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Introduction to Relentless Change; A Case Book for the Study of Canadian Business
History

The Canadian economy has enjoyed remarkable success in the past century and a half.
Business has played a crucial role in that success. This textbook explores Canadas
economic success and the role business played in it through a theoretical framework, the
Stern Diamond Model.

Theoretical Frameworks
A purpose of this Canadian business history text is to add to the understanding of the
evolution of Canadas advanced market economy. In addition to increasing
understanding of Canadas business evolution, this text aims to help students and
businessmen make better decisions today by providing insights from the past. The study
of Canadas business development can teach valuable lessons. Improved decision making
processes can contribute to better outcomes and continue the process that has made
Canada the wealthy society it is today.
Better decision-making is not just the application of a formula or calculation. It depends
on the framing of the problems and solutions: what variables to include; which are
salient; which assumptions to choose; what patterns are relevant. This text follows an
approach rooted in management studies. A framework is proposed that is derived from
theory and explores the application of assumptions to a set of data.

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The intention is to develop the framing abilities of those who use this text and to
challenge them to seek the parallels between historical situations and developments and
current events and issues. The frameworks are just a starting point in the search for
relevance in the past and it is hoped they will stimulate a quest by readers for other
models and theories which will illuminate business history in the future.

The Diamond Model of Sustainable Growth

The theoretical framework is derived from work done at the Stern School of Business,
New York University by Professors George D. Smith, Richard Sylla, and Robert E.
Wright
1
. Their contention is that, over time and in a wide range of economies, sustainable
economic growth is attained as the result of interaction among four variables as
illustrated in the model below. The four variables are:

1] public policy systems,
2] an effective financial system,
3] vibrant entrepreneurship,
4] sophisticated managerial capabilities.



1
George David Smith is clinical professor of economics and international relations, Richard Sylla is Henry
Kaufman Professor of the History of Financial Institutions and Markets and professor of economics, Robert
Wright is clinical associate professor of economics at NYU Stern.
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Copyright: George David Smith
2006
The Diamond of Sustainable Growth
Vibrant
Entrepreneurship
Sophisticated
Managerial
Capabilities
Effective
Financial Systems
Enabling
Political Systems
Resource
Endowments:
Natural
Technological
Human

Source: George D. Smith, Richard Sylla, Robert E. Wright (2006) The Diamond of Sustainable
Growth, page 8


The model states that a robust and enabling political foundation is necessary for
economic growth and activity. The enabling government must effectively govern,
maintain order, and provide an environment where its citizens can have an impartial rule
of law. Government also makes provision, through equitable taxation, for public goods
such as defense, education and infrastructure (roads, bridges, airports). Government also
must ensure that there is equality of opportunity for all citizens in order to ensure long
term stability.

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With the political system placed as a foundation, the model moves to financial systems,
the second point of the diamond. A capitalist economy requires the evolution of a sound
financial system that provides the ability for efficient economic exchange. Financial
institutions promote economic activity through the allocation of capital through banks
and capital market exchanges. Government and financial systems interact and are
interrelated as government regulates the financial environment and promote economic
activity and growth through fiscal and monetary policy. The combination of an enabling
government along with sound financial systems facilitates and enhances, entrepreneurial
activity.

Entrepreneurship in the diamond model is described along the lines used by the economic
historian Joseph Schumpeter. Entrepreneurs disrupt the economic status quo by
introducing new products or services, opening new markets, and creating new
combinations of land, labor and capital.
2
Since the model is interactive entrepreneurship
also interacts with government and financial systems.

To complete the diamond, the fourth corner is sophisticated professional management
and large firms. Large firms evolved as successful entrepreneurs built more capacity to
serve greater markets and hired management to handle operations that were growing
beyond the entrepreneurs individual capabilities; professional management came into
being out of necessity due to the increased complexity of large firms and the need for
greater delegation.. As firms grew, management and entrepreneurs recognized the

2
George D. Smith, Richard Sylla, Robert E. Wright, The Diamond of Sustainable Growth, (STERN
business, Spring/Summer 2007)27,28
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advantages of achieving economies of scale (reduced unit costs of production) and
economies of scope (costs of transactions are reduced through coordination of related
activities.).

As larger firms achieve greater efficiencies through scale and scope of operations, the
costs of products and services comes down and this enriches society. As societys wealth
increases, more capital is made available to invest in new projects and this feeds a cycle
of growth and increased wealth. Sound financial systems are necessary to ensure the
efficient channeling of wealth to new projects and growing industries. Government plays
another important role; Managerial corporations require an educated pool of human
resources trained in specialized skills. Without government investment in education,
business could never scale up or evolve into complex systems.
3


The Role of Public Policy in Canada

Because of the perception that public policy in relation to business is particularly
important in Canada a few words are in order on this topic. The starting point for
business history is the late Alfred D. Chandler Jr., who taught at the Harvard Business
School. Chandler overlooked the role of public policy as a key element in relation to
business.


