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Tuesday, July 31st, 2012

Why Technology Is Driving More Urban Redevelopment by Mark Suster

[ Mark Suster is a former Accenture guy like me who left to become a serial entrepreneur and is now a partner in a Los Angeles based venture capital firm. He writes an excellent blog on the tech industry called Both Sides of the Table that draws on both his entrepreneurial and VC experience. I consider it a must-read for those interested in tech. A recent story of Mark's caught my eye as it's relevant to cities and comes from a bona fide investor, not urban booster, perspective. He graciously gave me permission to repost it here - Aaron. ]

Like many I read the headlines about Pinterest moving from Palo Alto to San Francisco and thought about the trend it portends. For those not familiar with the local geography, Palo Alto is the north end of what most consider “Silicon Valley” although nobody local calls it that. Palo Also is about 35 miles south of San Francisco.

Palo Alto is home to Stanford. It is the birthplace of Hewlett Packard. And Facebook. It is adjacent to Mountain View, home to Google. Further to the south are the legendary companies of Cisco, Apple, Intel, eBay, Yahoo!, Juniper and countless others.

Back in 2006/07 when I sold my company and then worked at Salesforce.com there were very few options in SF for technology folk to build their careers at big, growing companies.

Today there’s many. In addition to Salesforce.com (the 800 pound gorilla) there is also Twitter, Zynga and Square – just to name a few. And now Pinterest.

So why all the movements towards cities? It’s clearly more expensive for office space and living. In addition to higher rents many cities impose city taxes on local businesses. It’s clearly a complex topic without black-and-white answers.

Fred Wilson ponders this in his post “Cause and Effect

Technology innovation doesn’t occur in a vacuum. It happens in a dialog with society. And sci-fi writers are but one example of the way society impacts technology.

I think that’s one of the reasons that many of the most interesting Bay Area startups are choosing to locate themselves in the city. And it is one of the reasons that NYC is developing a vibrant technology community.

Society is at its most dense in rich urban environments where society and technology can inspire each other on a daily basis.”

I’m sure there’s a lot of truth to that. I see it first hand in Los Angeles where given the growth of YouTube networks the worlds of art & technology are colliding. It’s becoming harder to distinguish tech companies from media companies.

Many “tech companies” now have green screens. And make-up artists. And costume & set designers. And sound engineers. And post production. And writers! And even … yes … actors.

I can’t say for sure, but it feels to me like the re-urbanization of technology companies is driven by a broader trend of the tech industry overall – cloud computing. In driving down the costs of building businesses it’s driving down the age of startup founders and thus they’re starting companies where young people want to live – in urban environments.

I’ve been meeting with LPs (those who invest in VC funds) over the past year and discussing trends I see in the market and where I think we need to be as a firm to be near to and meet the needs of our customers.

One of the major trends I’ve outlined is this movement of entrepreneurs (and as a lagging indicator venture funds) to more urban environments.

And it’s not just the movement from Palo Alto to San Francisco.

The same phenomenon is happening in many places.

  • In Massachusetts companies (and VCs) have migrated from out by Waltham to Back Bay (Boston) or Cambridge.
  • In LA companies used to be concentrated near Pasadena or in the San Fernando Valley. These days it’s Santa Monica and Venice. Not exactly “urban” in the way you think of SF or NY but certainly relative to the suburban communities of LA and at a minimum it’s where young people want to live / hang out
  • In England they were all in The Thames Valley (45 minutes west of London) and these days they’re all near Shoreditch east of London
  • I think NY has always – by definition – been urban. But there does seem to be huge startup energy around the Flatiron District / Union Square.

For those that aren’t aware of the broader technology shifts of cloud computing, the trend is described in a post I did about changes in the software industry.

The costs of building a company have gone down dramatically, from $5 million to get to launch in the late 90’s to $500,000 (or even lower) today for web companies.

As a result younger people are creating startups because they can. It’s far easier as an inexperienced 23-year-old to get $200,000 from somebody than $2 million or $5 million.

So we’ve seen an explosion in the number of startup companies and subsequently a huge burst in the number of incubators.

I think the urban tech renewal is happening for the same reason.

It’s not that young people wanted to live in Mountain View in the past. In fact, so many DID NOT that companies like Google & Yahoo! had free buses with wifi from San Francisco to their Palo Alto and Sunnyvale headquarters.

Young people want to live where the action is. They want to live amongst other young people. They want nightly restaurants, bars, dance clubs, karaoke, or whatever other late night activities are available to those with fewer encumbrances.

You know the story. You get older. You get married. You have a kid. Then another. Suddenly you feel the pull for a backyard and nearby parks. And a bigger house wouldn’t hurt so that when your mother-in-law is in town for 3 weeks it doesn’t feel like you see her quite so much.

So you move outside the city – even though you feel a strong pull to stay. It’s why many of the older executives at San Francisco startups live in Marin County and commute in. Or they do so from Burlingame, San Ramon or even Palo Alto.

I suspect the shift from the burbs to urban environments – or more specifically to places where young, single, technical startup people WANT to live – will continue into the future and will not decline.

And with startups so go VCs. Spark Capital, Flybridge, Founder Collective, NextView Ventures … all in Boston or Cambridge not west of the city.

In San Fran you find more recently established VCs like True Ventures, First Round Capital, Freestyle, Kii Capital and others.

And there has been a similar move from Sand Hill Road to Palo Alto itself with firms like SoftTech VC, Felicis Ventures, K9, Accel, True Ventures (other office) and Floodgate.

In NY you find the broader Flatiron / Union Square are home to USV (obviously), IA Ventures, First Round Capital, FF Ventures and the incubators General Assembly and TechStars.

I’m sure I’ve forgotten many who have moved or set up anew since I wrote the list in one sitting and with no research.

In LA the VC shift is clearly to Santa Monica / Venice, home of Rustic Canyon, Greycroft, Anthem and just about every incubator (Amplify, Launchpad, Mucker, Science).

