Sunday, January 28th, 2007

What Business Are You In?

When you start or run a business, key questions you need to ask yourself are 1) who is my target customer? and 2) what product am I selling? A big part of this is understanding what customers and targets you are not going after. Modern management theory suggests that businesses should focus like a laser on their core competence and not try to be everything to everybody. The decline of the general purpose department store in favor of discounters or specialty retailers with a clearly defined target market and value proposition illustrate this perfectly.

Now cities can’t be exactly like a business. Businesses can just stop doing business with customers they don’t want. Cities need to serve their residents. But it is just as important for cities to understand what they are all about and what their sweet spot is for attracting residents and businesses. It is a competitive world out there with about 50 major metro areas in the US, to say nothing of all the hundreds of cities around the world, small towns and rural areas to compete with, etc.

Part of that is figuring out if you are in the commodity business or not. Commodities are more or less interchangeable products where prices are set mostly purely by supply and demand. In a commodity business, the only thing people care about is the price. So the low cost producer almost always has a huge profitability advantage. Wal-Mart figured out that laundry detergent and many of the other products they sold were commodities and that the only thing customers cared about is the price. So Wal-Mart set about creating an unparalleled scale and logistics operation to make them the low cost provider. Southwest Airlines figured out that they only thing people cared about with regards to an airline ticket was the price. Both of these companies went on to put the hurt on their competition.

Now most of the aspirational cities that I cover on this site sell what I consider to be a similar value proposition. It goes something like this. “Hey, we’ve got a lot of the benefits of a big city like pro sports teams without the attendant hassles of horrible traffic and sky-high taxes. What’s more, we’ve got pretty good schools and are a great place to raise a family. Our overall quality of life is pretty high.” That’s not a bad value proposition. If you’ve got a choice between living in suburban Chicago or suburban Cincinnati, Cincy has to look pretty darn appealing.

But there are two problems with this:

1. All of these cities are selling basically the same product.

2. Selling this product implies that you are NOT targeting young, single, educated, ambitious people.

The first is pretty obvious to someone who is not from one of these cities. The competition in the Midwest is not just between Chicago and Cincinnati, but rather between Chicago and Cincinnati/Columbus/Louisville/Indianapolis/Milwaukee/Kansas City/Nashville/Charlotte/insert your city here. Once you’ve established that there are some real advantages in terms of cost and quality of life in the suburbs of a smaller city vs. Chicago, you’ve got to pick which of these places are attractive.

I argue that fundamentally they are all pretty much the same. Now I have my favorites and do think there are some factors that differentiate them, but to someone who is a total outsider, I don’t think there is a clearly compelling “answer”. What’s more, few of those differentiators that do exist are real attractors to someone seeking a suburban, family friendly lifestyle anyway.

Now residents of these places would surely object, “But we’ve got X” or some such. But every town has their own version of X.

- Charlotte has the financial industry, Nashville has the music industry
- Cincinnati has the Ohio River, Milwaukee has Lake Michigan
- Indianapolis has the Indy 500, Louisville has the Kentucky Derby.

The list goes on. It’s difficult to argue that any of these places has a uniquely compelling collection of assets. What that means is that they are in the commodity business. That is one reason they are so affordable. When you are in the commodity business, price matters, so naturally they have low prices. Chicago, New York, and San Francisco can have high housing prices and taxes because people are willing to pay a premium to live there. But no one is going to pay a premium to live in Columbus, Ohio or any of these other cities. Price equals supply and and demand and there is a large supply of cities selling the same thing, so naturally housing prices, etc. are cheap.

That’s actually good if you are the buyer, at least initially. When you want to sell your house and find you haven’t made any money on it, things aren’t quite so good. Still, in the mean time you practically had a mansion for what your friend in Naperville, Illinois paid for a tiny vinyl house. But if you are the seller, remember that if price is what matters, and the low cost producer is king. This means if you let your housing prices or taxes go up, it puts you in a bad spot. Similarly if other cost measures like traffic congestion hit you, that also hurts. But with low taxes you can’t invest in roads. This vicious circle almost locks you into a tough corner to fight from. It’s seldom pleasant to work in a penny-pinching commodity business environment.