3
Ibid, page 9
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In contrast, from the outset the Policy Advisory Board for Canadian Business History at
the Rotman School, composed of both business people and academics, wanted to ensure
that while the course was about Business, students understood the public policy
framework in which business functioned. The distinguished historian Michael Bliss was a
member of that Board and in his epic Northern Enterprise, Five Centuries of Canadian
Business he wrote, in Canada, far more than the United States, the competitive strategy
of working with or through government, or otherwise making use of it, has coloured the
evolution of enterprise, the economy, and government itself.
4


A number of other international business historians see government influence over
business as extending well beyond Canada - even to the United States. In the survey of
Business History around the World Mathias Kipping wrote: Governments have played
an important role in business matters ever since the Industrial Revolution. As numerous
studies have shown, there has been a very close relationship between the formation of the
modern state and industrialization.
5


The author leans to the Kipping view
6
and would add the point that foreign public
policies, particularly those of the United Kingdom and the United States and more

4
Michael Bliss, Northen Enterprise: Five Centuries of Canadian Business (Toronto: McClelland and
Stewart, 1987), 10
5
Business-Government Relations: Beyond Performance Issues by Matthias Kipping in Business History
around the World edited by Franco Amatori and Geoffrey Jones, 372
6
The 2006 annual international Business History Conference, held at the Munk Centre, University of
Toronto had as its theme Political Economy of Enterprise.The brochure describing the theme states, in
part, Business, the political system, and government have influenced one another from time immemorial.
This year's program theme invites us to reflect on those interactions. What institutional frameworks have
been more, and less, conducive to business enterprise? What has been the relationship of political
leadership to business success and failure? How has government promoted business and innovation? How
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recently China, have, had and will continue to have a profound effect on Canadian
business. This will be evidenced in both the Overviews and the Case Studies.


Book Structure
This textbook describes and analyzes the changes in major Canadian businesses over the
past century and a half. Divided into four parts, it traces the development of Canada from
the Second Industrial Revolution through the Third Industrial Revolution marking the
period from the 1950s to the present. The Parts are as follows:
Part I Laying the Foundations, mid-nineteenth century to early twentieth century
Part II Wars, Depressions and Dynamic Growth, early twentieth century to the mid-
twentieth century
Part III - The Great Years, from mid-twentieth century to 1980
Part IV - The Challenging Years, from 1980 to the early twenty first century.
The Parts are divided into Overviews and Case Studies.
Within each Overview are four different sections, patterned on the Stern Diamond Model,
in addition to an introduction and conclusion.

1. Government: the governments role relative to Business is analyzed in terms of
attitude towards business, dealing specifically with major public policies,

have regulation, taxation, and subsidies affected business? .In what areas of business has government
taken the most interest, and why? When does business corrupt government, and vice versa? How have
globalization and multinational corporations affected traditional business-government relations? What have
been and are the effects on business enterprise of free trade areas such as NAFTA, of customs unions such
as the EU, and of international organizations such at the WTO, the IMF, and the World Bank? This is an
indication that Canada is not unique in the degree to which government and business interact.

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including trade matters, creation of Crown corporations, regulation and levels of
taxation as a percentage of GDP
2. Financial Systems: this section discusses the role of financial systems in
facilitating economic growth. In addition to examining the role government plays
in the creation of the financial system through legislation, e.g. the Bank Act, and
the creation of Crown Corporations, i.e.. the Bank of Canada, the Central
Mortgage and Housing Corporation, this sections examines the role of the largest
financial corporations, particularly the banks and the life insurance companies.
3. Entrepreneurs: this section is brief, primarily because of the lack of historical
documentation on the role of entrepreneurs in Canada. However each Part does
contain a list of some of the major entrepreneurs and their contribution to
economic growth.
4. Big Business: when entrepreneurs are successful, their creations often rise to
become large firms run by sophisticated professional managers. This section
covers the largest of the non financial corporations in Canada and specific
developments in the various industry sectors including the increase and decrease
in importance of different sectors within the Canadian economy. Specific
attention is paid to the relentlessness of change as individual corporations and
indeed industry sectors disappear and are replaced by other corporations and
industry sectors.

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Each Part also has three or four Case Studies illustrating different corporate events during
the time period (the text contains a total of 13 case studies)
7
.

