of financial management and adapt myself to this new reality where management requires an act of faith if not a miracle.

From 1980 to the present day, the MSO has seen its budget climb from $3 million to $14 million based, on rules that are sometimes the antithesis of conventional management. In all honesty, I must admit that it is one of the most stimulating challenges that I have ever encountered in my entire career.

My former professor often recited a verse by André Chénier. He made us memorize it so well that I still remember it to this very day: “Art only produces verses, the heart alone is a poet.”

To paraphrase Chénier, I would say that to effectively run a cultural organization, management is an essential art, but a poet’s heart must also be present. If not, administrative and financial logic would lead directly to bankruptcy and the closure of several important cultural institutions. In other words, if we were to follow the conventional wisdom current of the marketplace, cultural organizations would not exist at all. Hence, today’s business world must stand in for the noble patrons of yesteryear.

The Challenge of Culture

It is important that we keep one fact in mind: like all sectors of our economy, culture is also facing significant challenges.

The first of these challenges is one of money and budget. Several years ago, it was almost a positive thing for a cultural organization to have a deficit. In a strange way, this proved that the organization was fulfilling its mandate! It demonstrated its commitment to the community! The generosity of a guardian-angel government, combined with more favorable economic conditions, would erase the deficit without too much difficulty. The same cycle would begin anew the following year with even more vigor.

It is a completely different story in 1995. Trapped between the current economic realities and previous generosities, governments are slashing expenditures, including grants to the cultural sector. In addition, companies are increasingly cautious in their donations. For cultural organizations, the goose that laid the golden egg would seem to be dead and buried once and for all.

The second challenge facing artists and cultural organizations stems from competition. Competition among themselves for their share of corporate donations, in addition to competition with social or humanitarian organizations that also see their government grants and subsidies dwindling despite a growing number of individuals on social assistance. Hospital foundations, post-secondary institutions, as well as organizations fighting against poverty, are all seeking to appropriate a larger piece of an ever-dwindling pie.

Third challenge: the technological evolution that is transforming consumer habits with regards to the arts and culture. Formerly, when someone wanted to listen to music, he or she had to attend the concert. Today, with the invention of the CD and satellite television, anyone can consume cultural products without so much as stepping outside. Faced with this virtually unlimited choice, the general public is less loyal than in the past and consumes a greater proportion of foreign products. Our artists and cultural organizations live with the constant fear of being “zapped.”

These are the major obstacles that the cultural industry must overcome. You may still think that they only affect the small, more marginal companies; however, this is just not true and I’ll explain why.

The Challenges of the Montreal Symphony Orchestra

To do so, I will employ an example with which I am very familiar: that of the Montreal Symphony Orchestra.

The MSO is considered by the experts to be one of the world’s 12 best orchestras. Despite its repeated successes over the past 15 years and its world-renowned recordings, the MSO operates in a competitive market and is facing major challenges, perhaps the most significant in its entire history.

The MSO presents approximately 55 programs per season. Last year, 140,000 individuals attended their concerts. However, over the past few years, the MSO’s audience has been decreasing, as has its attendance rate for its principal series.

In fact, the total MSO clientele has declined by 30% over the last six years. Of course, the MSO is not the only organization in this situation. Canada’s 200 largest cultural organizations have seen their average attendance drop from 80,000 to 50,000 between 1986 and 1993.

This situation is clearly disconcerting.

The decrease in attendance produces a drop in self-generating revenues and, hence, increases the MSO’s dependence on public funding and private sector donations. However, there as well, we should not expect phenomenal growth.

Despite the fact that the MSO exercises a most stringent control of its expenses – which it does, I can assure you – the organization’s financial situation remains precarious.

The MSO also faces additional challenges. For example, the slow yet steady increase of its audience’s average age continues to be a source of concern. Throughout the Western world, in most schools, the teaching of music has been eliminated from the curriculum. And yet, musical instruction is essential to a symphony orchestra in order to revitalize and renew its customer base.

The status and remuneration of musicians constitute another administrative puzzle for the MSO, for it is constantly being subjected to competition for its best musicians from other North American orchestras. Administering a symphony orchestra is somewhat similar to the management of a sports team. As in sports, orchestras performing in the larger markets possess more financial resources to pay the better musicians, the very musicians that attract the crowds. The MSO must fight tooth and nail to retain its musicians despite more lucrative offers in US dollars that they can receive south of the border.

This rapid overview demonstrates that the MSO is going through a difficult period. Difficult, but in no way hopeless. To counter this pessimism, one must act.

The MSO’s Future

Act, yes, but how?

First, the MSO must continue to improve its product and marketing efforts. The growth of its public will reinforce the MSO’s ability to raise funds from governments and sponsors. Last year, with this in mind, we created a planning committee mandated to study the MSO’s future. After reviewing the situation, the committee made 21 recommendations relative to such initiatives as a renewed marketing orientation, more efficient pricing policies, and so on.

Several of these recommendations have already been implemented. These target the development of a quality, well-balanced program that meets the tastes and expectations of music lovers. The MSO must increase its attendance rates by offering the best product possible. It is also incumbent upon the MSO to raise its profile and to convey its pride and international success to the general public at home.

Secondly, the MSO can meet these challenges by strengthening its financial foundations. Currently, the provincial grants received by the MSO are, in terms of a percentage of total revenues, inferior to those received by Quebec’s other major cultural institutions.

We have already taken steps to sensitize the Quebec government to the MSO’s critical situation in order to find, in concert with this partner, solutions that will ensure the long-term viability and ongoing development of this Montreal institution.

However, for reasons with which we are all familiar, the government’s ability to intervene is limited. This is why the MSO must turn to other funding sources. Hence, today, I am taking advantage of this opportunity to solicit the business community’s support.

I am pleased to announce to the Montreal business community and to all MSO friends, the imminent creation of a $15 million endowment fund to be officially launched in a few weeks. This fund will serve to assist the MSO. Its pledges will be spread out over a period of three to five years. The endowment fund will become fully operational by the year 2000.

I know that the Montreal business community has repeatedly demonstrated its unfailing support of the MSO. If I am once again seeking your assistance, it is because this initiative will stabilize the MSO’s financial situation and ensure that it will be able to preserve, once and for all, its privileged position among the world’s great orchestras.

The MSO: A Dynamic Small Business

I am proud to be the Chairman of a dynamic small business like the MSO. And if you have any doubts about its dynamism, I think its accomplishments speak for themselves. The MSO is:

• A leader in its market and one of the world’s 12 best orchestras

• An orchestra with 27 international tours to its credit

• A high-quality product that garnered 32 national and international awards from its 60 recordings produced over the last 13 years

• 4 million records sold worldwide

• A company that exports and has ranked among the best over the past few years with regards to classical music CD sales in Japan

• An entrepreneurial company masterfully managed from an artistic point of view

• A company capable of streamlining its administrative costs

• A company that operates in a specialized niche and that provides employment to a highly qualified work force

Such accomplishments do not lie. We are definitely talking about a dynamic small business, a business that enhances the quality of life in Montreal, that actively contributes to the renown of Montreal, Quebec and Canada overseas. The MSO deserves our recognition and support.

The City of Montreal has always counted on the MSO to represent it with dignity around the world. Today, the MSO needs Montreal, its residents and its business community in order to pursue its work. The bottom line: the MSO is counting on you.

THE COMMUNICATIONS NETWORKING REVOLUTION

Richard A. McGinn
Chairman & CEO, Lucent Technologies

Wall Street Journal Technology Summit, New York, October 5, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

I see on this two-day agenda many of my best customers and many colleagues that I’ve worked closely with over the years on the very topic we are here to address: the future of communications. This conference also brings together the people who we think have the most power in the industry – the people who use networks in their personal and business lives. It’s been clear for a long time that it will be the consumers of communications services who will truly shape the future of networks. And there’s been more consuming of communications in this decade than at any time in history. In fact, the growth and the pace of change in the communications industry is unlike anything we’ve seen before.

I think the work to be done over the next decade – changing, extending and improving communications networks – will have a greater impact on people’s lives than anything that has happened in the last century of communications history. And, contrary to the rumblings you heard in the market last week, that’s translating into a lot of continuous, long-term growth for companies like Lucent that provide networks.

To use a current sports analogy, in terms of building and outfitting advanced networks, we’re still in the regular season, with the playoffs still to come. But this is more than a game. We think what’s going on today is nothing less than a revolution. A revolution in networking. A revolution in communications.

Today, as we are sitting here, 37 million people will log on to the internet and choose from an estimated 830 million web pages. Last year the average number of hours spent online increased 55%. An average internet call is now 30 minutes and rising. People are shopping online for almost every imaginable product from books and records to automobiles. You can even buy and sell antique boats on the internet. I speak from experience. The buying worked just fine. But the hull was more antique than I counted on, so I’ll let you know how the selling goes.

As you listened to me talk over the last minute, five million email messages were sent. Grandmothers who have never used a computer are signing up for Web TV so they can do email with their grandchildren. Today 35 million voice mail messages will be left. (I know I sent close to a million of them on the way here.) By the end of this day, 50,000 people will sign up for cell phone service, joining 200 million other wireless subscribers worldwide. If there is a magic number for the networking revolution, it’s probably 700 million. It took more than a century to install the first 700 million telephone lines. We’ll be installing 700 million more in the next 15 years or so. And in that same period, we’ll expect to see 700 million new wireless subscribers as well. Worldwide, there will be 1,000 new providers of communications services by the beginning of the year 2000. That’s 1,000 new phone companies, internet service providers and wireless companies in the next two years. Traffic on today’s voice network is growing 35% a year. And data network traffic is tripling every year. If that’s not a revolution in communications, I don’t know what is.

As people who use networks start using them in revolutionary ways, the network of today needs to be revolutionized. The fact of the matter is, we’re seeing network congestion. And some of the patterns of congestion are now very predictable. A vice-president of operations at a major telephone company told me recently that every day at 3:00 p.m. his network slows down. That’s the time kids get home from school and log on to the internet. That slowdown is a big problem for his business. If you’re a stock trader or a catalog company depending on customers getting through to your call center, you can’t afford one minute of downtime.

What’s the answer? It all comes down to something we call bandwidth – capacity – the amount of traffic a network can handle. The answer is to find ways to pump data through networks quickly. That’s why this past year Lucent introduced a number of breakthrough technologies to address the problems of network capacity and quality of service. The first is a 400-gigabit optical networking system that has five times the capacity of the most advanced system that preceded it. This 80-channel system can carry the equivalent of an entire second of traffic on the worldwide internet over a single strand of fiber. And it will evolve to hundreds more channels by the year 2000. Early in the next century we’re expecting optical systems to reach a thousand terabits per second.

We also introduced a breakthrough internet protocol switch that brings the reliability of voice networks to the data world, and in the process allows network operators to guarantee a range of service levels. Customers can buy the quality of service they really need. It can be adjusted to serve millions of additional users as demand grows.

That $19.95-a-month fee for a teenager is just fine for a relatively dependable service and a modest wait. But a business might pay $100 or more a month to get guaranteed service with no waiting. And to meet the incredible demand for reliable communications services, phone companies and other service providers need flexibility built into their networks, so they can offer their customers these different levels of service.

These kinds of technological breakthroughs are sorely needed because today’s network is not flexible enough to meet what customers want today. And they want a lot. They want wireless phones. They want the internet to have the same quality as the voice network. They want to turn their laptops into cell phones and they want to talk to live humans on websites.

We can only wonder what the next generation will be demanding of their networks. My nine-year-old daughter has been using the internet for the last two years. If you ask her what she uses the computer for, she’ll tell you that a computer is something she does things on. And she does a lot of things, including trading Beanie Babies. What will she want to do when she’s 18? I believe she’ll want to do a lot more than is possible right now. Because to deliver what customers want and expect, now and in the future, will mean that voice and data, wireless and wireline all have to converge.

In the end, what we are heading toward is a network of networks. Today’s networks are beginning to merge, but there’s a lot of work to be done to finish the job. Dan Stanzione, the president of Bell Labs, says that the most exciting place in the communications industry today is the spaces between the networks. That’s where the convergence is happening. Filling those spaces to create a network of networks is what the networking revolution is all about.

In some cases, new service providers have the ability to start from scratch. For most, it’s about evolving existing networks to provide revolutionary services. The voice network has been evolving for over a century. It’s high in quality, low in cost and easy to use. At the core of the modern voice network is circuit switching, which provides a dedicated circuit for each call. Circuit switching evolved to make voice traffic clear and reliable. Circuit switching can also handle data traffic, but not as quickly or efficiently as packet switching.

Data networks are packet switched, and far more complex than the voice network. They’ve been built to handle information that comes in bursts, rather than in continuous streams. They very often experience bottlenecks, and at times are not very dependable. In fact, people have gotten used to data networks not being dependable. If data network users were less forgiving the internet would not have emerged as rapidly as it did. In addition, data networks are costly to maintain. The key is to link, and ultimately merge, the best of both voice and data, and wireless and wireline. The goal is to create a network fabric that operates with the quality and reliability of today’s voice network, no matter what kind of traffic it has to handle.

There are some who think it all comes down to just the internet. And indeed the internet sparked the networking revolution. But customers have fanned the flames. The future will require a lot more than today’s internet. It will require a common currency that links networks, protocols and any device you may want to connect to the network. It will require high reliability and quality of service guarantees. It will require unprecedented bandwidth to accommodate any new service without the wait. It will require the scalability to respond to rapid market growth. And it will require ever lower costs.

The revolution is not about the technologies that have brought us to this point in our history. It’s about the technologies that will shape our future and create a network of networks. It’s about technologies such as optical networking and next-generation data networking, not hubs and routers. It’s about wireless networking, and broadband access to both home and office, and schools. And that access may be provided by fiber, or by fixed wireless systems. It’s about software to manage those networks and services, and to optimize the spaces between voice networks, data networks and video networks. It’s about linking the features of today’s voice networks, like three-way calling, information services and 800 service with the packet networks of the future.

It’s about putting all these technologies together in a way that makes networks work together to deliver future services in a seamless way. Two-thirds of our researchers at Bell Labs work on software, and their priority is to fill in the spaces between the networks. In fact, in the last few months we’ve introduced several software breakthroughs designed to link the features of the public switched network with the internet world. Using these breakthroughs, our customers will be able to offer their customers the identical services whether they connect through an IP network or a traditional public network circuit. And certainly nothing less is required to meet the unparalleled demand for sophisticated services we see today.

A colleague of mine was asked recently what percentage of Lucent’s revenues in the future would be data compared with voice. His answer was that we won’t know the difference. Our revenues will come from communications networks – voice, data, video, wired, wireless, optical, and on and on. In the end, it’s really about communications networking. It’s about communications networking for a supplier like Lucent, for all of our customers, and – most importantly – for all those people who use communications in every aspect of their daily lives.

The future of communications is about revolution and evolution. The communications networking revolution will have a profound impact on every individual, on every business, and on every nation because it will transform the most important part of the global economic infrastructure. By interconnecting a network of networks, the world will find more freedom than it has ever known. That’s what the networking revolution is all about. And that’s why I’m proud to say that Lucent is right in the middle of it.

THE COMPENSATION-DRIVEN ORGANIZATION

Russell S. Young
Senior Vice President & CFO, Lyondell Petrochemical Company

Speech before the 1996 First Boston Value Based Management Conference
Published in The Corporate Report, Edition No. 19, September 30, 1996

In our drive to increase EVA, it’s important to examine whether all aspects of the organization – including pay and performance programs – are in sync with the process of creating maximum value. At Lyondell, such an examination has led to a dramatic overhaul of our evaluation/recognition/pay systems, one that we think is key to taking the organization to the highest performance possible.

To give you some perspective, let me briefly summarize where we came from. Lyondell was formed in 1985 as part of a restructuring by ARCO. We’re based in Houston. At the time we had a commodity petrochemical business and a large refinery. This business was losing about $200 million a year.

• Costs were too high

• There were way too many layers of management

• Morale was at rock bottom

A new management team, headed by our current Chairman and CEO, Bob Gower, quickly instituted a management style that turned the company around.

• We took out several layers of management and reduced the workforce to only those people who were necessary to get the job done

• We pushed responsibility down – made sure everyone knew what was required

• And then allowed decisions to be made right where the issue came up

• We emphasized teamwork – within the officer group – across functional areas – everywhere in the organization

• We emphasized communication – we have a philosophy that in order to do their job well, employees need to know what we know

Our executives hold monthly communication meetings with all employees at all locations to make sure everyone knows how the business is doing and what is required for continued success.

We ran the company like an LBO – managing for cash flow rather than earnings per share or book accounting calculations.

Sound familiar? Many companies have been going through these same processes over the past few years – lowering costs and increasing productivity and efficiency – encouraging employees to act as owners – in order to remain competitive and provide the returns that the financial community expects. We have been very successful with this approach.

• Lyondell became a low-cost leader in the petrochemical industry and one of the most productive companies in America

• We became a preferred supplier to many customers and were spun off from ARCO in a highly successful public offering in 1989

• We’ve earned more than $2.4 billion since 1985 and are approaching $5 billion in annual revenues

• We rank very high in sales per employee/profits per employee, often in the top five in the Fortune 1000

• We turned the business into a high-performance company

But one lesson not to forget is that it’s never safe to rest on your laurels. Looking over our shoulder in 1994 and seeing that the competition was closing ground, our officer group took a hard look at how we could further strengthen our performance. This led to a reevaluation and substantial overhaul of our pay and performance practices in early 1995.

Basically:

• We changed the compensation system.

• We eliminated the annual performance process.

• And we linked the process to EVA/MVA.

What we wanted to achieve was this:

• Further increase productivity and efficiency

• Maintain and improve our low-cost structure

• More closely align resources and decisions with company-wide goals

Let me talk first about the changes that affect the entire workforce. First, we eliminated job grades. Past systems promoted internal competition and discontent. And lots of effort was spent writing job descriptions in the most glowing light possible and in evaluating and debating job grades. Salaries are now based on external market surveys. It’s simple and it’s straightforward.

Second, we eliminated the annual merit increase. In the past, this led to competition among supervisors and forced ranking of employees. Everyone now receives an annual increase – based on where their compensation lies versus the market for their job. Again, simple, and it’s not controversial.

Third, we eliminated the annual performance process – including its multi-page format. The traditional system was a dreaded chore that tended to focus on past results. Today, we have a process that we call Dialog between employee and supervisor where frank and frequent discussions focus on how to achieve company-wide goals and performance that contribute to EVA.

• It is open, candid and flexible

• Non-threatening to the participants.

• It is forward-focused and planning-oriented

For our senior managers – which at Lyondell consists of about 7580 key players – we took an additional important step. We eliminated the annual bonus entitlement.

You know how the bonus concept works at most companies.

• You develop a system that you feel fairly certain will result in the desired level of bonus

• Then you package annual results up for the board of directors in the most positive way imaginable – so that the board will grant you the bonus you want

We are out of that system totally at Lyondell. No more bonus entitlement. Now the game involves hard performance data based on EVA/MVA. This means that when we actually create EVA and MVA, our senior management group receives bonuses and long-term compensation. We are not linked to performance versus a budget or even versus a peer group of companies.

It is absolute. We either create value or we don’t. The potential is there for greatly enhanced compensation versus our old system. In fact, there is no cap on the pay we can receive. It also means that there is no safety net. And, if we don’t create EVA/MVA, there are zero bonuses.

It’s a pool-of-dollars concept based upon hard mathematical formulas. EVA and MVA – on a five-year performance period basis – drive the outcome.

This system, which we adopted last year, addresses both bonuses and long-term incentive compensation. Values generated are paid out in three equal parts – one-third is a bonus, one-third is stock and the rest is a cash match to cover taxes and to encourage retention of the stock. And, we have stock ownership guidelines as well.

This has improved the corporate decision making process by looping in this broader group of senior managers – which is the key that drives the approach deeper into the organization. I can assure you that these senior managers are focused full-time on how they can influence costs and profits – and are providing that direction for the employees they supervise.

We’re conducting quarterly briefings with the senior management group on strategic initiatives and value creation opportunities of any kind. And you won’t be surprised to hear that they always want to know how we’re tracking toward the EVA/MVA pool.

All employees, by the way, are encouraged to make decisions that directly affect the performance of the company, with success recognized through profit-sharing. We’ve looked at stock options for this broad employee group as well. At this time, however, we think that profit-sharing is more aligned – since employees can see a more direct correlation between their performance and earnings.

We came to this new performance and pay system by asking ourselves – what do the stockholders want? We think they want a more objective system for rewarding performance.

The executive decision making for embracing this progressive new system was not easy. There were many skeptics at first and two typical concerns.

Concern number one: won’t this foster mediocrity? Our experience is the opposite. In practice, we have found that this puts more pressure throughout the organization on everyone to more than carry their own weight. It makes us more proactive in weeding out the mediocre. What we have found is that organizational “noise” quickly surrounds low performers and makes it imperative that their performance improves or they can’t continue.

Concern number two: how about the stars? Don’t they need a special incentive system? In practice, we have found that stars are driven from within to superior performance. But with our market-based pay system and EVA-focused incentives, we don’t need additional programs for our star players. Also, these folks typically get promoted most frequently and that opportunity is a motivator.

Employees had told us in previous surveys that the old performance review and job grading systems weren’t working very well. They certainly weren’t aligned with a high-performance focus. In fact, the old systems created a “distraction” that got in the way of performance. If you’ve ever been bothered by a pay issue – thought your pay was unfair or were unsure how it was arrived at – you know how unproductive this can be. We have minimized the odds of that happening at Lyondell. And once you’ve eliminated that distraction, you can address performance more directly.

How did we make this major change happen successfully? First, we hammered out a consensus of the officers. Then we rolled out the new approach to all employees through officer-led, face-to-face meetings and a videotape of the officers describing the issues and direction.

We invested in training for all our employees in the Dialog process – how to coach and how to push back. These are quarterly, if not more frequent, sessions between employees and supervisors. They are not a review of historical performance but a focus on current and future goals. As part of this process, we want to turn our supervisors into coaches rather than “bosses.” And we encourage subordinates to push back – for example, to question and reinforce priorities – obviously in a constructive manner.

I like to characterize our situation today as “work hard, pay well.” We give everyone a great deal of responsibility – and we expect and pay for above-average performance. We believe the new system is achieving the desired outcomes at Lyondell. Recent surveys have shown widespread acceptance of the new system as illustrated by an increased perception of fairness in our performance and pay system and a dramatic increase in the effectiveness of supervisor/employee discussions.

We also see increased productivity – and better alignment with company-wide goals through the frank and frequent Dialog process.

• Focuses forward on key goals – how can we get there

• More open and honest

We see increased productivity – and reduced costs through:

• Elimination of internal competition over job grades and annual merit pay changes

• Elimination of the paperwork and bureaucracy of performance review documentation

We see increased productivity from an enhanced focus on external competition – rather than internal, so we now expend our energy competing with true external competitors.

At Lyondell, Economic Value Added is the company-wide goal. Traditional systems work off of individual performance and contributions. In today’s business environment, it may not be enough just to develop key goals. Today, all systems should be examined to make sure they are linked to and in full support of the desired outcome – and sometimes we need breakthrough or cutting-edge approaches. One of the best tools is a compensation system that drives the organization to deliver the highest performance possible.

VISION 2000: THE CHALLENGE OF CHANGE

Kirk R. Schueler
President, Marion Merrell Dow Canada

Conference Board of Canada Workshop on Healthcare, March 28, 1995
Published in The Corporate Report No. 12 (June 15, 1995)

The pharmaceutical industry is changing. Our perception of who our customers are is changing. Hopefully, today’s workshop will help facilitate a greater partnership between the various groups which are represented.

The title of my remarks is “Vision 2000: The Challenge of Change.” I’ve actually delivered several presentations over the course of the last twelve months using the same title, but consistent with the title I’ve modified the content as the months have passed.

When I was an adolescent, I was fascinated with mythology, the stories of the Greek and Roman gods. One of the gods was Janus. His main distinguishing characteristic was that he had two faces which allowed him to look backwards and forwards at the same time. I’ll be doing some of that today, as I reflect on where we as an industry have come from and where we’re going or at least where we could go.

What I’d like to do is encourage each of us to have two sets of eyes, or perspectives but focus both of them forward – one short-range on initiatives happening today and one long-range envisioning positive directions for the future.

As I stated at the beginning, the pharmaceutical industry is changing. We’re seeing consolidation also known as horizontal integration as companies are combined, Roche-Syntex, American Home-Cyanamid, Glaxo-Wellcome, Marion Merrell Dow-Hoechst-Roussell perhaps. These are traditional consolidations in the sense that they are forming larger companies with the same business focus in order to have increased market clout and take advantage of cost-cutting opportunities related to synergies of infrastructure. They are still pharmaceutical companies, they’re just larger.

The industry’s historical focus has been to obtain all of our revenue from drugs. We emphasized the discovery, development and marketing of drugs and provided some value-added services free of charge such as continuing medical education, patient information and instructional tools to enhance communication between physician and patients. Physicians made most of the decisions regarding drug selection and did so based on therapeutics – providing the drug they felt would provide the most benefit for their patient and relationships – where a number of similar therapeutic choices were available, to choose based on value-added services, interactions with field reps or the reputation of the company.

The world has changed. There are new decision makers, many of them represented in this room – governments, insurance companies, employers who, as you well know, are all facing severe economic pressures and are looking for ways to reduce costs. Although drugs are a relatively small percentage of healthcare costs, the drug industry is known to have been very profitable. In the Canadian system where the largest costs – hospitals and physicians – are reimbursed by governments, drugs are a substantial portion of costs insurance companies and employers bear. So, these new decision makers are saying, “let’s target them for savings.”

How have we responded? Different companies have taken different approaches. Some have seemingly said, “If we can’t beat them, join them! If they want to save money on drugs, we’ll help them save money on drugs.” They’ve combined with pharmaceutical benefit management companies (PBM’s) in what is known as vertical integration, combining companies servicing the same customers but at different points within the process. The primary example here is Merck-Medco. This company, and others like it, at least in their initial stages, concentrate on reducing drug costs through a competitive bidding process whereby only drugs offering attractive discounts from their normal prices are made available to patients and the use of formularies which often prefer generics and encourage therapeutic substitution.

If your doctor prescribes Product A but the PBM has a better price on Product B used to treat the same condition, a pharmacist will call your doctor and ask permission to dispense Product B, regardless of whether that product is as good a therapeutic choice for you. They also save money through lower cost distribution methods such as mail order or negotiated lower dispensing fees at certain pharmacies. I tell you, “We’ve met the enemy and they is us” when pharmaceutical companies employ these practices. This single focus on price and on drugs is misguided and fortunately data is becoming available that shows that PBM’s haven’t saved money overall. They saved on drug costs but increased doctor and hospital costs because the best therapeutic choices were not being made.

Fortunately, other pharmaceutical companies and some PBM’s are changing in another way which has a broader perspective which is disease management. In this case, the objective is to minimize the overall cost of treating a disease, which requires evaluating more than the drug component. All other alternatives, costs involved with physicians, hospitals and lab tests, are considered. Patient education and information are part of the process. While the focus is still on cost in terms of what is the most cost-effective way to treat a disease, the perspective is a broad one encompassing all the costs. Here, companies are selling services in addition to drugs. Lilly is an example of a company working with disease management.

If one were to combine this disease management approach across a number of categories, you could think of healthcare management as a way to describe it. You start to measure what are the results in patients from taking different approaches. This is called outcome research. A possible example here is SmithKline Beecham, who through affiliation with DPS, Diversified Pharmaceutical Services, and an HMO, United Healthcare, has access to a database that can measure outcomes, helping them determine the most cost-effective treatment approaches.

Our vision at Marion Merrell Dow Canada is to go one step further into health management. Recent initiatives by Astra are in this direction as well. Health management aligns companies extremely well with governments and consumers in that the objective is to help people obtain and maintain optimal health. If you’re a smoker, you minimize health costs by quitting smoking. If you’re not a smoker, you minimize health costs by not starting to smoke. The more a person’s blood pressure is elevated, the higher the potential healthcare costs. If you reduce hypertension, you reduce healthcare costs. If you help people avoid hypertension, you avoid incurring related healthcare costs. So the focus of health management is treatment and prevention. This is a much clearer focus on the individual and how that person can be assisted to minimize their need for and use of expensive healthcare services. To be effective, this approach requires strong partnerships with funders, with providers and with individuals. The focus is the broadest of all the options I’ve described but includes the others. Disease management, for example, can be part of health management.

So what are the potential offerings from a health management company? Pharmaceuticals are still a core element. Pharmaceuticals can improve the quality and longevity of life and provide savings in other areas of healthcare. There is a need and opportunity to help patients get the maximum benefit from the drugs which are prescribed for them. I call that compliance enhancement. Data and information gathering and dissemination are extremely important in order to determine which approaches provide the best outcomes.

Decision support systems such as those offered by a company we recently acquired, Clinidata, can help physicians select products which will provide the best approach for each individual patient. Decision support for consumers is also an area of opportunity. Numerous education opportunities exist with all customer groups and particularly patients. Other offerings could include behavior modification services and consulting to healthcare funders and providers. The possibilities are only limited by the imagination.

In addition to initiatives individual companies can take, our industry association, the PMAC, has started to address a broader view of the healthcare marketplace. In 1994, we initiated our Knowledge is the Best Medicine campaign encouraging individuals to learn more about their medications and use them responsibly. We’ve been very supportive of the concept of optimal drug therapy. We need to move from the conceptual to the concrete and we’re working towards a more proactive approach. Will Rogers phrased it well when he said: “Even if you’re on the right track, if you just sit still, you’ll get run over.”

Bearing in mind the need to be active and proactive, positions are being developed on issues such as original package dispensing, clinical practice guidelines, drug use review and evaluation and sampling and hopefully we’ll see some concrete initiatives to make progress on each of these issues working in partnership with other groups involved in the funding and delivery of healthcare services.

As we look at what’s happening today, it’s easy to see the negatives faced by the pharmaceutical industry – delayed and restricted access to the market, reduced pricing flexibility, lower profitability, greater prescribing controls. Our industry’s challenge is to look beyond these factors to what is possible if we are proactive and innovative and play a leadership role in managing health and healthcare.

For those who are willing and able to exercise that vision, what they will experience is the opportunity of change. That change can only be made through effective partnerships with all affected groups. And in my mind, if we all work together, the opportunities are limitless.

A JOURNEY INTO THE FUTURE OF BANKING

Jerry McElhatton
President, Global Operations & Technology, MasterCard International

Business Week Corporate Crown Jewels Conference, Laguna Niguel, California, May 5, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

I don’t mean to sound alarmist, but I believe the banking industry is at what Andrew Grove, president of Intel, calls a “strategic inflection point,” a point at which the fundamentals of the banking business are changing.

I also believe that it is up to you in this room to guide your organizations on an extraordinary journey into the future. I’m talking about a journey for which the road maps we’re used to may be out of date, the guideposts from your career may point you in the wrong direction, and the vehicle that is supposed to take you there is about to run out of gas. It’s a journey to the future of money. The landscape is changing. Let’s take a look at the scenery along the road.

Consumers are changing. They want access to their money any time, anywhere, and they want to be able to choose how to get to it. Competition is changing. The banks we grew up with are becoming unfamiliar, and everyone wants a piece of the financial services pie. Computers are changing. There’s now more computer power in your wristwatch than we used to have on our desktops. Technology – the driver on this trip – is changing where we are going, how we will get there, and what we’ll do once we arrive.

In the midst of these converging and conflicting factors, some CEOs are likely to ask: Why me? Why is this happening on my watch? That’s a reasonable question to ask. And it should followed by a second question: what am I going to do about it?

I would like to share with you a view and some potential answers. But first, let me assure you that if you haven’t noticed any of these changes, don’t assume that because you can’t see them that they aren’t there. The changes on the horizon are likely to be more profound than any changes we have experienced in our careers.

Let’s fast forward on our journey into the future. A businesswoman breaks from a meeting, realizing the next day is her mother’s birthday. She fires up her laptop, dials a wireless connection over the Internet to MasterCard’s home page, and scrolls to PC-Flowers. She orders her mother’s favorite flowers, then hotlinks to the wine section, where MasterCard is running a special on wines, provided by the vineyard customer of a bank. The vineyard offers delivery service for special occasions from local wine shops. Working with a courier, she picks a wine, confirms a secure credit card transaction, and heads back to her meeting. Is that banking?

A soccer Dad wakes to bad weather. He wonders if his son’s game is postponed. Dad goes online with his WebTV to check the local information service, provided by AT&T’s WorldNet service. The local schedules are updated online, free of charge. The game is canceled. Then a banner flashes, saying: “Soccer jerseys with team names now available!” Dad orders a green jersey with the team name on the front. His son sees a picture of a new soccer ball on the page, and Dad orders that, too, with an encrypted debit transaction that instantly clears his account and pays the merchant, Wal-Mart, on the spot. Is this the same business you have grown up with?

I believe that the financial services business is facing a fundamental upheaval in both structure and delivery, and you the bankers need to know what to do about these changes, or I believe there is a significant chance you will see your business erode. The good news is that all this change presents a tremendous opportunity to every one of us in this room. But to seize this opportunity, we’ve got to understand at a minimum three things:

• One, that technology will continue to change the delivery dynamics of financial services

• Two, that technology has tremendous potential to cause banks to be disintermediated out of the crucial role they play, unless they understand how to use it to be competitive in this new world

• Three, that banks have a role in the future of money if we take action now

First, I’d like to talk about how technology is changing the delivery of financial services. For those of us of a certain age, there is proof all around us that the Industrial Age we were born into has given way to the Information Age, in which our children and grandchildren are growing up. Companies now spend far more on computing and communications equipment than on industrial, mining, farm and construction equipment combined. There is more computer power on your desktop than mainframes had 35 years ago.

The US workforce has added 25 million computers in the past few years. Homes and offices have added 10 million fax machines, and email addresses have increased over 26 million. There are over 16 million cell phone users. Over 19 million people carry pagers. Over 12 billion messages were left in voice mail boxes in one year alone. And telephone companies are being forced to add new area codes to expand capacity to relieve overloaded central switches. Something is happening out there, and it’s happening to all of us: technology is becoming ubiquitous in our lives.

Look at your home. Look at your children’s and grandchildren’s toys and games. The Sega Saturn game machine has a higher performance processor than the original 1976 Cray computer, used only by elite physicists. At nearly every school in the country, teachers are using technology to change the content and methodology of their lessons. Laptops are replacing textbooks. The former chairman of AT&T said that if we had the same progress in automotive technology as we do in computerization, you could buy a Lexus for $2. It would travel at the speed of sound and go about 600 miles on a thimble of gas.

The younger customers of today have grown up with computers. A mouse to them is like a calculator to us. They don’t think of technology as something to be learned – it’s an intuitive tool that navigates them through their daily lives. These computer-age customers are not walking through our doors, waiting patiently in a teller line for service. They’re zipping through cyber-doors, wanting online access to financial services and payment vehicles, and wanting it today. They want to bank on demand, with services customized to their individual needs. They don’t want to drive around to find an ATM to get cash. They want access to their accounts and to pay their bills at home, at work, on vacation – wherever they are right now. They look at a computer, and they see the closest branch of their bank.

According to Jupiter Communications, there will be hundreds of millions of children with access to the World Wide Web by the year 2000. And before long, they’ll start to accumulate money and look for financial services. You won’t have to wait till they grow up to find out what the computer literate want. Right now there are millions of people all over the world who are online. In a recent book called The Digital Estate, Chuck Martin calls these customers the Interactive Generation. He says that there are 30 million of them around the world. They are all ages and speak many languages. They don’t dress or look alike. They don’t share geography, music or art. What they share is a belief that they stand on the threshold of a future defined by global, interactive networks of communication and commerce.

How many of those potential customers already exist? According to Business Week, over 10 million people have already purchased something online – that’s a market the size of New York City. And that’s only about one-quarter of the adults who are online.

Do not make the mistake of thinking the Internet is just for the young, or a passing fad. Almost half (four out of ten) of the users on the Internet are 40 or older. They’re affluent and educated. Over 40% have household incomes over $50,000. Three-quarters of them are college educated. Don’t those numbers sound like the customers you are after today? Now you know where to find them. The foundation for that future is already in place, and this interactive generation is building on top of that foundation every day.

What does that mean for you? While bricks and mortar will be around for a long time, they will be far less important and incrementally more expensive in the future. Locational convenience, the key delivery philosophy of banking for decades, now means: “I want to bank in the location I choose, when I choose, in the way that feels most convenient to me.” The banks of the future will organize around that desire. The successful financial institutions of the future will deploy their assets – talent and technology – to deliver that level of convenience. We’ll return to this idea in a moment.

I see three forces causing technology to change: competition, buyer values and globalization. New competitors are posing significant challenges to every bank in this room. The old lines between banking, insurance and financial markets are blurring. Non-banks are already in your markets. Telecommunications companies and software vendors pose yet another kind of threat. They are continuously developing new products, seeking a share of your customers’ wallets. They are in your customers’ homes building relationships.

Once the cable company offers a faster Internet connection to the home, what’s to stop them from packaging a full complement of financial services, all billed through the monthly cable bill? The cable company has the potential to develop a stronger link to family finances than you have. A good relationship with a customer today will not necessarily translate into loyalty in the future as new financial products are being introduced, and new strategic partnerships are being formed.

New technologies are helping banks respond to competition. For example, new card technologies, like stored value, will enable banks to create loyalty applications that give additional value, such as storing frequent flyer points on a card and adding extra miles when items are purchased with that card. They’ll also help reduce fraud. Now, you can store a fingerprint digitally on a microchip and have it verified when money is loaded onto or withdrawn from a stored value card.

Let’s talk about how you might order pizza in the next few years. You’ll dial the pizza place, place your order, dip your Mondex card into a reader on your telephone or other interactive device, enter the exact amount of the order, add a tip, and wait for delivery. At the pizza place, the manager will transfer the amount from your card to the store card reader, and then transfer all of the card transactions to the bank at closing. The driver shows up at your house, carrying no cash, and gives you your dinner. No cash has changed hands.

In the next few years your customers will begin to see smart cards as an alternative to cash. Smart cards add convenience and value. It’s already happened both domestically and globally, and massive expansions are planned. That’s the future of money. And that’s one way technology will help you respond to the competition.

Another way is electronic commerce, which will provide a convenient way to pay over the Internet, using existing card relationships. Merchants and banks alike will be able to reach the millions of customers throughout the world who use the Internet and who want to buy and bank at home. The world’s first secure electronic transaction was just made in December by a Danish bank, IBM and MasterCard. By the end of this year, MasterCard expects to have 40 pilots in 19 countries that are developing and launching applications to drive ecommerce growth. Right now we’re developing pilots for small business purchases of bulk items, electronic catalogues, purchasing malls, ticketing, and arts and entertainment libraries, all of which will benefit banks.

Buyer values are changing. Traditionally customers wanted locational convenience, convenient service hours, professionalism, and competence. In the future customers will want convenient access anytime, anywhere, seamless service over multiple locations and channels, and security. Banks responding to those values by opening on Saturday and Sunday will find that response both inadequate and expensive, and that it won’t be enough for the future.

Chip technology is letting consumers download value onto their cards from a PC or telephone in their homes, whenever they want, and then to use that value as cash. They won’t even need ATMs. They’ll even be able to transfer money peer-to-peer, further eroding the need for cash or checks.

At MasterCard, we’ve just unveiled a very creative way to leverage card technology – we’ve teamed with Coca-Cola in a massive promotion that puts a single-use ATM card in 18 million cases of Coke this summer. The customer just takes the card to an ATM and inserts it to find out if they’ve won cash or a prize. Likewise, payment cards could be used on the Internet to generate awareness and provide access.

Once customers use their cards, we have information about consumer preferences and transactions that banks can use to market the appropriate services to each cardholder. We have neural networks that help predict purchasing patterns and assist us in better understanding consumer behavior, as well as predicting and reducing fraud.

New techniques such as data warehousing and data mining provide important tools to understand changing buyer values and preferences, and make information accessible throughout the corporation, easily and quickly. Data warehousing technology coupled with neural networks provides an unparalleled opportunity to understand consumer preferences, track responses, and develop strategic marketing programs that respond to specific consumer needs.

As a global company, we see emerging markets leapfrogging stages we have gone through here in the US, such as skipping check writing and going directly to smart cards. This is particularly true in Asia Pacific, where growth is outpacing the average, and where we see significant in-country opportunities for banks.

Globalization is opening up new markets for you, and new targets for your competitors. Globalization is also presenting major technical challenges for all players to communicate with one another. In the past, banks found it difficult and expensive to communicate globally because they relied on US-centric mainframe proprietary processing solutions. New advances in technology are eliminating those restrictions, and opening up our information technology assets to create new value for the banks.

For example, a UNIX-based open systems architecture coupled with a relational database provides a platform that supports corporate needs for consistency as well as regional needs for unique solutions. It requires a significant investment, but will prepare the enterprise for the future. Traditionally, bank systems were based on hardwired networks. Technology is making virtual networking possible, so we can connect communications links all over the world. Today, advances in telecommunications technology make possible solutions such as a virtual private network that is distance-insensitive, provides bandwidth on demand, and is non-capital-intensive. This means there is sufficient bandwidth available to handle peak-time needs flawlessly. When volume decreases, so do the costs for bandwidth. This flexibility was unthinkable in the not-too-distant past. Technology has changed and continues at a rapid rate to change not only how we operate, but our customers’ preferences.

Businesses – including banks – that will be successful in the future are those that couple core strengths in information technology with market needs and that add value. A perfect example from the non-bank world is Federal Express. By leveraging its internal package locating system, opening it up to customers anywhere in the world, FedEx has found a powerful marketing tool that adds significant value to its customers and has significantly increased its business.

Likewise, banks need to leverage internal systems and core strengths, opening themselves up to new functionality, and new relationships with customers in a cyberworld. In the past, the back-office payments system was a cost center for a bank. That’s not the case anymore. It adds value. Now, the back office is an asset, and can be a profit center.

Let’s look at the original role information technology played in many organizations. A recent issue of the Sloan Management Review from MIT laid it out nicely. The article said that in the past, IT was deployed basically to overcome weaknesses in operations. IT was considered an expense to be managed. IT managers considered outsourcing a threat, and monopolized technology resources and decision-making.

Today it is becoming increasingly clear as banks update their aging legacy systems – often in response to the year-2000 challenge – that they have an opportunity to build new architectures that will prepare them for an open, networked, virtual world. What it all means is that technology is causing the remaking of money and the payments system. It’s putting pressure on bricks and mortar as the definition of convenience, because increasingly consumers are demanding remote delivery. It means that banks will be competing with firms that are far removed from banking as we know it today. And because the Internet is a giant direct-distribution channel, it will be easier and cheaper for these new competitors to reach your customers. But, those same channels are also open to you.

Innovative banks will see technology and information as assets that provide tools to step over competitors and land directly in front of consumers. The technologies that we have today have brought us to the first stages of replacing cash and checks as the primary payment vehicles. And, we see the payment mix shifting.

In 1996 MasterCard conducted leading-edge research into the drivers of consumer payments behavior and profitability. Thirteen major US retail banks participated, providing data on over 180,000 households and over 20 million transactions. One of the insights MasterCard gained was that there are new opportunities for banks to enhance profitability by leveraging the data they already have about consumer behavior. We know card use has been expanding rapidly. Consumers are replacing cash and check payments with credit and debit card payments at an accelerating rate. And we know that the average credit card portfolio earns an after-tax return on equity well in excess of the hurdle rate required to create shareholder value. Profits may see pressure and asset quality may fluctuate, but credit cards will deliver attractive returns well into the future.

New payment products (like debit and stored value) and new channels for card acceptance, such as the Internet, will offer new opportunities for increased revenues. But the value to the relationship extends beyond revenue. A card may be the best vehicle to capture useful data on consumer behavior. Simply by using their cards, customers convey valuable information about who they are, what they want, and how they want it. This data is captured with a rich level of detail that is readily accessible to member banks through a data warehouse. We also confirmed that a growing majority of bank transactions continue to occur outside the branch.

From 1993 to 1995 the percentage of non-branch banking transactions increased from almost six out of ten to almost seven out of ten. Consumers’ growing comfort with technology is evident from the widespread use of ATMs and computers. Two-thirds of those surveyed report using ATMs, and almost half own a computer. Although branches remain important today, most consumers (60%) report using a mix of branches and non-branch delivery channels. Today, the average branch-only consumer is more profitable than other segments. However, that’s a trend that is likely to change.

The branch-only customers are the generally longer established, and more traditional customers. They maintain higher deposit balances, but their numbers will diminish as time passes. Within younger segments, self-service customers (those who do not use the branch) are more profitable than branch users. As they grow older, accumulate wealth and become more profitable, they are likely to continue to rely on non-branch channels for servicing.

The shift to non-branch channels presents a new challenge for banks to solidify relationships with customers they rarely see. Payment cards can help. In a remote environment, a payment card is both a way to access an account and a constant reminder of where the customer maintains the banking relationship. Cash and checks will play a less important role in the future, while cards will continue to grow significantly.

In his 1996 update to The Bankers, Martin Mayer makes the startling statement: “Banking is essential to the modern economy; banks are not.” He shared a vision of how the payment system might become a public utility.

I’d like to spend a few minutes talking about the threat of disintermediation of banks in a virtual world. How did disintermediation become a concern to bankers? Several reasons: there are new competitors, which we mentioned earlier; we don’t control the delivery mechanism, which we used to; and we don’t own the customers’ loyalty – anyone can market to them.

In the virtual world of the future, intermediaries in many industries will be eliminated. Stockbrokers are worried about disintermediation. Teachers are worried. Lawyers are worried. Open access to information, the great technological breakthrough of the 1990s, is making the middleman an endangered species. Most data is online, and the web provides a direct-to-customer distribution channel that will make intermediaries unnecessary. Look at what happened to the encyclopedia. All that data is online now, and it’s faster and easier to find information and there are several alternatives.

Let’s take it one step further. In the past, the major payment systems facilitated commerce and served society well. But most of those systems are based on large, host-system processing architectures, which will have limited value in an era of distributed processing technology, virtual networking, and other innovations. In this sense, adaptation to the Internet over the long term could result in the minimization of traditional payment systems. At the minimum, new technology is eliminating barriers to entry, making it possible for entrepreneurs to launch competitive enterprises, and for any organization that already has a strong brand or relationship with its customers to compete.

Steve Jobs, one of the founders of Apple Computer, recently said that the heart of the Web will be commerce, and the heart of commerce will be corporate America serving custom products to individual consumers. He added: “A small company can look as large as a big company and be as accessible as a big company on the Web. Big companies spend millions of dollars building their distribution channels. And the Web is going to completely neutralize that advantage.”

Here’s an example. What is the biggest book retailer in the US? You might guess Barnes & Noble, Borders, B. Dalton or one of the other large chains. The answer? None of the above. It’s Amazon.com. Amazon has no retail stores. No bricks and mortar in the mall. Only a Web address. It’s a virtual store with an astounding inventory of 2.5 million titles, compared to the 175,000 in most chains. This company didn’t even exist 18 months ago, and now it’s the biggest bookseller in the country.

Amazon.com offers as much customer service as the most upscale bookstore and more. You can order online, via fax or phone, using your credit card. All from home. At a 40% discount. What could be more convenient? And how can traditional bricks and mortar bookstores compete? As you drive around you continue to see the big chains putting up more bricks and mortar. Sure, they have customers now, but in the future, as the internet explodes, they will operate at a significant cost disadvantage. Many of their customers will look to alternatives and they may find themselves going the same way as the small, independent bookstores.

Another successful website is Wal-Mart OnLine. Wal-Mart saw that the markets are saturated with low-cost mega stores, and that current market demographics are already served. It decided to look for more upscale customers online, and targeted new customers with a co-branded MasterCard. There are more than 30,000 items available on the site, and it is generating real business every day. You can browse, look for sales, even order lobsters. It makes you wonder about the long-term prospects for their local stores.

Disintermediation is a threat to every industry because the information – say on book titles – that used to be available only to a few, can now be made widely available. Why should I stand in line and wait for a clerk to search the computer for a book, when I can do it at home? Let’s look at what we can learn from companies that are successfully doing business on the Web, that are developing the skills and expertise to disintermediate the businesses that are not ready to compete in a virtual market. How do they operate differently from the way banks operate? Chuck Martin, in his book The Digital Estate, gave some examples of what it takes to compete effectively in an Internet environment. He says we have to change the way we think, the way we compute, and the way we do business. He shared six common business practices of successful companies working in the digital environment:

• One, they launch and learn. They get products to market fast. Even if a product is not completely ready, it’s moved to the market, and improved as consumers use it. The thinking is that a product cannot be fully developed without hands-on customer experience, and it will be finished in a live environment.

• Two, they operate at what he calls “warp speed paranoia,” acting as if a competitor is at their heels, constantly. They work fast, long and hard.

• Three, they believe that flux is good – they know market dynamics are constantly changing, and traditional business approaches likely won’t work.

• Four, they believe the ink never dries – they change their business plan regularly, because the market changes so quickly. Five-year plans become one-year plans. One-year plans become single-quarter plans. Planning is necessary, as is the willingness to change the plan as soon as market forces demand it.

• Five, they tweak products – products are constantly changed with input from the customers. They are prepared to shape the product as consumers get some experience with it and provide feedback.

• Six, they always assume change is the rule.

This is a model for success in the new virtual marketplace. It’s a far cry from the way we learned banking and a far cry from the way many banks operate today. But it’s not too late to learn. Banks that actively manage these challenges will increase profits. The key is leveraging information about customers to enhance profitability – the information that banks may already have. For example, banks have got to know how consumer behavior preferences and attitudes affect profitability, so banks can develop effective and profitable marketing programs. Also, banks need to understand how each channel of service delivery is linked to profitability.

By coordinating product design and positioning to appeal to the right segments and motivate the right behavior, banks can leverage the new electronic channels and continue to be the central delivery point for financial products and services.

When sellers and buyers come together online, a successful transaction will require security, accessibility, information, confirmation, monitoring, tracking, and fulfillment. Banks must look at each form of value in each step of the transaction to ensure their continued participation in virtual transactions.

In his book, Martin Mayer asks an important question: “Will banking become just a little bit of application code in a smart network?” The answer is no, unless we let it happen. Digital technology is creating a tidal wave of application capabilities that provide unprecedented levels of convenience, utility, and gratification for consumers and businesses that put a high premium on speed and efficiency. To ensure banks are prepared for the opportunity, these applications must be harnessed into safe, cost-effective, globally inter-operable and accepted products and services that innovative banks can offer to their best and most profitable customers.

Some have likened the Internet paradigm – with its open, nonproprietary, ubiquitous, totally accessible, and virtually free environment – to such major changes as the PC or TV. But in its ability to leap geographic distance, provide universal knowledge of what exists, provide global availability, and (when software and bandwidth problems subside) impact time constraints as well, the internet may be the most significant event affecting commerce in this century – and perhaps the next. The impact to banking will be profound.

How we manage rapid change will determine whether or not we survive. Andrew Grove from Intel says you can ask yourself the following question: Is your key competitor about to change? To figure out who your key competitor is, he offers the “silver bullet” test. It works like this: if you had just one bullet in a figurative pistol, whom among your many competitors would you save it for? He says that, asked point-blank, most people can give an answer quickly.

He goes on to say: “When the answer stops being as crystal clear as it used to be, and some of your people direct the silver bullet to competitors who didn’t merit this kind of attention previously, it’s time to sit up and pay special attention. When the importance of your competitors shifts, it is often a sign that something significant is going on.”

Grove advises that you look at key partners to see if there have been shifts in their industries, as well. Finally, look around internally. Are there people who no longer “seem to get it?” Do they not understand who matters in the industry? Do they not know how things are done these days? If they don’t get it, or you don’t get it, he suggests maybe the “it” has changed around you.

One of the tactics for dealing with this change Andrew Grove suggests is mapping out the industry on paper, just as you map out your organization’s structure. Use this map to start internal conversations and develop a common view of the industry. This tool can help clarify your direction and lead you out of what he calls the “valley of death.” “If you’re wrong, you will die,” he says. “But most companies don’t die because they are wrong. Most die because they don’t commit themselves. They fritter away their momentum and their valuable resources while attempting to make a decision. The greatest danger is in standing still.”

If you sense you are descending into the valley of death, first look at how you use IT. Successful banks in the future will look to IT as a fundamental driver of future business opportunity. They will see IT as a resource to be leveraged, not an expense to be maintained. They will use IT as a solutions integrator to business requirements. They will manage IT as a strategic benefit.

My point is that you cannot afford to outsource your technology and assume it’s taken care of. In the future, technology will be your most important corporate asset. I am not suggesting you never outsource. In fact, to stay competitive and keep up with the pace of change, you likely need a sourcing strategy that combines internal and external resources.

Surround yourself with talented technologists, and manage outside resources that bring unique benefits to the table. Let me give you an example. About two years ago, MasterCard began looking at the enormous storehouse of data we have about card transactions to see what business value it could offer. Members would ask for reports that were important, but the systems were not set up to generate the information members needed without a great deal of work and time. MasterCard embarked on an effort to use new data-mining techniques to enable our members to tap into our enormous store of data – over one terabyte in size.

We brought together 80 people and gave them 150 days to develop a new product. We managed the project internally, but relied heavily on strategic alliances with companies like Oracle, AT&T, and Information Advantage. At the end of the project, we had the credit card industry’s first data warehouse, called MarketAdvisor, accessible through our MasterCard OnLine platform. We had a significant new product that allows our members to turn data into information they can use to target their credit card marketing programs. It was a significant effort, and it has been recognized as one of the best uses of datamining in the industry.

So it all comes down to this: the investment you make in technology today, both in money and talent, will determine how far you can go in serving the next generation. It’s time to create new business models that reflect the experiences of companies that already compete electronically, that more of your customers will begin to use. It’s time to look at your legacy systems, and see if they will enable you to compete in the new virtual world. If you don’t believe your legacy systems are inflexible, ask your IT director how the year-2000 conversion is going.

We started off taking a journey into the future. Here’s MasterCard’s definition of our destination: we believe that in the future you will be able to move money to anyone in many forms, from anywhere, more conveniently and with greater security.

That’s the vision that is driving our technology decisions. The stakes are high. But the opportunities are huge. The decisions we all make right now are tough ones. We can just start to see the valley of death, and we have to find the right trail for our organizations. We’re headed through uncharted territory. The journey could be treacherous. And we won’t even know for sure when we get to the end.

The technology choices you make today will influence your size, your strength and your earnings, tomorrow. Choose well.

ELECTRONIC BANKING: WHAT THE YEAR 2005 WILL LOOK LIKE

Marnie J. Kinsley
Executive Vice-President & COO, mbanx Canada

Business Computer Convergence ‘98, Calgary, May 7, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

When I was thinking about this presentation, I thought about my two favorite versions of the future. One is “Star Trek, The Next Generation,” which is perhaps a little too far into the future for today’s topic. The other is a person who thinks about the future and the past in a very approachable way, Stephen Hawking, the distinguished professor of mathematics and astrophysics at Cambridge University and best-selling author.

In his book A Brief History of Time, Hawking moved the world’s thinking forward by explaining clearly and quite simply some of the most complex theories about time, life and our universe. Hawking’s particular appeal is his ability to deal with large issues that are shaping the universe.

At mbanx, we take the same approach as Hawking does. Our world may not consist of black holes and collapsing stars. But the future of banking does consist of virtual branches and voice-to-voice relationships. At mbanx, we are committed to making the financial lives of our clients, convenient and clearly understandable. And, like Hawking, we’re responding to those large issues that are shaping the future. In our own “Brief History of mbanx,” we have responded to these emerging realities.

My presentation this afternoon has three parts. First, I will very briefly describe the emerging realities according to Bank of Montreal. We call them “drivers of change.” Second, I’ll talk about our response to these drivers by launching mbanx. And third, I’ll tell you how Emfisys, the bank’s information technology group, has played a crucial role in our success.

And I have a message for you, as chief information officers. My message is that the critical success factor for IT leaders, executives and managers in this time of rapid change is to become one with your customers. As CIOs, it is only by fully understanding your customers’ lives, that you can keep up with them. It is only by personally experiencing and experimenting with the technology that your customers are using, that you can anticipate the high-tech products and services that your company needs to survive and prosper. And it is only if you are physically, emotionally and intellectually integrated into the home and office environments of your customers, that you will be prepared for the next breakthrough that your marketing department or engineering division is going to come up with.

So, first, the drivers of change according to Bank of Montreal. Nobody ever said that being a banker in the 1990s was easy, and with good reason. Throughout the decade, we have witnessed powerful social and economic forces that have changed the shape of our industry, creating new patterns and parameters and presenting us with the stark choice: adapt or suffer the consequences. These drivers of change, as we call them, are probably familiar to everyone in this room. But I will mention them briefly, because they shaped the reality that created mbanx and they direct us to what the year 2005 will look like.

First, there’s globalization. Many companies are becoming global players just to protect their home markets and maintain their competitive position. As Matthew Barrett, our chairman and CEO, explained during our recent merger announcement, “We are creating a Canadian bank that can go head-to-head with any bank, anywhere.”

Globalization is also reflected in the growth of transactions across continents or national boundaries. Capital flows, manufacturing, and even sales of services are moving us towards a borderless bank. Indeed, the world is shrinking for all of us, and as Marshall McLuhan once said: “We live in a global village.”

The second force for change is the convergence of telecommunications and computing. Convergence is putting more information in the hands of more people. Knowledge and brainpower are clearly the new workplace commodities. This is very clear in the banking industry, which has certainly become an information business rather than a cash business. In this knowledge economy, hierarchies have been flattened, teams have become a critical success factor and more individuals in a company now take “ownership” of a process. Employees are empowered as information flows freely across the internet or corporate intranets.

The third force transforming our economy is restructuring. Long-protected monopolies, such as telecommunications, are now open to competition. Many companies have been forced to reorganize, re-engineer and rethink their business strategies, while absorbing losses to foreign entrants and small startups.

In financial services, regulatory changes have allowed banks, brokerage firms, mutual fund companies and insurance companies to restructure and expand their offerings into each other’s lines of business. Restructuring of North America’s financial industry has also brought many foreign competitors into Canada. ING, Wells Fargo, Merrill Lynch, MBNA, Capital One, GE Capital, Goldman Sachs, Fidelity Investments and Countrywide Mortgage Company are just a few of the foreign companies now, or soon to be, competing in Canada, thanks to deregulation.

Finally, profound demographic shifts and social change within the North American population have changed the marketplace forever. Consumer expectations have risen rapidly. Yesterday’s ceiling is today’s floor. Consumers demand zero defects…and faster, better, more reliable service…and they want it now. Their appetite for high-quality service will continue to grow. Companies that don’t provide them with the highest quality service will, quite simply, lose customers.

Globalization, convergence, restructuring and rising customer expectations. These drivers have worked in concert to rewrite the rules of our world for 2005 and beyond. Companies that don’t adapt will miss opportunities and quickly fall behind competitors who embrace these changes and they’ll find themselves in a black hole from which they will never emerge.

I’d like to illustrate the aggressive, successful response of the bank I know best, mbanx. New competitors have sprung up from within the financial services industry and from without, offering an assortment of new products and services in new ways, and often leveraging their own specific competencies to put the traditional industry players under severe price competition.

When an entrepreneur like Bill Gates, with his strategic sweep, acquisitive zeal and deep pockets, labels your industry a “dinosaur” facing extinction, you would be wise to sit up and take notice. Well, we did more than that. Bank of Montreal had identified these major drivers of change some time ago and we made the commitment to deal decisively with them. That commitment was realized by the launch of mbanx, our stand-alone virtual bank. It was just over eighteen months ago, on October 16, 1996 to be exact, that Bank of Montreal made history with the launch of mbanx, Canada’s first virtual, electronic bank. The concept for mbanx was the result of three years of market research and technology design. When the marketing group brought the concept to Matthew Barrett, he liked it so much that he decided the implementation should go ahead at breakneck speed.

In a matter of weeks, rather than months or years, Emfisys, put together a fully operational electronic bank with telephone, internet, fax, ABM and online banking functionality. And in eighteen months, our electronic platform has taken on over 120,000 clients and now supports 825 mbanx employees. By launching mbanx, we signaled to our customers, to our competitors and to ourselves, that Bank of Montreal is a leading force for innovation in the North American financial services industry…and that we have indeed built an organization that not only accepts change, but is prepared to embrace it.

Whenever I tell people that I am from mbanx, the reaction is usually the same. They always know the name, but most people are not really sure what mbanx is all about. I think that what throws people is the word “virtual.” It’s a term that was coined to describe an electronic environment like the internet or computer simulation games. Virtual has become one of the key words of our time. Virtual, in its new sense, is defined as “having the effect but not the actual form of something.” That’s especially accurate as it applies to virtual banking. Because mbanx works like banking. It has the same effect as banking, but it clearly does not take the form of the familiar branch on the corner of the street.

To most people most of the time, I suspect “virtual” means something like “totally super high-tech.” It suggests a world without people, a world which, at best, is like the Holodeck on the Starship Enterprise, and at worst, like being trapped inside your own PC. And for me, that is definitely not what virtual banking is all about. I believe that virtual banking is a paradox. It is a creation of technology. It depends completely on technology. But it’s not about technology…it’s about people.

Virtual banking brings the skills and motivation of one set of people, our employees, together with technology to give another set of people, our clients, a level of service perhaps never seen before in the retail banking market. We are a person-to-person bank that gives our clients access to their financial affairs anytime, anywhere, anyhow. We are a full-service bank for individuals and owners of small businesses who want to conduct their banking on their own terms, people who like to be in control of their financial lives but are too time starved to go to a branch. These are people who prefer to bank by telephone, fax, ABM, personal computer and even mail rather than take time out of their busy day to go to a bank building.

Our proof of the concept is that one of the busiest days in our client service center last year was December 25th, Christmas Day, between the time when the gifts had been opened in the morning and dinner was served at 6:00 p.m.

If this electronic version of life seems a little implausible, I’d like to ask you to think for a moment about the recent evolution of the financial services marketplace. In the days before 1980, the physical branch was the focal point of our relationship with customers. It was low-tech, if you like, but it was “high-touch.”

During the first half of the 1990s, bankers developed a multiplicity of add-on channels like telephones, automated banking machines and computers, channels that were high-tech, but which isolated the client in a low-touch relationship. Today, we are entering the third stage, when high-tech can be used more and more to provide high-touch in the relationship between the bank and its customers.

For the year 2005, I see the fourth stage, when high-tech enables our clients to design their own “home away from home” on the mbanx internet site, customized by them to manage their finances automatically most of the time, with an mbanx manager available face-to-face on the screen of the electronic device of their choice, via video, 24 hours a day, 365 days a year.

But back to today. mbanx is the new union of high-tech and high-touch in reality. Our virtual bank is designed for a particular market segment, time-pressed clients who are comfortable with the new ways to access their bank, like computers and the telephone. This is a rapidly growing segment and perhaps in 2005 it will be the largest segment, when all the 10-year-olds who are now explaining the internet to their parents grow up and need a bank. But it is the concept of tailoring the service to one part of the market that is truly new, and it’s a concept that makes possible new levels of service, because we are no longer constrained by having to make one size fit all.

Please don’t misunderstand this point. I am not here to announce the death of the bank branch. Branches will always be a vital part of banking, and mbanx clients can go to any Bank of Montreal branch if they really want to, although we have found that they rarely do. But branches are already rapidly ceasing to be transaction centers and are becoming financial services offices. Eighty percent of all Bank of Montreal customer transactions today are completed in electronic format. Branches have professional offices, a place where you go monthly or as the need demands rather than every week.

A virtual bank is open 24 hours a day, every day of the year – a massive change – that is possible through the internet, telephone and ABM. Our clients can mix and match in the way that suits them best, because while virtual banking is about accessibility, it is also about choice.

mbanx is a bank for real people who need assistance, seek advice – and even make mistakes – and who sometimes need to talk to a financial manager. And the electronic technology that makes virtual banking possible also means we have been able to create a system that pays rewards to our clients for the amount of business they do with us each month, and thereby makes it worthwhile for them to bring all their business to mbanx.

You can appreciate what a huge change that is from the not-too-distant days when the people who handled your mortgage had no idea where you might be buying your mutual funds and did not have the full picture of your financial condition. Again, technology is making it possible but it is people who will make it happen.

This brings me from the “what” of virtual banking to the “how” of high-quality, high-touch service provided each and every time a client calls or writes us a note. Our first priority at mbanx was to establish a standard of transaction quality that is near-perfect in principle and consistently attained in practice. This is what we call our STAR quality: Success Through Accountability and Responsibility. This is nonnegotiable. As IT executives, you know that you can’t constantly ask your clients to co-engineer with you while you debug a system that is supposed to be in production and operational.

Like a blind date, you pretty well have to get it right the first time you meet. And if you do that, you also free up people to do the things people do best, such as talk to clients. And to do that, you have to create the optimal work environment for the 825 people at the center of a virtual bank, full of diverse and highly motivated individuals with a vast array of expertise.

At mbanx, we have moved away from the repetitive, mass-production image of a traditional call center and have moved toward the model of the trading room, high-profile, rewarding both mentally and financially, and on the leading edge of change. In fact, mbanx has become a laboratory for best practices in human resources for the entire bank, and we have a lot of fun implementing our new ideas. The latest one is called Brainwaves, a center for creativity and innovation that will facilitate problem solving and innovative thinking at all levels of mbanx.

We believe that the true core of high-touch banking, for today and for the year 2005, is to assess and hire only those people whose personal attributes and values are aligned with those of mbanx. We look, in other words, for people who want to serve the client above all else. Putting it simply, we hire the values and teach the skills. We hire people who are personally in tune with the five values we have developed for mbanx and which we believe have given us a unique and sustainable competitive advantage. Let me list them for you:

• First, change is good. This means we must constantly innovate. We must recognize creativity. Challenge old assumptions. Be willing to learn from mistakes.

• The second is we believe in better. We must learn continuously. Search for ways to improve the quality of clients’ financial lives. Provide the resources for our employees to grow.

• A promise is a promise. We must have clarity about our commitments, our capabilities and about the timeliness of our commitments, with clients and with each other.

• Simple rules that work. We want to drive out complexity everywhere in our business, particularly in process, communications and access.

• Everyone is important. Everyone, without exception, is important. We must treat all others with the respect we would want for ourselves, all the time.

These are the mbanx values. They may not be appropriate for anyone but us. But for us, they are the defining difference in building a strong culture, guideposts that enable our employees to use their best judgment when dealing with clients, rather than a complex set of rules. And they work. mbanx is well-known in the Bank of Montreal as a fabulous and fun place to work and we are experiencing significantly lower turnover than the typical telephone service center encounters. We had tremendous success this spring at the universities where we recruited, because our reputation is preceding us.

The final step that I will talk about today that we are doing towards the goal of a virtual bank run by and for people, is to “fine sort” the client base so offerings appropriate for ever-smaller groups can be developed, until eventually one can be designed for the “segment of one,” the individual client.

Database technology – warehousing, mining, modeling – has become mission critical for mbanx, and I suspect that it is mission critical for your company, too, even if some of your colleagues have not realized it yet. Our aim is to reach a level where each customer has full power to choose among services, products and channels of access at any time…but his or her usual needs and preferences are built right into the system, and are met without the need to explicitly choose them every time. mbanx wants to be as comfortable as a favorite chair, a familiar home away from home for financial needs.

This brings me to our most important business partner in the delivery of the mbanx experience to our clients, that is, Emfisys, the reinvention of the operations group in Bank of Montreal. Until recently, operations accomplished its goals by being an inwardly focused group with limited customer interface, focused on transaction paper-based processing, and maintaining the reliability, stability and availability of computer and communications systems.

The present and future of Emfisys is about transforming to a business partner relationship with the lines of business in the Bank of Montreal Group of Companies. Emfisys has a clear, upfront understanding of what drives costs and produces value in a given line of business and an equally clear upfront contractual understanding of services, volumes and prices. With over 7,000 employees and sixteen locations worldwide, Emfisys is a large, stable, global company that is positioning itself to work with the lines of business to satisfy customers and create shareholder value.

Emfisys has two distinct service offerings. One is the traditional operational services, which adds value by ensuring operational excellence in the infrastructure and technology required to provide seamless, continuous customer access to an increasing array of products through a growing number of delivery channels. The other is consulting services, which adds value by providing the leadership in technology-related planning, investment and business performance improvement through research, redesign and reinvention. In terms of mbanx, this is the service that I am going to focus on, because it’s consulting services that has made the difference in our success.

The consulting services area includes:

• Client-focused account management

• Project and resource management

• Designing and building the latest in infrastructure

• Research and development of alternate delivery channels

• Development and sourcing of the most appropriate software and systems solutions

• Strategic IT planning

• Knowledge management through datamining and modeling

• Business process redesign and reinvention

• Change management best practices

• Identification, negotiation and management of strategic partnerships and alliances for IT

They measure their success if three things happen:

• They are the preferred supplier to a line of business because they’re unbeatable in the marketplace

• They are acknowledged to be a proven change agent

• They are valued as an indispensable partner in satisfying clients and creating business value

The consulting services area is a growing business for Emfisys, employing 20% of total staff and generating 20% of revenue. It has three divisions located in Toronto, Montreal and Chicago, namely, solutions and applications, business process improvement and, the most recently created division, global information technology, which provides knowledge management, technology planning and integration, internet and solutions productivity centers of excellence.

The solutions and applications group had a huge role to play in the delivery of mbanx. It’s a well-aligned group of over 50 business specialists dedicated to mbanx technology design. The solutions and applications senior vice-president’s office is right next to mine, not on some other floor or in some other building. He is as close to my business as I am, and to be honest, he sometimes knows about stuff before I do! But that’s the way I like it.

Solutions and applications provides mbanx with leadership in technology investment planning and works closely with us as a general contractor responsible for developing or sourcing the most appropriate technology solutions for mbanx. They operate an ongoing lab for research and development and they have several people who basically live on the internet, looking for new ideas and conversing with our clients about their requirements. They manage our contracts with Intuit for our Quicken connection and with Microsoft for our Microsoft Money connection. They work with Quadravision for our personalized internet site application and with IBM and other vendors for our integrated voice and data line for internet clients.

The other key consulting service is business process improvement. Since the very beginning of mbanx, they have provided design services for our business processes and change leadership. They have helped us achieve dramatic improvements in cost control, revenue, quality, client service and product delivery. We have 20 full-time people from BPI devoted to mbanx.

Both of the executives from solutions and applications, and business process improvement are members of our weekly mbanx executive meeting, because they are an integral part of our business. We won’t make decisions without their advice and expertise. We have tried to go it alone a couple of times, and found ourselves in our very own black hole.

Which brings me to the conclusion of my talk. These then are my messages today: the one, a vision of what technology can do and is doing to make banking not merely more convenient but more personal, responsive and humane…the other, a call to action for CIOs.

If you fully integrate yourself into the business that you are partnered with, you can enhance the customer satisfaction in that business and thereby greatly add value. If you stay isolated in your own universe, you may find yourself a collapsing star.

INFORMATION-CENTERED NETWORKS

Bert C. Roberts, Jr.
Chairman & CEO, MCI Communications

Bear Stearns Technology Conference, New York, June 17, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

I’m here today to talk about some of the trends we see in networks and computing, and to offer some suggestions about how companies can succeed in a rapidly emerging new environment.

We’ve all heard the promise of doctors interpreting CAT scans of patients in remote sites, or far-flung engineers collaborating on the design of jumbo jets. But that’s not what I want to talk about today. My discussion isn’t about fiber optics or fractal compression. It’s not about bits, bytes, bells or whistles. It’s about how technology can create virtual offices and intranets and call centers that help companies run their business and improve the bottom line. It’s about how more customers than ever before are connecting their people to the information they need, when they need it.

And today, whether I am talking about content or communications, I am really talking about one thing – intelligent networks that move information, connect people and create competitive value. Some have called this network-centric computing. We call it information-centered networks, because we believe that any benefit we create from any hardware, software, system or network will exist only in relation to how it moves, manages or maintains information for competitive advantage. To be successful at a time when information rules, we need to capitalize on an environment marked by convergence, on an architecture driven by flexibility, and on a marketplace ruled by competition.

Convergence, flexibility, competition, together they will shape the future of information-centered networks. Let’s take them one at a time.

First, convergence. Some people have used convergence to describe an impending marketing free-for-all that puts Time Warner against AT&T or Microsoft against Disney. That’s not what I mean. For us, convergence has a more literal meaning: it is the continued blurring of any distinction between networking and computing capabilities. Today, it’s almost impossible for our customers to distinguish one technology from the other. The truth is, they don’t care which is which, nor should they have to. What they do care about are the solutions that the technology provides.

A good example of convergence is CTI, or computer-telephony integration. And the best example of where CTI is being used is in call centers.

MCI Call Centers of course. In the future, call centers will be an even bigger deal – to MCI, and to all of our customers. Because both the technology and the market itself are on fire.

Today, 75% of all 800 service calls terminate in a call center. So MCI is leveraging our technology platform as a product unto itself. And our combination of technology, consulting expertise, and network services gives us great advantage in addressing the $100-billion market opportunity for call center services.

CTI is by no means the only example of the convergence of network and IT technologies. It’s happening everywhere. Perhaps the most prominent example of convergence is the Internet. The Internet crystallizes a fundamental new paradigm: information is at the center of the Network.

And now, the Internet has the speed and capacity to move information as never before. One week ago today, MCI and BT introduced the first global Internet backbone, through our joint venture, Concert. It’s called “Concert InternetPlus.”

We will create a new global Internet backbone and link the MCI and BT domestic networks to it. That means installing and interconnecting 20 new regional Internet “super-hubs” in key locations around the world. We will commence service with eight super-hubs – three in the US, and hubs in the UK, Germany, the Netherlands, Japan and Australia. The US hubs will be interconnected with links that run at 155 megabits-per-second. The others will be interconnected with high-capacity lines of 45 megabits per second. And the system will be operated with state-of-the-art routers and ATM switches.

Concert InternetPlus will provide PTTs, businesses, and Internet service providers with an array of Internet access and value-added services. We think we are making Internet history here, because for the first time, businesses will be able to rely on the Internet as an industrial-strength substitute for private lines.

Up to this time the Internet, as the name implies, has been a collection of thousands of individual nets, and only as strong as its weakest link. Concert InternetPlus eliminates the weak links and will provide a worldwide network under a single central management. We expect Concert InternetPlus to help raise the Internet to a new performance level, especially for bandwidth-hungry applications. Concert InternetPlus will deliver premium Internet service – priced and supported accordingly – to businesses around the world.

MCI’s leadership on the Internet should not come as a surprise. We helped build and operate the first 1.5 megabits-per-second research Internet backbone – the one run by the National Science Foundation – in 1987. And we are fortunate to have a team of experienced Internet experts on our staff, including Dr. Vint Cerf, the father of the Internet and the co-developer of TCP/IP, the Internet protocol.

As MCI moves forward with our Internet initiatives, we will be working with our technology partners – Microsoft, DEC and Intel – to implement these new services.

Just last Tuesday, we announced a new strategic alliance with Intel and the first result of that alliance: NetworkMCI WEBMaker. Network MCI WEBMaker is an easy-to-deploy combination server, router, firewall and management service package. It is targeted at small- and midsize businesses that have yet to establish a presence on the Internet.

In addition to our alliance with Intel, we are partnering with Digital and Microsoft to develop a fully integrated suite of Internet-driven business services, including InTRAnet, groupware, and electronic mail and messaging. These solutions combine MCI’s robust messaging network, Digital’s Alpha server systems, and the Microsoft Exchange server.

And here’s the most important thing. Our Internet initiatives and alliances fit perfectly with the explosion of corporate “InTRAnets” that represent a major evolutionary development of the Internet. InTRAnets use Internet technology behind firewalls that restrict traffic to sites selected by corporate network operators. But InTRAnet users can access the full breadth of the Internet.

Nineteen ninety-six already is being called, “The Year of the InTRAnet.” PC Magazine noted in a recent article on InTRAnets: “The wave of organizations setting up InTRAnets today is reminiscent of the move from corporate networks to departmental LANs over the past ten years.” It noted that the proliferation of new InTRAnet-related products is unprecedented since the early days of the PC industry.

In this “Year of the InTRAnet,” installed servers for InTRAnet service will exceed for the first time those used for the Internet, and shipment of new InTRAnet servers will be twice those for Internet. And by the year 2000, Zona Research estimates there will be 3.2 million servers installed for InTRAnet against 650,000 for Internet use. All this in the context of overall Internet growth of 100% per year.

Businesses find that InTRAnets are a less expensive, less complicated way of providing unifying communications within their enterprises. The movement to LANs over the last several years was driven by the need to share files and printing resources. The establishment of InTRAnets, on the other hand, lets an organization share information in nearly any form over any kind of hardware and any kind of operating system.

Zona Research predicts – and it makes sense – that growth of InTRAnets will be much more sustained and linear than growth in the Internet. Internet growth is likely to experience a period of market digestion that follows the hype generated by early adopters. The InTRAnet, on the other hand, will grow continuously. Benefits are obvious. And the technological infrastructure will be there. This is not the case with the often congested and sometimes unavailable Internet.

Speaking of infrastructure, that is the key issue on another hot Internet topic – Voice Over Net. We plan to be a leader in the developing VON market, although we do not in any way see VON as a substitute for today’s switched network for voice traffic. We do, however, see VON and Fax Over Net as a potential opportunity we want to explore.

With Microsoft, we recently announced a voice and document service, called NetMeeting, that will rely on the new international standards for voice and video over the Net.

But this area is still very much in development. There is just not enough capacity in the Internet today, notwithstanding huge growth, to handle a substantial increase of voice, fax and video packets.

MCI has the largest Internet backbone in the world, and if we dedicated our entire Internet to our own long distance traffic, we could handle only 6% of that traffic. Any non-carrier Internet Service Provider that tries to exploit the current VON vogue will soon find itself out of bandwidth and out of business at today’s flat pricing schemes.

Currently, VON takes two fast computers with two fast modems running the same software and connecting at a server at a prearranged time. Performance is uncertain and unreliable. Congestion, which is most serious on international links, degrades quality, making conversation impossible.

Even with predominantly text traffic, Internet users in Europe experience brownouts around 3 p.m. each day, when the US wakes up and goes online. The Inter-Arrival time of the packets slows down, and the packets don’t arrive fast enough for speech to be formed.

However, MCI is developing premium Internet services that will be suitable for applications such as voice and fax. These services will also permit differential and time-based billing that will, in turn, permit carriers to charge appropriately.

The real opportunity to make money today on the Internet is the InTRAnet. The InTRAnet is part of the third wave of Internet functionality – linking business processes to each other, rather than just connecting computers or providing access to information.

Businesses use InTRAnets for employees to interact on human resources issues. One example is the management of 401(k) funds.

Companies use InTRAnets to connect with customers and vendors in expanded InTRAnets. Fedex led the way here when two years ago it opened its package tracking system to its customers.

Corporations need and want and will pay for the bandwidth needed for multimedia applications. They need and want and will pay for Web-hosting services. They need and want and will pay for security-firewalls and encryption. And most of all they will need and demand a high quality, GLOBAL service they can count on to replace more expensive leased-line data networks.

MCI plans to be a major player in the development of the InTRAnet, as it has been with the Internet. And we will be looking to our most demanding customers to tell us what products and services they want from the evolving technology. For example, through our high-capacity Internet connections, our HyperMedia services are providing NBC with the ability to distribute video material on demand to its affiliates.

We believe that together, the Internet and InTRAnets represent a society-changing phenomenon that will spur extraordinary growth throughout our industry. Last year, for MCI, it was a $100-million business. Today, it is growing at a rate of 15% to 20% a month. And we expect that it will grow to $2 billion for MCI by the end of the decade.

Clearly, the Internet and InTRAnets are at the core of convergence and the heart of information-centered networks. When you think of convergence as a force that brings everything together, think of a flexible architecture as the way of making it all work. For MCI, planning and implementing a modular framework gives new power to our information-centered network and new revenue to our bottom line. Each technology component must work as an integrated part of the whole. So the overall intelligent network, in essence, is a collection of modules, or building locks, that can be combined and recombined in an unlimited number of ways.

Flexibility also applies to what we call our “INFOstructure” – MCI’s combination of marketing, intelligent networking, flexible billing and modular customer service. In other words, the whole end-to-end package needed to create and deliver a variety of services and solutions to our customers.

Consider MCI One, our newest brand. MCI One is an integrated package of long distance, paging, Internet access, home security and, soon, local service. Like our systems elements, any or all of these products can be mixed and matched as needed. Ultimately, this modular approach lets us think first about what the customer wants, rather than what the technology can do.

The final driving force behind information-centered networks is “competition.” Competition comes in two distinct flavors – the competition you face, and the competition your customer faces. At MCI, these are intertwined: the competitive advantage we create for customers directly determines our own success.

Over the years, perhaps the most important lesson we’ve learned about intelligent networking is this: its real value lies not just in efficiency, but in its boundless potential as a driver of innovation and revenue – for us and for our customers.

“Competition” is why we are so bullish on the prospects of an expanded communications industry, spawned by the new Telecom Act of 1996. The opening of the local telephone market will bring a rush of new technology and innovation to a marketplace that is starving for someone to address its growing needs.

Our customers have always come to MCI when they wanted to push the envelope. Ten years ago, The Home Shopping Network asked MCI to help them start a whole new industry through the integration of our intelligent network, innovative calling centers and television.

And today, when you call Citicorp for account information, your call is answered by software on the MCI network with access to Citicorp systems. It’s hard to tell where the Citicorp network ends and the MCI intelligent network begins.

For MCI and for our customers, competition means using the power of information-centered networks to change the way work is done and money is made. Networked companies using fast-moving, accurate information, will thrive in the next century by taking over new playing fields before their competitors have even figured out the rules.

One place MCI has added competitive value is with our sales automation efforts. In fact, we recently unveiled the first of our Sales Rally Centers – an environment that truly delivers on the promise of the virtual office.

Every advantage our Sales Rally Centers create is made possible by the timely movement and management of information that MCI’s technology platform delivers.

The deployment of useful technology into the hands of our sales and service teams has been one of the key drivers toward profitability improvements and higher productivity. And Sales Automation has also become a product that we offer to our customers to give them a competitive edge.

MCI’s core business is telecommunications, but our core strength is understanding what customers need to compete. The Boston Beer Company doesn’t know and may not care that our network routes and bills over 200 million transactions a day. They probably have no idea of how many MIPS of processing power our IT people oversee or how many terabytes of data we manage. But that’s just fine. Our customers know that we understand the day-in-and-day-out challenges they face, and that MCI is there with them.

The mission for information-centered networks is to use technology as a means toward providing the solutions companies want. There are many examples of how the network has reshaped the way companies operate. Take the NASDAQ Stock Market. It’s now the fastest growing securities market in the world and exceeds the New York Stock Exchange in total share volume. And at the heart of the NASDAQ network is the MCI network.

Today, it is clear what the market is demanding: technology that exploits convergence, is characterized by flexibility and creates business value. Customers want information that drives competitive advantage.

We believe that information-centered networks, whether defined by the corporate enterprise or the global Internet, are the key to delivering that advantage.

THE SURVIVAL OF THE CANADIAN GROCERY PRODUCTS INDUSTRY IN THE 21ST CENTURY

Claudio F. Bussandri
President & CEO, Medis Health & Pharmaceutical Services

The Canadian Club of Montreal, January 30, 1995
(Mr. Bussandri was president of Lantic Sugar at the time this speech was made.)
Published in The Corporate Report No. 11 (April 15, 1995)

When I was asked to talk about the future of the Canadian grocery industry, I started thinking about how difficult it is to forecast the future, to do any kind of scenario planning, especially in Canada.

For example, here’s the situation: You’re the owner of two cows. A socialist scenario would be: give one to your neighbor and keep one for yourself. A communist scenario would be: the government takes both and gives you a little milk. The capitalist scenario would be: you sell one cow and you buy a bull. The Canadian scenario would be: the government buys both cows at inflated prices, shoots one, milks the other, throws away the milk, and pays you not to raise feed for the dead one.

Well…to get back to our topic. In my talk, I’ll be covering three main areas: first, a brief overview of the Canadian grocery industry; second, the key challenges facing the industry; third, a synopsis of what the industry must do for future survival.

First, some industry data

Canadians every day come in contact with hundreds, if not thousands, of grocery products – at home, in restaurants, hospitals, hotels, in the workplace.

The grocery industry includes not only the manufacturers of food products and nonalcoholic beverages but also makers of products other than food, such as hygiene and beauty products, cleaning products and paper products. Most of these products are sold under commercial brands, names that are familiar, like Tide, Sunlight, Kraft, Nestlé, Lantic, Coca-Cola, Kellogg’s, Kleenex and thousands more.

However, we’ve got a contradiction. We’re the industry that’s most intimately bound up with the consumer’s everyday life and environment…yet our contribution to the Canadian economy is hardly known!

Here are a few facts and statistics:

• Sales of grocery products are approximately $50 billion. This is about 10% of the manufacturing GDP in Canada, which is ranked second in importance and approximately 7% to 8% of Canada’s GNP.

• The industry employs over 220,000 Canadians and is among the top three employers in virtually every province.

• Exports are approximately $7 billion; imports are about $7.5 billion.

• 175,000 individual products are available for sale in Canada with the major brands and major manufacturers accounting for 35,000 and representing about 80 per cent of the sales.

• The primary distribution channels (and major customers) of the industry are:

Grocery stores 60%

Drug outlets 10%

Food service outlets 7%

Mass merchandisers 6%

Club stores 5%

Convenience stores 5%

• The grocery industry in Canada represents good value. It’s very efficient despite Canada’s vast geography. According to the OECD, Canadians spend the second lowest proportion of their disposal income (after the US) on home food consumption…in the world!

An outline of challenges facing the industry

Challenge number one

The number one challenge will be to break the old paradigms and accelerate the recent transformations in the industry in order to survive and prosper.

The 1989 Free Trade Agreement (FTA), the recent economic recession, NAFTA in 1993, and the GATT have all reduced or eliminated tariff and non-tariff barriers. As a result, only the low-cost producers are surviving in what is now becoming a North American market.

The grocery industry is well into the process of adapting to this North American market.

a) Mergers and acquisitions are continuing at a steady pace, resulting in even larger and larger companies. In the last two years Kraft/General Foods acquired Nabob Food, BC Sugar bought Lantic Sugar and Maple Leaf Foods, Dough Delight.

b) Many of the grocery companies have reorganized on a North-South basis, which often means, in some cases, more decision-making south of the border.

c) And almost all of these companies have downsized, delayered, re-engineered and invested heavily in technology to enhance their competitiveness. To use Lantic Sugar as a specific example, last year the company, as a result of going through all of these processes, refined and marketed more sugar with only a little more than half the number of employees from 5 to 6 years ago. The people there, really, to their credit, have responded superbly! In addition, Lantic Sugar, has implemented a Total Quality/Continuous Improvement Program, is currently seeking ISO 9000 quality certification, and is now encouraging self-directed work teams.

Challenge number two

Another challenge is the profound impact the new NAFTA environment is having on our traditional distributive customers and partners (the eight major grocery chains, such as Metro-Richelieu, Provigo, Sobey, Loblaws, etc.).

Their landscape has been transformed by the introduction of category killers like Home Depot and Toys-R-Us, and by clubs and discounters like Price Club/Costco. The most recent phenomenon is the giant supercenters built by Wal-Mart. Nearly 200,000 square feet in size, they contain a broad mix of general merchandise and grocery products.

Please note that these alternative formats are growing at a phenomenal rate. In two years Wal-Mart will have sales of $100 billion or more, and they’re American companies.

The emergence of these new channels of distribution is blurring the lines of demarcation between the grocery chains, the drug chains, mass merchandisers, and discounters. Everybody is getting into each other’s businesses! This is exerting enormous pressures on both the distributors’ and manufacturers’ margins.

The traditional grocery chains are busy transforming themselves – investing and experimenting with different store formats, exercising their buying clout more skillfully, and reducing the number of SKUs to decrease their costs.

They’re also promoting private label or store brands much more aggressively. Some manufacturers consider private label a threat to their own brand franchise; others consider it an opportunity for more production volume.

Challenge number three

Changing consumer attitudes, expectations and profiles are another big challenge, conveying new possibilities and our future outlook.

Pivotal to our industry is the capacity to innovate based on lifestyles and the changing cultural mosaic. During the next decade, close to 40% of the Canadian population will consist of visible minorities. For example, close to 10% of the consumers in Vancouver and Toronto are Chinese Canadians. The Baby Boomers, who by now are middle-aged, are more aware of their health, more concerned about nutrition, more sensitive to the environment…and the population as a whole is aging. The consumer wants more for less. The market today is more and more segmented.

The keywords are: fresh, low-fat, light, cholesterol-free, diet, low-calorie, low in sugar, ethnic cuisine, mild, hot.

Marketing and innovative products are the key to survival. The idea is to do it skillfully, because for over 75% of the new products that are put on the market, the life span is less than 90 days!

Challenge number four

The next big challenge is Government Actions.

I think the most important thing that government, at all levels, can do is to create an environment which is attractive for investment, with a minimum of regulations to ensure safety and social security. Are we there? Well, not quite! Three quick snapshots:

1. First snapshot. We all know about the debt/deficit problem. Mr. Martin is talking about government cutbacks. Cutting government spending is rather like sex. Those who do it most, don’t talk about it and those who talk about it, don’t do it. I’m not personally optimistic that Mr. Martin will make the kind of cuts to government that our industry has had to do in order to be competitive in a global economy.

2. Second snapshot. By the year 2000, the federal government, via the National Packaging Protocol, wants a 50% packaging reduction. Great idea! Except that all the provinces have their own legislative ideas on how to do this. So the manufacturers, packaging suppliers and distributors, working through 42 trade associations, are painfully negotiating with each of the 10 provinces, one by one, trying to put into place a semblance of a national program. Only in Canada! This is not the way to be globally cost-competitive. Good idea! Poor execution.

3. Third snapshot. Canada’s having disputes with its biggest trading partner, the United States, on wheat, dairy, poultry, peanut butter and sugar. Let’s use sugar as an example. The Canadian border is essentially open to all US sugar and sugar-containing products. The US border, however, was partially open to Canadian sugar-containing products but closed for our cane-refined sugar. By the way, the US has 20%of our market and we have 2% to 3% of theirs. Last year, the US signed the GATT to “open up” trade. What did they do? Well, on January 1st of this year, they closed the border to half of our exports of sugar-containing products. This is Free Trade? Of course, to be fair, Canada has its own “lulus” too. If you’re an American chicken trying to cross the Canadian border, you’d have to climb a 300% tariff wall to get in. This is thanks to Canada’s own unique supply management system. As far as American trade negotiators are concerned, this is a link between chicken and sugar. Having said this, our government has got to win some of these trade battles!

What about the future?

Now this is where scenario planning with the two cows comes in. Remember? Now, I’m not sure what’s going to happen to them, but here are some “predictions.”

• Even more consolidation will occur among manufacturers. Marshall McLuhan predicted that the global village would be in constant change, but it was Charles Darwin, a century before him, who developed the evolutionary theory of the survival of the fittest. The weak/inefficient companies who don’t invest in modern technology, information systems and management practices will die, with the big getting bigger. If you’re small, smart, and nimble, you’ll thrive if you exploit the unique consumer niches we talked about before. Otherwise…pray!

• Under NAFTA, both the grocery manufacturing and retail distribution business will become more North American. Head offices, including sales and marketing services, will continue to consolidate, and North-South logistics will prevail over East-West logistics. As a matter of fact, excellence in logistics will be a key strategic advantage for survival.

• Pricing freedom and margin improvement will be virtually zero due to low inflation, coupled with customer and consumer tough-mindedness. This means that the pressure to improve productivity and employee performance will continue to go up. As we’re at the northern edge of the NAFTA trading bloc, we’ll need to be even more advanced and cost competitive, if our manufacturing facilities are to survive the US and Mexican attacks.

• Successful manufacturers will shift from a “push” marketing mindset to a “consumer pull” mindset. Instead of selling what they make and service, they’ll work harder at finding out what services customers really need and what products consumers want. This will be very hard to do.

• Consumer shopping habits will change…with time becoming the most valuable and rarest commodity for consumers! In addition, the information highway will become more accessible. I talked before about changing consumer demographics. How will this change grocery shopping? At one extreme, maybe consumers will only have time to go to one “Power Center” to do all their shopping. Maybe home shopping on the computer will be a new business. A company called UBI will soon be doing a pilot test in Chicoutimi on this concept. The answer will probably lie in providing consumers with a wide spectrum of products and services. The trick for each manufacturer or retailer will be to decide in what segments they can best compete.

• It’ll also be imperative to simplify the way we manage the flow of information, money and goods. The way manufacturers, wholesalers/distributors and retailers now do business is complicated and full of non-value-added activities. For example, in the US it takes 108 days before a manufacturer gets his finished goods into the hands of the consumer. Yes, 108 days in the supply chain! In Canada, it’s 82 days. In the UK, it’s 38 to 40 days.

We have a long way to go but a major Canadian initiative is taking place right now called Efficient Consumer Response or ECR. For the first time, manufacturers and distributors are thinking about sharing marketing, logistics and financial information that used to be perceived as a private competitive edge. Again, success and survival will only come from a “win-win” collaboration of all the players in the supply chain to the consumer.

The grocery manufacturing industry will survive to the new millennium only if it transforms itself even more in the next five years than it has in the last five!

All of us, as consumers, will be the ultimate drivers of this transformation, and the ultimate beneficiaries.

So, what about the two cows? Well, the Canadian government taxes you 50% and takes one cow, you form a strategic alliance with a neighbor who has a bull, you merge your assets, you form a superior breed of high output milk-producing cows, and you export them all over the world!

NATIONAL UNITY, QUEBEC AND THE ATLANTIC PROVINCES

John C. Crosbie
Chancellor, Memorial University of Newfoundland

Horizons 2000 Luncheon, Charlottetown, July 19, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

In my view, the most important regional issue in Atlantic Canada is the issue of national unity and whether or not there will be a Canada for Atlantic Canada to be a part of in the future. That, in turn, is a question that will be decided by whether the Province of Quebec remains part of Canada or not.

In my view, there are two provinces essential to the continuation of Canada as a nation. These are the two original provinces of Upper Canada and Lower Canada, better known today as Ontario and Quebec. If either of those two provinces leaves the confederation, then Canada ends as a nation. Canada as we know it cannot survive the departure of either Ontario or Quebec.

In Newfoundland, as in the rest of Atlantic Canada, most of our people are living in a fool’s paradise in which they seem to believe that if Quebec leaves the confederation nothing much will change except that we will no longer have to bother with policies of bilingualism and the problems caused by the French minority in Canada. The lazy assumption seems to be that the nine remaining provinces carry on, without Quebec, as a new country which we will call ROC or the rest of Canada. The assumption in my province appears to be that ROC carries on without Quebec and that life carries on with little or no interruption or unpleasantness. All social programs, all transfer programs from the central government to the provinces, such as the Equalization Program, the programs transferring funds to meet the cost of post-secondary education and the health system, medicare, hospital insurance, and federal transfers under the Canada Assistance Plan, all continue in place.

It is time for us to ensure that our fellow citizens are disabused of the easy assumptions that they are making about how life will unfold once Quebec leaves the Canadian federation. The time has come to deal with reality and to deal seriously with the threat posed to us all by the possible separation of Quebec from Canada.

It is important to recognize, as well, that this national unity crisis arises to be dealt with at a time when Canada and the provinces, certainly the Atlantic Provinces, find themselves, after years of overspending, in a horrendous debt and deficit position.

Canada and all four of the Atlantic Provinces, while facing the greatest constitutional crisis in their history, are also at their weakest fiscally, since both the Government of Canada and these provinces have had continuous deficits since 1970, dictating the need to devote ever greater percentages of their revenues to meet the interest cost on the debt built up through these deficits year after year.

The guiding economic theory in Canada and in Atlantic Canada since 1970 has been what I call “Kinky Keynesianism.” While Keynes advocated deficit spending during economic downturns and recessions, he also advocated repayment of debt during periods of economic growth and recovery. Our governments practiced only one branch of this theory and that was the deficit spending branch.

In the fiscal year that ended on March 31, 1995, a year ago, the deficit of Canada was $37.5 billion. In the financial year that ended on March 31, 1996, it was $32.7 billion. In that year total spending was $160.8 billion with revenues of $123.3 billion. The Government paid $42 billion in interest payments on the debt, which was an increase of $4.1 billion over the previous year. The Government had reduced program spending by $1.3 billion but interest costs were up $4.1 billion illustrating the dimension of the difficulties caused by the huge present debt. In that year we had to spend 34.1% of all our budgetary revenues on interest on the debt. Foreigners held $107 billion, or 20%, of the $545.7 billion Government of Canada debt or 20% of that debt. At the end of the year the debt was $578 billion. Canada is clearly at the mercy and in the hands of foreign lenders! They are well aware of the old English saying: “Sue a beggar and get a louse!”

It is true that the Martin budgets have begun to deal with this problem, but even if they are carried out in full there will still be something in the order of $74 billion added to Canada’s national debt over the three years from 1995, since annual deficits continue each year and will amount to $17 billion in his third year of 1997-98. The total interest payments that Canada must make increase each year and in this fiscal year of 1996-97 will likely total $47.8 billion or take 37% of all the federal revenues to meet. The financial position of the Government of Canada only improves significantly once we achieve budget surpluses that are used to reduce the debt and thus reduce our continuing interest cost, giving us some fiscal flexibility. Canada is a self-induced financial cripple, or to rephrase this in these days of political correctness, Canada is now financially challenged. Canada cannot transfer to the provinces what it does not have and therefore has to reduce fiscal transfers to the provinces.

It seems to me that Canadians have to accept and understand clearly that there can be no social safety net without a fiscal safety net first.

The Martin budgets remind me of a statement once made by Mae West that “Whenever I have a choice between two evils, I always chose the one I’ve never tried before.” The Liberal Party is today choosing an evil they have never tried before and we all have to hope that they will stay the course. Paul Martin has to watch out for a principle that Oscar Wilde once expressed with respect to George Bernard Shaw. Wilde said that Shaw “has no enemies but he’s intensely disliked by his friends.”

Not only is Canada financially challenged, but the four Atlantic Provinces are financially challenged as well, and could be described as financial dwarves or, to put it more correctly today, described as short-statured financially. The Atlantic Institute for Market Studies (AIMS) has just produced another of their excellent research reports which deals with public sector debt in the Atlantic Provinces and what it means for you. Anyone interested in Atlantic Canada and its future should definitely read this report prepared by Tom Riley of AIMS.

AIMS quotes Cicero as saying in 63 B.C.: “The budget should be balanced. The treasury should be refilled. Public debt should be reduced. The arrogance of officialdom should be tempered and controlled, lest we become bankrupt.” AIMS says that debt is the most important public policy issue faced by Canadians today and I would agree that debt is the most important public policy issue other than the issue of whether Canada is to survive as a country. AIMS points out that servicing the debt is the least productive expense of government and an economic drag on society. Servicing the debt threatens our ability to fund social programs and it endangers the economic well being of future generations of Canadians. AIMS points out that all a balanced budget does is service the debt. AIMS also points out that, until we tackle not just today’s deficit but the debt overhang, we control neither our economic fate nor our wallet. A blip in interest rates, increased political uncertainty, even exchange rate fluctuations could send debt servicing costs skyrocketing and plunge our narrowly balanced budgets into deep red so that debt starts building again. As AIMS points out, the risks don’t stop there since each provincial government in this region depends on Ottawa for at least 40% or more of its budget, while the federal government’s own fiscal problems and its moves to limit transfers are likely to inhibit provincial efforts to reduce their debt in the years ahead, emphasizing the need for aggressive action now.

The Atlantic Provinces are provinces dependent upon the Government of Canada for fiscal transfers government to government and dependent upon the Government of Canada for direct transfer payments from the Government of Canada to individuals through the UI System, the Canada Assistance Program and many other federal programs.

Of the four Atlantic Provinces, Newfoundland is likely the most dependent on the Government of Canada. In 1990 the Government of Canada collected $1.3 billion in federal revenue from Newfoundland and Labrador, but spent $4.09 billion either by way of transfers to the Government of Newfoundland or transfers to the people of the province. In that year, the Federal Government collected 1.04% of its revenue from the tenth province and spent 2.74% of its expenditures in that province. The Government of Canada spent $3.15 in Newfoundland and Labrador for every one dollar collected from the province.

Another sign of the dependency of the Atlantic Provinces on the Government of Canada is with respect to programs such as Unemployment Insurance. In 1992, residents of Newfoundland received during the first 11 months of the year, $1,005,000,000 in UI payments, while the statistics reveal that in the year 1990 Newfoundland employers and employees paid by way of premiums to the UI Fund $200,208,700.

As the AIMS study points out, all of the Atlantic Provinces except Nova Scotia have a huge unfunded pension liability, while Nova Scotia and Newfoundland have about half of their debt held in unhedged foreign currency. In the case of Nova Scotia, each 1% drop in the value of the Canadian dollar will cause the debt of Nova Scotia to increase by something close to $60 million or $4 million in annual interest costs. Note that a “Yes” vote in the Quebec Referendum would likely cause the dollar to drop between 10% and 25%.

I refer to these facts about the financial dependency of the four Atlantic Provinces on transfer payments from the Government of Canada to illustrate how great the threat is to all four of our Atlantic Provinces if Quebec separates from the rest of Canada.

As the AIMS study points out, just servicing the various provincial debts in Atlantic Canada consumes between 10 to 20 cents of every dollar collected by those provincial governments, while servicing the federal government debt consumes 37 cents of every federal revenue dollar collected.

In 1994-95 the Newfoundland Government spent $508,437,000 or 15% of its total current revenue, or 15.8% of its total current expenditures, on interest costs. The gross debt of that province on March 31, 1995 was $5,639,597,000. This is the debt for a small province with a population of 580,000. It is my view that the four Atlantic Provinces should cooperate with and encourage the Government of Canada to reduce its spending so long as it is done in a fair and equitable manner with respect to the situation of regionally disadvantaged provinces. They must also arrest the continuing financial weakness of each of their own provinces. The four Atlantic Provinces of tomorrow have to do more with less even if Canada continues as a nation. If Quebec leaves Canada, it is clear to me that even if the rest of Canada continues together as a country, each of the Atlantic Provinces will have to exist with very much less.

The national unity question that faces the four Atlantic Provinces is whether each of them in five years time will still be provinces in a country called Canada or, in other words, will Canada still exist? Will the comfortable pew that Atlantic Canadians have occupied since World War II collapse or will Canada continue with the Atlantic Provinces as part of it?

Thus the most important problem and challenge facing the four Atlantic Provinces is whether or not they will be a part of Canada in the future. In turn, that is an issue that will be decided by whether Quebec remains part of Canada or not. The options appear to me to be whether we continue as part of the present Canada, as part of the rest of Canada without Quebec (ROC), as part of a new Atlantic country composed of the four present Atlantic Provinces, or will the four become independent countries again as Newfoundland was until 1949, or will we become states of the United States of America?

These are the kinds of choices that Atlantic Canadians and other Canadians outside Quebec may well have to make in the next few years if Quebec does make a decision to leave the federation. Any one of these options is cataclysmic in its consequences for the ordinary person living in Atlantic Canada. There surely cannot be any issue more important than the national unity issue, yet in the last few weeks we have seen the Prime Minister and many of the Premiers refusing even to discuss constitutional and national unity issues because they appear to think that the public is bored or sick of the issue and not prepared to have this issue or the possible consequences dealt with. I believe the Prime Minister and the Premiers are elected to lead and not just follow. It was a Frenchman, Alexandre Leduc-Rollin who said in 1848 during the revolt in Paris: “There go the people. I must follow them for I am their leader.” The Leduc-Rollin theory of leadership seems to be much in vogue here in Canada at present, but if it continues there will be no Canada for this group to lead. In 1658, Harrington said “The people cannot see but they can feel.” I believe the people of Canada and of Atlantic Canada, while they may not be able to see the necessity of their leaders discussing constitutional principles such as asymmetry or distinct society or concurrent jurisdiction or subsidiarity, can certainly feel and understand that there is a deep national crisis in Canada that must be overcome. That crisis can only be overcome when our leaders exercise the arts of leadership and take some risks in order to ensure that our country continues. As Ralph Waldo Emerson said in 1861, “A nation never falls but by suicide.” I don’t favor the falling of Canada and certainly not the falling of Canada by suicide. As Aristophones said in antiquity, “The country of every man is that one where he lives best.” For Atlantic Canadians, I have no doubt that Canada is the country where we live best.

Last October 30th, Canada came within a hair’s breath of financial, economic and social chaos when just a few tens of thousands of votes resulted in a majority in Quebec voting against separating from Canada. In the week previous to the referendum, I actually heard then Premier Clyde Wells state publicly that his government had done no thinking about nor had it taken any steps to prepare for the contingency of a Quebec voting for independence, nor had it developed any options or any plan for the province in the event of a majority of Quebecers voting “Yes” in the coming referendum.

As far as I know, Wells was not alone in complete unpreparedness, since the Government of Canada had no contingency plans either. The Government of Canada stood by in complete stupefaction as the referendum events unfolded, taking no particular stand and failing to lay down any guidelines with reference to the situation.

The question asked of the people of Quebec in the referendum was not a clear question comprehensible to the ordinary person, but the Government of Canada took no action to declare the question unsuitable or to lay down any rules as to what the circumstances would have to be for the Government of Canada to consider a vote for separation as binding. This cannot be permitted if there is a future referendum in Quebec. I know of no other country that has ever permitted a major region to vote repeatedly over an indefinite period on the question of whether that region should remain part of the country or not. If we allow this process to go on indefinitely in Quebec, then there is no doubt that Quebecers will vote to leave confederation at some point.

The time has come for the Government of Canada to make clear that we will not have an infinite number of referendums in Quebec, that the timing of the next referendum, if there is to be one, is to be determined by us as well as by the Government of Quebec, that the question is one that we have to agree to as clear and understandable if we are to agree to be bound by the results, that we have to agree as to what percentage of the vote the “Yes” side must secure for the vote to be decisive, and we have to outline our views as to what the boundaries of an independent Quebec would be if Quebec leaves Canada.

The Quebecers should not be left to make erroneous assumptions about questions such as boundaries and the territory to be comprised in a new Quebec, about what is to happen to the aboriginal peoples who now live within the boundaries of the present Quebec, about the position with respect to currency, passports and citizenship and the central bank.

I do not accept and I will not accept any suggestion that such issues are of interest only to the people of Quebec. If the majority of the people of Quebec ever vote to leave Canada the results of their action will not only severely and adversely affect Quebecers but even more severely affect the lives and well-being of Atlantic Canadians. Quebecers in a referendum are not deciding an issue that is only of importance to them or that affects them only. They are making a decision that adversely affects every one who lives in Canada and certainly very adversely everyone who lives in Atlantic Canada.

What then would be the likely effect on Atlantic Canada if Quebec opted for independence in a proper referendum and by a decisive majority? In my view, the part of Canada that will suffer the most from such a decision by Quebec will be Atlantic Canada. Quebecers will suffer greatly in an economic sense, as will the rest of Canada as the value of the Canadian dollar quickly decreases further, interest rates increase and economic conditions worsen. Since the Atlantic Provinces have the greatest dependency on the Central Government of Canada, the Atlantic Provinces will be the greatest losers.

The first question arising out of a successful independence referendum in Quebec will be as to who is to negotiate with Quebec on behalf of the people of the other nine provinces of Canada. At that stage, the Government of Canada will have lost any authority that it had to act for us, as Canada would no longer be the country that it was a day earlier. There will be many difficult questions to be answered immediately, but leaving those problems aside the issue, of greatest importance to Atlantic Canada is whether the rest of Canada continues as a country. In my view this is most unlikely since I suspect that it will be found not to be in the financial interest of those who live in Ontario, British Columbia or Alberta to continue in such a new arrangement.

If we assume that some arrangement between the nine units could be cobbled together so that the nine remain together as a country, it is certain that the financial arrangements of this new federation of ROC would be completely changed as between the new central government and the nine constituent parts. The very generous transfers that now exist from the central government to the governments of the provinces would very likely no longer be in place, nor the very generous transfer programs from the central government to individual people.

What we have to remember is that Ontario, Alberta and British Columbia would be viable in an economic sense on their own and therefore they would have the option of going it alone. There is no reason for us to expect these three provinces to join a new federation and to continue the present transfers or levels of transfers for purposes of equalization, post-secondary education, health and social assistance. Such programs would certainly not be as generous as at present.

Thus it seems sensible to hypothesize that with Quebec gone a new country of ROC is most unlikely to be born. Even if born, there will be severe cutbacks of fiscal assistance to dependent provinces such as the Atlantic Provinces, and the residents of Atlantic Canada would be in a far less comfortable condition than they now are.

Would the four Atlantic Provinces then form a new nation together? I do not consider this likely since such a combination does not produce an economically viable entity nor a standard of living for the people of Atlantic Canada equivalent to our present standard. We also have to recognize the fact that Newfoundlanders have never shown much empathy with the Maritime Provinces so it is unlikely that the four would form a new nation.

Newfoundland and the Maritime Provinces might become independent countries, or the three Maritime Provinces might form one nation, with Newfoundland becoming an independent country again. The Maritimes and Newfoundland might exist as separate countries but certainly life would be more difficult, more arduous for our citizens and much less comfortable than it is today.

One final option might be for Atlantic Canada or the individual provinces of Atlantic Canada to join the United States of America if that country were willing. Joining the United States is not an option that we will likely favor since the individual states of the USA do not receive the kind of financial assistance from their central government that regionally deprived provinces of Canada receive. There are no immense transfer programs in the USA from the government of the USA to individual states for equalization or other purposes and the present US programs for unemployment insurance, health, social and old age assistance do not match present Canadian programs.

Clearly it seems to me that all of these options are far less desirable for the people of Atlantic Canada than the continuance of the present Canada, even if the present Canada has to put in place very considerable constitutional changes to ensure that it continues to exist. Those who represent us in these Atlantic Provinces should always act understanding that Canada does not exist to support someone’s particular view of what is an ideal constitution or what are the ideal constitutional principles that should govern in a federation, but rather that the constitution must exist to suit the needs of the country, Canada, and the 10 provinces and territories that make it up. This point of view was ignored by the Government of Newfoundland in the Meech Lake negotiations of 1990 as then-Premier Wells promoted his view of what should be contained in an ideal constitution for Canada, destroying the Meech Lake Accord and putting us in our present position of peril. No government of any Atlantic Province should ever forget this principle and the Procrustes precedent must never be followed again.

The people of Atlantic Canada should remember that as the Greek writer Plato once said: “Of our troubles we must seek some other cause than God.” We have caused our own troubles either through our neglect or indifference, or through the support we have given leaders who led us astray and into our present dark and gloomy prospects.

If we in Atlantic Canada are to avoid the perils that threaten us, we have to insist that our leaders insist on having these national unity and constitutional issues advanced to the head of the national agenda. It is probably true that Premier Bouchard of Quebec and his close political associates will never be induced to have Quebec continue in Canada, no matter what concessions we may offer, but we have to make the concessions needed to induce reasonable Quebecers to reject separatism and to continue with Canada.

Canada is the only country in the world, as far as I know, where the French and English peoples have together created a great nation. It seems to me that recognizing Quebec as a “distinct society” is the simplest kind of common sense and a necessary first step to ensure the continuance of a united Canada. The concept of asymmetry or the permitting of different legislative powers to be assigned to some provinces and not to others is not a harmful concept. The concept of provincial equality requires Canada to treat the interests of all provinces with equal concern and respect but does not require that every province be treated exactly the same. There is no reason not to expand the concept of concurrent jurisdiction to more areas. There is no reason not to implement, as far as we can, the principle of subsidiarity which means simply that decision-making should remain at the lowest government level closest to the people, unless moving the decision-making up leads to important gains of efficiency.

The actions and participation of groups such as the Business Council on National Issues with their Confederation 2000 initiative and their report “Today and Tomorrow: an Agenda for Action,” should be encouraged and an agenda for action insisted upon by the Prime Minister and the Premiers.

Atlantic Canadians have to make it clear to the Prime Minister and to the Premiers of Atlantic Canada that their first priority is the preservation of Canada through the present federation. Atlantic Canadians should also make it clear that they support the Government of Canada and their provinces in all reasonable attempts by them to restore the financial strength of the Government of Canada and of the provinces and to resolve their fiscal weaknesses. Atlantic Canadians must insist on their Atlantic governments having a plan that shows exactly what their future prospects are to make a living where they now live, a plan that successfully encourages the continued expansion of the economic opportunities of our region by encouraging the entrepreneur and the investor through a reasonable climate for their participation, and a plan that will give priority to the development of the innate skills of every Atlantic Canadian, particularly the young, so that they will have the knowledge and ability to compete in the new world economy. We must make crystal clear that first and most important we want Canada to continue with such reasonable changes as are needed to accomplish this, and we expect our leaders to give this top priority and for them to lead, to show the way, and not follow or lie fallow.

Finally, I call on our leaders to remember the wise words of Longfellow when he wrote:
“Not in the clamor of the crowded street,
Not in the shouts and plaudits of the throng,
But in ourselves are triumph and defeat.”

A POINT OF DECISION FOR CANADA’S HEALTHCARE SYSTEM

André Marcheterre
President, Merck Frosst Canada

The Canadian Club of Montreal, September 15, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

Today, the business world operates in a constant state of change. I like to describe it as a game of baseball, but with a twist. In this game, each base is in motion. The outfield can move them – any time, anywhere in the field. And, as such, batters never know where they must run to stay in the game. I believe this metaphor accurately describes the Canadian healthcare market. A multitude of factors changes our business environment every day. Let me briefly describe some of them that apply to the pharmaceutical industry.

Pharmaceutical companies are looking for better ways to leverage their resources. Consolidation has played a major role in such initiatives. One form has been mergers and acquisitions. In this decade alone, at least a dozen major pharmaceutical mergers have completely changed the competitive landscape. This consolidation is responsible for a new world order which can be described as a complex maze of competitors, partners and strategic alliances. Many companies must now determine where they fit into this maze.

Another factor is that global corporations now operate on the basis of international world mandates; and not only in production, but for research and development also. In Canada, both government and industry must continually demonstrate their ability to remain competitive in the global marketplace.

Canada was not a competitive market for pharmaceuticals up to 1987. Our patent protection system had been weakened by the introduction of compulsory licenses in 1969. By the mid-1980s, investments in R&D had reached an all time low, falling to 4.5% of sales. Bill C-22 in 1987 and Bill C-91 in 1993 corrected the situation and brought patent protection for pharmaceuticals to a level similar to that of some other industrialized countries.

The impact has been spectacular:

• R&D-to-sales ratio went from 4.5% in 1987 to 15% in 1996

• Actual spending on R&D went from $150 million to approximately $700 million

• Almost $4 billion of new investment

• In addition, an environment so competitive led to the creation of a new Canadian biotechnology industry

Nowadays, Canadian pharmaceutical firms are being awarded more world mandates than ever for production, and for research and development. If I use Merck Frosst as an example:

• We have a world mandate for research in respiratory diseases. This mandate translated into an investment of $100 million to build the Merck Frosst Center for Therapeutic Research, the largest biomedical research laboratory in Canada.

• We also have a manufacturing mandate to produce MEVACOR^®, a lipid-lowering agent, for Germany and Austria.

• We also produce another drug, PRILOSEC^®, for the US market.

All these investments are good news for Canada. However, a gap remains between Canada and other G7 countries. This gap must be narrowed in order to attract more investment opportunities and to build on the current momentum.

These issues deserve further attention. But today I want to talk about another issue, relevant to everyone in this room, indeed to all Canadians. I’m referring to healthcare reform. We are at a crossroads. And Canadians must make some very important decisions about the future direction of our healthcare system. I want to discuss my industry’s role in healthcare reform, the steps Merck Frosst has already initiated and the path we envision Canada taking into the 21st century.

Canadians benefit from one of the most comprehensive healthcare systems in the world. Professionals and high-quality services are certainly not lacking in Canada and, thanks to a universal system, healthcare is accessible to all Canadians. We are truly the envy of people worldwide.

We are nevertheless aware that the system is not perfect. Hospital emergency rooms are often overcrowded and lack the necessary equipment and personnel. For many patients, time spent waiting to see a specialist is intolerable.

The Economist once praised Canada for successfully controlling costs while continuing to provide the necessary care for its citizens. Today this is a difficult standard to maintain – a reality that we are slowly beginning to accept.

Everyone realizes that reforms are needed to preserve and improve our healthcare system. These reforms must also take account of the needs and good will of Canadians. A recent survey by the Canadian Medical Association showed that, according to a majority of Canadians, reforms should not result in the privatization of our healthcare system any more than they should in a tax increase. Consequently, we have to ask ourselves what form healthcare reforms should take. For the government, reforms have been centered mainly on the immediate problem of cost increases – and with good reason. Universal healthcare is expensive and costs have continued to rise for several decades now. Last year alone, the healthcare system cost $52 billion.

In an effort to lower healthcare costs, the government transferred a number of expenses to insurance companies, employers and patients’ families. In 1997 more than $1.2 billion was redirected to non-government sources of payment. Today, Canadian companies, third-party payers and patients are paying more than $21 billion a year for hospital fees, prescription medicines, private healthcare and medical services.

As you can see, the problem affecting our healthcare system does not come down to a lack of quality care. The problem is one of cost or, if you prefer, deficit. The quality of healthcare could, however, be jeopardized if drastic cost-cutting measures are adopted.

The government’s efforts in healthcare cuts have contributed to lowering costs. We nonetheless believe that the current approach affecting doctors and pharmacists and, quite often, pharmaceutical companies, discourages the partnerships needed to create a system that integrates cost-effectiveness and quality healthcare.

This is a rather recent issue. Between the advent of health insurance in the 1960s and the end of the 1980s, our healthcare system was essentially trouble free. Patients had unrestricted access to healthcare, which led to an unlimited demand for services. There was no budget ceiling on technology, numbers of beds, medicines or any other aspect of patient care. The system was, in effect, powered by technology and demand.

With new money constantly being pumped into the system, no compromises were needed to provide patients with the best possible care. No arbitrary restrictions on the choice of medical approach concerning diagnosis or treatment were imposed. In a world without constraints, there was no need for partnerships or integration.

The world since then has changed considerably. We are facing deficits, hospital closures and a rationing of patient care. While healthcare providers share the same objective, that is, to help Canadians live healthy lives, they are having to make difficult choices and are seeing their contributions to healthcare compromised by the decisions of others. Unfortunately, these decisions that are made cooperatively by all potential partners are all too often implemented in a more isolated manner. Once and for all, we must, to use a management expression, stop making compartmentalized decisions.

We have to create a system in which technology provides access to relevant data, in which a communications network connects all partners and in which every decision made takes account of the knowledge acquired at every level of healthcare management.

We have to successfully balance three interrelated elements of our healthcare system, that is, cost management, universality and quality care. At present, there is no mechanism in place within our system to collect the data necessary to evaluate the incidence of healthcare decisions and no means of monitoring the effect of these changes on the population. There is, in fact, no proof that the reforms, which focus on each of these three variables separately, produce the expected results.

All signs point to a healthcare system in trouble, of which long waiting lists and hospitals suffering from a shortage of personnel are just two of many manifestations. At this rate, I’m afraid that Canada will end up with a low-quality, fragmented healthcare system that can produce only mediocre results.

Let me explain. Today, the cost of healthcare is often erroneously linked to the cost of patented drugs, which represent only 3% of total healthcare expenses. In many cases, less effective, but also less expensive, medicines are prescribed to patients. These medicines were selected by government representatives on the basis of their low costs rather than their particular benefits.

Let’s look at heart disease – the number one cause of death in Canada. A recent study on the best drug treatment for coronary disease in Canada revealed that the drug in question, taken over a four-year period, would reduce the number of hospitalizations by 58,000 and would represent a saving of more than $380 million in terms of healthcare costs and related expenses.

Restrictive policies governing these drugs, however, prevent many Canadians from having access to this treatment simply because, when measured in the short term, on a pill-by-pill basis, it could represent a slight increase in cost. Such a restrictive approach limits the choice of drug therapies available to doctors. They may, in fact, be prevented from prescribing a drug that could prove more beneficial for the patient.

Consequently, overall healthcare costs are increasing as a result of visits to emergency, hospitalization and ensuing complications – a simple cause-and-effect relation. Unfortunately, our healthcare structure rarely considers comprehensive patient care.

Consider coronary disease once again. Overall, our system has not examined every step of patient management, nor has it considered how these steps are interrelated. As a result, the link between restrictive policies and healthcare costs has largely gone undetected. Only recently was the model identified, mostly in international studies. Canada is only beginning to explore this causality in greater detail.

Restrictive policies, transfer of costs to third-party payers and fragmented initiatives all aptly describe the current troubled state of our healthcare system. A system that restricts patients’ access to the best available products and services. A system that is gradually expecting employers to shoulder twice the costs and responsibilities. A system that prevents our industry from gaining access to certain markets and, as a result, limits R&D initiatives in Canada.

Fortunately, solutions exist. There are ways to improve the system so that we continue to manage the double feat of containing costs while delivering high-quality healthcare to all Canadians. One of the most exciting new schools of thought to emerge recently in healthcare is called evidence-based disease management.

This innovative science is a key factor in the effort to achieve a balance between cost and quality care. Evidence-based disease management recognizes that objective studies best determine just how efficient a healthcare system is. The approach helps us understand how cost-cutting in one area often leads to increased costs in another.

Merck Frosst was one of the first companies to pursue evidence-based disease management. In fact, we have established an initiative called Patient Health Management, or PHM, to support and partner with stakeholders who wish to move towards this model.

Patient Health Management is a comprehensive, seamless process that collects scientific evidence to determine which practices will deliver the best healthcare at the best cost. It is an inclusive process involving the entire stakeholder spectrum from patient to payer; physician to government. Merck Frosst believes this approach will preserve – and enhance – our healthcare system. To prove it, we are in the midst of major investments, currently in excess of $15 million. These PHM initiatives are already helping redefine the benefits of a broader, evidence-based view. Let me tell you about one initiative under way in Nova Scotia. It is called ICONS, Improving Cardiovascular Outcomes in Nova Scotia. And with 50,000 cardiovascular patients participating, it is the most comprehensive study on heart disease in Canada. Launched in February, this five-year initiative will collect data to determine which therapies, which treatment approaches and which follow-up mechanisms work best to improve the quality and cost of heart- disease care in Nova Scotia.

This initiative is generating keen interest in Canada’s healthcare community because of its innovative approach. For the first time, key stakeholders from the private and public sectors – government and industry, academia and advocates – will work together to track patients throughout each stage of their disease. Evidence will be collected about the entire healthcare process, then measured for its efficiencies. Recommendations will be made to improve the quality of healthcare, while containing the costs.

As someone who has worked in the pharmaceutical and medical community for 20 years, I can assure you that this approach to fighting heart disease is a radical departure from existing strategies. ICONS views patient care through a wide-angle lens rather than a microscope. It emphasizes partnerships, not piecemeal efforts; care, not cost; efficiencies, not economies. And, it is bound by an evidence-based approach, not short-term fiscal objectives.

Merck Frosst is committed to establishing new partnerships with healthcare providers, government and private players to develop more PHM programs across Canada. We believe it is the best approach to identifying and delivering more effective healthcare services in Canada. And in this case, Merck Frosst believes that, by improving the quality of care, we will lower the costs to the public system.

There are compelling reasons to support this approach. Healthcare costs will continue to rise due to our aging population. And, in turn, there will be an added pressure on government to find ways to control expenditures. Without alternatives available, the current approach to healthcare reform will remain intact. And, Canada may:

• Deny patients access to the most effective drug therapies

• Prevent physicians’ access to the best treatment practices for each of their patients

• Not identify and treat high-risk patients for diseases

• Cut healthcare services in our communities

ICONS demonstrates the level of integration that can be achieved when we put our hearts and minds together. It is a window on the future of healthcare in Canada. I believe that drug companies can and should play a central role in bringing about initiatives like ICONS for the following reasons.

First, medications themselves are becoming increasingly important to the populations of the western world. During their working years, baby boomers will use pharmaceutical medicines more and more to remain productive and healthy. During retirement, they will rely on drugs to avoid surgery and hospitalization, and in general to prolong and improve their quality of life.

The second reason why drug companies should play a central role in healthcare partnerships arises from the unique nature of the pharmaceutical business itself. Our drug development and clinical trial process brings us into close working relationships with doctors, nurses, pharmacists, government health officials, manufacturers – in other words, the wide circle of caregivers. And with an average of more than a decade to develop new drugs and bring them to market, drug companies necessarily have a long-term perspective on healthcare.

Canadians place great importance on their health and on their healthcare system. We are all concerned about the well-being of our families and friends. Nothing matters more to us. Today, our healthcare system has reached a turning point and we should all give it some serious thought. On the one hand, short-term and limiting economic considerations dictate the types of healthcare benefits available to patients, resulting in mediocre drug therapies and higher costs. On the other hand, a long-term strategy establishes a balance between costs and healthcare, with a view to maintaining an outstanding healthcare system.

Decisions must be made now. As a member of the business community, you also have a key role to play. You must ensure that your employees take responsibility for their health. This means providing them with information on healthy behavior and lifestyle choices and ensuring that they have access to the best possible care.

At Merck Frosst, for example, a health promotion committee for employees was formed and serves as a valuable resource in a number of areas, including assistance for those who want to quit smoking, training for breast self-examination and counseling on nutrition. We also publish an employee newsletter entitled “DR. MERCK,” which addresses such general health issues as care for seniors and sunscreen protection for children. Employees are invited to ask questions, which are answered in the next issue.

The well-being of our employees, our families, our friends and all Canadians is in everyone’s best interest. We cannot hope to solve today’s problems by applying yesterday’s fragmented solutions. Together, let’s be creative and innovative in preserving the integrity of Canada’s healthcare system.

DELIVERING VALUE IN THE NEW ECONOMY

John L. Steffens
Vice-Chairman & Executive Vice-President, US Private Client Group, Merrill Lynch

PC Expo, New York, June 17, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

I’m sure most of you read the financial press, which is captivated by the internet, and seems to be posing the question, “Can there even be a ‘Wall Street’ in cyberspace?” As I’ll explain, our answer is a resounding, “Yes!” But I believe this “cyber Wall Street” – and yes, Merrill Lynch – will be very different than often envisioned in the media. For all that’s been written about the digital revolution, I personally believe that its significance remains under-appreciated and, in my business, fundamentally misunderstood.

Let me begin by offering what many of you may consider to be a provocative proposition: the do-it-yourself model of investing, centered on internet trading, should be regarded as a serious threat to Americans’ financial lives. This approach to financial decision-making doesn’t serve clients well, and it’s a business model that won’t deliver lasting value. Today, I would like to demonstrate exactly why this is the case. I want to walk you through the macro-trends in my industry, outlining competing business models, and demonstrate Merrill Lynch’s strategy to deliver value in the new economy.

Thanks to the digital revolution, the “rules of the game” are changing across nearly every area of our lives. The global economy is evolving from a system propelled by labor and capital to one driven by information and ideas. Digital technologies create new kinds of relationships between people and change how we interact with each other. As during the agricultural and industrial revolutions, profound changes are now occurring with our longstanding assumptions about what is “scarce” and what is “plentiful” in our economy.

We’re entering a world where MIPS and bandwidth will likely be unlimited. Flowing directly from this, raw information and data are becoming commodities, available to all at minimal cost. The ability to conduct a straightforward transaction – be it trading a stock or buying socks – is likewise racing down the price curve to commodity status.

What will continue to be scarce – and, by extension, very valuable – in this brave new world? I would argue three things:

• First, the time and attention of human beings – who, even in a world of information overload, unfortunately remain bound by the limits of a day, a year and a life span.

• Second, the ability to sort through information, extract key insights and place them in the context of the unique circumstances of individuals.

• Third, the capacity to establish close interpersonal relationships built on trust and mutual understanding.

When I look to the future of the global financial services industry in this new economy, I see the world evolving toward two broad segments. One macro-segment is populated by a set of companies whose core business will revolve around facilitating transactions and providing basic data and information to individuals. These “do-it-yourself” companies will work to provide customers with the latest and most convenient tools to use on their own. They will provide the technology, information or products and let clients take it from there.

The other macro-segment will contain firms pursuing a very different – and I’ll argue vastly more promising – business model. They will seek to establish the capability for deep advisory relationships with their clients. To develop and satisfy these relationships, of course, advisors will need to fully leverage the tremendous capabilities that technology provides them. Merrill Lynch’s strategy is to dominate this segment of the marketplace. I believe the possibilities in this arena – and the potential to create genuine value for clients – will be extraordinary. This is because the services offered by advisory organizations are totally aligned with those precious, “scarce” elements I mentioned earlier: time, trust and, perhaps most importantly, insight. These companies will thus offer clients convenience, someone they can relate to and, critically, provide “wisdom” about the future.

Merrill Lynch’s strategy is centered on one overarching theme: creating value for our clients. As Tom Peters is fond of saying, “In an increasingly crowded marketplace, fools will compete on price; winners will find a way to create lasting value in the customers’ mind.” If we want to keep our clients’ business, and win others, we have to prove the unique value of dealing with Merrill Lynch.

We’re doing this in two distinct ways: delivering wisdom, and providing highly personalized service. First, let’s talk about wisdom. One by-product of the digital economy is already clear: information overload. In financial services, “information overload” is redefining value added. Raw information such as financial news, stock quotes, or mutual fund data, certainly is not “worthless.” On the contrary, it’s vitally important. But companies that focus simply on providing information won’t be creating much in the way of value. In fact, even providing information quickly won’t be enough. That’s why when people ask me if Merrill Lynch shouldn’t become an information company, my answer is a resounding “No!” We’re already an information company, but it’s not nearly enough. Merrill Lynch has to be a “wisdom company.” Our role is to sort through all the information in this complex world and translate it into “wisdom” our clients can use.

The second part of our value proposition is a personal relationship in which we provide personal service, understanding and trust. There is value in dealing with a trained professional – someone who knows you well and understands your overall circumstances. And it’s a value that no technology will ever replace. Indeed, the importance of personal service highlights a paradox of the digital economy. In the midst of this technology revolution, people and personal relationships will be more important than ever.

At Merrill Lynch, the need to deliver wisdom is driving our strategy. That means providing judgment and advice, and spotting opportunities. It means helping clients achieve the investment performance they need to reach their goals. The cornerstone of this effort is our 14,000 financial consultants – FCs, as we call them. Wisdom depends on people, and Merrill Lynch’s business is built on the investment savvy of our FCs.

Technology can’t replace insight and experience – but it can leverage them. Our technology strategy challenge is to take 14,000 incredibly smart and well-trained professionals, and, in an era of rapid change, make them smarter and give them more time to interact with their clients on an individual basis.

For example, to leverage our capabilities, we are combining Merrill Lynch Research and our global perspective with other data sources and applying artificial intelligence. By applying neural nets, fuzzy logic and genetic algorithms, we are seeking to distill the complex information into meaningful recommendations. Our next-generation “delivery systems” are also designed to help our FCs develop wisdom faster, and deliver it anytime, anywhere to our clients.

I’m stressing the importance of people because I think there is a persistent myth out there. In a nutshell, some believe the technology revolution will “disintermediate” financial advisors to make them as obsolete as an old Commodore 64. According to this school of thought, technology should be used to help consumers make their financial decisions on their own. They envision people monitoring the news, reading research, and then picking their own stocks and mutual funds, merely by answering a few simple questions.

My feeling is successful investing isn’t that simple, despite what some are saying. If you ask these folks where the technology revolution is going, they’ll probably echo an advertisement I saw this morning: they’ll tell you that the future of technology is about “helping people help themselves.” As a model for our industry, I think that’s dead wrong. And from our clients’ standpoint, it’s a recipe for failure.

The modern history of investing is filled with short-term wizards, but few have been able to maintain their magic over the long run. Achieving long-run investment goals requires careful individual planning and considerable diligence. That is why the future of Merrill Lynch in the technology revolution will be based on delivering personal service and advice through the human relationship leveraged by advanced technology.

If I had to describe Merrill Lynch’s technology vision in similar terms, I would call it “helping our people help our clients.” This approach is based on a reality, an empirical reality. Nearly all investors need advice of some sort, at some point. They need the help of a trained professional. Financial advice has clear and quantifiable benefits.

A recent study out of the University of California at Davis finds danger in trading without advice. The study, by Brad Barber and Terrance Odean, analyzes account data on over 60,000 households at a large discount brokerage firm from 1991 through 1996. They find that the 20% of households trading most – averaging 9.6 trades per month – earned an annual net return of only 10%. That’s compared to 17% for the overall market. That’s a pretty expensive way to do business.

Why do investors with advice do better? For a few reasons. First, they are more patient. With the reassurance of a professional advisor, investors tend to buy investments earlier in a market cycle and hold them longer. Investors with advice aren’t as likely to run from the market during temporary downturns. As concluded in the Barber and Odean study, “trading can be hazardous to your wealth.” And this is precisely the behavior pattern that we see when people try to invest without professional advice.

For most people, it’s a natural instinct to be a “market timer.” But this instinct runs against the stark reality that time in the market is much more important than timing the market! And they clearly don’t understand the risks of a “market timing” strategy. Over the last thirty years, 95% of the equity market’s gains would have been lost by missing just the ninety best days. On average, miss the three best days each year, and your returns nearly go to zero! No wonder there isn’t a single “market timer” on the Forbes 400 list!

One final reason investors with advice do better: on their own, most people invest based on historic performance. They read about last quarter’s winners in The Wall Street Journal or Business Week, or look on the internet. These investors buy history – but they own the future. The fact is, what made money yesterday, probably won’t do as well tomorrow. The moral of the story? Don’t look for funds in the “rearview mirror.”

It takes a human being, a trusted advisor – or as I like to say, a “human-browser” – to help people invest for the future, to reassure them, to help them stick with sound long-term plans. The technology revolution will accelerate. But these realities are going to remain timeless. Efforts are underway throughout the industry to develop simulated personal advice for clients. This advice may prove a powerful tool in improving efficiencies and providing guidance. But it will never possess insight or judgment the way people do. In this business, there are an infinite number of situations, each demanding independent judgment. Computers extrapolate from the past. Although history is important, investments are about tomorrow – and tomorrow never looks exactly like today. The irony is, if we aren’t careful, technology may actually leave some investors worse off.

This brings us to one other critical factor that gives our business model the edge. To successfully guide clients through this information it is critical that our relationships be based on trust. In the world of online trading and advice, trust becomes all the more important. In the “wild west” of the internet we now see sites not unlike late-night infomercials promoting the latest stock. Known only to those that read the fine print in the disclaimer, the companies have actually paid a fee to have their stock promoted.

In his 1995 work, Trust: The Social Virtues & The Creation of Prosperity, Francis Fukuyama argues that the social capital represented by trust will be as important as physical capital. In a recently released paper titled “The Virtual Handshake: E-Commerce and the Challenge of Trust,” published under the Merrill Lynch Forum, Fukuyama urges visionaries pondering electronic commerce to spend as much time thinking about human relationships and business models as they do considering technological hurdles themselves. He concludes that, “without the trust, reciprocity, and community that the social network provides, a digital pipeline of virtually unlimited bandwidth will be useless.”

At Merrill Lynch, we’re establishing that trust and reciprocity through our FCs. We are creating the technology-based financial advisory relationship of the future. It is based upon the wholesale integration of highly trained human advisors with the most sophisticated technology platform – all designed to leverage and strengthen the relationships between our people and our clients. We have four basic approaches in mind:

• First – for all the reasons I’ve mentioned – we’re going to keep the FC as the advisor at the center of our client relationships. New technologies will enhance the role of our FCs, not diminish it.

• Second, we are leveraging the global resources of Merrill Lynch. This means taking the expertise of product specialists and research personnel from all around the world, and bringing it closer to clients and FCs. With the rapid globalization of the world’s economy, and the growth of international investing, the ability to understand and react to events around the globe has become more and more critical.

• Third, we are harnessing technology to boost our productivity. We’re doing this with a range of applications, from simple functions like email and electronic calendars to more sophisticated database management tools.

• Fourth, we are using a variety of new communications tools to strengthen client relationships. We’re doing this with expanded use of full-motion video, shared computer screens, and video tele-conferencing. These technologies help our FCs synthesize an endless flow of complex and conflicting information by animating that information within the context of a client’s financial plan.

As significant as technology is, our business is a people business in the end. We see digital technologies not as media for managing information but as media for managing relationships. In managing these relationships, it is not a question of computers competing with financial professionals. Instead, it is a question of using technology as a tool to amplify our human ingenuity. But they will not replace the value of human relationships in financial services, or broader social structures.

Computers and digital networks will continue to transform the financial services industry and change how we work and relate to one another. Many technology experts are racing to develop the newest and cheapest way to trade online. But I believe the greatest opportunities for most of you in the audience today are in developing technologies – whether they be networks, information systems or artificial intelligence – that enhance and leverage relationships between individuals and institutions. I look forward to the new world these innovations will create.

WINDOWS EVERYWHERE

Steve Ballmer
Executive Vice-President, Sales and Support, Microsoft

PC Expo, New York, June 10, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

What I want to try to do is take a little bit of a step back, a little historical perspective, shall we say, on some of the important things we have tried to pursue, particularly with the Windows platform. Give you a little bit of an update on where we think that is as an industry phenomenon.

If you look over the course, certainly, of the time we’ve been in business, there have been perhaps five things which Bill Gates, Paul Allen, and other managers have believed in passionately that have really guided our view of what we need to do as a company, and what we need to do as an industry.

The company was founded on this notion that the PC model was very different from the mainframe and the minicomputer model. Hardware and software and services would be separate businesses. There would be specialists. And so the whole shape of the industry changed from one of vertical integration to specialization.

About 10 years ago, we started talking about something called “Windows Everywhere.” I want to give you an update on that today. But Windows Everywhere, when you really stop and think about it, was pretty silly in 1987, 1986, 1985. We talked about it in there a lot of times. But here, by the year 1997, I think we can really talk in quite an important way about this notion of Windows Everywhere. “Softer software,” the notion that software will adapt and shape and customize itself to you. We’re not going to talk about that today, but it’s another one of these guiding principles. “Information at Your Fingertips,” a vision that Bill Gates started talking about seven years ago, has been very much a guiding force for us and, we think, for others. And of late, we’re really pursuing this notion that IT can form almost a digital nervous system, acting as the backbone of the way corporations operate.

For today, I really want to dig into Windows Everywhere. I want to talk about it. I want to update you on it. And I want to give you a little bit of a perspective of some of the things that we’re trying to continue to invest in to make that possible.

Windows Everywhere is an investment that we started really with the notion that if we can take the Windows platform and deploy it quite broadly across a very broad set of devices, we would give developers a platform that was very rich and very appropriate for the broadest set of applications. The initial investment, of course, was in PCs, then in laptops; with Windows NT it’s graduated to become in servers. And today I want to update you on that investment. I want to talk a little bit about where we’re taking this notion of Windows Everywhere in terms of handheld devices, high-end workstations, servers. I want to talk about manageable PCs, because we have a lot of industry partners introducing the first NetPC, central administration, Windows support for really dumb terminal devices. And Windows on what I’ll call Windows, Windows on UNIX and Windows on Mac.

And I think that will be clearer to you as we go through the talk. When we’re finished with the kind of work that we embarked upon, really starting 10 years ago, we hoped to fill out this picture quite broadly. From low-end devices, Web TV-style devices at the very low end, consumer devices which you will find attached to every television set, which you will find attached to every DVD player, every low-end consumer electronics device, on up through handheld PCs that will be functional both at home and in business, to Windows terminals, NetPCs, portables, desktops, workstations, servers.

We had a chance about a month ago to talk about some of our initiatives to continue to push Windows to the super high end with our scalability efforts behind the Windows NT server. Filling this picture out, I think, is very important for us, for our partners, and for the customers who want to mobilize this platform in the broadest set of ways. It’s very important largely because of what it means to software developers. Software developers in many, many ways are really the lifeblood of our industry. They provide the innovation, the excitement, the applications, and I’m not talking today just about the developers that live in third-party software companies. But really the developers that live also inside large companies, small ISVs, custom application development houses. These people are creating the value that lets businesses run more effectively.

Developers need two things, or at least this is what we hear loudly and clearly. They want the best platform in a technical sense to build their applications, and I want to talk about that. And they want the widest set and the easiest set of deployment options for those applications. Without a lot of machines to run applications, software developers have a very hard time. When it is harder to deploy applications, software developers have a harder time. But the first thing they need is the tool set. And at Microsoft we put a lot of effort in Windows to creating the richest, most mature set of services for developers.

We talked a lot about the Win 32 API, the Windows 16-bit API, both of which are still supported. On top of that today, there’s literally been thousands of companies and hundreds of thousands of developers across the world who have built third-party libraries and objects which essentially extend the Windows core service set. If it’s not built into Windows, you can go get a third-party library that will put up a grid of numbers very conveniently that will give you access to transaction processing services, that will give you access to groupware services.

And so you amalgamate all of the exciting foundation that has been built both at Microsoft and in small third-party companies, and in custom application development companies, and in companies like IBM and Oracle and many, many others. It’s really a phenomenal, phenomenal amount of innovation.

So this rich set of services is incredibly important. And you couple this rich set of system services with the most modern things, the most interesting things going on. There’s a lot of discussion in the industry today about Java. So we’ve taken that to heart and fully integrated it into Windows system support for so-called “100% pure Java” in the Windows products. But with the announcements that we’ve made over the last several months, and particularly yesterday of this thing we call “J Direct,” we also allow developers who want to work in Java to take advantage of not only the full Windows set of system services, but the full set of services that have been built up in third-party libraries and objects, et cetera.

Developers need to write applications quickly. They need to write applications that are as good as the best of the best. And we’re allowing people to mix the best of what is coming with all of this huge body of existing Windows system services. The fastest application, the best application then can be built right away, no need to restart.

The Windows platform supports a very wide set of development languages: BASIC, COBOL, FORTRAN, SmallTalk, C, Java. We think that’s very important because it is not going to be the case that one language will fit all application development scenarios. We put a lot of effort to make sure that we provided the best environment for developing Java applications including our own Visual J++ product, because we want in no way the Windows platform to be anything but the best platform for writing applications in absolutely any language. Already we’ve found incredible interest in our Visual J++ product. We think we now sell well over half now of all Java development tools sold in the market, and we’ll just continue to push that product forward and enhance that product in a broad set of ways.

So the goal is to build up this set of services, and then give developers the chance to deploy these applications very broadly. Windows is a very popular platform. Over 90 million units of Windows will be sold in the next year. The installed base of Windows machines is already close to 400 million. The installed base of Windows 95 and Windows NT Workstation is over 200 million. We need to, in our Windows Everywhere initiative, continue to broaden out the places in which these Windows applications can be delivered…more platforms serving more market opportunities, more niches.

We need to provide facilities that make it easier and easier for developers to deploy these applications, and we need to make it possible for people to target less and less expensive hardware that is also less and less expensive to manage. And so I want to focus in really on that aspect of Windows Everywhere, how we let these developers, the over four million developers around the world today, take advantage of Windows Everywhere to take their best work, deploy it cheaply, quickly and in more and more places.

The most recent member of the Windows family of products of this Windows Everywhere vision is something that we call the Windows CE operating system. It’s a small portable, real-time operating system that runs on multiple chip sets. And it is Windows compatible. It is a subset. It doesn’t support the whole Windows API, but it is Windows compatible. There have already been devices introduced that deliver the Windows CE operating system in the context of handheld machines and now there are a number of others.

There are people working on quite a variety of new Windows CE form factors, and Windows CE applications. People want to do these handhelds, but they also want to do consumer devices. We’re taking a look at our acquisition of Web TV for using Windows CE in that device. I’ll talk later about the use of Windows CE in so-called “Windows Terminals.” We see being able to use it quite broadly in a variety of low-end devices. There are over 3,000 independent software vendors today building for Windows CE.

We thought this thing would start out as just a little pocket-held device that sort of mobile professionals would carry, but the level of interest that we’ve seen in Windows CE from people in vertical markets is, frankly, phenomenal. People in the retail community want to take the little devices that the retail sales clerks carry with them to monitor inventory and convert those to be Windows CE based. We’ve had ISVs in the healthcare field talk about wanting to do Windows CE devices for doctors and nurses. We’ve had people in Japan talk to us about wanting to use Windows CE in handheld devices that would be carried by utility linemen and repair people as they go out and work physically in installing electrical lines.

The list goes on, and the variety of applications and interest is quite broad and, frankly, opens up to the Windows developer a whole new community of applications, of interest, and market opportunities. You will see us not only continue to bring out new versions of Windows CE in the handheld form factor, but really push into these verticals and really push more extensively Windows CE into quite a variety of consumer electronic devices.

A particular area in which this Windows Everywhere strategy has taken us, and really one, frankly, that has progressed far more quickly than I think we had anticipated, is the penetration of Windows into the workstation space. And that was really precipitated by the launch of Windows NT Workstation and the incredible price-performance dynamics that a high-end PC running NT Workstation provides, versus what people can offer in the UNIX workstation space.

There are numbers that show the three-to-one price-performance comparison of a Compaq workstation versus a Sun workstation. But what we’ve seen come with that is just an incredible surge in application developer interest, an ability to target Windows applications to the high-end workstation. If you take a look, for example, at the top 10 CAD/CAM applications and graphical information systems, those applications are all now today targeted and available on the Windows NT Workstation product.

Other important CAD products, for example, used in the design of most major aircraft around the world, are just now in the process of being delivered on the Windows NT system. If you take a look at the visualization space, the kinds of work that have been done on Silicon Graphics Workstations, digital image editing, the kind of work that’s been done for visualization on Wall Street for financial trading applications, that application set has now moved over.

If you take a look at some of the other applications that have been done in the manufacturing space, they’ve moved over. Oil and gas exploration and geographical mapping in that industry, those applications have moved over. And from the standpoint of both the developer and the person deploying these systems, you now can have the price-performance of the PC, you can have this full range of Windows applications, and you can continue to run the hundreds of thousands of existing Windows applications. So we see people now able to target a broader set of applications and reach out to new places with the Windows API set. This has happened, as I said, far more quickly than we ever anticipated. The UNIX workstation market, amazingly, has actually declined in 1996 versus 1995. We don’t think that trend will stop. The price-performance economics of Windows NT Workstations versus what’s available for UNIX and RISC is too compelling. And Windows NT Workstation now has the full set of capabilities that developers in these areas need.

So this notion of Windows Everywhere is starting to extend, or has extended itself, on up into the workstation business, where we think Windows NT Workstation will outsell UNIX workstations now by over a million units a year. As I said, the UNIX workstation market actually declined last year.

We’ll sell over a million Windows NT Servers this year. And we’ve seen a phenomenal surge of interest in developers who want to have access or sell in new places Windows server-based applications. If you take a look at the work going on at companies like BAAN or SAP or PeopleSoft, there has just been an incredible shift to the Windows NT platform. Almost 50% of new SAP installations today go on top of Windows NT as opposed to UNIX.

A few weeks ago at the Supercom show we talked about the growing range of interest in Windows NT Server from telecommunications software vendors. We see people do SS7 switching on top of Windows NT Servers. We have a project that was announced with Octel, where they’ve moved their voice-messaging system over on top of Windows NT Server. We have projects going on with people like Ericsson, where they’re bringing their PBXs to use Windows NT Server. These are markets typically that were targeted before either by UNIX or proprietary operating systems. But, with the growth in capabilities in the Windows NT Server platform, people are moving over. Nine of the top 10 database price-performance records have been set on top of Windows NT Server. In the intranet space, over 60% of the new intranet servers and about 55% of the new Internet commercial servers are going in on Windows NT.

We’re working hard to continue to improve the scalability and availability of Windows NT, so that people can target an even broader set of deployment possibilities with their applications. In order to do that, if people want to configure increasingly complex and large data centers with Windows NT, we’re working with third parties who have data center management tools. And we continue to add features to the core set of services provided by Windows NT at the server level.

We’ve announced routing and RAS capabilities recently, directory, security options, transaction services, message queuing services, active web page services. Again, we’re trying to give developers a richer set of services, and give them the ability to target an even broader set of deployment possibilities.

Then there’s the NetPC. People often ask, though, what is a NetPC? A NetPC, in some senses, is just a PC which has been done, some people might say, right first and then we’ve also tried to take out a set of features which are simply overkill for a wide variety of users. So we’ve taken out some of the things which have provided complexity and management overhead.

We and our industry partners, Intel, Compaq and Hewlett-Packard, who have been our lead partners in this effort, have taken things out and we’ve tried to add simplicity. In addition, we’ve added some things here in the short term to try to make Windows systems in general more manageable. Not only NetPCs, but mobile PCs, regular PCs and those things go under the name of our Zero Admin Initiative. And specifically, we want to show you some things that we already have available today to make NetPCs and other PCs more manageable.

There is a variety of things that we’ve done to simply do the PC right and scale it down for a variety of low-cost deployments, that we think will be incredibly valuable. We’re joined in that belief by a number of hardware vendors. In our partner pavilion at PC Expo you can see NetPCs from Compaq, Dell, Hewlett-Packard, IBM, Gateway, NEC, Seimens Nixdorf, Digital, Unisys, Hitachi. All are here in our booths showing NetPCs.

It’s not an exotic, sexy, wild demonstration. It’s just a nice, simple, low-cost PC. And we think that that is a valuable addition to the set of deployment options that developers can see for their applications. It’s a lower-cost device, in terms of acquisition cost. And it’s a lower-cost device in terms of the management overhead in supporting users on those PCs.

We’re working very hard on this broader initiative that we’ve called our Zero Admin- Initiative. And the heart and soul of what we have to deliver, we will deliver concurrently with Windows NT version 5. Windows NT version 5 goes to beta in the fall and we hope to ship that product roughly a year from now. And the vision of our Zero Admin option is to simply create a world in which administrators who want to, have no ongoing need to touch clients. That is to take the cost, all of this management and people overhead cost in deploying applications, out of the system.

The core breakthrough that we’re focused in on, in addition to some other things, allows the administrator to lock down and secure from the user’s wandering hands, all of the resources of the system. The key initiative is the ability to store all of the state, all of the user’s configuration information, data and the like on a central server and have that automatically in a smart way get mirrored out to every client. We sometimes joke around, it’s sort of an intelli-mirror kind of concept. I don’t know what name we’ll wind up with, but to mirror things out to all of these clients automatically. It facilitates roaming, if the design is right. So users can move from machine to machine. Very important, for example, in a customer-service environment, or a retail environment. It makes it very easy to replace PCs. We’ve got a customer we’ve worked with, a bank in Australia, whose number one goal in their mortgage processing center, is when a customer-service rep’s system goes down, to just be able to shuttle in a new system and have the rep back and running in 25 minutes. That is a key target, and it’s only possible if all of the information, all of the data, all of the profile information about that user and what he’s doing, is cached up on the server and then just replicated out. You can’t be installing things on the client. So it’s a zero install world.

We’re trying to make sure we permit disconnected operations. So if you do have users who want to take a mobile machine with them, we can intelligently cache everything that’s necessary on the laptop before it gets undocked and try to provide them the benefits of the PC, with the benefits of centralized computing. One model will not fit all. I don’t think all applications in all corporations will be centrally administered. But, we do know that this is an opportunity for us to give developers and the IT professionals that they’re working with a lower-cost way of deploying these applications that add so much value.

Not all administrators want to configure everything in the same way. And so one of the key goals has got to be for us to allow not only a rich set of applications to be built, but we have to have a wide set of deployment possibilities. Everything stored on the server, things cached down on the workstation, things locked down, things not locked down.

If you talk to people in a variety of industries, even take something like telecommunications, they have these huge customer-service centers, where people really want to lock down exactly what the user can do, no access to applications, no ability to get themselves in trouble, because the customer-service center has to be always up and running. That same telecommunications company, though, quite likely has a group, a very large group of engineers who absolutely want to be able to twiddle and touch and control and launch and do everything with any application on the system. And we’re trying to provide the full range of tools to allow deployment in an organization that is as heterogeneous as most corporations are today.

The next thing I want to talk about in this Windows Everywhere strategy is something that we call the Windows Terminal. And the Windows Terminal is truly a thin client. This is something we’ve just recently started talking about. We hope to have partners introducing Windows Terminals in the first half of next year. But a Windows Terminal is truly a thin client and it is thin in some important ways technically. Our goal with the Windows Terminal is to have it work essentially like a dumb terminal. That is, the server simply sends it strings of information that it puts up. And not only is all of the storage central, as in Windows NT 5, but all of the processing is done centrally.

It’s actually a little different, for example, from the model of the network computer where, in fact, you have to run a big old browser, and Java applications, and everything down on the client. It’s actually a less thin device. This device is trying to do a lot less than even the so-called NCs by re-centralizing a lot of computing. You could have access on the thin terminal devices which we hope will be about $500 or less. They’d run full Windows applications. They’d run Java applications. They’d run any Web content. But all the processing happens at the server, and the screens of information are then painted on these $500 clients.

We’re working with a broad set of suppliers. Current PC companies, as well as companies that are in the terminal business today. We expect that there will be some software that lives permanently down in these terminals, and that that will be a Windows CE-based client, so that you have all of the architecture to download these screens being based and running off of Windows CE. And these things will require an add-on to Windows NT 5 that we call Hydra, as a code name. But it essentially builds from the technology that we’ve licensed from Citrix and from Prologue to bring multi-user, dumb terminal support capability to the Windows NT Server environment.

Do I think everybody in the world will need Windows-based terminals? No, I do not. I think it is more a replacement for today’s terminal market, which has shrunk over time. Perhaps some applications which are on PCs today will be deployed on Windows-based terminals. But the vast majority of workers will still want to have and need to have local intelligence, local processing power, in a way that makes this, I think, an important entry to the Windows Everywhere strategy but doesn’t wipe out the rest of the PC market.

Also with our acquisition of this multi-user technology from Prologue and Citrix, we’re embarking on something – a part of the Windows Everywhere strategy – that I call Windows on Windows. That is very important to developers. How does a developer who wants to target the most modern set of Windows services target old Windows 3.1 machines, or old NT 3.51 machines? In the future, how will somebody who wants to target Windows NT 5 get those applications to run on Windows 95? The answer builds from this same Hydra technology that we’ll use to support dumb terminals. So that if you have a system that’s doing a perfectly good job supporting a user, but you want that user to run a new application that is targeted at a higher-end version of the operating system, or higher-end hardware, they can through this multi-user emulation.

This is incredibly important to the IT people I talk to. This essentially allows people to think about how they extend the life of a PC. I think, over time, people will want to upgrade PCs, as they do today. But if part of what we get as a result of this Windows on Windows initiative extends the replacement cycle on PCs for some people from two years to three years, or three years to three-and-a-half years, or three years to four years – not every PC, but extends the life of a number of PCs – this will be another valuable element in letting developers continue to target and take advantage of the most modern technology, but still have a low-cost deployment option back into the installed base of Windows systems.

If you couple those two things, Windows on Windows and Windows Terminals, along with what I’ll call Windows on UNIX or Mac, through this multi-user technology, we’ll be able to let people who do own Macintoshes and UNIX workstations also run Windows applications. You really do get a world that is more heterogeneous in terms of the deployment of Windows applications, and lower cost for management in some cases, and certainly can extend the lives of existing PCs.

If you’re simply trying to give a user, one who is perfectly content with everything else in their system, access to one new application, the terminal emulation capability, really multi-user capability, does give you the ability to extend the life of old PCs, which frankly is probably the number one thing that IT people talk to me about – how do they extend the life cycle of existing systems and existing hardware.

I want to just make a contrast a little bit here at the end, of what we’re trying to do with Windows Everywhere versus what Sun, Oracle and IBM are trying to do with the Network Computer. The Network Computer, I would say, is part of a whole theme from these guys to try to undo what the PC revolution has done. The PC model, this notion of hardware and software being separate businesses. The notion of building up libraries of compatible software which can be deployed very broadly. In some senses, people from Sun, Oracle and IBM are trying to say: no, let’s start again. Let’s go back and re-pursue the UNIX myth. Let’s try to undo what’s already happened in the PC world.