GRP’s offices are near Beverly Hills. Our lease runs out in 2013. No prizes for guessing where our new offices will be located ;-)

Image courtesy of Philip Bouchard from Flickr

This post originally appeared in Both Sides of the Table on July 10, 2012.

Sunday, July 29th, 2012

State of Chicago: Lacking a Calling Card Industry

This article is part of The State of Chicago.

I now want to transition from a look at historical and current conditions in Chicago to a defense of a couple of my more controversial diagnoses that attepted to explain the problems behind Chicago’s weakness in recent years. These were my observation that Chicago lacks a “calling card” industry, and my claim that Chicago, while a global city, is weak enough in this dimension that it cannot rely on that alone to sustain it.

Today I’ll look at the former. In some rankings I’ve seen, Chicago has the most diverse big city economy in the United States. The flip side of this is that unlike with New York and finance, DC and government, LA and entertainment, etc., Chicago lacks a signature industry that is capable of generating significantly above average returns. That helps explain why on various quality measures (like GDP per capita) it greatly underperforms. Chicago is simply not the epicenter of any important 21st century macro-industry that is capable of generating super-sized returns. I gave a more detailed treatment of this some time ago in a post called “Chicago and the Epicenter” should you be interested. (You’ll note from that post I was already thinking about this series over two years ago).

Pros and Cons

Now being diverse vs. being concentrated in a particular industry has both pros and cons. If you are overly concentrated in a single industry, then you are vulnerable if that industry nose dives – just ask Detroit. Really the big difference between Detroit and Silicon Valley is that the latter’s signature industry is still going strong. Also, excessive specialization in one high value function can actually drive everybody else out as the highest value use bids up real estate into the stratosphere. Perhaps we might say that it operates with positive reinforcement, which isn’t always a good thing.

Very diverse areas, by contrast, aren’t as vulnerable (in theory) to big collapses. It’s slow and steady wins the race, with fewer boom and bust cycles. So there’s definitely value to diversity. Of course the flip side is that you don’t have that unique magnet for talent. No one has to do business in your city. You generally create average level returns and incomes. Indeed, we see all of this in Chicago. And having a diverse economy did not protect it from severe consequences in this downturn.

Does Chicago Want to Just Have a Diverse Economy? No

Some folks touted the diversity of Chicago as a great strength in response to my article, but deep down I don’t believe anybody really believes it. Everything every civic and economic development person is doing every day is predicated on the desire to be specialized.

Consider the trivial example of the culinary arts. Chicago likes to view itself as a rival to anyone when it comes to cuisine. Is this just a matter of Chicago being big? That is, that It has exactly as much fine dining as it is “supposed to” for a city of its size? Is this how locals sell the food scene? No. The entire idea is that Chicago is a special place, where it not only has a great food scene because of how big it is, but because it has something special that let’s it punch above its weight.

We see a similar dynamic at work in the tech sector. Chicago is determined that it wants to be a major American tech hub. Does this mean that it simply wants it’s “fair share” of tech for a city its size? The rhetoric doesn’t sound like it.

For example, at Tech Week Rahm Emanuel noted that Chicago is known as the Second City, but that “three years from now it’ll be known as the startup city if we do everything right.” The recent announcement of Google moving Motorola’s operations from Libertyville to downtown is also portrayed as boosting Chicago’s tech ambitions. Clearly, talk to any tech booster in town, and you won’t here how Chicago is mere “average” in tech for a city of its size – or that ranking as such is their ambition.

Also, if you look at Emanuel’s own economic plan you’ll see that the #1 item in its analytical framework is “Economic Sectors and Clusters.” What is a “cluster” except an industry where a city has a higher than average concentration (i.e., specialization) in that industry? Indeed, the plan uses location quotient, a standard measure of jobs concentration, as a tool to identify areas where Chicago is specialized.

The challenge is that these specialties are pretty weak and pretty general. It would have been nice had the various recent analytical looks at Chicago’s economy looked at how it differs in terms of a lack of high value specialization vs. other tier one cities.

Now, of course Chicago does have some specialties – logistics (particularly around rail/intermodal) for example at the macro level and say the design of super-tall skyscrapers at the micro. However, these either don’t necessarily generate significant high end returns or simply aren’t that big in aggregate.

In any case, it’s certainly not valid for Chicago boosters to cite economic diversity as the city’s key strength on the one hand while everything they do is designed to create specialization on the other. I’d like to see the rhetoric remain consistent.

Why a Calling Card Industry Matters

If you look at how businesses behave, you start to see why a calling card industry is important, especially for a city like Chicago. For example, former GE CEO Jack Welch said he only wanted to be in a business if he could be #1 or #2 in that market. Warren Buffett likes to talk about what he called “wide moat” businesses like Coca Cola – ones that have built barriers against competitors such that they retain significant competitive advantage over the long term and thus can generate superior economic returns.

It’s difficult for a city to generate those types of returns if it has no real competitive differentiator. If there’s nothing that enables a particular industry to thrive in your city better than somewhere else, then really you are just playing a commodity game. Those types of businesses tend to be brutal, low margin, and dominated by producers who have the lowest costs and most operational efficiencies, Wal-Mart for example.

Clearly cities like Dallas have mastered that market. Chicago is not a low cost producer and hardly as business friendly or efficient as many other places for Joe Average type businesses. So why are businesses going to locate there? There really isn’t a great answer to that question right now. The entire focus seems to be on global city/talent magnet/Loop. That’s an important piece of the puzzle to be sure – and not to be neglected. But as I’ll demonstrate in subsequent pieces, it’s not enough.

Often cities carve out a specialized basis of appeal based on the unique agglomeration environment in a cluster or major signature industry. If Chicago doesn’t have that, and isn’t the cheapest place to do business, it has to find another basis of competitive advantage to build its fortunes on.