Part I Overview traces the establishment of the Dominion of Act and those public policies
which had the most relevance for the business community, specifically the National
Policy with its protective tariff, national transcontinental railway and the incentives for
the settlement of the West. Moving to the financial system important legislations is
examined as are the major financial corporations of the day, primarily banks [23 of the 30
largest financial corporations in 1905] as well as life insurance, mortgage and trust
companies. Leading entrepreneurs are mentioned. And the major corporations of the day
are analyzed the railways, the public utilities, the coal mining companies as well as
some manufacturers.
The Part I Case Studies describes the passage of the first Bank Act, which is still in
existence in amended form to this day; the story of the sale of the Hudsons Bay
Companys vast Ruperts Land property to the government of Canada (which permitted
the future settlement of the West) and the companys subsequent decision-making
process as to what business it was going to be in. The third traces the evolution of Massey
Harris, Canadas first great manufacturer from its entrepreneurial beginnings to its
handover to professional managers and its attitude to the protective tariff.


7
As Graham D. Taylor and Peter A. Baskerville noted in their Introduction to A Concise History of
Business in Canada the case study method was particularly congenial to historical approaches.
A Concise History of Business in Canada by Graham D. Taylor and Peter A. Baskerville, ( Oxford
University Press, 1994), xiii
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The Part II Overview describes the challenges faced by the Canadian economy during
two World Wars and two major Depressions. It also notes the shift in the role of
government from passive to active, first with the movement of provincial and municipal
governments into the public utility business [and later the Government of Canada into the
railway business], the increase in taxation as the result of the temporary income tax, and
a more active public policy in response to the exigencies of the Great Depression,
partially brought on by protectionist policies in the United States and Canada.
The evolution of the financial system is described with the creation of the Bank of
Canada and the Central Mortgage and Housing and, at the provincial level, Workmens
Compensation Boards as is the consolidation of the nations banks, the increasing
importance of life insurance companies and the rise of trust and acceptance companies.
Turning from the financial to the non financial corporations the rise of Big Auto, Big Oil
and Big Steel are accompanied by the demise of the investor owned electrical public
utilities as well as the diminution in major coal mines as they are replaced by Big Oil and
new metals nickel and aluminum. The rise of the national and regional department
stores and later supermarkets is also traced.

The Part II Case Studies begin with the creation of the Canadian National Railways
[CNR], Canadas first great federal Crown Corporation, during World War I, a result of
earlier irrational exuberance on the part of both governments and business
entrepreneurs and managers. This is followed by the evolution of the Canadian
automobile industry from their entrepreneurial beginnings through the War and the
roaring twenties, where trade issues are dealt with, to the Great Depression. It ends with
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a Case on Canadas greatest Department store chain, family owned Eatons, beginning in
the Depression, running through World War II to the post war challenge from Simpsons-
Sears.

In the Part III Overview the extraordinary economic growth is noted as well as the
worrisome signs of rising interest rates, oil prices and a falling Canadian dollar.
Increasing government intervention is noted in terms of taxation, regulation and
operation, through the creation of many Crown Corporations, as is the dramatic rise of
provincial government spending and influence. Trade issues are quiescent as trade is
lilberalized through the General Agreement on Trade and Tariffs [GATT]. Changes in the
financial system are noted, most notably the removal of the interest rate ceiling for the
banks, the increased involvement of the banks in mortgage and consumer lending and the
mutualization of many of the life insurance companies. Among the financial corporations
the further consolidation of the banks is noted as is the more apparent than real stability
among the life insurance, trust and acceptance companies. Among non financial
corporations Big Auto, Big Oil and Big Steel are still the main drivers but change is
around the corner with the arrival of Japanese imports and the declining relative
importance of Big Steel. The CPR is the number one company in the land. Alcan has
replaced Inco as the countrys largest mining company. Manufacturing is starting to
decline. Retail has witnessed the extraordinary growth of Weston/Loblaws as well the
Bay, Provigo and Steinbergs and the demise of Simpsons and the decline of Eatons.
Large conglomerates are also a part of the corporate scene.
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Part III Case Studies begin with the Bank of Canada, specifically the events of what
became known as the Coyne Affair and their resolution, which was of long term
importance to the separation of monetary and fiscal policy in Canada. Next is the story of
decision making at Inco, the only Canadian company ever to be part of the DJ 30, and
how management reacted to the loss of their monopoly position by diversifying into
unrelated businesses. Part III concludes with a Case on the emergence of the Canadian
energy industry after the Leduc discovery and the traumatic impact of interventionist
government policies including the creation of Petro Canada and the National Energy
Program in 1980.

