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Friday, May 28th, 2010

Replay: Creative Destruction Is Real

Transformation comes from entering new markets and leaving old ones. Companies rarely transform themselves through cost cutting or improved operational effectiveness. Operational effectiveness is necessary to compete, and world-class operators can create competitive advantage, but in almost all cases, operational effectiveness is insufficient to stave off disruption and drive long-term competitive advantage.” – Scott Anthony

We read a lot, and in many cases see people celebrate, the idea of “creative destruction”. This notion is most popularly associated with economist Joseph Schumpeter. The concept is that innovation brings improvements to the world and fuels economic growth, but it also undermines existing ways of doing things. For example, we see online music distribution disrupting traditional CD marketing, with serious consequences for the music industry.

The positives are very real of course. In aggregate we are much better off for all of the advances that we’ve had as a country. People who think life was better in the past, I think, mostly think life was better in a past that never actually existed. Or they imagine that they would be part of the more privileged in that past without considering that they might be among the unlucky. But there are many very negative consequences to innovation too. Entire industries that used to exist now no longer do. Companies that couldn’t reinvent themselves for a new era often failed. This had both a financial and human toll. There’s no need for Midwesterners to dwell too much on this as they know it all too well from personal experience or front line observation.

What’s true for companies and markets also seems to be true of places as well. Most Midwestern cities would appear to no longer have that much economic relevance. They are sustained primarily on inertia and legacy economies that are in a state of decline. The challenge for them is to reinvent themselves for a new century and a new world.

This isn’t easy. Reinventing yourself requires letting go of what it is you identify as core to what you do today – never easy in the best of times, and particularly difficult in a place like the Midwest. Midwest cities need, more than anything, a game plan for making themselves relevant to the people and businesses who will be fueling the 21st century.

Many of them are attempting to do that by upgrading urban amenities. That school of thought suggests that one needs to build inspiring environments to lure people in. Then those people make your economy go. I’m sympathetic to this to a point. Over the long run in the modern economy, jobs follow people. The Sun Belt should have taught us that if nothing else. And of course I’ve championed better quality of space for our cities.

The problem is that biking trails and lanes, art galleries, light rail lines, etc. are really just the new ante in a respect. They are not going to create a differentiated environment to turn around decline, except perhaps on a relative in region basis. Consider: if you value these things, what Midwest city is going to be able to supply them in a better manner than places like Portland, Denver, or even Atlanta or Dallas? Not likely too many of them.

Back in the dot.com era, businesses used to re-brand their logos with .com at the end of them – I recall Neiman’s shopping bags for example – to show they were with it whether they were or not. Today, there’s no such thing as a “dot.com strategy”. Use of the internet is simply built into the fabric of business.

This is the real challenge. To come up with the right approach to create a viable niche the modern economy. Without this, too many places are simply going to end up like buggy whip manufacturers. Cities, like companies, can become obsolete. And the toll will be large in human, financial, and environmental costs.

It is imperative that there be a vision for change that is serious, relevant, and championed by community leadership. This can mean political leadership such as that from Mayor Daley of Chicago, who has been a tireless champion and promoter for Chicago’s transformation. It could also come from other sources too, such as leadership from a motivated business community. But whatever the source of it, it has to come from somewhere.

Some might say that we can’t afford to finance this type of transformation. Two responses. The first is that we can’t afford not to. With many of our cities and states withering away, the alternative is simply not acceptable. The other is that it doesn’t have to cost a huge amount of incremental money. There’s no doubt that financial discipline, and the effective and efficient delivery of quality public services is important. It’s like Indiana Gov. Daniels recently said, “I guarantee that the principles of fiscal caution and conservatism have not gone out of style.” His disciplined approach put Indiana in the best fiscal condition in the Midwest. It’s probably the only state not looking at major tax increases and/or service cuts – meaning it might be one of the few places able to invest, as it is doing with the Major Moves highway plan, for example.

The answer is not to simply throw money at the problem. Actually, we’ve been pouring money into cities for a long time, often doing more harm than good. Some cities may need to increase service levels and spending. Others might choose to spent the same or even less. But the key is to spend well, to make sure that we are investing in the service of transformation and not just spending for the sake of doing something. And with the level of investment we’ve seen in the last decade or two – much of which did in fact go for good things – I think most cities have proven that they can figure out how to find the cash for worthwhile endeavors. By all means we should be looking at ROI, however.

