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Sunday, July 5th, 2009

Replay: What Business Are You In?

[ This post originally ran on January 28, 2007. My thinking has evolved a bit since then, but this post is still relevant so I’m letting it stand more or less as was. ]

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 and value proposition 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 fundamental 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 déclassé 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. In the conventional wisdom book of urban planning, suburbs are Sprawl, and Sprawl is Evil. Nobody wants to be associated with that now, do they?

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 big 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 recreating the 19th century traditional urban model at large scale. 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 at least partially 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 that likely means doing some things that are incompatible with 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.

9 Comments
Topics: Strategic Planning

9 Responses to “Replay: What Business Are You In?”

  1. Stephen Gross says:

    A question for you: you originally wrote this article two years ago. Since then, which Midwestern cities (if any) do you think have embraced any of these ideas? Which cities grasp what it means to differentiate from the others? Which ones are still focused on stadiums and conventions?

  2. The Urbanophile says:

    Stephen, I don't think any of these cities have changed course at all.

    I should note, when it comes to focus on stadiums and conventions, it's a matter of where you want to place your bets. Indianapolis has obviously put a huge number of its chips on events and conventions. I won't say that's a bad thing per se. It's a risky strategy, but clearly the city has chosen that as its calling card. And there are no guaranteed courses of action out there.

  3. John says:

    Regardless of the direction a city chooses, does it really have to be an all or nothing approach? Would that even be wise? It seems to me that diversification is almost always good in the long term, whether it's in your 401K or your regional economy. Look at Detroit. They decided they were going to be the automobile manufacturing city, but when auto manufacturing left town they had nothing else to fall back on.

    So I don't understand why mid-sized cities would have to choose between serving families or some other niche market? It seems to be that cities like Indianapolis, Columbus, etc, are big enough that they should have healthy urban neighborhoods, prosperous suburbs, and more. Why can't there be something for everyone? I think shutting out any large group, whether it be families or young singles, would be a huge mistake.

  4. Mark Arsenal says:

    This is quite possibly the best essay I've read on the problem with non-"flagship" cities and how they market themselves.

    Richard Florida managed to sell them all the "Young Hip Alcoholic" vision and they went out of their minds because so many of them still had to convince responsible adult taxpayers that they were OK for families as well, whilst also thinking that they would be 'left behind' if they failed on the Hipster quotient. This is why they've all had limited success (which Florida admitted in the Atlantic a few months ago without taking any blame).

    One thing I would argue is that some places can also market themselves as places that are great for people who want something completely different. Portland is a case in point. It's still not THAT expensive (if compared to San Francisco, still the source of most of its new residents), and it continues to have lots of newcomers who love its quality of life.

    Pittsburgh is a good case in point too: it has thriving urban neighborhoods with lots of young families, most of whom are of working-class, and few of the neighborhoods are unsafe or hard to get around in. Property prices are low, which draws the working class and those who would rather have a simple life with free time than a 12-hour work day at Google.

    There's also that whole potential of being a visionary civic leader that realizes that suburban life is not going to exist forever – after the oil is gone and we default on our national debt we'll appreciate those cities that thought ahead and kept their urban infrastructure intact and maintained a manufacturing base – for young hip professionals and for working families alike.

  5. Anonymous says:

    Diversification is always a wise strategy, but I would argue that differentiation is as important if not more.

    I think the point is that cities have to understand how they function as collective entities in their regional, national and global markets. It's not the only issue, of course. As Urbanophile said, cities have many constituents whose needs must be addressed.

    But markets have their own logic and if cities don't understand what it takes to attract not just talent, ala Florida, but investors, visitors, resources, attention and prestige (as per a "CEO's for Cities report on city branding), then they will struggle to sustain themselves economically and, ultimately, culturally and socially as well.

    It ain't easy. The NY Times had a story today about the ongoing drug war that's gripped Vancouver, a place that in recent times has been consistently rated as one of the top North American cities. It's going to hurt them in the short term, but I think they will recover quickly with minimum damage to their prestige because of all the other good things they've been doing to enhance their quality of life for many years.