The Part IV Overview covers a period of slowing economic growth.
8
It traces a minor
reduction in government intervention, particularly a slow down in the creation of Crown
Corporations. Indeed at the federal level there are examples of privatization. And for the
first time in 70 years there is a Free Trade election, only in 1988 the forces for Free Trade
as opposed to this against are triumphant. In terms of the financial system the little bang
of the late 1980s, is examined, which permitted the formerly separated four pillars to
become one; the demutualization of the life insurance companies in the late 1990s and the
creation of the Office of Superintendent of Financial Institutions [OSFI].
Among the major financial corporations there occurred the enormous increase in the size
of the major banks as they acquired trust companies, investment dealers, mutual funds
and started selling life insurance. Among life insurance companies there was
demutualization and both creation (by going to foreign markets) and destruction (through

8
Compared to both historic norms and to other comparable developed nations.

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acquisition or insolvency). While trust companies and Canadian owned acceptance
companies disappeared they were replaced by other forms of intermediaries, credit
unions, family owned holding companies and venture funds. So too in the non financial
sector there was relentless change as Big Oil shifted west and was joined by a host of
widely held Canadian companies and Big Steel was replaced by Big Automotive Parts
Supplier [Magna]. The Big Three of Big Auto became the Big Four with two of the four
non US owned. Old manufacturing giants were replaced by new ones focused on high
tech. The retail sector looked totally different (with the exception of Weston/Loblaws)
with the arrival of Wal Mart and national/ North American players based in the
Maritimes and Quebec. In the new Media area, Thomson had totally transformed itself
from an old style to a new style organization.
Part IV Case Studies begin and end with Case Studies relating to the Free Trade
Agreement [FTA]. The first deals with the Wine Industry whose disappearance was
widely predicted once the Agreement was signed but which emerged stronger than ever.
The fourth deals with the Energy sector in a post FTA world and poses interesting
challenges in regard to a possible shift from a North American industry to a global
industry, given the apparently insatiable demands from China. The middle two Case
Studies deal with companies in the financial services sector one a failure, Confederation
Life and the factors that led to its demise - and one a success, the Royal Bank of Canada
but with some interesting choices if they are to continue to be successful in a globalizing
economy.

Conclusion
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While some may perceive Canadian business to be stable, with little evidence of change
this text book demonstrates the opposite. In 1905 there were over 20 banks among
Canadas largest financial corporations The Royal Bank of Canada was only the seventh
largest and still based in Halifax. A century later Canadians were becoming accustomed
to five big Canadian banks with the Royal as the largest, all Toronto based, although the
historical forces of relentless change suggests this picture will change soon!

In the non financial sector it is difficult to imagine but in 1905 12 of Canadas largest
corporations were investor owned electrical public utilities. It is not difficult to imagine,
however, that many, if not most, of the major non financial corporations of 2005 will
soon be acquired or destroyed, including Bell, which is the only non financial
corporation to be among the top 30 to have survived for over a century.

An examination of the Case Studies shows the rise of Massey, the stagnation of Eatons,
the demise of Confederation Life. They also illustrate the shift in Canadas external focus
from the United Kingdom, (HBC); to the US, (Automotive); and possibly to China,
(Energy). Within Canada the Case Studies also illustrate the tensions in different time
periods among Canadas regions.

While this kind of relentless change may not be creative destruction in the manner
defined by Joseph Schumpeter in his classic, Capitalism, Socialism and Democracy, it
closely resembles the pattern of change of Schumpeters gale of destruction a gale
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driven by entrepreneurial forces, Schumpeter saw as the innovating force in society. The
historic role of the entrepreneur in Canadian business history is a topic which cries out
for more research.

In conclusion the text book provides a wide range of data dates, places, industries,
corporations, individuals. At times this may be confusing. The essential point to
remember is that the purpose of studying business history is not to know the details of the
past. The essential purpose of studying business history is to help to understand the
future.
For example the what if scenarios in the CNR Case Study illustrate that there were other
options to the one chosen, options which could have saved the Canadian taxpayer
millions of dollars and provided customers with better service. The Eatons Case Study
illustrates how data on the predictable future could have been used to ward off the
challenge from Simpsons-Sears. The Royal Bank of Canada Case Study focuses on the
options for all of the major Canadian banks in the early 21
st
century.

A careful examination of the past will illuminate patterns and cycles. It will also give
many examples of success and failure. The Spanish American philosopher, George
Santayana, wrote: Those who do not remember the past are condemned to repeat it.
There is a less familiar quote from an anonymous businessman who made the profound
observation, I study history so that I can make my own mistakes. The purpose of
studying the past is to prepare for the future through improved decision making, based on
past examples.
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Bibliography
Smith, George D., Richard Sylla, Robert E. Wright, The Diamond of Sustainable Growth,
(STERN business, Spring/Summer 2007)