Whatever the individual strategies they choose to pursue, the cities of the Midwest need to step up to the challenge of transformation, lest they find themselves creatively destroyed right out of economic relevance.

This post originally ran on June 11, 2009.

9 Comments
Topics: Economic Development, Public Policy, Strategic Planning

9 Responses to “Replay: Creative Destruction Is Real”

  1. Alon Levy says:

    It’s a good article – thanks for the repost.

    How well do you think it has held up to the past year? For example, is Indiana still in good fiscal shape? Do you think that the cities you held up as good examples of the creative part have weathered the past year better than the cities you complained were more about destruction?

  2. Rod Stevens says:

    I really like this post, since it is about something that has been on mind a great deal lately: what do we do with all of normal, everyday places that do not fit the description “creative place”? I find that this term “creative place” has become like the term “high tech” of 20 year ago: it connotes the new and the competitive and the changing, but doesn’t really describe tie to everyday life. Twenty years ago the real meaning of “high tech” was “computer hardware” and “computer software”, but you will note that, like internet applications, these things are now woven into “old tech”, old industries and basic needs, like the purchase of airline tickets (Expedia), books (Amazon) and movies (Pixar). These aren’t really high tech companies, they are simply companies that are doing old things in new ways.

    And that is where we have to go with our cities. The coastal cities (like Seattle, where I live), don’t really have more “creatives” than other places. What we do have is a host of software engineers and other “knowledge workers” who happen to be working in companies that are in high demand because they are meeting basic needs in new ways. These are the “creative destruction” companies of the economy. Amazon, as the virtual department store, has put the old department stores like Marshall Field out of business. If there is a creative element here on the West Coast, particularly in Vancouver, Portland, or Seattle, it is an openness to new ways of doing everyday things, a different expectation about daily life. My biggest cultural shock in going East to business school, 20 years ago, moving from Berkeley to Hanover, was finding such different expectations about food. In Berkeley the emphasis was on fresh, locally grown and hand-made foods. In the northeast, the Green Giant still reigned. Now, the slow food movement is sweeping the first world. It is those differences in daily life, and of being willing to question how things are done, right down to the question where our food comes from, that are the real basis of the “creative places”. People question things.

    The Midwest has alwasy been about growing and making things. It is where real things come from. perhaps, like Henry Food 100 years ago, there are opportunities there for people to again question how we make things, to spark a revolution in manufacturing. That is a hard thing to do when you are losing the capacity to make things, but as long as there is a hint of manufacturing culture still there, perhaps there is still that possibility. Even more so, the cities that are losing population need to figure out who they really are, what makes them distinctively different, what personality they have, of how people searching for a new hometown will identify with them. I agree that we can’t spend our way out of these problems, that in fact spending becomes a surrogate for really good and really hard and really creative thinking about how a place can differentiate itself and win. The real work here is finding competitive advantage based on strategic competence, on figuring out how to win by doing something that reflects your native strengths. As a native Portlander, I know my hometown makes a lot of outdoor wear (Columbia Sportswear, Nike, Adidas) because people there like to go out and hike and run in rainy weather. They like to eat well, and can, because the Willamette Valley is a very fertile place that drew the original settlers across the Oregon Trail. Every place has its distinctive qualities. Indianapolis is now a winner at amateur sports partly because it now has a long tradition of high school and college basketball, as well as swimming. What are the traits and traditions and interests and passions that make a place from a given place feel like they are “home” when they return there? These should be the things that they build their economic development strategy on, the things that really define them.

  3. David says:

    “These should be the things that they build their economic development strategy on, the things that really define them.”

    They should, but they don’t. Instead, they put a lot of money behind fad chasing and me-too strategies based on some Richard Florida book the econ dev director just read. We don’t need 34 states claiming to be in the top 5 for biotech.