    I think that in addition to security and education issues, core areas of Midwestern cities have been badly hurt by their overall lack of curb appeal. For the most part, city governments have simply not invested sufficiently in the locations they actually own and most easily control—namely, their public realm. If cities won't invest in their own streets and public spaces, why should the private market?

    To me, this was the genius of Daley in Chicago. Once he started improving streets, parks and school facilities, investors stayed and others were drawn to the improved areas. It has not been a complete success in all neighborhoods, but before the housing market crashed there was lots of private investment occurring in neighborhoods such East Garfield Park, Oakland, Kenmore, Washington Park and Grand Avenue that had not attracted interest in decades. I've lived in the metro area for nearly 30 years and can say without a doubt that the City of Chicago is looking better and better with each passing year. Millennium Park is the feature that seems to put Chicago over the top as a global city, but it was the steady, incremental investment in the public realm of many neighborhoods over many years that stimulated private sector investment throughout the city. I think many other Midwestern cities should appropriate this strategy at their own respective scales.

    St. Louis' new City Garden in the Gateway Mall opened this week. It looks to be both impressive and ambitious. It will be interesting to see if they can build on that momentum with other public improvements that attract the interest of private sector investors once the market recovers. Same with Kansas City and their new Power & Light District. But destinations like these are only part of the equation. The public right-of-ways that link them have to be impressive as well. It won't always be a winning formula, but it's a lot cheaper than stadiums and convention centers.

  6. chuckswitzer says:

    Great post.

    I think, even more than roads, the issue that has to be addressed for any city wearing the “family friendly” badge is education. This isn’t discussed much on this blog, but education (forced busing) probably had more impact on city and suburban demographic shifts than any other factor in the last 50 years. Few people will up and move over city tax hikes, but busing sent families to the ‘burbs in droves. And more than anything else, poor inner-city public education is keeping families away from the city core.

    The most important step that any city can take to create an environment that plays to families is to forge good neighborhood schools. The trend most inner-cities have followed – charter schools – may help to slow the exodus, but can do little to attract new residents because there is so much more demand than seats admittance is based on lottery. Who moves to a neighborhood based on a chance that his child can get into a good school? Further, unless you knew you were moving into the school district months in advance, you probably had no chance to get your child’s name in the hat in the first place.

  7. John says:

    Anon 11:10
    I think you raise a good point regarding the distinction between diversification and differentiation. I dispute that differentiation is more important, but I think a city can and should do both. That led my mind to a related tangent though.

    There are basically two reasons people end up in a particular region. Either one chooses to live somewhere for one of countless reasons (weather, family, mountains, gambling habit, etc…) or one gets a job there. Differentiation can help attract those who choose where to live before finding a job, but diversification ensures a strong economy that has lots of jobs. While there are some people – and this group may be growing – who choose where to live first, I think most people prefer to get the job first, then move.

    How much of our urban policy should be geared towards attracting this minority of people that move to a region without an assurance of personal economic stability? I don't know the answer to that question. It depends how big that group is. And perhaps that group represents those risk takers and entrepreneurs that are so good for cities? But if I were a mayor, I'd focus first on creating new small businesses to grow jobs. Jobs will attract most of the people.

  8. The Urbanophile says:

    Great comments.

    anon 11:10 – your just jumped the gun on my next blog post! I already wrote something very similar wrt to Daley.

    I do think you can and should target multiple segments, but let's not kid ourselves that we can always have our cake and eat it too. Our investment policies are always favoring one interest over another. Different target markets are likely to require a least some different policies.

    John, certainly things like efficiency public services, a good environment for small business, etc. are all good things to do. They are probably the "base" you need for any strategy. In effect, the "play to your strengths" approach of simply saying let's be the best family place we can be is not that much different from this. I tend to look at things like this as the ante you have to pay to get in the game. It is a necessary but not sufficient condition for success.

  9. Rocky says:

    While people may have different views still good things should always be appreciated. Yours is a nice blog. Liked it!!!

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