I won’t rehash this since I already addressed some of this in a piece I called “Chicago’s Structural Advantages.” The idea is to look at structurally unique factors about Chicago and attempt to find ways to leverage them. The biggest advantage Chicago has it that it’s the only large, traditionally urban type city in the US interior.

Now, the city would no doubt say that it’s current talent/Loop/global city strategy is based on this, but I really don’t think it is. For example, the push into tech is basically a me-too type effort and I don’t see Chicago as well placed to punch above its weight in digital type startups. I’m sure it can do well to some extent, but it should. Chicago is the third largest city in America after all. That alone dictates it should be big on an absolute basis in most things. But I don’t see it as Silicon Valley II. For all the economic development “usual suspects” like tech, life sciences, and green industry, I suggest Chicago’s best strategy really is to get a “fair share” of these and not worrying about trying to build a fortress franchise.

My biggest recommendation instead is to focus on creating what I call “Professional Services 2.0″ That is, the next generation of professional services in America. As I noted previously, Chicago may be the best place in America to fly people around the country. Why not leverage that?

Indeed, we are seeing an uptick in professional services, but I see this as a natural revival, not as a result of any particular strategy on Chicago’s part. Which is fine, actually. But I also see weak spots. For example, the Indian outsourcers like Infosys, Tata, etc. don’t seem to see Chicago as their main US hub (or at least they didn’t last time I worked). Newer models of onshore consultancy seem not to be coming out of Chicago, but out of traditional innovation hubs. For example, firms like Slalom and Point B are both based in Seattle.

This suggests Chicago has work to do, but it doesn’t seem to be really focused on this. Professional and business services is part of Emanuel’s economic plan, but is clearly subservient to headquarters attraction. There needs to be much more focus on services for its own sake – Chicago should absolutely OWN the space.

In any event, that’s one example of how Chicago might move forward.

Diversity and Specialization Not Necessarily Opposed

Lastly, one final note on diversity vs. specialization. Sometimes diversity and specialization are posited as opposites, but in some cases it isn’t necessarily true. You can have a diversity of specialties, for example. That is, your city has multiple areas in which it has a dominant type position. I supposed you could call it a specialization conglomerate, though that’s a corporate approach that’s a bit out of favor.

I’ll illustrate this using a dusted off 2×2 matrix I put together a while back called the “Diversity-Tradeability Matrix.” It doesn’t look at specialization per se, but rather tradeability, or the ability of an economic activity to be performed elsewhere (such as offshore), which we might view as really the core of what we’re hoping to get at through specialization – the wide moat position.

Here’s the matrix with the resulting four typologies of cities:

And here’s how I mapped example cities into the grid:

So in a sense you can have the best of both worlds, though I’d argue New York is overly specialized in finance. (Please keep in mind this is but a rough cut take. For example, a true global city would have non-tradeable services that are in some way related to servicing globalization, for example).

For Chicago, I’d argue the city most belongs in the Regional Business Center category. It’s mostly a diversified regional capital like Atlanta moreso than a global city like New York, though of course it has global city parts to it. But it’s a Regional Business Center with a high cost profile, which creates the challenge.

Thursday, July 26th, 2012

A Report from CNU20

Ok, so I’m a day late and a dollar short on this one. I didn’t attend CNU20 as I’m not really that connected to the New Urbanist movement. However, one Erin Chantry did go and wrote several blog posts as a report. Here are some links to her various reports:

1. Daniel Solomon vs. Andres Duany. Here’s something you don’t see everyday: a big debate about what new urbanism really ought to be all about, at the new urbanism conference itself. In particular, there are some harsh words leveled at the new CNU-advised LEED-ND standards.

2. Why did we stop walking and how can we start again? An interesting look at the history of the introduction of the automobile into our cities and how it led to our social behaviors developing the way they did.

3. Who the heck invited the DOT? Someone from the Florida DOT reviewed four challenges state transport departments are facing: funding declines, safety, decrease in drivers, land use.

4. Clearer Thinking: Urbanism+Transit. Jarrett Walker, one of my favorite transit geeks, decided to serve up a little “fire and brimstone” as he took issue with the planner-centric views that underpin new urbanism (build it and they will come), contrasting it with his people-centered approach to transport.

5. Creating a culture of bike safety What it says, people.

6. Analyzing Space, Uses, and Transportation A report from a breakout session with miscellaneous thoughts on these topics.

7. Reflections on a morning with Leon Krier Krier launches into various polemics, including a statement that no building should be taller than 3-4 levels.

8. Final Reflections Erin sums up her experience at CNU20.

Wednesday, July 25th, 2012

Fort Wayne: My City

Here’s a video a group of hip-hop artists in Ft. Wayne, Indiana put together to show pride in their city. When Atlantic Cities linked this they talked about cheesy lyrics, so perhaps I had low expectations, but I thought it was pretty good – certainly for a small city grass roots effort. Full screen recommended. Enjoy. If the video doesn’t display, click here.

Tuesday, July 24th, 2012

Historic Heritage of the Rust Belt by Robert Bruegmann

[ I'm pleased to be able to run today this guest piece from professor and writer Robert Bruegmann. It originally appeared at New Geography - Aaron ]

I’ve been spending a lot of time in Ravenna recently. No, not the town in Italy with its early Christian buildings and glittering mosaics. I mean Ravenna, Ohio, a small industrial city of some 12,000 people near Akron.

Along with Akron and Cleveland, Ravenna flourished as an industrial center in the early 20th century. In recent decades, however, its economy, like most of northeastern Ohio’s, has been sluggish at best, and the town hasn’t changed much physically for many years except for occasional demolitions at the center and new subdivisions at the periphery. News from Ravenna rarely makes it http://www.newgeography.com/even into the Cleveland papers. It is certainly not known for its architecture. It has some perfectly good late 19th and early 20th century houses and commercial buildings, but none of these is likely to draw tourists.