  4. Matt Petryni says:

    Yeah, I think a lot of what’s said in this post remains true today. Also resonant are the comments of Rod and David on this issue — I too am not sure that trying to be more like Ecotopia is the best economic strategy for everyone. This approach, if made less hypothetical and more reality, could be disastrous. There was a post on this blog before about “Starbucks Urbanism,” which, to me, seems to fit into this whole same trend as this posting, Wal-Mart’s greenwashing, Richard Florida’s creative class, and the Feds’ almost religious emphasis on the future of “green jobs.”

    It all feels like the same thing: that if everyone just became a San Franciscan or a Seattleite, we’d all be better off. And obviously the internet and reinvesting in modern public transportation are probably smart bandwagons to jump on. So too might be organic food, farmers’ markets, and renewable energy. Maybe even some of the more radical ideas so potent in those coastal cities — say gay equality or the legalization of marijuana — are likely to spread elsewhere as well, in time.

    But when you get out to the point that everything should have the same economies, people and culture of San Francisco, Seattle, Portland or Vancouver, I think that’s where this gets into trouble. The Urbanophile is right to point that out. So too would be a more critical urban thinker like Joel Kotkin, if he really had any idea what he was talking about.

    America has always thrived on its cultural diversity. And if we start to water that down, ignore our unique regional histories, and forget about the needs of our own people (and not someplace else’s), something really important becomes lost.

  5. John Morris says:

    No time for an in depth response, but

    A) most regional histories involved much more dense and walkable towns, cities etc… (Even, Eeeeeek, “slums”.)It’s so sad that these real histories, of thousands of communities lost to urban removal have been so wiped out of people’s minds.

    B)It’s not like there isn’t a pool of evidence showing sucess vs. failure. The whole interest in the subject comes largely out of this and goes far beyond the green, granola, environmental wacko crowd and comes out of the obvious trail of failed places and exploding infrastructure costs.

    C)A large part of the complaint against these places now has to with most being to expensive, which, I think has more to do with supply and demand than anything else. (That and the desire to produce phony cookie cutter instant communites instead of just letting things happen.)

  6. Thanks for the comments.

    Alon, I think it is fair to say that the fiscal situation of most places has deteriorated markedly. Indiana is spending all of its reserves and had to make budget cuts to education to close a gap that remained. Also, the transport program is now underfunded by at least a billion dollars, and probably closer to 2-3 billion if you factor in the stealth scope decreases (not all of which were bad, mind you).

    Chicago is in a horrible fiscal hole, as this Pew study shows:

    http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Philadelphia_Research_Initiative/Not%20Out%20of%20the%20Woods_May%2026.pdf?n=203

    I’d say right now most places are focused on survival and restructuring, not transformation.

  7. David says:

    Aaron, thanks for the link to the Pew study, hadn’t read it before.

    I think the issue isn’t creative destruction, but destruction. These pension and health liabilities and eating everything in sight – transit budgets, muni budgets, school budgets – you name it. $32,000 in fringe benefits per worker at the Washington Metro Area Transit Authority. And with the fare increases to cover these growing-faster-than-inflation benefits, many people are giving their car a second look.

  8. Anon says:

    This would be easier to swallow if there was something being created to justify the destruction. Creativity did not destroy the middle class jobs in manufacturing that supported health cities and upward mobility.

    Toasters, coffee makers and brooms didn’t disappear because of the internet. Go into Walmart and see shelf after shelf of consumer products. While these are produced with more automation than fourty years ago, they still involve plenty of labor.

    The car factory destroyed the buggy factory, but it created a replacement (better) product and jobs. Today a Chinese factory produces the same or inferior product, and destroys jobs in an American city. That’s not the same process.

  9. John Morris says:

    There’s some truth in that.

    Also, I haven’t read Schumpeter, but I think he predicted that huge and firmly established business interests would work to use the state to lock out the process of change and new competitors. This was very true in the period he was talking about and still very true today.

    Is it a better investment to spend billions constantly keeping yourself with the best technology, processes and quality products or a few million on well placed PR efforts and political contributions?

    Aaron said,

    “I’d say right now most places are focused on survival and restructuring, not transformation.”

    No doubt about it, past is not prolog. Almost every system and process we consider locked in stone will be called into question and that’s good news.

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