4. Competitive Advantage Analysis:
Identifying Southwest Advantages

The information revealed in this section was compiled by Mr. Doug Elliott, the principal of QED Information Systems Inc. and publisher of Sask Trends Monitor. This section of the report will only provide a summation of Mr. Elliott’s findings. To review his report in its entirety and for explanation of some of the concepts behind the terms used and to describe the methodology employed to derive the findings please refer to the ASBNC Final Report Appendices document - Appendix - B.

Purpose

Competitive Advantage Analysis (CAA) focuses on the assessment, structure and performance of a region with the purpose to identify local strengths (competitive advantages and potential for economic development). A full competitive advantage analysis would include an examination of local infrastructure, markets, labor force, amenities, access to transportation routes etc. This analysis also focuses on examining local industries / sectors to identify leading and lagging sectors and their prospects for employment growth. CAA classifies sectors according to their concentration of employment and assesses their growth / decline compared to provincial trends. CAA helps identify opportunities for growing under-represented sectors that could provide required inputs for existing industries. It can also provide insights for industry targeting or niche marketing strategies, workforce development as well as broad community strategic planning.

The analysis compiled for this report is only the beginning of the competitive advantage analysis that is yet to be done. However, the information contained herein provides an examination of past trends with a view to identifying industry sectors that have under-performed or overperformed relative to others in the province. Perhaps this will enable an informed debate about where the Southwest is going and how best to get there.

Analysis

This report examines the economic strengths and weaknesses of 12 industry groups in the Southwest using employment data for 10 years from 1991 to 2001. In effect, this report has measured the performance of the Southwest compared to the performance of the province as a whole over the same time period.

Industry groups analyzed for this report are as follows:

• Agriculture
• Mining, oil and gas extraction
• Construction
• Manufacturing
• Wholesale and retail trade
• Accommodation and food services
• Business Services
• Finance, insurance, real estate
• Transportation and warehousing
• Education Services
• Health Care and Social Services
• Public Administration

Three calculations were used to determine Southwest performance:

• Location Quotients – measures industry concentrations.
• Shift - Share Analysis – explains which portion of employment change is attributable to provincial, industry, or regional trends.
• Leading / Lagging analysis – identifies the industry sectors that are leading or lagging in the economy.

Industry Concentrations

The first step in determining how our industries are performing in the Southwest involved calculating our regions location quotients. A location quotient Identifies the level of specialization in a geographic region. In simple terms it measures the concentration of certain industry sectors in the region relative to the provincial average. Higher values indicate that the industry is more prevalent in the Southwest than in the province as a whole. Low values imply that the region imports goods and/or services from other regions, while high values imply they are being exported to other regions.

Table 4.1: Interpretation of Location Quotients

Location Quotient	Label	Interpretation
less than 0.75	Low	Local needs are not being met by the resident sector. The region is importing goods and services in this sector.
0.75 to 1.24	Medium	Most local needs are being met by the resident sector. The region will be both importing and exporting goods and services in this sector.
1.24 to 5.00	High	The sector is serving needs beyond the sector, exporting goods and services in this sector.
More than 5.00	Very High	This is indicative of a very high level of local dependence on the sector, typically in a “singleindustry” community.

Findings: Not Surprisingly, agriculture had the highest location quotient among the twelve industry groups in the Southwest. However, the location quotient was well below the level considered as very high, indicating that the Southwest is not overly dependent on the agriculture sector. The location quotient has increased since 1991 in spite of the fact that employment in agriculture has declined. This indicates that employment in the region has not declined as quickly as in other parts of Saskatchewan. Agriculture employment dropped by 22% from 1991 to 2001 in the province as a whole compared with 19% in the Southwest.

Also not a surprise, the mining and oil / gas sectors were identified with the next highest location quotient. The location quotient has increased in this sector since 1991 so it is becoming a more important employer in the Southwest. The transportation sector was revealed with the third highest location quotient and it has also grown from 1991.