One of the very few really remarkable things about Ravenna is a 150-foot high flagpole erected in 1893. Almost absurdly high for the scale of the city, it is a fascinating product of late 19th century American engineering ingenuity and vernacular design as well as a reflection of patriotism and civic pride. Standing right in the center of the city, it is arguably the most notable monument not just of Ravenna but for miles around.

Unfortunately, township trustees now plan to demolish it.


Image: Ravenna flagpole viewed from East Main Street, Ravenna Ohio. Photo by Tom Riddle, 2012

The battle over the Ravenna flagpole says a good deal about the fate of the great manufacturing belt that stretches along the southern edge of the Great Lakes. Once one of the greatest manufacturing regions of the world, it has struggled mightily since World War II as aging infrastructure, obsolete industrial facilities, a gap in educational attainment, and non-competitive wages have left it fighting to find its place in the late 20th, not to mention the 21st century economy.

In many ways Ravenna is a microcosm of the larger region. In Ravenna, as throughout the region, economic stagnation has taken a toll on the city’s built environment. Main Street has vacant storefronts and empty lots where stores used to stand. Some of the housing stock has started to deteriorate.

The biggest change in Ravenna, as in most Rust Belt cities, though, has been the transformation in the industrial landscape. In city after city from Duluth, Minnesota, to Rochester, New York, icons of American industry have vanished. The Homestead Steel works outside Pittsburgh has been largely demolished, replaced by a shopping mall. The same fate has befallen the LTV Steel plant in Cleveland and the great Western Electric complex on the boundary between Chicago and Cicero.


Image: Hawthorne Works Shopping Center in front of remaining tower of the Western Electric Hawthorne Works in Cicero Illinois

Some of this demolition was necessary, even welcome, since many of these factories were located amidst densely populated neighborhoods and constituted a logistical and environmental nightmare. But much of the demolition has been motivated primarily by a desire to remove from sight embarrassing reminders of a previous era. Demolishing the factory, city fathers figure, better allows potential buyers of the site to appreciate a wonderful riverside location or proximity to downtown and the endless opportunities to build something new.

What has replaced those grand temples of industry, however, has usually been underwhelming, with late 19th century brick loft buildings reduced to rubble to make way for cheap one-story strip malls that neither employ a lot of workers nor generate a lot of tax revenue. The old urban identity has been destroyed, but there has been very little to take its place.

The process is akin to the efforts of men and women of a certain age who resort to plastic surgery, hair implants and clothes more appropriate for a younger generation. These cosmetic efforts rarely fool anyone. In fact, what they most clearly convey is a loss of confidence.

Fortunately there is a growing awareness that wholesale demolition of industrial fabric does not necessarily prepare cities for their post-industrial future. This movement to save industrial heritage came into its own first in Britain, not surprisingly, since Britain was the cradle of the Industrial Revolution. For decades now important eighteenth and early nineteenth century industrial sites have been preserved, often as historic sites and tourist destinations.


Image: Ironbridge in Coalbrookdale, Shropshire, England, named a World Heritage Site in 1986

A similar thing has happened in the United States.


Image: Pawtucket, Rhode Island, Slater Mill, started 1793, now a National Historic Landmark.

Old loft buildings have become residential condominiums, even in some rather unlikely places.


Image: River Mill Condominiums along the Fox River in Oshkosh, Wisconsin, opened in 1986 in a building constructed for the Paine Lumber Company


Image: Quaker Square, Akron, a hotel developed in 1980 in concrete silos built by the Quaker Oats Company in the 1930s and now owned by the University of Akron.

The preservation of the industrial landscape that cannot be easily reused has been more problematic. Even so, there has been a movement to preserve some of the most important examples both as testimony to the industrial heritage of their regions and as a way of showcasing the regions in which they are located, providing amenities for the citizens and attracting tourists.

Germany has been a leader in this movement. The Voelklinger Huette outside Saarbrucken preserves an entire complex intact as a monument to the industrial heritage of the area. Even more spectacular has been the transformation of large pieces of the Ruhrgebiet, the heart of Germany’s pre-World War II heavy industry, into a set of imaginative parks, museums and other institutions.


Voelklingen Huette (Voelklingen Iron Works) near Saarbrucken, Germany. A UNESCO World Heritage site and museum.


Duisburg Nord Landschaftspark (landscape park) in Duisburg, Germany, a coal and steel plant transformed into a public park according to designs done in 1991 by architect Peter Latz who retained as many of the old structures as possible.

Of course, the Ravenna flagpole lacks the grandeur or the historical significance of these places. But it is an important historic relic in its own right and arguably as important for Ravenna as the great industrial complex at Duisburg is to the Ruhrgebiet.

Erected in 1893 by the Van Dorn Iron Works of Cleveland, the flagpole was one of at least four similar or identical structures erected in the northeast of the United States. It appears that only the one at Palmyra, New York, still stands. Recently refurbished, the Palmyra pole seems to have been built as a mast for displaying banners of political candidates.


Image: Post card of Main Street Ravenna showing the flagpole in front of the courthouse.


Image: Palmyra, New York, flagpole, fabricated, like the Ravenna pole, by the Van Dorn Iron Works of Cleveland. It has been recently restored.

These flagpoles reflect late 19th century American engineering ingenuity. Earlier poles had usually been of wood. They frequently snapped in high winds and had to be replaced. When the Ravennans needed to replace their pole they used a new and improved technology available to them.

The technology, involving the use of latticed steel boxes, was developed for the railroad and construction industry. The individual elements were not new. Steel had been replacing wrought and cast iron for a number of years. Truss bridges and other constructions using similar structural technologies had been well developed earlier in the century. Inexpensive steel and the techniques of constructing large structures out of it using rivets rather than bolts, however, was new. The technology was ideally suited to the construction of large structures of all kinds, notably bridges.

The same qualities of strength and light weight that made it ideal for bridges also made it perfect for towers. All over Europe and America engineers used latticed towers not just for flagpoles, for but lighthouses, look-out stations, electric light towers and a host of other uses.


