The return of long-term strategic thinking
Canadian companies need to prepare for tough times south of the border

Long-term planning has been much maligned in recent years. Strategy has taken a backseat to tactics, as companies struggle to deal with short-term shareholder profit demands, technology changes and evolving consumer tastes.

But several clear trend lines --which point to a much different outlook for Canadian businesses than the scenarios we grew comfortable with during the 1990s -- are emerging south-of-the-border. All of them tend to have few short-term, but considerable long-term consequences.

The most recent, is last week's decision by the Bush administration to impose duties of up to 30 per cent on some categories of imported steel. These measures may not affect Canada directly since Canadian companies were exempted. But the move, which will almost certainly lead to retaliation from the countries affected, -- especially in Europe - is but one in a series of long-term bad news emanating from our largest trading partner.

And bad news from the U.S., means bad news for Canadian companies, because about a third of our GDP consists of exports south-of-the border.

Consider:

o The War on Terrorism. While the Taliban government has been brought down, the U.S. War on Terrorism shows no signs of abating. It appears Bush believes his own post-911 rhetoric about al-Qaeda terrorists active in 60 countries, which he plans to destroy through "dramatic strikes visible on TV, and covert operations secret even in success."

Whatever the public policy implications of this decision are, it makes it much harder for companies trying to export hamburgers and Coca-Cola to the countries affected and to their friends. This is important, because U.S. companies -with their powerful brands - were supposed to be the big winners of globalization. With some markets threatened, these benefits become less clear.

o The Security Tax. To deal with the post-911 terrorist threat, the U.S. government is undergoing a massive expansion, which includes a $38 billion homeland security initiative and the largest increase in military spending since the early 1980s. The initiatives together comprise what economists call a "security tax" on the economy which will encompass an estimated one per cent of U.S. GDP - indefinitely.

This security tax is expected to claw back about a third of the "peace dividend," which saw military dollars transferred to the far more efficient private sector after the collapse of the Soviet empire. While one per cent of the U.S. economy might not sound like much, it works out to about $100 billion dollars a year, which over ten years comes to a trillion dollars.

o Tighter Accounting Standards. While U.S. Federal Reserve Board chairman Alan Greenspan downplayed the effect of the Enron collapse of the U.S. economy, one result will almost certainly be tighter accounting standards and enforcement. While this should boost confidence in the markets over the long-term, tighter standards also mean lower reported corporate profits.

While it's impossible to predict how much corporate earnings will be affected, it's going to be a lot harder for managers to inflate short-term numbers. This means they are going to have to focus more on long-term prosperity.

o Lower P/E multiples. While price/ earnings rations for both U.S. and Canadian public companies remain high, they have come down considerably in the last two years. This substantially reduces the incentive for company managers to spike earnings in one year, and then take advantage of the high valuation by cashing in on an IPO.

o Aging population. The U.S. consumer does not seem to care about any of this, and is happily spending away. However a big chunk of the U.S. population is moving inexorably toward retirement, a period during which consumption tends to decrease.

While these trends give cause for concern, the Bush administration's protectionist stance is the most puzzling. The prospect of a Herbert Hoover Republican in the White House during tough economic times is less than comforting, as Canadian lumber companies - which have already felt the U.S. iron fist - can attest.

While steel is not nearly as important an industry today as it was decades ago, Bush's tariff decision during uncertain economic times is uncomfortably reminiscent of the Hoover's Smoot-Hawley Tariff Act, which prolonged the great depression, by spreading U.S. economic hardship to Europe.

In the short term both the U.S. and Canadian economies seem to be picking up. But with those kinds of trends on the horizon, it's no wonder that many businesses don't want to think about the long-term.

 

 

Diekmeyer's E-mail address is peter@peterdiekmeyer.com

 

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