In absolute terms, the two sectors with the strongest increase from 1991 to 2001 was the manufacturing and construction industries.

Public administration ranked well within the “low” category. There are relatively few federal or provincial offices in the region compared with the rest of Saskatchewan, so public administration in the Southwest is dominated by employment in rural municipalities, towns and city administrations.

Mr. Elliott made two further observations. Firstly, the location quotient for accommodation and food services is lower than one would have expected given the opportunity that the Trans Canada highway and Cypress Hills affords. An expansion of this sector may be possible. Secondly, the strong growth in the manufacturing sector from 1991 to 2001 is indicative of some of the efforts to add manufacturing and processing activities to the region in the past decade. The same is true for the business service groups. Although still classified as “low” in 2001, there has been a noticeable increase in the location quotient since 1991.

Table 4.2: Location Quotients for Southwest Saskatchewan

Industry Category	Location Quotient			Category
	1991	1996	2001
Agriculture (incl forestry, fishing, trapping)	2.10	2.22	2.34	High
Mining, oil and gas extraction	0.95	1.18	1.07	Medium
Construction	0.73	0.67	0.87	Medium
Manufacturing	0.48	0.48	0.70	Low
Wholesale and retail trade	0.82	0.88	0.84	Medium
Accommodation and food services	0.79	0.82	0.78	Medium
Business services	0.45	0.50	0.72	Low
Finance, insurance, real estate	0.92	0.73	0.84	Medium
Transportation and warehousing	0.79	0.86	0.89	Medium
Education services	0.82	0.83	0.80	Medium
Health care and social services	0.77	0.79	0.78	Medium
Public administration	0.58	0.60	0.57	Low

Industry Growth Effects

If a particular industry is growing or declining, an automatic question that arises is whether or not the decline is “natural” in the sense that it is growing or declining elsewhere as well. Shift - share analysis attempts to answer this question by breaking down the components of change.

Using employment as the measure, the shift - share analysis ascribes changes in employment over a period and within a region to three components.

• The provincial effect - which is the industry’s share of overall growth in the province; all sectors in the Southwest should get their “share” of overall employment growth.
• The industry effect - assumes that the Southwest would follow the provincial pattern for that industry.
• The regional effect - is the residual growth that is attributable to the specifics of the Southwest.

The sum of these three effects yields overall employment change in the sector from 1991 to 2001.

Findings: The Southwest lost 1,890 jobs over the ten years from 1991 to 2001. The majority of this loss (1,660) jobs was an industry effect. In other words, employment in the Southwest was concentrated in industries that had declining employment provincially. Agriculture is the obvious example but it was also occurring to a lesser extent in the wholesale and retail trade group and in public administration. The declines were offset by employment growth in some growing industries – a positive industry effect. The best example of this is health care and social services where employment grew from 1991 to 2001; Southwest’s “share” of this growth was 300 jobs.

Industries that had a positive “regional” effect are those in which there was genuine growth from 1991 to 2001. That is employment grew more quickly (or fell more slowly) than would have been expected from provincial and industry effects.

These sectors, in absolute terms of the overall regional effect were:

• Agriculture (+350 jobs)
• Manufacturing (+320 jobs)
• Business Services (+210 jobs)
• Construction (+140 jobs)

Other sectors had a negative regional effect in the shift - share analysis. Their employment dropped exclusively because that sector was not doing well in the Southwest relative to the rest of the province. In absolute terms, the largest were:

• Finance, Insurance, and Real Estate (-120 jobs)
• Education Services (-170 jobs)
• Wholesale and Retail Trade (-160 jobs)
• Health Care and Social Services (-150 jobs)
• Accommodation and Food Services (-140 jobs)

A slightly different picture is revealed in terms of the regional effect if the percentage is examined rather than the absolute change in employment (see Figure 4.1). The large absolute increase in agriculture, for example, is relatively small in percentage terms whereas the small decline in public administration is relatively large in percentage terms.

Business services and manufacturing are clearly the success stories in the 1990s for the Southwest, with large regional effects in both absolute and percentage terms.