But this NC thing smells a lot like UNIX to me. The NCs from Sun, Oracle and IBM are simply not compatible. They’re not. These are companies that, in some senses, all compete on being different, and their machines are not compatible. A browser in a Java runtime, it’s not thin. A browser is one of the largest applications being written today, and the notion that that is a thin client, for people who really want thin, is simply mis-shapen. A terminal-based approach gives you a much thinner client.

There’s been a proposal essentially to rewrite all applications for this world, to not use the applications and libraries of codes that have been built up. But there’s no obvious new benefit in terms of applications that you can’t write today using Windows, the Java run-time in Windows, the Java VM, the Java development tools, anything you can do today in the Windows environment.

The whole approach here overloads servers and networks. So, by the way, do Windows Terminals, but that’s another option in the Windows family. It’s not the only option in the Windows family. There’s no NC support for portable, printing and expandability. There are different programming models. There’s the Java model at the client, there’s the NC model, there’s the HTML model, and there’s still good old UNIX running up on the server, and it’s fairly poor coexistence with existing PCs without technology like terminal emulation in terms of Windows clients.

Now in some senses I joke that Windows Everywhere is part of our “write once, run everywhere” strategy. It’s a very different kind of strategy than the one Sun is pursuing, but it certainly talks to the same core idea. And that idea is letting developers get the broadest set of deployment opportunities for their applications – but we’re not starting from scratch in Windows. There’s a huge installed base and a huge Windows run rate. There are also lots of code libraries. The glass here is half full. Windows has this rich set of services and we’re extending into new markets. And we’re trying to take out some of the prohibitive costs and a problem for people in terms of deploying Windows applications.

We’re pretty excited about Windows Everywhere. We think it was the right strategy in 1987, and with all the momentum behind Windows today, all of the progress we’ve made in handhelds, workstations, terminals, servers and so on, we think this is a glass that is actually a lot more than half full. And we’re excited to be continuing to pursue Windows Everywhere, the richest platform for developers and the one with the broadest set of deployment options.

THE OFFICE OF THE FUTURE

Bill Gates
Chairman & CEO, Microsoft

Comdex/Fall 1995, Las Vegas, November 14, 1995
Published in The Corporate Report No. 16 (February 29, 1996)

There are a lot of really big milestones this year. Microsoft celebrated its 20th-year anniversary. I turned 40 years old. That means for the majority of my life I’ve had the same job, same job title. When I started out it was tough being young, I couldn’t rent a car, people wanted to have meetings in bars I couldn’t go in. Now, I go into review meetings on the products, and these hip programmers are making jokes about “Friends” and “ER” and things I just don’t understand, so maybe I’m a little too old. I told Jay Leno that I was turning forty and he suggested that maybe I’m the Mick Jagger of the software industry. And I’m still trying to figure out, is that a compliment or what does that mean?

Well, I could spend the next 60 minutes talking about Windows 95. So I thought I’d ask, are there people here who have not heard of Windows 95? It looks like maybe we can stop running our ads now. What I do want to talk about is how personal computers have helped knowledge workers. What have they done to make those jobs more effective?

If we go back 20 years and we think about the earliest personal computer, this MITS Altair with the paper tape BASIC, I think it’s fair to say that this did not help knowledge workers at all. It was a kid’s computer. You would go home at night and try to put the thing together. About half the people who bought it actually successfully got it put together. The programs would blink the lights. At best you could play tic-tac-toe, but it was kind of a miracle that individuals could own a computer, and it was fascinating to put it together and figure it out. Now over the next several years, products did come along like Electric Pencil or WordStar or VisiCalc. But I think we can say that it was really in 1981, with the advent of the IBM Personal Computer and Lotus 1-2-3 shipping in 1982, that started to bring computers into the business world, where people could think, “Hey, this will help us get our jobs done in a better way.”

Another major milestone was in 1985, and this is when the Macintosh came along and gave us the graphical interface. At first it was a little slow, but it really became a foundation for the last decade of innovation. Things like the integration that we’ve got now are really so far beyond what we had back in 1985. The desktop productivity category, if you look at software publishing data of all of the software sold on PCs, is 59% of all software sold. The second biggest category is utilities, and most of those utilities are to solve problems created by desktop application software. And so this is overwhelmingly the biggest thing going on the machines that are sold to business. People are primarily using these applications. Over 80% of the world’s documents are now created with these applications.

The improvements of the last ten years have been evolutionary. Every couple years there’s a major new version, a lot of competition, and I think, because of that evolutionary nature, it’s easy to miss how far we’ve come. Integration used to mean cut and paste. It didn’t carry the font across or any of the other attributes, but it was kind of a miracle. You could even take the characters from one application to another. Now we not only preserve those things, but we support arbitrary objects with the plug-in architecture out there. Any applications, not only from one company, can be pulled together in an integrated fashion.

We have a great deal of economization now making the screen look like what it wants. The computer provides tips to help you out. There’s been a very rapid shift over the last three years towards buying office suites. During the last two years, we’ve increased our number of Microsoft Office users by a factor of four. And with that paradigm of letting those things work together, documenting techniques in one way has brought a dramatic change.

I can just give you a few personal examples of why I’m an excited user of these products. A recent advance is this thing called Spell-It. As you’re typing your document, it puts a little red underline under any words that look suspicious, that are misspelled, and, of course, you just use the right mouse button, click, and it suggests how you might want to properly spell the word.

It’s amazing how many words I’ve been misspelling all of these years. Nobody ever told me. Maybe it’s because of my job title or something. The nice thing now is when I get mail from other people it automatically runs Spell-It across what they’re sending to me, so I can see the spelling errors they’re making too.

Another big thing for me is WordMail. The ability to take all of the richness I’ve got in the word processor – revision marks, putting in an outline, different text – the fact that all day long I’m in the word processor means I don’t need to boot it up again when it’s creating a document or reading mail. I’m just there with all of that richness, which means that I can use the advanced features, because that’s the only text editor that I need to work with.

Another big thing for me is Pivot Tables. Whenever I’m going to visit a country, I want to quickly look and say “How are the sales? How did their sales compare to the United States? Where are they ahead of budget? Where are they behind budget?” And the Pivot Table is a fantastic way of doing that. You can look at it in different time periods, zoom in on detail, even go into sub-regions of the country. And the contrast between trying to look at printed information about sales data, just in one view that’s always too detailed to really figure out what’s going on, versus having these Pivot Tables is being able to mail them around, say to people, “Hey, what do you think of this?” It’s not an executive information system, where just a few people are seeing it. Everybody is looking at the same data and talking about the same results.

Today we want to share a vision of where office software is going in the years ahead. Some of the things we’ll show will take us a couple major releases to get to, but these are things that we’re working on today that I think are very exciting. We call this the personalized, connected office.

A big part of this is going to be taking advantage of the revolution in communications that’s taking place right now. Of course, this means the Internet. The Internet is kind of like a gold rush, the amount of excitement, the number of new companies, it’s really unbelievable. Now fortunately this is a gold rush where there really is gold. It may be buried a little deeper than some people think, but the drops in the price of communication, the fact that PCs everywhere will eventually have very high-speed data rates allowing them to work together, really will have a fundamental impact. In fact, it will mean that our industry will be changing the way people do business, the way they learn, and even the way they entertain themselves, far more than I think people outside our industry expect.

The Internet, the breadth of its impact, really struck me a few days ago when I was in downtown Seattle. I just had a meal and I was walking back to my car, and somebody came up to me asking me for some money. I wasn’t quite sure what to do, but then this person mentioned that they have a URL (Uniform Resource Locator), and I thought whether they do or not, that’s such a good line I gave the guy $5. And, you know, for all I know this is a homeless guy who’s got a home page.

The whole Internet thing, it’s a little strange. I mean there’s more new magazines being started about the Internet than anything else. Here at the show you go to booths, people are talking about the Internet. Why doesn’t the Internet itself allow those things to happen?

Could the Internet ever be a way that the industry gets together and shares things? Well, we’ve got a lot of work to do to make it be that kind of vehicle, but this gold rush atmosphere is getting people to invest in some great approaches and many of those will pay off and really deliver on the promise that’s out there.

Now, it’s always hard to talk about future software, and so what we’ve done here is something that we tried before, and that is to make a little movie, a little story that’s set in the future where Office plays a role. It sort of provides the special effects for the story here.

The setting is a small town called Kelseyville. This is the kind of little town you might have gone to when you were young, and where there was a nice resort. This town is faced with a bit of a dilemma, because the resort that was the lifeblood of the town has been shut down, and now they’re trying to decide should they make it into a historic landmark, or should they develop it into a shopping mall as a commercial development. So, let’s go and see how this story unfolds.

[ACT I OF MOVIE]

What are we seeing here with Office so far? We’ve seen a very deep level of integration. The first thing that happened was that Martha went into her desktop and she had projects, four different projects that she was able to choose from. The project contained all of the customized information. There are the four projects, she picks up one, and up it comes. It’s a whole workspace, with business cards and documents. This workspace happens to have the schedule open right now and is showing all of the events, when she started working on the documents, when the documents are due. It’s very easy to get into, and you don’t have to think about particular applications or directories. All the data is there in one place.

One of the documents, the most important one, is this proposal for the shopping mall. And there we saw that information of all types was brought together. We had a movie, we had sales projections, we had charts, and as we saw her use that she was able to navigate very easily. Different files were involved.

[REFERS TO VIDEO OF SCREEN SEQUENCE]

This is a unified table of contents here. Over on the left it’s like an outline to go to the different pieces. You navigate through without ever starting up a program or even knowing what’s being invoked, so there’s an object architecture there, an integration of use interface to share across all of those different document types.

Finally, we had the idea of bringing time into the picture, integrating your work with the schedule. You can go back in your calendar and see how on a particular day what documents you edited, when you started, what you did, and look at the version that you were working on that day. All of it’s tied into your different meeting times. The calendar can even blink when something is due, like the document we see there. The Assistant, which is down in the lower right there, is actually recommending that a meeting be scheduled by looking at different business bits for all of the people involved.

All that’s taking place across the Internet. All of the different appointments are easy to pull together. It’s the intelligent Assistant that makes that easy. Looking forward in time and looking back, the journaling keeps track of all of that history and makes it very accessible.

[ACT II OF MOVIE]

Now, we’ve seen a number of cases where this idea of IntelliSense has been taken to a new level. IntelliSense is watching how a particular user works with documents, and therefore is able to suggest things that are going to be helpful. A first example we saw of that was as the mall document was being put together, the Assistant suggested that maybe the author would like to look out on the Internet and find related documents. By having natural language technology, you can find the proper nouns, you can know what the context of the documents is and you can highlight exactly those words and use those for a rich kind of search.

[REFERS TO VIDEO OF SCREEN SEQUENCE]

After that search was done we went out and we were able to find a couple of things and they’re marked according to a little summary, including whether it requires a license fee to use those documents. Of course, you can easily drag and drop those things and either link to them or use a portion of those documents in terms of what you want to create. Another thing we saw was a meeting taking place where the personal computer, through presentation software, was being used along with audio conferencing, and so we had the new kind of simultaneous voice data modem.

At the end of the meeting, the Assistant asked, “What about the meeting summary? Should it be sent to other people? Should it be just the action items?” And that was all done very automatically. In fact, the meeting summary highlighted different things, and no effort was required. You can see the names here are linked so you can send e-mail to those people, and any of the documents that were used would be referenced there as well. So it’s a case where you really get automatic help as you go along.

[ACT III OF MOVIE]

Well, here we’ve used the Internet a couple of different times to do important things. In the previous act, we actually went out and created an online version of the document and were able to look at that. And so we call up a dialog box that we’ll see here that lets us go out and have that online edition. We could register it in various directories, such as Lycos, and we could notify the registered readers so they would have mail in their inbox telling them that there’s a new document out there.

[REFERS TO VIDEO OF SCREEN SEQUENCE]

Another thing we saw was the meeting between Bob and Stan, and here they’re working together, and there’s something very important here which is that they didn’t have to learn any new applications. They didn’t have to learn any new commands. They were simply using Word and working on the same document.

They didn’t have to define roles for each other. It simply showed them the two different cursors that were in the document, and either of them could go to the same section of the document, and they could each edit at the same time. That kind of collaboration across the Internet can work very, very easily with today’s applications and nothing extra to learn. And of course this can extend to all of the different applications that people work with. Well, our story is moving towards a quick climax, so let’s get back and see how it wraps up.

[ACT IV OF MOVIE]

Well, we’ve got this very complex meeting taking place, and different people want to make comments and have side conversations. You’re presenting rich types of information, so that the town planners are able to make little annotations to each other. As the questions come in, they’re logged together with the slides so that you can go back and the moderator can select the right one, really making this kind of event work well, even allowing people who aren’t at the meeting to watch as it goes on and later to come back and capture some of the dynamics of what took place there. Multiple streams of input again are being integrated together, bringing the rich kind of conferencing that can make these meetings more effective.

Another thing that we saw here was the idea of customization. The mayor, Alice, had a third-party component that was plugged in that let her see traffic data in a nice map view. She was able to customize that, pull the data in, which was probably in an Excel table, and pull it up onto her map. She could then simulate what this new traffic pattern might look like there and see that there was really a problem. You’ve got lots of end-user customization, allowing you to see data in a very new way.

[CLOSING ACT OF MOVIE]

We saw a number of pieces there that define our vision of this personalized, connected office. We saw the advance in integration, eliminating the idea of the independent applications. We saw a great exploitation of the Internet, so that inside a company information is easily available and it also breaks down the boundaries between a company and its customers, or between a company and its vendors. All of the information is there, easily viewable, easy to collaborate in creating.

We saw big advances in IntelliSense, where the user tells us what their preferences are, and we see over time exactly what they’re doing in helping them out. We saw big advances in natural language. That’s an area where for almost a decade we’ve been making major investments, and just now the speed of the machines, the size of the memory, all of the elements have come together with this new software to allow us to bring this into the office and allow it to be more effective.

And, finally, we saw a component architecture where people use the pieces that they’re interested in, including the ability to plug new things in that leverage off of the richness that the Office platform is able to provide.

Now, there are a number of enabling pieces that have to come into this besides the software. We do need faster processors. Fortunately, we have Moore’s Law working for us, as well as billions in investments that the chip industry is making. So in the next few years we will have speed that’s more than adequate for everything we saw. We also want the presentation to be easier to work with, the animation, the motion video. And so the graphics capability has got to improve, and that’s on a very fast track as well.

Some of these new input techniques will also be important. The video camera that lets you video conference will also let you make gestures that the Office software can understand. Voice input, pen input – we believe those are all complimentary to the keyboard which will continue to be a primary way of getting lots of text into the system.

Now to make using all of this easy, the communications hardware is going to have to be built in. There are many different generations of communications. Within an office in the local area network, we’re moving up to a hundred megabit speeds and we’re getting the kind of quality of service guarantees that allow you to pass audio and video across that local area network. But the hard problem is when you move to the wide-area network and you’re trying to reach out to other people, what kind of connectivity do you have? If we just use today’s phone system with modems, that’s what we call narrowband. Sort of the ultimate speed we’ll get out of that is about 28.8 KB that’s moving into the mainstream. But an important characterization to it is the simultaneous voice data, DSVD, and that really lets you know whether it’s discussing a contract, or getting product support, or ordering something out of the catalog. It really makes it far more social and yet gives you the richness of the computer display as part of that conversation, being able to hook up those connections by finding a Web page and saying that you want some advice, you want someone to talk to you. That will all become very seamless now.

We also need to take narrowband communication out and make it easily available on a wireless basis for people who are working in a mobile fashion, and that will take a couple more years before the infrastructure is in place. During that same time period, though, we expect a very rapid move to the next generation that we call midband. We’re very excited about ISDN. The ease of setup is improving. The price of the hardware is coming down, the monthly charges are coming down, and ISDN, because it’s about five times faster, really makes a qualitative difference. Today those images that seem a little bit slow out on the Internet will be very, very snappy. Still image performance at midband is really, really excellent.

Another flavor of midband that’s not quite as far along but will also be important, is the cable modem, taking the coaxial infrastructure that the cable TV companies built for broadcast video and using that to tie your PC in at data rates about the same as ISDN, or perhaps even a little bit better. At midband, we can do some video capability, but it’s a little bit like still images are in narrowband. It works, but it’s not perfect. For example, you wouldn’t want to watch a movie sitting there with a midband connection. For a business meeting it works, and I think it would be very popular.

The ultimate is still broadband, and that means providing data rates of several megabits or more. Now, this has been the Holy Grail of the so-called information superhighway. A couple years ago some communication companies were really talking about how many millions of people they’d connect up in the next few years. Well, a little bit of reality has snuck in here, and they’re realizing that the revenue opportunity for connecting broadband up to homes is going to take quite some time to develop. The prices have got to come down. The applications have to be far better than they are today.

And so the concrete evolution is moving towards midband, and then using that as the base point to eventually get to broadband. Broadband will happen, and it will be important. Using technologies like the optic fiber, asynchronous transfer mode and ADSL. We’ve got that in front of us but not as a revolutionary step, not as a big bang, simply as something that we’ll move to step by step.

Now the goal of all of the things we’ve been talking about is to empower users. We want people to have more effective meetings, to have fewer meetings, to be more in touch with the things they want to do.

If you look back ten years ago to somebody writing a Ph.D. thesis, using a Selectric typewriter, hiring somebody to do that, and compare what that will be like as this round of Office comes around, where you’ve got the richness of the Internet, you can send out versions to your reviewers, get their comments and organize things very easily.

Imagine a small business person who wants to just focus on particular tasks. They can be alerted when their financial data shows something that’s out of line, be alerted when a customer has a request. Small business people will be able to connect to this electronic world on an equal basis with large businesses, and the authoring tools they’ll use, they’ll want to work for online and in the print world simultaneously, so we want to take all of the learning that’s been done on these tools and carry that over.

We need better decision-making, the kind of Pivot Table connection to database, ways of visualizing information and passing that around. This process will help all businesses, particularly large businesses where coordination is a major, major issue.

We also create flexibility. People can work wherever they are and be in touch, whether it’s somebody who wants to do telecommuting, work out of their house, work part-time, be a consultant, or whether it’s a salesperson out on the road who wants to make sure they know the status of orders, who wants to be able to very easily communicate back to headquarters ideas and customer information.

All of that will be enabled by office productivity software, so I hope you can tell I’m very excited about this future vision. It really is something the whole industry needs to pull together the pieces for. Better hardware here for the desktop applications part of the market that’s the majority of PC sales, better software from lots and lots of companies, better communications infrastructure, and perhaps most importantly, the solution providers, the people who have provided the consulting and training, and take these standardized building blocks and put them together in a way that’s meaningful for the incredible variety of uses that are out there.

I really think this is an incredible opportunity for all of us.

THE MONTREAL EXCHANGE: BRINGING DYNAMISM AND INNOVATION TO THE CANADIAN CAPITAL MARKET

Gérald A. Lacoste, Q.C.
President and CEO, The Montreal Exchange

The Canadian Club of Montreal, April 10, 1995
Published in The Corporate Report No. 12 (June 15, 1995)

Above the 49th parallel we have fostered our own capital formation process over the years. And for the most part, we have done it well. The instruments in this market range from money market certificates to 30-year bonds, from basic stocks to complex futures on stock indices, from derivatives on government bonds to wheat futures and bank syndicated loans. Some of these financial instruments are traded on our exchanges, some are not.

This market services an energetic nation with many different requirements. From our governments issuing “billion-dollar” bonds to small cap mining companies raising equity to explore the Great North, these issuers are served in Canada by a number of financial intermediaries, ranging from independent securities houses to full service banks operating in all areas of the capital market.

Whether these intermediaries are regulated provincially, as is the case for the securities industry, or by dual jurisdiction, as in the trust and insurance industries, or federally, as for banks, the Canadian capital market is perceived by the investment world as one unified pool of assets. Let us say that our Canadian capital market is one Canadian Club to which we all belong.

Global financial competition and the Canadian market

Canadian exchanges have had to respond on two fronts: the growth of institutions and the tremendous development of technologies. The institutional investors have watched their assets expand, and pushed the development of new instruments and technologies, such as derivatives and program trading. Their quest for limited market impact and confidentiality in trades has spawned off-exchange trading and proprietary trading systems.

If we want a date for the beginning of the new global capital market dynamic, it would be May Day 1975. On that day fixed commission rates were abolished for brokers in the US, and the US Congress mandated the SEC to implement a National Market System through amendments to the Securities Act. Thus, the curtain rose on an exciting new era of financial opportunity, technological creativity and competitiveness.

Under these pressures, the financial world began to opt for new policies. In Canada, as in Europe, regulators began to reconsider the traditional structures of the financial services industry. When London announced its Big Bang in 1986, Canada followed by redesigning its regulatory approach to financial institutions. The four-pillar approach keeping banks, insurance companies, securities houses and trust companies as distinct and separate entities was abandoned. And, that paved the way for a complete restructuring of the securities industry, allowing banks into the business.

Canada competes in the major leagues as an industrial economy fueled by a small population. It has developed its own idea of competitive fairness. We tolerate and encourage corporate concentration in ways that our neighbors in the US would not. The reason being that only large entities can survive and grow in the current international market for goods and services.

The same perspective came into focus in the restructuring of our financial services industry. The consensus was that Canada needed strong entities to compete in the global market with the large US, European and Japanese financial powerhouses. After all, how can our resources be organized to measure up to Deutsche Bank, Nomura and J.P. Morgan without the necessary capital? By necessity we designed powerful, well-capitalized Canadian financial conglomerates, thus unshackling the potential of our banks, some of the world’s largest.

And, the timing could not have been better. Soon after our reform came the Canada-US Free Trade Agreement, then NAFTA, and more recently the Uruguay Round of GATT. These trade deals will continue to force us to address the issue of the competitiveness of our capital market.

Although these agreements have not encompassed total reciprocity or truly free market access in the capital markets, players have jumped the fence and started to play in each other’s yard. As we have fewer restrictions on foreign presence and foreign ownership of financial intermediaries, more players have jumped the fence into the Canadian yard.

Redefining the role of Canadian exchanges

So today Canadians are discovering that something has been left out of the mix in the restructuring of their capital market. For some reason, we have failed to apply the same rationale in redefining the role of our exchanges as we did in the reforming of our financial services industry.

Over time, Canada has watched the development of financial services reforms in the UK and US, and has chosen certain elements from each to integrate into the Canadian framework. In terms of financial system reform, while the US has maintained the greater part of its Glass-Steagall legislation, separating banks from the securities business, Canada has been inspired by the UK model – some say the German model – of financial conglomerates.

Canada has followed the path of the US May Day in at least one major area. For example, we have chosen to deregulate fixed commission rates. Yet, one important US reform that never made its way to the Canadian market seems to have been overlooked: the concept of the National Market System.

Let us look at the “why” and the “how.”

Volumes on our exchanges have continued to grow over the last 20 years. Nineteen ninety-four, with a total volume of 25.5 billion shares traded, amounting to some $223 billion in value, was another record year. Despite this comfortable level of activity, our dominance in the Canadian capital market is challenged in four areas. First, Canada is losing market share in the trading of Canadian stocks interlisted on the Canadian and US markets. Second, we are seeing an increasing number of small cap companies heading first to the US in search of new equity. Third, the options market on Canadian stocks has proven to be inefficient. Fourth, the volumes in our financial futures markets are a fraction of what they should and could be. These are clearly the symptoms of a malaise in our capital market.

Understand me well! This is not a Montreal problem. This is a problem that the whole Canadian capital market must address.

A year ago, Jacques Ménard called for immediate action to dispel economic fatigue in Montreal. Mr. Ménard suggested that Montrealers pull together to rebuild their city and their regional capital market. I agree completely with this idea of pooling our talents. It is a must. But I would like to add that we cannot consider the Montreal Exchange as separate from the Canadian capital market. As I mentioned before, we are all part of the Canadian Club, and the challenges facing the Montreal Exchange must also be dealt with from a Canadian perspective.

It will not mean much if the Montreal Exchange achieves a 25% share of the Canadian market if that market shrinks by 50%. And, that is exactly what is happening.

US exchanges transact some 50% of the trading in Canadian-based interlisted stocks, and these exchanges are eager to win even more business. Over the last five years we have seen some 40 small size Canadian companies floating their initial public offering exclusively in the US. While we expect, and support, this kind of activity from more mature companies, seeing this trend among small caps is startling in terms of what is missing in our Canadian capital market.

On the other side, Canada is a foreign market that American investors understand. It is close to home, there is no language barrier, and many of the companies whose stock they buy have large US operations. And, not only are these companies close to home, they can be bought on a US exchange in US dollars.

Still, we must ask ourselves why our exchanges have failed to win a greater share of this US trading in Canadian shares. We cannot blame it on the competition. Instead, we must look at our own performance. We cannot expect this business to come to Canada, and in some cases come back to Canada, unless we put our own house in order. We must make sure we offer a visible market with the deepest liquidity. That is the only way to stop the erosion, and we must take these steps now…20 years after the May Day reforms!

There is no doubt that the talent, technology and services exist to get the job done. In the past, our capital market has done an outstanding job on capital formation for Canadian companies. In Montreal, we have taken a leadership position in technology; and Toronto is credited for being the first exchange worldwide to develop electronic trading through the introduction of the CATS system.

But, Montreal and Toronto must do more than rack up innovation on an individual basis. While the Canadian corporate world has been concentrated to compete in the global market, and while the financial services sector is primed to go head-on with the biggest players in the world, the Canadian stock market has been left fragmented.

If a US investor wants to find out about the market for a Canadian interlisted stock, he may have to look at three or four screens. If he wants to trade on our market, he may have to cope with three different sets of exchange trading rules. And we do not have to go as far as the US to point out the anomalies. A Toronto trader could have a hard time getting his order properly allocated on the Montreal Exchange. Of course, the reverse holds true for Montreal traders.

These structural inefficiencies must be rooted out if we are to compete for our share of Canadian business in the global capital market. The time has come to pool expertise and experience for the greater good of all Canadians.

Now you may ask, what do I mean by a better and more visible Canadian capital market? Do I advocate one exchange with a single black box handling all trades? Absolutely not. After all, we have very good reasons to keep our various exchanges functioning as distinct entities. In Europe, or more specifically in a country like Germany, where seven different exchanges have been integrated into a single scheme, the dynamic is different. Our geography and our regional diversification are quite different.

Our American friends did not take the route of a single exchange for the entire country. They chose to go with the National Market System in 1975, and that was later developed into the Intermarket Trading System in 1978 by the exchanges themselves. ITS is a communication and routing system designed to facilitate trading of listed stocks among competing US markets. Specialists, floor brokers and market makers can view the quotes in other markets and transmit buy and sell orders to markets offering a better or the same price. Based on this composite quotation of bids and offers, it can be determined whether to seek an execution in another market.

In Canada, exchanges must work together to achieve “in a Canadian way” the goals of the May Day reform. A National Market System may well be the missing link in the reform of Canadian financial services. As in the US, our goals are simple: to reduce fragmentation; to enhance competition; and to allow for the best execution of orders for customers in the Canadian market, wherever the trade takes place. Our exchanges must work with goodwill and a sense of innovation to attain these common goals, while building on the synergies of a rich mosaic.

Innovation at the Montreal Exchange

What does this mean for the Montreal Exchange? The M.E. is a regional market, and, as is the case in regional markets worldwide, innovation is a fact of life. Regional exchanges must work extra hard to keep their place in the new capital market order. Exchanges from Montreal to Paris to Frankfurt are challenged to maintain critical volumes in the listed companies and instruments they trade.

All regional exchanges are battered by the enormous liquidity pools in New York, London and Tokyo. As for the rest of the world’s exchanges, they are all regional in nature. To stay on top of the game, regional exchanges must work hard to offer innovative and value-added services. They must find ways to lower trading and participation fees. And, throughout, regional exchanges must maintain a fair and efficient market. If this is achieved, then regional issuers will benefit greatly from an easier access to the capital market.

From the perspective of the Montreal Exchange – the oldest trading place in Canada – we are accustomed to innovation. In fact, today we find ourselves asking many of the same questions that were put forward in the days of the first coffee house meeting back in 1832. Why did the pioneer traders of the Montreal equity market decide to hitch up their horses to the coach at the same time twice a week and ride over to the Old Exchange Coffee House on St. Paul Street to make deals? Was it merely an excuse to visit with the boys, or enjoy the hospitality of the keeper of the coffee house – Mr. Goodenough? I think not. The first capital market traders in Canada shared the very idea of a central meeting place where trading, payment and settlement practices were fair, and counterparties well-known.

In the context of the Canadian capital market, Montreal has a tradition of innovation. The Canadian Depository for Securities (CDS) was launched in La Tour de la Bourse in 1970. That was followed by the creation of the first options clearing corporation, Trans-Canada Options in 1976. Although both the CDS and TCO were launched in Montreal, right from the outset we invited the other Canadian exchanges to participate in their development. In this way, the economies of scale could best serve the often overlapping membership of exchanges.

More recently, the successful introduction of Canadian financial futures proved to be another Montreal innovation. After five years of complex product development and intensive marketing, the Montreal Exchange has positioned itself as a leader in Canadian financial futures instruments. And, there is little doubt this business will grow exponentially when compared to vigorous similar markets. Thus, Spain, with a smaller capital market, has eight times the volume we have on a similar 10-year government bond.

The future growth of this market in Montreal, and its success, will be measured in jobs created and other economic benefits. So far, this market has created some 150 jobs on the floor of the exchange, and two or three times that number upstairs. Meanwhile, our futures products have become widely used by risk managers investing from outside the country.

At the Montreal Exchange, stocks and financial futures live side by side. Most countries have chosen to develop stock and financial futures trading on different exchanges. By taking a different route, the M.E. has been able to benefit from the synergies flowing between people trading a variety of products on the same exchange. Not to mention, the evident economies of scale gained by having one trading floor offering several products.

Basically, our exchange is a trading place, not just a trading system. It is a place where people meet on the phone, physically or through computers to trade financial instruments. It is a bundle of relationships that create activity, and foster the growth of the Canadian economy.

One must also look at the Exchange as a public institution, just like a courthouse, a hospital or our Grands Ballets Canadiens. While it is owned and governed by its members, the Exchange has a broad base of stakeholders whose lives and well-being are directly affected by its activities.

Perhaps the best way of clarifying the importance of an exchange is to consider the economic landscape without one. Without an exchange, access to capital would be made much harder. Issuers would have to go farther afield to connect with the global capital highway. In a world where economic growth depends on the expansion of small and medium sized companies, we must keep the process of local capital formation intact, and readily available. And what about our securities lawyers, accountants, portfolio managers and traders? Without an exchange in their region, they will be one step further removed from the all-important decision-making center.

Public companies like Bombardier, Cambior, Cascades, Groupe Transcontinental, Quebecor, Pharmacies Jean Coutu, Vidéotron and many more have counted on the Exchange as their gateway to the capital market. These companies successfully completed their primary listing on our Exchange, and they continue to play an important role in terms of volume traded. It is crucial that our Exchange act as the gateway to pools of equity capital for the Bombardiers of the future. After all, tomorrow’s jobs will come from the small enterprises of today.

It is with this sense of responsibility that Montreal has opted to increase its services to listed companies, and to assist those companies considering their first step into the stock market. We understand that once these companies reach a certain level of maturity they will seek larger pools of capital. When this happens, our first reaction should be one of pride that our homegrown companies have reached the stage where they can compete with global players.

Making Canadian capital markets efficient

When it comes to innovation, Montreal has demonstrated it can meet the challenge. The question now is how our talent for innovation will bring us to the next stage of development.

Let me conclude by turning back to the notion of the Canadian capital market, armed and ready to meet the global competition head-on. While Canada has four exchanges – Toronto, Montreal, Vancouver and Calgary – a significant portion of the trading on the exchanges is transacted by the major securities houses, all of whom happen to be member-owners of all the exchanges. At the same time, many of the same issuers are interlisted on these exchanges.

However, this dynamic has not created a cohesive Canadian market. Our market is still fragmented, and it is within this fragmented framework that our exchanges must meet the global competition head-on.

I believe that Toronto, Vancouver, and Montreal can all work better in their own markets to serve their own regional stakeholders. They can assist local companies in taking their first steps in equity markets, they can train talented personnel in the skills of finance; but can they work to promote the cohesive capital market as a team? Achieving this goal will not be easy, yet is there an alternative?

We must pool capital and human resources. We must avoid duplicating complicated trading and settlement technologies. We can form the necessary alliances to meet set objectives.

Two months ago Umberto Santos, President and CEO of the Desjardins Laurentian Financial Corporation pointed out that in many cases capital follows talent. In Mr. Santos’ own words: “…We need time, brains, personal involvement, experience, savoir faire, a good ear, new ideas.”

Well, at the Exchange, we are developing a long-range plan aimed at maintaining, attracting and training the most innovative financial talent. And we fully expect the capital to follow. We look forward to sharing our ideas on how to improve the Canadian capital market and ensure it helps Canadians play a more competitive role in the global market. We also look forward to fulfilling our responsibility in keeping the Montreal Exchange both dynamic and innovative for future generations of Quebecers.

GLOBALIZATION AND MARKETS: CANADA AT THE CROSSROADS

Gerald A. Lacoste, Q.C.
President & CEO, Montreal Exchange

The Canadian Club of Montreal, February 1, 1999
Published in The Corporate Report No. 27 (June 30, 1999)

As we look ahead, the question is what, if any, is the significant role of Montreal, Quebec and Canada in global capital markets? And in the securities market the question is a defining one: what is a market today in a world of globalization, in a world without borders and in the virtual world of internet commerce?

This is a world in which the medium of the web, which had no commercial applications at the beginning of this decade, will have 400 million users by the end of it. It’s the fastest growing medium in history. This is a world in which a virtual company called America-On-Line, which did not exist at the beginning of the 1990s, trades at such high multiples of earnings that its market capitalization exceeds that of General Motors.

Globalization has transformed the world economy and markets in the 1990s, and the issue for Montreal, Quebec and Canada is how do we remain competitive in that context?

For market operators, such as exchanges, the issue is one of creating value-added services and products in such a way that not only maintains the necessity for our services as an essential mechanism for capital formation, but responds to additional demand out of innovation and technology. World trends in capital markets are reshaping the landscape of exchanges and offering interesting value-adding roles for regional exchanges such as the Montreal Exchange. And we must seize this opportunity.

There are also issues of critical mass and economies of scale and, in this respect, Canadian capital markets are no different than other sectors of the Canadian economy. We need to achieve both, or we simply won’t be world competitive. We can be either agents of change or victims of change.

International trade has always been an integral part of Montreal’s economy, beginning with the fur and forestry trade of two hundred years ago. The origins of the Montreal Exchange are rooted in the financing of banks and railways, over a century ago, both in our local market and outside. In fact, the initial offering of the Bank of Montreal was sold half in Canada, half in New England.

We also have a tradition of trading, innovation and value-added products at the Montreal Exchange, which this year marks the 125th anniversary of its incorporation in 1874. In its first year of operation, the Montreal Exchange traded approximately 2 million shares and bonds of 63 companies. Today, we have nearly 600 listed companies, trading over 4 billion shares a year.

We are the oldest stock trading place in Canada, and we can trace our origins back to the 1830s. We’ve had several homes, the old Exchange Coffee House on St. Paul Street, the Montreal Stock Exchange building (now the Centaur Theater on St. François Xavier Street) and our current location at La Tour de la Bourse in Place Victoria. We welcome thousands of people every year in our Visitors Center, from school groups to investment clubs, as well as hundreds of thousands of visitors to our website.

Our tradition of innovation has seen us diversify in the last three decades, from shares to options in 1975 to financial futures, in which we have carved out a new role for the Montreal Exchange in the 1990s. We were also instrumental in the creation in Montreal of CDS, the Canadian Depository for Securities, established in 1970, and Trans Canada Options set up in 1976, now the Canadian Derivatives Clearing Corporation.

We’ve experienced more change in the last quarter century, indeed in the last decade, than in the previous century. Last year we marked the 10th anniversary of the BAX, a Canadian-dollar denominated interest rate 90-day futures contract, which in 1998 ranked eighth worldwide for short-term futures instruments.

The Montreal Exchange has two-thirds of the combined volume in financial futures and equity derivatives traded on Canadian exchanges. Montreal was the second-fastest growing futures exchange in the world over the last two years. More than 50% of the trading activity in Montreal Exchange futures is conducted internationally.

And the market opportunities in Canadian derivatives are only just beginning. Canadian stock options trade at only one-seventh of world ratios. Index derivatives trade at one-eighth of world averages. Long-term interest rate derivatives trade at only 1/14th of the world average. As you can see there is room to grow in this market. To secure a value-adding role in Canada, shouldn’t the exchanges take up collectively the challenges in developing those derivative markets?

In equity markets, like all Canadian exchanges, ours continues to be challenged by our American colleagues in trades of interlisted stocks in Canadian companies which are also traded on the Big Board and NASDAQ in New York. We are also threatened by non-exchange trading systems (such as ECNs, NETS, PTSs and ATSs), which although not a major force in Canada to date, are playing an important role in the US.

To put things into perspective, we must remember that Canada represents 2% of the total value of all shares traded around the world and 2% of the world’s GDP, whereas the United States represents more than 52% of the value of shares traded worldwide with 20% of global GDP. This demonstrates that it is possible for a country to attain a share of the global market that is greater than the relative size of its economy.

Turning to market structure, most of the equity activity in the US occurs on two markets, the New York Stock Exchange and NASDAQ. In all of the US, assuming completion of proposed mergers, there are only seven or eight equity markets, depending on how you count. Yet in Canada, we have five stock markets, almost as many as in the US, which, again, trades more than 25 times the value of the stocks traded in Canada.

For the outside world, we are one market: the Canadian market, as I declared here at The Canadian Club in 1995. I also suggested then that we had to change and adapt our market structure to face global competition and evolving technology. Four years later, as global markets have developed, as competition has increased, as technology has progressed, I must report to you that the structure of the Canadian market remains as it was, unadapted to these new realities.

At a certain point, there is a basic question of affordability in operating an exchange. How much do we spend on duplication of services when we could be pooling our resources to invest in the technologies we need to remain competitive? Just consider the costs of making the five Canadian stock trading systems Y2K-compliant.

The US stock markets, and the New York Stock Exchange in particular, have spent several hundred million US dollars on new technologies in the last few years. What can we do, in the face of such investments by our competitors in the US?

In addition, there are now nearly 240 Canadian companies interlisted in Canada and in the US. Of these, over a third, including very large companies, trade more heavily in the US. This underscores the fragility of our Canadian markets.

Then we are confronted with other external competitive issues, beginning with non-exchange trading systems, which permit institutions to trade without going through an exchange. Think also of large institutional investors: Fidelity for example, with $830 billion in assets under management and 12 million investors, has the capacity to trade internally among its numerous funds.

It is a world of new global trading platforms, such as the one being created among exchanges in several European countries, and new access providers, offering global access through technology. These present real challenges for regional markets. The challenge is to become value-added players on the new global stage, and to create demand for competitive regional services and market access points. Market fragmentation, service duplication, a technology lag and non-exchange trading systems, all of these challenge us in Canada as never before.

Our mission at the Montreal Exchange is to offer access to capital markets. Our vision is to facilitate access to global markets through networking and strategic alliances. A recent step in that direction was the arrangement we made last summer with the Bourse de Paris to enable our London-based members to trade futures at night on the Paris trading system.

But we need to go beyond that. In this century, we’ve done a good job of capital formation. Canada is one of the countries in the world where it is easiest to raise money. We have wonderful primary markets. Looking ahead at our secondary markets, we must focus on offering added value with advanced technology and services. This means more specialized markets, better technology and lower costs. Clearly, we need to consider solutions that will assure the development of all Canadian marketplaces, while drawing on the strengths of each of them. But the key is “value-added” on a global scale.

How do we create value-adding roles for each financial center? First, by collaborating, and agreeing that the sum of our market forces exceeds the parts. We need to agree on a common purpose, while maintaining our distinct identities in the marketplace. Then we can complement each other, rather than compete against each other, as well as our global competitors. The provincial securities commissions have moved in that direction by creating a virtual national commission and developing the concept of mutual reliance. That’s a good example of collaboration.

In any discussion about roles and relationships for Canadian exchanges in this globalizing market, our test will be whether each financial center can “earn the right” to continue its development as a value-adding marketplace for Canadian market participants. To do so will require first reaching the critical mass and creating efficiencies currently lacking in the Canadian market.

Among other benefits, each center would be a magnet for capital formation and other financial activity. Montreal, Toronto, Calgary and Vancouver would become known in global markets as exciting places to invest. This in turn would also attract the best people to work in those markets. We can also create an environment of comparative advantage in terms of human capital. Remember that the US share of capital markets is more than two and half times its share of world output.

The exchanges themselves would benefit from lower operating costs, more efficient investments in technology, and increased revenues from both equities and derivatives. Brokers would achieve lower operating costs and higher returns. And most of all, investors would benefit from deeper market liquidity and a broader menu of derivatives.

What we’re looking at here is a scenario of synergies in which everyone wins. In moving in that direction, we will leave behind the “me too” syndrome. If you consider Canada as a regional market, which is how the world views us, then we have to look at ourselves and ask what value-added services we can offer in a global market, whether it’s in equities, options or futures.

It’s how we can define a chosen role for ourselves. We have it within our power to create an efficient Canadian market, also known for innovation and creativity. The TSE is currently evaluating its new strategy as set out in October 1998 in its Blueprint for Success. In the introduction to this document, the TSE has indicated that it is, “open to discussing with other Canadian exchanges how best to evolve existing relationships beyond established alliances.”

I welcome this opportunity for discussion. Let’s really move on this issue. It’s time for the financial communities of Montreal, Toronto, Calgary and Vancouver, led by their exchanges, to regroup and together confront the challenges of globalization. It’s the only way we will have strong financial centers within a significant securities market in Canada.

CANADA AND THE GLOBAL CAPITAL MARKETS: A RATING AGENCY PERSPECTIVE

John A. Bohn, Jr.
President, Moody’s Investors Service

The Canadian Club of Montreal, April 25, 1994
Published in The Corporate Report No. 7 (August 15, 1994)

I am delighted to be in Montreal today. Moody’s has long enjoyed an excellent working relationship with Canadian investors and issuers, a relationship we trust will be taken to a new level with the opening of our Canadian office this year.

Ratings are hardly an unknown quantity in Canada; they have been a fixture of the financial landscape here for some time. Even so, I think it important to begin with some fundamental information about what we do, and what we do not do, just to ensure that there are no misapprehensions.

In the complex and increasingly integrated financial markets of our time, there is a premium upon information. Information is obviously vital to the investor, whose choices – and therefore potential risks – are multiplying with the globalization of markets. Information is equally vital to the issuer: the more information associated with an issue, the more access the issuer commands to world markets and to competitive rates.

At Moody’s, we offer an opinion on credit risk, called a rating. That rating is itself information and is accompanied by extensive data. But it’s a very specialized opinion: it extends only to the ability and legal obligation of an issuer to make timely payments of principal and interest on a security over the life of the instrument.

This opinion also has a comparative dimension. A rating evaluates, within a globally consistent framework, the relative risk of each debt issue and issuer. Thus, an investor whose market is the entire world has some basis for comparison and judgment.

It’s important to stress that Moody’s does not buy or sell securities. Nor does Moody’s have an opinion on the level of credit risk that is appropriate for this or that investor. Our function, to reiterate, is to measure the relative risk of credit loss on the huge range of debt instruments globally available.

Within that broad framework of definition, let me make four points about what Moody’s does.

FIRST, our focus is upon credit risk.

We maintain continuously updated ratings on the creditworthiness of most of the major borrowers in the global capital markets. We rate the debt of:

• Some 4,000 individual corporate entities worldwide

• More than 20,000 government entities in North America, from state and local governments to airports, schools and hospitals, including the debt of the Canadian provincial governments

• And, we rate the credit quality of some 47 nations, from the United Kingdom to the People’s Republic of China

We rate a variety of instruments, from bonds and commercial paper to numerous structured finance transactions in the asset-backed and collateralized mortgage markets. We also rate the credit risk of bank debt and deposit obligations and the claims-paying ability of insurance companies.

SECOND, we are forward-looking.

Bond investors throughout the world rely upon our ratings. They hold debt instruments with maturities ranging from one to thirty years, and more. Equity analysts are sometimes charged with being obsessed with the next quarter’s earnings report. That charge is rarely made against Moody’s. It is true that we watch current events, but we do so with an eye to the unfolding of the future, both medium- and long-term.

THIRD, Moody’s emphasis is qualitative. Long-term investors are ill served by any emphasis upon the sudden swoopings of the business cycle – the ebbs and flows of quarterly earnings, for example. Our analysis, and our ratings, are directed toward the fundamental forces affecting qualitative, long-term credit strength.

FOURTH, and finally, our analysis is global. By that, I do not simply mean that we rate international firms or sovereign entities, which of course we do. But I also mean that we have long grasped the globalizing nature of the world economy.

Much large-scale economic and financial activity, certainly including investment, is now global in scale. Fully 40% of all Canada’s publicly-traded debt outstanding is held by non-Canadian investors. By way of illustration, some 16% of it, according to the latest figures, is held by Japanese investors. Events in Canada affect those Japanese investors. Events in Japan touch Canadian issuers. A full grasp of those realities is essential to accurate analysis.

Therefore, we appreciate that we cannot measure the long-term financial strength of, say, Ford or General Motors without grasping the similar strengths and global strategies of Toyota, Daimler-Benz and Volkswagen.

But our attention must also include even broader developments than the finances of individual companies or industries and the economies of countries and continents. In order to render reliable, qualitative opinions, we must factor in modifications in the regulatory systems throughout the world, adjustments in accounting standards, and other changes in the business culture and environment. Similarly, we must be sensitive to the political pulse of the world, from ministerial changes in Japan to the progress of stabilization in Eastern Europe, and even including the electoral politics of the province of Quebec.

This brief review will, I hope, give you some idea of what we are – and aren’t. But it may be that this introduction was largely unnecessary. After all, Moody’s is scarcely a stranger to Canada. To the contrary, we have been doing business here since 1918, when we began rating provincial government debt. In the subsequent three quarters of a century, we have become keenly interested students of Canadian debt markets, and of the broad financial, economic and political foundations in which those markets are rooted.

Today, Moody’s rates over 150 Canadian issuers of debt. Our coverage includes all segments of the fixed-income markets:

• Government, at all levels, from federal to municipal

• And corporate, from the most important and economically significant industry sectors in this country

While our coverage is broad, it is focused in particular upon the vital sectors of telecommunications, oil and gas, pipelines, metals and mining, forest products, and financial services. Moody’s rates all six Schedule One banks in Canada, assigning long-term and short-term bank deposit ratings, as well as ratings on short- and long-term debt. We also assign financial strength ratings to some of Canada’s largest life insurance participants.

Over the past several years, Canada’s fixed-income professionals have seen the development of a new market niche: securitization.

Broadly speaking, securitization can be defined as the pooling of a particular type of asset for the purpose of creating collateral to support a debt security. Debt instruments created through this securitization process are often referred to as asset-backed securities, or in the case of a pool of mortgages, mortgage-backed securities. A Moody’s rating is an integral component of the securitization market in Canada, and we have rated Canadian transactions involving the securitization of auto loans, auto leases, mortgages, and most recently, mutual fund fees.

While Moody’s assigns ratings to the long-term debt securities of Canadian issuers, we also look at the shorter-term fixed-income markets, commonly known as the money market.

The commercial paper (CP) market is an important segment of the Canadian money market. CP developed in the 1950s as an outgrowth of the federal government’s bill market. It experienced a tremendous surge of issuance during the 1980s, as the Canadian economy expanded and borrowers sought low-cost funding.

In the 1990s, despite the comparatively short term of CP, it is a market subjected to increasing credit risk analysis by investors across the country. A key component of the healthy functioning of any CP market is the assurance of alternative sources of liquidity to ensure timely repayment by issuers. This area is one of particular concentration for Moody’s. We believe that lack of attention to such credit essentials as liquidity support can render a market vulnerable to disruptions or shocks.

All of us here are aware that the Canadian debt markets are dominated by government borrowing – local, provincial and federal. Government accounted for fully 80 per cent of total Canadian debt issuance in the public markets of North America, Europe, and Asia in 1993. Increasingly, the biggest players have been the ten provincial governments, and Moody’s has rated almost all of the debt issued within this sector. We are also active in the global bond market, rating every one of these large provincial or provincial crown corporation issues, representing some CAD$40 billion in debt securities.

The analytical task is thus large, and varied. The challenge of distribution is almost equally so. Timely and orderly dissemination of rating opinion and associated research is a critical aspect of our role within the global capital markets. It is also a matter upon which our Canadian office will be of great value to fixed-income professionals here.

Moody’s rating opinion and research is distributed by a variety of means, from a real-time global electronic delivery system, through ongoing fax transmissions, to the dispatch of a multitude of printed materials, including comprehensive research reports, rating reviews and watchlists. But we also encourage investment professionals who have a customer relationship with Moody’s to speak directly with our analysts by any of several means:

• Either privately on the telephone

• Through our “Newsflash” teleconference meetings

• Through attendance at formal analyst presentations

• Or at in-person meetings

In addition to rating opinion and information on specific debt issues or issuers, Moody’s regularly produces research on topics of particular relevance to investors. These “Special Comments” do not focus on specific rated entities, but rather on topics of broader interest to the marketplace.

For example, we recently published a report on “The Outlook for the Canadian Life Insurance Industry.” We also publish outlooks and system studies on the various banking systems around the world. In response to market demand for information, we have published Special Comments on the risk associated with financial derivatives – certainly a topic of urgent interest to investors here and throughout the world’s advanced capital markets.

Naturally, we believe that Moody’s ratings are always significant. But they are particularly crucial in times of market volatility and turbulence. Canada has traditionally been a market which has attracted substantial activity from foreign investors. These investors rely heavily on Moody’s to help get a measure of their own credit risk exposure. I think there are two key reasons for this reliance.

First, there is our track record. We are extremely proud to say that, to a rather remarkable degree, we get it right. I hasten to add that this is no idle boasting which the interested observer has no way of verifying. To the contrary, Moody’s publishes default studies, for both the short-term and long-term fixed income markets, to demonstrate just how accurate our opinions on credit risk have been. I regard these as our report cards, public records of how often we have been right, and those reasonably rare occasions upon which we have been wrong. As a consequence, global investors have come to depend upon us in their decision-making process.

Second, they depend upon us because of our globally consistent rating standard. Moody’s has expanded steadily worldwide over the last decade, and our rating coverage is increasingly global with every passing month. In the course of that expansion, we have maintained a single analytical foundation, a claim which – within the credit rating business – I believe only Moody’s can credibly maintain.

As I have said, our rating system integrates the special practices and orientation from numerous business cultures. But this information is all put at the service of a uniform rating system. Our rating of A1, for instance – which is defined in our explanatory materials – means the same everywhere, whether it is applied to an Austrian insurance company, a South Korean manufacturer, or a Canadian province like Quebec. Thus, in our increasingly globalized financial markets, investors can be confident that a Moody’s A1 is a consistent standard of credit analysis wherever they see it.

This confidence of investors in our reliability and our consistency is of great importance to us, but it is also of great importance to issuers. Ratings not only provide a frame of reference and analytical guidance to investors. They also provide access to, and credibility in, the capital markets for borrowers. On those relatively infrequent occasions when an issue comes to market without a Moody’s rating, an investor may well ask, and we believe is justified in asking, a single question: “Why not?”

I have mentioned in passing the fact that Moody’s, among its several activities, also rates sovereign debt. I have every reason to believe that this activity is one which has captured your attention in Canada recently. Let me inform you about an important fact.

Sovereign rating at Moody’s is undertaken by highly specialized and thoroughly trained financial analysts. They are the people who have compiled the enviable track record of which I just spoke. Institutionally, there is an impenetrable fire wall between our rating activities and the administration.

I can’t speak for our sovereign rating specialists and I really know only what they issued in their press release. That release stated that the review was limited to the foreign currency debt rating of Canada, which currently carries a rating of Aaa. In other words, bonds denominated in foreign currencies are included in the review, while bonds denominated in Canadian dollars are not affected. In the words of the press release, “The rising concern about the level of public sector finance within Canada appears to pose a risk that, during a period of stress, holders of Canadian dollar-denominated debt might turn those assets into foreign-currency assets. Moody’s will evaluate whether the trajectory of debt buildup through the public sector poses a potential foreign currency risk higher than generally associated with an Aaa rated country.”

I can speak to the origins and rationale of our sovereign rating activity, and I think you might find that instructive.

In sovereign analysis, Moody’s looks at structural issues that may point to long-term strengths and vulnerabilities. It is not a judgment on the political personalities of the day, quarterly balance of payments or the annual budget. Nor is it a judgment on a particular ideology. Though these and others are useful indicators, they are transitory.

The traditional objective of sovereign risk assessment grew from a single, narrow question:

• Will borrowers from a particular country have access to the foreign currency they need in order to service their future obligations on foreign-currency debt securities?

The country rating is thus a measure of the ability and the willingness of a country to manage itself in the light of reasonably foreseeable circumstances so that it will have the needed foreign currency to service debt, including the debt of the central government itself.

As I have said, Moody’s has been in Canada for many years, and we look forward to even closer association with our many Canadian customers. Here, and everywhere that we have done business throughout the world, we have enjoyed a close and open relationship with our customers. Although there is, naturally, disagreement from time to time about our opinions, we operate with our customers as partners in the capital markets rather than adversaries. Our interest is to help make those markets as efficient as possible, and that is surely the interest of issuers and investors alike.

MOODY’S CREDIT ANALYSIS OF MONEY MANAGEMENT BUSINESSES

Haig Nargesian
Senior Vice-President, Securities Ratings and Research, Moody’s Investors Service

Putnam Lovell, DeGuardiola & Thornton, Annual Symposium on Money Management Companies, New York, March 27, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

I have titled my remarks “Moody’s Credit Analysis for Money Management Businesses,” with a very deliberate selection of the word “businesses” over the word “companies.” The distinction is an important one simply because there are very few rated money management companies in the world – in fact, Moody’s Investors Service rates only three major money management companies. [Alliance Capital Management L.P. (senior at A2/P-1), AMVESCAP plc (senior at A3), and Franklin Resources Inc. (senior at A2/P-1)]

The reason our rated universe is so small is that money management companies in aggregate have not issued much debt. Debt levels have been low because cash flows have been sufficient to finance growth and because returns are so high that operating leverage seemed unimportant. In the future, we may well see more public debt in the industry, possibly to finance cash needs associated with growing 12b-1 fees, which could also drive public debt issuance; this is perhaps less likely with securitization of 12b-1 fees, now a viable financing source of distribution payouts. (Please see “Moody’s Approach to Rating Mutual Fund Fee Securitizations” dated April 24, 1998.)

Even if there are not a large number of rated independent money management companies, analysis of the money management industry continues to be important to Moody’s because so many financial institutions have money management businesses. When Moody’s rates insurance companies, banks, or brokerage houses, a money management business is frequently an integral component of the group. To demonstrate this point – as well as to highlight the significant M&A activity in the industry these days – we put together a list of the ten largest acquisitions of money management companies last year. We observed that Moody’s had rated seven of these ten acquirers.

Whether on a stand-alone basis or as part of larger financial enterprises, Moody’s has a basic rating methodology for money management businesses. I would like to review some of the key criteria of this framework with you today. Then I will make some comments about the M&A wave sweeping the industry.

The first thing I want to focus on is the all-encompassing issue of business franchise. There are several attributes of a money management business that give us insight into the overall composition of the business. By understanding each one, we build toward an opinion of the business as a whole. For example, Moody’s will take a considerable amount of time on client or shareholder profiles, with a keen eye on how, and to what extent, trends are reshaping the profile of the customer base. Not surprisingly, these characteristics are often tied to the product mix and distribution channels of the business.

The questions we are asking as we look at these details are: How resilient is the base of assets under management – which is the company’s source of earnings power – likely to be over time and what are the prospects for growth and the risks of loss? To the extent that we can identify a diverse customer base, a balanced product mix, and reliable access to distribution, we are likely to have higher confidence around the predictability asset levels.

Other factors that help define the business franchise are the investment styles and performance track records of the money managers. If the company has good track records, how did they get them? This question leads inevitably to some examination of management and other talent pools. Who are they and how are they attracted and retained? To the extent that the business relies upon – or at least and as importantly, is perceived by investors to rely upon – some important star-performers, how vulnerable is the franchise to their departure? Finally, we take a careful look at the business shareholder servicing capabilities, or access to shareholder servicing. It may not be a particularly glamorous angle of the business, but bad shareholder servicing is sure to be noticed.

To the extent that this analysis gives us only a moment-in-time picture of the business franchise, we have a long way to go. The next and more challenging task is the development of our assessment of future business prospects. This is based in large part on our review of management’s strategic thinking. Understanding such strategic issues as product development initiatives, plans to attract and retain key professionals, and effective management of distribution channels (or development of new channels such as defined contribution plans) is critical. When making these assessments, we ask: “What does management think are the critical issues facing their business today, what actions might management take as a result and what are the identified uncertainties associated with them?” Not surprisingly, we frequently end up talking about things like acquisition planning, which I will discuss further in a moment.

Now, let me turn to some of the key financial issues. My remarks will address two main themes that have particular weight in ratings outcomes: earnings power and capital. Strong and predictable earnings are the key to high ratings. In the money management business, the levels and types of assets under management drive earnings. The greater the certainty around future levels of managed assets, the more predictable the earnings power. But predictability here is inherently scarce because assets under management fluctuate with both changing market values and with investor sentiment. In fact, in some areas these two forces may work in tandem and deliver a “double-whammy” – mutual fund sales will be strong as market values rise and redemptions pick up as market values fall. This happened to bond funds sold to retail investors in 1993-94. Robust inflows from individual investors in recent years – particularly to those vehicles that are not tied to specific retirement plans – and the amazing appreciation of market values have added to the uncertainty.

Money management companies with broad, diversified pools of managed assets, reliable distribution channels and diverse customer bases will usually have higher earnings predictability than those with narrower product mixes and customer bases. Money management companies looking at debt financing opportunities sometimes ask if there is a ratings limit for asset management companies based on size measured by assets under management. How high could Moody’s possibly rate a company with, say, $10 billion in assets under management?

Our response is that, in general, levels of assets under management are, by themselves, not very good predictors of ratings. Indeed, a small pool of managed assets could be very profitable, which would be a clear credit positive. On the other hand, it is hard to imagine that the same small pool of managed assets could provide sufficient earnings predictability to make us feel comfortable with a top rating. Diversification is typically found at larger money managers. And diversification – whether in terms of products, customers, or distribution channels – is, we believe, the best way to mitigate the risks and uncertainties that are more predominant in lower-rated credits.

High growth rates in the industry and a wave of mergers and acquisitions have helped some firms achieve not only larger, but more balanced business mixes over the past few years – a clear positive from a credit perspective. One interesting example of this is US-based Franklin Resources. When comparing Franklin’s assets under management in 1992 with those of today, a shift is revealed, not just to bigger, but to better in the sense of creating a broader based and better diversified pool. Before it acquired Templeton in 1992, Franklin was narrowly focused on managing taxable and tax-exempt mutual funds with 84% of its managed assets invested in fixed income products and a large customer base concentrated in California. Templeton managed global equity funds with 80% of its managed assets in invested in equities.

Beyond just adding to scale, the Franklin Templeton match provided product diversification that proved particularly beneficial when retail investors flocked to international equity mutual funds and away from fixed income funds earlier in this decade. With the current pressure on some of its global equity funds, the stable of more reliable fixed income products helps to mitigate the risks associated with declining asset values in some asset classes and shareholder redemptions. The mix of product offerings was further diversified with the 1997 acquisition of Mutual Series Funds that gave the firm a more solid position managing mutual funds invested in US equities. The diversification achieved over time is a factor contributing to Moody’s positive outlook on Franklin’s A2 senior debt rating.

Another important financial consideration that I would like to focus on is capital and capital adequacy. The obvious question here is: how much is right? The obvious response: it all depends. Moody’s recognizes that compared with many other businesses, money management businesses are not major users of capital. Relative earnings stability – despite the uncertainties discussed before – and very limited requirements for fixed assets to support the business argue for relatively lower capital levels. Compared with companies in other industries at the same ratings level, money management companies often have lower capitalization.

This said, there are several reasons we believe that capital requirements in the industry may be rising, and that larger capital bases may be important for some companies in the future. We point to several long-term trends, including the importance of investments in technology and infrastructure or, if these are “farmed out,” the fixed nature of these costs. We believe also that money management companies may have unpredictable cases in which they may use capital to protect their reputations.

Just a few years ago, we saw several cases in which mutual fund companies chose to buy securities such as mortgage-related derivatives, Orange County bonds, and emerging market securities from funds. They took these steps not because they were legally required to do so, but because such actions would restore the confidence of mutual fund shareholders and forestall lawsuits, or so they hoped. The point is that in cases like this access to capital resources can be critical to the rescue effort or, at the very least, to protect against a period of earnings shortfalls.

Changes are sweeping through financial services industries in many ways and for many reasons. Further, the huge volumes of M&A transactions involving money management companies are both a sign of and a reason behind some of these changes. Rather than discuss the broad industry trends that are giving rise to these changes (an intriguing but lengthy topic that we explore frequently at Moody’s) let me proceed directly to the questions that we, as credit analysts, explore with regard to specific M&A situations.

At the heart of the matter, we want to understand the motivations behind a transaction from the perspectives of both buyers and sellers. Among buyers, the motivation is frequently a matter of “scope and scale.” These transactions will, it is hoped, broaden and diversify businesses through product offerings, distribution channels, geographic reach, talent pools and other business components. These transactions almost always anticipate that value can be created from cross-marketing opportunities, and sometimes from cost savings.

An equally interesting area to explore is the motivations of the seller. Increasingly, we see companies that have reached an inflection point in their growth at development. At this point, additional resources are often needed in order to grow. Perhaps management is ready to retire or “cash-out.” These cases may also be associated with an important change in management with the principals of the acquired businesses planning to make an exit, whether immediately or gradually. In any case, the builders of the business may not be there in the future, which adds to uncertainties about the future. Once we understand the motivations of both buyers and sellers, we develop a viewpoint about the realism, and about the risks behind those expectations.

Risks common to acquisition in the money management industry include high levels of management turnover, periods of under-performance while managers and employees “take their eyes off the ball,” loss of clients, interference (cannibalization) of existing brands as well as risk management and operational problems related to technology and servicing integration. No acquisition is without these risks. But in the best cases, they have been clearly identified by management and there are specific plans to mitigate them.

Moody’s Investors Service will continue to monitor the money management industry, and will be publishing a full-length special comment on our ratings methodology for this sector.

WIRELESS TECHNOLOGY: A VISION FOR THE 21ST CENTURY

Christopher B. Galvin
CEO, Motorola Corporation

Wall Street Journal Technology Summit, New York, October 6, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

It seems appropriate to begin my comments by discussing the world context in which this conference takes place. As I deliver this speech, there is an enormous amount of uncertainty in the world. The global financial situation has taken its toll on all industries. It is surprising that with all the spectacular opportunities around the world for technology, and telecommunications in particular, the technology market would feel so heavily the impact of this financial situation, but indeed it has. In the midst of the current global setting the telecommunications industry has an enormous amount of hope. And why is that? In Motorola’s experience, it is because the human being has an overwhelming need and compulsion to communicate. Over the past 70 years, we have had the opportunity to provide services and content to people in a way they hadn’t seen or imagined before. And in every instance, these markets have turned out to be bigger, sometimes ten times bigger, than the business plan suggested.

Our first way of moving information, entertainment and news to people was through a radio in the car. That’s actually where the name Motorola comes from – the brand name of our first radio was the first word of “motorcar” and the end of the word “Victrola,” creating the image of music on wheels. We have since, with our partners, created the two-way radio, the portable two-way radio and the pager, and ultimately promulgated the cellular phone industry and satellite technology. And each time we pioneered a new industry, we made available the ability for human beings around the world to communicate from a time and a place in a dimension that they consider valuable and that they couldn’t have imagined before.

The cellular phone business is as robust now as it has ever been. It continues to grow because human beings need to communicate. This growth naturally leads us to the question: What will happen to communications in the 21st century? People talk of the tremendous opportunity for wireless, the proliferation of IP and the emergence of broadband width. They discuss the concept of the personal network and the ways in which we will touch everyone’s lives no matter where they are.

In the 21st century the key network will touch people in their homes, at work, in their cars and in public transportation. It will affect how we work and how we play. Over the next ten years, major shifts will occur in this industry. The market will move from the traditional mass market segmentation to individualized personal solutions. However, if the market is to grow, all the propositions will have to be simplified. The paradox will be the requirements for the complex technology that will simplify these propositions. Today manufacturers and software designers create products and then offer them to consumers. In the next ten years, sophisticated consumers will design their own “intelecommunications.” The number of devices that they will carry will go from three or four to six or eight. The networked economy will shift to the mobile economy and at least 25% of telecom minutes will move from wireline to wireless. In order to realize this evolution of wireless, technology companies have to spend time focusing on the basics. The basics can be found in “four C’s”: convergence, content, connectivity and coverage.

There is much talk about convergent integration – voice and data and video broadband being brought together. That trend will occur in wireless as well. Content is the issue of substance – the right information delivered at the right time to either entertain people or let them get their work done or enable them to connect better socially. There will be interconnectivity with a number of different kinds of networks. Standards and IP will prevail everywhere. There will be new interfaces required and created. But the issue that is most intriguing about the four C’s is the issue of coverage. Coverage is something that we pay an enormous amount of attention to at Motorola. By coverage we mean coverage not only in the building or the home, but in the city, throughout the country and the continent and across the oceans. It is the ability to put robust communications on every square meter of the surface of the earth.

In the 21st century there will be a new environment for wireless. There will be the opportunity to create large market segments beyond the individual ones. There will be communication gateways that have to be produced, and the concept of physically configurable portable subscriber devices. Motorola has a set of guidelines for how to succeed in this new environment. They are encompassed in what we call the ten S’s.

The first issue is that of simplicity. In this spectacular business we call telecommunications, we are going to have to learn from the past. Four or five years ago, there was enormous enthusiasm about the personal digital system and the ways in which it was going to transform the industry. Motorola made an investment in the personal digital system and from that investment we learned that what people really want is a powerful and simple communications device. The personal digital system was not only oriented to the killer applications like email and faxing and search agents, but also simple and easy for consumers to use. Because the General Magic proposition came just before the internet was discovered and popularized by web browsers, it was not very successful. Additionally, Windows 95 and the problem with desktop simplicity were not yet there to synchronize. In fact, the standards didn’t even exist to create the industry. It turned out that General Magic’s lack of synchronization, and the tradeoff on the size and weight of what people were willing to carry at that particular point in time, caused it not to work. What we learned from that product was to stay with the basics – to keep the products powerful, but simple.

The second issue is that of substance. There are a lot of cute and interesting tweaks on how we go about delivering things to customers, but the prevailing propositions are the ones that do real things for people. We need to deliver the right information at the right time in a time frame, a place and a way that improves customers’ lives and really contributes to the value of what they do. Customers must drive our efforts in this regard. One concept Motorola is focusing on today that will increase the level of substance our products bring to every commercial, industrial and government consumer is that of mobility. Mobility has driven the vision of both the Iridium and the Teledesic partnerships. For us, mobility means the ability to make available on every square meter of the Earth all of the propositions we’ve dreamed about up until now and will dream about in the future. Today, we are already capable of gathering information from airplanes while they are in flight in order to determine what their condition is and to predetermine their maintenance schedules. In the 21st century that type of in-motion telemetry will be made significantly more robust. There will be an opportunity to complete remote site inventory management of bulldozers and large fleets of ships. At Motorola, we are working to pioneer the telematics industry so that in the future consumers will be able to download information about the condition of their car and determine preventative maintenance while driving.

The third S is synchronization. There has got to be a way to bring the entire issue together for the consumer. After all, that’s why we’re investing in these propositions. To that end, Motorola has partnered with Lotus and Palm Pilot – to bring these propositions together in a synchronized way for the customer.

The fourth S is self. In the 21st century there will be an enormous emphasis on the concept of ‘self.’ There will be self-organizing networks and self-configured products, both physically and in software. There will be self-initiated systems integration tools. These tools will have to be made available to people so they can adapt them to what they need and what they want from technology. In the 21st century, the power of technology will reside in the unimaginable ways consumers will architect our solutions for themselves. The fifth S is speed. Perhaps the Motorola product with the highest customer satisfaction rating is the cable modem. We have come to learn about speed from our offerings in the modem industry. As I stated before, people have a compulsion to communicate. For those people who use the web to satisfy that need, there’s nothing more pleasing than speed. Network access, customer service and content delivery will determine who wins in the future.

The sixth S is the issue of standards. We can never forget standards. Almost every failed attempt in the telecommunications industry has occurred when companies have pursued their own proprietary approach. Whether it’s the wide area protocol for wireless applications, browsers, 2½ G, third-generation, or fourth-generation wireless, technology markets will be seven to ten times bigger if we can get those rules right.

Which leads us into the seventh S, that of sharing. For companies that invest an enormous amount in intellectual property, the issues of sharing and collaboration will always be critical. If one doesn’t find a way to partner across the industry, whether it’s through consolidation, partnerships, joint ventures or consortiums, we will all fail. No one company can do it alone. We have to license the essential elements of intellectual property in order to create an ecosystem that fosters larger opportunities for us all. There is a unique, distinguishing aspect to technology when one has the vision and the capability to bring it to market first. Our network visions are probably no different than those of our competitors but what we’re doing with those visions is unique. We have the evolution to packet for our wireless networks. We have new voice markup languages for the internet and we’re attempting to set the standards for that industry. Motorola owes these unique innovations to the market-maker approach that we’ve had over the years and to successful collaboration with our partners.

The eighth S involves the aid of security. We have not yet been able to adapt fully to the concept of what will be required in the 21st century in the area of security. In the future, we will have to work through partnerships with others to ensure the integrity of voice and data transactions.

The ninth S is science. In the 21st century, there will be new discoveries. There will be new ways to process and handle information. There will be new ways to improve compression and the process of bringing data to people. Although some in our industry would argue that these new ways of doing things have already been discovered, many are not even imaginable yet. The arena of life sciences is one of the unique things evolving today that Motorola has had the opportunity to become involved in. People ask why a company like ours would be interested in life sciences. It is simply an area of science where we have the ability to explore something very new. In addition to the understanding of biochemistry, we look at life sciences as the concept of energy and information. As the Juno project is completed there will be a need to move information, a demand for networks and an influence on computing that no one has yet been able to imagine. It turns out that within the human body, which is a bioelectrical system, there is one of the most unique and effective communications architectures in the world. It is likely that in the future we will change telecommunications by studying the human body. And it may turn out that by embracing the work of science and incorporating it into future innovations in the telecommunications industry, we will discover the next approach to communication inside the human body.

The tenth S that we use as the framework to guide us through the future is the concept of surprise. Many technology companies will be surprised in the 21st century, due to the juncture we are entering in the market, what is happening around the world globally and the tremendous pace of change in our industry. When my grandfather decided to put a radio in a car in 1928, there were at least 16 surprises he couldn’t see. Those surprises were things that would be invented years later like the rocket, the two-way radio, radar, TV, the transistor, the computer, the pager, the modem, satellites – the list could go on and on. Each of these surprises was not visible to my grandfather as he tried to develop his business. But each of those surprises brought to Motorola a new opportunity.

As we stand here today, we look back and ask: what were the inventions or concepts that drove innovation? They were things as fundamental as electricity, the telephone, the discovery and invention of the radio, and things as complex as the computer and the transistor. We look into the 21st century and ask ourselves: what will occur in the area of science, what will determine our opportunities?

At a meeting like this in 1992, or maybe even as late as 1993, it’s very likely no one who came to the podium would have mentioned the internet. Or if they did, it would have been mentioned as a passing thought or something of curiosity at the academic level. This is how fast things can change. We are always searching for the next big surprise. And despite how firm things look, despite how the past seems to determine where things are going, despite whatever the economic issues are on the very short term, we go back to one very fundamental concept – people need to communicate. And out there is the next unique thing, the next surprise that no one understands but will impact and alter the way that communication takes place.

At Motorola, we have been able to discover that next surprise time and time again with our partners. As we look forward to the next millennium, there is an enormously huge potential for business with the next world-changing surprise in telecommunications. With you as our partners and customers, we will discover it together.

INTERNET COMPUTING

Dennis Schneider
Vice-President and Director, Advanced Technology & New Business, Motorola Computer Group

Comdex Canada, July 9, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

I’ll be talking with you this morning about what we at Motorola see going on and what we are calling Internet Computing. You’ve heard enough about the clichés. The network is the system. The network is the computer. Folks, the computer is the computer. There is a different style of computing on its way and the network isn’t quite the network anymore and we’ll talk some about that, too.

We want to give you Motorola’s view on where we see the trend – computing is being revolutionized by what’s going on in the network – where it’s going to be taking us and how that ride’s going to feel for most of us. For those of us in the industry it kind of feels like one of those roller coasters: how fast can it go, how far can it drop us, how quick can it go up, and how ill can we get?

We see this trend showing up in the stuff you’ll see on the exhibit floor, the stuff you probably see every day in your office. The key: we are now looking at a universal infrastructure. I do not mean just universal connectivity. We’re looking at an environment that now, from top to bottom, from network service through to connectivity, is changing how people write software, changing how hardware gets developed, and changing how we run our businesses. That infrastructure has become dovetail-jointed, tightly linked with so many of the things we use every day, telephony, paging, email, conferencing, alternate technologies for connectivity. Even at home things like Web TV.

So, three key things this morning: Where are the opportunities? (And clearly lots of folks are using the internet as a marketing tool but I think that the opportunity goes way beyond that.) What’s the direction? Where is this vector going? More importantly, where is it leaving? Being the last person out of town is a bad thing to be. Being the first person to a new city may be very lonely so most folks elect to be somewhere in the middle and it’s good to kind of know where you are. If it’s looking a little lonely where you are, you may be one or the other and you cannot tell which. It’s one of those problems with the internet: Where are the challenges for the people using it, the people defining it, and for those of us trying to serve it?

You all know about the internet. I’m just vaguely curious, how many of you use the internet two or three times a week. Can I get a show of hands? If we rolled back four years, how many of you would have had your hands up? Lots fewer. How many of you with children have your children using the internet? OK, if I asked you a year ago, how many of you would still have had your hands up? Lots fewer. Some of you say, “My kid was too young to use a mouse, so it doesn’t count.” That’s OK, they’ll grow. Part of why I asked those couple of questions is that there is a wave sweeping through education, through the use of systems at home that the internet is driving. That drive ultimately is going to change how businesses operate. It changes dramatically how products are engineered.

One of the things going on is marketing through the internet. This is something of an oxymoron. Marketing is supposed to be kind of a science, and internet marketing is kind of more like a game of chance.

If you’ve noticed, there are these things called Web search engines and there’s now an entire science running to figure out how you can make your Web page show up first on a web search engine. If you search for a book, or book store, people are getting paid large fees to figure out how your bookstore on the Web shows up first. This, too, will pass. It’s OK. This whole marketing regime is giving rise to a different way of trading in the marketplace. How many of you have made a purchase over the internet? If I asked you six months ago you probably couldn’t have done it, so it’s all relevant.

Intranets, what are those creatures? An intranet is nothing more than the application of internet technology within a company’s infrastructure, helping you manage the company. An intranet is essentially an information connector. It’s an application of technology that lets us connect most of our users to most of our applications and data. It too is one of those waves sweeping through businesses.

How many of you here have an intranet in your business? If I asked you that question a year ago, about a tenth of the hands. How many of you do not have one but are planning to put one in? OK, just a few. Looking at what people are doing in the world, this is about a three-and-a-half month old study from Forrester. Roughly 40% are either using an intranet or planning to use an intranet. It’s a mechanism for connecting their users and their employees together. A third have no plans. A prior study, by the way, showed 5% using an intranet and almost no one planning. So, if you look at just one year of change, 40% shifting. Clearly people are learning in internet years how to use internet tools. Why is that? Very simply, because this stuff works better. It’s easier to use, it’s inexpensive, you don’t have to worry in large part about the software going out of style because you know it will almost immediately. Those of you who are worried about that – I feel very sorry for you because your worries will only escalate over time. The good news is, all the browsers are free for the moment so you won’t care about that and the standards are evolving very quickly but backward compatibility has been excellent, people have not lost the ability to chase their internet tools backward in time. So you don’t get forced to move forward except by your power users.

How are people using it? According to the chart, (and this is an end of 96 study) 52% are using it for accessing information. “I want to know something and it’s on the internet.” Those of you who have been in computing more than five or 10 years will know that finding something on your corporate network was an ultimate challenge for almost any user and ultimately how great a power user you were was knowing how to get into all the systems and where all the data really was. This really changed with intranets. People are now using these as organizing vehicles for all the information a company has internally and to make it available to most of their employees.

At Motorola, everything from new jobs to surveying our employees to paging one another is done through our intranet and by the way, not something that was done centrally, thrust upon us. People just began to contribute applications to the intranet. And because the tools are as good as they are, it was relatively easy to promulgate. Those of you who have deployed Lotus Notes know that it’s one of these hockey sticks curves of use. Either it sort of languishes or it takes off like a rocket. Intranets have followed that same phenomenon.

Another little factoid to take away today – a staggering 80% of all new software being developed or deployed for desktop systems or LAN systems is “Web ready.” So, all of a sudden, you see manufacturing systems that advertise Web readiness. Now, who would have thought that something as fascinatingly external as your MRP would be made Web ready? Well, if you have a software tool that’s going to hit the market later than about the first quarter of this year, not being Web ready is a competitive knockoff. So, fundamentally these tools are now buried into everything we get to use and buy. It’s really only a matter of time before our software infrastructures turn over and are all accessible from the Web. Then it’s a choice: do I want to use these Web tools to make the software easier to access?

This is my obligatory slide on how business needs progress. We have to globalize, we have to cooperate, increase revenue, lower costs. I’ve now said my obligatory business requirements bit for the morning. But ultimately, let me ask a question, how many of you believe that the deployment of disconnected PCs did any of this? Think about it. Anybody believe that when they put a bazillion PCs in, any of this stuff would actually have happened? By the way, some people, have said yes. But for large corporations it’s not very credible to say that we accomplished this with PCs.

Now if I ask the same question on “LANs plus PCs” did it convince anybody? Certainly didn’t accomplish this lower cost thing, this whole routine about PCs being cheaper, kind of didn’t happen. Fundamentally, we got some benefit out of end-user productivity but a lot of the benefits are soft. Much has been said about the computing models of the 1970s and 1980s, but let me make an observation: other than how the cabling is run, and where the processors are located, the applications that drive the businesses essentially still look the way the old style stuff did when we had mainframes and terminals. Now they look better, we have Windows, we have mice, we can point and click, they are easier to use, easier to learn. The software develops more rapidly, it’s more responsive, but we still have walls that are very carefully managed between ourselves and our suppliers, ourselves and our customers. Very narrow windows are being built between those walls, and the style of computing is still essentially looking like the old world of central computing – we just changed it from mainframe-terminal to client-server – which has lots of benefits for the IT organization and for the end customer but hasn’t fundamentally changed how we deal outside our firm. Email is probably the most prolific application we’ve got that gets us in and out of our company.

I talked earlier about this engine of change and where is this engine taking us? We have looked at central computing, the style of computing we’re using, the isolation we’ve had, and now the question become where is this engine of change getting us and where is the train going to go, how do you get on it and how do you enjoy the ride?

The new computing model is coming along. This could look like an obligatory LAN picture of a 1988 presentation on computing. But in fact, what we’re talking about here are organizational linkages. We see a very transparent, very high velocity link occurring and being available between engineering and customers.

How many of you use PCs? Just out of curiosity. How many of you have ever downloaded a piece of software? Or a patch? Fact of the matter is, what you’re using is a service connection directly from an engineering organization right to your desktop – the software engineering world is well down this route because ultimately their product is network transferable. You can get patches and updates and all that stuff in a heartbeat as long as you have the internet available to you.

Similarly, engineering organizations can get information about upstream products. For example, all of our microprocessors as we deploy them, all their specs, are available on the Net. The age of the component catalogue is over. If you want to shop for a microprocessor or you want to shop for any of Motorola’s products, you can shop for them entirely on the internet. When a product changes, at that same moment, the Web changes. So, how people look at specifying componentry is changing as well. We are seeing the beginnings of very wide information pipes, that are very quick and very easy to use, opening up between suppliers and customers and everything in between. So those of you that manufacture components have traditionally used some of this stuff to speed up your supply chain but if we look at this whole thing as a large value chain, what we’ve ended up with is a tremendous acceleration of the movement of information.

If customers stopped buying something on one side of the value chain, we can stop planting seeds at the other side of the value chain. Look at some of the very large volume transportation-centric things. For example, a product we’re all familiar with is toilet paper. That stuff has a fairly high velocity through the value chain and you really don’t want it stacking up in large quantities because it’s very large, very light and hard to move around. So literally there are now connections between the supermarkets pulling a sales system in for example, the United States and here in Canada as well, and the forestry people at the other end. They can throttle the speed at which the trees can be chopped down depending upon the supply chain of that all-important commodity. That may be a trivial item, but the fact of the matter is that it’s being enabled, literally by this technology and that gets easier and easier to do.

Those of you who have hard-good products and have to manufacture know the difficulty of integrating all the way back and forth. The wave of the 1980s in manufacturing had to do with things like the well-known Toyota Production System linking manufacturers and their components suppliers. That was a miracle in the 1980s. It’s almost trivial today.

How many of you have deployed a large corporate private network or have one at your company? Now realize, those were once competitive weapons. The problem now is that if you have a small company you have to use the internet so you don’t need a private one. Is your private corporate network a key strength or is it a town being emptied by the internet in terms of an investment position? It’s a question that I think deserves some attention but ultimately what we’re building here is an extranet, an extended intranet.

So we started out with the internet, consumer connection, university connection, email connection. Baseline networks went to the internet and took those tools that were developed for that environment and moved to use them internally. Now we’re externalizing the intranet to our partners over a virtual private network laid across the internet. This is a massive change in how business is done but it’s coming one grain of rice at a time. I’m trying to make a bowl of rice here. Easy forecast, no question about it: internet computing will drive hardware and software development.

This is the engine of change. How many of you are developers by the way? Leave your hands up if you’re not developing for the Web. Glad to see so many hands go down on that one. If you’re doing hardware then the word internet has to appear otherwise it’s probably a waste of your time.

Market sizing for the industry, the overall information technology business, is in excess of $100 billion. The internet piece is at $5.5 billion, and that’s just the forecast for this year. If one rolls that forward from less than $1 billion 18 months ago, pretty much half the IT industry turns into Web or Net-centric technology and revenue. This is a huge and opening opportunity and the bad news is everybody knows about it. So if you haven’t gotten under this one yet, you’re really late and you need to catch up cause the engine has left.

Where’s the payoff in the extranet? Fundamentally it’s in four areas. If you do an intranet or extranet technology, the velocity of information change goes way up. What does that mean? It means that you can throttle your supply chain much more rapidly and in hard-goods manufacturing, the supply chain is virtually everything. In retailing, the supply chain is everything – we have things like the Wal-Mart phenomenon. If you look at Wal-Mart vs. Sears for example, Sears Canada, ended up in a huge issue in the supply chain and Wal-Mart was way ahead because they had their supply chain well under way. What they did was declare some rules on how that supply chain would work.

Major vendors now are declaring how supply chains will work. The extranet makes it practical to do that. If I had a lot of small suppliers, I could not, two years ago, demand full electronic ordering and processing. Today I can because for $19.95 a month they can have perpetual internet access and that really changes the way I can connect to a supplier. If you’ve got something as simple as a PC, you can now be part of my supply chain, fully integrated. When something changes on the store shelf, or something changes in the parts bin, you can know immediately all the way up the supply chain. That was impossible before without a huge investment and only the most integrated companies could afford to do it. Now almost anybody can afford it.

The development and maintenance of applications has always been a problem. When we had mainframes it wasn’t so big a problem. You could just update the mainframe. How do you get a new version deployed today? We have a huge problem in application change management. Well, we’ve got the internet. Why can’t the machine just do it for itself? It knows where the internet is, what software it’s got. Just get on with it. All that’s coming…it’s clearly coming. Most of the software isn’t mature enough and frankly I wouldn’t trust it to update itself. However, this too will pass. The technology’s all there for the software to update itself.

How many of you knew there was a problem with one of the browsers? (I won’t say which one). We were online with my daughter the other night and we went to log off and it said: “Well, gee, there’s a security issue with your browser so just hang loose for 45 minutes while I do a download and update your browser.” Which is exactly what happened to every AOL user in the world. The good news is they can close that security hole that way. Prior to this they would have never been able to do it. So the whole notion of being able to change application directly and immediately is just now really possible because you have the infrastructure.

The agility of the value chain is another question. Sure information can move back and forth but how fast can you bring on a new supplier? How fast can a supplier get into the system? How fast can a part change from a supplier move around the value chain? If you change your design, how fast can all of your suppliers reconfigure their lines? Again, as this software changes technology and information velocity moves ahead, the agility of the supply chain for almost any company goes up. A great example of that: rock band tours. Rock band tours used to be huge hiring events and bands would hire literally hundreds, and they go from city to city hiring more and more for these huge logistics events. They had a staff of sometimes 20 or 30 people that ran all this stuff. No more. They are now virtual, completely virtual. They operate out of a PC on the web and they connect up to people as they need them and the staff has gone from 20 or 30 to two or three and people just come on and leave that value chain.

We’re going to talk at some length about the thing I want to call the “new competitive weapons factory.” How do you use all of this cool stuff as a competitive weapon for what you’re doing? A couple of ways. First you have to know where this infrastructure is going. So I’m going to come back and talk about competitive weapons.

What’s in this universal infrastructure? At some level, the usual stuff. There are network services, directories, security, management. Now I say the usual stuff but when you have potentially 150, 200 or 300 million people and up to billions of people on the network, these usual problems become fairly difficult to deal with. Those of you who appreciate the use of the internet should send thank-you notes occasionally to the Internet Engineering Task Force who’s had to keep up with this mess. Because ultimately the addressing problem, the directory problem and the security problem become severe. The issues are massive and they show up almost everywhere. The management problems of this network are not trivial.

You’ve got terabits of information flowing literally every minute on the internet. If one looks at a simple statistic, the entire aggregate throughput of all the phone switches is somewhere in the area of five terabits. Five trillion bits a second, that’s the switching fabric speed of the entire voice telephone network of the world. If one projects the internet forward just three years, the internet’s traffic is 75 terabits a second on average. That is a monstrous basic networking problem. We have to do something like double, triple, 10 times the aggregate information transport capability of our local infrastructure, data-sharing, data-access, collaboration. This problem has now become quite significant – no longer what I would call something that you could easily attack – because you do have to deal now with navigating millions of nodes.

Very few company networks have millions of nodes. I recall the largest corporate network was built by one of the computer vendors, had at one point, the record of a 100,000 nodes. I believe it was the largest private network in the world. That is a drop in the bucket compared to what’s going on now on the internet.

What HTML and the Web introduced to the world is a universal document format and it’s really swept the access and sharing mechanisms. You now get nice text and graphics multimedia documents but what I’d like for you to think about for just a moment is that content now includes applications. We now have Web content that is or can be an application.

This takes us to the subject of Java. I’m not one of these people who is going to tell you about religious conversion to Java. We’re not big believers in religious conversions in general. Applications-as-content are really a big deal, and you couldn’t do that without a portable language, and you couldn’t do that without a language that could actually perform reasonably well across the platforms. So there’s a huge debate going on in the industry about who’s going to control the standards for Java, and let me give you my personal perspective: I don’t care how it ends. I care that we get a standard because otherwise you can’t get applications-as-content to work.

This brings us to network computers, the information toaster of the 1990s, and I will spend a minute on the controversy of network computers. Network computers are the lowest form of life on the desktop. By the way, this doesn’t mean they’re bad. It’s one up from a terminal, this is a good thing. The good news here frankly is that they will become something that you can actually deploy, to actually save some time, effort, energy and money. Will there be a paradigm shift? The answer is absolutely. The question is from what to what?

John Yarmis of the Gartner Group has pioneered the accurate measurement of the cost of having a personal computer. This is the lowest number he can possibly put his name to: $12,500 a year. That’s US by the way, you can do the exchange rate here in Canada.

Will there be change? Obviously not. Millions of PCs are out there. Every application is being done on a PC. Win16 and Win32 are the standards. I’m going to need multimedia and I’m going to need more hardware, and “those poor overstressed networks will get destroyed by network computers.”

Now let’s forward the clock two or three years to an easy forecast. Putting a network computer next to a PC. Fire them both up. If you can boot up a PC in about two minutes or less, you can boot the NC. When they’re all done they’ll look about the same and they’ll act about the same. Those of us who have spent our lives, or most of our lives learning to double click will now learn to single click. Basically, everything will work the same way. The one-click Web phenomenon. Java changes the standards processes around somewhat. It’s easier to write software in Java than it is in Visual Basic, C+, C++. People have tried it and it’s easier because it’s a higher level language.

NC to the rescue. The low prices I’ve heard quoted won’t be here for a while. The monitor will cost more than that. It’s just real life. They’re nice numbers but you can’t find one that works. They’ve got “batteries not included” written all over them and you need a big battery!

Component software: this is cool. This is really good stuff – the idea of being able to plug together applications quickly, which by the way will play equally well on a Mac or a PC or anything else. You don’t have to worry about where it’s running. The easy answer here is if you can’t call the NC vs. PC decision, don’t bother. Write to the Web and you’re safe, use what you choose, mix and match. It won’t make any difference.

If you choose to write to just one of them, you’ve taken away one of those destinations you might be able to use. Leave the device selection to the time and place when you need to make a decision but make the software standards decision in a way that enables you to take the opportunity to the bank. One way or the other, whichever way it turns out, it’s with great clarity: Java will deploy.

More questions about network computers. Internet for software distribution: it’s clear and obvious you will basically have to update one copy and reuse it. Easy way to do it because everything’s coming off a small number of places. If you want to look for an overstressed network, go to a bank that boots their PCs off a network at 9:00 a.m. on a Monday morning. Come in about 9:30 a.m. and the machines will be up. They have network computers. They’re just calling them PCs.

Central management: this may not be a terrible thought, but it could be an oxymoron. “I can make some changes more readily and more quickly.” Now for some sets of users, this is a blessing, and I can scale the servers much more easily than I can upgrade the desktop.

Without again doing a product commercial, how many of you installed Office 97? Do you still have any disk space left? One hand. That’s good, you must have a really good disk. That’s a reality of life. Software is getting bigger. It isn’t like they tried to make it bigger, people demanded more functionality and the market that makes software will get bigger. Disks are getting cheaper, but not that much cheaper. Plus, how many of you have a PC that’s newer than one year? Older than two years? Those of you with your hands up can’t run Office 97. You don’t have enough horsepower.

The Net PC to the rescue. This is a PC that acts like a network computer but it’s still a PC. There’s a very simple bottom line to the net PC. “This is a cheap PC, it’s as simple as that.” That’s a BYTE magazine quote. What we’re looking at here is a machine that’s just plain cheap. It’s a PC, same technology, you just can’t put new stuff in it. They have taped over the floppy drives and what not. With the Net PCs one wonders why would one do that? People have done this for years. You buy a PC, take the stuff out and seal it up. You can buy a product like that.

This is sort of back to the future. Those of us who have been in the industry long enough will remember that back in 1988, a product from 3Comm called the 3Station, it was a net PC. Didn’t do real well. The reason it didn’t do well was because it has all these attributes we just talked about. It boots slow, so on and so forth. PCs were not built to be net PCs. Technology is really not there. You can zero administer the things, and this too will come. It’s not going to be as inexpensive. It won’t be well crafted because PCs intrinsically were built to be personal devices. That’s what the ‘P’ is for.

The Net PC will solve some of the cost problems for some users, and again how does one make sure we have the choice? The answer is to adopt something that’s common across them and the only thing that’s common is Java. So, as one looks at the Web, as one looks at this stuff, if we use Web tools, we use Web software and Web component stuff, it’ll run on all the platforms. So, the one thing I want you to walk away with this morning is, separate this whole debate on desktop devices from how you write your software. Not related. Keep your choices open.

What’s in a Network Computer? Sounds suspiciously like a PC. It has 640 x 480. It has a mouse. It has a keyboard. It has a network, supports internet protocol stacks, has network management and full Java. And by the way, we now have them coming along and they have Citrix interfaces so that you can run Windows in them off NT servers and so on. More and more stuff getting built in, again small component software so it fires up and is reasonably capable. So, we believe fundamentally, there will be a range of these things, a complete range, and they’ll all inter-operate and you’ll have them all. There is no sweeping tsunami of change about to wipe you and your PC away. You know you’re in trouble when some vendor begins to start labeling the thing you just bought a legacy system. So, not to worry. Whatever you just bought, as long as you can get to these tools, is not a legacy system.

On your right of the slide, you’re going to see some devices you might not think can access the Web. But in fact, at Motorola we think that same set of software – when you use the right tools – can and will run wirelessly and transparently in phones and pagers and PDAs. And this is not Buck Rogers. This stuff is really working today. A little slow and a little clunky but give us a little bit of time. The idea that we can use these tools begs the question of software standardization. If you do one, you can use the other. Today, if you pick some software, it will run on some systems.

What are the four major issues facing these new capabilities? First, user expectation. Some of you will ask yourselves: are we ready for this technology? Is it ready for us? How do we migrate? What happens in the world of business? What’s the impact there? So in user expectations, for the terminal users. (By the way, that’s a device, not an end state.) First you get a better interface. People want Windows so they can point and click. Running these new lightweight applications means it’s snappier, it’s more responsive. It’s got a more predictable response pattern. You can access more stuff, you can get to more applications. You can get to more things. And for the people managing these terminal farms, you’ve got a whole new way of doing software, a whole lot easier and a lot more user friendly. Lower training costs, lower system costs, and so on. For the PC user, a mixed bag. You’ll lose access to some applications, you can still run Windows apps but they’re remote. It’s less powerful and less integrated. Same information access. I don’t think you’ll lose anything in that process. It is a better managed environment. So now we have a balancing act.

If management’s the problem, and the number of applications you want is relatively low, you’re a candidate. Now, you may not want to be a candidate, but you’re a candidate. There’s no great reason why you have to give PCs up. Now if it’s more of a problem than it is an opportunity, than why not give it a whirl? However, if it’s more of an opportunity than a problem, then just stick with it and just keep upgrading it.

For the Network Computer: there is a set of people who spend a lot of their time looking things up, looking up parts list, looking up price files, kiosks systems, manufacturing data entry. There are literally millions and millions of these used everyday. A lot of them use PCs because they think that’s all they can use. These are simply high cost NCs, an easy conversion to have. The NC is a natural fit, simplifies everyone’s life, including the user. They never have to wonder: “What is that funny little message on the screen? What’s it doing?” Because it never really delivers one of those. Lots and lots of folks can actually make very good use of these things. They’re a heck of a lot simpler to live with.

Data reviews: I know none of you ever would become one of those nasty data reviewers, but if you were, you might actually prefer one of these systems. Is its technology ready? It’s there and being driven and dragged by the engine of the internet. Applications are en route, more and more full suites of full Java coming out. More and more Java embedding – HTML is getting broader and broader – no reason why we can’t develop most of these applications in a manner that lets us have the choice. NC hardware maturity clearly is not there. There are few very lovely products. Every three months they get a new thing they’re able to do, which is great. And the question is when are there enough things that they are able to do to meet your requirements. They are a whole lot cheaper but they’re not for your assistant, the person who’s going to edit your PowerPoint and things like that.

The application development tools are just coming. For a long time, Java was the most popular language that was unavailable. Today it’s kind of available so you can actually write software in it. And again, its only been a few months now.

Migration is a big issue. How do we move a user from A to B? How do we handle security? Security problems are really easy to see. Today, your PC is your PC. It’s set up for you the way you set it up. You shut it down and bring it up. Hopefully it comes back up the same way you left it. In the case of an NC, any computer could be your computer. So this notion of having the security you might or might not have on your PC today is gone. We have to make sure we can secure your environment on an NC. Security is a much more significant problem when any machine can look and be and act and feel just like your machine.

Complex application integration is still coming. Things like SAPR/3, Oracle Enterprise, those vast applications people are using to replace their back offices are just beginning their journey to the Web. If you’re trying to do all of that I’d check and make sure everything’s available in the proper way.

Depending upon what you’re trying to do, how robust, how well do these things perform? All these “non-PCs” use processors that are just about as fast as anything you can have in a PC – but how fast is the network and how fast are your servers? So, when you get into that question, remember the software is smaller but it still has to travel the network. The fundamental problem ends up being: how does one move that many bits across the network that could be choked already?

It’s very clear that this is going to happen. Zona, a reputable research shop that has done a careful job of tracking the trends, is forecasting that every dumb terminal will disappear and be replaced by an NC. That’s an easy forecast to make and one that benefits all of you. You get to save money as you choose.

Opportunities in the short term: if you’re in an industry that deploys a lot of screens for what I would call fixed application use (banking, retail, travel, sales force automation, education), this technology is a natural. For schools it dramatically lowers the cost per seat, letting schools that couldn’t deploy 40 or 50 systems, do it more readily. It isn’t like they have the choice. They just don’t have the money, and they won’t have the money.

From a tools perspective, we’re seeing the very first true cross-platform popular application tools showing up. We now have a solid belief that you will be able to develop cross-platform applications that are stable, that are speedy, with a long-term future. The internet engine is dragging that destination into our future.

Legacy application integration – this means that really old stuff, database application stuff, terminal-based applications – we didn’t have a good way of putting applications on either a PC or an NC. The Web has given us that. We can now see these form-filling applications arriving through the Web browser of your choice on the machine of your choice. New applications are lighter function, they’re smaller. The new personal applets that are coming along make some systems like Windows CE really possible.

We can find out if this whole PDA revelation is really going to happen. There are a lot of questions about where do you get the software from? Well, this is basically the answer: the same stuff that ran in your Web browser will run there.

So, a couple of takeaways: first, universal portability. It’s been a dream of the computer industry for as long as I’ve been in it, about 25 years. Applications run anywhere, do the same things everywhere, know where they’re from, know where they’re going, have universal addressability, know where their databases are…this stuff is clearly happening. It’s happening right now. This is, by the way, a dislocation, a place we’re leaving. So if you’re out there using an application development environment that doesn’t offer portability, and you’re feeling a little lonely, it isn’t because you’re the first to be there. The odds are pretty good that this is not a place to stay. Fundamentally, this is not where the industry is heading. It’s easier to do tools and software using this new stuff that operates in the new paradigm than it is to do it in the old one. It’s easier, cheaper and faster, a rare combination to come together, and in fact in this case they’re all true. So this is a place to be going.

Definitely, if you’re being dislocated, get on with it. Focus on the value of these choices. There are phenomenal amounts of hype around the question. Separate the technical issues from the hardware issues because the hardware issues frankly will settle themselves out the way they always do – which means you’ll get to pick.

However you use these new standards – this is a great thing. There’s a saying on the internet that nobody is smarter than everybody, and everybody will be using these new tools. The NC has just expanded the opportunity for you to save money. It gives you another choice. This gives you another option you didn’t have before. Wouldn’t it be really cool to be able to use these new tools in a device that was a lot less expensive so you could have more of them? So you could bring it out to people that don’t have any device other than the telephone?

Those of you who can be agile, if you position yourself for agility, you can use these new tools. If you haven’t, my suggestion would be to start. As a corporate entity or an institution, your competitiveness will rely on how well you make these choices. Let the hype settle itself down, but don’t miss the real change. Watch how software is developed and how networks become the way computing is done. This engine is taking us to where I think is a really fun place to be. It might actually make some of you with systems you have to manage have a heck of a lot more time available to actually do your job instead of backing up your hard-drive and downloading those upgrades and updates. Hopefully we’ll get there sooner rather than later.

If nothing else happens with the NC, then it forces the PC community to figure out the answer to these problems and that alone will have made it a vast success.

WINNING THE WIRELESS RACE

Micheline Bouchard
Chairman, President & CEO, Motorola Canada Limited

Canada Wireless Telecommunications Association, Toronto, May 21, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

You think competition is tough in wireless: just look at championship car racing. Mark Blundell won the 1997 Molson Indy in Toronto by 0.659 seconds. That’s just over half a second after several hours of driving. And that stiff competition brings me back to wireless. Here’s why. Every car in the race used a Motorola two-way radio. But Blundell loves to talk and used his radio to maximum strategic advantage in his Motorola-sponsored car. His wireless system was state-of-the-art. Along with handling voice communications, his equipment transmitted reams of data about everything that was going on in the vehicle.

Did we make a difference? I think so. We were determined to put our best into Blundell’s car. And we did. Still, as anyone involved in racing can tell you, you must do a lot of things right to win the big races. No one consideration – from an excellent communications system, to a first-class driver, to a topnotch pit crew – can do it alone. You need them all. And that brings me to my message. It’s this. In today’s fiercely competitive marketplace, the wireless companies that succeed must do many things right: listen closely to their customers, provide the best products, spend on R&D, and have an open flexible structure. No one action guarantees success. You need them all. I’ll illustrate my argument by looking at the company I’m proud to lead, Motorola Canada. But I think this discussion of wireless will have a broader relevance for the industry. Let’s begin by looking at that fiercely competitive marketplace.

I think we could expect competition among firms supplying the wireless market to be intense at any time. But the battle for market share is particularly intense because of changing technology, conflicting standards, falling prices and an extraordinary growth in demand. We can look at each of these factors in turn.

We’re now in the midst of a rapid and far-reaching shift in technology: the changeover from analogue to digital service. Most phones and most networks today are analogue. But analogue dominance won’t last long. Digital technology has too many advantages. Here are just a few:

• It offers sound quality comparable to wireline.

• It provides a rich array of functions, such as visual call display and text messages.

• It makes possible much greater security than analogue.

• It allows for far more capacity than analogue can. This in turn will lead to lower airtime rates and ultimately greater ownership penetration than wireline.

So the world is rushing to digital. And that creates new opportunities for manufacturers as well as network providers. And it makes the wireless market even more of a dogfight. The problems of this wide-open marketplace are compounded by the lack of a single standard. Along with analogue, there are no fewer than three digital standards: TDMA, CDMA and GSM. Viewed globally, each has a strong base of support. And each is incompatible with the other’s digital standards. Eventually, these conflicting standards will sort themselves out. They must, just as VHS did in Beta, or Wintel became a de facto standard in personal computing. Until that happens, expect confusion and more niches for producers.

Incidentally, government won’t and shouldn’t make those decisions. We’re inching our way toward deregulation, or I should say, self-regulation in wireless. And that is as it should be. The marketplace and the firms involved, not bureaucrats, must decide on standards.

Falling prices add to the competitive pressures in the wireless market. When Motorola first introduced cell phones 12 years ago, they cost $5,000 and were considered a rich person’s toy. Now we sell some of our phones in Canada for as little as $120. This trend has obviously provided great benefits for consumers. But the trend also intensifies the pressure on all companies to produce better phones more cheaply.

Finally, the rapid increase in demand for wireless has also stoked the fires of competition. Currently, over 6 million Canadians use a wireless device on a daily basis. That includes 4.5 million wireless phones, 1.25 million pagers, and 1 million mobile radios. And this market will continue to expand. In Canada only 14% of phone customers have signed up for cellular service. In the US the penetration rate is 18%. And a more accurate indication of the potential market in developed countries is suggested by Scandinavia, where fully 40% of possible subscribers now have cell phones.

Looking globally, the potential for growth is enormous. Many countries, including China, do not have the costly wireline infrastructure that characterizes North America and Europe. So they are looking to wireless to provide their primary network. This large and growing potential is a strong inducement for producers to enter the market, and to invest heavily in creating cellular products. So like a championship car race, there are a lot of companies going flat out. The stakes are high. And there will be winners and losers. Let’s look at what makes for success in this race.

Success in the wireless industry will not come from any single initiative. Rather it depends on leadership in several key areas. The successful companies will be the ones that listen closely to their customers, provide the best products, spend heavily on R&D, and have an open, flexible structure. These elements form the guidelines for success. They shape our plans at Motorola.

Paying close attention to your customers has to be part of any strategy for growth. At Motorola we’re learning this lesson all over again. Our origins were as a consumer company. Beginning in the 1930s we were the leading producer of car radios, hence our name. By the 1950s we were producing televisions, radios, and lots of other electronic equipment for the home. In the 1970s, however, we rethought our focus. We moved away from consumer electronics and concentrated on technology-driven communications and information processing products. We made microprocessors and communications equipment for the space program, but relatively little was sold to households.

Today Motorola is drawing closer to the end-users of cell phones. It’s a development that’s long overdue. But it also reflects a change in the cell phone market. For many years network providers subsidized the sale of phones. They made customer entry into the cellular world as easy and painless as possible. Now rates have come down. There are more networks and fewer free phones. And it’s more and more our responsibility to persuade consumers about the wisdom of buying our products.

So what Motorola has done is interview 4,000 people worldwide. We asked them how they use telecommunications products. We learned an enormous amount. What we found is that people crave the freedom and choice that mobile communications now make possible. They want to be able to stay in touch with family, friends, and business wherever and whenever they desire. They want portable, reliable, easy-to-use products.

Our new campaign theme is Wings^TM. You’ll see it in ads that will appear in many media. The point of this advertising is that Motorola products, like the wings of a bird, will help set you free. No matter who you want to stay in touch with, Motorola brings you products to communicate with effortlessly and effectively.

But listening to customers is only a start. It must lead not only to targeted advertising, but also to the design of the best products. To remain a market leader in a field that is changing as rapidly as wireless, companies must remain on the cutting edge of product design. Motorola is proud to be a leader in the sales of cell phones, pagers, and other communications devices. But we know we’re being challenged. And we’re well aware that the battleground is in the rapidly growing area of digital products. Which is why Motorola Canada, as well as Motorola worldwide, is firmly committed to leadership in digital communication. We are the only company to offer products in each of the three digital standards. Others have staked their future on one mode or another. We feel that is unwise until the market sorts this one out. And we’re the first company to introduce Six-Sigma rates of reliability.

Our iDEN^TM technology is now the fastest growing segment of the digital wireless industry. This “integrated digital enhanced network” system works with sophisticated TDMA technology which combines four distinct services into a single digital handset. It offers instant conferencing for group or private two-way calls, mobile telephone services, alphanumeric messaging, and data/fax communications. Over 2 million iDEN handsets have been shipped around the world. Systems are now operational or under construction in 12 countries in North and South America, the Asia-Pacific region and the Middle East. In Canada, Clearnet’s MiKe^TM network currently offers iDEN service in Ontario and Quebec, with service planned for certain areas in western Canada in 1998 through 1999.

We’re also leaders in ergonomic design. That’s what we mean when we call our products wearable. We have the same ear to mouth ratio that people have been historically used to with their phones. And that’s important as consumer concerns shift from ruggedness and functionality to friendliness and the warm fuzzies that make us delight in a product.

Motorola also continues to reinforce its leadership in digital paging. The FLEX binary protocols we introduced in 1995 have become the de facto worldwide standard. They have been adopted by more than 150 carriers in 31 countries. Last year we shipped our 20-millionth FLEX pager. And our vision of leadership in wireless goes beyond cell phones and pagers. Motorola has been the driving force behind IRIDIUM^®, a global personal communications system. IRIDIUM is based on a 66-satellite constellation, which will permit voice, paging, data, and fax services to anyone, virtually anywhere in the world. We’ve now placed all digital TDMA intelligent satellites into orbit. And we’ve completed test phone calls and paging messages. The results are very positive. We’re well on the way to achieving this “network in the sky” that will bring the people of the planet a little closer together.

Responding to customer needs and producing the best products requires excellence in a third area: research and development. Motorola is firmly committed to R&D. Here in Canada, Motorola has more than 1,000 employees and is among the top 30 firms for R&D spending. In 1996 we spent $38 million on research. We have a total of five research and development centers in Canada. Here’s a thumbnail sketch of what we’re working on:

• Digital communications for public safety systems in emerging markets

• Development of next-generation data over cellular infrastructure products

• Wireless packet data for 2-way messaging and paging infrastructure systems

• Multi-service access devices for data, voice, and video

• High-speed communications interfaces for the corporate and burgeoning internet markets

This work by our talented Canadian engineers is being coordinated with the activities of other researchers in Motorola Inc. and with other scientists and engineers who are on the cutting edge of digital communications.

We also invest heavily in our human resources. We have strengthened the Motorola Learning Institute, which is the Canadian affiliate of Motorola University. “Motorola U” is a non-degree-granting institution that focuses on skills development for Motorola employees and customers. In Canada the Learning Institute works with universities, colleges and CEGEPs across the country.

More broadly, Motorola worldwide is focusing on research that will help define the next generation of digital communications products. We are involved with 3G, which will replace PCS early in the next century. 3G is true broadband, and will allow video as well as voice and data transmission.

Finally, leadership in wireless will go to those companies that get their organizational structure right. This, too, is a concern at Motorola. For the past 18 months, Motorola has worked on removing barriers and bringing groups together within our large company. We now see the synergies that come from encouraging our skilled engineering teams to work more closely with one another. Too often in the past, parallel research might have occurred in the divisions dealing with paging and cellular phones. We’ll reinvent the wheel, if we have to. But we only want to do it once.

We’re also looking to create more joint business ventures with our customers. We’ve hired a new vice-president of business development with a strong mandate to do just that. These partnerships will tap the energies of our customers, and in turn will help serve them better.

And while it is important to serve our customers well, we recognize that it is equally important for us to serve our community well. Canada was the first international expansion for Motorola over 50 years ago. Our country has long provided value-added service to Motorola, and, in turn, we take great pride in the our accomplishments and our desire to share these with our neighbors. For example, during the recent Ice Storm, the Ontario Fire Marshall asked for our help. And we provided a mobile trailer with a complete wireless communications system and 100 two-way radios to the Emergency Response Center. This trailer, fully stocked and ready to go, served as the backup wireless communications system for communities in Quebec and Ontario during the crisis. For this act, I would like to share a few words from a letter minister John Manley addressed to our employees:

“It is reassuring to know that when a natural disaster strikes, the people of Canada can rely on the expertise and goodwill of companies such as yours to come to their aid, and to keep Canadians connected to one another, even through the greatest natural disaster in decades. Motorola Canada Limited went above and beyond the call of duty, and for that the government and the people of Canada are extremely grateful.”

Let me conclude by underscoring my message. In today’s fiercely competitive marketplace, the wireless companies that stay at the front of the pack must do many things right: listen closely to their customers, provide the best products, spend on R&D, and have an open, flexible structure. No single one of these actions guarantees success. A company must show leadership in all these areas.

Given the ability and strength of competition in this field, no company can take this challenge lightly. Motorola certainly does not. But we have a good track record, worldwide strength and exciting plans for the future that reflect our determination to lead in each of the areas I’ve discussed.

At Motorola we feel like Mark Blundell in his championship car. We know there is tough competition out there. And we know the race is a long one. But we’re confident in our excellent team. And we know that by getting it right in each area, we’ll remain one of the winners.

WHAT’S GOOD FOR CANADA?

André Bérard
Chairman of the Board and CEO, National Bank of Canada

The Canadian Club of Ottawa April 18, 1995
Published in The Corporate Report No. 12 (June 15, 1995)

Today, I will speak about decentralization. Don’t be afraid. I am not becoming a politician. Nor am I here to transform Canada. Long ago, I realized that Canada is like vichyssoise. It’s half French. It’s cold. And it’s hard to stir.

In fact, I’m here as a businessman who operates in Canada and around the world. And as such, it’s a business case that I want to present to you today. And like every business case, I will start with an historical overview. I will then move on to the idea that to survive in this day and age, businesses must operate in a decentralized fashion. I will also explain how centralized governments have become dinosaurs. I will then explain what I mean by decentralization in a Canadian context.

As a starting point, we have to realize how profoundly World War II changed the viewpoint of businesses and governments. Among other things, it was a full-scale laboratory of planning for large organizations. Immensely complex projects – such as the landing in Normandy and the Manhattan project – were successfully achieved by combining management models and military structure. In the militarist approach, everyone had a precise role to play and was familiar only with part of the operation. It was the rule of “need to know.”

The war was also a huge public works program that pulled North America out of the Depression. The theory of Keynes, according to which the state should take the place of the private sector when there is a slackening in the economy, was believed to be confirmed.

It is this context that gave rise to the great postwar recovery which ended in the early seventies. Many factors, such as a young workforce, technical innovations, cheap energy and surging international trade, contributed to this landmark period of growth. It was then believed that transposing the recipes of the war economy to a peacetime economy was a contributing factor in this growth. Strategic planning became the modus operandi of ever-larger corporations. It was a period of internationalization, which proved a few years later to be nothing more than the art of losing money in many countries instead of just one.

Business organization charts came to resemble those of armies, with foremen for corporals and higher-level positions filled only by graduates from business schools, instead of West Point.

The state obviously espoused this trend. Politicians and bureaucrats alike became convinced that the economy could be fine-tuned using the levers of money and public expenditures. Regulations were introduced to confine each activity and business to its intended role in the economy and in society. National policies were introduced in order to model the country’s industrial landscape.

This concept of an organization would obviously lead to centralizing the power of the state. Provincial and local government initiatives were seen as interfering with the precision work of the central government. In Canada, the federal government gave itself the mission to set up the welfare state, more often than not by taking over ideas from lower levels of government, such as medicare, first introduced in Saskatchewan.

The social safety net was considered to have only benefits. Not only was the state responding to the wishes of Canadians to share the fruits of easy wealth with the have-nots, but everyone was also benefiting from the economic activity stimulated by public spending.

Goodbye Mr. Keynes

That was how the world looked in the early 70s, before everything flipped.

Luckily, today’s business world no longer looks anything like it did in the postwar years. Companies are decentralized. Centralized, planned management worked as long as growth was stable, with no surprises. But as soon as the economy began going off track without warning, people noticed that the only use in planning was to explain the past, or else predict with precision today what was not going to happen tomorrow.

Dividing business into airtight compartments had also been tried. Which didn’t yield the best results. Instead it prompted the appearance of tribes struggling among themselves for power instead of fighting the competition.

Today conditions for success are different from those in the postwar era, when creating wealth was easy. People created it, for example, by constantly introducing innovations, the best example being personal computers. We also owe a debt to the flexibility of operations provided by new principles such as just-in-time delivery. Increased efficiency in distribution networks has also become one of the sole sources of increased consumer purchasing power. Warehouse-type stores are proliferating and are succeeding in reducing retail costs by merciless suppression of frills and several levels of middlemen.

The troops fighting on the ground have been given a larger role and more freedom, and at the same time as organizations are being leveled. It’s quite simple. Everything is changing too fast. The only way to face the music is to leave the initiative with the people who are right in the middle of the action and put all the company’s resources at their service. And this ground differs from one place to another. Not all consumers have the same likes and dislikes. The competitors and the intensity of competition change from one market to the next.

Like many others, the National Bank has shifted toward decentralization. We’ve never been as much of a presence as we are today or as able to gain more large market share. We don’t have just one business plan, we have scores of them. Every region adapts to its own market. Every subsidiary operates in its own niche, respond effectively through its own local competence. Initiative has taken the place of directives. Globalization is blowing the borders wide open and attracting ever greater numbers of competitors, while making the world even more unpredictable.

All it took was the Mexican government losing control of its finances and its inflation to start interest rates climbing again and set the American dollar falling on the money markets. All it took was one hothead in Singapore to throw the stability of the huge derivatives market utterly into doubt. Mr. Nick Leeson is the living example of a broker as defined by Woody Allen: “A broker is somebody who keeps investing your money until there isn’t any.”

These upheavals have all changed the roles government plays. The ability of the state to stabilize the economy and perform feats of social engineering used to depend on a certain number of premises that today are obsolete.

The first, surely, is Keynes’s theory that supposed you would cut spending when things were going well and increase it when things were doing poorly. As we’ve certainly seen, the politicians only understood half of that economic theory. As a second condition, a country’s borders were supposed to be relatively closed. Otherwise, all your efforts towards stabilization could be scuttled by shocks coming from outside. Today, obviously, this condition no longer holds. We’ve never been so interdependent. The third condition you could set, last but not least, was that people would be too dumb to adjust to state intervention. To see the number of citizens and even whole regions that profit from all the weaknesses of the welfare state, you’d have to conclude they underestimated the perverse effects of a host of policies and programs.

The all-powerful state is no more

Today, the concept of an all-powerful state within national borders is gone. For one, the debt load no longer allows any leeway to expand fiscal policy. International agreements limit regulatory powers, as is the case in the financial sector. With freer trade, the national economy is interwoven with the world economy, on which the national state has no leverage whatsoever. Because of treaties that Canada has signed, the federal government was obliged to scrap major policies, such as the energy policy, and smaller ones, such as the inter-provincial ban on beer trade. The last federal budget made new victims, not the least of which was the Crow’s Nest Pass Agreement subsidies, the ultimate symbol of the omnipotent national state that can shape the country according to its will.

In short, a lot of reasons that supported a strong central state with huge means are no longer relevant. What’s left to the state? All in all, the state has become a huge service enterprise. When we talk national policies these days, we think healthcare, education, income security, vocational training or environment. Of course, international free trade, monetary policy or the removal of barriers to inter-provincial trade are also all important national policies. But in terms of public cash expenditures, these are peanuts when compared to the social policies.

The present challenge, as we all know, is to contain the explosion of public service expenditures and to put an end to the perverse side effects of the welfare state. I strongly believe that this can only be accomplished by a further decentralization of the state.

Many of you, especially here in Ottawa, would tell me that Canada is already one of the most decentralized states in the world, and you are probably right. But I would add that Canada is also the industrialized country with the largest external debt. It is only by decentralizing the State even more that we can obtain more efficient public services and a permanent reduction in deficits. To sum up, we should give the power to spend to those that have little power to borrow.

At the risk of making enemies, I rather agree with the federal government offloading part of its deficit on the provinces if and, I will stress, only if it follows the same diet that it imposes on others. The provinces are the government level that spends the most in goods and services in Canada. They are the ones who decide how healthcare, education and, to a certain extent, income security are organized. If we add up these three elements – including unemployment insurance – we arrive at 30% of GDP, or two-thirds of non-interest public expenses. If provinces do not feel an intense fiscal pressure, we will go nowhere in containing these expenses.

If we look at the initiatives that the provinces and the federal government are starting to take, we can see that there are ways to reduce these expenses. Alberta and Saskatchewan – the birthplace of social democracy in Canada – are closing hospitals. Quebec will follow suit. They have realized that an empty hospital bed is like a parked taxi with the meter running. University tuition fees are going up everywhere. The access criteria for social assistance and unemployment insurance are being tightened. But, as I said, we must go further. And to do that, a number of constraints must be removed.

First, we must eliminate national norms for health services, the way it has been done to a large extent for social assistance. Provinces should be given total freedom to organize health services as they wish to. Ottawa justifies its national standards by pointing to the unconditional support given by Canadians for a universal healthcare system.

But I’m asking you: who’s to say that attachment to the values of universality and accessibility will be any less strong just because these norms are decided by the voters of each province? I will give you an example. Last year, the Quebec government tried to abolish the policy of offering certain drugs free to people with cancer and cystic fibrosis. The public uproar was such that the government had to backtrack in a hurry. I’m convinced that, when it comes to the ways and means of reducing public spending on public programs, we can trust people to clearly decide and to tell politicians what’s acceptable and what isn’t. Especially when they know that it is not their neighbor who will pay the bill.

We urgently need new approaches to healthcare programs. We should allow provinces to impose user fees. To pretend that user fees will deter some people from seeing a physician is to take Canadians for fools. If this is true, food should also be free in order to prevent people from starving. We should also favor the expansion of a private sector element if it is the wish of the people of a province. We should throw out the communist idea that if it is not freely available for everyone, no one should be allowed to have it. The medical profession should also be asked to cooperate in reexamining task-sharing between physicians, nurses and other professionals.

In education, a public sector coexists with a partly subsidized private sector. This private sector acts as a safety valve in reducing the system’s costs for government. My son went to such a private school. I thought that they would make a man out of him until I received the following letter: “Dear Dad. Write me soon. Even if it is only a few dollars.” More importantly, the private sector acts as a yardstick so that we can judge the quality of the public sector.

Don’t hide the truth from the voters

Secondly, full provincial responsibility also supposes a transfer of tax points in place of cash transfers. The provinces themselves could then finance their own responsibilities based on the needs and preferences of their respective populations. Paying tax federally or provincially is really just going to the cleaners. Whatever happens, you lose your shirt.

Obviously, tax leeway opened up by the federal government would vary a lot from one province to the other. You would have to readjust equalization based on the formula in the Constitution. Some people see a danger in the increased visibility that transfers between regions in Canada would have, once they were grouped under a single equalization mechanism.

As these transfers are huge, it’s feared that support among Canadians for this massive redistribution would be eroded. Personally, I think this argument is totally antidemocratic and unacceptable. What public morality could justify hiding from the electors the cost of the programs they finance, for fear they might withdraw their support?

Redefining equal opportunity

Thirdly, we have to redefine what equal opportunity means in this country. This equality shouldn’t mean that someone has the right to live forever at the expense of society, because he has adopted a system of twelve weeks of work and forty weeks of UI. We have to rethink this system, even if it means questioning the future of regions that cannot offer anything but seasonal jobs.

In the history of this country, businesses and industries have had boom times before disappearing, regions were well-populated and then abandoned. If a region or a lifestyle can barely survive on massive transfers from citizens in other parts of the country, should it be maintained at any cost? Not only do we no longer have the financial resources, but we must also ask ourselves the following questions. Is it the lifestyle we want for our children? Are we acting in the best interests of Canadians by maintaining the existence of such regions?

We have to trust people and their resourcefulness. Aspirations of success and surpassing oneself are inborn. It’s the state that kills these driving forces by taking people by the hand. Empowering individuals is more likely to succeed in a decentralized system.

To break the vicious cycle of dependency requires a comprehensive approach that can be undertaken only at the community level. It is easier to overcome system abuses with controls at the grassroots level than in an ivory tower in the capital.

If the citizens of a city or a borough had to pay entirely for the social assistance in their community, I swear to you that it would not be long before fraud would be totally eliminated. We would not have horror stories such as assistance checks sent to deceased persons or of fishermen who left the industry many years ago and were still receiving compensation when the moratorium was imposed on cod fishing.

It is unfortunate, but large bureaucracies are just unable to take the action that a majority of taxpaying citizens would like. This creates the kind of society in which we live, where taxpayers have obligations and those who benefit from them have rights.

If we look more closely at the merits of decentralization, the main one is certainly to render politicians accountable for their acts. When one reads the reports of various auditors general, it can be concluded that waste tends to increase the farther we move away from citizens.

For example, I doubt that federal politicians received heavy mail when the Auditor General of Canada found that the $1.3 billion of aid money given to Pakistan seems to have been devoted to many things but not to alleviate poverty. At the opposite extreme, God knows how many votes were lost by the former mayor of Montreal, Jean Doré, for redoing the window in his office at a cost of $300,000.

The nearer the level of government is to the citizens, the more merciless these citizens are when they see public waste. They know that they are the ones who will ultimately pay. They are merciless because they know that they have real power; that their own voice will be heard; that their vote will not be diluted by millions of others.

Politicians are all affected by what I call the decorator syndrome. Only the finished product counts; money is no object. That’s the reason why the first thing you do when dealing with a decorator is to impose a budget constraint.

There is one last point that I would like to make in favor of decentralization. We must create competition between governments. Such competition will allow for experiences and innovations that will serve as models or lessons for others. As it is often said, “Eleven heads are better than none.”

A centralized corporation that implements a bad idea throughout the organization could compromise its future. Such a fatal mistake is unlikely to happen within a decentralized organization where each component can implement different strategies according to its own situation.

At National Bank of Canada, we have such a decentralized structure. Every time our regional vice-presidents meet, we never miss the opportunity to ask those who have tried something new to share their experience. And when we are hit by a general problem, we ask those who fared better to explain their recipe for success. This is a never-ending source of know-how and emulation.

Competition between provinces will become an even more important factor in the future development profile of Canada’s various regions. To date, we have tried to orient this development with industrial policies and regional development grants. The former have been killed by market globalization and the latter have been reduced as we came to the inescapable conclusion that they were unable to foster lasting development.

The possibility of each province luring investments will depend more and more on its capacity to be an efficient low-cost producer of public services. Frank McKenna has understood this, as he is the kind of politician who approaches problems with an open mind rather than with an open mouth. It is simply extraordinary what New Brunswick has been able to accomplish with few resources, but spent in the right place. His strategy works so well that New Brunswick is heading for a balanced budget and richer provinces are now accusing New Brunswick of unfair business practices.

Decentralization is everyone’s responsibility

This competition between provinces, which people had tried to avoid, or at least conceal, is there to stay. And this is good thing. I prefer to see Alberta and Quebec compete for an investment project rather than see it go into an industrial park in New York.

The provinces that are choking on deficits and taxes and will be incapable of delivering quality services will have no other choice than to get in step. And it really isn’t the role of the federal government to make up the difference by an increase in transfers between regions.

We expect individuals to take responsibility for themselves, which means they take the consequences for their actions and their choices. And this is an equally valid principle for regions, provinces or even municipalities. The Lord rewards hard work, thrift and efficiency.

I’m going to end there. Decentralization has proven itself in business. It’s now beginning to yield results in the public sector, which is also, at last, subject to constraints. Wherever you look, in the west, in the east, in central Canada, the idea of more decentralization is making headway, over and above political ideologies.

And there’s nothing surprising about that, because we’re talking about the only way to survive. Get competition happening everywhere. Bring in original solutions that have been tried in other places. Make citizens and politicians responsible for their acts. And above all, have confidence that people will do the right thing.

CANADIANS, FINANCIAL SERVICES AND REGULATORY REFORM

Leon Courville
Chairman, Canadian Bankers Association
President & COO, National Bank of Canada

The Toronto Board of Trade, February 11, 1999
Published in The Corporate Report No. 27 (June 30, 1999)

I hope you realize that standing before you is a member of that rare species, a Canadian bank president who doesn’t live in Toronto. Given what some people say about bankers you might think that bank presidents are all endangered, no matter where they live. But we are trying to fix that and part of the process is frank talk about where our industry is, where it’s headed and the perception people have of us.

You know of course about the criticism of Canada’s banks. Some of you may have a personal story. Today, I want to respond and plan to do it from three perspectives. First, let’s lay down some facts – the industry’s perspective. Second, I want to look at the economic contribution of the banking industry to Canada, as well as this sector to Toronto. And finally, if you’ll allow an economist to stray, I would like to provide my sociological perspective on how banks are received by Canadians and their government.

In light of the criticism leveled at us, from our perspective performance is the place to start. If the criticism of our industry is aimed at size, or reach, or profits, or financial strength – all attributes that are much praised in every industry except banking – I cannot accept that these are actually defects. If on the other hand people dislike banks because they perceive us as bad corporate citizens, bad to our clients and customers or employees, those would be serious defects of deep concern. Such perception would be symptomatic of the banking industry failure to convince the public that what it sees as excesses are either strengths or, in some cases, without foundation.

At a time of unprecedented rapid change in the financial services industry, it is difficult to adequately explain and communicate how these changes are affecting everything we do, and why. It is also difficult to grasp all the implications, as is usually the case with most heated and emotional discussions. Therefore, I have decided to raise the issues up front and to deal with them directly.

Do you have a general impression from what you’ve read or heard that banks are downsizing – laying off people as we close branches? Please look again. Total bank employment across Canada in 1986 was 172,000. Today, it has increased by 28% to 221,000. Moreover, the quality of bank jobs has increased. An example: tellers are becoming financial planners through our unique educational and training programs. The total number of bank branches in 1990 was just under 7,400. Last year it was just over 8,200, an increase of 800 branches. That is almost 100 new branches a year, every year, for the past eight. Yet common myth still exists, that we are closing branches and laying off employees.

Banks are a big generator of tax revenues to all levels of government – disproportionately so. Traditional banking activities alone represent almost 3% of GDP, but we pay 8% of all corporate income taxes. Banks in fact pay higher levels of income tax than any of the non-financial industries. According to a KPMG study, taxation levels under Canadian banking rules are 24% higher than in the UK and 19% higher than in the US.

Well, are those high Canadian taxes the reason why loans cost more here? In a word…no. Loans don’t cost more here. They cost less. The best measure of comparison is average spread, the difference between loan rates, and deposit rates. The World Economic Forum’s Global Competitiveness Report for 1998 put the figure for Canada at 1.37%. In the US, it was 2.82%. In the UK, 2.95%. In Germany, it was 6.44%. So then, you might ask, does a lower spread mean Canada has higher service charges? Again, the answer is no. McKinsey & Company has measured average monthly costs of a basket of the most commonly used services. Their figures, all in Canadian dollars, show Canadians pay an average of $10 a month. The Japanese, $12. Americans, $15.50. The German figure is $7.75, but their average spread is almost five times ours.

The reasons banking in Canada is less expensive have to do with efficiency in Canadian bank operations, and here some fairly vivid contrasts show up between banks and non-banks. In my home province, Quebec, the largest market among individual customers is held by the caisses populaires. Their charges to their customers are higher than ours and they make less profit despite considerable tax breaks.

On the innovation and technology front, again Canadian banks are better than you might think. A recent two-year study by Statscan even ranks financial institutions slightly ahead of telecommunications firms and business service companies – which includes computer service firms – in terms of innovation.

As for problems like Y2K, Canadian chartered banks are globally regarded as world leaders in addressing and resolving that challenge. Peter de Jager, an internationally recognized Y2K expert has said that “The Canadian banking system is the success story worldwide. Without a shadow of a doubt, with no exaggeration, they are the best prepared worldwide.”

And you could find essentially the same answers on a long list of other comparative measures. In straight factual terms, compared to the biggest and best in the world, compared to banks in all the other industrialized economies, Canadian banks are at or near the head of the list.

Does this mean our critics, or our dissatisfied customers are wrong? Absolutely not. And while international comparisons put us in a positive light, most Canadians take the pragmatic view that they live here, not in those countries. They do not care that the Americans are paying $5.50 more a month for the same services. They want to know why they are paying $10 for services previously provided for free or at little cost. Well, it is because new competition meant the old cross-subsidization could not continue. Average spreads used to be a lot higher. Daily interest did not exist. That extra margin allowed a number of other services to be provided at no direct cost, or low direct cost. But starting back in the early eighties, competitors – inside and outside banking – started focusing on single services.

Exactly the same thing is happening now in telecommunications. As soon as governments permitted competition in long distance, the cross subsidy for local service was on its way out. If a new telco doesn’t provide local service, it doesn’t have to build part of the cost of it into my long distance rates. And it’s going to be able to take some of the established company’s customers away because they are going to think the new deal is a lot better. But all services do not have the same costs.

Branches versus electronic service? That’s another example. Branches are expensive to maintain. To justify keeping them, you have to have enough business being done in them to cover those costs. The day of the branch certainly isn’t over, or even about to be over – but what they do and how they operate is changing very quickly. Canadians like the convenience of all of the new electronic access methods – machines, telephone, computer, internet – and they are using them at rapidly increasing rates. But they like the branches too, as long as they are convenient. That’s why we are opening new ones in supermarkets, post offices, and other retail outlets. And perhaps in part because of that, Canadians think the general pattern is one of fewer and fewer branches, where the reality is a large number of traditional branches coupled with many new points of services.

What about our economic function, the role of the banks in the economy? There are two aspects to that. On one hand we are among the principal players in the financial system. There are a lot of new players that aren’t banks, some of them huge. But banks continue to play a major role as intermediaries between savers and borrowers, between investors and investments. But we also contribute to the economy as corporations. We are large employers, purchasers of goods and services, and so on. We are also an important part of the wealth of Canadians.

So because of its role in the economy, and its institutional size, financial services and banking is a strategic industry for Canada. It’s particularly strategic here in Toronto, the country’s largest financial center. The financial services industry is the fifth-largest employer in the Greater Toronto Area, with banks representing almost 70,000 men and women. Adding indirect employment, our financial services sector in the GTA represents 320,000 high-quality jobs and generates nearly $21 billion in GDP. Torontonians therefore have a special interest and stake in any debate involving this industry and its economic role.

I mentioned market change and increasing competition. What’s the blunt reality of financial service competition in Canada in 1999? For retail services, those for individuals, statistically at least, all of you deal with two or more suppliers, by no means limited to just banks. There are still about 40 different sources in Canada for residential mortgages. There are about 70 institutions offering mutual funds. According to McKinsey & Company, Canada has a total of more than 3,000 financial institutions – One for every 7,000 adult Canadians.

Banks compete vigorously with each other and with all other suppliers, encouraged by their customers and by their own instincts of self-preservation. So why all the calls for more competition and more competitors? One reason is that at street level, you just don’t see all the competition that actually exists in the new economy. What you can see are street corners with two or three or even four different branches, always of the same six or eight institutions. You don’t see Wells Fargo. You don’t see ING. You don’t see corner branches from GE Credit or General Motors Credit. You don’t see branch offices of huge mutual funds that have moved a couple of hundred billion dollars out of bank core deposits and into their coffers. If you were doing a profile of competition in retail book selling, you would see Chapters and Smithbooks and Indigo and others. You wouldn’t see Amazon.com. Okay to just leave it out? Of course not.

Should we have more competition? Absolutely. Bring it on. Lower the entry barriers, attract new entrants, and encourage new startups. In fact, we have only one possible problem with increased competition and it is this. In some quarters, there are those who say that government should let a lot of new competitors in, but delay regulatory reform for the banks. At the same time new competitors should be handed a number of special tax and other concessions. In other words, we will encourage better competition if we make it difficult for our current competitors to compete and use their legitimate competitive advantage – or something like that.

And if the problem is that new competitors will have difficulty because of supposed special chartered bank privileges, then we say change that. It is now well over a year since the industry unanimously asked government to reevaluate those so-called privileges. Wide ownership requirements, CDIC deposit insurance, Bank of Canada liquidity support, access to the payment system, and foreign bank entry policies. If there are sound public policy reasons for any of these, that is for government to decide. But the chartered banks do not require any special privileges to compete and to succeed.

I hope it is obvious to Canadians that if new competition is introduced, operating under different rules than those governing the banks, the result would not be an increase in competition at all but a decrease. Your interests, our interests and the national interest would all suffer.

There are some instructive lessons in our recent history. Between 1980 and 1995, there were only two bank failures in Canada, versus more than 1,500 in the United States. But the two that failed here were established as a direct result of the desire of governments to increase competition. They didn’t fail because of governments. Their management was responsible for that – but all bank customers in Canada paid the cost of those failures through CDIC premiums.

The banks will happily meet any new competition that comes to Canadian markets. But the impression we are left with from the public policy discussions of the last few months is that the only real proof of increased competition in Canadian financial services would be an erosion in the bank’s market share across the board. That sounds a little perverse, doesn’t it? An egotistical Hollywood producer, one of the great moguls of film, is supposed to have said: “It is not enough that I succeed. Others must fail.” Is that what we are dealing with here?

The real answer to this question of competition, it seems to me, lies more in the area of regulatory reform than in an arbitrary increase in the number of new institutions. And that brings me to what I called the sociological perspective. What is it that society really expects of its banks and its bankers? We are moneylenders, of course, controversial and unpopular in some ways for at least two millennia. It isn’t a job at the best of times calculated to make people popular.

But that isn’t what Canadians want. They expect what we all in general want from each other: to do our job, obey the law and make appropriate contributions to Canada, its communities and its causes, as individuals and corporations.

But governments also have expectations of banks. They have on occasion used the banks as policy instruments. If a government wants to intervene in the economy, well who else deals with every economic sector and every region across this country?

There are people in Ottawa today who think it would be a fine thing to direct the banks in their levels of lending, community by community. A recent report even had recommendations on the number of seats that ought to be provided in branch lobbies. And of course the political popularity or otherwise of any group, including banks, can stimulate partisan instincts among politicians.

Well, I can’t disagree with the general notion that banks have a social or policy role above and beyond our basic function. Where the problems arise, and where I do disagree, is when government and others forget that these institutions are not public utilities. They are competitive private sector businesses responsible to their customers, their shareholders and their employees, among other stakeholders. When those fundamental interests are at odds with something government would like to do, through or with or to the banks, the inevitable result is trouble – and at the end of the day no one wins. The issue is simply one of balance. Social expectations of banks have to be carefully balanced against their commercial function and mandate, and a little understanding from time to time, on both sides, might not hurt.

There’s an old story about a blind man, standing on the corner with his guide dog. Suddenly, for no apparent reason, the dog bit his owner. A bystander watched with amazement as the victim reached into his pocket, took out a dog biscuit and offered it to the animal. He couldn’t contain himself. “Why are you doing that?” he asked. “The dog just bit you, and you’re rewarding him?” “You don’t understand,” responded the blind man. “I mostly like this dog but he made a mistake. What I’m doing now is locating his front end so I can kick his rear end.”

In the banks’ case, you have the branch offices at one end and the head offices at the other end, and I don’t have to tell you which is which. Our research tells us that an overwhelming majority of bank customers are satisfied with their bank. That is, the branch and the bankers they deal with regularly. They don’t feel that way about the other end. How do we fix that? Well, as I’ve mentioned there are a number of things that we can do on our own, and we’re doing them. As many of you will know, the explaining is already well under way.

A series of 14 booklets has been published as part of a program launched last year by the Canadian Bankers Association called “Building a Better Understanding.” More than 1.4 million copies of these booklets have been requested by Canadians and more than 3 million visits to the CBA’s website have been logged, many of them by people downloading booklets rather than waiting for them to be mailed. And there will be more to come, both from the CBA and the member institutions.

It still isn’t enough. We also need, through public and government debate and decision, to fix the regulatory structures. An ideal one would have at its core the safety and soundness of the financial system, balanced with the need for efficient and competitive institutions. An ideal one would differentiate between institutions providing retail services, services to individuals or those that affect them, from retail deposits to clearing – and institutions providing sophisticated wholesale services. It would acknowledge that the latter require less regulatory oversight. An ideal structure would serve the interests of customers by being open to new competitors. It would give institutions the organizational flexibility needed to implement their strategic plans. It would apply taxes fairly. It would eliminate artificial barriers to competition and product offerings.

Is that a reasonable vision of a regulatory structure for financial services? A reasonable vision for oversight of the vital financial functions for you and your companies and our governments? I think so. And that is exactly what the banks have long ago asked government to provide. Among other things, that completely level playing field would allow Canadians to judge their banks right alongside every other financial service provider, head to head, cost to cost and price to price. It will intensify competition, and place a premium on innovation and efficiency, on service improvements and on value.

Let’s remind ourselves going forward, as we enter a very important phase in the evolution of this sector, what we as a country, not as individual institutions, have built together. An industry of 221,000 employees in high-quality jobs. An industry that purchases more than $6 billion in goods and services from Canadian suppliers. An industry that donates $71 million to social and community causes. An industry that generates more than 40% of its profits from exports. An industry that is present in almost every community across the country. And despite this contribution, an industry with an important perception problem.

Let’s remind ourselves what we have built together because if we are unable to understand each other better, no one benefits and no one wins. Through a cooperative approach and understanding we have a better chance of ensuring long-term economic prosperity for our country, for all Canadians, and for this city.

WHAT NIKE IS DOING ABOUT WORKERS’ RIGHTS

Philip H. Knight
Chairman & CEO, Nike

National Press Club Conference, Washington, May 12, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

The thing that I’m going to focus on today is the cloud that has been over Nike’s head for the last couple years, and it has to do with our global manufacturing processes. A recent story I think is interesting from Nike’s perspective. Mark Thomashow, a longtime Nike employee, has had a ten-year correspondence with Garry Trudeau, the cartoonist who has been bashing Nike lately. The correspondence went like this: “Hey, Garry, would you like to see some facts on this issue?” To which Garry Trudeau answered, “No, I’m not interested in facts. I’m not a journalist; I’m a social satirist.” Forgive us out in the Pacific Northwest – sometimes it’s a little hard for us to tell the difference.

In recent times, Philip Knight has been described in print as a corporate crook, the perfect corporate villain for these times. In addition, it’s been said that Nike has single-handedly lowered the human rights standards for the sole purpose of maximizing profits. And Nike products have become synonymous with slave wages, forced overtime and arbitrary abuse. One columnist said: “Nike represents not only everything that’s wrong with sports, but everything that is wrong with the world.”

So I figured that I’d just come out and let you journalists have a look at the “Great Satan” up close and personal. But as long as I was going to do that, I thought that I might as well bring along some of the “Satanettes” who are sitting out among you – six of the owners and managers of Nike foreign factories as well as four of the owners or managers of US apparel manufacturers. I don’t know whether the US apparel guys are “Satanettes” or the “good guys,” but I will say this: “Without the foreign manufacturing processes, we wouldn’t have the orders going to the US manufacturers that we do, and US manufacturers supply about 40% of Nike’s apparel sold in the United States.

If I accomplish my objectives today, it is not to change the dynamics of the debate, but rather for those who are truly interested, those who want to look beyond the sound bite, to give you a base of facts for context on an issue that I believe will be with us for the better part of the next decade. We have some significant announcements today, but first I want to put them in perspective.

The company that became Nike began life in 1964 as an importer and distributor of Japanese track shoes made by the Onitsuka Company of Kobe, Japan. Starting out, everything was done either on a commission or relative basis. We had no money, no sales force, no employees and no clout. Our first year sales were $8,000 and we made a $254 profit. The outgoing freight company was the trunk of my 1963 Plymouth Valiant. And as an asterisk to all that, factory workers at Onitsuka made about $4.00 a day.

After eight years, our annual sales were up to $2 million, which was 10% of the total sales of Onitsuka. And they decided if that little company in Oregon could do all that, what could they do with big-time distributors? So they pulled their distribution rights. But we thought our 45 employees had been instrumental in the success we had, so we started to do it again, this time in our way and under our own name. The brand we picked was Nike. Whenever I’m asked about how we became the biggest sports and fitness company in the world, I’m reminded of John Kennedy’s answer on how he became a war hero. “It was easy,” he said. “They sank my boat.”

When we started Nike, we had two other manufacturers in Japan make our shoes for us. One was in Hiroshima, Japan and the other was Kurume, just outside of Fukuoka. In neither case were we 10% of their volume. We actually considered ourselves fortunate that they would make shoes to our design. It never occurred to us that we should dictate what their factory should look like, which really didn’t matter since we had no idea what a shoe factory should look like anyway. But some 26 years later, I can tell you one of the few absolutes of this business. Whatever you may think of Nike shoe factories today, they’re far, far better than those factories in Japan back then.

When the Nixon administration cut the yen/dollar loose from the exchange rate that had existed since the end of World War II, it went from 360 yen to the dollar to 180 in just a few short months. And within the last couple of years it went all the way down to 80, although it’s back to 130 today. In that process, basically all shoemakers quit making shoes in Japan. Even our old friends at Onitsuka now get approximately 90% of their product outside of Japan.

We began making shoes in Taiwan and Korea, and in a bold experiment in 1977 we made up to 15% of our shoe products in two owned facilities in Maine and New Hampshire. With lots of ups and downs and the emotional charge of being kicked out of the two banks from a state that only had two banks, using innovative design which spelled waffle sole, and then later patented air midsoles, we grew to be number one in the US. And in 1980, just eight years after starting the Nike brand, we had a public offering.

There are a couple of things about those days. The early success we had in making shoes in the United States happened during a severe recession. As New England came out of that recession, we began to lose workers to other industries until in 1984, the two factories became so uneconomical we closed them. The write-off was about $10 million in a year when our total profit was $15 million.

Since that time, the US economy has become by far the most robust in the world, and shoemaking has moved again to Southeast Asia. A lot of people say: “Why don’t you bring shoemaking back to the United States?” Our studies show that using the same production techniques, the average retail cost of a pair of Nike shoes if we did that would go up $100. The average retail price for a pair of Nike shoes is between $70 and $75, so therefore it would go up to $170 or $175. The price of a pair of Air Jordans, which today sell for about $150, would increase to $250. There are only two ways to bring back shoe production to the United States: either by creating new advances in automation, which we believe are a few years away, or by establishing tariffs and quotas that dictate that shoes have to be made in the United States.

But just as in Japan, the factories in Taiwan and Korea that we established back in those early days were far better in terms of their quality of work conditions than the factories we had in Taiwan and Korea, and frankly the factories that we had in the United States in the in the 1970s and early 1980s. The early 1990s brought another shift – sending shoe production to Southeast Asia. But we did it a different way. Instead of the way we did it before, which was to move production, this time we said we don’t want to lose the management skill and the partnerships that we have built up with our Asian manufacturers. So when we went into the Southeast Asian countries, we took the managers and owners from Taiwan and Korea with us. It was essentially a new type of manufacturing. It is not a legal partnership. It is an emotional partnership between our factories and us. And it does involve the way we think about the business, including the responsibility that we believe we have for the men and women who manufacture our products. We see them as our employees and our responsibility.

One of the great experiments and successes of that time was taking Taiwan shoe managers and moving them into China in the early 1990s. One of the great heroes of that time is here today, C.H. Wong, who, according to local people, has done more than any single outside foreign investor to uplift the province of Fujian. In addition, as we went into these new factories in Southeast Asia, we got to build them from scratch. And now Nike, having had quite a lot of experience, was able to have quite a bit of input into what these factories look like. And we believe they are the most advanced and best physical facilities in the world.

From our experiences in the 1990s, we had experiences that caused us to really believe in the benefits of international trade. The uplifting of impoverished people, the better values for consumers in industrialized nations, and most of all, the increased understandings between peoples of different cultures. As a Nike vice-president recently said, “When you go to check out a Nike shoe factory, you now fly across the Pacific River.”

So when we saw the need for advanced production going to Southeast Asia, one of the most adventurous things we did was to decide to make shoes in Vietnam, an area that has had a lot of observation and criticism over these last couple of years. It is a grand and bold adventure, and there are a lot of aspects of it that I believe you have not heard.

There was a lot that was attractive about making shoes in that country, not the least of which was to have commerce flow where a dreadful war had once been. But there was one serious problem: there was no existing shoe industry. So we realized that if we were going to make it work, we would once again have to take our Taiwan and Korean managers with us.

There were two problems with that. First of all, foreign-owned factories by law in Vietnam must pay a minimum wage 50% higher than Vietnamese-owned factories. So if we were successful, we would then in turn create a shoe industry in which our competitors would be able to come in and start their businesses with Vietnamese-owned factories and have a competitive advantage. The second thing, of course, is very simplistic, but it’s true. There was historical hatred between the two ethnic groups, but we did it anyway. A couple months ago I had dinner with my friend, the author David Halberstam, who’s had quite an experience out in Vietnam as well. When we told him that we were using Korean and Taiwanese managers in Vietnam, his comment was simple: “How could you have been so stupid?”

But the flip side is equally simple: no Koreans and Taiwanese – no Vietnamese shoe industry. And for all you have read, Nike shoes make up 5% of the total export of the whole nation of Vietnam. So we contribute on two counts: we provide jobs and we generate a significant amount of foreign currency.

But there are, with all of that, lots of problems. The management of the Vietnamese workforce by foreign managers has complicated the whole process, and it has come under a great spotlight, which has given our critics lots of anecdotes to talk about. Essentially, those critics will hang around restaurants, outside factories and in pubs to get those anecdotes, to illustrate how dreadful this whole globalization process is in general and how evil Nike is in specific.

We have about 530,000 workers working on Nike shoes and clothes on any given day. There are going to be incidents. There have been some in the past, and there certainly will be more in the future. There are too many workers, too many interactions daily; and in Vietnam, too much tension based on nationality to avoid incidents completely. That there have been as few as you have read about I think in many ways is remarkable.

Back in 1992, before anybody else in the athletic footwear industry – and I believe that only Levi-Strauss had one – Nike instituted a code of conduct for use in factories throughout Asia. In 1994 we became the first in any industry to have that code of conduct audited by the international accounting firm of Ernst & Young. We’ve been criticized for using a firm that we are paying for this review, and I think this is really pretty funny. The only reason that a CPA firm has for its very existence is its independence. And if, in fact, it was not independent, we have a much bigger problem than Nike foreign factory relations. The whole New York Stock Exchange would be built on a fraud.

There is another incident, which I think is somewhat instructive of Nike’s activities in Asia. Kushid Soofi is not able to be here today because his father took ill. He is from Sialkot, Pakistan. But his associate Dr. Shah is here and will be able to talk to you later, I believe.

In 1994, Jack Becraft of our Singapore office flew into Sialkot, Pakistan to check out the first ever Nike soccer ball holder. What he found were unacceptable conditions. What he found were conditions that did not meet Nike’s code of conduct. For 50 years, the Pakistan soccer ball industry had been made up of a process in which the ball uppers were sent out into a cottage industry with very little control on who the uppers were sewn by. They were sewn by children, old people, and blind people, under all kinds of bad conditions. Seeing this, he said: “This is not acceptable under the way we do business.” And he and Mr. Soofi got together in Beaverton, Oregon three months later to plan out a very different way of making soccer balls in Pakistan.

It’s been two years now since we set up the first controlled soccer ball stitching centers under which we have a minimum age of 16. They are well lit, and the balls are made under our control. Nine months after we began that process, Reebok started a similar process in their soccer ball factories in Pakistan as well. But the European athletic firms who make by far the greatest number of soccer balls in Pakistan – as much as 70% of the total export of soccer balls – have not changed the way they do business at all. And I point this out to show that the often-used phrasing of Nike critics, that they pick on Nike because as an industry leader, if Nike changes their manufacturing process, the others will follow, is simply not true.

A couple of other things about some of our people doing business in Southeast Asia. Narong Chatnahat, who is here today, 30 years ago faced a career decision. He was to either become a Buddhist monk or go into the family business. His choice was to go into the family business. But I’ll say this: the very thought that he went into the family business to abuse Thai workers is absolutely absurd. Hundreds of Nike people have worked with him over the last 15 years, and not a single one of them has ever heard Narong tell a lie.

David Tsai who is here today began as a worker in a shoe factory in Taiwan 30 years ago. He made $15 per week. Today he is a major shareholder of the largest manufacturer of athletic shoes in the world. And his associate Wong Li, who started at $2.00 a day in Taiwan and is not here, today makes $1,500 a month working in a shoe factory in Taiwan. And it is a story told thousands of times throughout this whole process.

Recently we have come across an interesting incident in China. Young women come from farms clear across China to go to work in a shoe factory to make their lives better. These women – average age 18 to 22 – have never had a TV, have never had a VCR, have never had a DVD, have never had a camera, and usually do not even own a radio. But what we have found in a couple of instances over the last couple of months is that hundreds of them will pool their money and buy a personal computer. And after hours, they are entertaining themselves by going on the internet.

The thing that we have learned more than anything else in this process is that when Nike has gone into a country with its manufacturing operations, wages have increased and poverty has decreased. Nike, of course, is not solely responsible for that, but we have been a part of that process, and we are proud of it and not ashamed of it.

With this as a background, we have on this day six new initiatives to announce. The first one has to do with health conditions within the factories. I believe it is true that every Olympic marathon champion in this century but one has run the 26 miles, 286 yards in shoes made with potentially harmful chemicals, including the much-publicized toluene. It is just the way rubber soled athletic shoes have always been made. And the one marathon exception, of course, was Abebe Bikila, who won the 1960 Olympic marathon in Tokyo running barefoot.

Today, marathoners and most other athletes for the first time have a choice. After four years of extensive research and hard work with our partners in Asia, we have developed and put into practice water-based cements, which allow shoes to be cemented without the use of the most potentially harmful solvents, including toluene. Today we use water-based cement in 80% to 90% of all our shoe production. We still haven’t figured out a way to bond the plastic soled cleated shoes, the baseball, football, and soccer cleats, but they represent less than 15% of our production. So what we say is that with that major breakthrough in footwear manufacturing, that by the end of this calendar year, all Nike shoe factories will meet OSHA standards in indoor air quality.

We have raised the minimum age of all footwear factories to 18. And at all apparel and equipment factories, the minimum age is 16 – the same as it is in the United States. And I really do have to add this: there has never been a time in Nike’s history where child labor has been a problem. And I also say that it really hasn’t been a problem in the shoe industry as a whole.

We’ve publicly recognized the need for expanded monitoring to include non-government organizations and the need for a summary statement about this monitoring. We are not ready to announce how that will be done, but our current guess is it will include a CPA firm as well as health and social auditing by an NGO. The specifics of this will come sometime down the road, but we are working hard to put this into effect.

We are expanding our education program in our footwear factories. It began this year in Vietnam and it includes middle and high-school equivalency course availability for all workers in Nike footwear factories. We are increasing our support of our current micro-enterprise loan program to a thousand families each in of Vietnam, Indonesia, Pakistan and Thailand. These micro-enterprise loans are used for small businesses such as pig farming and the making of rice paper. The limited amount of experience we’ve had in doing that in Vietnam is showing that they’ve been extremely well received and also extremely successful.

We will fund university research and open forums to explore issues related to global manufacturing and responsible business practices such as independent monitoring and health issues. We will begin by funding four programs in United States universities in the 1998-99 academic year, and we’ll have our first public forum in October of this year in Hong Kong.

Having lived through this business for 35 years and the current debate for the last couple, I know that these announcements will not end the debate. In fact, perhaps just the opposite. It will create many more targets to shoot at. Opponents will certainly be able to find incidents and anecdotes of exception. “Aha! Got you there!”

But for those that are truly interested, the North Carolinas and Dartmouths of this world will set the standard for our industry and related industries to follow. We believe that these are processes that the conscientious, good companies will follow in the 21st century. These moves do more than just set industry standards. They reflect who we are as a company. I don’t necessarily expect you to believe that, but I will tell you this. It does make us feel better about ourselves.

BUSINESS ACCOUNTABILITY: SHAREHOLDERS, STAKEHOLDERS OR SOCIETY?

Courtney Pratt
President, Noranda Inc.

The Canadian Club of Montreal, October 6, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

I will start this talk by posing two questions. Is the responsibility of a business, its CEO and executives, and its directors limited only to a responsibility to shareholders? Or, does a corporation have a responsibility to a broader constituency – a constituency that includes, but is not limited to, the shareholders?

These questions are asked often these days in a variety of forms. The issues that surround the questions are complex. They are therefore not easy to answer in a manner that satisfies everyone. I am going to address them from the business perspective, but I do not claim to represent all business. Indeed, within the business world, raising these issues often creates discomfort and controversy.

The idea that business has a responsibility to a broader constituency than shareholders is often characterized as “social responsibility” or “corporate citizenship.” During the course of this talk I will first try to provide some definition to these terms. I will outline the perspectives of groups and individuals who have studied the question. And I will give you my thoughts on areas in which businesses wishing to pursue this broader definition can concentrate.

Business has long insisted on playing a role in key public policy issues. From free trade, to government deficits, to interest rates and the value of the Canadian dollar, to education, to participating in election campaigns. All of this has been done on the basis of the interest of the individual business or of generally improving the climate for doing business in this country.

I am not apologizing for this kind of activity. But I do believe that with such a posture goes a responsibility. Business can choose to be a spectator or, even worse, a passive critic as society develops. Or business can choose to play an active, positive role – to be part of the solution, not part of the problem.

As the questions I stated at the outset suggest, there are two different views on the role that business should play.

First, from Al Dunlap, former Scott Paper CEO and now Sunbeam CEO – author of MEAN Business:

“The most ridiculous word you hear in the boardroom these days is stakeholders. Stakeholders! Whenever I hear that word, I ask how much did they pay for their stake?”

Second, from Charles Handy, the management thinker and writer. Not as prolific as Peter Drucker, but very insightful, innovative and influential:

“I see the company as operating in a bounded space surrounded by competing pressures from financiers, the employees, the customers, the suppliers, the community – the so-called stakeholders. Within that ring, I want to see the development of the corporation whose principal purpose is to fulfill itself, to grow into, develop to be the best that it can be.”

For Handy, profits are a necessary, but not sufficient, condition of success. I fall into the Charles Handy school of thought, which targets the creation of wealth in the broadest sense. There is a striking difference between just making money and creating wealth.