Most of these cities end up spending their precious funds on things like sports stadiums that don’t even do a lot to add to their fundmental value proposition. If you are trying to be a great place to raise a family with an easy quality of life, you’d best be investing in your roads to keep congestion low and making sure the schools stay solid. But those are seldom the priorities of local leaders. I can’t name any places out there that are really, unabashedly trying to actively create an environment that plays to the product they are selling.

Why is that? Well, I’d argue it’s because they have big city envy. They believe that they should be an urban playground kind of place like Chicago. They are also worried about losing their educated youth to places like Chicago. So what they do is try to emulate the bigger city environments they are most familiar with, which is that of the large 19th century metropolis. Plus, suburbia is generally viewed as declasse by the elite, and a leader who said he was going to concentrate on building the greatest, lowest congestion, nicest suburban environments around would probably earn strange looks.

I believe this effort is largely doomed to failure and in fact can cripple the very value proposition they do have. First, these smaller cities are not Chicago, Seattle, Boston, etc. and they never will be. Those cities are the way they are for historical reasons. They grew up in the pre-automobile era. Rolling back the clock to the 19th century is impossible. Given the choice between a real big city and a smaller city trying to act like a big city, people are going to choose the real big city every time. And focusing on surface elements like pro sports and rail transit really misses what it is that makes places like New York, Chicago, and San Francisco to great to begin with.

What’s more, all of these cities are doing the same thing. You might think your downtown has seen lots of exciting development, new lofts, etc. And it has. But so has everyone else’s. All of these shiny new toys quickly become basics, the extremely expensive “ante” you’ve got to pay to stay in the game. So you’re already back into a commodity business, and one with a high cost base to boot.

I think there is a better way. There are one of two ways I think these cities could really start to distinguish themselves.

The first is to be unashamedly the best family friendly, low cost of living, easy quality of life, suburban oriented city in the world. Make a commitment to efficient and corruption free government. Focus on having the lowest congestion and best roads of all competitors. Build higher quality suburbs that nevertheless aren’t ritzy enclaves. Have very targeted investments in urban amenities. For example, decide that a good regional airport and pro-sports are good, but don’t focus on conventions or other tourist oriented industries.

I don’t see many cities wanting to sign up for this. And it is structurally impossible to begin with in most places because the central city is not a suburban environment and is going to continue to try to differentiate itself from its suburbs anyway. It’s also not sexy.

The other is to apply the economic law of comparative advantage and figure out how to build a differentiated city that is not based on the 19th century traditional urban model. Believe it or not there are good examples of small cities that have done this. Las Vegas decided to be a gambling mecca and has done well with that. Austin, Texas decided to be a very large college town and reject many suburban values altogether. Portland decided to it was going to try to make a radical transformation to really become a more traditional 19th century – complete with high costs and horrible traffic congestion I might add. Charleston, South Carolina (admittedly a significantly smaller place) decided to preserve its antebellum heritage.

The trick is that these cities have to find a way to be something unique based on what they are, not what they aren’t. That means letting go of Chicago envy and an inferiority complex towards larger urban areas, and having the confidence to go out into the world and make your own way, to find your own path. Who is your target market? What product are you going to sell to attract them?

It probably also implies that you are abandoning your existing value proposition. If you want to build a differentiated city that, for example, is attractive to bright, ambitious, educated young singles, then you need to start building a total environment that is going to cater to them. Part of doing that is to say good-bye to the idea of being a “great place to raise a family”. That doesn’t mean you have to kill off the suburbs any more than being a suburban family friendly oriented city means you can’t have a downtown. But it does mean that the environment and the marketing and the vision of the place is going to go in a different direction.

I believe that is also deeply difficult to do because it is so core to the current identity of the city. What’s more, the existing residents probably like things the way they are. The youngsters who moved off to Manhattan can’t vote in local elections. Plus it requires a lot of hard thought and a lot of creative, visionary leadership.

That last element is the key: leadership. Change is hard. It takes a great leader to not only set the agenda and vision for change, but also to deliver it. Sometimes leaders emerge in just the right place and time for something big to happen. Ultimately, for any of these cities to start moving down a either of the two paths I mention, it is probably going to take a unique leader to take them there.

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Topics: Public Policy, Strategic Planning

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