Image: Electric Light Tower, constructed in 1881 at the corner of Market and Santa Clara streets in San Jose, California to house arc lights intended to illuminate downtown. It collapsed in December 1915.


Image: A surviving “Moonlight Tower” in Austin, Texas. Manufactured by the Fort Wayne Electrical Company for use in Detroit, 31 of the towers were purchased from the city of Detroit and re-erected in Austin. In 1970 the remaining 17 towers were listed on the National Register of Historic Places. The city spent $1.3 million to dismantle and restore these towers in the early 1990s.


Image: Villingen, Germany, Aussichtsturm (Observation Tower) 1888. This 30 meter high tower, erected on a hill outside the village of Villingen, provided views over the surrounding countryside as far as the Alps.

The grandest example of this structural technique is, of course, the Eiffel Tower, built for the Paris exposition of 1889. Although larger in scale than any of the other examples, it used many of the same materials and construction methods as the Ravenna flagpole. Initially heavily criticized by much of the artistic elite of the day as being essentially useless and much too big, the Eiffel Tower soon came to symbolize Paris to the world. No one would imagine demolishing it today.


Image: Paris, Eiffel Tower built for the 1889 Exposition. It reaches a height of 1015 feet using latticed steel elements and rivets similar to those used on the Ravenna flagpole

The Ravenna pole, erected four years later was built as a monument to national pride and an affirmation of the place of the city of Ravenna in the larger American republic. The pole also had a more local significance. It would allow Ravennans for once to greatly outstrip their neighbors and rivals in Kent, 10 miles to the west. In fact, at the time of its completion, the pole must have been one of the taller flagpoles in America and one of the taller structures anywhere outside the largest cities. Of course, by now it has been dwarfed, particularly in the last couple of decades when a new battle for flagpole superlatives has broken out, curiously enough this time in some of the most out-of-the-way corners of the globe.


National Flagpole at Baku, Azerbaijan, at 545 ft. flagpole, briefly the world’s highest flagpole before being eclipsed by one in Tajikistan. Both were built by a company in San Diego.

Even if now dwarfed by flagpoles in Azerbaijan, North Korea, and Tajikistan, the Ravenna flagpole still reflects the pride of a struggling industrial city. It has required periodic maintenance and has gotten into the news occasionally when some inebriated citizen has tried to climb it. However, for most Ravennans it has come to be so much taken for granted that citizens were stunned when they heard that the Trustees of the Township of Ravenna, the body that has jurisdiction, decided that it was a legal liability, a drain on township resources and should be demolished. In response, a group of local citizens has stepped in and is fighting to maintain the pole, raising money toward its repair and trying to see if ownership can be transferred to a governmental entity or group of entities willing to maintain it.

In one way, this is a fight about intangibles like local pride, patriotism, a desire to maintain historic heritage and a sense of place. Some people write off these sentiments as mere nostalgia. But preservation of this kind can have tangible consequences. No one is claiming that preserving the pole will generate vast new tourist revenues or solve basic economic problems. But the movement to save the flagpole rests on the notion that stewardship of historic heritage can play an important role in reminding everyone of the specific qualities of a place that made it successful in the past – and perhaps can be built upon to craft a better future.

Robert Bruegmann is professor emeritus of Art History, Architecture and Urban Planning at the University of Illinois at Chicago.

This post originally appeared in New Geography on June 19, 2012.

Sunday, July 22nd, 2012

The Business Model Innovation Factory by Saul Kaplan – A Review by Aaron M. Renn

“Institutions are designed for stability. They are designed to protect the status quo. They are designed to resist change and are allergic even to the hint of transformation. They are not designed to reflect the will of citizens, consumers, students, patients, and entrepreneurs.” – Saul Kaplan, “The Business Model Innovation Factory”

Some folks like to suggest that it is the biggest, most dense cities where the most serendipitous interactions tend to occur, the types of random encounters that lead to crazy innovative breakthroughs. I’ve found in my own personal experience that it is in fact smaller cities where in practice this more often occurs. Because the pools of people in particular niches are smaller, cross-niche collaboration and interaction is a necessity.

A few months back I experienced this again when I went out for drinks with a guy running a tech incubator in Providence, and he happened to have Saul Kaplan in tow. Turns out Saul is an old Accenture guy like me (though we never worked together) with a ton of private sector experience both in staff and strategic consulting roles. But he also spent a few years as head of economic development for the state of Rhode Island so has seen the public sector as well.

These days Saul runs a cool outfit called the Business Innovation Factory, and also does quite a bit of writing on strategy at his blog, the Harvard Business Review and elsewhere.

Recently, he put out a book called The Business Model Innovation Factory. I generally don’t review business books here, but this one is highly relevant to cities and other entities we don’t necessarily think of as businesses.

The first part of the book is a description of what a business model is. This is worth its weight in gold if you haven’t thought about that. The simple definition given is that a business model is a “story about how organizations create, capture, and deliver value.” As he goes into more detail, he draws heavily on the type of business model definitions used in the lean startup model, of which I approve heartily, most notably that of Alexander Osterwalder’s Business Model Generation.

Skipping to the end of the book, Saul notes that all too many public sector entities and non-profits don’t think they have a business model. In fact, they often define their very raison d’etre as opposed to business and operating purely to make a buck.

But ask yourself these questions as a city or civic development group. Do you deliver any value? (I certainly hope you think you do!) Do you want to capture any value? (How do you propose paying your bills?) What is it that you actually do that creates the value I’m sure you believe you make?

After thinking about the book, the focus changes to the disastrous results that can result when the current business model breaks down. He uses the well known example of how Netflix totally disrupted Blockbuster, leading to the latter’s bankruptcy. And also how Apple completely disrupted the traditional music value chain.

We can perhaps think of many similar examples from the public sector. States and localities often rely on sales taxes from bricks and mortar retailers as a value capture mechanism. Tax free internet sales from the likes of Amazon put a dent in that. Similarly, government relied on gas taxes at a flat price per gallon to capture value from the highway network. Fuel efficient and alternatively powered cars have disrupted this and made it difficult to finance infrastructure improvements in the US.