Neil Shaw, chairman of Tate & Lyle, expands on the notion of creating wealth when he says:

“What defines business success? There is growing evidence that the answer depends not only on bottom-line profits, but also on the value-added a business creates. Adding value depends on creating positive relationships with people – employees, customers and suppliers as well as other stakeholders in a wider community. Through community involvement, businesses can build their reputation with all these groups as well as develop the skills and experience of their employees and create a more economically prosperous and vibrant society.”

From everything we know, the population at large is also of the Handy and Shaw school. Surveys in North America and the UK consistently show that a large majority considers social responsibility a key element in their judgment of a company. Further, they state that people’s judgment of a company on these dimensions affects their buying decisions in a significant way.

What kind of marks does the general population give to business? An Angus Reid poll taken earlier this year showed that 45% of Canadians thought corporations were becoming “less responsible.” As a businessperson, I find this statistic disturbing. I see many businesses, including mine and a number of those represented here today, working hard to become “more responsible.” I have to conclude, however, that the work of this group alone is not enough and that we are not telling our story very well.

What is needed at this time is, first of all, an understanding of what business is actually doing. Then we will be in a position to discuss not whether business has a responsibility to community or social responsibility, but how that responsibility is to be met. The “Imagine” campaign of the Canadian Center for Philanthropy, of which I am chairman, has set itself the task of initiating and facilitating the discussion.

My fundamental hypothesis is that if the Canadian business community can come together in a commitment to making a difference in building the society of the next millennium, then Canadian corporations will be able to make a meaningful difference in shaping a society that is better for all of us – business, employees, the environment and our communities.

Where is the evidence that this vision is not just a pipe dream? We need only to look at United Way. United Way campaigns across this country provide critical funding to our social service support structure. Last year, the United Way of Greater Montreal raised $28.3 million to support 233 essential health and social service agencies in our community. Over 80% of that money came from businesses and their employees. Business, labor, and the public and not-for-profit sectors have come together in United Way for years in a strong joint commitment to making this community a better place – and it has worked.

But if the business community doesn’t come together to define its social responsibility and then to act on that definition, I fear we will not achieve that better society. That statement gives you an indication of the importance I attach to the impact of business in today’s world.

I want to emphasize that in defining social responsibility we start with the need to be competitive on a global basis. Without that essential competitiveness, a business is not in a position to make any meaningful contribution to society. My company, Noranda, is a prime example. We are in the natural resources businesses – mining and metals, forest products, oil and gas. Businesses that are critical to Canada’s economy.

Fundamentally, Noranda’s businesses are price takers – prices for our products are set on international markets. We can’t compete on the basis of price. We must compete on the basis of the quality of our assets and our cost competitiveness. When prices for our products are up, our operations need to be industry leaders in profitability. When prices are down, they can’t be the marginal producer whose costs are so high that they can’t survive. Our businesses must be globally competitive.

At Noranda we know that our fundamental social responsibility is to be profitable, which enables us to provide challenging, well-paid jobs and the opportunities for development for all employees. To quote the late Roberto Goizueta, Coca-Cola’s CEO, in that company’s 1996 Annual Report:

“We work hard to remember that the wonderful things our company is capable of – serving our customers, creating jobs, positively impacting society – happen only as long as we fulfill our vision of creating value for our shareholders.”

In fact, I am going to make the case that “positively impacting society” is an integral component of creating value for shareholders. Having said that, now let’s look at the issue of “positively impacting society.”

I think we have to ask ourselves where our society is heading and what the responsibility of business is. We are increasingly becoming a society of haves and have-nots. We have a country where 52% of individuals and 13% of families earn less than $20,000 per year. A country where, despite our apparent economic success, unemployment rates remain stubbornly high, with unemployment for youth particularly troubling – twice the level of the general population. And as for those workers 25 to 30 years of age with jobs, their real earnings have fallen 20% relative to those of mature workers since 1974.

Food banks are accepted as a necessity in this city. And in our streets the plight of the extreme have-nots is increasingly visible to us all. We are not used to seeing so many people living in the streets, so many people asking for money. If you are like me, you find it profoundly disturbing. The real danger is that we become used to seeing these people, that we accept it as a fact of life and that we stop being disturbed.

Our social safety net, designed for another economic era, no longer works, and it is being cut apart every day. And, of course, as a country, we risk being pulled apart, polarized, at a time when we should be recommitting to each other.

Is this our vision of the society we want to develop? It’s not my vision, and I’m pretty confident that it’s not the vision of most of my business colleagues.

I like the vision expressed by Judith Maxwell, former head of the Economic Council of Canada and now president of the Canadian Policy Research Network. She talks about building a “resilient society” in which costs are still important but the dominant theme is investing in human capital.

The responsibility for social well-being is shifting away from a total dependence on the state to a combined responsibility for individuals, families, employers and the state. As we look ahead, social capital is the foundation of economic success in the civil society.

I like the way Judith Maxwell characterizes the evolution over time of the definition of the three classical factors of production:

“We’ve moved from land to the quality of the environment. We’ve moved from labor to human capital, including technical knowledge, problem-solving skills and autonomy or empowerment. We’ve moved from capital to social capital in the community and society in which the firm operates. Social capital includes institutions, patterns of behavior, and the trust and reciprocity that enable us to solve problems, adapt and grow.”

I consider it to be a self-evident truth that the success of a business is ultimately dependent on the success, strength, and optimism of the society in which it operates. I consider it a responsibility of business to take an active role in shaping that society. Business can, by its actions, be one of the key contributors toward the evolution of our society in a direction that will benefit every stakeholder.

The broad support for business, the public trust which is critical to our ability to operate and compete, is enhanced if business is perceived as having a genuine concern for society and making a positive contribution. We will, ultimately do well by doing good. This is the bottom line of social responsibility for business: it’s good for business. And good for shareholders.

In January 1993, 25 of the UK’s top companies came together under the leadership of Sir Anthony Cleaver, chairman of IBM UK. The objective was to develop a shared vision of tomorrow’s company. The aim was specific and practical: to stimulate competitive performance by provoking business leaders to think about the sources of sustainable business success. It was born out of a concern for the global competitiveness of UK businesses.

The key phrase that came out of this work was that “to achieve sustainable success, tomorrow’s company must take an inclusive approach.” They concluded that internationally competitive companies will be those that maintain their “license to operate” by securing high levels of support from all those with whom they interact directly or indirectly. They stated very directly that an exclusive concentration on any one stakeholder will not lead to sustainable competitive performance. They further concluded that it is therefore not necessarily in the best interest of shareholders themselves to be singled out in this way.

If business accepts that it has a multi-stakeholder responsibility, a responsibility to create social capital, what sort of things can business do to create that capital? I believe there are at least three areas of potential focus: employees, the environment and the community.

First, employees. We must invest in them as individuals, in their development. In today’s world, the quality of our workforce is an essential component of any organization’s competitive advantage. We can’t guarantee jobs for life, but we should guarantee personal growth and the attainment of skills and aptitudes critical to success in the future, whoever their employers may be. We can’t promise employment, but we should be able to promise employability. We can make work and life transitions easier: job to job, employer to employer, full-time employment to retirement. We can create a “family-friendly” workplace which will help to ease the day-to-day stress many of our employees feel and at the same time give a strong boost to the “readiness for education” of our employees’ children.

Second, the environment, which is particularly critical to a company like Noranda. We need to make the principles of sustainable development a fundamental part of our business strategies and day-to-day operations. Sustainable development is a very broad concept which highlights the need to look at the economic, environmental and societal aspects of a business together. The trustees of the New York State pension fund have stated: “When corporations treat the environment badly, they treat their investors badly.” To return to a theme, sustainable development is good business and socially responsible. We also need to be open about and accountable for our environmental performance. At Noranda, we are proud to have been leaders in this country and in the world with the Environmental Annual Reports, which we began publishing in 1990. And finally, we need to invest in the research that will enable us to ensure that the massive environmental-related expenditures that companies make are directed to finding solutions to real, not perceived, problems.

Third, the community. As a total business sector, we have to give more money. A recent Goldfarb poll found that 10% of Canadians believe that corporations are currently most responsible for community service charities. The recent funding cuts from all levels of government have created huge and unrealistic expectations that business should, or must, pick up the slack. In fact, business contributes less than 2% of the total expenditures in this sector.

Many corporations are already doing their fair share. That’s not enough. All businesses must do their share. We must find new ways to support and work with the voluntary and charitable organizations that are struggling to meet community needs as governments cut back. An important part of this contribution must be financial.

The “Imagine” program has set a target of a minimum of 1% of pretax profit as the benchmark for corporate giving. Today, over 436 companies have committed themselves to this target. While we can be proud of this progress, the reality remains that the majority of Canadian companies have yet to reach this modest benchmark. That’s just not good enough.

However, we must do more than simply just give money. We must get involved in and work with the community to solve community problems. I know from working with many of these community organizations that the sharing of our other resources, particularly our people, is of enormous value.

We have to encourage our employees to volunteer and make it easier for them to volunteer. This is a definite “win/win.” The personal development that comes from a good volunteer experience ranks right up there with what we can accomplish through the training and development programs that we spend a lot of money on.

As I look back, some of the highlights of my career in terms of development and sense of satisfaction have come from volunteer work. And that’s not just at the level of working on or chairing boards. I have been involved for the past four years in designing and delivering a four-day program on organizational culture and change to teachers, department heads, vice-principals and principals from across the Greater Toronto Area at the Learning Partnership’s Summer Institute. This sort of volunteer work brings with it a very different kind of learning, personal development and a feeling of having made a valued contribution. Just as in my business life, I find that I am always learning in my interactions with the not-for-profit sector. And that learning is of great value in my business life.

We should also encourage, support and seek partnerships with organizations which need our help, whether they be schools or social service organizations. Sharing a joint commitment and making a joint effort with another organization to achieve an important societal goal has tremendous benefits for all parties to the partnership. And we are fast learning that the complexity of many of today’s problems requires the differing resources that only multi-sectoral partnerships can bring to bear if we are to be effective in our efforts. The projects of The Learning Partnership between business and all 17 School Boards in the GTA, of which The Summer Institute is an example, are strong evidence of what can be achieved when we work together.

We need to work to find and support new forms of school-to-work transition. We cannot allow the Catch-22 of employment for young people to continue: “I can’t get a job because I have no experience”…”If I don’t get a job, I can’t get the experience.”

Career Edge, the national program to provide internships for graduates of high school, college or university (developed and implemented entirely by the private sector) is an example of which I am extremely proud. In this one-year-old organization, we have placed 600 interns, of whom 84% became fully employed either during or one month after completing the program.

Are there other ways in which we can meet our broad responsibilities and play our role? Of course there are. In the last two years, we have had over 160 outstanding examples of innovative business community partnerships submitted for the “Imagine” New Spirit of Community Partnership Awards. And I know there are many more wonderful stories to be told – a lot of good things are happening. But more has to happen.

Business must be prepared to talk openly about its responsibility for making more happen. The members of the business community must debate these issues, both within their own community and with the other constituencies or stakeholders in our society. Business must seek some form of consensus about the role its members will play in contributing to the evolution of our society and about the resources it can and will make available. Only in this way can we address, in a transparent fashion, the conflicting and often unreasonable expectations which currently exist. If we achieve this consensus, then business can play a meaningful and constructive role. A role that is good for business and its shareholders and for our many stakeholders.

I started today with two questions. Is the responsibility of the corporation limited to shareholders? Or do we have a responsibility to a broader constituency? The questions were stated as if they were mutually exclusive.

In fact, I hope it is clear to you now that I believe that a company has a responsibility to a broader constituency than its shareholders, because a company can meet its responsibility to create value for its shareholders only by seeing the world in this way.

Business is a critical element of society. It inevitably has a great impact on how society develops. It has a responsibility to play that role with high ethical and moral standards, with consciousness and with purpose.

CANADA AND NORTEL: A PARTNERSHIP WORTH CELEBRATING

Jean C. Monty
President & CEO, Northern Telecom Limited

The Canadian Club, Montreal, March 18, 1996
Published in The Corporate Report No. 17 (April 30, 1996)

Last year at this time we held a celebration in Montreal to mark our 100th anniversary as a company. Many of you attended that special evening featuring Céline Dion, which followed our annual meeting. The annual meeting was a memorable and historic occasion because it not only enabled us to report on Northern Telecom’s progress but also provided an appropriate setting for:

• Saluting the founders of our company, which started life in Montreal in 1895 as a small manufacturer of telephone sets with three employees.

• Launching our second century by introducing “A World of Networks” as our vision for the future of global communications.

• Announcing we would use Nortel as our logo and brand in the marketplace, although Northern Telecom Limited remains the legal name of the corporation.

Today I want to talk about the framework Nortel has created to ensure a prosperous future and use the occasion to comment on what Canada should do to continue to ensure an attractive future for all Canadians. Along the way, you’ll permit me to underline the significant contribution Nortel is making to Canada’s:

• Economic development

• Job creation

• Exports growth, which has been the segment of the Canadian economy expanding fastest in the 1990s. Canada’s trade surplus in goods hit a record $28 billion in 1995. Today a third of the value of all production in Canada is exported. Canada is indeed a trading nation.

Growth in the export sector – almost 8% a year since 1990 – is evidence that, contrary to a lot of recent comments, business is making a strong contribution to Canada’s economic development and job creation. You’ll be hearing a bit later that Nortel is one of the companies contributing to job creation in Canada through exports. In fact, the jobs of nearly 60% of our employees in Canada – 12,500 jobs – are export dependent. This is some indication of the need for Canada to be internationally competitive. Job creation and our ability to export are tightly linked.

The title of my talk is: “Canada and Nortel: A Partnership Worth Celebrating.” Over the years, this partnership has served all Canadians and given the country a major stake in the global telecom industry of the 21st Century. More than ever, Nortel has to lead the way in order to remain a core element of Canada’s scientific and commercial future. The telecom sector is a global industry with a future – it’s big, it’s growing, and it is economically strategic to the ability of countries like Canada to connect to the opportunities of the networked global economy. In Canada, the telecom industry is also creating high-quality employment because of its ability to compete internationally as well as domestically. In fact, Nortel is a global resource for Canada, and a national asset. As a global resource, we provide Canada with a window on the world telecom industry – and we bring to our customers in Canada the experience and expertise we gain from our presence in Europe, in Asia/Pacific, in the Caribbean and Latin America, and in the United States, which is the lead market for telecommunications.

I believe that in the years ahead Nortel stands to make an even greater contribution to Canada than in the past. But to do so we have had to face up to the emergence of a networked global economy that’s transforming our company. The change we’re experiencing is irrevocable and such change is causing dislocation in all segments of our industry. One thinks of Emerson’s line (lightly adapted): “Events are in the saddle, and ride mankind.” Never has that seemed more true for countries and companies. The twin forces of globalization and the information revolution cannot be stopped. In the case of Nortel, the new age of telecommunications has resulted in a company not only transformed but, more fundamentally, a company reinvented. Let me explain why this reinvention was necessary:

• First, globalization is not only opening new markets to us, but it has also forced us to prepare for a more competitive future.

• Second, the information revolution – the digital revolution – presents new opportunities for growth. Just as economic growth is vital to Canada’s future, so too is business growth critical to Nortel’s continued development. Throughout our reinvention, we never lost sight of that priority. It is wrong to focus on cost reduction alone. Progress requires growth, especially in the technology business. In fact, in the early 90s our growth had slowed down to a crawl.

The reinvention of Nortel is not about restructuring, reorganizing, reengineering, benchmarking, or total quality management, though it did involve the use of these management techniques and tools. No, our reinvention is about focus, speed, growth and customer satisfaction. Nortel’s reinvention is a comprehensive response on our part fundamental changes in our industry. Customers and end users – citizens and consumers – need telecommunications to improve human contact and social behavior in an increasingly electronic world. Society needs telecommunications to improve medical and educational services. Governments and enterprises need telecommunications to improve their product and service capabilities and reduce operating costs.

Our reinvention is also a response to changes in public policy driven by dramatic technology advances that are transforming the communications industry here in Canada and globally. Corporatization, privatization, and deregulation are the order of the day, and the change we’re experiencing is accelerating. In order to adapt to these changes and capitalize on new opportunities created by discontinuity, Nortel has adjusted its corporate plans and strategy. From being the leader of digital switching systems for telephone operating companies, we’re now taking a global leadership position as a provider and integrator of digital network solutions and services to many different types of customers.

We are now developing integrated network solutions for providers of enterprise and wireless communications and new public carriers, as well as helping the traditional telcos pursue the development of their networks. In fact, in 1995, only 40% of our revenues were generated from sales of central-office-switching systems to telcos, Nortel’s traditional market. I will illustrate our new direction with three examples. We built a new electricity-grid telecom network in the United Kingdom – called Energis – from scratch. It’s the UK’s third national telecommunications network. By wrapping fiber-optic cable around overhead power lines, Nortel and Energis created a network with more capability and lower costs than other UK network providers. And we did it in 18 months – from traffic analysis to network design and delivery.

Last year, we also began supplying a turnkey system for Avantel, a brand-new long-distance network in Mexico. Avantel is a joint venture of Banco Nacional de Mexico (Banamex) and MCI with ambitious goals and a very short time frame – 12 months – to get a full national network up and running. And in the space of just a few months, we also supplied and installed Singapore’s first national network for personal communications services (PCS), supporting 160,000 subscribers. For Nortel, our repositioning as a “systems company” and integrator of network solutions was “un virage” – a sharp turn from the strategies that defined the Northern Telecom of the last 20 years to the new Nortel that’s opening up to a new set of opportunities not only in North America, but globally.

Our reinvention is multifaceted. To support our ability to serve customers worldwide, we’re building a strong global presence in key markets including China, Germany, France, the UK, and Mexico. Revenues from customers outside Canada and the US now account for 39% of consolidated revenues. Canada now accounts for only about 11% of our consolidated global revenues. Our plans to increase our business are showing results. In both 1994 and 1995, our revenues grew by 15% or so each year, after a period of stagnation from 1991 through 1993.

Last year was a year of growth for us. Our revenues broke through the US$10 billion mark – or $14 billion Canadian. Here are a few examples of how we’re expanding our customer base and increasing our revenues:

• Last year, in Israel, we teamed up with BellSouth, a US carrier, to build a cellular network that costs subscribers less than five cents a minute.

• We extended Colombia’s wireline network, began building a broadband network for the Dutch military, created wireless networks in France, Taiwan, China, Colombia, and Mexico, and started deploying one of the world’s most advanced broadband networks in Canada.

• More than 260 of our data networks are operating in more than 150 countries – including China, Spain, Korea, Germany, Italy, Australia, Canada, and Brazil – and in the global networks of organizations such as SWIFT and SITA.

• We’re supplying fixed wireless access systems in countries as diverse as Brazil, Finland, Mexico, and the United Kingdom.

• Large global corporations such as Microsoft, Kodak, and Bankers Trust use our technology to connect their operations around the world.

We could not pursue our transformation without a strong commitment to research and development. In creating “A World of Networks,” customers expect us to continue investing heavily in research and development. Our R&D investment in 1995 was 14.8% of revenues, or US$1.6 billion, primarily driven by increased investments in wireless, enterprise, and broadband network portfolios.

We’ve been extremely aggressive in globalizing our R&D organization. Today, our worldwide network of R&D labs consists of 29 sites in 13 countries in North America, Asia/Pacific, the Middle East and Europe. We’re making R&D a highly visible element of our global marketing.

Internally, our reinvention is taking hold in many different ways. Our in-house corporate network bridges all 24 time zones and links 200 of our locations around the world. Our people work together in a multimedia environment. Our Nortel “Intranet,” if you will, carries more than 80,000 voice calls and over 110 million packets of data daily. It offers a custom-built approach to work flow and project management, and a platform for product design and process redesign. Our internal network helps us get maximum efficiency from various functions and departments, no matter where in the world they are located. There’s more coordination, more collaboration, and more use of virtual teams.

The globalization of our operations is leading to the intermeshing of our trade flows. For instance, R&D for one of our products may be conducted in two or three countries – in France, Germany, Turkey, Japan, Australia, or China – in parallel with our main centers in Canada, the US, and the UK We also subcontract some of our technology development to partners in India, Russia, Israel, and Austria. But the process does not stop there. Basic components are manufactured in Malaysia, Mexico, and the UK. They are assembled in Canada, France, or several other nations. Finished products are distributed and serviced in over 100 countries.

But through all this reinvention and globalization, we continued to invest heavily here in Canada. While international revenues are increasingly important to our success, our Canadian operations continue to play a vital role in our strategy. As I said earlier, only 11% of our revenues now come from Canada, but one third of our employees and approximately 50% of our R&D are in Canada. Several of our operations in Canada have global product mandates. Our corporate headquarters remain in Canada. Our Canadian market position has been the springboard from which we have been able to vault into international markets, including the US, which today is our largest market.

Just as our investments in R&D and in training form an integral part of our corporate strategy, so does our Canadian heritage – our long-standing relationships with Canadian customers, the Government of Canada, and the Canadian academic community, which we support through our University Interaction Program. As Canada’s flagship high-tech company, we are very conscious of our broader responsibilities as a corporate citizen. During the past three years, we have been careful to minimize the negative impacts of our restructuring in Canada.

For example, during the restructuring it was necessary for us to dispose of a number of non-core assets in Canada, not only here in Quebec, but also in other provinces and in other countries. Actually, we disposed of over US$2 billion of assets primarily in the UK, the US, and Canada. And we used these funds to invest in new growth opportunities and reestablish our financial position. I’m pleased we were able to sell most of these properties and assets as ongoing businesses to companies for whom they were core activities. This includes our copper-cable business in Quebec, which we sold to Cable Design Technologies at the end of 1995.

Where we had to downsize operations in Canada, we worked hard to help our employees by providing transition benefits and support in finding new employment. We offered relocation opportunities and training. In Brampton, Ontario, where we significantly downsized our manufacturing operations, over 50% of the affected employees were either placed in other jobs or volunteered for early retirement. At the same time, during the reinvention period of the last three years, we hired nearly 4,800 new employees in Canada. The net result is that our Canadian workforce remains around 21,300, just slightly below what it was before we began restructuring in 1993 and, as I said, 12,500 of these jobs depend on exports from Canada.

We may not have as many people in manufacturing as we used to, but were hiring hundreds more professional people and knowledge workers for our R&D labs, our marketing functions, our lines of business, and corporate operations. These are specialists like software engineers, product designers, finance, and marketing professionals.

Nortel mirrors Canada’s transformation to a knowledge-based economy. In the late 1980s, 45% of Nortel employees in North America were knowledge workers. Today, 68% are knowledge workers. By 1998, we expect the figure to be 75%.

We have an extensive hiring program across Canadian universities. Over 700 new graduates and knowledge workers joined our company last year. Indeed, in 1994, we hired one out of every three of Canada’s Masters and Ph.D. graduates in electrical engineering and computer science. Last year we provided CDN$4 million to universities in Canada through our University Interaction Program and our external research activities. In addition, over 2,000 intern and co-op students join us each year. Many eventually are hired as permanent employees when they graduate from university. We are proud of our record in employment and job creation, even if we had to make some hard decisions over the last few years. The results are there. We never stopped focusing on growth, and we invested hundreds of millions of dollars to support our plans to expand the business and strengthen the international competitiveness of our Canadian operations.

When it comes to investing in Canada and maintaining our presence in this country, let me highlight a few facts that are not generally known but that I believe underline our Canadian commitment:

• First, as I said earlier, we maintain our world headquarters in Canada. We are currently converting a million square feet of space in Brampton, formerly used for manufacturing, into a new corporate head office. This represents an investment of around $60 million. Capital spending in Canada over the past three years totals around CDN$650 million. In 1995, Canada accounted for 31% of our capital spending.

• Nortel accounts for about 20% of the industrial research and development done in this country. Nortel Technology has more than 6,300 R&D employees in Canada. In 1995, alone, we spent CDN$1.2 billion on R&D in Canada.

• We also have state-of-the-art manufacturing, semiconductor, and software engineering facilities in British Columbia, Alberta, Ontario and Quebec.

• We spend over CDN$1.5 billion with over 5,000 Canadian suppliers. This helps spur the growth of small- and medium-size enterprises across the country – something that’s essential to creating more jobs for Canadians.

• Over the last five years, our exports from Canada have almost tripled, from CDN$1.4 billion to $3.7 billion in 1995. This represents 70% of Canadian sales – some of our plants are exporting over 90% of their sales. As I mentioned, this translates into jobs for Canadians – another sound reason for our globalization.

• Moreover, as Canada’s flagship high-tech company, Nortel has been the mother house for some 55 high-tech businesses during the past decade. Some of them have become familiar names in the Canadian high-tech sector – Mitel, Newbridge Networks, Corel, Telesis North, CML Technologies and ABL Canada to name a few. Many of these companies are now contributing to Canada’s expansion into global markets.

I also want to point out that Nortel is a Canadian company that maintains a strong presence in Quebec. Nortel is one of the largest high-tech companies in the province, and we are proud of our contributions to Quebec’s economic and social development. Nortel employs over 3,400 people in Quebec. Our manufacturing facilities here account for over 20% of the total in Canada. And by using innovative processes and investing in plant improvements (and that includes more than $120 million invested in Montreal-area plants in the last three years) we contribute to Quebec’s international competitiveness.

We spent about CAD$80 million on R&D in Quebec in 1995. Our labs on Nuns’ Island are world-renowned for their advanced research. And through our University Interaction Program, we’ve allocated more than $2.5 million in research funding to Quebec universities in the last five years. We are a major contributor to Quebec’s trade surplus. In 1995, more than 90% of Nortel’s production was exported out of the province. Our exports from Quebec run around $1 billion annually. We annually contribute about $650 million to the economy of the province through salaries and benefits, taxes, investments in fixed assets, and purchases from 1,700 local suppliers.

As you can see, Nortel not only contributes significantly to Canada’s scientific, educational, and economic well-being, but also has a lot at stake in Canada. So, it will not surprise you in view of our interest and investments that I want to conclude my talk with a message about the future of this great country. In effect, my message is that we have to get on with the reinvention of the Canadian economy. My message to Canadians today is one of hope, challenge, and opportunity. What we are in the process of realizing at Nortel is within reach of Canada as a whole. Canada needs to re-ignite its vision of a people from many different origins who come together in a common front, turned outward and to the future. After years of lethargic economic recovery, difficult structural transitions, and tortuous referendum debates, there’s a negative mood in the country – a lack of hope that our way of life will survive.

This is understandable. Over the last 50 years, we have been through significant changes. During the first 20 years after the war, Canada built a very strong base economically, socially, and culturally. During the 1970s and 1980s, we took advantage of that base to push forward a very extensive social-support system while absorbing the “oil shock” of 1974-75. Actually, we have almost come to see our social programs as our common bond as Canadians. Unfortunately, while we were building a more acceptable social order we did not continue to build and invest in our economic base. Over the latter part of the 1980s and the early 1990s, we have had to come to grips with the fact that our governments are overextended and that we owe too much money to each other at home and to foreign lenders.

The mood of anxiety in Canada is leading some of our fellow Canadians to think that our economic troubles have their root in a flawed political structure. Nothing could be further from the truth. Our political structure is flexible enough to accommodate many different views and approaches to public policy. And it is flexible enough to reflect changing circumstances. Since the war, there have been significant changes in the sharing of revenues between the federal and provincial governments, for example.

In the 1950s, Quebec decided to develop its own system of personal income taxes. During that same period, we established the principle of equalization payments. In the 1960s, Quebec decided to develop its own pension plan. In the 1970s, Quebec was granted authority over the selection of immigrants. And all these changes took place without changing the constitution.

Then came the early 1980s, when we shifted away from this evolutionary approach to federalism and moved decidedly on steps to radically alter the federation. The patriation of our constitution and the introduction of the Charter of Rights were momentous events which unfortunately did not receive unanimous support. Attempts were made at reconciliation. Unfortunately, Meech and Charlottetown failed. But their failure does not mean that we cannot work and live together.

Canadians need Canada more than ever before. We face some very challenging economic issues, which, divided, we will find even more difficult to deal with. Politically, globalization is already undermining the very concept of the nation state. Increasingly, transnational enterprises and supranational political arrangements are assuming some of the powers previously exercised by national governments. This is not the time for us to fragment our political and economic position. And that’s true whether you are a British Columbian, an Albertan, or a Quebecer.

Faced with globalization and the information revolution, citizens seek political solutions and democratic accountability at local levels even as the world economy moves towards ever greater levels of integration. And this social trend speaks loudly for the increased devolution of political powers. I am totally in favor of this orientation, which is also becoming inevitable for economic reasons. This should not, however, be seen as contradictory to the need for a united Canada.

At the same time, I firmly believe that Canadians have more power to influence their destiny as a people through a federation of 30 million citizens than through a set of splintered groups of varying size trying to reset the boundaries of their national relationships. As a trading nation, we have to capitalize on our position as a founding member of NAFTA and APEC (Asia/Pacific Economic Cooperation), not to mention the Commonwealth and La francophonie, in both of which Canada plays a strong leadership role.

Canada is both an Atlantic and Pacific Rim nation with unusually privileged access to the North American market and growing relationships throughout South America. No other country in the world can claim such diversity in the relationships so important to success in the networked global economy. These relationships are also critical to Nortel’s success as a strong participant in Canada’s and Quebec’s economy. Without them our export prospects would be questionable. These relationships are critical to a country and corporation relying on exports for their livelihood and employment.

Just as we all win in a united Canada, we would all lose in a divided Canada. As our country would be divided, we would be diminished, in our own eyes and in the eyes of the world. As citizens of a united Canada we all benefit from the critical mass of the Canadian economy, which has given us membership in the world’s most exclusive club, the G7, and which has given Canadians the second-highest standard of living in the world.

Canada’s future lies in reaching outward, not looking inward, and by building on the strengths of the Canadian brand name, one of the most recognized and respected in the world. I see this myself. Everywhere I go on behalf of Nortel, I’m received not only as the representative of a global corporation but also of a country whose reputation is a measurable source of comparative advantage in the international business community.

I see good will towards Canada. I see the esteem in which Canadians are held for our democratic values and quality of life. I see the regard in which we’re held as a trading nation. I see the respect customers and competitors have for Canadian products, innovation, and ingenuity. I’ve also seen how Nortel’s Canadian employees benefit from our activity within the Canadian economic union. Products developed at our Nortel Technology lab on Nuns’ Island, Quebec, create jobs for the Albertans who make those products in Calgary for sale in Canada, the United States and around the world. Products developed at Nortel Technology headquarters in Ottawa mean jobs – high-tech, high-paying jobs – for Quebecers at our St. Laurent manufacturing plant.

The interprovincial trade accord and the recent agreement to reduce the 500 remaining barriers to interprovincial trade are major strands of our economic fabric. We should not even consider rethinking them, any more than we should reconsider our position in global alliances and partnerships. They are the core of our future economic well-being in a global, free-trade world. It takes decades to set these relationships and agreements. They are based on long-standing historical ties and goodwill. We have to continue to build on this base. Trust is something that’s very difficult to acquire but extremely easy to lose.

The fact is, Quebec is too small to fulfill the dreams and aspirations of Quebecers. Just as Newfoundland is too small for Newfoundlanders, Alberta too small for Albertans, and British Columbia too small for British Columbians. A Canadian platform is what we all need.

On the economic front, we need more exports, more “Team Canada” spirit, more free trade, and more multilateral, supranational arrangements to defend our rights as a trading nation. In this respect, I want to congratulate Finance Minister Paul Martin for the initiative he announced in his last budget to support increased export financing. This is an investment in job creation and in helping Canadians secure their future.

The government’s new focus on science and technology is also welcome. It is true as the industry minister states in his recently released paper, “Science and Technology for the New Century,” that science, technology and R&D “play a critical role in the health and well-being of Canadians and in the country’s ability to generate sustainable employment and economic growth.”

Canada needs more investment in research and development, as well as lower interest rates from lower government deficits. We need more privatization of government entities to rekindle our competitive spirit. We need more productive investment by private industry. We’re certainly doing our share at Nortel when it comes to creating jobs for Canadians, investing in research and development and generating new wealth through contributing to the economy’s renewal. Economic renewal is the way for Canadians to avoid a future of falling opportunities and diminished prosperity.

On the political front, we have to come back to constitutional incrementalism prevalent prior to 1982, constantly adjusting our federation and managing our affairs with respect for diversity. We have to continue the process by which Canadian regions can develop their individuality within a strong economic union and where they are supported by a united national presence in our international relationships. I am encouraged by recent announcements of the Chrétien government in this respect.

These changes in the management of our social and political affairs can take place at the administrative level without resorting to constitutional negotiations, as has happened so often in the past 15 years. As we begin the second half of the 1990s, Canada is weaving itself into the networked economy and the global political structure of the 21st Century. We must unite around that great cause by creating a “new-century economy” attuned to the new realities and challenges of a different future.

The creation of a “new-century economy” must be our focus – the driving force – for reinventing Canada, for securing our future and ensuring that Canada is on the vanguard of change, not its victim. In this respect, let us accept the federal government’s challenge to work together to make sure the new economy is an economy that generates prosperity for all Canadians. I believe this challenge is a much more attractive rallying cry to unite all Canadians than holding more constitutional conferences and never-ending searches for common values and for a common identity. I am a Quebecer as well as a Canadian. I am proud to be both. And I do not need a “distinct-society clause” to remind me of who I am.

As a country, we have great potential provided we keep our faith in the future strong – and have the will, the courage, and the boldness to make a national commitment to economic renewal. This is a great national challenge worthy of support by all Canadians.

BUILDING A UNIFIED SYSTEM AT NORTEL NETWORKS

Keith Powell
Chief Information Officer, Nortel Networks

CIO Summit, Toronto, November 9, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

In 1989, Rosabeth Moss Kanter, professor at the Harvard School of Business, wrote an insightful book called When Giants Learn to Dance. Large corporations, she said, face a dramatically changed world. And if they want to survive, they must transform themselves into nimble, responsive, “post-entrepreneurial” organizations. They must bring together entrepreneurial creativity and corporate discipline. Her book was prophetic. Who here has not experienced the transformation she describes? During the 90s, large corporations have moved from large, lumbering giants of organizations to agile enterprises.

Nortel has achieved such a transformation. But we knew our agility could not come from getting small or spinning off businesses – as so many other companies have done. Rather we wanted to enjoy the benefits of size and a worldwide presence. The key for us would be building a unified communications environment. It would give us what Jack Welch calls “a small company feel inside a large company body.” In short, we were determined to be a giant that learned how to dance.

I’m here today to tell you how we achieved our goals. And my message to you is this: during the past decade Nortel overcame a series of challenges, and built an integrated communications infrastructure that has been a key to our corporate success. I’ll first discuss the challenges we faced. Then I’ll describe the communications environment we created. Finally, I’ll discuss implications for the future.

I’ll begin with the five challenges we faced in building a single operating environment. First, any system we built had to respond to the needs of an enormous, worldwide company. Nortel is unquestionably a giant. Nortel Networks is a company with 80,000 employees. We have facilities in 150 countries. And we are actively involved in five major lines of business – all contributing to our reputation as the only provider of complete network solutions. Here’s another way of looking at our size: We have C$18 billion in revenues. Our earnings will be close to C$1 billion this year, and growth should top 14% a year through 2001. So developing a single integrated communications environment for such a giant of a company was a serious undertaking.

The second challenge was the soaring need for bandwidth as the use of data took off. Nortel had been a voice company. But the need for data communications within Nortel has outpaced voice. We had to respond reliably and cost-effectively, so that our internal clients’ costs went down as their demands increased. To do so we needed bandwidth – much more of it. We also needed the applications that would support Nortel’s use of this bandwidth.

Our third challenge was building a cutting-edge system that kept pace with technological change. To illustrate just how fast technology is changing, let me note the following:

• Gordon Moore, founder of Intel, has observed that the number of transistors on a chip doubles every 18 months.

• George Gilder, the futurist, notes that the performance of a processor is proportional to the square of the number of transistors.

• Bob Metcalfe, inventor of Ethernet, says that the utility of a network is proportional to the square of the number of users.

• Nicklaus Wirth, inventor of Pascal, says that software is getting slower faster than hardware is getting faster. This explains why applications still “feel” slow despite your sophisticated computer.

These statements show that the various aspects of technology are rapidly changing – and at different rates. And this inevitably causes “disconnects” for a large, technology-driven organization like Nortel.

The fourth challenge was confronting regional and national barriers to globalization. In North America we have many vendors and suppliers to choose from – and all could provide us with universal access to data from the desktop. But in some countries the only providers were regulated, government-owned telecom companies. We had to ask, for example: should a Nortel employee in the depths of Russia have the same access to information that other Nortel employees do?

Security standards also varied from country to country. Every government has its own rules. The Chinese government doesn’t allow employees to have access to the internet, even though every other Nortel employee outside China has it. The French government doesn’t allow encryption technology, even though we use it everywhere else in the world. We had to understand all these national and regional rules before we could construct our global networks.

The fifth challenge was creating a system that would allow our far-flung employees to collaborate on highly sophisticated projects. We needed to have design engineers and product specialists, for example, connected electronically and able to exchange complex plans. As well, we knew we had to be able to communicate with our partners electronically. As I’ll show later, we achieved such a collaborative environment in our merger with Bay Networks. The answer was to create an efficient, integrated communications environment that would support our worldwide business while leveraging the economy of scale. I’ll tell you how we did it, then what we created. The “how” is a dramatic story. Unlike many other firms, we adopted a centralized model and got senior management to buy into the project. The centralized model was absolutely critical to our success. Our starting point was a fragmented IT model, where every business was doing its own thing. Our goal was a centralized model where everything is standardized on a corporate basis, or what we call our Common Operating Environment.

This took time – too long – and involved many steps. We eliminated the independent IS organizations affiliated with the business units. And we created a single wide-area network, and a single corporate-wide IS organization. The IS organization was then merged with the Network Management Group – creating the Information Services Organization, which I head. It’s this organization that oversees the development and management of the communications infrastructure. It is the single network service provider.

Our centralized approach was absolutely necessary. It allowed us to achieve the full power of a corporate network. We knew too many companies that were struggling with a decentralized model, including ourselves. These companies find that their business groups wanted to control the technology decision-making.

We held to our vision. And I’m glad to say we gained tremendous executive buy-in. At first, there was some skepticism. Many executives feel more comfortable when they own the systems and services that support their businesses. It took time to get their full support. But we got it, and that has made all the difference. By the way, the process we went through to make this change has been documented in a business case at the University of Western Ontario Faculty of Business. That’s how we created our centralized, corporate-wide intranet. Now I’d like to tell you what this system is like.

Today at Nortel Networks there are fewer boundaries. Fewer organizational boundaries. Fewer geographical boundaries. Fewer customer boundaries. Fewer boundaries in our partnerships. Our target is no boundaries, where information flows seamlessly. In fact, in the program for this CIO Summit there was an ad for Bay Networks that says it all: “Any network can move information. The future belongs to those businesses that make it flow.” At Nortel Networks, information is flowing around the world in one grand design.

We have a completely integrated worldwide network that connects more than 87,000 users who send 15 terabytes of data each month. They send 1 million email messages each day, and use 11 million call minutes of voice each month. And thanks to Webtone, these IP-based communications are virtually of the same quality as voice communications. The network serves Nortel employees in 150 countries and 300 locations. As our CEO, John Roth, told a Business Week forum this year, “This very-high-performance ATM-based network and its many interactive web-based applications are critical to our operations as a global corporation.”

The real achievement is that we created a single, unified operating environment. That is, we are now well on our way to having a computing/communications network, with one global messaging environment, one set of shared global systems, one shared information resource, one set of basic business codes, one set of IT standards and one architectural blueprint. Let me tell you about each of these in turn.

One global messaging environment. Three years ago, Nortel had seven separate email systems. They communicated with each other, most of the time, but in a way that was very costly. The three major ones were Quick Mail, COCOS, which was our internally developed system, and Eudora.

We are now migrating the entire corporation from those seven separate email systems onto one: Microsoft Exchange. We will be complete by year-end. It took a year and a half, and there have been some bold challenges. Standardization was one. We had many UNIX users who couldn’t use Microsoft. Scalability was another challenge. As we moved to a single, unified environment, usage soared. So we had to constantly increase our capacity. And we had to find ways to ensure reliability.

Today we have an email system that is 99.984% reliable – very close to the magic figure of 99.999% everyone is talking about. Today our people can use email anytime of the night or day. They’re not constrained by time zones. And they’re using email for collaboration. Suppose two employees are on the phone, and one mentions an important report. The first person clicks on the email, and the report is instantly sent and discussed. Email is not just a communications vehicle: it’s a collaborative tool. The capability of combining voice and mail is the beginning of something Nortel calls “Unified Networks.”

We have one set of shared global systems. We’re now putting systems in place that support common global processes. For example, when somebody requests human resource data anywhere in Nortel, we’re able to respond to that request using a common process across the corporation. Achieving this consistency requires corporate commitment and discipline across the company.

Nortel has 14 major business processes. We’re moving systematically to develop a single approach to all of them. Already we’ve achieved this consistency in finance and human resources processes. Now the company is committed to a single set of global systems in sales and marketing, and customer service. The challenge has been to get people to change the way they do things. In each instance, an executive-level process owner is accountable for overseeing this change. And these business process owners report to our CEO John Roth. So there’s tremendous accountability, and that’s been key.

We’ve selected a single system to support each corporate-wide process. So, for example, our order fulfillment process is supported by our Global Enterprise Resource Planning System delivered by BAAN. And Oracle provides the common global financial system for our financial processes. We also have a single corporate directory for all Nortel employees worldwide. And we’re building common design tools and systems. We have about 20,000 product designers who love to design – so you can understand our challenge in creating a common product design process.

We have one shared information resource. Our unified system disseminates information throughout the corporation in a seamless way. It provides online real-time data to anyone who needs it. A good example is a tool we’ve developed for our salespeople. It’s called Sales.com. Our CEO stood up at a sales conference and declared: “We’re going to have the most knowledgeable sales force in the industry.” He then turned to us, and said: “Make it happen.” So we built a new environment. Sales.com gives all our salespeople access to sales and product information – instantly, whether they’re in Singapore or Alabama. It provides product specs, presentation formats, and sales material. And it allows salespeople to interact with that material, and provide feedback and updates.

We’re providing one set of business codes. With common global systems in place, we found we could merge data very quickly and develop a single set of business codes. As a result, we’ve created a common catalog of all Nortel products. Before that, every line of business had its own product catalog, with overlapping codes and names. Merging these codes was a huge advantage to us as a company. And when Bay joined us, we easily integrated their product catalogs with ours. As a result, the Nortel Networks sales force could hit the pavement as soon as the merger was completed – and sell combined products from a single product catalog. This has helped them tremendously.

We’ve created one set of IT Standards. This undertaking is a bold but necessary one. It’s bold because in a company of 80,000 technology experts, and in an environment that prides itself on being innovative and independent-minded, it’s not easy to impose IT standards. But we’ve had to. Uniform standards remove boundaries that impede information flow. So we’ve standardized every single aspect of our IT environment. We’ve chosen Dell for desktop computers and laptops. We’ve chosen Microsoft Office and Exchange for the desktop software. We’ve selected Oracle for our databases. And we’ve chosen our own Entrust Security for security and encryption standards. This standardization is a remarkable feat in a company like Nortel. I don’t know of any other company that’s achieved the level of standardization we have.

We’ve created one unified architecture. This architecture is designed to serve the business. Typically when IT people talk about architecture, they focus on network and computing, and perhaps middleware as well. But our focus is on all these layers – and applications, data and the business processes as well. In fact, we started with the business processes. If they’re well defined, then we can look at what data and information are required to support them. Then we look at appropriate applications, and finally the middleware and processing needs that will support that business process. This approach, and this model, is a direct result of Nortel’s focus on core business processes.

The best testimony to our success in establishing a unified network is the Nortel/Bay merger, which went off without a hitch. This merger, the largest ever in the telecommunications industry, was done in only 75 days. It’s remarkable for a merger to be completed and for the two firms to be operating as a single company that fast. Our IS organization played a critical role in making it happen. We were responsible for linking and integrating the infrastructure of the two companies. And all that was done in such a way that when we turned on a switch the day of the merger, everything was seamlessly integrated with no boundaries whatsoever.

From that first day, we had the ability, as a single, connected organization to send email anywhere in the network. Our voice networks were fully integrated, our intranets were linked and our data networking was integrated. And there’s still more: our corporate extranets were linked, our directories were brought together, our websites were combined, and our call centers operated as one. It made my day! And our people were talking as one company. Our engineers were sharing design information with Bay’s engineers, our marketing and salespeople were sharing product information with Bay’s marketing and salespeople. It was all one company with a single knowledge-worker community.

We’re proud that Nortel Networks has created an internal network that will lead us into the future. What lessons can I offer you that you can apply to your own organizations? To begin with, and most importantly, when you build your infrastructure, insist on standardization. Standardization is to a network builder what “location” is to a realtor. Next, make sure you have common process ownership at the corporate level. One executive should own each business process and have clear, corporate-wide accountability for it. Also, realize that the building of the system is just the beginning. You have to work very hard to make sure the information in the system stays current and of high quality. We have feedback mechanisms I’d be pleased to tell you about. The real challenge is having an effective mechanism to manage the content.

Finally, realize that your true role as a CIO is not technical. You have to “sell like hell” to get people to buy in. Nobody likes to give up power. A centralized model – which I believe is the only one that works – requires leadership on your part. And your leadership must continue to exert itself as you shape people’s understanding of the power of the system, and encourage them to use it (or lose it).

All these points add up to one final lesson: be daring, take risks, believe in the power of what you offer your corporation and don’t let anyone undermine the power of a fully integrated corporate network.

I’ve shown you the power of a unified network to make a big organization lean and flexible. But this network itself should not be our focus. Technology, as we all know, is not an end but a means. As CIOs, we need to spend time thinking about how the corporation can create value from this information – customer information, product information, process information, supplier information, partner information, business unit information, and employee information. I spend much of my time in this “middle zone,” because we’ve created a highly disciplined, efficient network that supports the flow of data.

It’s in this middle layer where all CIOs need to be – creating financial return for their shareholders. It’s an exciting and bold challenge. This mandate takes us beyond the world of networks and computing, into the realm of leadership. And I believe if we can show how IT investments create shareholder and business value, we’ll be seen as – and perform as – highly valuable members of the leadership team. No question is as important to CEOs today as, “What can technology do for us?”

I’m fortunate in being part of an organization that understands the central role of an integrated network. I’ve had tremendous support from my colleagues, my CEO, and my team in building our infrastructure. I hope you’ll find the same support in your organization. If you don’t, create it. And if I can help, I’d be pleased to do so. That’s our business.

CHALLENGES FACING THE RESEARCH-BASED PHARMACEUTICAL INDUSTRY IN CANADA

Hans Mäder
CEO, Novartis Pharma Canada
West Island Chamber of Commerce (Montreal), November 14, 1996

Published in The Corporate Report No. 20 (January 15, 1997)

I was scheduled to speak here last April 11, but a funny thing happened on the way to this forum. I was sidetracked by what has been called the largest corporate merger in the history of the industrialized world, the union of Ciba and Sandoz to create Novartis.

The announcement came on March 7, catching the world by surprise. It followed several months of top-secret negotiations between two companies in Basel, Switzerland, whose head offices face each other across the Rhine but which were separated by a tradition of corporate rivalry. Only the Swiss, with their long history of banking secrecy, could have pulled off this coup without the word getting out. It even caught me by surprise, because I was on holiday with my family in the Caribbean on March 7 and I had to rush back to manage the change here in Canada. As you can imagine, things have been happening very quickly since then, and that’s why I didn’t have the time to address you last April.

Today, the picture is clearer, and my intention is to present Novartis and, in particular, Novartis Pharma Canada, the prescription pharmaceutical sector of the Novartis Group. At the same time, I will also be talking about the challenges facing the research-based pharmaceutical industry in Canada.

However, my point of reference for all of this will be what is happening right here in the West Island. The Novartis Group worldwide will be focused on the life sciences and it will be the world’s largest company in that field with pro forma 1995 revenues of $30-billion. To achieve this focus, Novartis is getting out of the chemical business to concentrate on three areas: agriculture, nutrition, and, the one that will be the largest by far, healthcare.

Novartis is not only large, it is also financially solid. Because this was a merger and not an acquisition, the new company did not have to take on any debt to finance the consolidation. In June of this year, Merrill Lynch stated that it considers the merger of Ciba and Sandoz to be “one of the most exciting investment opportunities in our universe. We believe that the combination is much stronger than either company separately and the positions it will hold in the global healthcare, agrochemical and nutritional markets, leading to improved growth, should not be underestimated. In pharmaceuticals, it will be the number two in the world with what we consider to be a first-class R&D portfolio. There appears to be very little product overlap, with most areas being enhanced by the merger. The new company will have strong positions in six key therapeutic areas: immunology/inflammation, central nervous system, metabolic diseases, cardiovascular, oncology, and dermatology.”

The new company’s top ten products are expected to continue to grow strongly, most achieving double-digit growth. Also helping to maintain Novartis’ positions of leadership is an excellent product pipeline with more than 90 new medicines at various stages of development. In total, Novartis expects to launch approximately 10 new products in the next three years.

Now, my purpose is not to promote Novartis shares, which are, in any case, only traded on the Swiss exchange. Rather, I want to emphasize the research and development portfolio that was mentioned. Novartis will have unprecedented resources to devote to R&D. We all know that a major benefit of a merger is that it allows us to access a larger discovery pipeline, which in turn helps us to better manage the risks inherent in developing new medicines.

Dr. Marc Moret, the chairman of Sandoz, probably said it best: “It is our firm belief that in the long term only companies endowed with the greatest research and innovation potential will be among the leaders. The elite will consist only of those companies that can manage several large projects at once, shoulder the long-term investment burden for research of growing complexity, duration and riskiness and in the event of failure sustain all the financial risks.”

On a worldwide basis, the Novartis Group is divided into eight sectors. In Canada, seven of these sectors (Nutrition, Gerber, Animal Health, Crop Protection, Seeds, Vision and Self Medication) will have their headquarters in Ontario. Ontario, more precisely Toronto, will also be the location of the office of the Novartis national organization, a small coordinating body for certain administrative functions for all Novartis sectors in Canada.

As you know, both Ciba and Sandoz are part of this West Island community, with the Ciba manufacturing plant and the Sandoz head office side by side in Dorval. On June 26, we announced that the head office and the major research facilities of Novartis Pharma Canada, which is by far the largest sector of the company, would be consolidated in Dorval. This means that Novartis will have a presence in both of Canada’s largest provinces. It also means that some 30 to 40 Ciba employees will be transferring from Ontario to the West Island. Last month, Peter Yeomans, the Mayor of Dorval, met with a group of these employees and their families and we thank the city for the warm welcome that was extended to them.

On October 17 we announced that pharmaceutical production for Novartis would be centralized in Whitby, Ontario, by mid 1999. Because of the need to eliminate excess manufacturing capacity worldwide and to achieve economies of scale, it was obvious that Novartis could not, unfortunately, maintain a two-plant Canadian manufacturing operation. The Dorval plant will remain open and operational until the production is transferred, which is expected to take from 24 to 30 months. In the meantime, we are actively engaged in an intense search for a suitable buyer to continue operating the Dorval plant as a pharmaceutical operation.

Discussions are already taking place with interested parties. One of the advantages of Quebec’s thriving pharmaceutical industry is that there are emerging companies on the lookout for just such opportunities. I am confident that, in the end, we will be able to save most of the jobs in the Dorval plant.

In general terms, the decision to choose Dorval over Mississauga for our head office reflects the major advantages that Quebec has in the pharmaceutical field: the quality of its universities and scientific resources, a favorable R&D tax-credit policy and a firm position in favor of increased protection for intellectual property. In more specific terms, as our friend George Nydam, the industrial commissioner, likes to say, all West Island sites are strategically located close to the highway and the airport and not far from downtown Montreal.

Most of you have seen the Sandoz facilities in Dorval, which are destined to become the new Canadian headquarters of Novartis Pharma Canada. Our building is more than 40 years old and showing some battle scars. We are adding on temporary space for our new colleagues in order to have enough time to do the proper planning for a potential expansion and certainly a major renovation. With a bit of patience, you will soon see that Novartis is adding a new image to the landscape along the 2+20 highway.

The beauty of our Dorval location is that we have room for improvement and expansion when the merger is complete. This is probably a good place to mention that, although the European Union has approved the Ciba/Sandoz merger, we are still waiting for regulatory approval in the United States and Canada. This is expected by year end with the launch of Novartis planned for early in 1997. I can tell you that our internal integration plans are well advanced. As soon as we hear the starter’s pistol, we’ll be up and running.

I would like to say some more about the importance of research to the brand-name pharmaceutical industry. Much has been written about the new economy, in which Canada must succeed in the emerging global marketplace. It is an economy made up of knowledge-based, technology-driven companies, and the brand-name pharmaceutical industry is very much a part of it.

Unlike the generics, who only produce copies of existing products, our overriding objective is to find new medications that fight the diseases which afflict humanity. It is a long and costly process. To develop a safe and effective drug for the market, researchers start by synthesizing or isolating more than 10,000 new chemical compounds. Of these, perhaps 20 are promising enough to merit further pharmacological and toxicological studies. These are followed by several other phases of clinical trials in humans to determine which drugs are safe and effective enough to continue further testing.

On average, only one of every 10,000 new molecules ever reaches the market, and bringing it there can easily cost up to $500-million in R&D investments. However, the process works-it produces new medications to fight disease.

One drug we are very proud of is cyclosporine. You probably know that this is the agent which revolutionized and virtually established the whole therapeutic field of organ transplantation. What you may not know is that Sandoz Canada, from our research facility right here in Dorval, was at the forefront of the international program to develop this drug in the 1970s and also in the 1990s effort to produce a new, improved formulation, which is now available as Neoral.

There are some 240,000 transplant patients throughout the world. You may have read about one of them who was featured in the Globe and Mail magazine last month. Michel Perron, CEO of Uniforêt, triumphed over a life-threatening illness thanks to a kidney transplant with an organ donated by his son, Henri who is with us today. (Also with us is Dr. Pierre Daloze, an eminent transplant surgeon who is also chairman of the board of the Maison des greffés.)

Michel Perron then went on to conquer the North Pole and to revive the fortunes of a pulp mill in northern Quebec and the town of Port Cartier which depends on it. This is a concrete example of the human results of medical research.

Under Novartis, combining the experience of Ciba and Sandoz, cutting-edge research will intensify, with techniques that only a few years ago would have sounded like science fiction. We are working hard on gene therapy, making use of science’s ever increasing knowledge of genetics. At the Montreal Neurological Institute, Dr. Richard Leblanc is using a Sandoz technique to insert altered genetic material into fast-growing cancer cells, thus making them susceptible to destruction by chemotherapy. This therapy, which is showing favorable results in early trials, offers new hope for certain patients with glioblastomas, the most devastating type of brain tumors.

We are also studying advanced techniques in the field of xenotransplantation, which is the use of animal organs for transplant into humans. Organ transplantation is a proven medical therapy which is tragically underused because of a lack of donor organs. At the present time, more than 2,600 Canadians are waiting for an organ transplant. In the course of an average year, because there simply aren’t enough organs available, well over 100 will die and hundreds more will be kept alive through kidney dialysis, a therapy which is difficult for patients and costly for society.

Xenotransplantation provides an answer, but the medical challenge is tremendous because of the body’s natural tendency to reject an organ from another species. Much of our research focuses on the use of pigs which have been transgenically altered so that the human body is “tricked” into recognizing a pig kidney or heart, for example, as a human one. If research into these techniques continues to advance at today’s pace, the technology will be available for use in humans before the year 2000.

The pharmaceutical industry provides economic benefits as well. In a recent position paper on the industry, the Board of Trade of Metropolitan Montreal noted that annual biomedical R&D investments in Quebec have increased by 234% since 1988, and that pharmaceutical companies have $653-million invested in land, facilities and equipment in this province. Quebec’s innovative drug industry accounts for 6,128 direct jobs and over 3,600 indirect jobs. Many of these jobs are located right here in the West Island, and they are top-quality jobs. Quebec has almost 50% of the research positions in the Canadian pharmaceutical industry. There is no reason why these benefits shouldn’t continue to flow into Quebec and our local community, if the climate which encourages the expansion of the pharmaceutical industry remains favorable. For this, we all have to work together.

The provincial governments should have a receptive attitude to reimbursements for new medicaments, keeping in mind that new drug technology can often reduce overall healthcare costs by making more expensive medical and surgical interventions unnecessary.

The federal government should play its part by improving the drug approval process and by maintaining, or even improving, the protection of intellectual property. The pharmaceutical industry will continue to play its part by investing in research and development. But every dollar we spend on R&D is a dollar we have to earn first. Measures which affect the revenues of the pharmaceutical industry inexorably affect our ability to invest in R&D and to create jobs. In this context, I would like to talk to you about one of the challenges facing our industry-the protection of intellectual property.

As you probably know, in 1987 and 1993 the federal government passed laws which had the effect of restoring the 20-year patent term for pharmaceuticals, as well as establishing an agency to control new drug prices and monitor the industry’s investment in R&D. Making the Canadian pharmaceutical industry more competitive internationally was the objective of this legislation. Next year, it is coming up for review, and certain parties would have the government cast aside the benefits of a thriving pharmaceutical industry by reverting to previous lower levels of patent protection.

There are a number of facts you should be aware of with regard to this issue. First, even with Bills C-22 and C-91, Canada still lags behind most of its industrialized trading partners in terms of patent protection. In Canada, there is a normal patent period for all inventions but, because of their long development period, patented medicines have an effective patent life of only about 10 years. By comparison, the European Community and Japan have already increased effective patent protection to 15 years and the United States to 14 years. In this area, we are behind every other member of the G7.

Second, contrary to the predictions of some, Bills C-22 and C-91 have not led to exorbitant increases in the price of drugs. In fact, between 1987 and 1995, the average annual increase in the prices of patented medicines was well below the level of inflation. International studies indicate that, on a per capita basis, drugs are more affordable in Canada than in most other industrialized countries.

Now it is true that the total amount of money spent on patented medicines has been increasing because the use of prescription medications has been growing. This is hardly surprising, given our aging population and the fact that the elderly are the greatest beneficiaries of the improved health provided by modern medicines.

But, in this context, I wonder how many of you realize what part of total healthcare expenditures goes to patented drugs. Would you say 50%, 25%, 10%? The answer, according to a Health Canada report, is 2.4%. The actual cost of patented medicines represents less than 3% of Canada’s healthcare expenditures, far less than hospitals, the services of health professionals, or even over-the-counter drugs. Everyone agrees that healthcare costs must be controlled, but it is hard to imagine why the smallest budget item should be regarded as the major culprit.

As businesspeople, you know that Canada’s prosperity depends on investment. Since federal patent legislation was improved in 1987, the brand-name pharmaceutical industry has increased its investments in R&D from about $100-million to almost $600-million a year. That represents a multi-billion dollar investment in better health and top-quality jobs.

Many years ago, I started my career as a sales representative, and I’m still selling. Now, as CEO of Novartis Pharma Canada, my job is to sell Canada as a place for the Novartis Group to spend money on drug development. I’m in a fierce but friendly competition with my fellow Novartis CEOs from around the world, as each of us tries to attract R&D funds and manufacturing mandates to his or her country.

In this competition, the economic and scientific environment has to be right. Without a proper level of protection for intellectual property, Canada becomes a hard sell. That is why I’m convinced that this is not the time to weaken Canada’s patent legislation for pharmaceuticals. On the contrary, I believe that the government should be increasing the level of intellectual property protection, ensuring that Canada plays on a level field with other industrialized countries. I hope that you agree and that you will be ready to support us when this question comes up for debate next year.

I believe that the pharmaceutical industry and companies like Novartis, Pfizer Canada (represented here today by company president Alan Bootes), and Merck Frosst are valuable assets to this community. We are proud to be citizens of the West Island and we intend to remain here to grow and create jobs for a long time to come.

STRENGTHENING CANADA’S ECONOMY WITHIN THE GLOBAL HEALTHCARE ENVIRONMENT

Hans J. Mäder
President & CEO, Novartis Pharma Canada

Swiss Canadian Chamber of Commerce and the German Canadian Chamber of Industry and Commerce, Montreal, May 19, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

It is both an honor and a pleasure for me to address this joint meeting of the Swiss Canadian Chamber of Commerce and the German Canadian Chamber of Industry and Commerce. One of the topics I wish to cover is an update on the progress of Novartis, an organization which has become the world’s largest life sciences company from its base in the Swiss-German city of Basel.

The main topic of my speech, however, is strictly Canadian. I will be discussing some of the major issues currently facing Canada’s research-based pharmaceutical industry. I hope to demonstrate that these issues impact on our healthcare system, our whole economy, and especially on our vision of the kind of country Canada should be in which to conduct business.

Corporate mega-mergers are much in the news these days, what with the dramatic announcements by Daimler-Chrysler and by some of Canada’s largest banks. I am no expert on either the automotive or the banking industry, but I do know the pharmaceutical business, which has undergone its share of corporate marriages. Let me say that I am convinced the merger trend will continue in our industry. It provides the best response to managing risk in an environment where research and development are becoming ever more costly and time-consuming. To increase our R&D strength was the main reason for the creation of Novartis. As Dr. Marc Moret, our honorary chairman, said so well: “It is our firm belief that in the long term only companies endowed with the greatest research and innovation potential will be among the leaders.”

Today, after Novartis’ first full year of operations, I am pleased to report that it has succeeded in its merger and established itself as a leader in the life sciences field. The Novartis Group concentrates on three core areas: healthcare, nutrition and agribusiness. It employs about 87,000 people and operates in more than 100 countries. During 1997, Novartis increased its total sales by 10% to more than C$31 billion. It is safe to say that the worldwide Novartis Group achieved its first-year objectives and is poised for future growth with an annual R&D budget of $3 billion.

In Canada, Novartis has also become firmly established, with eight new companies active in our core businesses: Novartis Pharma, Novartis Consumer Health and Ciba Vision in healthcare; Gerber Canada and Novartis Nutrition in nutrition; and Novartis Animal Health, Novartis Crop Protection and Novartis Seeds in agribusiness.

As for pharmaceuticals, I am pleased to be able to say that Novartis Pharma Canada has had a fruitful first year. Four new drugs were launched, including Diovan, a new treatment for hypertension, and Apligraf, a living skin substitute and the product that marks our entry into the biotechnology industry. In fact, our Canadian company is the first Novartis affiliate in the world to obtain marketing approval for this revolutionary new product and to begin marketing it. We are among the pioneers in developing biotechnology products, pushing the boundaries of our knowledge in this field and making discoveries that will benefit all other Novartis companies in the world.

I should mention here that one of the major advantages of global companies comes from the interchange of ideas, knowledge and expertise between countries. The worldwide Novartis pharmaceutical R&D program is fully integrated. The global company invests money in research to be done here and, in addition to conducting the trials, our Canadian scientists and experts influence the shape of R&D programs all over the world. A similar cross-fertilization of ideas takes place in many areas, from marketing to medical education.

At this point, it is safe to say that Novartis Pharmaceuticals Canada is now firmly established as one of the top four companies and a leading force within Canada’s innovative, research-based pharmaceutical industry.

Let me just briefly remind you what this industry means to us in Quebec. The new pharmaceutical companies directly employ more than 7,000 Quebecers and are the source of numerous other jobs in research and supplies. In 1996, these pharmaceutical companies injected $1.2 billion into the Quebec economy. Investments in research and development, which create high-level jobs, have grown by 268% since 1988, climbing to $265 million in 1996. During the nine-year period ending in 1996, the pharmaceuticals industry invested a total of $1.6 billion in R&D in Quebec.

It is not surprising, as a result, that in 1996 Patrice Simard, then president of the Chamber of Commerce of Metropolitan Montreal, made the following statement: “A flourishing pharmaceuticals industry is clearly a major plus for the province and for the greater Montreal area and the impacts are wide-reaching.”

And while the economic advantages are important, the potential to change people’s lives is even more dramatic. I am a businessman and most of my speech deals with facts and figures. However, I want to say that the biggest thrill I get from my job is meeting with patients who have been helped by our medications. Throughout most of my career with Novartis, I have been involved in one way or another with the development and marketing of cyclosporine, the drug now available in an improved form called Neoral, which essentially made organ transplantation possible. Although my contribution was very modest, I have a great feeling of satisfaction whenever I meet a previously sick person who now is living a full life thanks to an organ transplant.

Take the case of Deborah Summers, for example, which I heard about several months ago. This Vancouver woman is the first Canadian heart-transplant patient to give birth to a child. Just four years ago, Deborah Summers didn’t think she was going to live much longer, let alone become a mother! Yet on February 13, 1998, Deborah gave birth to Brandon, a beautiful boy brimming with health. Without a strong pharmaceuticals industry aware of the importance of R&D and the benefits of new drugs, I would not be able to tell you this wonderful story today.

And so we must ask ourselves what conditions are necessary for the pharmaceuticals industry to continue to thrive in Quebec? To begin with, the drug industry is an integral part of the new global economy based on knowledge and technology. The arrival of soft sectors that rely on brainpower and the increasingly rapid circulation of capital and technical resources around the planet has intensified international competition for jobs and investments. To succeed in this new context you need to know what factors can make a firm competitive on the world scene. And that requires clear-sightedness.

In the pharmaceutical sector, four factors make us internationally competitive:

• Excellent medical researchers

• A timely drug approval process

• International standards of patent protection

• Open patient access to new medicines

I will briefly discuss each of these. Canada can be proud of its medical researchers. The Ottawa newspaper, Le Droit, recently reported that Canadian scientists have discovered or contributed to the discovery of genes responsible for more than 20 diseases. Some of the brightest and the best of Canada’s researchers are working right here in Quebec, as a result of the long-standing efforts by several governments to give Quebec world-class research centers. At Novartis we are well aware of this because of our close relations with Quebec scientists. There can be no doubt that in this country we possess the brainpower needed to compete with the world.

Another major component of Canada’s competitive stance is a timely approval process for new drugs. New medicines are approved in Canada by the Therapeutic Products Directorate (TPD) of Health Canada, which has recently been able to dramatically decrease approval times overall, and for this we commend them.

In certain therapeutic areas, however, the improvement has been uneven and much less than satisfactory. Because international pharmaceutical companies must get their products to market as quickly as possible to begin recouping the hundred of millions of dollars it costs to develop a drug, they naturally favor those countries with the most timely drug approval practices as places to invest and conduct R&D. It is our view that the Therapeutic Drugs Directorate is, to say the least, underfunded. Consequently, we call on the federal authorities to make sure all therapeutic areas benefit from timely drug approvals.

The third key to Canada’s international competitiveness in pharmaceuticals is a globally competitive stance with regard to patent protection. In January 1998 the federal government announced changes to Canada’s drug patent regulations following a comprehensive Parliamentary review. In brief, the results of this review maintained the status quo in terms of 20-year patent protection for pharmaceuticals. Within the details of this complex question, the government also reduced from 30 months to 24 the review period for disputes on patent infringement, a move favoring the generic industry.

However, enough is never enough and the generic industry has been bombarding you with advertisements denouncing the government’s decision. What is important to note is what they don’t tell you. Their complaints relate to a practice called “early working,” through which a generic company can begin stockpiling a copied drug so that it has immediate market access when the patent expires. What they don’t tell you is that this Canadian advantage for the generic industry doesn’t exist in any other industrialized country.

The generic industry also doesn’t tell you that even with the 20-year patent protection Canada is still way behind its main competitors – because most other industrialized countries use patent-term restoration to compensate for the major delays inherent in the marketing approval process. All of which is to say that the effective term of a pharmaceutical patent is 10 years in Canada, compared to 14 or 15 in the United States, Japan and members of the European Union.

An impartial observer might conclude that the generic industry enjoys unprecedented advantages in Canada. But for the generic manufacturers, this doesn’t seem to be enough. They would like to see a patent term in Canada similar to that in Third World countries. For a young Canadian who has just spent ten years in university becoming a scientist, that’s the same as saying: “Go work in the United States. We’re not interested in developing a research-based industry here.” And for Canadians suffering from an incurable disease, the message is also clear: “Wait a few years. We’ll end up importing new medicines, and you might just live long enough to get some of them.”

The vision of the research-based pharmaceutical industry is quite different. We don’t want Canadians to be just hewers of wood and drawers of water. We have made promises to establish a dynamic, research-based industry and we have kept those promises. In response to improvements in Canada’s Patent Act in 1987 and 1993, our industry has increased its R&D expenditures by more than 276% since 1988, to exceed $3.2 billion. At the same time, since 1987, the price increases of patented medicines have been on average about half the rate of inflation. People and countries with vision realize that greater patent protection – in the form of patent term restoration – would lead to an even greater investment in jobs, research and new medicines to cure disease.

The fourth factor relating to Canada’s international competitiveness in the healthcare sector is patient access to new medicines, the value of which can hardly be exaggerated. But we tend to take past examples for granted. Lest we forget: over the last 50 years, medicines that were once new have prevented at least 90,000 deaths from tuberculosis, and vaccines have helped to avoid nearly a million cases of polio. Today, hope of a cure for AIDS comes almost exclusively from the development of innovative drugs. New medicines are indeed the best value in healthcare today.

However, the notion of access to new medicines is one which requires a bit of explanation. More than 85% of Canadians do not pay for medicines out of their own pocket because their drug costs are reimbursed by private insurance plans or provincial governments. Few doctors will prescribe a medicine if it is not reimbursed. Therefore, what patient access to innovative medicines really means is having those medications inscribed on the provincial and insurance company formularies – the lists of drugs approved for reimbursement.

Facing budget restrictions, many provincial drug plans have a tendency to block the listing of new innovative medicines, largely based on a silo approach to budgeting. What is needed is the vision to see that in a proper system expenditures will tend to flow to the more productive and efficient element of healthcare. It may be that the best and lowest-cost care is provided by allowing expenditures in one sector to go up, resulting in expenditures in another area to fall by an even greater amount. Examples abound: new medicines to treat schizophrenia have greatly reduced the need for hospitalization and, according to the Canadian Coordinating Office for Health Technology Assessment, could, with greater access, save $660 million in annual healthcare costs across Canada.

Among all the provinces, Quebec is the most responsive in listing new drugs on its formulary, with an average processing time of 9 months as compared with two years in Ontario. Quebec also has a special measure known as BAP15, not available in other provinces, under which a bran-name drug is protected from mandatory generic substitution for a full 15 years after being listed on the formulary.

To take some examples close to home, we at Novartis appreciate that since August 1997 the Quebec drug board has given a general listing to six of our products. We support the Quebec government’s initiative in setting up a universal drug plan. It advances the cause of making the best therapies available to treat diseases while also making the population more aware of the real costs of healthcare.

However, whereas Quebec is on the right track when it comes to pharmaceuticals, the same can’t be said about its approach to leading-edge biotechnology treatments, though biotechnology is a rapidly growing healthcare field that many experts find highly promising. Apligraf, the biotechnology product manufactured by Novartis that I spoke about earlier, is a perfect case in point. Officials have shuffled our request to list Apligraf in the formulary back and forth because there is no mechanism for evaluating and approving biotechnology products. We ask that authorities correct this situation. After all, if Quebec, as it claims, would like to be home for new biotechnology companies, it will have to do something to ensure biotechnology products have market access.

In addition to its exceptional responsiveness in listing new drugs in its formulary and tax incentives for companies devoted to research, Quebec has offered the pharmaceutical industry the most attractive conditions anywhere for years now. As a result, the province has attracted numerous pharmaceutical and biotechnological companies and promoted their growth. This openness was definitely a key factor when it came to selecting a site for Novartis Pharma Canada’s head office after the merger. As you know, we decided to set up headquarters in Dorval. I would like to add that the building housing our head office is now undergoing a sorely needed renovation, at a cost of $2 million. Are the renovations the prelude to future expansions? We’re banking on it, believe me.

In the final analysis, if our industry is to thrive and we are to expand, it’s a question of vision. The creation of Novartis arose from a clear corporate vision of how to be globally competitive. What we need in Canada is for more governments to share that vision. The federal government must see that lengthy drug approvals reduce the very sales that finance research, and that uncompetitive levels of patent protection drive investments away to more favorable destinations.

The Quebec government and, especially, the other provincial governments, must understand that reducing patient access to new medicines simply increases costs in the long run. Both provincial and federal authorities need to see that they have everything to gain by working in partnership with the pharmaceutical industry to make Canada a success in the new global economy. This is another way of saying that partnership between governments and the pharmaceutical industry to increase the level of R&D investment in this country represents a win-win approach for everyone. And the biggest winners of all are those most in need, those people suffering from disease who can benefit from the new medicines that research provides.

WHAT CONVERGENCE MEANS TO BRANDING

Shelly Lazarus
Chairman & CEO, Ogilvy & Mather Worldwide

Global Convergence Summit, New York, October 28, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

Now that we are in this new world, I think one of the great unknowns is how the advertising business will work. How will manufacturers build brands? They will certainly have to do it in new ways now that the simplicity of mass media is gone. Remember ten years ago, when many people in the advertising industry bemoaned the TV clicker because we thought zapping was going to destroy the power of TV advertising, then the Big Bertha of brand building? We thought giving the consumer choices about commercial messages, even limited choices of hitting the mute button or changing a channel to avoid commercials, was dangerous.

We were wrong. This clicker – or rather something more complex that allows the consumer to have more choices, more interactions – is actually a very good thing. The convergence of media, the explosion of channels, all the technology-enhanced interactivity that will be orchestrated by and not at the consumer will mean a number of very important things in the advertising world.

First, it will mean that marketers will be able to find the right consumer for the right message. Just around the corner is what we call “addressibility,” a term we use that means what we give up in mass reach, we make up for in targeted touch. This will finally bury the old Wannamaker saw about “50% of my advertising is wasted, but I don’t know which 50%.” We will be able to reach the people we want to reach, and they will allow it because we will be addressing them specifically with information they want and need.

Second, I do believe that this will all mean better-quality advertising, advertising with more precise messages, more strongly branded messages. And the advertising will have, must have, this utility particularly for high-end, complex products. Advertising, at its root, has always been about the exchange of information. For complex purchases, the consumer’s ability to interact with commercial messages – to get more out of them and to give more of themselves – will be a true benefit to the manufacturer and the consumer. And ultimately it will be a powerful brand-building tool.

Here’s the bad news: advertising in this new media environment is going to cost more. The good news is that the higher costs will be paid off with exquisitely targeted, perfectly relevant communications.

What else? Well, I believe that direct marketing in all forms will become a much more central part of the marketing mix – and will be an even more exact discipline. Data mining, already key, will further guide the course of intelligent interactions. Today’s intrusive telemarketing will cease to exist. If a consumer gets a call, it will be one he’s waiting for, and wants to answer. And he’ll probably take it on his wrist phone.

On the other hand, I believe that the prediction that Super Bowl-like advertising extravaganzas will disappear is a lot of hogwash. Event mass media will still happen, and happen importantly – as one of many tools available to marketers. Overall, I do think that the approach to TV advertising will be far less formulaic, both in terms of content and structure. You’ll see 5-second spots run often, and 2-minute spots just once.

In any event, brands will be experiential. Three-dimensional, environmental, immediate, nonlinear. Therefore advertising communications will be the same. We will have to envelop the consumer, surround him with the brand in a way that he feels it.

Which brings me to my final point: brands will have to be communicated in a 360-degree manner. Every point of contact will have to reflect the brand whether it’s the online showroom or the real showroom. Whether it’s the telephone service center, or the digital search service. From sponsorships to content generation – the only way a brand will survive in the complexity that’s coming is to make sure that everything that touches the consumer is in touch with the brand. For this reason, integrated brand-driven campaigns will be the norm and not the exception. Brand strategy brought to life in every component of our client’s business will be the business of agencies.

What convergence means is that the advertising industry will transform itself – in fact, it already has – to be all about delivering the brand.

BUSINESS OPPORTUNITIES FOR CANADIANS IN CHINA: A LAWYER’S PERSPECTIVE

Claude Fontaine, Q.C.
Senior Partner, Ogilvy Renault

Institute of Chartered Secretaries and Administrators in Canada, April 5, 1995
Published in The Corporate Report No. 12 (June 15, 1995)

The business environment in China

Canada/China bilateral trade in 1993 amounted to $4.8 billion, of which admittedly $3.1 billion was from the Chinese side. However, non-cereal exports from Canada have surged from $800 million in 1985 to $1.1 billion in 1993, with cereals at $600 million in 1993. Professional services such as accounting, banking and finance, architecture, construction engineering and law are not included in these figures and will have yet greater potential as China’s economy progresses.

Initially, in 1970, wheat and barley constituted the mainstay of our exports; now Canada provides higher value-added products such as oil and gas processing equipment, pipeline technology, Candu’s, hydropower generation and transmission know-how and equipment, environmental technology and transportation, telecommunications and mining equipment.

Here follow examples of sectors of the Chinese economy where Canada already has substantial presence:

1. Information technology and telecommunications. Northern Telecom – plants, joint ventures; Teleglobe; SR Telecom for microwave communications for rural application; SPAR Aerospace for satellite communications and Mitel in switching equipment.

2. Transportation. Sydney Steel Corporation supplied US $50 million worth of rails in the last two years. Canac International, a subsidiary of CN, has a number of projects in China. CAE Electronics has signed a US $47 million contract with Air China for flight simulators. Bombardier sold its first three Challengers to China in the mid-80s and has been successfully pursuing further sales of aircraft and ground transportation equipment ever since.

3. Grains and oil seeds. Wheat, barley, potash fertilizers and services and equipment for agricultural development, grain handling and storage.

4. Power and energy. Joint ventures and furnishing of turbine generator substations and automatic control systems. Formation of Asia Power Group with Power Corporation, Hydro-Québec and Ontario Hydro.

5. Oil and gas. numerous projects dealing with transfer of technology and drilling techniques, enhanced extraction technology, pipeline construction and management and petroleum-related product manufacturing.

6. Mining metals and minerals. Barrick Gold and others.

7. Pulp and Paper. Numerous projects with involvement of Canadian pulp and paper companies or in consultant role. Repap even has an office in Beijing.

8. Construction and building products. Several Canadian builders are involved in substantial residential housing developments. In addition, numerous development projects in China’s major cities are importing high-quality building products from Canada.

9. Environment. With Canada’s environmental standards among the highest in the world, Canadian companies are successful on the international scene and regularly awarded contracts by the World Bank and the Asian Development Bank in China.

10. Financial institutions. ManuLife, which is the largest of all life insurers in Hong Kong, has been admitted as the third non-Chinese insurance company authorized to write policies in China. As a proof of its long-term commitment, ManuLife had established, even before being allowed to write policies, five offices in China over the past few years. Bank of Montreal is opening a representative office in Guangzhou.

Canadian companies have so far been most active in the regions of Guang Dong, Shanghai and Beijing. There are at least three other regions with more than 100 million people each.

A few interesting statistics:

• 10 million young people join the labor force annually.

• 375 million peasants are unemployed or underemployed. Farmers still account for 73% of the population; rural unemployment is as high as 37% although the official unemployment figure is only 2.7%, which is explained by the fact that 20 million people in state-owned firms and factories and the 5 million in the government offices are officially employed but have no jobs to do. This leads to flocking to the cities in search of work.

• There are quotas for moves from the countryside to the cities and under such quotas alone, 25 million new jobs will have to be created in the cities by the year 2000. It is said that illegal transfers from the countryside to the cities are even higher than the quotas!

• China’s state-owned enterprises employ 100 million workers and account for almost half of China’s economic output (down from two-thirds five years ago).

• Half of state enterprises are losing money. According to the China monetary society, they cannot repay loans of US $117 billion, or 40% of China’s outstanding bank loans. Without a letter of credit from a reputable bank or cash payment, selling goods or services in China and extending credit to finance is a mug’s game. Unrest among the unemployed, newly employed and underemployed and people working for bankrupt enterprises is compounded by sharp inflation averaging 21.7% in the cities in 1994.

• Government is funding bankrupt businesses with billions of dollars in loans which will not be repaid. State banks lend money at 812% – ludicrous when inflation is almost 22%. Bankrupt companies can therefore remain in operation producing inferior or unwanted goods and their employees remain employed. According to reports by Salomon Brothers, bank credits fund an extraordinary 8090% of their current operations; this rewards failure and hampers success.

• Retail sales in China in the 12 months ending October 1994 were US $188 billion, up 37.4% over the year, representing, however, per-capita retail spending of only US $157 for the year. There is, therefore, plenty of room for the Chinese to become a consumer society!

• Gross domestic product per head was estimated at $450 in 1993, declining to $400 in 1994 and recovering to $460 in 1995. In 1994, the average state wage was approximately 4,500 Yuan, or US $537 per annum.

• According to the China Daily, there are 100,000 foreign-funded enterprises currently operating in China. They employ 14 million people and most are reported to be in good financial condition with sales and profits increasing annually. Their exports in 1994 reached US $34.71 billion (up 37.6%) while their imports were US $52.94 billion (up 26.6%).

• China’s stock market capitalization is US $42 billion. This is minimal compared to Taipei’s at $228 billion, Hong Kong at $314 billion, London at $1.05 trillion, Tokyo at $3.6 trillion and New York at $4.25 trillion.

The Team Canada Trade Mission to China in November 1994

The mission of the Canada China Business Council is: “To stimulate and support trade of goods and services and investment and technology transfers; to achieve greater economic growth and closer relationships between Canada and China; to provide practical and focused assistance to business; and to be the voice of the Canadian business community on matters of Canada/China relations, both to governments and to the public at large.”

This translates into a wide range of services from direct sales and marketing support and sectors specific industry intelligence, to the provision of ongoing high profile and high level Chinese connections.

The Council also actively assists Chinese organizations by coordinating participation of the Canadian private and public sectors in Chinese-sponsored exhibitions and trade fairs and organizing workshops for visiting Chinese delegations on such subjects as concessional financing, auditing, taxation and environment.

In addition, the CCBC has offices in Toronto and Vancouver and a representative office in Beijing with secretarial and interpreter services and conference rooms available on a fee basis.

The Team Canada Mission in November 1994 was the largest trade promotion effort ever by Canada. It involved over 350 business, government and various organization leaders. It coincided with the Canada China Business Council’s 14th Annual General Meeting. The Chinese were very impressed by the Team Canada mission. It is probably consequential that we have seen an increase in Canadian business in China recently.

During this trade visit, contracts and letters of intent with a value of approximately CND $9 billion were signed between Canadian and Chinese parties. Of these, $2.6 billion were actually signed commercial contracts, another $2.5 billion are agreements in principle and $3.5 billion relate to the purchase of two Candu nuclear reactors from Atomic Energy Canada Limited, under which AECL must however finance the $2 billion worth of contract work to be performed in Canada.

Even after that November 1994 trade visit, there were a number of major transactions concluded and made public.

1. Barrick Power Gold Corporation is a co-partnership between Barrick Gold Corporation and Power Corporation for the development of two gold mines as a pilot program to initiate foreign investment in China’s gold mining industry.

2. AIT (Advance Information Technologies Corp.) got the contract from the government of Hong Kong to supply automatic scanners for reading passports.

3. Power Corp. (Asia) Limited formed Power Asia Capital Ltd. with partners controlled by the government of Singapore. This joint venture will have an initial capitalization of over US$150 million, and will have interests in energy production, real estate development, gold mining exploration and railway car manufacturing.

4. Babcox & Wilcox Canada has been contracted to supply boilers and steam generation equipment for a power station in Yang Ziu City. This is a contract that’s worth over US$155 million.

5. Northern Telecom, which certainly is no newcomer to China, will acquire 55% of Shenyang Nortel Communications Co., which will turn out digital transmission systems. Furthermore, Nortel has announced the formation of three joint ventures relating to a plant that manufactures switching equipment and two microchip manufacturing plants.

Export Development Corporation (EDC) supports operations in China

In November 1994 the Export Development Corporation announced a new US$300 million line of credit with the Bank of China, putting the total funds available for financing through the EDC up to $525 million for Canadian Exports to China. Exports with at least 50% Canadian content automatically meet the criteria in virtue of Canada’s policy on revenues, a key element in having access to these lines of credit.

Carrying on business in the People’s Republic of China

Business reasons for investment in China by foreign companies include low-cost manufacturing, access to the domestic market, keeping up with international competition, sourcing of raw materials and manufactured goods and participation in the dynamic growth of the Chinese economy (812% per year).

Some points to consider by Canadian firms seeking to develop their interests in China:

1. Market information tailored to product or service

2. Financing – now usually a precondition

3. Level of provincial and municipal authority

4. Policy influence with central government

5. Taxation structure – evolving rapidly with implementation problems

6. Development of legal and regulatory framework – slow progress

Before looking at the form of your investment, a few preliminary considerations:

What is guanxi, and where can you get some?

Although foreigners are permitted to carry on business in the PRC via a wholly-owned subsidiary, most investment is done through joint ventures with PRC entities. You must have connections to effectively carry on business. One of the hardest things to come by in China is certainty. You don’t know all the rules. The Chinese don’t know all the rules. There are competing factions within every level of government, and multiple possible interpretations of law and regulations. A well-connected Chinese partner can help obtain favorable government treatment, required approvals, tax benefits and a more definitive interpretation of the rules.

Absence of impartiality and transparency in government decision-making, which includes allocation of all resources, and the workings of the legal system of the PRC necessitates obtaining partners/investors who are well-connected.

The Chinese see business deals as something that follows from a friendly relationship – the latter must precede the former. But if you are friends, you do things for each other. Having friends in China who will do things for you is having guanxi.

Expropriation comes in many forms:

• Currency devaluation. The Yuan/US$ swap rate at the 1991 yearend was 5.58; in 1992: 7.25; and in 1993: 8.70. It must be noted however that the Yuan has been holding its own against the US dollar in the past year. Most investment commitments for foreigners are expressed in US dollars; sudden devaluations of the Yuan do not, however, lead to an entitlement to a greater share of the assets or earnings of a joint venture.

• Nonpayment of intercompany debts by state-owned firms. While late payment equals expropriation of interest without compensation; nonpayment is expropriation of capital without compensation. Foreign businesses need to be extremely careful to ensure timely payment. Merrill Lynch, Goldman Sachs, Crédit Lyonnais, Prudential Bache and other financial firms are currently engaged in trying to recover what dealers estimate as hundreds of millions of dollars in debts from Chinese firms. These firms advanced credit to leading Chinese state-owned trading and financing companies on the basis that they were a sovereign credit and that Beijing would stand behind any losses that they incurred. Zhu Rongji, China’s Executive Vice-President and economic czar, is reluctant to pay out scarce hard currency to make good on debts from trading never officially approved by the government. He and other Chinese leaders blame the western financial institutions for having granted credit in the first place.

• Taxation. Up until recently, it was negotiable with the local authorities. However, China has recently announced wide-ranging tax reforms, including a value-added tax (VAT). The new tax laws and rates are internationally competitive, but there have been implementation problems. For example, the August 1994 modification stated that foreign investment enterprises’ exports were tax exempt, implying the input VAT on domestically-bought raw materials could not be refunded. The ruling puts an increased tax burden on the foreign enterprises manufacturing or assembling in China. Theories for the policy flip-flop include the state not having the money to refund the VAT, or the bureaucracy not being able to cope with refund claims from the over 200,000 foreign joint ventures in China. In November, the standing committee of the National People’s Congress announced that foreign enterprises formed before 1994 may receive the VAT back after all. In December, the vice-director of the State Administration of Taxation reiterated that no VAT rebates would be made to foreign enterprises. This mini-saga begs the question of who speaks for China’s taxation policies and what those policies are.

• Unilateral termination of land use right agreements. Much has been made by the Western press about the recent experience of McDonald’s in downtown Beijing which is its biggest branch in the world, but two blocks from Tianamen Square. The Western press carried the news of systematic expropriation or non-respect of contracts by the Chinese government without indemnification. A more balanced view would be that:

1. All land in China is government-owned.

2. The Joint Venture Law grants joint ventures a right-to-use license for the term of the joint venture.

3. The law permits the license to be revoked “in the public interest,” and requires compensation.

4. The Beijing government is concerned about the McDonald’s huge golden arches being too close to and too visible from a Chinese historic site (the Forbidden City and Tianamen Square).

5. McDonald’s has negotiated compensation, including five new sites in Beijing and, some argue, is coming up smelling roses.

6. In conclusion, the Chinese authorities acted within their laws and agreed on compensation.

• Borrowing” your designs, trademarks, software, music and other intellectual property. Expropriation is through inadequate laws, non-enforcement of the law as it exists and the non-enforcement of your rights. Some progress might be made under pressure from the US.

• Legislation that retroactively affects your joint venture. Like the new Company Law passed in mid-94 which establishes allocations to the various funds required to be maintained by a joint venture which were formerly at the discretion of the board of directors of the joint venture. When annual profits are to be distributed, the joint venture must allocate 10% thereof to an official accumulation fund until such time as the fund has reached in excess of 50% of the joint venture’s registered capital. From 510% of profits must be allocated to an official public welfare fund to be spent on the well-being of employees. This constitutes mandatory retained earnings and profit-sharing – repatriating capital will be more difficult in the future as a result.

The form of investment in China

The most common form of investment by foreign companies in China is equity joint venture although there are wholly-owned foreign enterprises and foreign representative offices in China.

Establishing a Sino-foreign equity joint venture

1. Finding a partner
Depending on the industry, the government may impose a partner, e.g. telecommunications, power generation and mining. In other industries, the foreign party is free to choose his partner, e.g. retail sales. Nothing is more important to the success of a joint venture in China than finding the right partner and then building the right relationship. The potential partner can be identified through several sources, including trade missions to China, trade missions to Canada from China, municipal, provincial or central state representatives or companies, Canadian offices in either Beijing or Hong Kong or other sources in Hong Kong such as accounting firms, law firms or agents who are engaged in the business of finding potential joint venture partners. Hong Kong is generally considered to be the gateway to China and the identification of potential joint venture partners can start in Hong Kong. In addition, some foreign investors elect to identify a local Hong Kong partner who will be charged in turn with seeking out potential Chinese joint venture partners.

Selection of a partner and building the relationship requires planning, time and care. The whole process can take several months, and foreign investors are urged to exercise patience in these early stages as the pace of negotiations can be considerably slower and more cumbersome than what one is accustomed to in one’s home country. An example in point is Hudson’s Bay, which has reportedly been looking for a suitable partner for over two years.

2. Sino-foreign equity joint venture
Unlike other areas of the law in China, Sino-foreign equity joint ventures are governed by a reasonably comprehensive body of law. The principal pieces of legislation are the Law of the People’s Republic of China on Sino-foreign Equity Enterprises of July 1979 and its implementing regulations of September 1983. These two pieces of legislation are supplemented by laws and regulations relating to specific matters such as taxation, registration, labor, accounting, foreign exchange, dissolution, minimum equity requirements and contributions of registered capital.

These joint venture laws provide that a Sino-foreign equity joint venture is a distinct legal entity in the form of a limited liability company with a registered capital. However, the rights of the joint venture parties and other matters such as corporate governance are determined by a combination of the joint venture laws and, more important, whatever is negotiated in the joint venture contract or the articles of association of the joint venture company. This is extremely important because most of the protection for investors that Canadians are accustomed to finding in corporate statutes do not exist in the joint venture laws; it will therefore have to be negotiated by comparable provisions in the joint venture contract or the articles of association. Similarly, in the absence of intellectual property protection, technology transfer contracts will provide the only protection to the Canadian corporations’ proprietary information and technology.

The registered capital of a joint venture represents the capital contributed by each of the parties, whether in cash or in kind. The foreign party is required to contribute at least 25% of the registered capital, with no maximum contribution. Recently, it has become more common for foreign partners to contribute more than 50% of the registered capital, which in turn enables them to control the board of directors and management of the joint venture.

The parties to an equity joint venture share its after-tax profits in proportion to their contributions to the registered capital, although it is not necessary to distribute profits. Legal liability of joint venture parties is limited to the amount of registered capital contributed by each.

Unlike corporations in Canada, equity joint ventures have a pre-established term of operation which should be a minimum term of ten years in order to benefit from certain preferential tax treatment, and will normally not exceed thirty years, although some have been established for as long as fifty years.

The highest authority of the joint venture company is the board of directors; there are no shareholders’ meetings. It is therefore important to have qualified directors and proper procedures.

Finally, in the event of dissolution of an equity joint venture, the remaining assets of the joint venture after payment of all debts and liabilities, are distributed to the joint venture parties in proportion to their contribution of registered capital, unless they have otherwise agreed.

3. Steps to the establishment of a joint venture
Specific documentation must be agreed to at different stages of the establishment of the joint venture.

1. The parties normally enter into a Letter of Intent, once the foreign party has identified a suitable Chinese partner. The Letter of Intent is usually non-binding and sets out the basic parameters of the joint venture and will be used by the Chinese party to obtain preliminary governmental approval.

2. After the preliminary approval is obtained, the joint venture laws provide for a Joint Venture Agreement to be formed. The Joint Venture Agreement is a more comprehensive form of the Letter of Intent and is similar to the Joint Venture Contract, although it is not binding. Most of the time, the Joint Venture Agreement is disposed of and the parties move directly to the preparation of the feasibility study and the negotiation of the joint venture contract proper and the articles of association.

3. The Feasibility Study is required by the joint venture laws and serves to establish certain of the technical and financial assumptions which will serve as the basis for the Joint Venture Contract and will have to be approved by the necessary authorities. This is the time for the foreign party to evaluate key financial and business considerations, such as the venture site (including utilities, telecommunications, transportation and work force), foreign exchange balancing (through semiofficial swap centers or export sales), production strategy (including local procurement and import duties), labor (highly regulated – skilled labor can be problematic), and distribution and marketing.

4. The Joint Venture and Ancillary Agreements (technology transfer contract, sales and marketing agreement, technical training agreement, trademark licensing, etc.) are the final contracts to be negotiated and will be legally binding on the parties. The Ministry of Foreign Trade and Economic Cooperation (MOFTEC) has prepared a model form of joint venture contract and articles of association which is hardly used at all, as these are normally unacceptable to the foreign party. Foreigners know that differences in culture will give rise to lengthy and at times difficult negotiations of these contracts. Patience and the use of experienced professional advisors is capital. The contracts are normally signed in Chinese and the language of the foreign party; both versions have equal validity.

5. Once all of the above documents have been settled and signed, they must be submitted to MOFTEC for approval.

6. After MOFTEC’s approval, the parties must apply to the State Administration for Industry and Commerce for a business license.

The Chinese negotiation environment and tactics are very different from Canada; as a result, experienced professional advisors are very helpful.

Osler Renault in China

In 1989, Ogilvy Renault of Montreal and Osler, Hoskin & Harcourt of Toronto formed an international firm which they named Osler Renault. Its first offices where set up in Paris and London. Next, Hong Kong, New York and, in the fall of 1994, Singapore, were added to the list of our international offices. Osler Renault provides services by Canadian lawyers, and their associates, in each of these offices and relies regularly on experts from Osler, Hoskin & Harcourt offices in Ottawa and Toronto, and from Ogilvy Renault in Montreal, Quebec City and Ottawa, so as to provide the resources, experience and skills of each of the Canadian offices to our Canadian and international clients

Osler Renault and its “mother houses” in Toronto and Montreal have also formed an “Asia working group” with offices in Hong Kong and Singapore, which also includes lawyers with experience in international law in Asia, whom you’ll find in our Toronto, Montreal and Ottawa offices.

Osler Renault is recognized as one of the most important Canadian law firms in Asia, and the Hong Kong office, ever since it opened, has been involved in quite a number of very major financings, acquisitions of companies and joint ventures involving partners from Canada, Hong Kong and the People’s Republic of China.

The Osler Renault office in Hong Kong also represents Asian clients or others in matters relating to growing their business in China.

Osler Renault’s main focus is international corporate and commercial law, including financing, access to capital markets, mergers and acquisitions, banking and real estate law. We also consult on tax matters, fiduciary planning and immigration.

Osler Renault is considered a leader among Canadian law firms for setting up and financing of joint ventures in the People’s Republic of China, including infrastructure projects, real estate, manufacturing and retail distribution. Our clients in the People’s Republic of China include several major Canadian corporations and we’ve been retained as legal counsel on a large proportion of the most widely known projects.

Osler Renault’s Hong Kong office includes one Toronto associate, Steve Trumper; one Montreal associate, Hartland Paterson; one lawyer, who is a member of the bars of BC, Hong Kong and England, Olivia Lee; and most recently Dale Scott, a lawyer in Ontario, who has several years’ experience in the establishment of manufacturing companies either wholly owned or as joint ventures with China. In Singapore, our team includes Franca Ciambella, who has been in practice in Singapore for six years, and John Treleaven from Montreal.

I’d like to go on and sing the praises of all our lawyers in this part of the world, and tell you about their great legal feats – but modesty forbids. Of course, if any of you would like to hear more about the many ways we’d be able to help you out with your business dealings in this region of the world, I’ll just have to stifle my modesty and keep on talking. I’d be very proud to do just that, actually.

Conclusions

1995 promises to be an interesting year for Sino-Canadian, and as a matter of fact, Sino-foreign, trade relations. Contrary to our economies, China is seeking a reduction in growth rate to 8 or 9½% as a strategic objective, from the double-digit figures of the past few years, to hold inflation in check and promote an orderly change to a market economy.

After a few years of unprecedented economic growth and foreign investment in China, some skepticism is emerging about the future. Isolated incidents, such as the McDonald’s Beijing lease issue and Chinese defaults on derivative trading accounts, as well as other domestic and external factors are fueling these concerns.

There are also the questions of the political succession to Deng Xiao Ping and the transition of Hong Kong to China rule.

Beyond these are concerns such as the accelerating inflation rate, longer-term concerns about the legitimacy of a one-party rule by the Communist Party without a sound grassroots base, the erosion of the central authority’s power over the provinces, the reform of state-owned enterprises into market enterprises, the tensions emanating from the regions who have benefited the least, and in some cases even suffered, from China’s economic reforms, and the stresses placed on China’s ecological resources.

As to whether “Team Canada” could be considered a flash in the pan…my own view would be that China has only been open for business in a serious way (that is, with appropriate legislation to protect and encourage foreign investment) in the last five years or so, and would be foreign partners are well advised to start building commercial relationships, on commercial terms, now. Foreign companies wanting to do business in China must pay attention to internal trends and be aware that what they have to sell today, may not be what China wants to buy; focusing on the latter will be more productive in the long-term. It is worth noting that Quebec-based companies have been leaders in investing and operating in China.

The most important advice: get the money up front, or at least on delivery. There are an unbelievable number of bankrupt businesses carrying on active business in China, and most of them can claim some reassuring ownership links or other relationships with the Army or the Government – both really just one and the same.

CANADA IN THE 21ST CENTURY

The Right Honorable M. Brian Mulroney
Senior Partner, Ogilvy Renault

Prime Minister of Canada (1987 – 1993)

The Canadian Club of Toronto, Toronto, April 14, 1997
Published in The Corporate Report No. 21 ( June 30, 1997)

You have invited me to speak about Canada in the 21st century. When it comes, I will have celebrated (I hope) my 60th birthday. Ten of those years will have been spent in Parliament, as national leader of my party, almost nine of them as prime minister. However, my perspective on the 21st century has also been shaped by other experiences: by my boyhood on the north shore of the St. Lawrence River; by having attended university in Nova Scotia in the late 1950s, and in Quebec at the beginning of the Quiet Revolution in the 1960s; by a career in law and business in this country in the 1970s and 1980s; since 1993, by my activities in law and business internationally; by the biggest learning experience of all, the experience of parenthood, and my concern for the country and the world we are leaving to our children.

Canada’s professional and corporate world, to which I returned after 1993, is far different from the one I left in 1983. In politics, my colleagues and I had been preoccupied with ensuring Canada’s successful transition-Canada’s dangerously belated transition-from the old economic environment to the new. At one point in the early 1980s, the British weekly magazine The Economist had carried an editorial headline which read as follows: Wildcat Canada Resigns from the World.

The headline summarized the economic and fiscal policy against which my party, in opposition, waged political battle, culminating in the election of 1984. The reference to “resigning from the world” was a bow to the phenomenon we have come to know as globalization. This new economic environment is so different, the change so great and the transition to it so wrenching, that some historians compare its impact to that of the Industrial Revolution some 200 years ago.

At such a time, people are gripped by anxiety and insecurity. It was no different in the 1980s. A resurgence of protectionist sentiment and policy arose in the Congress of the United States. And as The Economist noted, the previous federal government here had designed its own Canadian version of Fortress America.

Canada had to alter course. We had to make fundamental policy changes: a Free Trade Agreement with the United States. NAFTA. Abolishing the 13.5% manufacturers’ sales tax and introducing a 7% consumption tax (the GST) to spur exports. Eliminating FIRA. Abolishing the National Energy Program, including the PGRT. Privatizing Crown assets from Teleglobe to Air Canada to Canadair and de Havilland to (partially) Petro-Canada. This, along with operational efficiencies, resulted in 90,000 jobs being removed from the government payroll. The Patent Act was revamped to strengthen the pharmaceutical industry and attract billions of dollars in new investment. On the fiscal side, the average rate of growth of program spending was cut by 70%. Government spending on programs moved from $1.23 for every dollar in total revenues to $0.97 by 1993. An operating deficit of $16 billion per year was transformed into a $6.6 billion surplus. As a percentage of GDP the federal deficit was virtually cut in half, from 8.7% in 1984 to 4.6% in 1990-91. The worldwide recession took a serious toll on that number but public finances were still left in a position significantly stronger than where we found them. (I want to congratulate the present government on maintaining all of these policies in place – in spite of the fact they had voted against every single one of them while in opposition!)

However, the success of those policies lies not in their embrace by the present government but rather in their contribution to Canada’s economic progress. The groundwork was laid for a strong, export-driven recovery which has now come to pass. The day I signed the FTA with President Reagan, exports accounted for less than 25% of our GDP. Today, that number is 39% and rising swiftly.

By the time my government left office in June 1993, employment in Canada was up 1.4 million jobs from the September 1984 level. The prime rate was at 6%, the lowest in 20 years; our inflation rate was 1.5%, the lowest in 30 years; and the United Nations had just reported that in terms of quality of life, as you have repeatedly heard, Canada was the No. 1 nation in the world. That was the Canada we turned over to our successors less than four years ago.

It needs to be emphasized that these policies, whether of free trade or of fiscal management, are not ends in themselves. They are a means to an end, which is the achievement of greater opportunity, higher incomes and better living standards for all Canadians. In that context, the persistence of high unemployment-unemployment of recession levels long after the recession has passed-should be a matter of acute concern to all of us. The most urgent purpose of public policy today must be to offer hope and opportunity to all Canadians without jobs.

It also needs to be repeated, and remembered, that economic adversity and national unity problems usually exacerbate each other. The most divisive example of regional alienation in the past 20 years was that of western Canada, Alberta in particular, as a result of the economic dislocation caused by the National Energy Program. And, for more than 20 years, the uncertainty about Quebec in Confederation has cast a shadow over Canada’s economic future.

So, how did you like the referendum results? Probably not very much. The sight of a great country coming within an inch of self-destruction is hardly reassuring. Canadians probably were surprised. They had after all in the weeks before, been told not to worry-a persuasive victory was at hand. A few years earlier, Canadians had been soothed by statements from some of the same people to the effect that the failure to ratify a signed constitutional agreement was of little consequence. “Don’t worry” the Solons said, “Quebecers will get over their disappointment.”

Those statements were not true then and are not true now. Forget a separatist premier. There will never be a federalist premier of Quebec who will sign the 1982 Constitution without changes that include reasonable provisions for the uniqueness of Quebec in Confederation, and hence for the security of the French language and culture in the Canada of the 21st century. The plain fact is that if Canada and Canada’s Constitution cannot help guarantee that security in the next century, many Quebecers would rather try to achieve it as an independent state.

But today, renewed federalism beats sovereignty as the majority preference of Quebecers every time a poll is held. Unfortunately, there is no proposal for renewed federalism from either provincial or federal governments at this time – nor, apparently, any in progress. Such a proposal could win a referendum in the year 2000 by attracting Quebec federalists, including the hundreds of thousands who have reluctantly concluded that such an effort will not soon be made. If it came early enough, such a proposal might even eliminate the prospect of a referendum by helping to elect a federalist government at the next provincial election.

For many reasons, including understandable fatigue after past battles, much of public opinion in English Canada is completely uninterested: “If they’re not satisfied, let them go,” is the statement often heard. Do we continue this ill-tempered drift towards inevitable crisis? Or do we try to find the common ground that will enable Canada’s federalists to enter the next millennium with today’s uncertainty dispelled?

How is this achieved? With political leadership that is not fearful of public opinion but is resolved to lead it. It would help clear the air if people were told the simple truth about Plan A and Plan B. Plan B appeals to a lot of people because it allows us to say “Boy, did we ever show them.” Show them what? Plan B, brought to its natural conclusion, really means that Canada will be destroyed in an orderly, legalistic manner on a Friday rather than a more disruptive fashion on a Wednesday. Then what? We would be left with a country with a hole in its heart.

Plan A, therefore, was, is and always will be the only plan for a united Canada. The pursuit of our unity must be executed thoughtfully, persistently, courageously-we do not have energy and talents to waste on deciding how separation will take place. We must use all our skills and resources to ensure it never happens.

Ten years ago this month, as prime minister, I convened the meetings that culminated in the Meech Lake Accord. Why was this done? Because a careful approach to this end had been strongly endorsed by Canadians everywhere in the 1984 general election and because the premiers of Canada in August 1986 decided unanimously that, with the election of a federalist government in Quebec, it was now time to secure Quebec’s signature on the 1982 constitutional agreement that, at the time, both Liberals and Péquistes in the National Assembly had rejected.

Most Canadians knew the 1982 arrangement was incomplete. Can you imagine a major constitutional amendment in place in Canada that did not bear the signature of the premier of Ontario? Of course not. Most premiers who had participated in that process urged action to remedy the deficiency.

So did many others. In September 1983, former Privy Council clerk and newly-appointed senator, Michael Pitfield, made the following observation:

“We won the referendum, we said we would give Quebec a new deal and we have not delivered a new deal. If we don’t move soon they’re (Quebecers) going to reconsolidate into a nationalist vein.”

On December 18, 1984, Le Soleil reported:

“Mr. Chrétien believes the new Conservative prime minister has a unique chance to succeed where Mr. Trudeau failed. The former minister spoke of an historic occasion presently offered to Mr. Mulroney to correct grievances for which Quebec will always blame Ottawa, if they are not resolved.”

Mr. Chrétien was right to urge action to bring Quebec into the constitutional fold. We proceeded with great prudence and the agreement was concluded only two and a half years later. That day there was joy across the land. One of Canada’s most accomplished political leaders and public servants, the Right Honorable J.W. Pickersgill, best summed it up: “On the eve of that meeting, I would not have given the first ministers one chance in 10 of success. I was excited and delighted when they reached accord…once I read the document, I was satisfied it met the requirements of Quebec without in any way reducing the jurisdiction of the Parliament of Canada.”

A new provision 38 of the 1982 amendments provided provinces with a three-year delay in which to ratify this and some took full advantage of it. Others – some separatists, some federalists – attacked Meech. Meech died in June 1990 – unlamented in some quarters, mourned in others – when, despite signatures, it went unratified in two legislatures.

What did Meech contain that justified its death? It contained concepts and clauses that had all been offered at different times, in different forms in the past by the previous government of Canada. Essentially, Meech Lake offered the additional security Quebec needed to sign the 1982 Constitution and resolve once and for all the question of Quebec’s place in Canada. All of the provisions of Meech – but one-were offered to and accepted by all the provinces. The only provision unique to Quebec was that which allowed for the recognition of that province as a “distinct society within Canada.” This was simply a recognition of reality that added no new powers to the National Assembly of Quebec nor removed any from Ottawa. It was an interpretative clause that would guide the courts in their assessments of Canadian reality.

In fact, the “distinct society” provision was one half of a new interpretative clause. The other half, largely forgotten by the critics, was the recognition, for the first time by 11 governments, that “linguistic duality” (the English-French dimension) is a fundamental characteristic of Confederation. But Meech’s opponents conjured up ominous and apocalyptic predictions of how such a provision would be interpreted by the courts suggesting the destruction of Canada was at hand-and many Canadians assumed this would happen.

Well, last June, the Right Honorable Brian Dickson, the distinguished former chief justice of the Supreme Court of Canada, discussed precisely that:

“I know that this issue (distinct society) remains a matter of some controversy in Western Canada. But let me say quite directly that I have no difficulty with the concept. In fact, the courts are already interpreting the Charter of Rights and the Constitution in a manner that takes into account Quebec’s distinctive role in protecting and promoting its Francophone character. As a practical matter, therefore, entrenching formal recognition of Quebec’s distinctive character in the Constitution would not involve a significant departure from the existing practice in our court.”

So much for the judicial calamity some had forecast.

Ironically, because of federal government commitments in recent years, the provisions of Meech are today almost all in effect – not constitutionalized, but in effect. Imagine that: the big bad Meech Lake Accord so vigorously rejected by some 10 years ago has or had been largely accepted in Canadian practice-with no unfortunate consequences for the federation. In other words, we got all of the anguish and none of the benefits. And we lost the opportunity to destroy the most powerful and compelling separatist argument in the last referendum-namely, the visible lack of Quebec’s signature on the Constitution.

Are there lessons to be learned from this and other experiences?

1. Canadians, and especially some of their provincial political leaders, must stop taking for granted the advantages that all of us derive from belonging to one, united Canada. Depending on where we live, the difference between a united Canada and a Canada fractured in perhaps five or six pieces is a brutal drop in our standard of living and an immediate evaporation of our influence in the world. Even the most prosperous and self-reliant regions are greater for being parts of the greater union that is Canada. Our futures are all diminished by disunity.

2. It follows that in all parts of Canada, we and our leaders must stop treating constitutional issues as a zero-sum game in which an improvement for one part of Canada implies a loss for other parts of the country.

3. Compromise in Canada is not a sign of weakness. It is both honorable and essential to keep our country together.

4. Unnecessary discord among federalists on this issue, whether generated by political partisanship, rigid doctrine or vanity, plays into the hands of the separatists who argue that Canadians cannot agree on anything except the status quo. They are counting on us doing nothing again.

5. This focus on Quebec is temporary and does not in any way lessen the importance of the rest of Canada. It simply means that Canada agrees to solve this problem now so that together, collectively, all Canadians can deal with urgent economic and social problems tomorrow in an atmosphere of political stability and predictability.

6. If there is a lack of leadership at the national level, the provincial premiers must fill the vacuum (as John Robarts did with the Confederation of Tomorrow initiative in 1967). The constitutional amendment process can be initiated not just in Parliament but in any provincial legislature.

Can this challenge be solved in terms that are fair for all Canadians? The answer is clearly yes. I will believe until my dying day that a seminal opportunity for Canada was missed in 1990. But, for all its reasonableness and simplicity, the time has come to put Meech aside.

Among federalists, on this vital question of national unity and constitutional reform, let us begin again. Let us wipe the slate clean of partisanship and find a new formula, vocabulary and timetable for renewal so that, for our children and their generation, this matter will be resolved.

Meech was not the only casualty in Canada’s search for unity. Fulton-Favreau was never accepted. The 1971 Victoria formula failed and the 1982 amendments, as noted, passed without Quebec. Charlottetown did not receive sufficient public support.

I believe it was a mistake for the Government of Quebec to reject Victoria. It contained most of the elements long sought by Quebec and other provinces. It was a good deal for Canada.

I believe it was a mistake for the Government of Canada to proceed with patriation over the objection of the Quebec National Assembly. We changed the rules of the game affecting Quebec without Quebec’s consent. The British North America Act had served us pretty well for 115 years. Surely, we could have waited a while for the election of a federalist Quebec government because, as Senator Ernest Manning predicted in 1981 in arguing against proceeding, “There is no real profit in gaining a new constitution if in the process you lose a nation.” I believe it was a mistake for certain signatories of Meech in 1990 not to secure its ratification as agreed.

So, how many mistakes does a country get to make? At what point does the insistence on perfection become the enemy of the good? Some 200 years ago, Thomas Jefferson said:

“I confess that there are several parts of this Constitution which I do not approve, but I doubt whether any other convention may be able to make a better Constitution. For when you assemble men to have the advantage of their joint wisdom, you inevitably assemble all their prejudices, their passions, their errors of opinion, their local interests, their selfish views. From such an assembly can a perfect production be expected? I consent to this Constitution because I expect no better and because I am not sure it is not the best.”

Jefferson didn’t get his way fully – but he saw no reason to disparage or reject the efforts of others because of that. And the history of the United States has proved him right.

So what course will it be for Canada in the 21st century? The referendum results were 60%-40% in 1980 and 50.6%-49.4% in 1995. The case for Canada was carried by 6/10ths of a percentage point – or 52,448 votes. What would you wager about next time? In the eyes of many, constitutional reform is a tar baby and no one wants to touch it. To do so is both unfashionable and unpopular. But prime ministers are not chosen to seek popularity. They are chosen to provide leadership. There are times when Canadians must be told not what they want to hear but what they have to know.

And what they have to know is that, of the various problems that confront Canada, only one-the Quebec problem-has the potential to break up the country. They have to know that the problem cannot be solved without a constitutional initiative, and that if our leaders, federal and provincial, persist in putting it off, we will fight another referendum with a hand and a half tied behind our backs.

There is nothing we can do that will attract the support of convinced separatists. But the majority of Quebecers remain attached to Canada. If we can make the reasonable constitutional changes that will secure their place in the Canada of the 21st century (and which threaten no one else’s place) French Canadian Quebecers will respond strongly to reclaim those golden opportunities from a country they explored and settled in the cold and brutal winters of their youth, over 350 years ago.

We have to confront the problem of our disunity for what it is-a completely unnecessary impediment to our future prosperity. Canada’s prime minister-whoever holds that office after the next election-must engage the provinces and summon the people of Canada to weigh what we have to gain from resolving this problem and what we have to lose from failure. Before Canadians will be able to fully enjoy the promise of the 21st century, they must deal with a problem, created and unresolved, in the 20th century.

It is too late for the tiny, timid steps of incrementalism. In the Peace Tower in Ottawa there is inscribed a quotation from the Book of Proverbs: “Where there is no vision, the people perish.” Before the turn of the century, the prime minister must place before Canadians-in the window of history-a compelling vision of our future together. The promise of that future will heal our divisions. It will create the solidarity and sense of purpose needed for great achievement. And it will restore the pride and unity that define a great nation.

As we approach a new millennium, the prime minister must assume the role of “rassembleur,” to attract the support of a strong majority of Quebecers for a united Canada through an approach that is generous, a policy that is sound and a dream that will inspire. I believe such an approach will deal a body blow to the cause of separation. As essayist Mark Helprin has written, “In the life of a nation, risk is sometimes more prudent than caution.”

To people outside this country, Canada is the very model of a successful nation-federal, bilingual, multicultural, diverse, prosperous and at peace. In the new century almost upon us, no country has more to offer to its own people and to the people of the world. The only question now is whether this generation of Canadians – we and our leaders – have the vision and courage equal to the task.

RESTORING NUCLEAR PERFORMANCE AT ONTARIO HYDRO TO ITS FORMER LEVEL OF EXCELLENCE

William Farlinger
Chairman, Ontario Hydro

The Canadian Club of Toronto, January 26, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

It has been two years since I last spoke to this prestigious institution. I ended that speech by saying I would appreciate the chance to return to report on progress. Well, a lot has happened since then. And a great deal of change is coming, both for Ontario Hydro and for Ontario’s electricity customers. Ontario Hydro has been through some tough times since I was here last. We face a very challenging future. Today I will describe our challenges and how we will overcome them. But first, I want to talk about something that I am very proud of.

I want to salute our employees, the men and women of Ontario Hydro, who have gone well beyond the call of duty to get power restored in eastern Ontario. Our people have been working 16-hour shifts for almost three weeks, sometimes in awful conditions, to restore the damage inflicted by the ice storm. I know how incredibly demanding this has been on our employees. They haven’t wavered in their resolve. I am extremely proud of them. We have never seen such destruction in our 91-year history. At the height of the storm, 122,000 Ontario Hydro electricity customers, mostly in rural areas, were without service. And a similar number of municipal utility customers were affected. The ice storm damaged 40% of our transmission and distribution system in eastern Ontario, including 250 large towers and 7,000 poles. We have replaced more than 350 kilometers of line.

To get power restored as quickly as possible, we mobilized more than 1,100 Ontario Hydro staff. Our people were supplemented by 800 staff from 90 different municipal electric utilities, and crews from as far away as Manitoba and British Columbia. They did in days what would normally take weeks or months. I am happy to say that, with the exception of some customers in remote areas, all the power is back on. But we will not cease our emergency operation in eastern Ontario until every customer has their electricity back.

The ice storm tested our emergency capability to the limit. Now, we are looking at what it has taught us. We want to be even better prepared should we ever suffer such a destructive event again in the future. The ice storm also showed what Ontario Hydro is capable of when we work towards a common goal. The dedication of our employees makes me optimistic about our future.

Today I will bring you up to the present on other recent developments, such as our programs for improving our nuclear performance and for managing our environmental impacts. Then I will tell you about the changes that Ontario Hydro and the province’s electricity customers can look forward to over the next few years, as competition and choice are introduced in the electricity sector. Finally, I will say a few words about our labor agreements.

I’ll begin by describing how we are improving nuclear performance. There are three basic facts about our nuclear program that I will share with you, to help you better understand our recent nuclear decisions. The first fact is that Ontario is very dependent on nuclear power. When all 19 of the province’s nuclear reactors were operating, nuclear power supplied two-thirds of the electricity we used each day. By way of comparison, France is the only G7 country that is more dependent on nuclear power.

The decision to be so reliant on nuclear power was made many years ago and can’t be changed overnight. The decision was based on the undeniable advantages of nuclear – when it is working well it is cheap to run, it doesn’t produce air pollution, and there is no problem with fuel supply and cost. It was the right decision when it was made. And it may well be the right decision for the future.

The second fact about our nuclear program is that its performance has deteriorated for several years now. Instead of making the global top-ten list that shows the annual operating reliability of the world’s reactors – a list we dominated in the late 1970s and early 1980s – our nuclear reactors are now closer to the bottom compared to other world nuclear programs. Let me illustrate this point. In 1994 our nuclear reactors ran at 73% of capacity, declining to 70% in ‘95, then 68% in ‘96, and finally just below 60% last year. Despite efforts to improve performance, we have suffered a 22% decline over four years. It’s my view that to a large degree the performance decline resulted from a poor maintenance program on our part, and a lack of adequate operational focus.

The third fact about our nuclear program is that the performance decline, if unchecked, could have had an effect on safety margins. Now, let me be very clear on this point. I am not saying our nuclear units are not safe. They are safe, or we would not run them. What I am saying is that when operating performance worsens, safety will eventually be affected if actions are not taken. An efficient operation is a safe operation. So, to sum up, we are very reliant on nuclear power, its performance has slipped, and we must address this to ensure that safety will not be affected.

It is within this context that Ontario Hydro’s board of directors took a tough, radical, but absolutely necessary course of action. Last August we announced the results of a very thorough study that uncovered the causes of the decline in nuclear performance. We also announced our plan for restoring the performance of our nuclear fleet. We will not be satisfied until our nuclear performance is in the top quartile compared against all the other world nuclear reactors.

Our plan was recently reviewed at the request of the provincial government by an all-party select committee of the provincial legislature. The select committee met over several weeks through last fall, and heard many witnesses. Their conclusion was, and I quote: “The select committee agrees that the…plan should be accepted as is.”

They did, however, add a number of caveats to their general endorsement. For example, they asked us to keep an open mind about options for achieving nuclear recovery more quickly and cost-effectively, without in any way sacrificing safety or the environment. They asked us to be mindful of how our plan affects nuclear communities, particularly those around our Bruce site. And they asked us to make regular reports on our nuclear recovery progress, which we are doing already in publicly-released monthly “report cards.”

Our nuclear recovery program will be expensive – in the billions of dollars – but I would like to make it clear that these are expenditures that should have been made in the past. We are paying today for yesterday’s lack of diligence. Some commentators have suggested that we should not have to sink all this money into our fixed assets. In fact, we are not investing in fixed assets. Our expenditure on nuclear recovery actually represents how our bottom line will be negatively affected over the next few years compared to our previous budgets. While a small portion of our expenditures will be of a capital nature, most of the money will be spent for replacement power we will generate at our fossil fuel plants.

A significant amount of the expenditure will be for retraining management and staff, and implementing improved work processes and practices. We are doing a major overhaul of how we operate our plants, focusing on upgrading the skills and discipline of all our people. Finally, the cost of nuclear recovery also reflects how unrealistic our operational planning and budgeting have been in the past.

So, once and for all, we have stopped applying band-aids. We will do whatever is necessary to restore nuclear performance to its former excellence. Our plan is to concentrate our resources on improving the performance of our 12 newest nuclear reactors while laying up the seven older ones. We will use the employees from the laid-up nuclear units to help restore the performance of the 12 units we will keep going.

At the beginning of this month, we safely laid up the four older nuclear units at our Pickering “A” station. The workers at these nuclear units are already starting on the recovery of the newer Pickering “B” reactors. This leaves the three older units at our Bruce “A” station still to be laid up. One of these reactors has been shut down for several months now, because of problems in its steam tubes. It will remain out of service. As for the other two – units 3 and 4 – we would like to keep them operating, because they would generate electricity at a lower cost than all available alternatives. Moreover, we are aware of the importance of our decision on the Bruce community.

However, a number of criteria must be met if we are to keep the units operating. First and foremost, we would have to be sure that we could continue to operate the units safely, that safety margins would not be eroded, and that risks would not be increased. We would also have to ensure that the operation of these two units would not jeopardize our ability to recover the performance of our 12 newest nuclear units. And finally, continued operation of Bruce units 3 and 4 must be a cost-effective decision for all our customers.

Another option for our nuclear program is the possibility of a public and private partnership. You may have recently read media reports of British Energy’s interest in talking to us. We met with them recently. They are not looking to buy specific nuclear reactors, but rather want to explore the option of a public-private partnership with Ontario Hydro. We will continue to explore this option as we move ahead with our recovery program.

That brings you up to date on our nuclear recovery program, and leads me to my next topic: how we are managing our environmental impacts. This is another key priority for Ontario Hydro. I’ll describe three major environmental initiatives we have underway.

First, we have established environmental management systems across the company to ensure we are consistently managing the environmental effects of our operations. We have chosen the international standard ISO 14000 as the benchmark for our systems. I’m proud to say that our Darlington nuclear station was the first generating station in the world registered against ISO 14000. Since that initial certification in January 1997, we have successfully undergone an audit by a registered third-party auditor to retain our certification. Other parts of Ontario Hydro will be pursuing ISO 14000 registration over the next year.

We have enshrined our environmental commitment in a policy statement. Our board of directors recently reconfirmed our environmental policy which states that environmental compliance is a minimum requirement, but that our objective is to go beyond compliance with laws and regulations.

The second program I want to tell you about relates to our responsibility to better understand our environmental liabilities, such as any contamination of our properties because of past practices. As businesspeople, you are aware it is not uncommon for industrial sites to have areas of contamination, especially for companies in business as long as we have been. We have fast-tracked a project to identify and assess possible contamination on all our properties across the province. We will work with the Ministry of Environment and local communities if any cleanup or remediation is required.

A third example of our environmental commitment is our response to the issue of global climate change. Ontario Hydro has been a major contributor to Canada’s progress in reducing greenhouse gases. However, recent events will challenge us as we continue to manage our emissions. One of these events was the Canadian pledge at the Kyoto conference that our country is now committed to a more aggressive greenhouse gas-reduction plan. We will do our part in supporting this pledge. We are also challenged by our need in the short term to increase our use of fossil generation, because of the lay up of our nuclear units. Nevertheless, we are committed to stabilizing our net greenhouse gas emissions at 1990 levels by the year 2000, and to reduce emissions by a further 10% by 2005.

Our plan has a number of components. For example, we are improving the energy efficiency of our operations. We are helping our customers use less energy where this is cost-effective. And because some of our customers have an interest in “green energy,” we are looking at small-scale renewable energy options. Each of these parts of our plan helps reduce our electricity generation at our fossil fuel stations.

Managing our environmental impacts and restoring nuclear performance are essential to our future success. And the future shape of the electricity industry recently became much clearer, as a result of the provincial government’s white paper on how competition will be introduced to the electricity market. The white paper announced the province’s intention to introduce new legislation that would create a competitive market for electricity supply for all customers, beginning in the year 2000. Those who were present here two years ago heard me recommend exactly that.

Briefly, here’s how it will work. Electricity will be available both through long-term contracts and on a daily market. Every customer, from the largest industry to small households, will have access to any electricity supplier. They could stay with their current supplier. Or they could have an electricity broker arrange supply for them. Or they could buy it themselves.

The most important point here is that, for the first time, electricity customers will be able to choose their supplier. And monopolies will be replaced by markets. It’s my firm belief that we will all benefit from competition. Competition will put pressure on electricity suppliers to keep prices low. It will result in a much larger menu of services and products. Innovations will come more quickly with competition.

Ontario Hydro will compete in the new market as two new commercial companies. One of these companies will generate electricity, taking over our generation facilities. It will be one of the largest electricity generators in North America. The second company will include our current electricity sales and delivery functions. The transmission and distribution wires of this new company will form one of the largest electricity grids on the continent, with 30,000 kilometers of high-voltage and 100,000 kilometers of low-voltage wires.

The one part of the current electricity system that will remain a monopoly will be transmission and local distribution wires. They will be much like telephone lines and gas pipelines, which became common carriers when their industries were opened to competition. The monopoly wires will be under regulatory pressure to deliver electricity as efficiently as possible. This second company formed from Ontario Hydro will also include competitive businesses. They will be under pressure to find the most efficient ways to meter, bill customers, buy and sell power, and ensure customers have the service they want. Otherwise, they will lose their customers.

The white paper also calls for the creation of an independent market operator. This will be a new, nonprofit corporation that runs an electricity exchange, dispatches electricity based on lowest bids, and arranges settlements between buyers and sellers. Its job is to ensure that competition develops quickly and fairly.

The process of creating the new market is beginning. Last week, Energy, Science and Technology minister Jim Wilson announced the establishment of a market design committee, which will help iron out the complex technical details of how the new market will work. The committee includes customer and industry representatives. Its job is to advise the minister on the structure, governance, rules, and procedures required for an electricity marketplace, and any substantial obstacles to achieving them.

From this brief description of how competition will be introduced to the electricity industry, you can see what I meant when I told you at the beginning of my talk that a great deal of change is coming. But it will be good change – not just for Ontario Hydro, but for all our customers, and for our province.

The final subject I want to address today, and in some ways the most important, is our need for new labor agreements. I don’t really have the time to do justice to this topic, so I’ll just touch on it. It is absolutely essential to Ontario Hydro’s future that we have much more flexibility in our labor agreements than we now have. Right now it is very difficult for us to ensure we have the right people in the right place at the right time.

As one example, our labor contract makes it almost impossible to move people with the right skills to where we need them, because the agreement is based on company-wide seniority. When we find ourselves with too many workers in a certain location or in a specific job class, we have to address the imbalance through a very cumbersome process. Our agreements are unwieldy, costly, and don’t reflect our current challenges. They have to change if we are to successfully improve our nuclear performance, and if we are to take on all comers in a newly-competitive marketplace.

Ontario Hydro now finds itself in the same situation that a lot of industries have had to deal with. For example, the railroads, post office, and private-sector companies such as auto manufacturers and the steel companies have all made significant changes to their collective agreements. We have heard both public and private commitments from our union leaders. They agree that it will be necessary to reexamine our collective agreements to help ensure our future success. So far, however, we haven’t achieved much progress. Ontario Hydro needs to be able to deploy its workers to where they are needed. This is the goal that I am committed to achieving.

Let me close by saying I appreciate this opportunity to bring you up to date on Ontario Hydro. We have faced some tough times over the past couple of years, and we still have many challenges ahead. But we know what it takes to succeed. We will recover our nuclear performance to its former excellence. We will deliver competitive prices, maintain a very reliable electricity supply, show environmental leadership, and never waver in protecting public safety. We are determined to win your business. And we plan to hold on to it.

MARKET POWER IN A COMPETITIVE MARKETPLACE

Ronald W. Osborne
President & CEO, Ontario Hydro

The Toronto Board of Trade, September 11, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

Back in February, the minister of Energy, Science and Technology, the Hon. Jim Wilson, kicked off these Power Breakfasts with his speech on the new electricity marketplace. Since then, you have heard several interesting and informative perspectives on the changes about to occur.

Our chairman, Bill Farlinger, spoke to you back in March. He reviewed some of the challenges facing Ontario Hydro as we prepare for a competitive future, and he outlined the roles of our successor companies in the new marketplace. He expressed his confidence about the future of our industry and our new companies, a feeling that I certainly endorse. Today I will discuss some of the same issues that Bill discussed, taking into account developments of the past few months.

A great deal has occurred in the last half-year to bring us closer to a competitive electricity market. The provincial government has introduced Bill 35, the Energy Competition Act, and it has received first and second reading. The Standing Committee on Resources Development last month finished public hearings, held in six locations around the province, on Bill 35. The committee heard 91 presentations over eight days, including one from Ontario Hydro. The Standing Committee will start clause-by-clause examination of the legislation before the end of the month, a necessary step before third reading of Bill 35 can occur.

Also at the end of this month, the third quarterly report of the Market Design Committee is due. If you were here on June 17, you heard Ron Daniels preview their second quarterly report, which dealt extensively with market power and ensuring the Ontario marketplace is competitive – a theme I will also address today.

Other restructuring activity includes the work of the Ministry of Finance, which released a paper at the beginning of July on the stranded debt that will be created as a result of introducing competition to the electricity industry. The Ministry is now busy creating the financial architecture for the successor commercial companies of Ontario Hydro. These successor companies are the Ontario Electricity Generation Corporation, which I will refer to as Genco, and the Ontario Electric Services Corporation, known as Servco.

Much remains to be done. Market rules need to be established, and the financial structure of Genco and Servco must be put in place. Then the government will appoint new boards of directors, senior management will move into the new companies, business plans will be created, and Ontario Hydro employees will be allocated to Genco and Servco.

Clearly, a great deal of change is about to occur. Today I want to discuss two of the larger issues associated with the restructuring of our industry: Genco’s role in the new competitive electricity marketplace, and the need to rationalize the distribution sector in a way that most benefits electricity customers. But first I will update you on our operations, and the prognosis for the next few months.

I’ll begin with the recent operating performance of our generating stations. Our hydroelectric and fossil fuel plants are performing extremely well. In particular, our coal and oil stations are efficiently meeting a larger part of customer demand than in previous years, because of the temporary lay-up of our Pickering A and Bruce A nuclear units. I want to note that even though our fossil fuel units are generating more power, they are staying within the provincial limits for air emissions.

The Pickering B, Bruce B and Darlington nuclear units have also operated well recently. For the first time in a while, we had all 12 operating units in service together for several weeks this summer. Their good performance helped to ensure reliable supply during the hot summer months. Seven times this summer we exceeded our previous summer peak demand set in 1995, and in each case we met the high demand without incident. South of the border, many US utilities had to appeal to their customers to reduce their electricity use on several occasions. Over the past several months, however, we were able to meet our export contracts and make additional sales in the US, helping boost our financial results.

After a relatively slow start, our Nuclear Asset Optimization Plan is showing signs of progress. We have now put most of the fundamentals in place for our nuclear recovery, including a plan comprising 66 key initiatives, each with a detailed project execution plan. We are also publicly releasing monthly report cards on our progress. Our most recent report card for July shows that our overall performance index is the best since we began issuing the reports last October. We are meeting or exceeding targets in 11 performance areas and are below target in only four areas.

Over the past couple of months, a contingent of 20 international officials from the World Association of Nuclear Operators conducted peer assessments at our Pickering B and Bruce B stations. While they indicated that we still have a lot of work to do, they agreed with our findings of what needs to be improved, and they confirmed that our nuclear recovery program is sound. We believe these outside reviews are healthy, and that they help to keep us on the right track.

We know that it will take five to seven years to implement our nuclear recovery program and achieve top-decile performance compared with nuclear plants worldwide. We are committed to achieving this goal. We acknowledge the amount of work still ahead of us, including training our staff, instituting best practices, and fostering a high-performance and high-safety culture. If we can successfully attain our former high-capacity factors, I think that nuclear power can be the hidden pearl of our system as we enter a competitive environment. Our nuclear stations could very well be a very profitable investment for our shareholder.

In June we reached a new collective agreement with our 15,000-member Power Workers’ Union. Most significantly, we reached a lateral transfer agreement with the union and made a number of other changes to our collective agreement which will increase the efficiency and flexibility of our staff deployment processes. We have also reached a separate lateral transfer agreement with our professional union. These agreements will help us to make more rapid progress on our nuclear recovery program.

I see signs that we are working more cooperatively with the PWU, that we have a mutual desire to accomplish major common goals. I know that John Murphy, the president of the PWU, understands the importance of our nuclear recovery program. He stated when he testified before the Standing Committee that “everybody understands that nuclear recovery is an absolute must.” He acknowledged to the committee that the plan is not as far ahead as envisioned, but expressed his confidence that nuclear recovery will be successful.

Before I turn to restructuring issues, I want to update you on some of our environmental commitments. You may recall Bill Farlinger describing our efforts to address the problem of copper and zinc emissions from our generating stations into the Great Lakes. We hired two experts – Dr. Peter Victor, dean of Environmental Studies at York University, and Dr. Leonard Ritter, the executive director of the Canadian Network of Toxicology Centers – to perform an independent review of how well Ontario Hydro has implemented remediation measures. In their recently-released third report, they state that Hydro has made very good progress, and they compliment Hydro for “a strong record of achievement that goes a long way towards full implementation of the recommendations.”

It is very clear to us that electricity companies will have to make the link between competitiveness and environmental sustainability if they want to succeed in the new marketplace. Companies that succeed on these fronts will be able to differentiate themselves from the competition.

One area where Genco will try to press its environmental advantage is the relative cleanness of its electricity supply. Genco produces low air emissions per megawatt because of its mix of nuclear and hydroelectric, which do not emit air pollution, and its relatively clean fossil fuel stations. You may have received a different impression if you read Greenpeace’s comments in The Toronto Star on Wednesday and Thursday. I won’t disagree with them that our emissions have increased in 1998. We have consistently said that our emissions will be higher for as long as our nuclear units are laid up. As we bring nuclear units back into service, emission rates will decline. This underlines the importance of our nuclear program in helping us manage air emissions.

As I mentioned earlier, we are meeting the acid gas regulations now, even with higher emissions, and it is our intention to stay below the regulation. Since the regulations were put in place in the 1980s, we have never exceeded them. In fact, we have been significantly below them during most of the 1990s.

We are importing more power from the US, but we are doing so to ensure supply reliability in Ontario, and not to lower our emission levels here in the province. We are also importing economic hydroelectric power from Quebec and Manitoba when it is available.

Over the past decade or so, we have spent more than C$1 billion to minimize our acid gas emissions. We have installed scrubbers to remove sulfur dioxide and new burners that reduce nitrogen oxide emissions. We buy low-sulfur coal. And we are converting two oil-fired units to burn gas. We are committed to keeping our emissions as low as possible while also keeping the power supply reliable.

I see Genco as a North American company that will play a positive role in the continent’s air shed. We support the Bill 35 provisions promoting the trading of emission reduction credits as an economic way of encouraging companies to reduce their air emissions. We also support the bill’s proposal of common environmental standards that companies must meet if they want to sell into the Ontario market.

This leads me to Genco’s role in the restructured electricity market. Specifically, I want to address the issue of market power. Genco now supplies about 86% of the electricity used in the province. How can there be a truly competitive market for electricity when one company starts out with most of the generation? Shouldn’t that company be broken up into smaller pieces, as some presenters advocated at the Bill 35 hearings?

In its White Paper, the Ontario government decided that Genco should remain as a major player in a larger market, rather than become a bit player. There are a number of good reasons to maintain Genco’s critical mass of about 30,000 megawatts, and also to believe that this will not hamper the establishment of a competitive marketplace. I believe that the market power issue will be addressed in two interrelated ways. First, Genco’s presence in the Ontario market will be reduced over time. And second, as Genco loses market share in Ontario, it will increasingly look southward to US markets for a significant portion of its electricity sales.

Nobody suggests these changes will happen overnight. The White Paper recognized that there would be a transition period to the new market, and that this transition will have to be carefully managed. It will be an evolution rather than a revolution. The Market Design Committee is currently looking at a number of market mitigation measures for Genco. One option would be for Genco to set its low-cost, baseload hydroelectric and nuclear generation at a defined price. This, in effect, would take the bulk of Genco’s generation out of the competitive market, and ensure that this low-cost resource is primarily reserved for Ontario customers.

The higher-cost fossil fuel generation would compete for sales, but again the Market Design Committee is looking at ways to ensure these generating stations do not dominate the market. For example, Genco could swap the output from generating units, or even swap generating units, with other utilities. This would give Genco a presence in other markets, and introduce new players into the Ontario market. Or Genco could lease units, or auction the capacity rights of the units, to other companies.

These are some of the measures currently before the Market Design Committee. As I said, changes of this magnitude will take some time to implement. We all know where we want to get – to a competitive marketplace. At issue is how we get there and over what time period. Other industries that have deregulated did not get there overnight. The government, the Market Design Committee and electricity industry stakeholders are discussing mechanics and timing, and I am confident we will all work through these questions.

New entrants to the market are already starting to line up. If you heard Ron Daniels back in June, you will recall his words about how new generating technologies will result in new facilities built by the private sector and located close to the electricity demand. In the last couple of months a number of projects have been announced, including a C$400-million co-generation plant proposed by TransAlta Energy in Sarnia, and a C$400-million co-generation plant proposed by Northland Power in Thorold. These join a C$120-million power plant planned by TransCanada PipeLines in Hearst, which is to begin construction next year.

Non-utility generators now supply about 7% of Ontario’s power, and it is interesting that these recent announcements come from three of the largest NUG generators in the province. Their proposals represent almost C$1 billion of new investment in the electricity generation industry. Obviously they see a potentially growing role for competitors to Genco. An additional reason to be bullish about competition is that our interconnections with other jurisdictions now allow for the import of up to 4,000 megawatts of power. That is a significant amount of the competitive market. But we agree with AEP’s statement to the Standing Committee that the interconnections should be beefed up to allow for the import and export of more power. Servco is looking to increase the province’s interconnections, which will increase the access of other companies like AEP into the Ontario market, and bring Ontario customers the benefits of increased competition.

The reduction of Genco’s market power through vesting, decontrol of generation, new generation from other players, and imports from other jurisdictions will result in an increasingly competitive generation market in Ontario. As Genco loses market share in Ontario, it will increase its sales into the US northeastern and midwestern states. That is the biggest reason why it needs to remain as a large generating company.

As Bill Farlinger mentioned to you in March, the competitive electricity market in the US has led electricity companies to become bigger, mainly through mergers and acquisitions. Our reading of the situation is that generation ownership will become more concentrated, with fewer owners controlling larger asset bases. In other industries such as banking, airlines, telecommunications, oil and gas, and steel, it is typical that four or five companies control a majority of market share of production, supply or services. Electricity generation is likely to follow a similar pattern, with perhaps 10 to 15 large companies dominating the North American electricity market.

Currently in the US there are more than US$300 billion in mergers and acquisitions underway in the energy industry. The largest energy utility in terms of customer size was recently created when Enova Corp. and Pacific Enterprises merged in California to become Sempra Energy, with a base of six million gas and electricity customers.

In the electricity sector, most of the mergers to date have been between midsize utilities, such as the creation of 11,000-megawatt Cinergy through the merger of PSI Energy and Cincinnati Gas and Electric. Since Bill Farlinger spoke to you six months ago, however, American Electric Power, at 23,000 megawatts, and Central South West Services, at 14,000 megawatts, have announced plans to merge into what will become the largest electric utility in North America. This is the first of what could be a number of mega-mergers south of the border.

Genco, at 30,000 megawatts, is still one of the five largest generators in North America. In our market area, stretching from Illinois to New York and from Ontario to Kentucky, we will own about 15% of the generating capacity. We will be competitive, with among the lowest marginal costs of any generator selling into this market. Genco stands an excellent chance of remaining one of the large remaining generators in the North American market a decade from now.

Will Ontario benefit from a large, successful Genco? I believe it will. I mentioned earlier that a critical mass is essential. A single large generating company will maximize the value of the investment that the province has made in Genco’s assets. If the company were fragmented, it would lose operational efficiencies gained by being able to coordinate the operation of different kinds of generators. For example, Genco is now able to increase its fossil generation when water levels are low, and efficiently coordinate maintenance scheduling because of its generation mix.

The benefits of having a large, successful Genco, headquartered in Ontario, include preserving high-tech jobs in the province. It also means preserving a significant amount of spending on research and development in Ontario – last year, Ontario Hydro spent C$101 million on R&D. And a strong company will pay more taxes and pay debt down more quickly.

I believe that a large Genco that increasingly competes in the US is quite compatible with a competitive electricity market in Ontario. New entrants will find their way into our market and existing players will no doubt increase their market share. Genco is poised to increase its share of the US market. While it will take some time for these changes to fully unfold, each will happen over time and the province and its electricity customers will benefit.

Now I will briefly discuss my third and final subject: the need to rationalize the distribution sector in a way that is most beneficial to electricity customers. Bill 35 will result in the corporatization of Servco and all the municipal electric utilities under the Ontario Business Corporations Act. These companies will have new business imperatives – their goals will be to provide the highest levels of service at the lowest price. Customers will be in the driver’s seat, for the first time able to choose their electricity supplier.

When I discussed the subject of distribution rationalization at the Standing Committee, one of the committee members later suggested that it is Servco’s intention to muscle its way into the municipal utility territories. That is certainly not what I said, nor is it Servco’s intention. I told the Standing Committee that Servco’s vision is to contribute to the province’s objective of gaining efficiencies in Ontario’s electricity distribution sector by entering into a wide range of voluntary, negotiated business arrangements with municipal utilities. Let me emphasize that our intention is to negotiate mutually beneficial business solutions. We believe that Servco is uniquely positioned to contribute to rationalization because of its geographic scope – it already has a presence across the province – and because of its economies of scale. It has almost a million customers, which makes it a bigger distributor than even the new Toronto Hydro.

Servco and the municipal utilities could provide services to each other, enter into partnerships and joint ventures, or even acquire some of each other’s assets, if that would be mutually beneficial. These future business arrangements would help productivity, reliability and service to customers, as well as lower costs and increase financial returns to the provincial and municipal owners.

As I mentioned to a municipal utility audience yesterday, we are keen to have a good, productive, and businesslike relationship with them, while working together to gain efficiencies in the province’s distribution sector. We are also committed to signing agreements before the end of the year with those municipal utilities that passed bylaws for expansion of their service territories under Bill 185. We will also do our best to complete as many transfers as possible before year end.

I will end my remarks now by observing that it has been a fast-paced and eventful six months since we at Ontario Hydro last spoke to your Power Breakfast meeting. The next year or so will see this pace of change accelerate. I am confident that these changes will create a competitive market that will greatly benefit Ontario’s electricity customers and the province.

THE ONE TO ONE ENTERPRISE: HOW TO BUILD RELATIONSHIPS ONE CUSTOMER AT A TIME

Martha Rogers, Ph.D.
Cofounder, Marketing1to1/Peppers and Rogers Group

Canada Post Postal Conference 98, Toronto, March 12, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

Just a few brief words about Marketing1to1, the company, before I proceed with my talk. I became a cofounder of Marketing1to1 in 1992. Don Peppers and I formed our company after working, studying and teaching in the fields of marketing and advertising for a good number of years. During that time we observed what we considered to be a very clear and rapid evolution occurring in the marketplace. More and more, successful marketers have been shifting their emphasis towards identifying and serving the needs of individual customers, and then treating them differently based on their specific needs. No longer is it good enough to treat all customers the same, as has been the accepted approach for so many years. Marketing1to1/Peppers and Rogers Group was formed to develop strategies to deal with this new approach to marketing and to show enterprises of all sizes, from home businesses to Fortune 500 companies, how to identify different customers and how to treat different customers “differently.”

Let’s take a look at traditional marketing as most of us have known and practiced it over the years. Standardized products and services have been developed based on generalized market surveys. Using this approach, one customer became the same as another. Customers were interchangeable. It is no wonder that it has functioned that way. After all, market knowledge was gained through sampling a relative few customers in the marketplace, and then projecting their profile onto the rest of the customers in the market. A very homogeneous approach which does not really allow for any differences among customers – or differences among products and services either. Using this traditional model, the primary criterion for measuring success was whether one was gaining more customers, or not. In the final analysis, this approach to marketing led eventually to the commoditization of every company and product.

In the past few years, some companies have been waking up to the fallacy of this old approach to marketing and are now leading the competition by looking more at the needs of individual customers. One of many good examples of this is British Airways. They have announced that they intend to develop customized customer amenity software that will eventually be operational at 160 airports they serve around the world. The software will keep track of the specific likes and dislikes of the airline’s regular passengers. Whenever one of those identified passengers is passing through the BA system, staff will be provided with detailed information on the preferences of that passenger. Of course, under such an approach the passengers will feel special because they will end up receiving personalized service, because the airline will have taken the trouble to treat them as unique individuals. This approach is expected to save British Airways between $5 and $8 million a year by reducing waste.

Another example of 1to1 Marketing is Bandag, a company that retreads truck tires. It serves about 500 dealer-installers across the country. Bandag has gone beyond the traditional approach to retreading tires. It has developed a number of technical innovations that allow it to provide its customers with individualized information. For example, when retreading tires it places microchips into the new rubber. These microchips can then be used to monitor and report on such things as operating temperatures, total mileage and tread wear as well as other operating parameters. Access to this data through Bandag’s systems provides fleet operators with valuable information they can use to optimize their operations. It also allows Bandag to electronically gather a vast amount of data for its operational database that can be used to refine its services and develop new ones, customized to the specific operational characteristics of each customer’s fleet. As a result of this knowledge, Bandag has decommoditized the tire retread business by turning themselves into fleet managers.

One-to-one marketing is a relatively simple concept. It is about customizing products and services targeted to the individual customer. It is an approach whereby the enterprise listens to each customer and responds by modifying existing services or developing new ones. For the 1to1 enterprise, success is not just about getting more customers – it is also about keeping existing customers as well as developing new products and services to meet their growing and changing needs over time.

There are two major dimensions to competition in the marketplace. One is to reach as many customers as possible. The other is to satisfy the needs of those customers. The traditional mass-marketing approach is all about reaching the most customers. It is based entirely on gaining market share. On the other hand, 1to1 Marketing is all about satisfying the needs of individual customers. It is based on gaining “share of customer,” an increasing share of each customer’s business, or garage, or closet or wallet.

Share-of-customer strategies can be brutally simple. For example, if you were a retail florist, a 1to1 approach might be as basic as keeping a small database of the birth dates of the families of regular customers, and perhaps also recording their flower preferences for later strategic reminders.

Why has this focus on the individual customer come to the forefront now? Largely because such an approach is now possible when just a few years ago it would have been unfeasible due to prohibitive costs. The microchip invasion of the last 20 years is finally making it possible to execute micromarketing strategies that would have been unthinkable until recently. Every 20 years or so since computers were used in business, the cost of processing a single bit of information has declined by a factor of 1,000. That explains why most companies couldn’t even consider a 1to1 approach as little as five years ago.

The computer provides marketers with three major capabilities. Number one, is the ability to keep customer databases in which we can identify single customers. Customers can now provide us with interactive feedback in ways not feasible before, using such technology as the internet, electronic kiosks, and touch-tone phones. Finally, through mass-customization we can provide products and services suited to the unique needs and preferences of the individual customers at a reasonable cost.

There are three key reasons why more and more organizations are making the transition to becoming a 1to1 enterprise. First, it builds better customer loyalty. Second, the enterprise gains a higher share of customer. Third, customers tend to stay as a result of the 1to1 approach, which is much cheaper than having to go looking for replacement customers.

One-to-One Marketing is based on what we call the “Learning Relationship.” This is a relationship defined primarily by the customer. First you learn what he wants. Then you tailor your product or service to meet his specific needs. By this point, the customer has invested in the relationship with you by putting time and effort into identifying his needs to you. He would rather not go elsewhere, since it would mean having to reinvent the same relationship with someone else.

These days, the key strategic question is – what can an enterprise do to make customers more loyal and valuable even when your competitors will do the same thing, the same way? The answer to this is better customer differentiation.

Now, even very small companies can afford the cost of keeping relatively sophisticated customer databases. With these, it is now possible to keep track of the needs and preferences, as well as the value, of individual customers. Each customer has a different value to the enterprise. The customer’s “actual value” is their value today. The customer’s “strategic value” is their as yet unrealized potential value. In this way, actual value divided by strategic value will yield “share of customer.”

For the typical enterprise, some customers are worth more than others. This is of course based on the “Pareto Principle” that 20% of your customers give you 80% of your business. Telephone industry research has shown that when it comes to long-distance calls, an extreme version of the Pareto Principle is at work, with the top 5% of customers making 60% of all long-distance calls. Similarily, in the UK 6% of the cola drinkers account for 60% of the cola sold.

Another excellent example is the US car rental business, where 0.2% of all car rental customers are responsible for 25% of all car rentals. Imagine this in terms of a football stadium full to capacity with 40,000 car renters. Only 80 of those people in the stadium would account for 25% of all cars rented! The traditional marketing approach would be to target all 40,000 people using the stadium’s Jumbotron, as if they are valued car renters. Meanwhile, the special relationship with the valued customers is being ignored.

In short, this example demonstrates that in terms of customer value, there is a “value spectrum.” Organizations have lots of customers who are not worth very much and a few who are worth a great deal. The problem with the traditional approach using mass media buys is that the marketing budget has been equally spread across all of the customers rather than being aimed at the most valuable ones. One-to-One Marketing is all about spending the most resources on the most valuable customers (MVCs).

I touched on this point earlier, about how 1to1 Marketing is changing the way we measure the success of an enterprise. For example, there are the traditional standard measures such as return on investment (ROI) and return on equity (ROE). We know how to measure a company’s market share. Are these true measures of success anymore?

What about if we look at success in terms of customer equity? This would bring into play such success measures as share of customer, lifetime value of that customer’s business and customer retention rates. Is it okay for an enterprise or a product to be unprofitable as long as every individual customer is profitable?

The 1to1 enterprise first rank orders its customers by value and identifies its first-tier customers. Then those customers are differentiated by their needs. This will help to rationalize the investment and ensure that there is a direct relationship between customer value and business investment.

Under the traditional marketing approach we would flood the market with information, customers would sort through it, then they would take action by either purchasing a product or service, or not. The 1to1 enterprise would work differently. First, the enterprise would use the information it has gathered to figure out what each customer needs next. Based on that it would then produce the required product or service. This way a 1to1 enterprise controls its own destiny, while creating satisfied customers at the same time.

A graphic example of this principle at work is the Streamline company of Boston. It has made mass customization the essence of its operations, where products/services are developed and delivered for each individual customer. Streamline is an alternative retailer that has a warehouse instead of stores. It sells household products and services such as: groceries, dry cleaning, pharmaceuticals, cleaning supplies, office supplies, videos, film processing, and postage stamps, and delivers them direct to the customer’s home. Special compartmentalized supply cabinets are set up at the customer’s residence. Only the customer and Streamline have access to the cabinets. Standard delivery is once a week, but more frequent arrangements can be made. Streamline develops customized shopping lists based on the actual behavior of its customers. Customers pay a one-time setup fee of $49, and a weekly delivery and service-charge of $30. Streamline buys wholesale and delivers retail, and prices are about the same as they would be at a grocery store – although the margins are higher. Using this system, customers get exactly what they want, when and where they want, at a reasonable price. This version of 1to1 Marketing has been very successful for Streamline. At last count, the company’s share of customer is 85% for groceries and nearly 100% for dry cleaning. Its yearly revenue per household is $6,300 – nearly 1/3 of that as profit.

Successful 1to1 Marketing depends on three key attributes: product quality, service quality and fair price. But this combination is now a requirement and no longer a differentiator, since many companies have adopted Total Quality Management. The relationship is now based on who has, and uses, the most information about the customer, rather than on who has the most customers. In the 1980s TQM became a minimum requirement for success. It was a given in any discussion about customer retention and increased customer value. At Marketing1to1 we believe that, in the 1990s and beyond, competitive success will depend on the best “quality of relationship.” Customers will be the ones defining success.

Implementing Marketing1to1 in an organization involves a different way of looking at things. First, one must set objectives based on individual customer information. Cost-efficient ways need to be developed to open a dialogue with the customer that will lead to product definition and development. This relationship should span across the spectrum of products and services. The time-frame will be longer, too, since the intent is to form a long-term relationship. In an organization, this will mean moving up the organization chart and looking at cross-functional alliances among product and program managers from other areas in the company. This broader vision approach is required to lead the way in a 1to1 Marketing world.

Practically speaking, to implement 1to1 in an existing organization, customers must first be grouped into portfolios. Each portfolio should contain customers with similar needs. Traditional customer managers will become the “portfolio managers” responsible for managing the long-term relationship with the valued customers, as well as the asset of lifetime values – of the customers assigned to him. Customers with similar characteristics are grouped together, so we can learn enough about a portfolio to have an informed “starting point.”

Initially there may be some confusion between the traditional market segment approach and 1to1. Under traditional market segments all customers in the segment would be treated in exactly the same way. In 1to1 Marketing, experience is used as a starting point for the portfolio groupings. However, in the final analysis a customer can be in more than one segment, but in only one portfolio.

The first part of the battle is getting a quality customer database into place. The second half is developing and implementing a 1to1 strategy. With a marketing database installed, “product” managers become “capabilities” managers. Under the traditional DBM approach there is usually excellent data in the database that unfortunately often results in undifferentiated blanket junk mailings that tend to annoy customers. With 1to1 there is still the same excellent data, but this time the customer managers act as “gatekeepers” taking pains to “delight” the customer with controlled and specifically targeted mailings that address the actual needs of the recipient and encourage a dialogue.

The paradigm shift is fundamental when it comes to customer information. To the traditional marketer, a primary value attribute of customer data is its resale value. For example, take the case of the customer who buys a king-size bed and then buys $1,000 worth of king-size accessories from a cataloguer. The cataloguer then turns around and sells the name and address to a dozen other bed and bath cataloguers for a dime each. So he makes $1.20 on the name of a $1,000 customer who could well have the potential to buy the linens for bunk beds in the future.

In Marketing1to1, the customer information becomes the key corporate business asset, constantly being refined and enhanced to improve the value of the relationship with the customer. As the saying now goes, “1to1 enterprises buy lists, they don’t sell them.”

To be successful at Marketing1to1 there are three critical things we need to know. Who are the most valuable customers (MVCs)? Who are the second-tier customers (STCs)? Who is not worth having as a customer? One of the critical new marketing tasks is to determine how to find this information. In yesterday’s marketing, we created one-way messages to customers. In tomorrow’s marketing we will be figuring out how to generate feedback from our customers so that we may better identify their needs and understand their true value.

This new dialogue with the customer requires continuity. We can start by using what we already know about the customer. What have they already told us via their behavior? What have they said “no” to? This information is a starting point for continuing what now must become an ongoing conversation between the enterprise and the customer. Every enterprise should ask itself, “Is our memory as good as that of our customers?”

In these days of the internet it is important not to underestimate the power of the worldwide web. In many ways the internet is a marketer’s dream. Never have we had such a powerful tool for individual dialogues with vast numbers of customers and potential customers. According to a recent Dataquest survey, by the end of 1997 there were 82 million personal computers hooked-up to the internet and over 20% of the US population had access to the web. Over one third of all telephone calls made in California these days are internet calls. It is estimated that by 2001, more than one billion people worldwide will be online. This is a very powerful tool for communications with customers and it will only get more powerful as the technology is further developed and increasing numbers of customers become available through this medium.

As I have pointed out, relationships are key to the 1to1 Marketing enterprise. Dialogue with the customer gives us critical information. Information leads to knowledge about the customer and his needs. Serving the customer’s needs in a 1to1 fashion stimulates loyalty. Loyalty leads to increased and repeat business, resulting in more income for the enterprise. In short, dialogue equals profits.