Industry Growth Overall

Another way to look at the different industry sectors is to examine their employment growth relative to growth in the overall economy at either the provincial or regional level. Industries which are “leading” have a growth rate in excess of the rate of growth in the overall economy and those that are “lagging” are growing more slowly.

Further, the provincial and Southwest indicators are combined with the location quotient to yield an overall assessment of the sector. The categories are meant to be descriptive. For example, consider an industry which is strong at the local level, that is, has a high location quotient.

• If the industry is lagging at the provincial level but leading at the local level it is considered to be “evolving”.
• If the industry is leading at both the provincial and local level it is “driving”.
• If the industry is leading at the provincial level but lagging at the local level, it is classified as “promising”.
• If the industry is lagging at both the provincial and local level it is “challenging”.

Table 4.3: Cavalho Classification System

PSRG	LSRG	Location Quotient	Classification
Leading	Leading	High (> 1.25)	Driving
		Medium (0.75 to 1.25)	Accelerating
		Low (<.0.75)	Rising
Lagging	Leading	High (> 1.25)	Evolving
		Medium (0.75 to 1.25)	Transitional
		Low (<.0.75)	Moderate
Leading	Lagging	High (> 1.25)	Promising
		Medium (0.75 to 1.25)	Yielding
		Low (<.0.75)	Modest
Lagging	Lagging	High (> 1.25)	Challenging
		Medium (0.75 to 1.25)	Vulnerable
		Low (<.0.75)	Marginal

Findings: One industry group was classified as “challenging”, namely agriculture. It is an
important industry in the Southwest, however because it was lagging provincially and barely
leading locally it has been categorized as challenging.

Three industry groups were lagging at both the provincial and local level. Two are medium size in the Southwest and were therefore classified as “vulnerable” - education services and retail / wholesale trade. They are considered as vulnerable because an important source of employment may be declining. The third industry group was public administration but because it has a low location quotient it is considered as “marginal”, that is, further declines will not have an impact on as many jobs as those in the “vulnerable” category.

Three industry sectors are classified as “yielding” because they are leading provincial level but lagging in the Southwest. In each case they have a medium location quotient so they are not particularly strong or weak in the Southwest. In all three cases, services are increasingly being provided from outside the region:

• health care and social assistance;
• finance, insurance and real estate; and
• accommodation and food services.

That the accommodation and food services sector is in this category should be of concern because it is one of the indicators for the tourism sector which many see as an opportunity. Employment in this sector grew by 10% provincially but only by 1% in the Southwest. The location quotient is so small as to make the sector nearly “modest”.

There are five industry groups that could be considered as successful in the Southwest over the 1990s. Three are classified as “accelerating” because they are prevalent in the Southwest and growing both locally and provincially.

• The resource sector has a relatively high location quotient in the Southwest and employment grew by 26% from 1991 to 2001 compared with 20% provincially.
• The construction sector is also in this category and its growth is partially a consequence of growth in other sectors. The work on the Trans Canada highway will also have contributed.
• Employment in the transportation sector grew by 20% from 1991 to 2001 compared with 14% provincially which puts it in the “accelerating” category as well.

The manufacturing and business services sectors are classified as “rising”. The manufacturing sector grew by nearly 50% from 1991 to 2001 compared with provincial growth of 9%. The sector is relatively small in the Southwest (location quotient is 0.70) so there is clearly some potential for growth. The business services industry group straddles a number of categories. It is on the line between “rising” and “moderate”. Growth is strong in the Southwest but near zero provincially. The location quotient is also small (0.72) but has grown to nearly the “medium” category.

Industry Targeting

There are a number of ways to summarize the indictors for the individual industry groups. One such way is the industry targeting classification. It combines the shift – share analysis with the location quotient to yield a future oriented outlook for the industry group.

