Canada is immune to disruption (and that's bad for business)

The structure of the Canadian economy means that the process of disruptive innovation plays a relatively small part in the country's economic future

If there were an award for the most worn-out business term of 2017, “disruption” would no doubt be a top contender. Judging from the business world’s current obsession with the concept, a casual spectator might in fact be fooled into thinking that a modern business exists for the sole purpose of disrupting its competitors. Seen through this lens, the global business world becomes an anarchic and nihilistic zero-sum game. The spirit behind the old adage of “kill or be killed” is re-invented to reflect the less violent but equally competitive attitude of our age. “Disrupt or be disrupted” is now the norm.

But how disruptive is disruption? And who in fact is gaining or losing from the powers of this force, if it is indeed as powerful as it seems? Is disruptive innovation, as management scholars tend to call it, really the new force driving corporate change around the globe?

"Is disruptive innovation really the new force driving corporate change around the globe? "

The evidence here in Canada suggests that disruption is, in fact, little more than a buzzword, and has had very little effect on the corporate character of our country. Granted, if you once owned a video rental store, you’re probably smashing your screen right now in frustration (having grown up in the 1980s with fond memories of movie rental night, believe me when I say that I feel your pain). And if you’re a taxi driver who once spent a fortune getting a taxi license, then you will understandably see things a little differently. Without doubt, it is clear that consumer habits in Canada have changed drastically over the past decade, from how we hail a taxi to how we watch TV. There’s also still a strong chance that e-retailers like Amazon will continue to fundamentally alter the ways in which Canadians purchase consumer goods, and buying music will probably never be the same as it once was. Nonetheless, these are relatively small blips in our economy. When seen in aggregate, the reality is that the Canadian economy seems strangely impervious to disruption.

"Our country's most powerful and valuable corporations are in fact a group of relatively staid and highly conventional entities."

If you’re having trouble swallowing this claim, then take a quick glance at the chart below showing the ten largest publicly-traded Canadian companies, as of January 2018. Would you consider any of these companies “disruptive innovators”? I’d argue it’s quite the opposite – our country’s most powerful and valuable corporations are in fact a group of relatively staid and highly conventional entities. That’s not to say that these organizations aren’t employing innovative technologies, or that they haven’t been affected by broader disruptive processes, but as a general collection of organizations, they’re neither disrupting nor being disrupted. In fact, looking at this list, you might be forgiven for thinking that it’s still the 1990s, when disruption was barely more than a twinkle in Jeff Bezos’ eye.

Now for some context. While I’m always a bit hesitant to compare Canadian economic data to American figures, given the differences in scale between the two economies, I do think that in this case the example is useful. The second chart, below, shows the largest publicly-traded American companies, as of January 2018. The first thing you might notice about this list is that 2017 was a great year for America’s tech giants, who clearly dominate in terms of market value. But the shocking thing here – at least when considering how open to disruption the American economy is relative to Canada – is that the only two companies which were on this list as recently as 2010 were Exxon Mobil and Microsoft. GE and AT&T, which were both dominant American players less than a decade ago, have fallen from the top ten, while upstarts like Facebook, Alphabet, and Amazon have all assumed a substantial place in the American market. If there were ever a stronger reminder of the power of disruptive innovation than this simple comparison between the US and Canadian stock markets, then I’d certainly love to see it.

But while looking at the largest companies in the US and Canadian markets might give us a sense of the pace of change, it doesn't reveal much about why this change (or lack of change, in the case of Canada) is taking place. To better understand the forces advancing disruption in the US market, we need to consider the structure of the market itself. The pie chart below shows the S&P 500 stock market index by sector weighting. If you've already looked at the column graph showing the largest US companies, then there shouldn't be any surprises here. IT makes up nearly a quarter of the index, with no other sector being nearly as dominant in terms of weighting.

Now consider the Canadian market. Like the previous American example, the second pie chart (below) shows the S&P TSX Composite - Canada's main stock index - by sector weighting. Again, if you looked at the graph showing the largest Canadian companies by market cap, then there shouldn't be any surprises here either. Combined, the financial, energy, materials, and industrial sectors account for an outrageous 75% of the total value of the index! Tech, by comparison, makes up only slightly more than 3%. I'm certainly not the first commentator who's pointed to the lop-sided nature of the Canadian market, but when considered against a comparable US indicator, the reality of this lop-sidedness is even more striking.

"It's a glaring reminder of how relatively specific the forces of disruption are in terms of sector."

So what does this mean in terms of disruptive innovation? Well, in short, it's a glaring reminder of how relatively specific the forces of disruption are in terms of sector. Technology continues to be the driving force of disruption, but we still have a very long way to go before conventional industries like mining, banking, and oil extraction see much impact from the tech giants. While conventional companies are certainly being affected by disruptive forces like automation and technological innovation, this is in fact helping them maintain their corporate incumbency, rather than threatening it. In Canada, this is acutely true. Our economy is dominated by sectors that have tremendously high barriers to entry, whether that be capital requirements in the case of energy and mining companies, or regulatory issues as in the case of the financial and telecommunications sectors. By comparison, the sector that has the greatest ability to foster corporate disruption, technology, remains a fairly marginal component in our economy.

But what about Canadian tech darlings like Shopify or Open Text, you might ask? Well, as of early 2018, Shopify had a market capitalization of roughly $14 billion, while Open Text was worth a little bit less, at $11 billion. These numbers are nothing to scoff at, but they're a small fraction of the value of Canada's largest companies (not to mention an almost immaterial fraction of the largest US tech companies).

"Canada, after all, continues to suffer from a depressingly low level of labour productivity in relation to other developed countries."

As The Economist has recently predicted, 2018 will be a banner year for US corporate incumbents who have finally begun to develop tech strategies that will allow them to compete better against the forces of disruption. While this might be true for American giants like General Motors (which is now making a strong strategic push into electric vehicle technology), in Canada our own corporate incumbents have never been seriously threatened. And aside from the obvious benefit this brings to the incumbents themselves, it’s hard to argue that such a state of inertia is good for the Canadian economy.

Canada, after all, continues to suffer from a depressingly low level of labour productivity in relation to other developed countries. Measured as the amount of GDP produced per hour worked, Canada's productivity - at 48.9 - ranks below the G7 average of 55.5, and significantly below the US at 63.3. In terms of productivity, it actually makes more sense to compare Canada to Spain or Italy, neither of which is terribly noted for the high productivity of its workers. And while Statistics Canada has shown that Canada's economy has recently gathered some steam (at least in terms of GDP growth and job creation), job growth without productivity growth can only take an economy so far.

To see a true paradigm shift in terms of how well the Canadian economy can innovate, we need to consider how 2018 can become the year of disruption. If 2018 is the year that US incumbents take their revenge against Silicon Valley, then it might be interesting to see what happens if 2018 also turns out to be the year that Canadian incumbents experience some much-needed disruptive shock therapy.