Most existing big organizations — the 800-pound gorillas — subscribe to Michael Porter's value chain framework. As I mentioned in the first part of this series, this model optimizes for efficient delivery of a known thing. Organizationally it means Z follows Y, which follows X. It carries with it one fundamental assumption: that customers are tangential to the process. ...
... The 800-pound gorilla dominated at a time when companies needed and used more capital, when the value chain could be profit maximized through vertical integration. To run this kind of organization, leaders had to be focus on being big enough to enable scale — because that's where the profits once were. Once an organization got big, it took a lot to displace it. But the social era demands something more of our organizations. Something that is qualitatively different. The social era rewards the gazelles — the ones that are fast, fluid, and flexible.
Nilofer Merchant is describing a paradigm shift for business. I see an analogy for urban economics. Once a city gets big, it takes a lot to displace it. Residents are tangential to the process.
My first clue should have been the greenfield advantage for cities. Established cities amass too much social capital and legacy costs. The link to David Dollar's essay in Newsweek ("China's Golden Cities") has gone dead. I'll repost the key passage:
Being near the coast is a help in China, because of access to external ideas and because coastal areas were permitted to experiment with reform first. An intriguing pattern is that governance is best in coastal cities that had very little industry when reform began in 1978. Shenzhen now has the highest per capita GDP in China. The same holds in Jiangmen, Dongguan, Suzhou—all were industrial backwaters in 1978, and responded to China's opening by creating good environments for private investment and learning from outsiders. Cities that already had industry tended to protect what they had and reform less aggressively.
Emphasis added. Globalization rewarded the more nimble, greenfield cities (i.e. "industrial backwaters"). The American equivalent has been Sun Belt boomtowns, Houston being the best example. However, Houston didn't displace New York. The city joined the peer group of alpha cities dominating the US economy. In that sense, nothing has changed in the world of urban hierarchy.
In the Rust Belt sense, much has changed in the world of urban hierarchy. Houston has displaced Pittsburgh, Cleveland, and Detroit (to name a few). But as Ben Schulman points out, something magical happened in Pittsburgh:
The steel collapse decimated Pittsburgh and its region, taking with it nearly 1 out of every 10 jobs there. Entire towns surrounding the city became obsolete. But it is because of that failure, that absolute bottoming-out, that Pittsburgh has been able to cast aside its past and emerge as a unique showcase of what a small, bustling, connected American city can eventually become. The example of Pittsburgh is to fail on the failures and invest in the attributes- granted, of which the 'Burgh had many, in its beautiful architecture, old establishment money, intact communities and ethnic organizations, and cultural trusts and universities- that a place already has. It is a tale not so much for cities facing similar problems to the Pittsburgh of 30 years past, as it is for the country as a whole in this stage of national transmogrification.
Emphasis added. Pittsburgh transformed from an ossifying industrial dinosaur drowning in social capital to a greenfield city capable of reforming aggressively. Pittsburgh did the fail. Only now is the urban frontier becoming trendy, attracting young talent. About a year ago, Governing picked up on it:
Recently, software firm Reserve Data in Silicon Valley, Calif., pulled up stakes from pricey San Francisco and opened shop in inexpensive Youngstown, trading California’s Bay Area chic for Rust Belt grit. The number of jobs that follow may be modest -- 50 to 100 -- but the staff will be able to enjoy Youngstown’s unique social scene, which includes the Rust Belt Brewing Co., located in an old train station.
Brownfields are the new greenfields. Relatively speaking, Youngstown is an urban gazelle whereas New York moves like a supertanker trying to change direction. If you will, Youngstown is home to DIY economic development. Residents aren't tangential to the process like they are in New York. Ideas are implemented quickly. Firsthand, I've seen similar green shoots in Cleveland. Going forward, better to be Cleveland than Brooklyn.
Reading the blog post about the rethinking of Michael Porter, I also thought of the research demonstrating how Halifax could compete with Toronto for musician talent. Toronto is the gateway drug for Halifax. From the Martin Prosperity Institute:
Traditional investigation emphasizes the influential roles that natural endowments, geographic location and access to markets play in shaping growth trajectories, but this research underscores how the social dynamics of city-regions may influence migration outcomes. In so doing, the research identifies the growing challenge that Canada’s largest city has in retaining creative workers who are increasingly attracted to smaller, more affordable and more inclusive scenes such as Halifax.
Halifax has something that Toronto does not. The smaller community puts talent at the center. People develop, not places. The social era makes this economic geography possible. Bigger is not better.
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