Table 4.4: Industry Targeting Classification System

Location Quotient	Provincial growth	LSRG	Classification
Medium to High (> 0.75)	Positive	Leading	Current strength
Low (<.0.75)	Positive		Emerging strength
Medium to High (> 0.75)	Negative		Prospects limited by external trends
Low (<.0.75)	Negative		Prospects limited by external trends and weak base
Medium to High (> 0.75)	Positive	Lagging	High priority retention target
Low (<.0.75)	Positive		Prospects limited by weak base and declining competitiveness
Medium to High (> 0.75)	Negative		Prospects limited by external trends and declining competitiveness
Low (<.0.75)	Negative		Prospects limited overall

Mr. Elliot’s findings revealed that four industry sectors have limited prospects for a variety of
reasons.

Agriculture: A sector limited by external factors. It is an important and leading sector in the Southwest but as we know, external factors such as trade barriers, international subsidies, low commodity prices, and even the weather will limit growth for agriculture in its current form.

Wholesale / Retail Trade and Education Services: This sector is also limited. The trade sector is consolidating in large centres with “big box” retailers, new car dealerships, large inland terminals, and farm machinery dealers. Education services is faced with declining enrolment at the elementary and secondary level and no major post-secondary institution in the Southwest. The classification system captures these trends as a combination of external factors and declining competitiveness. That is, the concentration of services in large urban areas makes the smaller businesses in the Southwest less competitive.

Public Administration: This sector faces all of these barriers plus the fact that it already
employs relatively few people, that is, has a small base.

The following three industry sectors are classified as being the Southwest’s current strength. They are growing sectors provincially and the Southwest is leading that growth.

Mining, Oil and Gas Extraction: The resource sector is a current strength because of the oil and gas extraction currently underway. This sector is very location-specific; much will depend on whether the natural gas exploration activity is successful and commodity prices remain high enough to encourage capital investment.

Transportation and Warehousing: This sector is also a current strength to some extent because it has taken advantage of the consolidation of the retail and wholesale trade business and is undoubtedly profiting from the growth in manufacturing. The transportation of cattle, grain, feed, and retail products has enabled the trucking industry to grow. Location, that is, the presence of the Trans-Canada highway is also an advantage.

Construction: The construction sector is, in some senses, a service industry in that it thrives only when other parts of the economy are making capital investments such as drilling wells or building homes and highways. The fact that the industry is leading provincial growth suggests that much of the construction work in the Southwest is being done by local firms which is a testament to the self-sufficiency of this sector in the Southwest.

The following three sectors are classified as high priority retention targets. These are industry groups that the model suggests should receive attention in order to prevent them from declining or enable them to grow.

Finance, Insurance, and Real Estate: This group is classified this way because employment in the sector grew at the provincial level but not in the Southwest. There are challenges in this sector as the Internet has enabled many finance and insurance services to be obtained electronically and the centres for these businesses are not located in the Southwest.

Accommodation and Food Services: A surprising member of this classification. Unlike retail trade, most consumers do not travel far to go to restaurants and bars. The decline in employment in this sector in the midst of provincial growth should be of concern. The new casino in Swift Current may assist that community but services in other centre should also be a retention target.

Health Care and Social Services: This sector is also affected by travel to larger centres. To
enable growth in this sector, a greater proportion of health care services need to be available in the Southwest.

The final two industry sectors are perhaps the most interesting.

Manufacturing: Considered and emerging strength of the Southwest. Growth in manufacturing employment from 1991 to 2001 was 49% compared with 9% provincially so manufacturing in the Southwest is clearly and emerging sector. The availability of skilled labour will be of concern for future growth because the population in the area is so small.

Business Services: This group straddles a number of different categories. The location quotient is between small and medium and provincially it is neither declining nor increasing. So its classification is either as a current strength or an emerging strength. The potential for growth may be limited by outside factors and may be limited by the weak base. The indecisiveness for this category is not a major concern however. The business services sector – consultants, lawyers, IT professionals, accountants, and advertisers, for example, will naturally grow when the business sector grows. In practice, it will follow rather than lead business development.

Southwest
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