The communications media used by 1to1 marketers must be interactive, addressable by the customer, and widely accessible. These media must necessitate explicit bargains between the customer and the enterprise whenever possible.

The question now arises: what will customers say once we allow them to talk back? Of course, they’re going to complain! It seems to be part of the human condition. There’s the story about the little boy who never said a word until the age of three. Then his first utterance was a complaint. There was a story in The Wall Street Journal not long ago about some CEOs whose companies had installed 1-800 customer feedback lines. A number of them pulled the plug when they realized that all they were getting was complaints.

Traditional mass marketers would see these complaints as nuisances. On the other hand, 1to1 marketers welcome complaints as “collaborative opportunities.” That is, now that we have the customer’s feedback, how can we improve our product or service to eliminate the complaint condition. 1to1 marketers are in the “complaint discovery” business. In the Ritz-Carlton Hotel chain, the use of the word “complaint” isn’t used – instead, they see this type of customer feedback as “opportunities with patrons.”

One-to-One Marketing isn’t about every customer. Not all customers are interested in collaborating. However, it’s the ones that are interested in a relationship that 1to1 marketers are most interested in, since they are the ones who will show us the road ahead. What we are talking about here is not 1to1 relationships with 15 million customers, it is about treating different customers differently.

If we look at our customer base initially, we realize we have a lot of customers who are not worth very much, and a few who are worth a great deal. These most valued customers will be the beginning of a firm’s 1to1 efforts. They are put behind a “picket fence” and the firm pursues a 1to1 learning relationship with them. The challenge for the 1to1 marketer is to gradually move this picket fence further into the traditional mass marketing group as the costs of interactivity and mass customization decline.

The customer manager is the one most responsible for moving the “picket fence.” His objective must be that once a customer buys from the enterprise, she will never buy from anyone else. There are ways to measure the relative success of a customer manager. High potential customers can be identified at the outset, and their behavior monitored over time. Is share of customer increasing? Has volume per customer increased? Has the customer’s lifetime value (LTV) increased? Is the customer retention rate higher? These are the typical performance measurement indicators for a 1to1 customer manager. It should be noted that, over time, a customer may be moved from one portfolio to another as his needs change. This is usually a natural progression and should be totally transparent to the customer.

Finding products for customers can be a challenge for a customer manager. Mass-customization, which I described earlier on using the Streamline example, is one way to market 1to1 to many customers. Cross-selling is another approach that has been used successfully by many companies. Pitney-Bowes and 3M come to mind right now as two firms that have developed industrial products with separate sales forces and have then successfully restructured the sales force compensation in order to minimize cross-selling across product silos. And, strategic alliances between companies offering complementary products and services to the customers of their partners are becoming commonplace.

The best customer managers will become increasingly familiar with the needs identified by their most valued customers, both explicitly and implicitly, and they will know what to do next for each customer. Traditional companies find customers to buy the products that they have developed. The 1to1 enterprise uses customer information to find products for customers. There are four key strategies for becoming a functioning 1to1 enterprise:

• Identify customers individually and addressably – so you recognize a customer at every contact, through any medium or location.

• Differentiate your customers individually by their needs and their relative value to the enterprise.

• Interact with individual customers cost-effectively and efficiently.

• Customize some aspects of the enterprise’s behavior in order to make it easier for your customers to stay than it is for them to defect to a competitor.

Where can your enterprise make progress? You may not make it all the way to pure 1to1 Marketing, but every move in that direction will help you compete more successfully. To be successful, the 1to1 enterprise ensures that every interaction with a customer improves its service of that customer’s needs. That way, you will incrementally become more valuable to the customer as the relationship develops over time. It will very quickly get to the point where it will be a very unattractive proposition for the customer to switch because it would take a great deal of time and effort on their part to get equivalent understanding and service from someone else.

With 1to1 Marketing, brand is still in the picture, but with a slightly different spin. Traditionally, products, services and stores become the brands which help sell to the least valuable customers. With 1to1 Marketing, you brand the “relationship” in order to sell more to the most valuable customers. In simple terms, every human contact with a most valued customer becomes a brand. Traditional brand managers build brand equity. A 1to1 customer manager builds “customer equity.”

As we approach the millennium, it’s not a moment too soon to begin your company’s transition to 1to1:

• It is critical to focus as quickly as possible on those customers that are the most profitable (the MVCs). You can later move the “picket fence” from this position of strength.

• Today’s technology is changing rapidly. One needs to stay on top of this technology for reaching customers, because the competition will be using it.

• Globalization of business is no longer a choice, it is reality. Someone, somewhere in the world already has a more flexible package to offer your customers than you do, and right now they want your MVCs.

In closing, I would like you to know that the concept of 1to1 Marketing is not new. A Japanese company practicing Toyama No Kosuri-Uri has been selling medical supplies house to house since 1752. Since that time, it has been operating with a written customer database called daifuku cho, and has some customers today whose ancestors were customers 250 years ago. Definitely an early prototype of 1to1 Marketing.

Remember, in the long-run, products come and go – only customers are real. As André Gide once said, “One does not discover new lands without consenting to lose sight of the shore for a very long time.”

GLOBALIZATION AND THE PETROLEUM INDUSTRY IN CANADA

James Stanford
President & CEO, Petro-Canada

The Canadian Club of Montreal, April 7, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

I know that global competition is not a new concept for this audience. Montreal and Quebec firms have been on the leading edge of Canada’s growing role in the world economy, showcasing our technology and carving out markets for our products and services around the world. Bombardier, Teleglobe, SNC Lavalin, Alcan, Canam Manac and others symbolize Canada’s success in competing in today’s global marketplace.

I have the good fortune to be CEO of a leading company in a leading Canadian industry. The oil and gas industry is a powerful engine of growth in the Canadian economy. The low-cost energy we provide is a source of competitive advantage for our industries and prosperity for many of our citizens. It would be nice to think that the petroleum industry’s strong contribution to the Canadian economy will continue unabated, and that our economy will continue to grow and to provide a high standard of living for all Canadians. But unless we show wisdom in addressing some of the issues we face, it may not work out that way.

I will talk today about the petroleum industry, as well as the role my company plays, but let me stress right up front that my primary theme today is one of caution. Like many of other industries, the oil business operates in a global marketplace in which competitiveness is the key to success-and indeed survival. I am deeply concerned about a trend toward unilateral regulation, a trend which imposes costs on industry which are often unnecessary, and which poses a clear threat to Canada’s position in the global economy.

I have particular concerns about my own industry and the impact of some legislative initiatives on the long-term viability of some of our operations, including those in this province. Regulatory burden is an issue which affects many of us in this room, and, indeed, business leaders across Canada. Escalating costs imposed by regulation threaten the international competitiveness of my business, your business, and our country. The intent behind regulation may be honorable and praiseworthy. But too often the means chosen to reach the objective are inefficient, ineffective, heavy-handed and unnecessarily costly. There is a very real risk, if we go too far down this path, that we may inflict severe and irreparable harm on the Canadian economy and our competitive position in world trade.

I propose a more collaborative process of consultation on these complex issues to find effective ways to achieve valid public goals without putting our economy at risk in the process. Consultation is the Canadian way, and the best way to ensure we arrive at practical solutions that reflect the interests of all Canadians.

If Canadian industry is to maintain its competitive position in the years to come, we will have to overcome some major challenges, many of them related to protection of the environment. These challenges are global in scope and Canada’s response will affect our ability to compete globally.

According to a 1996 study by Wright Mansell Research, the petroleum industry provides direct and indirect employment for some half a million Canadians and contributes 5% of our Gross Domestic Product.

Approximately $5 billion in exploration and production revenues go to governments each year in the form of taxes, royalties, rents, and payments to acquire exploration rights. Taxes on fuels, which make up more than 50% of the pump price here in Montreal, generate an additional $12 billion a year for governments.

Increased exports are behind most of the growth in the Canadian economy, and the petroleum industry has been a major factor in that growth. In 1996, the industry produced $30 billion worth of crude oil and natural gas, more than enough to meet Canada’s needs. In fact, exports of oil and natural gas accounted for a net surplus of more than $10 billion last year, nearly one-third of a record merchandise trade surplus of $34 billion.

Our industry is a global one. In the past few years we’ve witnessed the opening of huge oil producing regions in the former Soviet Union, Asia and Latin America. Similarly, in the refining and marketing sector, competition takes place on a global scale. The world’s three major refining centers, the US Gulf Coast, Western Europe and Singapore, establish world petroleum product prices.

Western Europe has surplus gasoline capacity and exports some 350,000 barrels per day of gasoline, about half of which finds a home in Eastern Canada and the US. These imports establish pricing levels with which Canadian refiners must compete, especially in a port city like Montreal. There is now significant refining over-capacity in Asia too, creating further potential offshore competition for Canadian refiners.

Our exploration, development and refining sectors must compete for capital against these global opportunities. And, as every business leader knows, money will go where it can earn the greatest return. As we seek to address legitimate concerns such as air and water quality, we must take care to find cost-effective solutions which do not price our industry out of the market. To speak bluntly, if we can no longer refine oil competitively in Canada, global suppliers will be happy to provide refined product at the expense of Canadian jobs, earnings and economic growth.

Our vision is for Petro-Canada to become the preeminent Canadian integrated oil and gas company. Petro-Canada is the only oil company controlled by Canadians with a national presence in refining and marketing. Most of our business is within North America, but we do produce oil from the Norwegian North Sea and Algeria. We are also a successful global marketer of lubricants, where a recent expansion of our plant has positioned us as a low-cost, world-scale supplier of white oils and specialty lubricants.

One of our main businesses, refining and marketing, is particularly important in Montreal. Montreal is headquarters for our refining and marketing operations in Quebec and Atlantic Canada. We have a major refinery here in Montreal, one of three in the province. We have a 17% share of the retail gasoline market in Quebec, and serve commercial fleets through 20 Petro-Pass truck stops. We are partners with several small businesses that supply home heating oil to customers throughout the province. Petro-Canada provides direct employment in Quebec for 600 people and, through our marketing network and suppliers, indirect employment to an estimated 4,700 more.

On the marketing side, we continue to increase our presence. We are investing in revitalizing our retail network with a sleek, new site design, building our customer base through initiatives such as the Petro-Points loyalty program, and continually enhancing our product and service offering. We have also recently concluded a partnership with a local entrepreneur to operate an additional 82 stations from Rimouski to Gaspé. This brings the total number of stations flying the Petro-Canada flag in Quebec to more than 500.

We are proud of our contribution to the Quebec economy. But being a refiner on the Eastern Seaboard does bring some challenges. As I mentioned earlier, European refiners export substantial volumes of gasoline into Eastern Canada and the US. Wholesale prices in Quebec are essentially established by these imports. Canadian refiners are therefore competing directly with much larger refineries in the US, Europe and the Caribbean. Our facilities, built for the relatively small Canadian market, do not have the economies of scale of many of our offshore competitors.

The profitability of refineries in Quebec and Atlantic Canada has historically been well below the benchmark rate of return on capital employed of 10%, even though the Canadian industry has achieved operating cost efficiencies comparable to US refineries of similar size and configuration.

However, refiners in Quebec and Atlantic Canada will have to spend at least $85 million in capital investment, and an additional $30 million a year in operating costs, just to meet currently planned environmental legislation aimed at reformulating motor fuels. Targets include the reduction of sulfur in diesel, reduced benzene levels in gasoline, and the removal of MMT (methylcyclopentadenyl manganese tricarbonyl).

We will be challenged to meet these requirements and remain profitable as we compete against low-cost imports. Further government initiatives which would place additional financial burdens on this industry need to be contemplated very carefully, lest we reach a point at which it is no longer economic to refine crude oil in Quebec, or indeed in Canada.

By way of example, I would like to discuss briefly three recent initiatives by governments which would have the effect of increasing costs of our industry, and therefore for our customers.

First, Bill C-29, currently before the Senate, is a bill to prohibit importation and interprovincial trade of MMT, an additive which has been used for 20 years by Canadian refiners to boost the octane in unleaded gasoline.

Health and Welfare Canada and Environment Canada have reviewed MMT and found that it does not create a health hazard or harm the environment. Nevertheless, automobile manufacturers claim that MMT causes the emission-control systems in newer vehicles to malfunction, even though tests conducted by our industry and others show no such problem.

Our industry has offered to fund its share of an independent scientific evaluation to determine, once and for all, what effect MMT has on the quality of our air and vehicle emission systems. The refining industry has agreed to accept the conclusions of such a study as binding. Seven provinces, including Quebec, also support the need for further study on MMT. Unfortunately, the federal government rejected the proposal for a study.

Bill C-29 is also problematic in that it is trade legislation that attempts to resolve what is perceived to be an environmental issue. Banning the importation of MMT may breach provisions in the North American Free Trade Agreement. Banning interprovincial trade in MMT may contravene the Federal Provincial Internal Agreement on Trade. Ethyl Canada, the manufacturer of MMT, is seeking $200 million in compensation for loss of business, while the provinces are expected to launch a challenge on trade or other constitutional grounds.

Surely an independent study is a logical, reasonable approach to resolve the considerable controversy brought about by this legislation. Surely it makes sense to get some answers on MMT, answers we can all agree on, before requiring an expensive solution to a problem that may well not exist. Our industry is prepared to live by those answers. If there is an environmental issue, then let’s settle it as an environmental issue, not a trade issue.

Bill C-74, which proposes changes to the Canadian Environmental Protection Act, is another telling example of how legislation threatens our competitive position, and not just for the petroleum industry. Many of your companies may also face increased costs due to the potential this bill creates for arbitrary regulation, without due process, with no appeal and without regard for the economic consequences of those regulations. There is tremendous danger in this legislation of arbitrary actions, which could cost Canadian industry billions of dollars and thereby severely erode our competitive position.

One change, for example, would see the federal government assuming unilateral power to dictate automobile emissions levels and even the formulation of the products we produce. There has been talk of mandating high-cost California-style standards of reduced sulfur content in our gasoline. Such standards were developed in response to the unique geography and climate and the density of vehicles in the Los Angeles basin. To duplicate these standards would cost Canadian refiners an estimated $1.7 billion, raising costs for all Canadian industries and consumers – yet such Draconian measures may not be necessary at all to achieve high air quality in Canada.

I do not for a moment deny the importance of protecting Canada’s environment. As CEO of Petro-Canada, I believe unequivocally that it is plainly in our long-term interests and in the interests of our shareholders to ensure a clean and safe environment for our customers, for the communities in which we operate and live, and for all Canadians-now and in the future. We will not sacrifice environmental protection for short-term profit. But let’s deal with environmental issues sensibly, with full consultation. Let’s make sure we solve real problems, cost-effectively, without jeopardizing the economic well-being of our country.

This bill should be amended to provide for a collaborative approach to finding solutions through consultation, and to better reflect government’s stated objectives such as the streamlining of regulations, reduced federal provincial overlap, transparent regulatory standards and an appropriate appeal process.

I would like to touch on one last example of government intervention, in the area of gasoline pricing. In the past few years, we’ve witnessed numerous gasoline pricing inquiries, at all levels of government. Just a couple of weeks ago, the Bureau of Competition in Ottawa confirmed what earlier federal and provincial investigations already had determined, that Canadian gasoline markets are competitive and there is no collusion among oil companies to fix prices at the pumps.

Last year alone, the federal government, British Columbia, and New Brunswick initiated investigations to determine if gasoline prices were too high. Simultaneously, Nova Scotia and Quebec held investigations into allegations that prices were too low.

With the sole exception of the recent Quebec inquiry, repeated federal and provincial investigations over the past 20 years have concluded that the retail gasoline market is competitive, and that intervention into the gasoline market is unwarranted.

Quebec’s investigation was prompted by last summer’s severe price war, which gained a lot of attention and led to legislation to establish a new regulatory board. This board will be responsible for setting a minimum margin between the wholesale and retail price of gasoline as well as monitoring those prices. By guaranteeing a minimum margin, this legislation shelters less efficient marketers from competition. It forestalls the rationalization and restructuring which is happening elsewhere in the country-and indeed around the world-restructuring which is necessary to make the business efficient and competitive. And it will almost certainly result in higher prices for consumers.

Petro-Canada does not support price control legislation. We believe market forces and open competition should determine the final price. Price control leads to higher prices at the pumps. Nova Scotia deregulated gasoline prices in 1990 and prices dropped.

These recent examples suggest the impact on the cost structure of our industry of well-intentioned but misguided legislation and regulation. To the extent these costs are passed on to our customers, including pretty much all of Canadian industry, this approach poses a very real threat to Canada’s global competitiveness.

I am really concerned, though, when I think of how Canada may respond to a current challenge of major proportions to our environment and to our economy. I am referring to the issue of global climate change, and the pressure on governments around the world to do something about it. Here Canada could set itself up for economic misfortune, if we take an arbitrary approach based on adopting politically attractive positions, without regard for the economic costs.

I will not dwell on the details of the scientific debate about global warming. The debate will continue, but I have no intention of using scientific uncertainty to justify inappropriate action. It is surely prudent to take precautionary action today to reduce the impact of our human activities on our atmosphere, given the potential long-term effects of climate change.

In Canada, many industry and government sectors are already taking voluntary action to reduce emissions and improve energy efficiency, an approach which is good for business and good for the environment.

For example, about 80% of Canadian oil and gas producers have signed on to the federal government’s Voluntary Challenge and Register. Since 1995, through actions chosen on the basis of impact and cost-effectiveness, our companies have been able to reduce total greenhouse gas emissions per unit of production by 10%. In the refining sector, between 1990 and 1995 the major refiners reduced CO₂ emissions by 14% and cut energy consumption by 16%. That’s the power of voluntary action.

The federal government has made a commitment at the 1992 Earth Summit in Rio to reduce Canada’s greenhouse gas emissions to 1990 levels by the year 2000. While Canada will not likely meet that aggressive target, we are making significant progress. Current estimates suggest Canada’s greenhouse gas emissions in the year 2000 will exceed 1990 levels by 8.2%. The US, by comparison, is projected to exceed by 16%.

In fact, only two countries are likely to meet that overly optimistic target of stabilization: Germany, by closing antiquated factories in the former East Germany; and Britain, by converting old, coal-fired plants to natural gas from the North Sea. Canada, with our modern plants and high standards, has no opportunity to effect such a dramatic drop in emissions so quickly.

The international community is meeting in Kyoto this December to agree on legally binding targets for greenhouse gas reduction and measures to enforce those targets. Such measures could result in penalties, such as trade sanctions, if commitments are not met. Various targets and revised time lines are being proposed, including stabilization at 1990 levels by 2005 or 2010, and a 10 to 15% reduction by 2010 or 2020.

If we think only of the environment, these targets sound attractive. We as Canadians like to think of ourselves as world leaders in “doing the right thing,” and it will be tempting to go to Kyoto and support these targets. I am asking that we stop and consider the impact such measures would have on Canada and Canadians, particularly if common targets are adopted, applying equally to all industrialized countries.

Canada is particularly vulnerable to across-the-board targets. We are one of the highest per-capita energy users in the world. But we are by no means inefficient energy users. Our economy has a high proportion of energy-intensive industries, such as resource extraction, often consuming energy here to produce products for use in other countries. Our vast distances require energy for transportation. And we need to keep warm in the winter. Our greenhouse gas emissions are high on a per capita basis, and rising on an absolute basis due to an expanding economy fueled by exports and a growing population boosted by immigration.

Stabilizing or reducing emissions within Canada will be tough. And even if we succeed, the impact on the overall problem will be small. Only 2% of the world’s man-made CO₂ originates in Canada. Drastic action to reduce Canada’s emissions-and I stress the word drastic-would do little to solve this international environmental dilemma but could most certainly inflict severe damage on our economy. Indeed, independent studies indicate Canada has more to lose than any other country from an across-the-board agreement on emissions reduction, with the possible exception of Australia.

A 1996 study, by DRI McGraw-Hill in Toronto, produced some alarming conclusions. To merely stabilize our greenhouse gas emissions at the 1990 level would require a 14% decrease in primary energy use. Petroleum use would need to decline 18% and natural gas by 15%. To go beyond stabilization, for instance a 20% reduction in greenhouse gases over 1990, our primary energy use would have to fall by 27%.

Our refining output would drop by some 270,000 barrels per day, or 27% of current Canadian refining capacity. To put it into perspective, that would mean closing three refineries the size of ours in Montreal. But what would it mean for your industries? How would you cope with a mandated reduction in energy use on that scale? Energy efficiency measures can only do so much, and they are costly. Major reductions would mean scaling back production, cutting back exports, raising costs and pricing ourselves out of world markets.

To achieve stabilization at 1990 levels, we would have to limit growth in our gross domestic product to 0.3% annually up to the year 2000. For a 10% reduction by 2010, we could grow by no more than 1.4% a year. The DRI study suggests the result would be a cumulative loss to our economy of $28.5 billion over the next 10 years.

So what is Canada’s appropriate contribution to addressing the issue of climate change? And what position should we take in Kyoto? Canada’s top priority should be to achieve differentiated targets that recognize Canada’s special circumstances, including our export-driven resource-based economy, our cold climate, our vast size and our growing population. We must oppose across-the-board targets which will damage our economy and our competitive position. Our negotiators must fully understand the economic consequences of the proposals under discussion, and not accept an agreement that would hurt Canada disproportionately and put us at a competitive disadvantage.

Instead, let us champion an agreement that is sensible and recognizes that nations are in different situations. Action is needed on climate change, but the burden must be shared equitably, and not just by the present industrialized countries. The greatest leverage in controlling greenhouse gases is not in drastically reducing emissions from already efficient countries like Canada. It lies in helping the rapidly industrializing countries of the developing world to restrain the growth of their emissions by providing advanced technology. There are great opportunities for Canada to export the state-of-the-art technologies developed for our industries to improve our own energy efficiency and emissions control. As we enter the upcoming negotiations, let’s look for opportunities to win in the global marketplace, by contributing appropriately to the resolution of the issue while still protecting our legitimate interests

Let us also make sure we get the best “bang for the buck” from the investments we will have to make to reduce emissions. Developing and applying new, more energy-efficient technology may provide a much greater benefit than just curtailing current operations. That will take time. And linking investments to the normal replacement cycle for manufacturing plants could bring the desired results while substantially reducing the burden on Canadian industry.

As business leaders, we must look at these issues today, understand what the Kyoto proposals mean for our industries and our country, and work with the government to achieve a practical, responsible and positive Canadian position in these negotiations. At the same time, we in industry must support voluntary programs, such as the Voluntary Challenge and Registry, to reduce emissions.

The petroleum and other industries have been strong supporters of the Voluntary Challenge, but it needs greater support from all segments of Canadian industry if we are to make progress in reducing greenhouse gas emissions. Only by achieving measurable progress through voluntary initiatives like this will industry have a credible voice in shaping Canada’s approach to this global problem.

A strong oil industry plays a major role in the health and vitality of the Canadian economy. We would like to continue playing that role. Canadian business faces major challenges, now and in the coming years, in maintaining its competitive position in the international marketplace. Ill-considered attempts at unilateral regulation can threaten our competitiveness by adding unnecessary costs. I urge that we return to a truly Canadian process of consultation to find sensible, practical solutions in a spirit of collaboration. Most urgently, in the few months remaining before the Kyoto conference in December, let us work with government to develop a Canadian position that demonstrates responsible leadership on this important issue.

Let’s take action, but let’s do it responsibly. Sensibly. Collaboratively. If the process of mutual trust, consultation and open communication fails, so too does our economy.

POLITICAL UNCERTAINTY, AND A HIGH-TECHNOLOGY BUSINESS IN QUEBEC

John W. Hooper
President & CEO, Phoenix International Life Sciences Inc.

The Montreal Board of Trade, Montreal, February 13, 1996
Published in The Corporate Report No. 17 (April 30, 1996)

Phoenix International Life Sciences is a contract research organization serving the drug industry. Our company was founded in 1989, and has grown from the original 20 employees to almost 1,000 employees in less than seven years.

At the time Phoenix started in business, the advantages of locating in Quebec were numerous: refundable tax credits on unfunded R&D and on contracts from outside Canada, the offer of a loan from the Quebec government’s Société de Développement Industriel on excellent terms, Quebec’s proximity to the US market, salaries paid in Canadian dollars, relatively inexpensive space, the availability of a large pool of well-educated technical labor and the fact that Montreal is a pleasant and inexpensive place to live, an important factor in attracting the top-level scientists needed to make Phoenix successful. However, there were some disadvantages to establishing a contract research organization in Quebec. Quebec was considered to be located in the “wrong” country (90% of Phoenix’s business comes from the USA). It had the “wrong” working language. Canada had restrictive drug regulations for clinical research. And there was potential for political problems in Quebec that could negatively impact client contracting decisions and hamper our ability to recruit high-ranking scientists. On balance, the advantages offered by Quebec, particularly refundable R&D tax credits which made it the most favorable fiscal climate in the Western world for R&D-based companies, overwhelmed the disadvantages of establishing a business here.

Since 1989, government policies have begun to erode the advantages of locating in Quebec. Innovative, entrepreneurial scientists are the reason we were able to sell the concept of Phoenix to investors. They are also the reason for our success and the primary prerequisite for future success. High-level specialists in narrow fields are rare in Canada and Quebec. As a result, in our Montreal operation 54% of our high level-scientists with doctorates or 10 years’ experience are of foreign origin, while only 36% are from Quebec and 11% from elsewhere in Canada. In the future, while we expect to promote from within, if we are looking for people with extensive experience (as is usually the case) we expect to recruit many, or even most senior executives and scientists almost exclusively from the USA or Europe. But political issues are seriously hindering our ability to recruit immigrant scientists.

The issues are now numerous. The language of their children’s education on many an occasion has been a deciding factor in whether or not to accept a job in Quebec. The spouse’s job is often important and the need for French language skills often poses a problem. Political stability is important for immigrants, particularly those who fled political unrest. Canadian, and especially Quebec taxes, tend to rule out US scientists, who pay significantly lower taxes at home, and immigration fences are up for both scientists and spouses.

This is in a climate of increased competition for scientists worldwide. Western Europe offers better vacations and fringe benefits, the United States pays higher salaries and taxes residents less, and both are politically more stable than Quebec and bear no education restrictions. Canada does have an appealing international image (despite the weather!) and a good, but not outstanding, scientific image. It’s Quebec that has a harsh image and is seen as out of mainstream North America. It’s not as well known as the rest of Canada and its desire for separation from Canada is not understood by people from other countries.

We promote Canada to senior level potential employees by stating that it is, according to the United Nations, the best place in the world to live. This frequently produces the response: “Then why do Quebecers want to separate from the best country in the world?” This question is often the beginning of the end of the interview, for it leads inevitably to discussion of language laws and the education of the candidate’s children.

The following stories illustrate how difficult it now is to recruit at senior levels in Quebec. Recently a top US executive with a Ph.D. was interviewed by Phoenix for a position as senior vice-pesident. The candidate was clearly superior to all others, and possessed the qualities required for succeeding the President. While the candidate expressed great interest and agreed to the remuneration offered, he called off his second visit as he said he was pursuing a better opportunity. It was later discovered that in fact he turned down Phoenix’s offer because his daughters would need to pass French examinations to graduate from high school!

In another example, an unmarried couple, both Ph.D.’s, came from the UK for an interview. The woman had two young children from a previous marriage. The first day of their visit, the lead story in the news read something like “Child of blended family from US forced to go to French school!”

In addition to the difficulty we are experiencing recruiting senior scientific staff, changes in government policy, uncooperative civil servants and uncompetitive government regulations are also making it more difficult for Phoenix to operate.

As stated earlier, Phoenix is in Quebec because of its refundable tax credits. When we took our company public at the end of 1994, our projections assumed no change in Quebec tax credits. Four months later, Quebec changed the credits to make ours largely nonrefundable. This change has significantly and unexpectedly reduced cash flow, and greatly reduced our ability to invest and create new jobs. We created over 400 jobs in Montreal between 1994 and 1995. We intend to create only 40 jobs in 1996. Obviously governments must have the flexibility to change tax legislation. However, the arbitrary cutoff, without warning, of a longstanding incentive can only reduce industry’s faith in future government promises of incentives. Surely, if removal of this incentive was deemed to be in the public interest (a position we at Phoenix feel is totally incorrect), it could have been phased out with adequate warning, thus allowing business to make appropriate plans in an orderly manner.

As for uncooperative civil servants – in the summer of 1995, we hired a top scientist from the UK accompanied by his wife and daughter. His wife, an expert in pharmaco-kinetics who worked five years for Glaxo, the world’s largest drug company, applied for a managerial job at Phoenix in pharmaco-kinetics. Phoenix could greatly benefit from her expertise, and we have been unable to find someone with her experience in Canada. However, since she is not a landed immigrant, Employment and Immigration Canada will not give her a work permit. What a tragic waste of talent! And just think of the jobs her employment with Phoenix could have created, based on five to 15 non-supervisory employees to every managerial employee.

Uncompetitive government regulations forced Phoenix to open a clinic in Cincinnati, Ohio, rather than Montreal. In order to obtain government authorization to start a clinical study in the US, there is a waiting period of 30 days; in the UK 0 days. In Canada the wait is 60 days and winds up effectively being 100 days! By the time we start the study in Canada, it would be complete in the US or the UK. This regulation excluded Phoenix from a key business segment and therefore forced us to invest CAD$13 million and create 165 jobs in the US rather than Canada. Our experience in Cincinnati has been very beneficial. We find both the government and the people there very friendly, and eager to succeed, and there is no political agenda hanging in the air. We do not regret going to Cincinnati, but if Canada adopted UK regulations, Phoenix would immediately build another clinic in Montreal to supplement the existing Cincinnati and Montreal operations.

Government is impacting negatively on high-tech business. It now takes more time to get things going, there is less investment taking place, there’s slower growth, fewer jobs and therefore less taxes being collected. Why are our governments giving with one hand and taking with the other, or giving today and taking tomorrow? The answer must be that either the public does not know or sees no cause for concern.

Cleveland in the 1970s is a good illustration of what could happen – and probably is happening – to Montreal. In the 1960s and 1970s the world changed and Cleveland did not change with it. Some 130,000 jobs were lost over twenty years and Cleveland experienced a population loss of 210,000. In 1977, a new city mayor, elected on a populist ticket, removed incentives for business and spent large sums on sweeping social programs (sound familiar?) and in 1978, Cleveland became the first major US city to default on its debt since the depression. At the end of that year, the CEOs of Cleveland’s 50 largest companies formed “Cleveland Tomorrow.” With their help and resources, this organization worked with politicians who understood economic development to restore Cleveland, and successfully campaigned for removal of the previous administration. They took charge of their future, and at the time they made the comment: “This is enough. We are not going to let this place be ruined by the politicians.” The Cleveland businessmen’s initiative worked, although it took some years to restore prosperity to Cleveland. In 1989, Cleveland’s bond rating was restored and in 1993, Cleveland won an unprecedented fifth All-American City Award.

Faced with a similar situation here in Montreal, I propose we form an organization of CEOs and public figures, which could be called the “Movement for Montreal Prosperity.” This organization would reveal to the public the impact of government policies, past, present and predicted future. It would be fair and constructive, encouraging and proposing positive initiatives. The mandate of this organization would be to tell the truth and back it with readily understandable data. Possible objectives would be to keep Quebec in Canada, or at least keep Montreal in Canada, link proposed changes in business related government policies to jobs, tax revenues, R&D and Quebec’s/Canada’s image, pre-empt proposed changes in government policies that negatively impact on our ability to profitably grow our businesses, publicly recommend to government new policies that will help us grow our businesses and create jobs. All this for the ultimate benefit of Montreal, Quebec, Canada and its citizens.

“You name me a company with pan-Canadian or North American interests, and you’ve named a company looking at moving out (of Quebec),” said Business Week, February 2, 1996. On January 29, Maclean’s said: “Canadian CEOs just don’t do that sort of thing (speak out on the impact of Quebec separation). They squirm on the fence. Or they make funny throat-clearing noises.”

I say, the time has come for all of us to speak out and fight for political ideas and policies that will enhance the standard of living for all Quebecers, keep businesses in Montreal and attract new businesses to our city and province.

BUILDING BRIDGES TO ASIA: THE ROLE OF MINING IN APEC

Robert M. Franklin
Chairman, Placer Dome

The Board of Trade of Metro Toronto, June 18, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

The Pacific Ocean is the largest physical unit on earth. At 166 million square kilometers (64 million square miles), it covers about a third of the surface of the globe.

From Cape Horn to the Philippines, the track of the first crossing of the Pacific by Magellan in 1520 is 13,000 miles or 21,000 kilometers. Measuring the other way, from the southwest to the northwest, from Tasmania to Alaska is 10,000 miles or 16,000 kilometers.

Until two centuries ago, most of the inhabitants of the lands on the rim of this great ocean had little, if any, knowledge of each other. Now there are 27 nations ranged around the Pacific, from New Zealand and Australia in the south, north to China, Japan and Russia, and on the eastern rim from Canada and the United States to Central and South America.

These countries are home to most of the world’s population and collectively represent more than half of all global economic activity. And like a microcosm of human progress, they represent all the stages of our economic and social development.

We have hunter-gatherer societies in remote parts of Papua New Guinea and Indonesia, as well as the newly industrialized countries of Southeast Asia and Chile. Then we have economies in transition like China, as well as the advanced industrialized economies of Japan, North America, New Zealand and Australia.

The organization known as the Asia-Pacific Economic Corporation, or APEC, was formed in 1989 in response to the growing interdependence among Asia-Pacific economies. Started as an informal and limited group to conduct dialogue, APEC has become the primary regional vehicle for promoting open trade and practical economic cooperation around the Pacific Rim.

APEC has 18 member economies – they call them economies rather than countries to get around sensitive issues like membership of both China and Chinese Taipei (Taiwan) – and includes all the fastest-growing economies in the world and three of the largest: the United States, Japan and China. APEC’s economies have a combined gross national product of US$13 trillion, about half the world’s total output. Together, APEC members represent about 46% of the world’s merchandise trade.

APEC is topical for us in Canada because the 1997 summit meeting of member economies is to be held in Vancouver in November. Last year APEC met in Manila, and the previous year in Osaka.

Overcoming APEC’s diversity, the organization’s objectives are:

• To help grow and develop the region for the common good

• To enhance the gains that flow from economic interdependence, by encouraging the flow of goods, services, capital and technology between member economies and those of the rest of the world

• To develop and strengthen an open trading system in the interests of the Asia-Pacific and all other economies

• To reduce barriers to trade in goods and services among participants in a manner consistent with the General Agreement on Tariffs and Trade (GATT)

More than any other regional organization, APEC is driven by business interests and objectives. APEC gives the private sector credit for the explosive economic growth around the Pacific Rim, and has committed itself to promoting the role of the private sector and the application of free-market principles.

With this as a background, I have been asked to speak about the role of the mining industry in the Pacific Rim region, and specifically the interests, activities, problems and opportunities we at Placer Dome see for the region.

Placer Dome is uniquely qualified to be a leading participant in APEC’s agenda of integrating the Pacific Rim region into a rapidly growing economic bloc. The Asia Pacific has been Placer Dome’s history, and will increasingly be part of our future. Our predecessor company, Placer Development Limited, was incorporated in Vancouver in 1925 and achieved its first earnings from dredging river gravels for alluvial gold in the interior of New Guinea.

In the 1960s Placer constructed its first offshore mine in the Philippines, and in the 1980s it invested in Australian and Papua New Guinean mines. In the late 1980s it was the first Canadian mining company to commit to a substantial development in Chile, just before the transition to democracy and an open economy in that country.

If you look at a map of Placer Dome’s mining localities, all 16 of them are in APEC countries, that is to say, in countries washed by the Pacific Ocean. Our mines are in Canada and the western United States, in Chile, Australia and Papua New Guinea. You could call Placer Dome an APEC-centered organization.

While we also have interests in Africa and in parts of South America that are not Pacific Rim countries, it is clear that our future will be closely bound up with the developing opportunities of the Asia Pacific region.

Our past and current linkages with APEC trade and investment are strong. Our activities open channels of capital flow and provide a focus for trade around the Pacific Rim. In our wake, we pull with us Canadian exporters of engineering services and mining equipment.

The APEC agenda that I described earlier is important to the future security and attractiveness of mining investment in the region. Mining requires long periods of certainty about the rules to make sound investment choices. Ours is a highly regulated industry and that is the way it should be.

But because the life cycle of a mine from discovery to development and at the end of operations is counted in decades rather than years, mining companies require clear and achievable rules that will not change radically through successive governments. Mining investments of the size in which Placer Dome is interested typically approach $1 billion. And unlike a shoe factory or a bank, if the investment rules change, you cannot move your business elsewhere.

APEC has developed a set of non-binding investment principles, which we see as being helpful towards strengthening a receptive climate for mining investment in the region. The principles were agreed to in Jakarta in 1994, in the spirit of APEC’s approach to what is called organic regionalism. The principles recognize the importance of promoting domestic environments conducive to attracting foreign investment.

Looking at those principles from the perspective of mining investment, I note that member economies are urged to make all laws, regulations, administrative guidelines and policies regarding investment publicly available in a transparent and accessible manner.

Our principles include:

• Extending all investors the same treatment, regardless of national source

• No relaxation of health, safety and environmental regulations to encourage investment

• No expropriation of foreign investment, except for a public purpose and in accordance with international laws regarding compensation

• Liberalization of free trade and prompt transfer of funds relating to investment, such as profits, dividends and royalties

• Settlement of disputes through consultation and negotiation, or failing this, by arbitration

• Rights of sojourn for key foreign technical and managerial personnel

• Avoidance of double taxation

These principles have been endorsed by APEC members, but are non-binding. That is, they do not possess the force of a treaty or a domestic law. They do, however, carry significant moral suasion, which we believe will encourage the member economies to put in place supportive laws and regulations, and to adhere to transparent investment practices that will encourage and benefit mining investment.

Placer Dome is an active member of the Pacific Basin Economic Council, or PBEC, which is described as the private-sector counterpart to APEC. Our membership and participation in PBEC are proving to be a useful channel for advancing our corporate interests in the region. For example, as the company representing Canada on PBECs foreign direct investment committee, we are involved in putting pressure on APEC to strengthen and implement the non-binding principles of investment that I have just described.

Now I want to deal with how Placer Dome sees the opportunities and risks in mining in the Asia Pacific, as well as say a few words on our approach to the environmental and social issues that are part and parcel of any mining investment, especially in the developing world.

Opportunities and risks for global mining will largely reflect the rate of discovery and the challenge of developing new ore bodies. The principal questions are: how easy will it be to find the next decade’s ore bodies? And how difficult will it be to develop those new discoveries? What will the expectations be of society, economically, socially and environmentally, of the mines of the future? What will be the consequent cost implications and management challenges facing us, as well as our investors and lenders, who will provide the required capital?

My perspective is based largely on the experience and activities of Placer Dome, which, as I have said, are very focused on the Asia Pacific. As a long-established and geographically diversified corporation, we have a global perspective. We spend over $100 million each year on exploration, and over the last 37 years our in-house engineering and construction group has built 34 mines and expansions, at a total cost (in 1997 dollars) of $4.3 billion, of which about half was spent in the last 10 years.

The members of our project development division, who design and build our mines, frequently say that “Mines are made, not discovered.” However, before a mine can be made, an ore body must be discovered.

We can glimpse the future if we look at what is happening in global exploration at present. Exploration geologists must be optimists to survive, because the odds they face are long shots. For example, we estimate that it takes 1,000 green-field prospects to make a discovery, and that of 400 discoveries only one will become a mine. Given these odds, you might wonder why it seems so easy to raise money to fund exploration.

The Metals Economic Group (MEG) has estimated that in 1996 total worldwide non-government, nonferrous exploration spending was about $4.6 billion. Of this, about 61% was directed at gold targets, 31% at base metals and 6% at diamonds. Looking at the trends in expenditures by region, MEG analyzed the spending of 223 companies, which spent a total of $3.5 billion. The largest amount is spent in Latin America, where almost $1 billion was spent in 1996. The fastest rate of exploration growth was experienced in the APEC region, where expenditures exceeded $400 million, 61% higher than the previous year.

As I have indicated, the chances of discovering an ore body are quite low, but from our view of the world, there are some places where it seems he chances are better. In much of Canada, the United States and Australia, the “easy” deposits may have already been found. What is now being looked for in these well-explored places are the “buried” deposits, which require either a new theory or new technology to discover.

However, in Latin America and in much of the Pacific Rim, including Indonesia, China and eastern Russia, where the exploration cycle is at a much earlier stage, the chance of finding a significant resource is greater because shallow deposits still remain to be discovered. Accordingly we should expect that a disproportionate number of discoveries might occur in the APEC region, along with other parts of Latin America.

For some of these countries, a mining industry may be the start of their industrial development, as it clearly has been for Papua New Guinea. Mining has the potential to be a strong contributor to the economic and social well-being of any nation. To achieve its potential, it is imperative that mining be done in a socially acceptable and environmentally responsible manner.

Mining is different from most other industries in the APEC region. The vast majority of investment from industrialized countries goes to the urban centers or more prosperous areas of developing countries, where there is infrastructure and a workforce. Mining, on the other hand, goes to the frontier zones of countries.

As a frontier industry, mining is at the cutting edge of social and economic development in many places along the Pacific Rim. We believe that Placer Dome has the background and the track record to bring the skills that are needed for succeeding in these challenging frontier zones. To be successful on the frontier, a mining company should be regarded by aboriginal people as the most desirable partner for projects on their traditional lands. We must show an understanding of the social development role we can play as a major mine developer, including sustaining mine-created social improvements of health services, education and employment after closure of the mine.

A company must have the patience and tactical agility to persevere through the erratic treatment of the development countries’ governments. We should be prepared to integrate our activities with the developmental expectations and needs of a developing country, perhaps in some cases by building alliances with aid agencies and non-government organizations.

To answer the perception that multinationals are accountable to no one, companies should go public with defined principles governing relations with governments and communities, against which their actions can be assessed, just as APEC is going public with defined principles for investment.

Among actions by the mining company could be broad support at the community level and anticipating the growing influence of local communities on mine development decisions. Placer Dome is breaking new ground in this direction with the recent creation of a Stakeholder Monitoring Committee, which includes non-governmental organizations, to play a watchdog role on the environmental performance of our 50%-owned Porgera Mine in Papua New Guinea.

There should be support for the development of technical and managerial capacity of governments. And in all dealings with government, companies should maintain consistently high ethical standards, which have the effect of leading by example. Over time, Placer Dome has evolved in step with the expectations and changing demands of the public and our shareholders. We have developed a competitive edge in specialized community activities.

More and more, as mining companies, we can operate successfully only if we have the support of local inhabitants. Effective public participation must integrate public concerns into our project planning, mine design and decommissioning. If this is the case, then we as an industry should have no problem embracing the concept of sustainable development as the framework in which our contributions are acknowledged.

Sustainable development has been defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” At Placer Dome, we have expanded this to mean “the exploration, development, operation and closure of mines in a manner which contributes to the economic, environmental and social needs of the present while enhancing the ability of future generations to meet their own needs.”

We need to firmly establish the concept that mining activities have benefits far greater in extent than the number of jobs created and export credits earned. Many other positive legacies should be considered in judging and making decisions concerning our industry. We must also acknowledge that some of our activities will have negative impacts, that they should be judged in a manner that gives both sides of the balance sheet.

What is needed from mining is a series of progressive changes in the quality of life of people in the region as the principal short- and long-term beneficiaries of development to help justify our activities on a broader basis than before. Simply contributing to the economy through jobs and taxes is no longer enough. All current activities and future development should also contribute, and be seen to contribute, to the social and environmental goals of a nation or region. We should talk the language of the audiences we must convince.

For mining to succeed in the APEC region, it must be able to present its projects in sustainable-development terms. It must address a wide range of economic, social and environmental issues. By doing so, we can provide governments with the information not only to make their decisions, but to meet their political needs and deal with narrowly based objections and personal agendas when they occur.

It is in the spirit of recognizing and embracing these challenges that Placer Dome is enthusiastic about its future in the Asia Pacific region, a region that clearly has boundless potential for increasing the contentment and well-being of its teeming populations.

MINING RISK

John M. Willson
President & CEO, Placer Dome

Vancouver Board of Trade, Vancouver, June 9, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

The three factors which count in the mining industry are the quality of the deposit, where the deposit occurs and whether the business climate supports the commercialization of the deposit. While none of us can control geology, whether a mine is brought into production or not depends largely on politics and public policy, which have a significant impact on the economics of a deposit. Making a country or a jurisdiction attractive for mineral exploration and mining investment is ultimately up to the people who live there and their elected representatives.

What I would like to do today is provide you with a look at the world through the investment binoculars of a major international mining company. How does British Columbia compare with other jurisdictions that also have an abundance of mineral-hosting mountains and exciting geology?

For background, we are a British Columbia company. Placer Dome, through its predecessor Placer Development Limited, has been headquartered in Vancouver for more than 70 years. From being a regional company dependent on mines in the British Columbia interior and the western United States, we have become a global leader among international gold miners, with 14 mines in five countries and exploration in over 30 more, with not one mine left in British Columbia. How did this diminished operating presence come about? It was, of course, a combination of factors, including Placer’s transformation from base metals to a gold focus, and the need to follow those opportunities with the greatest potential to create value for shareholders. The Brits used to say trade follows the flag. In today’s mining world, investment follows the welcome mat.

First, let me tell you how Placer came to be headquartered in Vancouver in 1926. A British mining engineer and an Australian mining entrepreneur chose Vancouver as the place of incorporation and headquarters of their new company, Placer Development Limited. The focus of their gold dredging plans was on the Pacific Rim, in California, Alaska, New Guinea and South America. They could have chosen another city on the West Coast, but Vancouver was most attractive because the tax laws in British Columbia were the most favorable.

Gold dredging offshore gave Placer Development its start, but the great leap forward towards becoming a multinational took place here in British Columbia. During the four decades from 1940 to 1980 that were this province’s golden age of resource development, Placer was a major player, thanks to a favorable and supportive business climate. Placer developed a tungsten mine in the West Kootenays that was very profitable, due to strong US demand for the metal during the Korean War. A zinc-lead mine in the same area pioneered the use of mechanized mining methods underground.

In the same era, Placer developed bulk-mining techniques using large truck-shovel combinations for the development of high-tonnage, low-grade base metal mines such as Craigmont copper near Merritt, the Endako molybdenum and Gibraltar copper mines in the central interior, and the Equity Silver Mine. These projects provided not only well-paying jobs for thousands of people, their operating costs generated payments to suppliers, mostly resident in British Columbia, of billions of dollars over the years.

In a typical year, Placer’s mines would pay out C$100 million for labor, electricity, fuel, consumables and payments to governments. These are significant multipliers of economic activity which helped make this province prosperous. Remember that these major dollars accrued to British Columbia largely because two businesspeople chose British Columbia to set up shop. The welcome mat improved the house; but now in the 1990s the house has lost its shine. Part of the reason is that the government take from the mining industry has become almost confiscatory. There is an upside to that, however. It made our industry much more efficient. It reinforced the importance of controlling costs. Placer Dome’s mining experience in British Columbia prepared us to become more competitive on the world stage.

The period from 1979 to 1988 marked the greatest decline of the industry in this province. Earnings from mining were negative in five out of the 10 years. And yet the mining industry in British Columbia paid a total of $4 billion to various levels of government. Today it is much the same. According to the latest Price Waterhouse study, in 1997, while mining revenues went up slightly, earnings declined by 26% to $154 million, while payments to governments were $459 million. In the last three years governments have taken $1.5 billion while net earnings for shareholders of mining companies were $873 million.

Mining companies create wealth for our shareholders – many of which are pension funds which benefit people like you. As we do so, we create wealth for employees and for the jurisdictions in which we operate. Many emerging countries welcome the benefits which mining can bring. With the breakdown of all-out socialism in many places, much of the world appears to have turned to free-enterprise economics as the key to future prosperity. Many countries that once spurned private-sector investment in their mineral resources are now ardently courting foreign mining companies.

Placer Dome is going places that were unimaginable a few years ago. And we are going to places where governments actively protect and further the interests of investors. These emerging structures promise a more welcoming environment in which we can invest, make and remit profits, and reward our shareholders.

While in theory the whole world is open to an international mining company like Placer Dome, how do we evaluate risk and reward? And of greater interest to this audience, how does the Province of British Columbia compare with jurisdictions like Argentina, Chile, Mexico, Venezuela and Papua New Guinea? These countries have consciously and deliberately adopted policies that create a business climate conducive to mining investment. It is relevant to us because British Columbia, if it wants a mining industry, must compete with these countries for the same investment dollars. I say this without any political agenda or rancor; for in the end, a mining company’s decision on where to invest is made for business reasons alone. (But one is, of course, human!)

The last time Placer Dome made a major capital investment in British Columbia was an expansion of the Gibraltar Mine near Williams Lake in 1986, at a cost of $16 million. In the ensuing 12 years Placer Dome has spent $4 billion on nine new mines and eight mine expansions in the United States, Chile, Papua New Guinea, Australia and eastern Canada. These are mines we built ourselves, employing our BC-based, in-house engineering talent. It would have been nice to spend some of those hundreds of millions of dollars in our home province, especially when you consider the ongoing benefits that mines bring in terms of wages, government revenues and economic spin-offs. The very large sums of money necessary to build a mine are attached to fixed assets which cannot be moved. Unlike a factory, you cannot pull up and move a mining operation if conditions change. Mines are where you find them, not where you choose to build them.

Mining must take the long view. Besides evaluating the pros and cons of the present, they must do a risk assessment of factors that may cause a change of policy detrimental to their long-term investment. At Placer Dome we seek a balance between risk and reward. The ideal is to go where the rewards are the greatest and the risks are the least. Of course this ideal situation rarely applies; it is always a mixture.

To repeat and emphasize, geological potential is the most important factor which determines where mining investment takes place. British Columbia forms part of the Rim of Fire, that huge arc of volcanic rocks that ring the Pacific Ocean, hosting some of the great gold and mineral deposits in the world. British Columbia is famous for copper and zinc-lead-silver deposits, molybdenum, coal, and to a lesser extent, gold. Gold is Placer Dome’s focus. For a gold miner, in comparison with parts of South America, Asia and Africa, British Columbia does not rank high. This is especially so as windows of opportunity open in other parts of the world.

The second most important factor we look for is political stability or positive political trends. Compared with countries in Asia, Africa and South America, British Columbia certainly has a system that is stable and dependable. It is backed by a sound and equitable legal system, as well as liberal institutions like an independent media and academic corps, and strong human rights and social freedoms.

But British Columbia has sent inconsistent to negative messages when it comes to the third important factor, consistent, modern and competitive mineral policies. This is where the public policy agenda comes in. It is where a jurisdiction can extract the greatest benefit from its natural assets, or let them lie fallow.

Before undertaking major mineral exploration, among the critical factors that have to be considered are:

• Access to land

• Security of tenure

• Nature of environmental permitting

• Taxation and investment rules

• Quality of work force

• Ability to recruit and retain high performance people

Land access and security of tenure in British Columbia are often uncertain, due to the absence in some areas of binding agreements with First Nations people, land use designations, and the possibility of additions being made to protected areas. The expropriation of the Windy Craggy deposit took place before an economic assessment, bypassing the government’s own process. It remains a deterrent to mineral exploration in British Columbia to this day. That’s because exploration is expensive. Before you spend millions of dollars, you want to be sure that if you find anything, you will continue to own the right to develop the deposit if you choose to do so.

Contrast this with Argentina’s new Mining Investment Law that increases the amount of area available for exploration and creates a system of mining registers that ensure legal guarantees on mining rights. Or Indonesia, where a Contract of Work covering a defined area of land is signed by the president, has the force of law and can only be varied with the agreement of both parties. This is extremely attractive because it provides certainty for long-term decision-making.

With regard to environmental permitting, mining is one of the most regulated industries in the world, and we accept this must be so. At Placer Dome we have gone further by developing a sustainability policy that demands we measure ourselves with a triple bottom line: financial results, environmental performance and social contribution. In mining, a scientifically sound environmental plan from construction to operations, to closure and reclamation is an essential part of every project.

But the length of time it takes to obtain environmental approval is critical to the economics of a project. The longer it takes, the longer the capital investment must wait for value to be realized. In North America there is a public assessment process which is often abused by groups opposed in principle to mining to attempt to block a project, or at least delay it as long as possible. Combined with studies demanded by multiple jurisdictions, it means environmental permitting can take many years. It invites adversarial political grandstanding into the permitting process.

Jurisdictions elsewhere, like Argentina, Chile and Mexico, try to seek a balance between ensuring that mining operations achieve internationally accepted environmental standards without setting time-consuming constraints. In most emerging mining jurisdictions, environmental approvals take no more than one year. In Chile it can be as quick as six months, in Venezuela three to 12 months, and in Papua New Guinea six to 12 months. The difference is not the quality of environmental controls, it lies in the authorities’ belief that mining is a positive force in their national economy. There’s a desire to make it work. These people love the environment as much as we do. Chile has 18% of its land designated as protected areas compared with 8% in Canada.

I spoke earlier of taxes, how they generally benefit our standard of living and betterment, and how the need for public revenues should be balanced against the requirement of business to make a profit. A recent survey of mining companies operating in Canada by the Fraser Institute found that British Columbia is regarded as the worst province in Canada for mining taxation. And I’m afraid it’s not very competitive internationally either. In British Columbia, the effective overall tax rate for mining operations is 51%. This is 2% above the rate in Ontario where we operate four gold mines.

The main difference is that British Columbia does not give a resource allowance similar to the federal government and other provinces in Canada. By comparison, Nevada, where we have two mines, the effective rate is 24% (excluding state net proceeds tax). In Chile, it is 35%, in Papua New Guinea 45% (excluding gross sales tax on metals sold) and Venezuela 34%. What’s more, in British Columbia if you build a mine you pay sales tax on construction materials. So if we were to build a typical $600 million mine we would have to find an additional $24 million.

In some countries, like Argentina, if the minerals are for export, which they generally are, the sales tax is refunded. In Chile there is no value added tax on goods and services necessary for exporting. In Venezuela and Papua New Guinea construction costs are tax deductible. In British Columbia, the mineral tax, or royalty on production, is 13% compared with 17% in Ontario. In Australia it is 1% or 2%, the same as in Papua New Guinea, and there are no royalties in Chile or Mexico.

A plus for British Columbia in the finance area is the free movement of capital, the ability to repatriate profits, hold offshore accounts and borrow externally. In some emerging countries, such as Venezuela and Papua New Guinea, there are often restrictions or controls on these business instruments. Another plus is our well-trained workforce. There is no problem finding highly skilled people. And they are productive people. A copper miner at Highland Valley near Merritt may earn twice as much as his or her counterpart at Chuquicamata in Chile, but the British Columbia miner is estimated to produce four times more ore per year.

In Chile, skilled labor is often difficult to locate and retain, especially in the northern regions where mining takes place. Also, the employer in Chile has a more paternalistic role, which brings a number of management challenges and associated costs. In Venezuela and Papua New Guinea, where there is no modern mining infrastructure, skilled labor must be hired from regional cities and there is a high cost to employing expatriates for senior management.

Nevertheless, hiring and keeping topnotch talent can be difficult in British Columbia, relative to the rest of North America. Our rates of personal tax here are a deterrent, especially when we want to hire or transfer somebody from outside BC. Our principal North American competitors all enjoy a recruiting and retention advantage in this area. Some time ago we offered the position of vice-president of human resources at Placer Dome to an American woman. But she turned us down when she investigated the personal tax rate in British Columbia, even after we had massively violated our Vancouver salary scale. One of our senior executives who was born, raised, educated and trained in British Columbia and worked for us in San Francisco has chosen to retain his United States resident status and commutes two hours a day to and from our corporate office in downtown Vancouver.

So these are some of the pros and cons of mining in British Columbia as viewed by an international gold mining company. While it is geologically attractive, it is not sufficiently attractive to offset the risks of expropriation, land access uncertainty, potentially delayed development permitting, overzealous environmental regulation, and high taxation.

Placer Dome enjoys an international presence. We are the most globally diverse pure gold mining company. Our search for large quality gold mining assets is under way on every continent. We are positioned to become “the earth’s gold leader,” to be a top performer in the world gold industry measured by total shareholder return.

And we remain a corporate citizen of this province. As such, we look forward to British Columbia once again becoming reasoned in the competition for investment dollars. It’s not enough for British Columbia to say it wants investment, it must act to attract it. Indeed, it should do so decisively, unequivocally and permanently. It must create incentives to attract investors, otherwise they will go elsewhere.

The measures announced in the 1998 budget speech, to improve access to mineral lands and improve the mine permitting process, are well-meant and helpful. Further, a competitive advantage we enjoy is that British Columbia has the potential to supply low-cost hydro power. This is being recognized in the “Power for Jobs” initiative launched last year. We hope this will prove to be an incentive for more investment in the mining and metals industries.

Nevertheless, continuing and even more dramatic signals of commitment are needed. Government must forge a permanent partnership with the mining industry for our similar objectives of wealth and job creation. Because the trust between the mining industry, if not all industry, and government has been so severely eroded, it will be difficult to regain. But, it is worth the effort. British Columbia was the nursery of mining, before companies such as ourselves went global. We would certainly like to return to our own backyard.

If I could emphasize one thing again, it would be that mines cannot move. They are very capital intensive. There are many risks. Witness the current gold price about $290, when we expected $375. Witness the difficult nature of assessing ore reserves in the ground. Tom Buell, someone whom many of you know, is the director of many companies, as well as Placer Dome. He tells me, and I believe him, that at no company is he expected to take as many difficult decisions as a director than at Placer Dome. He says his pay per hour is lower with us than with any other company. But then Tom is a long-term BC resident.

The point is, we take big risks, our projects are thin with long paybacks, and if we cannot trust the jurisdiction for the long term, we hesitate to invest.

THE PLAYBOY EXPERIENCE ON THE NET

Christie A. Hefner
Chairman and CEO, Playboy Enterprises

Herring on Hollywood Annual Conference, July 28, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

If there’s one thing I can say with any certainty when talking about the internet and the online world, it is that the people who confidently predict what is going to happen next are the people you should trust the least. At this point, there is much more that is unknown than is known about the internet, how it ultimately will affect the way we interact with one another, and how we receive information and entertainment. But I think there’s value in sharing with you what we’ve learned in the past four years. And while many of our experiences are unique to Playboy, I think there also are lessons that can be applied by other companies around the world.

I said there are properties unique to Playboy, and that is true. The most unique is perhaps the concept of a magazine becoming a consumer brand. Most great magazines were started in the same way Playboy was – by an entrepreneur with a passion and a vision, whether it was Henry Luce at Time or Jann Wenner at Rolling Stone or Gloria Steinem at Ms. But there has never really been another editor-in-chief like Hugh Hefner or another magazine like Playboy. And that’s because no other magazine has personified for its readers so successfully an attitude and lifestyle that it became a global consumer brand.

What I’d like to talk about today is the internet and what we’re doing with Playboy Online, so I’ll focus less on how a company becomes a consumer brand, and more on how a magazine moves from one entertainment medium to another, from print to TV, and ultimately, to the web. When most of you hear “Playboy,” you probably think magazine. And the magazine is the flagship of our business, where it all began 45 years ago this December. Playboy is the largest magazine for men in the world. Besides the US edition, we publish editions with partners in 17 countries and territories. But with the advent of cable television in the 1970s, we felt the Playboy brand that had been so successful in print and products could be equally successful on television.

Today there’s an assumption that the scale and size of large entertainment companies will make it difficult for smaller companies to break into the business and be major players. But think about the sports network that many of us know. It’s not called Sports Illustrated, it’s called ESPN. And the world’s best-known music network isn’t called Rolling Stone, its called MTV. In the television industry, companies with existing entertainment or publishing franchises weren’t always the ones to become the dominant player. It instead was companies that were more entrepreneurial, more open to the new medium, that were more willing to experiment with what the new medium represented that became some of the dominant players in the television world. We think this will be even more the case on the internet. We’re very convinced of the value of the Playboy brand, but it is by no means a guarantee of success when charting a new course in the entertainment field. We think we have been successful – in going from print to television, and now to the web – mainly because we have respect for the unique properties of each medium, and don’t try to translate one to another. Instead, we try to capture the essence of the Playboy brand, and then reinvent it in the new medium.

So in the late 1980s, when we were thinking of how to grow Playboy Enterprises beyond its successful publishing and products businesses, we focused on international and electronic growth. We first did that through home video and television around the world, and then more recently, through the internet and the worldwide web. One of the first decisions we made with regard to television set an important precedent for what we later did on the internet.

Reading a magazine is a solitary experience, a personal dialogue between the editorial voice of the magazine and the reader. We believed that for the most part, Playboy TV would be more of a social experience, something that people would share together. To achieve that positioning, we would have to create a network that would be designed for couples, not for lonely guys. This meant we would have to be willing to invest quite a bit of money to create original, unique programming that reflected the idea of Playboy as sexy, fun, romantic, and a good time. And today, we have built a very successful business around that principle, along with a programming library of more than a thousand hours, which we now broadcast or license in about 130 countries.

So, our first move to multimedia began with Playboy TV and was predicated on this commitment to create original content, including Playboy movies, Playboy comedies and Playboy series for the cable and direct-to-home satellite markets in the United States. We then began developing international networks, in partnership with other companies that could provide capital and distribution.

Part of what intrigued us early on about the web was that it had similar properties. But, as we saw with television, the web involves a commitment to not just replicate content from one medium to another. Its success will depend on exploring the potential of creating original experiences that capitalize on the unique qualities of that medium, whether it’s a magazine, a TV show or a website. We created our flagship website, Playboy.com, as most companies did, by using existing content we had from another entertainment product – in our case, Playboy magazine. In the early days when we first went on the web, the conventional wisdom was for companies to license their content to an existing service, like America Online, CompuServe or Prodigy. But we felt strongly that we needed to maintain both commercial and creative control over our web content, the same way we did with Playboy magazine and Playboy TV.

We were fortunate enough to hook up early on with Jim Clark, now chairman of Netscape Communications. Jim was very excited about Playboy being on the web, and he helped us build a simple and inexpensive infrastructure, so that we could go directly onto the internet.

And so our question became, “If we build it, will they come?” And the answer was “Yes.” When we went live in August 1994, we had a few very simple pages. We received 10,000 “hits” from 32 countries on that first day, with absolutely no marketing or promotion. While 10,000 hits doesn’t sound like much now, it was phenomenal in the early days of the web.

Those results encouraged us to believe that there might be a real opportunity to create a new version of Playboy, this time on the web. Even better, it would be different from – and actually bigger – than what we do in print or on television. This is because one of the intriguing properties of the internet is that you can offer each person a unique experience without editing for space or time, which is a major consideration when creating a magazine or television show. On the web, we can provide consumers almost limitless content and experiences, which they can then pick and choose from, depending on their personal interests.

So, when we started to generate significant traffic to the site, we naturally wondered whether we could sell advertising and build a revenue stream. We initially thought magazine advertisers would be our major web advertisers, but this turned out not to be the case. The majority of advertising dollars came not from print advertisers, but from companies like CNET, and CBS Sportsline, and Amazon.com, companies created on the internet. Almost four years later, 15 of our top 20 advertisers on Playboy.com have not previously advertised in the magazine. The web was opening up an entirely new advertising market to us.

But it’s not just about new kinds of advertisers, it’s about new kinds of advertising. Successful websites are full of entertainment, services, and information, which creates opportunities to buy cool stuff and do neat things. We were lucky, in that in addition to having the ability to leverage the content of the magazine, we also have a catalog business. We started by creating a small online version of our Playboy catalog, which offers branded merchandise, which we did very little to market. Last year, we sold about $1 million of Playboy merchandise on the web. More significantly, three-quarters of those customers were new to the Playboy catalog. Again, the web was helping us to reach entirely new customers.

Late last year, we added online versions of Critics’ Choice Video and Collectors’ Choice Music, two of the largest video and music catalogs in the United States, which we own. We’ve since joined with other online companies, including Amazon.com, to sell their merchandise on our site. Today, our e-commerce revenues are rapidly approaching our advertising revenues.

One of the things that was very encouraging is that our web customers were overwhelmingly people who had not bought from the print versions of our catalogs. Similarly, people who came to the website were not readers of the magazine. They were younger, better educated and made more money, which makes sense when you look at the demographics of the web, or, for that matter, at any communications medium in its infancy. We think the younger audience is the audience we can connect best to through the web, and over time, we think they also will stay with the Playboy brand in its other forms.

One of the other things we believed in from the beginning was the idea of creating a community. And ultimately, much more than we do today, we think we will generate revenues not just from advertising and e-commerce, but also from creating opportunities for chat and interactivity. For example, this year we had live webcasts of the New Year’s Eve party and the Playmate of the Year party at the Playboy Mansion, and we’ve also offered interactive chats with Hugh Hefner, Playmates and other magazine celebrities.

One of the most powerful qualities of the web we’ve experienced is its global significance. When we launched our subscription site, the Playboy Cyber Club, in the summer of 1997, we did very little promotion of it, yet 28,000 people from more than 100 countries found us and joined, paying $6.95 a month.

I already mentioned that we publish 17 international editions of Playboy magazine. With partners, we also operate Playboy TV networks around the world. In the future, we very much want to leverage Playboy’s relationships with international publishers and television companies to not only translate what we create in the United States into other languages, but to translate what other countries create. While there are obviously many similarities between the international editions of Playboy, about three-quarters of all content in any given international edition is locally produced. So, one of the things we think will be particularly fascinating will be that someday, a Playboy fan in the United States – or in Russia, for that matter – could visit the Japanese Playboy site and experience what is the same – and what is different – about Playboy in Japan. The idea of creating this true worldwide web is something that simply isn’t possible in other media, which is what makes it so intriguing.

One of the major decisions we made at the beginning of this year was to treat Playboy Online it as its own line of business, comparable in stature and independence to our Publishing, Entertainment, Product Marketing and Catalog groups. To lead the new business, we hired the former president of New Media at Reuters. His charge has been to make us a much larger presence on the web, primarily through developing original content. There are two ways to do that. One is to build an organization that can create that content. The other is to align ourselves with other companies in step with the Playboy sensibility, and co-brand their content for this megasite we’re building.

Within the last few months, we’ve created several content areas on the site that tap into many of Playboy’s most powerful brand attributes. The first was “World Of Playboy,” where we feature events at the Playboy Mansion and our other properties, as well as news about Playboy celebrities and executives. We’ve also created a category called “Sexcetera,” which is about relationships, gender and sex. Part of what we are doing with “Sexcetera” is experimenting with a common theme and sub-branding it across all Playboy-branded media. So, besides the area on the website, we’re going to have a page every month in Playboy magazine called “Sexcetera,” and we’re going to have an hour-long weekly television show on Playboy TV called “Sexcetera.” Each will be different, but they will be interrelated and will cross-promote one another, and entice customers to visit the other versions in the different media.

Another category we think that is very relevant to the web and to Playboy’s attributes is “Compete.” It has to do with games and sports, and ultimately, may feature gambling. As you may know, in the 70s and early 80s, we were quite successful in the gaming business in England and Atlantic City. Later this year, we’re going back into gaming, when we open the Playboy Casino and Beach Hotel on the Greek island of Rhodes. None of the big gaming companies is doing anything now on the internet because of regulatory concerns, but we think there may come a time where online gaming will be a major global business. We’d obviously like to position ourselves to be a player if it evolves. Other content categories on our site are “Prowl,” which explores urban life, and “Pop,” which features pop culture, entertainment, books and movies.

As I mentioned earlier, one of the ways we plan to expand our site is to not only create our own content, but also develop it with other companies. So, within “Pop,” we have the “Playboy Listening Lounge” with Rhino Records. We also feature comics from Dark Horse, which is one of the leading creators of adult comics in the United States. We are working on new areas, including “Scan,” which will be technology oriented, and “The Bachelor Pad,” which will feature information and entertainment about the single guy, his apartment and his stuff.

During the summer, we announced partnerships with several smaller, but successful, online entertainment companies that are now producing content for our site. We think this is a great example of how entrepreneurial the web is and how dangerous it is for big companies to think they are going to own it because they have critical mass and money. The reality is that the people who are going to own the web are those who have the creative resources, and are the risk-takers, and we all know that it gets harder to take risks the bigger you get. All of these theories are holding true so far. More than 2 million people visited Playboy.com in August and looked at 65 million pages. We think this number is only going to grow.

Our strategy also is working financially. Playboy Online’s revenues doubled in 1997 over 1996, and our goal is to do that again in ’98 over ’97. Because we’ve been committed to investing in Playboy Online since we separated it as its own business group at the beginning of the year, it’s not now profitable. But if our experience in television is any predictor, Playboy Online could potentially be the biggest profit center of the company, and our highest-margin, fastest-growing business.

So, in closing, I’d like to reiterate the most important lesson we’ve learned: the rules governing the internet have not been written yet. It took generations to discover that cable would come to mean CNN, HBO, MTV and ESPN. Right now, that’s what’s happening on the web. What we’re trying to do is create a culture in which talented people at Playboy magazine and Playboy TV will join with our young, new talent at Playboy Online and ultimately create something so dynamic and compelling that none of us can imagine it now. Thinking about how much we’ve changed as a global entertainment company, that’s a very exciting place to be.

OUR BORDERLESS WORLD: THREAT OR OPPORTUNITY?

Paul Desmarais, Jr.
Chairman & Co–CEO, Power Financial Corporation

The Board of Trade of Metropolitan Montreal, May 28, 1996
Published in The Corporate Report No. 18 (June 30, 1996)

Rarely in its history has Montreal so needed the devotion and solidarity of all those who love it and want to contribute to its economic recovery. We will also need a lot of determination and imagination to transform the difficult period we are going through into an opportunity to renew and reinvent Montreal.

More than 350 years ago, a small group of settlers, soldiers, missionaries and merchants brought their dreams and their ambitions here from France. Together with the men and women who came from England, Scotland, Ireland and then from all horizons of the world, they built a dynamic city and founded a country that is admired and respected around the world.

Today it is our turn to roll up our sleeves, to channel our energies, to summon our courage. In that spirit, as a Montrealer and from the special perspective that is given me at Power, I would like to share with you a few thoughts on our common future.

Power Corporation was born in Montreal, grew and keeps on growing throughout Canada. But Power has also established itself in the United States, where we are present in every state. We are firmly positioned in Europe, especially in France and Belgium, where we hold major positions in well-known and solid financial institutions and industries which, taken together, employ more than 150,000 people. We are also active in Asia, in particular, in China.

Ours is therefore a Quebec, Canadian and international group. These three identities blend together and reinforce each other. But if Power can post interesting results today, it is largely because of the vision and determination of my father, Paul Desmarais. Inspired by his example, my brother André and myself, together with the colleagues with whom we have worked for many years, form a team dedicated to continuing this growth while respecting the central objective of the company, which is to increase shareholder value.

During the last few years, this team gradually developed the strategies which will allow us to plan the growth of each one of our companies. As an international holding company, we also remain open to other investment opportunities which could strengthen the group even more.

The integration of national and regional economies, the globalization of markets and the internationalization of skills are not theories invented by futurologists. Neither are they phenomena that exist only in Europe, in Asia or “elsewhere.” These notions describe the exacting reality in which all major companies must operate and which all governments must learn to control. A reality that affects producers as well as consumers, employers and employees. Countries and cities alike.

It would be a mistake, however, to believe that everything is decided in our absence in the new global economy, that we are somehow caught up in an irresistible wave which will either carry us home safely or submerge us once and for all.

It is true that those individuals and societies who are not ready to change not only their way of acting but even their way of thinking could end up being buffeted by economic changes without being able to control them. But it is just as true that people and groups with the daring and foresight to prepare for and adjust to, economic changes will be in a position to profit greatly from them. This requires that we maintain an attitude of openness and resist the temptation of isolating ourselves.

We don’t succeed today because we are American, German, or Japanese…or from Quebec. We succeed when we are able to meet the competition, wherever it may come from. We must therefore stimulate entrepreneurship, the willingness to take risks. We must encourage initiative and reward effort. This recipe is not new, but it remains the foundation of economic and social progress.

I share the opinion of those who believe that this generation of Quebecers will be able to accomplish great things here, and everywhere they will be given the chance to compete – that is, if their path is not blocked by old fears and attitudes which always threaten to return from the past.

The protectionist mentality, for example, is far from dead. One only has to look at the United States or certain European countries to see that the protectionist forces seem to be gathering strength. Protectionists often drape themselves in the cloak of protectors of the national identity. That attitude, however, sometimes hides negative motivations such as mistrust of foreigners, fear of change and uncertainty in the face of competition. We Quebecers are not any more immune from that reflex than our southern neighbors or our transatlantic partners.

More than ever, we must form strategic alliances, find new partners, among Francophones of course, but also among our Anglophone compatriots who have greatly contributed to the economic development of Quebec for many generations.

This willingness to cooperate, this search for partnerships, is one of the main characteristics of Power Corporation. We have, for example, concluded family alliances like the one that unites us with the Frère family in Belgium, or institutional ones with the French bank Paribas, or more recently, with the German group Bertelsman, with whom we have just formed the largest multimedia company in Europe. We have also formed alliances with governments, such as the Singapore government and, through CITIC, with the government of China for all our activities in that country and that region.

While the world is creating and cementing ever bigger and ever stronger economic and political blocks, how could we Montrealers, we Quebecers, we Canadians, ever hope to succeed by dividing our forces?

We will not succeed either if the economic context inspires part of our population to remain frozen by doubt and questions in the face of the future or to quietly shirk their responsibilities.

To succeed together, we must work together. And to succeed on the world scene, we must join forces and marshal all our resources. Canada itself became a great economic power, in spite of having a relatively modest population scattered over an immense territory, thanks to the richness and diversity of its natural resources and through the work and the cooperation of many different cultural groups.

Of course, we must be ourselves, and the Quebec government must remain faithful to its responsibility and its duty to protect the French character of Quebec, notably by ensuring that the language of the majority can shine forth. But we must also develop our knowledge of the English language which enables us, as citizens of Montreal, to position ourselves in the international mainstream. As a French-speaking island in the middle of an Anglophone sea, “prisoners of our geography” in a sense, we must build bridges, develop new links so that we may succeed throughout the continent.

I am convinced that by being exposed to two cultures, being familiar with two systems of values, being marked by both Anglo-Saxon pragmatism and cool-headedness, as well as the rationality and the Latin aspect of our French origins, we Quebecers are considerably advantaged. We can act as a bridge between America and Europe.

Diversity is, in a way, natural to us. It allows us to approach new cultures more easily and to penetrate new environments. I have never felt less Francophone because I know the English language. Power has never stopped being a Canadian company because it succeeds in the United States and Europe.

The best way for Anglophones to ensure that Francophones do not come to fear assimilation or marginalization is by demonstrating that they are willing to make the effort of learning – and using the French language – which, happily, a growing number of Anglophones are doing. In Canada, outside of Quebec, close to 2 million students attend regular French courses, while close to 300,000 are registered in French immersion courses.

If in the past Canadians had had the same opportunity – and the same wisdom – to learn a second official language as younger Canadians have today, who is to say how much misunderstanding, how many failures to communicate could have been avoided?

Businesspeople working in Montreal know how language laws can be cumbersome. But linguistic proficiency should not be seen as an imposition. It is a condition for success in a global society. Between compatriots, language should not be a barrier; it should be a bridge.

It is a fact that we have serious problems to face in Montreal: aging infrastructures, unacceptable rates of unemployment and poverty, and insufficient investment capital, to name just a few. Many of these problems stem directly from the climate of political uncertainty to which we have been and still are subjected. It is not the only factor, of course. But it is an important factor, all the more important because it is a factor that we can influence directly and rapidly.

I do not believe that separation is a viable option for Quebec. That is why I noted with satisfaction the intention expressed by the Premier of Quebec at the beginning of his mandate to give priority to our economic problems, rather than trying to lead us into another crusade about sovereignty.

No other city in Canada has suffered more from economic and political uncertainty than Montreal. Any other round of uncertainty, with its cumulative negative effects, would only aggravate the situation. In the mid-1970s, this climate of uncertainty scared away head offices and capital, diverted investments and made approximately 300,000 of our fellow citizens leave, not to mention the paralyzing effect it had on our own energies.

The closeness of the last referendum result also made many Quebecers think about their future. For some, what was unthinkable a few years ago is not anymore. We all know people who, for the first time, considered moving out of Quebec. Though perhaps more discreet, these departures or thoughts about leaving are no less insidious.

We will not resolve Montreal’s economic problems with repeated referendums on independence. We have been through two of them in the space of 15 years, and the least that can be said is that we have not come out of them more prosperous or more united. On the contrary, the most certain and most dangerous result of an eventual vote in favor of separation would be that it would not only divide Canada, but would also divide Quebecers among themselves, within their families and friends. I cannot get used to the idea that my generation could be plunged in that unhealthy climate for 25 or 30 years.

Time is in short supply, and the task ahead of us is great. The months and years ahead will be crucial for the future of Montreal. But we should never forget that we can count on major advantages. The awakening of entrepreneurship in Quebec about 20 years ago, what became known as Quebec Inc., signaled a willingness and an ability on the part of Francophones to play a greater economic role. Many of the companies that participated in this collective awakening today form the backbone of a renewed business sector. Some others did not succeed. That is the law of the market and the nature of business. But the path is now more open to all those who want to fulfill their potential and contribute to the economic progress of their community.

One only has to look around this room to recognize representatives of some of the most dynamic companies in Canada, companies that are known around the world like Bombardier, SNC-Lavalin, Quebecor, Teleglobe, Vidéotron, Canam-Manac…and Power, and many more which compete in world markets and win!

A new generation of Montreal companies is also appearing. Many are the product of innovative and promising initiatives like Inno-Center, an incubator of high-tech firms that has contributed to the birth of nearly 50 new companies since 1987.

Among the assets that we can count on to form the next wave of Montreal businesspeople, the most important are our four first-rate universities. To be able to contribute effectively to the economic rebirth of Montreal, however, they need to strengthen their ties with the business and labor sectors. The pioneers of the Chamber of Commerce showed that they understood very well the importance of this relationship when they proposed the creation of a school of Hautes Études Commerciales way back in 1892. Only 30 years ago, less than 1,000 students were enrolled at the HEC. There are about 9,000 today, 5,000 of them full-time students.

The recent graduates of the HEC have created a new class of businesspeople whose knowledge and skills will allow Quebecers to fully play their economic role in the Canadian federation.

The advisory council of McGill’s Business School also plays an exemplary role in the necessary interaction between learning institutions and the business community. We helped establish both the HEC’s and McGill’s advisory councils, to which I still devote a lot of time, because I firmly believe that Montreal can only benefit, in the near future, from a closer cooperation between its first-rate universities and the business world. Institutions of higher learning are sometimes compared to ivory towers. But for many students who are about to embark on a career, it is usually the business world that seems to be entrenched behind its glass towers.

The quality of our workforce remains a fundamental factor in the development of new competitive strengths. Governments alone cannot meet this urgent need, as the unending federal-provincial feud on manpower training reminds us. Neither should we expect our colleges and universities to take on all of this responsibility. We must all do our part and participate in those initiatives aimed at preparing the new guard that Montreal, Quebec and Canada will require in the coming years.

Recent history teaches us that Quebec Francophones have what it takes to succeed in those sectors from which they are no longer excluded. Never in our history has a generation of Quebec entrepreneurs, administrators and professionals been so well prepared to express the full personality and pride of our society, here and across the continent. Governments must do everything they can to help this generation fulfill all its potential. The future of these young people, our future and the future of Canada all depend on it. We are entering a world which offers us a unique opportunity. Globalization, trade liberalization, technological progress can afford us a period of growth as strong as the one our parents experienced in the postwar era.

We can even hope to be able to start repaying the debts inherited from the 1970s and 1980s, when we tried to cheat reality and believed in the mirages of inflation. Our governments have already understood the limits of their action and the fragility of their financial situation. Many of them have eliminated their deficits. Others are working on it. This is an important step in the right direction. But to eliminate the enormous debts that our governments drag behind them like a ball and chain, we will have to devise strategies that will produce surpluses over the long term. We will be able to shoulder this responsibility only if past quarrels do not stand in the way of our future. That is the request that my generation presents to the one that came before it.

We want to mobilize for tomorrow’s battles: the economic, technical and global battles, not those of yesterday. We must also liberate those energies and those resources that are presently paralyzed by political feuds and channel them towards the resolution of urgent and serious problems, such as poverty and unemployment. It is not enough to strive to profit from the new economic realities. We must also help those who find it difficult to adapt to them.

That is why we ask only of our governments that they practice the art of politics – intelligent compromises. If we are given the same chances and the same advantages as our competitors, we will be able to lead Quebec and Canada into the 21st Century as the vanguard of modern societies.

Quebec, Canada, the world, that is where we want to make our mark. Those who are in their forties today were born and grew up during the Quiet Revolution, when Quebec awakened to all its possibilities. We are the sons and daughters of a hope and the inheritors of a dream. That hope and that dream is a modern and prosperous Quebec thriving within Canada and succeeding around the world.

EXPORTS IN A GLOBAL ECONOMY

Dave Caplan
President & CEO, Pratt & Whitney Canada

The Board of Trade of Metropolitan Montreal, April 13, 1994
Published in The Corporate Report No. 6 (June 15, 1994)

Over the years, Canada’s economic record has been enviable. Since 1960, our rate of economic, investment and employment growth has been first or second among the major industrialized countries of the world. We have also maintained a leading position among exporting nations.

Our strong economic performance and exports have allowed us to enjoy one of the highest standards of living in the world. The contribution of exports to our wealth is clear. In 1993, exports represented 34.3% Canada’s GDP, up significantly from 22% in 1980. In Canada, we are twice as dependent on international trade as Japan or the United States.

When we look at Canada’s more recent export performance, we see some encouraging trends and some areas which should give us concern. On the good news side, exports have grown strongly in recent years in spite of the worldwide recession. Last year, exports increased by 9.6%, making this the leading growth sector of the Canadian economy.

We have also succeeded in increasing the diversification of our exports. We are selling more value-added products than a few years ago, but technology-intensive exports are still very low at 14%.

Canada’s share of world exports, according to the International Monetary Fund, was 4.1% in 1982. It went up to 4.5% in 1986 but has since decreased by 20% to 3.6% in 1992. This decrease since 1986 translates into exports of $30 billion to $35 billion and perhaps as many as 200,000 – 300,000 jobs.

In fact, since 1982, we have the worst growth record among the world’s leading exporting nations. This raises the question about Canada’s ability to compete in world markets.

Canada is now 11th out of 22 countries in terms of competitiveness. It ranked fourth as recently as 1989. It also ranked last of the seven major industrialized countries, the G7, in total business productivity growth. A particular concern is the gap with the US our biggest trading partner.

The current low Canadian dollar will contribute to narrowing the competitiveness gap, but do we really want to pay this price to be competitive? To accept a very low Canadian dollar is to accept a lower standard of living. Being competitive through productivity leads to a higher standard of living.

Now I would like to take a few moments to talk about aerospace, a sector which is obviously very close to my heart.

Aerospace is one of Canada’s top success stories. Despite a small domestic market and a shrinking worldwide defense industry, Canada’s aerospace industry ranks 6th worldwide. I think we have an example here of how government and business have worked together for many years to achieve something extraordinary.

In the aerospace industry, total exports for the last decade amounted to $47 billion or 67% of sales, which totaled $70 billion.

From 1983 to 1993, Pratt & Whitney Canada’s sales totaled $12 billion, with exports accounting for $10.5 billion, or about 90% of our production. During that period, we also spent $2.3 billion on R&D – an annual average of 19% of sales. And we’re not planning on slowing down. In 1994, we’ll invest over $225 million in R&D. We simply cannot expect to continue to be the market leader without this high R&D-to-sales ratio.

We all recognize that a strong economy and exports are critical if we are to sustain and improve our standard of living.

Yet, despite the recent improvements in exports and other economic indicators, we are seeing a general deterioration in our standard of living, income growth, services and debt. Incredibly high direct and indirect taxes are siphoning off available resources, while services are being reduced and our social programs are being challenged.

How can we ensure future prosperity and the protection of our safety net? The answer to this question is very complex. It includes, as one would expect, improvements in our competitive performance, productivity, education, training, and R&D investments, along with a commitment to quality from all stakeholders. But most importantly, I think the proper answer requires that we recognize these needs and the urgency of the challenge in the context of the changes produced by globalization. We are living in a very different world – a world being shaped by new forces and new dynamics.

The trends we’ve observed in the 1980s and early 1990s are being reinforced and accelerated by the removal of trade barriers. The Free Trade Agreement, GATT and NAFTA have defined a new world, and new trade and export dynamics. The integration of computers and communications has basically eliminated as many barriers as the recent trade agreements.

We must understand, adapt to, plan for and strategize in recognition of this new environment. The conditions which historically have allowed us to become one of the world’s most prosperous countries – natural resources, an educated work force, the proximity of the vast US market – are still with us but they no longer provide us with the same advantage.

The end of the Cold War and the continuing development of Third World countries will dramatically increase the volume of natural resources available. The aluminum industry is a good example of excess capacity problems which have been complicated by the end of the Cold War. China, South Africa, India and other developing countries could soon add to the challenge. Like Japan, China and Russia will also become net exporters of high-technology products at some point in the future. Imagine what kind of a competitor China will be with its domestic market of 1 billion people. Ukraine, once a giant producer of wheat, could supply much of the planet if it begins using available Western farming technology; bad news for our western farmers as well as those in Australia and the United States.

In this context we must ensure that government policies continue to support our traditional advantages. At the same time, we have to recognize that, in order to maintain our living standard, we must expand into value-added, technology-intensive production and high-knowledge specialized services.

We also have to recognize that one of the major instruments of change in the globalized economy is foreign direct investment and its prime agent, the multinational enterprise. Intra-corporate transfers of goods and services constitute a growing portion of international trade. The automobile industry is a good example of this. It should also be noted that several important multinationals are Canadian. This should be a source of both pride and strength. The contribution made by small and medium companies to our economy and export sales is important, but, increasingly, as concluded by a recent United Nations study, exports are being driven by large international consortiums with very complex integrations. In Canada, multinationals are responsible for 75% of manufactured exports with only 100 companies accounting for 70% of the total value of exports in 1992. The ability to attract and retain foreign direct investment and to provide an atmosphere conducive to the expansion of Canadian companies is critical to our long-term success. I am concerned that we are in danger of moving in the wrong direction.

With today’s computing and communications technology, products can be designed, manufactured and managed from different locations around the world simultaneously. The cycle time of technological advantage is continuously decreasing. This, together with the increased mobility of capital, is accelerating global competition.

Today we have to compete against other nations to attract investment, capital and jobs. Within countries such as the United States and Canada we also see the additional competition between states, provinces and, in some cases, cities.

To succeed in this globalized economy, we have to create a superior investment climate. Export strategies, fiscal and monetary policies, job creation plans, social programs – everything must be efficiently and intelligently brought together to create this climate.

We have a great base on which we can build a superior investment climate – a modern society, an educated work force, potentially competitive, lots of natural resources, energy, a relatively good social climate and a great international image. We also have some distinct disadvantages – a small internal market and population, our climate, political uncertainty and something that is as painful as winter without a Florida vacation: high direct and indirect taxation at all levels of government.

What do we have to do to achieve a superior investment climate? I’m sure you’ve heard most of them: encourage R&D, technology diffusion, innovation and risk taking; harmonize standards across Canada; support small and medium companies with export potential; enhance education at all levels; introduce training on export skills; and commit to a quality culture.

Currently, corporate R&D investment in Canada averages only 1.5%, trailing of the industrialized countries. In Quebec, 50 companies are responsible for 81% of the industrial R&D activity. These companies are concentrated in aerospace, electronics, transportation and pharmaceuticals.

We must also promote a technology culture and increase the number of people involved in science and technology activities. In 1989, we had 46 scientists and engineers per 10,000 people in Canada, compared to 77 in the US and 89 in Japan. Also, we must encourage the diffusion of new technologies. A recent Quebec Manufacturers Association survey indicates that 49% of the 400 Quebec companies studied are not using any production generic technology such as CAD/CAM or numerical control machines.

In terms of education, our dropout rate is one of the worst among modern societies. Although the work force of today is relatively well educated, if we do not reverse this trend, it will become a negative factor in the future as technology and knowledge requirements grow.

Some of our policies, regulations, practices and politics are counterproductive to our goals. The Canadian Exporters Association and many other groups have recommended that all government policies and regulations be reviewed for their impact on the competitiveness of Canadian industry in a global context. Environmental, health and safety issues should not be sacrificed but a fresh look at many of our regulations and laws should be undertaken. When we look at all our laws, regulations and taxes we can understand foreign investors’ concern about doing business in Canada. Also, the lack of free trade within Canada and the overlapping and duplication of federal and provincial jurisdictions do not help our competitiveness or our tax burden.

Finally, something I feel we must do with great urgency – get our act together and stop the general deterioration of our quality of life. The decline of Montreal as a safe, clean, progressive and dynamic city is sad and as someone who was born and lived in Montreal all my life it troubles me. The alarming signs of poverty and social deterioration are all around us. Our tax dollars at all levels of government are too readily spent on short-term opportunities that have little long term benefit. Governments must focus their priorities on areas that have potential long-term viability and benefit and ensure that our social safety net is not being abused or misused. This is the only approach that will ensure our global competitiveness and provide higher living standards for Canadians over the long term while safeguarding the social safety net that Canadians have come to enjoy.

We all share a responsibility for developing the society we dream of. We can do it and we must do it, if not for our benefit, then for that of our children.

BEYOND BORDERS: ADAPTING TO THE REALITIES OF GLOBALIZATION

Dave Caplan
Chairman & CEO, Pratt & Whitney Canada

The Canadian Club of Montreal, November 20, 1995
Published in The Corporate Report No. 15 (December 31, 1995)

It is a pleasure to be here today to speak on the subject of globalization. Originally I was scheduled to be here on October 30th. Unfortunately, we could not get Mr. Parizeau to reschedule the referendum, so here I am today. November 20th is another busy news day with the expected announcement by Mr. Bouchard about his future plans.

What all this means is that in today’s environment it is impossible to address an audience such as this on globalization without some reference to the current political situation in Canada.

The Financial Post editorial, the day after the referendum, made an excellent point. Even if we Canadians strongly believe we live in the best country on earth, it pointed out, two referendums in fifteen years is a clear sign that all is not well in this fair land of ours.

Unfortunately, the latest referendum has not ended the political bickering. If anything, it has only turned up the heat. And while we definitely have to take positive action – and quickly – to right our constitutional wrongs, we also have to get on with the business of business.

Time and world markets wait for no one. While we’ve been fighting among ourselves, over the past 20 years, our share of the world economic pie has been steadily diminishing. At the same time, our unemployment rate, and the difficulty of supporting our social safety net, have been increasing dramatically.

A lot of people place the blame on government, and let’s face it, government is guilty. Guilty of overspending, guilty of carelessly running us into a bottomless pit of debt, guilty of not making the difficult decisions. For too many years, government deficits and debt kept on increasing. A Conseil du patronat du Québec study shows that every Quebec wage earner had $88,000 in direct government debt at the end of 1994 – $43,000 federally and $45,000 provincially. This is an increase of 40% in just four years.

It is only very recently that governments have had the will to deal with these issues, and this will still has not been demonstrated here in Quebec.

Government is also guilty of not making Canadians aware early enough of the realities of globalization, the need to be competitive and how we really do have to work together as a nation if we hope to maintain the excellent standard of living we have taken for granted for far too long.

Today the overwhelming issue is the question of national unity and political instability. We have already paid a heavy price over the last 20 years. Instead of focusing our energies to ensure that we can maintain and improve our standard of living, we have spent a disproportionate amount of our time and resources on the national unity question.

Can the politicians of all parties, who have kept this issue open for over 20 years, look in the mirror and not accept a good measure of responsibility for what is happening in Quebec today, with our high unemployment and record number of people on welfare?

As someone born in Montreal, it pains me to see how our beautiful city has suffered and paid the price during the last 20 years. The Quebec economy has not reached anywhere near its potential, and the drive of the current government to keep separation at the top of its agenda can only exacerbate the situation.

Relating all this to my favorite industry, it is important to note that only a handful of the largest economies in the world have the infrastructure to successfully develop and support an aerospace industry. As China, Russia and other potential economic giants develop, it will be a real challenge to maintain our position as number six in the world of aerospace.

The ability of a country to invest in R&D is clearly linked to the level of that country’s gross national product and the ability to support and maintain a significant presence in world aerospace markets.

Just one last comment on the question of political stability and how it affects companies such as ours. First and foremost, our concern is our customers’ attitudes and the questions and concerns they have expressed. A decision to use one of our engines is a mutual commitment for anywhere up to 25 and even more years, which represents the life cycle of an aircraft or helicopter program.

The bilateral agreements between Transport Canada, the US Federal Aviation Administration (FAA) and the European authorities allow us to certify and deliver products worldwide with full acceptance by all potential customers and countries. This relationship is not one which is easily duplicated. Potential concerns about this and other factors, such as the validity of defense treaties between Canada and the United States, would create major uncertainties for our customers and question our ability to market our products. As an example, a Pratt & Whitney Canada engine was recently selected by the US military to power its next-generation primary trainer, which will likely be in production and operation for the next 20 to 30 years.

The second important factor is our employees. We must have an environment which is attractive in order to both recruit and retain experienced and new engineers and technically skilled personnel as well as other professionals. Is it merely a coincidence that our two largest competitors have had a recruiting campaign in Montreal during the past few weeks?

There are many other practical and legal concerns that are too numerous to mention here. Any assurances by politicians that transition would be simple and painless are, in my opinion, false.

I would now like to move into a short discussion of the Canadian aerospace industry and Pratt & Whitney Canada’s world product mandate for small gas turbine engines and, finally, my view on how globalization should be looked upon as an opportunity.

As I noted earlier, Canada ranks sixth in world aerospace.

We are a proud player in Canada’s highly successful aerospace industry, a sector that generated some $10 billion in sales in 1994, with $7 billion of that in direct exports.

The $10 billion in aerospace sales didn’t come cheap. The industry invested close to $1 billion in R&D in 1994. Pratt & Whitney Canada put about $250 million in R&D last year, in line with the 15% to 20% of sales we invest each year, in good times and bad. Because whether the economy is up or down, the competition never sleeps. During the last decade we invested nearly $2 billion in R&D at our Longueuil and Mississauga facilities.

The participation of the Canadian government has been critical to the success of our industry. When compared to the levels of spending by the governments of our major competitors, Canada has achieved success even though its relative level of spending has been significantly lower than in Europe or the United States.

Government can create an effective atmosphere for growth by focusing on education, training and sound monetary and fiscal policies, including effective tax incentives and risk-sharing repayable support in R&D – especially in high-risk areas. I know for a fact that Pratt & Whitney Canada would simply not exist as we know it today were it not for our own aggressive R&D strategy and government participation in the form of repayable risk-sharing funding and tax credits.

Governments throughout the world invest in aerospace because of the economic, technical and social benefits it brings to a nation. Every industrialized and developing country in the world is focusing on aerospace as a means of creating high-value-added, long-term employment and economic benefit.

The payback on government risk-sharing investments in areas like aerospace is, by the way, impressive by any standards. Something on the order of $25 to $40 back in sales for every dollar invested. Canada’s aerospace industry directly employs some 50,000 highly-skilled people, rewarding them with above-average salaries and plenty of room to fulfill their career ambitions. It’s also one of the few areas where we truly are competitive as a nation. And here in Montreal, we are especially fortunate, being the center of Canadian aerospace, with companies such as Bombardier/Canadair, Bell Helicopter, CAE, SPAR, Marconi, Heroux and, of course, Pratt & Whitney Canada and our Quebec work force of 6,300 out of a total of 8,000. There’s certainly no other city like this in Canada, and only a handful of cities in the world, where an aircraft or helicopter can be completely developed and manufactured.

Aerospace is far and away the major positive contributor to our trade balance in the high-technology sector, to the tune of about $1 billion in 1991. Computers and telecommunications – star performers on everyone’s business hit parade – had a negative trade balance of $5 billion in the same year. This shows you just how much work we have to do to move ahead in most of the major high-tech markets. Success in these high-value-added sectors is what will ultimately determine our standard of living in the years to come.

With the help of repayable government funding, Pratt & Whitney Canada successfully developed the PT6 engine in the 1960s and then went on to become the world’s leading developer and producer of small and medium-size gas turbine engines, a position we have held since the mid-1980s. Our worldwide mandate is the design, development, manufacture, marketing and service support of our engines. Every two seconds, an aircraft powered by Pratt & Whitney Canada engines takes off somewhere in the world.

Because of our heavy investment in R&D we have been able to more than double our market share over the last 10 years, from 15% to a leading 34%. I am nevertheless concerned because the Federal Government eliminated its commitment to supporting aerospace R&D in the 1995 budget. Recent discussions with senior cabinet members have encouraged me to believe that the Government understands the fundamental need to support R&D. I am hopeful that a national technology investment program will become policy in the 1996 budget but I am still concerned that this commitment has not yet been made. I can assure you that without such a program the Canadian aerospace industry, as we know it today, will not survive.

Now, finally, let us turn to globalization. Economies of scale, access to ever-larger pools of capital, strategic alliances and instant global networks are all pulling companies together to gain advantages in an increasingly competitive world. When you’re taking on the world, size counts. One hundred Canadian exporters accounted for 61% of our exports last year. It took another 63,000 smaller firms to make up the remaining 39%.

From 1982 to 1992, Canada was not only the smallest G7 exporter in absolute terms, but our export growth rate was also the smallest. I am happy to note that Canada’s export performance has really improved since 1992 thanks to free trade, a low Canadian dollar, substantial improvements in the competitive position of Canadian industries, like aerospace, and, most importantly, a strong US economy.

We are all aware that the Asia/Pacific region is outpacing North America and Europe in terms of economic growth. Pratt & Whitney Canada’s parent company, United Technologies, has been shifting the emphasis to global growth for years. The international portion of United Technologies’ sales has increased from 32% ten years ago to 54% today, and it will reach 65% of total sales by the year 2000. United Technologies has 10,000 employees whose first language is Russian. Exports represent 90% of Pratt & Whitney Canada’s sales today.

Tapping into growing international opportunities requires a solid proactive approach. It is no longer enough to produce in Canada and then simply export. We must be participants in the markets we want to penetrate. This is why Pratt & Whitney Canada has been developing key partnerships and joint ventures in manufacturing, service, engineering, overhaul and sales in the Pacific Rim and Eastern Europe since the late 1970s. This approach creates high-value-added jobs in Canada while expanding the overall market through increased local participation.

Countries like Russia, China and India already have important and established aerospace and defense industries, which they have no intention of abandoning. They are also not in a position to import Western goods on a massive scale because of affordability. So the strategy we have established is to become an integral part of their aerospace industry by joining with local partners and creating new companies or establishing joint ventures to serve local markets.

A good example of this approach is the Pratt & Whitney/Klimov joint venture inaugurated in 1993, where Pratt & Whitney Canada and Klimov, an engine design firm based in St. Petersburg, Russia, created a new company to serve the market of the Commonwealth of Independent States. The mandate of Pratt & Whitney/Klimov is to design, develop, manufacture and support a complete range of civil aviation engines. The first engine developed through this joint venture was tested on February 4, 1995, in St. Petersburg. This engine has been selected to power the BERIEV 32, which recently flew at the Moscow Air Show.

The Sukhoi aircraft design bureau recently selected another engine designed by the Pratt & Whitney/Klimov joint venture to power a new advanced prototype trainer. Kazan Helicopter presented a light helicopter powered by one of the venture’s engines at this year’s Paris Air Show. After only two years, the Pratt & Whitney/Klimov joint venture is providing all sorts of opportunities, and I am sure this is only the beginning.

Our Klimov joint venture is an important part of our strategy to maintain our worldwide leadership position and ensure long-term growth. We don’t know exactly when Russia will begin to enjoy all the fruits of a free market system, or when India’s reforms will effectively foster a modern economy there, or when Vietnam will join the other Asian tigers. All we do know is that these markets will emerge. And our strategy is: be there early, be there first.

The borderless world we live in is technology-driven, and technology has been driving down costs in two main areas: transportation and communications. Technology has also enabled companies in the developed world to access work forces anywhere, allowing workers to compete globally for the best jobs, just like companies do for global market share.

Swissair’s move to do its accounting in India is a good example of this trend. To reduce operating costs, Swissair subcontracted its accounting activity to an Indian company. From Switzerland, Swissair’s management can access the accounting data as if it was on site.

While the local demand for non-skilled workers may shrink in many areas, the global demand for qualified, skilled workers will continue to grow. In a globalized economy, competition between Montreal and Toronto, between Quebec and Ontario or some other region of Canada, is just a small part of the picture. Investment and marketing strategies for many companies now go far beyond local and regional considerations, as they scour the planet for locations with the business, taxation and labor advantages that give them the edge.

This is why it is important for us to get our act together and invest our energies in creating the best environment to attract investment. We have to capitalize on the advantages we have such as an educated work force, modern infrastructure, personal safety and security and many more.

Competitive pressures are not going to let up. If we are to succeed, we need a positive political environment and industry attitude, as well as a willingness to compete aggressively to maintain and strengthen our world-class manufacturing and technology base. We need to be united in our efforts as a nation so that we can attract the investments necessary to create jobs and maintain our standard of living.

Let me emphasize that I recognize that a country is a lot more than just numbers on a ledger. But I am also convinced that the majority of Canadians and Quebecers need to better appreciate the tremendous negative implications of political uncertainty in today’s and tomorrow’s global economy.

Success as a nation is ours for the taking if we can deal with the issues that are holding us back. To achieve stability, there will be a need for flexibility from everyone – from the Federal Government and the other Canadian provinces – to respond to the legitimate aspirations of Quebecers, and from the Quebec Government to negotiate in good faith with Ottawa and the rest of Canada.

In my opinion, it is still possible to reach a satisfactory agreement without tearing the country apart…but it is not a certainty.

SEAMLESS INFORMATION SELF-SUFFICIENCY

William D. Friel
Senior Vice-President & CIO, Prudential Insurance Company of America

Business Week Corporate Crown Jewels Conference, Paris, October 1997
Published in The Corporate Report No. 23 (January 31, 1998)

Prudential Insurance Company of America is a US-based company with an international presence serving more than 50 million people worldwide. More than 2,300 companies and institutions – including one of every three Fortune 500 firms – entrust Prudential to manage their pension and other institutional funds.

Prudential comprises a number of diverse businesses covering all aspects of financial services. What we’re all about is financial security. And if you look at our businesses in those terms, you’ll see that a customer potentially could come to Prudential for all of their financial security needs. Some of them do. We, of course, want all of them to.

Our mission speaks to the importance of information in our business. We will help customers achieve financial security and well-being by providing them with information, advice and products that best meet their needs.

For those customers who work with our agents and partners we will provide the technology and information they need to provide the best customer service in the marketplace. For those customers who feel their needs are best met when they can access information and service electronically, we will provide easy-to-use electronic access.

However, providing our customers with direct access presents some unique challenges. We offer complex financial products that often require detailed explanations and illustrations.

Our products and business practices are governed by complex and differing government regulations and disclosure rules. Our 20,000-member sales force provides advice-based services to help our customers determine their needs – and certainly many customers want and need this personal touch. So our challenge is to reach the optimum balance between high-tech and “high touch,” while insuring that our sales force does not perceive our online offerings as a threat.

As the CIO, I work for a financial services institution, but I also work for an information and technology company. We are spending over $1 billion on information technology this year. Our goal, and the direction we’re working toward, is information self-sufficiency: our customers, agents, partners and our employees will be able to get the information they want, when they want it, the way they want it – anytime, from anywhere.

Our vision is to have customers be able to contact us and get information in the way they want. Customers will enjoy all available means to contact us, whether it be via the Internet, phone, fax or in person. Information about our customers will be available to our employees to help them provide the very best service available in the marketplace.

Technology, then, becomes an enabler to our adding value. We use it to make it easy for customers to do business with us. We give them the support and information to help them make decisions about their financial security so that they succeed. And by doing this, we strengthen our ties with customers, gain their loyalty and retain their business.

We use a number of technologies to serve our customers and employees. One important vehicle we use is the Internet. The Internet gives us global reach to 35 million people. It gets us out in front of an evolving marketplace. And it lets us provide service and add value to our customers around the clock. You’ll find Prudential at www.prudential.com. Through our Internet site, we showcase our full range of products and services.

Our Prudential Securities clients can access their account statement, review their investments, pay bills, electronically transfer funds and we’re working on the capability to allow select customers to buy and sell equities in real time online. We’re also extending the online service to individuals using the new WebTV.

Prudential HealthCare introduced its first extranet platform in May 1997. The Employees of Netscape Communications were our first pilot user base. Netscape’s Employee “Self-Service” intranet application directly interfaces with Prudential HealthCare via the Internet. Customers can view their health plan eligibility and beneficiary information, get the status on claim payments and even get a map with door-to-door directions to doctor’s offices.

The Prudential Online Retirement Center is available to the employees of companies that sponsor certain Prudential retirement plans, such as 401(k) plans. It gives customers tools and information to help them make informed decisions. The retirement planner helps customers set retirement goals. They can also access a library full of literature covering investment and retirement planning topics.

Prudential is also the first company in the insurance industry to offer an Internet search facility for unclaimed money. Policyowners or their beneficiaries can search for unclaimed checks or death claim payments they may be entitled to.

Internally, we’re leveraging technology to empower our employees and increase their productivity so that they may better serve our customers. We’re now piloting Prudential’s Employee Self-Service application. It gives our employees an easy, efficient way to access information, manage their personal information and process a wide range of transactions. Employee Self-Service lets our people complete online forms like travel and general expenses vouchers, enroll in benefits programs – or view their current benefits. They can access company policies and even order office supplies.

Another important medium we’re beginning to roll out is kiosk technology. Not everyone is on the Internet yet, nor will they be. Kiosks provide customers with another easy means to do business with us. It gives them self-service access 24 hours a day.

The kiosk can connect customers to our Virtual Call Center. We’re investing heavily in creating call centers to link our customer service reps with the information they need to provide the very best service. We’re beginning to leverage two key technologies for our Virtual Call Center: computer telephony integration, and imaging and workflow.

When a customer calls, he or she can be identified in a number of ways – by phone number, social security number, policy number – and this can be done in many cases before the customer service rep answers. Imaging and Workflow are the tools that let us retrieve the information we need to quickly and efficiently process customer requests.

Our guiding philosophy is “once and done” service. Customers shouldn’t be routed around, or told to hold on, or that they’ll get a call back. They should be able to get in touch with us once and have their problem solved, their transaction processed, their question answered, or purchase a product. Our customers and Prudential are beneficiaries of this new technology. The key is that we’re making it easy for customers to do business with us.

We are adding value: customers can get information they want anytime. They can complete transactions simply, in a responsive environment. Our customers can be assured that their personal information is secure. It’s fast, it’s efficient, and it’s at their convenience.

While providing added value to our customers, our Internet presence lets us market our entire product line to generate more business and generate sales across businesses. By providing these services, we’re more likely to retain our customers. Customers who receive great service are loyal and will purchase additional products.

Being on the Internet also positions our firm as innovative. In short, it gives us an edge – an edge over those companies that don’t add this kind of value to their customer relationships.

As technology reaches every business, home, and every employee, vast new electronic applications, audiences and information usage opportunities will emerge. The corporations that have invested in their technology future will be the future beneficiaries and providers of services to new markets. The continued price performance advances in telecommunications, coupled with cheaper, more powerful machines, will provide endless possibilities of seamless global access and exchange of information, regardless of its form.

As our employees and customers become better versed in these new technologies, our internal and external relationships and partnerships will take on added importance and complexity as the technology links us closer and closer. This is what we’ve started and where we’re headed. Our customers and our employees will be able to be self-sufficient when it comes to information.

We will make it easy to do business with us. Anyone will be able to do business with us anytime, from anywhere, using any means they want. They will get fast, efficient service, and they will get value.

The leaders of the future will be those institutions that fully integrate business and technology efforts, creatively exploit their information and technology assets, invest in their human resources and listen to their customers.

With our technology direction, Prudential is well-positioned to support its customers through these very exciting times – anytime, anywhere.

DRIVEN BY THE DESIRE TO WIN

Charles G. Cavell
President & CEO, Quebecor Printing Inc.

The Canadian Club of Montreal, April 6, 1999
Published in The Corporate Report No. 27 (June 30, 1999)

I know I haven’t been invited to speak to you today because of my charm, or my personality, or my good looks. It’s probably because I’m the chief executive of one of the many successful Canadian companies known as Quebecor Printing.

In 1989 Quebecor bought the Ronalds printing company. Or rather – as I tell Pierre Karl – in 1989 BCE persuaded Pierre Péladeau to acquire Ronalds. There’s a difference. The two companies’ printing plants were then merged into a single firm: Imprimeries Quebecor, or Quebecor Printing.

Quebecor Printing went public in 1991 and today it has more opportunity in front of it, than it has history behind it. In ten years the company has grown from approximately the 50th largest printer in North America to number two in 1998. In 1998, the number one printer shrank 27% and we grew 12%, so stay tuned! How we accomplished this is the obvious question. There are obviously a number of reasons but upon reflection, four important fundamentals stand out: markets, management, unique strengths and people.

Ten years ago, Ronalds/BCE Publitech and the Quebecor printing plants were both successful Canadian companies – large by Canadian standards. Then my friend Brian Mulroney took the country into Free Trade with the USA. The protective tariffs of up to 26% were gone in five years. The high labor rates, benefits loading, taxes, older equipment and small size could have killed us. Which explains the “merger” with Quebecor, to give us some critical mass and some economies of scale. This combined with Pierre Péladeau’s courage and foresight to agree that his printing company “would be as large in the USA as it was in Canada before the full implementation of Free Trade.”

The idea was simply that if we couldn’t make our Canadian plants competitive with the US and we were going to lose Canadian customers, then we should lose them to our own plants in the US. It didn’t quite work out that way. We have retooled our Canadian plants. We have new progressive labor contracts with our staff and we have developed specific niche markets where we excel. For example, we are the largest North American manufacturer of comics. All done right here in Montreal. Who would imagine! In 1998, our export sales from Canada to the US were US$167 million. In fact, one out of every four jobs in Quebec is export dependent. Thank you, Brian Mulroney!

We liked playing the game on a North American scale, so much so that we went looking for other markets to consolidate. In 1995, we made our first acquisition in France. My friend Pierre Karl showed up with just his luggage and his briefcase. The possibilities for market consolidation we’d done so well by in America were also waiting for us in Europe. Eleven takeovers later, you could say we’re the largest commercial printing company in the European Union.

The same story is unfolding in South America. With MERCOSUR, you have the same dynamics, so we are in the process of building a network of plants to serve all of South America. We obviously need to move into Brazil. We waited for what we thought was an inevitable devaluation. It has now happened. Interest rates are at 42% this morning and that means there is a lot of pressure on the balance sheets of several companies with whom we have developed relations in the past two years. What a coincidence! If someone needs a “White Knight,” we might be able to send one.

The expansion of free access markets changes the game. If you are a gazelle, you will find that there are new lions that you must outrun. But if you are a lion, it means that there are more gazelles to hunt. Would you like to hear me roar?

How do you manage a company that has 115 plants in 14 countries? Well, I don’t. It’s that simple. There are seven operating presidents that run the business – each totally immersed in the market and culture that they compete in. I have what they call this “flip-flop” which allows me to look at the landscape and identify the under-performers and these entities are the only plants that I personally follow up on with the operating presidents. The “flip-flop” has each operating unit, with EBIT to sales, EBIT to value added and EBIT to capital employed, versus budget and previous year.

When we acquire a company, they have 90 days to convert to our chart of accounts. There is no acquisition debt at the operating level. A plant has the debt of its assets, its inventory and its receivables. It is a pure apples to apples comparison. Performance information is openly shared by the operating presidents and no operations manager wants to have the lowest returns on capital. No operations manager wants to have the lowest margins. It’s human nature to want to win. Quebecor is driven by its people and their desire to win.

I call “unique strengths” the ace and we have as many up our sleeves as the shirt will hold. We buy them and we build them. What do I mean? Well, technology is an ace. Printing is a manufacturing business. In my 20 years in this industry, I have seen printing presses go from 1,000 feet per minute to 3,000 feet per minute using the same number of crew. We have more of the state-of-the-art equipment than our competition – my targeted bombs. The old machines still print quality but they are slower. Therefore a flyer for Sears, Canadian Tire or The Bay of one million copies would take a day and a half on an old machine, but only 10 hours on state-of-the-art equipment. If I only need 20,000 copies, it’s more efficient to use my Dash 8 than it is to use the Concorde.

Economies of scale are another ace. If you look at the P&L of a printing company, approximately 50% of sales is made up of something purchased. The economies of scale are massively relevant to our performance. Paper and ink are our two largest costs. Hertz doesn’t pay the same price for a car that you and I must pay. We are Sun Chemicals’ largest customer for ink. Because we have built critical mass on a global platform, we expect to have the best discounts in the industry, discounts that we share with customers and shareholders.

We are now in the process of establishing a global procurement center in Europe. Why Europe? Well, of my top three paper suppliers, two are European, and 90% of my machinery suppliers are now European. Both of these industries are consolidating and globalizing. I would like to buy more paper from my friend Joseph Kruger, but I have to get the best deal possible for my shareholders.

A principle of this company is the belief that machines do not provide service to customers nor do they provide wealth to shareholders. People do. Our most prized asset is not on our balance sheet. The management structure and compensation plan support an entrepreneurial spirit. Yes, we are global but we are very local from a marketing point of view. We have one global listing in Montreal, Toronto and New York, but we have 14 country cultures, seven languages and 115 faces.

The acquisition that we made last week was in Barcelona, Spain, or is that Barcelona, Catalonia? This is a great deal for the shareholders financially. Our plant manager – now country head, Antonio Fernandez – found this family company, and with help from the European office, we put together deal number 63. So a family enterprise is unit number 116 in the global strategy.

I don’t blame local management for being apprehensive. But I have to say, when Pierre Karl met all the senior management and explained to them in Spanish who Quebecor Printing was and what we believe in and how our size and strength could help them, I watched anxiety change to pride and courage.

As Canadians, and above all as Quebecers, we have a culture like no other. We’re a modest, plain-dealing, accessible people. But what really matters is that here in Quebec we live with everything that cultural diversity represents. (We pay too much tax, but that’s another story.) I’m Anglo-Saxon and Pierre Karl and Erik are Franco-Latin. We see the same things but in different ways, which has made us sensitive to the fact that every culture sees things in its own way. This sort of exercise we’ve had is the fundamental reason for our success internationally. That’s how we do things in the world family of Quebecor Printing companies.

Quebecor Printing is my second wife. I will always be married to her. So I guess in my role as chairman of the new Sun Media, she is my mistress. By merging Quebecor’s weeklies and dailies with Sun Media’s weeklies and dailies, we have formed the second largest newspaper chain in Canada with approximately 25% of the daily circulation in the country. We have eight urban dailies, seven community dailies and 152 weeklies.

Yes, you guessed it – we have “flip-flop” number two. So how come salaries and benefits are 48.5% at Le Journal de Montréal and 36.3% at The Toronto Sun? So how come promotion and marketing is 0.8% at Le Journal de Montréal and 4.2% at The Toronto Sun?

I have total confidence that Paul Godfrey as CEO will find the answers, and make changes when he doesn’t. Why am I so confident? Because when I was in Europe last week, Paul made an executive appointment. The ex-general manager of The Toronto Sun was appointed vice-president, corporate operations and best practices coordination.

I’ll give you an example. In the past two months, bad debt in Le Journal de Montréal was 0.1% of revenues, but it was 1% in The Toronto Sun. Well, one of the reasons is that in Montreal, 49% of classifieds are either charged to Visa/MasterCard or paid in cash up front, while in Toronto 28% are charged and 71% are invoiced for payment 30 days later. A “best practice” opportunity if I ever saw one. Selling our national chain of tabloids to national advertisers should also develop significant opportunity.

So can we build a great Canadian newspaper company? Yes, we can! Can we become a North American publishing company? Time will tell. Can we evolve to be a global publisher? I hope so.

COMPETITION STIMULATES AND ENLARGES THE MARKET

Edward S. (Ted) Rogers
President & CEO, Rogers Communications Inc.

Midland Walwyn Convergence Conference, Toronto, November 28, 1995
Published in The Corporate Report No. 16 (February 29, 1996)

I will cover four topics today which are interrelated. First, how Rogers is positioned to meet increased competition in the wireless and cable television businesses. Second, how we propose to strengthen our balance sheet and enter into strategic partnerships for the long term. Third, how Rogers Communications is dealing with eventual succession through a strong, in-depth management team. And fourth, how the Rogers group of telecom assets is unique in North America. My most important message is that competition stimulates and enlarges the market! This is particularly true with products that have only just started to penetrate the market and are engaged in strong growth, such as wireless products – cellular, paging and data. More competition can ignite such markets and increase – not decrease – the pace of growth of existing operators.

Even in mature products, such as local telephone or cable television, competition stimulates the existing operators to improve their market efficiency and customer service and, most importantly, stimulates them to develop new products which then offer tremendous growth. An example is Rogers Cable launching its broadband services for home computers, which offer a potential greater than its TV set services. Another example is the home security business, which has a very high growth trajectory. The best example is commercial telecommunications for businesses led by Rogers Network Services.

In essence, Rogers Communications has much more to gain from competition than it has to lose – obviously assuming fair and reasonable regulatory oversight.

My second key message on competition is that Rogers has all the key assets in telecommunications to be the second force in Canada. We are the largest alternative, local telecommunications service provider in Canada, serving two and a half million homes. We are the only wireless operator with a national cellular license operating in all ten provinces covering 93% of Canadians by mid-1996. We have converted the Rogers Group of companies from an engineering centered company to a sales and marketing company. We are used to competition. Where we control the operations, we are used to winning – including the most competitive industries – radio broadcasting and cellular.

In cellular, it looks as though we will get increased competition from new PCs licensees. I am sure that many of you in this room have heard sales pitches from prospective PCs licensees over the last several months. Cantel will be ready to meet this competitive challenge.

The first thing new competitors might promise are lower prices. However, Canadian cellular rates are already 25% lower than US cellular rates, leaving less room for economic price flexibility for new Canadian competitors. As well, it is hard to beat the free phone offers launched last week by Cantel and soon to be followed by the telcos. It is essential that investors understand that Cantel will not be undersold! This quarter, Canada will see the biggest marketing shootout and price warfare that the wireless industry has ever seen. Cantel will be the market leader and shall increase its market share! Price shall not be an effective tool against Cantel for new wireless providers in Canada! On the contrary, as the low cost provider, Cantel will not only survive but prosper, particularly if wireless usage is stimulated by the increased marketing, as has happened in the UK.

The fundamental premise of our potential new PCs competitors is to differentiate themselves from analog cellular services. When comparisons are made by our potential new competitors to analog cellular service, many of their claims of increased functionality and features are, in fact, true. But if you compare PCs with digital cellular, there is in fact no difference! That’s because there isn’t any difference! PCs is simply digital cellular. There are no features or functions of PCs digital cellular at 2 GHz that can’t be provided on 800 MHz digital cellular. Our potential new competitors have succeeded in creating the perception of PCs as a new wireless technology, when in fact it is not. Consumers buy brands or products, not frequencies. They don’t care what frequency the phone uses, they just want it to do what it is supposed to do at a reasonable price. Cantel is extremely well positioned to fulfill their needs for PCs digital cellular as a product. We have the marketing and sales force and retail distribution across Canada to guarantee great growth for Cantel.

The diagrams I have beside me show where Cantel will be by the end of 1996 with its digital cellular PCs platform, and estimate where our competitors will be with their PCs coverage at that time. The first diagram shows Cantel’s Ontario digital cellular PCs coverage by year end 1996 and the second shows the province of Quebec.

All I want to show here is that 87% of the population in these two provinces will be within Cantel’s digital cellular PCs network, compared to only 28% for our competitors. If you, as a business customer, had a choice – which would you choose?

All of the new PCs licensees intend to have their customers roam on Cantel’s or Bell’s analog service where they don’t have digital coverage. We will be required to resell our network, and in fact look forward to the revenue opportunities that this new business will create, both within Cantel as the reseller and within Rogers Cable as the transport system, for PCs services within Toronto and Vancouver. The PCs providers have made much of their feature-rich digital networks; but when their subscribers roam onto analog, only the voice service will work, and none of the digital PCs features will work! Importantly, the subscriber will also never know whether to expect the features to work or not. We don’t believe that wireless subscribers – especially business wireless customers – will be satisfied paying for services that only work sporadically.

In the business segment, Cantel will be able to provide a digital cellular PCs product that works everywhere all the time, not just some places, some of the time! To the business user, who depends on features in late 1996 such as short messaging and response message, it’s not the price at which the service is offered but the value which they derive from the whole package. Value is not just price! No one will offer a broader range of business products, or a broader digital cellular PCs coverage area than Cantel, Canadian businesses’ number one wireless provider.

At the other end of the spectrum is the consumer marketing sector. This is mass retailing: Radio Shack, Future Shop, Canadian Tire and mass advertising; double page newspaper spreads, TV, radio, magazines – the works! Rogers Cantel invests over $3 million every month on average in mass advertising. It spends over a million dollars a week in the critical fourth quarter.

The most expensive part of adding a wireless subscriber these days are the sales and marketing costs which run in excess of $500 per customer.

In addition to this are the subsidies to the hardware the customer “buys.” Cantel gives away the super Motorola analog flip phones costing us $239 – but in return for a long term contract. Everyone knows digital phones are much more expensive – dual mode phones may be $500 and $600 and really have services designed for business customers. The cost of giving away digital phones plus the sales and marketing costs will cost digital cellular PCs competitors in excess of $1,000 per gross new subscriber – in addition to the extensive capital costs of constructing a digital wireless network across this vast land.

With these sorts of economics, it is no wonder a prominent money manager summarized most independent PCs business plans as, and I quote, “the mindless destruction of capital.”

Cantel has a low debt to EBITDA ratio and has unused credit totaling hundreds of millions of dollars. Cantel is profitable and has a constructed network which, in 1996, will cover 93% of Canadians. If anyone thinks the Rogers Group is hesitant to do whatever it takes to be the dominant wireless carrier in Canada – let them think again! We have a history of dynamic growth and marketing leadership. Rogers is number one in cable and number one in radio broadcasting, with CHFI-FM being the top-rated, top-billing, FM station in Canada. We know how to market – and how to win!

Cantel has invested over $1.5 billion in high-quality wireless facilities from coast to coast, serving approximately one million cellular customers by the beginning of 1996 and earning well over $300 million in EBITDA. By the end of 1998, Cantel will have almost doubled its cellular base to about two million mobile telephone subscribers. This month – November 1995 – Cantel’s marketing and sales campaigns has resulted in record sales.

And I’m not done, yet. On this topic of our new digital cellular PCs competitors, the worst is yet to come! In the early 1980s, standards were developed for analog cellular intended to ensure one standard across all of North America. Analog phones bought in Toronto work in every province across Canada and in every state in the US. Because of analog’s universality and the mass production of analog wireless phones, the price of analog phones after 10 years is very low.

Digital cellular PCs is a disaster by comparison. Unfortunately, there are three or four different digital cellular PCs technology standards, and the Canadian PCs competitors to Cantel are proposing to use different ones. They will be using three or four different phones which are incompatible with one another. This will result in our competitors’ digital phones being expensive because of limited production runs. It also means there will be vast tracts of Canada and the United States where our competitors’ digital phones will not work for their digital services for many years, if ever!

There is a European digital standard called GSM which one of the PCs competitors is planning to use. It is an orphan technology in the United States and it is questionable, in my opinion, whether dual mode GSM digital-analog phones will be able to hand off without interruption and the need for redialing.

CDMA (Code Division Multiple Access) is the “mystery” digital standard! It promises everything, but – it is new – unproven in a commercial rollout in North America and therefore more technically risky. It is supported by many of the US and Canadian telcos. Time will tell!

The proven North American digital technology is TDMA (Time Division Multiple Access)! AT&T Wireless and Rogers Cantel have pioneered and developed this technology. By the end of 1996, TDMA digital will be available to over 80% of Canadians and over 80% of Americans. It is a proven, world-class technology with mass-produced digital telephones. Rogers has always been the leader in technology in Canada, and AT&T is in many respects, the technology leader in the world.

Our wireless competitors will be in technological disarray and disunity while the leaders – AT&T and Rogers Cantel – will immediately cover 80% of the North American continent with the unified standards of technology and common, user-friendly business services.

Early next year, Cantel will introduce the digital control channel, which will allow many of the features people attribute to digital cellular PCs such as sleep mode, which will dramatically improve battery life and allow for smaller batteries, and therefore lighter phones, to be provided on digital cellular. Later in 1996 we will introduce a new digital voice coder providing dramatically higher voice quality to our digital network. These “upper end” business subscriber services will be available to 80% of North Americans – not little clumps of coverage separated by thousands of miles of no digital cellular PCs coverage and services, which will be our new PCs competitors’ situation for many years.

We believe that competition will be healthy for the wireless market and look to the UK as an example of what competition can do for the incumbent providers. For those of you unfamiliar with the UK experience, prices came down in that market because they had room to, growth rates doubled, and the incumbent cellular providers took 80% of that growth because of the value they provided to their subscribers.

Cantel’s growth will increase due to more activity in the wireless market in the 1997-2000 time period. For the balance of 1995 – and 1996 – as you see and hear all around you – Cantel is driving consumer cellular as an affordable, customer-friendly service – driving down costs and leaving as little room as possible for new entrants.

Now Rogers Communications Inc. also happens to be in the cable broadband telecommunications business! Rogers Cable is the most clustered cable group in Canada serving the richest parts of Canada – Southern Ontario (centered on Toronto) and the Lower Mainland of British Columbia (centered on Vancouver). It’s not only the best situated – it’s the largest broadband telecom supplier in Canada serving over 2.5 million homes.

Rogers’ broadband plant is more developed technically than any other cable company in Canada and is one of the best in North America. While it still has hundreds of millions of dollars of cable capital expenditures to go to make it a Full Service Network – it has far less to spend proportionately than the other public Canadian cable companies. Within a few years – Rogers Cable’s capital expenditures will be substantially reduced while our EBITDA from new services will be substantially increased. Leadership today – and substantial investments – will serve as the base for continued growth and profits in the years ahead!

In early 1997, Rogers Cable will be offering a number of product categories:

• Analog cable – high quality – robust – the largest number of analog channels offered.

• Digital cable – most cable companies are proposing to use the new addressable digital converters only for pay TV and 20 channels of pay per view. Their basic service and tiers would continue to be only available on analog, which does not have the sparkling pictures and audio quality of digital. We believe that if we are going to be able to successfully compete with satellite services which are 100% high quality digital, our entire offering has to be 100% digital. That’s a key factor in Rogers having high capital expenditures, because we have greater channel capacity. For example, the digital boxes being created for Rogers will have 40% greater capacity than the boxes selected by most other cable systems in North America. Late next year we will offer 100 channels of pay per view, not 20, and our entire cable offering both in analog and digital. Few cable companies in North America will be as well prepared to compete against digital satellite services and other potential competitors as Rogers Cable.

• Digital PC Internet service – featuring very high speed, high band width, cable super modems at affordable monthly rates for the growing PC home market. This has been launched today in Newmarket on a commercial basis at a rate of $39.95 per month, including the modem. You can see the newspaper ads and inserts at your table. This has the potential to be a bigger business for us than our existing business serving the TV set.

• Security services featuring constant monitoring, generally unavailable from telephone-based security services.

• Commercial telecommunications products from Rogers Network Services, which is the fastest growing sector of the Cable group of companies.

I want to emphasize the critical factor that Rogers Cable’s technical infrastructure is much more developed and built than other cable companies. Right now Rogers has over 600,000 subscribers with 600 MHz of capacity and two-way capability and the number is growing every month! To the best of my knowledge, no other Canadian cable company or the vast majority of US cable companies have two-way commercial service to customers at all.

To be a player in local telecommunications, cable companies have to be two-way! To be a player in the vast growth market of interconnecting home PCs, cable companies have to be not only two-way but also much more robust, secure and high-quality. Rogers is rolling out commercial development of these services – other cable companies are not yet equipped to do so.

Rogers is investing in new businesses – in new sources of revenue – i.e. new EBITDA. Rogers Network Services’ EBITDA this year is one dozen million dollars – next year it will be double to two dozen million dollars, and in 1997 to four dozen million dollars.

Rogers high capital expenditures are designed to fulfill two purposes:

• The first is to develop new cash flows from new businesses such as local business telco bypass, broadband high speed and home computer services.

• The second is to make our basic entertainment services the highest and most reliable quality possible with the broadest shelf space possible to be able to handle the widest possible array of entertainment, education, home training and information services.

Rogers’ strategies are not just defensive, but are also offensive. The technologies that we have chosen will allow us to be leaders in competitive new businesses such as high speed access to the home, advanced telemetry and eventually local telecommunications. We are confident that the diverse basket of new revenue opportunities which we are developing in the cable company will provide the level of return on investment that is expected from our investors.

The telephone companies have talked about building a broadband delivery platform. The recent CRITIC Split Rate Base Decision, which required the telephone companies to place costs associated with such a build-out in the competitive side of the company and not in the monopoly side, should ensure that initiatives such as Beacon are paid for by the telco shareholders and not by local telephone subscribers. Without the ability to cross-subsidize this build-out, I seriously question the viability of such an initiative. But don’t take my word for it. Many of the US telephone companies who also made noises about building a broadband distribution network have shelved those plans, at least temporarily, in favor of a wireless solution. But if the telephone shareholders do make an overbuild investment in what is essentially a cable system, the days of large and predictable dividends for telephone company shareholders are over!

Perhaps the greatest growth story within the Rogers group of companies resides inside the cable group – and that’s Rogers Network Services. It is clear, judging by the valuations attributed to companies such as MFS (Metropolitan Fiber Systems) or Teleport in the US, little value in the RCI share price is being attributed to this jewel right now.

Rogers Cable also owns the second largest video store group in Canada. Some of you have wondered why we are in video stores? Why did Sumner Redstone, one of the smartest men in media, buy Blockbuster? He did it because it was a very astute financial investment. We think it is the same in our case.

Rogers Video Stores also provide us with a face in the communities in which we operate. Cable companies by the nature of their efficient operation are remote. The video stores are now, and will increasingly be, the primary physical place for customer interaction with all of Rogers’ telecom businesses. It is there that you will be able to rent a video, trade up to a DVC box or computer modem, pay your bill and much more. Rogers Video Stores are, first, profitable and, second, an integral part of our cable division’s marketing strategy.

All in all, we feel the three components of the Rogers Cable group – Cable, RNS and Video Stores – will contribute great growth and rising EBITDA’s to Rogers Communications Inc. over the balance of this decade and for many years thereafter.

Financing

It might be helpful to discuss financing and leverage for the Rogers companies. As you know, it is important to note that some businesses can reasonably sustain higher borrowing and higher leverage than others. It’s important to fit borrowing and leverage à la carte, specially designed for each of our businesses. RCI has normally done its financing in each of its operating companies with no cross-affiliate guarantees. We think this is prudent!

In the early days of very high-growth products – such as wireless or Rogers Network Services – it is not unusual to start with a debt to EBITDA multiple in the teens or higher because it is forecasted to come down to the 5 to 6 level within a reasonable number of years. On the other hand, a magazine business may have a maximum limit of debt to EBITDA of 3 or 4. Thus, the total debt ratio to EBITDA of Rogers Communications Inc. consolidated doesn’t mean much by itself. It is a blend of the newer growth-oriented businesses with more mature, slower-growth businesses and products.

Traditionally the Rogers companies have featured high growth, capital intensive businesses which have escalating EBITDA. Rogers is always developing new businesses and new products – FM in the 60s – cable in the 70s – cellular in the 80s. It’s even truer today that new products for the 90s promise continuing growth and higher EBITDA’s for Rogers Communications such as computer telecom service to the home and commercial business services.

Our ratio of debt to EBITDA in media is 0.4 in the Toronto Sun and a reasonable 4ish for broadcasting and publications. These businesses are high-quality, with a continuing history of sustainable profit. How many other Canadian newspaper groups are operating at a profit as Paul Godfrey’s Toronto Sun Newspapers are? Rogers Broadcasting, under Tony Viner, is successful and profitable. Our magazines are profitable and Canadian icons. They have excellent management under John H. Tory and we foresee substantial progress in the future.

High-growth Cantel has a relatively modest debt to EBITDA of less than 3.5 to 1. Cantel could draw several hundred million dollars of additional credit if needed for competitive purposes. However, Rogers Cantel’s capital needs after 1996-1997 should be relatively modest since its analog and digital coverage will bring the service to 93% of Canadians and it will have over 1 million phone subscribers and 250,000 paging subscribers. Cantel is profitable.

RCI corporate has about $300 million of non-convertible debt. It is anticipated that in the three-year 1996-1998 planning period this would be reduced, although it may be higher short term. The area which needs attention and reduced leverage is the cable division which embraces cable and video stores. RCI is committed to investing at least $200 million of additional equity into the cable division in mid-1996. These funds are already arranged. In the 1996 to 1998 three-year planning period, we are planning to reduce the ratio of total debt to EBITDA in the cable division from 7 times today to a maximum of 6 times and probably 5.5 times.

This will be achieved by a combination of some or more of the following.

• First, the possibility of a powerful strategic partner who could assist Rogers in marketing, branding and bundling as well as investing in the equity of the Rogers telecom companies would be something I support. There is no group of telecom assets in North America with the breadth and quality of Rogers Communications. Rogers offers exciting potential for a global telecommunications partner.

• Second is the raising of equity by a future issue of RCI – Raising equity in RCI will be made much easier by the recently announced changes to government regulations on non-Canadian ownership. This will permit RCI shares to be listed on a US stock exchange and be actively promoted in the United States. We believe this will be a most important reason for the improvement I anticipate in the RCI share price over the next twelve months.

• Third, the sale of non-strategic assets.

In summary then, we are sensitive to the fact that competitive businesses require more equity and less financial leverage than monopoly businesses. We are actively undertaking steps to facilitate this. Rogers has substantially hedged its interest rate exposure and its currency exposure from US public debt instruments.

With the growing importance of branding, bundling and joint billing – about which I will speak more in a moment – the marketing and sales advantages from such activities (and particularly if combined with a strategic global telecommunications partner investing in Rogers) can create increasing values for our shareholders. I believe the long-term share price trend for Rogers will continue its upward pattern. When I started 16 years ago, the market price adjusted for splits was 70 cents. Today it is $13.50! It has been higher and, in my view, will be much higher again!

In the past few days I have placed orders to buy 2 million shares of Rogers Communications for my private account and am looking to purchase more. With the plans I have outlined, I believe Rogers Communications Inc. is the top communications buy in the market for very substantial market growth in the medium term.

I promised to review the Management Group at Rogers Communications. Management is always an issue, particularly in a controlled company where the controlling shareholder is also the Chief Executive Officer. I am a very hands-on, involved executive entrepreneur and I enjoy my work. I hope the Good Lord allows me to continue actively for a long time. But the company has enjoyed tremendous growth from the little FM-only operation of 35 years ago. It’s therefore very important to pay a lot of attention to management and control succession.

It is essential to be prepared so the company doesn’t miss a beat. At Rogers – at the beginning of 1996 – we will have three Chief Operating Officers, each running a different facet of the business and each qualified for promotion. Colin Watson is COO for the important cable television unit – John H. Tory is COO for our Media Group – and I have hired an outstanding executive who has accepted the position of COO of Telecommunications involving wireless, Rogers Network Services and whatever interest we may have in long distance. This announcement will be made within a week or so (Bill Catucci).

At Corporate, there are two long serving senior officers – Vice-Chairman Phil Lind, and Chief Financial Officer Graham Savage – who are each well versed in the affairs of the company and qualified for promotion.

Our Chairman, Garfield Emerson, would become acting CEO while the Board determined who should take over as CEO. Gar himself would be an outstanding candidate if he ever had the interest.

From a management standpoint, I believe Rogers has more depth and more succession planning than most other communication companies – certainly in this country. Frankly a lot of my drive and concentration on this issue is because of my father’s untimely passing at age 38 and the results that transpired.

Supporting each operating group President are equally capable and dynamic managers. In Cable, Scott Colbran, formerly President of Maclean Hunter Cable, is CEO. Rudi Engel is Executive Vice-President of Sales and Marketing, and Frank Eberdt, Executive Vice-President Field Operations. They will guide Rogers Cablesystems into its new role beyond traditional TV entertainment. In an effort to strengthen our position in the West, Rogers Cablesystems has recently hired an Executive Vice-President and General Manager for Rogers Cablesystems’ western efforts. His name will be announced soon.

John Tory’s role of coordinating the activities within the Multi-Media group to ensure economies of scope and scale in the new media era are supported by veteran broadcasters such as Tony Viner at Rogers Broadcasting. The newspapers, under Paul Godfrey, and the magazines are increasingly profitable despite draconian paper cost increases. To produce such increases in a time of spiraling cost structures is a true indicator of good management.

At Cantel, during my recent tenure as Acting Chief Executive Officer, I have come to know and appreciate Mick Mullagh, John Maduri, Bob Berner and so many others, and am comforted by the fact that despite how difficult it is to run a company with a part-time CEO, we have performed well and successfully together. The Rogers Group has an outstanding management team in depth – many of whom have been with the group for many years.

Finally, I promised to discuss how the Rogers Group of telecom assets are unique in North America and whether an investor in Canadian telecommunications should buy a one-product or multi-telecom product company. In our view, success in telecommunications companies will increasingly be dependent on branding, bundling and joint billing. The Cantel brand is the strongest non-telco brand in this country!

We believe that any company whose business plan is based on one technology or one product is extremely vulnerable and is not a safe investment. To be just in PCs, or just in cable, or just in long distance is not the right strategy for the next five years. We believe that increasingly the public looks favorably on a firm supplying a number of telecom products at a discount and with one bill. It substantially reduces churn. That is why we have worked so hard to build the portfolio of products and technologies that define RCI today. Our purpose for the next several years will be to coordinate these assets into one sales, marketing and information technology platform. RCI is becoming more and more an operating company and with a host of different telecom products and bundling companies.

One reason multi-telecom product companies will prosper will be their greater access to shelf space at telecom retailers. As you know, acquisition costs in wireless are very expensive. As the market becomes more competitive, it will become more and more critical to get retail shelf space. When you have a number of telecommunications products and commission streams, you are in a significantly better position than someone with only one product and one commission stream. Common branding will be helpful if it can be accomplished. Bundling is also the way of the future, and it is more permanent and easier to develop with common ownership. Common billing and information technology is also more essential. Rogers will be in a position in the first quarter of 1996 to take advantage of these features and implement multi-product billing.

What you are seeing in RCI today and what you will continue to see in the immediate future is a transformation of a company from a strong engineering base to an exceptionally strong marketing, sales and customer service base. You see evidence of that all around you in the Cantel Christmas campaigns. Our recently opened customer service and telemarketing centers contain leading-edge software systems and technology and well-trained staff. What we are demonstrating in competitive wireless today will be also demonstrated in our other telecommunications end products.

Increased competition will stimulate the marketing and increase the tempo of sales of Rogers telecom products. It will continue the transformation of Rogers Communications Inc. as an operating company with a host of new telecom products and services and make it the second force and main alternate supplier to the telephone companies. Rogers will forge alliances with others to ensure continued financial, technical and marketing strengths.

This unique combination of telecom assets operated by Rogers Communications makes it an extraordinary investment. Come – become our partner – for truly The Best is Yet to Come.^®

RETAIL TRADE AND DISTRIBUTION: PERMANENT REVOLUTION

Robert R. Dutton
President & CEO, Le Groupe Ro-Na Dismat

The Board of Trade of Metropolitan Montreal, April 2, 1996
Published in The Corporate Report No. 18 (June 30, 1996)

Barely a week goes by that we don’t hear something about the revolution in retail trade. The notion has been around for a few years now, and while it doesn’t mean anything precisely, it brings to mind an image of expanding retail space, shrinking prices, predators and victims. Almost any discussion on the topic ends up with the following predictions.

1. Big box stores are going to squeeze out traditional stores until there are none left.

2. The wholesaler is a parasite. Luckily he’ll gradually die over the medium term, while intermediaries of any sort will be completely wiped off the map.

3. If we live to be old enough, we’ll see the electronic highway completely replace the current distribution infrastructure, including the retail store, because it is becoming more and more easy to buy directly from the manufacturer, over the head of any intermediary.

But these three statements are more myth than reality. They are just the eddies passing alongside the current of the real revolution, the one we really have to deal with. Over the next few minutes I will be addressing these three myths and just what the real revolution entails.

First of all, the disappearance of independent stores. This same prediction has popped up at least four or five times over the last 150 years. It started when the first department stores opened their doors, then again with catalogue sales. The next time was with the arrival of chain stores across North America, then with the five-and-dime stores. More recently, the threat has come from the big box stores, the discount stores, the super-variety stores (such as in France) and now the warehouse stores.

But today all these retail sales networks operate alongside each other, each occupying its own segment of the market and responding to the specific needs of that market. And sure enough, the independent store that was supposed to have disappeared a century and a half ago is still alive and kicking.

With all due respect to the “Home Depots” of this world, we should take a look at the United States, where the big chains of warehouse stores first started out. At the moment they account for about 25% of the hardware and renovation sector. The remaining 75% represents US$75 billion. That leaves sufficient room for a good 40,000 independent stores not only to survive, but also to prosper and grow.

And so, is this so-called revolution simply a spoof? No indeed! It’s there, all right. But sometimes its true nature and impact fall out of focus. To believe that the warehouse stores are waging war against the smaller stores is just too simplistic a notion.

The truth of the matter is that whatever the size of the store, good merchants and good stores don’t die. What dies are methods that have been outdated by technology, or that haven’t kept up with the evolution in consumer demand. Revolutions don’t close stores of a particular size or type. Revolutions close inefficient stores, no matter what their size.

Three factors gave rise to the present revolution:

• First of all, there was the enormous leap ahead brought on by information management technology over the past few decades. Technological progress has resulted in much greater efficiency and it has also brought forth the notion of “just-in-time” as a provisioning strategy.

• The second factor is the evolution in consumer demand. We are seeing more and more demand for custom items at mass-consumer prices.

• And the third factor is the brain wave, often attributed rightly or wrongly to Sam Walton. It was the idea that the role of the merchant is not to buy, stock and sell articles, but rather to efficiently manage a flow of products and services between the producer and the consumer. The distinction may not seem readily apparent, but it is nonetheless fundamental.

I would like to draw your attention for a moment to the following notion: none of these three factors has anything to do with store size. As spectacular as it has been, the arrival of the warehouse store has not, in itself, been a revolution. It is a byproduct of the retail revolution. It is not a cause.

The real revolution isn’t just at the retail level. It involves the whole supply chain from the manufacturer right down to the consumer. And so it affects stores of all sizes and the entire supply chain, including wholesalers – which brings me to the second myth that I was talking about earlier: the disappearance of the wholesaler.

Many an observer has thought that the wholesaler was a dinosaur: big beast, small brain, a species from the past. Interestingly, the facts don’t support this notion. Over the past fifteen years, distribution activities, both wholesale and retail, have represented an increasingly large portion of the economic activity both in Canada and in the US. In Canada in 1983, distribution accounted for 10.7% of the GNP and 12.1% in 1993. It may come as a surprise, but all this growth is attributable to wholesalers. These are not the typical figures of a sector that is losing ground.

The myth that wholesalers are disappearing comes, for the most part, from our lack of understanding their role in society and of the gains in productivity in distribution in general. Despite technological progress, it is still more efficient for a manufacturer to deal with a limited number of wholesalers rather than with hundreds more retailers. Just think of managing credit and risk, orders and returns…not to mention the efficiency of the actual physical distribution. Most products coming from American mass merchandisers go through their own warehouses. They are in a way their own wholesalers, but the function remains nonetheless.

Having said that, I do concede that there is a phenomenon of consolidation out there. It is true too that wholesalers, just like retailers, will have to change their ways. But that doesn’t mean the species is on the verge of extinction. On the contrary, they are on the front line of the current revolution.

This change is nothing new for wholesalers. In fact, their position in the supply chain makes them the most vulnerable to change. Changes happening in the consumer market affect them well before the manufacturers. And they feel any change in the manufacturing sector before it effects the retail and consumer level. And as for change, we’re talking big change! Changes to such an extent that even the most dynamic wholesalers are reviewing their mission. Improvement is not enough. We’re talking redefinition.

A few moments ago, I mentioned that merchants can no longer afford to see themselves as buyers-resellers, but rather as elements in a system centered around the flow of merchandise. Wholesalers are really at the hub of the system. Those who want to extend their reach out from the hub have a fourfold challenge.

The first challenge is to perfectly master all fundamental aspects of the trade: first and foremost is managing human resources, then operations, stocks and finance. These fields are the building blocks, and there is no room for mediocrity. You can’t let go of the reins for a minute.

The second challenge is technology. If you still see distribution simply as putting the contents of big boxes into little boxes, you’re in for a surprise. Distribution has gone hi-tech, which puts it fully into the knowledge-based economy. Not only because we are using computers and powerful software, but because the logistics and management of the matter have become rigorous, scientific, and innovative disciplines.

The third challenge is information. With modern technology we are being swamped with information. The challenge is how to use it effectively, particularly to better understand and single out the needs of the consumer. This means micromarketing and micro-merchandising, which enable the stock and layout of each store to be adapted to socio-demographic particularities. From now on, wholesalers will no longer be assessed for how they manage stocks but more for whether or not they can supply the consumer and the manufacturer the information to make them more efficient.

The fourth and last condition for success for wholesalers is the strengthening of vertical systems. That means solidifying ties with manufacturers on the one hand and with retailers on the other. Traditionally, wholesalers have tended to maintain antagonistic relations with both manufacturers and retailers. From now on, manufacturers, wholesalers and retailers alike, have to work symbiotically as important elements of the same system, a system based on the consumer. Wholesalers such as Le Groupe Ro-Na Dismat that are owned by retailer groups, are the most strategically positioned for this transition. This explains why in the United States wholesalers of this type now account for more than 71% of the market, compared to 62% back in 1983.

The four challenges of management, technology, information and vertical systems have already been met for several years now at Ro-Na Dismat.

As for basic functions, international statistics show that we have become one of the top-performing companies in the world in our sector of activity. For the past five years, everything has pointed to our often spectacular performance improvements, whether it be in employee relations, stock management or operations. As a result, over this same period we have managed to increase our net earnings per share by 20% per year, while reducing our prices and gross margin. In addition, the book value of our company has doubled. A notable advantage of this performance is that Ro-Na Dismat has also considerably firmed up its financial situation. With very healthy financial results, Ro-Na is well equipped to meet its challenges.

As for the challenge of technology, we are investing more that $1 million a year in our information systems. This figure will be increased to $3 million this year. Not to mention the millions invested by our dealer-owners. Fully 90% of them are connected to Ro-Na Dismat by computer and, as well, 90% of our own purchases are conducted through EDI. Ro-Na Dismat is well on top of its technological challenge.

Third challenge: information. Our 386 dealer-owners are also, to a certain extent, marketing researchers, largely with the help of technology, to be sure, but also because of their attachment to the milieu they serve. Nonetheless, the structure of our ownership is such that each of these 386 researchers, if you will, is also an authentic and responsible decision-maker, capable of adapting his merchandising to local conditions. No distribution system in Quebec at the present time is able to make this adaptation better than the Ro-Na network.

Fourth challenge: our ties with manufacturers and retailers. I believe this is the most important of the four. And it is our response to this particular challenge that gives us the greatest satisfaction at Ro-Na.

Our retailers own their own stores. To say that our ties are solid and durable would be an understatement. For example, in 1995, Ro-Na merchants carried out 91% of their purchases at Ro-Na Dismat. To give you a better idea of what such a figure amounts to, we can look at the US, where loyalty rates of 50% are common and where most companies similar to ours are happy to get loyalty of 70%.

The strength of our ties with our merchants has greatly facilitated our relations with our suppliers. Our growth is also a factor in their development. For Quebec companies such as Sico, Duchesne et Fils and Garant, Ro-Na Dismat is their biggest customer.

We collaborate with our suppliers in many ways. We do joint advertising and work together on various strategies for market development. There are even times when we have used our knowledge of the market to convince a manufacturer to bring out a new product. For example, Ro-Na Dismat asked Peinture Laurentide, a company in Shawinigan, to develop a paint based on recycled products. It is due to come out on the market in a few weeks.

Twenty years ago, Ro-Na Dismat turned the page on being a simple buying group and progressively became an integrated retail company. So the current revolution has not left us shorthanded. We decided to adapt by being active in all segments of the market. Le Quincailleur, Le Quincaillier Ro-Na, Le Rénovateur Ro-Na, Dismat, Ro-Na L’entrepôt and Botanix cover all store sizes in the current market. Each banner has its own specific niche that corresponds to the needs of a particular segment of the market. That is how we have been able to generate $1 billion in retail sales from the 4.5 million Quebecers who shop at our stores.

Out in the field, this segmentation has meant renovating our networks. While this is under way, it is far from finished. Renovation projects being undertaken by our dealers over the coming years will exceed the $10-million mark.

The concept of our Ro-Na L’entrepôt stores was based on an accumulation of all we have learned from the Quebec consumer, particularly in our network of stores operating under other banners. If we compare it with its typical counterpart in the US, our store is warmer, brighter, more roomy and pleasant – maybe a little more Latin! Ro-Na L’entrepôt is unique in North America, not only because the store layout is different, but also because of its ownership formula, which is based on a regrouping of member dealers.

Ro-Na is present in all segments of the market and is looked upon as a consumer specialist – as opposed to a specialist of a particular store size, whether big or small.

This is a choice, and it was motivated by two things. First of all, we have a diversity of store size, which reflects a permanent diversity in consumer expectations and makes the best use of the diversity of ambition and financial means of our dealer-owners. Each of our store sizes responds to a need and a place in the market. Adherence to the same buying group is profitable for all stores, regardless of their size.

Towards the virtual store

Just imagine: it took 100 years for the department store to reach maturity, 25 years for the supermarket, 20 years for the super-variety stores (such as in France) and a little more than 15 years for the warehouse stores.

If the last ten years have been a fertile time for market movement, the future promises to be even more interesting – and more demanding. It is already a well-known fact that retail trade overall is going through a consolidation period that is just starting. According to Coopers and Lybrand, in the US there is currently approximately 18 square feet of retail space for every inhabitant compared to only 13 in 1980 – an increase of nearly 40%. Progress in Canada has no doubt been along comparable lines.

It is difficult to say at what point we’ll be talking about over-saturation, but the market will let us know, I’m sure of that. Once we reach that threshold, then we’ll see just how timid the current consolidation really was. We will also see that there is no magic formula: in every market niche it is the most efficient and the most innovative that will prove the most successful.

For this reason, Ro-Na Dismat is comfortable with its decision to occupy all segments of the market. Rather than gambling on just two store sizes, our dealer-owners are wagering that they can be the best in all segments.

The forthcoming consolidation is all the more potent when we look at the new store format that is already emerging: the zero-space or virtual store. Just like the warehouse store, the virtual store has its champions who claim that it will dominate the market, even to the point that it will eradicate the dealer himself – there’s the third myth I talked about at the beginning. The virtual store also has its skeptics, who claim that it will be nothing more than a fad. But I believe that the virtual store, just like the warehouse store, will find its niche and that other supply chains will have to adapt.

The virtual store has certain undeniable strong points – mainly that the consumer can shop without leaving home. But it would be wrong to imply that it will eliminate the function of the merchant as such. In fact, I’m sure that the contrary that will happen: wholesale and retail merchants will continue to play an even greater role in the economy, even if they have to make changes in order to do so.

This I believe for three reasons. First of all, the virtual store will not decrease the importance of physical distribution – that will increase. The consumer will not even go to a store to pick up merchandise any more, he’ll have it delivered to his home. And, as I mentioned a few moments ago, the know-how in matters of logistics and moving merchandise is a strength possessed by merchants, particularly wholesalers.

Second, the virtual store is not necessarily a method of distribution any more efficient than the real store. It is one thing to order software and have it delivered by air courier, but a circular saw or four gallons of paint may be quite another matter.

Third, the consumer, left to his own means on the information highway, will be submerged under the flood of information. As far as I’m concerned, those who are the most aptly placed to process information so that the consumer can shop efficiently are those who are already in the field: the merchants.

Nothing will stop Ro-Na Dismat from adding the virtual store to its lineup of banners. We are well positioned to do it. With our already considerable technological facilities and with our already efficient distribution network, to say the least, we have a definite competitive edge. We have managed to adapt the warehouse formula to our organization and our ownership structure. I don’t see any reason why we couldn’t just as well invent a typically Ro-Na way to move out over the information highway.

Of course, I’m not making any official announcement. I am simply thinking out loud. But the day Ro-Na decides that it is worthwhile to make the virtual store a reality, then we will move ahead with the same objective as for the other niches – to be the best.

To sum up I have a feeling that we have not yet seen the end of the revolution in the distribution of consumer products. In fact, it will be a permanent fixture. And I couldn’t predict, any more than you could, exactly what is in store for us. But I do know that success will continue to be achieved through collaboration. If there is one thing that Ro-Na has succeeded in doing over the past years, it has been to stimulate and encourage collaboration among the different levels of the supply chain, from the manufacturer to the retailer, to better serve the consumer. If there is one thing we should continue to do successfully, be it in a virtual store or in a corner hardware, it is to continue working together to ensure the best service possible for our customers.

There is one thing that I am sure of: the Ro-Na Dismat customer will always come out a winner in the ongoing retail revolution.

FIVE CHANGE PRINCIPLES FOR BUSINESS AND GOVERNMENT

John E. Cleghorn
President & COO, Royal Bank

The Vancouver Board of Trade, Vancouver, September 16, 1993
Published in The Corporate Report No. 4 (December 15, 1993)

We live in an era of spectacular innovation that demands change in how we think, how we live, how we work and how we learn. But we also live in a period of world economic downturn which is unlike anything we’ve experienced for almost two generations. Nations – and companies – that cannot adapt to this uneven and uncertain tide of change will be left behind – may even cease to exist.

Today, the true wealth of nations – and businesses – no longer depends mainly on the dollar value of physical resources – oil, gas, metals, wood, crops, real estate and other fixed assets. It depends increasingly on the quality of goods and services we create with the help of a whole new array of computers, software, telecommunications and multimedia technology.

The value of this new electronic highway lies in the ideas, big and small, that go into it – and between the ideas and the reality, between the motion and the act, (to borrow from T.S. Eliot), falls the practical application of those ideas to markets.

Ideas are, of course, the output of the most precious asset of all in this new Information Age: human resources. If you doubt that, just look at Japan. Compared with Canada or the United States, it is very poor in natural resources. But it has become an economic superpower by nurturing rich human resources through quality education and quality training combined with high standards of quality products and services and a capacity for hard work. Other Asian economies are following the same route to success.

It wasn’t always this way. A generation or so ago, it seemed that life and our careers in North America would be one long continuous line, with luck and application, sloping upward. Companies then saw the future as largely predictable, to be planned for and managed on rigid hierarchical lines. Most people thought then that change would mean more of the same, only better. We felt like winners and because we thought it was only natural, we thought we could sustain the present into future generations, we spent and then borrowed heavily to bet on it.

Today, there’s a different paradigm. We are much less certain about the future. We know that in many areas of life, we cannot guarantee more of the same, be it work and money, health and happiness, peace and freedom. We’ve come to realize that we simply can’t afford it all.

We can no longer predict with confidence what will be happening in our own lives (the reality was we never could). Young people now in the workforce face the probability of having to learn new skills several times in a working lifetime.

What’s the result of this uncertainty? We could leave our children a lower standard of living than the one that, until recently, we took for granted – unless we manage change more effectively in our public and private enterprises.

If the change is now more risky and can lead to adversity, it can also be more exciting and rewarding – if we want to see it that way and act accordingly. Even in difficult times the challenges of adversity are also educational. They teach us what really matters in life.

And we must appreciate that there is as much scope for improvement through large numbers of small changes as with just a few big changes.