These are perhaps modest examples, but show what government has to deal with every day in a realm of ever faster technological and business change.

It’s interesting to note the standard reactions governments have had to the problems I outlined above. In the first case, the proposed solution is invariably let’s tax internet sales. For the latter, it’s let’s tax by miles driven rather than by gallon.

Both of these I think are fairly limited responses. They get to the heart of how most businesses approach innovation. Their desire is to find ways to sustain, optimize and improve the business current model. It is never to think of a new business model in terms of what value should be delivered, how to deliver it, and how to capture value from it.

For example, a switch from a gas tax to a VMT tax is a bit of a shift, but not much. It doesn’t change the value bundle being delivered – more roads – or the basis of value capture, which is “inputs” based rather than “outputs” based (i.e., the actual value delivered). Also, it links value capture directly to a particular class of direct infrastructure users without considering all the externalities generated. For example, many people have gotten insanely rich because the government routed a new freeway past their property. The property owner did nothing to create that increased land value through their own efforts, yet captures 100% of the value privately, except in limited cases.

If businesses all too often fail to think about the fundamentals of their business model until they are destroyed from without (a type of “innovator’s dilemma”) how much moreso hidebound institutions like governments, universities, and other non-profits? Indeed, like most people, they seem not to have articulated, much less questioned their fundamental truths.

Kaplan goes on to talk about business model innovation – not just incremental innovation within a particular business model – as a core competency organizations must have in a rapidly changing, ever more complex world. He talks about a bit about what this should look like and what the barriers are in the book, so I’ll encourage you to read that for yourself.

They key is that to be successful in the 21st century, organizations need to be willing – and able – to fundamentally rethink their business models. Given the difficulty of doing this generally in the public sector, the cities and states that are successfully able to pull this off will create enormous competitive advantage for themselves.

If you think your region is already innovative, think again. Kaplan makes a great observation. Look at the regions that consistently score so highly in innovation hub surveys. Are they doing anything fundamentally different in terms of health care, driving significantly better patient outcomes for more people at lower cost? Is their K12 educational system a hotbed of innovation and better results? Their fiscal environments? Generally, as a rule, these places aren’t as different from others as say Apple is from its competitors. Therein lies the challenge to them I think.

There were a couple of things I did take a bit of an exception to.

Kaplan tends to downplay incremental innovation a bit. But the reality is that the vast bulk of improvements in our society, including ultimately fundamental change, result from compounded incrementalism. The radical transformation is often less so than it generally appears. I think we’re inclined to focus on cases where we can attribute a breakthrough to some radical rethink because of our culture’s longing for the Romantic hero (think Steve Jobs).

Perhaps this is inevitable in a book that sets up to contrast business model innovation with traditional innovation. We’ll certainly come away more excited about the former than the latter. But the sad reality is that few organizations even do traditional innovation within the existing business model. So how much harder is rethinking that model completely?

Also, Kaplan takes aim at Detroit. After a visit there listening to various civic leaders talk, he came away thinking – and I’ll put a fairly harsh paraphrase on it – they were clueless.

However, I might suggest he was looking in the wrong place. Detroit is perhaps the most innovative city in America in a number of ways. It’s certainly not because of the Mackinac Island annual policy conference crowd. It’s in the grass roots. It’s happening because of the extreme collapse and ineffectiveness of those institutions. This has cleared the way and created a nearly zero price greenfield for experimentation, a phenomenon I documented in “Detroit: Urban Laboratory and New American Frontier.” I don’t want to minimize Detroit’s problems, but there’s a lot of ferment going on.

It seems to be the same in Saul’s home town of Providence. There are a lot of interesting people doing interesting things, but many of them seem to be operating completely outside the system. In this regard, having a “free enterprise zone” where people who want to play and experiment in a low cost environment can go wild is a way to start renewal in places that have suffered a lot.

In any case, The Business Model Innovation Factory is a timely and relevant book for city and state leaders as their existing business models are clearly under extreme pressure from the marketplace. It’s written in this style of a business book, which may be off-putting to those not used to it, but it’s easy to read, provocative, and has many lessons that need to be absorbed by organizational leaders across America.

Friday, July 20th, 2012

State of Chicago: The Risks of Recovery

This article is part of the State of Chicago.

In comments to previous installments, some folks have highlighted recent positive news for Chicago – job announcements, the decline in unemployment rate, some indications of a housing market uptick, and improved hotel occupancy – as evidence that perhaps I spoke too soon or was wrong about Chicago.

Well, if I’m wrong, I’d happily take that. If Chicago starts back up on a 90s-like upward trajectory, that would clearly be something to celebrate.

On the other hand, there are risks that come with recovery. Few cities go straight down – not even Detroit did that. The national economy has been in the dumps for quite a while. It probably won’t stay there forever. Recoveries in the national economy will no doubt lift Chicago.

The risk is that, if things improve, leaders in Chicago will simply say, “Whew! Glad we made it through that.” And go back to business as usual. It’s not like Chicago was in an absolute sense ever going down the tubes anyway. But what happened is that it was increasingly falling behind other big cities. This is what could easily happen here. A return to a modest upwards trajectory that means things are better than they used to be locally, but on a comparative basis the city is actually falling behind.

As for the recent uptick, I think you can attribute a lot of it to the view I advance that Chicago is not primarily a global city, but instead Capital of the Midwest. Its performance is heavily linked to the performance of the Midwest and the manufacturing industry overall.

