Financial Post: MBA helps SMEs grow globally

The following article was published by the Financial Post on March 27, 2012 as part of their MBA issue.

BY REBECCA WALBERG, FINANCIAL POST

Most business students realize the future holds more options than Bay Street and the FP500. While multinational corporations and the business world elite get the most attention, the scope and importance of Canadian small and medium-sized enterprises (SMEs) make them vitally important to the domestic economy, the export sector, and current and future business executives.

Industry Canada says 1.1 million small businesses employing 100 or fewer staff are operating in Canada, not including self-employment. That represents 98% of all Canadian companies. Small businesses also account for 42% of GDP and a quarter of all exports.

Entering the international market is important for SMEs, and the potential benefits in terms of growth and profit are tremendous. The potential risks of expanding are significant, too, as Canadian businesses face a wider range of competitors and may operate at a disadvantage when expanding into a new country. Doing business internationally has implications for almost every aspect of a firm’s operations, and that’s increasingly reflected in MBA course material.

“International business is becoming an increasingly important part of almost every course we teach,” says Walid Hejazi, associate professor of international business at the Rotman School of Management. While electives in international business are still available, the implications of global business are now integrated into classes on human resources, marketing, productions and finance. “Canadian companies are more likely to do business internationally than ever before, so managers need to grasp the implications of that, be it organizational behaviour, strategy or managing projects across international borders.”

Culture is a significant factor in international business, sometimes in ways that aren’t immediately obvious. Islamic finance, which involves compliance with Muslim moral and financial rules, is the fastest-growing element of the global financial system, and Canadian companies doing business in the Middle East or southeast Asia need to grasp its fundamentals whether or not they follow that finance model.

“Companies need to know what it means for them to deal with businesses within the Islamic finance framework, and what the costs and benefits are of partnering with such firms, or setting up an investment relationship with them,” says Dr. Hejazi.

Social norms and etiquette also vary by region, and companies with employees from different backgrounds, or working in different environments, must be aware of this. A company consulting with faculty at Rotman, for instance, found that employee evaluations for staff in north Africa and the Middle East were routinely much higher than their Canadian counterparts despite the fact their performances were comparable.

Why? Canadian managers take a fairly straightforward approach to performance reviews and give scores that reflect each employee’s track record. In Middle Eastern cultures, though, criticism is expressed more obliquely and direct admonishment can be considered rude. Managers there tended to give high scores across the board for written evaluations, while reserving criticisms and negative feedback for private and informal communication.

Expanding overseas also brings in many new considerations with respect to comparative advantage, operations and marketing. “Foreign markets can be less contested terrain, so it can be easier for a strong Canadian performer to make money in a new country,” says Eric Gedajlovic, professor and area co-ordinator of strategy at Simon Fraser’s Beedie School of Business. “Expansion is often based on value added, so accessing a new market means more potential customers without necessarily increasing sunk costs and operating costs, which can keep costs down.”

On the other hand, businesses without a clear understanding of their core strengths, or knowledge of local business practices, can run into trouble. It’s very hard for a Canadian company to compete in a market where inputs, whether resources or labour, are substantially cheaper than in Canada. It is also crucial for businesses expanding abroad to have excellent legal advice from someone with local expertise; if the language of a contract differs substantially between the native language and the English translation, the native language interpretation usually takes precedence, for example.

These principles are part of the core curriculum of MBA schools today, so all graduates grasp the most basic dimensions of international business.

Dr. Gedajlovic also studies family businesses, a group made up almost entirely of small businesses. These firms face unique challenges expanding beyond Canada. “Family businesses usually make it a priority to keep the company family controlled,” he says. “It’s hard to do that when you internationalize, because that involves more governance issues and usually requires hiring people outside Canada, and outside the immediate network of family and friends.”

The big exceptions Dr. Gedajlovic sees are family businesses with their own networks established in other countries before coming to Canada. Personal contacts in a country of origin and familiarity with the language and culture are major potential assets for businesses started by new Canadians. More broadly, Dr. Gedaljovic and Dr. Hejazi agree about the value of a diverse student body that can relate their experiences in other countries with the course material.

Dr. Hejazi says 40% of Rotman students are foreign citizens, and at most Canadian business schools, about a third of MBA students come from abroad. “They bring valuable first-hand perspectives about how business and work culture differ outside of Canada.”

Click here to read the article in its entirety at the Financial Post.