Businesses that succeed in the 1990s and on into the next century will be the ones that give their people wide scope for creative innovation. We are experiencing what the noted economist Joseph Schumpeter once referred to as “creative destruction, where new ideas bring new economic growth and a whole host of new companies spring up while less competitive sectors decline and disappear.

The Canadian workforce is very different today than it was 30 years ago. More women are working. More parents are working. The population is aging. There is much more ethnic diversity. Everything moves faster and news travels instantly, anywhere. Our income and assets have been squeezed or reduced by past inflation and the recession, by higher taxes, falling real estate prices and high personal debt.

This has propelled a shift in values, life styles and attitudes. Excess consumption is out, getting value for money is in, more so than ever. Forced to scrimp, people have made a virtue of necessity and have adopted new spending habits and new habits at home.

In the 1980s, the question was “What do I want?” Today, it’s “What do I really need?” People will only pay premium prices if they’re convinced the product delivers solid value. Convincing people that the product or service has real quality will continue to be the biggest challenge facing businesses. The familiar echo from the past is our good old common sense finally reasserting itself again.

At Royal Bank, we too have to change the way we do things which is why we have adopted five guiding principles to help us focus on what really counts to enhance the quality of our service, our work environment, our productivity and our teamwork. And also enhance our earnings, which our shareholders want and rightfully expect.

The first guiding principle is:

Exceed customer expectations with value.

Winston Churchill summed this up when he said: “I am easily satisfied… with the best.” It means we must not only meet, but exceed the expectations of our customers, both internal and external. To do this, we’ve got to know who our customers are and what they want. And we must also understand how they are going to determine whether or not we are succeeding.

Moreover, we’ve got to use that information to determine what our customers need in the future. We must continuously identify customer delight and be the first to the market in trying to provide it. We must do this by enhancing the value of our services and the way we deliver them. In other words, customers must perceive there is good value in the quality, timeliness, convenience and price of our services.

Continued customer loyalty will depend on our ability to take customers beyond just satisfaction. They must perceive ever higher levels of performance in doing business with us.

The second guiding principle is:

Value and respect each other.

If we are going to create real value for customers, we must help each other within the bank discover and use our full potential to innovate, to make choices, to act decisively. Participation, openness and empowerment must be at the core of our management and leadership style.

We must create an environment where everyone is valued, respected and brought into the decision-making process.

We believe this is the only way we can get the extra effort, the extra caring, and the extra enthusiasm that we need to reach the next plateau of total quality.

The third guiding principle is:

Continuously improve everything we do.

In order to provide more value for the customer, this must become a way of life. We must constantly review and re-engineer all our processes, structures and activities to ensure they support the cost-effective delivery of quality service to the customer.

Continuous improvement means taking advantage of everything we learn, day by day. The challenge is to make sure we move on to the next plateau by implementing quickly what we are learning. We cannot wait, as we did in the past, for the economy to help us get back on track over time. We have to make ourselves get back on track – now.

The fourth guiding principle is:

Manage by fact.

It is never enough to know that we have failed, or that you have succeeded. You have to know why. Only by this kind of self-analysis can we build on other people’s success and learn from our failures. If we understand that no organization and no person is perfect, it is easier to accept the fact that we can always change for the better, that we can always improve and learning, therefore, becomes continuous.

We must have an environment that encourages us to face up to reality, to bring problems and customer complaints out into the open. We must seek them out aggressively, to use them as opportunities, so we can continuously improve. We must step back and analyze what is really important to our customers – through evaluation, benchmarking and measuring. This is the foundation of managing by fact.

The fifth and final guiding principle is:

Build teams and teamwork.

Teamwork is energetic groups of people committed to achieving common objectives. People working well together. And people taking advantage of the strengths of each other to create a more powerful force.

Taken together then, these five principles:

• Exceed customer expectations with value

• Value and respect each other

• Continuously improve everything we do

• Manage by fact

• Build teams and teamwork

….can guide us in bringing about the necessary changes that face us as businesses and as a country.

If no individual, or company can afford to become a victim of change, neither can any government. And in our national affairs the danger is immediate and pressing that we will fail to meet this challenge. Canadians are becoming alienated from their governments and their policies, from politicians of all political persuasions. It threatens the health of our democracy and our future prosperity. How can we manage our nation’s affairs or bring people together to face up to tough issues when Canadians have so little confidence in national decision-makers? We must recognize that many of the problems we face today – from high unemployment to high debt and deficit – stem from our approach to the public policy making. There is no reason to assume that we can solve these problems using the same approaches as before.

During the past year, I have been a member of the steering committee of the Public Policy Forum, a nonpartisan group including representatives for business, labor, the academic community, media and other non-governmental organizations. In late June, we published a report called, “Making Government Work,” an agenda for change compiled from discussions with public and private sector leaders across Canada. It makes recommendations in six key areas which could form the basis of a blueprint for reform.

What has occurred to me is how closely the five guiding principles that I’ve shared with you, are related to the report’s recommendations.

For example, the first recommendation is that there be much greater public participation in the decision-making process. The challenge facing today’s public policy makers is often to find ways of reconciling the demand for public input with the responsibilities of representative government. As well, they must tap external sources of information and expertise in order to arrive at sound policy conclusions. These twin imperatives suggest that government must develop a new approach to consultation with Canadians.

In other words, we should value and respect each other, if we’re going to get serious about improving the way we do things.

Government, business, labor and academia still operate too much in isolation from each other. While government is frequently criticized for being out of touch with the private sector, the reverse is also true. The Public Policy Forum’s recommendations would bring about a dramatic increase in the exchange of people and ideas between the public and private sectors.

To go back to my guiding principles, it would build teams and teamwork.

There has never been a greater need to coordinate fiscal strategies across levels of governments in Canada or to generate broad consensus around the tough choices required to bring deficits and debt under control. Yet federal budgets are drawn up in isolation from parliament, the provinces and the public.

A much more open process could be developed without creating opportunities for private speculation which gave rise to the convention of budget secrecy. The Forum has made several recommendations to make that possible.

In other words the link here to my guiding principles is:

Continuously improve everything we do.

The Forum also makes recommendations on parliamentary reform, to make parliament a more relevant, respected part of government. It suggests ways in which a cultural change in the public service can be brought about. The real challenge is to make it better, while making it less costly. Improving quality of service while improving productivity is not easy, to say the least, but it is being done more and more today in the private sector.

And last, but not least, we have recommended ways to increase public awareness. Many of the tough issues Canada faces – the problem of the debt and deficit, continuously improving health care and education, while making them more cost effective – are extremely complex and interrelated. If Canadians are ill-informed, they cannot participate in any meaningful way in the resolution. Our problems are not going to be resolved without a broader understanding of the tradeoffs that are necessary, a real commitment to change and a sustained effort that will take more than a few years to correct the imbalances.

In other words, manage by fact.

So, what it all comes down to in trying to cope with change in public and in private enterprise, is listening to our stakeholders, to determine how they define and measure good performance, and then moving ahead together as a team with a sense of confidence that we can indeed exceed their expectations.

OUR VISION: TO BE CANADA’S BEST PROVIDER OF FINANCIAL SERVICES

John E. Cleghorn
Chairman & CEO, Royal Bank of Canada

Annual Meeting of The Royal Bank of Canada, March 6, 1996
Published in The Corporate Report No. 17 (April 30, 1996)

Many millions of Canadians hold shares in Royal Bank through their investment portfolios in mutual funds, pension plans and insurance companies, making us one of Canada’s most widely-held companies. For example, everyone here in Quebec who belongs to the Quebec Pension Plan has an interest in Royal Bank through the Caisse de dépôt, a large and very active shareholder. All of our shareholders, direct and indirect, benefited from the increase in our common share dividend announced in the third quarter last year. They were rewarded with the substantial $535 million of common share and preferred share dividends we paid in 1995.

Since March last year, when we released our first quarter results, our common shares have appreciated by 11.7%. That’s based on yesterday’s closing share price of $32.25. When combined with a dividend yield of 3.9%, our total return to common shareholders was 15.6%. And our shareholders are just one group that benefited from our improved financial performance in 1995 and the first quarter of this year. Our customers also gained, because we could afford to invest substantially in new, cost-effective financial products, services and delivery channels. Our employees, most of whom are shareholders, also benefited through new job opportunities, and because part of their compensation is tied to the bank’s performance. Governments, which impose higher taxes on Canadian banks than any other sector, benefited from income and other taxes of $1.3 billion in 1995. And communities benefited from the $16 million we donated to almost a thousand worthy causes, as Canada’s largest corporate donor.

As a result of steady improvements in 1994 and 1995, we’ve been able to set new financial goals for the next three to five years. For example, we’ve raised the goal for return on average common shareholders’ equity from 16% to a range of 16 to 18%, bringing it closer to the performance of the best international banks. And the improvement in risk quality has allowed us to improve our goal for provisions for credit losses from 0.5% of average loans and bankers acceptances to a range of 0.35% to 0.45%.

We continue to aim for improvement in our efficiency ratio from the current 62.5% level towards our goal of 58%. We’re benchmarking all of our businesses and functions against the best in our industry throughout the world. We’re also reviewing all of our processes including the $1.1 billion we spend annually on buying goods and services from our suppliers. As a result of all these efforts, we will remove at least $200 million in cost savings from our cost base by the end of the next three years.

Continuous cost-reduction initiatives allow us to stay ahead in the marketplace. They enable us to make necessary investments in technology, human resources, innovative new delivery channels, and products and services. And, cost reduction keeps our prices competitive while improving our overall performance. Beyond these risk-quality and efficiency improvement targets, we’re putting greater emphasis on our top-line priority – revenue growth and diversification. To this end, we’re strengthening our traditional banking activities. We’re also expanding such high-growth, fee-based businesses as wealth management and mutual funds. And we’re seeking international growth, especially in the United States.

Our dominant retail franchise is one of our great strengths. It has generated solid, steady earnings-growth, with widely diversified risk. It is the key factor behind Moody’s awarding us their highest Bank Financial Strength rating in Canada. It’s critical that we use our market-scale advantage to give our customers better value. We’ll do that through more convenient, user-friendly products and services and wider choices, at the lowest possible prices.

Our annual report, which you may have seen and which is now on the Internet, gives details of many of the customer initiatives in our 11 businesses. Here are a few highlights:

Royal Direct, our new 24-hour, seven-day-a-week telephone banking system, now offers service nationally and internationally. It has met with terrific customer acceptance. From a standing start last year, we expect Royal Direct’s client base to double from where we are today, to 800,000 active users by the end of this year.

Starting next month, clients of our discount broker, Action Direct, will be able to manage their accounts and trade directly by personal computer 24 hours a day, seven days a week. We’re piloting the Mondex electronic cash card system in Canada this year. In an alliance with four leading American banks, we’ll be offering our customers across North America a PC home-banking money-management program this fall. Our new electronic check image capture system, another first in Canada, is already improving service and reducing costs.

Small and medium-sized business is a very important market for us. We’re aiming to be more helpful to this sector with specialized programs for knowledge-based companies, retailers, professionals, home-based businesses, and aboriginal people. We’re working with governments, universities and industry to create alliances that develop innovative new ways of improving access to capital. A recent example is the $300 million we’ve committed for loans specially geared to export-oriented small businesses. We are one of the leading Canadian institutions providing small and medium sized enterprises with venture capital, through Royal Bank Capital Corporation. And, last month, we formed a special advisory council of ten successful entrepreneurs from across Canada to give us new ideas on how we can improve our service to small business.

A major new factor affecting financial services is changing demographics, as the maturing population becomes more interested in investing than borrowing. We are already Canada’s largest provider of personal and institutional investment management services. That puts our group in an ideal position to benefit from this trend. That’s why we’re striving to grow revenue in key high-potential businesses including money management, mutual funds and insurance. We’re integrating the private client services of Royal Bank, Royal Trust and RBC-Dominion Securities to further enhance the relationship with our customers.

Demographic changes make mutual funds another field for strong growth. Royal Mutual Funds is the largest no-load mutual fund company in Canada. Its 34 funds are distributed through branches, through RBC-Dominion Securities and through our discount broker, Action Direct. We aim to build long-term investment performance, energize the sales force and improve systems capabilities within the Group’s broad client base.

Insurance is another business that we’re expanding. With gross annual premiums exceeding $300 million, we’re already among the top dozen or so insurance premium generators in Canada. We’re developing this business beyond creditor and travel insurance, to give customers wider choices and lower prices. This month we’re acquiring Westbury Canadian Life Insurance Company. It brings us annual premiums of $90 million, 150,000 policyholders, top-quality management, low costs, and a wide range of innovative products. Westbury is an ideal platform for further expansion of our insurance business.

Of course we are pursuing future bank regulations which would allow us to sell insurance in our branches. From the insurance consumer’s point of view, enhanced bank powers would be a no-lose situation. Consumers will gain with lower prices in many cases, and wider product service choices. If banks can’t compete effectively, the banks’ shareholders – not customers – would lose.

I’ll say more about government policy later. But on insurance I think the question must be asked: why set up artificial barriers that limit consumer choice? This argument is even stronger when one examines the impact of bank entry into three new fields of the past: personal lending and mortgages in the 1960s and the securities industry in the 1980s. In all these cases, entry of the banks enhanced competition. Volumes and product ranges increased rapidly, while prices remained stable or fell.

Right here in Quebec, the Caisses populaires sell insurance. Moreover, in other countries the entry of deposit-taking institutions on the insurance market increases access to products and their distribution while generally lowering premiums.

Another priority is international business, as we grow and diversify our revenues abroad, particularly in the United States. We’re already an established player on the corporate side in the US, ranked 17th in loan syndications. Our foreign exchange volumes there have tripled to US$135 billion since 1992. Our trade finance assets have quadrupled to more than US$800 million during that same time frame.

RBC-Dominion Securities has placed increased emphasis on the US market with an expansion of its equity sales and trading desk in New York and the addition of a new equity derivatives team. With our listing on the New York Stock Exchange last October, we’re hoping to broaden our US shareholder base which, in the past year, has grown from 4% to 7%. Beyond the US, we have a strong retail franchise in the Caribbean.

In Asia, Europe and Latin America, we’re growing our profitable businesses in correspondent banking, trade financing and private banking. We’ve recently opened offices in Chile and South Africa and a third office in China. Our objective is to become one of the top 20 global trade finance banks by the end of the decade.

Half of our earnings in Europe, where we do more business than any other Canadian bank, now come from private banking. In the United Kingdom, we’re buying Hambros Equities to create Canada’s leading global mining sales and research team. To provide better service and more synergy, we’re integrating our top ranked Royal Bank and RBC-Dominion Securities trading activities. Our new state-of-the-art Global Trading Unit, will open in the Royal Bank Plaza in Toronto in August.

I’ve discussed our current performance, and what we’re doing to grow. Now I want to share some views with you on a very important element of our future growth: the policies of governments. As the federal government reviews possible changes to the Bank Act, some critics are saying Canada’s banks have become too big, too concentrated. Given this criticism, we have to do a much better job of explaining ourselves to our customers and to the public at large. The onus is on us to prove that Canadian banks are doing a good job for their customers, shareholders and communities where they operate. Last week, Royal Bank took a step in that direction. We released a special study titled “Three C’s of Canadian Banking: Conduct, Competition and Concentration.”

Our study compares us with US banks – a valid benchmark, as North American financial services are becoming more integrated. It concludes we have lower spreads, lower fees and a much better history of stability over the years. Canadian banks are less profitable and pay much higher taxes than US banks.

Although the Americans have many more banks than we do, there’s less real competition. That’s because past laws banning interstate banking have bred local and regional monopolies. Americans don’t benefit from the economies of scale we enjoy in our national banking system.

But our historical advantage is now being lost. Deregulation and consolidation are moving the US toward a strong, Canadian-style national banking system. For example, the merger of Chase Manhattan and Chemical Bank results in combined assets almost two and a half times the size of Royal Bank.

Even in Holland and Switzerland, smaller nations than Canada, the big banks are much larger than Canadian banks. The Dutch and the Swiss understand that they must compete at home and abroad with the banks of bigger nations. That’s why they need only a few, global-scale national financial institutions, which, by all accounts, are serving their customers very well.

While in Canada it’s said we’re too concentrated to really be competitive, the Canadian “Big Six” have only about 47% of the total assets of the Canadian financial services sector. The federal guideline for concentration is that if the top four companies in a sector have 65% of the market, there’s reason for concern. Even if the five largest Canadian banks all merged – out of the question, but if they did – their total share of the Canadian financial market in mortgages, for example, would still be less than 50%; and they would hold 56% of personal deposits, and 22% of mutual funds.

Apart from the banks and natural resource companies, few other Canadian sectors have a global presence. A diminished capacity of the banks to offer a globally competitive service could therefore impair the overall competitiveness of Canadian firms in the world economy, and eventually at home as well.

Given these trends, we’d welcome a more active public discussion on whether the national interest would be served by greater consolidation in Canadian financial services. Ultimately, the test must be: will it be a positive experience for consumers and for the country as a whole? Our industry can demonstrate that compared to other countries, we meet the test. However, it is clear we need to work harder to explain the benefits to a much wider audience and to get their buy-in.

Now I’d like to comment on perhaps the most important single issue facing Canadians: the future of our country. Royal Bank has addressed national issues ever since our first chief executive, Thomas Kenny, went from Halifax to Ottawa as a Member of Parliament. He helped Sir John A. Macdonald make the idea of a united Canada a reality. Kenny and the Bank believed that in economic unity there was political strength for all regions. So did his successors. They spoke out during the century that followed, as Canada grew through many cycles of prosperity and depression, two world wars and a major expansion of our country. They called for a strong national banking system, low taxes, curbs on public spending, and low inflation to support economic growth. They argued that national unity is the essential precondition to progress in other fields.

In our time, Earle McLaughlin, Rowland Frazee and Allan Taylor spoke out on the basis of Royal Bank’s national and international economic and financial experience. They told Canadians they had a lot to gain if Canada remained united, and a lot to lose if our country were to break up. These conclusions still stand.

So today I want to repeat Royal Bank’s long-held view: we all stand to benefit if Canada moves forward as a united country. The costs of separation would be high and long-term; they would be paid by everyone in Canada – in every province and territory.

Perhaps it’s time Canadians appreciated what people around the world seem to know instinctively about us. As a country, Canada has so much more to offer than just a narrowly focused set of financial statistics. Canada, according to the United Nations, is now the global leader in providing its people with the things that really matter in life. Out of 186 countries, we rank first for the quality of life based on our standard of living, health, education, security and justice. We rank second in the entire world for our national wealth, which is defined as a combination of human resources and physical assets.

As we look to the future, Canada’s federal and provincial governments are working hard to secure our leadership position by focusing on the economy while reducing deficits and debt. To that end, it is very encouraging to see Quebec’s determination to address these issues as key priorities. Royal Bank Financial Group supports all these efforts.

We Canadians have enjoyed prosperity over the last century, while developing a society which celebrates freedom. With freedom comes a responsibility to help those who are not as fortunate. Canada has never shirked this duty. On the world stage, Canadians have made great sacrifices to maintain peace, order and good government. Canada never sought to become a Great Power, but it has become a good power. Indeed, there’s so much that’s good about our country that I’m convinced we can reshape it creatively and positively.

This will be a challenge for sure. It will require an uncommon degree of generosity and compromise and great human effort. But Canadians can prevail, just as those who walked this road before us prevailed, because they were, and we are, a smart, practical and generous people who basically respect each other. If Canada isn’t worth saving, what country is?

THE PRODUCTIVITY DIVIDEND

John E. Cleghorn
Chairman & CEO, Royal Bank of Canada

Address to the Montreal Board of Trade, January 26, 1999
Published in The Corporate Report, Edition No. 27, June 30, 1999

In the early 1990s, Canada’s economy was in trouble. Government debts and deficits were mushrooming. Taxes were rising, and so was unemployment. Canada was said to be in danger of becoming an economic basket case. It was predicted that we’d soon “hit the wall.” A Wall Street Journal editor even predicted we’d decline to Third World status. Some observers said the International Monetary Fund, having intervened in Mexico, would soon come knocking at our door.

Some basket case! Through its enterprise over the last five years, the private sector has created impressive economic expansion that has, among other things, boosted tax revenues. Our governments have done many things right, by leading Canada into North American Free Trade, balancing their books, starting to pay off their debts, taming inflation and depending more on market forces to drive growth. Since 1994, Canada has jumped from 20th place to fifth in the global competitiveness ranking of the World Economic Forum. As a result, with government surpluses anticipated at the federal and provincial levels, Canadians can now enjoy some of the benefits of the “fiscal dividend” that seemed a pipe dream in the early 1990s.

But before getting carried away, it’s important to recognize that while our economic performance has improved, we’ve underachieved on a central objective of economic policy – bringing about rising living standards for Canadians. Throughout the 1990s, real family incomes, after inflation and taxes, have been in decline. Not only that. The Paris-based Organization for Economic Cooperation and Development, the OECD, warns that Canada’s envied standard of living may fall behind those of other countries.

It is our mediocre productivity growth that’s mainly responsible for our lackluster performance in raising living standards. That’s why I believe, with the fiscal dividend about to materialize, addressing “The Productivity Dividend” should be a national goal. This afternoon I want to look at some of the challenges we face and how to overcome them. In order to do so, it’s important to sort through the economic relationships I have just set out.

Productivity, competitiveness and rising living standards are all interconnected. But productivity – individual, corporate, and as a nation – is ultimately the mainspring to competitiveness and rising living standards. In addressing productivity, we have to begin by demystifying the term and depicting it in a more positive human light. Too many Canadians and too many companies believe it means nothing more than layoffs and downsizing.

In my book, improving productivity means achieving better results with less effort. Those of us who have shoveled snow recently understand this concept very clearly. If you’re standing at the end of your snow-packed driveway with a small shovel, you know that you could be more effective and efficient with a larger scoop or a snowblower, and had a regimen of keeping in shape. While we understand that example, we often trip when we start applying the concept of productivity beyond our own driveway.

John B. Taylor, director of the Center for Economic Policy Research at Stanford University, says: “Productivity growth is not a household term, but it should be. Many workers think productivity means ‘the boss wants me to work harder.’ But actually productivity – the value of goods or services produced per hour of work – grows mainly through timesaving innovations, more and better equipment, greater knowledge, advanced skills, and more efficient organizations.”

Productivity requires governments to create more open and competitive markets. It requires upgrading education, research and development to foster innovation and a learning culture. Productivity is a long-term process with no quick fixes. It requires consultation, compromise and communication by society’s stakeholders.

The Conference Board of Canada has been sounding alarms about declining productivity for several years now. So has the Business Council for National Issues. The House of Commons Standing Committee on Finance is urging the government to commit to a “productivity covenant” with Canadians. This would assess all government initiatives on their contribution to productivity and, hence, the standard of living of Canadians. The prime minister stresses the need to create a better-educated, more productive workforce. And we should hear more about the productivity imperative from the minister of finance in his budget.

Now let’s look at a little recent history to see why Canada’s productivity has been so disappointing. Why has Canada’s absolute and relative living standards, as measured by real disposable income, declined so substantially? Why do we face such a huge threat to our quality of life?

Falling living standards in the 1990s have been mainly due to three factors. The first is rising Canadian taxation – both absolutely and relative to the United States. Higher taxation has diverted savings into the government sector that would earn higher productivity returns for companies and society at large in free markets, as companies invest in timesaving innovations, more and better equipment, greater knowledge, advanced skills, and more efficient organizations.

Higher taxation also hits living standards more immediately by cutting into what’s left in our pocket at the end of the day to spend on our family and ourselves. In Canada, taxes now eat up about 37% of the gross domestic product, compared with only 29% in the US. The burden of personal tax in our country is the most onerous in the G7 industrialized nations.

For example, our top marginal rate, covering federal and provincial taxes, of 50% kicks in for every dollar earned above C$63,000. In the US the top rate, covering federal and state taxes, can also be as high as 50%, but only kicks in at US$282,000, that’s C$430,000! A middle-class couple in Toronto earning the equivalent of US$60,000 takes home about US$9,000 less than their Houston counterparts, even after accounting for health insurance premiums. And the tax gap leads to another obstacle to productivity growth as some of our brightest minds are lured south of the border, robbing us of their knowledge, talent and innovation.

In Canada, the burden of taxes, including payroll taxes, on companies is also too high, especially in my business. The MacKay Task Force on the future of financial services acknowledged this in its report to the federal government last fall. It said: “The overall tax burden on the financial sector has been increasing rapidly and is substantially higher than the tax burden on the non-financial sector.” Regulated financial institutions – banks, other deposit-takers and insurance companies – are the only companies in this country faced with a capital tax. This is payable even if they lose money. And Canada is almost alone in the world in imposing such a tax. Certainly none of our major competitor countries have one.

In recommending their elimination, the independent, government-appointed task force says capital taxes “make our financial institutions less competitive and create incentives that are inconsistent with sound prudential management.”

But while the capital tax is unique, Canadian financial institutions are not alone in facing higher taxes than our international competitors. Many Canadian enterprises are in the same boat. For example, Paul Tellier, who is turning Canadian National into a North American railway, complains that much higher Canadian taxes, and many more government regulations, are putting CN at a huge disadvantage as it seeks to grow against larger US competitors. Little wonder, then, that the OECD survey says bridging the Canada-US tax gap is a priority to make Canada more productive.

The second factor behind Canada’s poor productivity and lower living standards is unemployment. Yes, unemployment has been coming down. Canada produced 449,000 jobs last year, the best performance of the decade. But our unemployment rate is still stuck several percentage points above the United States, which has been hovering around 4.5%, and too many Canadians have simply dropped out of the workforce. Moreover, fewer teenagers can get jobs today than at any time in the last 25 years. A country can’t be fully productive unless its workforce is fully and efficiently working.

And, to some extent, our workforce won’t be fully employed unless we are more efficient and productive, investing in research and development, providing superior education and training, and competing forcefully internationally. It all hangs together.

The third factor behind Canada’s poor productivity is the declining value of our currency. Partly because of lower world commodity prices and our falling exchange rate, the prices of the things Canada produces have been rising less rapidly than the prices of the things we consume. This has had a direct, negative impact on living standards, as we see any time we travel or buy imported goods.

The declining value in the currency erodes our living standards in another, less direct, but also critical manner by undercutting productivity. This can best be seen in manufacturing. Canada’s performance in manufacturing productivity is poor in absolute terms. Relative to the United States, our major trading partner, we have a real problem ahead. Canadian manufacturers are now only 70% as productive as their US rivals are and our unit labor costs are rising much faster.

Why is there such a gap? After all, Free Trade and other structural reforms were supposed to boost productivity in our manufacturing industries. The fact is that Free Trade has over-delivered on the growth in Canada-United States trade and under-delivered on productivity growth on our side of the border.

The manufacturing sector, sheltered from strong foreign competition by our weak dollar, has felt less pressure to innovate and reduce costs. The low dollar allows companies to put off tough decisions on costs, on improving productivity. The weaker dollar also raises the cost of machinery and equipment, 60% of which is imported.

A weak currency makes it more costly for Canadian businesses to go abroad to invest where returns are higher, something they must do in this era of globalization. It also makes it easier for foreign companies to enter or expand in Canada, or to acquire our companies cheaply.

The web page of the “CNBC-Wall Street Journal” recently highlighted this advantage for US companies in an article about “Canada’s Fire Sale.” This article reported that “With the US dollar close to a historical high against its Canadian counterpart, the incentive for US companies to buy Canadian is that much greater…From the oil patch to the internet, US companies snapped up $16.2 billion worth of bargains in Canada last year. That’s an increase of nearly 70% over the previous year.”

The article highlights the strong US interest in acquisitions in Canada’s high-tech sector: “Cash-rich US companies in the last year spent about $428 million buying Canadian hardware and software companies, more than six times the value of similar deals in 1997.”

Certainly it’s true that Canadian unit labor costs, measured in US dollars, have declined through the 1990s. But this is only because of the 22% depreciation in our currency between 1990 and 1998. The link between shifting dollar values and manufacturing productivity is confirmed by our research. Since 1980, any Canadian currency depreciation has been followed two years later by a decline in the ratio of Canada-to-United States productivity. Conversely, when the Canadian dollar appreciated between 1987 and 1991, two years later our relative productivity performance improved. But those post-appreciation gains aren’t automatic. You have to work to get your costs under control and invest in productivity improvements through new technology and better processes.

At some point, the Asian and emerging market crisis will end and commodity prices will recover. That, together with continued inflation control and debt reduction, should produce a rising Canadian dollar. It will also produce a huge challenge to Canadian companies to become more cost-effective. So this is no time to relax on the cost side. We should be moving quickly to boost productivity, because not to do so, as the dollar appreciates, means we’ll simply fall farther behind in our ability to compete and to renew the social programs most Canadians want and which are paid for by our taxes.

Now, I’d like to discuss productivity in financial services, which employs 550,000 Canadians and ranks second only to manufacturing in its contribution to Canada’s economy. In strictly Canadian terms, the productivity performance of financial institutions, especially banks, has been better than average. But in the North American and global financial markets that are changing rapidly, we found that we faced a growing disadvantage starting around 1994. It showed up, among other areas, in our technology budgets and in our efficiency ratios, which calculate noninterest expenses as a percentage of gross revenue.

I quote again from the MacKay Task Force on Financial Services regarding the productivity of Canadian banks: “Their cost efficiency, while collectively competitive…lags behind the leading performers in the US and the UK. The three largest banks in the US have an aggregate technology budget of US$5 billion, which compares to the US$1.6 billion for the three largest Canadian banks.” It was primarily to become more productive and achieve scale – especially in the application of technology – in North American, global and Canadian terms that Royal Bank and Bank of Montreal proposed a merger a year ago. We wanted to build a stronger, more cost-effective North American-scale bank. This would provide better service and lower prices to Canadian customers, higher-value jobs for our staff and higher returns to shareholders.

While the merger was not to be, we are now pursuing other avenues open to us consistent with our strategy and values to achieve the market and productivity goals we must reach to remain relevant to our customers while remaining sound financially at the same time.

Like other Canadian companies, we need to find growth opportunities in North America and abroad and to invest in new technology. To do that, we have to shift resources to areas where we can be more competitive and more productive by continually working on reducing costs. So, if that’s what we have to do in our business, what can be done to enhance our country’s productivity? How can we grasp The Productivity Dividend?

One thing governments can and should do is cut personal and corporate income taxes. This should be done partly to increase living standards, partly to sustain the economy in a low-growth period, and partly to contribute to more of our better-trained people staying in the country. High taxes reduce incentives to work and to change by tackling new challenges.

Ottawa now has some room for tax cuts. Our economists estimate that Canada could, in fact, afford cuts totaling $15 billion over the next four to five years, without imperiling the social safety-net Canadians want to see renewed. At the same time, it’s imperative for governments to continue to pay down the public debt. Federal and provincial debt as a percentage of GDP may be declining from its peak of 100% in 1996, but nonetheless it stands at an unacceptably high 96%.

Canada also has to fight protectionism. Rising protectionist sentiment, especially in the US and Europe, is disturbing. With 40% of our economy devoted to exports, we are more vulnerable than most nations to this threat. Our governments must also resist the pleadings of special interest groups, including regional interests, and secure even less regulation and freer trade, at home as well as with other countries. Those counterproductive restrictions due to excess regulation and inter-provincial trade barriers, have to go.

We need a more open and flexible regulatory framework to allow Canadian companies to grow with the times. The new economy has diminishing respect for national, let alone provincial, borders and regulations. In this new economy, knowledge and its application to free markets – not government subsidies or decrees – is rapidly becoming the prime creator of higher living standards.

Our governments have to view the future of all of Canada’s regulated industries, not just the banks, in relation to their future competitive status in continental and global markets. To date, the focus of our governments has been too short-term, narrow and domestic.

It is imperative for Canadian lawmakers and regulators to take this global view in light of what happened in 1998, and what will likely happen this year. The rising pace of corporate consolidation shows no sign of slowing in North America and Europe in 1999, as companies take advantage of the stable economy, low interest rates and the new single currency in Europe. Over-capacity in many industries, including banking, is driving this aspect of productivity improvement – and Canada will eventually need to catch up, before it’s too late even to try.

But perhaps most important of all (as the Conference Board recommends), Canada must create better human capital by streamlining and upgrading education. This requires continuous learning, training and retraining, at home, at school and college, and in the workplace. While the proportion of students who eventually graduate from Canada’s schools continues to rise slowly, and we invest more on schools than other developed nations, our system is relatively inefficient. The high school dropout rate is higher than in Japan, Germany or the United States and there’s a shortage of graduates in mathematics and science. This has contributed to Canada’s “innovation gap.”

Canadian companies, especially small and medium-sized ones, still lag in research and development. We have fewer research people in our labor force than our competitors. Canada may offer the best tax breaks for research and development. Yet American, Japanese and German companies spend almost twice as much in this area. In on-the-job training Canada ranks 13th globally.

A critical element of productivity is innovation. Those companies which are leaders in innovation grow faster, create more jobs, trade more and contribute more to the nation’s wealth. That’s why we opened Royal Bank Growth Corporation in 1997. It seeks out and commercializes innovations in biotechnology, agri-sciences, e-commerce and robotics.

There’s also a compelling need, as the Conference Board has documented, for medium and small Canadian enterprises to make organizational reforms. A stronger focus is required on teamwork, and quality and cost control at all levels. Constant re-engineering is required to make our companies more globally-oriented, to get to markets faster, to seize and improve productivity to stay competitive.

Improving productivity is, then, the most important economic challenge facing Canada. The challenge will be compounded as our reliance on natural resources continues to decline while the knowledge sector grows. What’s more, as the baby boomers start to retire, improved productivity will have to come from an even smaller base of wage earners.

Benjamin Disraeli once said: “There can be no economy where there is no efficiency.” But, enhancing our productivity need not be a negative activity. Delivering “The Productivity Dividend” is the only positive way to improve Canada’s standard of living over the long term.

We are a small to medium-sized country that must compete against the best in the world to survive. We have no choice but to improve our productivity performance if we’re going to win our share of the vast marketplace out there in the future.

FINANCIAL SERVICES: EVOLUTION OR REVOLUTION?

Monique F. Leroux
Senior Vice-President & General Manager, Quebec, Royal Bank

The Club Saint-Denis, Montreal, May 7, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

Considering that in the United States, in Canada and elsewhere in the world, few weeks have passed in which there hasn’t been an announcement of a transaction involving hundreds of billions of dollars, you will probably agree that the theme of my presentation – evolution or revolution in financial services – is very topical.

Even if the concepts tend to be treated as opposites, the ideas of evolution and revolution have many things in common. After all, both bring about change. The main difference between the two is the pace of the change. Evolution may be so gradual that it is difficult to notice. In contrast, revolution involves abrupt, sudden, spectacular change – so abrupt, in fact, that its real causes are often not perceived.

The changes that the financial services industry is currently undergoing are of the second kind, a series of changes of such scope that they deserve to be called revolution. Over the next few minutes I will be dealing with the nature, sources and consequences of this revolution. I will also explain the ways in which Royal Bank is adapting to and participating in these changes – in other words, what our development strategy in this turbulent environment is. I will conclude by showing you how our proposed merger with Bank of Montreal is part of this overall strategy and should not be seen as an isolated move.

I begin with the nature of this revolution. Today, banks still have a reputation for being “conservative.” Not so many years ago, it was said that bank managers practiced the 3-3-3: give 3% on deposits, take 3% more on loans and…leave to play golf at 3:00 p.m!

These days such a practice couldn’t be further from the truth. We’re a long way from the “3-3-3” when you consider that 24-hour-a-day services are available with the automated banking machines; that RoyalDIRECT Banking makes it possible for individuals to do a whole range of transactions using telephones or personal computers; when you think it is possible to apply for a loan by telephone in a few minutes or that bankers would meet with you at your home, on a day and at a time that is convenient for you; when you consider that even small businesses can obtain Royal Bank financing by telephone or fax.

I don’t want to sell our services, but to point to a fact that is easily overlooked: in less than fifteen years, the financial services industry has literally reinvented itself. So it really is a revolution in financial services that we are witnessing. A revolution that in some respects is reminiscent of the one that has transformed how consumer products are distributed. A revolution that can be characterized by three components: increased operational efficiency, greater emphasis on the service component, and increased and redefined competition. Its effects are felt by three groups of people: the customers, the shareholders and the employees.

The first component is efficiency. With regard to distribution, technology now makes it possible to deliver products from the manufacturer to the consumer with high efficiency. In the food and hardware sectors, this takes the form of optimal use of inventory, staff, and warehouse capacity. In financial services it takes the form of mechanizing routine transactions, training personnel to carry out more complex activities and heavy reliance on telecommunications technology and information management.

In both cases, technology also makes it possible to better know and understand customer needs. Given the capacity of computer systems, we can now collect, process and analyze the mountains of information generated by commercial transactions. By knowing customers better, we can design services tailored to the individual needs they express. Technology doesn’t, therefore, threaten clients with, for some of them, the horrible possibility of having to manage a machine. On the contrary, current technological capabilities are a means of personalizing services and advice.

In 1996, North American banks invested $5.2 billion in computer equipment, 20% more than in 1995. In research and development, Canadian banks invested $1.7 billion in 1996, Royal Bank alone accounting for $750 million. Impressive figures, but put into perspective when one considers that Citibank puts $3 billion a year into research and development and this before its merger with Travelers.

The second component is the new focus on service, which resumes its central role in the relationship between supplier and customer. If technology has provided the fuel for this revolution, its real engine has been the customer, a customer who is more demanding than ever, looking for both top-quality service and good prices.

The latest issue of Protégez-vous is significant in this context. It compares the various Quebec supermarket chains. Nothing new in that. But this time the comparison didn’t deal with the price of a cart of groceries. This time Protégez-vous compared supermarkets from the point of view of quality of service. Consumers want the best price on luxury items, but they also want top-quality service when they buy basic necessities.

Financial institutions, banks in particular, are present at both ends of the market: as much as some transactions are basic necessities, some wealth-management services are upscale services. Competition thus works both on prices and on quality of service. But competition is such that price differences cannot survive very long. Quality of service is the only way in which financial institutions can distinguish themselves from each other. I would even go so far as to say that the skills and commitment of a financial institution’s employees constitute its only lasting competitive advantage.

Banks invest hundreds of millions in automated banking machines, telecommunications systems and the development of ever more convenient ways for consumers to carry out their transactions. But each time a bank innovates in this area, its competitors quickly catch up, so this is not the way that a bank can make its mark. What remains is the quality of their relationship with clients and this relationship is made by the employee. Therefore, the competence and commitment of employees are a financial institution’s only lasting competitive advantage. This shift is very real at Royal Bank, where most of the financial services jobs have already been redefined, or are in the course of being redefined.

The third component of the revolution is a proliferation of distribution channels and sales formulas. This is true of the distribution of consumer products, and it is true of financial services. At the same time as warehouse stores were being built, the specialized boutique sector was quickly restructuring and growing because of very specialized market positioning. At the same time, the traditional borders between commercial sectors were being eliminated. For example, both Costco and Wal-Mart are competitors in the food, hardware, book, record, consumer electronics, and even service station markets.

Not only are financial institutions witnessing the same trend; it might even be said that they were its forerunners. For several decades now, all the financial institutions have competed for consumer savings, for consumer credit and mortgage loans – banks, trust companies, insurance companies, investment companies and brokers. But over the past years, competition among the various kinds of institutions has become keener.

In fact, even if we still speak of the big six Canadian banks, our competitive reality is much more reflected in the following figures:

• 50 Schedule II banks, foreign for the most part, such as Hong Kong Bank

• 50 trust companies, the biggest of which is Canada Trust

• 2,500 credit unions and caisses populaires, whose product range competes directly with that of Canadian banks

• 150 life insurance companies (Sun Life and Manulife have sales comparable to the TD Bank or Scotiabank)

• 80 mutual fund companies, which are managing an increasing percentage of savings

• 28 automobile leasing companies

• 18 credit card companies

• Dozens of consumer credit companies

• Government financing bodies, such as the Business Development Bank of Canada and the Farm Credit Bureau

• Even Loblaws supermarkets has entered the financial services market, with its President’s Choice Financial

In England, three food chains offer selected financial services that are among the most lucrative in partnership with British banks. In the United States, Bombardier’s Capital Group has begun financing assets that it doesn’t itself produce, including mobile homes. And Bombardier intends to make an independent profit center of this activity.

As with the distribution of consumer goods, the financial services market has seen the advent of “category killers.” Thus, the American specialist in mortgage financing, Countrywide Credit Industries, has announced its imminent arrival on the Canadian market. This single-service company holds $228 billion in mortgage loans, more than all Canadian banks put together.

We are very far from an oligopoly. In fact, the share of banks in the financial services market, which stood at 79% in 1870, was 58% in 1945 and stands at 46% today. A little-known fact is that the big banks hold less than half the total of financial services delivery points in Canada.

The increase in competition is not about to stop. Following the example of other western governments, the Canadian government favors greater openness in the financial services sector. It has relaxed entry conditions for foreign businesses and it recently signed the World Trade Organization Agreement, which liberalizes trade and investment in this area. The phenomenon is very real. A recent article in the American Banker mentioned that US financial companies consider Canada the next territory to be conquered.

Our environment at the close of this millennium can be summed up in a few words: we are in a strong and growing, technologically intensive industry that calls for significant, sustained investment; our competitors are more numerous, more varied and more aggressive than ever; and our customers are expecting topnotch service from us, of a quality equal to the best in the world – at the best possible price.

I would add that our relation with our shareholders has changed. For a long time, banks were “blue chips,” like public utilities and other sure, quiet securities. Investors were attracted to us more for the dividend amount than for the total return. In the current environment, this is no longer true, or possible. Our shareholders expect not only attractive dividends, but also the creation of value and growth.

This is what the revolution looks like today. For us, this is a very stimulating environment. In this context, our analysis led us to make certain basic strategic decisions. First – and perhaps you have already noticed in our advertising – we no longer define ourselves as Royal Bank but as Royal Bank Financial Group. This refers to a group of specialists not only from the bank, but also from Royal Trust, RBC Dominion Securities, Royal Bank Action Direct, RBC Insurance Holdings, Royal Mutual Funds, and others. Together, these institutions and their specialists provide consumers with a whole range of financial services and advice, in Canada as well as abroad. This was not the only choice possible. We could have pursued a niche strategy. Other financial institutions will do so. However, we decided to exploit the full quality and scope of our know-how, two of our main competitive advantages. We therefore made the strategic choice to offer the full range of financial services.

Our second strategic decision was the recognition that the competence and commitment of our employees are key to the creation of value for our clients and our shareholders. I should add that all these things – that the customer is our “raison d’être,” that our success is based on the competence and commitment of our employees, that our shareholders are entitled to superior rates of return, that we should be an asset to the community – are not recent discoveries at Royal Bank. But we have decided to take a new look and to systematize our approach based on these four stakeholders: our customers, our employees, our shareholders and the community.

Employees are the cornerstone of our success. We are a service company. Without competent and committed employees, there is no service for our customers, no return for our shareholders, no commitment to the community. Royal Bank employees are the bank’s real capital. They “represent and they are” the bank. If we distinguish ourselves from the competition, it’s only through the difference our employees make.

This difference comes from their technical competence and their commitment. We don’t neglect either. In 1997 we invested $100 million in training – an average of $2,000 for each of the our 50,000 employees. We seek out commitment by favoring an entrepreneurial spirit, creativity, teamwork and a real employee/employer partnership.

Our employees must first make a difference to our customers, who, can find at the bank and the other institutions in the group the full range of financial services. But it isn’t enough just to offer complete services, even if they’re the best. Our relationship with our customers is transaction-based, so we urge our employees:

• To use the information we have at our disposal on our customers carefully, to better serve them and to deserve their loyalty

• To be proactive, and to approach our clients with a view to the long-term relationship, not to a one-time transaction

• To ensure systematic monitoring of customer satisfaction

Our employees must make a difference to our shareholders. Our employees alone can ensure that we can provide our shareholders with a return on equity of 19% and a total return on investment of 74%, as we did in 1997. Moreover, 94% of management employees and 89% of all our employees are shareholders. To tell the truth, you are all shareholders of the bank, either directly or through pension funds, mutual funds or the Caisse de dépôt. How can we make a difference to our shareholders? By seeking growth, yes, but profitable growth. By giving a greater place to service, yes, but service with efficiency, so that it creates value for our shareholders and for our customers.

Finally, our institution and our employees must make a difference to the community. Not only because this is our duty as a corporate citizen, but because getting closer to our community helps us understand it better. This has become a factor in our growth.

To summarize. First strategic choice: to offer the full range of financial services, taking particular advantage of the complementary nature of all the institutions that make up Royal Bank Financial Group. Second strategic choice: to put our customers at the center of all our actions, by promoting a privileged relationship with our employees, for our shareholders’ benefit. Our third strategic choice is to put into place the conditions that favor the success of the first two. It deals with the size and the configuration of our institution and with its positioning in the market.

However exciting and stimulating, the current context is not of any less concern to us. We may be the biggest bank in Canada, but on the international level we are of very average size. This was true in January and is more so now that US institutions have announced megamergers. Our market capitalization was approximately US$19 billion last April. That of Citigroup, the product of the proposed merger between Citicorp and Travelers Group, would have been $146 billion; that of BankAmerica after the proposed merger with Nations Bank, $136 billion; that of Lloyd’s was $90 billion.

In this environment, we intend to remain competitive while remaining an institution that offers a full range of services, and we intend to do so by creating value for our customers and for our shareholders. To achieve that, we must rapidly increase our size, and we must become a truly global institution.

Our third strategic choice is, of course, to merge with Bank of Montreal. The merger we propose is not an isolated strategy. It is a consequence and a condition of success with regard to the other strategic choices we have made.

The proposed merger will strengthen our competitive capability, in particular faced with the foreign giants who will be increasingly present on the Canadian market. In fact, soon there will no longer be a Canadian market and we will have to be competitive on the North American, if not world, market. In other sectors, the most competitive Canadian businesses are those that have world-class stature, often achieved through mergers and acquisitions. I refer, in this context, to Bombardier, Nortel and Abitibi-Price, for example.

The merger will allow for economies of scale, which will in turn lead to better access to capital and technology. The Americans, the Dutch and the Swiss have already proven that size brings with it competitive advantages. As for us – we have resolved to remain at the cutting edge of technology and we will continue to invest massively in it after the merger. In this way we will create significant windfalls for high-tech industries, while enabling our clients to profit from technology.

The strategic complementarity of our banks is remarkable – it’s one of the first things that outside observers noted when we announced our proposed merger last January. Our two institutions share the same vision of what we want to be in the next millennium: a dynamic institution in which each employee centers his or her activities on the customer. Our loan management strategies are compatible. We share certain technologies, which will facilitate the integration of our operations. Our visions of the future make for a good match. On the international level, Royal Bank is solidly established in Europe, Latin America and the West Indies. Bank of Montreal has concentrated on the United States, the major market offering profitable growth prospects, and Mexico.

Perhaps you’ll say to me that the merger will be good for both banks, but won’t it be to the detriment of customers and employees? Quite the contrary if you will just recall the description I gave a few minutes ago of our competitive environment. The merger of our two banks won’t reduce this competition. If our proposal is approved, the Canadian market share of financial services held by the new bank will remain under 20%. This figure is less than the market shares held by many other businesses in the media (Thomson comes to mind), aeronautics (Boeing), transportation (Air Canada), communications (Bell) and information technologies (IBM).

In fact, the arrival of new foreign competitors, fostered by the Government of Canada’s policy of openness, will only increase this competition. Merger or no merger, the Canadian consumer will never have had so much choice where financial services are concerned.

Consumers will therefore be the first to benefit from our gains in efficiency. Competition will force us to make that the case, as it does now. Our sharing of operations and customers will enable us to offer more branch services. Our new bank will have establishments in more Canadian localities than any other financial institution. We will offer our clients the greatest variety of products at the most reasonable cost.

Our two banks are already leaders in services to small and medium-size businesses. After the merger, SMBs will be in a better position because our capital, our size, our technologies and our employees will enable us to serve them even better than before. And we will be able to support them not only in Canada, but also everywhere else in the world.

The goal of our proposed merger is growth. In fact, the merger is an essential instrument of growth. It will create value for our customers, it will create value for our shareholders, but it will also create value for the 85,000 employees in our two institutions.

As you can see, even if our proposed merger is part of a worldwide trend, it is first and foremost part of our own strategic planning. Business mergers are a little like marriages. It’s difficult to evaluate them, taken all together. There are marriages that make sense and are to the advantage of both spouses, and there are some that are bound to fail, at great cost to both parties. The secret of a successful marriage is to marry at the right time, for the right reasons and to choose the right person. For businesses, be they banks or other companies, it’s the same thing. The success of a merger is based on the choice of the right partner, for good reasons, and at the right time. Each merger must pass the reality test and be assessed on its own merits.

We are convinced that the merger we’re preparing has every chance of success. But its success will be no more automatic than that of a marriage – we’re very aware of this. For in the final analysis, the merger will succeed if all the customers of our new financial institution can find with us, even more than they do now, the services they’re looking for at competitive prices. Such success will be realized in the thousands of daily moments of truth in which our thousands of employees will make a difference to you, our customers. In other words, you will be the real judges of the success of our strategy for the year 2000 and of our merger with Bank of Montreal.

HUMAN RESOURCES, LEARNING AND ECONOMIC GROWTH

Allan R. Taylor
Chairman & CEO, Royal Bank of Canada

Financial Management Association, October 15, 1993
Published in The Corporate Report No. 5 (April 15, 1994)

It was nine years ago, in October 1984, that I spoke to you as president of Royal Bank when you last convened in Toronto. My topic was “Too Little Learning in the Information Age”. I suggested that the corporate and academic communities should join forces to build a new culture of lifelong learning. This would help us to compete in the emerging knowledge-based economy.

Well, today, I want to update that message. I will first discuss how the challenges of the information society have multiplied in the intervening decade; and then, because success in our business requires us to lead the way in the information society, I will discuss some innovations in financial management.

Since 1984, the pace of technological progress has accelerated so rapidly that we have reached the point where it helps to create not just momentous economic changes, but also political changes.

The new tools of instant communications that have no respect for national borders – not even the borders of police states – were decisive weapons in the implosion of Communism throughout Eastern Europe. These tools included global satellite news network, CNN, computers, faxes and cellular phones. They enable democratic ideas to penetrate the bastions of the thought police.

Benefactors in the West helped to prepare the ground for these democratic upheavals by donating faxes and other high-tech communications instruments to dissidents so that they could communicate their conspiracy to freedom.

And the hard-liners in Moscow who mounted the coup against Gorbachev in 1991 made a fatal error in failing to seize the TV station from the journalists who controlled it.

Thus did the new technology make it possible for ideas – ideas of justice, equality and liberation – to triumph over tanks and tear gas in a remarkably peaceful, irresistible wave of change.

All of which would have surprised George Orwell, but not Marshall McLuhan. In the 1940s, Orwell saw modern means of communication as Big Brother’s prime weapon to control the minds of the people. In the early 1970s, right here in Toronto, McLuhan saw mass communication as a liberating force, an empowering force: a Village, in which people would be free to exchange ideas. It was McLuhan’s view that electronic technology was making information itself the main traffic of our market system.

It seems McLuhan was right.

What has happened in Eastern Europe is a very dramatic example of how technology is forcing us to make adjustments in how we think, how we live, how we work and how we learn. The wealth of companies, the wealth of nations now depends on it.

At Royal Bank we are making special efforts to anticipate changes in how we do business in the Information Age. That takes resources – and we are now investing nearly $80 million a year in education, training and retraining. This begins with learning on the job and moves on to formal classroom courses within the bank and at outside institutions.

For the same reason, we support a wide range of educational and training programs that are preparing Canadians for the 21st century. At McGill University in Montreal and at the University of Calgary, we invest in programs that help university teachers to teach more effectively, and students how to learn better. At Queen’s University in Kingston, Ontario, we invest in programs to improve the teaching of maths and the sciences in our elementary and secondary schools. At the University of Western Ontario and at McGill, we invest in programs that help Canadian managers and entrepreneurs to acquire the skills to win a bigger stake for Canada in global markets. And, at the Canadian Institute for Advanced Research, we invest in research into how ideas and discoveries are now the critical engines of economic growth in the Information Age.

The Canadian Institute for Advanced Research has no walls. It is a unique network that brings together world-class scientists and scholars in Canada and abroad, supported by a rare partnership of individuals, companies, unions and the federal and provincial governments.

The Institute is underwriting research and scholarship of the highest caliber in the physical and social sciences. It is also helping executives of Canadian corporations, including Royal Bank, to understand the challenges of the new knowledge-based economy. It is showing us how to generate new wealth and to create new, well-paying jobs, and rise to the challenge of the technological innovation. It is trying to solve complex problems in, among other areas, artificial intelligence and robotics; population health; economic growth and policy; human development; cosmology; superconductivity; and evolutionary biology.

Let me mention here two examples of research the Institute is conducting that are very pertinent to the financial services sector.

First, Dr. Elhanan Helpman of Tel Aviv University, Fellow of the Institute’s Economic Growth Program, and David Coe, of the International Monetary Fund, recently surveyed the rate of return on investment in research and development. They found that the average rate of return on R&D in developed economies was substantially greater than the return on capital invested in physical assets. The difference can be as much as ten to one! The implications of this research are formidable for countries – and companies – that are not investing sufficiently in research and development.

The second example is Professor Paul Romer, of the University of California at Berkeley and the Royal Bank Fellow in the same economic growth program. He has shown that ideas are the very core of the new economy. Our ability to generate ideas, to develop them, to fund them and to commercialize them is crucial to achieving real growth.

We are proud of our sponsorship of Dr. Romer’s work. His research underscores how economic competition between nations has become less dependent upon human resources skills, knowledge, ideas, invention, innovation, entrepreneurship.

As this trend accelerates – and it will – the quality and effectiveness of our education and training become the most crucial factors for success.

The wealth of nations is now derived from ideas: ideas that create new products, new skills and new relationships in the public and private sectors.

Renewed and sustained economic growth means investing in knowledge in the same way we have invested in machines: investment spurs knowledge. Knowledge spurs investment.

We support these initiatives because we know that aspiring to world-class rank means developing a workforce of people with the ability to think, to learn, to communicate…and to adapt to new situations.

Which gets me back to my theme here nine years ago: learning – which now means understanding technological change – is the essential ingredient in creating human capital for economic growth and competitiveness in the Information Age.

Now these enormous technological changes have not been lost on those working in the financial services industry. In a world where ideas will drive economic growth, we in finance will also be judged by how good our ideas are, and how efficiently they are applied.

When bankers talk about financial engineering it tends to make people nervous. Some may misinterpret this expression as a comment on the need to bolster weak financial structures, or manipulate mergers and acquisitions for purely short-term gain. That is not the case. What we mean by financial engineering is banking at its best. That calls for innovation that responds to the needs of our customers at the retail and corporate level in a creative and profitable way. Using this definition, we already have impressive financial engineering in financial services worldwide and are certain that this will continue unabated.

Before I reflect on future developments, let me briefly put financial engineering in perspective.

There is nothing new in creating dynamic and effective financial arrangements. Sharing risk is a fundamental instinct, one that created the first organized society. In the Middle Ages, over 600 years ago, the first share certificate was issued in Norway for Kopparbeget (Big Copper Mountain in English). The problem was how to sell copper ore and still keep the mountain. The solution came from selling shares, a dramatic innovation for the times.

When Louis XIV’s extravagances and foreign adventures threatened France with an unmanageable debt, the first liquid sovereign foreign debt market was created. Thus, in 1716, national debt arrived. (Well, I never said all innovation is good!)

In the 19th century, when farmers around Chicago became fed up with the opportunism of grain merchants, they engineered a financial solution we are just now fully exploiting: a futures market.

Today, of course, rapid change demands greater attention to the need for innovation.

Communications and computerized systems have had a huge impact. Technology has allowed the creation of a seamless 24-hour global foreign-exchange trading window. Automated teller machines now offer individuals access to their accounts from a growing number of countries. Every day, billions of dollars in financial transactions go 27,000 miles up to satellites and down again to banks next door or half a world away.

National boundaries have become obsolete to the financial world in many aspects. And that transaction is driving globalization in other areas. During this business day, Royal Bank trading rooms in Toronto, New York and London will handle some $13 billion in exchange transactions. And our branch network today will process eight million transactions.

What changes may we expect in the future? Predictions can, of course, be dangerous. The Director of the US Patent Office, for example, recommended in 1899 that his operation should be closed down because (and I quote) “Everything that can be invented has been invented”. He did this four years after the eminent British physicist, Lord Geldon, had opined that “Heavier-than-air flying machines are impossible”.

However risky predictions may be, it is a safe bet that, over the next ten years, the automatic teller machine will be replaced by the telephone, radically changing the delivery of financial services. This will involve regular telephones and smart telephones, with built-in computer power, “smart” cards, personal computers, interactive televisions and video imaging – and smart people will, of course, be needed to operate them. These remote, high-tech self-services will help us to cut overhead costs by becoming less dependent on bricks and mortar. Ultimately, we are told, there will be the Virtual Reality Bank in which, among many other things customers will interact with bank personnel on live TV from their homes, offices or playgrounds.

Meanwhile, much of the innovation we already see is spurred by the changes taking place today in the structures of financial institutions: changes that require synergy in new partnerships and alliances.

Here in Canada, the barriers between commercial banks, investment dealers, trust companies and insurance companies have been largely removed – and this is working to our advantage. Royal Bank is now a group of some 40 financial service companies engaged in corporate and retail banking, securities investment management, mortgages, leasing, property management, export financing, venture dealings, mutual funds, investor trading, and some insurance services.

One of the major ideas that has blossomed in financial services in the past two decades is financial derivatives. They were inspired by the floating currencies established after the Bretton Woods fixed exchange rate system fell. Despite some skeptics, confidence in these risk management products continues to grow. Derivatives, which redistribute risk, are a key component of today’s financial engineering, which segments every identifiable risk component and structures transactions so that each component lies with the person best able, or most willing to carry that risk. And, this is one area where banks are making a major contribution to the economy of ideas.

In step with exchange-traded derivatives, banks have developed their own risk management vehicles – swaps. Swaps are often misunderstood. In essence, they represent an opportunity for financial institutions and commercial organizations to better manage interest rates and currency risks. Royal Bank group is credited with being the first to link a swap with a public bond issue – a package which is commonplace today, as companies use derivatives to unbundle elements of risk.

The swap market has exploded as companies are eager to hedge interest rate and currency exposures. Last year, total notional principal amount of interest and currency swaps approached the $3 trillion mark.

Today, bankers and business managers are working closely together to engineer new risk reduction techniques customized for corporate needs. Exciting as the prospects for creating these new products may be, there is an essential precondition for developing them, and the multimedia systems that deliver them.

The precondition is that we must manage our human resources creatively to take advantage of rapidly evolving technology. Our people must be empowered to conceive, and apply to the marketplace, the new ideas that win the competitive edge.

So, once again, I come back to my theme of nine years ago: learning is the essential ingredient in creating the human capital that underpins economic growth and competitiveness in the Information Age.

THE STORE IS A BRAND

Morris Saffer
Chairman, Saffer Group Inc.

Retail Advertising Club of Toronto, March 26, 1996
Published in The Corporate Report No. 17 (April 30, 1996)

It is human nature to form opinions, habits, routines and relationships. “Branding” is the outcome of the marketing communications process aimed at convincing consumers to perceive or hold specific opinions about products or stores and to habitually buy specific products or shop at particular stores.

As consumers will always form opinions and attitudes that influence their shopping decisions, it is incumbent upon retail and advertising managers to ensure that their communications consistently lead customers to perceive their stores in a particular way and learn the habit of shopping in their stores. Clearly, branding is as much an issue for retailers as for packaged goods manufacturers.

While in the past it may have been considered optional for a chain of stores to consider itself a brand, this is no longer the case. Success in retail today and tomorrow will be a direct function of how well the chain has managed to live up to the premise that “the store is a brand.”

The allure of tactics

Unfortunately, the tools with which many retailers have lured customers into their stores have themselves been habit-forming. These include the ubiquitous flyers and the all-too-frequent “30% to 70% Off Sales” that fill our store windows and stand at lease lines throughout the malls of North America.

In other words, rather than having built relationships between customers and stores, most retailers have built relationships between customers and promotional tactics. Spread out across kitchen tables are the plethora of circulars from supermarkets, drugstores, discount and department store retailers. Consequently, customers need not develop a trust for any particular merchant. Instead, decisions are being made at home based on price – rather than the shopping experience, rather than the attention to service, rather than a feeling of respect and recognition.

On the other hand, retail communicators have been well schooled in the benefits of “branding,” “positioning” and “image.” We recognize the importance of ensuring that our stores stand for something in our customers’ minds and that our communications with them ought to consistently reinforce this position.

The proven advantages of branded marketing – promoting and communicating the consumer benefits or personality of a product or service in a consistent manner over time – are numerous. These range from the goodwill market value of Kellogg’s, Nike, Coca-Cola, McDonald’s, Wal-Mart and Target, to the success of associate training in branded stores, and to the power of word-of-mouth consumer endorsement about stores with which they can truly identify.

Sears USA

To be true to your brand you must be true to yourself. And that requires understanding the reality of your Brand Equity, or it’s easy to squander it. The customer bestows your branding on you; it’s up to you to recognize and cherish that trust. Sears USA almost blew it. This $45-billion retailer was a heartbeat from extinction before they finally recognized and refocused on their female customers, launching the re-branding campaign “The Softer Side of Sears.”

It’s hard to believe how long Sears had ignored their brand. It’s equally awesome how quickly their love-starved customers responded. In just two years, this campaign has led Sears USA to record sales, profits, and a doubling of its stock – quite the opposite of the retail industry as a whole. What I find especially satisfying about the Sears USA campaign is its intelligence: the clever lyrics of the jingle building on their hard lines heritage. But equally clever is how they moved beyond price in their promotions, building in brand equity into every price offer.

Our marketing plans pay homage to the image of our store that we wish to instill in our customers’ minds. Yet a sampling of Sunday paper inserts, store displays and sales associates’ attitudes will prove that for most retailers there is a very little correlation between the image that has been strategically developed and the reality of the customer’s experience.

What’s gone wrong? The conflict of “strategy” versus “tactics”

Certainly there has been a combination of several factors, including: recessionary spending, retail management shuffles, leadership from accountants rather than merchants, unfocused leadership from conglomerate retailers, time constraints, resource constraints, poorly conducted or misunderstood consumer research, and on and on.

Perhaps more important however, has been the lack of a true discipline to retail brand marketing. This does not just mean that we have all taken our lessons from different and inconsistent textbooks or from different “schools of hard knocks.” Rather, it points to an ongoing conflict within most retail organizations: the conflict of “strategy” versus “tactics.”

For example, if sales for this week are below plan, the advertising department is called upon to make these sales up – immediately (“yesterday”). Under these deadlines, who has time to think about the “right image for the store?” Rather, we rush to produce a “Buy-One-Get-One” or “50% Off” or other tactical solution in the next day’s paper, radio or TV spot.

Is it possible to operate a successful retail chain without losing track of “who we are” and “what we stand for” as a store when we sign our stores, run our ads and train our associates? Obviously, with examples such as Wal-Mart, Target, The Body Shop, GAP, Baby Superstores, and Ikea, the answer is “Yes.”

Euro Disney becomes Disneyland Paris

The danger of discounting your brand equity can even affect as great a brand as Disney. Euro Disney was a total disaster, not least of all because they failed to establish the brand personality that we associate with Disney in North America. So they reverted to price promotions which did nothing to solve the problem. Only when they finally realized they had to create more value than price did Euro Disney find its focus and begin to build the brand quality that we have always admired.

How to do it

First of all, we must solve the conflict between strategy and tactics. “Strategy” is a plan or method to achieve a goal. “Tactics” refers to things that are done to get results. “Strategy” is a very sexy word. “Tactics” is akin to “executional.” The “thinker” versus the “doer.” If the person in charge of advertising is a “doer,” then ads get out. But if the ads don’t build a distinctive brand identity over the long term, that’s stupidity. Ask yourself: if one $24,000 newspaper ad brings in some customers tomorrow, and another $24,000 newspaper ad both brings in some customers tomorrow and makes everyone who reads it think better of you – which would you choose? Obviously, the latter is preferable. It is preferable because it is pragmatic. As retailer marketers, we should first recognize that the solution is to develop strategies that are pragmatic.

Second, we need to adopt a lexicon and process of store branding that makes sense to retailers. Rather than merely grafting on the parlance and patience of packaged goods marketers, retailers’ processes and terminologies must be in keeping with our pragmatic view of the world.

Third, we need leadership. If there is one key ingredient for retail branding success it is strong, focused, intimate, direct, dynamic vision and direction from the top.

Walgreens

Size and success themselves do not signal a brand. In fact, the reason many huge retailers fail is that they have not grasped the crucial “Brand Soul” of their relationship with the customer. When Craig Sinclair joined Walgreens, he had to come to grips with the fact that billions of dollars in sales, thousands of stores and the reality of being America’s biggest chain of drugstores counted for nothing in the customer’s mind. Intense customer research showed that no one owned the leadership position and, in fact, Walgreens’ personality was actually defined by the sale of TV-advertised items.

Walgreens was a long way from controlling the brand, and its advertising didn’t help. The new brand identity centered around “The Pharmacy America Trusts” but is notable in that it never shows a pharmacy or a pharmacist.

Pragmatic branding for retailers

Our job as retail marketers is to drive traffic into our stores on a consistent basis. That is, we must help customers become habituated to our shopping environment – to desire us over the competition. For retailers, then the object of branding our stores is to build customer loyalty. If our stores and our advertising are inconsistent, this loyalty will be hard to come by. On the other hand, if our advertising and our store environment consistently promote a clear image of who we are and what we stand for, then we will have defined our store as a brand – desired and demanded by consumers.

Perhaps the most effective way of branding a store is to think in terms of the following equation: Relationship + Reward = Response.

First, with the help of consumer research, we determine who our customers are (and who they should be), and what is the most relevant relationship our stores can have with them. The role of advertising is to make this relationship as vivid and desirable as possible – primarily by spelling out the reward that our customers will enjoy from the relationship.

If the advertising campaigns we develop powerfully communicate the nature of the relationship and the rewards that flow from it, then it will generate strong consumer response. Store branding is distinguished from product branding by its need to always include both relationship and reward in its communications. The reason for this is that a response is always essential in retailing. The “Three Rs” are therefore essential for store branding. Whereas for product marketing, advertising the image of the product is often done without a response mechanism in retail, communication must always lead to sales.

In retail advertising, we must come to recognize that our brand personality is a combination of “relationship” and “reward” – that we must never advertise one without the other. Every time we do so, we lose brand equity with our customers. In other words, it is more pragmatic to run an advertisement that demonstrates both: (1) relationship: the level of style and excitement that reflects the personality of our store, and (2) the rewards: specific offers, guarantees, or community involvement that demonstrate fulfillment of the promise inherent in the relationship, than it is to run an advertisement with just one or the other. In other words – no advertising the sizzle without the steak; no “image” advertising for “image” advertising’s sake; no sales event advertised that is not in keeping with the relationship we are establishing, or have established, with our customers.

The Bay

Here in Canada, The Bay uses our national treasure, Céline Dion, to further its own brand leadership. Department stores have struggled to brand their role in the lives of their customers. The Bay has earned the reputation as Canada’s fashion department store because it continually demonstrates the aspirational nature of its offering (relationship) with sales promotion activity (reward) that makes the “aspiration” achievable. In fact, in 1995 Canadians rated The Bay’s advertising as “the most liked” and “the most likely to make me want to buy goods and services being advertised” (Television Bureau of Canada Comp ‘95).

Branding the relationship

When determining what the relationship is between your store and your customers, it is important to consider, among others, the following brand attributes of personality, position, culture, relevance and equity.

• Brand personality: what are the character traits of your store? If the store were a person, who would it be? What characteristics are inimical to your store personality?

• Brand position: what do people think your store stands for? How do consumers describe your store? How do these consumer perceptions change for the competition?

• Brand culture: how does the operation of the store/chain reinforce the store’s personality, character and consumer promise? What values are reinforced among store associates and management?

• Brand relevance: what does your store do that makes it an important part of the community in which it operates? If your store were no longer operating, would consumers miss it?

• Brand equity: synonymous with goodwill, the actual worth of the store name – both its intangible and tangible assets from store fixtures to customer lists. At the end of the day, the stronger the relationship with customers, the stronger the brand equity.

The checklist

Again, from a very practical point-of-view, it should be possible to make a checklist for every advertisement and store display that the president, sales associate and customer could all agree on because each understands the store is a brand. This checklist would very likely include the following: Is it us? Yes/No. Does it differentiate us from the competition? Yes/No. Does it foster a relationship with our customers? Yes/No. Does it ask for a buying decision? Yes/No.

For retailers, the process of brand marketing is the very real practice of consistently reinforcing “who we are” and “what we stand for” and always giving proof to the customer in our communications.

The Body Shop USA

The ultimate value of a brand is its power. Perhaps no retailer has used its power more effectively that The Body Shop, long known for its cause-related marketing. This year, The Body Shop campaigned to “Blow the Whistle on Violence Against Women.”

Your relevance in your customers’ lives is an essential element in the branding process. Not every retailer would choose to use that power the way the Body Shop does. But the truth is, we could – and that’s the reality of branding. It gives you the opportunity to make a difference in your customers’ lives. And, more importantly, they welcome that role from their favorite brands. You have the potential to be a powerful brand retailer; it is your choice if you control your future or not.

By better understanding our customers and ourselves, we can define the relationships that our stores must have with customers, and the rewards we need to supply in order to keep them shopping at our stores and believing in us. It is our responsibility as marketing and advertising directors and advertising agents to become the stewards of the branding process and ensure that our “Store is a Brand.”

CANADIAN UNIVERSITIES: COMPETING TO WIN?

Peter C. Godsoe
Chairman & CEO, Scotiabank

The Canadian Club of Toronto, March 4, 1996
Published in The Corporate Report No. 18 (June 30, 1996)

What I am going to talk about today is excellence, and the need for excellence in today’s world. Specifically, I would like to talk about excellence in education. My main point today is this: I believe that we need to create centers of excellence within our university system to develop our best and our brightest students – our business, political and academic leaders of tomorrow – to ensure that we are able to compete with the best and the brightest from around the world in the years ahead.

The way I see it is that if we feel it is fit and proper to ensure that we have the very best athletes represent us in major sports competitions like the Olympics and in professional sports – like the Blue Jays of a few years ago and the Raptors a few years hence – then why does this same logic not hold true for scholastic achievement, where the need for excellence is even more important?

Let me elaborate. With today’s global competition and the technological revolution – which, believe it or not, we are only at the start of – our economic prospects depend more than ever on the quality of our resources, particularly our human skills. This is especially true in countries like Canada, a trading nation so dependent on international markets. We must compete to win against global competition. And our traditional comparative advantages – in trees, minerals and fish, for example – are simply not as relevant today.

So I am coming at this issue from a business perspective. That may be a bit simplistic, but remember, I am a banker and I am heavily influenced by my experience in the school of hard knocks and my international experience. In a service industry like banking, high-quality employees are an essential element of success – success in meeting the competitive challenges here at home and in markets around the world.

I should mention that Scotiabank, with operations in some 44 countries around the world, has given me a very practical view of global competition and today’s human resource requirements. We know what it takes to compete and win in global markets, like the US corporate market, where we are a top 10 bank, going head to head with the big US and major European banks, and in markets like the Far East, where we operate in 10 different countries and where we are up against the biggest banks in the world. High-quality and highly trained people make us successful in these markets.

To give you a more general illustration of the importance of human skills in today’s economy, the number of university graduates with jobs in Canada has increased by more than 500,000 since 1990, while during the same period the number of jobs for people who have not completed university declined by about 200,000.

The development and maintenance of high-performance standards in education – for our universities – and continuously benchmarking ourselves against the best in the world is, more than ever before, a key to our ongoing success and prosperity.

I want to acknowledge that universities in Canada are developing centers of excellence, new links with business and new, specialized programs that are taking us in this direction. There are a number of success stories – here in Toronto, elsewhere in Ontario, and indeed, right across Canada. There are success stories that show we are, as a country, already heading in a fundamentally new direction on education.

But more has to be done to support this sort of institutional excellence and to move the process of change forward at a faster pace. We see stories in the press every day on government budget cuts, and the issue is becoming more pressing. Last month’s student demonstration at Queen’s Park – notwithstanding the trouble – served to underscore this point.

This is not to take anything away from the new programs and initiatives that are being developed and tested in different schools across the country. Nor is this to take anything away from our top-ranked universities like Queen’s, the University of Toronto, Western Ontario, Waterloo, Dalhousie, McGill and the University of British Columbia, to name only a few. These are all quality institutions.

But I am unaware of any major country outside Canada that does not have two or three truly world-class institutions – the “Grandes Écoles” system in France, the great Ivy League schools in the US, Oxford and Cambridge in the UK, the University of Tokyo in Japan, and so on. These are the types of institutions that we need.

What I am suggesting is that we develop policies and funding schemes to foster institutions that are first-class by global standards, while at the same time supporting the fundamental realignment of our educational system that is already under way.

What is the downside? What are the risks of not having or developing these sorts of truly world-class institutions? I believe there are two risks. First, we risk under-developing important resources – not giving our most promising students the very best education. Second, which I would call the worst-case scenario, is that we risk losing important resources altogether to other countries – a “brain drain” of our business, political and academic leaders of tomorrow, which could ultimately mean that we would pay a heavy price in the global marketplace.

Let me step back for a minute and look at where our universities are today – the good and the bad in our current system. On the positive side, public expenditure on education in Canada is among the highest in the world. In terms of the percentage of young adults enrolled in higher education, we rank highest in the world. We also have a very high proportion of university-educated adults by international standards. On the other hand, Canada scores second lowest among G7 countries in terms of well-educated people staying employed in their own country, according to the 1995 World Competitiveness Report. This is the so-called “brain drain” – the worst-case scenario that I just mentioned.

In addition, although our university system offers a complete range of programs, it has not developed the necessary depth in certain key areas that are becoming increasingly important. We have, for example, fewer science and engineering graduates than most developed countries. These are human skills that we need to develop in order to improve our research and development capabilities.

Now, much of the good in our current system – as well as some of the negatives – stems from the evolution of our university system. Since the early 1900s, and especially since the 1960s, government has emphasized a high level of equal access to post-secondary education. And as a matter of public policy, one that parallels other strong social programs that help to set Canada apart from and above other major countries in the world, I have no problem with access being a priority for our educational system. But it cannot be the only priority.

A second and equal priority must be quality, or institutional excellence. At a public policy level, however, I believe that this priority – to develop schools and programs to nurture our most promising students, and develop institutional excellence within our university system – has not received the attention and support it must.

Access and institutional excellence are not tradeoffs. The equation is not as simple as that. In fact, the real challenge going forward is to develop the sort of excellence that I am suggesting while maintaining a satisfactory level of accessibility. On that note, I would like to offer a few thoughts on the next steps – a few thoughts on possible reforms to our educational system. Naturally, I am talking about the long term. While universities, like business, are becoming much more responsive to change, the issues are huge and there are no quick fixes.

I would like to touch to two issues. First, I would like to take a look at funding policies, because money for education is a major issue. And second, the role of business, which in part is related to the funding question, but is really much broader than that.

So let us look at funding. Very simply, going forward, there will not be as much money to run our educational system. Government support is going to be cut back. So the question is, how do we identify and back winning programs and encourage the development of excellence – centers of world-class expertise – in the context of reduced public funding?

Our university system will see a period of rationalization over the next decade. Overlapping programs must be eliminated or merged, and greater efficiencies in program delivery and in administration will have to be found and developed. The answer to the funding question has to lie in better management. There are a number of ways to maintain accessibility while reducing costs, to allow a reallocation of resources to support the development of institutional excellence.

Distance education – the so-called virtual classroom, made possible with advances in technology – creates enormous opportunities to deliver quality instruction to students across Canada and around the world through interactive teleconferencing. The Internet opens up a whole set of possibilities. This sort of technology will drive down costs significantly – while pushing accessibility to levels not considered possible with only “traditional” delivery channels.

A greater emphasis on part-time studies and on community colleges, which generally have lower cost structures, could also drive down total system expenses. And of course the rationalization of schools, programs and administration is essential.

But, for the most part, how we fund our universities comes down to a very fundamental choice. Should we continue to expect government to decide how money should be allocated for universities – what I will call the bureaucratic status quo option – or should we let competition among our universities decide, on the basis of peer competition for funding?

This second option is clearly the one I favor. Under the status quo, spending on education in Canada would remain high and we would continue to see a large number of graduates – both good things. But we would, in effect, be perpetuating the overemphasis on access by rewarding and funding schools on the basis of the number of students.

I would argue that this sort of funding equation makes our universities a tool of social policy. I very strongly support the need for universality in certain areas of social policy, such as healthcare and pensions. These needs are clearly understood. But I do not believe that universities should be funded on the basis of head count. Existing funding schemes have hurt the overall quality of education in Canada. I find it somewhat ironic that over the past couple of decades, as the demands on higher education were becoming more diverse, universities were becoming more alike and trying to be all things to all people.

Existing funding mechanisms have also eliminated much of the accountability in the system. Student fees cover only about 15% of total university costs. That is not much of a check and balance. Instead, why not allocate research money to universities on the basis of competition? Why not provide some government funding, while letting universities vary fees?

This would force universities to compete for students – for bursary and scholarship money. It would also make it easier for students to pick the university they want to attend – for specific programs and specific areas of excellence. And it would make it easier for employers to know where they should go to recruit the best students in a particular field.

As a matter of fact, many universities are already jockeying for the most promising students. Rob Prichard at the University of Toronto brought busloads of Metro’s most motivated students in for an open house last year. And Carleton University in Ottawa – which was built on the basis of accessibility but today suffers from declining enrollment – is introducing a new elite humanities program later this year. In other words, many of our foremost academic leaders, such as Mr. Prichard at Toronto, Larry Tapp, who is newly ensconced at the University of Western Ontario (now the Ivey) Business School, and others, are welcoming change, challenge and competition. And that is great.

On the issue of tuition, fees at U of T or Queen’s or Western are about one-tenth of the tuition at a US Ivy League school. Even public universities in the US have significantly higher fees. Encouraging our universities to develop world-class programs in Canada would mean that a premium could be charged, which would support an even greater emphasis on institutional excellence. The winners get funded, while the losers must change.

Typically, the argument you hear against higher tuition is that this would mean certain students could not afford a university education. I am certainly not arguing for some form of elitism. But the experience of other countries would suggest that low tuition is not necessarily required to protect access. Australia eliminated tuition several years ago but saw practically no change in the demographic make-up of its student population. They have since gone back to charging tuition fees.

That said, I am very conscious that last year’s enrollment numbers in Canadian universities leveled off and that this year’s preliminary statistics show the number of applications to Ontario universities for this fall are down.

So access – based on merit, not the ability to pay – must be protected. It is time, in my view, for governments to reexamine their student loan programs. It is time to look at loan systems that link repayment schedules to income after graduation. Over the past couple of years, banks have developed very aggressive student loan programs. At Scotiabank we are funding more students’ loans than ever before. As well, we need to encourage private institutions to supplement public institutions with more focused privately funded schools. On this front, I believe that we need to rethink our fundamental approach to education.

Let me make one last point on funding. Individual generosity towards universities in Canada has never equaled that experienced in the US. But if the education-economic prosperity link is better understood, my sense is that this support will improve. Certainly, university fundraising in the corporate sector has become much more sophisticated and much more relevant over the past few years.

Which leads me to the last item that I would like to discuss: the role of business in education and the development of institutional excellence, and in private funding of programs. Canada has a good track record on this count. We have been leaders in the university co-op concept – with the University of Waterloo probably being the best example. Clearly, universities and business must continue to work together on these sorts of programs.

But even more is required of business today. It is no longer sufficient to simply provide donations. Business has a responsibility to ensure that it supports institutions financially and in program development, making sure that programs are aimed at real needs, real skills and real benefits to the student and to our community.

To use Scotiabank as an example, our financial support for educational institutions over the past year totals almost $2 million, including our commitments to new programs. And more and more, we are helping fund specific programs – working with universities to make sure that we are adding value, that our efforts are oriented towards the job market and that we are helping to develop necessary skills.

To give you a couple of examples, we recently funded a program at Carleton University to expand its link to the information highway by sponsoring a major expansion of the school’s electronic communications infrastructure.

At the University of Saskatchewan, we have donated $250,000 to develop and deliver an Aboriginal business program, in response to the growing demand for Aboriginal business leaders who understand increasingly complex economic, government, land-claim and resource issues. And the program is enjoying great support.

At Simon Fraser University, we are funding – for $300,000 – a new program for women entrepreneurs, who are a fast-growing group and a key element in the small business market.

And at the University of New Brunswick, a $200,000 donation last month will help establish the Scotiabank Distance Education Center. UNB has emerged as a strong regional leader in technology-assisted education. Over 100 courses are offered through CD-ROMs, audio and video teleconferencing, and on-line PC hookups.

These are new approaches and new attitudes. They reinforce the strong business-education partnership track record that already exists, and constitute funding of relevant programs rather than just bricks and mortar.

On that note, let me summarize. I believe that our economic future depends on our ability to create, use and manage knowledge as effectively – more effectively – than the rest of the world. I believe that human skills – that people – are the only true source of comparative advantage over time. And I believe that we have to move towards the forefront of university education by developing the sort of institutional excellence that exists in other countries. Or we risk, over time, losing our best and most capable people – our leaders of tomorrow.

To do this, we need to unbundle our funding and allow universities to compete for research grants. We need to tolerate variation in tuition fees to promote institutional excellence. And we need to permit private institutions to play a role in our university system. Let the market, not the government, determine which universities succeed and where our centers of excellence are.

We have a great country and I, personally, believe in its future – a future that demands the best and most challenging of educational systems.

HOW BANK MERGERS LESSEN COMPETITION AND REDUCE CONSUMER CHOICE

Peter C. Godsoe
Chairman & CEO, Scotiabank

Liberal Caucus Task Force on Financial Services, Ottawa, June 16, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

I would propose to open with some thoughts on financial sector policy and on bank mega-mergers in particular. By way of general comment, it’s important to remember that mergers are just one issue, an issue that has unfortunately preempted much of the discussion and debate around the larger public policy framework that needs to be considered. It’s also important to recognize that this is not a question of the proposed mega-mergers versus the status quo.

Our banking sector is undergoing significant change driven by globalization, technology, and increased competition. Change has become a constant and it’s a very positive factor for Canadians and for Canadian financial institutions. The status quo therefore is not an option and it’s not something I’m arguing for in raising the need for careful review of the proposed mega-mergers.

The real challenge for government and for policy-makers is to bring the focus back to the broader policy framework and determine the best way to guide the evolution of this sector, to ensure maximum benefits for all stakeholders, including Canadian consumers and businesses – small and large – and communities across Canada as well as employees and shareholders.

Let me start by commenting on where I see the industry today. Although we – the banks – have our faults, Canada’s financial system and the Canadian banks have been an important part of the history of this country and of its success and economic vitality as a nation. I’m of the opinion that these strengths – the great strengths of our system today – must be maintained to ensure maximum benefits for all Canadians.

Which is why I don’t buy the idea that we need a massive restructuring of our system through mega-mergers. A massive restructuring that would be irreversible and would cost about one-third of our banking system. A massive restructuring that would mean two institutions would control 70% of virtually every core banking market in the country.

Right now, Canada has one of the best financial sectors and one of the best banking systems in the world. It’s a national system – highly efficient, very safe, stable, technologically advanced, and extremely competitive with five strong national players. These strengths show through in our results. Earnings are strong. This is not an industry that needs to go through a massive restructuring, one that could tear apart the fabric of our system, to survive.

Looking at bank earnings from wealth management – where we serve high net-worth individuals through advisory services, investments and mutual funds and so on – it is hard to buy the idea of an overwhelming competitive threat to Canadian banks.

Scotiabank is in favor of competition – the more the better – and of enabling banks and other players to grow and bolster competitiveness. Toronto Dominion’s discount brokerage acquisitions, our merger with National Trust, and Bank of Montreal’s acquisition of Harris and other banks in the US is the right way to go. However, we’re against mergers that substantially lessen competition and significantly reduce choice for Canadian consumers and business.

On the Royal/BMO and CIBC/TD proposals specifically, we suggest that these are in-Canada mergers that would create a level of concentration and potential market dominance that would not be tolerated anywhere else in the world. The two mega-banks would have 70% of core banking markets. The Royal/BMO alone would be at almost 40% of personal bank deposits here in Canada. On small business, the two mega-banks would control more than three-quarters of the small and medium-sized business market, and well over 80% in some provinces.

In looking at these ratios, I’d like to emphasize that this is really about core banking for consumers and for small and medium-sized businesses. This is the way that all the banks look at the market and the way the analysts look at the market. Other players are a factor, but this is about banking, core banking. Under US law, as a point of comparison, a merger would not be tolerated if the new institution were to control more than 10% of deposits at insured institutions nationally.

Obviously, going from five major banks to three will not increase competition for Canadians and it will not give Canadians more choice, especially in smaller communities. And I don’t buy the claim that some new competition will come from the mergers at some unspecified future date. Again, for the record, Scotiabank is for competition, the more competition the better.

On that note, let me take a couple of minutes to look at the rationale for the mergers, the arguments being put forward by the merging banks as well as the reality. The reasons, or at least the importance attached to the various points, seems to be shifting significantly. The first, and it seems up to now, the main argument, is that mergers are needed to compete abroad.

The reality is that these mergers are not about global competition. I agree that size is a factor in investment banking – in our capital markets area – where you can take bigger risks with more capital. But generally, bigger is not necessarily better. Look at Scotiabank’s international network. We have operations in 53 countries around the world, including the high-potential markets in Latin America and Asia. We don’t have to merge with another Canadian bank to achieve international success.

Other Canadian bank success stories include TD’s discount brokerage operations, now already the third largest in the world and CIBC Wood Gundy’s successful investment banking operations in New York. And one final example is Scotiabank’s success in the US loan syndication market, where we’re top ten year after year – competing and winning – against the best banks in the world.

The second line of argument is that mergers are needed to prevent takeovers. The reality is that Canadian banks are small by international standards, and mergers are not going to change that. Banks in the US – Citi/Travelers – Bank of America/NationsBank – would be about four times larger than Royal/BMO by market capitalization. When one compares the market capitalization for various Canadian and US banks, clearly, even the merging banks are not too big to bought. Ironically, if takeovers were permitted, the mega-banks would be an even more attractive target given their potential dominance of the Canadian market.

The next argument is that banks need to merge to foster greater competition at home and to be able to defend themselves against foreign competition. The reality is foreign banks control only about 10% of total banking sector assets. This is one of the lowest totals in the world. The US, for example, is at about 14%. How much protection do the merging banks need? No proof exists that Canadian banks are being beaten by foreign competition or the so-called monolines. Moreover, these institutions do not compete in a meaningful way in small towns and rural Canada.

Certainly, the monolines and other foreign competitors are an essential part of the financial sector, adding an important element of competition. But they are not threatening Canadian bank viability. On this point, as part of a presentation at a UBS conference for investment analysts in New York, Royal Bank not only showed itself as number one in every core banking market in Canada, but also presented the dominance it would enjoy combined with BMO. And then it compared its totals to the CIBC/TD – presenting the mergers as done deals – and presenting the Canadian market as an effective duopoly.

The common question around mergers has been: is bigger better? The more relevant question might be: when is big too big? When is powerful too powerful? In mutual funds, where much has been said about the extraordinary foreign competition, 13 of the top 15 players in this country are Canadian. Is this a market where Canadian banks need protection?

The final argument is that mergers are needed to be cost effective, and to be able to compete on technology. Certainly the mega-mergers would generate immediate cost efficiencies, in the form of $1 billion restructuring charges that would be paid for, in part, by the taxpayer.

They would also mean 1,000 or more branch closures, despite claims by merging banks that branch networks will expand, and over 20,000 job losses. That’s the only way to create savings out of an in-market merger. There’s not been a major merger anywhere in the world without major cuts.

Over the longer term, however, there is little evidence to support efficiency gains. A recent report by the Bank of Canada, for example, notes that “empirical work thus far has provided no evidence that a bank has to be a mega institution, rather than just large, to achieve most economies of scale.”

Also consider that Scotiabank and TD, the two smallest of the big five, have been the most efficient banks in Canada for many, many years. The reality is that significant efficiency gains will likely not result. And even if there are some advantages in technology spending, these could be achieved through joint ventures, strategic alliances or outsourcing without merging our way to a major, irreversible restructuring of Canada’s financial sector. If there’s any doubt on this, look at Citibank, which is developing a major outsourcing strategy.

So, overall, there’s no case for mega-mergers. They’re clearly anti-competitive, and we’d lose about one-third of our banking system.

Now, I recognize that listening to a banker on this might leave you with a degree of doubt, so I would encourage you to consult further with others, especially small business, given its role as a key engine of economic growth, and the Canadian Federation of Independent Business. My understanding is that 64%, almost two-thirds, of CFIB members oppose bank mergers, according to polling done last year. The main concern is less competition and less choice.

In addition, technology is not the answer for small business, especially when you consider that about two-thirds of small business customers don’t use the internet, and won’t be able to use alternate delivery channels when branches close down. Clearly, more information is needed on the issue, which is one of the reasons why the work of this caucus task force is so important.

In terms of alternatives to mergers, I think the primary aim must be for government to maintain and foster a safe, accessible and efficient system for all Canadians in responding to and guiding changes that are underway – and inevitable – in our system. Most important, policies should encourage greater competition and choice, in particular a high degree of domestic competition in core banking, and open entry for foreign players, so long as Canadian firms can compete fairly.

In my view, allowing the mergers would mean a financial sector that would be far too concentrated and risky. Risky in the sense of the two mega-banks being too big to fail. Who would, or could, bail out a troubled mega-bank? Public policy should encourage big-medium – cross-pillar – and cross-border mergers – not big-bank, in-Canada mergers. I think we need at least four to eight nationally competitive players, to ensure satisfactory competition and to ensure Canadian consumers and businesses are well served.

To this end, there should be greater flexibility to allow holding companies, joint ventures, outsourcing and partnerships. At the same time, we must maintain overall Canadian ownership of the industry, through ministerial discretion, which I see as an important part of supporting our long-term national interests.

There is no case to support a massive restructuring, an irreversible restructuring, that would eliminate one-third of our country’s banking system. The proposed mega-mergers represent the highest risk policy scenario. It would reduce competition, reduce choice and increase concentration to levels not seen anywhere in the world.

I would urge you to consider a broad range of policy options and make sure we get the future framework right. This is about Canadians, and about the future of our financial system. Careful study and thorough assessment is needed. It’s a bit ironic that in a country that takes two years to approve a pipeline, we consider a major restructuring of the financial sector over just several months.

When I first joined Scotiabank back in the mid-1960s in Ottawa, one of my first jobs was to cover some of the work around the Porter Commission – a study on the financial sector that spanned some two and a half years. In closing let me quote from that report: “We have sought a set of general principles and remedies rather than just a specific prescription for today’s troubles which may be useless or even toxic tomorrow.”

WHY WE’RE TRANSFORMING SEAGRAM

Edgar Bronfman, Jr.
President & CEO, The Seagram Company Limited

The Canadian Club of Montreal, March 8, 1999
Published in The Corporate Report No. 27 ( June 30, 1999)

I’m pleased to be here. The history and tradition that my family shares with Montreal and The Canadian Club are meaningful and important. However, I must confess that for those of us who work at Seagram, the term “Canadian Club” brings to mind something entirely different than this fine organization.

Actually, I’m very pleased to be here to talk to this distinguished group, which is so bound up with the history of Montreal and of Canada. Seagram was born and raised in Canada, and although we are now a global enterprise, with activities in more than 190 nations and territories, we remain a Canadian company. Many of our shareholders are Canadians, many of our consumers are Canadian, and I know that many Canadians are deeply interested in our company.

Because of that, I would like to take this opportunity to tell you what has been going on at Seagram recently. We have completed approximately US$40 billion in transactions in the last four years, which has transformed our company. So I’d like to tell you about three things in the next few minutes: why we’ve chosen to transform Seagram, what we’ve done, and where I think we’re going.

In a nutshell, since 1995 we have redeemed our considerable investment in DuPont and we have sold our Tropicana beverage business. Meanwhile, we have acquired two exceptional companies, MCA/Universal and PolyGram and we have realigned our television assets. What was once essentially a beverage company with a sizable investment in DuPont is now an operating company whose largest single business is entertainment. We own a major movie studio, we own a rapidly expanding theme park business, we are now the largest and most profitable music company in the world and, in the years ahead, we have the path to control a very exciting and growing television and e-commerce company, USA Networks Inc.

When I joined my father and uncle in running Seagram in the mid-1990s, after a number of years managing segments of our beverage business, I had become increasingly concerned about two aspects of our company. First of all, the company’s traditional beverage business was strong, but its prospects for growth were clearly limited. In fact, the limits on the beverage alcohol business had become clear to Seagram management years earlier. And that has been an important lesson to me. As Winston Churchill noted, “The farther back you can look, the farther forward you are likely to see.”

As I contemplated our company when I became CEO a few years ago, I was reminded that in the 1950s, my grandfather had begun making personal investments in other industries. And in 1962, he began the process of formally diversifying Seagram by acquiring the Texas Pacific Oil Company. This investment in the energy industry would ultimately be transformed into an investment in DuPont in 1981. Seagram purchased Tropicana in 1988 and under our leadership it become the world’s leading juice company.

However, as the 1990s unfolded, we began to confront a real concern. Seagram had become a hybrid – it was both an operating company and an investment company. A substantial portion of our earnings were dependent on the results achieved by DuPont. In fact, depending on how you apportioned our debt, DuPont accounted for anywhere from 70% to 90% of our net income. In such an arrangement, the only real reason to buy Seagram stock, was to gain an investment in DuPont, and to do so at a discount. If our shareholders wanted to make passive portfolio investments, they didn’t need to funnel them through Seagram. And it cannot be that the reason for one public company to exist is to merely facilitate an investment in another, unrelated public company.

So we concluded that we should attempt to redeem our investment. After the redemption, we needed to reinvest the proceeds in something that we would manage directly and that could propel our company into a higher growth trajectory.

And what should that be? After a careful analysis of the alternatives, we concluded that the entertainment industry was the best place to redeploy our capital. It is easy to forget that entertainment is more than fun and games. It’s a multibillion dollar global industry that has been growing rapidly as leisure time expands in this postindustrial age. More and more people around the world are reaching levels of prosperity where they have the time and money to become avid consumers of entertainment products and services. Entertainment is not only a major industry within North America. In fact, it is the second largest US export after jet aircraft.

We acted on this analysis by acquiring 80% of MCA from the Matsushita Electric Company in 1995. MCA, best known for its Universal Studios brand, was a well-established entertainment franchise, but in its later years had been a corporate underachiever. We believed then, as we do now, that MCA offered a valuable entry into the motion picture and television industries, and we also felt that its music and theme park businesses provided levers for dramatic growth.

As soon as we gained control of MCA, which we renamed Universal, we quickly moved from renaming to rebuilding to reinventing it. We installed new management at all of the company’s divisions. We went on to revitalize and re-engineer Universal, wringing efficiencies and economies out of every facet of its operations. But we have also reshaped the fundamental nature of Universal’s activities.

In the case of motion pictures, the company’s flagship division, it had once prospered essentially by enabling Steven Spielberg to pursue his creative genius. Unfortunately, he went on to form his own studio, while Universal continued to give too much free rein to other moviemakers. We have now imposed much stronger managerial control over the development process. We’ve also reduced the number of films we fully finance each year, while increasing co-production arrangements, as well as capitalizing on our global infrastructure by distributing more films financed by others.

We remain committed to the movie business. It plays an important strategic role in enhancing the value of our other entertainment assets. Movies drive our theatrical business, our home video business and our pay television business. Movies establish and legitimize stories and characters. Movies live on through soundtracks and they come alive all over again at our theme parks.

Our efforts in motion pictures are still a work in progress. As you know, we’ve had a well-publicized dry spell at the box office. But the recent success of films like Patch Adams, starring Robin Williams and Shakespeare in Love, I believe, are harbingers of continued success to come. We’re pleased that two Universal releases, Shakespeare in Love and Elizabeth, have both received a number of Academy Award nominations, including Best Picture. And we have a strong slate of new releases for 1999, including October Sky, EDtv, The Mummy, Notting Hill, starring Julia Roberts and Hugh Grant, Bowfinger, with Steve Martin and Eddie Murphy, For Love of the Game, with Kevin Costner, Man on the Moon, with Jim Carrey and Danny DeVito, The Story of Us, with Bruce Willis and Michelle Pfeiffer, and End of Days, with Arnold Schwarzenegger.

In television, meanwhile, we have also transformed Universal’s role. At the time of the acquisition, Universal was a onetime television programming powerhouse whose sale of prime-time programming to the big broadcast networks had been dropping steadily and whose first-run syndication business was weak. Meanwhile, its role in distribution was limited to a half interest in the USA and Sci-Fi cable networks.

The rules of the game in television were completely transformed in the mid 1990s when regulators permitted networks to own their own programming. That meant program producers needed direct access to distribution in order to compete.

In October 1997 we were able to buy Viacom’s half interest in the USA Network and the Sci-Fi Channel, following a lengthy litigation. A few weeks later, however, we announced a deal that we think will make Universal a major force in television and on the internet as well. Our two cable networks and a number of our other domestic television assets were combined with HSNi, the company which operated the Home Shopping Network and owned television stations in 12 of the 22 top US markets. HSNi was headed by Barry Diller, a highly regarded entertainment executive.

We joined forces with HSNi to create a new company called USA Networks, which has strong positions in both creating programming and distributing it via broadcast and cable television. In combining our domestic television assets with HSNi, we received $1.3 billion in cash and a 45% interest in the new company. In the 13 months since this transaction, the value of our investment in USA Networks has increased by some $3 billion.

And that was before USA Networks created a merger of sorts with Lycos, the third largest internet portal. Combining Home Shopping Network and Ticketmaster Online/CitySearch with Lycos will put USA Networks at the center of e-commerce. That’s one of the reasons why a few weeks ago, Business Week said USA Networks is “on its way to becoming the prototype of the 21st century media company.” We have the right to increase our ownership to 50.1% in three years and to 57.5% over time. And we have a clear path to gaining full control of USA Networks at the time Barry Diller departs.

Meanwhile, we retained sole ownership of Universal’s filmed entertainment library, which in addition to thousands of hours of television programming, contains more than 3,500 motion pictures. That library contains everything from such classic Universal films as the original Frankenstein and Dracula to current releases, and it has hours of Murder She Wrote, Alfred Hitchcock Presents, Miami Vice and other television series. This library is playing a crucial role as we expand our involvement in television internationally, where we own 100% of our television business.

There is an explosion in television taking place around the world. In the developing world and in the former Soviet Union, there used to be only one channel, usually run by the government. Now virtually every country has a cornucopia of broadcast, cable and satellite television alternatives. That creates vast opportunities for those involved in distribution as well as those who create programming. We’re involved in cable operations in several countries and we’re providing programming in dozens of countries. We believe the combination of USA Networks and our international activities is creating an increasingly central role for Universal in the new world of television and telecommunications.

In recreation, we have also jump-started what had been an under-exploited asset. When we acquired Universal, it had two theme parks, in Los Angeles and Orlando. We are doubling the size of Universal Studios Escape in Florida by creating a second theme park, called Islands of Adventure, which opens in May. It will feature attractions that draw on a number of extraordinary names in the entertainment world, including Jurassic Park, Dr. Seuss and Marvel Comic Super Heroes. This is the best theme park in the world. Steven Spielberg, who designed the park, went to survey its progress with me recently and called it the eighth wonder of the world.

To fully exploit the potential of our Florida park, we are adding three spectacular new hotels, to be managed by Loews. And we have opened a Florida version of CityWalk, the shopping and dining experience that has been a major success at our California park.

Meanwhile, we are expanding internationally. Universal Studios Japan will open in Osaka in 2001 as the centerpiece of a $15 billion redevelopment of the Osaka waterfront that is being called Universal City, Osaka. We have also acquired a 37% interest in Port Aventura in Spain. And we became the first western entertainment company to open a permanent attraction in China, called the Universal Studios Experience, in Beijing. The result is a branded network of theme parks in North America, Europe and Asia.

While the expansion of our parks in Florida and Japan alone will cost more than $4 billion, we are investing only $500 million of our own money. By limiting our own investment, while generating substantial income in the form of royalties and management fees, we are improving our return on capital. As I look forward, I expect the cash flow from our recreation group to triple in the next five years.

Finally, let me describe our activities in recorded music. It’s no secret that a few years ago Universal was deep in the second tier of the six companies that dominated the global recorded music industry. We installed new management that signed new groups, built new labels, and began developing an international sales network. But we soon reached a crucial fork in the road: either we had to accept second tier status, particularly outside North America where our distribution was weak, or we had to make a major acquisition. We took the latter course. In December of 1998, we completed our $10.4 billion acquisition of PolyGram N.V. The result is the Universal Music Group, the world’s largest music company.

We think the recorded music industry is on the verge of a boom for several reasons. One is demography. Half the world’s population is under the age of 25, and these people are prime buyers of recorded music. Moreover, there is a whole new market opening up beyond North America and Western Europe. In Central and Eastern Europe, and in the developing countries of Asia and Latin America, there are millions of people who are now acquiring the means – and the freedom – to buy the music they want.

But recorded music is not only a wonderful business because there are more and more customers. It’s also appealing because technology holds the promise of completely transforming the distribution of music in the next several years. You all know that Amazon.com is changing the book business by letting people order books via their computer and have them delivered to their door.

Music will one day take this a step further. You will be able to sample music on the internet, select what you like, and order it with your credit card. But then, in contrast to internet retailing, you won’t have to wait for the post office to deliver it next week or even for Federal Express to deliver it the next day. It can be instantly downloaded to your computer. Many other internet transactions culminate in a package being loaded on a delivery truck. They’re essentially updated versions of the old-time mail order catalog business. Music may well be the first example of pure e-commerce: it’s all done by computer.

I believe music is destined to be a significant part of the dramatic upsurge in e-commerce that we’re hearing so much about. It’s part of the reason why investors are so excited about internet stocks. And it’s a major reason we’re so excited about music. The internet holds the promise of dramatically reducing the substantial costs of distributing millions of CDs to thousands of retail outlets in dozens of countries. Universal alone produces and distributes some 550 million CDs every year.

While reducing distribution costs, the internet makes the entire world of music more accessible to consumers in every part of the world. And for those of us who are “older consumers,” and in the music business that means people over the age of 24, who find a less than welcoming environment when we go into a record store, we can buy what we want, and only what we want, in the comfort of our homes or offices.

To be sure, the technological security issues need to be tested and refined. Recently, the Universal Music Group joined with the four other major music companies and IBM in announcing the first market test of a secure digital downloading system for distributing music over the internet.

But the universal appeal of music is unquestioned, and the universality that e-commerce provides for distributing music promises major rewards. The Universal Music Group, the largest player in this industry, has the combination of global reach and local knowledge to play a leadership role across the entire spectrum of musical tastes and distribution channels. In terms of financial performance over the next two years, I’m confident that we will achieve our target of $300 million in cost savings and grow our cash flow 15% to 20% each year. I could tell you more, but, as befits a music company, we have a music video that attempts to explain a little about the Universal Music Group.

While we have been absorbed in revitalizing Universal, we have not been neglecting the rest of Seagram. Let me turn now to our traditional beverage business. This is a mature industry that has faced major shifts in demography and consumer preferences. People have been drinking different beverages than in the past. But we have been building our sales in North America and maintaining, and more recently building, our market share in key markets in Western Europe. We have also been focused on building sales in the developing markets in Asia, Latin America and Eastern Europe. The emergence of sizable middle classes in many of these nations has brought a growing interest in the finer things in life, including Seagram products.

In recent years, we have had dramatic success in Asia. However, last year the Asian financial crisis hit us hard. Our response has been to stay the course. We have made additional investments in South Korea, Thailand and elsewhere in Asia. We are taking advantage of falling equity prices to buy out joint-venture partners and strengthen our position in anticipation of the next round of growth in Asia, which we hope is not far away.

Meanwhile, we have been revitalizing Chivas Regal and other brands. And we have restructured our organization to remove unnecessary layers of management and keep our managers in close touch with their markets. Our Spirits and Wine Group reported strong growth in our second quarter and I expect strong growth in our third and fourth quarters as well.

Our Spirits and Wine Group is an integral part of our company, and not just for historical or sentimental reasons. It is a leader in its industry, it is consumer driven, it delivers strong free cash flow and it is a well-managed global operation with a focused plan for growth. Every few weeks you can pick up a newspaper and read that Seagram is planning to get out of the beverage business. Contrary to all the speculation, we do not intend to separate or sell this business.

For a number of years, critics have pointed out that the DuPont shares we sold had appreciated more than the value of the entertainment company we were building or our own share price. However, with the recent momentum in the price of Seagram stock, that comparison is no longer as valid as it once seemed.

In any case, those who make this comparison are missing a far more fundamental point. The process we started in 1995 was not merely an effort to trade one investment for another. Instead, we have transformed a passive holding into a major enterprise with strong growth characteristics that we own and operate. Acquiring Universal was the beginning rather than the end of a process that will raise our growth prospects and make us more fully masters of our own destiny. I am confident that this will continue to provide substantial benefits for our company and our shareholders. We have spent some four years rebuilding Universal and Seagram, and the value of what we have done is becoming increasingly clear.

Companies periodically need to be renewed, refreshed and even transformed. That’s what we’ve done with Seagram. We are now an operating company with leading, cash-generating, global businesses. Our franchises are strong. Our growth prospects are real and immediate. Sure, there are challenges ahead but we intend to deliver on the promise of all of these changes, achieving strong increases in financial performance in each of the next few years.

The company that was born here in Canada is now a global company with two major businesses: entertainment and beverages. In both cases, we have products and brand names that are known around the world as the best in the house. In fact, the prospects for Seagram’s future have never been brighter, the foundation of our business has never been stronger, and our confidence has never been greater. And we look forward to delivering that future, quarter by quarter, year after year, long into the new millennium.

EMPOWERING WOMEN TO BE THEIR BEST

Rochelle Udell
Editor-in-Chief, SELF Magazine

Speech to The Folio Show, New York, November 2, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

Change is SELF’s reason for being, our DNA. SELF was born out of change and has been guiding women through positive, personal, fully integrated change to “well-being” since January 1979. Twenty years ago, Phyllis Starr Wilson, the founding editor of SELF, wrote in her first letter: “Why SELF? Very simply, there was no fitness magazine for women – until now. Fitness is America’s No. 1 enthusiasm and this exuberant concern for body and mind is what SELF will focus on. An extraordinary spirit and energy are emerging in women today. Fitness is the fuel…SELF will be a guide to the vitality we need to do all the things we want to do…” She goes on to make a very important point about total well-being, our positioning for the last 20 years: “Health experts now give the connection between fitness of body and mind top priority in their research. SELF will keep you up-to-date with their findings and with everything that makes a richer life for you.”

In 1979, I know there were people who thought: why would anyone build a magazine around well-being and change? Because the pursuit of well-being demands change, and women’s lives in the 1970s were changing – rapidly – in ways that they had never changed before. Who remembers the 1970s? (Who’s too young to remember the 1970s, but has watched a lot of “Nick at Nite”?) What were you doing? I’ll take you back.

The 1970s was a decade of cataclysmic change. The baby boomers turned 21, came of age, graduated from college, found jobs, experimented with new lifestyle choices and went through changes. Now, one person experimenting and going through changes can send shock waves through his or her family and circle of friends and associates. When millions go through changes at the same time, it’s a cultural revolution – and can send shock waves around the world.

Women, once happy to conform, now wanted to do their own thing. Women went to college to get a better job instead of to get a husband. In record numbers, women went to work, and women had their own money to spend. The birth control pill drove women from no sex to free sex. Couples moved in together before they married. Women won the right to choose. Our Bodies, Ourselves made reproductive health a topic of open discussion.

Alternative medicine began to gain broader acceptance. We threw out carbon paper and made photocopies. The medium was the message. The Vietnam War raged nightly on the news. The motto was “You can’t trust anyone over 30.” People, particularly women, had new goals and consequently new needs. They were looking for guidance, benchmarks, resources, in-depth coverage on what might have been at one time taboo subjects – and they were looking for new thinking from magazines.

There were a lot of startups in the 1970s. The economy was ripe for it. I worked on three of them: New York Magazine, the first city magazine; Ms, the first feminist magazine, and SELF, the first magazine of total well-being positioned to women of a particular state of mind, as opposed to a demographic or topic of interest. That positioning, in and of itself, was a breakthrough.

SELF was the first new Condé Nast magazine in 40 years. That should give you some idea of the significance of this introduction. Eighty percent of SELF’s readers worked, were marrying later and having children later, and taking charge of their own lives. (Curiously, they were also smoking. We had one of the highest indexes for smokers in 1979.)

Within two and a half years of SELF’s launch, circulation was one million. In the August 19, 1981 New York Times, N.R. Kleinfield wrote: “SELF has dodged the pitfalls and emerged as one of the most successful big-circulation magazines hatched in recent decades.” Phyllis Starr Wilson, SELF’s first editor-in-chief, had capitalized on change, connected to the emerging, female, affluent market and created the right magazine for the times. And the advertisers and marketers loved it. Those magazines that supported women’s new goals and needs, more than ever before, were influencing thinking, behavior and buying decisions – actually driving the culture, and thereby driving the economy, and fast.

I know that every successful editor, marketing, advertising and promotion director in this room tracks change. We all need to know what’s important or is about to become important in our readers’ lives. If we’re not relevant, we’re soon out of business. But that’s not what I mean when I say that SELF is about change. Our mission, our editorial and our marketing message is clear and consistent. If you are thinking about making changes in your life, this is the magazine to read. If you are trying to understand the changes happening around and to you, this is the magazine to read. SELF follows cultural shifts, from a very personal perspective.

At the core of SELF, we know that our reader is interested in moving forward in her life and understands that forward movement, growth or achieving her full potential, starts from within. There’s no question that what drives our reader to change is the larger culture. Her goals and dreams are shaped by what she sees around her, just like everybody else. She’s not immune from peer and social pressure. If anything, she’s more responsive to the times than most women. Her goal is to excel at all the things that are important to her and to keep up with the times. In the 1970s, there were key areas in which she wanted to fully realize her potential and excel and in the 1980s, as the world changed, she moved to excel in new areas.

As the world changed, and our readers responded, what was our responsibility? In the information decade, the yuppie decade, the money-money-money decade, the cutthroat decade, the “I want it now, look at me” decade – better known as the 1980s – desktop, consumer and business technologies rocked the world. Technology changed the way we access, receive and retain information. Gadgets were status and people hoarded information. We were drunk on the promise of greater efficiency, more leisure and access. Information, we believed, was the ultimate power tool – and power was what we wanted.

In the 1980s, only the best was good enough. Our calendars were always overbooked, and we bragged about it. The stock market crashed. The Berlin Wall tumbled. And democracy died in Tiannamen Square. Women, including mothers, were working and moving into middle management. Divorce rates soared. Marriage became an option. Dads became involved fathers. Domestic abuse made the news. We were all wired for cable and fixated on celebrities.

Health news, particularly women’s health, became front-page news. Alternative medicine and anti-aging treatments moved into the mainstream. AIDS became a national epidemic. Fertility treatments and sports medicine found plenty of patients, so did plastic surgery, as we assumed it was our right to change what we didn’t accept about our bodies. Patients began demanding informed care. The baby boomers entered their peak earning years, made their big career moves – and, oh, decided that life begins at 40. In that climate, our reader was looking to gain an edge and she was prepared to change her fitness routine, her diet, her vitamins, her job, her relationship, her wardrobe, her makeup and her schedule to get that edge.

Optimization of personal resources was the name of the 1980s game. So SELF’s goal was to be the premier provider of diet, fitness, beauty and peak performance information. To be the best, we reported, you needed to make changes and we outlined those changes. We provided the new benchmarks for excellence. And we helped women who weren’t, and in many cases still aren’t, accustomed to taking power in their relationships and in their careers.

The pressures of the 1980s, of keeping ahead of technology, keeping up with information, and keeping that edge created stress. In the 1990s, change accelerated at warp speed and things started to break down – big things, like government, schools, healthcare, boundaries and families. People rethought their goals, asked, “What’s going on here?” and put on the brakes. As the 1990s drew to a close, most Americans became less interested in living fast and more interested in finding what works for them. And we’ve entered the “Age of the Individual,” an age tailor-made for a magazine named SELF.

Personal reality became the only reality in the 1990s. Pressed for time and money, and convinced that the infrastructures meant to support us weren’t up to the job, Americans found their own very individual solutions for life. Style, fitness and beauty were now self-defined. Family, marriage and community were now self-defined. Education was self-defined. “God” was self-defined. Consumers demanded more from the products they bought and more of the people who sold them.

Women are now expected to work – and have money. Women’s issues have become the country’s issues. We’re seeing the introduction of initiatives that support women and mothers in the workplace. At the same time, feminism has become a dirty word.

A baby-boomer now turns 50 every eight seconds. So suddenly 50 is young, and the last of the big spenders have started investing in the stock market. The growth has been staggering. The volatility has been chilling. Old age and retirement, however, are looming. So spirituality once again is a central part of American life. And anti-aging everything, nutrition, health, and well-being are top of mind. Alternative medicine, yoga and meditation are mainstream. Strength, well-being and vitality are the new standards of status and beauty. Menopause is out in the open. And health is driving economic growth. Cloning and genetic engineering are the new frontiers. Super-bacteria and AIDS are an ever-present threat. And Viagra has launched the next sexual revolution.

The news media have taken a serious hit as news teams abandon objectivity for speculation. Entertainment is a major contributor to the GNP and driving medical, manufacturing and communication technological enhancements. Computers, telecommunications and video are converging. The internet is driving the financial markets and moving into more and more homes. The way we take in information is changing and our attention spans are growing shorter.

Remember, we thought computers would give us more leisure time? Technology is our 24-hour-a-day taskmaster. And hurrying – struggling against time – has become the American way of life. Our calendars are overbooked, and sales for Prozac and St. John’s Wort are through the roof.

In the 1990s, SELF, in many ways, returned to its inner-directed roots and became more deeply involved in the well-being movement. Our focus tightened. Our format and design changed and so did the way we presented information. We’re more sensitive to how people take in information in the “Internet Age.” Our reader doesn’t want us to tell her what she has to do. She knows. But there are lots of ways of doing and being.

SELF is an advocate for our reader’s causes. Breast cancer will touch all of our readers’ lives. In fact, the pink Breast Cancer Awareness ribbon was introduced at SELF. Over 320,000 women a year request copies of our Breast Cancer Report. We lobby for a woman’s right to mammography, new therapies, support groups and an end to drive-through mastectomies. We bring the rights and needs of women to Washington.

Last year, we started running a series on the Ten Best Hospitals and Healthcare Facilities for Women. Our objective was not to send women flocking to these medical facilities, but to provide them with a standard by which they can measure their care. In our health coverage, we provide multiple treatment options for the most common disorders and diseases. When a new therapy emerges, we research it to make sure it will do our readers no harm. Lots of our reports are picked up by the nightly news.

And in every issue and every article, we remind our readers that they are entitled to all the information and the healthcare they need. Our reader typically expects a lot from herself. We remind her that she has the right to expect the same of everyone else.

In the area of interactivity, SELF has also introduced more features that get the reader involved in the content of the magazine. We issue challenges, and keep in touch with readers as they go through our programs.

Our 20-year readers range in age from 39 to 75. Georgian Murky, age 46, is a human resources manager from Falls Church, Virginia. When we asked her about why she started and stayed with SELF, she answered: “When I first saw the announcement, I was excited by the holistic approach SELF planned to take with health, fitness, mind/body and the rest, so much so, that it seemed timely and unique among women’s magazines. I think people were ready, that it was a very opportune time to launch the magazine. The information on women and women’s health issues, in particular, was also attractive. That it addressed knowledgeable women, and didn’t talk down to them was another great attraction. I’m almost amazed that any magazine could grow with its audience – it’s not easy for a publication to do, but SELF definitely has grown with me.”

So, what’s happening in the years ahead for SELF Magazine? I’m going to give you nine of my favorite trends, from the hundreds that we’ve spotted, trends that we’ll be making sense of for our readers and for our editors as well.

• First, time is the ultimate status symbol and the coolest people will be those who select the times they can be reached.

• Second, the information, entertainment and education industries have combined – the media are being reconfigured. How should we deliver our content?

• Third, individuals will customize products – the “have it your way” mentality. How do you know what you want?

• Fourth, as we try to put some soul back in our lives, art will enjoy a renaissance. More people will visit museums, theaters and so forth. And industry will support the arts. How does media language reflect these experiences?

• Fifth, we are shifting from curing diseases to genetic engineering to improve the immune system, to eliminate genetic predispositions to diseases and disorders, and to make people stronger and smarter. Diseases like breast cancer, Alzheimer’s, high cholesterol, osteoporosis, MS and Down’s Syndrome will be treatable, preventable or even eliminated. Then how will we assess living?

• Sixth, 60 will be young and the anti-aging business will be a huge global enterprise, and we need to rethink relationships and boredom.

• Seventh, workplace and homeplace have become more integrated as people telecommute, which will change the design of buildings, communities, and redefine the work week, and the play week.

• Eighth, there will be no majority. How will cultural priorities be set?

The last one is that the strong, the self-aware, the self-reliant are very adaptable and they’re the ones that will thrive.

Information overload will lead to a pressure to be succinct and trustworthy which will lead to an increased respect for editors. How do you gain and maintain trust?

Depth is the province of magazines. We’ll always be the pause button, the media where people make a personal connection, ponder, fantasize, meander, aspire and stumble across an interesting notion that might take their lives in a new direction. As readers change, and as the culture changes, we’ve shaped our issues.

We looked at the change process. Take the metamorphosis of the not-so-simple butterfly. As a caterpillar, at a predetermined point in its life, it will spin a cocoon, go through the process of metamorphosis and emerge as a butterfly. In the cocoon, the caterpillar’s body is chemically broken down into different components. A new body and wings develop. And in a life span of weeks, it takes hours for the young butterfly to figure out how to fly. The caterpillar has shifted from a funny-looking earthbound creature to a beauty that is airborne.

Change is loss. Visible parts and behaviors of the caterpillar die in order for it to move onto the next stage of its life. As you change, you say good-bye to a part of yourself in pursuit of what you believe will be a better you. Positive and desirable though that may seem, you will mourn the loss of the part of you left behind. This hurts. You loved or needed that part of you. It probably pulled you through a few tight spots, even if it’s not working for you anymore. You have to face and understand the value of the rejected part of yourself, feel the sadness and pain of your loss, as you learn that something better will take its place.

Which means you have to take some risks. Change is uncertain. It sends you out into the great unknown without a map, and it raises frightening questions. Who are you if you aren’t who you were before? You won’t know whether it’s a good idea until you get there. So you might feel anxious, impatient, depressed and more than a little angry. And you may have to live with those uncomfortable feelings for some time. Change is often slow. It’s not one-dimensional. You’re a complex creature. Your change touches everyone in your life. Every behavior or idea you embrace is supported by many different functions of your body, mind and spirit.

Change that works is change that is integrated into every aspect of your being. Like the caterpillar, you have to break down all the components – work through all the emotions you’re likely to feel along the way, if you are to emerge beautifully and successfully changed. Unlike the caterpillar, you’ll have years to enjoy it.

21ST CENTURY CANADA: TOWARDS NEW SOLIDARITIES

Guy Saint-Pierre
President & CEO, SNC-Lavalin Group

The Board of Trade of Metropolitan Montreal, September 20, 1995
Published in The Corporate Report No. 14 (October 19, 1995)

Once again, Quebecers will have to collectively decide whether they should maintain or break the ties that bind them to the rest of Canada. Once again, we are called upon to enter a debate which has proven beyond doubt its ability to create division among us, with all the economic and emotional drawbacks that such division implies. As far as I am concerned, the choice is clear: I will vote NO at the October 30 referendum. I am here today to tell you why. But before I delve into the subject, allow me to set my intervention in the proper perspective.

SNC-Lavalin does not vote. Neither in elections, nor in a referendum. Like all other private companies, we live with the governments given to us by the electorate. That is part of our corporate environment. We are active in 90 countries with wide-ranging political cultures and we live and deal with as many governments, whose orientations and approaches are multiple and variable. However, we do occasionally express our point of view on key issues, either directly or through such bodies as chambers of commerce, Quebec’s Conseil du patronat or Canada’s Business Council on National Issues. This we do when we believe that we can make a genuine contribution towards the development of government policies. We do it not only in Canada, but also in other countries where we are a corporate citizen. Sometimes governments take our suggestions into account, sometimes not. Democratic governments are accountable for their decisions only to their electorate.

If the only issue at stake on October 30 was the election of a government, I would not get involved publicly – although as a citizen I would have the right to. However, the outcome of the current issue involves consequences much more serious than a mere election. We are not just electing a government. We are about to make a choice which could bear irreversible consequences. In my view, the proponents of secession are fostering a project which, should it materialize, would incur severe drawbacks not only for SNC-Lavalin, its shareholders, its employees, its clients and suppliers, but for all my fellow citizens of Quebec. Given such high stakes, I consider that it is not only my right, but my moral duty to get publicly involved in the debate, because in debate lies the essence of democracy.

Now, how does this debate present itself? My government – the government of all Quebecers – recommends that I should vote “YES,” in favor of a collective emigration project which would have us all leave Canada to become citizens of a new sovereign State: Quebec. My government recommends that I leave a rich country, a free and democratic country, and this at a time when my mother tongue is spoken more than ever and my culture is more than ever acknowledged. I consider that the burden rests with this government to prove that not only is this collective emigration feasible, but that it is desirable and necessary. I have not been offered such a demonstration.

I will therefore vote NO at the referendum. Because I say NO to a costly, unnecessary venture. Because I say NO to a needlessly risky gamble. Because I say NO to a project which offers the ordinary citizen absolutely nothing to gain.

A costly venture

Sovereignists quite openly suggest that a YES at the referendum would be followed by a quick accession to sovereignty, after which only a few formalities would remain to be settled, such as: valuing public equipment, allocating the federal deficit, and Quebec’s almost automatic joining in all the international organizations and treaties that Canada is now a part of. A few months of intensive negotiations, after which the Government of Quebec could concentrate merrily on creating heaven on earth for all of us.

“Nothing to it!” they might add. Sort of like a large corporate reorganization. You hear the rationale and you would think that Quebec’s accession to independence will be slightly less complicated than the SNC-Lavalin merger.

Well, in actual fact, the process of Quebec’s accession to independence and the resulting negotiations would be so involved that it would monopolize our political and bureaucratic system for years to come – for a whole generation or more.

First, I simply shudder when I think of the tidal wave of lawsuits that each stage of the process would give rise to: between Canadian Constitutional Law and International Law, between the people’s right to self-government and the determination of boundaries between their abodes…you can imagine the fantastic career opportunities this could lead to for a myriad of lawyers and legal scholars!

Next, in the best of scenarios, negotiations will have to take place. First, for the terms of secession, then for the terms of a new partnership. The whole sovereignty project being based on a partnership offer with the rest of Canada, it stands to reason that negotiations are unavoidable. EITHER this partnership offer will be turned down by Canadians, and Quebecers will find themselves without any form of association. Such an outcome would deprive a vast proportion of YES voters of a condition essential to their consent. OR, the partnership offer will be followed by negotiations. I cannot imagine any reason why discussions should become miraculously quicker and easier between Quebec and an impatient and aggravated alien country than between partners within the same country. Both scenarios are plausible. Both are costly. Needlessly.

A needlessly risky gamble

Now, we are only looking here at the process of Quebec’s accession to independence, not at the subsequent results. These results are highly uncertain. So, the process of separation would be risky business and, furthermore, who can tell what the real nature of Quebec would be in the event of independence? This is a matter of sheer speculation.

As I mentioned before, the risks involved are needlessly high. I will spare you the speculations concerning the agonies and nirvanas of an independent Quebec. You will be saturated with them long before the referendum comes. In the weeks ahead, analysts will dissect the viability of a more or less independent, more or less associated Quebec. You will be literally bombarded with figures and scenarios.

I presume that such topics as “the fate of farm products price regulation in an independent Quebec” will be brought to bear; or “the pros and cons of being a Canadian province, or a state of the USA or Mexico rather than a sovereign Quebec, in view of the North American Free Trade Agreement.” I presume that there will be lengthy discussions concerning the national deficit, with profound interrogations as to whether an independent Quebec would resemble Switzerland or Senegal.

I imagine that the YES side as well as the NO side will both find a way for their analysis of these topics to support their theses. But in the end, once the sandstorm of figures and arguments settles, Quebec citizens will not know any better than today what a sovereign Quebec will be made of. Simply because that Quebec will stem from the interaction of extremely complex forces, and negotiations whose outcome is absolutely unpredictable.

In actual fact, we do not know what the national debt of an independent Quebec would be, nor what this debt would cost to service. We can only be sure that our per-capita debt would be greater than it is now, and that interest rates paid by Quebec would be higher than those paid by Canada. We do not know under what conditions we could access the Canadian market, on which 20% of our economy is dependent. We only know that there is no reason why they should be better than they are now. We do not know what would be the impact of using a henceforth foreign currency, the Canadian dollar, or how Quebec’s economy would be affected by a monetary policy designed in a foreign country. No matter what we think of the current situation, whatever the sovereignists hope to achieve does not appear to me as conducive to more Quebec autonomy in terms of economic policy.

We do not know what other conditions would make up the political partnership with Canada. We do know, however, that our influence on Canada would be much weaker than it is now.

Sovereignists often claim: “We will negotiate on equal terms.” Any negotiator knows that there is no such thing as “equality by decree.” Equality is the product of a rapport de forces. Ask yourselves if the sovereignty of European countries makes them all truly equal within the European Community. Ask yourselves if the sovereign country of Mexico negotiates on truly equal terms with the United States.

To take into account the demographic and economic realities as they are is an act of lucidity, not weakness. To replace these realities with illusions is a show of folly, not courage. Instead of being a powerful and influential player within Canada, as it is now, an independent Quebec would be a small country forced to negotiate with a country three times its size. Is this the kind of bargaining power the sovereigntists want for Quebec?

For 41 of the last 50 years, Canada’s Prime Minister was a Quebecer. In the current Canadian Parliament, the Prime Minister, the Minister of Finance, the Minister of External Affairs, every member of the Official Opposition and the chief of a third Party are all from Quebec. Now that’s political weight, if I’ve ever seen any! Not to mention the Chief Justice of the Supreme Court of Canada. As you can see, there are more oppressed peoples than Quebecers.

No benefits for ordinary citizens

This brings me to the third reason why I will vote NO: I fail to see any benefit for ordinary citizens in a sovereign Quebec. Why sovereignty, in fact? This question surfaced on Quebec’s political scene 35 years ago. From a hunger strike by Marcel Chaput to FLQ bombs, from the advent of the RIN Party, to the PQ election in 1976, from the 1980 referendum to the 1995 referendum, sovereignty has been supported by sometimes aggressive, sometimes appeasing discourses; and it has been supplemented with a more or less firm, more or less realistic commitment to a partnership with what would be left of Canada. However, basically the project remains the same: to make Quebec an independent country.

What strikes me today in the question that is put to us is not so much the variety of seasonings it has been dressed with, nor the formidable legal expertise and media industries it has nurtured. What strikes me is that this question dates back to the beginning of the 1960s. And since the 1960s the world has changed radically but the question has remained the same.

Let’s go back to the 1960s for a moment, when the independence movement was born. Quebec’s Quiet Revolution was in full swing. It had begun with Jean Lesage’s slogan: “Maîtres chez nous” (“Masters in our own house”). State intervention, in those days, ruled the major part of the aspirations of Quebecers.

A Providence State it was, certainly, but also a Producer State, a Planner, a Catalyst, an Educator, a Regulator, an Equalizer, and – I was going to say a State of Happiness. Quebec’s situation was not unique – this was a characteristic of the whole Western Hemisphere. In France, Great Britain, Germany and even more so in Scandinavia, the State was the key to progress.

This is the context in which the independence project was born. Of course, when the State is perceived as the cornerstone of all economic development, of all social progress and of all human evolution, the wheres and hows of political power become a fundamental issue. Now, if a community further perceives the State as its main promotional tool, as was the case in Quebec, then understandably it will find it essential to control all the functions of the State.

The crux of the matter is that in 35 the world has changed radically. Particularly in terms of the relationships between the State and the citizen, which have undergone such alterations that the question put forth by independence leaders of the 1960s has lost the core of its substance. The State is no longer the main engine of all development, as it was 35 ago. Not even in Quebec.

In the 1960s, it could be argued that in Quebec the State had to compensate for a lack of entrepreneurs and private capital. I fail to see how this could be argued nowadays. Nor can I see what contributions sovereignty could make towards the well being of the average Quebec citizen. Would he or she have more freedom? I cannot see in which areas or how this could be. Would my fellow citizen become richer and more prosperous in an independent Quebec? I cannot see why this would happen in the short, or the long term. Would he or she be in a position to create a more tolerant, more equitable and more compassionate society? In this respect, what options would an independent Quebec have that Canada does not have already? Would the average citizen be provided with more public services? I have not heard nor read anything that points in that direction. Would he even be more Francophone? Rooted in the land of America as it is, Quebec could not become more Francophone unless it sacrificed its openness to the world. We are already as French as we want to be.

The truth is that the constitutional debate which has been going on for more than thirty years between political-bureaucratic coalitions has little impact on the average citizen. Stripped of its mediatic pathos, it is of consequence only for the members of these coalitions, who are, in fact, negotiating their own power base. Granted, I can understand the frustrations of the politicians and bureaucrats who must find themselves daily in the midst of quarrels over jurisdictions and powers. But we would be fooling ourselves if we were to think that the quarrels will be less frequent or virulent after separation. Divorced couples seldom become blissful lovers.

I admit that I am sometimes affected and even offended by the excessive language used by some of our fellow citizens from other provinces. On the other hand, I imagine that certain words coming from here have a similar effect on our fellow Canadians in the rest of the country. I take note that the secession of Quebec would not help matters. And I am amused more than anything when I hear people who try to justify independence by alleging that an end must be put to the so-called never-ending, energy-wasting negotiations between Canada and the provinces. For more than forty years European countries have been negotiating among themselves and with the European Community, and nobody would dare call these wasted! Indeed, permanent negotiation among these countries is a remarkable improvement over their formerly belligerent relationships! Permanent negotiation is a sign of civilization.

Decentralization: a fundamental trend

But I am truly sensitive to arguments in favor of a decentralization of powers and responsibilities advocated by sovereigntists of a less romantic persuasion. Decentralization and empowerment are desirable within political as well as corporate structures. SNC-Lavalin has itself opted for a management model that is inspired by this trend.

But there you have it! Decentralization stems from a fundamental trend which is affecting power centers across the world. On the one hand, sovereign states are delegating an increasing share of their powers to supranational organizations: the World Trade Organization, the European Community, NAFTA, to name a few, are nothing less than restrictions on Member States in the exercise of their sovereignty. On the other hand, the infra-national regions are asking – and getting – powers and responsibilities that are best handled on a regional basis. This is true in France, in Germany, in Italy and in Spain, and I could name more.

It was very well put by a German politician, who said, speaking of Europe: “The Nation-State is too small for large problems and too big for small problems. It must transfer part of its powers both to the European Community and to its own regions.” Would the separation of Quebec be part of that trend? I strongly believe that it would not. Because if, from what I see happening in the world, I should conclude that Quebec would gain from being a sovereign state, then I would have to also conclude that the 16 German Länder, the 17 autonomous regions of Spain and many other jurisdictions should also become sovereign.

Yet Canada does not escape this decentralization movement. Although for many years Quebec has almost monopolized the quest for increased powers, the phenomenon is now becoming generalized. Alberta, New Brunswick, and more recently Ontario are all requesting more and more autonomy.

Decentralization will materialize in Canada, and for this to happen there is no need for Quebec to become independent. It will materialize progressively, under fiscal pressure. It will happen because it is a worldwide trend. It will happen because this trend reflects a necessity that all Western communities have to face: that of reinventing the State.

Decentralization will not stem from any political big bang. Why should it? The reallocation of powers will be implemented one step at a time, prompted by administrative arrangements, federal-provincial conferences and statutory constitutional conferences – the first of which is scheduled for 1997, let us not forget.

This decentralization will be all the more quick and efficient if the discussions are free of the incredible emotional charge that currently loads relations between Quebec and its other Canadian partners.

Some will argue that since there is no consensus among the provinces concerning the decentralization scenarios, decentralization is unlikely. Just think! If there were a consensus, if the provinces all had the same point of view, why would they want to decentralize powers in the first place? It is precisely because differences must be expressed that decentralization is likelier than ever!

Being a part of new solidarities

We are on the threshold of year 2000. It is my firm conviction that historians of the next millennium will describe the 20th century as one in which the Nation State was dominant – as feudalism was dominant in the Middle Ages and great empires dominated the 19th century. But they will also say that following the era of Nation States humanity invented new ways of expressing and channeling its solidarities; that it created new models of social and political order fully adapted to the imperatives of a world at once tribal and global.

We are on the threshold of year 2000 and the whole world is working on the legacy that it will hand down to citizens of the next century, who will live by this new world order. An order in which the true autonomy of a community will be based on the know-how, the creativeness and the enthusiasm of its members.

I would be highly disappointed if we were to hand down to the Quebecers of the 21st century an obsolete and illusory development tool from times past. Rather, I want to endow them with the tolerance, compassion, and adaptability which have built Canada. Regardless of political structures, these traits are both the cornerstone and the true measure of civilization. I want to endow them with the richness of Canadian diversity. More than ever, it is a window on a fast-changing world and its opportunities.

I am already a full-fledged citizen of a Sovereign State – Canada – and this does not in any way weaken the ties that bind me to Quebecers as a people. After all, am I not simultaneously a Montrealer and a Quebecer, an engineer and a business executive? There is no contradiction in belonging to groups within groups, or to various centers of human solidarity.

I am, and I will remain a Quebecer. I am, and I will remain a Canadian. For this reason, I will vote NO at the referendum.

MYTHS, REALITIES AND LESSONS FROM A GLOBAL PLAYER

Colin D. Watson
President & CEO, Spar Aerospace

CIO Summit, Toronto, November 18, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

You’re probably wondering what the head of a Canadian aerospace company knows about information technology and what qualifies me to be a speaker at this conference. So let me start with an explanation of why I think I was asked to speak to you today.

Simply put, Spar is intimately involved with information technology. I’m sure you won’t find that surprising, given that any company today that is involved in high-tech processes and service delivery is, first and foremost, in the information technology business. Our computer-assisted design and manufacturing processes make it possible to build robots that operate in space, satellites that deliver messages around the world, and software that assists airports in guiding aircraft in for landing. As a recent Aviation Week and Space Technology magazine article stated: “The aerospace industry is increasingly becoming an information-processing industry. Computers have moved well beyond guiding missiles and milling machines to showing engineers how to organize production lines and build aircraft. Managing data to work cheaper and more efficiently has become a prerequisite to winning contracts.”

Of course, we also develop and deliver information technology through the broadcast and network communications products of our subsidiary company, ComStream, and information technology is what drives the delivery of data from our communications and earth observation satellites.

So you see, Spar is a provider of information technology. We are also a voracious consumer of information technology in our production and administration functions. And given that the transmission of digital information from one mechanism to another is the basis of such products as our space robotics, we are about as intimately involved in the world of information technology as any company can be.

Now let me give some context to the title of today’s presentation: Thinking Global, Going Global. That title also could be “Thinking Global, Growing Global.” Because any company that expects to grow significantly in today’s aerospace industry has to be looking at the global market. The costs of doing business in the aerospace industry are simply too high to justify a domestic presence only. Our research and development costs are such that the international market is the only place big enough for our products and services.

So when we think aerospace we must think global. In fact, “global business” is almost redundant in the aerospace business today. Canada’s aerospace industry ranks sixth in the world, and we expect to better that position to fourth by the year 2000 (and remember the year 2000 is only 25 months away). Canada’s aerospace industry is the fastest growing among leading aerospace nations.

First, let’s put the industry into perspective as an exporter, and then I will talk about Spar specifically. In 1996, the total output of the Canadian aerospace industry was $12.5 billion – and of that, $9 billion was exported. In fact, aerospace is the only Canadian advanced technology sector with a consistent record of trade surpluses. And to put our record into perspective, by the end of this year, the Canadian aerospace industry will have invested $1.5 billion in new product development. More than 15% of all industrial R&D undertaken in Canada is conducted by the aerospace industry. And as an industry, more than 12% of sales revenue is reinvested into the development of new and innovative products and services.

Spar’s record reflects these industry trends. Sales originating outside of Canada in 1996 represented 66% of total sales. Our research and development costs are 6.6% of our revenue. I also should point out that research itself is a business for us. We conduct research on behalf of the Canadian government and that research is recorded as revenue.

As you may know, my history with Spar and the aerospace industry is relatively recent. I’m about three months short of my second anniversary with the company. But even in my relatively short tenure with the company, I have seen tremendous and accelerating changes taking place in the industry. With a merger and acquisition rate second only to the accounting industry these days, the number of players is contracting steadily. Like so many industries, we are seeing fewer but huger companies. As such, the competition is fiercer than ever.

Spar’s strategy for survival in this brutal environment is straightforward: simplify the company into an aviation and space services and space communications products company. We are committed to doing fewer things better, and doing them internationally. We just sold our Applied Systems business, which manufactures flight incident recorders and shipboard communications systems and performs small-batch advanced manufacturing for original equipment manufacturers. It was a profitable business but it was out of step with what we do best. So we sold it and are reinvesting the proceeds into what we do best.

In doing fewer things better, we are carving out distinct niches in our major lines of business. In our satellite business, for example, we are moving from being Canada’s only prime contractor, building the huge communications satellites that take several years from development to launch and cause serious bulges in production capacity, to providing products such as antennas to other prime contractors around the world. We work with Hughes in the US, Matra Marconi in France, CASA in Spain and the governments of China and Thailand, among others, in our satellite business.

We captured the world’s number-one spot in developing space robotics several years ago, and we continue to dominate that market. We are not interested in building assembly-line robots for the automotive or pharmaceutical industries. We want to continue to be the best space robotics designer in the world. While keeping our focus on one line in this business, we are going to find every international opportunity available. The National Aeronautics and Space Administration and Boeing, the prime contractor for the International Space Station, recognize us as such. So does Japan. That is why, when Japan needed a robotic grappler for its module on the International Space Station, Toshiba came to us. And we delivered.

The other major advantage to being the best builder of space robotics in the world is that you also have the opportunity to become the world’s best space robotics service company. We have contracts for more than $20 million annually in maintenance and upgrade work on the four Canadarms delivered to NASA. And those are pure export dollars. We plan to provide the same service on the International Space Station’s newer, bigger, smarter robotics.

Our Aviation Services business takes the same approach. By concentrating on specific componentry of certain airframes – the dynamic components of the Sea King helicopter, for example – we have won military and civil customers around the world, in the US, Brazil, Thailand, Malaysia and Jordan, among others. We develop our expertise and depth on these airframes in Canada, we become dominant in that area, and we then export that expertise around the world.

Well, that gives you a snapshot of some of our businesses and their export situations. I’ve probably made it sound easier than it is. And believe me, as important as it is for a growth-oriented company such as ours to have a plan for winning increasingly larger slices of the export sales pie chart, that doesn’t mean it’s an easy task. In fact, it’s probably the most difficult task facing any company today.

Successful international sales are not difficult from the perspective of understanding the various markets, or overcoming distribution and shipping challenges. No, the biggest challenge for a Canadian company doing business in other countries is understanding the finer points of those countries’ cultures and how those cultural differences define the way business is conducted there.

If there is a common error made by Canadian companies in doing business in other countries, and if there is a single reason for their failure in other countries, it probably is their lack of appreciation for the cultural differences between our societies. Trying to do business North American style in China, for example, is like trying to eat spaghetti with chopsticks. It’s messy and it’s not going to be successful.

If there is one area where the difference in attitude from one country to another is most apparent, it is time. In Canada, the watchwords are: “Time is money. Time flies. Time is running out.” In Asia, on the other hand, time is much less important than decorum. Deals take longer to consummate there. Neither contracts nor relationships can be rushed there. There, time is savored, not squandered.

So take my advice: don’t try to set up shop in China or other Asian countries on your own. Ensure that you have considerable degree of understanding about the new country you are entering, and that you are wired into the appropriate government and bureaucratic systems. Look at establishing joint ventures, licensing agreements, technology transfers, partnerships, or other teaming arrangements to further your success rate.

Spar has sales offices in several countries, the largest and longest established of which is in Beijing. We had to have a presence there to do business there effectively. But what is more important to us than having an office in Beijing, is having an office in Beijing that is staffed completely by local employees – employees who understand the business culture, customers’ priorities, government bureaucracy. We have no expatriate employees in our Beijing office. All were hired locally.

As you have probably gathered by now, our informal motto is: “Do what you do well, and do it everywhere.” Take our RADARSAT satellite. It’s a wonderful example of combining the two industries for which Canada has built an international reputation and successful export industries: advanced technology and natural resources.

RADARSAT is a satellite that uses radar to “see” and capture images of the earth. These images are then used for such natural-resource-based activities as polar navigation, crop monitoring, mining exploration, and reforestation programs, among others. It is the first, and so far the only, commercial earth observation satellite of its kind.

Designed and built by a Canadian industrial team led by Spar, under contract to the Canadian Space Agency, the first RADARSAT satellite has been a tremendous example of a successful industry/government partnership project. RADARSAT was launched two years ago this month, and since then it has captured thousands of images, including the Wales oil spill (to help contain the spill and manage the cleanup) and the Saguenay floods (to monitor the waters’ flow). And it has just completed the imaging needed to construct the first-ever high-resolution map of the Antarctic continent.

Talk about a new industry with almost limitless export potential! Its images are purchased and used around the world. In fact, you could compare RADARSAT to the personal computer for the way it is facilitating a whole new industry. Just as the PC started as an expensive typewriter with unlimited potential for new and interesting applications that people hadn’t yet thought of, followed by spin-off businesses, peripheral devices and new features that no one could have imagined and that now are developed and sold around the world, so too will RADARSAT grow well beyond the applications for which it initially was developed.

Many new value-added businesses already have sprung up as result of their management’s insight and entrepreneurship. We can expect more and more of these new businesses to appear across Canada and around the world as creative minds seize the opportunities RADARSAT presents to them. In fact, Spar is so confident about this nascent industry that we are preparing our bid to build and fund a second RADARSAT satellite. This second bird, which will take about four years to build, test and deliver for launch, will ensure there is no interruption of data flow as the first satellite approaches the end of its life. As the demand for data grows with the development of new value-added services, we expect additional satellites will be ordered by other countries. So as you can see, another Canadian-born industry is taking flight.

Well, ladies and ladies and gentlemen, this has been the long way of saying that at Spar we have built a successful export business by:

• Carving out specific, specialty niches

• Becoming the absolute best in the world in that niche

• Identifying the markets that need our expertise

• Ensuring that we have a keen understanding of the way that market operates

• Successfully establishing our business in that new market

I’ll conclude my remarks this afternoon with a quote from one of the world’s most successful business leaders, GE CEO Jack Welch. He captured the message of today’s shrinking world well in his company’s latest annual report to shareholders when he said: “The constant sharing of business experiences and cultural insights from around the world is creating a company whose brains, as well as its businesses, are truly global.”

I like to think Spar’s brains and businesses also are becoming increasingly global.

PREFERENTIAL TREATMENT FOR BANKS MUST END!

Claude Garcia
President, Canadian Operations, The Standard Life Assurance Company

The Board of Trade of Metropolitan Montreal, October 24, 1995
Published in The Corporate Report No. 15 (December 31, 1995)

Is there anyone out there who would want to dispense with competition in the telecommunications field? I would find it surprising, for the simple reason that we all benefit from the drop in prices of long distance calls that has resulted from competition.

This example allows us to recognize the close link that exists between fair and healthy competition and lower consumer prices. This link also applies in the financial sector. As the fairness of competition grows, so will the cost of financial products and services drop to the lowest level possible. Unfortunately, this is far from being the case in Canada and, once again, the consumer has to pick up the bill.

The full impact of the 1992 reform of financial institutions legislation has not yet been felt; moreover, we have not had the opportunity to assess that reform thoroughly. Yet, the federal government is getting ready to change the rules of the game.

Our industry has formally requested that the federal government devote the time required to assess properly what is at stake in a reform of financial institutions legislation, including an objective analysis of the impact of the 1992 reform. It is essential that a thorough study of the financial sector be carried out prior to any new reform. One of the reasons for such a study is that the competitive situation in Canada’s financial market seems to be unfair and biased in the banks’ favor.

The reform of financial institutions legislation three years ago did not substantially modify the structure of our industry. The growth of our assets reflects that reality. They grew by about 10%, from $159 billion in 1992 to $176 billion in 1994. Some acquisitions have taken place, and a new bank has been established, but there have been no major transactions because the industry did not find them attractive and because it cannot raise funds on the capital market with the same ease as the banks.

Striking moves toward concentration
Before the 1992 reform, the banks already enjoyed several privileges. The reform reinforced those privileges by deregulating financial activities, thus, paving the way for the banks to enter new sectors. The results have been spectacular: the banks’ share of the assets of trust companies rose from 0% in 1992 to 45% in 1994, and their share of the assets of stock brokerage firms went from 0% in 1984 to 70% in 1995. The share of the five largest banks in all branches of financial activities has soared from 53% in 1992 to about 62% in 1995; the tolerance threshold, as set by the Bureau of Competition Policy, stands at 65%. In total, the banks’ assets, which equaled $636 billion in early 1992, rose to over $850 billion in the first quarter of 1995 (according to Bank of Canada data) for a growth of nearly 34%.

The above reflects some of the most striking moves toward concentration ever seen in Canadian economic history. Indeed, the Canadian financial sector has become one of the most concentrated among OECD (Organization for Economic Cooperation and Development) countries.

As the concentration has grown, so has the banks’ profitability, which is reaching a peak, while the percentage of the Gross Domestic Product from profits of all business has not yet returned to pre-recession levels. Profits recorded by banks also provide another measure of their size in the Canadian economy. Of the six Canadian companies with the highest profit levels, four are banks. This move toward concentration is not brought about by natural market forces but, rather, by the rules of the game that favor the banking system.

The banking system privileges
Beginning in the 1950s and especially in the 1960s, legislators adopted various measures favoring Canadian chartered banks. The present level of concentration in the sector is, in large part, due to those measures. Following are some of the primary privileges granted to the chartered banks by the federal government, either on a continuing or ad hoc basis:

• Deposit insurance. Through it, Canadian taxpayers are guaranteeing a part of the banks’ liabilities. In that regard, from an economic effectiveness point of view, it has been demonstrated that deposit insurance using public funds can lead to non-optimal management of financial resources. Managers may assume risks they would refuse in the context of a private insurance scheme.

The current deposit insurance scheme gives banks a competitive edge with financial products such as RRSPs, where we are in direct competition. Surveys indicate consumers prefer RRSPs consisting of guaranteed deposits (GICs), which they regard as safer than deposits guaranteed by our private system (CompCorp). The guarantee supplied by the government is becoming a characteristic of financial products. In addition, in a survey conducted by Decima in the fall of 1993 (before Confed went bankrupt), consumers displayed greater confidence in banks than in life insurance companies. However, the facts differ greatly from perceptions, since the capital structure of life insurers is so solid that their credit rating (assessed by Moody’s) is higher than that of banks for a number of companies (including Standard) and equal to that of banks for the others.

The bankruptcy of Confed brought out, in concrete terms, the asymmetry in the treatment granted deposit-taking institutions, as defined by the CDIC, and life insurers. Investors who had an RRSP with Confederation Trust were able to gain ready access to their funds, as the CDIC borrowed in order to lend the cash required to cover the amounts insured. On the other hand, Confederation Life clients will have access to their savings only progressively, starting in 1996, because the assets of the bankrupt company must first be used to cover its liabilities.

• CDIC as source of bank cash. You should also bear in mind that chartered banks can use the CDIC as a source of cash whenever needed. The CDIC borrows at the most favorable rate, namely, the Canadian bank rate, and can provide cash advances to the banks. This is a low-cost source of cash that may also encourage banks to inflate their loan portfolios.

In 1992, the Office of the Superintendent of Financial Institutions introduced a capital standard for federally regulated life insurance companies called the Minimum Continuing Capital and Surplus Requirements (MCCSRs). This directive concerning the amount of capital required and the eligibility of capital compels us to meet standards similar to those that apply to banks. In the first place, we find this regulation questionable or even excessive because our standards of risk management and capital holdings are more prudent than those of the banks. But what is even worse regarding competition is that, while these rules applicable to the banking system are forced on us, we are still not allowed access to the liquidity support provided by the CDIC or the Bank of Canada, nor can we qualify as members of the Canadian payments system. I will discuss this in more detail in a few minutes.

• Bank of Canada: lender of last resort. To complete this discussion of government support of the liquidity of the banking system, let us recall that the chartered banks may turn to the Bank of Canada as a lender of last resort. Furthermore, the Bank of Canada also lends the banks cash if they have a serious cash shortage. For instance, the Commercial Bank of Canada and the Northland Bank received major support from the Bank of Canada before they were declared bankrupt. That cash inflow from the public sector is not available to insurers. Thus, the federal government refused to lend the funds that might have enabled Confed to break the financial deadlock in which it found itself.

The Confed bankruptcy also illustrates another aspect of the asymmetrical system in which banks and life and health insurance companies operate. Last fall, the Superintendent of Financial Institutions asked life insurers to build up reserves in advance to cover the contingent losses (as yet undetermined) of Confed for a period of five years. Those reserves were over and above the provisions already established by the life insurance companies, within CompCorp, to cover their own losses. However, the same Superintendent does not require the banks to build up reserves to cover the CDIC’s deficit, which was about $1.75 billion (3.5 years’ worth of contributions) in March 1995. Thus, deposit-taking institutions have no provisions to cover the CDIC’s losses and operate in a “pay-as-you-go” system, which is far more liberal.

• Loan guarantees. The federal government, aiming to secure reasonable access to bank credit for small business, guarantees small business loans at floating rates reflecting market conditions. Provincial governments have similar programs. We do not benefit from such government support when we invest in business concerns. Besides being questionable in terms of economic efficiency, these guarantees again distort the competitive play in favor of the banks.

• Payments system monopoly. The Canadian government has fully delegated to the Canadian Payments Association, under bank control, the introduction and implementation of the national payments system. This system provides for the transfer of funds from the buyers of goods and services to the sellers. The transfer can be made by check, debit card or credit card, or by electronic funds transfer. Since they are not deposit-taking institutions, in the legal sense, insurance companies do not have access to that network. This causes our customers a number of problems.

In the context of the payments system monopoly, the banks have invested in the development of Interac, which represents a first step in the growing use of the information highway as a means of making financial transactions. Banking customers have easy access to automated banking machines and to electronic payment using debit cards. The “electronic cash” card will soon grow in use, and the banks’ customers will be able to go to a simple banking machine and fill up their card with dollars by debiting their account.

As a result of their control over the payments system and of joint investments in computerization, the banks now have a segment of the electronic highway that gives them a long-term competitive advantage that we are just beginning to understand. From now on, it will be possible for the banks to sell a whole line of financial products from an electronic booth.

• Strict entry barriers. Since the 1960s, the banks have enjoyed a degree of protection against foreign competition in the form of strict entry barriers. This protection was lessened for US banks by the Free Trade Agreement, although some restrictions have been maintained. There are no entry barriers in the insurance field. Canadian consumers have, thus, been able to benefit from the presence of foreign companies in the insurance market. Their presence increases competition in the market to the benefit of consumers and forces Canadian life and health insurance companies to be more effective and innovative. This dynamic quality of competition is the reason why our companies export a major part of their sales.

• Tax privileges. The tax treatment of banks’ preferred shares lowers the cost of capital when these institutions choose that means to secure capital. Among other things, the banks may have financed a part of their computerization expenditures by taking advantage of this measure. But, in addition, the federal government has used ad hoc tax measures to help banks cope with the consequences of bad loans; thus, banks have been allowed to spread losses on loans to developing countries and for oil prospecting, as well as losses in the real estate sector, over a long period. Our industry enjoys none of these privileges and did not receive any favorable treatment at the time deflation occurred in the real estate sector in the 1990s, affecting our profitability.

The consequences of these privileges: powerful oligopoly
All these privileges traditionally granted to banks account, in large measure, for the very high concentration in the Canadian banking sector. The 1992 reform discussed earlier also helped to increase the concentration of financial sector activities in the hands of the major Canadian banks. Banks control a large portion of all existing financial services, with the exception of the insurance sector; however, they may enter this field by means of subsidiaries. Furthermore, it should be stressed that some banks already sell life insurance to holders of mortgages or loans. The CLHIA estimates that credit insurance already enables banks to collect approximately 3.3% of all personal insurance premiums in Canada.

The protection, support and privileges that the federal government has granted to the banking sector have turned the deposit-taking institutions into an increasingly powerful oligopoly, and the resulting concentration should raise concern among the regulatory authorities.

This oligopolistic attitude of the banking sector has become more apparent in the last decade, as evidenced by the following:

• All chartered banks offer a complete range of financial products, except for insurance, and can resort to cross-financing to create entry barriers and, thus, control the competition. In this regard, American Express, having succeeded in qualifying as a Canadian chartered bank, tried to join the payments system. But, faced with very high entry fees, the company had to form an alliance with a Canadian bank in order to use another payments network.

• Banks have increased their service fees and have divided among themselves a large portion of the markets of stock brokerage firms and trust companies. This consolidation has resulted in increased earnings, which have sharply exceeded the average for the country’s economy.

• Some banks assume leadership in setting rates, and the others follow. This brings to mind the oligopolistic way in which the American automobile industry operated until foreign competition toppled the existing structures of the industry.

Limited competition, which inevitably comes about in an oligopolistic market, tends to maintain prices at higher levels and to engender the “planning” of innovations with a view to writing off costs over a longer period in order to avoid destabilizing a competitor.

Users of bank services, as well as consumers (households, corporations, governments), obviously end up paying for this type of market structure. Faced with criticism of the banking sector, frequently emanating from consumer associations and from regulatory organizations that usually ask pertinent questions, banks retort that large deposit-taking institutions (which are few in view of the small Canadian market) are essential if banks are to meet growing global competition.

Although banks require sizable assets to be able to compete on the international market, no economic study has ever recommended that such a high concentration of activities be attained in the banking sector. A recent comprehensive study carried out by the OECD shows that deregulations such as those that took place in 1987 and 1992, which favor mergers, acquisitions and concentration in the financial sector, did not generally produce the economies of scale and scope that had been expected. An institution does not become more competitive because it grows in size.

Finally, highly concentrated operations in the financial sector raise the problem of systemic risk. The development of a multiplicity of products has made the financial market more complex and has created new risks, as recent events have shown. Past management of banks does not offer a fail-safe guarantee that these institutions could not encounter serious difficulties in the advent of an economic shock. The failure of a large-size bank in a concentrated banking system such as ours would have enormous impact and could lead to the collapse of the entire Canadian financial system. Rather than aiming at growing concentration of banking activities, maintaining and increasing competitiveness among Canadian financial institutions appears to be the best means of ensuring the profitability and security of our financial system.

All in all, major privileges that were conceded to commercial banks, associated with deregulation and decompartmentalization of our financial institutions, have contributed to the emergence of a powerful oligopoly. At a time when banks are pressing for free access to the life and health insurance market, there is an urgent need to give all players an opportunity to compete on an equal footing.