And how is the region doing? Pretty well right now. Last year (May over May, seasonally adjusted) Michigan added 47,500 jobs. Ohio added 75,700. Indiana added 61,300. Only Wisconsin lost jobs in the region. Even extremely troubled metros like Detroit managed to add jobs last year (May over May, not adjusted). Detroit added 33,800 jobs or nearly 2% – pretty strong growth. Between 2010 and 2011, metro Detroit grew manufacturing employment by 7.8% – by far the highest of any large city in America. Unemployment rates have dropped sharply in the region. There has also been an energy boom in places like North Dakota and Western Pennsylvania that are sort of in the fringe areas of Chicago’s primary zone of influence.

With the Midwest rebounding thanks to a manufacturing resurgence, and possibly a bit of the energy boom, Chicago is benefiting. It benefits because of the services it provides to manufacturing and other industries in the region (what’s good for Detroit is good for Chicago). It also benefits in other ways such as tourism. The 92% hotel occupancy in June was attributed to more aggressive marketing in the Midwest. That’s no doubt part of it, but also more of those Midwesterners have jobs now that allow them to indulge a visit to Chicago.

So part of the question is: Is the Midwest comeback sustainable? It’s hard to say. Manufacturing is pro-cyclical, so often leads into and out of recessions. Previous strong manufacturing comebacks have been illusory. Some analysts like Richard Longworth suggest that we shouldn’t celebrate too soon. I personally don’t think we’re in for an era of strong and sustained manufacturing growth at good wages in the Heartland, though the energy boom would appear to be the real deal. This should especially help Chicago as the Ohio shale fields come on line.

In any event, as Rahm himself understands, a crisis is a terrible thing to waste. If Chicago doesn’t take this chance to reform now, in the way that governors and mayors or pushing reform across America, it would be a shame.

So my overall view would be this: let’s celebrate successes and good news along the way, but not let that devolve into just using them to develop a marketing spin story about how fantastic things are in Chicago. And above all, don’t take the foot off the gas on reform and the changes that need to be made.

This concludes my discussion of current conditions. Next I’ll turn to addressing a couple of my unique analytical frames that have generated controversy, namely having a diverse economy vs. a specialized one, and the degree to which Chicago is a global city.

Thursday, July 19th, 2012

Why I Don’t Live In Indianapolis

It’s no secret that Indianapolis has been a huge focus of my blog over the years. One of the biggest criticisms I get here, especially when I ding some other city, is that I’m nothing more than a mindless booster for Indy. While I like to think I’ve given the city a lot of tough love over the years, it’s definitely true that I’ve had many, many good things to say, and I have no problem saying that I’m a big fan of the city overall.

Why then, might one ask, don’t I actually live in Indianapolis?

The answer is multifaceted, but without a doubt one key reason is that I simply can’t sign up to what the city is doing in its urban environment. Indy is going one direction, I’m going another. It’s as simple as that.

Let me give you an example of what I’m talking about. The city recently announced a plan to subsidize a mixed used development on a parcel in the core of downtown, a project called “Block 400.” It would include apartments, retail, etc – all good. While the concept is great, the design is another matter. I could go into depth on the monotony of the structure and other matters, but what I want to show you instead is a parking garage that will house employees from One America insurance. Here was an initial rendering of the garage:

It’s about as boring a garage as can be imagined. It’s on a prime block just steps from Monument Circle, but has no street level retail or other interest. It’s just a dead parking garage.

Various folks took umbrage at this, so the developer decided to tack on some awnings, which got them approved by the city’s hearing examiner. Here’s their updated design:

Let’s be honest: this isn’t a garage, it’s urban design garbage. And guess what? The city of Indianapolis itself is paying to build it.

I don’t want to let the perfect be the enemy of the good. I can certainly understand that there are economic constraints, tradeoffs to be made, etc. And not every project can be a home run.

But this isn’t unusual at all – this is standard operating procedure for Indianapolis. This is par for the course. This is just what Indianapolis builds. I cannot name another major city in the United States where the city’s own developer community (including Flaherty and Collins, the developer of this property), own architectural firms (including CSO Architects, who designed this) and own city government so consistently produce subpar development.

I’m not exaggerating at all. And this isn’t even the worst offender. For example, here’s another downtown development that not only sucks out loud, but the state fire marshal condemned it and forced residents to move out:

While I’ve named the names of the folks involved in the parking garage and they certainly deserve it, let’s not focus overly on them. This trend goes back a really long way, and is pervasive. The previous city administration, which was of a different political party, behaved no differently. Partially it’s a result of a lack of good urban history of the type that exists in other places. So there isn’t a good template ingrained in the city to follow.

But ultimately, as I’ve written before, it’s a crisis of values.

Indianapolis is the place where, as a rule, not good enough is more than good enough for most people, even community leadership.

That’s why I don’t live there. Because that’s not good enough for me. I may not be perfect, but I aspire to more than mediocrity. I don’t expect any city to be perfect or all the way there yet. You can inspire people, including me, to join your army to take hamburger hill or to get behind the rock and push, if you provide a vision of what can be. That’s one reason people are planting their flag in Detroit. It’s the hope of the possible.

But when it’s clear that the city itself – and I mean that in the broadest sense – has decided it wants to go march off in a different direction, it’s a lot harder to enlist in that army, no matter how much you might want to.

Alas, it seems lots of people agree with me – on the actions if not the reasons – as Center Township (the urban core) lost another 24,000 people in the 2000s. They voted with their feet – just like tens of thousands of others have been continuously voting with their feet since 1950 – to go build a better life for themselves somewhere else.

And in a decade where downtowns made strong residential comebacks, with young people streaming in to live in them, Indianapolis was an exception. Its downtown* added less than a 1000 residents, and their distribution suggests that almost all of that might be a result of jail population expansion. Even downtown Cleveland did better.

I’m sure Indy’s boosters will be happy to talk about world class parts of downtown like Monument Circle, the Cultural Trail, Georgia St., etc. And these are legitimately first rate. Actually, that makes it worse. It shows that Indianapolis can compete with the best if it wants to, but most of the time it just doesn’t care to. It’s not ignorance. The city knows that to do, it just doesn’t want to do it.