Concluding observations
There are a number of measures that could help to restore the competitive balance in the Canadian financial markets. Without claiming to offer a definitive solution to the problem of competitive asymmetry, we believe our proposals merit study. Among them:

• The deposit insurance provided by the federal government through the CDIC should be thoroughly reviewed. It must first be noted that the deposit insurance scheme, as it presently operates, does not correspond to the fundamental objective of measures of this nature, which is to guarantee the liquidity of the payments system. At present, the deposits covered that represent true cash (i.e., demand deposits) account for only some 25% of the total amount covered by the CDIC. Thus, nearly 75% of the sums covered by deposit insurance are, in fact, savings vehicles, consisting mainly (at an 85% level) of term deposits that are not liquid. Insurance coverage for these products should be provided entirely on a private basis and patterned after that of our industry (CompCorp).

• To ensure solvency of the payments system, in the true sense of the words, without government support, various solutions should be considered. In this regard, one interesting proposal, from an economic viewpoint, is that of the internationally renowned economists Friedman and Tobin, who call it “narrow banking.” This proposal consists of establishing, within the banks’ portfolio, deposits fully covered by liquid short-term securities such as Treasury bills. Returns on such deposits would obviously not be very high, but the deposits would be guaranteed. Risk-averse consumers could deposit as much money as they wished in that type of financial product. The other savings vehicles, which would not be guaranteed, could offer higher returns reflecting the inherent investment risks.

• The banks’ tax privileges should be abolished. This is desirable in terms of economic efficiency because it would remove the distortions in savings allocation and place all financial market players on an equal footing.

• In the age of the information highway, our industry should have access to the Canadian payments system and the Interac network. The issues of access to the payments system and of competition in the financial sector bring to mind the debate concerning the freeing of competition in the telecommunications market (which I mentioned at the start) and the access of competitors to the Stentor Group’s network. This network is considered a public network to which competitors have access for a fee reflecting network investment and operating costs.

• In order to give consumers access to a broader set of options, the federal government should abrogate all rules and regulations limiting entry by foreign banks.

These are the main measures that could place our industry on an equal footing to compete with the banks. They will result in greater competition in the financial market and, in the medium term, they will lower the systemic risk caused by excessive concentration of activities in the hands of the banks. In the coming debate, the objective is not to determine who should or should not sell insurance but, rather, to learn whether a few institutions will be left free to control the financial sector, to control your finances, to control my finances.

THE NEW INNOVATORS: HOW WOMEN CAN SHAPE THEIR LIVES IN A CHANGING WORLD

Daniele Bertrand
President, Stentor Innovation Center

Address to the Women of Influence Luncheon, Montreal, March 6, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

I’m very pleased to be here to talk with you about innovation and the changing lives of women. Let me begin with a few comments I really believe in from others about creativity and innovation.

First Lady and humanitarian Eleanor Roosevelt observed: “The future belongs to those who believe in the beauty of their dreams.” The next is from the 17th century writer, Jonathan Swift. He says: “Vision is the art of seeing the invisible.” And then there’s the comment of television personality Oprah Winfrey: “Unless you choose to do great things with it, it makes no difference how much you are rewarded, or how much power you have.” All of these observations point to the need to be daring. Or as Erica Jong notes: “The trouble is, if you don’t risk anything, you risk even more.”

We must pursue our dreams. Create something new. And I think for women there never has been a better time to be innovators. Today’s world offers us remarkable tools. They help us break through the barriers of time and distance, and they provide us with more choices in our lives and careers. These “tools” include virtual offices, telecommunications services, and information technology. Today’s changing world does provide remarkable opportunities for women. But, as I’ll show, we’ll benefit from these opportunities only if we’re willing to be innovative in our lives and careers.

Each of us can and must become an innovator. Let’s begin with the changes in our world today – changes that have shaken our traditional ways of doing things and opened new doors. Family life, for example, has been so transformed that far from restricting us, it now can provide a springboard for our innovative lives. The so-called traditional family with the woman at home, and the man marching off to the office has not disappeared. But it’s become an exception in a world where most families want and need two income earners. This development creates new possibilities. It helps re-balance power relations.

For me this transformation is underscored by personal history. My grandmothers were stay-at-home moms. My parents both came from families of 10 children each. That experience must have been a sobering one for my mom and dad, because they had only one child – me. Still, my mom was a homemaker, and my dad, who was a doctor, went off to work each day. Now in the 1990s, Jean and I struggle with two active careers and two active kids. Fortunately, we have help from my parents. I think they’ve finally recovered from raising one spirited girl.

Another area where older structures are breaking down is in the business world. Everywhere the old, top-down, command-and-control corporation is giving way to a more fluid, open organization. It’s a change driven by the growing importance of knowledge workers, by the spread of distributed computing and by the accelerating pace of change in all businesses.

This transformation is long overdue. In her book When Giants Learn to Dance, Rosabeth Moss Kanter observes, “The traditional large, hierarchical corporation is not innovative or responsive enough…Something new is required, something that marries the entrepreneurial spirit to discipline and teamwork.” And that something new is the new organization – one where teams replace chains of command, and matrix management proves more effective than the old hierarchies.

The tendency for women to be more team oriented, more willing to share information, bodes well for their ability to adapt to this new environment. So does their skill in dealing with change and a multitude of responsibilities. Skills that women have developed are now more valued than ever. The new leaders provide support rather than give commands. The best managers are listeners not order givers. The new company fosters creativity, and even allows those who soar to crash to earth occasionally. Actor Mary Pickford would have understood. She observed: “This thing we call failure is not the falling down, but the staying down.”

The world of business is changing in another way. Small firms and recent startups are becoming more significant. And more and more of these independent businesses are started and managed by women. Did you know that today women own or control over 660,000 businesses – that’s about 40% of all small businesses in Canada? And women are creating new businesses at more than three times the rate of men.

Finally, women have benefited from the changing world of technology. The flexibility it provides and the opportunities it opens up are enormous. Computers and far-flung networks now link all our desks. The new technology is user-friendly and extraordinarily powerful. With it we can search millions of pages on the Web or crunch numbers in complex spreadsheets.

And we do. Fifteen years ago, 70% of all PCs were bought by men, but today women and men are buying computers in almost equal numbers, according to Trendata Research. Fully 83% of teenage girls are now computer users. And computers are only the beginning of this technological revolution. Telecommunications is providing some extraordinary opportunities to reshape the world of work. Women have become comfortable using information technology because they represent the majority in sectors where it has spread rapidly. In the New Economy most people will not work as technology producers but as technology users.

Technology is a key driver for change because it makes possible virtual companies of any size – companies with no geographical boundaries and little overhead. People operate from a home office at any hour of the day or night with a phone, computer and desktop conferencing. Bell Canada, an important member of the Stentor alliance, has given enthusiastic support to these new approaches. In short, we live in a world where far-reaching changes have enabled us, as women, to shape our lives as we want them to be – personally and professionally. But it’s up to each of us to take up the challenge. To accept responsibility. To go for it!

Innovation is a way of life and thinking. So I’d like to suggest six guidelines for realizing these possibilities, six ways that we must innovate in our lives and work. First, if we are to be innovative with our lives, we must have a vision of what we want to accomplish. Each of us must periodically step back from our day-to-day routine, and reflect on where we’re going. What’s the right balance for our lives? What weight do we give our careers, our family and our other activities?

These questions are not always easy to answer. There are days when it seems impossible to get it right. In fact, there are days when everything seems wrong. But achieving a good balance over time is personally rewarding and provides a good role model for our children. Right now I can report: so far, so good. But I’m keeping my fingers crossed.

Second, you must be innovative in your education. In his book, Beyond Certainty, Charles Handy describes the results of a study which asked 200 distinguished executives what had contributed to their success. At the top of the list was a good education. All of us need a broad set of skills to succeed in today’s world. I grew up in a unilingual family in Quebec City and continued my studies in French at a CEGEP. But I recognized I had to become proficient in English. And I knew that I had better develop business skills if I wanted to succeed in the corporate world.

So I applied to the University of Toronto and Queen’s. Knowing only the words “yes” and “no,” I began my first year in the business program. It was like that old-fashioned approach of teaching children to swim: you throw them into the water, and if they don’t drown, they’re swimmers. That year I learned much of my accounting by sign language. My accounting teacher gave me lots of extra help, and that greatly expanded my skills with debits, credits and the English language. Today I’m proud that one of my strengths is my ability to deal with corporate balance sheets.

So a daring, broad-based approach to learning is important. And of course learning never stops. Since entering the telecommunications industry I feel as if I’ve been taking one long cram course on technology. I can speak French and English. Now I’m coming up to speed on acronyms. I know what people are talking about when they discuss ISDN, ATM, ASDL and even DVD.

A third area where we must be innovative is in the workplace. The new shape of business demands a new style of managing…and indeed, of relating to others. In Megatrends for Women, Patricia Aburdene and John Naisbitt observe: “Descriptions of the ‘manager of the future’ uncannily match those of female leadership. Consultants have tried to teach male managers to relinquish the command-and-control mode. For women it was different: it just came naturally.”

The consultative style is one that has served me well. First at General Foods, then at Unilever Canada, I received positions of increasing responsibility. I chaired a number of committees and projects. I had no power to order anyone around, but I could persuade. And that situation suited me well. I was determined to get results. To make a difference. And I did so by making my case clearly and building a broad consensus.

That experience in turn helped prepare me for my work at Stentor. Stentor is the alliance of nine major telecommunications companies. Those companies span Canada from coast to coast. And Stentor Resource Center Inc., where I work, is just that – a resource center. We don’t dictate to the individual member companies. We coordinate their efforts and suggest what approaches might be in their best interests. I don’t think it’s coincidental that many of the senior policy-makers at Stentor are women.

The fourth thing we can do is to be innovative in creating or redefining structures in the workplace. The business world is now more fluid and open. Alliances, partnerships, virtual teams and even virtual companies are common. With this fluidity comes new opportunities for us. Traditionally, women have been more likely to play a supportive role. But that’s no longer good enough.

At Unilever Canada I headed one of the divisions. The unit was doing well, but I soon realized that it lacked the fundamentals for growth. We considered many options from growing the business, to acquisitions, to partnering with firms in other countries. None seemed workable. So I proposed the division be spun off from Unilever and sold. I encountered a lot of resistance, but convinced top management that the plan made sense. I also worked to make sure the employees in the division were reassigned and protected from the impact of this change.

The same willingness to redefine structures has characterized my work at Stentor and helps explain how I’ve become the founding president of the Stentor Innovation Center. Put simply, I helped identify a need and then created an organization to respond to that challenge.

The Innovation Center does two things. First, it brings together the leading-edge work done in each of our nine regional companies. It helps the telcos share their discoveries. And second, the Innovation Center will encourage dynamic Canadian businesses by forming equity partnerships with them.

For example, we’re building on the work of Bell Canada’s Innovation Center. It’s a pioneer in several areas, including the development of multimedia. Bell MediaSphere is promoting the development of expertise that will enable Quebec’s new media industry to achieve international visibility. Bell has brought together 15 founding members in this project.

Our Stentor Innovation Center focuses on five growth areas: electronic commerce, personal communication services, education, content and healthcare. One of our education initiatives last year was a conference called “Oui Can Learn.” It brought together distance educators, publishers, telecommunications companies and others. As a result important partnerships were formed and key businesses expanded.

A fifth area where women can be innovative is in starting their own businesses. As head of the Innovation Center, I work with and encourage small companies. I’ve been fortunate to work for corporations that have been open to change, responsive to new ideas and willing to support women. But I recognize that not all environments are people-friendly. That’s one of several good reasons for starting your company.

I’m impressed by the determination and success of women in opening their own businesses. I recommend a report sponsored by Bank of Montreal, entitled Myths and Realities: The Economic Power of Women-Led Firms in Canada. It makes clear the strength of firms led by women. Women-led firms now provide more jobs than the Canadian Business top 100 corporations in Canada. And employment at women-led firms is expanding far more rapidly than the national rate for all companies.

The sixth area where we can be innovative is at home. When my husband Jean and I got married, we were determined to have a marriage of equals. Our household is an egalitarian one, as I think the homes of many professional couples are. This obviously calls for tradeoffs and diplomacy. The issues we deal with go far beyond the question of who does the grocery shopping or who pays the bills. Jean and I spend much time discussing how to establish a balanced lifestyle, that responds both to our needs and those of our children. Sorting out these issues demands very open communication.

I once had a boss who told me that I’d have to choose between Jean and my career if I wanted to succeed. I am happy to report that our marriage is fine, and we’re both doing OK as presidents.

Our family is also shaped by the new world of telecommunications. Both Jean and I have business commitments across Canada. While I head up the Innovation Center in Montreal, I also have staff in Ottawa, Vancouver, and Toronto. My husband has offices in Montreal and Toronto. We both teleconference and use phone, fax, and email to keep our travel time to a minimum. That way we can preserve as much family time as possible. But I’ll confess, I’m still on the road too much.

We’ve encouraged our two children to be informed, well-read, alert youngsters. We’ve taken Jessica, who’s now 12, and Philippe, who is 10, on trips with us around the world. They’ve seen Asia, Europe and Mexico. Both children swim competitively, and Jessica is a champion speller. She recently won a trip to Senegal as part of a national competition.

Are we pushing them too hard? Both kids are excited about their activities, so I’d like to think not. But I know that Jean and I are exhausted at the end of a week from all the swim meets and other activities. As you know when your children play hockey, you’re at the rink. When they’re swimming, you’re at the pool. In fact, when my job has demanded meetings at odd hours, I’m able to attend – even at pool-side – because I have my trusty cellular phone. Such is life on the home front (or on the waterfront). The new family is a wonderful, oh-so-tiring, yet very exciting institution.

Today’s changing world provides remarkable opportunities for women, but they’re ours only if we’re willing to challenge traditional attitudes and become innovators. We must be innovative in our broad vision, in our education, in our relationships at work, in creating new structures in the business world, in starting companies and in our family life too.

I’m pleased to say that many women excel in each of these areas. But such progress is never easy. Challenges to accepted beliefs or a determination to push into new areas can create tremendous strains. Naturally I’m convinced that the struggle is worth it, that innovation leads not only to something new, but to a sense of accomplishment, a more joyous life.

Sure there might be some women who say: “Why bother? Why have it all?” To those people I say: “Why not have it all?” We have an opportunity as never before to shape the future for ourselves and for the women who follow us. We have an opportunity as never before to show the human potential we as women have. And we have an opportunity as never before to give back to the world and to recreate ourselves – whether in our inventions, our writings, or our relationships.

So let’s accept all the opportunities life has given us. Let’s celebrate the promise life holds. Let’s be innovators.

WOMEN ANSWER THE NEW NEEDS OF MANAGEMENT

Carol Stephenson
President and CEO, Stentor Resource Center

Women of Influence Luncheon, Toronto, October 16, 1996
Published in The Corporate Report No. 20 (January 15, 1997)

I thought I’d begin by sharing with you some of my favorite quotes – four, to be exact. The first is from the English actress Glenda Jackson, who said, “If I’m too strong for some people, that’s their problem.” The next comes from Anne Barstow, an American educator. She observed, “Power can be seen as power with rather than power over, and it can be used for competence and cooperation rather than dominance and control.” The third is from the actress Cicely Tyson: “Challenges make you discover things about yourself that you never really knew. They’re what make the instrument stretch – what make you go beyond the norm.” The last one comes from Jessamyn West. She said: “Groan and forget it.”

These remarks suggest some of the themes I’ll touch on: power, challenges and growth, and the need, at times, to groan. But the focus of my talk is a new female model of leadership. My message here is that my own success reflects the growing importance of a such a model. I’ve risen from telephone operator to the head of Stentor Resource Center, which represents the alliance of nine major Canadian telephone companies. I believe it’s important for women to share our stories and experiences, as I will today.

I want to begin by talking about the new approach to leadership that women bring to the corporate world. Some of its aspects aren’t new. There’s common ground that good leaders, male or female, share. It takes self-confidence to guide others.

Leaders are able to articulate a vision, a sense of direction. I believe that, during the recent US Presidential debates, most people in the audience were less concerned about policy details than about the broader vision the candidates conveyed-or should have conveyed.

Leaders also have to be dedicated, hardworking, committed. It’s not uncommon for executives to spend 60 and 70 hours a week working. If you don’t make that commitment, someone else will.

Along with those traditional strengths, women bring important new qualities to the executive office. To begin with, they’re better listeners. They’re more likely than men to seek out the views of a subordinate, or to benefit from the advice of a mentor or colleague. Men, on the other hand, are more likely to interrupt an exchange, or simply take charge.

Deborah Tannen, author of Talking from 9 to 5, writes that men are far more reluctant than women to ask questions. Many men don’t want to be in a position where they might appear ignorant. As we know, they won’t ask for directions.

Are women born good listeners? Perhaps not. But boys and girls become different beings early on. The games they play are different. When we’re growing up, we don’t usually put on heavy padding and run or skate into someone coming the other way.

Women bring to the boardroom an ability to conciliate. They’re willing to subordinate their ego for the goal of getting a job done. And women, I feel, bring a new sense of style. A refreshing individuality. Few of us now wear blue suits or feel we have to play golf. We might, if we choose, but many of us feel, as Mark Twain wrote, that “golf is a good walk spoiled.” Women have their own flair. We are likely to sport bright colors, take up rock climbing or gardening, or cocoon at home.

An article in the August 5, 1996, issue of Fortune magazine is about seven top women executives. What’s striking, among other things, is the flair these women bring to their positions. The traditional qualities of leadership-self-confidence, a sense of vision and commitment-have long been valued and will continue to be. But the new strengths women bring – an ability to listen, to speak clearly and honestly, to mediate, and to bring a new style to their jobs – are increasingly important.

Why is this so? Because the corporate world is changing, and more rapidly than many people realize. The time allotted to bring a product to market has shrunk. The expression now is “better never than late.” At the same time, the products and services we offer have grown more complex. The solutions demanded by our Stentor clients might involve both software and hardware, as well as transmission facilities and perhaps new content.

No one company can provide all the answers, and do so within the tight deadlines we face. The answer is partnerships. Alliances have become the rule throughout the world of technology and communications. The Stentor Alliance is one such alliance. And it’s one of the most interesting alliances in Canada. Nine companies, nine CEOs, nine regional interests – one solution. It takes a new style leader, one with the qualities women bring to the workplace, to make these strategic alliances work.

The way we manage employees is also changing dramatically. More and more employees are knowledge workers who want to be supported and not bossed. Again, there’s a need for a new style of leadership if we want to make our workplaces productive. And it’s a style that contrasts with the old top-down approach. Henry Mintzberg, one of the most interesting management minds in Canada, recently wrote in the Harvard Business Review: “Organizations don’t have tops and bottoms. These are just misguided metaphors. What organizations really have are the outer people…and the inner ones…The sooner we stop talking about top management, the better off we shall be…The only thing a chief executive sits atop is an organization chart.” Women, fortunately, have not learned the command-and-control approach that will have to be unlearned by all leaders who wish to succeed.

Let me make myself clear. It’s largely women who bring these new qualities to the office. A recently released study undertaken by the Foundation for Future Leadership underscores this point. It places women managers ahead of men in 28 of 31 areas that relate to interpersonal skills and managerial effectiveness.

It’s largely women who have these qualities, but not exclusively. Some male managers are changing and taking a new approach. That’s a development I applaud. Just as we women have learned much from the best male executives, it’s good to know these men are responding to our example and, more broadly, to the new imperatives of business. One of my close colleagues, John McLennan, president and CEO of Bell Canada, is certainly a new kind of leader. His style of “warm intensity” as he himself describes it, is certainly informed by the new values I have described. And there are many men going down this path, but many will have to ask for directions.

With these qualities as a framework, I’d like to turn to my own career and my life. My childhood gave me self-confidence and set me on a track of being a conciliator. I was fortunate to grow up with excellent female role models. My grandmother was co-owner and manager of a business college. She and my grandfather, along with the teachers in their school, produced a corps of prominent women in business.

My mom was a nurse. She worked long days, but baked a mean casserole as well. That was a time when most women didn’t go to work. So, sure, we kids missed out on a few things our friends had. But the tradeoff was more than worth it. My mother set a wonderful example for us. She gave each of her children a determination to succeed.

It was around the family dinner table that I first discovered I was a natural conciliator. Mealtimes were accompanied by ferocious debates. Everybody in my family had pretty strong views-and these opinions were often diametrically opposed. When the discussions got too heated, I was the one who mediated between family members. I found middle positions and showed warring parties the important areas of overlap.

The strengths I gained in those early years were important. During the next stage of my career I built on them. I developed a determination to get ahead and a strong commitment. I left Petrolia, the small Ontario town I grew up in, and attended University of Toronto. I studied psychology, sociology, and English. During the summers I worked as an operator at Bell Canada. I planned to enter social work. During the summer of my last year, I changed my mind. I saw a large company with lots of opportunities. Its very size offered great possibilities.

In 1973, after my graduation, I entered Bell as a management trainee, determined to succeed. But believe me, there were many times when that success seemed elusive. Starting with my first week. A few days after I arrived, a senior executive addressed the new trainees. He announced that anyone who didn’t measure up would soon be looking for another job. That must have been an effective speech because the next morning I showed up early. During the ensuing months, I worked my butt off.

Bell then had five levels of management leading up to the vice-presidential level. Gradually I worked my way up the ladder. I recognize there are many possible paths to success in the corporate world, some involve changing companies. I believe the values I learned in those first years-a deep commitment to corporate goals and the need for hard work-are important for individuals who want to succeed in any environment.

With my appointment to more senior positions, I came to realize that I had something special to offer. It was, if you will, a different style of leadership – a female style. The value of this approach first became evident to me in 1980 when I became plant manager. I was asked to run a switching center in downtown Toronto. That’s the place where enormous digital switches, the “brains” of the network, route the calls over one set of lines or another. About 60 men worked at the plant. And virtually all of them were engineers or technical specialists.

No woman had ever held the manager’s position before. Not only that but my peers told me I had taken on an impossible job. They informed me, politely mind you, that I lacked the technical skills for the position. My boss wasn’t much more help. He was a crusty old plant manager and prided himself on being tough as nails. At first, he wouldn’t even talk to me, but after one week, he called me into his office to tell me this was no job for a woman. He told me that it was his recommendation not to hire a woman.

Despite that rocky start, the job of plant manager turned out to be one of the most successful and easiest positions I’ve had. I started out by talking to the men at the switching center. Their real beef, I found, was that they had always been over-managed. They knew their job well, and resented the succession of managers who tried to impose the obvious on them. So I said, fine, I’ll be a resource person. I’ll be there to respond to their needs and requests. I let them know that, as long as performance levels remained high, they could run their own show.

The result was a win-win situation. The employees were happy because, in the language of the late 1980s, they were “empowered.” I was delighted because my job became so much easier. Even my crusty boss was pleased. To his great credit, he had the strength and honesty to tell me so. And he recommended me for my next promotion.

If the female model of leadership involves listening and learning, one awfully important person to find, listen to, and learn from is a corporate mentor. Many successful women, and some successful men can point to a senior figure who helped them at different stages. Owen McAleer, one of Bell’s senior executives, encouraged me. When I attended his retirement party not long ago I told him I must have been one of his most challenging projects. He was too polite to agree.

I took his advice very seriously and profited from it. He encouraged me to take tough assignments and to broaden my skills by moving into lateral areas. He encouraged me with my presentation style. He also encouraged me to continually broaden my education. I’ve done that by completing executive programs at University of California, Berkeley, School of Business, and at Harvard.

During quarterly performance reviews, he would toss aside my well-prepared stack of key indicators and say, “Let’s talk about the qualities of an excellent leader.” He encouraged me to constantly “sell” my positions and communicate widely-both internally and externally. I have always remembered one thing he said: “If someone doesn’t buy your idea, either it’s a dumb idea or you didn’t sell it well. And most likely it’s the latter, knowing you.” Mentors like this are difficult to come by, but you should always be on the lookout for such corporate guardian angels.

The result of such advice and my determination was a series of ever more challenging positions. They tested and strengthened what I call the female model of leadership. In 1988, I became a general manager of operator services. It was an important promotion. I was now at the vice-president level. People warned me this post could be a career killer. There didn’t seem to be much chance to shine managing 3,000 operators whose jobs were, after all, pretty routine. They were viewed as a cost, not an asset.

But I saw the position as a great opportunity. I began by talking to as many of the 3,000 operators as I could. For the most part, they were women. I found they were bright and creative. Many were working part-time. Many were well-educated. Together they talked to a million people a day. Our polling showed that customers respected and trusted them. All this led to a clear vision of how operator services might be transformed. These employees, I believed, could do more than provide routine information. They could help promote Bell products and services. For example, they might encourage customers to sign on for calling cards and long distance savings plans. So I helped put in place a new program-with excellent results. The operators were soon generating millions of additional dollars.

My last position before going to Stentor was vice-president, regulatory affairs. It was a crucial career move because I went from a line job into policy. And it was a position that fit well with the feminine style of managing. Believe me, there’s no bludgeoning or ordering a regulator about. Rather, the key lay in a process of patient negotiation. Our team sought to find common ground with the regulator and to get the best deal for Bell. I think we did very well in achieving our goals. The result of this success was a promotion to group vice-president at Stentor and, soon thereafter, my appointment as president and CEO.

Before examining my present, challenging position, I’d like to discuss what the female model of managing means for me at home. To begin with, it helps to have a supportive, loving husband, and I do. He’s a great supporter of me and my career-a great supporter of women in general. He’s put up with my often being away from home, and he’s not threatened by my accomplishments. In fact, he’s proud of them. Indeed, although he is my toughest critic, he is also my strongest supporter! I’m convinced this more complex attitude toward women is developing among men as many come to accept and value our accomplishments and ambitions.

We have no children, and that’s by choice. It’s a decision we’ve made with no regrets. I have a wonderful niece and nephew, and I dote on them. But I never relished changing diapers. The truth is, when I was in my early 30s and thinking that if I was going to have children that would be the time, Mike and I were living in separate cities. Today, I’m glad I can come home after a very long day and just prop my feet up and enjoy the quiet.

How do I spoil myself? With a shopping spree or a day at the spa. A good massage is one of my favorite ways of releasing tension. I’m also an avid gardener. After a week of negotiating with CEOs, or regulators, or competitors, I’m ready to plant bulbs, prune the trees, or nurture my flowers. What joy it is to see seeds you’ve carefully planted grow in to a beautiful array of blossoms, and nobody can tell you where to plant them.

And now let me turn to my position as president and CEO of Stentor. I’ve held no tougher job. Nor have I been in a position before where all the qualities that make up the female style of leadership are more fully needed.

Stentor is a powerful alliance of nine phone companies. They range from BC Tel in the West to Newtel in Newfoundland. These companies have strong common interests and provide shared services, but in some areas they remain rivals, and they are unequal in size and clout. Bell Canada is easily the most powerful of the nine. If I thought my family’s dinner table was contentious, imagine dealing on the wrong day with nine forceful CEOs! My job is to find common ground and move the Alliance forward toward shared goals. I’ve been working hard to make a clear vision of the future as well as the dangers of disunity.

Could I do this job if I were a man? Perhaps. But as a woman, there’s a natural style that equips us well for such situations. I listen a lot, work toward compromises and remain as flexible as I can. A top-down approach would simply not work. Many view compromise as a decision of the lowest common denominator. I don’t-it can’t afford to be! A compromise takes the best from all viewpoints and makes a better decision than would otherwise have been made. Then you can move on.

Let me summarize. The corporate world is changing. More and more there’s a need to develop alliances. Knowledge workers require a new approach to employee management. The result is that the feminine style of leadership is valued more than ever before. The female model is a mix of old and new. Traditional virtues such as self-confidence, a well-articulated vision, commitment to the company and hard work remain important. But the new strengths that women bring have become crucial for success. These include: an ability to listen, to speak clearly and honestly; skill in mediating between conflicting views; and the ability to brighten the workplace with a new sense of style.

The growing importance of the feminine style of management has propelled my career. I feel I was fortunate to enter the business world when I did, and I’m confident there will be still more opportunities for those with these strengths in the years ahead. As Winston Churchill once put it: “Now is our finest hour.” Let’s make the most of it.

Let me close with some concrete suggestions that will allow you to break through traditional barriers and achieve business success.

• First, go for the challenging jobs, the difficult assignments. They’re the ones that will get you noticed when you succeed. If you fail, people will appreciate that you were willing, to take it on. If you succeed, your accomplishment will be noticed.

• Second, focus on goals and on progress. Don’t focus on the negative. Don’t take disagreements personally. And ignore pettiness if you can. Above all, don’t blame yourself if things go wrong. Accept that not everything is going to go your way. Realize that, when it comes to influencing others, you may have to take a step back before taking two steps forward. You’ll get the last laugh if you keep your eyes on what’s important.

• Third, if you want to advance, go for breadth rather than specialization. The demands of the workplace are changing so rapidly that no narrow set of skills will suffice. So, go for different kinds of jobs. Within a given position, do what you can to broaden it. Manage your career.

• Fourth, be aware of our strengths as women. This means cherishing those skills you learned in the playground. Remember the afternoons when the boys were running around and the girls were talking quietly? Believe me, there’s a great future for the feminine style of leadership.

• Fifth and finally, develop and celebrate your own style. Don’t try to imitate men. Jock talk and masculine clothes are no way to get ahead. Rather, find your center, your authentic self. In this way, you will move from what Simone de Beauvoir describes in The Second Sex as an “other” to what she describes as a “self.” Confer reality upon others, rather than having it conferred upon you.

I wish you well in your quest for success and fulfillment. Remember: all of you are women whose time has come. Use the advantage you have, for your sake and for the world’s sake.

WOMEN, MEN AND WINNING COMPANIES: BUILDING THE BUSINESS OF TOMORROW

Carol M. Stephenson
President & CEO, Stentor Resources Center

Conference on Maximizing Women’s Talents, Toronto, Ontario, December 10, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

As the last speaker at this conference, I’d like to express my pleasure that this event has taken place. It’s a step toward removing those obstacles that for many years have held back women in the corporate world.

We’re building on the accomplishments of generations of Canadian women. For example, back in the 1870s, Emily Stowe, who was Canada’s first woman doctor, remarked: “I will make it the business of my life to see that the doors will be open, that women may have the same opportunities as men.” The suffragist Nellie McClung was also a pioneer in women’s rights. She said, “Never retract, never explain, never apologize. Get the thing done and let them howl.”

Today, there may be a few people out there still howling, but we are not alone, as these women often were. This conference is evidence of the broad support we have. Yet it would be all too easy to congratulate ourselves for a research report well done, for corporate sponsorships so generously given, for the involvement of men and women in this higher cause and for a future that promises greater equality.

But the end of our work is not in sight. And it will not be in sight until corporations and the men who run them realize that they must make room at the top for women. If they don’t, they must accept that their organizations, quite simply, will not be winners.

My remarks are meant to reach all those CEOs and executives who hold power in Canada’s corporations. My message to them is this: promote women into positions of leadership, not for our sake (although that would be a refreshing departure) but for the sake of your own organizations. Corporations will not be winners unless they have women, along with men, at the top.

I’ll first address the reason why companies should change. Then I’ll explore the obstacles, and finally I’ll suggest an agenda for change.

Let’s begin with the why. Why should corporations bring more women into senior management? The reason is clear: senior women will help firms succeed.

I also feel that corporations should end discrimination because it’s the right step to take. But social justice does not have to drive this decision. Self-interest dictates that the doors to the executive suite be pushed wide open.

The need for more senior women is the direct result of the transformation of corporations. The hierarchical structures that shaped the firms of the Industrial Age are disappearing. Instead we have companies that depend on knowledge workers. Teams have become a way of life. And more and more companies are coming together in alliances. My company, Stentor Resource Center, is a good example of this new-style “organization of the future.” We rely on 1,000 knowledge workers who take a team-based approach to projects.

Companies that have moved beyond hierarchy to collaboration and consensus demand new management skills – skills that come more naturally to women than to men. These knowledge-based companies need a new approach: they need leaders who listen, rather than issue orders. Who motivate, rather than discipline. Who empower their employees, rather than command them. Who focus on possibilities, rather than on limits. These new organizations, in short, need brainpower not bully-power. I believe, and it’s a controversial belief, that there’s a new and increasingly important style of leadership – a female style. Women, I believe, have a more natural tendency to these qualities.

Experts agree, too, that these qualities come more readily to women than to men. In Megatrends for Women, Patricia Aburdene and John Naisbitt observe that “descriptions of the ‘manager of the future’ uncannily match those of female leadership. Consultants tried to teach men to relinquish the command-and-control mode. For women it was different: it just came naturally.” As a group, women bring a set of abilities that are absolutely necessary if organizations are to flourish in the years ahead.

If women have such strengths, what’s keeping them out of the top ranks of management? Before suggesting the reasons, let me first acknowledge that some progress has been made. There are 10 women CEOs in the top 500 corporations in Canada. And other companies are making strong commitments to expand the number of women in senior management.

But on balance, progress has been slow in Canadian corporations. The 10 companies with women CEOs constitute only 2% of the top 500 corporations in Canada. Four out of 10 boards of directors among Canada’s leading companies have not a single woman. In all, women account for just 9% of all directors. Are they hard to find? Don’t believe it when you hear someone say: “I tried to find a woman to put on my board and I couldn’t find one.”

In short, despite some progress, there are very few women in the most senior positions. High barriers are still blocking the advancement of women. What are the obstacles? The report just released provides powerful answers to that question. And I’m delighted it does. I saw the need for this project after attending a Catalyst Award ceremony in New York. I was struck by their findings for the US. And I was deeply aware that such information was lacking for Canada. Sixteen leading companies provided the funds for this project. I thank them for that support. The important findings of this report make it clear that a male-oriented culture is keeping senior women out of the top ranks. And until the CEOs and leading executives get that point there will be very little change.

Let me be specific. CEOs and senior women were asked to identify the most significant barriers keeping women from advancing. The answers could not have been further apart. For the CEOs, the top reason was the lack of line experience. And their second argument was that women were “not in the pipeline” long enough. For women, the top reason was male stereotypes and preconceptions. They also cited exclusion from informal networks, a factor far down the list for the CEOs. Some women noted the lack of line experience. But very few accepted the argument that women were “not in the pipeline” long enough.

And the women are right. There are many educated women. There are many women managers – at the lowest levels. The talent is there. So is the ambition and desire to get ahead. But very few of these women are given the opportunity to enter the upper echelons.

Another key question in the report, “Why do senior women leave?” underscores a similar gap in perceptions. While the CEOs and senior women agree on the top two reasons why women leave corporations – increased compensation and greater opportunities for advancement – there is one area where the two groups sharply diverge: culture. Some 33% of the women believe that the values held by a corporation must be compatible with their values. In sharp contrast, CEOs don’t see compatible values as an issue. Rather they feel women leave because they want to relocate or because of family responsibilities. These two reasons were dead last with female executives.

The message from the women is unmistakable: at the top of corporate Canada is an Old Boys’ Club that’s perpetuating itself. And I’d agree. In small and large ways, women are made to feel excluded. Not intentionally. But it happens. Be assured that solutions must be found if Canadian firms are to grow and prosper in the years ahead.

Women are not asking for any special favors. They simply want to be treated equally. Women want the same opportunities to demonstrate their abilities that men have had. That sounds simple enough. It’s a point of view that most CEOs should heartily approve. But it’s not being endorsed. It requires a thoroughgoing change in corporate culture.

What’s to be done? Here are some of the leading strategies recommended by the senior women polled in the report. All of them will make companies winners.

Winning strategy No. 1. Companies should identify and develop high potential people. And they must do so in a way that is fair to women.

The findings of the US cosmetics company Avon are revealing. When executives analyzed performance reviews of men and women, they discovered systematic discrimination against women. They found that men were promoted based on potential, while women were promoted based on experience. The phrase “She’s not ready yet” became a warning bell to Avon CEO Jim Preston. As soon as he heard it, he made sure that the woman referred to was given the opportunity. Avon has made far-reaching changes in policies. Avon is now known not so much for its “Avon ladies” as for its female executives.

Winning strategy No. 2. Companies must give women high-visibility assignments. If you want to promote women, provide them with challenges. Help them grow their skills and confidence.

Winning strategy No. 3. Prepare your senior women for the top levels of management by offering them positions that broaden their knowledge of the company. In too many firms women are clustered in corporate staff jobs. That must end.

Do I believe in quotas? Absolutely not. Setting goals? Yes, absolutely. And measurement? Certainly. The goal must be parity for women in senior management. If your company isn’t moving in that direction with all due speed, you had better change your policies. I know CEOs demand no less when they set goals for productivity, or return on assets, or customer service standards. They must demand no less in this all important area.

Women also bear a great deal of responsibility for making this change succeed. Women must move into new areas, strengthen their contacts across disciplines and across levels of the corporation, and take the difficult assignments or international postings. In short, they must take charge of their careers.

The strategies I have described are ones that both companies and the women themselves can pursue. Then there are the things we all can do. I’d say we must keep our sense of perspective. Keep our joy and good will. And keep our sense of humor. The humor is particularly important, I feel. After all, as someone once said, he or she who laughs – lasts.

I’ve emphasized that if corporations want to succeed, they must bring women into positions of leadership. I’m optimistic that change will take place. I believe corporations will open the doors of the boardrooms and the presidential offices to women. These steps will not be easy. But Canadian companies have no choice but to move down this path if they are going to succeed.

I look forward to the day when men and women agree that advancement reflects ability and not the preference given to one group or another. I look forward to the day when women’s representation in top management reflects their share of the population. I look forward to the day when the corporate culture feels just as comfortable to an ambitious executive who is the single mother of a toddler as it does to the executive with a stay-at-home wife and grown children.

I look forward to the day when Canadian corporations gain a competitive edge in world markets because they’ve made full use of the leadership talents of women. I don’t expect that day to come tomorrow. Or next year. But I do expect it to come. And when it does, we will all be the better for it. Women, men and the winning Canadian companies that embrace this vision.

LEAD, FOLLOW OR GET OUT OF THE WAY: A NONPOLITICAL CANADIAN-QUEBECER TAKES A LOOK AT QUEBEC AND CANADA

Richard W. Pound, O.C., O.Q., Q.C.
Executive Board Member, International Olympic Committee and Partner, Stikeman, Elliott

The Canadian Club, Montreal, January 15, 1996
Published in The Corporate Report No. 16 (February 29, 1996)

This is an unusual occasion for me. Normally when I am asked to speak, it is on topics such as how to save money on taxes or how to get tickets for the Olympic Games in Atlanta this summer. (Don’t call!) Indeed, I suspect that those responsible for me being here today probably expected something of that nature. The risk they took was in letting me choose the title of my remarks. And but for the Quebec Referendum last October, taxes or the Olympics is probably what you would have got.

Why this topic? Why now? Why here, at the Canadian Club? Why me? The topic is designed to reflect my personal concern with the quality of the political leadership we are getting in this country at a pivotal time in our history. It is perhaps a bit too soon to say that as a Canadian and as a Quebecer I have lost all confidence in such leadership, but I am getting very close. So the title I have given to these remarks, “Lead, Follow or Get Out of the Way,” is an imprecation directed at the entire spectrum of our political leadership.

Why now? It is now, because we have fumbled the constitutional ball too often in the past. Now, because we may not get another chance.

Why at the Canadian Club? Simply because I cannot imagine a more appropriate occasion than a meeting of Canadians from all backgrounds and walks of life in the most important city in Quebec to consider what our destiny as Quebecers and Canadians should be.

Why me? A more difficult question. It is certainly not because I possess any political experience. Nor because I belong to any political party. Perhaps the answer lies right there, because I am outside the formal political processes that have thus far directed our future in this country, but I will be very much affected – as will we all – by how that future is determined.

Why me? Perhaps because I have been fortunate enough to have experienced more of Canada than many of us and have some concept of its vastness, its differences, its strengths and its possibilities. I was born in southern Ontario and have lived there, in rural Ontario and in Toronto. I have lived in small-town Quebec, in La Tuque, in midsize Quebec, in Trois-Rivières and in Montreal. I have lived in an isolated small paper town in British Columbia and in Vancouver. I have crossed Canada four times by train, and more times than I care to remember by air. I have competed in most of the provinces of Canada. I have studied both our legal systems, civil and common law. I have argued cases in most of our provinces. I have had the honor to represent my country, my province and my city abroad. I live in Quebec by choice, not because I have to. I live in Montreal because it is a wonderful city. I am a Canadian because it is the finest country in the world. I want it to remain so.

I travel quite a lot all over the world and everywhere I go people envy me for being a Canadian in one of the greatest countries in the world by any measure. What they cannot understand is how we are allowing ourselves to get into this position. They want to know if we are collectively crazy. I don’t think we are completely crazy, but we certainly have been dangerously reckless about not nurturing the special relationships which make Canada such a special country. And we have been reckless about abandoning responsibility to politicians who have parochial interests and who seem incapable of stepping up to the serious issues.

So, why me? Why not me? I am one of 29 million Canadians who have the right to be heard and, more importantly, the duty as citizens to speak out and to insist that our leadership be what we need them to be.

How did all this begin?
Some 500 hundred years ago, Europeans “discovered” America and began a process of exploration and population of the continent, led by peoples primarily from two great colonial cultures. There were the inevitable turf wars, but, by and large the two cultures found a way to live together, partly from conviction and partly from necessity. The colonization, fueled from Europe, moved largely from east toward the west. In the ways of the times, a relatively minor skirmish 237 years ago in Quebec, which lasted only ten minutes, led to a change in overall political control and, three years later, one of the founding colonial powers traded away all its rights in a European treaty. The eventual country, called Canada, was conceived on an Imperial model and was designed before many of the blanks between the two oceans were filled in. It is not at all surprising that there would be, in such design, a bias toward the powers of a central government and that the “default” power would be that of the Dominion Parliament, subject of course to the Imperial Parliament which created it. On the other hand, there was a definite recognition of the special status of Quebec in the design of the constitution of the day, which preserved the institutions of Quebec and provided that important matters such as taxation for provincial purposes, education, property and civil rights would be matters of provincial jurisdiction. We should be wary of falling into the trap of being led to believe that the Imperial Parliament was insensitive to these issues. The US model of the “melting pot” was deliberately not adopted in Canada.

How did we get to where we are now?
The continent opened up to immigration and westward movement. It was not long before the population mix began to expand and those of French descent became a smaller and smaller component of the whole – as, in time did the component of British descent. One change which occurred was that the French, who had been major travelers and traders throughout America, became less so. Those who wanted to expand or needed work left Quebec. This was coupled with development of a very introspective and conservative attitude, heavily influenced by the Roman Catholic Church, which only began to diminish in mid-20th century.

As this conservatism began to disappear, we witnessed the emergence of a dynamic new class of entrepreneurs in Quebec – in my opinion, the most creative in Canada of their generation – for whom Quebec was, and is, too small. We also witnessed a massive game of catch-up in secularization of the province. Much of the economic field had been occupied by anglophones, for whom, unlike most Francophone Quebecers, this had been the natural course of their lives.

In the last 30 years, there has been a politicization of this process in Quebec and the development of a politically created insecurity, which has become almost a cultural phenomenon. This insecurity has evolved to one which is language-based and more recently narrowed to pure laine, with distinct racist overtones. These overtones have been encouraged in recent years by political ideologues, even to the point that they were publicly expressed by both the leader of the Quebec government and its designated leader of the Referendum, and the attitude is now in serious danger of becoming ingrained. Insecurity has now spread to the anglophone and allophone communities and notice of this has been taken by the world at large.

What are the implications of failing to manage the next few years?
We are faced with a real issue of managing the destiny of our country in the next few years. We can emerge from this process with an even better country or we can destroy it. Even worse, by inaction, we may allow it to be destroyed through our indifference.

We have both everything to gain from acting with vision and everything to lose from failing to act. The downside is, I am afraid, all too obvious. There is a very real possibility that Canada will not survive as a country. There is a very real possibility that Quebec will become a rapidly-shrinking marginalized ghetto from which much of its talent and most of its capital will flee. There is a very real possibility that, in the case of a complete separation of Quebec, Quebec will become radicalized and the institution of private property as we know it will be in danger. There is also a certainty that the rest of Canada will pay as great a price as Quebec: the sum of the parts is definitely less than the whole. To date, Canada as a whole has not given this aspect sufficient thought, but there should be no mistake about the price that will be exacted from all Canadians if this country breaks up.

What are the real issues before us?
I am convinced that if we can properly identify the real issues which are before us, we can find the solutions to them. As you know, defining the problem is often far more difficult than finding the answer to it. One of the most important aspects of our present circumstances is to persuade people at large that there is a real problem, one which must be addressed and one which must be solved in good faith by all Canadians.

Unlike many of my friends, I believe that the Referendum outcome was just about right for this purpose. If the outcome was not to have been a significantly greater margin for the “No” side than in 1980, then the narrowest margin in favor of remaining in Canada accomplished two things: it keeps us “inside” while finding the necessary accommodations and it demonstrates all too clearly that something must be done in the very near future.

Then how do we accomplish this, in a serious manner, but one which allows us to be flexible to meet the changes that will undoubtedly occur in the years to come? How can we find out what it is that will be acceptable – not just acceptable, but embraced as a new vision of the country? With this challenge in mind, are we satisfied that the present partisan political leadership throughout the country is capable of acting with vision? I, for one, am not satisfied that it is capable of acting with the necessary wisdom and foresight.

What we need is a new generation of Parents of Confederation, not just parochial politicians. We need builders, not tinkerers. We need statesmen, not carpetbaggers. We need people of vision and resolution, not a bunch of minor dukes who want to become kings. We need substance, not sterile and acrimonious debate.

What do I want?
I should preface anything I say here with the qualification that, inevitably, my perspective is that of an Anglophone, but an Anglophone who has lived the great majority of his life in Quebec – by active and enthusiastic choice – and who thinks of himself as a Quebecer. I do not purport to speak from the perspective of Francophone Quebecers – and Francophone Canadians – but I deeply respect that perspective and want that perspective to be an important part of Quebec within Canada.

I want the traditions, the culture, the institutions, the language and the special joie de vivre of Quebec and Quebecers not just to survive, but to flourish, to flourish with confidence, not with defiance. Such flowering does not have to be – and must not be – at the cost of losing, eradicating or subjugating other cultures, traditions, languages or institutions.

I want the rest of Canada to understand what this means and why it is so important to Quebecers that their special status be recognized. In a country the majority of whose population is spread along a band that is almost 10,000 kilometers long and only about 500 kilometers deep, it is unlikely that much of what Quebec wants and needs and deserves will have any impact on the daily lives of Canadians in Alberta or British Columbia. It would be mean-spirited not to recognize the distinctness of Quebec. One does not have to be a rocket scientist to comprehend the reality of this distinctness.

I want my fellow Quebecers of all backgrounds to understand that as a matter of human nature some of the things that matter deeply to them are simply not perceived as important to many others in Canada. This does not mean that these Canadians do not like Quebec; it is just that because the concerns of Quebec are not something which the others face on a daily basis, they occupy none of their thoughts, and they genuinely do not understand what all the fuss is about.

I want everyone to understand that there will undoubtedly be many provocative statements made in the months to come. Some will result from ignorance. Others will be from a deliberate effort to destabilize. Many of those who appear before the media on a regular basis have agendas which are not shared by the people. They will try to use the current situation to advance personal or partisan interests. This includes many of the established governments in the country. Some governments will undoubtedly try to maintain the status quo. Some have come to understand the power of government, but not the heavy responsibility that comes from the possession of such power. Others think of nothing but the next election. We must not allow any such provocations to derail a positive process.

I want Francophone Quebecers to abjure the alarming racial sentiments which emerged in the course of the Referendum, not to tolerate them, to exorcise them. The world is too small and too interrelated to allow such attitudes to persist. We have the horrible example of former Yugoslavia.

I want Francophone Quebecers to have the confidence to embrace the option which has Quebec as part of Canada, to understand that to want this is not to betray any portion of their heritage or their future. Indeed this option is the best and perhaps the only way to assure a vigorous future for the language and culture of Quebec. A united Canada has the ability to carve out a distinct Canadian entity in the face of the communications and commercial pressures which surround us. Quebec alone simply does not have either the critical mass or the economic clout to do so.

There are advantages which flow from being the United States’ largest trading partner which should not be overlooked or minimized. We negotiate much tougher as Canada than we could ever hope to do as a series of small republics. The remnants of Canada might well be able to negotiate free trade and other agreements with the United States, but, believe me, the terms of those agreements would be much different from the current ones and far more heavily weighted in favor of the United States.

Quebec needs Canada to preserve its unique characteristics and Canada needs Quebec to be an important cornerstone of a Canadian identity that could not otherwise survive. The interdependence is inescapable. Let us embrace that, not reject it.

I want Francophone Quebecers with a vision of this future to speak openly and passionately about it within Quebec. By the same token, anglophone and allophone Quebecers should take upon themselves the responsibility of carrying the message to the rest of Canada, to demonstrate that this vision is the best for all of us. Let us express our confidence in the choice we have made to make Quebec our homes. As Anglo- and Allophones, we must also recognize that culturally it is much more difficult for us to show and express our emotions; but we must break out of that reluctance. We must be prepared to wear our own hearts on our sleeves. We must all share in the continual process of communication.

I want all of us to break out of the mold which is peculiar to Canadians that, somehow, governments know best. They do not. They are merely the servants of the people. It is the people who should be directing governments in these matters, not the reverse. We have been dangerously lax in failing to do so.

I want all of us to understand that merely tinkering with the system will not be sufficient, that we must change the traditional modes of looking at the problem. It is tinkering with basic problems that has allowed our country to become one which is in danger of breaking up and, at the same time, it is tinkering that has made us one of the most heavily indebted countries in the world. What has possessed us to have permitted this? What miracle do we think will suddenly make the debt go away? I don’t know about you, but the sight of a Canadian Minister of Finance taking public satisfaction in having spent only $38 billion more than he took in last year is personally offensive to me. What terrible price have we left the next generations to pay? Because one day the price will have to be paid? I shudder to think what will be the critical judgment of history of our irresponsible generation? “Après moi le déluge.”

I want us not to forget the past, but to learn from it; to appreciate the richness of our past, but not to be a hostage to it. No country can evolve or progress when it handcuffs itself to a romanticized past. I want our community leaders to be public in their support of an optimistic future of this country which we will all share. I want our business leaders, who have been, with few exceptions, embarrassingly and publicly absent from the discussions on these important issues to stand up and speak out. They have abandoned a major societal responsibility simply in order not to offend, to be popular, not to rock the boat. I say to them, do not worry about offending some; those who are offended by facts deserve to be offended and in being offended, will identify themselves as the problem. Your shareholders, whom you purport to protect by sitting on the sidelines, are the very ones who will eventually be in the soup if the problems are not addressed, so do not pretend to hide behind their interests as an excuse for failing to act.

I want our leaders of organized labor to lead, to understand what disaster faces their membership if this process gets out of hand. Look beyond the next payroll deduction to the welcome opportunity of more jobs or to the specter of longer and longer unemployment lines. We have a fabulous pool of labor in Quebec. Let us make sure it has a chance to flourish. I want our media to accept the responsibility of reporting the facts and of analyzing the issues. I do not accept that the media in a society such as ours should become mere distributors of anyone’s propaganda or that, as is more and more the case, they play merely to themselves. I do not accept that the issues facing us can be dealt with in ten-second sound-bites, unreliably “explained” by commentators who know less about the situation than we do. Give me the facts and let me decide. Do not purport to be interlocutors of the facts. I accept the right of editorial opinion and encourage it, but insist that there be a responsible balance exercised. If a free press is to be worthy of all that it claims as defender of fundamental freedoms, it must be prepared to discipline itself.

What do we do now?
The Parti Québecois has a new leader in Lucien Bouchard and it seems likely he will become the next Premier of Quebec. This will be a test for him, and possibly for all of us. In responsible leadership, the assumption of power should tend to moderate and to move a leader and government closer to the center and farther from radical extremes. That, regrettably, did not happen under the leadership of his predecessor.

Mr. Bouchard is going to take charge of a government which has many difficult problems facing it and, unlike his predecessor (l’autre facon de gouverner), is going to have to deal with them. There are serious economic issues which can no longer be swept under the carpet. They must be addressed. These issues must be debunked of the economic silliness which prevailed during the Referendum. It will be unconvincing and unacceptable for him to attempt to blame all the economic and other problems of Quebec on “Ottawa.” Mr. Bouchard is perfectly aware that such a position would be fundamentally dishonest, factually and intellectually. As the presumptive head of the Quebec government, he cannot hide and must not be allowed to hide behind such a facade.

If his only agenda is breaking up this wonderful country, that will be a tragedy for everyone, but if that is the irresponsible choice that he forces on us and on the country, then let us meet him on that barren ground and defeat the idea. And let everyone involved have the courage to put the issue squarely before the people, instead of hiding it in the arrantly ridiculous question we had before us in the Referendum. But such a destructive course will, in the interim, only exacerbate a situation which has already caused enormous difficulties for Canada, for Quebec and for those of us here in Montreal in particular. Montreal is fast becoming a Third World city. This is a disgrace.

But, if Mr. Bouchard is the leader that many Francophones – indeed that all of us in Quebec – hope he can become, then he will act, as leader of the government, in their interests as well as those of Quebec as a whole. He will analyze the problems and propose the solutions he believes will lead us out of our present decline and on to a future which will make us all better. I repeat, all of us. Not some of us, or some of them. All of us.

If he does this, he can expect the help of everyone in the country. Canadians, here and throughout the country, want Canada to succeed and prosper. If he does not, then he will be responsible for plunging Quebec and Canada into a disastrous tailspin.

If he proposes some sensible structural changes to Canada, let us not prejudge them. It is not surprising that a 130-year-old constitutional model should be critically examined from time to time. Let us examine the proposals, discuss them, see how they play out, see what the side effects will be and, if they are indeed sensible, I am sure they will be acceptable. Let us not forget that other provinces and organizations also have structural concerns about Canada. They may be allies in the process. Let Mr. Bouchard also listen with an equally open mind to proposals that may come from other quarters. No one has a monopoly on good ideas.

While I have not spoken much about our aboriginal peoples, I want to make it clear that, in my view, their perspective on these questions should not and cannot be ignored and will be an important factor in the process which we face in the redesign of Canada. We owe, and I insist upon, responsible attention to their rights and needs.

There is no limit to what can be accomplished if it does not matter who gets the credit. Let us all insist that puerile debating points and media exposure are entirely secondary, and set them aside while we solve our problems.

In law, there is often a discussion of “onus,” whether of proof or of argument, within a proceeding. In our present circumstances, there is a double onus. The rest of Canada, following Quebec’s Referendum, has an onus to indicate that even if they do not fully understand what is the problem, there is nevertheless a problem and one in which they must participate in finding a solution. Quebec has its own onus as well. It must make clear what reasonable changes are really necessary to provide the cultural security which Quebec seeks. This onus extends to refraining from a disembowelment of the country.

We have never had a defining war that coalesced our national identity, and for that we should be profoundly grateful. Our defining process must continue to be dialogue, discussion, negotiation and accommodation. That is how the country was built and how it became great.

In China, they say that “May you live in interesting times” is a curse. Not so in Canada. My sense of excitement and purpose at this time is similar to that expressed in Tennyson’s “Ulysses,” when Ulysses and his colleagues set out on their voyage across unknown seas. Their resolve was: “To strive, to seek, to find, and not to yield.” Let that resolution be our purpose in search of the new Canada: to strive, to seek, to find, and not to yield. And to our political leaders, I repeat: lead, follow, or get out of the way.

THE FUTURE OF SUN MEDIA

Paul V. Godfrey
President & CEO, Sun Media Corporation

Speech to the Canadian Club, Toronto, November 23, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

Several months ago, when the Canadian Club was kind enough to invite me to speak today, I accepted willingly. I was very pleased to have the opportunity to tell you about the exciting progress we have made since going public. Progress that was driven by recent bold acquisitions and imaginative initiatives. I looked forward to the opportunity to stand here and share our good news. Well, to borrow an old line, “a funny thing happened on the way to the podium.” Except it isn’t very funny. So today, I’m even more thankful for the opportunity to talk to you about the future of Sun Media.

However, before I address our future, I would like to speak briefly about our past. The fact that a colorful, hard-hitting, populist tabloid has a place in Canadian journalism was proven decisively 27 years ago this month when the Sun rose from the ashes of The Toronto Telegram. The Star spent CAD$10 million to buy the Tely’s circulation lists. But they hadn’t figured on Doug Creighton, Peter Worthington, Donald Hunt and a loyal team of 59 former Tely employees.

Those five dozen people did something that no one else in North America had done in decades, and few have done since. They launched a successful big-city daily newspaper that many believed would never survive a month. The Sun founders had the foresight to see that an alternative newspaper could succeed in the Toronto market – so long as it had something unique to offer. Like all pioneers, they understood the need to break new ground. The Telegram failed because it was the same type of newspaper as the Star. The Sun had to be different.

Breaking new ground included a tabloid format – something that no English-language daily in Canada had ever used before. Breaking new ground included color. The Sun was the first newspaper in Canada to make extensive use of color photos. Breaking new ground included a commitment to short, lively, easy-to-read articles, and a heavy focus on sports and entertainment. And, just two years later, it included launching Canada’s first major successful Sunday newspaper. The Sun formula includes something even more important: a feisty, no-holds-barred, non-elitist style. Nothing and no one is out of bounds. That includes the CEO. Just like when I was in politics, I sometimes find myself criticized by my own columnists. The only difference is that now I’m signing their paycheck. Anyone who thinks that all newspapers are run from the top down has never worked for the Sun. If you don’t like what one of our editorials has to say, you can write a letter blasting us. Or you can wait a day or two and one of our columnists will do it for you.

The men and women who started the Sun not only created a new paper, they fostered a unique culture – a rare combination of laid-back informality and high-pressure competitiveness. The thousands of men and women who have worked for the Sun for two-and-a-half decades have perpetuated that style – marked by aggressive, enterprising reporting and aggressive, entrepreneurial management. Consistently, the Sun has reached beyond the inner circle, with a user-friendly, interactive style that says to readers: we care what you think, and your opinions are not just welcome, but actively sought.

Our independent culture is our most valuable asset. This unique culture motivates our staff, energizes our management, and benefits our readers. It is the main reason that the Sun and the Star are like day and night. About a week ago, our board of directors and an independent committee voted unanimously against Torstar’s hostile takeover bid. Many others have also expressed concerns about the Torstar bid. Our board of directors has determined that the Torstar offer does not reflect fair value for shareholders.

Our employees have voiced their opposition – in print, on buttons and T-shirts and in spirited conversations in newsrooms, cafeterias, and offices throughout the Sun Media chain. Our retail and classified advertisers have also expressed their concerns. And our newspapers’ most important constituency – our readers – have made their opposition to a takeover known in phone calls, emails and letters – including letters to The Toronto Star.

If a bid of this nature had been made by any other newspaper or corporation, it is highly likely that The Toronto Star would be blasting it all over their editorial page. In the proposed bank mergers, the Star has criticized reduced competition, potential job losses, and concentration of economic power and influence. In their own proposed takeover, the Star seems prepared to waive these concerns.

After years of criticizing Conrad Black for buying newspapers and acquiring a bigger share of the Canadian market, Torstar now seems to be saying that they are against concentration of media power in anyone’s hands but their own. That’s their call.

As a director of Sun Media, I have a fiduciary responsibility to maximize shareholder value. As CEO, I have a moral responsibility to ensure the future of our 15 daily newspapers and more than 100 community newspapers across Canada. And as a 14-year Sun employee, I have a personal responsibility to ensure that the values and principles that have guided us for more than a quarter of a century are maintained. Like every other member of the Sun Media board, I examined the Torstar bid in detail. I found that it would be a bad deal for our shareholders.

But it doesn’t really matter what I think. Let me tell you what our stakeholders have told us. To begin with, and of paramount importance, our board of directors believes that it would be a bad deal for shareholders. As the board has stated, it does not provide fair value. Torstar opportunistically timed their offer to take advantage of a general decline in stock market values which lowered Sun Media’s trading price, despite our continued excellent financial performance. The Star trumpeted the fact that their CAD$16-per-share offer was 62% above recent traded value of Sun Media shares. In fact, Sun Media was trading at $16-a-share as recently as July, before the stock market downturn. Trading had reached more than $17 in February, and that was prior to making several acquisitions that have clearly strengthened the company.

Our board believes that the offer is especially low when you consider that Sun Media is now in our fourth quarter, which historically is our most profitable. In fact, last year, nearly 50% of Sun Media net earnings were in the fourth quarter. When you look at it in context, Torstar isn’t offering shareholders a premium – they’re trying to grab a bargain. And moreover, determining fair shareholder value is not simply a matter of comparing an offering price to the current trading price. When you look to medium and long-term value, Sun Media is especially strong.

We have only begun to take advantage of synergies from the purchase of four major southern Ontario dailies less than three months ago. We have considerable hidden asset value, including CANOE – the leading Canadian online portal site – and a growing network of online products on the worldwide web. Our participation in CP24, the Toronto 24-hour all-news channel, puts us at the leading edge of electronic news delivery.

We also know that it’s important to compare track records. Over the past 27 years, the Sun company has started the only five successful daily Canadian newspapers with circulation over 50,000, including The Financial Post, which Southam recently used as the foundation for launching their National Post. That’s five more startups than Torstar.

Given these factors, it’s not surprising that CIBC Wood Gundy advised the Sun Media board that the takeover offer is “inadequate from a financial point of view.” In fact, if any other major corporation made this kind of bid for a competitor, the Star would probably say they were trying to steal the company – and they’d be right.

What’s more, when it comes to actually running their company, Torstar can hide behind a curtain of secrecy called a “voting trust.” They’re asking our shareholders to give up 100% of a voting share, for 25% of a non-voting share. They’re asking Sun shareholders to invest in the Star – and they won’t even have a say in its future. Torstar may be a publicly traded company, but it is controlled by a very private backroom group of families, who are virtually unknown.

The decisions at Torstar will continue to be made by a small circle of friends and relatives. In fact, less than 13.5% of their total shares are voting shares, and 97% of those are held by members of the five families who set up the voting trust 40 years ago. Compare that to the Sun, where all shares are voting shares, and hundreds of employees are shareholders. The Star has their families – and we have our family.

Our employees have told me they believe that the deal would be bad for them. They now have a say, a financial stake, and a future in Sun Media. Compare that to the Star, which has been plagued by labor disputes, offers no share ownership plan and did not even initiate a profit-sharing plan until a quarter-century after the Sun.

Our employees have written that they do not want to lose the family culture I described earlier. Of course, we squabble at times like any other family. Staffers feel free to tell our publishers what they’re doing wrong. But senior management knows how important it is to thank employees for all they do right. In the end, management and employees stick together in good times and in tough times. That sense of family is something that would undoubtedly change under Torstar ownership. And of course, jobs would be at risk – for Sun and Star employees. As an acquiring company, the Star could be expected to comb through the ranks of both firms.

Just look at the numbers. Torstar has informed market analysts and institutional investors that it would expect to save at least CAD$50 million a year in synergies through the purchase of Sun Media – a fact they did not detail in their circular to Sun shareholders. Where would that $50 million come from? Layoffs? Circulation price increases? Increased advertising rates? That’s the 50-million-dollar question that Torstar management has been ducking, and that advertisers, readers and employees should be asking.

Let me first deal with our advertisers. You all know by now that the Competition Bureau is currently analyzing the impact that the Torstar bid would have on advertisers. This tribunal will present their findings when they have completed their analysis.

And what about our more than three million stakeholders who could be hurt by the proposed takeover – our readers – over a million of them in Toronto alone. If these people wanted to rely on the Star for their news, they would read the Star. Our circulation has increased in the past two years, while the Star’s has continued to erode. Obviously, we are offering hundreds of thousands of readers something that the Star isn’t. It is hard to imagine two newspapers that are more different in their pages, internal cultures, operating style, decision-making and political philosophy. That is why I was shocked when Torstar ambushed us last month. For the Star to try to merge with the Sun is like Prime Minister Chrétien suggesting that the Liberal Party should try to merge with Reform. Can you imagine Jean Chrétien explaining to Preston Manning that after a merger they would now be on the same team – and that Reform would be able to continue to operate in the same outspoken and critical manner as they have in the past?

Gimme a break! Star management and Sun culture simply wouldn’t mix. Torstar claims that under its ownership, the Sun papers would continue to be independent. But how credible is that claim? Where would budgets be approved? Where would senior corporate appointments be decided? Where would key decisions be made about the paper’s target markets, long-term focus, and allocation of resources? The Sun sign might still hang outside our office building at 333 King Street East, but the decisions would be made at One Yonge Street.

And, for how long would the Sun be allowed to maintain an independent editorial position? As Toronto Star publisher John Honderich pointed out last May, when he criticized Conrad Black’s purchase of the Victoria Times-Colonist and the Nanaimo Daily News: “While he does not individually direct editorial policies and control at every paper, certainly those who run those papers on his behalf know what he likes and what he expects. There is potential in that situation to have a homogeneity of views.”

Exactly. Mr. Honderich, the same warning applies here.

What about operational independence? Does anyone believe that during the next economic downturn Torstar would refrain from meddling with the Sun’s editorial and advertising budgets? How long would they run two City Hall bureaus, two Queen’s Park bureaus, and two Ottawa bureaus? Would they send two full reporting teams to the Olympics and the World Series? Would they send two sets of reporters to cover the Blue Jays and the Leafs?

What would happen to the culture that is central to the Sun’s energy and appeal? As bureaus become consolidated and reporting shared, slowly but surely the Sun would be forced to become more and more like the Star. The newspaper that was created to fill the place of the Tely would suffer the same fate as the Tely – stripped of its appeal as it became a blander, less lively and less relevant product.

What Torstar is offering the Sun isn’t a merger – it’s a sub-merger. But let there be no mistake about it, the Sun is not easy to submerge. Our board of directors has made a strong case to shareholders against this proposed takeover. I am confident that our shareholders will not support any deal that doesn’t fully recognize the Sun’s value and its potential. Many of you may be thinking that Sun management just doesn’t want to be taken over, period. That is not true. In fact, we have a history of being taken over. The Toronto Sun Publishing Corporation went public on the TSE in 1978, and in 1982 Maclean Hunter acquired over 50% of our shares. We had a great relationship with Maclean Hunter as our major shareholder until they themselves were acquired by Rogers Communications in 1994. From 1994 to 1996, Rogers was our major shareholder until they decided to put their 60% ownership position up for sale.

Many of you will recall, at that time, how management and several financial institutions came together to acquire 100% of The Toronto Sun Publishing Corporation. We became a private company, with three large financial institutions as our major shareholders, until December 1997, when we again offered our shares to the public in the second IPO in our history.

So we are not afraid of a change of control, or having major shareholders. With so little variety of ownership in Canadian publishing, it is vital to retain every voice. The federal government’s prohibition on foreign companies owning more than 25% of a private company or 49% of a public company was intended to make sure we didn’t lose Canadian ownership. Instead, we risk losing diversity of news and opinion. When it comes to news and editorial content, Canadians are entitled to alternatives. That is why the Sun was founded 27 years ago. That is why the Sun is the tremendous success it is today.

At the end of the day, the decision of who owns and controls Sun Media Corporation will not be decided by management – not by our directors, not by our advertisers, not by our readers – but solely by our shareholders. I am but one shareholder, who personally owns or controls, through shares or options, a substantial position in the company. Financially, the present offer would allow me to walk away with a great deal of money – more than I dreamed I would ever have. This entire process is not about any single individual, nor it is a question of entrenchment of the CEO. It is, however, my direct responsibility and obligation to act in the best interest of the company and all it shareholders.

This offer from Torstar doesn’t measure up for all the reasons stated. That is why I am doing everything in my power to seek out other interested parties that could present a better offer for Sun Media shareholders. In the words of our columnist, Michel Mandel, “we will not go quietly into that starry night.” This is one little paper, and one giant publishing company, that should continue to grow.

OUR COMMON GROUND: A CALL FOR CANDOR ON NATIONAL UNITY

A. Charles Baillie
Chairman & CEO, TD Bank Financial Group

The Canadian Club of Montreal, February 23, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

I’d like to say also that, although my remarks have to do with changes that are taking place in this province, I am not an expert on the issue of Quebec, nor do I live there. Most of you have knowledge and a direct experience that I could never equal. That being said, I am a citizen of Canada, and if there is one thing that should preoccupy a citizen, it is the future of his or her country. That is true for all of us. And it gives us a right, if not an obligation, to speak out. The stark reality is clear. Canada did not exist at the beginning of the last century. There is no guarantee that we shall exist beyond the beginning of the next.

Let me start with the broad picture. What are we, what have we become, we Canadians? On the one hand, we are, by any reasonable standard or definition, one of the most fortunate peoples in the world. We have a track record of political stability, of cohesion, of social peace, that is virtually unmatched in Europe – certainly unmatched south of the border.

We have succeeded where so many have failed in avoiding both assimilation and separation, building an extraordinarily rich and diverse society on the foundation of two of the great cultures of the world. Our prosperity, though not perfect, is a quantum leap above that experienced by more than 95% of humankind. After decades of fiscal mismanagement, we have become a paragon of fiscal virtue and our economic fundamentals today are among the finest in the world. And yet, despite all that, what else do we find? We find ourselves still in shock, two and a half years later, at having almost lost a referendum – a loss that would have ruptured the country I have just described. We find ourselves faced with the prospect of yet another referendum, should the separatist agenda prevail in the next election. And in the rest of Canada, we find ourselves in a situation where the broad will to defend the cause of unity is still, I fear, far too weak and hesitant and conditional.

Now, some may say I am being too pessimistic, too negative. After all, the last referendum was won, wasn’t it? The support for sovereignty has slipped, hasn’t it? The Calgary Declaration will help save us, won’t it? Real steps are being taken to prove the federation can function better, aren’t they? Well, to those willing to hang the future of the country on those hooks alone I say, I hope you’re right. But today I have some questions in return.

Yes, the last referendum was won. But was that not a hollow victory? And what are the implications for the voting patterns of newly enfranchised Quebecers with the simple passage of five or six years? Yes, support for sovereignty seems in some polls to be slipping, but isn’t support still much higher than in the period before the last referendum? Yes, the Calgary Declaration is a step forward, but it is only a step, and I fear that as time passes we may discover how many of its friends fall away with the fair weather. And yes, progress has been made legally and administratively to make the federation function better, but surely if there is another referendum it will be decided on the basis of hearts and minds, not memoranda of understanding?

Now some of you may disagree with the specifics of what I have just said. But I doubt if any of you would assert that a victory in another referendum is a sure thing. Therefore the issue is, how do we improve the prospects? Of course there is no magic solution. But let me put forward a series of propositions, beginning with some basics.

First, we need to work hard now, not later. There is no such thing as the right moment. The moment is now. Secondly, while this is very much about Quebec and about decisions Quebecers themselves will make, it is also, in a profound sense, about the conduct and comportment of other Canadians. If Quebecers are to decide who they want to be, part of that choice will be about who they don’t want to be – whom they are willing to leave behind. Another referendum will be, and should be, about Canada.

Thirdly, while it is, on the face of it, always valid to propose changes that address the specific needs of various parts of our society, I think it is essential that we nip in the bud any notion that we should be heading towards some sort of omnibus round of change – the kind that seemed to be the final undoing of the Charlottetown process. Already one hears ominous murmurings that a Triple-E Senate or other such major reforms – much as they may be valid in and of themselves – should be brought forward once again. I say no. To turn this into a three- or four- or five-ring circus would be wrong. It would overload the agenda. It would invite ultimatums. And most importantly, it would dilute, if not destroy, what I believe the central message must be: that Quebec is wanted for what it is, and wants to become, within Canada – that this is reward enough, without the need to solve all our problems at once.

A final point: I believe many of us have become hostages to a pervasive feeling that we must shy away from reality. That calling it as we see it is impolite. That it is better, perhaps, simply to be quiet and go about our business. I apologize for being so blunt, but I am appalled by the self-censorship that has seeped into this debate. Too many, I believe, are willing to leave unchallenged the emotions and prejudices and fairy tales that are disguised as received truths. Perhaps it is fatigue. Perhaps it is fear of reprisal. Perhaps it is a sense of inevitable failure. I simply say that it is in what we choose to declare, and what we refuse to declare, that the seeds of victory or failure will be sown.

What, then, should be the substance of those declarations? Where does our case lie? What needs to be said, and done, inside Quebec, and outside? The answers to those questions lie in part, I believe, in a cold look at where we failed last time. Where did we fail? We failed to make the case convincingly that the vote was not about creating a new country, but about rejecting Canada. Not about validating the Quebec identity, but about rejecting the Canadian part of the identity the vast majority of Quebecers share.

We have not known how to make it clear that Canada is not a foreign country, that the values it encompasses and maintains are the same values as those which are dear to Quebecers, and that Canada was built not in spite of, but thanks to, Quebec – in short, that Canada belongs to Quebec. We failed to confront the presumption, so successfully sold by separatists, that they are the true ark of Quebec’s destiny, the true interpreters of its history, the sole guarantors of its values and accomplishments – saints, where others are villains. We failed to bring the issue out of the past to challenge the myths of perpetual humiliation, oppression and victimization. To challenge strongly enough what was so clearly false. To say that this is about the future and our potential together as Canadians – not about the past.

I believe that we outside Quebec failed to convincingly and unconditionally extend a welcoming hand of friendship and respect. Not of grudging acceptance or tightlipped tolerance, but of genuine regard for the society that has in so many ways defined who we are as Canadians – and who we are not. Too much of what we did do reeked of last-minute desperation. And we failed, I believe, the test of “truth or consequences.” Too many of us failed to talk about the costs of splitting up, and heeded instead the frankly self-serving separatist warnings that to talk about the costs was to issue threats. And we allowed the illusion of “partnership” to endure when it was very clear – even clearer today – that the game was separation, and “partnership” the Trojan Horse.

Based on all that, then, what do we require for the future? What we need above all else, is clarity. We need clarity on the costs of separation. No distortion. No exaggeration. They’re not needed. We simply need to point out what every study says: that on our currency, on interest rates, on investments, the world will watch and the world will act. That investors don’t have confidence in countries that don’t have confidence in themselves. And let me be clear: those costs, while borne primarily by Quebecers, will also be shouldered by all Canadians, from St. John’s to Victoria.

We need clarity on the issue of partnership: that it simply won’t happen, can’t happen, the way the separatists pretend that it could. That countries don’t readily embrace those who have just rejected them.

We need clarity on what Quebec would lose: membership in the G7, in APEC and, yes, in NAFTA – and that the acquisition of sovereignty in law would in many cases mean the loss of sovereignty in fact. Sovereignty given to other Canadians to decide on the nature of whatever cooperation would emerge. Sovereignty given to the Bank of Canada to determine the monetary policy of Quebec. Sovereignty given to foreign investors, and others, who would determine how high Quebec interest rates would have to go. And sovereignty to Americans, Mexicans and Canadians to decide if and on what terms Quebec would be admitted to the North American trading partnership.

We need clarity on history, on identity and on shared and common values. The separatists thrive on the sense that Quebecers are different, not only in language but in spirit – when the love of freedom and the pursuit of fairness and the exercise of tolerance are found everywhere across this land.

The separatists thrive on pretending that Canadian history is not Quebec history, except when it comes to the conquest, when in fact Confederation owes its final structure less to John A. MacDonald than to George Étienne Cartier. When French explorers and entrepreneurs played such a role in opening up this great land. When so many of the social programs Quebecers and other Canadians take pride in were co-authored by Quebecers. And when we have fought together in two world wars, and served as peacekeepers since in every corner of the world.

We need clarity on the issue of what precisely Quebec has failed to accomplish within Canada, of what precisely it could do outside that it cannot do within.

The separatists don the cloak of their predecessors, but Quebecers must be told that most of Quebec’s leaders succeeded not by walking away from the table, but by sitting at it. Premier Godbout, who sat at the table when unemployment insurance was created. Premiers Sauvé and Lesage, who formed a partnership with the Government of Canada to bring hospital insurance to Quebecers. Premier Lesage, who moved forward in cooperation with the Government of Canada to create the Quebec Pension Plan, which in turn led to the Caisse de dépôt. Premier Bourassa, who, working with his Canadian partners, completed the task of bringing health insurance to Quebec, who worked to have Quebec’s uniqueness recognized by family allowances, who negotiated Quebec’s large role on immigration.

The separatists say Quebec and Canada can agree on nothing. But time and again, we have. We must point to that real history, and tear down the notion that Quebec’s greatest moments arose when it picked up the ball and went home. The question needs to be posed squarely: how is modern Quebec being held back? What is there of abiding importance to its citizens that Quebec cannot do now, but a separate Quebec could accomplish? And how does that stack up to the price that would be paid? Within Canada, Quebec left behind the restraints of the past and pursued the Quiet Revolution, creating extraordinary institutions of economic growth and social progress. Within Canada, Quebec has succeeded in putting its economy firmly in the hands of Quebecers. Within Canada, the French language and culture have not only survived, they have thrived.

Clarity. Common sense. Logic. And, yes, emotion. This issue won’t be decided in Canada’s favor if all who are opposed to separation look like auditors, lawyers or even bankers. We’ve been at the sovereignty debate so long that it has assumed a ritualistic rhythm, a detachment, a character that would be bizarre, were its possible consequences not so tragic. Most Quebecers and most Canadians are tired of this issue, and they are leaving the field open to the extremists. What passes for debate has become a hurling back and forth of rhetoric, not of substance.

I am concerned about the impact of fatigue, the possibility that people might say, “All right, let’s just do it, if that will keep them quiet.” And the possibility – just as worrisome – that separatism for too many may have passed from being trendy to being a sort of symbol of social acceptance, not thought about, not questioned, but simply worn like a sweater or a pair of shoes.

I believe our greatest challenge is to make this issue real again. One that focuses on real values and real lives. Because we know, when that happens, the discussion assumes an entirely different tone. Poll after poll shows that most Quebecers have a profound attachment to Canada and what it stands for. That the values and priorities they share are shared by other Canadians. That they don’t want to have to chose between their Canadian and Quebec identities. And yet, too many believe that they must, that they can’t start being full Quebecers unless they stop being Canadian. And it is here that my remarks turn to the rest of Canada. Rightly or wrongly, as the result of real events or the manipulation of myth, the real problem is that many Quebecers do not feel they are wanted here, as Canadians. That they are strangers in this land. Of course that’s not true, but the truth does not matter if Quebecers do not see it.

The repatriation of the Constitution did serious damage. So too did failure to pass the Meech Lake Accord. So too, today, does the cynical destructive elevation of the notion that equality in law requires uniformity in treatment, a proposition as fundamentally intolerant, ultimately ruinous and non-Canadian as any that has entered our contemporary discourse.

For those reasons and others, there is a sense, I believe, among Quebecers, that we in this country are, at best, simply coexisting – at worst, two scorpions in a jar. That the will to reach out is not there, nor the understanding nor acceptance of the legitimacy of the aspirations of the majority of the Quebec people.

Outside of Quebec there is a profound mis-attribution of motives. The desire to protect and develop Québécois culture is not some plot to take away the rights of others, but an understandable desire to preserve themselves. That basic fact is simply not understood well enough, or widely enough, outside Quebec.

I do not disparage – far from it – the Calgary Declaration. I do not belittle for one minute the very real efforts the federal government, together with the provinces, is making to demonstrate that the federation, as it always has, can improve, change and work better. But at some point, the rest of Canada is going to have to summon the collective will – the political gumption – to make an unambiguous gesture of welcome, of recognition, of understanding. One that is designed to stand for the ages, not one that can be ignored or set aside for reasons of convenience or political whim.

Too often, I fear, we are not responding to the real question, to the real need. Reasonable Quebecers talk about clear recognition of the distinct society. Our tendency up to now has often been to offer them jurisdiction over forestry instead. It’s as if a hand is being reached out and we respond, not with a handshake, but a set of steak knives.

What on earth is wrong or costly about agreeing formally that the courts would take into account the linguistic, cultural and legal uniqueness of Quebec in interpreting fundamental law as it applies within this province – something the Supreme Court already practices, and agrees is proper? What on earth is so onerous about putting into the fundamental law of the land something which the Supreme Court already stipulates, that three of its judges must come from Quebec, a reflection of Quebec’s unique use of the Civil Code? Why not formalize existing understandings or legislation on immigration and on the veto? Is the price too high? Indeed, is this a price at all? When not one right of one Canadian or one power of one province outside Quebec would be affected at all? When these steps only confirm the essence of principles that precede Confederation?

I have addressed the issue today of unity from a variety of perspectives: law, logic, costs and consequences. But one thing troubles me more than anything else. If we fail, this generation, to sustain the tolerance and acceptance of diversity that has been the hallmark of this land, if we fail that test over the question of Quebec – what would be the impact, not on our geography on our borders, but on our psychology, our being? With our sense of solidarity shattered, our spirit broken, who else would feel the cold shoulder of disrespect?

I worry about that outside Quebec. And I worry about that inside Quebec. I worry about the profound resentment and shame that millions of other Canadians would feel if they were told their country had been taken from them. And I worry about the deep wounds and divisions that would be created here if millions of Quebecers who wanted to retain it were told they must give up their Canadian identity.

When all is said and done, the real question today is: is our spirit still large enough for this large land? I believe it is. But that spirit must be summoned, not assumed. It must be demonstrated, not just declared.

Throughout our history we have fought a long, enduring battle between withdrawing inward and looking outward. Between dwelling on past mistakes and focusing on future potential. Between seeing difference as a defect, and turning diversity into the unparalleled strength it can be. Often we have failed. More often, though, we have succeeded.

One of the successes, which predates this country, was Britain’s Quebec Act of 1774, which repealed the flaws of the Royal Proclamation 11 years earlier. That proclamation had threatened to force British laws and British customs on a colony of Quebec citizens an ocean away. The Quebec Act, an extraordinary achievement for its time, put in law the respect of Quebec law and religion and system of land ownership.

Recently I was reminded that the very same year the Continental Congress of America invited Quebec to join them. They believed their invitation would be taken up. It was not. Quebecers knew then that their society was better respected here.

Our challenge now is to rekindle that realization. To demonstrate that Canada is the “sovereignty-association” that succeeds, the “partnership” that protects. A “real country” that respects all its parts. A community not of convenience, but of conviction.

Concordia Salus. De la concorde vient le salut. From concord, or agreement, comes salvation. That is Montreal’s motto. In that motto lies our mission today.

CANADA AND THE GLOBALIZATION OF COMMUNICATIONS

Charles Sirois
Chairman and CEO, Teleglobe Inc.

The University of Ottawa, March 5, 1996
Published in The Corporate Report No. 17 (April 30, 1996)

The Standing Senate Committee on Transport and Communications – before which I will soon be appearing – has been meeting here in Ottawa over the past few months, examining issues that relate to Canada’s competitive position in the global telecom industry.

The committee’s mandate covers two industries that go back a long way in Canada. Until quite recently, in fact, telecommunications companies were regulated by the Railway Act. Nowhere else in the world have the telegraph and telephone systems, combined with the railway, played such an important role in the development of a nation. All we have to do is remember that British Columbia joined Confederation on the promise of a railway link with the rest of the country. Looking at the geography of Canada even today, there can be no doubt that national unity has more to do with modern transportation and telecom technologies than it does with constitutional principles. Indeed, the growth of the telecommunications and transportation industries, which occurred in parallel, was an essential condition for the economic and political development of the country as a whole.

Transportation and telecommunications are not the only fields where the growth of a domestic industry was furthered by the political desire to maintain a separate Canadian market within the broader North American context. In the cultural arena, for example, this political will power translated into regulations covering radio and television broadcasting, cable TV, and films.

Deregulation of companies is making way for the new regulation of the market
In the fields of transportation, telecommunications, radio and television, new economic realities have profoundly shaken the existing order, or at the very least created a momentum for change that could ultimately prove unstoppable. Faced with this situation, is Canada losing the means it has traditionally employed to promote or protect its economic, technological and cultural development? Or, putting it another way, are the tools it has always used to create jobs becoming obsolete?

Before answering this question, let’s look at the supposedly unstoppable forces that have helped create this momentum for change. A number of factors have contributed to the tidal wave of privatization, deregulation and liberalization hitting the telecommunications industry. Each factor by itself was certainly capable of having a significant impact; by occurring more or less at the same time, however, these forces have combined to launch a revolution that is sweeping away everything in its path.

Over the past two decades, we have witnessed several almost simultaneous technological developments that have impacted on telecommunications. These include the growing sophistication and availability of computers, as well as the introduction of fiber optics and radio-communication systems operating at very high frequencies. All of these developments have led to the emergence of many new products. While traditional regulatory systems might take into account the impact of productivity increases in terms of conventional services, no form of regulation could provide incentives for innovation without at the same time asking customers to assume all the risks. In any event, the advent of new technologies – especially wireless communications – has swept aside the long-held notion that telephone service is a natural monopoly.

From the moment the US and the UK embarked on their privatization and deregulation programs, companies in both countries set out to capture new markets and also exploit the economies of scale to which the telecom industry lends itself. In addition to these pressures on the supply side, multinational corporations began looking around for telecom service providers that could match their worldwide presence by furnishing services on a global scale. As an indication of the amount of telecom traffic generated by these multinationals, consider that 50% of international transactions involve parent companies and their various offices around the world.

We are therefore facing a fundamental and non-reversible change, rather than a passing fad that can safely be ignored. And with it comes a fundamental choice that all governments and companies must make: either adapt to change, or be left behind.

Global strategic alliances
Canada has been successful in the regulated and neatly segregated telecom environment that has existed up to now. Will we be able to play a significant role – if not a starring one – on the much larger international telecom stage?

Global alliances designed to address the dual objective of reducing costs and optimizing marketing activities are not some flight of fancy. Some of the world’s biggest telecom alliances of the likes of World-Partners, Concert and Phoenix already have a foothold in Canada. In recent months, Unitel has, for all intents and purposes, become AT&T Canada, the name it would like to be known by. In a similar vein, Sprint Canada was created under the terms of an alliance with US Sprint. And Stentor, for its part, has marketing and technological agreements with MCI, whose largest shareholder is British Telecom.

In an industry dominated by giants, can a company based in Canada hope to play a major role? Or will Canadian telecom companies be pulled into the orbit of the mega-carriers – reduced to the role of service distribution points, or mere outposts in vast market empires centered mainly in the US, Europe and Asia?

Canada’s strengths: challenges for our policy makers
THE CANADIAN MARKET

With a population of 30 million, Canada is certainly smaller than the US or the European Union, but that doesn’t make it an insignificant market. On the contrary, our country represents one of the world’s richest markets, especially with regard to telecommunications, of which we are major consumers. That’s not surprising, given our unique geography and the fact we have the world’s highest standard of living, according to UN statistics. But will we allow this market to simply become an extension of the USA? Or will we insist that service providers which want to make profits here should also pay for the cost of serving those Canadians who live outside Montreal, Toronto, Vancouver and the country’s half-dozen other large urban centers? The green light to enter the Canadian market should of course be given to other domestic or foreign carriers without discrimination. But should it be given, with no strings attached, to companies whose sole aim is to engage in skimming practices? Or should the market be reserved instead for companies willing to directly or indirectly assume their share of the cost of providing this country with its own infrastructure?

CANADA’S TECHNOLOGICAL SOPHISTICATION

Canada is well-known for its sophistication in producing the equipment and software that go into modern telecom networks, as well as for its R&D capabilities and resources. Canadians also have a reputation for being highly skilled in telecom management and technologies. In other words, we have what it takes to meet the needs of companies wanting to base their worldwide operations right here in Canada. And so the issue becomes: do we have the necessary commercial agreements in place to give such Canadian-based companies access to the most lucrative international markets? And will Canadian companies be able to truly take advantage of the economies of scale that can be achieved in huge markets? If free trade in the telecom sector means anything at all, the relatively small size of the Canadian market should no longer have any bearing.

CANADIAN COMPANIES: GETTING INVOLVED

It is not only the services market that should be openly accessed, but international capital markets as well. We require ownership rules which will not prevent us from participating in consortiums, strategic alliances or other group ventures that would enable Canadian-based firms to forge close commercial ties in order to maintain an effective presence in foreign markets. Otherwise, it seems almost inevitable that any Canadian company with global aspirations will have to operate as a supplier of discount or specialized services, forced to use unbeatable prices to compensate for the lack of established relations with other international service providers.

We have just discussed three of Canada’s strengths. We have also looked at three challenges – perhaps the most important among many – that Canada’s telecommunications policy-makers are currently being called upon to address. The decisions they make will no doubt affect the performance of Canada’s domestic and international telecommunications players for a long time to come.

I’m favorably impressed by the careful and rigorous approach taken by the Government of Canada to resolve the many outstanding telecommunications matters that need to be dealt with. Moreover, I am delighted to see that John Manley has retained the critical Industry portfolio, since he already has a solid grasp of telecom-related issues. However, the scope and complexity of the decisions which are pending give cause for concern – all the more so when you realize the speed at which other countries are moving and how narrow the window of opportunity is for Canadian companies wanting to take advantage of these rapidly changing circumstances.

Teleglobe at the crossroads
For its part, Teleglobe has on numerous occasions made known its intention to become the nucleus of a global entity specializing in intercontinental telecommunications. Given the need to compete against industry giants on a global basis, Teleglobe’s well-publicized ambitions may seem unrealistic. However, it may be useful to remind skeptics that, despite its modest size, Teleglobe has many impressive strengths.

An international telecom network is much more than a collection of submarine cables and satellite links. In fact, it is based first and foremost on commercial relations with carriers from different countries. Teleglobe is uniquely positioned in this regard, having negotiated bilateral agreements with some 250 operators around the world.

Teleglobe has been active in intercontinental telecommunications for more than 45 years. During that time, its staff have developed high-level technical expertise in their field. In February of last year, for example, the company again showed its leadership by becoming a driving force behind an initiative called the Global Inter-operability for Broadband Networks – one of 11 demonstration projects launched in connection with the G7 Conference on the Information Society. The network is still under development, with extensive testing already done on the Canada-Germany segment. The broadband network will provide the cornerstone for tomorrow’s global high-speed transmission facilities.

Teleglobe operates the world’s most extensive undersea cable networks, which rank only second to AT&T’s in terms of capacity. The company owns CANTAT 3, the fiber-optic link which represented a great leap forward in submarine cable technology when it went into service in November 1994. CANTAT 3 features two leading-edge technologies: Synchronous Digital Hierarchy, or SDH, and Asynchronous Transfer Mode, or ATM.

Teleglobe is also active in next-generation wireless technology, particularly through its involvement in the Odyssey and ORBCOMM mobile satellite projects. ORBCOMM launched US commercial service in February of this year, ushering in a new telecommunications era.

Since being privatized in 1987, Teleglobe Canada has achieved an almost complete makeover from a monopolistic Crown corporation to a market-driven company. Today, its per-minute costs are approximately 40% below what they were five years ago. What’s more, Teleglobe recently welcomed the CRTC decision to introduce a new regulatory framework based on the regulation of prices rather than a rate of return. This gives us much more operational flexibility both here and abroad. In return, we have committed to rate reductions in Canada of 10.62% in 1996 and 8% in 1997 and 1998. Teleglobe is the first Canadian company to operate under a price-cap regime. Teleglobe’s embrace of a market-driven culture is best illustrated by the fact that, last October, we proposed that the Government of Canada terminate our exclusive mandate.

Transit traffic carried by Teleglobe’s network, that is, traffic which neither originates nor terminates in Canada, totaled 112.5 million minutes in 1995, accounting for approximately 8.6% of the company’s overall volume. Transit, which is a completely unregulated activity, represents the highest growth sector, one that will play a key role in our future development. Teleglobe intends to be aggressive in attracting traffic in foreign markets. For example, it has obtained a reseller license in the UK and applied for a series of 214 licenses in the US.

However, a successful international growth strategy must be based on more than deregulation and market liberalization. Also critical is Teleglobe’s ability to participate in strategic alliances, which could eventually represent an appropriate response to the presence of the industry giants I described earlier. The new US telecommunications legislation which was recently approved by Congress and signed into law by President Clinton signals the start of massive changes in that country’s telecom industry. All the experts agree that service providers will need to bundle their offerings so as to give customers one-stop-shopping, including centralized billing, for all their service requirements: local, domestic and international long-distance, cellular, and so forth. Because of the need for a rapid transition, most US companies – which operate in specialized market segments – will be left out in the cold unless they forge strategic alliances. Teleglobe is fully aware of the opportunities this situation presents and is determined to take advantage of it.

Conclusion
As the telecom industry continues to undergo profound and rapid change in the next few years, there will be plenty of opportunities for Canada and Teleglobe. However, timing will be critical. There’s no doubt we are determined enough and enterprising enough; the question is whether these strengths will be used to create value and jobs for Canadians or whether our efforts will be hampered by unfavorable conditions. What exactly needs to happen if we want to make the most of our opportunities?

First, a world-class company should be able to base its operations in Canada. This requires a successful outcome to the ongoing negotiations within the World Trade Organization on basic telecom services. They must lead to agreements that ensure true telecommunications liberalization between countries, including the US and Canada. And that means no longer being subject to retaliatory measures that are both arbitrary and unpredictable.

Second, restrictions on Teleglobe’s activities contained in Canadian legislation should be removed. Among other things, this would mean quickly repealing the particular regime that governs the company under the Teleglobe Act, as well as any regulations that cover only Teleglobe and differ from those generally applicable to other Canadian telecom firms. Equally important would be the lifting of restrictions that prevent foreign carriers from investing in our company. We would like to see foreign ownership limits raised to the same level that applies to other Canadian carriers. Ideally, the ceiling would be brought up to 49% for everyone.

Finally, we should also spell out every carrier’s obligations with respect to routing traffic over Canadian facilities. Compliance with existing regulations varies from one carrier to another, since there is no enforcement by a central authority. Because of the potentially serious long-term consequences for the Canadian telecommunications network in a competitive environment, this situation cannot be allowed to continue.

CANADA AND THE STAKES IN INTERCONTINENTAL TELECOMMUNICATIONS: CHALLENGES AND PERSPECTIVES

André LeBel
President & CEO, Teleglobe Canada Inc.

The Canadian Club of Toronto, April 24, 1995
Published in The Corporate Report No. 12 (June 15, 1995)

I wonder how many of us could conceive of a day without a fax machine? A day without a cellular telephone? Or a day without access to a data bank?

Those of you who feel like slaves to the telephone might be interested to know that there are only 600 million active phone numbers on the entire planet. That’s not a lot, considering there are almost 6 billion people. Furthermore, half of the world’s population lives more than two hours travel from a telephone.

The bad news for anyone who might dream of a phone-free environment is that 75% of the world’s phones are located either here in North America, or in Western Europe and Japan – which share only 15% of the world’s population. And Canada is second in the world in terms of the number of telephones per capita.

If it’s any consolation, I can tell you that even those people living in the remotest regions of the world will soon be brought within reach of the telephone. Global satellite telephone systems are on the way. Within five years, you’ll be able to routinely pick up a phone here in downtown Toronto and reach a colleague or customer in the hinterlands of Mongolia or the rain forests of the Amazon.

The advances in telecommunications technology remind me of a quip by the British academic Havelock Ellis. “What we call progress,” he said, “is the exchange of one nuisance for another nuisance.”

At any rate, the telecommunications industry is blazing new trails every day. And the growth is the most noticeable, not in traditional telephone calls, but in a host of other new services that are becoming available at attractive prices.

These new services are about to surpass traditional telephone calls in terms of volume. Consider that the telecopier did not even exist 15 years ago. Yet more messages are now being transmitted between North America and Europe by fax than by phone! And, last year alone, 12 billion messages were left on voice mail – those answering devices we love to hate. To this we can add phenomenal growth in mobile telecommunications. In 1980, there were hardly any cellular phones. And the most optimistic predictions were that there would be about 1 million cellular users by the turn of the century. Well, by last year, there were already 45 million!

When we speak of the telecommunications industry worldwide, we speak of a sector whose 1992 revenues totaled $415 billion. As for the segment Teleglobe is engaged in – that is, intercontinental service – annual traffic is now some 24 billion minutes. And that figure is expected to double within five years. This is a fast-growing and potentially lucrative market in which the Canadian industry is well-positioned.

The point of my remarks today is to impress upon you that Canadian leadership in intercontinental telecommunications can – and must – be reaffirmed.

The universe of telecommunications is not only experiencing explosive growth. It is also in a period of severe upheaval. Why? First of all, because it’s undergoing a rapid evolution of technology.

Today, we can send a fax from Toronto to Hong Kong in only a few seconds. You can receive a call on cellular in La Paz, Bolivia. And, in just a few minutes, you can transmit the complete works of William Shakespeare by modem.

We are entering the era of multimedia. And it’s an era full of promise. Look, for instance, at healthcare. Thanks to advances in telecommunications, a doctor in Toronto can now make a diagnosis of a patient in Vancouver or, for that matter, in London, England.

Innovative new services are becoming more and more accessible at affordable prices. And new ways of sending calls have already lowered prices significantly for users of intercontinental telecommunications services.

Take “callback,” for example. Callback enables customers in one country to make calls to or via a second country which offers lower international rates. Let’s say you’re in Tokyo, and you want to place a call to New York. You’d communicate first of all with a North American carrier that offers better tariffs than can be found in Japan. A special device calls you back and gives you access to a dial tone in North America. You then dial the number of the party you wish to reach. And the tariff that applies to your call is that of the US or Canadian carrier, not the Japanese tariff.

However, these sorts of technological advances can also have a negative effect. For example, modern technology makes it very easy to “bypass” networks. A call from Canada to Britain, say, can be diverted through a US carrier’s network instead of through Teleglobe. Although this practice is illegal, it’s a fact of life.

In summary, technology has opened the door to services that were unimaginable or unaffordable to most only a few years ago. It is bringing about profound changes in the way we all do business.

But technology is not the only factor at work. The structure of the industry itself is undergoing drastic change. The ground rules are no longer the same.

Telephone services, cable TV services and computer networks used to be clearly defined, and operated in mutually exclusive territories. Today, they are all part of the same industry.

As well, national telephone-service monopolies are fast becoming obsolete. Within the next two years, around 30 countries are expected to privatize their national networks. Several of those will open up their markets to competition.

The impact of these changes on our industry is already very evident. In the past two years, 11 of the 15 largest international telecom carriers have announced new strategic alliances.

The largest of these alliances is World Partners, which brings together AT&T of the United States, KDD of Japan and Unisource, the European consortium.

Why? Because in hockey, everyone knows where the puck is. But not many players know where it’s going to be a few seconds later. If Gretzky was the biggest star, it’s because he knew where the puck was headed, and was able to get there before everyone else.

It’s the same in business. If the Canadian telecom industry wants to score points, it’s got to know the markets, predict the needs of the future and respond to them quickly.

The Canadian industry must also make a realistic assessment of its own strengths and weaknesses – and act accordingly. Have you ever seen Gretzky throw a body check in a corner? If he’d focussed on that aspect of play, his career would not have been very long – or illustrious.

Canada’s strengths are enormous. It is one of the countries that has been best served by its telecommunications enterprises. Those of you who have traveled extensively are certainly in a position to confirm this.

Of course, these strengths are counterbalanced by certain weaknesses of a geographic and demographic nature. Canada is a huge country, with a widely spread population – less than 30 million people dispersed over an area of 10 million square kilometers.

This is a situation which, from other viewpoints, makes Canada the envy of many. However, along with our proximity to the United States, these factors render Canada unique in the telecommunications world. Obviously, we are not the only country that has neighbors. But we are one of the few countries with a neighbor whose economy is ten times larger than our own.

Canadian telecom enterprises cannot base their growth completely on the domestic market. Even if all the Italian-Canadians in Toronto called their relatives back home a couple of times every week, it wouldn’t be enough traffic to provide the critical mass we require to compete in world markets. We would need expatriate Italians in New York, Chicago and Buenos Aires to use our network as well as Canadians.

In the near future, fewer than five major telecommunications carrier groups will share more than two thirds of the world market – and Teleglobe will be part of that.

Competition at this level is intensifying. Regulations are becoming less stringent; services are expanding; prices are falling. Ultimately, it is the consumer who will benefit.

The Canadian telecommunications industry has long been a major contributor to the prosperity of the country, not only by its own economic weight but also by the competitive advantage it provides to Canadian industry.

With revenues of $14 billion, projected to grow to $20-billion by the turn of the century, telecommunications – like few other industries – acts as a nerve center for the Canadian economy.

The question is not to determine if the Canadian industry wants to win the telecommunications battle in world markets. The reality is that our industry has no choice, if it wants to continue to grow and prosper in a sector where growth is synonymous with survival.

Make no mistake. It’s not just the survival of one sector of Canadian industry and its employees that is at stake. It’s also Canada’s presence in a high-value-added sector of the economy. And the future of Canadian research and innovation. And Canadian intellectual property in high technology.

How do we win this battle? First of all, by demonstrating lucidity and vision. Allow me again to illustrate my point with a sports metaphor. Would you believe it? At the beginning of his career, some connoisseurs of hockey suggested that Wayne Gretzky would never make it to the National Hockey League. Too frail, they said. Not heavy enough. And not very fast. But Gretzky had decided that he would play NHL hockey. And he became the best.

There is nothing really new in that. Canada’s prosperity has always been based on its capacity to seek out other markets. And, in our case, this is the only way to build the critical mass that will ensure Canada a spot at the table when crucial decisions affecting the global information highway are made.

The Canadian telecommunications industry is in the midst of redefining itself in light of these requirements. And it must avoid being weakened in the process.

The domestic Canadian market is extremely competitive. In the long-distance sector, Bell, Unitel, Sprint Canada and other rivals are throwing themselves into not just competition, but a ferocious rivalry. The same highly competitive situation prevails in the intercontinental services Teleglobe provides to Canadians through these distributors.

Even in the domain of intercontinental calls, Teleglobe’s so-called monopoly is a myth. We are forced by the laws of the market and by the proximity of the United States to offer extremely competitive tariffs. If we did not, then bypass – the illegal practice I mentioned earlier – would assume disastrous proportions.

Since we’re talking about myths, it’s about time to disprove another. I’m referring now to the myth that the United States, in telecommunications as in other industries, is a hotbed of competition. In fact, nothing can be further from the truth.

Those of us familiar with the US market know there has never been real competition at the level of intercontinental telecom infrastructure. With few exceptions, everyone in the States passes through AT&T’s cables and COMSAT satellite circuits.

Not just anybody can enter the US market. The barriers are stronger than one might suspect – something we are beginning to fully appreciate as we attempt to penetrate there. The US intercontinental telecommunications market is an oligopoly dominated by AT&T.

Nevertheless, there are tremendous opportunities awaiting us out there, thanks to NAFTA and the globalization of telecommunications.

But if Canada is to remain a force to be reckoned with in global telecommunications, it must have the necessary tools to win. And it must have the courage to put together a strategy that adequately reflects its ambitious plans. The Canadian government will soon define a new policy for international telecommunications. This policy must provide for the maintenance of Canadian leadership.

To achieve this end, Canada must adapt to the new competitive environment knowing full well where its interests lie – just as our neighbors never lose sight of their interests.

We must learn from mistakes of the past and from those of others. And we must tell it like it is: Frankly, the liberalization of value-added telecommunications services such as voice mail, EDI and access to value-added data bases – to name just a few examples – has worked against Canadian companies. It has resulted in an erosion of Canada’s leadership in a sector where we’ve always excelled.

Teleglobe feels strongly that we must not let the same thing happen in intercontinental telecom services. And I’m quite certain that most Canadians would agree with us on this point.

Don’t get me wrong. We welcome fair competition. The issue here is how to level the playing field – how to instill a true spirit of competition. Naturally, we don’t want to be pushed off the road by a huge American “semitrailer” just as we’re picking up speed on the information highway.

That said, Teleglobe accepts the fact that US mega-carriers would like to compete in the Canadian market – just as we would like a piece of the action south of the border. Indeed, such head-to-head competition is inevitable. Consequently, we favor a gradual liberalization of the intercontinental telecom sector in North America. And we’re asking the government of Canada to consider pursuing such an arrangement in ongoing free-trade discussions with the United States.

This gradual liberalization of the North American market might well entail phasing in competition in the respective jurisdictions with different time frames. Details of the arrangement would have to be negotiated. Such an approach is not without precedent. I’m thinking, for instance, of the “open skies” agreement signed recently between Canada and the United States. As you probably know, by virtue of this agreement air carriers from the two countries have access to Canadian and American cities. However, US airlines’ access to Montreal, Toronto and Vancouver is restricted for a period of several years.

At any rate, I can tell you that my colleagues at Teleglobe are excited about the prospects of taking on the global telecom mega-carriers – and winning. But we know those mega-carriers already are busy multiplying their alliances and refining their networks. So it’s imperative that our Canadian industry acquire the means to provide serious competition on a continent-wide level.

We must be able to support our position at the top of the hill for the long haul.

Okay. So what else do we need to do in order not to destroy a system that has taken Canadians years of collective effort to build? First of all, we must not duplicate, unnecessarily, the extensive telecommunications infrastructure that already exists in the Canadian market. It would be ridiculous, in fact, not to use our existing infrastructure to the optimum, to avoid needless duplication of expensive facilities for a population of 30 million.

Instead, Canada must channel its energies, its capital and its human and technological resources into the development of world-class, value-added services. It must be able to bring such services to market quickly and to successfully export them – rather than be content with the role of distributing US technology and know-how.

Canada must continue to offer the best intercontinental telecom services at the best prices. It must accomplish all this by piloting the creation of another great global telecommunications alliance, similar to those formed by US carriers – but this one of Canadian origin.

It is in this context that we must look at the upcoming review of Teleglobe’s exclusive mandate as Canada’s international telecom carrier, which runs through 1997. We know full well that this mandate will eventually disappear. Meanwhile, however, it should not be regarded simply as a corporate asset of Teleglobe’s. The mandate is also a valuable instrument that can be used to provide Canada with additional leverage in the context of global telecommunication politics.

Before renouncing this instrument once and for all, Canada must be sure to have a solid and coherent policy that will provide access to the entire North American market without undue delay.

In this context, we see Teleglobe as the international launching pad of the Canadian telecommunications industry. Working over the years with our Canadian partners, we’ve managed to put together one of the most efficient and competitive networks in the world, linking Canada to more than 230 countries and territories.

Since Teleglobe was privatized in 1987, end-user prices have been reduced by more than 40% on average. It is Canadian businesses and consumers that have profited from these prices, which are equal to, or lower than, those offered by the big US carriers.

With more than 860 million minutes of outgoing traffic in 1994, and total traffic approaching 1.5 billion minutes, Teleglobe currently ranks seventh among the world’s intercontinental telecom carriers. We’re determined to play a leading role on the global stage.

To this end, Teleglobe is already engaged in several major initiatives. Through projects such as Odyssey and ORBCOMM, Teleglobe is pioneering the new frontier of worldwide, satellite-based mobile phone service.

Elsewhere, we’ve recently brought into service our new CANTAT-3 fiberoptic cable linking Canada to Europe. CANTAT’s leading-edge technology opens the door to high value-added services such as transatlantic video-conferencing and high-definition television.

The capacity of CANTAT, which will soon be linked directly to the US market via another superhighway we’re building, surpasses that of all other existing transatlantic cables combined. It can carry more than 60,000 simultaneous conversations – but only 40,000 in French, because we require many more words to say the same thing.

In conclusion, I’d like to draw your attention to a recent report by the US Council on Competitiveness. This influential organization affirmed that information technology was the principal factor that has enabled the United States to rebuild its international competitiveness.

The technologies of information and telecommunications are elements of primary importance in the competitiveness of a national economy. As Canadian author Bob Edwards once put it: “The meek are a long time inheriting the earth.” And without taking anything away from others, I don’t think there are many recent corporate success stories to rival Teleglobe’s.

This is an enterprise that has succeeded in meeting the needs of its clients, launching new products and lowering prices in a market that’s expanding rapidly. And our success is clearly to the benefit of all Canadians.

What Teleglobe wants today is clear support for maintaining its dynamism, excellence, creativity and competitiveness. In exchange, it offers an equally clear commitment to make Canada one of the great leaders of our industry and to continue to offer Canadians first-rate services at the best prices available.

The future successes of Teleglobe – the development of world-class services, its capacity to offer rapid and economical access to the entire world – will have an undeniable impact on your own successes here in the business heartland of Toronto and Ontario.

Teleglobe’s vision is founded on the notion that Canadian enterprises are our partners and that our destinies are closely linked. Our objective for the future is continue to provide Canadian companies with an edge that will make the difference in an open market which is becoming more and more competitive.

THE WIRELESS REVOLUTION

Charles Sirois
Chairman & CEO, Telesystem Ltd.

Canadian Wireless Telecommunications Association, Montreal, June 15, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

There’s a telecom revolution going on. As information technologies converge on telecommunications, neither will ever be the same again. Like any worthwhile revolution, this one is bringing personal freedom, convenience, and empowerment to the people, and eliminating costs they should not bear.

To accomplish this, a stream of new services, better ideas, and new business propositions are in motion or ready to roll. More are coming down the development pipeline, or being dreamed up somewhere in the world today. And a wave of deregulation – new regulation as well – is clearing the way for the change all this will bring about. It lets the wireless industry get on with its business, and it keeps the revolution going.

How far will this revolution go? In Canada, it has already brought telephone numbers to the people. With local number portability part of the CRTC’s May 1 rulings on local service competition, a telephone number is now something people will keep for life. Our Microcell employees are assigning them to their children at birth! We’re expecting local number portability to be fully implemented early in 1998.

Next, the number must follow the person. No more office number, cell phone number, fax number, pager number…or else try this other number later this afternoon. Your location should not matter, only your number (Fido™ will fetch you – provided of course you want him to. People may start to think of the on-off switch as a privacy button!)

And finally, if this revolution lives up to its promise, it will bring a single portable personal communicator to provide this service, anywhere in the world – with of course, very low costs in both the long distance and the local loop.

While the complete package is somewhere out in the future, the main elements of this vision are in reach today. PCS is one of those elements – personal, mobile access to the rich digital information universe. PCS is the best platform for convergence with information technologies. It’s the end-to-end digital system that allows us to interconnect all of the other standards and infrastructures, and bring all of the pieces together for the user:

• Network operations, with SS-7 platforms and their intelligent switching and call management options that bring us closer to true personal communications

• All kinds of new services on your personal communicator, like faxes, money transfer, Internet, or the electronic agenda, electronic copies of important documents like medical records and driver’s license, remote control of automated home functions, like heating, lighting, and security systems, and much more

Some of you may have had a chance to see one of the latest generation of personal communicators – the Nokia 9000 – on display here today. I think it’s a good gauge of how far the convergence with information technologies has gone. It brings together a mobile phone, fax, Internet, and personal organizer, all in a palm-size unit. You can also see it in action in the movie The Saint, where many of its features get a good workout.

So PCS makes possible – in fact it demands – a whole new market approach that goes far beyond the telephone as people know it today. It’s a breakthrough that is expected to bring wireless service to 45% of Canadians – some 15 million people – by the year 2005.

As for the choice of standard for PCS operations, at Telesystem we think GSM offers the best standard to make all this happen. It is proven technology, so no nasty surprises. And yet, as an open standard, GSM will continue to evolve and support all of the features in our vision of the future. GSM has emerged as far and away the leading standard around the world. It has been adopted by some 215 operators in over 100 countries, including companies with licenses to serve 98% of the North American population. So for subscribers GSM offers the widest roaming possibilities by a wide margin.

Over the 15 months from January 1996 to March 1997, GSM was used by some 41% of new wireless infrastructure projects by contract value worldwide. That made a healthy $10.6 billion for vendors, certainly enough to keep a very big pool of suppliers very committed to the technology, and interested in competing and advancing the state of the art.

So PCS has lots of promise. But what is needed to make that promise a reality? PCS requires a healthy and competitive environment to get on its feet, and to convince the market to invest. The technology starts with a built-in cost advantage, with its new levels in network performance and efficiency. Nevertheless, the first great challenge is the licensing process, be this by way of auction or by comparative selection. The proven choice will have a huge impact on the visibility and success of this new industry.

In several countries, development of PCS has been set back at the outset by license fee inflation – the government sold too many licenses, at unsustainable prices, and the financial markets backed away.

In the US, our colleagues feel the process was unfortunately overwhelmed by hype. The auction went on far too long, and the market swung wildly. At the peak, C band licenses went for a total of $11 billion, three times more than expected! But the market retreated fast. By the time the WCS licenses went on auction, where the government planned for $1.8 billion, instead it received bids totaling less than $15 million, about 1%. Imagine: a nice city like Minneapolis, sold for a dollar!

As a result, just as the licensees need major investment to build out their networks – and are carrying some $20 billion simply to hold their licenses – suddenly investors are in a “wait-and-see” mode wanting results. This situation creates carnage at the starting line. It forces a wave of shakeouts, mergers and restructuring before the industry can hope to return to the public financial markets for funds to get back in the race.

In the United Kingdom, PCS licenses did not go by auction, as in the United States, but rather through the same kind of comparative selection process we had in Canada. However, in that country, it became evident that too many PCS licenses had been allocated. Mergers were required before companies could get financing. And obviously, no networks were built without the money to do so. Now there are two cellular incumbents and two new PCS entrants, just like Canada – and they are all solid and moving ahead.

In Canada, it’s clear that Industry Canada listened to some good advice, and took a more realistic view of the startup market when it assigned PCS spectrum. It wanted a strong, competitive new industry to challenge the established players, both cellular and wireline. It wanted spectrum to be used efficiently, and it wanted a very vigorous new industry doing lots of new facilities-based business, building out and hiring in. It sought a good price for the public good of the spectrum – Microcell and the others are paying significant license fees – but it did not hit the industry with an inflated and damaging fee structure.

Following the issuance of PCS licenses by Industry Canada, Microcell’s other regulator, the CRTC, was finalizing the regulatory framework in which PCS would emerge. With the May 1 decisions, the Commission has wisely pursued the goal of competition with positive measures like equal status for wireless in the local market, and obligations to interconnect PCS with dominant carriers on a “bill and keep” basis.

Other crucial competitive and regulatory issues have also been handled well. In particular, the local subsidy from long distance. This remains in place, to ensure that telecommunications service is universally available, with minimal price differences. However, with the subsidy now going into a pool rather than directly to a local monopoly, it also becomes available to encourage new wireless build-outs in areas less populated and more expensive to serve.

The CWTA has also played a vital role in representing our industry, and helping to advocate these measures.

So now Canada has four strong licensees: Clearnet, Microcell, Cantel and Mobility Canada. The government has set a clear path ahead for years of development and growth and consumer benefits. And the build-out has begun: billions of dollars in new investment with thousands of new direct and indirect jobs are expected by the year 2002. Microcell’s own five-year plan projects a $1.2 billion investment, including over $100 million into R&D.

At Microcell, we have also structured our network in an open concept that responds to the spirit of the Canadian regulation, and allows for a very competitive environment in the local loop. Microcell Connexions, our network operator, can wholesale its network to other PCS service providers, thus competing head-to-head with Microcell Solutions Fido. This invites the entry of niche players that would otherwise have to build their own infrastructure. We believe it maximizes our network efficiency to the benefit of everyone involved, especially the consumer.

To complete the vision of universal personal communications, the biggest challenge is ensuring coverage everywhere on the earth’s surface. For that, we need one last piece, the high ground of space. This is also within our reach. The state of the art in satellite communications has come a long way. This was, after all, the first commercial use of space. Typically, satellite ground stations are not exactly portable (unless you’re driving a large truck), and definitely not cheap. Nor is a dish antenna something you want to carry around in your pocket. Some marvelous work has been done to get all this down to briefcase-size, the only problem being it does not fit inside your briefcase – it is your briefcase.

But the next generation, such as the ORBCOMM communicators, have shrunk this down to the size of early cell phones, and are following the same path, getting smaller all the time. ORBCOMM is a “little LEO” low-earth-orbit satellite, close and easy to reach. It’s small, reliable and cheap to build. Satellites are being built and launched this year, on track for a full constellation of 28 satellites in operation in 1998. Its sponsors are Teleglobe and Orbital Sciences Corporation.

With paging, location, email, and other data communications, ORBCOMM is a valuable component of the PCS network. But the information skyway will not be complete until it includes voice. For that, Teleglobe, along with TRW, is building ODYSSEY. This is a middle-earth-orbit satellite, a much larger and more expensive spacecraft. We’re aiming to have the ODYSSEY system in operation for 2001.

So when all of the pieces of this puzzle are sorted out, we’ll be offering compact personal communicators with dual modes, that use lower-cost local wireless connections whenever they’re available, and uplink to satellites as needed. They will be switched automatically by software because people are developing great resistance to complicated new gadgets that promise to make their lives simpler and easier, and just want seamless service.

The communicators will support all of the features needed for a virtual office: full convergence with information technology. And they will work just as well halfway up the Amazon River as they do halfway down St. Catherine or Bay Street.

In Canada, we’re well on the way with PCS. Billions of dollars of new investment with thousands of new direct and indirect jobs are projected by the year 2002. Internationally, it could be an even greater opportunity for Canadian companies, as we move rapidly to develop the potential of PCS.

Canadian wireless expertise and experience is already active around the world. At Telesystem International Wireless we now have: cellular operations in Romania, China, and India with 135 million licensed points of presence; the Specialized Mobile Radio sector in Western Europe, with 151 million licensed POPs in the United Kingdom, France, Germany, and Spain; and paging operations in Mexico and The Netherlands.

The challenge in international growth is not so much about finding markets. The pent-up demand for dial tone alone is staggering. If $1 trillion is invested in the next five years, that demand will still be growing, as rising incomes meet more affordable services. And those with dial tone will be ready to move rapidly into the wider universe of services that PCS can bring them.

The challenge will be raising money in a market with lots of telecom offerings, from all over the world, to choose from. In this respect, when TIW had its IPO in April, to raise $175 million, we found the market was impressed when we were able to show a track record of success at home.

So we, in the Canadian wireless industry, have a tremendous opportunity. We can take a lead in a revolutionary new communications system. We have the help of a competitive and regulatory environment that encourages wireless operators to get busy and build, to get real-life experience in PCS operations.

As we get creative, develop new solutions, and exploit new information technologies; as we move ever closer to using the full potential of wireless personal communications; there is a whole world out there, eager to join our Canadian-style revolution.

CORPORATE MARRIAGE

George Petty
President & CEO, Telus

Conference Board of Canada Mergers and Acquisitions Conference, Toronto, March 24, 1999
Published in The Corporate Report No. 27 (June 30, 1999)

I want to begin by congratulating the Conference Board of Canada for the timeliness of this conference. Mergers and acquisitions are the hottest business topic today. Everyone’s doing it – or talking about it. The Economist says: “Companies are joining together like never before. Last year, mergers were worth 50% more than the year before – and more than twice as much as in 1996.” We’re seeing mergers in all industries, in all parts of the world. It’s a global phenomenon.

Last year, some of the largest mergers were announced in the telecommunications industry: Bell Atlantic and GTE, US$153 billion, MCI and WorldComm, US$156 billion, SBC and Ameritech, US$176 billion. Here in Canada, we’re seeing the same trend. We started the trend last October, when we announced our plans to bring BC Telecom and Telus together, pending shareholder approval. We received that approval in January and our new company, BCT.Telus (now simply Telus), was born February 1, 1999.

Ours was a merger of equals. Which is good for the balance sheet: an acquisition would have put $1.5 billion of goodwill on the balance sheet – a drag on earnings for years. However, a merger of equals takes longer, and the human issues are more complex.

I know from experience that acquisitions are easier. In 1995, Telus bought Ed Tel, the city-owned telephone company in Edmonton. While we put a lot of effort and energy into making the transition more comfortable for the people of Ed Tel, in the end we did it the Telus way.

As a merged company, we generally used the Telus processes and systems. Our human resources and accounting systems. And our work processes. As the acquirer, while you want to be conciliatory, you do call the shots. A merger of equals is more complex. I’ll talk about that in a few moments.

What I want to focus most of my remarks on today is what I believe is the key to a successful merger – the magic ingredient. Most of this conference has been focused on making the deal work. I think the “premarital” phase is more important. Even if finances, shareholder value, and strategic fit are all there, does this deal have the magic ingredient?

The magic ingredient is like-mindedness. A shared philosophy of life. A common approach to business. I’ll talk about why I believe like-mindedness is so important, as important as all the aforementioned factors. Then I’ll discuss why the merger of BC Telecom and Telus was the right answer for us – and why it’s going to succeed.

Let’s begin by defining like-mindedness. I believe a corporate marriage, just like the marriage of two people, needs a solid foundation on which to grow. That foundation includes a common vision, a common approach to life, and shared goals. Do you want seven kids, or none? Where do you want to live? Do we enjoy the same leisure activities? Are our religious views compatible? Very basic stuff, but very important if you want to have a successful marriage.

For a business, it means compatible visions of the approach to market, care of customers, building of shareholder value, and the treatment of employees. I’ve learned that many different models work – but not in the same company. Do you want to compete on price, or value? Do you want to be the low-cost provider, or differentiate yourself on customer service and product selection?

What’s your investment philosophy? Are you comfortable investing in new technology? Are you going to be a technology follower? What’s your approach to employee relations? How highly do you value employee communications? If you and your partner have different answers to these questions, red flags should start flying. And that compatibility, or like-mindedness, is critical to your long-term success. Minimal like-mindedness – low chance of a silver anniversary.

I believe a merger can make technical sense, financial sense, even strategic sense – and still not work. Again, you need the magic ingredient. According to a 1996 study by Mercer Management Consulting of the 300 biggest mergers in recent years, 47% either under-performed or, at best, were compatible with their peers. Why? I would argue that they didn’t do their homework: they didn’t partner with the right company, a company that was like-minded enough.

For example, look at AT&T and NCR – the classic marriage failure. It made perfect sense for the two companies to get together. Telecommunications and computers were converging. AT&T needed a presence in the computer business. However, the two companies were fundamentally incompatible.

Their short-lived marriage was especially difficult because it began as a hostile takeover – a very bad way to get started. The folks at NCR vehemently resisted the takeover bid. Bad feelings were created. Senior managers fled. People at AT&T, at the operating level, had no idea how to bring about the vision. As a result, the two operations never really came together. They never gelled. For the employees of NCR who stayed, the merger just never made sense. To them it was disruptive, unpleasant – and those who left just got rich. AT&T never captured their hearts and minds, never had them on side. And that was the fatal flaw. Three years later, the marriage failed – big time. It ended with AT&T selling off NCR, and losing US$10 billion in the process.

In the same era, IBM read the same books and decided it had to get into the communications business. But it didn’t fare much better in its marriage to ROLM, a California-based telecommunications equipment maker. Frankly, you could not have found two companies more ill-suited to each other: IBM, “Big Blue,” where you couldn’t wear striped socks – versus ROLM, where ponytails and sandals were standard issue. IBM sold its remaining stake to Siemens of Germany in 1992. I don’t mean to bash IBM. They are among our first partners.

So when do you have these discussions about life goals? Right away. At the same time as you call the investment bankers. Getting to know someone is essential during the early stages of discussions with a potential partner – just like dating. And it’s a long-term process. You need to commit considerable resources up front to find out whether you’re suited for each other, or not. I believe if you don’t get it right at the beginning, you do your employees and your shareholders a huge disservice.

Now let’s talk about why the merger of BC Telecom and Telus was the right answer for us – why we began to court each other. As you know, the telecommunications industry is a much different business than it was even two years ago. Change has been fast and relentless in our business.

Being successful today means something quite different than it did yesterday. For one thing, you need scale, and scope – size does matter today. BCE, the largest corporation in Canada, is just the tenth-largest telecom company in North America. And we at Telus are ranked fifteenth. In other words, we’re in an industry of giants.

What’s more, technology in our business turns over every few years. So it’s a very expensive game. Merging our operations simply made sense. In fact, it was being talked about by the employees when I came to Canada four and a half years ago.

However, we didn’t put our two companies together to become a bigger Western Canadian company. Our focus is on growth – by providing service across the country. Synergies just for their own sake are no fun. Our solution? To become a national provider – from serving 20% of the market to 100%. And through GTE we got the big brother we needed. Through GTE, which now owns 26.7% of our company, we have international scope, and access to the latest products and services.

Our merger also makes sense because we have a long and proud history of working together. Mergers often bring together competitors. Ours brought together alliance partners, companies with similar histories. We have a very strong relationship. We use a common cellular platform, and a common billing system. All in all, the merger made sense strategically, financially and technically. However, what I believe is most important, our merger made sense because we have the key ingredient: like-mindedness.

Our merger is going to succeed because we have a similar outlook and a shared vision. Both our organizations were focusing on growth. We each wanted to find a partners with whom we could achieve growth. Expand beyond our geographic boundaries. That shared vision is what brought us together, and will keep us together.

But we have so much more: a similar history of achievement. A similar commitment to customer service. When the initial discussions were on, Frank Parotta, who led the negotiations for Telus, said, “George, they’re more like us than we are.”

As many of you know, we at Telus had got pretty far down a similar path with AT&T Canada. Those discussions were called off last spring. The biggest factor? Our two organizations were simply too different – our histories, our corporate cultures, our business approach and, ultimately, our goals. We didn’t share the same like-mindedness. Unfortunately, we didn’t really discover this until the eleventh hour.

So where are we today? As I said at the beginning of my talk, a merger of equals is more challenging than an acquisition. We are literally starting a $9-billion company up from scratch. All the basics need to be worked out. For example, board governance: our board of directors, made up of eight members from BC Telecom and eight from Telus, and which in future will meet every six to eight weeks, has met three times in the past six weeks.

And there will be more board and committee meetings until everything is ready and in place. Our board policy manual is being created. It’s a one-and-a-half-inch binder. Committee structure, terms of reference, compensation – we’re creating everything from scratch, using a collaborative model.

We’re creating what we believe is the best of both worlds. The “pooling of interest” has become a balancing of interest. We’re creating a collaborative, functional relationship where people know and trust each other. Our greatest challenge right now is that financial analysts, investors and the media can’t see what’s going on. Our stock price is down. My message to investors is: don’t confuse silence with inaction. We’re definitely not standing still.

We have a clear strategy that we’re pursuing aggressively: national growth. Just as important, we’re doing the tough work to put the two companies together. We’re in the middle of the integration process. We’re just not going to make any announcements or promises before their time.

We want to be known for our achievements, our credibility, our dependability – not broken promises and missed deadlines. Our approach is to plan well, make no announcements or promises before their time and be utterly reliable in fulfilling our commitments.

If you are thinking about marching down the aisle – be sure you know your future partner very well. Be sure you have the same life goals. Don’t be swept up in the excitement of the courtship. Just like marriage – the real work comes after you say, “I do.”

GOING GLOBAL: SUCCESS ON THE FRONT LINE

Dana G. Mead
Chairman & CEO, Tenneco

Business Week Presidents Forum, Phoenix, Arizona, April 10, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

I have just come back from an around-the-world trip, with the focus on Asia and visiting Tenneco operations and people in India, Thailand, Vietnam, China and Singapore. I also had several meetings with government officers, bankers, consultants and regional experts and untold numbers of economic development agencies. So I bring a very fresh perspective this morning on many issues.

Let me start by defining our organization a little bit and describing some of the credibility scars we’ve collected in the international area. Six years ago, Tenneco was a very large conglomerate with seven or eight major businesses. We’ve now refocused the company, in the current jargon, down to two businesses – auto parts and packaging – with more than $7 billion in annual sales.

We are the world’s largest non-captive producer of ride control, in Monroe shocks and struts, and of exhaust systems, with Walker mufflers. One out of every two shocks that is put on a car or truck in the world is a Monroe shock, to give you an idea of our global penetration. Nearly four of every 10 mufflers, catalytic converters, pipes or manifolds that are installed on a car in the world are part of a Walker system.

We’re also one of the world’s largest producers of specialty packaging. That’s a fancy word for carryout food containers, plastics, and aluminum, which is an attractive business. More meals in the US last year were prepared outside the home than inside. Anytime you go to a fast food outlet, a Chinese carryout, and so on, or any time you go on a picnic and take foam cups, foam plates, foam trays, you’re probably using our products. Since 1995, we have owned Hefty trash bags, Baggies sandwich bags, and a new product from the same group, called Hefty OneZip food storage bags. Some of our other brands are Diamond plastic tableware and E-Z Foil single-use cookware. We also have a large paperboard business that makes corrugated packaging, folding cartons and container-board.

As new leaders from outside the company, we had to go through a sorting process at Tenneco five years ago and we did it in a lot of dimensions. One of the major ones was the ability of the businesses to capitalize on the growth that is occurring overseas. This was one factor that helped us determine which businesses we could build on. Our corporate goal was to grow earnings by an average of 15% a year through the business cycle. We can’t do it unless we’re overseas…in economies growing 7% to 12%. So it was a key part of the strategy.

It was clear that North America is a relatively mature market for auto parts. If you look at car sales in the United States and you look at the replacement rates, they’re pretty flat, growing at 1% to 2% a year. We have more potential for growth here in our packaging business, but both businesses have very appealing opportunities for faster growth throughout the world.

Unlike my colleagues on the panel this morning (CEOs, respectively, of a major international oil company and an engineering and construction company), we are a metal bending manufacturing company. We’re not project-oriented and we’re not resource-oriented per se. When you look at Tenneco internationally, we have manufacturing facilities in over 30 countries, we have technical centers on five continents, we make products in nearly every underdeveloped region of the world. We’re pursuing the markets. There aren’t a lot of car people here, but the car guys know that 70% of new cars that are going to be produced in the world in the next decade will be produced outside of North America.

We also know that most of that increase in demand in autos, just as for packaging products, is related to increases in discretionary income. There is a huge, emerging middle class in many parts of the world, such as Latin America, Central and Eastern Europe and Asia. Our products provide protection, convenience, safety, comfort and, in the case of packaging, communication. These are all part of a modern, middle-class lifestyle. So that’s why we’re moving more overseas.

Let me balance that introduction now with a few of cautionary tales on the international side. First, my view is that competition is changing dramatically. It is becoming more intensive overseas. Now if you’re talking about competition just to do business, that’s one thing. But if you’re talking about competition to excel and to basically command a market presence and to make money, I think it’s intensifying and it’s going to continue to intensify.

Let me just give you an example. Fifteen years ago in the developing economies, capital was king. They wanted US capital. We had an entrée into any market that we wanted to get into because we could bring large amounts of capital to bear. That isn’t the case anymore. Asia, for instance, is awash with capital and it isn’t US capital. They could care less, frankly. They not only have capital in the regions, they’re pulling capital out of Europe also. They have capital within their own countries that’s now being developed because these economies are beginning to generate cash. So our initial competitive advantage, as thin as it was, is now beginning to erode and is going to continue to erode. It isn’t exclusive.

We have to fall back, as my colleagues this morning have said, on what are more traditional areas of competitive advantage: technology (and I’ll come back to that in a minute), products that are tailored to the markets, and managerial know-how. In the long run, the painful process that we’ve gone through in the United States in the last 20 years in learning how to manage our businesses again and to manage them properly, may be one of our major competitive advantages overseas. And it may be the one thing that differentiates us from our competition, both local and international, as we go forward.

Another area is brand equity. Believe it or not, brand equity, in my view anyway, is probably more valuable overseas than domestically. We can thank television for making our brand names that valuable overseas. This is something we have to capitalize on.

In contrast, technology is an advantage that can literally evaporate instantly. We know that. Don’t drop a CD on a sidewalk in Southeast Asia because you’ll find bootleg copies the next morning in the stores. It can move that quickly and it’s a big problem. So Cautionary Tale No. 1 would be: there isn’t much low-hanging fruit out there anymore. In fact, it’s going to disappear very quickly. I believe competitive advantages are going to be much thinner and it’s going to be a much tougher competitive environment.

Cautionary Tale No. 2 deals with what I like to call economic myopia, or a kind of general market euphoria about these developing economies. Now I’m not Alan Greenspan, although I realize I just used one of his words. There is some kind of a notion that the growth rates of these economies are always going to be this way. They’re always going to be explosive. But the fact is that these economies cannot repeal the fundamental laws of economics anymore than we can. These growth rates will not always be double digit. The political situations in which we operate are not always going to be stable or, I should say, permissive. There are going to bumps along the road. There are going to be currency issues. There are going to be regional relationships that unravel. There are going to be recessions. There are going to be trade issues that effect these businesses.

If you go to Bangkok today, you’ll find out that their growth rate has dropped below 7%. And their currency is under attack. There are going to be inflationary pressures. Les McCraw, chairman and chief executive of Fluor Corporation, just talked about the problem of hiring skilled labor and skilled talent. That creates inflation. (If Alan Greenspan heard us talking about paying financial people that much, we’d probably get a rate rise next week.) So the very conditions that are nurturing the growth in these economies can create the pressures that can snuff out this kind of growth. And that’s whether it be political, social, or economic…rich vs. poor…rural vs. urban…labor shortages…and the like.

There’s also a question of whether or not any of these developing countries can deliver on their own promises and on their own goals. And I’ll just talk about infrastructure. Go to Bangkok. They’ve been building the loop around that city for 25 years. And you can go to parts of China where some infrastructure is going in, and some, frankly, isn’t. If you get 100 miles off the coast and you start heading into Chengdu or into Chongqing and those areas, you’ll find out exactly what I mean. So there’s the danger because of a kind of euphoria that we don’t take into consideration enough of the risks, whether they be financial or political.

Every major company in America has some system of adding an increment of return for risk for financial here, and a return for political risk there. But I think there’s still some danger and I see a lot of it. We tend to fall in love with some projects just because they are international¼you feel your company has to be global. I think the best guidance is: if it isn’t a good business deal, it isn’t a good business deal. Whether it’s in Southeast Asia or Bogalusa, it’s got to be able to stand on its own merits.

There’s an old axiom in project management that all projects are on time and under budget until they begin. Well, it’s certainly true globally. I saw on the slide that you all agreed with that, but I think you just about have to double the degree of difficulty, as the Olympic divers would say.

Cautionary Tale No. 3: there is no political situation out there, in my experience, that is as stable as it appears. That could be said of the United States, also. But politics is a critical factor in so many of these deals and so many of the business processes. This is because we’re dealing to a great extent with countries that are making the transition from state-owned or controlled economies into more of a private economy.

Let’s take Poland. Poland is an interesting case because as these privatized companies get confidence in their ability to run themselves and to obtain capital and to build markets, they’re beginning to question some of the wisdom and the decisions that the central government made about privatizing with particular partners. In other words, they’re standing up on their hind legs and saying: “Wait a minute. We can make that decision.” In fact, 12 business sectors in Poland right now are basically paralyzed because they can’t get agreement between the central investment funds and the old businesses that are being privatized.

My point is that in most of the developing economies, the strategy that you need going in has to have two parts. It’s basically an exit strategy, with the flexibility to shift gears when and where the situation requires it. You have to have a way of getting out or protecting the assets, protecting your people, and protecting your business if any or all of these things go wrong. At Tenneco we have a rule that you don’t make an investment so large that tomorrow morning you can’t walk away from it and not sink your business or the company in the process.

Cautionary Tale No. 4. We’ve talked about people. Most US companies are woefully unprepared to deal in these situations. Time after time the issue is not capital, it’s not technology, it isn’t machinery, it isn’t markets, it isn’t distribution. It’s: do you have the human resources to cope with the challenges you face? And by the way, it isn’t just the US that is inadequately prepared here. Everybody is. The countries themselves are woefully unprepared.

I talked last night to the head of a very prestigious B-school. He told me that in order to meet the development goals of China, they need 300,000 MBAs a year. Now that’s frightening in itself, right? But to give you an idea, China actually graduates 1,000 MBAs a year. The United States, the cradle of MBAs, graduates 100,000 a year. India does have a relatively sophisticated set of B-schools, but even at its most prestigious business school there are 42,000 applications a year for 250 slots. In fact, they whittle the applications down to 2,500 and then they draw lots to see who goes. We’ve all got a problem in personnel. We all need international managers.

And finally, Cautionary Tale No. 5: the complexity of the situation. In most cases, the workers that we have in our plants, and the governments in the regions where they live, have widely different and much more complex agendas and goals than we do. (Most of our plants average 200 to 300 employees.) Employment vs. productivity, volume vs. profit. In a lot of countries there is no concept of profit. In fact, in some languages there isn’t even a word for profit.

Stability turns out to be one of the most prized values in the developing economies. The American notion of re-engineering or restructuring, is inherently destabilizing and it’s very tough to accomplish similar projects in many different cultures. Most of us who’ve fought through Europe…restructuring and re-engineering operations in France and Germany and other places…well, that was a picnic compared with the destabilizing fears these programs create in many developing countries. Americans who persist in this are going to fail. It’s that simple.

So those are a few cautionary tales about doing business in developing economies. Let me close by saying I think Americans are facing a very tough, tough environment. I saw Commerce Secretary Mickey Kantor this morning and I mentioned to him some of the things I’d heard and seen about the views, not just of American business, but of the American government and our goals overseas. I also said that the tendency is going to be in the next three or four years to begin to lose our sense of optimism as these things begin to change. I don’t think we can permit that to happen because we do have great opportunities, but we do have to do something.

One of my favorite Chinese expressions is: “A man will sit in a chair with his mouth open for a very long time until a roast duck flies in.” In other words, I think we have to be more aggressive and more proactive in all of these areas in order to succeed because the competition is going to intensify. The kinds of advantages that we’ve had in the past are rapidly, rapidly disappearing.

DIGITAL CONNECTIVITY

Thomas J. Engibous
Chairman, President and CEO, Texas Instruments

Speech to The Wall Street Journal Technology Summit, New York, October 5, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

This conference features an impressive and wide-ranging list of speakers, each of us with our own version of the future of communications. Being in the same room with all these leaders of the communications industry reminds me of a comment baseball great Dizzy Dean made on the eve of a World Series. Dizzy said: “The Series is already won – but I don’t know by which team.” Sounds like today’s communications business.

In this room are companies that will create the future of communications. But at this point it is a little difficult to know who all the winners will be. So much can change, so much could happen, that it makes predicting the distant future about as chancy as a high-stakes poker game. In a way, that is exactly what this is.

As a technology company, TI is a supplier to the communications industry. Our role is to enable the future. Our task is to take the brute force of technology, harness it, give it more horsepower and make it more affordable so that we’ll be able to communicate in ways that once seemed impossible. Step by step, technology is breaking down the barriers of communications. Technology is delivering greater bandwidth, more features, and new networks. It’s even taking some of the gamble away with digital processors whose software can be reconfigured or reprogrammed to accommodate changes in networks. At TI, we certainly expect our technology to contribute to a strong future for communications. But we don’t expect to do it alone. Nor do we expect any other one company to have what it takes to shape the future of this industry.

To get where we want to be as an industry, it’s essential for every player at every position to take a strategic approach to this business. We all must share a vision of the future. A vision based on bigger pipelines, open standards and an industry commitment to grow the total communications opportunity. Otherwise, we will impede the growth of one of the most dynamic industries in history. We all know a new technology will not wipe out the old. Wireless phones do not make wireline phones obsolete. If anything, wireless technology creates more demand and more types of demand for service providers.

As an enabler of the future of communications, you might think TI would have the inside story of what direction the industry will take, what companies may prevail. In one way, we do. We’re making it our job to develop the technology that makes bigger, more powerful pipelines possible. It makes appliances smaller and more efficient. It makes it easy for content providers to shape the information they offer. We call it DSP – the digital signal processor.

In the future, no matter what type of network, whether it’s wireless, landline or satellite – no matter what type of pipe, whether it’s copper, fiber, coaxial or thin air – at every connection, at both ends of the network, there will be a digital signal processor. DSPs are the engines of the digital age of communications. DSPs enable communications to become more personal. They allow all electronic equipment to be connected, speaking the same language – a digital language.

What separates DSPs from other processors is their ability to perform real-time processing. (“Real-time” is techno-speak for a system that can process information as fast as it comes in.) By crunching numbers at incredible speeds, up to 2 billion operations a second, DSPs are the perfect processors for electronics that need to function in the real world, where waiting is not an option. That includes digital communications services, where you can’t wait for a little hourglass to pop up and leave when the processor has finished its work. Digital connectivity solutions must be processed instantly. You have DSPs in your modem and the hard disk drive on your computer. Your digital cell phone uses a DSP. DSPs are even in your car, triggering your air bags and anti-lock brake system. By lunchtime today, you’ll probably used a DSP more than 20 times, whether you are aware of it or not.

Digital signal processing is the technology that will enable the future of electronics. But what I want to talk most about today, is the role DSPs will play in digital connectivity. DSPs are already creating robust networks that have no bandwidth limits. But that is just the beginning. Most communications companies can be divided into three categories: content, delivery and appliance. Content includes digital sound, digital television and digital databases. Delivery is the networks such as wireless and data transmission. And the appliances are the multitudes of end-equipment that plug into those networks.

Every one is going digital. Every one needs DSPs. This is changing the dynamics of the semiconductor industry. And it is changing TI, as we have moved to capitalize on our world leadership in DSPs and its companion analog technology. In the past, the personal computer drove the SC industry. The birth of the PC created massive businesses that didn’t even exist 10 to 20 years ago. But today, our industry is being driven by a new force, the surge in digital connectivity. This can be seen dramatically in two areas – wireless and networking. The growth of digital wireless networks has astounded even the experts. Last year, for the first time ever, there were more digital cellular phones sold than PCs. And this year, even with current global economic conditions, the forecast for digital phones has recently been increased. It is expected that more than 140 million digital cellular phones will be sold this year. That’s a 60% increase over last year. Every one of those phones has a DSP at its core. And, I’m proud to add that more than half of those use a TI DSP.

One of our most successful products is a family of baseband circuits for digital cellular phones that are being used by our wireless customers including Nokia and Ericsson. Some of these circuits combine two high-performance core processors – a DSP tailored for wireless applications and a microcontroller designed for a low-power embedded system. On the same chip we also have integrated memory, logic and some analog functions, all necessary to make an efficiently designed cellular phone. For mobile phone users, this means small phones, with greater talk and standby times that work seamlessly across multiple cellular networks. It’s led to new programs by service providers, such as AT&T, who offer large nationwide networks that don’t have roaming charges.

Without question, TI DSPs have changed the face of wireless communications. It won’t be the last time. The next generation of wireless phones and networks already is being developed. Most of today’s wireless phones and systems are generally limited to one type of network. They provide limited bandwidth. And they are used mostly for local services with pricing based on air time.

That profile of wireless communications is changing dramatically. In the coming years, we can expect that wireless users will be putting many new demands on their service providers. They are going to want the same level of connectivity, no matter where they happen to be or what network they happen to be using. And that expectation will put drastic new requirements on us to enhance the technology we offer. Wireless users will not be satisfied with voice-only service. They will demand multimedia capability from their personal devices. Video and data phones will be required.

More and more, we are likely to find that advanced functionality will not be built into every appliance. Instead, it will come via software, downloaded from the network. Tomorrow’s users will want to be able to reconfigure their end-equipment in an endless variety of ways. And we need to provide the systems that are capable of making that happen.

Let me share one idea that might spark the imagination. In a few years, every digital cellular phone sold will have a global positioning system or GPS. The main driver behind this is emergency situations. Police will be able to know exactly where an emergency call is coming from. But this also can be used to make your wireless service very personal. The network not only knows where you are, it also knows you. This opens enormous opportunities for content providers. The network can enable you to navigate through unfamiliar towns, automatically finding the best routes with the least traffic. It can tell you the nearest hospital, gas station or which Italian restaurant is nearby and what the daily specials are. It can remind you that your laundry is ready on the way home or there is a sale on the golf clubs you were looking for as you pass a mall. All this can be broadcast on wireless networks using the GPS that will soon be on your digital phone system.

This is far more advanced than GPS devices you see being offered today by some car makers. What I am referring to is sharing the GPS task with the cellular task on the same processor, so that the two are intimately linked. The cost is minimized and any cellular service can host the service. Plus, you can take the cellular phone with you wherever you travel, far beyond the limits of today’s systems.

The second force in digital connectivity is networking. By networking, I’m referring to any equipment used to link computers together. PCs don’t stand alone any more. They are all getting connected, via modems and local area networks. DSPs play a key role in both segments of the networking market. More and more, we are seeing processing power pushing to the edges of the network, straight to the desktop. Here again, our role is to enable the industry’s agenda of broadband data communications.

As that trend has taken shape, it’s had a profound effect on the way people use their information technology. Applications like file-sharing, groupware and email now make it possible for people to work in entirely new ways, to collaborate more effectively. Each day, more than 150 million email messages are sent…most of them to my office! And on the internet you find some incredible – and incredibly powerful – new concepts emerging. All this requires robust networks with many times the processing power of today’s fastest connections. It also requires an open architecture that serves as a software platform to help personalize your information technology. As a supplier to this industry, it’s critical for TI to understand the issues network builders face.

Many times, the barriers that slow growth aren’t technical. They’re economic. A good example is the development of DSL or digital subscriber line technology. This technology turns ordinary copper phone lines into high-speed data networks, carrying data at more than 100 times faster than today’s fastest analog modem. It also allows the same line to be used for voice traffic.

Sounds great, doesn’t it? But what drives the success of DSL will not be the technology. It’s the cost. For network builders – they are concerned about keeping their technology up to date without having to buy expensive upgrades. The tremendous flexibility of DSPs lessens this concern. Because it’s not just DSPs. It’s programmable DSPs. Programmability means these DSPs can change the software code in the chip after they leave the factory. New upgrades can be made without additional reinvestment in new hardware. And changes can be made over any network from remote locations.

As for service providers – they are concerned with keeping the costs of installing DSL affordable. I’m sure the service providers in this room can quote what it costs to roll a truck and send a technician to visit a customer. Multiply that millions of times over for the new DSL customers we expect to come online, and you have a logistical nightmare. One DSP solution involves a chip set that eliminates the need for telephone companies to visit a customer’s premise and install a splitter on the phone line to separate voice and data traffic. Instead, it can be done from a central office. The technology eliminates a costly roadblock to both the customer and the phone companies.

We also are working closely with other communications and technology companies to agree on standards for DSL or digital modems. It is in everyone’s mutual self-interest to put a set of standards in place as quickly as possible. The faster we do this, the faster the market will grow. By this time next year, you can expect digital modems to start to take off. By 2001, some analysts expect this market to reach 18 million digital modems. But that kind of explosive growth can’t and won’t happen unless all the players share a common vision of what the network can become.

Resolving issues such as these illustrates the importance of working together to build the communications industry. To stay relevant, technology companies like TI need to know what is going on in their customers’ businesses. We do know what is going on and we are working hard to be part of the solution.

If you couldn’t tell by now, Texas Instruments is convinced that our technologies are moving to center stage in the communications industry today. The versatility and power of the DSP and the real-world interface of analog chips make them the technologies of choice for digital electronics. That’s one reason why industry analyst Forward Concepts forecasts that the DSP market will triple during the next five years. We think they’re right. We believe in the future of digital signal processing and analog chips so much, that we have totally restructured our company to take advantage of this opportunity. We knew that in order to meet our customer demands for more horsepower and more effective solutions, we’d have to focus all our attention on the DSP and analog technologies. And we did. We are the world leaders in both DSP and analog. Our commitment is to drive new products into the market and broaden our market leadership.

I’m enough of a techie that when someone asks me about the future, I easily go off and describe the wonderful applications that today’s technology will bring you tomorrow. But I’m also enough of a realist to know that reality, both today and in the future, is not always the picture we paint. We do have tremendous opportunities where connected networks can make your life better and easier. But we also have a hard time making a VCR that is easy enough for the average person to tape a program. One solution that TI uses is helping our customers get to their end destination faster. We do that through using the power and flexibility of our technology.

TI will do its part to make the vision of the future of communications a reality. We’ll help build bigger pipelines and faster networks. We work with standards to smooth the flow of information up, down and through any network. We’ll help build a bigger communications market that offers tremendous opportunity. Our hope is that the leaders of all communications companies will do the same.

REINVENTING THE CORPORATION FOR SUCCESS IN TODAY’S WORLD

Lewis B. Campbell
President & COO, Textron Inc.

Aerospace Industries Association of Canada, Ottawa, September 18, 1995
Published in The Corporate Report No. 14 (October 19, 1995)

Aerospace is a tough industry to be in right now. I’m told that it’s been nearly 25 years since we’ve experienced a twin downturn in both the military and commercial aerospace business.

My message today is not complicated, but it does contain a combination of success stories and strategic challenges relative to this exciting industry of ours. You will hear me talk about how Bell Helicopter is not only weathering its way through this twin downturn, but actually prospering along the way.

And while other countries are trying to decide “whose side they’re on,” Canada and Bell have joined forces to become the most formidable commercial helicopter enterprise in the world. And finally, you may hear some fairly strong opinions along the way on items that need added focus by all of us if we are to get through this turbulent time in our industry.

For those of you who may not follow Textron, or haven’t seen our annual report, Textron is a US $10 billion, multi-industry company based in Providence, Rhode Island. We manage 27 businesses and employ 53,000 people worldwide. In Canada we have over 4,500 employees with revenues exceeding $1.5 billion. Bell Helicopter is a core business in Textron’s portfolio…representing almost one-sixth of our revenue base this year. Canada’s relationship with Bell is critical to Bell’s long-term success. Bell’s relationship with Canada began in the mid-80s when we opened our new Mirabel facility in 1986. We’re very pleased with all aspects of our Canadian partnership. It has provided us with:

• A skilled, highly motivated workforce

• A business partner that joins us in supporting new product development

• And a sales and marketing partner that aggressively promotes and sells our product worldwide

I’m proud to say that our Mirabel operation, in my opinion, is the most modern helicopter production facility in the world. We have delivered over 1,000 helicopters from Mirabel over the past decade, and, believe me, Bell is proud to call Canada home. This sense of partnering has to go both ways. We’ve both fully supported the evolution of the Mirabel facility, its products and its workforce. I bring this point up because a supportive business environment certainly has to be a key business success factor in our industry, especially during such turbulent times. And because our commercial business is so successful, Bell can continue to evolve into a more significant global company, and develop and sell innovative new products – and in turn, will continue to add to the Canadian tax base and provide increased employment opportunities.

So, it’s in this spirit that I’d like to move now to use the Bell story to make a few strategic points relative to our topic today. First, I believe that many of the success factors for a country, mirror the success factors of an industry. Competing efficiently and effectively internationally has to be a shared objective for company and host nation alike, particularly in an industry as vital, and, right now, as challenged as aerospace. Today’s discussion can serve as a metaphor for government decision-makers here in Ottawa, as well as for the business leaders here today.

Government and private enterprise are both continuously confronted with the need to become more competitive on a global basis:

• Downsizing

• Cost reduction

• Improved decision-making

• Strategic investment

• Aggressive sales and marketing

• Cycle time reduction, and

• Long-term partnerships

I believe subjects like these are just as important to the leaders of Canada’s local and national governments, as they are to the managers of our Bell Mirabel facility.

My next point requires another comment or two about Textron. At Textron, one of our Core Strategies is to build and actively manage a multi-industry company comprised of market leaders. We are industry leaders in:

• Aircraft, with Bell and Cessna

• Automotive interior and exterior components

• Fasteners

• Financial services

• Paul Revere disability insurance

Our actively managed, multi-industry balance has enabled us to weather numerous industrial, economic, and business cycles including the challenge currently facing the aerospace industry. In fact, and I “knock on wood,” we’ve had six straight years of double-digit earnings-per-share growth. We haven’t missed a quarter since 1990.

So what’s the point relative to today’s conversation? This isn’t a commercial for Textron. I believe that we have managed through some fairly major downturns these past five years as a result of one of our basic operating principals at Textron: we do not rely on forecasted up-cycles in any industry for future earnings-per share growth. As such, we consider the current condition in Aerospace to be much more permanent in nature and our operating strategies are based on this assumption.

I still hear people talking about the aerospace “cycle,” which implies, among other things, a natural return to better times. I’ve been hearing about that “up-cycle” that is “just two years away” since I came to Textron in 1992…and it’s still two years away. Well, I come from the automobile industry – General Motors, to be specific – and I can tell you from experience that it will be a mistake for us to rely on a return to “normal” business levels in aerospace. Sure, it might happen, but I think it’s too risky to bank on it. A forecasted cyclical upturn should not be relied upon for our salvation.

We need to use these hard times to motivate ourselves and our organizations to get even more competitive. “The sight of the gallows clears the mind.” Hopefully we can use this difficult time to clear our minds and firm up our resolve to become cost and quality leaders in our industry.

I can remember when that next “wave” of recovery that the auto industry was banking on, turned out to be just a “ripple.” While the world around them was changing. At first they didn’t see the change coming. The return to normal sales volumes was to be the salvation. At first, they weren’t prepared to make the kind of fundamental structural adjustments needed to adapt to a totally new environment. And for the most part, they did not have the right industry/government relationships in place to help weather the storm. It was not business as usual for the auto industry back then, and it is not for the aerospace industry now. Canada, Bell and Canadian Aerospace are in this together. In fact, I’m sure you’ll agree on this next point: every competitor in every nation wants our US and Canadian jobs. They will do anything and everything to get these. The only solution?

• It’s not only unqualified host country support

• It’s not only investment for new products

• It’s not even tariffs or trade barriers

• It’s total competitiveness in every area of customer value

There is no substitute for relentless pursuit in each area. We have to find a way to win in every area. So the key question for each of us is: “How do I compete, survive and prosper in a very depressed aerospace industry that could provide for continued low-growth, possibly no-growth or even shrinking markets for many of us here today?”

That takes me to Bell Helicopter. Next year, Bell will celebrate the 50th anniversary of FAA certification of its first civil helicopter, the Bell 47. Since that historic day in 1946, we have manufactured over 32,000 helicopters, comprising the largest worldwide fleet in operation. While Bell currently maintains a 47% share of the world’s commercial market, the news wasn’t always so good. Bell was a distant second in market share in the mid-80s, with 26% of the market for commercial units. Bell was at a crossroads back then, and in the late ‘80s, they decided to start asking and answering some very tough questions about themselves and about their future.

Bell basically reinvented itself. From 1992 to 1995, Bell has realized a productivity improvement greater than 30%. We’ve reduced the cycle time on light helicopters from 24 months to 9 months, and on medium ships from 24 months to 11 months. We did this by being more in touch with our customers and building products that our customers really want, that deliver the best value in every category; by completely retooling our procurement, inventory, manufacturing and sales processes; and by instilling a competitive passion for continuous improvement in every employee. The result? From 1992 to 1995, Bell has seen revenue growth of 70%, profit growth of 75%, reduced cycle time by 50%, and improved service parts delivery to world-class levels. And we’ve done all this while reducing inventory 6% and improving asset turns 50%.

The point here is that the management team at Bell didn’t count on a cyclical upturn in the market. Instead, they focused on operational improvements. After reinventing itself, Bell continues to gain market share despite the overall low-growth conditions of the marketplace. And I have to say that our Mirabel facility, with its focus on modern manufacturing and management practices, has been leading the way in Bell’s resurgence.

But there’s another story here. One of the old habits we’ve been struggling with in many of Textron’s aerospace businesses is what is often referred to as a “cost plus” mentality, especially on the military side. A major portion of our business base was tied into contracts that encouraged a “cost + profit = price” mentality. I strongly believe that this thinking must be replaced with: “competitive price - required profit = allowable cost.” We can’t let our weaker managers continue to let a “cost plus” mentality get in the way of aggressively reducing every element of cost. Our customers and our shareholders demand it…and our future depends on it.

Speaking of our future, much depends on product development. With the help of the Canadian Government, Bell has been extremely active in the development of new commercial products. Products such as the 407 light and 1430 intermediate twin helicopters, along with our light and medium-size ships including the 206-B, the 206 light twin, the 230 intermediate twin, and the 412 twin-engine ship. Your DIPP program has been vitally important to Bell in Canada. Given the increasingly competitive world we live in and the opportunities to partner around the globe, we certainly hope DIPP returns in some form to support the future growth of Canadian aerospace. Canada represents our commercial arm of Bell and Fort Worth, Texas represents the military end of our business. And while it’s assumed that commercial and military ships are separately designed and manufactured, Bell has long realized the importance of transitioning its proven military technology into its commercial product line.

This is another strategic success factor in aerospace. The most noted example of which is our Canadian Forces 412 aircraft. The Canadian Forces helicopter is a hybrid of our commercial 412 ship. The 412, however, is actually a hybrid of our 205 Huey Series which was originally designed for use by the US Army and Marines. Essentially, the 412 aircraft has gone full circle from military to commercial back to military again. For those of you who aren’t familiar with this ship, the Canadian Forces have ordered 100, 412 medium, twin-engine helicopters which will be used for peacekeeping and search and rescue. By leveraging new models off of proven existing designs, Bell helicopters are recognized as the most reliable in the world.