For some reason locals seem to think that doing it right should be reserved for a handful of special places and occasions. But the mark of at great city isn’t how it treats its special places – everybody does that right – but how it treats its ordinary ones. Indy is like the guy who thinks he can get away with wearing the same old dirty clothes fives days in a row and not taking showers, as long he slaps on a little top shelf cologne before he leaves the house. I’ve got news for you, people are going to notice.

Indianapolis retains a very compelling regional story to tell. There are tons of reasons for people to come to or build a business in, metropolitan Indianapolis. But the real story there is mostly in the suburbs.

Yet I believe even the urban core of this not very historically urban city could be compelling as well – if it wanted to be. Indianapolis has all the potential in the world. Indy is like the up and coming star at a company whose boss pulls him aside one day and says, “You’ve got all the potential in the world, but if you want to get that big promotion, you need to stop doing/start doing X, Y, or Z.” Anybody who has made it to the top was fortunately enough to have somebody give them one or more of those good kicks in the pants along the way.

Indy, unfortunately, has heard the message many times before from many different people, and has elected not to do anything about it.

Locals love to make excuses for why things can’t be better. F&C’s development director for the project said of the garage, “Some things aren’t achievable.” What is so different about Indianapolis that makes that true there but no where else? What miracle of economics allowed similar cities like Nashville or Cincinnati or Columbus to build many urbanistically correct new developments in those places while somehow it is impossible in Indianapolis? Maybe it’s time to recruit some out of town developers and architectural firms who have a different attitude towards the possible.

I would encourage Indy’s leaders to take a short hour and a half drive to downtown Cincinnati and take a look around what’s there. Not the old buildings, but the new ones. Most of them are candidly quite bland architecturally, but from an urbanism perspective – and be sure to take someone with you know what’s what they are talking about on this so that they can point it all out – even the bottom quartile of new buildings in downtown Cincinnati beat most of the top 5% of what’s been build in downtown Indy.

I’ve listened to various civic leaders of late talk about how rebuilding the urban core is now a big priority of the city. If that’s true, and business as usual has been leading to a catastrophic population collapse for some time, wouldn’t you think that you might, you know, try something different? Apparently not.

When people in Indy want to do something, they can. That’s why they built an amazing franchise in events hosting, particularly sports. They understand what world class is there, they understand the competitive marketplace, and they do what it takes to succeed – including building world class venues, districts, and capabilities to make it happen. So why hasn’t it happened elsewhere?

I was involved in a discussion about building a high tech industry in Indianapolis a few years ago. Someone boldly said that since Indy had been able to pull off building the sports cluster, it should be very capable of equally pulling off a high tech cluster to rival top hubs in the country. A friend of mine was very dubious about this, and said insightfully, “Sports succeeded because sports is consistent with the state of mind (i.e, the culture, values, and patterns of life) of Indiana. But high tech is more consistent with the state of mind of other places and not so much with Indiana.” Indianapolis is #1 in sports. And while it’s done well in some parts of tech, I don’t see how you could really rate it as more than the middle of the pack nationally on that.

“State of mind” makes a big difference. That’s ultimately a question people ask themselves these days, whether it is a company and a prospective employee sizing each other up, a consultant and client, or a city and a prospective resident or business. The most important question is always, “Is there a cultural fit?”

In an era where an ability to attract talent is perhaps the defining characteristic of urban success over the long term, Indy needs to ask itself the hard questions. How competitive is it? I’d have to say right now that it does a great job for people who want to live in a suburban environment like Carmel or Fishers. That’s very, very important and not to be minimized.

But there are people out there that want more, who prefer different types of environments. Right now Indy is simply not very competitive in that market. And if it keeps on its current path, it never will be. Convince yourself otherwise by finding the exceptions to the rule and getting them to gush about how great things are. But the numbers don’t lie.

Like that young up and coming employee who’s got the goods but has a few problem areas that will, if not fixed, hold him back, Indy needs to take a serious gut check about the things that hold it back – and an embrace of mediocrity and lack of seriousness in its approach to urban core development are chief among them.

Ultimately as I said it’s a question a values. There’s nothing wrong with being happy about where you are. Most people don’t have that burning ambition to make it higher, nor a passion for excellence. In this competitive world a lax attitude will probably undermine your performance in the end, but if that’s what you want be, go for it. I won’t judge a place for that. Just don’t expect those who want better for themselves to sign up for it.

In any choice a city makes, somebody is going to be unhappy. Any branding choice is, in a sense, a choice to exclude by focusing on something rather than something else. There’s nothing wrong with setting down a marker of what you’re going after – and being comfortable with fall out from that.

Ultimately it’s not about me or any other specific individual. I’m under no illusion that I’m someone who is personally important to future of any city I might find myself. But it about people generally, and being able to attract enough of them – particular of those that are critical to the 21st century economy – to make the city successful and indeed sustainable over the long term.

Just remember, talented, ambitious people – those with big dreams and hopes for themselves and their societies – want to live in a place where the civic aspiration matches their personal aspiration.

What do you aspire to, Indianapolis?

* Downtown defined as the area inside the inner freeway loop and the White River.

Wednesday, July 18th, 2012

Infographic: Corporate Headquarters

In a piece called “Cities With the Most Corporate Clout,” Richard Florida included this interesting map of Fortune 500 headquarters per capita:

Wednesday, July 18th, 2012

Eurolapse

No, this is not the European collapse, but a time lapse of various cities in Europe. I hope you enjoy it. If the video doesn’t display, click here.

h/t Likecool

The Urban State of Mind: Meditations on the City is the first Urbanophile e-book, featuring provocative essays on the key issues facing our cities, including innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. Included are 28 carefully curated essays out of nearly 1,200 posts in the first seven years of the Urbanophile, plus 9 original pieces. It's great for anyone who cares about our cities.

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Aaron M. Renn is an opinion-leading urban analyst, consultant, speaker, and writer on a mission to help America’s cities thrive and find sustainable success in the 21st century.

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