While Bell is a recognized world leader for helicopters, we are equally well-known for tilt-rotor technology, more particularly, the V-22 Osprey. Hopefully, many of you attended the Paris Air Show and got a chance to see the V-22. I have to tell you that I had an enormous sense of pride watching the military version and the commercial variant of the V-22 make their successful Paris debuts. The V-22 is the culmination of years of hard work by Bell, Boeing, the US Government and many other parties. We believe tilt-rotor technology will not only play an integral part in the defense sector of the aerospace industry, but also holds the promise of creating an entirely new industry segment on the commercial side.

New industry segments don’t happen every day. I’m sure we will need the help of many of you in the room today to help us successfully launch the commercial V-22. It’s still a bit early yet to begin formal plans, but we can’t wait much longer.

Hopefully, I’ve been able to give you the impression that the Textron and Bell relationship with Canada is one of mutual support and satisfaction. That’s why we do business here. That’s why Canada serves as the centerpiece of our worldwide helicopter business. And that’s why we’re optimistic about the future of our aircraft business here. I’ve just painted a fairly bright picture of Bell. That’s where we are today in our company’s evolution and while the results are good, the battle is never-ending.

I hope I haven’t been too aggressive in some of my remarks. I also recognize that there’s nothing particularly esoteric about identifying and dealing with many of the issues I have raised. In fact they’re mostly common sense. Yet common sense can be elusive, particularly when times are tough.

The answers often lie in the basics and the solutions often lie in the best implementation of the basics. In closing, I would like to personally recognize the importance of the Aerospace Industries Association of Canada and in particular, the leadership role it has assumed in helping all of us in the aerospace industry.

NEWSPAPERS IN THE AGE OF THE INTERNET

Michael Goldbloom
President & Publisher, The Gazette (Montreal daily newspaper)

Quebec MBA Association, Montreal, March 11, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

I am going to talk about the future of newspapers in an era when computers are playing an ever-increasing role in our lives. Let me begin by pointing out that making predictions about the impact of computers is a perilous task. As many of you know, in 1943 Thomas Watson, chairman of IBM said: “I think there is a world market for maybe five computers.” In 1949 Popular Mechanics predicted that “computers in the future may weigh no more than one and a half tons.” So it is with some trepidation that I will try to foresee the impact of the computer on the daily newspaper.

Let me begin by noting that people have been predicting the imminent demise of the newspaper ever since the invention of radio. The newspaper once had a virtually exclusive franchise for communicating news and information to a broad public. We have come to share that role with the radio, telephone, television, cable TV, satellites and now the home computer. None of those inventions have made the newspaper obsolete, and I don’t believe that it is yet time to write an obituary for the ink-on-paper newspaper. I do recognize, however, that newspapers are facing significant challenges as the personal computer becomes an increasingly important component of people’s lives.

So let me start by giving you some facts and figures about our industry, starting with circulation and readership. Let’s start with some good news: after eight years of constant decline, circulation appears to have stabilized in Canadian newspapers. In fact, all of Southam’s newspapers in major Canadian markets – Montreal, Ottawa, Hamilton, Windsor, Edmonton, Calgary and Vancouver – are showing circulation growth over the first quarter of 1997.

Readership is also encouraging across the country. Some 64% of Canadian adults read a newspaper on weekdays, and 72% of them read one during the weekend. They spend an average of 45 minutes with their newspaper during the week, and 90 minutes on average during the weekend.

It is interesting to note, and in view of our ongoing political battles it is not surprising, that Quebecers spend the most time with their newspaper each week. Their reading time is an approximate 5.5 hours per week.

As for advertising, the last report from the Canadian Newspaper Association on advertising revenues showed a very healthy picture. Advertising revenues in Canadian dailies increased by 16% in the first nine months of 1997 compared to the same period in 1996. In fact, the positive advertising trend started in 1995 when we saw the first lineage increase since 1990 and has grown significantly since then.

The combination of stable circulation, increased advertising revenue and reasonable newsprint prices allowed the newspaper industry to have a very good year in 1997. The fact that many newspapers spent most of the decade introducing new technologies, learning to operate more efficiently and reducing costs has positioned us to enjoy significant growth. For The Gazette, 1997 was the most profitable year in recent memory and probably in its history.

It is as a result of that performance that the board of directors of Southam recently authorized an investment of $63 million for a new printing plant and refurbished presses for The Gazette. For our advertisers, this investment will mean much sharper images and vastly improved and expanded color reproduction. We will soon be able to produce images which do justice to our advertisers’ goods and services. That means no more green eggs and gray steaks, no more faces with four sets of eyes. For our readers, the sharper images, enhanced color and smaller format will make the paper much more attractive. And in addition to that, we will be able to shorten our print window, which will mean that the vast majority of our readers will get final sports results and we will also be able to provide 6 a.m. home delivery for most of our subscribers. Many people have asked me why we cannot provide both a business section front and a sports section front every day. These new presses will finally allow us to do just that.

So this is obviously a very significant investment for us. It is a very strong statement by Conrad Black, David Radler and their colleagues on the board of Southam of their confidence in The Gazette, of their confidence in the future of the newspaper industry and of their confidence in the future of our city. These are generally good times for The Gazette and for the newspaper industry. But one would have to be very shortsighted not to recognize that there are significant challenges on the horizon.

We are already facing ever-increasing competition for the advertising dollar. Advertisers have more and more options to choose from. Not just traditional vehicles like television, radio, magazines, billboards and direct mail, but electronic advertising in the Metro (subway), bus stop advertising, lighted panels on our streets, advertisements not just on the boards but also on the ice at the Molson Center – the choice is staggering. Recently the coat-check person at a restaurant gave me a stub with an American Express ad on the back! Furthermore, many traditional department stores have closed: Simpson’s, Miracle Mart and Pascal’s were all heavy users of newspapers. They have been replaced by the new large-scale retailers also called “category-killers” like Wal-Mart and Costco, which do not do much advertising. The independent store is in significant decline, having been replaced by chain stores. So, for example, rather than running twelve ads for twelve different electronics stores as we once did, we now may run one ad for a chain store, like Future Shop, which would include a list of its locations.

Another example is the movie business. The conversion of the Montreal Forum and the former Simpson’s store into entertainment centers with multiple movie screens may have the same impact on our advertising. And as the advertising environment has become more competitive, so too has the competition for our readers’ attention. The Gazette’s own website had 2.5 million hits in 1997, so we know very well the power of these new technologies.

It is clear that we must change as the times and our audience change. Newspapers have done this in the past. The switch from predominantly afternoon papers to virtually exclusive morning papers is an example of that ability to respond to changing consumer demand. And we do have several factors working in our favor.

Firstly, demographics are on our side. Part of our salvation lies with the baby boomers who adopted the newspaper reading habit and who, for at least the next 20 to 30 years, should remain loyal newspaper readers. (It is not a felicitous analogy, but reading a newspaper is a bit like smoking – it is a very hard habit to kick.) In his book Boom, Bust and Echo, David Foot predicted a growth in newspaper readership. We know that newspaper readership increases with age. As the baby boomers no longer spend their mornings getting their children off to school, they will have more time to read. And when they begin to retire, they will find that reading a newspaper is an inexpensive and rewarding way to spend their time.

The fact remains that the newspaper is a great value for consumers. The daily paper is cheaper than a cup of coffee and it takes longer to consume. And I like to think that it provides more nourishment. Anyway, as they say, you can’t wrap old fish in a computer!

My optimism for the future of the newspaper is rooted in part in the sustainable business model which has made it such a great success:

1. Newspapers are read by a broad cross-section of the population.

2. Consequently advertisers buy newspaper space as a cost-effective means of reaching a broad public.

3. Advertising revenues cover close to 80% of total newspaper costs.

4. Consequently, newspaper publishers can sell their newspapers at a low price to consumers (which leads back to the first point that a lot of people read them).

Furthermore, I do not believe that ink on paper will be replaced by the computer in the foreseeable future. The newspaper is more convenient than other existing means of delivering news and information because of:

1. The density of information it provides

2. Its broad range of subject matter

3. Its portability

4. Its browseability

5. The fact that it can be read by more than one person

6. And finally, because it is attractive to look at and easy to read

Each one of us reads the paper differently. We browse through the paper and read the articles and ads which interest us. We read what we want, when we want and where we want. We can read one section while someone else reads another. I haven’t seen any hardware and software package which can match the convenience of the newspaper. It would take several hours to read your daily newspaper if you tried to do it on a computer screen by clicking on a menu of stories.

There is a lot of talk about an electronic tablet replacing the ink-on-paper newspaper, and it will probably arrive one day. But it will be a long time before the electronic tablet provides all the convenient characteristics of the ink-on-paper newspaper. Even Bill Gates says that if something is more than two pages long, he wants to read it on paper and not off a screen.

It does appear that those newspapers which are read more for entertainment than for information are more vulnerable to electronic competition. The home computer and the internet are in significant measure entertainment media which are taking viewing time away from TV and other forms of entertainment.

But the proliferation of information available to consumers may actually enhance the role of the newspaper. The internet and other recent electronic innovations have geometrically increased choice. And consequently, they have increased the importance of the editorial function of the newspaper editor. Confronted by a growing torrent of information, a well-edited newspaper, with an intelligent selection of news, features, sports, business listings and comment becomes more important than ever.

At the Massachusetts Institute of Technology’s Media Lab, they explored the future of newspapers with something they called The Daily Me, an electronically-delivered collection of articles selected to fit the individual reader’s specified areas of interest. In essence, what they were envisioning is that each one of us would get our own unique, individualized, newspaper. If your areas of interest are hockey, gardening, Quebec politics, the Far East, the aerospace industry and crossword puzzles, that is what your daily electronic newspaper would contain.

But would it be smart to do so? Would The Daily Me satisfy the appetite that newspapers fill? Or would something be missing? Delivering material tailored to an individual’s interest may make sense in certain narrow areas. There may be no reason to give a person a listing of every stock, in every market, every day if he or she is only interested in a half dozen. There may be no reason to give sports statistics to people who aren’t interested.

But newspapers deliver much more than just useful data, and we had better be careful not to lose sight of that as we adapt to the electronic world. That something is the human element. The first problem with The Daily Me is that it does not include any serendipity. Because editors select what a traditional newspaper includes, the reader always stands the chance of being surprised by it. And surprised by ourselves, too, when we discover that our curiosity reaches to subjects that had never much interested us before.

What a well-edited, ink-on-paper daily newspaper can provide that interactive technology can never provide is a common experience, a common reference point, a sense of community. If we are each only getting the information which we specifically request, we will diminish our shared experience. Part of what makes a community is responding to an article or a column which we have all read. In a world where technology is allowing people to live in greater isolation from one another, I believe that the daily newspaper will have an increasingly important role in preserving a sense of community. The daily newspaper with a large penetration in the market may reemerge as the most effective vehicle for reaching a broad cross-section of the population.

Newspaper people fear the development of the new electronic technologies, but it is also possible that in a largely fragmented media world, where people can choose between 55 TV stations (or even 500 channels, as some experts in the field are projecting), such avenues become less interesting and less efficient for an advertiser wishing to reach a broad market.

It should also be said that in commercial terms, the online business is not – or at least is not yet – a real business. Together, Hollinger and Southam are a major internet publisher with over 70 websites. We have millions of hits every day. But virtually all attempts by us – or anyone else – to create a viable electronic newspaper business have failed.

I do not intend, however, to suggest that newspapers will not be obliged to change. In our own lifetimes, daily print journalism has been transformed. Newspaper reporters used to be taught to focus on the five crucial components of any story: who, what, where, when and why. The reality today is that on most major stories, the vast majority of newspaper readers know the answer to the first four of those questions before they pick up the paper in the morning.

You probably didn’t learn about Quebec Liberal leader Daniel Johnson’s resignation from your newspaper. You heard it on the radio or saw it on TV. In fact, even though the race did not end until close to midnight last Saturday, most of you probably knew that Jacques Villeneuve finished fifth in the Australian Grand Prix before you picked up your Sunday paper.

With the advent of CNN, NewsWorld, RDI, CTV’s and TVA’s new headline news stations, and morning TV news shows in addition to regular network radio and television newscasts, there are not many “hard news” surprises left on the front page of your morning newspaper. So what newspapers must focus on is the fifth “W,” the WHY. What newspapers can provide, and which TV and radio have more difficulty providing, is context. Our readers are asking us not just to tell them what has happened but why it has happened and what the consequences may be. TV tends to amplify the emotional content of events, while print journalism is better able to bring a sense of proportion and place events in their context.

The other major change that I believe newspapers must face is to recognize that we are in the information service business. The crucial word is service. My sense is that newspapers have tended to print what interested their editors, or at least what editors believed the public should know. But if newspapers are going to continue to attract readers, they will have to become much more focused on researching and understanding what our readers want to read.

That does not mean that the quality and professionalism of newspapers need to suffer, but it does mean that we must make a greater effort to ask our readers what interests them: world news, news about their city, local community news, news about home and family, social trends, politics, business, sports, entertainment, comics, crosswords or any of the other myriad elements which make up the paper. We need to ask the question rather than assume we already know the answer. We need to make more of an effort to know and listen to our audience. We must do the kind of customer research and marketing that all other major consumer product companies do.

And I believe that we must bring more community voices into the paper, as The Gazette has tried to do by expanding the space for letters to the editor, turning our Sunday editorial page over to a board of contributors and actively soliciting contributions to our commentary pages. We must also do our best to ensure that we do not fall across the line from healthy skepticism to unhealthy cynicism.

Not every story is about who won and who lost, who’s up and who’s down. As William Glaberson wrote in The New York Times: “If we cover the world cynically, we invite our readers to be cynical about journalism. It is important that we remain skeptical about public authority – but we must not discount the possibility that our political leaders sometimes have altruistic motives – as well as selfish ones.”

I also wish to say that as an avid newspaper reader I am constantly reminded that despite all their imperfections newspapers remain a key component of a healthy democracy. And journalism remains a crucial but dangerous profession in many parts of the world where writers, editors and journalists are imprisoned, killed or forced into silence simply because of what they have written. More than 75 print and broadcast journalists were killed last year while on assignment, yet this hasn’t deterred men and women from continuing to do their part in the search for truth and in the sharing of information. So as we see the reams of material about O. J. Simpson, Michael Jackson or Monica Lewinski emanating from the US mass media machine, we should also remember that journalism, at its best, remains a high calling. And there remains a significant market for high-quality journalism.

I also think that communities get the newspapers they deserve. One of the contradictions inherent in a newspaper is that traditionally journalists and editors have refrained from involving themselves in the governance of the organizations of their community so as to be free from bias or influence in their reporting. There are good reasons for that approach, and I don’t propose that it should be changed. But there is an inherent risk, and that is that the people who produce the newspaper may become disconnected from the community they are covering. One way to compensate for that is for our readers to let us know their concerns. A good newspaper is one where its readers actively contribute to it in order to participate in public debate. So I encourage you to use our pages to express your views.

I have tried to focus on the future, but I would like to conclude with a reference to the past. On February 26, 1998 the board of Southam approved our new press investment. It may interest you to know that it was on the same day 222 years ago, February 26, 1776, that the Second Continental Congress meeting in Philadelphia decided to send a committee, led by Benjamin Franklin, to Montreal to seek the support of Canadians for the United Colonies.

Fleury Mesplet joined that delegation as its master printer, with the mandate to establish a free press in Canada. Congress voted an amount of $200 to cover the costs of transporting Mesplet and his hand-operated press to Montreal. Southam’s board of directors authorized a somewhat more substantial sum of money to install a somewhat more substantial press. But our purpose is the same as Mesplet’s when he established the Gazette du Commerce et Littéraire in 1778: “To publish a newspaper which will be useful for commerce and for the free communication of ideas.”

Mesplet’s views – inspired by Voltaire and the philosophers of the Enlightenment – on liberty, reason, tolerance and freedom of expression were not widely held in Montreal when he began publishing his newspaper. He was, in fact, jailed for his views.

Today’s Gazette also frequently articulates a minority view. But we do so with pride, affection and optimism for our city. With our readers and advertisers’ support, we will continue to be both a profitable business and a strong and independent voice. And together with all of you – either on paper or perhaps, someday soon, electronically – we will look forward to continuing to build Montreal.

TECHNOLOGY, DEREGULATION AND ACCESS TO CAPITAL

Richard D. Parsons
President & COO, Time Warner, New York

Speech to the Conference on Converging Technologies, London, September 8, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

In about a half hour, I’ll be part of a panel discussion on the place of Europe and its culture in the new global digital-media market. That’s a big topic, and I’m sure my fellow panelists will have a lot to say. I don’t intend to pre-empt that discussion by using my time here to offer up a monologue on my personal view of what’s ahead for Europe. I’m prevented from doing so by a simple piece of wisdom about the dangers of predicting the future that I once received in a Chinese fortune cookie. The message said: “He who makes a living from gazing in a crystal ball should be prepared to eat ground glass.”

I have a very healthy appetite – my wife says it’s too healthy – but ground glass isn’t on my list of favorite foods, so I’m going to steer away from making predictions about what the future holds for Europe or, for that matter, any other part of the globe. In the best of times, the forecasting business is highly risky. Given today’s turbulent market conditions, it’s downright dangerous. Instead, I’d like to stick to what we already know – that is, what we can say with certainty about the facts of the digital economy as it now exists and as it affects our businesses.

Let me begin that effort by pointing out that for my company the future of the digital economy here in Europe is of real and material interest. At present, Time Warner employs 8,000 people in Europe. These employees come from practically every country from Ireland east through Poland, and they are well integrated in the local media industry. As a broad-based global company, we learned a long time ago that the media business isn’t the same as an old-style manufacturing business, in which a part made in Munich can be sent around the world and fitted into the same machines from Oslo to Singapore.

The business of information and entertainment is far more nuanced, complex and subtle. It requires both the size to make the immense investments necessary to build and maintain global news-gathering operations and the on-the-ground ability to gauge local interests and needs. It is within this context that I’d like to briefly consider what I see as the three factors that are already determining the shape of the competitive landscape in Europe and across the globe, particularly for the media and telecommunications business. They are technology, deregulation and access to capital. The first, technology, is already having a profound impact. The concept of media scarcity that has dominated the information and entertainment industries since their inception – of not enough shelf space, or movie screens, or television channels to accommodate the profusion of products – is being blown apart. In other words, with such things as satellite delivery and greater cable-channel capacity, distribution has ceased to place a predetermined limit on supply.

And then there’s the most powerful innovation of all: the internet. It’s the first new medium since television, and I believe it will be every bit as influential and important. The internet is making interactivity, which for so long seemed like a mirage, dramatically real. By early in the next century, the internet will have taken on the same universal aspects that telephone service has today. The internet is not the only medium that is in the midst of significant change. The traditional world of television is quickly reinventing itself with two developments that we are actively supporting: digital television distribution and the digital versatile disk.

Both in Europe and the US, digital television distribution has enormous potential for becoming a mainstream platform of the digital economy. It will expand the distribution universe and allow us and our competitors to serve individual consumers more precisely with what they want, when they want it. It will also create new opportunities for the production of a greater variety of audiovisual content. Equally, we believe that the digital versatile disk (the DVD) will jump-start a new phase in the audiovisual industry, the same way the compact disk did 15 years ago for the music industry. As a result, Europe’s impressive libraries of classic audiovisual productions could see a real revival in the digital age. The implications of all of these technological transformations aren’t limited by national borders or ethnic boundaries, and no single country or corporation, or even a combination of them, can ever hope to control it.

Although none of us can predict the exact configuration of the communications paradigm that will dominate the next century, we can say with absolute certainty that the only companies with a chance of emerging as winners from the convergence of digital technologies are those with an in-depth comprehension of both the nature of the medium and the programming that suits and enhances it. At some level, the companies involved in program creation and distribution must maintain working partnerships with the designers and operators of the digital hardware, and vice versa. This is already apparent in the United States where software companies and cable companies are forming partnerships and joint ventures to their mutual benefit.

The second factor in determining the shape of the competitive landscape in Europe and elsewhere is deregulation. The stated purpose of regulating markets is to achieve “a level playing field.” More often than not, the result is to tilt the playing field, not level it. Businesses are frequently content with the tilt, as long as it is in their favor. In the US, for example, the seven decades of telephone monopoly sat equally well with the regulators and the regulated. As long as the technology stayed the same, it was business as usual for all involved. But once technology created dramatic new possibilities, the old arrangement had to be demolished before capital investment could fund the momentum of change and set off an explosive round of competition and innovation.

As it now stands, the greater level of telecommunications deregulation, the greater the speed and scope of transforming change. And the greater the level of change, the greater the requirement for partnerships that give competitors the fiscal and technical resources to stay in the game. The recent partnership announcement between AT&T and British Telecom is just one example of this imperative. The truth is, I think, that the global communications revolution we’ve now entered is antithetical to the old arrangement of centralized monopolies either run or regulated by the state. These giant concentrations resemble nothing so much as the dinosaurs at the end of their long dominance, lumbering and ungainly, unable to match the agility and adaptability of the nimble-footed mammals springing up all around them.

The state can raise resources on a magnitude no private corporation can match. Yet its tendency to place that investment on a single technology – and to surround it with a large bureaucracy – is ultimately a formula for failure. In America, we’ve made significant progress in the deregulation of the markets for telephone, cable, satellite and internet communications. Along with sweeping aside outmoded and irrelevant restrictions against open competition, Congress has further liberalized the limits on international involvement, and we expect this trend to continue.

There are now no legal limits on non-Americans owning cable systems, studios or programming networks, and some of the restrictions on the ownership of broadcast licenses have been changed. Where companies with such licenses were formerly prohibited from having non-American officers and were limited to 25% of their board of directors being non-American, an entire board can be non-American. Similarly, impressive changes have taken place in Europe. The intense deregulation efforts of the European Commission are now resulting in some of the most competitive communications markets in the world. No doubt this will stimulate growth and investments in European content and infrastructures.

For my part, whether in America, Europe, Asia, Africa or elsewhere, I welcome every step toward an unfettered market in the creation, production and distribution of information and entertainment. As long as a company plays by the rules and observes the law, it shouldn’t matter who generates or delivers the stories and images that the world’s audiences are so hungry for. The criteria should be the quality and worth those audiences find in what they are offered, and the value the marketplace decides these products should have. The global media-and-communications infrastructure of the 21st century, which is now taking shape, won’t be contained by presumptions and propositions inherited from the 19th century. Market deregulation is an indispensable part of clearing the ground for what lies ahead.

Equally, we know that the exchange of ideas and products in a competitive marketplace doesn’t result in the triumph of a bland uniformity or the obliteration of local cultures. Competition fosters diversity, and in the context of the new outlets provided by the digital media, this means new opportunities for arts and cultural programming. It’s possible to sympathize with the goals of those who want to guard unique cultural heritages and standards. But it’s also necessary to recognize that what’s often behind this urge is the fear that drives all protectionists: not that the other guy’s product isn’t good enough, but that it’s too good, that it delivers what they can’t (or won’t), that it’s what people want and, if given the choice, will pay for.

Protectionism in general has two effects. First, by cutting down on competition, protectionism removes the underlying motive for industries to improve their products and thereby weakens what it is supposed to strengthen. Second, by restricting choice and artificially supporting producers’ prices, it cheats the consumer. Though many critics still talk as if cultural diversity were being smothered and destroyed by global media monoliths, the whole thrust of what’s actually taking place is in the opposite direction. The proliferation of new media, especially digital interactive media, is replacing single mass one-way communication with an amazingly vibrant dialogue, empowering cultural diversity as never before and allowing local programmers, artists and writers an access to audiences that was inconceivable as recently as a decade ago. Along with my colleagues at Time Warner, I believe that over the next few years, we must seek to reverse the tide of economic-cultural protectionism through negotiation and common sense.

The third, and final, factor that will continue to drive and sustain global media and telecommunications businesses is access to capital. All of the opportunities made possible by the digital revolution and deregulation are going to require immense amounts of capital investment. No company can do it alone. Successful global companies need to forge international partnerships that infuse them with local instincts and intelligence and also provide them with capital.

While a company like Time Warner needs to be big enough to compete on a global level, it also must remain entrepreneurial and agile, with the ability to communicate to different audiences with different tastes in different places. Time Warner’s local European partners are one of our most important business resources. Using the market knowledge of our partners, we are developing a broad range of possibilities for providing people of widely differing tastes and cultures with an array of choices that can increase their awareness, deepen their understanding and heighten their enjoyment.

Our success in Europe also depends on local and regional employees (and creative talent) who understand their specific environments and their customers worldwide. They provide Time Warner with the localized understanding of business development which will support future growth. In the film business, for example, the immense cost of producing quality content favors the sharing of risk. In that regard, the experience of our Warner Bros. division has drawn it towards a major expansion of joint ventures, including significant production and distribution agreements with several European film producers. Warner Bros. has also entered into joint ventures with European partners to build multiplex theaters throughout the continent, to build a theme park and studio in Germany and to open retail stores in the UK, Germany and other countries.

In our music business, which has always relied heavily on the development of local talent, more than 56% of the Warner Music Group’s recorded music revenues in 1997 came from outside the US, a substantial part of it in Europe, and over half of that was based on sales of local repertoire. The experience of Warner Bros. and the Warner Music Group in Europe supports our belief in the vitality and significance of local content. And it is indicative of the type of mutually beneficial relationship that we hope to continue in the future.

We are hopeful that these partnerships and joint ventures in Europe will continue to expand, bringing higher levels of investment capital to the region and helping to widen the circle of competition and success. Again, I’m not talking here about cultivating new audiences for programming or films or music or print that is made in America. Our goal is to invest in European artists, musicians and filmmakers, and to participate in the evolution and development of European media.

Part of the confusion over what’s really taking place in the whole arena of digital media arises, I think, from the old and cliché images of “the global village.” There are a lot of people who would be very happy if our planet were really evolving into the communications equivalent of a village. Preferably a village in the traditional style. Neat. Orderly. Everyone sharing one set of values. A community where everyone knows his or her place. Where the villagers gather in front of one radio or TV or VCR. Where they absorb only what their “betters” have decided they should.

But the world isn’t going that way at all. Technology, and especially the new interactive technology, isn’t creating a single village, but a raucous, noisy global arena of competing media and competing messages: the good, the bad and the genuinely offensive all mixed in, a marketplace in which citizen-consumers are left with the final choice about what they want to watch, read or listen to. In America, the internationalization of the media industry is already well advanced. The largest publisher in the US is a German company. A Japanese company owns one of America’s top studios and record companies. Another major studio and record company was recently sold by a Japanese company to Seagram’s, a Canadian company, which recently purchased Polygram, which was Dutch-owned. We think that’s a healthy trend. And we’re glad to have competitors like Sony and Bertelsmann in our home markets. If the American government kept them out, it would be to our detriment.

Building Europe’s new digital economy means increasing investment and production. And the only way to do that is by making it easier for all companies – including European companies – to compete. The advance of technology and the new cyberculture makes competition inevitable. As the technology advances and the delivery systems increase, the best products are going to win. A liberal regulatory environment will not threaten cultural diversity. Rather it will enhance it, by encouraging the kind of investment that will create more outlets for European culture and more demand for European content. The digital economy is presenting our two continents with unprecedented opportunities for sustained growth and new levels of prosperity. History has already demonstrated that the development of this new digital prosperity is intimately tied to the democratic freedoms that are the shared basis of our societies.

It would be ironic, as well as tragic, if instead of dismantling the barriers to the growth of new industries and new jobs, we strengthened those barriers, and even added new ones. It would be particularly dangerous if we did so in the face of the present financial turmoil spreading across the globe. If there’s one lesson we should have learned from past economic crises – especially that of the 1930s – it’s the immensely negative effects of every country going its own way, erecting new barriers to trade and seeking to solve its problems in isolation from the rest of the world.

I believe we’re smarter than that. I believe just as our two continents joined together to win the Cold War and to defeat the threat of tyranny and intimidation – a struggle that required fifty years of patience, determination and cooperation – we will have the wisdom and intelligence to grasp the possibilities of a freer, more prosperous future.

REGULATION VS. TECHNOLOGY

Rowland W. Fleming
President & CEO, The Toronto Stock Exchange

Canadian Capital Markets & Investment Conference, Toronto, May 13, 1996
Published in The Corporate Report No. 18 ( June 30, 1996)

A few weeks ago, a headline in The Globe and Mail read: “Internet heralds new stock-trading era.” What caught my attention was not the fact that a company is using technology to assist its shareholders in swapping shares, nor the writer’s statement that “the implications of combining stock trading and the Internet are far-reaching and potentially revolutionary.” It was the fact that this so-called “electronic exchange” was characterized as delivering a technological wake-up call to the SEC. Elevated to the international plane, this development may yet be another motivator for the SEC to take a harder look at its position on the regulation of cross-border, or international electronic trading, and bring it in line with technological realities.

SEC Commissioner Steven Wallman recently acknowledged that the increased use of the Internet is raising issues that challenge the SEC’s traditional geographic-based regulation. Addressing a recent conference, he said that since the Internet has no jurisdictional boundaries, the SEC’s “usual method of regulation by geographical jurisdiction is about to disappear.”

This morning I want to examine a particular challenge faced by traditional stock exchanges to maintain strong capital markets in the face of regulatory approaches that are out of step with today’s globe-spanning computer and telecommunications technology. At a time when technological advances have facilitated new competitive realities, regulatory controls that do not adequately recognize these realities are not only restrictive in their scope but also can be discriminatory in their application.

The costs to issuers and investors of not arriving at a rational scheme to regulate cross-border electronic access to exchanges will drive market participants to pursue alternatives that in the long run will impair the quality and efficiency of our capital markets. And that is something that capital markets – including those of the US – simply cannot afford.

My task in dealing with this topic is to underscore the serious challenge that unregulated electronic trading, on the one hand, and regulatory barriers, on the other, can pose to established exchanges like the TSE, if we are restrained from using our own electronic trading capabilities to the fullest extent possible in the international arena. In order to compete successfully among ourselves and against a host of emerging proprietary and unregulated trading alternatives, including the Internet, we traditional exchanges must be able to use our technological capabilities to create a strong competitive trading environment – an environment that will distinguish us in the marketplace by providing all of our constituencies with well-regulated, but nevertheless competitive, efficient and cost-effective services to meet their changing needs.

I will begin with a brief look at The Toronto Stock Exchange to provide a context for understanding the impact of cross-border electronic trading on domestic capital markets. For 135 years, the TSE has played a dynamic role in building the Canadian economy by providing an orderly and disciplined central auction market for the shares of its listed companies. By facilitating access for many of this nation’s leading businesses to the capital that they need to grow, the Exchange has helped Canada become one of the leading economic powers in the world.

The TSE’s initial focus, like that of many other exchanges, was to sell stocks, rather than to meet the needs of buyers. Today traditional central auction markets like the TSE are facilitating the meeting of capital supply and demand, both in respect of the primary market for issuers, and as the secondary market for investors by bringing buyers and sellers together.

For the TSE, the initial supply side of the equation has been generated by consistently attracting the best of Canadian business to list on the Exchange.

The ongoing demand side of the equation for equities initially distributed in the primary market is being driven by investors in Canada and around the world who are constantly looking for new investment opportunities. It is the ability of the TSE to add value to the capital-raising and investment processes by creating strong supply and demand that has made for a market dominance for trading in Canadian securities that is recognized around the world.

Several years ago we began to see two trends emerging, each of which, while driven by sound business and economic logic, has the capacity to fragment our strong domestic equity market. The first is an increasing number of Canadian companies interlisting on exchanges in the United States. Of course, historically, listing on multiple exchanges, particularly where regulatory or other barriers frustrated an otherwise willing offshore investor’s access to the issuer’s home market, has been seen by many large multinational corporations as a way to access multiple pools of capital.

The problem with this approach today is that, by listing on multiple exchanges, an increasing number of companies are fragmenting the supply side of the capital equation by moving portions of it to the location of the investors. In the process, that supply is being subdivided, rather than consolidated in the issuers’ home markets, thus compromising the liquidity of those markets.

The second trend is the increasing investor demand for remote electronic access to offshore markets – a demand facilitated by advances in technology. This development has the potential to strengthen home market exchanges by taking secondary demand for the shares of their listed companies to the international level. However, undue regulatory restrictions preventing the access of investors to those more competitive markets and frustrating the union of willing buyers and sellers can arbitrarily weaken them by reducing liquidity. Only a strong, centralized, highly liquid market can generate the revenue necessary to provide the technology, the trading systems, the pricing structures and other efficiencies that will enable stock exchanges to compete successfully in an increasingly competitive and fragmentary global trading environment – and of course preserve fundamental values such as fairness, effective price discovery, market integrity and investor protection.

There are at least two diametrically opposed approaches being taken in addressing the issue of remote electronic access to traditional exchanges. One is the European model, which incorporates mutual recognition as its fundamental tenet in creating a level playing field for member country exchanges, enabling them to provide cross-border access to each other’s nationals. The other is the approach being taken by some at the SEC which paternalistically attempts to provide protection for American investors by restricting their electronic access to offshore markets from the US.

The European Community’s model implicitly recognizes that electronic access to exchanges has become a technologically-entrenched demand by investors. The Community’s Investment Services Directive, now in the course of progressive adoption by each member state, allows securities firms in the Community to electronically access exchanges in member states without the traditional requirement of a physical presence in the accessed jurisdiction.

As a corollary, once an exchange has been recognized as a “regulated market” within one of the countries of the Community, it then has the right to place, in any other member country, computer terminals giving electronic access to its market. By facilitating such cross-border access, the European model creates two distinct benefits. First, it eliminates the necessity and cost of interlistings by major corporations simply to access multiple pools of capital. Capital markets in each country can now focus on showcasing the investment opportunities represented by their listings, and use their technological and other competitive strengths to attract demand from investors in other member countries. Second, the concentration of liquidity resulting from this focused demand can increase trading efficiency and create better markets with more competitive pricing for investors.

The regulatory issues inherent in the European model have been addressed by establishing a minimum set of standards to govern the activities of all “regulated markets.” In effect these create a “floor” of regulation, based on a common denominator of a minimum level of protection for investors. Though the ability of individual exchanges to take advantage of market opportunities while meeting these standards will vary, the fundamental premise of enhanced competition within an agreed multi-jurisdictional regulatory framework represents a disavowal of protectionism as well as regulatory attitudes of excessive “nannyism,” to use Mrs. Thatcher’s famous descriptor.

In contrast to the European model, the regulatory approach by the SEC to the electronic access issue is based on a highly technical interpretation and application of the US Securities Exchange Act of 1934, and the Securities Act of 1933. These 60-year-old statutes were created to regulate domestic US exchanges at a time when international equities trading was virtually nonexistent. Even as recently as the last efforts by Congress to address issues of market structure, the focus was exclusively on strengthening internal markets. The international dimension was not on the agenda. Thus, neither in the genesis of the governing legislation nor during its seminal review in 1975 were the current regulatory issues raised within the SEC as a result of US investors trading on foreign exchanges ever considered.

The SEC’s instinctive geography-based approach to regulatory controls, embodied in the interpretation of these statutes, follows the adage that “all roads must lead to Rome,” – in this case, to the SEC. But unlike ancient Rome when commerce followed the pathways of the empire, commerce today travels electronic highways that will not be contained by geographic or legislated boundaries. With the advent of the electronic revolution, cross-border trading to world stock markets from the United States is increasing exponentially every year. Technology is allowing stock exchanges to showcase their corporate listings anywhere in the world, and investors in the US are demanding efficient electronic access to these investment opportunities.

Unfortunately, US federal regulators are asserting that an offshore exchange such as the TSE accessed electronically is tantamount to that exchange “operating in the United States.” It therefore must be registered as a “national securities exchange” and become subject to the regulatory regime in the 1934 Act, while remaining subject, in our case, to the oversight of the OSC. But it doesn’t stop there. In the absence of special relief, member firms of the offshore exchange would have to register as broker-dealers with the SEC, necessitating major changes in their operations in order to comply. And every TSE-listed company would have to register under the Act, thereby inheriting the regulatory reporting burdens and heightened exposure to US civil liability and the SEC enforcement process.

This position, of course, is not only untenable, but also totally unrealistic in today’s technological climate. If applied in its broadest context, the position of US regulators would result in every exchange in the world being directly regulated by the SEC. Clearly US regulators are failing to come to grips in a rational way with the realities of globe-spanning technology. For the TSE, their position belies the truth that “no man can serve two masters” and ignores the contradictions and conflicts that would inevitably arise in us answering concurrently to two overseers – the Ontario Securities Commission and the SEC. As for Canadian companies, they are being persuaded that the only way they can currently access US investors to any significant degree and respond to North American investor demand is to become interlisted on a US exchange. Unless, of course, US investors ignore the SEC view of the world and invest directly in foreign markets using a telephone or mail as the means of communication – which, by the way, seems to be okay with the SEC!

That brings me to the question: “Where do we go from here?” To put the issue in its proper perspective, I should mention that the TSE has been involved for some years in discussions with the SEC on cross-border jurisdictional issues. Other exchanges from Europe and elsewhere are initiating such discussions as well. For our part, we have been trying informally to negotiate a reciprocal – and that’s the key word – resolution and harmonization of regulatory requirements that should apply to cross-border trading based on mutual recognition.

There are a number of general suggestions for resolving the North American cross-border access issue, including statutory amendment to the current SEC regulatory regime (and we all know how long that could take), or by following the Arizona Stock Exchange’s lead in securing recognition as a low-volume exchange – the only explicit statutory exemption available. This latter alternative is clearly not an attractive option for the TSE, since from the outset it would place a ceiling on the growth of our US order flow.

Other alternatives include:

1. Simply ignoring the SEC’s jurisdictional claims.

2. Applying to the courts for some type of declaratory determination that mere electronic access from the US to an offshore exchange does not subject that exchange to the jurisdictional authority of the SEC.

3. Continuing our dialogue with SEC staff in an effort to bring about a mutually acceptable solution.

4. Aligning ourselves with European exchange “partners” and others in promoting the European model as the right concept for North American and global regulators to follow.

All of these alternatives have pros and cons that make each one a difficult proposition to pursue. We believe that, rather than attempting to impose duplicative direct regulation on offshore exchanges, the better way for the SEC to protect US investors trading abroad would be to adopt some iteration of what has been called the “home-host” regime. We have been advocating this concept in international councils for some time now as the rational way to organize regulation of exchanges in a world of ever-increasing cross-border electronic trading. The International Federation of Stock Exchanges and the International Council of Securities Associations have both endorsed this approach. In fact, such a scheme has been in place in the United Kingdom since 1986, and it has become the standard of the members of the European Community. And closer to home, and on a different political plane, it has been the unarticulated convention among the provinces of Canada.

This simple and straightforward concept involves the “host country,” which is the jurisdiction of the accessing investor, in our case the US, first satisfying itself that the accessed exchange’s regulatory framework provides substantially the same protections for the host country’s nationals as the host country is providing. It then “recognizes” the offshore exchange but leaves its direct regulation to the authorities in the exchange’s “home country.”

At the same time, the authorities in the host country retain full jurisdiction over the local intermediaries that facilitate remote access to the offshore exchange, and over the standards and conduct of their business activities. If the host country’s authorities become disenchanted with the home country’s standards of market regulation and their administration, it withdraws its recognition of the offshore exchange.

Naturally, before the SEC adopts the “home-host” regime it would need to determine a substantial equivalency in the protection afforded US investors and the existence of information sharing and investigative agreements between the regulators in the “home” country and the SEC. The latter have been in place between Canadian and US authorities for some time. In addition, the TSE has developed an international reputation for being one of the best regulated exchanges in the world. Since our regulatory standards and administration closely resemble those of the United States, the TSE should already provide the SEC with the highest possible comfort level in fulfilling its mandate of US investor protection.

For world-class exchanges like the TSE, success in the new millennium will not be achieved if a fragmentary approach is taken to our future market development. The path to success for the exchange of the future lies in developing a logical, coherent, constructive approach to electronic trading that strengthens, not weakens, capital markets. The strategy must have as its fundamental objectives concentration of the supply side of the capital equation, i.e. liquidity, and the focusing of international demand by facilitating global access to home markets. It is only in achieving these objectives that we will be able to maintain our market efficiencies, including trading, pricing, technological and other efficiencies that are at the heart of the TSE, ensuring that the highest and best interests of investors and other market participants will be served effectively.

In the North American context, until we have a more integrated market continentally, US. underwriters are likely, for a number of reasons, to insist Canadian companies list on a US exchange or NASDAQ. It thus becomes difficult to avoid original or interlistings of securities in which the TSE could have or has established itself as a primary market or has cause to believe, all other things being equal, that it would have the market-driven franchise on liquidity. What we do not want is for US-sourced order flow, which would migrate naturally to the TSE based on our offering a superior market, to be interdicted as a consequence of the SEC insisting that we be registered as an Exchange under US legislation.

The best-case scenario would see Canadian companies that are listed solely on the TSE (and have no interest or need to raise public primary capital in the US) accessed freely and electronically by US investors!

If the forced listings of Canadian companies south of the border continues, the quality of Canadian equities markets will be affected over the long term. Quality rests on liquidity! The lack of sufficient capital in the home market of the issuer and the resulting dispersion of ownership to other pools of capital impacts liquidity in the issuer’s stock and ultimately overall market quality. (I will leave it to other commentators to opine on the policy issues surrounding the long-term economic implications for Canada if the senior equities markets in this country become increasingly subject to dependence on the ebbs and flows of NASDAQ or the NYSE.)

Continentally, indeed globally, the capital needs of major businesses, the demands of investors, the market economic development of our nations and the realization of efficient global markets made possible by modern technology and telecommunications dictate that a solution to the issue of cross-border access be developed quickly. Until one is, the cost of capital for issuers will be higher, the ability of investors to seek out the best return will be compromised and the overall strength of our markets will be hampered by inefficiency.

If the SEC does not move soon in resolving the cross-border issue, we risk having the decision made for us by unregulated proprietary trading systems and the Net, which offer little or no protection for US investors. Nero fiddled while Rome burned. Even the Great Wall of China failed to hold back the hordes of Mongolian invaders. Surely we have learned that in the electronic age you cannot stop what technology makes possible.

One hundred and thirty-five years ago, stock exchanges were relatively unencumbered by regulation. Gradually, over time, major exchanges like the TSE built regulatory frameworks to provide higher and higher levels of protection for investors and other market participants. Regulation, however, was never intended to impede the exchanges’ ability to bring willing buyers and sellers together. Yet in simplest terms, that is exactly what SEC staff are doing in attempting to extend the reach of their direct regulation to electronically accessible markets outside the United States.

In the final analysis, we cannot afford, nor will we be able, to move forward into the new millennium without resolving what has become a dysfunctional situation. The pace of technological change is too swift, and the demand for new applications of technology too pressing, if we are to serve the best interests of the institutions and other investors represented here today. I am confident we can create a win-win-win scenario for all investors, issuers and exchanges on the issue of cross-border trading, and lift the pall cast by the SEC over the ability of investors to enjoy the most efficient access to markets of choice. But we had better do it soon, if we are to maintain the operating quality and integrity of our Canadian equity markets for the benefit of all the constituencies that we serve.

THE TSE AFTER BRE-X

Rowland W. Fleming
President & CEO, The Toronto Stock Exchange

Corporate Secretaries Congress, Toronto, May 6, 1997
Published in The Corporate Report No. 21 (June 30, 1997)

There are many points on which The Globe and Mail and I do not agree, but there is no question that they run the most credible horoscope column in the country. So I knew something was afoot when I awakened yesterday morning to my daily horoscope which said, and I quote: “Not everything that glitters is gold. Not every ‘sure thing’ is as certain as we like to think it is…so be smart and give a ‘once in a lifetime’ opportunity a miss today. Deep down inside you know it is no such thing.”

This is my first opportunity since the move to an all-computerized trading system on April 23 to speak with members of the industry about the TSE and how it is preparing for the future. I will turn to these matters in a moment. But I know you would be surprised if, on today of all days, I did not first speak to the matter of Bre-X.

Events of the past two months have underscored the crucial responsibility of the TSE to maintain an open and efficient marketplace-a marketplace of unquestioned integrity. Those events have also added emphasis to the importance of the many technological and regulatory initiatives we are undertaking to ensure we meet our responsibilities-both for investors and for our listed companies.

The recent glare of publicity may have temporarily overshadowed some of the many programs we are initiating to ensure that our nation’s leading exchange remains competitive with other world markets. At the same time, those changes are increasing our long-term reputational value and the attractiveness of our listed companies with the investing public, both here and abroad.

A very small part of the Bre-X saga is a technology issue. The exposure last month of a 20-year-old flaw in our system software by the unprecedented order flow for Bre-X shares, was corrected quickly-and has not been repeated. If anything, it served to highlight the imperative for a new trading system at what, by the way, was the first exchange in the world to create and use automated stock trading.

As of April 23, the TSE moved to total electronic trading, an important step in the transition from what was leading-edge technology 20 years ago to the most sophisticated trading system available today. Later this year, our new TOREX system will be fully operational, delivering faster and more efficient trading technology, and supporting the continuing growth of trading in Canadian equities.

I believe TOREX will, in time, be an electronic gateway not only to the TSE capital market for investors inside and outside Canada, but a gateway to the world of Canadian investment knowledge and opportunities.

The Bre-X issue certainly highlights the need for a new trading system. That said, even a TOREX system would not have prevented the Bre-X saga from turning into the Bre-X scandal. Remember: it wasn’t until late Sunday that there was any confirmation that the Busang property was possibly a fraud.

There is, however, a second issue at play here – a regulatory issue. Frankly, that is where I believe we at the TSE and you as companies trading on the exchange, have both been unfairly wronged.

In the rush to allocate blame for what now appears to be the biggest stock fraud in mining history, both perspective and truth are in danger of being lost. Such a loss, I believe, has consequences greater than even the losses chalked up by Bre-X investors. So it is crucial to set the record straight.

Over the past few months, we have all been bombarded by media commentary on Bre-X. This is totally understandable given the extraordinary story that has unfolded: gold, international intrigue, rags to riches, death in the jungle, political maneuvering, and now, a likely fraud.

Regrettably, the TSE has become a lightning rod for part of the story, despite the fact that our role is in some respects peripheral, and that no exchange in the world could have prevented the Bre-X scandal. Even in hindsight, I can assure you we would have done little differently.

The reality is, most of the headlines about the Bre-X relationship with the TSE have been substantiated by questionable expert opinion on both the TSE and on securities regulation, and backed up by “unimpeachable” sources ranging from Internet chat lines, to unnamed officials, to unattributed quotations, all implying indirectly that somehow the TSE or our securities regulators are at fault in not preventing the Bre-X fiasco.

But for any reporter who has bothered (and few have, so far) to learn the actual history of how Bre-X came to be listed on the TSE, or has analyzed Bre-X in the context of applicable securities laws, at least for the TSE, the story would be much different from what’s been reported – and repeated.

Now I’ve been told that you should never get in a fight with someone who buys their ink by the tanker-load. I guess that is the risk one always takes in rebutting the media. But frankly, I have no choice. There are facts about this situation that I must share with you today in the hope that they may begin to take the place of the media hyperbole which has been every bit as over-the-top as the claims Bre-X was making for itself.

Fact 1: Bre-X was not originally listed on the TSE. It was originally listed as a public company on the Alberta Exchange in 1989, and applied for a secondary market listing on the TSE in April of 1996. Under our current securities laws, less disclosure is required for a secondary issue than an original listing.

Even so, I cannot see how additional disclosure, assuming the integrity of the host of advisors and experts attendant on the matter, would have dictated that the company should not have been given secondary market listing as a mining exploration company-with all of the risks that status implies.

But if someone is simply lying, in a huge and stupendous fashion, as appears to be the case with Bre-X, all the disclosure rules in the world will not protect either the gullible investor or, it seems, even the most sophisticated one.

Fact 2: In April of last year, before the TSE listed the company, the Alberta Exchange advised us that they had no detrimental information on the company.

Fact 3: Bre-X not only met, but exceeded all of the listing requirements as a mineral exploration company.

It is important to remember that Bre-X was not a mining company with proven resources. It was a mineral exploration company. There is a big difference, particularly in how investors should assess the risks involved. Like many mineral exploration companies, it had no production, no proven reserves. What it did have are all the associated risks that are attached to any exploration company.

Bre-X’s 1995 annual report is instructive. Total assets of $25.5 million are recorded with over $10 million of that in cash. Bre-X had 6,500 shareholders. At the time, the management team and board of Bre-X were well regarded and of some recognized reputation. Prior to Bre-X’s listing, positive research reports were issued on the company by respected gold analysts from leading investment houses both north and south of the border.

Fact 4: Early in 1996, the TSE reviewed, with the assistance of external experts, a three-volume pre-feasibility report on the Busang property, prepared by Kilborn Engineering, an organization respected around the world.

Fact 5: Over $9 million had been spent by Bre-X in the two years before it was listed on the TSE in acquiring and exploring Busang. Prior to its listing on the TSE, private placements raised the company’s working capital to $48 million and equity to $62 million. The company had a market capitalization of more than $3 billion. First analysts, then the media, and then investors successively fell in love with the company.

The lessons here are the old ones. In fact, they’re the eternal ones: no matter how tough the securities regulations or laws, perpetrators of deceit-and there now seems no doubt that deceit and, in the words of the Strathcona report, “massive and unprecedented fraud” were all at play-those people will find a way to break the rules.

Their fondest hope is everyone else’s worst nightmare: taking advantage of gullible investors eager for the big win-investors who sometimes fail to discern the degree of risk on the downside. In the words of that most revered of rule books, all that glistens is not gold.

The combination of gold fever and media frenzy created a lethal combination which has led to screams for even tougher regulation and a second media frenzy that has lost all sense of proportion and reality.

Amidst the dozens of stories in the Toronto papers alone, it was virtually forgotten that the TSE is not in charge of creating securities law and regulation; the securities commissions are. We’re only in charge of enforcing them-and then, only to a limited degree. Not that any regulation, or indeed any exchange, could have stopped the people determined to fleece investors in what is appearing to be the most sophisticated fraud in decades.

For our part, we have turned away almost as many potential listings as we have accepted over the past 12 months, and 60% of mining company applications from listings on other Canadian exchanges have been rejected. Despite this, world-class listing standards cannot guarantee absolute safety for investors.

Listing on the TSE means that a company has met the highest standards in Canada and what are widely recognized as some of the highest standards in the world.

However, all exchanges, including the New York Stock Exchange, rely on accurate disclosure and the integrity of the listed company. And on any exchange, there is a potential for unpleasant surprises. No exchange is impervious to companies that fail, for whatever reason.

Just a few weeks ago, The Wall Street Journal reported on a technology company that was the darling of the New York Stock Exchange in 1996…until it came crashing down because of fraud. Were their listing standards questioned by the media? No. Was their overall reputation as a quality market challenged? No.

There have been others, just last year, also listed on New York and also the victim of fraud. Same questions. Same answers. A few companies that are listed on the world’s most respected stock exchange crash and burn because of fraud-and no one points a finger at the exchange. For good reason-no matter how well you burglarproof your home, if someone wants to break in, they will.

Unfortunately, in Canada some of our business writers have seen fit to inflict damage on the overall reputation of your market, the TSE, with, at times, quite irresponsible distortion of the facts. With some legitimacy, I have to wonder why. As a regulator, I also wonder why there are no accountability standards to be met by business reporters who, unlike tabloid writers, must meet a higher credibility test.

For example, there was a report in The Globe and Mail on April 11, which was picked up by The Wall Street Journal a few days later. It was said that a small Nevada-based mining company had decided it would not list with the TSE, and had chosen the American Stock Exchange instead, all because of the way we handled Bre-X. The Globe reporter never checked his facts. If he had, he would have learned that the company in question would never meet our listing standards in the first place, and was not listed on the AMEX. When challenged, the Globe defended the reporter, but offered to print a letter from us if we cared to write. We did. But of course, the damage was done by then, with other news services compounding the error by picking up the original Globe story.

That is just one example of how some very unprofessional behavior in the business media has diminished what we believe to be the entirely professional behavior on the part of the TSE – and more importantly, world-class regulation of world-class companies.

Will we learn new lessons from this experience? Of course, we will. We will carefully and in a balanced way examine our listing disciplines and market regulations for areas of improvement. Not to prevent a Bre-X look-alike from ever happening again. But to make it more difficult for it to happen.

We will reinforce our commitment to investor education and protection-not to prevent investor loss on investments that do not fulfill expected promises, but to continue our world leadership in encouraging improvements in governance, in disclosure and in shareholder rights and awareness.

We will review our index policies because we are sensitive to the criticisms of how Bre-X was included in our indices. We are taking steps to ensure this kind of situation never happens again.

Following the Bre-X revelations, the TSE announced a joint task force with the OSC to examine the need to set standards for mining and mining exploration companies on the disciplines of exploration programs, and how those results should be reported and disclosed to investors. And by the way, contrary to reports, there is not a substantive difference between Canadian and Australian standards.

As of yesterday morning, trading was halted for Bre-X shares on the TSE to allow the market to absorb shocking news. Trading commenced this morning and we are now reviewing Bre-X’s listing status. However, those who will really determine the fate of Bre-X are the Alberta Securities Commission and the other regulators and enforcement agencies involved.

Going forward, we will encourage the enforcement of securities regulations and laws against those who breach them, even though, as I said, we are only one among many regulators. If anything positive is to come from Bre-X, it will be yet another compelling argument for the long overdue formation of a national securities commission in Canada.

The fact that there are 12 securities commissions in Canada, with its 2% of the world’s equity capital, and yet there is only one securities commission in the US, one securities commission in Great Britain, Germany, Japan, in fact, anywhere of repute where capital gathers except Canada, tells you what our next step must be in regulatory reform.

If it wasn’t clear before Bre-X, it certainly should be by now that if Canadian companies are going to compete for the world’s capital, they have to have a national regulatory framework that’s as competitive and efficient, and that speaks for the quality of as well as regulates Canadian securities standards.

No exchange may be able to stop the next Bre-X from happening. But I would argue that a single securities commission can certainly make that possibility much more remote-just as it did in Australia in the wake of a nickel scandal similar to Bre-X in the l980s. And a single commission can react much more quickly when a scandal of this proportion occurs.

As Canada’s largest stock exchange, we simply don’t have the privilege of operating in a sheltered environment free of competition. In virtually every area of our business, we are facing increased competition, and more competitors are coming on-stream all the time.

So the impetus for change is not so much a question of what is really in the ground in the jungles of Indonesia. Rather, it is a recognition of the evolving needs of all 1,323 companies listed on the TSE, our 101 member firms, and the millions of individual and institutional investors who rely on the TSE, both those in Canada and, increasingly, in the leading markets of the world.

The changes we have made are sweeping. The changes we have planned are even more so. If anything, we are one of the leading advocates for reform and modernization within the securities industry. We are often used as an example by others on the international stage. But at our core is a steadfast commitment to the central purpose of the TSE, which has essentially not changed since that day in 1852, some 145 years ago, when we opened.

Back then, Toronto was a sleepy provincial capital of 32,000 people. But even though it had nowhere near the population, business or capital of Montreal, a group of businessmen decided nonetheless to start their own stock exchange. Its mission was, and I quote: “the establishment of a medium of communication between members, so as to facilitate the negotiation of bills of exchange, stocks, shares, bonds, debentures, mortgages and other loans, thus establishing a reliable market for the benefit of the public.”

Today, we are still delivering on that mission. That we are delivering on it is a testament to the core values a public exchange must maintain, no matter what the time or circumstance. How we are delivering on it-and how those delivery mechanisms have changed and must continue to change-is where the TSE’s performance should really be measured. And by that measure, we are doing well by any standard.

We were front and center on promoting corporate governance reforms with the TSE-sponsored Dey Report. Last year alone, the exchange sponsored two important studies on the issues of investor protection, market quality and fairness. The first was the report on corporate disclosure, released early this year. The product of two years of work by a distinguished industry committee led by Tom Allen, it is aimed at providing further protection for shareholders. The report’s key recommendations, which have been well received by securities regulators, are to legislate civil liability for misleading continuous disclosure and to introduce an integrated disclosure system.

In addition, recognizing the demands of investors for access to new, competing trading services, a Report on Market Structure brought forward proposals to regulate and integrate proprietary electronic trading systems (PETS) in our marketplace. The report also assessed the impact of the internalization of order flow from the central auction market-in particular, price discovery and investor fairness-and delivered recommendations to strengthen the central book all in the best interests of investors.

Last year, as you know, we introduced a number of other regulatory and technological initiatives. One of these is decimal trading, which brings Canada in line with most international exchanges and makes us the most competitive market in North America in terms of efficient pricing. Indeed, the United States Congressional Committee on Commerce is using the TSE experience as a prototype as they consider making a similar shift to decimalization in their own market.

The TSE has also been a major partner in SEDAR, one of the most significant initiatives to transform the work of corporate secretaries in the past decade.

I have just mentioned a few of our many new initiatives. But they are indicative of a much broader shift in the TSE’s perspective and organizational strategy that is spawning these initiatives. That transition is seeing the TSE become less governmental in structure, less bureaucratic in personality, and more business-driven and customer-responsive in all of our operations. The reason is clear-there are many more individual investors entrusting their money, either directly or indirectly, to companies listed on the TSE than ever before.

Canadians trust the TSE, and by extension, the companies listed on its exchange. We increase your credibility by enforcing high standards and a level regulatory playing field. We increase your value by promoting the attractiveness of our member companies and of their exchange among investors. And we add value by taking steps to be more efficient, making greater use of modern technology to deliver our services. We continuously seek new ways of adding value to our listed companies as we adopt a more business-driven approach at the TSE and pursue our strategy to maintain our role as the market of quality for investors in Canada.

SHAREHOLDER ACTIVISM: THE SWINGING PENDULUM

Rowland W. Fleming
President and CEO, Toronto Stock Exchange

Canadian Corporate Shareholder Services Association, March 19, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

You and I share the same goal: enhancing shareholder value. That sounds like a basic objective, but at times it is one that receives too little attention – from government, the media and other institutions that help shape the public agenda. Take one current example: the proposed bank merger. Obviously there are a number of significant pros and cons to the proposal, and before giving a go-ahead the federal government will have to consider all aspects of the national interest. We have seen considerable discussion about a number of possible effects of this merger. Will it cause layoffs? Will it reduce jobs? What impact would a merger have on service levels and access to loans? Will branches be closed? But one question we almost never hear is the most obvious: what impact will a merger have on the value of the capital belonging to the shareholders of the two banks?

It is perfectly reasonable that politicians and others would focus on the possible effect on jobs, communities and small business. Those factors have an impact on a great many people. But long-term investor value has an impact on even more people. One-half of all adult Canadians own shares in one of the five banks. In this day and age, when pension funds represent one of the largest pools of capital in Canada and when our largest demographic group is looking at retirement in 15 to 30 years, policy-makers should not forget that Canadians are not just workers and consumers. Increasingly, they are also investors.

The scant attention that has been given to that aspect of the merger issue – investment value – symbolizes a lack of understanding of the importance of building financial equity. Increasing value for the investor – in pension plans, mutual funds and other investment instruments – determines for many individuals and families their ability to achieve economic independence, help their children obtain advanced education and ensure financial security for a large part of their lives. Enhancing investor value is one of our most important priorities.

We are advancing the goal on a number of fronts: technological, educational and structural. Two of our important focal points in recent years have been the issues of corporate governance and continuous disclosure. Three years ago we sparked considerable debate with our report “Where were the Directors?” It was based on a year-and-a-half study by the Dey Committee which included public meetings in cities across Canada and more than 150 submissions by interested parties.

This afternoon, I would like to pick up on the governance issue – and its relationship to shareholder activism. What corporate governance comes down to is how effectively corporations are able to represent and respond to the interests of their shareholders. Obtaining the views of shareholders is an increasingly complex challenge in an era in which institutional investors and mutual funds hold about 40% of the value of publicly-traded shares. Few companies could produce a list of their shareholders. I don’t mean the institutional investors. I mean the people on whose behalf they invest. How many investors in mutual funds actually know which firms those funds are invested in? How does a corporation talk to its real investors when it does not even know who many of them are – and when many of its investors do not even know they have a stake in the company?

Just as the 19th century saw the professionalization of management, the 20th century has seen the professionalization of ownership. Over the past few years, new trails have been blazed by institutional investors: in Canada, by funds such as OMERS (the Ontario Municipal Employees Retirement System), the Ontario Teachers’ Pension Plan Board and the Caisse de Dépôt. In the United States, ground has been broken by CalPERS (the California Public Employees Retirement System), the state pension systems in Florida and Wisconsin, the City of New York, the College Retirement Equity Fund and even private-sector pension funds such as the fund managed by Campbell’s Soup Company for its own employees. Outside the pension fund sector, institutional investors have also shown their muscle, including influencing change in management of many blue-chip firms.

In corporate governance, the pendulum has clearly swung. But will it swing too far? Where will the pendulum settle, and how will that affect a corporation’s ability to grow value for its investors? The rise in shareholder activism has antecedents that go back well into the history of the development of capital markets. It comes down to the notion that shareholders must act like owners and take an active interest in the performance of their stock portfolio. It has been more than a half-century since two of the founders of fundamental stock analysis, Benjamin Graham and David Dodd, observed that “there is as much reason to exercise care and judgment in being a shareholder as in becoming one.”

Although, the phrase “shareholder activism” is fairly new and the concept of corporate governance has only attracted broad interest in recent years, the question of how to make managers accountable to investors has been debated for more than 100 years. It all began when the creation of the public limited company separated the owners of firms from the managers who run them.

The issue is now being given new importance and urgency by the growth of institutional investors. When shares were owned overwhelmingly by individuals, with each investor owning a very tiny slice of any individual company, no one had any great incentive to incur the costs of monitoring management. The emphasis was on good information: making sure corporate management provided it, and ensuring no one investor had access to more of it than anyone else. In effect, retail investors opted for third-party regulation as a substitute for responsible activism. People who weren’t happy with a corporation’s performance or policies had an option: to vote with their feet and sell their shares.

That was several trillion dollars ago. Since the early 1980s institutional investors (principally, pension funds) have grown at a phenomenal pace. In the United States pension fund assets have grown almost tenfold since the mid-1970s, from $400 billion to almost $4 trillion. In Canada, pension and mutual funds now hold $782 billion in assets, just over 35 times their value in the mid-1970s. With those kind of resources, one can push the pendulum a long way.

The relationship of large institutional investors to the companies in which they have holdings is no longer “love it or leave it.” They can try to change it. Many of the old arguments for passive investing have become less persuasive and, for large institutional shareholders, the Wall Street walk or the Bay Street bounce has become an expensive trip. Selling large chunks of a firm may mean driving down the price, which makes it more expensive to walk away and more pragmatic to work within. As well, many institutional investors hold indexed portfolios, which often preclude the sale of a specific stock, regardless of its performance indicators.

We have seen some interesting results, such as when OMERS blocked a takeover bid by refusing to tender until the deal was enriched, and when it litigated in a privatization transaction to push for a higher price. CalPERS, with over 1 million members and $100 billion in assets, has been North America’s best-known standard-bearer of institutional shareholder activism – regularly reviewing and ranking the more than 1,000 companies in its portfolio, identifying shareholder returns over multi-year averages and pushing under-performers for specific changes in governance structures, operating strategy and corporate philosophy. Just yesterday OMERS indicated it is also considering some form of ranking system for companies based on their quality of corporate governance, and press reports suggest that OMERS is developing approaches similar to those used by CalPERS to create greater accountability to shareholders.

Monitoring market performance and pressing for changes to maximize earnings is one significant element of institutional activism. But what about when it goes beyond that? Once again, CalPERS provided an example last year when it tried unsuccessfully to impose a new model of boardroom behavior on corporate America – proposing and then quickly withdrawing a blueprint for corporate governance. The detailed agenda included an age limit for directors, a 10-year term limit for any independent director, a prohibition on former CEOs serving on the company’s board, and a requirement that board members receive more than half their total compensation in company stock. The proposal sparked vigorous opposition from many of the companies in which the pension fund held shares – indicating that perhaps the pendulum is starting to swing back.

Some of the specific ideas may appear to have appeal – but are they right for every corporation? Let’s consider some of the issues. First, take age. A number of companies were inclined to point out that some of their most effective directors were over the age of 70 – as was Winston Churchill when he served his second term as British prime minister. How about length of service? Serving for more than 10 years may cause a director to become too close to corporate management to provide proper oversight. But it can also provide the in-depth knowledge and institutional memory that a new director would have to work hard to build. Compensation? The notion of director compensation in the form of stock has considerable appeal, but do all companies have to fit the exact same formula?

The varying sizes of boards has also attracted considerable attention. There is evidence that a board that is too large can diminish meaningful discussion and decision-making. In fact, the Dey Report made that point. But can all corporations be expected to have boards of the same size – regardless of how many lines of business the company is involved in, how many continents it operates on, the number of languages it conducts business in or with how many cultures it interacts?

Many call for a separation of the position of chairman from that of the CEO, with an unrelated director serving as chair. Indeed, the Dey Report recommended that. But in some instances it is argued that splitting the jobs might cause more problems, as the task of keeping the chairman properly informed would fall to the CEO. The Dey Report suggested an alternative of a lead director designated to monitor executive performance and chair meetings of unrelated directors.

The bottom line is simple: one cannot apply a cookie cutter to corporate governance issues and start slicing away. Every corporation requires its own recipe. Every corporation has its own unique agenda. One cannot legislate corporate culture any more than one can legislate societal culture. A former head of corporate governance at CalPERS summed it up: “A one-size-fits-all model just doesn’t wash.”

That is why we adopted the recommendations of the Dey Report as guidelines, not rules. The obligation of a listed company is to describe in its annual report its system of corporate governance with reference to the new TSE guidelines. The emphasis is on full disclosure. In that way, each company develops its own system of governance, and each shareholder determines his or her own level of confidence in it. That approach is, we believe, in the best interest of the shareholder and the listed company.

It seems to be working. We have already seen concrete changes in corporate governance. According to a study conducted by Spencer Stuart, corporate boards have become leaner – down to an average of 13 members, compared to 17 members in a 1990 survey conducted by the Conference Board. The study also found that directors are more active and hands-on: 80% of companies have developed formal corporate governance statements outlining board practices in compliance with TSE guidelines, 82% have formal training programs for directors and more than half regularly evaluate board members to ensure they are fulfilling their responsibilities.

The issue of corporate governance has attracted noticeable attention only in the past few years. Is the issue of pension fund governance far behind? As I pointed out a few minutes ago, many beneficiaries know very little about their pension plans or mutual funds, how they are governed or what power they have. In an era when accountability is on the rise, it would not be surprising to soon see those beneficiaries begin to take a hard look at the investment decisions that are being made on their behalf. Indeed, this is one of the issues that is central to the hearings being undertaken by the Standing Senate Committee looking into governance practices of institutional investors. And, interestingly, the investment behavior of institutional investors is also the subject of considerable study by organizations like the OECD.

Actually, one of the things that potential fund governance activism demonstrates is the validity of institutional funds. They contain their own internal pressures for responsibility and a potential process for accountability. There are built-in, long-term pressures on institutional investors to keep them directed at wealth gain for shareholders. Unfortunately, that is not the case for all forms of shareholder activism. In a way, institutional investors are similar to a posse, actively pursuing increased returns. But shareholder activism also produces the occasional lone ranger, grandstanding on their own by attempting to mask personal social and political agendas in the guise of investor interests.

For many years shareholder annual meetings have provided a forum for one-man or one-woman sideshows. The corporate gadfly kept bobbing up, introducing motion after motion with little support and no relevance to the goal of increasing shareholder value, contributing little to the process except a form of offbeat entertainment.

Corporate gadflies are not new. What is new is the attention they are given, and the persona they are attempting to adopt. Corporate gadflies of the 1970s are being transformed into corporate populists of the 1990s, challenging boards to make decisions that at times offer no enhancement to shareholder value, but do advance iconoclastic social objectives. Perhaps an example of that is the issue of executive pay levels.

Critics of current executive pay levels voice their criticism on two occasions: when a corporation is showing increased profits, and when it is not. It can be argued that this is a crusade that is in no way related to shareholder value. To my knowledge no one has produced any evidence that reducing or capping the compensation of a senior executive would increase shareholder value. Quite the opposite: formula-based limits on CEO compensation make no sense in industries where the competition for top executive talent is heavy and the pool of proven candidates is not deep. The bottom line? Hiring and compensating executives is a market-driven activity, not an exercise in social equity.

Unfortunately, what the populist view is often advocating is not the fiduciary interests of shareholders, but the social agenda of one shareholder. That is fine, in terms of the right of a single shareholder to be heard. However, extreme care must be taken in considering such advocacy to ensure that the interests of all shareholders are being properly served.

A few minutes ago, I asked if the pendulum of corporate governance has swung too far. If it has produced an environment that allows a one-man band to steal the show, turning forums for evaluation of shareholder interests into a stage dominated by one individual’s personal interests that do not enhance shareholder value, then the pendulum may have swung in the wrong direction. We have to maintain the balance. We must ensure that responsible shareholder activism does not become confused with irresponsible populism. We must ensure that constructive examination does not turn into destructive obfuscation. We must ensure that the shareholder is not hit by a swinging pendulum going the wrong way.

There is a tremendous opportunity for organizations like the Canadian Corporate Shareholder Services Association to demonstrate leadership and contribute to maintaining the appropriate balance. There is a need for responsible reporting, full disclosure and good governance. But there is an equal and compelling need to keep in mind the point of the exercise – to increase shareholder value. That is the balance we must strike, and the balance your investors will benefit from.

PROTEUS AND PRINT: WHY NEWSPAPERS WILL FLOURISH IN THE YEARS AHEAD

David A. Galloway
President and CEO, Torstar Corporation

The Canadian Club of Toronto, April 20, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

In Homer’s Odyssey, there is a figure, Proteus. He is a god, the son of a sea god, and he can see into the future. But more importantly, he has the ability to change shape to meet each new challenge. Proteus appears to be an old man. But when attacked, he can turn into a lion, or dragon or other fierce animal. Proteus, I’d like to think, is an apt metaphor for our major newspapers. Like Proteus, we look old, we have been around a long time. But we still have the vitality to change in response to each new challenge.

And that brings me to my message. It’s this: despite tough challenges, the newspaper industry will continue to flourish because of its natural strengths and its ability to adapt. My confidence is based on the fact that we have faced challenges before. And by facing them we have become a stronger, more dynamic industry. Let me first tell you about the challenges we’ve faced. Then I’ll tell you about our future challenges and how we’ll meet them.

The television challenge. First, TV. The newspaper industry has responded to the advent of TV by reinventing itself. If you had asked people in the 1950s where they got their “breaking” news, they would have said, from their daily newspapers. Our parents relaxed after dinner with their evening newspaper and listened to the radio. TV changed all that. Today television is on 24 hours a day and major news stories are initially reported by them – CNN being an obvious case in point. Who can forget watching the Gulf War in 1992 with actual missile strikes? Or who will forget watching O. J. Simpson in his white Bronco trying to decide whether to turn himself in? Competition from television is intensifying. We now have not one but several 24-hour-a-day news stations.

There is no denying television’s impact on newspapers. The percentage of people who read newspapers every day has dropped dramatically from 80% thirty years ago to 62% today. The result? Most urban centers now have only one daily newspaper. Toronto is the exception with four thriving dailies.

We are fortunate to get different points of view in Toronto. Last September there was an excellent example of this. As one of our ads said, “It was the best of times” or “the worst of times,” depending upon your point of view and which paper you read. The Star’s headline read: “Women win on pay equity.” The Globe’s headline read: “Ontario loses pay-equity fight.” Same day, same story, two points of view.

Coming back to the impact of television: the point is, while Toronto has been a wonderful newspaper market, newspapers in general have suffered a setback from TV. Fifteen percent of newspapers have shut their doors over the past 20 years. But the newspapers that remain continue to do well. In fact, they responded vigorously to the challenge posed by television.

Why newspapers are so strong today. I’d like to share with you four ways newspapers have responded. First, we switched our focus from the evening to the morning. Television preempted the evening time that once had been set aside for reading the paper. Those papers that fought this change, generally lost – and have gone out of business. We knew our survival at The Star depended upon shifting to the morning.

That was a $400-million decision for us at The Star. Let me explain why. We have to have a morning paper on your doorstep by 6:00 a.m. To be competitive with our friends at The Sun, we have to publish the results of the Blue Jays games played the night before in California. The game doesn’t end until 1:30 a.m., our time. That means we need a plant that can print 500,000 copies of the paper between 2:00 a.m. and 4:00 a.m. That way, it reaches you by 6:00 a.m. The reality is we start printing at 1:00 a.m. and the first papers off the presses go to outlying areas. At 2:00 a.m. we stop the presses, replate for the sports update, and you get the paper when the ink is barely dry. Afternoon papers are dead. We had to adapt and we did.

Our second response to the television challenge was to produce a paper with much more color. You can’t compete with color television in black and white. It’s that simple. Color provides greater interest for readers and greater impact for advertisers. Even the venerable New York Times has recently made the move to color. It did take them a while to follow our lead. It took The Globe and Mail even longer.

The third way we responded to the challenge of TV was to become more interpretive – more analytical. A paper at mid-century might have had 23 brief stories on its cover page. Today, a front page has five to seven in-depth articles. This development toward more in-depth coverage is one that we have welcomed. It builds on The Star’s tradition of fighting for social justice – a tradition that John Honderich and his team are carrying on with distinction. And we believe strongly that we’ve made a difference. Let me tell you about some of our recent successes.

We published a groundbreaking series on spousal abuse and children at risk. This series sparked widespread public debate, prompted a formal government review, and won the prestigious Michener Award for meritorious public service in journalism. We were among the first to argue for a megacity in Toronto. The GTA is now a reality. We have reported on the shocking differences in the quality of care provided by different hospitals and doctors. We have called for more public disclosure. We have highlighted youth unemployment in a series called “Lives on Hold.” This series, which stimulated the federal government’s interest in youth employment programs, has been nominated for a Michener Award this year. We recently investigated the taxi industry in this city. The Star’s analysis prompted a formal review of that business as well. Newspapers can, and do, create social change.

The fourth and final way we responded to television was the simplest but probably the most profound of all: we remained faithful to our traditional strengths. Each of the media that provide news has its own strengths. Radio can be listened to while driving to and from work. Television has motion and immediacy. Let’s face it, it is a pervasive and important medium – even though most people in this room will claim they don’t watch much television. But newspapers have something no other medium has. They distill the news – compress it and make it accessible. The problem with TV news is, you can’t fast forward: if you are interested in the fourth story in tonight’s “lineup,” as they call it, you must watch the first three stories as well.

Now, let’s look at our morning newspaper. There may be seven headlines on the front page. Let’s say you’re somewhat interested in four of these. You read the first three paragraphs of these stories and, if the paper is well written, you’ve got the gist. You have already received as much information as you would have in a 15-minute TV newscast.

Let’s suppose you decide to read two of the stories in greater depth. It takes about as long to do that as it has taken me to tell you what you already know: that people read newspapers with a set of choices that they don’t have in other media. We scan some stories and read others in depth. That’s why today the newspaper industry is not simply alive and kicking, it is flourishing. And 17 years after Ted Turner’s famous boast that “the newspaper, as we know it, will be dead in ten years,” 1997 was the most profitable year ever for North American newspapers.

How profitable has the industry been? Profitable enough that Conrad Black is willing to wager $150 million that he can set up a new, successful newspaper in Toronto. We’ll take that bet. We at The Star welcome Black’s foray into Toronto. I know everyone would like me to comment on Black’s new paper. It is difficult to comment on something you haven’t seen. I will say that I agree with Conrad’s comment in The Globe and Mail this morning – this is not a zero-sum game. People do read more than one paper. Fifty percent of Globe readers, for example, read the Star as well – we are a little bigger – so that only 18% of our readers read The Globe.

The key will be to find a niche. With the resources Black has at his disposal and the size of the paper he is contemplating, it will be difficult to provide: a better business section than The Globe or The Financial Post, better local news and sports sections than The Star and The Sun. But is there room for a paper with good writing that stimulates debate? You bet. My test is, “Will he be able to create a buzz around the water cooler? Will people say: Did you read what Black’s paper said today?“ If he can do that, he will have a business. I would never want to bet against Conrad Black and David Radler. These two are very good businessmen and good publishers. But my larger point is that this is a flourishing industry. Conrad Black knows it, as we all do.

Why newspapers will continue to flourish. I know many of you out in the audience are going to say, “That’s well and good, David, but you are looking back, not forward. Television may not have been the death of you, but the internet will be.” In fact, a recent Financial Post article had the headline: “Newspapers losing ground as king of classified.” And the subhead read: “Internet could steal $4.1 billion in advertising by 2001.” A report from Forrester Research in the US concluded a year ago: “Newspapers are in big trouble and they’re going to get hammered.”

News like that we can do without. The internet is a wonderful new medium. It will find an important place in consumers lives, along with other media. Yet we are confident that while the internet will change us dramatically over the next twenty years, we can live with it. In fact, newspapers and the internet will complement each other. Let me explain why. There are two issues we must consider with regard to the internet, as it grows in usage: what will happen to our readership, and what will happen to our advertising? In both these areas, newspapers will benefit from being bedfellows with the internet. Let’s consider our readership first. There are three reasons why our readers will not give up newspapers for the internet. First, research has shown that people getting information online are not using it as a substitute for reading the newspaper. In fact, the online capability expands our role.

Those using the internet can be divided into three distinct groups. Some look for immediacy. They want to know at 10:45 p.m. who won the hockey game. We can provide that information on the internet. (Guess what? We are back in the business of “breaking” news.) We can give you the score at 10:45, and a commentary on the game the next morning in the paper. Then, there are those who want to study a subject in depth. They want access to our archives and they can do so through the internet. We can charge for that. And then there are some people who get all their information online. Using services like Pointcast or Timecast, they are presented with their own customized newspaper each time they log on. Fortunately, most of these people were not regular newspaper readers previously. They are new customers for us.

The second reason why the internet will not draw away newspaper readers is that they perform different tasks. Derrick de Kerckhove, director of the McLuhan Program in Technology at the University of Toronto, states the issue well, and I quote: “The job of the newspaper is to sort out items which are relevant to the public’s interest, over and above those which address purely individual needs.” What he is saying is: issues that you should know about will fall through the cracks, because you didn’t request them – the Quebec ice storm, or the taxi industry in Toronto, for example. That’s why customized online newspapers don’t work. The reverse, however, is true for business information. I am interested in specific subject areas, such as the communication industry and customized reports can be waiting for me, online, when I arrive at work. That is of value and worth paying for.

The final reason our readers will stay with us is the “feel” of a newspaper compared to a screen. Would you look forward to Sunday morning in your favorite easy chair, a cup of coffee and your touch-screen? I don’t think so. A newspaper in its present form works. It’s already wonderfully interactive. You can pick it up and put it down whenever you want. The reality is people use the internet during the day for business information and in the evening for personal interest. That hour spent in the evening cuts into television, not newspapers. Not too many people are online over breakfast.

Let me now turn to advertising, the second area where the internet provides potential competition. In fact, we believe again it allows us to expand our role. I say that particularly with respect to classified advertising. Why classified? Because it accounts for 25% of newspaper revenue and a higher proportion of their profits.

You have to ask yourself why readers in the future will trudge through pages of used car, real estate, help-wanted advertisements, when a search engine can explore dozens of computer databases for you. Online, you can sort complex data quickly, such as make, price, year and model of car. You can find a consumer report rating. You can look at houses in your desired neighborhood. You can even take a tour inside.

Electronic classifieds are a threat. We cannot pretend they are not. And as Business Week said last month, “Buying a new car on the internet is pretty spiffy too.” You can go to the internet site AutobyTel, which has enlisted 2,200 dealers across North America, and get a quote from a dealer that participates in this buying service. This will surprise you! Four percent of new cars were sold over the net last year. What will this mean to dealerships in the long run? What will it mean to dealers’ display ads? What will it mean to newspapers?

The key to our future will be whether we can continue to be in the business of bringing buyers and sellers together. Newspapers have always been the gateway to classifieds. We can capitalize on that history. But our customers do not want merely to read print classified online. They want value-added service. We must take advantage of the interactive capability of the new delivery system, and assist the buyer and seller in completing the transaction.

Partnerships will enable us to do that. Take for example Classified Ventures, a new online technology partnership of Times Mirror, Tribune and Washington Post Companies. This group can direct traffic to their site through in-paper promotion. Yet the scope of the consortium will attract national advertisers who will be interested in advertising online against millions of daily hits. These developments and others have led Forrester Research to revisit their conclusions. They now believe that newspapers have an advantage. As they say, it’s our business to lose – and we don’t intend to lose it!

The Star has also taken significant steps forward in the area of online advertising. You should visit The Star’s internet site, thestar.com. Many do: we get 150,000 page views a day. That’s one of the busiest websites in Canada. You should visit The Toronto Star’s CitySearch site as well. It was just named one of the three best, all-round, online newspaper services outside the US by Editor and Publisher magazine. You can find both of those properties at our new address, Toronto.com. You didn’t think you would get through lunch without a commercial did you?

If the theater interests you, you can check out what the critics have said and then order tickets. If you want to dine out after the performance, we’ll show you the possibilities within easy walking distance. If you want to read the reviews of a particular restaurant, or look over the menu, just double-click. You can use email to book a table for Saturday night. You see, we are bringing buyers and sellers together, and assisting them in completing the transaction. And all that valuable information is free. It’s like having your own private concierge at home. Not bad, for a newspaper. In short, we see the internet as a means of building our franchise. Newspapers and the internet are complementing each other.

Edmund Burke once wrote: “You can rarely plan the future by the past.” We may not know exactly what the future will bring. But as I look ahead to the future of newspapers, I do see with clarity that the newspaper industry will survive. We survived television. We’ll survive the internet. You can count on us being around for a long time. Why? Because, as I’ve shown, newspapers are necessary. Newspapers are full of news that’s both accessible and analytical. And newspapers are just plain neat to read.

So the message I want to leave you with is this: newspapers do face tough challenges, but they will continue to prosper in the years ahead because of their natural strengths and their ability to adapt. I’m certain that if we emulate the god Proteus, and change our shape as the situation demands, we’ll flourish in the 21st century and beyond.

MARKETING AT THE MILLENNIUM

Sidney J. Levy
Head of the Department of Marketing, College of Business and Public Administration, University of Arizona, Tucson, Arizona

École des Hautes Études Commerciales, Montreal, November 1997
Published in The Corporate Report No. 24 (May 30, 1998)

We are approaching the millennium. Such a time excites people who see it as a great milestone, a time of momentous portent, of redemption and perfection, perhaps the end of the world. Optimistically, I do not expect such an awesome event. But at such a time it is customary to take stock, to look at the past and to the future. I have been observing the marketing scene since my childhood, when, at the age of nine, I worked in my father’s retail store. I set out pretty pyramids of oranges, painted little signs saying “Special” or “Today only 2 for $2.54,” and watched how customers shopped.

In later years, I conducted formal studies of merchandising, advertising and consumer behavior. I added to the marketing literature with my discussions of the importance of brands, of the way people in the marketplace use symbols, and analyze the meaning to them of products and services. I suggested that although the term “marketing” was usually understood to refer to business transactions, it could be readily seen that all individuals and organizations may be said to engage in one or another form of marketing, no matter what the nature of their endeavors.

As we think about our contemporary era, I want to focus on its common characterization as “The Age of Communications.” Of course, every age has been an age of communications, given how essential communicating is to life. But we have come a long way from the time when men were said to “lead lives of quiet desperation.” The enhancement of the ability to communicate, even potentially out into the vast universe – if there is anyone out there to listen – means that if one is desperate enough everyone will learn of it. Therefore, as marketing is manifest in the way we pursue our lives, I am going to trace the development of technologies as a sophistication of the ways of writing, talking, recording and sending messages.

Going to the movies. In contemplating this topic I have the benefit of bringing to bear a long perspective. I remember going to the picture show, as we called it, to see silent movies with Tom Mix or Charlie Chaplin. Still vivid in my mind from the 1920s is the experience of holding my father’s hand as we went to a downtown theater in Chicago to see Al Jolson in such early major sound films as The Jazz Singer and The Singing Fool. There was the exciting moment when Greta Garbo first spoke and allegedly said huskily, “I vant to be alone,” the disappointment with Chaplin’s high-pitched voice, and the amazement at the vivid Technicolor of Miriam Hopkins as Becky Sharp in the 1935 version of Vanity Fair. Moving pictures are called that because they show motion. But they are also moving because they create emotion.

Listening to the radio. Then, too, at home I would sit with earphones on my head while scratching at a crystal with a wire to bring in the early radio messages. Not long afterwards, radio was bringing us Little Orphan Annie, sponsored by Ovaltine. And on hot summer evenings one could walk down the streets of the neighborhood and follow an episode of Amos ‘n’ Andy through all the open windows. Air-conditioning closed most of those windows, and radios in every room left the listeners enclosed and private, and able to make more individual choices of programs. Television came along as a kind of combination of movies and radio, leading to a reorientation of how to receive news and entertainment, and how to use leisure time.

Talking on the telephone. Although my parents were poor immigrants, as soon as we could possibly afford it we had a telephone. It had a hook on which to hang the receiver and a box into which we inserted nickels or slugs in order to make calls, and the phone was on a party line that we shared with other subscribers. Sometimes it was necessary to interrupt another party talking too long on the line by saying, “I’m sorry, but I have an important call to make.”

Positive motives. We see here various motivations in action. The positive motives are those that make innovative developments possible by providing interest, receptivity, and both financial and psychological support. Taken in the large, consumers are curious. They were eager to marvel at the movies and talkies, to see the color, to hear the new sound systems, to hear whatever the radio had to say, they wanted to talk on the telephone. They want what is new and different. They want to know about the latest developments, to learn about them, to go to see them. They want to acquire and will buy what is available. They want the new inventions and equipment. They are willing to go into debt. They will support the sponsors and drink the Ovaltine. Some of the early sponsors became famous brands, many of which endure to this day. They are optimistic. They pursue novelty even when it seems primitive in its early stages. They want to be part of the in group. Common communications foster a cultural content and cultural awareness for members of society. They want to have what their peers have, to show they are knowledgeable members of the group, and perhaps to lead the way and stand out in the group. They are impatient and petulant. Even when there is no emergency they want the telephone line. They want everything to work and to work right away. The electronic world seems to go marvelously fast, but in short order it is not fast enough. News that used to take months to arrive is now available almost instantly and is sought avidly.

Negative motives. Study of diffusion processes shows that these motives are most characteristic of the innovators and early adopters. There are also the countervailing attitudes and motives that have critical effects on new technologies. These show themselves when consumers are skeptical. New things commonly face resistance to novelty and change. Initially, there is often the attitude that it – whatever it is – will never work, or it will be just a fad. They think it is not good enough yet. Innovators are a minority, perhaps because, as Ibsen said, the wise are always in the minority. Or maybe they are rash and willing to take risks. Other people may have the wisdom of caution because they want to wait “until they get the bugs out,” to be sure the technology advance is proven reliable. They are stingy or conserving. They think that if the idea is any good, it will cost less after a while, and they are willing to wait until it seems affordable. They are technically challenged. Most people do not understand how and why complex modern technologies work. In fact, great numbers do not understand how old technologies work, either. They are generally geared to results and outcomes and to the simplest prevailing ideas of physics and chemistry. Even my childish thought that “maybe there are little people in a radio box” seems easier to postulate than to comprehend the astounding abilities of semiconductors and the central processing unit in computers. Youngsters of course do better, as testified to by the common joking about adults not being able to set the time on the VCR so that it keeps flashing 12:00.

Growing gratifications. Consumers are most receptive to what gratifies significant individual and social aims. Any aspect of telecommunications may serve someone’s need to accomplish or be amused. But the ones that are most widely adopted and enduring are those that succeed in intensifying self-expression, enhancing communications, facilitating productivity and satisfying playfulness. These and other elements of consumer reactions to modern information technology may be brought out and elaborated by examining specific devices and the changes they have wrought over time.

I began formal research on the meaning of the telephone in 1955, in a marketing study for AT&T, when they wondered why consumers were slow to purchase new equipment and services, such as colored phones, extension phones, long distance and intercom systems. At that time the telephone was seen as important for community membership, as evidence of the individual’s substance, stability and credit. The phone itself belonged to the telephone company and was to be used with respect and restraint, briefly, with no bad language. And while it was wonderfully useful and desirable, it was something of a luxury, not to be used wastefully. Long distance calls were for special occasions, emergencies and for important people with distant connections. The telephone company was seen as austere, demanding and stern. It was efficient and technically superior, but inflexible.

In a more recent study, the role of the telephone has changed to that of a servant and casual means of talking to almost anyone anywhere. Having many phones was once a sign of executive power. Now they are a cheap convenience. Telephone subscribers are impressed by the great, vast network of telephoning that is available to people all over the world. They own their own phones and do not have just a main phone with one or two extensions for security in the bedroom or convenience in the basement workshop. Many people have one or more phones in every room, maybe a car phone, and the use of cellular phones keeps some in almost constant conversation with friends, relatives and customers. Such users are more cosmopolitan, citizens of the world, expansive and constantly exchanging information about the details of life and their ramifications. One sees them talking on the phone as they wander the supermarket aisles, race through traffic, checking on the baby-sitter, the grocery list or the deals that earn the money being spent at the same time. Inevitably, some people find all this too intrusive. It makes them feel too democratically accessible and sociable.

Another instance of a developmental stream in technological improvement and human self-expression is one that I think of as starting with the typewriter. I bought a Smith-Corona Junior Portable typewriter from Sears, Roebuck & Co. around 1937. I paid $36 for it – $3 a month for a year – and used it through high school and college. When striking the keys, a clever arrangement of levers, springs, and inked ribbon produced impressions on the paper rolling over the platen. It was an ingenious but transparent machine. Typewriters became the central symbol of a business office, with stenographers and secretaries sitting at their machines, and in time an essential object in all homes with conventional intellectual and academic pretensions. Only great creative writers persisted in writing their manuscripts in longhand. No matter how bad the handwriting, with touch typing or hunt and peck, everyone could use the typewriter to print out thoughts in pica or elite font style. The electric typewriter, the much admired IBM Selectric, for example, was a more elaborate version, intervening electrical impulses between the typists’ fingers and the printing letters (and it readily made superior carbon copies in triplicate).

As the computer age began to take off, electric typewriters became more sophisticated, introducing digital windows and the ability to store what was typed before printing it. A great advance – one of those little things that looms so large to the typist – was automatic erasing of errors. A teletype machine did largely the same thing, but added the mysterious capacity to take what was typed and send it out over telephone lines. Then the concept of word processing began to arise. There was some ambiguity in this idea, since typewriters already were word processors, as were the stenography machines used by court reporters. But the idea of a dedicated word processor that enabled not only ready editorial corrections but greater flexibility in handling content took hold. Some typists became experts, so that offices began to reorganize. The concept of the typing pool intensified, and some venues considered the possibility of eliminating or drastically reducing the local secretarial staff. But the various consumers involved resisted. The pool was too separate and isolating, and managers and executives wanted secretarial help and access to it closer at hand.

However, before things could get too much out of hand, the computer revolution began in earnest, making the dedicated word-processor relatively obsolete. Word processing came to mean Word Star, WordPerfect, and Word, fabulously responsive programs that were learned rather easily by anyone with a computer, although going through the growing pains of learning WordPerfect 4.1, 5.1, 5.2, 6.0, 6.1 and 8 in DOS and Windows has not been a totally enjoyable experience. Nevertheless, the irony of this demotion, that is, learning how to be one’s own secretary and stenographer, is balanced by the ability to express one’s thoughts more flexibly and to see to one’s own format, accuracy and desktop publishing. And in turn, the secretarial staff, clerks, agents, bank tellers and automobile mechanics can keep track of our transactions for us.

Freedom and control. The telephone, typewriter, and computer situations point to the interweaving of two major issues operating in our lives: the dimension of personal freedom and the dimension of social control. Control stands for all the elements that socialize us and assist us to be members of the group, to be conventional and conforming to prescriptions and standards, to consume like the others. At the far end of the control continuum is the extreme of cults, of behavior modification, with the kind of mindless obedience exemplified in George Lucas’s 1971 film THX 1183, depicting the terrible robotic existence of people being totally dominated via dogma, programming and drugs. At the opposite extreme are solipsism, anarchic impulsive expression, and sociopathy, the kind of breakdown of social order shown in Stanley Kubrick’s A Clockwork Orange (also 1971) or Ridley Scott’s Blade Runner (1983). In between range the various degrees of sense of community, altruism, devotion to others, mutuality, providing service, or the degrees of using people, being self-seeking, emphasizing privacy, individuality and narcissism among which people move, characteristically, or in response to particular situations.

Information technologies and telecommunications offer possibilities in both directions. Their appeal and special success lie in the ways they foster personal, egocentric absorption and self-expression, and develop technical and language skills, while at the same time enabling connection and interaction with other people. Each of the many modern innovations that have been and are being widely embraced shows particular blending of these qualities and feeds the great movement called the communications revolution.

Talking, writing, sending messages. The role of telecommunications is extended, not only through the many phone jacks at home, but through the use of cellular phones and pagers. People in Israel joke about how everyone wanders around with a phone to his or her ear. In the March issue of Business Korea, it is said that new and improved beeper services are sending pager sales through the roof, that the use of pagers seems like a nationwide epidemic, with subscribers in the millions and growing rapidly. The relatively low cost of pagers and beepers makes them attractive to teenagers who say that if it were not for pagers their boyfriend or girlfriend would have to stay near a telephone to receive calls from each other. Now they have the freedom to move about and avoid adult social controls without sacrificing social contact. In the US, 50 million beepers are in use, of which 8 million are owned by teenagers. Martin Walker in The Guardian also reports on the way pagers are revolutionizing the sending of messages by the use of codes in which numbers are used symbolically and cleverly. For example, 07734 turned upside down reads “Hello.” 1134 2 09 reads “Go to Hell.” 141 means “I’m with you, on your side.” 100-2-1 means the odds are unfavorable. 1040 means “You owe me big time.” 10 is for perfection, 11 for even more so and 54321 for counting down to exploding. Here there is wit, ingenuity, demonstration of awareness of a cultural shorthand, again an expansiveness and enrichment of participation, even when put to deleterious purposes such as trading in drugs.

Given the desire to create messages and, our having written them, typed them or printed them, feeling the need to send them, tradition gave us the messenger and the postman, and such sending now occurs in the billions of times daily, with packages and letters flowing in every direction. But the ever-present sense of urgency leads also to the fax machine. Somehow, even if incomprehensibly to most people, out into the great void goes the image of the message, to be delivered almost instantly to the recipient. More and more, in our eagerness and impatience, communications are expected to happen right away, if not sooner. And, aesthetically, the incoming fax should be on regular paper, so the message has to be copied or a fax machine in good working order is replaced with an improved unit.

In addition to making faxes more attractive to handle, the copy machine makes everyone a potential publisher of everything of interest, laughing at the idea of the much heralded paperless society. From photographing one’s face or one’s buttocks to making sure that everyone has a hard copy, we marvel at how quickly and easily that can now be done. Managers struggle with the fact that there is now a tremendous amount of duplicating going on, with a great waste of paper, some hoarded in files and a lot thrown away, with much enjoyment found in the busy clackety shuttling of the wonderful copy machine.

In this expanding and diverse communications process, there are always opportunities and frustrations that provide further opportunities. The intensification of telephoning makes it hard to cope with all the incoming calls, and anxiety about calls being made when one is not there, which leads to the telephone answering machine. This machine and its variations in voice mail make it possible to store and to screen calls – a great convenience on all sides, as it allows users to both maintain their interactions and to avoid them. This flexibility penalizes and frustrates by its delays, its lack of immediate human response and its insensitive circular menus.

Leonard Pitts, Jr. complains of “Impersonal America,” when phone transactions occur without people, machines calling to talk to machines. He says that we wanted cost-effectiveness and speed, efficiency, uniformity, encounters made sterile and personality-free, “customer service free from the messiness – bad moods, biases, idiosyncracies, small talk – that characterize human interaction.” Now he misses that messiness. People are annoying, but it is lonesome without them. Offering help on the technical side comes Dr. Edward Lin of Ingenious Technologies Corp. He invented a telephone keypad after he became frustrated by regular phone buttons while trading stock by phone. His device makes it easier for callers to spell out requests and eliminate some of the touch-tone rigmarole and could streamline paging. But those consumers who are glad to reduce the messiness of personal interactions welcome the ability to make direct deposits and withdrawals, to make bank transactions by telephone, by modem, and to use debit cards and smart cards to spend money.

The computer, above all. Now that the personal computer is sweeping the world, essential to the office and becoming widely an ordinary household appliance, it brings with it a great array of servers and research engines powering and empowering a remarkable access to information and other people. More and more devices offer separate or combined functions in relating to the web, the internet, to specific sources, to visual and auditory features. The phenomenon of electronic mail is utterly fantastic in the way it has made available combining the keyboard and the sending of messages. It is a modernization of the teletype machine I worked at in 1941, which allowed just that among limited stations. But now it has opened up to the world, where casual emailing goes on among consumers, at least those who participate in this network and have someone to email and fax to, as great numbers do especially in the furtherance of business and academic life, but also as part of a general social intercourse. There are also those who feel unable to cope, who feel left out, lacking access, resources, or ability, attributed to poverty, age or social status.

Despite the rapid growth of computer ownership, it is still in its early stages. One survey earlier this year indicated that 25% of US adults have the use of computers at work and 28% at home. Eighty-eight percent have heard of the internet, but only 11% say they use it and these users are predominantly young males. Strong drawbacks remain in the confusion generated by frequent innovations that leave consumers uncertain of what to do and how to decide among the many alternatives, and in the knowledge required to make effective use of the equipment. Great strides have been made in training programs, the experience of computers in the elementary schools, in consultative help and in making programs more user-friendly. But there is a long way to go in these respects. Creators of computer programs, their tutorials, and their user manuals, often show a disconcerting insensitivity to consumer needs as they struggle with strange machine failures, mysterious error messages and unfathomable instructions. And the year 2000 is getting uncomfortably close without a great reassuring announcement that the problem of computer dating has been fundamentally solved, and not to worry.

Similarly, in other realms of the telecommunications industry, consumers feel buffeted by the changes, by the flood of mail catalogues and brochures, telemarketing calls and advertisements in print and broadcast. News and feature stories about regulation and deregulation and litigation in the competitive industry are confusing. I recently received a memo that began as follows: “To understand the intraLATA dialing parity issue you start with the breakup of the old AT&T telephone system…,” at which point my eyes glazed over and I turned to more congenial reading matter. A report in The Wall Street Journal (September 16, 1997) says that the stock of CWC (Cable & Wireless Communications, Britain’s biggest cable company) fell because of investors’ uncertainty about the British cable industry’s future. It seems that although CWC’s revenue rose and the number of new subscribers increased significantly in the quarter, the company’s market penetration stayed below the industry average because so many consumers gave up the service. In the same issue, George Gilder comments that the Federal Communications Commission is thwarting competition. He fears that “by luring entrepreneurs into huge investments and then crashing their markets, the US government has imposed an oppressive tax on some of the most creative forces in US communications.”

Many critics yearn for the good old days of face-to-face service and hearing the human voice. They hate techno-babble and the exaggerated promises of problem-solving. They say – see Michael J. Pemberton, “Confronting the big lie: A neo-luddite manifesto,” (Records Management Quarterly, January 1977) – that technology is not a panacea. They remind us that the basic human problems remain the same, that becoming attendants to machines is not progress, that computers may not actually enhance productivity. And they fear the uses they perceive as evil, by seducers, pornographers and political dissidents.

However, even they make use of the equipment to present their criticisms. And undoubtedly more technology will come along that assists in using all the ways of talking, editing, printing, transmitting and recording messages, bundling and unbundling, surfing, emailing, faxing, filing, transacting and entertaining. The excitement remains and grows, with facilities being swamped by the demand for email access and by web browsers, and governments being urged to deregulate the competition to provide the telecom services that are at the heart of economic growth. Consumers seem infinitely receptive, insatiable in their willingness to try new things and variations on old things in their constant search for entertainment, knowledge, and feelings of fulfillment and competence.

They will continue to swing between their desires to increase their personal freedom, their privacy, self-expression, and individual choice, on the one hand, and their desire to be part of what is going on, to reach out and to link up with other people. They are largely trusting, and show increasing willingness to order by phone, giving strangers their credit card and bank account numbers, making electronic transfers of all kinds, and absorbing the often wasteful costs of constantly upgrading their equipment. Marketing of the customary array of necessary and discretionary products for food, clothing, shelter, and transportation becomes increasingly taken for granted, while the marketing of information and communications technology and services takes center stage.

To conclude: as the millennium comes near and consumers confront the remarkable ongoing revolution in technology and telecommunications with its intensive and hectic marketing, they seem to peer into a cave of great treasure, and above all they want what I have referred to throughout these remarks: accessibility to a market that is welcoming, accommodating, fast and cheap, that enables endless patterns of self-fulfillment and social integration in the heavenly perfection promised by the millennium.

ACCESS + BANDWIDTH = COMMUNICATIONS REVOLUTION

Reed Hundt
Chairman, Federal Communications Commission

Speech prepared for the INET ‘96 Conference, Montreal, June 28, 1996
Published in The Corporate Report No. 19 (September 30, 1996)

Here we are at last, smack dab in the digital age – an age of promise, an age of possibility – and for many an age of anxiety, apprehension and alarm. The embodiment of this era is, in all respects, the internet. This is a technology every bit as revolutionary as the invention of the telegraph was over 150 years ago.

The internet grew out of a small project started by the US Department of Defense to link up four military research centers. Similarly, the telegraph got its start as a small government grant – $30,000 awarded in 1843 led Samuel Morse to the first test of a telegraph line from Washington DC to Baltimore in 1844.

The internet can help us achieve many goals we’ve had since that first city-to-city click. Even though it’s been 150 years since Samuel Morse’s invention, much of the world does not yet have basic telephone service, millions of American households do not have active phone service, and our kids spend each day in classrooms, 90% of which are unconnected to the world of information.

The growth of the internet provides new ways to bring all children and all Americans into the Information Age. Today I want to talk about the questions we face in assuring that we can realize the full promise of the internet.

In preparing for this speech, I asked my staff to explain to me how the internet works. They said I wouldn’t understand. I told them I was the first FCC chairman to have a computer on my desk. That’s our point, they said. I persisted – so in desperation they resorted to charts. Then they showed me a picture of a plate of spaghetti. The internet, they said, looks like this. And they showed me pictures of trains in a switchyard. It works like that, they said. Then they showed me curves that sloped up like the ascent of Everest. It’s growing like that, they said. Then they told me that, based on current projections, in the year 2010 there will be more internet users than people on the planet. That’s a little hard to get your mind around.

Here’s what I took away from these desperate, nearly hopeless efforts to explain the internet to a lawyer. The internet changes everything. Its digital code turns a zero into a window on infinity and a one into a unifier of economies and society. It turns the world upside down. In the words of Jimi Hendrix, a six becomes nine, and I don’t mind.

Jimi Hendrix is, I know, a historical figure who needs explanation for the internet group. He is a person whose accomplishments in the musical field are memorialized in a Seattle museum owned by Paul Allen, cofounder of Traf-O-Data, a small Seattle business that changed its name some years ago to, if I remember correctly, Microsoft.

And because the internet changes everything about the way we communicate, it necessarily changes all our governmental communications policies. To drill down a little deeper: it would be more accurate to say that the internet gives us the opportunity to change all our communications policies.

George Washington Plunkett, the famous 19th century politico in New York, explained the secret of his success this way: “I seen my opportunities and I took them.” So what should we do with the opportunity to change communications policy that the internet gives us?

I see five major questions that need answering at the get-go.

1. How can public policy promote or at least not deter expansion of bandwidth to power up the development of the internet?

2. What rules can we get rid of and what rules should we write to promote the development of the internet?

3. Should we be concerned that the economics of pricing on the internet – influenced as they are by current out-of-date regulatory policies – won’t in fact sustain development of the internet?

4. How can we make sure the internet reaches all Americans, especially kids in classrooms?

5. How can we make sure the internet reaches across the globe? Don’t we need government policy in the United States and worldwide to guarantee that internet access becomes a truly universal product? Don’t we need to guarantee that everyone gets access to the common network of networks?

We at the FCC have seen the benefits of the internet firsthand.

One of my first actions as chairman of the FCC was to speed the replacement of the outdated FCC communications equipment and mainframe computer systems with a state-of-the-art internal computer network, ISDN phones, and PCs on all staff desktops. Last fall I unplugged our 25-year-old mainframe because we can now do much more with networked PCs and workstations than we ever could with that behemoth in the basement. (If anyone is looking for a good deal on a used Honeywell, come talk to me after the speech. I’ll even throw in a bunch of rotary phones we still have lying around.)

When we put up our World Wide Website in 1994, we initially got about 100 hits a day. That reflected our low-budget operation and the small community of lobbyists who normally visit us. But our goal is to open up our doors on the net and let all Americans participate. We’re getting there. We now get 50,000 hits a day and transfer almost 400 megabytes of data. We get visits from more than 50,000 unique hosts every month.

To some of you, this may not sound like a big deal, since there are now many sites that get over a million hits a day. But, for the first time, members of the public can get copies of FCC information shortly after it’s released – or months later – and for no charge. We couldn’t afford to duplicate and mail copies of our decisions and resource materials to every home, or even every public library in America. But we can put everything online, where anyone in the world with an internet connection can get access to it.

The explosion of external communication with the FCC is nothing compared to what has happened inside our walls, up and down our linoleum-lined halls. Not only are we on the net – we are accommodating our own internal communications and networking needs via an intranet and remote access connections to our servers. What this shows is that an open, distributed, inter-operable packet-switched network is an incredibly powerful force for change.

The success and openness of the internet is attracting a proliferation of new services. Streaming video and audio may alter TV and radio as we know them in the long run. But in the short run, these and other new services give us three major objectives – bandwidth and access, more bandwidth and more access, even more bandwidth and even more access. That’s what our policies should promote, facilitate, encourage or at least avoid deterring.

The traditional communications industries don’t think in this way. They think they are in the telephone business or the broadcast business or the satellite business. They don’t think they are in the access and bandwidth business – but they are. And when people used to think of the FCC, they thought about universal service, affordable rates and quality service. Now they recognize, I hope, that we’re in the access and bandwidth business. Or, to be honest, when people think about the FCC, they think about radio shock jock Howard Stern. But all these issues – yes, even Howard – are really about bandwidth.

Our policies have too long and too often been focused on services: how to keep local telephone prices or cable rates low, or how to get lower accounting rates on international telephone calls.

Bandwidth and access are not goals that presuppose any particular service. They are means not ends, and over time our focus on services can diminish even as our zeal to maximize bandwidth and access is unabated. After all, if the bandwidth and access are there, the services will be invented. Indeed, visions of services are dancing through the heads of you in this room. Bandwidth on networks accessible to all will make those visions possible.

Of course, no one can afford to build, on their own, the spaghetti plate of networks that is not only the internet but also the underlying telephone network. Government is necessarily involved in the promotion and development of bandwidth and access.

As Lincoln said, “The legitimate object of government is to do for a community of people whatever they need to have done but cannot do at all, or cannot so well do for themselves in their separate and individual capacities.”

Building a network to some people – like the FCC’s intranet – is something that some communities can do for themselves. Building a network to all people – which is what the internet should be – is something that needs to be done, but that none of us can do acting alone or so well as if we act through government.

I want to dispel the myth that bandwidth is infinite and access to everyone is guaranteed without collective action. The FCC, like similar agencies in other countries, was created because there are limits on the availability of bandwidth. Over-the-air transmission requires spectrum, of course. Spectrum is bandwidth. By definition spectrum is a scarce resource. If I weren’t, we wouldn’t have collected $20 billion in spectrum auctions. People don’t pay that kind of money for a non-scarce community. Spectrum is infinitely inexhaustible, but it is finitely available. You can’t use spectrum up by using it, but you can’t make more of it than God gave us.

Of course Manhattan is a small island, but tall buildings permit more people to use it. Similarly, new compression techniques make more use of bandwidth than previously thought possible. I just read that a single swatch of six megahertz for digital television need not be limited to a single channel of high-resolution picture but can be used for 24 channels of standard definition. That means that the 10 licenses that Congress is ordering us to give to the broadcasters of Washington, DC can be used for 240 terrestrial over-the-air digital channels. That trumps the satellite industry and even cable. It is a tremendous force for competition.

Compression doesn’t prove that spectrum is no longer scarce. Even George Gilder would agree with that (except possibly in the Keynesian long run – defined as when we’re all dead). But compression does prove that market forces, if unleashed, will make more of spectrum than any government policy is likely to do. That’s why the idea that digital broadcast licenses should be regulated to produce just one high-definition channel may not be a crime, but, in the words of the French diplomat Talleyrand, “It is worse than a crime, it is a blunder.”

Bandwidth over wired networks is also a scarce resource, because it costs money to build those wires. We have historically allowed companies to monopolize bandwidth in one region in exchange for the authority to regulate the way those companies offer their services.

In 1984, we opened up the right to offer national bandwidth connections – long distance service – to competition. In the Bandwidth Act of 1996 – excuse me, I meant the Telecommunications Act of 1996 – Congress gave the FCC a mandate to take the next step and open up local telecommunications markets to real competition. Our mission is to give consumers and businesses more services, more choices and more control over those choices – in other words, more bandwidth.

Congress also asked the FCC to guarantee universal service, especially to kids in classrooms – in other words, more access. The future of the internet, and the ability of service providers to offer more bandwidth to their end users, will thus depend on how successful we are at promoting competition in local telecommunications markets and truly universal service.

This gets to our second goal: rule writing or rule un-writing. We need to write rules that open up the local exchange market. We need to un-write written rules and undo unwritten rules that inhibit the competition.

In August of this year, I hope the FCC will issue interconnection rules. I’m going to get technical now – these should permit the spaghetti strands of competing networks to connect at fair prices and terms to each other. And by the end of the year, all states will impose fair terms and conditions on Bell companies and AT&T and MCI, among others. These terms will translate our rules into the text of the interconnection arrangements available for all network providers and users. But while we need to write interconnection rules, there are other rules I’m not convinced that we should write.

The FCC has received a petition from the America’s Carriers’ Telecommunications Association asking that we restrict the sale of “internet phone” software because the providers of that software do not comply with the rules that apply to telecommunications carriers. Similar issues are being discussed in other countries, including Canada. We’ve just finished getting comments on that petition. We’re in the process of reviewing those comments now, but I would just note that the National Telecommunications and Information Administration, the Administration’s telecommunications expert, has filed very thoughtful and very well-reasoned comments with us asking us to reject this petition.

I am also strongly inclined to believe that the right answer at this time is not to place restrictions on software providers, or to subject internet telephony to the same rules that apply to conventional circuit-switched voice carriers. On the internet, voice traffic is just a particular kind of data, and imposing traditional regulatory divisions on that data is both counterproductive and futile. Even if most of the FCC wasn’t working around the clock on implementation of the Telecommunications Act, I can’t imagine that we would have the time to keep track of all the bits passing over the internet to separate the “acceptable” data packets from the “unacceptable” voice packets.

More importantly, we shouldn’t be looking for ways to subject new technologies to old rules. Instead, we should be trying to fix the old rules so that if those new technologies really are better, they will flourish in the marketplace. For years, some engineers have been telling us that voice over a packet switched network wasn’t possible. The latency periods were too great, they said, and you’d never get acceptable quality. Well, it is going to be possible, and in the short period of time since the first commercial products became available, the quality has been rapidly improving. But the last thing we want to do is stop that improvement by thoughtless regulation.

Internet telephony may well become, in time, a competitive alternative to traditional circuit-switched voice telephony. After all, as the growth of the cellular industry demonstrates, people are willing to give up a significant level of quality in exchange for other benefits. In the cellular case the benefit is the ability to make a call from virtually anywhere. In the case of internet telephony, the benefit is a vastly lower price. This is especially true, for example, for international telephone calls.

And now the third goal: an economically-sustainable regime. Economics is about the marketplace sending signals that compel users and service providers to do the right thing, to utilize the network in the best and most efficient way, and to encourage the network to be built in ways that, for example, avoid brownouts by building in redundancy.

When we have competition among network providers, many of the pricing problems we now address through regulation will be resolved by competition instead. Consumers will be able to choose a communications company that gives them the best deal on subscription charges, service availability and charges for making calls. Although competition is seldom perfect, we look forward to being able to rely on it.

One problem that competition might not resolve, though, is that, under anything like today’s network architecture, someone who wants to call me has no choice but to deal with the carrier that I have chosen to provide my connection. There’s a monopoly relationship there, however many carriers vie for my choice. The monopolist on terminating calls at my home doesn’t charge me but charges those who make the calls, so I may not care very much (or even know) how much it charges. So, as the econo-guys would say, there’s a monopoly problem exacerbated by a principal agent problem.

What then is the appropriate economic model that can sustain the internet? With the number of users and host computers connected to the internet roughly doubling each year, and traffic on the internet increasing at an even greater rate, the potential for congestion is increasing rapidly. The growth of the internet, and evidence of performance degradation, has led some observers, including Bob Metcalfe, the inventor of Ethernet and founder of 3Com, to predict that the network will soon collapse from excessive usage.

Because the internet interconnects thousands of different networks, each of which only controls the traffic passing over its own portion of the network, there is no centralized mechanism to ensure that usage at one point on the network does not create congestion at another point. Because the internet is a packet-switched network, additional usage up to a certain point only adds additional delay for packets to reach their destination, rather than preventing a transmission circuit from being opened. This delay may not cause difficulties for e-mail, but could be fatal for real-time services such as video conferencing and internet telephony.

Moreover, at a certain point, internet routers are simply unable to handle the load and will “drop” packets, causing network “brownouts.” Such brownouts are already occurring. A group of high-energy physics researchers recently sent a memo to the Federal Networking Council complaining about “catatonic” connections that made it impossible to effectively share scientific data over the internet. It’s like Yogi Berra’s old line about a popular restaurant: “Nobody ever goes there anymore; it’s too crowded.”

Even if individual providers upgrade their networks to achieve sufficient capacity, end users may still experience congestion delays when their traffic must traverse another backbone provider’s network, or the smaller networks to which the receiving computer is connected. Standards bodies are developing new standards to reduce congestion and make possible more reliable connections for bandwidth-intensive applications, but these standards must be widely deployed within the network to have a significant effect.

The increasing levels of internet use are also beginning to affect the telephone network. Carriers engineered and deployed their switches based on the characteristics of voice traffic, where a conversation lasts an average of three minutes and an average customer attempts about three calls per busy hour. Internet users, however, typically engage in far longer calls than voice users. As a result, internet usage is placing unexpected demand on local exchange carriers’ switches, to the point that switch congestion is threatening service quality for voice users of some switches.

This might not be such a big problem if we had an all-digital phone network that was based on a packet-routing multimedia technology such as ATM. But we don’t, yet. We’ve got hundreds of billions of dollars of plant in the ground that works fine for voice, but that gets strained by the requirements of data communications. So the hard question is: if there are costs for upgrading the network to support the explosion of internet and other data usage, who pays those costs?

The FCC decided in the early 1980s that enhanced service providers, which include internet service providers, should not be subject to the interstate access charges that long-distance carriers pay to local phone companies for originating and terminating calls. ISPs are therefore treated as “end users” and can purchase lines that have no per-minute usage-based charge for receiving calls from their customers. The phone companies argue that the absence of usage charges means that ISPs do not provide the revenue to cover the additional costs they impose on the network.

I don’t know what the full answer is to this problem. But I’m inclined to believe our best guidance is to let technology, competition, and access reform make the problem go away. We are working to open markets so that these forces can operate most effectively.

I’m also aware that as the internet becomes a part of daily life for more and more people, reliability and service quality will be increasingly essential.

Whose job is it to minimize the likelihood that the network will go down? Last week, Netcom’s 400,000 customers lost connectivity to the internet for more than 13 hours. I don’t want to single out Netcom because they aren’t the only company that has had this kind of outage, and because this is ultimately an industry-wide issue. How would we feel if Montreal lost its telephone service for a day? I might be happy that no one from my office in Washington could reach me, but I would be concerned about being unable to get in touch with my family.

We have a Network Reliability and Operability Council in the United States that addresses these issues for the telephone network. It reports regularly to the FCC, but it’s an industry-led group. I know the internet has the IETF, which does a very effective job in setting standards. I hope that an appropriate body can be developed for addressing the issues of reliability in the context of the internet.

And now the fourth goal: ensuring the availability of bandwidth to all Americans, especially kids in classrooms. We have an obligation – legally, morally, and economically – to promote universal service, especially for those with limited resources. The value of networks increases exponentially as more people are connected. In addition, the internet rides on top of the existing public switched telephone network, and the rapid growth of the internet is driven in part by the universal deployment of traditional telephone networks.

Ensuring that schools, libraries, healthcare providers, and poor, rural and insular communities benefit from the internet and the new communications revolution it represents is one of the great challenges of the beginning of the 21st century. Government can no longer assume that it can meet public policy objectives by directing regulated or public companies to invest in a certain manner. But the private sector must also contribute its fair share if we are to escape from what the econo-people call the tragedy of the commons. So today, I challenge the internet community to provide two years of free internet access to classrooms and libraries.

On this and other issues, we find the challenge is to find ways to work together – governments, businesses, service providers, researchers and educational institutions – to solve common problems. Because it’s in everyone’s interest to have more bandwidth. It’s in everyone’s interest to have ubiquitous access. And it’s in everyone’s interest to minimize the artificial barriers placed on the free flow of information.

As the Federal Court in Philadelphia properly recognized two weeks ago in enjoining enforcement of the Communications Decency Act, the internet is a new medium. It encompasses some aspects of traditional media such as broadcast and telephony, but it is much more than that. Whether or not it was a wise decision to pass the amendment – and the Court has said it was not – we still need to recognize that if kids have access to the internet at home and in classrooms, then parents and teachers need software filters and other tools that empower them to make choices. I’ve talked to Tim Berners-Lee about this, and he said he and his very able team are working on addressing this very problem with the PICS system.

If we want, as I do, for our children to ride the information highway from Carthage, Tennessee, to the Library of Congress, we can’t permit the virtual school bus driver that takes them on that field trip to travel through the red light district. It’s legitimate to challenge the Communications Decency Act in court but again, it’s not enough to just say no. Your policy goal and our policy goal has got to be to fulfill the promise of the internet, not just protect the problems of the internet from governmental solutions.

My final point is that our internet policies must be international, because the internet is an inherently global medium. Although the largest concentration of internet users is still in the United States, the fastest growth is occurring in other countries. Internet users may not even know where in the world content providers are located. Material that is legal in one country may be illegal elsewhere. It doesn’t make sense to subject providers in one country to the laws of a different country simply because, unbeknownst to the provider, someone in the second country downloaded its material from the internet. To the extent that there are legitimate, agreed-upon governmental objectives – such as privacy and protection against fraud – that may be adversely affected by activities conducted over the internet, governments should look to international, and wherever possible industry-driven solutions, rather than acting unilaterally.

A second critical area in which we must have global solutions is standards. The internet has been successful because it is based on open, inter-operable standards. In addition to technical standards for the transmission of data across the network, frameworks are needed in areas such as electronic payments, intellectual property, commercial codes governing contractual agreements, security and privacy.

As the internet grows and becomes more commercialized, however, existing mechanisms may not be sufficient. There are many administrative functions that are essential to the smooth functioning of the internet, which are handled by a variety of different governmental and non-governmental bodies. We must consider whether any of these functions can be coordinated in a more efficient way, without losing the flexibility and openness of the existing processes. When I say coordinated, I do not mean government-controlled. Although there are occasions where it is useful for governments to participate in the standards process, the process should be international and driven by the private sector. The efforts of Tony Rutkowski and the Internet Law and Policy Forum on issues such as domain name assignment are an encouraging example of how such a process might work.

So we have many challenges before us. I’ve outlined what I think are some of the most difficult problems because I think they are also the most important. And all of this is important precisely because of what the internet means for tens of millions of people today, and what it could mean for hundreds of millions more in the next decade.

This came home to me recently when I traveled to Johannesburg for the meeting of the G7. While there, I visited the township of Alexandra. Surrounded by 350,000 people from all over the world, I thought about how many of these people came from terrible war-torn areas to this frightening township, a place without clean water, electricity or police or jobs.

But while I was there, I looked up and saw around Alexandra Township the towers of the world’s second largest digital mobile communications system. These towers deliver telephone calls. They can also deliver the power and promise of the internet. I was proud to be there because in Johannesburg we Americans announced the “Mickey Leland Initiative” to bring the internet to Africa. If you really believe in the theory of the internet, in the democratization of this medium, and the need and the ability to reach all people, then you should be the biggest proponents of expanding their access to the internet. You should support this initiative as well as Net Day and any other effort designed to connect us all.

Bandwidth and access in an information world should be on a par with clean air and water – we are all benefited when these fundamentals are available from Canada to South Africa from Alexandria, Virginia, to Alexandria, Egypt, to Alexandra, South Africa.

THINKING ABOUT WHY SOME COMMUNICATIONS MERGERS ARE UNTHINKABLE

Reed Hundt
Chairman, Federal Communications Commission

Brookings Institution, Washington, June 19, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

We are at a watershed point in the evolution of the telecommunications industry. Whether we have competitive or monopolized markets depends on the interactive and complex decisions of private firms, investors, Congress, agencies and courts. At stake is the possibility of billions of dollars of economic growth and astounding feats of innovation only achievable through competition.

This fateful period of communications history began just over one year ago when Congress passed the landmark Telecommunications Act. After long debate, Congress courageously opened communications markets to competitors that had been precluded by law or by the absence of pro-competitive rules. Since then, the FCC has issued a trilogy of implementing orders that comprise several dozen pages of rules necessary to allow new entrants to share or connect to the existing network of the local telephone companies.

Incumbents are now seeking to stay these rules across the board and to reverse Congressional, FCC and state commission decisions in courts and state legislatures. Nevertheless, we’re on the eve of competition. Companies stand poised to enter new markets and to defend vigorously their existing markets. This is, I believe, exactly what Congress intended – for new entrants to be invited and even obliged by new circumstances to enter markets from which they have been previously precluded: International Exchange Carriers (IXCs) vs. Local Exchange Carriers (LECs) and vice versa; telcos vs. cable and vice versa.

If by government policy and private zeal we get competition going, the winners will be taxpayers who enjoy the benefits of economic growth, job seekers who have new opportunities for work, entrepreneurs who have new markets in which to make their visions come to reality, financiers who have new ventures to back, consumers who have new choices, and even incumbents who have the chance to be competitors in markets from which they were previously precluded. The ultimate reward will be deregulation of the whole communications sector when competition is real.

It is natural in this time of transition from the monopoly paradigm to the competitive regime for firms to explore the possibility of entry into new markets by way of merger. It is natural for firms to ask lawyers what is thinkable and what is unthinkable in the way of such mergers. And it is unsurprising, if unprecedented, for AT&T to assert publicly that the hypothetical occurrence of an AT&T-Bell merger is “not unthinkable.” That happened last week.

It is right and proper for government to respond to such assertions by trying to give clear guidance to firms about what mergers are unthinkable and what are thinkable in the new world of open communications markets. It is right and proper for AT&T to invite us to a dialogue on the subject of whether a hypothetical AT&T-RBOC (Regional Bell Operating Company) merger is unthinkable. And so today I will discuss hypothetically that which AT&T has hypothetically discussed in recent days. For the reasons set forth here, my belief is that a combination of AT&T and an RBOC is unthinkable.

Under the statutory authority granted to FCC in sections 214 and 310 of the Communications Act, as well as under the Commission’s authority to enforce Section 7 of the Clayton Act with respect to combinations of common carriers, the FCC would eventually be obliged to pass judgment upon any such merger.

If the FCC is presented in the future with the sort of merger that AT&T is publicly discussing as a “hypothetical,” we will judge it on the law and the specific facts that are placed on the record at that time.

However, it is bad policy and bad practical application of the 1996 Telecom Act for government to act in response to a virtual request for hypothetical discussion from AT&T in the way the Delphic Oracle treated supplicants for guidance. Cryptic, virtually indecipherable utterances from government do not give guidance to lawyers and firms and investors who deserve, indeed require, every opportunity to plan ahead with certainty about the rules that are intended to guide the transition from monopoly to competition.

If certain forms of cooperation are going to be out of bounds for some firms in some markets, we need those firms to devote their zealous energy and precious resources to the push for fair, pro-competitive rules and real entry in all telecommunications markets, rather than to be encouraged to spend their time trying to accomplish an unthinkable combination. No one benefits from protracted uncertainty that freezes business zeal into a state of suspended animation, while government authorities mull proposed combinations.

Furthermore, Congress deserves to know that its laws and policies will be enforced, rather than frustrated by years of debate in court about corporate combinations inconsistent with those laws and policies. The Telecommunications Act of 1996 was intended to repeal the MFJ, not replace it with tortured litigation of consent decrees in various jurisdictions. Consequently, the agencies and the courts charged with implementing Congress’s directives must be vigilant in safeguarding these principles against all potential threats.

Of course it is impossible to discuss every conceivable hypothetical merger today. But some discussion can be offered about the hypothetical AT&T-RBOC merger presented by AT&T’s CEO. I hope to do so today, in a spirit of open-minded willingness to have a discussion about matters of terrific importance to the future of the American economy.

It’s been reported that some believe a merger between two adjacent Bell companies should be evaluated as a “horizontal” merger whereas an AT&T-RBOC merger would be “vertical.” Horizontal mergers typically involve combinations of firms that operate at the same “level” in an industry; in other words, they sell the same or similar products to the same customers. By contrast, a vertical merger typically involves two firms at different levels in a distribution chain. From an antitrust perspective, horizontal combinations are often viewed with greater skepticism than vertical combinations.

Because the Bell Atlantic-NYNEX merger is currently before the FCC, I cannot and will not comment on that merger or how I think it should be categorized. Nothing in this speech should be read as any kind of communication on the topic of that merger.

However, AT&T is currently present in the same geographic markets as each and every RBOC. In each RBOC region, Bell and AT&T offer service to the same customers. They have parallel and not wholly dissimilar facilities. They often have parallel billing systems. They have brand name recognition and marketing capability with respect to the same customers. They are what ought to be called “precluded competitors” – that is, firms that naturally would compete with each other, and that have not competed only because they have been precluded from doing so by law and by the absence of enforceable pro-competitive rules. In fact, these particular precluded competitors have sought the legal rights and legal capabilities to compete with each other. Analysis of any hypothetical AT&T-RBOC merger as a horizontal merger is therefore not ill-advised.

This brings us to a discussion of something that we’ve been thinking hard about at the FCC: how to evaluate combinations of precluded competitors in the rapidly changing telecommunications industry.

You might say that providing local exchange service is like being a bran merchant and offering long distance is like being a vendor of raisins. The goal of the Telecom Act was to get the raisin merchants into the bran business, the bran sellers into the raisin business and everyone into the raisin bran business – that is, bundled telecom services.

Of course, telecommunications may be more susceptible to technological innovation than the cereal market. But the presence of technological change and innovation does not mean that proposed combinations of precluded competitors are now “thinkable.” It is not necessarily the case that new technology can quickly cure the cold that telecom markets would catch from allowing or even opening the door to allowing ill-advised combinations. And that cold can kill the patient – the telecom sector – which is after all a monopolized market only just started on the road to recovery.

When we evaluate mergers in communications markets, we need to determine whether the parties in question fall into the category of competitors that have been precluded from entering a market. It may aid clarity of thought to call firms precluded competitors instead of potential competitors when law, or the lack of pro-competitive rules, not inclination or capability, is the reason they have not yet become actual competitors. In any event, under potential competition theory and under our newly named “precluded competition” theory, the result is essentially the same: an AT&T-RBOC merger is not thinkable.

Nor can would-be merger partners reasonably suggest that certain conditions support a hypothetical merger, when those same firms helped generate those conditions by not taking all appropriate actions consistent with the basic tenets of the Telecom Act. Rather, sound analysis of hypothetical mergers looks at the opportunities for competition created by effective enforcement of the new law and new rules at the federal and state level. Government cannot be asked to condone mergers on the grounds that government cannot or will not write and enforce fair pro-competition rules.

Now let’s look in a little more detail at the competitive issues raised in an RBOC region by a hypothetical AT&T-RBOC merger.

In the long distance market in the subject RBOC’s region, AT&T’s share of the residential market is presumably about 70% and its share of the business market is presumably about 40%, measured in minutes or revenues.

An RBOC can enter the long distance market in its region when it chooses to take the steps necessary to meet the section 271 checklist and the public interest standard under the Telecom Act. If an RBOC has the will to take these steps, there is a way to enter the long distance market. An RBOC is a precluded competitor in long distance, but it has in its own hands the capability to lift the terms of preclusion.

The impact of RBOC entry, when it occurs, can be judged by examining the experience of Southern New England Telephone in long distance. This experience and other evidence suggests that one could reasonably expect that the in-region RBOC will garner in a fairly short period of time roughly 20-30% of the long distance market when it chooses to do what is necessary in order to enter that market. The reason for this impact is the network, customer information, brand recognition, and other assets and capabilities that an in-region RBOC brings to bear as a long distance competitor.

Combining the long distance market share of AT&T in any RBOC region (even as it may be reduced by RBOC entry) with the long distance market share that reasonably can be imputed to the RBOC yields a resulting concentration that is unthinkable.

The analysis of an AT&T-RBOC hypothetical merger in terms of the local market is similar. Every RBOC is, in its region, by far the dominant firm in the provision of in-region local exchange service. Only a tiny fraction of customers choose any other local service provider. According to its own assertions and the convictions of most in the business community, one of the best positioned entrants in the local exchange market is AT&T. It is the largest telecommunications company in the country. It already has a business relationship with presumably about half the customers in any given Bell region. It has extensive network assets, a powerful brand, customer information, and sales force expertise. AT&T has already publicly set the goal of taking one-third market share in Bell markets.

Indeed, it’s difficult to imagine that any other firm will be a more effective broad-based local entrant than AT&T as long as the market-opening provisions of the Telecom Act are fully implemented and enforced. It seems unreasonable to assert that AT&T cannot obtain at least some meaningful entry in Bell markets if it seeks to enforce all the rights of entry given to it under the new law and our rules.

Imputing to AT&T even a modest percentage of market share taken from the existing Bell incumbent in that Bell’s region, as we must do under our potential or precluded competitor doctrine, then under conventional and serviceable antitrust analysis, a merger between it and the Bell incumbent is unthinkable. It would be exactly the type of horizontal combination that antitrust law frowns upon.

Suppose we ponder the telecom market of the future and assume that many customers will prefer buying telephony services as integrated local-long distance bundles: in other words, let’s assume raisins and bran are combined for sale as raisin bran to many or most customers.

One way to think about a bundled market is to ask how much of all telecommunications revenue in a Bell region goes to that Bell and how much to AT&T. Including access, a typical Bell earns about 60% of all telecom dollars in a given state, while AT&T, excluding access payments, gets about 20%. Assuming these market shares, a combination between the two in the bundled market is unthinkable.

Nor are the concerns created by an AT&T-RBOC merger necessarily confined to in-region combinations. Many of the RBOCs have expressed intentions to compete out-of-region in long distance and, eventually, local markets. They could be formidable competitors of AT&T, among others, in all out-of-region markets. This would be particularly true if the RBOCs supported and used the pro-competitive rules written by the FCC.

AT&T has expounded the idea that any merger between it (or any IXC) and an RBOC must pass the test of being good for competition. To quote from a recent speech by AT&T’s chairman:

“But most important of all, any partnership between any long distance company and any regional Bell company would have to be pro-competitive…No exceptions.”

A hypothetical combination between an RBOC and AT&T out-of-region does not appear to pass this test.

Moreover, there could be risky “spillover” effects of such an out-of-region combination. Could the RBOC and AT&T management teams reasonably be expected to collaborate and share their best-developed business secrets and strategies out of the RBOC region even while using those same tactics and strategies against each other in the RBOC region? Could the RBOC join AT&T in pressing for its legal rights as an entrant out of region to be upheld at the FCC or in court, while arguing in the same forums against AT&T when the dispute concerned an in-region issue?

To implement a competitive entry strategy in today’s transition period, a new entrant has to be an aggressive, albeit reasonable, advocate in all venues – in the marketplace, in negotiations, in state regulatory proceedings, in front of the FCC, and in court. The entrant may not be always right and it may not always win, but its shareholders will expect it to be always aggressive.

Some have discussed the benefits to competition from dividing an RBOC into separate wholesale and retail operations, akin to the Rochester Telephone plan and a recent SNET proposal. Separation of an incumbent company into wholesale and retail operations may or may not be a necessary pro-competitive step. If it is necessary or useful, AT&T or anyone else can so assert. But such a wholesale-retail separation does not mitigate the potential harm to competition created by a hypothetical Bell-AT&T combination that still eliminates a competitor from relevant markets.

Contemplating, discussing, negotiating and proposing unthinkable mergers can have negative impacts on competition. During the period of negotiation and subsequent regulatory scrutiny and likely court challenge, local competition plans and actions can be seriously slowed down. Worse, other unthinkable merger ideas might be pursued in reaction to an AT&T-RBOC merger announcement. These are additional reasons to discuss now what hypotheticals are correctly regarded as unthinkable.

Meanwhile, new entrants need to be pushing for fair interconnection agreements. This requires negotiation where necessary and reasonable pursuit of rights and remedies. New entrants need to be pushing for fast, fair and efficient ordering and provisioning so they can aggressively sign up customers. New entrants need to be planning and making the requisite investments so they can provide the competitive access to the information network to all parties in the economy.

Recently, LCI International, one of the larger long distance companies, presented us with a detailed petition to set performance standards for operational support systems. We have responded rapidly to this petition by asking comment on an expedited time schedule so that our process will not frustrate efficient competition. We will act rapidly and fairly in response to petitions of incumbents and new entrants. We will always make our decisions objectively and as rapidly as possible.

Teddy Roosevelt wrote: “The true function of the state…should be to make the chances of competition more even, not to abolish them.” Hence Roosevelt was a trustbuster. He felt that the trusts – what we call monopolies and what gave rise to the phrase antitrust – were the enemies of the three values he enunciated in his 1905 inaugural address: “Energy, self-reliance, and individual initiative.”

As David Brooks has explained in his essay on Roosevelt in the Weekly Standard, June 23, 1997, Roosevelt’s philosophy resonates in our time. Similarly, antitrust policy, as we move to the 21st century, can reflect, if not the economic theories, at least the values of antitrust policy developed as the country moved into the 20th century.

Of course, the factual inquiries and the analytical tools of modern antitrust are very different than they were in Roosevelt’s time. But the need to have open, honest discussion of what’s best for the economy is as great now as it was then. I appreciate the opportunity to talk with you about hypotheticals that are and ought to be unthinkable, because they do not serve the values or goals of our historic, present and future economic policies.

THE CHALLENGE OF CENTRAL BANKING IN A DEMOCRATIC SOCIETY

Alan Greenspan
Chairman of the Board of Governors, US Federal Reserve System

American Enterprise Institute for Public Policy Research, Washington, December 5, 1996
Published in The Corporate Report, Edition No. 20 ( January 15, 1997)

William Jennings Bryan reportedly mesmerized the Democratic Convention of 1896 with his memorable “. . . you shall not crucify mankind upon a cross of gold.” His utterances underscored the profoundly divisive role of money in his time – a divisiveness that remains apparent today. Bryan was arguing for monetizing silver at an above-market price in order to expand the money supply. The presumed consequences would have been an increase in product prices and an accompanying shift in the value of net claims on future wealth from the “monied interests” of the East to the indebted farmers of the West, who would arguably be able to pay off their obligations with cheaper money.

The debates, before and since, over the issue of our money standard have mirrored the deliberations on the manner in which we have chosen to govern ourselves, and, perhaps more fundamentally, debates on the basic values that should govern our society.

For at root, money – serving as a store of value and medium of exchange – is the lubricant that enables a society to organize itself to achieve economic progress. The ability to store the fruits of one’s labor for future consumption is necessary for the accumulation of capital, the spread of technological advances and, as a consequence, rising standards of living.

Clearly in this context, the general price level, that is, the average exchange rate for money against all goods and services, and how it changes over time, plays a profoundly important role in any society, because it influences the nature and scope of our economic and social relationships over time. It is thus no wonder that we at the Federal Reserve, the nation’s central bank, and ultimate guardian of the purchasing power of our money, are subject to unending scrutiny. Indeed, it would be folly were it otherwise.

A central bank in a democratic society is a magnet for many of the tensions that such a society confronts. Any institution that can affect the purchasing power of the currency is perceived as potentially affecting the level and distribution of wealth among the participants of that society, hardly an inconsequential issue.

Not surprisingly, the evolution of central banking in this nation has been driven by such concerns. The experiences with paper money during the Revolutionary War were decidedly inauspicious. “Not worth a Continental” was scarcely the epithet one would wish on a medium of exchange. This moved Alexander Hamilton, with some controversy, to press for legislation that established the soundness of the credit of the United States by assuming and ultimately repaying the war debts not only of the fledgling federal government but of the states as well.

Equally controversial was the chartering of the First Bank of the United States, which, although it had few of the functions of a modern central bank, was nonetheless believed to have brought about an era of gold-standard-induced deflation, which, while it may not have thwarted the impressive advance of industrialization, was seen by many as suppressing credit availability for the rural interests of the nation, which were still a majority. The general price level declined for more than two decades, which meant borrowers were paying off their loans in more expensive dollars than those they borrowed.

Not surprisingly, mounting pressures developed for reform, with Bryan bearing the standard for subsidized silver coinage, that is, “free silver.” Though Bryan lost to McKinley in 1896 (and again in 1900), the rural-based pressures for a more elastic currency did not diminish and ultimately were reflected, in part, in the creation of the Federal Reserve.

Nonetheless, many of the proponents of banking reform in the 1890s, and in the aftermath of the Panic of 1907, were suspicious of creating a central bank. In very large measure, those concerns underlay the various threads of reform that were joined together in the design and creation of the Federal Reserve System in 1913. Its founding followed a prolonged debate on the balance of power between the interests of the New York money center banks and the rest of the nation, still largely rural.

The compromise that resulted from that debate created twelve regional Reserve Banks with a Washington presence vested with a Federal Reserve Board. Its purpose was to “furnish an elastic currency…to establish a more effective supervision of banking in the United States, and for other purposes.” Monetary policy as we know it today was not among the “other purposes.” That evolved largely by accident in the 1920s.

Even with a central bank, the gold standard was still the dominant constraint on the issuance of paper currency and the expansion of bank deposits. Accordingly, the Federal Reserve was to play a minor role in affecting the purchasing power of the currency for many years to come.

The world changed markedly with the advent of the Great Depression of the 1930s, and the evisceration of the gold standard. The upheaval, and still-festering fear of New York “monied interests,” engendered the Banking Acts of 1933 and more importantly of 1935, which vested more of the Federal Reserve’s authority with the Board of Governors in Washington. During World War II, and through 1951, however, monetary policy was effectively subservient to the interests of the Treasury, which sought access to low-cost credit. With the so-called Federal Reserve-Treasury Accord of 1951, the Federal Reserve began to develop its current degree of independence.

Although in the 1950s and early 1960s there were short-lived bouts of inflation that caused momentary concern about sustained increases in the price level, these events did little to shake the conviction of most that America’s economic and financial structure would indefinitely and effectively contain any inflationary forces. This prescription certainly seems to have been reflected in the low inflation premium then embedded in long-term bonds.

That this view was profoundly wrong soon became apparent. The 1970s saw inflation and unemployment simultaneously at relatively elevated levels for some time. The notion that this could occur was nowhere to be found in the conventional wisdom of the economic policy philosophy that developed out of the Keynesian revolution of the 1930s and its subsequent empirical applications. Moreover, these models embodied the view that aggregate demand expansion, from almost any level, would permanently create new jobs. When that expansion carried the economy beyond “full employment” there would be a cost in terms of higher inflation-but only a one-time increase in inflation, so that there existed a permanent tradeoff between sustainable levels of inflation and employment.

The stagflation of the 1970s required a thorough conceptual overhaul of economic thinking and policy-making. Monetarism and new insights into the effects of anticipatory expectations on economic activity and price setting competed strongly against the traditional Keynesianism. Gradually the power of state intervention to achieve particular economic outcomes came to be seen as much more limited. A consensus gradually emerged in the late 1970s that inflation destroyed jobs, or at least could not create them.

This view has become particularly evident in the communiqués that have emanated from the high-level international gatherings of the past quarter-century. That inflation could reduce employment was a highly controversial subject in the mid-1970s when introduced into communiqué language drafts. At the meetings I attended as Chairman of the Council of Economic Advisers, the notion invariably induced extended debates. Today in similar communiqués such language is accepted boiler plate and rarely the focus of discussion. This shift in attitudes and understanding provided political support in 1980 and thereafter for the type of monetary policy required to rebalance the economy.

Despite waxing and waning over the decades, a deep-seated tension still exists over government’s role as an economic policy-maker. This tension is evident in Congressional debates, campaign rhetoric, and our ubiquitous talk shows.

It should not be a surprise that the very same ambiguities and conflicts that characterize the rest of our political life have their reflection in the nation’s current view of its central bank, the Federal Reserve. With regard to monetary policy, the view – or at least the suspicion – still persists in some quarters that an activist, expansionary policy could yield dividends in terms of permanently higher output and employment.

Nonetheless, there is a grudging acceptance of the degree of independence afforded our institution, and an awareness that unless we are free of the appropriations process that our independence could be compromised. It is generally recognized and appreciated that if the Federal Reserve’s monetary policy decisions were subject to Congressional or Presidential override, short-term political forces would soon dominate. The clear political preference for lower interest rates would unleash inflationary forces, inflicting severe damage on our economy. Notwithstanding, the central bank has not been immune from the suspicion and lack of respect that have come to afflict virtually all institutions in our society since the traumas of Vietnam, Watergate, and the destabilizing inflation in the 1970s.

The Federal Reserve’s most important mission, of course, is monetary policy. I wish I could say that there is a bound volume of immutable instructions on my desk on how effectively to implement policy to achieve our goals of maximum employment, sustainable economic growth, and price stability. Instead, we have to deal with a dynamic, continuously evolving economy whose structure appears to change from business cycle to business cycle, an issue I shall return to shortly.

Because monetary policy works with a lag, we need to be forward looking, taking actions to forestall imbalances that may not be visible for many months. There is no alternative to basing actions on forecasts, at least implicitly. It means that often we need to tighten or ease before the need for action is evident to the public at large, and that policy may have to reverse course from time to time as the underlying forces acting on the economy shift. This process is not easy to get right at all times, and it is often difficult to convey to the American people, whose support is essential to our mission.

Because the Fed is perceived as being capable of significantly affecting the lives of all Americans, that we should be subject to constant scrutiny should not come as any surprise. Indeed, speaking as a citizen, and not Fed Chairman, I would be concerned were it otherwise. Our monetary policy independence is conditional on pursuing policies that are broadly acceptable to the American people and their representatives in the Congress.

Augmenting concerns about the Federal Reserve is the perception that we are a secretive organization, operating behind closed doors, not always in the interests of the nation as a whole. This is regrettable, and we continuously strive to alter this misperception.

If we are to maintain the confidence of the American people, it is vitally important that, excepting the certain areas where the premature release of information could frustrate our legislated mission, the Fed must be as transparent as any agency of government. It cannot be acceptable in a democratic society that a group of unelected individuals are vested with important responsibilities, without being open to full public scrutiny and accountability.

To be sure, if we are to carry out effectively the monetary policy mission the Congress has delegated to us, there are certain Federal Reserve deliberations that have to remain confidential for a period of time. To open up our debates on monetary policy fully to immediate disclosure would unsettle financial markets and constrain our discussions in a manner that would undercut our ability to function. Nonetheless, we continue to look for ways to expand the flow of information to the public without compromising our deliberations and purposes. We have recently commenced to announce all policy actions immediately (federal funds rate changes as well as discount rate changes) and have expanded the minutes of the Federal Open Market Committee.

For many years, the Federal Reserve has maintained what we trust is a highly sophisticated day-by-day, near-real-time evaluation of the American economy and, where relevant, of foreign economies as well. We are able, partly through our twelve Reserve Banks, to monitor continuously developments in the real world. The information supplied about local conditions by the directors of the Reserve Banks has been frequently useful in identifying emerging national trends and in evaluating their underlying regional implications.

The issues with which we are confronted differ in urgency over time. Inflation concerns were not a dominant factor in economic forecasting in the 1950s and early 1960s, for example. Since the late 1970s, however, such concerns have become an important element in policy-making. More recently inflation has been low, but its future course remains uncertain. The development of comfortable product, but tight labor, markets has been a crucial factor in short-term economic forecasts of recent months-a phenomenon for which there is scant historic precedent.

There is, regrettably, no simple model of the American economy that can effectively explain the levels of output, employment, and inflation. In principle, there may be some unbelievably complex set of equations that does that. But we have not been able to find it and do not believe anyone else has either.

Consequently, we are led of necessity to employ ad hoc partial models and intensive informative analysis to aid in evaluating economic developments and implementing policy. There is no alternative to this, though we continuously seek to enhance our knowledge to match the ever growing complexity of the world economy.

At different times in our history a varying set of simple indicators seemed successfully to summarize the state of monetary policy and its relationship to the economy. Thus, during the decades of the 1970s and 1980s, trends in money supply, first M1, then M2, were useful guides. We could convey the thrust of our policy with money supply targets, though we felt free to deviate from those targets for good reason. This presumably helped the Congress, after the fact, to monitor our contribution to the performance of the economy. I should add that during this period we maintained a fully detailed analysis of the economy, in part, to make sure that money supply was still emitting reliable signals about the state of the economy.

Unfortunately, money supply trends veered off path several years ago as a useful summary of the overall economy. Thus, to keep the Congress informed on what we are doing, we have been required to explain the full complexity of the substance of our deliberations, and how we see economic relationships and evolving trends.

There are some indications that the money demand relationships to interest rates and income may be coming back on track. It is too soon to tell, and in any event we cannot in the future expect to rely a great deal on money supply in making monetary policy. Still, if money growth is better behaved, it would be helpful in the conduct of policy and in our communications with the Congress and the public. In the absence of simple, summary indicators, we will continue our detailed evaluation of economic developments. As we seek price stability and maximum sustainable growth, the changing economic structures constantly present more analytic challenges.

I doubt the tasks will become any easier for the Federal Reserve as we move into the 21st century. The Congress willing, we will remain as the guardian of the purchasing power of the dollar. But one factor that will continue to complicate that task is the increasing difficulty of pinning down the notion of what constitutes a stable general price level.

When industrial product was the centerpiece of the economy during the first two-thirds of this century, our overall price indexes served us well. Pricing a pound of electrolytic copper presented few definitional problems. The price of a ton of cold rolled steel sheet, or a linear yard of cotton broad woven fabrics, could be reasonably compared over a period of years.

But as the century draws to a close, the simple notion of price has turned decidedly ambiguous. What is the price of a unit of software or a legal opinion? How does one evaluate the price change of a cataract operation over a ten-year period when the nature of the procedure and its impact on the patient changes so radically? Indeed, how will we measure inflation, and the associated financial and real implications, in the 21st century when our data – using current techniques – could become increasingly less adequate to trace price trends over time?

So long as individuals make contractual arrangements for future payments valued in dollars, there must be a presumption on the part of those involved in the transaction about the future purchasing power of money. No matter how complex individual products become, there will always be some general sense of the purchasing power of money both across time and across goods and services. Hence, we must assume that embodied in all products is some unit of output and hence of price that is recognizable to producers and consumers and upon which they will base their decisions. Doubtless, we will develop new techniques of price measurement to unearth them as the years go on. It is crucial that we do, for inflation can destabilize an economy even if faulty price indexes fail to reveal it.

But where do we draw the line on what prices matter? Certainly prices of goods and services now being produced-our basic measure of inflation-matter. But what about futures prices or, more importantly, prices of claims on future goods and services, like equities, real estate, or other earning assets? Is the stability of these prices essential to the stability of the economy?

Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? As central bankers, we need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.

The public examination of Federal Reserve actions extends well beyond our stewardship of monetary policy. Our overall management of the Federal Reserve System should, and does, come under considerable scrutiny by the Congress. Since we expend unappropriated taxpayer funds, we have an especial obligation to be prudent and efficient with the use of those funds. I am not particularly concerned about the one-third of our annual $2-billion budget that is expended to provide financial services to the private sector in competition with other providers. Such services include the clearing of checks, the operation of the Fedwire system, and the processing of automated clearing house payments. We are reimbursed for those services, and at competitive prices still make a reasonable profit for the Treasury. If we became inefficient and uncompetitive, we would be priced out of the market, and eventually out of that line of business.

An additional one-sixth of our expenses are for providing services to the Treasury and other agencies of government for which we are subject to reimbursement with appropriated funds. For the remainder, which mainly covers monetary policy, supervision and regulation of banks, and currency operations, we have to be especially diligent, for there is no external arbiter.

The rapidly changing technologies of recent years are pressing us to review thoroughly our structure and operations. We have already engaged in major consolidations of operations when such consolidations have been made cost effective by the newer technologies. Although in my experience the Federal Reserve System has been responsible, efficient, and has performed well, the rapidly changing external environment frequently requires us to rethink our role and mission. Even where we can be competitive, it is not the role of a government agency, especially one vested with an unsurpassable credit rating, to seek out all available market opportunities. Accordingly, where specific priced services have become effectively and competitively provided by private sector suppliers, the Federal Reserve needs to reassess whether the extent of our participation in those services fulfills a reasonable public purpose. There are, of course, certain services that the Congress has, and will in the future, deem appropriate for us to subsidize. But these areas presumably will remain circumscribed.

As a step in our periodic reassessment, a special committee of Federal Reserve Board governors and Reserve Bank presidents has been set up to review our priced services operations and other system-wide activities. Another step has been to engage outside accounting firms to audit the Federal Reserve Board and the twelve Reserve Banks. We had been quite satisfied with the Board as general auditor of the Reserve Banks since 1914. But the range of activities and the reach of the Federal Reserve in recent years requires us to address the perception that we are auditing ourselves without the full arm’s length relationship deemed appropriate in today’s environment.

Finally, the substantial changes under way in bank risk management are pressing us to continuously alter our modes of supervision and regulation to keep them as effective and efficient as possible.

Most importantly, all of our recent initiatives, especially the strengthening of the payments system and supervision, are critical to a central mission of the Federal Reserve, to maintain financial stability and reduce and contain systemic risks. This mission is an extension of our monetary policy. Our country cannot enjoy the long-run “maximum employment and stable prices” objectives we are given for monetary policy if the financial system is unstable. In this regard, the successes that most please us are not so much the visible problems that we solve, but rather all the potential crises that could have happened, but didn’t.

Doubtless, the most important defense against such crises is prevention. Recent mini-crises have identified the rapidly mushrooming payments system as the most vulnerable area of potential danger. We have no tolerance for error in our electronic payment systems. Like a breakdown in an electric power grid, small mishaps create large problems. Consequently, we have endeavored in recent years, as the demands on our system have escalated (we clear $1.5 trillion a day on Fedwire), to build in significant safety redundancies. This has been costly in terms of equipment and buildings.

Along with our other central bank colleagues, we are always looking for ways to reduce the risks that the failure of a single institution will ricochet around the world, shutting down much of the world payments system, and significantly undermining the world’s economies. Accordingly, we are endeavoring to get as close to a real-time transaction, clearing, and settlement system as possible. This would sharply reduce financial float and the risk of breakdown. Meaningful progress has already been made in this direction.

This evening I have tried to put current central banking issues in historical context. Monetary arrangements, including central banks, naturally are under constant scrutiny and criticism. This is no less true of the Federal Reserve in 1996 than of the gold standard in 1896. Central banks need to respond patiently and responsibly to the commentary, and we need to adapt to changing circumstances in markets and the economy.

A democratic society requires a stable and effectively functioning economy. I trust that we and our successors at the Federal Reserve will be important contributors to that end.

THE GLOBAL FINANCIAL SYSTEM

Alan Greenspan
Chairman, US Federal Reserve System

The Economic Club of New York, December 2, 1997
Published in The Corporate Report No. 23 (January 31, 1998)

Dramatic advances in the global financial system have enabled us to materially improve the efficiency of the flows of capital and payments. Those advances, however, have also enhanced the ability of the system to rapidly transmit problems in one part of the globe to another. The events of recent weeks have underscored this latter process. The lessons we are learning from these experiences hopefully can be applied to better the workings of the international financial system, a system that has done so much to foster gains in living standards worldwide.

The current crisis is likely to accelerate the dismantling in many Asian countries of the remnants of a system with large elements of government-directed investment, in which finance played a key role in carrying out the state’s objectives. Such a system inevitably has led to the investment excesses and errors to which all similar endeavors seem prone.

Government-directed production, financed with directed bank loans, cannot readily adjust to the continuously changing patterns of market demand for domestically consumed goods or exports. Gluts and shortages are inevitable. The accelerated opening up in recent years of product and financial markets worldwide offers enormous benefits to all nations over the long run. However, it has also exposed more quickly and harshly the underlying rigidities of economic systems in which governments – or governments working with large industrial groups – exercise substantial influence over resource allocation. Such systems can produce vigorous growth for a time when the gap between indigenous applied technologies and world standards is large, such as in the Soviet Union in the 1960s and 1970s and Southeast Asia in the 1980s and 1990s. But as the gap narrows, the ability of these systems to handle their increasingly sophisticated economies declines markedly.

In western developed economies, in contrast, market forces have been allowed much freer rein to dictate production schedules. Rapid responses by businesses to changes in free-market prices have muted much of the tendency for unsold goods to back up, or unmet needs to produce shortages. Recent improvements in technology have significantly compressed business response times and enhanced the effectiveness of the market mechanism.

Most Asian policymakers, while justly proud of the enormous success of their economies in recent decades, nonetheless have been moving of late toward these more open and flexible economies. Belatedly perhaps, they have perceived the problems to which their systems are prone and recognized the unforgiving nature of the new global market forces. Doubtless, the current crises will hasten that trend. While the adjustments may be difficult for a time, these crises will pass. Stronger individual economies and a more robust and efficient international economic and financial system will surely emerge in their wake.

While each of the Asian economies is unique in many important respects, the sources of their spectacular growth in recent years, in some cases decades, and the problems that have emerged are relevant to a greater or lesser extent to nearly all of them.

Following the early post-World War II period, policies generally fostering low levels of inflation and high rates of savings and investment – including investment in human capital through education – contributed to a sustained period of rapid growth. In some cases this started in the 1960s and 1970s, but by the 1980s most economies in the region were expanding vigorously. Foreign net capital inflows grew, but until recently were relatively modest. The World Bank estimates that net inflows of long-term debt, foreign direct investment, and equity purchases to the Asia Pacific region were only about $25 billion in 1990, but exploded to more than $110 billion by 1996; less comprehensive data suggest that inflows rose to a still higher rate earlier this year.

Sustained, spectacular growth in Asian economies fostered expectations of high returns with moderate risk. Moreover the global stock market boom of the 1990s provided the impetus to seek these perceived high returns. As that boom progressed, investors in many industrial countries found themselves more heavily concentrated in the recently higher valued securities of companies in the developed world, whose rates of return, in many instances, had reached levels perceived as uncompetitive with the earnings potential in emerging economies, especially in Asia. The resultant diversification induced a sharp increase in capital flows into those economies. To a large extent, they came from investors in the United States and Western Europe. A substantial amount came from Japan as well, owing more to a search for higher yields than to rising stock prices and capital gains in that country. The rising yen through mid-1995 also encouraged a substantial increase in direct investment outflows from Japan.

In retrospect, it is clear that more investment monies flowed into these economies than could be profitably employed at reasonable risk. It may have been inevitable in those conditions of rapid growth, ample liquidity, and an absence of sufficient profitable alternatives, that much investment moved into the real estate sector, with an emphasis by both the public and private sectors on conspicuous construction projects that had little economic rationale. These real estate assets, in turn, ended up as collateral for a significant proportion of the assets of domestic financial systems. In many instances, those financial systems were already less than robust, beset with problems of poor lending standards, weak supervisory regimes and inadequate capital.

At the same time, rising business leverage added to financial fragility. Businesses were borrowing to maintain high rates of return on equity and weak financial systems were poorly disciplining this process. In addition, explicit government guarantees of debt or, more often, the presumption of such guarantees by the investment community, encouraged insufficient vigilance by lenders and hence greater leverage. But high debt burdens allow little tolerance for rising interest rates or slowdowns in economic growth, as recent events have demonstrated.

Moreover, the rapidly growing foreign currency denominated debt, in part the result of pegged exchange rates to the dollar, put pressure on companies to earn foreign exchange. But earning it became increasingly difficult. The substantial rise in the value of the dollar since mid-1995, especially relative to the yen, made exports of the Southeast Asian economies less competitive. In addition, in some cases, the glut of semiconductors in 1996 and the accelerated drop in their prices suppressed export earnings growth, exerting further pressures on highly leveraged businesses.

In time, the pressures on what had become fixed exchange rate regimes mounted as investors, confronted with ever fewer profitable prospects, slowed the pace of new capital inflows. Fearing devaluation, many domestic Asian businesses sought increasingly to convert domestic currencies into foreign currencies, or, equivalently, slowed the conversion of export earnings into domestic currencies. To counter pressures on exchange rates, countries raised interest rates. For fixed-exchange-rate, highly leveraged economies, it was only a matter of time before slower growth and higher interest rates led to difficulties for borrowers, especially those with fixed obligations.

Particularly troublesome over the past several months has been the so-called contagion effect of weakness in one economy spreading to others as investors perceive, rightly or wrongly, similar vulnerabilities. This is an age-old phenomenon. When investors are unsettled by uncertainties and fears, they withdraw commitments on a broad front; the finer distinctions between countries and currencies are lost. There is a flight to safe-haven investments, many of which are in developed nations.

Perhaps, given the circumstances, it was inevitable that the impressive and rapid growth experienced by the economies in the Asian region would encounter a temporary slowdown or pause. I say temporary because there is no reason that above-average growth in countries that are still in a position to gain from catching up with the prevailing technology cannot persist for a very long time, provided their markets are opened to the full force of competition. Nonetheless, free-market, even partially free-market, economies do periodically run into difficulties because investment mistakes invariably occur. And, as I noted earlier, many of these mistakes arose from government-directed or influenced investments. When this happens, private capital flows may temporarily turn adverse. In these circumstances, individual companies should be allowed to default, private investors should take their losses, and government policies should be directed toward laying the macro-economic and structural foundations for renewed expansion. New growth opportunities must be allowed to emerge.

Although the economies of the troubled Asian countries were usually characterized by a combination of current account deficits, large net foreign currency exposures, and constraints on exchange rate fluctuations, one cannot generalize that these are always signs of impending difficulties.

Large current account deficits, per se, are not dangerous if they result from direct investment inflows that are not subject to rapid withdrawal and that generate an increase in income sufficient to compensate the investors. Foreign currency exposures need not be a problem if positions are properly managed and the risks are recognized. Fixed exchange rates, also, are not necessarily a problem. Indeed, if they can be sustained, they yield extensive benefits in lower risk and lower costs for all international transactions. But a small open economy can maintain an exchange rate fixed to a hard currency only under certain conditions. Both Austria and the Netherlands, for example, have been able to lock their currencies against the Deutschemark because their economies are tightly linked through trade with Germany, they mirror the Bundesbank’s monetary policies, and they are perceived to engage in prudent fiscal policies. Were it not for issues of national identity and seignorage, they could just as readily embrace the DM as their domestic currency without any economic disruption. Other economies, such as Argentina and Hong Kong, have fixed their exchange rates essentially through currency boards. Changes in dollar reserves directly affect the monetary base of those economies.

But when exchange rates are fixed, with or without currency boards, should monetary and fiscal policies diverge significantly from those of the larger economy, the currency lock of the smaller economy would be difficult to hold irrespective of the size of reserves. Large reserves can delay adjustment. They cannot prevent it if policies are inconsistent, or prices in the smaller country are inflexible.

A well-functioning international financial system will seek out anomalies in policy alignments and exchange rates and set them right. In such a system, the exploitation of above normal profit opportunities, that is, arbitrage, will force prices to change until expected returns have been equalized. To policymakers in the country whose currency is not appropriately aligned, capital outflows are too often seen as attacks by marauding currency speculators. There have no doubt been some such attempts on occasion. But speculators rarely succeed in dislodging an exchange rate that is firmly rooted in compatible policies and cost structures. More often, speculation forces currencies through arbitrage into a closer alignment with underlying market values to the benefit of the international economic and financial system as a whole. We used to describe capital flight as “hot money.” But we soon recognized that it was not the money that was “hot” but the place it was running from.

The prodigious expansion of cross-border financial transactions in recent years has tightened and refined the arbitrage process significantly. But, to repeat, the inestimable advantages that it brings to trade and standards of living also carry a price. The inevitable investment mistakes and governmental policy failures are more rapidly transmitted to other markets by this process than was the case say twenty, or even ten, years ago. Moreover, there is little evidence to suggest that the rate of increase of financial transactions will slow materially in the years immediately ahead.

Technology will continue to reduce the costs of finding and exploiting perceived differences in risk-adjusted rates of return around the world, helping to direct capital even more to its most efficient use. Already, covered rates of return on actively traded interest-rate instruments have been equalized among many industrial countries.

But the broader merging of world savings and investment markets, clearly, has not been achieved, largely because investors are fearful of investing in countries they do not understand to the extent that they do their own, or are uninformed of the opportunities.

One measure of this so-called home bias in world investments is the degree that portfolios remain substantially local. Foreign investments, on average, represent less than 10% of US portfolios, for example. The percentage of Japanese portfolios is only slightly higher, and 15% of German portfolios is in foreign assets. The partial exception is Great Britain, where, with a longer history of global financial involvement, one-third of portfolios is invested in foreign assets.

Home bias in investments is considerably less than it was ten years ago, but we are still far from full globalization. Unless government restrictions inhibit the expansion of ever more sophisticated financial products that enable savers in one part of the world to reduce risk by investing in another, the bias will continue to diminish and the size of the international financial system will continue to expand at a significant pace. It is this overall diversification, and hence lowering of risk, that an effective international financial system offers. It facilitates the ever more efficient functioning of the global economic system and, hence, is a major contributor to rising standards of living worldwide.

Nonetheless, there are those who ask whether the price of so sophisticated a financial system is too high. Would it not be better to slow it down a bit, and perhaps achieve a system somewhat more forgiving of mistakes, even recognizing that such a slowing may entail some shortfall in long-term economic growth?

Even if we could implement such a tradeoff, with only minor disruption, should we try? For centuries groups in our societies have railed against, and endeavored on occasion to destroy, new inventions. Fortunately for us the Luddites and their ilk failed, and recent generations have enjoyed the fruits of those technologies.

Moreover, such a slowdown may not even be possible – at least not without major disruption and cost. Newer technologies, especially advanced telecommunications, make it exceptionally difficult for open markets, with associated opportunities, to be suppressed. Price and capital controls, which might have been feasible a half century ago, would be very difficult to implement in today’s more technologically advanced environment. Tinkering at the edges of our system in order to produce a less frenetic pace of change would be easily circumvented. Arguably, it would take massive government controls to substantially slow the advance toward greater efficiency of our systems. This would surely produce a far more negative impact on economic growth than would be acceptable to even the most ardent advocates of reigning in the rapid expansion of our international financial system.

If, as I suspect, it turns out after due deliberation and analysis, that slowing in the pace of financial modernization is not in fact seen as a feasible alternative, what policy alternatives confront the international financial community to contain the periodic disruptions that are bound to occur in any free market economy?

A financial system, like all structures, is as strong as its weakest link. As the international financial system has become even more complex, the particular areas of weakness to be addressed have changed. At the risk of oversimplification, let’s examine some of the key links of our current infrastructure.

Today the organized exchanges and over-the-counter markets of industrial countries can handle massive volumes of transactions. Even in emerging countries exchanges are developing and expanding. In contrast, during the worldwide stock market crash of October 1987, the transactions systems were under severe stress and, indeed, some broke down, incapable of handling the enlarged volumes. At that time, the Hong Kong Stock Exchange could not open for several days. The New York Stock Exchange was straining badly under the near 400 million daily share volume of late October 1987, with long reporting delays creating uncertainties that, doubtless, exaggerated the price declines. Those weaker links have since been strengthened by large infrastructure investments. Almost 1.2 billion shares traded on the NYSE on October 28 of this year, three times the 1987 volumes with no evident problems or delays.

Our equity, debt, and foreign exchange trading systems, and their peripheral futures and options markets have functioned well under stress recently. These systems are not weak links in the developed economies, nor, for the most part are they in other economies.

Neither is the payment system, that complex network, which transfers funds and securities in huge and growing volumes domestically and internationally, rapidly and efficiently. The private and public sectors across the globe have endeavored diligently for years to expand the capacity of the system to meet the increasing demands put upon it. And they have initiated and strengthened procedures for reducing risk in settling transactions, and diminishing uncertainties. That they have generally succeeded is evident from the smoothness with which huge volumes of funds produced under recent stressed market conditions were transferred and settled with finality, through various netting and clearing arrangements.

Banks are another matter. These are highly leveraged institutions, financed in part by interbank credits and, hence, prone to crises of confidence that can quickly spread. In most developed nations banking systems appear reasonably solid. Japan has been somewhat of an exception, but there have been some positive signs there, as well. Banks have been recognizing losses, and the government seems finally to be appropriately addressing their problems. In a large number of emerging nations, as I indicated previously, banks are in poor shape. Lax lending has created a high incidence of non-performing loans, supported by inadequate capital, leaving banks vulnerable to declines in collateral values and nonperformance by borrowers.

How can such deficient institutions be elevated to a level that would allow their economies to function effectively in our increasingly sophisticated international financial system? Certainly, improved cost and risk management and elimination of poor lending practices are a good place to start.

But these cannot be accomplished overnight. Loan officers with experience judging credit and market risks are in very short supply in emerging economies. Training will require time. The same difficulties confront bank supervision and regulation. Important efforts in this area have been underway for several years through the auspices of the Bank for International Settlements, the International Monetary Fund, and the World Bank. But again, it will take time to develop adequate systems and trained personnel.

Moreover, robust banking and financial systems require firmly enforced laws of contract, and transparent, market-oriented systems of corporate reporting and governance. The current crisis in Asia is, to a much greater extent than many previous crises, one of private not public debts, at least de jure. Arguably, the absence of efficient and transparent workout arrangements for troubled private borrowers makes the problems more difficult to deal with. Efficient bankruptcy arrangements reduce disruptions to economic activity that often arise when losses have to be imposed on creditors. Many developing countries do not have good workout arrangements for troubled debtors, and, as a result, governments in these countries often feel compelled to bail them out rather than accept the consequences of defaults.

The most troublesome aspect of many banking systems of emerging countries, to expand on the issue I raised earlier, is the widespread prevalence of loans driven by “industrial policy” imperatives rather than market forces.

What is wrong with policy – that is, politically driven – loans? Potentially nothing if they were made to firms to finance expansions that just happened to coincide with a rise in consumer or business or overseas demand for their newly produced products. In these circumstances, the loan proceeds would have been profitably employed and the loan repaid at maturity with interest. Unfortunately, this is often not the case. Policy loans, in too many instances, foster misuse of resources, unprofitable expansions, losses, and eventually loan defaults. In many cases, of course, these loans regrettably end up being guaranteed by governments. If denominated in local currency, they can be financed with the printing press – though with consequent risk of inflation. Too often, however, they are foreign-currency denominated, where governments face greater constraints on access to credit.

Restructuring of financial systems, while indispensable, cannot be implemented quickly. Yes, the potential risks to the banking systems of many Asian countries and the potential contagion effects for their neighbors, and other trading partners, should have been spotted earlier and addressed. But flaws, seen clearly in retrospect, are never so evident at the time. Moreover, there is significant bias in political systems of all varieties to substitute hope (read, wishful thinking) for possibly difficult preemptive policy moves, both with respect to financial systems and economic policy. There is often denial and delay in instituting proper adjustments. Recent propensities to obscure the need for change have been evidenced by unreported declines in reserves, issuance by the government of equivalents to foreign currency obligations, or unreported large new forward short positions against foreign currencies. It is very difficult for political leaders to incur what they perceive as large immediate political costs to contain problems they see as only prospective.

Reality eventually replaces hope, and the cost of the delay is a more abrupt and disruptive adjustment than would have been required if action had been more preemptive. Increased transparency for businesses and governments is a key ingredient in fostering more discipline on private transactors and on government policymakers. Increased transparency can counter political bias in part by exposing for all to see, the risks of current policies to stability as they develop. Under such conditions, “failure” to act would also be perceived as having political costs.

We should strongly stress to the newer members of the international financial system – the emerging economies – that they should accelerate the restructuring of their financial systems in their own interests. But having delayed timely restructuring, many now find themselves with major shortfalls in bank liquidity and equity capital that put their systems at severe risk of collapse before any full restructuring is feasible. The IMF, the World Bank, and their major shareholders, the developed countries, may wish to facilitate adjustment through temporary loans to governments and the encouragement of private equity infusions to these banking systems. Since any severe breakdown can have contagion effects on a worldwide basis, it is in our interest to do so.

These loans must be judged in their entirety. They transform short-term obligations into medium-term loans, but they do so contingent on the country using the time to reform financial systems as well as adopt sound economic policies. Such conditionality accelerates the adjustments in financial systems needed to lay the foundation for resumption of robust, sustainable, growth, while cushioning to some degree the economic effects of the immediate crisis. Assistance without further reform of financial systems and economic policies would be worse than useless since it would foster expectations of being perpetually bailed out. That, in turn, could induce perverse behavior on the part of emerging nations’ governments and of private sector investors in emerging nations. Believing that the international financial community will support these economies, in part by backstopping the obligations they incur, induces investors to commit more than they would otherwise. This has tended in the past to push the expansion of investment beyond prudence – given the limit of profitable opportunities.

As the international financial system becomes ever larger and more efficient, the size of the financial response – whether to help banks or to add to foreign currency reserves – may have to be correspondingly larger per unit of crisis, if I may put it that way, unless we alter our approach. While it is precarious to generalize from one observation, it is likely that the Mexican financial crisis of the 1980s was broader than in 1994-95, but the size of the assistance program, to set things right, was much larger in the latter than in the former case. The reason appears to be that the increased efficiency of the financial system created a larger negative spillover, which had to be contained. Among other developments, the marked shift from bank credits in the earlier crisis, to a more securitized, anonymous, set of liabilities made workouts far more complex.

It is, hence, all the more essential that the weaker links in our international financial system, the banking systems of the emerging nations, be strengthened. Preventive programs should be accelerated sufficiently far in advance of the next crisis to effectively thwart or contain it.

Moreover, it is incumbent on governmental policymakers to ensure that unstable economic environments do not induce or exacerbate international financial disruptions. But governments and international financial institutions should be brought on the scene only rarely. To do otherwise risks the perverse incentives I spoke of earlier. Markets should be allowed to work.

Recent events in Asia have sharpened our understanding of the complexity of today’s international capital flows and, presumably, of similar episodes that may emerge in the future.

The rapid integration of national financial systems has fostered the growth of trade and standards of living worldwide. It has also forced a review of the soundness and viability of our burgeoning financial systems. We should welcome such pressures even as they impose challenges to all of us. The end result is very worthwhile having.

THE STRENGTH OF THE US-CANADA RELATIONSHIP

William Daley
US Secretary of Commerce

The Montreal Board of Trade, August 4, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

It’s a pleasure to visit Montreal, one of the world’s most charming and cosmopolitan cities, a center for arts and culture as well as manufacturing and research, an international business hub that also attracts visitors and immigrants from around the world. The ingenuity and resourcefulness of the people of this city and this province have been an important part of the unique bond between the US and Canada.

I chose Canada for the site of my second trade mission as a way of highlighting and cementing that bond. With a shared border that stretches for thousands of miles, with common values and heritage, with similar political, economic and legal systems, the US and Canada are natural partners.

Which is why I’ve focused this mission specifically on opportunities for small and medium-sized businesses, many of whom have less export experience. Our close ties and similar national profiles make Canada the ideal foreign market for American firms making their first foray into the global marketplace.

And the same goes for smaller firms here – their search for international buyers and partners should lead them naturally to their American neighbors. With fewer cultural land mines to navigate, they are free to do business in an environment that is comfortable and familiar.

Small companies have a lot to offer the global economy. They are pioneers in the high-tech industries that will drive the 21st-century economy. Many of the most cutting-edge innovations and the best-paying jobs can be found in firms with 50 or fewer employees.

You deserve credit for the way you’ve nurtured the growth of small firms. Bolstered by strong federal and provincial support for research and development, Montreal has experienced major advances in pharmaceuticals, aerospace, agribusiness, telecommunications and biotechnology.

The time has come for our governments to ensure that small businesses seize the potential of the integrated North American market. Canada is doing its part, with strong small-business efforts through its “Team Canada” program, as well as Quebec’s goal of “2,000 new exporters by the year 2000.” One of my top priorities as Secretary of Commerce – and one of the cornerstone’s of President Clinton’s economic agenda – is to help small businesses expand their trade portfolios. My cabinet colleague Aida Alvarez, the head of the US Small Business Administration, has also made this one of her top priorities, and she has joined me here in Montreal to promote small-business partnerships between the US and Canada.

Companies large and small benefit from the fact that ours is the closest bilateral alliance in the world. We set the standard by which nations judge their relationships with one another. For all of the focus on new, emerging markets, the fact remains that the good jobs and opportunities generated by US-Canada ties are unrivaled.

This story often gets lost, with most of the attention focused on more antagonistic trade relationships with China and Japan, for example. But the fact is that no two countries trade more with each other than the US and Canada. Two-way trade in goods and services amounts to a staggering US$1 billion a day. Over 97% of all our trade passes unimpeded across our border. Last year, US-Canada trade was worth even more than our trade with the entire European Union.

We also have the world’s largest investment relationship, with accumulated foreign direct investment in each other’s economies totaling US$130 billion. The strength of our economies and the prosperity of our people depend on the business we do with each other.

Low interest rates and low inflation on both sides of the border have made for a climate even more conducive to trade, investment, and commercial exchange. Canadian government, at the federal and provincial levels, deserves enormous credit for deficit reduction initiatives that are fueling investment and business growth. With the International Monetary Fund predicting that Canada will lead the industrialized world in economic growth over the next two years, Canada’s appeal as an international market will grow, and the US-Canada commercial relationship will continue to flourish.

Of course, the potential for Canadian trade with the US is greatest along the border. We’re proud to have the Governor of New Hampshire, Jeanne Shaheen, with us on this trip. She’s here because Quebec and its businesses are ideal partners for her state. Home to thousands of Americans of French-Canadian descent, New Hampshire is as close to Montreal as it is to almost every major US city. With barely a million people, New Hampshire export sales to Canada still approached US$500 million in 1995. And I’m confident that that number will grow under Governor Shaheen’s leadership.

Millions of Americans owe their jobs to our trade with Canada. In every conceivable sector, American firms have teamed up with their Canadian counterparts, building strong partnerships, setting up joint ventures, completing mergers and acquisitions and establishing other strategic alliances.

I got a firsthand look at the level of integration between our two economies today, when I visited Bell Helicopter Textron’s manufacturing plant in Mirabel. This state-of-the-art facility, the world’s largest producer of commercial turbine rotary-wing aircraft, employees 1,600 people. Meanwhile, Bell’s main plant back in the US sells 30% of its total output to Canada, exports which support almost 2,000 jobs in Fort Worth, Texas.

Quebec contributes mightily to the whole of the US-Canada relationship, but it has also emerged as a global economic force in its own right. When you take inter-provincial trade into account, Quebec is the sixteenth largest exporter in the world, despite a population of only 7.2 million people. Quebec exports more than 40% of its goods and services, and over a quarter of the province’s GDP is attributable to exports.

Within Canada, this province is a unique market, with its own particular tastes and identity, and Americans doing business here must treat it accordingly. They need to adapt to a foreign language that they don’t face in the rest of Canada. They also have to be cognizant, for example, of Quebec’s distinct consumer habits.

But if the challenge of doing business here is great, so are the rewards. Quebec alone is the United States’ sixth largest trading partners with two-way exchange totaling approximately US$50 billion. That’s comparable to our trade with Asian tigers like Taiwan and South Korea. The US consumed 82% of Quebec’s exports in 1995, and Quebec does more business with the US than with the rest of the Canadian provinces combined.

In just the last decade, the US-Canada relationship has been bolstered by a strong effort to eliminate barriers to two-way trade and investment. The US-Canada Free Trade Agreement has been a shot in the arm for both of our economies, increasing our two-way trade by 5% between 1989 and 1994. Under the terms of that pact, all tariffs on bilateral trade will be eliminated by January 1st of next year.

The 1995 Open Skies Agreement finally brought modern, convenient air service to travelers between major American and Canadian cities. Our respective tourism industries received a boost. And by making shipping more efficient, the agreement has facilitated exports between our two countries.

The Canada-US Accord on our Shared Border has helped harmonize commercial border procedures and reduce congestion at busy crossings. And during Prime Minister Chrétien’s recent visit to Washington, he and President Clinton announced a series of agreements to further streamline the legitimate movement of people and goods across our border.

As much as our two nations are in sync, nations are a lot like people: if two of them agree on absolutely everything, then probably only one is doing the thinking. As separate, sovereign states, of course we have our differences. We disagree, for example, on the best approach to promoting democracy and economic reforms in Cuba.

But our friendship sustains us through our disputes. I had a good meeting just last week with Fisheries Minister Anderson and Ambassador Chrétien, which helped us move toward a resolution of the standoff over salmon fishing and conservation along the Pacific Coast. I remain confident that we will settle this as successfully as we have other contentious issues – softwood lumber, for example – without a threat to our overall relationship.

The strength of the US-Canada relationship reverberates beyond our borders, and its fruits are enjoyed around the world. Because together we are looking outward, as hemispheric leaders, as partners in APEC, working in tandem to help build a global marketplace based on the principles of open markets, trade liberalization, and economic integration.

The US-Canada FTA was a building block to NAFTA, a trilateral free trade zone that covers 15 million square miles and captures 400 million people. We have just completed a three-year assessment of NAFTA’s impact, and it’s clear that the US, Canada and Mexico are all stronger and more prosperous because of the treaty. And let me add that we would never have completed NAFTA without the tireless efforts and vocal free-trade advocacy of the people and government of Quebec.

Knocking down North American trade barriers, however, was just the beginning. The US and Canada are leading the drive toward a Free Trade Area of the Americas, which would be the largest free trade zone in the world, a crowning achievement that would mean unprecedented prosperity and opportunity for the hemisphere’s 750 million people. Already the pieces are in place, with regional agreements like Mercosur, the Andean Pact, the Central American Common Market, and Caricom, which are introducing competition into the region’s economies and preparing them for FTAA membership.

At the Americas Business Forum and Trade Ministerial in Belo Horizonte this spring, we took major strides toward full commercial integration. Fast-track negotiating authority for President Clinton will be an important tool in accelerating this process. We are working with Congress to find common ground, and I’m confident that we will have fast-track by the 1998 Summit of the Americas in Santiago.

Hemispheric economic integration is the most ambitious manifestation of what President Franklin Roosevelt called the “policy of the good neighbor.” That commitment to the health and vitality of the nations of the Western Hemisphere – as pragmatic as it is idealistic – has guided US-Canada relations ever since.

Together, as the best of neighbors, we have met the most daunting challenges of this century. Shoulder to shoulder, we have fought and won wars both hot and cold. We have led a western alliance that is the greatest force for peace and stability the world has ever known.

Now we stand on the brink of a new century, one that will be dominated by globalization, one in which the fate of nations will rest on the strength of their relationships with one another. And so, being a good neighbor is as urgent as it ever was. In fact, it’s a matter of economic survival.

I know that we will work, as neighbors and friends, to make the 21st century one of growth, prosperity, and security for ourselves and all the people of the Americas.

Speaking to the Canadian Parliament in 1995, President Clinton put it this way: “I come here today to reaffirm the ties that bind the United States and Canada in a new age of great promise and challenge; a time of rapid change when both opportunity and uncertainty live side by side in my country and yours…I came here because I believe our nations together must seize the opportunities and meet the challenges of this new age. And we must – I say again – do this together.”

OPPORTUNITIES OUT OF CRISES: LESSONS FROM ASIA

Lawrence H. Summers
US Deputy Secretary of the Treasury

Overseas Development Council, Washington, March 19, 1998
Published in The Corporate Report No. 24 (May 30, 1998)

I would like to spend my time today discussing the short- and longer-term causes of the recent crises in Asia, the opportunity they present for putting Asia’s growth on a more sustainable footing and some of the implications for the International Financial Institutions.

Systemic roots of the crisis. In the wake of these crises there has been a great deal of discussion about the “Asian model.” To the extent that there exists such a model, given the enormous differences between the economies of the region, it lies in a number of common features in their economic and financial approach, an approach that in many ways tracks the postwar development of Japan.

This was built on the fundamentals – on high savings, high levels of education and hard work. But it was also an approach that favored centralized coordination of activity over decentralized market incentives. Governments targeted particular industries, promoted selected exports and protected domestic industry. There was a reliance on debt rather than equity, relationship-driven finance, not capital markets, and informal rather than formal enforcement mechanisms.

This model has had important and profound successes. And the performance of Asia has truly been spectacular. But it has been a difficult and ongoing question of interpretation quite how much of that spectacular growth was due to strong universal fundamentals, such as high savings and high levels of education, and how much due to practices uniquely Asian. What we can say is that even before the onset of the recent financial problems a reassessment was under way, not merely within American universities but within Asia:

• Japan’s disappointing economic performance had led to plans for a “Big Bang” liberalization of the financial sector and repeated calls for sweeping deregulation.

• Prominent Korean observer Kim Dae Jung (now, of course, the president) had published books calling for wholesale reform of the economic system: an end to government-directed lending to industry, for non-inflationary macro-economic policies, for reforming the chaebol and for opening up the financial system.

• Respected academic studies of Asia’s growth record, pioneered by Alwyn Young, began to suggest that the miraculous growth of Asia might owe rather little to sustained growth in productivity and a great deal more to rapid accumulation of capital.

These longer-term issues were conflated in recent years with a set of shorter-term problems of macro-economic management: the maintenance of mutually inconsistent monetary policy and exchange-rate regimes, excess inflows of private capital channeled into unproductive investments, substantially reduced competitiveness and significant failures of debt management that led to unsustainable quantities of short-term debt. All of these elements, short- and long-term, came together to produce these crises, and were then reinforced by lack of market confidence so as to set up a situation with many of the features of a bank run.

This, then, is a distinct kind of crisis. It has a common element with almost all financial crises: money borrowed in excess and used badly. But it is also profoundly different because it does not have its roots in government improvidence. Relative to nearly all of the crises we have seen in recent years, the problems that must be fixed are much more micro-economic than macro-economic, and involve the private sector more and the public sector less.

Another way to put this would be that the reforms are less about changing the short-term policy mix than they are about changing the long-term institutional environment. Short-term adjustments in policy can and have been needed to revive confidence and correct imbalances. But the overriding focus has been on addressing the same long-term challenge at the root of those earlier reassessments: the challenge of building a new system of governance better attuned to the demands of an integrated modern market economy.

The approach to reform. We can see the core elements of such a response in the reform programs the International Monetary Fund, along with the World Bank and the Asian Development Bank, have supported in Asia. The goal in each area of policy is both to tackle the short-term problem of confidence and to clear the way for a new growth path built on private investment and individual opportunity.

Macro-economic reforms have involved not merely short-term adjustments to restore confidence and growth but long-term reforms to make the framework for macro-economic policy more transparent and accountable. Each of the programs commits the government to regular publication of foreign reserve and other data and greater public scrutiny of policy decisions, both so as to build consensus and to reduce the scope for unpleasant surprises.

Financial sector reforms have envisaged not merely restructuring of the financial system but laying the groundwork for a new one. While attention has focused on the closure or merger of insolvent financial institutions, at least as important to the long-term resolution of these crises will be the commitment to build a new supervisory and regulatory infrastructure and foster modern credit evaluation and risk management techniques within private financial institutions themselves.

Corporate sector reforms have all involved a recognition that there needs to be bankruptcy regimes in place, and system-wide improvements in accounting standards and corporate disclosure to facilitate the move to a more arms-length, market-driven investment culture. If one were writing a history of the US capital market, one of the most important innovations one would say had shaped that market would be the idea of generally accepted accounting principles. It is a minor but not insignificant triumph of the IMF program that when I and other members of the administration were in Korea earlier this year, a teacher of night school courses in accounting told us he normally has 22 students in his winter term – this year he has 385.

Reforms of the role of government have sought not merely an end to those public interventions directly contributing to the crisis but fundamental changes in what government is expected to do. The emphasis is on reducing direct public involvement in the productive sector, as for example in the Korean pledge to eliminate non-economic lending to industry. And it has been on opening the economy to foreign participation and competition with sweeping trade and financial sector liberalization, both to improve the efficiency of the economy and to let long-term capital in.

But this is only one part of the story. The emphasis of these programs has been at least as much on improving the quality of government intervention: to make it more transparent, less open to corruption and more focused on the things that sustainable market-led growth depends on, but markets alone cannot provide. Most notably, all of the most recent reform programs include measures to improve the quality of the social safety net and to maintain and improve government spending on education, healthcare and other basic services.

It is arguable that reform would not be politically sustainable in these situations without an assurance that the pain of adjustment will not fall only on the poor. What we know for sure is that they would not be economically sustainable, in the long run, without these kinds of reforms. Years of research into the business of “picking winners” in development have given a clear verdict: when it comes to the long-term economic return, public investments in health and education and an effective social insurance system win out every time.

Decisively implemented, these changes will help address Asia’s shorter- and longer-term imperatives. They will increase confidence and attract private capital in the short run. And they address the longer term problem of allocating capital on a more market-oriented basis. They are also important for the international community, because an Asia that addresses these problems will be a stronger, more balanced contributor to global growth and trade. And we should remember they will offer the prospect of resuming sustained growth in living standards and opportunities in a region where two-thirds of the world’s population live.

The role of the International Financial Institutions. This many-sided response is a response to the particular challenges facing Asian economies in these crises, and in each case, to the specific circumstances of each country. But it is not an Asian response. Nor is it an Anglo-Saxon response. It is rather an effective response, grounded in the now very broad consensus in favor of economics based on markets and market-supporting institutions.

For all the debates we have seen recently about the proper role of the IFIs, they have focused to a very large extent on the means and modes of official assistance. The end goal, of laying the foundations for market-led growth, is no longer in question. What has been a matter of continuing debate and pressure on the part of the United States has been the desire to ensure this objective is being met as effectively as possible.

Let me just highlight three instances where we have pressed for change in areas that have been brought out with particular salience in the Asian case:

Laying the foundation for stable finance. We have pressed to ensure that the IMF would never again stand for It’s Mostly Fiscal – by working to adapt the IMF’s policies and practices to meet the needs of a more integrated and market-driven global economy. For example:

• Through the US-initiated creation of the new Emergency Financing Mechanism, to provide for more rapid agreement to extraordinary financing requests in return for more intense regular scrutiny.

• By successfully urging the IMF to take the lead in international efforts to promote greater disclosure of economic and financial data and improved banking supervision in emerging markets.

• More than 40 countries have already subscribed to the IMF’s Special Data Dissemination Standard created in April 1996. And the IMF was closely involved in the development, by the Basel Committee, of the Core Principles For Banking Supervision and Regulation that were formally approved by the G7 countries last year.

• And most recently, through the US-inspired Supplementary Reserve Financing facility, to let the IMF lend at premium rates in short-term liquidity crises and improve borrower incentives, a mechanism that grew out of recent developments in Asia and has played a major role in the IMF’s assistance to the region.

Let me applaud the commitments that Jim Wolfensohn has made, since becoming president of the World Bank, to upgrade the organization’s involvement and expertise in the area of financial sector reform. If there is one area where I welcome a competition among the IFIs, it is here. And indeed a large, in many cases the major, portion of new Asian Development Bank and World Bank lending to Korea and Thailand in response to the crises has been focused on this sector.

Greater emphasis on good governance. The Asian crises have brought out even more clearly what Jim Wolfensohn and Michel Camdessus had already recognized: that good governance is a core institutional underpinning for growth. With strong urging and support from the United States, both institutions have rightly been moving toward making reduced corruption as central to their assessment of countries as more traditional, narrowly economic concerns such as tariff reform and tax administration.

Putting the fight against corruption at the heart of development programs is an economic as well as an ethical imperative. Corruption results in distorted allocation of resources. And new laws and supervisory systems will do little to safeguard stability if there is no credible, and honest, authority to enforce them. As we are learning, any country’s capacity to take on major reform challenges such as those faced in Asia will depend critically on the credibility of its policy-makers and public institutions, credibility that corruption fatally undermines.

It is my hope and expectation that there will be a great deal of further attention given to this issue in the months ahead. But as you know, promoting good governance does not only, or even mainly, involve “anti-corruption” measures. Greater transparency and accountability of public institutions, the elimination of cartels, subsidies, trade restrictions and other distortions – all of these will have a direct effect on the scope for cronyism and corrupt practices, and a direct and positive long-term effect on growth. The proposal for an IMF code of fiscal transparency provides just one example of ways that the IMF could press governments to move further in this area in the future.

Greater emphasis on the social implications of reform. A concern with the quality of public spending, as well as the absolute quantity, has been a long-running object of US pressure on both the IMF and the World Bank. We have pressed the IMF to pay closer attention to the needs of the poor in designing adjustment programs, to encourage cuts in unproductive expenditures such as military spending and shifting of more resources to primary education, healthcare and essential public investments. Since 1990, military spending has declined from 5.5% to 2.2% of GDP in program countries, and has declined as a share of government spending while social spending has increased.

All of the recent programs have been designed to ensure that the necessary adjustments do not come at the expense of the poor:

• In the Indonesian and Thai programs, spending on health, education and social programs has been expressly protected from any fiscal consolidation, and where possible, efforts to target spending on the poorest in society have been intensified. In Korea, the program commits the government to strengthening the labor insurance system, and the promotion of active labor market policies to lessen the shock to employment due to the crisis.

• In designing programs to supplement the IMF program, both the World Bank and the Asian Development Bank have been acutely aware of the need to focus on the impact of policy on the most vulnerable, both in the new lending provided to these countries and through the restructuring of existing lending programs to promote urban and rural employment and basic health services. Planned new World Bank lending to Thailand and Indonesia, for example, foresees upwards of $600 million in new loans for improving the social safety net in each of these countries.

There is a broader point that needs to be made in these discussions. We do not emphasize financial stability for its own sake. Stabilizing capital flows is a means to a more ultimate objective of increasing living standards and economic opportunities for all of the world’s population. Yet in working to promote free flows of capital, we will not and cannot allow ourselves to get caught in a race to the bottom – a bottom in which governments cannot promote fair taxes, uphold fair labor standards or protect the environment.

That is not the world we want to build. It is not the world we are building. That is why we are working with other countries to promote global cooperation against corporate and legal tax havens. That is why we are working actively in the OECD on the issue of tax competition. It is why we have worked, within the IMF and the other IFIs, to ensure that the concerns of labor and the environment get a fair hearing in devising reform programs and sustainable development strategies. And it is why fair labor and environmental standards have played a core role in our bilateral and multilateral trade liberalization initiatives.

The immediate need to support the IMF. The crises have brought home the absolute indispensability of the IMF as the core provider of emergency, conditioned international support to countries in financial difficulty. Long experience has taught that countries cannot be helped by the IMF, or, indeed, any of the multilateral institutions, if they are not willing to help themselves. But without the IMF, even those countries that are committed to reform might face default, either at a government level or through the failure of the financial system as a whole, which could have devastating effects on their own economies and significantly raise the risks of contagion in other markets.

It has rightly been said, in this context, that if the IMF did not exist we would have to invent it. But of course, we do not need to imagine such a possibility, we can simply look at the history of the late 1920s and early 1930s, when there was no collective response, and no United States leadership to address serious financial problems, and lenders and creditors were left to sort things out by themselves. The result was a vicious cycle of devaluations, deflation and depression, which laid the groundwork for the greatest conflict the world has ever seen.

For all the controversy surrounding the IMF in recent months, it is striking that relatively few of the critics – more than one perhaps, but it is fair to say, relatively few – have consistently suggested that there should be no IMF to respond to these situations. The call, rather, has been for a different IMF.

We agree on the need for change at the IMF. Indeed, we have done much to change it and point it in new directions these past few years. And we will be keeping up the pressure for change because there is – there will always be – room for improvement at the IMF and every one of the IFIs, if they are to be up to the challenges of a fast-changing global economy. But leaving aside for a moment the merits of the particular reforms being called for, there is a curious recklessness in the proposition that to make the IMF do its job better we should jeopardize its ability to do it at all.

Without new resources, the fund’s capacity to respond to future outbreaks of “Asian flu,” or other crises that may arise down the road, is very much in doubt. We must and will continue to equip the IMF, equip all of the IFIs, to meet the demands of a demanding new world. But we must not, and will not, do this in a way that undermines the very international financial stability we are seeking to promote, and in which our economy has such an enormous stake.

THE NUMBERS GAME

Arthur C. Levitt, Jr.
Chairman, US Securities and Exchange Commission

Speech to the NYU Center for Law and Business, New York, September 28, 1998
Published in The Corporate Report No. 26 (January 31, 1999)

Seven months ago, I expressed concerns about selective disclosure. Through conference calls or embargoed press releases, analysts and institutional investors often hear about material news before it is made public. In the interval, there is a great deal of unusual trading. The practice had been going on for a long time. And, while everyone was aware of it, and most were extremely uncomfortable with it, few spoke out. As the investor’s advocate, the SEC did and we will continue to do so.

Well, today I’d like to talk to you about another widespread, but too-little-challenged custom: earnings management. This process has evolved over the years into what can best be characterized as a game among market participants. A game that, if not addressed soon, will have adverse consequences for America’s financial reporting system. A game that runs counter to the very principles behind our market’s strength and success.

Increasingly, I have become concerned that the motivation to meet Wall Street earnings expectations may be overriding commonsense business practices. Too many corporate managers, auditors and analysts are participants in a game of nods and winks. In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation. As a result, I fear that we are witnessing an erosion in the quality of earnings, and therefore the quality of financial reporting. Managing may be giving way to manipulation. Integrity may be losing out to illusion.

Many in corporate America are just as frustrated and concerned about this trend as we at the SEC are. They know how difficult it is to hold the line on good practices when their competitors operate in the gray area between legitimacy and outright fraud – a gray area where the accounting is being perverted, where managers are cutting corners and where earnings reports reflect the desires of management rather than the underlying financial performance of the company.

Tonight, I want to talk about why integrity in financial reporting is under stress, and explore five of the more common accounting gimmicks we’ve been seeing. Finally, I will outline a framework for a financial community response to this situation. This necessary response involves improving both our accounting and disclosure rules, as well as the oversight and function of outside auditors and board audit committees. I am also calling upon a broad spectrum of capital market participants, from corporate management to Wall Street analysts to investors, to stand together and re-energize the touchstone of our financial reporting system: transparency and comparability.

This is a financial community problem. It can’t be solved by a government mandate; it demands a financial community response. Today, America’s capital markets are the envy of the world. Our efficiency, liquidity and resiliency stand second to none. Our position, no doubt, has benefited from the opportunity and potential of the global economy. At the same time, however, this increasing interconnectedness has made us more susceptible to economic and financial weakness half a world away.

The significance of transparent, timely and reliable financial statements and their importance to investor protection has never been more apparent. The current financial situations in Asia and Russia are stark examples of this new reality. These markets are learning a painful lesson taught many times before: investors panic as a result of unexpected or un-quantifiable bad news. If a company fails to provide meaningful disclosure to investors about where it has been, where it is and where it is going, a damaging pattern ensues. The bond between shareholders and the company is shaken, investors grow anxious, prices fluctuate for no discernible reasons and the trust that is the bedrock of our capital markets is severely tested.

While the problem of earnings management is not new, it has swelled in a market that is unforgiving of companies that miss their estimates. I recently read of one major US company, that failed to meet its so-called “numbers” by one penny, and lost more than 6% of its stock value in one day. I believe that almost everyone in the financial community shares responsibility for fostering a climate in which earnings management is on the rise and the quality of financial reporting is on the decline. Corporate management isn’t operating in a vacuum. In fact, the different pressures and expectations placed by, and on, various participants in the financial community appear to be almost self-perpetuating.

This is the pattern earnings management creates: companies try to meet or beat Wall Street earnings projections in order to grow market capitalization and increase the value of stock options. Their ability to do this depends on achieving the earnings expectations of analysts. And analysts seek constant guidance from companies to frame those expectations. Auditors, who want to retain their clients, are under pressure not to stand in the way.

Our accounting principles weren’t meant to be a straitjacket. Accountants are wise enough to know they cannot anticipate every business structure, or every new and innovative transaction, so they develop principles that allow for flexibility to adapt to changing circumstances. That’s why the highest standards of objectivity, integrity and judgment can’t be the exception. They must be the rule. Flexibility in accounting allows it to keep pace with business innovations. Abuses such as earnings management occur when people exploit this pliancy. Trickery is employed to obscure actual financial volatility. This, in turn, masks the true consequences of management’s decisions. These practices aren’t limited to smaller companies struggling to gain investor interest. It’s also happening in companies whose products we know and admire.

So what are these illusions? Five of the more popular ones I want to discuss today are “big bath” restructuring charges, creative acquisition accounting, “cookie jar reserves,” “immaterial” misapplications of accounting principles, and the premature recognition of revenue.

Let me first deal with “big bath” restructuring charges. Companies remain competitive by regularly assessing the efficiency and profitability of their operations. Problems arise, however, when we see large charges associated with companies restructuring. These charges help companies “clean up” their balance sheet – giving them a so-called “big bath.” Why are companies tempted to overstate these charges? When earnings take a major hit, the theory goes Wall Street will look beyond a one-time loss and focus only on future earnings. And if these charges are conservatively estimated with a little extra cushioning, that so-called conservative estimate is miraculously reborn as income when estimates change or future earnings fall short. When a company decides to restructure, management and employees, investors and creditors, customers and suppliers all want to understand the expected effects. We need, of course, to ensure that financial reporting provides this information. But this should not lead to flushing all the associated costs – and maybe a little extra – through the financial statements.

Let me turn now to the second gimmick. In recent years, whole industries have been remade through consolidations, acquisitions and spin-offs. Some acquirers, particularly those using stock as an acquisition currency, have used this environment as an opportunity to engage in another form of “creative” accounting. I call it “merger magic.” I am not talking tonight about the pooling versus purchase problem. Some companies have no choice but to use purchase accounting – which can result in lower future earnings. But that’s a result some companies are unwilling to tolerate. So what do they do? They classify an ever-growing portion of the acquisition price as “in-process” research and development, so – you guessed it – the amount can be written off in a “one-time” charge, removing any future earnings drag. Equally troubling is the creation of large liabilities for future operating expenses to protect future earnings – all under the mask of an acquisition. A third illusion played by some companies is using unrealistic assumptions to estimate liabilities for such items as sales returns, loan losses or warranty costs. In doing so, they stash accruals in cookie jars during the good times and reach into them when needed in the bad times. I’m reminded of one US company that took a large one-time loss to earnings to reimburse franchisees for equipment. That equipment, however, which included literally the kitchen sink, had yet to be bought. And, at the same time, they announced that future earnings would grow an impressive 15% per year.

Let me turn now to the fourth gimmick, the abuse of materiality – a word that captures the attention of both attorneys and accountants. Materiality is another way we build flexibility into financial reporting. Using the logic of diminishing returns, some items may be so insignificant that they are not worth measuring and reporting with exact precision. But some companies misuse the concept of materiality. They intentionally record errors within a defined percentage ceiling. They then try to excuse that fib by arguing that the effect on the bottom line is too small to matter. If that’s the case, why do they work so hard to create these errors? Maybe because the effect can matter, especially if it picks up that last penny of the consensus estimate. When either management or the outside auditors are questioned about these clear violations of GAAP, they answer sheepishly, “It doesn’t matter…it’s immaterial.” In markets where missing an earnings projection by a penny can result in a loss of millions of dollars in market capitalization, I have a hard time accepting that some of these so-called nonevents simply don’t matter.

Lastly, companies try to boost earnings by manipulating the recognition of revenue. Think about a bottle of fine wine. You wouldn’t pop the cork on that bottle before it was ready. But some companies are doing this with their revenue…recognizing it before a sale is complete, before the product is delivered to a customer, or at a time when the customer still has options to terminate, void or delay the sale.

Since US capital market supremacy is based on the reliability and transparency of financial statements, this is a financial community problem that calls for timely financial community action. Therefore, I am calling for immediate and coordinated action: technical rule changes by the regulators and standard setters to improve the transparency of financial statements; enhanced oversight of the financial reporting process by those entrusted as the shareholders’ guardians; and nothing less than a fundamental cultural change on the part of corporate management as well as the whole financial community.

This action plan represents a cooperative public-private sector effort. It is essential that we work together to assure credibility and transparency. Our nine-point program calls for both regulators and the regulated to not only maintain, but increase public confidence which has made our markets the envy of the world. I believe this problem calls for immediate action that includes the following specific steps.

First, I have instructed the SEC staff to require well-detailed disclosures about the impact of changes in accounting assumptions. This should include a supplement to the financial statement showing beginning and ending balances as well as activity in between, including any adjustments. This will, I believe, enable the market to better understand the nature and effects of the restructuring liabilities and other loss accruals.

Second, we are challenging the profession, through the AICPA, to clarify the ground rules for auditing of purchased R&D. We also are requesting that they augment existing guidance on restructurings, large acquisition write-offs and revenue recognition practices. It’s time for the accounting profession to better qualify for auditors what’s acceptable and what’s not.

Third, I reject the notion that the concept of materiality can be used to excuse deliberate misstatements of performance. I know of one Fortune 500 company that had recorded a significant accounting error, and whose auditors told them so. But they still used a materiality ceiling of 6% earnings to justify the error. I have asked the SEC staff to focus on this problem and publish guidance that emphasizes the need to consider qualitative, not just quantitative factors of earnings. Materiality is not a bright-line cutoff of 3% or 5%. It requires consideration of all relevant factors that could impact an investor’s decision.

Fourth, SEC staff will immediately consider interpretive accounting guidance on the do’s and don’ts of revenue recognition. The staff will also determine whether recently published standards for the software industry can be applied to other service companies.

Fifth, I am asking private sector standard setters to take action where current standards and guidance are inadequate. I encourage a prompt resolution of the FASB’s projects, currently under way, that should bring greater clarity to the definition of a liability.

Sixth, the SEC’s review and enforcement teams will reinforce these regulatory initiatives. We will formally target reviews of public companies that announce restructuring liability reserves, major write-offs or other practices that appear to manage earnings. Likewise, our enforcement team will continue to root out and aggressively act on abuses of the financial reporting process.

Seventh, I don’t think it should surprise anyone here that recent headlines of accounting failures have led some people to question the thoroughness of audits. I need not remind auditors they are the public’s watchdogs in the financial reporting process. We rely on auditors to put something like the “Good Housekeeping Seal of Approval” on the information investors receive. The integrity of that information must take priority over a desire for cost efficiencies or competitive advantage in the audit process. High-quality auditing requires well-trained, well-focused and well-supervised auditors.

As I look at some of the failures today, I can’t help but wonder if the staff in the trenches of the profession have the training and supervision they need to ensure that audits are being done right. We cannot permit thorough audits to be sacrificed for re-engineered approaches that are efficient but less effective. I have just proposed that the Public Oversight Board form a group of all the major constituencies to review the way audits are performed and assess the impact of recent trends on the public interest.

And finally, qualified, committed, independent and tough-minded audit committees represent the most reliable guardians of the public interest. Sadly, stories abound of audit committees whose members lack expertise in the basic principles of financial reporting as well as the mandate to ask probing questions. In fact, I’ve heard of one audit committee that convenes only twice a year before the regular board meeting for 15 minutes and whose duties are limited to a perfunctory presentation.

Compare that situation with the audit committee which meets 12 times a year before each board meeting: where every member has a financial background, where there are no personal ties to the chairman or the company, where they have their own advisers, where they ask tough questions of management and outside auditors, and where ultimately investor interest is being served.

The SEC stands ready to take appropriate action if that interest is not protected. But, a private sector response that empowers audit committees and obviates the need for public sector dictates seems the wisest choice. I am pleased to announce that the financial community has agreed to accept this challenge.

As part eight of this comprehensive effort to address earnings management, the New York Stock Exchange and the National Association of Securities Dealers have agreed to sponsor a “blue-ribbon” panel to be headed by John Whitehead, former deputy secretary of state and retired senior partner of Goldman Sachs, and Ira Millstein, a lawyer and noted corporate governance expert. Within the next 90 days, this distinguished group will develop a series of far-ranging recommendations intended to empower audit committees and function as the ultimate guardian of investor interests and corporate accountability. They are going to examine how we can get the right people to do the right things and ask the right questions.

Finally, I’m challenging corporate management and Wall Street to reexamine our current environment. I believe we need to embrace nothing less than a cultural change. For corporate managers, remember, the integrity of the numbers in the financial reporting system is directly related to the long-term interests of a corporation. While the temptations are great, and the pressures strong, illusions in numbers are only that – ephemeral, and ultimately self-destructive. To Wall Street, I say: look beyond the latest quarter. Punish those who rely on deception, rather than the practice of openness and transparency.

Some may conclude that this debate is nothing more than an argument over numbers and legalistic terms. I couldn’t disagree more. Numbers in the abstract are just that – numbers. But relying on the numbers in a financial report are livelihoods, interests and, ultimately, stories: a single mother who works two jobs so she can save enough to give her kids a good education, a father who labored at the same company for his entire adult life and now just wants to enjoy time with his grandchildren, a young couple who dreams of starting their own business. These are the stories of American investors.

Our mandate and our obligations are clear. We must rededicate ourselves to a fundamental principle: markets exist through the grace of investors. Today, American markets enjoy the confidence of the world. How many half-truths, and how much accounting sleight-of-hand will it take to tarnish that faith?

As a former businessman, I experienced all kinds of markets, dealt with a variety of trends, fads, fears, and “irrational exuberances.” I learned that some habits die hard. But more than anything else, I learned that progress doesn’t happen overnight, and it’s not sustained through short cuts or obfuscation. It’s induced rather by asking hard questions and accepting difficult answers.

For the sake of our markets, for the sake of a globalized economy which depends so much on the reliability of America’s financial system, for the sake of investors and for the sake of a larger commitment not only to each other, but to ourselves, I ask that we join together to reinforce the values that have guided our capital markets to unparalleled supremacy. Together, through vigilance and trust, I know, we can succeed.

A PROGRESS REPORT FROM THE WORLD’S LEADING VENTURE CAPITAL EXCHANGE

Michael E. Johnson
President & CEO, Vancouver Stock Exchange

Vancouver Board of Trade, Vancouver, June 18, 1998
Published in The Corporate Report No. 25 (August 31, 1998)

I’m pleased to be here today to provide an update on the progress of the Vancouver Stock Exchange. I welcome this opportunity to review the path we have taken, and milestones achieved, as we build and strengthen an organization that ranks among this city’s oldest and largest institutions…for the VSE is now 91 years old and provides direct and indirect employment for thousands of people.

I first spoke to the Vancouver Board of Trade in January of 1996, soon after I became president of the VSE. At that time I shared with you the challenges we faced and outlined the initiatives we were implementing to bring substantial change to the VSE.

I sought to be very forthright and candid. The perception of the VSE, among both business and the public, was negative to the extreme. There were some who considered us an embarrassment to this city, and questioned the value and economic contribution made by the VSE to the people of British Columbia. Others called for a rule book so tough that no unsavory business activity could ever taint our market again. The only true consensus was a shared view that change must come…and it must come soon.

This criticism emanated from market problems, abuses and failure by the exchange to take strong remedial action. While the VSE and its members may not have agreed with all of the comments and criticisms – which were often a commentary on how gray was gray – we were strong in our resolve that the VSE’s market must be open and fair. Abuse could not be tolerated.

I was then, and remain today, absolutely determined to ensure that the VSE is a market that effectively serves investors, listed companies and our member firms. The VSE must be operated within a balanced regulatory framework that attracts quality, listed companies, while effectively protecting investors.

Two years ago, in the face of skepticism from members of the media, politicians, and, I imagine, some of you in this room, we made but one request. We asked that you judge us by our actions, not our words. The process of change, which requires focus, patience and perseverance, had begun in earnest. We were determined to lay the foundation for lasting change.

A year ago, I returned to address this group of business leaders for a second time. Hopefully, at that time, we converted some of our critics by demonstrating that our efforts were sincere and our progress meaningful. After the first year I was convinced that our agenda for change was becoming reality. Much had been accomplished in those first months. An organization that had shown signs of lethargy and excessive bureaucracy was being transformed. The VSE had clearly defined its place within the global financial industry and had a firm strategic focus. We were applying the rules and regulations governing our exchange with commitment and uniform diligence. Listed companies, our member firms, the business community – and even the media – began to concede that we were serious in our determination to operate a marketplace that was honest…fair…and efficient.

I return today, for the third time, and I do now as I did then. I call upon you to judge us, not by our words, but by our actions, what has been accomplished. The difference is that while we are, and always will be a work in progress, the VSE is fast becoming the exchange we need it to be.

Our direction as a venture capital exchange is clear and well articulated. We have defined and are firmly establishing our role within the financial markets of Canada and the world. We are leaders among other exchanges for our technological sophistication, efficiency standards, and the market information provided to our member firms and investors. Our market regulation is the most demanding in North America…and there is no tolerance of abuse.

If I sound proud, it is because I am. I am proud of the 220 employees, 57 member firms and our board of governors, who worked very hard over the past two and one half years. We have faced very complex challenges, but we have been diligent in our quest. The VSE today is an organization for which we should all be proud.

It is for this reason that I am here today. It is to you, the business community we have been part of for more than 90 years, that I want to deliver our annual report. For it is to you that we directly and indirectly contribute, as we attract business from around the world to Vancouver.

We have played a major role in building this province’s mining industry, supporting BC’s junior exploration companies. From this activity, Vancouver has grown to become the world center for mining exploration, with a professional infrastructure that brings contracts from every corner of the globe. This expertise defines a part of this city’s strength and it must be fostered.

A few weeks ago, the VSE and its member firms were pleased to kick-start the current fundraising program for the University of British Columbia’s Mineral Deposit Research Unit. It is important that we all invest in maintaining our global leadership in this key field. If we fail to support vital initiatives such as applied research, the baton will pass to others, most probably in Australia.

It is into our shared economy that the VSE brings economic activity that was valued in 1996 at C$1.5 billion. And it is in British Columbia that we create 8,637 jobs, more than half of the 15,855 jobs created across Canada by the VSE and the financings we support. I should add the footnote that this is the direct contribution we make to the economy. The indirect effect is, of course, very much greater.

However, we understand that for many of you the concern has not been the size of the VSE’s economic impact, but rather, our market integrity. You want to be proud of both our accomplishments, and how they are accomplished.

Our strategy has been based on a simple equation: greater market integrity will improve our reputation and credibility – and strengthen our competitive position. If we are competitive, we will gain new listings and financing opportunities. If we are credible, investor confidence will grow and with it the liquidity of our market. And with new business and confident investors, the VSE’s market will grow, and all of us will be among the beneficiaries.

A year ago we adopted a mission statement for the VSE. It is brief, and to the point. Our mission is to be an honest, fair and efficient market for venture capital. Conveyed in this sentence are our purpose, our focus and our values. The VSE is a venture capital exchange. Our role is to facilitate the funding of new businesses and new ideas. For several generations our market has been the birthplace for hundreds of mining expeditions and the first home for some of the world’s greatest mining enterprises. Each year we facilitate the financing necessary to explore for mineral wealth on every continent. And each year we watch some of our listed companies gain the strength needed to progress from the venture board to advanced status on our exchange. We also congratulate our listed companies who graduate to the senior exchanges, becoming important, long-term contributors to our economy.

While our purpose is fixed, our target has expanded. Building on our expertise in working with new businesses, evaluating risk and assessing potential, we now reach beyond the world of mining. High-tech, biotechnology, and various other business ventures are increasingly represented on the VSE.

There is, however, a common and essential similarity that characterizes the companies listed on the VSE. First, there is an obvious and inevitable element of investment risk because these companies are at the development stage of their life cycle…and the birth of a new enterprise is never easy. Secondly, there must be a great deal of scrutiny and analysis that assesses the business risk and ensures that each venture has been carefully thought through. And thirdly, investors will expect and demand a high rate of return because they are placing their money at risk, backing ideas that have promise, but may not achieve the anticipated opportunity in our very competitive world economy. Overriding these common characteristics, the VSE’s listed companies are in their early stages. The VSE is the exchange “where business starts.”

The mission I spoke of also summarizes our values: to be honest, fair and efficient. Public ownership demands a high degree of trust. Our members must fairly represent investment opportunities, investors must have access to the information they need to make informed decisions, and our listed companies must provide a true picture of their operations. In all of these areas we have a responsibility to ensure that the VSE’s market exemplifies the characteristics necessary for its operations to be honest and fair.

We must also realize that we operate in a highly competitive environment. The VSE’s member firms must compete for business and earn the right to represent companies seeking financing through public ownership. This demands that we operate in the most efficient manner possible, demonstrating our advantages over other alternatives through superior service levels and the ability to respond quickly.

In many different ways, the VSE has been striving to bring new methods of operation to the exchange for almost 10 years. In 1990 we became the first exchange to remove the trading floor, where sharp elbows sometimes defined good performance, and introduce fully automated trading. We remain leaders in this area today. With the advent of automation we were able to build surveillance tools which could identify market manipulation and improper trading. And with each passing year, the sophistication of our surveillance staff has grown. Today we assist the RCMP and other exchanges in developing similar systems for use across Canada.

A few years ago the British Columbia Securities Commission initiated a series of important changes that advance our shared goals. Revising the due diligence procedures, requiring the creation of separately licensed corporate finance departments within the member firms, increasing to one year the required length of time that our member firms must remain the sponsor of new issues – all are signs of progress.

These are important steps designed to improve the quality of the companies listing on the exchange. These regulations also demanded greater accountability in the relationship between listed companies and our member firms. A very important addition to our process was the introduction of what we call PLAC – the Pre-Listing Advisory Committee. This nine-person committee reviews every application for public listing and no company is approved for listing on the VSE without their endorsement.

Some of the proposed regulations sought to build an increasingly higher fence around the VSE. The thrust was to ensure that poor quality businesses were kept away. Develop rules and regulations, the theory suggested, that make it impossible for unworthy players to participate in the VSE’s market.

While the intention of these initiatives is honorable, the approach is inadequate. The Ten Commandments may represent the rules that should guide our society and our lives, but they have little value if our behavior does not conform. What was wrong with the early efforts to improve the market integrity of the VSE was a preponderance of concern for the rules, set to the lowest common denominator. This direction threatened to create so much regulation and red tape that quality businesses would feel stifled, and look to other markets for financing.

But much more importantly – the action necessary to change market behavior was missing. This is the key. The rules governing the VSE are the strictest in the world, but by themselves they will not make our market honest, fair and efficient. We will only be able to realize our mission through enforcement of our rules in ways that change market behavior. The reason why I can stand before you today and be proud of our progress is because we are seeing significant and demonstrable changes in behavior.

The foundation for our progress is that we are diligently, and with a high degree of objectivity, enforcing the rules guiding practices in the VSE’s market. Let’s be frank, this is tough medicine, and it has required courage and conviction from the exchange and its member firms. Applying punishment is never easy but it is necessary. The VSE has a disciplinary process that is driven by a committee of public and member firm governors. It acts like a district attorney’s office, undertaking case-by-case reviews and acting, when appropriate, with determination.

We have banished some registered representatives from our market, some for life. We have levied heavy fines on member firms and their employees. We’ve halted trading, suspended and delisted companies for violation of their responsibilities to investors. We’ve audited compliance practices and we routinely confirmed the accuracy of information being disclosed.

However, we must recognize that no set of rules will ever be perfect and no surveillance will be foolproof. Public markets are always vulnerable to abuse. But this having been said, we will be steadfast in our efforts to defend our market and act quickly against anyone who seeks to abuse it.

Our emphasis on changing market behavior, as opposed to adding ever more regulation, is of critical importance for another reason. Not only is it the only strategy that has been proven to work…it is the strategy that allows us to achieve our other goals. We must walk a careful line between protecting our market and ensuring that it is not so excessively regulated that good business is driven away.

Our member firms operate in a very competitive industry, and if we make entrance to the VSE’s market so restrictive that our advantages are diminished, we will see business decline, and with it the economic benefits we bring to Vancouver and British Columbia.

Good regulation is the process of finding the right balance between a framework of rules and enforcement that demands the desired market behavior – without so much restriction that the opportunities for sustained growth are lost.

With our values clearly understood, we have embarked upon the process of building a strong service culture within the VSE, and ensured that it is reflected in every aspect of our operations. I do not need to tell any of you that service has become the important competitive advantage that is separating successful from unsuccessful enterprises.

As a bureaucracy we would fail. Without excellent service to our listed companies they would seek alternatives and we would not grow. Without reaching across Canada and around the world to invite new businesses to our exchange, we would lose our momentum. And without growth we would lose our relevance, and serve our members and the business community in Vancouver very poorly.

In changing the VSE we have sought to advance by evolution, not revolution, developing high and meaningful service standards throughout our organization. Excellence is not achieved in business by an act of will. It requires that we develop goals by which we can measure our progress and be accountable for our achievements. In no part of the VSE is this more visible than in the area of corporate finance. We have set benchmarks for our service that we believe establish new standards for our industry, and we seek to achieve these service standards without sacrificing quality.

In our annual report, our corporate finance group makes a commitment to exacting service standards, objective criteria against which our performance can be measured. A private placement will take 20 days, venture capital pools 25 days, an exchange offering prospectus 70 days and a full IPO 90 days. These are the types of standards that drive our service culture, and assist our listed companies. I am proud of the way in which our staff has embraced providing quality service.

Based on sound market integrity, the British Columbia Securities Commission and the VSE are developing new initiatives that will improve access to our market. A program that creates venture capital pools will be launched on July 1 of this year, enabling companies at a very early stage of their development to raise capital in the public market. This new method of financing for the VSE will allow proven managers to raise money so that they can respond quickly to an acquisition opportunity, or identify property that has new mining potential. It is an important means of early financing that allows entrepreneurs to assemble the ingredients of a successful new company that can later bring a qualifying transaction to the VSE for funding.

Of particular note, the venture capital pools provide an opportunity for public investors with a prudent appetite for high risk to get in on the very ground floor of a new company. Prudent, because these companies have few assets beyond the quality of the management team.

Also at the beginning of July, the responsibility for processing IPOs will be transferred from the BC Securities Commission to the VSE, providing more streamlining and efficiency. This action will be complemented by postaudits that the BCSC will conduct on a sample basis to confirm the quality of the review process. Changes in escrow and other related policies will also be implemented in the near future.

Our technology leadership affords us a platform upon which to become ever more competitive with expanded service capability. Vancouver Computerized Trading (or VCT) remains a world leader. Facets of this state-of-the-art system are constantly being upgraded to improve the trading capabilities of North America’s fourth busiest exchange. Last year our system executed over 2 million trades, representing almost C$9 billion. The average trade took 1.25 seconds and reliability performance stood at 99.4%. Against any standard these numbers are impressive.

Fortunately, our trading system was built with the foresight to be ready for the year 2000. There are some small changes still to be implemented, but we are ready to enter the next millennium. We are now working with our member firms, helping them prepare for this computer glitch which has caught much of the world by surprise. As part of our concern for service reliability, we have implemented a very comprehensive business continuity program. If 609 Granville Street all of a sudden disappeared, the VSE could restore full operations within 24 hours.

Our new initiatives also reach out to the investors in our market. We were the first Canadian stock exchange to launch an internet site. In the near future, we will offer the first comprehensive listed company database that sets a global standard for depth of information on listed companies. Private and institutional investors in Vancouver, Sydney, Toronto or Geneva will have direct access to the information they need to make informed decisions.

Our website also provides a comprehensive array of services including exchange policies and procedures, market highlights, delayed quotations – and the listed company database with everything from technical reports to trading summaries and news releases.

Easily accessible information on our listed companies enables investors to make informed decisions, thereby facilitating even greater market support. I encourage you to bookmark www.vse.ca on your computers and take a look at what we are doing to help investors, analysts, listed companies and members of the financial community participate in our market.

The past year has demonstrated that the VSE and its members cannot remain static in the rapidly changing financial world. Together, the exchange and its members must seek new opportunities and ways in which we can both maintain and expand our business base. This has not been easy in the past year when we have been seriously affected by events over which we have no control. We are witnessing continued turmoil in the mining industry as it seeks to recover from the loss of confidence that resulted from the collapse of Bre-X. While the VSE was never part of the Bre-X story, we are not immune to the damage it has done to investor confidence.

The decline in gold prices has also impacted the mining sector and slowed exploration activity around the world. And on top of these issues, just as we were finding a path forward, the Asian contagion swept across that continent and into the world economies. While three major challenges in one year may be an anomaly, it is also the reality of the world economy that has a multitude of vulnerable dimensions. Yet amid these incidents over which the VSE and our market had no control, the exchange performed exceptionally well, recording its second best year on record for new financings.

Highlighted in 1997 was the message that global markets are not independent. We must be continually working to expand the VSE’s market in both Canada and abroad. In fact, global competition provides new opportunities to attack international markets rather than endeavoring to preserve traditional areas of business. Consequently, we are at work on many fronts, helping our members bring business to the VSE. Our marketing department is reaching across Canada, the United States and around the world. While our focus has been on this continent, we have been to Africa, South America, Mexico, Asia, Australia and Europe.

We continue to be the leading source of venture capital for mining exploration. We are also applying our venture capital expertise in understanding business risk and junior companies, to assist new enterprises with a focus in high-tech and biotechnology. In the future, these industries will assume an ever-greater share of our total activity.

Very significantly, with sound market integrity and access to a comprehensive array of listed company information, the VSE can encourage institutional funds to increase their involvement or participate in our market for the first time. Obviously, these major capital pools have the ability to increase the strength of our market, its liquidity and its ability to grow.

The aspirations of the VSE and its members cannot be separated from those of Vancouver and British Columbia. We seek to attract new business to our city from around the world. We support the growth of emerging businesses where new job growth rates are in excess of 30% each year – far exceeding the growth rate of the economy as a whole, as well as that of large, mature companies.

We serve as the entry point for many new businesses into Canada, providing the base from which they are established and later graduate to the senior exchanges. Many people are still surprised to learn that almost 20% of the new listings on the TSE each year come from the VSE.

We are an essential part of Vancouver’s emergence as an international financial center on the Pacific Rim. The millions of dollars that pass through the VSE each day are a critical part in making that aspiration a reality.

The VSE and its member firms have significant strength that is driving us forward:

• We have the venture capital expertise to understand and evaluate emerging businesses.

• Vancouver has developed the professional infrastructure to support mining, technology and many other emerging businesses.

• Our market has the liquidity to fund venture business.

• The VSE’s market has integrity.

• The exchange’s commitment to service standards makes access to our market efficient and competitive.

• The VSE is a technology leader.

• The information available to investors, listed companies, analysts and the financial community is second to none.

• The member firms in this city understand the complex business of risk management and raising capital.

• The VSE and its members are committed to growth and have the marketing ability to build business.

These are some of our strengths. But perhaps the greatest proof of the VSE’s capabilities, our competitive advantages, can be seen in our primary statistics:

• In the past year more than 50 new companies were listed on the exchange after careful review.

• CAD$1.4 billion was raised in new financing, including 15% of the world total for mining exploration.

• The market capitalization of our listed companies stood at CAD$9.4 billion.

• 42 companies advanced from the VSE’s venture board to the more senior geographic boards.

• 29 companies graduated to the senior exchanges in Canada and the United States.

A few years ago the VSE was rather defensive. The organization was beleaguered and its future direction unsure. Today we are confident and fulfilling our mission to be an honest, fair and efficient venture capital market.

To be candid, our largest problems today are within this room, this city and this province. We are still seen by some as a source of embarrassment. Our performance today tends to be admired much more from afar, than in our own community.

Like you, we are working to build Vancouver and British Columbia with integrity and determination. We are doing a good job, and people need to know that. The past perceptions are not our present reality…or part of our future.

I invite you to get to know us better by visiting our website, reviewing our publications, and calling our customer service numbers.

I ask you to become our ambassadors, just as we are your ambassadors when we travel across Canada and throughout the world seeking to bring business to this city. Do not let our critics go unanswered, with their vision blurred by events of years ago. I ask you to stand up and defend the VSE.

The Vancouver Stock Exchange, its member firms and the Vancouver business community are partners. For more than 90 years we have lived and worked together. The companies we have helped grow are all around us…as part of this province and this country. Today, as never before, we deserve your respect and praise.

I ask you to help us grow the VSE’s market. Help us bring more business and investment to Vancouver. Help us to give new companies the opportunity to develop and give life to new ideas. Do not be reluctant to introduce us to new business opportunities. We will not disappoint you. We will act with speed and professionalism to bring business, jobs and wealth to this region.

An article in the June issue of Investment Executive provides a clear understanding of the challenge before all of us. The story speaks to the pro-business attitude of Alberta and provides examples of companies that have left BC to find the support they need in Alberta. The article concludes with the following words:

“BC’s economic growth is grinding to a halt. In fact, the province is arguably in recession, its ‘growth’ in GDP driven largely by immigration, masking sagging per capita incomes…Luckily, there’s a remedy that doesn’t depend on escalating natural resource prices or handouts. It’s all about attitude. Just look at Alberta.”

These words set the stage. These are issues that must be addressed. Together we must compete in a global economy and stand against the economic challenges that are threatening our province. Together we must work to build Vancouver…and our provincial economy. At the VSE that means continuing to be the place “where business starts.”

THE ENABLING STRATEGIES OF SUSTAINABLE GROWTH

Melvin R. Goodes
Chairman & CEO, Warner-Lambert Company

Business Week CEO Forum, Washington, September 26, 1996
Published in The Corporate Report No. 20 (January 15, 1997)

By “enabling strategies,” I mean those strategies that are the foundation for developing and executing global plans. The right enabling strategies can free you and your companies to focus on your most compelling strengths.

It has been five years since we defined a series of enabling strategies for Warner-Lambert. Only in the past year have the outcomes of these strategies captured widespread attention. Our stock price, now at an all-time high, reflects the confidence that we deliver on our commitment to shareholders. That commitment is to provide reasonable returns now, and superb returns as we move into the next century.

If you read the recent media reports on Warner-Lambert, you may come away believing that somehow, in just the past year, we got blinding insight into global business. Admittedly, such stories are a welcome change from our treatment during the early 1990s, when we were beaten up more often than your average junkyard dog. But the fact is that we had the insights years ago. It has taken five years of hard work to get these enabling strategies to take hold. Here are our four enabling strategies:

• First, instilling new values in our 37,000 colleagues

• Second, moving to a globalized management system in each of our business lines

• Third, renewing our commitment to our core businesses

• Fourth, pursuing an alliance strategy, focusing on late-stage, large-impact deals

Let me address each of these briefly. First, instilling new values. Don’t be misled by cynics who try to tell us that values don’t count, or that corporate cultures can’t be changed. Values count. Change can happen. Changing values can be the critical difference in corporate performance.

Five years ago, Warner-Lambert was a company with an unhealthy aversion to debate, conflict and risk. And so our first task was to hammer out a new set of values for the company. Values like candor, focus, creativity, speed of action, and the rewarding of both big-time success and ambitious failure.

There is no doubt that my colleagues grew weary of me starting every presentation with a statement of our values. But ultimately the message sank in and helped to create a culture for business success.

One area where we’ve made truly remarkable progress is in speed of action. We’ve become known as a company that will move quickly and decisively to seize opportunity. Now, armed with new values, we needed a new approach to international operations. Hence our second enabling strategy, globalization. Our old organization of stand-alone affiliates were run like fiefdoms. They smothered what should have been a compelling competitive advantage for our company – that is, our global reach.

Here you had a company that operated in 140 nations. A company whose global experience was long, broad and deep. But we had managed these businesses as though they were stand-alone, independent operations.

In 1991 we moved at full force to globalize. We took a practical approach, first globalizing, by lines of business, across North America, Western Europe, and Japan. These three regions account for about 80% of our sales and profits. We did not globalize in developing nations, where it made more sense to keep the traditional country manager system.

Our rapid move to globalize caused discomfort, dislocation and disorientation. But globalization has worked to unleash a great deal of energy. For the first time in our 130-year history, we can direct our resources to the best growth opportunities worldwide. Today, Warner-Lambert gets about 57% of its business from outside the United States. Moreover, we have footholds in dynamic developing markets-markets like China, India, Indonesia, Brazil, and South Africa-markets that will drive huge growth in world trade. We take heart in knowing that Listerine may be 120 years old, but there are billions of people who have yet to see their first bottle.

Which brings us to our third enabling strategy, commitment to our core businesses. These are confections, consumer healthcare items and ethical pharmaceuticals. Quite frankly, in the early 1990s, when our margins were fading, it would have been easy to cut investment in R&D, A&P, and the other basics to satisfy short-term investor demands.

It also would have been easy to follow the conventional wisdom and sell one of our core businesses. But we enjoy these businesses, we’re good at them, and we know they can offer above-average returns on investment. And so we struck a bargain with our investors in 1995, offering reasonable returns now and prospects of superior returns in the short-term future.

We then made major investments in our R&D, manufacturing, distribution and customer service capabilities. We funded these investments through the sale of non-strategic assets and productivity programs. We delivered EPS growth of 6% to 8% in 1995, and will do the same in 1996.

We now have a product pipeline fully competitive with any in our industry. We will double our pharmaceutical business over the next five years, and we’ll do it the old fashioned way-with breakthrough drugs that meet serious patient needs. Best yet, we’ve found unexpected synergy as our core businesses have meshed with trends in world trade. We match up well with the pattern of demand in emerging nations. We can enter a market with low-cash-ring items like confections, and move up to personal hygiene items like Schick razors. We can then ride the wave of economic development to value-added healthcare items and pharmaceuticals. We now have a healthy outlook of 15% annual growth over at least the next five years.

Our global reach and solid businesses have given us the chance to pursue our fourth enabling strategy-large-impact alliances. Having gone through a wrenching series of divestitures in the 1980s, there was little initial enthusiasm for an alliance and acquisition strategy. Especially one focusing on “late-stage” deals, that is, deals at the final stages of product development, and deals with the potential to redefine the company.

This approach had to change. We simply did not have the internal horsepower for vibrant growth. But we did have defining strengths-global reach, a superb sales force, expertise in Rx-to-OTC switches-that could be the basis for major deal making.

Our alliances have been worldwide ventures. They cover deals with companies like Glaxo Wellcome in the UK, Sankyo in Japan and Pfizer in the US. Our first step in striking any deal, large or small, is to generate a set of objectives. We try to discipline ourselves to focus these objectives throughout the deal-making process.

We understand that these types of deals require considerable investment of senior management’s time and demand uncommon focus. So if you pursue this kind of strategy, you should choose your spots carefully. You should be fully aware of the importance of speed in negotiating and closing deals. That speed can provide your organization with an almost insurmountable competitive advantage.

Obviously, you shouldn’t make decisions without the facts. But you should have people thinking about potential deals in advance of the time they may emerge on the market. In that way, your decisions can rest on facts you need only to confirm and not to discover.

My talk today has focused on enabling strategies that provide the environment for sustained growth. These strategies are often complementary and synergistic. Each boosts the capability of the organization in executing others. But assessing the need for such strategies requires us, as CEOs, to be more than grand visionaries. We must also be sober realists, ready to actively confront the weaknesses in our organizations.

All of us want to lead our organizations to our vision of the shining city on the hill. Enabling strategies can help us cross the valleys as we move others forward to that vision.

MARKETING: ONE FREEZE-FRAME FROM A MOVING PICTURE

Martin Sorrell
CEO, WPP Group plc

Excerpt from the WPP Group Annual Report and Accounts, May 31, 1996
Published in The Corporate Report No. 18 (June 30, 1996)

One freeze-frame from a moving picture

If the last five or ten years have seen a toughening of competition, wait for the next five to ten. In a sense, there is a Moore’s law of competition. As low population growth continues, as communications and free trade improve, as technology transfer intensifies, as retail power grows stronger, as more new competitors emerge and if relatively stable growth and low inflation continue, the pace of competition will quicken exponentially. In this environment the power, importance and difficulty of brand differentiation will grow too.

Low population growth

Most companies aim to grow their sales, profitability or earnings per share by at least 5% to 10% per annum. Most population growth rates are less than this, particularly in the slower growth, mature economies. As a result, consistent achievement of these targets will mean taking market share from a competitor.

Improved communications and free trade

Increased travel and improved electronic communications have made global competition a reality. However, cross-border and inward competition has really increased as a result of the development of free trade policies and areas. In many parts of the world, including the Americas, Europe and Australasia, the single most important stimulant to the advertising and marketing services industry has been the opening up of trade. For example, in Latin America, hitherto moribund economies have flourished following the development of free trade policies. Chile has always benefited from this, and Mexico, Argentina, Colombia and Peru have followed. As a result it is no longer essential, as it was ten years ago, for Brazil to be progressing economically for Latin America to grow. Now Brazil is also moving in the right direction, the only concern being over the pace of change, not its direction. Although Mexico has stumbled and the Salinas regime has lost its reputation, it can be only a question of time before it regains its poise, given the proximity of the American market, the 95 million people comprising Mexico’s internal market and the impact of NAFTA. Although it will probably take longer, Venezuela too will recover from its recent economic problems. For multinational companies these hiccups present buying opportunities.

Technology transfer

As technology becomes easier and easier to transfer and copy, our clients find it increasingly difficult to protect their competitive position. In this respect all industries, even those that seem to be technologically sophisticated, exhibit similar competitive characteristics. Computers, telecommunications and automobiles share the characteristics of detergents, food and credit cards. Product life-cycles shorten as a result, while brand-cycles lengthen. Lead times for the introduction of products concertina, and product testing is a luxury. The speed of competitive response demands instant action. This difficulty has been compounded by the trend towards strategic alliances among hitherto fierce competitors, for example in the airline or automobile or high-tech industries, and even the development of new technologies by competitors, as in the photography industry. In such an environment it is increasingly important for our clients to be prepared to take calculated risks in bringing new products and services to market quickly. Naturally more mistakes will be made as a result, but it is important that failure is not punished, and that risk-taking is not discouraged.

Growing retail power

Manufacturers have to operate in an environment where distribution is increasingly dominated by retailers, particularly in the area of packaged goods. For example, in the UK nearly 60% of food sales are controlled by four retailers. At the same time as controlling distribution, retailers have established their own label or store brands. While some years ago store brands had either a real or perceived quality problem, rather like Japanese or Hong Kong products used to, in the late 1980s retailers improved the quality of store brands significantly and even developed products at different price points – for example A & P with Master Choice and Tesco. At the same time as retailers were improving the quality of their own label products in the 1980s, packaged-goods manufacturers, in particular, were increasing their prices significantly. Though this might work in inflationary times, in the slower-growth, more stable, lower inflation 1990s this pricing policy was cruelly exposed as the consumer became more price-value conscious. As a result, significant price reductions have been made in categories such as tobacco, cereals and paper products.

Advertising was created as a means for manufacturers to appeal over the heads of the wholesale and retail trade direct to the consumer. The new media could present a revolutionary way of reestablishing this contact through the medium of home shopping allied with direct delivery. Distribution costs often represent as much as 50% of total costs for the manufacturer. While direct communication and delivery will not remove all these costs, they may reduce them significantly. Curiously, however, it is the retailer who is dabbling with these new media. For example, in Germany, two major retailers, Rewe (groceries) and Queller (one of Europe’s leading mail order companies), have taken significant stakes in, respectively, Pro Sieben, a national television channel, and Hot Order TV, a home shopping channel. Perhaps retailers are more aware of the potential of these new media opportunities because of their closeness to the consumer.

New competitors emerge

No product or service category is safe from new competitors. Not only packaged-goods manufacturers face intensified competition. Strong brand names and value-based products are invading new categories. Who would have thought that in our own industry a small Hollywood talent agency would have displaced McCann-Erickson on the Coca-Cola account? Or that Swatch would go into the automobile business along with Mercedes-Benz? Or that Virgin and Marks & Spencer would enter the financial services business? Or that coming full circle, Virgin would compete with Coca-Cola in the cola business?

Stable growth and low inflation

These trends – low population growth, the development of free trade areas, the ease of technology transfer, the growing power of retailers and fiercer competition – have been accentuated by the more stable, slower, less inflationary growth of the 1990s.

If (and it is a politically difficult “if”) governments can resist the temptation to prime the economic pump in front of elections, these conditions are likely to continue making it difficult for our clients to pass on price increases to the consumer, which mask inefficiency and remove the incentive to improve operations still further. The sad truth is that our clients prefer a small dose of inflation.

It seems unlikely that governments will be able to resist the political cycle. Twenty-five or thirty years ago we were all Keynesians, using fiscal policy to figure out what level of inflation we would tolerate at what we termed full employment. Today we are all Friedmanites, using monetary policy to try and figure out what level of unemployment we can tolerate at what we term zero inflation.

All over the world, governments are finding it difficult to deal with the political implications of unusually high levels of unemployment. While unemployment may be declining in the US and in the UK, Germany, France, Italy and Spain are wrestling with historically high unemployment stimulated by high real interest rates, reduced government spending and privatization programs, all of which cause significant political pressures – particularly around election time. How long can electorates tolerate unemployment levels of 15% or more, and graduate unemployment levels of up to 60%?

Geographical expansion

Given this background it is easy to see why our clients have expanded the geographical base of their operations so significantly. While thirty years ago many companies believed they were multinational, it is only recently that this has become the case in reality. Even so, there is a long way to go. According to recently released US government data, the average US company only has 20% of its sales outside the US. So the appropriate model is not Coca-Cola with 80% of its sales and profits outside the US, but Pepsi-Cola with 80% of its sales inside the US. Hence Pepsi’s dramatic push into Asia Pacific, Latin America and Central and Eastern Europe.

As a result, growth in advertising and marketing services in Asia Pacific and Latin America continues at double-digit rates, often more than twice those of mature markets. This growth continued during the recession of 1990-1992. Even in a period of economic strength as now, in our own case, these markets are growing 50% faster than the US and Europe. Recent World Bank data highlight the point. In 1996 the mature economies of the US and Europe will grow their GNPs at approximately 2%, the world will average about 4%, the faster growing markets of Asia Pacific and Latin America will grow at roughly 6%. As a result China, India and Vietnam have joined Taiwan, Thailand, Indonesia and Malaysia as lead markets in Asia Pacific. Myanmar will be the next focus for interest, with its population of 45 million. Similarly in Latin America, Colombia and Peru have joined Brazil, Chile, Mexico, Argentina and Venezuela as growth markets.

CLIENT STRATEGIES

In response to these challenges facing clients, three basic strategies have developed which seem to vary in emphasis with the economic cycle.

Cost cutting

In the first stages of the downturn in the economic cycle, heavy attention is paid to cost-cutting and the focus is on core activities. At the beginning of the process, there is considerable scope for cutting out peripheral activities which have blossomed at the top of the previous cycle. With the development of technology there will continue to be significant opportunities for zero-based budgeting, total quality management, process re-engineering, de-layering, downsizing, outsourcing or whatever other buzzword or process is fashionable at the time. Indeed increased competition will demand it, and it is clear that the old hierarchical model of industrial organization is not appropriate anymore. Network-type organizations which utilize modern technology are much more relevant. However, after the early downward stages of the economic cycle there seems to be diminishing returns from concentrating on costs, the significant advances having been made.

Acquisitions

As concerns about costs start to recede, perhaps a boredom factor starts to operate, and chairmen and CEOs are attracted by expansion opportunities, stimulated by lower costs of capital as stock markets improve and by lower interest rates. For example in the last cycle, 1990, 1991 and 1992 saw focus on costs and process, while 1993, 1994 and 1995 witnessed a significant increase in acquisition activity. An interesting aspect surrounding this acquisition activity is that pricing does not seem to fluctuate very much in relation to the stage in the cycle. Price-earnings multiples and price-to-revenue ratios paid seem to be similar at both the high and low points of the cycle. This seems to reflect both the scarcity of outstanding brands and the difficulty and cost of developing them.

Revenue growth

As growth prospects start to improve during the cycle, more attention is paid to top-line revenue growth. Geographical expansion follows and perhaps this is the main reason why advertising expenditures start to pick up, as they did in 1994.

Generally, differentiation between products and services is becoming more and more difficult, and as a result the skills and talents of advertising and marketing services companies will become more and more important. Revenue growth can be stimulated by geographic expansion both nationally and internationally. Manufacturers will continue to look for technological advantages no matter how transitory the advantage. Service in many sectors will become an increasingly important discriminator, especially with the development of direct marketing and its protégé, the new interactive media. A one-to-one relationship with the consumer will enable marketing companies to develop a better understanding and relationship with the consumer and differentiate themselves more effectively.

THE DEMAND FOR MARKETING SERVICES

Worldwide advertising and marketing services expenditure grew to about $840 billion in 1995. It is expected to grow by about 7% to about $900 billion in 1996. In 1995 the two biggest market segments were worth about $800 billion between them. Media advertising accounted for almost 40% of the total and promotion for about 35%.

The impact of fear of unemployment on the short-term demand for marketing services expenditure

Consumer expenditure and corporate profitability determine the demand for marketing services expenditure. Given the outlook for both factors, 1996 will probably see greater growth over 1995 than 1995 saw over 1994 – approximately 6% to 7% in nominal terms, or 3% to 4% in real terms. The stronger growth rate reflects the quadrennial coincidence of elections in the US and UK, stronger economic growth as a result of the political cycle, and the Olympic Games and European Football Championships. All this is supplemented by continuing strong growth in Asia Pacific and Latin America.

Although these growth rates are strong, they are not as significant as the rates of the 1980s. They seem to reflect the considerable fear of unemployment among both consumers on the demand side and managers on the supply side. As a result, neither group is willing to commit to expenditures, and advertising and marketing services expenditure seems to be lagging rather than leading the cycle. Advertising expenditure is no longer a lead indicator of economic activity.

In an economy characterized by low inflation, tight monetary policy and higher than historical unemployment these conditions may persist. However, as the political cycle kicks in, incumbent governments will seek to stimulate the feel-good factor through a reduction in taxation or increased public expenditure. While this will not damage the demand for marketing services in the short-term – in fact it will stimulate it – in the longer-term there will be the inevitable hard landing and consequent recession that will blunt demand. This is unlikely to happen in 1997, but may do in 1998.

The two long-term trends in the marketing services industry

WPP was founded just ten years ago with two long-term trends in mind, which are even more relevant today.

First, marketing services expenditures continue to grow faster than advertising expenditure. In the 1970s and 1980s, when media inflation outstripped general price inflation and network television was a monopoly, clients started to question the effectiveness of media advertising in general, and television advertising in particular. In the 1990s, with inflation under better control and clients experimenting with different forms of agency remuneration, they have diverted increasing proportions of their advertising and marketing services budgets to marketing services such as direct marketing and interactive marketing, to identity and design, to public relations, to audiovisual and specialist communications.

Secondly, advertising and marketing services expenditures are growing faster outside the US than inside. This does not mean that if you are in media advertising in the US you commit hara-kiri, but it does mean that the greater growth opportunities are elsewhere. All the competitive pressures previously identified are driving our clients to explore worldwide opportunities for growth. Over the last decade Korea, the second largest advertising market in Asia Pacific, Taiwan, Hong Kong, Singapore, Thailand, Indonesia, Malaysia, Mexico, Chile, Argentina and Venezuela have become important markets. India, Vietnam, China, Colombia and Peru now follow, with South Africa, Israel and the Middle East not far behind.

Advertising and marketing services expenditure per capita and as a percentage of GDP are considerably lower in these faster-growth markets. As a result, the balance of this growth is likely to be skewed to Asia Pacific and Latin America as governments are more stable and welcoming rather than Central and Eastern Europe which continues to be constrained by a lack of political stability and infrastructure. Indeed it is possible that growth in Africa and the Middle East will outpace Central and Eastern Europe unless the political and economic situation changes.

OPPORTUNITIES AND THREATS

Three related areas – organizational structure, size and people

The need to develop new organizational structures

The common perception is that the advertising and marketing services industry is on the cutting edge of progress, well versed in youth culture, and comfortable with change. Nothing could be further from the truth. Indeed, the industry is probably more conservative than lawyers or bankers or accountants or even actuaries. Some of our specialist communications companies with their shorter histories and more entrepreneurial backgrounds do have flatter, more process-driven structures. But despite the fact that our clients have been going through significant structural change, most advertising and marketing services companies remain rooted in the past with functionally driven, silo-like structures. Although many industries have seen radical reductions in their head counts, with reductions as much as 50% by number, our industry squeals with displeasure at relatively minor reductions of under 5%. The strengths of well-established agencies include their institutional qualities; their weaknesses include the inertia that their heritage encourages.

Advertising agency structures remain very much the same as they were some eighty years ago. Indeed in some cases organograms only reveal one change over that period – the editorial publicity department has become the creative department. Vertical department structures predominate, with strategic planning departments dealing with account handling departments and creative, media, production, finance and administrative departments. These structures encourage miscommunication as briefs or messages are passed from one department to another. However, all is not lost. Another of our strengths is our commitment to following clients, and the strategic and structural changes they are making. Probably the single most common feature among all our clients is their desire to coordinate their activities both functionally and geographically. They are searching not for economies of scale, but for economies of coordination or knowledge. This is not in contradiction with modern preferences for autonomy, empowerment or decentralization. It makes little sense for different parts of an organization not to share experience or knowledge, particularly when modern technologies are making this process so much easier.

Faced by this situation, agencies will have to overhaul their structures. It will require the methods and qualities of the long-gone organization and methods departments which examined each element of the production process in minute detail. To date, such experiments in agency organization have been largely unsuccessful and not well received. Cluster group experiments where vertical departmental organizations are dropped in favor of horizontal, client-based teams have failed in two non-WPP agencies in New York.

Intriguingly, it is the faster-growing markets where the greatest progress is being made. In Bangkok and Manila, the strongest creative agencies have organized themselves in a so-called “foxhole” structure mimicking the cluster organization by client. In Buenos Aires, one relatively small agency moved to one floor of a new building and reorganized on similar lines.

Within WPP, major progress has been made in this area in Brazil and Hong Kong, and in 1996 fourteen test beds have been identified in our seven brand profit centers – Ogilvy & Mather Worldwide, J. Walter Thompson Company, Conquest, Kantar, Hill and Knowlton, Ogilvy Adams & Rinehart and Specialist Communications. Each profit center has identified two operations, either worldwide client groups or offices for process improvement, the battle-cry being “Better work, faster.”

To some – particularly in the creative departments of advertising agencies – this might seem a long way away from the creative process. However, unless agencies concentrate on how they can improve their working methods to ensure they are more responsive, they will not be in a position to deal on behalf of their clients with the more demanding competitive environment.

Big or small?

Closely related to the issue of organizational structure is the question of organizational size. The perception is that as organizations grow in size they become less responsive, more bureaucratic and slower. As a result, will large agencies dominate the industry with their breadth of geographical coverage and coordination strengths? Or will the smaller agencies with their greater flexibility and responsiveness, reinforced by new technologies, provide clients with the creativity they require and outmaneuver their larger competitors? Or alternatively, will large and small agencies coexist, the large agencies tending to align with multinational and global clients, and the small agencies with national clients or those multinationals who become frustrated with the unresponsiveness of large, bureaucratic agencies?

Perhaps the last scenario is the most likely. Last year and early 1996 saw a continuation of the large agency consolidations that started with IBM’s decision in 1994 to consolidate all its advertising from 40 agencies into one agency – Ogilvy & Mather Worldwide – and represented the largest account move in advertising history. De Beers, Colgate-Palmolive, S.C. Johnson, SmithKline Beecham, Eastman Kodak and Kimberly-Clark/Scott Paper are all recent examples of major clients who, in similar moves, have chosen to consolidate their business into large multinational agencies.

At the same time, agency consolidation through acquisition continues. Chiat Day, TBWA, Ammirati & Puris and Ketchum have all succumbed to the blandishments of IPG and Omnicom despite being run by idiosyncratic and iconoclastic entrepreneurs. According to industry rumor, BDDP and N.W. Ayer could go the same way. Why? Clearly the financial inducements were heavy, and some companies were financially overburdened. However, another factor was at work. Many of these agencies found themselves excluded from consideration in the client consolidations referred to above, or out of the running for multinational assignments as a result of the lack of a multinational agency structure. Even some so-called creative hot shops such as Weiden & Kennedy, M & C Saatchi and Simons Palmer, who could not stomach their loss of sovereignty, have formed non-equity alignments with networks in order to give clients access to global capabilities.

As a result, the market share of the bigger agencies has grown, and only sixteen agencies owned by nine holding companies operate in more than forty countries. With the exception of Japan or India, where agencies have developed strong market share and differentiation is difficult, there is a strengthening oligopoly of international advertising agencies capable of handling multinational client business. This phenomenon is most easily seen when major pieces of multinational business come up for review and the range of options available to clients is limited, particularly when they uphold rigid conflict policies. In the case of Mars, for example, additional choice was effectively limited to two agencies, one of which was eventually conflicted out. Bristol-Myers, having spent six months reviewing its options, did not make significant changes to its agency roster.

At the other end of the spectrum, Coca-Cola continued to splinter its agency lineup and move from one or two agencies to over thirty. This approach is very different, with the client insisting on developing the strategy and leaving the agency – or, more appropriately, agencies – to be idea factories. The agency functions of strategic planning and coordination are of no value and creative execution is the agency’s only role.

Clearly, at the same time, new agencies will continue to be born, particularly at the national level. People will continue to leave agencies in a healthy Darwinian-like process to form new agencies. As a result, big agencies will have to behave like small agencies, emphasizing their creativity, flexibility and responsiveness. On the other hand, small agencies will have to try and act like big agencies, emphasizing their scale of resources and capability.

Long-term importance of attracting bright young people

Many people in the advertising and marketing services industry believe there is a dearth of talent at the entry level. However, the problem may well be that not enough effort is made to attract the right people. The problem is not a new one. As with so many other issues, David Ogilvy spotted the situation many years ago, when he noticed that his friend Marvin Bower, who built up McKinsey & Co., spent much time recruiting the best students. Indeed the situation may well be worse now, as it seems it is not in the nature of senior and middle management in many agencies to want to hire bright young people. Perhaps this has something to do with the industry’s inherent sense of insecurity. After all, if agency contracts are on ninety days’ notice, it is difficult to feel secure. In any event, although senior managers complain of intense work pressure, high levels of activity and too few resources, at lower levels people complain of too little exposure and challenge. There is a tendency for senior managers to try and wrap their arms around client relationships and prevent broader exposure of clients to others in the firm. Agencies have to figure out the best ways of attracting and developing the best talent, as management consultancies have done. In investment banks, although new recruits will have limited exposure to clients in early days, they are put through a grueling course throughout the firm.

There is an opportunity here to develop consistent recruitment and training programs, particularly those that stress multidisciplinary approaches that clients increasingly demand. Apart from being an extremely enjoyable and agreeable way of earning a living, the advertising and marketing services industry offers just as broad an exposure to a variety of industries, functions and companies as its competitors do. Its excitement lies in its variety and its ability to influence clients at the highest levels. The challenge is to communicate that excitement and fun as effectively as others have done. As a result, WPP has developed its Fellowship Program, offering the best first- and second-degree graduates a three-year rotational program through three companies and three different advertising and marketing services disciplines.

Interactive – a non event?

Many colleagues in our industry tend to dismiss the new interactive media. Not so David Ogilvy, who highlighted the future importance of direct marketing, of which the interactive media is its protégé, some forty years ago. As a result, today Ogilvy & Mather Direct is the world’s leading direct marketing company. In a sense interactivity is nothing new. You could argue that something like 80% of newspaper advertising is interactive in some way, relying on response through box numbers, coupons or telephone numbers. The new interactive media will, however, provide an even more highly effective, targeted way of reaching the consumer. With their far greater cost per thousand, the new media will have to develop a stronger case for our clients on the basis of effective cost per thousand rooted in better data on the audience being reached.

The alliances between telecommunications, computer, media, entertainment and consumer electronic companies continue apace, although there have been some significant shakeouts as finance directors exercise their influence over chief executives, following years of losses on interactive ventures. As in other fields, Asia Pacific and Latin America yield better examples of interactive success than the mature markets. Hong Kong, Singapore, Thailand, Taiwan and Chile are more advanced and successful than experiments in Orlando or Castro Valley. It is likely that the first commercial video-on-demand and home shopping services will be available in the East before the West. There is, in truth, a lot of confusion and a lot of money will be wasted. The honest investor will admit to technological perplexity and the likelihood of technological obsolescence. However, the interactive media are growing like topsy. Nicholas Negroponte of the Massachusetts Institute of Technology Media Lab estimates that a website is being created every four seconds on the internet, and that the number of web users is doubling every fifty days. Now, Nicholas, as a result of his evangelical zeal, may be prone to exaggeration. However, even if he were to be out by a factor of two or three, the miracles of compound arithmetic mean that the new media will have a rapid and dramatic impact, even if websites are being created every 12 seconds and internet audiences doubling every 150 days.

As with all previous media, economic success will depend on the development of an advertising revenue model which will subsidize the media’s cost. In 1995 the internet in the US generated only approximately $25 million in advertising revenues. However, forecasts predict a level of $1.6 billion by as early as 1998. To date, the only advertising techniques that are being used are banner headline adverts on web pages which are really reference points for websites. It is here that significant opportunities abound for agencies and their interactive units. Three key questions have to be answered. What does the consumer want? What is the consumer willing to pay for it? And finally, what is the most appropriate form of advertising content? To date, most of the initiatives have come from agency media departments, and it is important that agency creative departments become more involved. Sadly, the internet has already become more cluttered than network television, and a lot of its material is substandard and of poor quality. The skills of advertising and marketing services companies can be used most effectively in these areas. Current developments in the interactive area mirror early stages in the growth of other consumer products where engineering led the way, and marketing thinking was relatively slow to develop.

The need for media power and greater coordination of creative and media

The early 1990s have seen the growth of new media conglomerates. Examples such as the ubiquitous Rupert Murdoch’s News Corporation, Disney/ABC, the proposed Time Warner/Turner Broadcasting alliance, Westinghouse CBS, NBC and Microsoft, and GE and Netscape are not confined to mature markets. In South America, Grupo Televisa (Azcarraga), Globo (Marinho), TCI (Malone) and News Corporation (Murdoch) have developed an alliance, and Hughes is developing its satellite network. These companies, which are not really conglomerates but relatively focused media owners, are intent on developing their media networks throughout the world, much as our clients have done in response to that trend. They are looking to develop their programming and advertising revenues globally, and, in particular, in the faster growing markets of Asia Pacific, such as China and India, and Latin America such as Mexico, Argentina and Brazil.

The development of these new media conglomerates represents a major opportunity for agencies to negotiate transparent worldwide media deals on behalf of their clients. As the conglomerates wish to expand their penetration of the newer, faster growing markets and have significant capacity in the older, slower growth markets, major media buyers could negotiate attractive arrangements spanning all markets. Not many of the new media companies will be well-enough coordinated to execute these arrangements, but at least News Corporation and Disney/ABC probably will be. In these circumstances media power will become increasingly important in these negotiations. So will the ability of agency people to “walk with” media owners as well as clients. Agency chiefs have tended to underestimate the importance of the media function, and as a result media departments have not been granted access to the human and capital resources necessary. This will have to change as the media function assumes a role almost as important as the creative function. In fact, the agency roles of strategic thinking, creative execution and coordination apply equally to the media area.

Despite the significant fragmentation of the media in the 1980s and 1990s, as the cost of producing television, newspapers, magazines and radio has declined, media price inflation is still a significant concern to our clients. Perhaps due to cyclical rather than secular factors, in 1995, in both the US and UK, network television advertising pricing rose by almost 10% in nominal prices. Quite rightly our clients do not like paying more for less and would not tolerate a similar 7% increase in the price of labor or capital or any other input. Again, in these circumstances, media power will become increasingly important, and it will increase effectiveness if media buying capabilities are concentrated rather than splintered.

In the longer term, media fragmentation will encourage clients to focus on effective cost per thousand, as they will have the opportunity of reaching consumers in a more targeted but higher-cost way. In these circumstances it will be even more important to link the creative and media functions as it will be increasingly difficult to develop creative executions across a broad range of media. In the 1990s, perhaps as a result of cyclical pressures, some clients have examined unbundling their creative and media requirements as a means of reducing their costs. This may well prove to be shortsighted, given the increasing need for coordination between media and creative, which will not be achieved by splitting the advertising function between creative boutiques and media buying companies.

More strategic thinking required

All advertising and marketing services are becoming more executional. Probably as a result of competitive pressures, clients have been encouraging their advertising agencies, market research companies, public relations consultants and specialist communications advisors to come up with quick fixes. Creative hip-shooting has been more highly valued than well-thought-out strategic brand development.

In recent years, management consultancies have turned their attention increasingly to marketing strategy, as the distinction between this discipline and business strategy has become blurred. In fact, marketing strategy really is business strategy, starting with the needs of the consumer. As a result, McKinsey, Bain, Boston Consulting Group, The Monitor Company and even Andersen Consulting have started to look at how marketing budgets are allocated and marketing departments structured. In addition, they have started to recruit staff to advise on such areas.

As a result, advertising and marketing services companies are in danger of being pushed further down the value chain, despite their enormous reservoirs of marketing knowledge and experience of branding. They risk having their services become more commodity-like, with margins coming under increasing pressure. There are a number of ways this problem can be addressed. First, a consulting capability could be acquired, although this approach has been compromised by previous unsuccessful and unfocused attempts. Second, a stronger internal capability could be developed at the parent company or operating company level by recruiting or training people with greater strategic skills. Third, they could use those parts of their organization that are more strategic in terms of the knowledge they use as a base. Finally, they could form strategic alliances with suitable consulting partners, who lack access to the marketing function of clients, or who are regarded by clients as lacking marketing know-how.

Remuneration and conflict policies

Fee-based remuneration has increased over the last ten years. In WPP’s case, it now accounts for approximately 30% of advertising commission and fee income. However, over the last two or three years there have been major re-negotiations with many large clients such as Kraft Foods, Nestlé and Unilever, which have resulted in commission arrangements remaining in place. Commission levels in all these arrangements start at approximately 13%, with media buying accounting for approximately 1½% to 2%. In addition, there are success commissions giving total commission levels of as much as 17%, often based on achievement of mutually agreed profitability objectives or sales and market-share targets. This willingness to develop an attractive commission-based structure probably reflects the growing importance and difficulty of service or product differentiation, the relative scarcity of multinational agencies, and the simplicity of the arrangement.

There are also some signs of a weakening of client conflict policies, as clients wrestle with the difficulties that increasing globalization, acquisitions, mass product launches and joint ventures bring. For example, Mars is now prepared to look at individual agency networks for conflict purposes rather than just holding companies. Procter & Gamble has also loosened its category conflict policies.

Market research and corporate identity become global businesses

The market research industry has exhibited strong single- and double-digit growth even during the recession of the early 1990s. The demand side has been stimulated by worldwide expansion of clients, the increasing difficulty and risk of intuitive decision-making, and increased demand from privatized utilities, governments and service industries. On the supply side, client outsourcing has driven the need to coordinate research on a worldwide basis and concentrate supplier relationships. As a result, our market research networks have developed significant new relationships spanning 30 or 40 countries with our top 10 clients in the areas of custom research, copy testing and advertising tracking over the last two or three years. A similar opportunity may be about to happen in the application of new technologies. Interactive media will ease and improve the speed and efficiency of data collection and sampling. Virtual reality technologies may well significantly alter the nature of market research and its approach.

As a result of worldwide expansion, increased merger and acquisition activity and joint ventures, the corporate identity industry is following a similar course to the advertising and market research businesses. There is a significant increase in demand for multinational firms who can execute identity programs on a worldwide basis.

What’s P&G really up to?

In early 1996, the London Sunday Times carried a headline that suggested that the world’s largest advertiser, Procter & Gamble, was cutting its advertising. In fact, as was clear from the full text of the leaked P&G memorandum that was subsequently published in the trade press, P&G was actually reducing the proportion of its revenues that it spends on advertising and marketing support (approximately $8 billion) from approximately 25% to 20% by the year 2000. To those of a mathematical persuasion it will be clear that this could actually mean an increase in P&G’s advertising budgets, depending on what happens to sales.

In any event, it is instructive to examine more closely P&G’s marketing behavior, as it reflects quite closely what others are doing, and may indicate a secular change in the balance between above-the-line brand advertising support and price loyalty building below-the-line trade promotion.

In the high-inflation 1980s it was relatively easy for price hikes to be passed on to a less price-sensitive consumer, who in turn was receiving relatively high increases in money wages. At the same time, store brands or own-label products represented relatively low-quality alternatives to manufacturers’ brands. Manufacturers also sought to leverage the power of their brands by extending or stretching them as far as they would go through line extensions or new product introductions.

In the lower inflation, lower growth, higher unemployment 1990s this strategy is no longer applicable. More price-value-conscious consumers have become concerned about unemployment. They are unwilling to pay a significant premium, often as much as 50%, for manufacturers’ brands, particularly as retailers have started to introduce better quality store brands and own-label products, often with different qualities at different price points. Retailers have established their own labels or store brands as brands in their own right. At the same time, manufacturers have started to question the wisdom of pouring more and more money into trade promotion to secure distribution, when all it seems to do is to encourage price loyalty among consumers. In other words consumers wait for the products to come on offer, and go elsewhere when the promotion ends.

In these circumstances, a change in strategy is required. In P&G’s case, this has been reflected in a reduction and stabilization of prices through so-called everyday low pricing and an increase in its media advertising. This was financed by a reduction in trade promotion, a whittling down of the number of products and greater focus on its stronger brands. The only figures available on P&G’s media advertising expenditure prior to publication of this piece cover the first nine months of 1995. Over this period, P&G increased its media advertising expenditure on its top eight brands by over 25% on average. The only brand on which it reduced its spending, Crest, lost share significantly to Mentadent, Unilever’s brand, and as a result increased spending in the third quarter to twice the level of the first six months. Overall media spending on all P&G brands increased by over 4%. All this clearly shows a concentration of increased media spending on core brands, combined with reduced pricing and trade support. At the same time, P&G is testing a reduction in coupon activity.

P&G’s behavior has been replicated elsewhere by other clients to such an extent that for the first time for many years promotion’s share of advertising and promotion has declined. In addition, store brands’ market share has also topped out, and media advertising has increased. All this seems to indicate a resurgence in the importance of branding and media advertising. The difficult thing to figure out is how much of the change in strategy is due to secular changes in behavior and how much is a more tactical response to the upward turn of the cycle. Time, and next year, will tell.

BEANS AND PEARLS: THE BEGINNING OF THE END OF EITHER/OR?

Martin Sorrell
Chief Executive, WPP Group

British Design & Art Direction President’s Lecture, London, November 27, 1996
Published in The Corporate Report No. 20 (January 15, 1997)

I’ve looked with great interest and even greater respect at your other speakers – those who’ve been before and those still to come – and it seems to me that, as a speaker, I’m in a bit of a minority. As David Ogilvy pointed out seven years ago, I’ve never written an ad in my life. Nor is that all. I’ve never art-directed an ad either. Nor made a commercial. Nor designed a pack nor conceived a corporate identity. I haven’t even sold a brilliant campaign to a skeptical client in the teeth of hostile research findings. So I’m not even a creative “suit.”

So where does that leave me? In our black-or-white, either-or, one-thing-or-another world, that leaves me with only one available label: if I’m not a creative and I’m not a suit, then I must be a moneyman. And so, I’m very happy to be able to tell you, I am. That’s not all I am but, yes, I like counting beans very much indeed. And I find counting a great many beans a lot more satisfactory than counting a very few beans and I know that because I’ve tried both.

But what also interests me – and always has, and interests me more and more – is how those beans are made in the first place. There must, I’m sure, be a certain pleasure to be gained from making lots of money by dealing in copper futures. There’s always a certain pleasure in making lots of money. But you can make a lot of money out of copper futures without being in the slightest bit interested in copper. You don’t even need to know what a piece of copper looks like. And if you think you could make even more money by credit factoring, or reinsurance or double-discounted forex trading, then you go and do it without a second’s, sentimental thought.

Slightly to my own surprise and just occasionally to my intense regret I can’t do that. The beans that I get most satisfaction from counting are the beans that your world makes. That’s what attracted me to it in the first place and that’s what has kept me in it ever since. I find your world both intriguing and infuriating: because it can be both brilliantly inventive and stubbornly reactionary. I believe you overrate yourselves in some ways and grossly underrate yourselves in others.

I don’t think you know who your enemies are. I think you are a great deal better at advising and promoting your clients than you are at directing yourselves. And I’m not at all sure you give nearly enough thought to the future. And if all that sounds a bit hostile, please remember this: first, that I’m a kind of reluctant groupie; and that second, mad fool that I am, I’ve pinned my entire future to your abilities, so I have an unusually acute interest in seeing that you get it right.

So what I would like to do this evening is take advantage of your invitation and do some thinking aloud about all the things that have been preoccupying me over the last year or so. And from now on, if it’s all right with you, I’ll stop talking about “you” and “your world” and starting talking about “us,” not least because I believe our long-term interests are more or less identical. And although I know there are clients and others in the audience, I’ll assume that you’re all in design or advertising or marketing communications because it’s simpler that way.

Here are some of the things I wonder about. What exactly is it that we sell? Why are we worth our fees and commissions? What are we good at? What are we bad at? How is the world developing and is it good for us or bad for us? Who, other than ourselves, are our true competitors? Why are we different? And what are we most likely to regret if we let things jog along as they are?

First, let me look at the way the world seems to be shaping up. This is what Charles Handy has written recently: “The coming of the information economy offers the tantalizing promise of a modern alchemy, the ability to create wealth out of nothing. Microsoft stands as a sort of parable of our times, for it was built on nothing but the ideas and energies of two people. It needed, in its origins, nothing of land or materials or machines or even of finance-the sources of wealth in times gone by. The modern economies will not be constrained by lack of resources but only by lack of creativity and ideas.”

That’s Charles Handy. Next, I turn to John Kao. Kao, as I’m sure you know, is an entrepreneur himself, a film producer, and a jazz musician, and he also teaches a course in creativity at Harvard Business School. His latest book, published this year, is called Jamming: The Art and Discipline of Business Creativity.

John Kao believes, with the Nomura Institute, that you can usefully divide the world’s economic activity to date into three distinct eras. We have gone from Agriculture to Industry to Information. And right now, he believes, we are entering the fourth era: the Creative Age. In a recent interview, he said this: “The search for value has led companies to seek efficiency through downsizing, rationalizing and right-sizing-approaches that eventually result in a diminishing level of return. But what will fuel growth in the future? Growth will come through mastering the skills of creativity – and making creativity actionable.”

And there’s one other bit from the same interview that I’d like to quote: “Business should be about passion. The reason that companies are filled with miserable, bored people who provide lousy service and make utterly forgettable products is because their people are not passionate about what they do. To remain competitive, companies that want creativity, new sources of value, new products and services and new ways of working, must find ways to inflame their people.” (Maybe that explains why I never got into copper futures.)

Those are the views of just two thoughtful and perceptive people. There are many more like them, all beginning to say very much the same things. You do not have to believe that they are absolutely right about absolutely everything to believe that – if only we know how to take advantage of it – the world of business is moving in a direction that should offer our particular world far more exciting opportunities, far more fun and far more beans to count than we have ever so far experienced.

That’s the good news. The bad news is that I don’t believe that many of our client companies are yet ready to ask for it; and, even more seriously, I don’t believe that many of us are yet ready to provide it. John Kao is clearly right to say that we are already moving out of the Information Age. Information, of itself, will only very rarely deliver competitive advantage. Furthermore, as knowledge – information, data – all become more and more available to more and more people more and more immediately, any lingering competitive advantage will soon disappear. Just as the lead times on technological innovations have consistently shrunk, so have the lead-times on the possession of information.

More than ever before, it’s what we do with that information that will matter. Our value to clients will be in exact proportion to our ability to take information, to take knowledge, all of it almost certainly known to others, and through a series of creative acts and processes, transmute that knowledge into unique and desirable goods, services and systems.

It will be extremely difficult and probably extremely painful for long-established companies to welcome creativity into the instinctive heart of their organizations. What will make it not so much difficult as impossible will be if none of us are ready to write the prospectus, to make the case and to help make it happen.

In theory, those of us in marketing services companies are more perfectly poised to help than any other. We are, after all, the only group of professionals whose job it is to apply talent and imagination and ideas to commercial activities for measurable commercial purposes. D&AD’s current “Twin Peaks” Exhibition contains a great many examples of the demonstrable, quantifiable benefits of creativity.

But I fear that we have at least one serious problem to overcome before we are welcomed as the rightful senior partners to our clients in the new Creative Age. We must first recognize ourselves, and then convey to others, that creativity, as Kao and Handy and others understand it to be, is not simply about communications. It may not be as true for design companies, but I believe it to be true for most advertising agencies. I believe that, over the last 30 years and in most parts of the world, agencies have become more rather than less specialized in the forms of creativity they offer. And by more specialized, I mean more narrowly focused, and therefore, more limited.

There was once a time when client companies would welcome an agency’s thoughts on just about all aspects of their business: diversification, brand strategy, investment and internal training as well as advertising and promotions. For a wide variety of reasons, all that has changed, certainly in the US and the UK. Increasingly, clients expect only creativity in their communications from their agencies. And increasingly that’s all that agencies are organized to provide.

The internal consequence of this is significant. It’s clear from the books and from talking to David Ogilvy and others, that the best agencies were once all-round inventive enterprises, with creativity to be found in their management, their planning and media and account services departments as well as in their creative departments. Clients approached agencies hoping for and expecting inventive and unorthodox perspectives on their total businesses.

Today, it seems, only creative departments are expected to be creative – and the consequence of this is twofold. The first is to reaffirm the impression that the only creativity that matters to clients is the creativity of their communications-the words, the pictures, the packaging, the posters. And the second effect, linked to the first, is that it increases the risk of advertising creativity being seen, at least by its practitioners, as an end in itself rather than the means to an end for a happy and prosperous client. When creativity of communications is the only recognized form of creativity, then creativity and function can very easily become decoupled.

I know this is a debate that D&AD has had with itself over the years and, again, I must congratulate you on your Twin Peaks approach. But if I am right (and I wouldn’t be saying all this if I didn’t think I might be), we in advertising and design are not nearly as well placed as we should be to take advantage of the new, burgeoning age of creativity. People in creative departments, however outstanding, are rarely recruited for their understanding of business. Nor am I suggesting that they should be. Nor am I recommending that for every MBA the client hires, we should hire three.

What I am saying is that increasingly clients will be looking for creative strategies, creative processes, creative ways of communicating with their increasingly fragmented staff, creative ways of understanding and leveraging their corporate brand strengths, and creative ways not just of generating ideas, but, in the words of John Kao, “making creativity actionable.”

That’s what many will be looking for – if not now, then soon. And if they don’t find it from us, they’ll go looking elsewhere. I think it quite possible that many will not even think of getting it from us, so linked in their minds have we become with the final expression rather than the central, driving purpose.

I believe we will make a very great mistake if, just because we dismiss the management consultancies as uncreative, we also dismiss them as potential competitors. Listen to this: “Many brands today are dying. Not the natural death of absence but the slow, painful death of sales and margin erosion. The managers of these brands are not complacent – in fact they are constantly tweaking the advertising, pricing and cost of their brands. At the heart of the problem is a more fundamental issue: can the original promise of the brand be re-created and a new spark lit with today’s consumers? We believe it can. Most brands can be reinvented through brand renaissance.” And there follows a well-documented account of the huge success of Nike. Even 10 years ago that could only have been written by one of the great design companies or advertising agencies. It comes, in fact, from a recent Boston Consulting Group brochure.

For client companies anxious to become more flexible and creative, but equally fearful of the effects of such a change on their own internal structures and traditions, the steady hand of an established consultancy could be very desirable indeed. And particularly one which has learned to speak the language of brands with such warmth and familiarity.

You may well believe that the number of client companies seeking creative help with strategy and systems will be limited, that the great majority – and perhaps an increasing majority – will believe themselves strategically self-sufficient. And that the only creative contribution they will willingly pay for will continue to be communications.

Even if this should be the case – and in part I think it’s bound to be-we are still vulnerable. If all clients want are ideas – lots of them, from which they can pick and mix to their hearts’ delight – then they won’t want conventional, full-service advertising agencies. They’ll want fast, flashy, fee-based ideas factories: factories that take the client’s strategy with no questions asked and come back within days with a hundred different executions. We haven’t heard the last of the CAA/Coca-Cola story. And the CAA/Coca-Cola story will not be the last of its kind that we hear about.

So we face competition not just from each other, as we all too comfortably sometimes think, but from two relatively new sources. From further upstream, where the strategy starts and the client’s chief executive gets deeply and personally involved, we face new competition from the established, but still ambitious, consultancies. And from further downstream, happy to serve clients who have no identified need for a strategic partner, we face competition of another kind: from companies capable of generating ideas and designs and promotions and commercials at a speed and a cost far closer to that of newspapers and broadcasting than to the stately deliberations of conventional advertising agencies.

At exactly the time when the traffic is getting faster and louder, and coming at us now from both directions, the middle of the road may prove an extremely uncomfortable place to find ourselves. Now let me tell you why, if we’ve got our wits about us, we can start on this new Creative Age with some worthwhile advantages. We are the only professional group that has, for a great many years now, been consciously turning the talents of creative individuals to clients’ business advantage. That is what we sell.

We are the only group to recognize out loud that business success and progress depend on hunch, intuition, trial-and-error and inspiration, as well as analysis, precedent and the rigorous application of research. Above all, perhaps, we are the only group of business advisers that consciously works from the ultimate consumer backwards.

Some of you may know Aldo Papone of American Express and BodyShop. This is a man who’s been choosing and employing agencies, design houses and consultancies all over the world for 30 years or more. And he makes this important point: to buy, from a management consultancy, a thorough and accurate analysis of your company’s market – its strength and its weaknesses, its competitors and its future – is always worth doing. But you’re still, as management, left wondering what to do with all this information. The wonderful thing about a good design company or a good agency, says Aldo, is that the analysis can be just as thorough, but they also leave you with actual things, actual, practical recommendations, words, pictures, designs and programs that you can actually do something with. And he says, with some surprise: “I often wonder why you don’t make more of that.” I wonder, too, and I find his insight an extremely helpful one when wondering what we should all do next.

To read some of the winning submissions to the IPA’s Advertising Effectiveness Awards is to be reminded just how valuable a good agency can be. Not just because highly effective advertising is produced and placed, but because of the sometimes quite priceless value of the advertising development process. As the analysis is done, and consumer attitudes established, and then ideas tried out and modified and strengthened, so a great wealth of knowledge and understanding emerges about the whole of the client’s business. And it comes from the only source that ultimately matters, the sovereign with increasing power, the choosing, buying public.

That sort of process provides a bottom-up understanding of a business enterprise in a way that the top-down consultancies would find difficult to equal. And I know that the best of the design houses and the identity specialists have at least as rigorous and useful an approach to their final recommendations. But, still, at least in the agencies, we tend to give such invaluable insights away. They come free, with the layouts and the storyboards. And we talk about something called “our creative product” as though only the words and the pictures are creative-and never the processes of thought and analysis and imagination that led up to them. No wonder Aldo Papone is puzzled by our reticence. No wonder we find fee negotiations getting harder all the time.

In a business world that is going to put a higher and higher rating on integrated creativity, we are in danger of losing what should be our overwhelming advantage, by allowing something called creativity to be confined to the creative compound. What we sell are pearls. Whether we are designers or planners or writers or art directors or corporate strategists, our raw material is knowledge. We turn that knowledge into ideas, insights, and objects that have a material, quantifiable value to our clients. They are all pearls. Pearls of wisdom, of beauty, of desire, of wonder. Only the human mind can perform this extraordinary alchemy. And only certain kinds of minds, at that.

But here we must be very careful. We have come to believe, with our modern narrow vision, that only very few are alchemists, and I think that’s wrong and I think that’s dangerous. I believe we will survive and thrive in the new Creative Age only if we enlarge both our understanding and our delivery of creativity. And I’ll deal with those two separately. Both as a nation and as an industry, we need to start closing a few cultural gaps.

When people first hear that there is a professor of creativity at Harvard Business School, they’re always surprised and usually make jokes. I know I did. Partly that’s a result of straightforward prejudice – and partly, I suspect, because we tend to use the word “creative” in such a restricted sense that it immediately conjures up the vision of some head-shorn, ear-ringed art director mumbling incoherently at rows of deeply serious would-be chief executives.

What should be surprising, and even slightly shocking, is how rare it is for creativity to be taught anywhere. It’s one of those great and imaginary gaps. Conventional thinking tells us that there are competent, conscientious, diligent, numerate, businesslike people. And then there are creative people. That is certainly not how it seems to me, and certainly not how it must be in the future.

There are other great and imaginary gaps between academics and businessmen, between artists and engineers. It hasn’t always been like that, and if nations are to learn how to turn knowledge into actionable ideas, those gaps must go. And they must start to go first, I believe, in our world.

When the enlightened client of the future employs a marketing services company, he will hope to be employing a team of all the talents. He won’t want to deal with an empty suit who has occasional, privileged access to something called the creative department. He’ll want his account man and his planner and his media planner to be at least as inventive in their own respects as any writer/art-director team. Even today, the best clients don’t want to work with identical clones of their own marketing department. They want complementary skills, refreshing approaches, new and questioning perspectives. And from a team, a team of all the talents, that’s dedicated to making their business go better.

Brand advertising in the next twenty years is going to demand a great deal more than the ability to write, produce and place a 30-second spot on network television. If our world doesn’t increase the breadth of creativity it can provide for its clients, then our clients, out of cold necessity, will emigrate to those who can. And if we are to repel the rapacious consultancies, anxious to usurp our strategic function – and a great deal better at getting paid for it – then we must also increase the breadth of our creativity. I am absolutely certain that the only way for agencies to get back upstream, to get back up the value chain, to regain their lost strategic ground, is not to forsake their creative heritage, but to build on it. But that means a much wider understanding of the meaning and nature of creativity than we commonly hold today.

So much for a greater understanding of creativity. There is as much to be done, I believe, in its delivery. To return to Charles Handy: “The cultivation and exploitation of imagination will need new organizational forms. We shall need to look for them in unfamiliar places. Perhaps in the theater or in the arts, in unlikely places such as universities, or in the metaphors of the new sciences with their complexity and chaos theories.” And then he says, and this I think is a particularly important bit: “Imagination starts with individuals but flowers in groups, and it needs the power of an organization to bring it to its full potential. The challenge of bonding the individual to the organization is one that will stretch the imagination of our leaders-and they will be leaders rather than managers, for creativity can be led, it can be channeled and fostered but it resents being managed.”

It is here that the understanding and the delivery of creativity come together. I’m delighted to find that, around the world, in major WPP companies, there are already 14 different test-bed experiments going on – and they’re all to do with the reorganization of client teams.

I have long believed that, however talented the individuals may be, without clear leadership and a lean and lively structure, the work will be much less good, will take much longer to emerge, and will therefore generate far meaner margins.

No one knows what the 14 experiments will deliver, but I’m greatly encouraged that they’re happening and I hope there will be more. At the very least, the shaking-up of structures and processes that predate the new technology by about 100 years can’t fail to have a liberating effect that should be greatly to the benefit of clients.

Then, too, we must be ready to compete on more than equal terms with the ideas factories. New structures may speed us up a bit. A new breadth of understanding may widen our repertoire of creative solutions. But I suspect we need to be a lot more adventurous than that. I think we need to start learning from, and be ready to subcontract to, a huge diversity of peripheral talent.

Handy mentions the theater and the arts and the universities. I would add some of the sciences, electronic publishing and design, theatrical stagecraft and a great many more I don’t even know about. And I suspect we should embrace these creative cousins in two ways. First, I think we should get to know them better. And by “we,” I don’t mean just the creative departments. I mean management, account management and strategists. Because anyone who is managing a complex and creative organization-or perhaps I should say, anyone who is inspiring and leading a complex creative organization-is doing something of the greatest interest to us. It’s most unlikely that we will find many tidy practices we can simply adopt. But it’s very likely indeed, it seems to me, that we would derive huge benefits from such an open-minded exploration.

There’s another important reason that we should know them better, and that’s because we should have a lot of them on our books. I don’t mean on our payrolls. They wouldn’t want that, and nor would I. I mean we should know where they are and what they can do and be able, on a case-by-case basis, when the strategy dictates, to bring them in as temporary extensions of the client team. It is, after all, how we have used commercials producers for many years, but the dominance of that medium seems to have restricted our thinking to that medium.

Last week, Feona McEwan, who looks after communications for WPP, went to Wembley to see Tina Turner. Tina, predictably, was quite amazing. But even more amazing, according to Feona, was the stagecraft, the spectacularly inventive use of sound and picture and the new technology, not just for showing off, but for sensational theatrical and magical effect.

As media continue to fragment, and massive audiences become more and more difficult to buy, there will inevitably be a demand for other forms of spectacle. If I were a client, I would not expect my agency to have in-house experts in all known skills. But I would be very comforted indeed to know that, through my agency, I had immediate access to the world’s most talented musicians, inventors, composers, writers, directors, lighting technicians, computer games designers, special effects masters…and the leading-edge wizards behind Tina Turner at Wembley.

We should not only be seen, in the round, as creative business consultants. We should also be seen as a gateway for clients to a vast gallery of other talents to be chosen from when the opportunity calls. If we don’t do it, someone else will – and they’re probably called Spielberg or Disney.

I’ve talked a bit about beans and a lot about pearls. As you’ve almost certainly forgotten, the title of this talk was “Beans and Pearls: the Beginning of the End of Either/Or?” What that wistful question represents is the hope that we can begin to narrow yet another gap, to eliminate yet another false antithesis. I find it absurd that clients when looking for partners should feel that they have to choose between marketing companies who are sound but solid, and creative companies who are occasionally brilliant but almost as often un-businesslike.

As I hope I’ve made clear, I believe that every advance that our own industry makes in the new creative era must be built on our own creative heritage. It is that which distinguishes us. It is that which our clients pay for. And it is that which will be in ever more demand.

But we will earn those new responsibilities, and achieve that new respect only if we behave like a grown-up industry. Engaging grown-ups, I hope. Eccentric, inventive, challenging and unconventional grown-ups. Grown-ups who help their clients look through new doors and open up new vistas of opportunity and profit.

All those qualities are entirely compatible with being grown up. Just as the alchemy of turning knowledge into pearls is, in my extremely suspect judgment, entirely compatible with the need to make beans: and having made them, to count them.

DOING BUSINESS IN THE DIGITAL WORLD

Paul Allaire
Chairman & CEO, Xerox Corporation

DocuWorld, Toronto, May 14, 1997
Published in The Corporate Report No. 22 (September 30, 1997)

I’d like to share with you some thoughts on what is often called the “print-on-demand revolution.” I’ll address three key factors that are driving this revolution and transforming today’s businesses:

• The impact of new services and service requirements

• The impact of digital technologies

• And, specifically, the impact of color technologies

And I’ll reflect on what these mean to each of us doing business in the digital world.

The print-on-demand revolution: is it really a revolution? The industry numbers are certainly revolutionary. CAP Ventures estimates that the retail value of print produced in this digital market will grow by 400% between 1996 and 2000. I’d say that’s revolutionary. Xerox announced the DocuTech in 1990. Since then, we’ve installed more than 14,000. That’s pretty revolutionary too.

But in many ways, the print-on-demand phenomenon has evolved quite naturally from the mix of technologies and business conditions that existed at the beginning of this decade. And it can’t help but continue to grow and evolve well into the next decade and beyond. The reasons are simple. First, many of the fundamental business needs that these systems fulfill are intensifying. And, second, the development of technologies that support these systems is occurring more rapidly than ever before. So, let’s start by taking a closer look at trends in services and the business conditions that this revolution – or evolution – is addressing.

At Xerox, the senior team meets regularly to analyze and discuss our perspective on what the world will be like ten years from now. We look at our own business…the businesses of our customers…and the outlook for technology, both from our labs and those of our partners…and establish a shared Xerox vision that is critical to all of our decision-making.

It’s probably no surprise that one crucial factor is the increasingly global nature of business. For businesses of all sizes, thinking globally is rapidly becoming a requirement – not just an option. Globalization, in turn, is one of many factors that are leading to intensified competition. In order to deal with this phenomenon, many businesses are reevaluating their entire focus and process – diverting more energy and assets toward developing their core competencies. That’s a clear business trend.

What are the implications? As organizations focus on their core competencies, they’ll look for partners who can help them manage their documents. Managing documents in the digital world is more challenging and complex. It is crucially important to do it well. Much of the critical information that organizations need to communicate is in documents – which Xerox defines as information structured for human comprehension.

Many new services revolve around corporate information, which is increasingly perceived as a key asset – pivotal to achieving business success. Managing and utilizing those assets optimally is becoming a top priority. That’s because companies see documents as both a means – the currency of internal processes – and an end, a product delivered to their customers.

And no business documents in history have offered as much potential value as today’s networked digital documents. They are easier to share…faster to deliver…and more agile in performance than any previous document format. The new capabilities of the digital document bring new complexities. A new expertise is needed to get the maximum value out of the digital document.

Some organizations will decide to develop their own capabilities. But you may find that partnering with other companies in complementary businesses is a good way to acquire these expanded services quickly and competently with much less cost. Partnering has been our strategy at Xerox and it’s met with rave reviews from our customers. We believe that companies will get farther, faster by partnering with experts.

As you might imagine, I can’t talk about most of the projects underway at PARC, the Xerox Research Center of Canada, Grenoble or any other Xerox research facility. But I can say that digital printing has only captured approximately 25% of the potential digital market. The new solutions that we’re unveiling here today will accelerate the pace of change with respect to digital printing and realize the potential yet untapped. There are three categories of digital technology I’d like to discuss: computer technology, telecommunications technology and graphic arts (or imaging) technology. At least, we traditionally have thought of them as three distinct categories. For many decades these technologies were developed independently of each other. Until a new trend began, a trend I’ll call “technology confluence.”

Today, these three technologies are inextricably linked with one another. Because of the synergy among them, in which the whole is greater than the sum of the parts, the value that they provide to all of us has increased exponentially. And it’s this new level of technology that has enabled this whole phenomenon of digital printing – print-on-demand – that we are here to explore.

There’s a concept in information technology called Moore’s Law. Many of you, I’m sure, have heard of it. Its basic premise is that the power of computing technology doubles about every eighteen months, and the price of computing power decreases.

This performance is unmatched in the history of industry. Futurist John Naisbitt notes in his book, Global Paradox, that had the automobile industry made similar progress, a Lexus today would cost about $2, travel at the speed of sound, and go about 600 miles on a thimbleful of gas. And change of that magnitude is not over. We believe Moore’s law will continue to be a reliable metric for predicting computing power for the foreseeable future.

Of course, digital technology is not new to many of your businesses. In the graphic arts industry, print jobs have been created and submitted digitally for quite a while, even though much of the printing has been analog. But digital printing enables a whole new range of opportunities, for custom-assembled documents, for inclusion of personalized data. And that means we need to provide a whole new level of integration among computer systems.

The telecommunications area is perhaps the most exciting of all and has been the source of the most rapid innovation. Arguably, the most important of those innovations is the internet. The Internet is a revolution in the truest sense, especially when you consider the speed at which it has caught on and the fundamental economic changes, and business process changes, that it has brought about. Make no mistake about it: the internet is going to change your business, if it hasn’t already.

The internet has two basic applications. First, you’ll be using it in much the same way other businesses do: taking orders, making inquiries, maintaining a home page to give you global reach in your marketing efforts and, increasingly, performing financial transactions.

The second application is more fundamental and is of immediate concern not only to the graphic arts business, but also to education, banking and government to name but a few. And it’s here where we will see the most dramatic change.

The internet is a vehicle for submitting digital files for printing, delivering raw materials for manufacture, if you will. And, to carry that analogy one step further, it offers the possibility of distributed manufacturing at multiple sites. The internet has some traditional drawbacks for exchanging print files, especially full color ones. Security is an issue. Bandwidth is a big issue. Reliability is yet another. Despite these issues, the “internet train” has left the station. It has been embraced by both business and consumers. And it is here to stay.

Ten years from now, the Internet may “look” different than it does today. The infrastructure may be different. But there will be an internet, and it will be a central, unifying element for all of us. Intranets and private networks will remain, but they will use Internet protocols and provide similar functionality. The principal form of information carried across all those networks will be documents, mostly in color and hyperlinked. Many will be with multimedia, audio, video and embedded software agents.

Computer workstations often are seen as the “on ramps” and “off ramps” for these networks. But they’re not the only ones. Digital, color, connected I-O devices (scanners and printers) also will become ubiquitous with increasing reliability and decreasing prices. Printers and scanners are the new on- and off-ramps of the net.

Connectivity among and between networks, devices and systems will become easier and more widespread. This is, of course, a standards issue more than a technology issue. We believe that standards for distributed print services will deliver the connectivity required.

And that brings me to the third point I want to make the growing impact of color technology. This widespread connectivity to the colorful images of the World Wide Web is one of many factors that will place increased demand on vendors to provide affordable, high-quality color output devices, on the desktop as well as in production environments. CAP Ventures projects a tenfold growth in the retail value of color pages between now and the year 2000.

In the coming years, you’ll see more powerful configurations for both highlight color and full-color printing. Highlight color systems will be even faster and more productive and will deliver the business benefit of improved response rates to key information in documents like invoices and statements.

We will begin to see color devices do for digital color printing what the DocuTech has done for black and white. Moore’s Law can be seen in the rapid development of controllers that provide fast processing speeds for complex color image files, making color printers far more practical for advanced print-for-one applications than ever before.

The short-run production color market exploded in the second half of 1996 and it shows no sign of stopping. We believe a major factor fueling the next wave of growth in the production color arena will be in short-run personalization and customization. Ultimately, the market needs mass customization capabilities in color at today’s production speeds, with photographic-quality images and in-line finishing. That will be the big enabler for real global one-to-one marketing.

We see color printers beginning a gradual evolution away from black-and-white devices for some applications. And we can see a day when black-and-white pages and color pages will cost the same, whether they are printed on a color or black-and-white-only device.

Indeed, the evolving ubiquity of color and graphic-intense content is changing the nature of the business document and the skills required to create it. Increasingly, the basics of graphic and color design are becoming fundamental business skills that need to be taught along with writing and mathematics. Good designers are becoming more and more valuable.

All of these business trends – and new technological capabilities – lead us to an inevitable conclusion. We have seen only a small fraction of what digital publishing, that is print-on-demand, customized printing and distributed printing, has to offer. For all the technological reasons mentioned earlier, it’s becoming practical to split document production runs into a series of shorter batches. And for the business reasons I mentioned, it’s becoming more and more desirable to do that.

Those print runs are broken up over one or more dimensions, including:

• Time – printing just the quantity needed, when needed

• Physical space – printing just the quantity needed where needed

• Content – printing the precise information the reader needs whether that means including variable data or assembling a custom document from multiple sources

Print-on-demand offers each of us tremendous opportunities. So, what can organizations do to prepare for that future we’ve been examining? Here is the bottom line – the most important thing I believe you must keep in mind if you want to be successful in this business. The products you offer, the tools you employ, the services you provide, the skills you apply, your competitors, your sources of revenue, even the very business you’re in, will change. Significantly. Maybe sooner than you think. Your future is dependent on your ability to adapt to a fundamental paradigm shift. It’s a slow, evolutionary shift, but it’s one with revolutionary implications.

Today, organizations regard documents as a means to an end. And document management as a necessary evil. But as the print-on-demand revolution progresses, that’s changing. The value of the document has increased and document management is a strategic advantage. Documents need to be effective, relevant and move people to action. More and more, your success will depend on this. It’s a radical change in the way we think about our business, but it’s an important and inevitable one. It expands the options for creativity and for delivering more value to our customers through documents. The possibilities are vast and they’re compelling.

The revolution that’s going on has opportunities for all of us. But it does require expanding our knowledge base, enhancing our skill sets and devising and implementing new ways of delivering value. And of equal importance, we need to help our customers understand the possibilities in the new digital world.

A CRISIS OF OPPORTUNITY: LEARNING HOW TO THRIVE

Diane E. McGarry
President & CEO, Xerox Canada Inc.

The Canadian Club of Montreal, March 27, 1995
Published in The Corporate Report No. 12 (June 15, 1995)

The last time I spoke in Montreal, the Canadiens were in a terrific play-off series with the Bruins. This year? Well, we’re here to talk about change, aren’t we? And judging by the Hab’s year, change is not always for the better. Change. It means many things to many people.

I have a friend about my age, for instance, whose mother – as a teenager – trekked by covered wagon from Southern Alberta to the Peace River country after her father’s farm failed and he had to look for a homestead in the north. She’s still traveling today, only now it’s in cars and airplanes – and on the internet.

Think about the incredible changes she’s seen in her lifetime: from the horse-and-buggy era to the Information Age, from crystal radio sets to television to cyberspace. Through all of it, she and millions like her have adapted, and in fact thrived, on breakthroughs, working hard to get beyond the disruption that change brings and integrate it into a better life.

In large measure, that is what managing corporate change is all about, working through the discontinuities to create dynamic, forward-looking organizations with the inner strength – and the confidence – to take on whatever tomorrow brings.

I want to lay out for you Xerox’s own covered wagon story for two reasons. First, because it’s one I know very well, having almost literally grown up in this corporation. And second, because it’s a case that I believe has wide application for Canadian companies – and for Canadian companies as a whole.

You know the data as well as I do – we’re members of the G7, but the World Bank ranks us in 13th place today, and other national economies are growing faster.

It’s probably not time to circle our collective wagons. But we do face a challenge to rev up our economy to growth rates that ensure not only Canada’s place among the world leaders, but also to generate a dynamic business environment for ourselves and our children.

That was certainly the challenge facing Xerox not that long ago. Like many individual Canadians, we faced a crisis of survival – and made it through so that today we’re in a position to address a crisis of opportunity as we head to the year 2000.

Before I tell you how we got to where we are, let me make one point very clear. Our corporate recovery – and the foundation for all our change management – has been due to a steadfast focus on quality. That’s not a new idea. And maybe because it’s not new, quality isn’t even particularly fashionable these days, if you judge by the media interest or the falling number of applicants for quality awards. But I’m here to tell you that it is only because of a continued corporate commitment to quality that Xerox has a story to tell today…and a sector-leading business to run tomorrow.

For us, quality is a state of mind.

Where once we defined quality as an obsession with statistical conformance to standards in manufacturing, we now know that it requires an intense concentration on every facet of the enterprise. And it begins with an attitude within the company that quality is paramount. Share of market follows from share of mind, whether that’s in terms of the customer and his or her expectations or the employee and his or her commitment to and understanding of quality.

The new quality imperative also goes beyond simply satisfying the customer – that word “satisfy” is to me a prescription for mediocrity. It goes beyond that, into the realm of customer loyalty, where things like mutual trust and commitment are the defining elements.

To put it simply, the 1990s arrived about 15 years ago at Xerox – and we weren’t ready. We had invented a better mousetrap – the plain paper photocopier – and spent the 1960s and 1970s basking in the short-lived kudos of Bay Street and Wall Street. Our self-satisfaction wasn’t entirely without justification – the copier was, at the time, the single most successful (that is, profitable) product ever invented. What is not so justifiable, however, is that we grew fat on the industry we’d created, selling all we could make at whatever price we set.

But we weren’t paying attention to what was happening outside our self-imposed boundaries. We were so happy simply reproducing our success that we did nothing to capitalize on other inventions that came out of our world-class Palo Alto Research Center – little things like personal computers, the mouse, graphical user interface. You might have heard of them – but not with a Xerox name on them. We were so busy counting our paper profits that we failed to read the “Sayonara” message in our Japanese fortune cookies.

Until one year, our profits dropped by $1 billion – overnight – and we realized that in just five short years, the Japanese had gone from zero to 40% market share in an industry that we had created.

They were selling their machines for what it cost us to make ours. Our benchmarks were not even in the same league. Our product lead time was twice theirs, we had 10 times the assembly line rejects they did and nine times the number of suppliers.

All of a sudden, we found ourselves with hundreds of competitors, each focusing on a slice of our pie – the document market – and shaving our margins. They were listening to what we had thought of, proprietarily, as “our” customer. It was clear we had to change or die. We chose to change and have been doing it ever since – fundamental, lasting change, in the way we perceive our business and the way we carry it out

We started with quality. In the early 1980s, we turned to our affiliate, Fuji Xerox, as a model and committed to a Leadership Through Quality Strategy.

We looked at competitors to benchmark the standards they set, then embarked on nothing less than a culture change operation among our own employees to make it clear to them that customer satisfaction – as we called it then – was the objective.

We also made it clear that we would retool our business until we reached our goal. We laid the foundation for a “quality-is-a-state-of-mind” organization by setting new standards for staff training. To give you an idea of our commitment, it took six years to put all 100,000 people through the initial training. Today we insist that all new employees take a week-long course on continuous improvement…and we refresh this regularly.

We reinforced this change with internal communications programs that emphasize the customer and the urgency with which we have to meet their requirements. And we began to shift our focus from an individual to a team approach to problem solving.

The results: by the late 1980s we had:

• Cut our time to market in half

• Reduced the number of suppliers by a factor of 10, from 5,000 down to 500

• And improved our customer satisfaction results by 50 per cent to 95% satisfied today

It’s no surprise that our profits grew as we became the first North American company to recapture market share from the Japanese (without the help of government tariffs.) I’m proud to say we were recognized for that turnaround, notably by winning the Canada Award for Business Excellence (Total Quality) in 1989. We have also won 18 other major quality awards, including the Baldrige in the US and the Deming Prize in Japan. But I’m even prouder to say that we learned from our past and didn’t stop to bask in the glow of our press clippings. We knew that we had come through the crisis of survival only to face a crisis of opportunity. Put another way, we knew how to survive – we are learning how to thrive. We took a hard look at ourselves and realized we had attractive markets and superior technology but there was more to do to ensure future success. So we set our sights to do three things:

• Refocus on what business we are really in

• Change our structure for a better line of sight to our customer

• And adhere to a quality assessment process to achieve business excellence

In short, refocus, realign and recommit. In each case, we kept the quality imperative at the top of our agenda, and as you’ll see, worked very hard to make it a part of the every day state of mind of the worldwide organization.

The first dimension of our strategy was to refocus. By that I mean we looked in a fundamental way at what business we’re in. People thought our business was photocopiers. So did we. But when we sharpened our focus and looked at what would enable us to regain our competitiveness, we broadened our vision. Our business is THE DOCUMENT – the heart of the business process.

Yes, we make machines that copy paper documents, but we produce hardware and software to handle and distribute documents in whatever format – digital, graphic, text, pictures, eventually video, voice and who knows what other forms documents will take.

And there’s more to it than that. Every business lives and breathes documents. The document is an essential tool in the business process – we think of it as the currency of the office – and we are focused on helping to manage that currency to improve an organization’s productivity. We had to get it through our heads that we shouldn’t be selling our products because what people were buying were the benefits those products make possible.

Today, we’ve come to understand that we provide productivity tools – hardware, software and grayware or wetware, or whatever people are calling brain power these days – for our customers.

Take, for example, our award-winning partnership with the McMaster University bookstore in establishing a Document on Demand facility. This pioneering system – the DocuTech 135 Production Publishing system – stores professors’ selected notes, lectures, articles and book chapters. Students order customized packages of information as needed. The system then searches its databases, prints and binds a hard-copy “course pack” for the student. No lineups, information on demand and, at $20 to $25 a pack, considerably less expensive – a not inconsiderable point in these days of rising tuition fees. As well as helping students, the system is easily up-datable so that participating faculty members can ensure the currency of the information. And the bookstore is transformed from a warehouse with swiftly aging inventory into a strategic resource center – a true electronic information store.

It’s the kind of project that typifies our new approach to business and innovation management at Xerox: a productivity solution that helps our customers help their customers through an innovative approach to THE DOCUMENT.

So that has become our strategic focus. And that’s why our new signature is The Document Company – Xerox. Built on our heritage but focused on our future – the digital world. We focus sharply on what it is we really do to give us a competitive advantage. And then we pursue that advantage in partnership with our customers and suppliers.

The second dimension of our current strategy is to take our commitment to quality and apply it to our organizational structure. The goal is to realign ourselves to gain a better line of sight to the customer. To be blunt, we simply will not get there unless we overcome the cumbersome, functionally-driven bureaucracies that we seem to create so universally.

As I said before, we’re looking not to limit ourselves to satisfying customers. What we want is to foster customer loyalty – a mutually rewarding relationship with customers, a two-way commitment to each other’s best interests. In that context, despite the quality advances we’ve made in the last decade, we continue to remake our organization every day, moving away from the traditional command-and-control hierarchy.

We’ve moved decision-making closer to the customer, instituting a bias in favor of flexible, cross-functional teams that come together to solve specific challenges. We know from years of research that we employ a lot of creative people at every level of the corporation. We feel that more of their entrepreneurial energy can be captured through these teams.

But we also support innovation with information technology. For example, we have created a database that enables business unit leaders to compare their numbers in real time with those of their colleagues in other units. Should they see that Quebec is getting a better expense-to-revenue ratio, they can pick the Quebec managers’ brains to help with their own results.

And we reinforce that behavior with a compensation and reward system that emphasizes the performance of the team, not the individual.

My point is that we are working to build a culture in which quality improvements are everyone’s business. In fact, I like what John Seeley Brown wrote in the Harvard Business Review. Dr. Brown is Xerox’s chief scientist and the head of the Palo Alto Research Center that produced all those wonderful inventions that got away from us. He believes the most important invention that will come out of corporate research labs in the future will be the new corporation itself.

As part of the ongoing foundation for that future, I’m happy to say that Canadian expertise has led the way in innovation with Xerox worldwide. In a more traditional sense, it was our Mississauga lab that developed one of our great success stories in recent months – an environmentally friendly product called Verdefilm, which will eliminate polluting chemicals in graphic arts film used by newspapers, magazines and catalogues. This film, developed here in Canada, is being marketed worldwide.

The Canadian operation has made breakthrough innovations in other areas. For example, our sales force developed an automated sales tool kit that has become the worldwide standard for Xerox. The kit includes relational databases and selling tools such as proposal generators, prospect management and customer profiles. As I said, the team did such a good job developing this kit that Xerox now uses the Canadian operation as the competency center for the worldwide sales force. This new culture of cooperation and teamwork requires a quantum leap in communications with employees, for it creates a changing environment in which uncertainty is the only sure thing.

We’ve developed the standard communications tools: the internal television broadcasts and the monthly newsletters with feature columns on behavioral change and continual messages from me. But those only emulate – and sometimes not very well – the most effective way to communicate, and that’s face-to-face. To address that, we use town-hall-type meetings and small roundtable sessions to communicate with and to understand the impact of change on all employees across Canada.

In my first year on the job, I held more than 50 employee meetings and met close to half of our 4,000 employees through them. The feedback we’re getting is that the message is being heard – we’re reinventing Xerox and the employees are feeling part of the process. But we cannot relax. We cannot underestimate the continuing impact of change and the need to keep communicating, fully, frankly and often.

The third dimension of our strategy is a recommitment to a quality assessment process that continues to enhance our business excellence. In some sense, this commitment grew out of our application for the Baldrige award in 1990. The Baldrige team visited only a small subset of our operation and we won the award, which was fine. But as we thought about it, we recognized that our whole business could benefit from the same sort of close scrutiny, beginning with the North American marketing group and its 140 operating entities. We set up a team of internal examiners to do the assessment, and they found that while some units were up to world-class standards, some were not. Those who fell short used the assessment to get up to snuff. The exercise has given us an internal base line for quality adherence – and as a by-product has produced a large number of committed TQM champions among the examiners.

When I was at Rank Xerox in the UK, we took that example and refined it, training more than 700 senior managers in quality examination and self-assessment over two years. The practice spread quickly to our units across Europe, the Middle East and Africa, and last year was extended across the entire company. It is now an annual exercise in self-assessment across 43 different quality practices. It’s become the Xerox Management Model used around the world. The assessors provide each unit with a detailed picture of where it stands, what needs to be improved and some insight into how to get at the root causes of any shortfalls. It is our annual recommitment to quality…our fundamental response to this crisis of opportunity. In fact, the process has proven so valuable that it is now an offering Xerox makes available to other organizations.

My point here is not only that Xerox has made a strong commitment to quality, it has renewed it every year. In addition, I would point out to those who de-emphasize quality award programs, many of our most valuable lessons on quality have been a direct result of the application process. It is clear to me that these awards are important not just for what they tell others about your company, but also what they tell you about yourself.

Well, that is the Xerox story, and it’s still being written as we speak. We came through a crisis of survival by remaking our company around the quality imperative, not only on the shop floor but in every facet of our organization.

We had to see ourselves differently and act accordingly. We did it. And we’re still doing it. Today we are taking on this crisis of opportunity and many new challenges by focusing on these three essential strategies – refocusing on what business we’re really in, realigning our structure for a better line of sight to our customers and recommitting to the quality assessment process built into our management model so that we can achieve business excellence.

The only way to really ensure success is to focus on quality. Quality not as a fashion, not as a fad, not as a buzzword. Quality as a state of mind…throughout the organization. It is the single most important key to competitiveness. It is a crucial first step in our effort to achieve customer loyalty. And it is fundamental to our ability as Canadian businesses to make “real” the opportunities that await us all in the uncharted territory of the new world.

A record of what was said…

THE CORPORATE REPORT 1993 TO 1999 200 SELECTED SPEECHES

SPEECH SUMMARIES LISTED BY COMPANY

STAR ALLIANCE: MEETING THE NEEDS OF THE GLOBAL TRAVELER

CONSOLIDATING THE FUTURE OF MONTREAL: AIR CANADA’S STRATEGIC VISION

OPPORTUNITY KNOCKS: TRANSLATING THE NEW CANADA-US AIR TRADE PACT INTO BENEFITS FOR THE MONTREAL REGION

1984–1994: A SWINGING DECADE

MANAGING CUSTOMER NEEDS ACROSS THE AMERICAS

INVESTING IN EXCELLENCE: A COMMITMENT TO EMPLOYEES, QUALITY AND CUSTOMERS

THE INTEGRATION OF TECHNOLOGY

WHAT GLOBALIZATION MEANS TO CANADIAN UNITY

ADVANCES IN COMMUNICATION TECHNOLOGY AND THEIR IMPACT ON CONSUMERS

PLAIN TALK ABOUT THE FUTURE

NON-TARIFF BARRIERS: A NEW THREAT FOR EXPORTERS

FINANCIAL MARKETS AND THE CANADIAN ECONOMY

DOES CANADA NEED MORE INFLATION TO GREASE THE WHEELS OF THE ECONOMY?

THE NEW WORLD ECONOMY

CANADA’S FISCAL CRISIS DEMANDS BROAD PUBLIC CONSENSUS

ARCHITECTS OF OUR FUTURE

CANADA’S RECOVERY: THE SHORT AND LONG OF IT

WHAT HAS WORKED FOR ME

HOW CHANGE IN TELECOMMUNICATIONS BENEFITS YOUR BUSINESS

POSITIONING FOR CONVERGENCE

CANADA 2000: LOOKING FORWARD AND OUTWARD

TELEPRESENCE: THE CHALLENGE AND THE OPPORTUNITY OF THE FUTURE

A LEADING ROLE FOR CANADA IN 21ST-CENTURY CYBERSPACE

COMPETING FOR THE FUTURE

PACKAGES OF VALUE

SUCCEEDING IN A CONSTANTLY CHANGING WORLD

TELECOMMUNICATIONS REVOLUTION: ARE WE READY YET?

MULTILATERAL CARTS AND CANADIAN HORSES: PUTTING FIRST THINGS FIRST ON CANADA’S INFORMATION HIGHWAY

ALL THAT JAZZ: SUCCESS IN THE MULTIMEDIA INDUSTRY

THERE ARE NO LIMITS: PCS AND A NEW NATIONAL COMPETITIVE ADVANTAGE

BIOCHEM PHARMA: THE FIRST 10 YEARS

SETTING THE RECORD STRAIGHT

EUROPE’S NEW DIGITAL ECONOMY

REINVENTING MONTREAL

NORTHERN RENAISSANCE: PERSPECTIVES ON CANADA’S ECONOMIC PERFORMANCE AND GLOBAL COMPETITIVENESS

SMALL BUSINESS: BEYOND THE RECOVERY

IS HELPING SMALL BUSINESS SOUND BUSINESS?

BEYOND THE BANK MERGER DEBATE

NEW OUTLOOK FOR THE BDC

CAE’S APPROACH TO GROWING INTERNATIONAL SALES

INVESTING IN OUR FUTURE

WE HAVE THE CAPACITY TO DO MORE AND DO IT BETTER: 30 YEARS OF FRUITFUL PARTNERSHIP

CANADIAN TELECOMMUNICATIONS: THE TRANSITION INTO TURMOIL

CORPORATE SUCCESS, SOCIAL FAILURE AND CORPORATE CREDIBILITY

IF I WERE PRIME MINISTER

CN’S RECOVERY

CLEARING THE TRACK: PREPARING CN FOR A NEW ERA IN RAILROADING

48 HOURS: A COMMUNICATIONS CASE STUDY

A TRADING COMPANY IN A TRADING NATION

SEPARATING PULP FACTS FROM PULP FICTION: A GOOD-NEWS STORY AMONG CANADA’S RESOURCE-BASED INDUSTRIES

SPACE: THE GLOBAL VILLAGE

RETOOLING FOR THE NEW ECONOMY

SETTING THE STANDARD IN THE AUTOMOTIVE INDUSTRY

THE LEARNING ORGANIZATION

CANADIAN FINANCIAL SERVICES IN THE 21ST CENTURY

BREATHTAKING CHANGES IN STORE FOR BANKING

BUSINESS CHALLENGES AND THEIR LINKS TO INTERNAL COMMUNICATIONS

INTERNATIONAL DEVELOPMENT: EVERYBODY’S BUSINESS

EXPANDING OUR HORIZONS

COMPAQ AND THE NEW WORLD OF COMPUTING

THE LATEST DEVELOPMENTS IN THE CREDIT UNION SYSTEM

THE EMPOWERMENT OF WOMEN IN THE WORKPLACE

SET SAIL FOR 2000 AND BEYOND: THE FUTURE OF FINANCIAL SERVICES

GETTING INTIMATE

NET EFFECT: DEBUNKING MYTHS OF THE INTERNET

BUILDING ON OUR STRENGTHS: THE COMPETITIVE CHALLENGE OF THE PAPER AND FOREST PRODUCTS INDUSTRY

WHAT GETS MEASURED GETS MANAGED

THE INFORMATION SOCIETY, CORPORATE RESTRUCTURING AND CHANGES IN THE WORKFORCE

PUBLIC RELATIONS: THE DRIVING FORCE IN GLOBAL COMMUNICATIONS TODAY

EICON TECHNOLOGY CORPORATION: CONNECTING NICHE TO GLOBAL MARKETS

THE INFORMATION IN YOUR MEDICINE

SEX IN THE SNOW: HOW WELL DO YOU KNOW WHO YOU’RE TALKING TO?

WHY MONTREAL IS THE PREFERRED LOCATION FOR GLOBAL HIGH-TECH LEADERS

RUSSIA: THE WILD CARD IN NICKEL

CUSTOMERS FOR LIFE

THE CONTINUING IMPORTANCE OF BRAND

NEW CHALLENGES IN THE CANADIAN AUTOMOBILE INDUSTRY

THE CORPORATE REPORT
1993 TO 1999
200 SELECTED SPEECHES