Friday, March 14, 2014

Small, impermanent and sticky - the real innovation world

There's nothing more aggravating than when a Disney World ride can communicate a deep philosophical point about business.  After all, once we knock down trade barriers, globalize the financial systems and everyone starts using the internet for interaction and commerce, it's a very small world after all.  That point was brought home recently for me in a rather interesting way.

I've been leading an innovation project in Cincinnati, which has been really negatively impacted by the Delta-Northwest merger.  Cincinnati lost on the order of several hundred flights a day when the two "hubs" - Delta's in Cincinnati and Northwest's in Detroit - were merged into Detroit.  This supposedly led to the loss of some multinational corporations, since international travel became more difficult.  One notable loss for Cincinnati was Chiquita Brands, the number one distributor of bananas.  Chiquita moved out of Cincinnati in early 2012.

Now, here's the interesting point about "economic development" as it is pursued today.  One state will try to convince a factory or business to relocate to its state from another.  This is a zero sum game, because any firm willing to leave one state or location for another will do so again.  But traditional economic development has been focused on recruiting existing companies to open new locations or to move or relocate locations to other states.  What we end up competing on are factors like low cost of labor, available land, low taxes and other factors that aren't adding value and can be easily copied by someone else.

Where, you may ask, did Chiquita end up, and why is it the focus of an innovation blog?  Well, Chiquita ended up in Charlotte, not far from my hometown of Raleigh.  And boy was Charlotte excited.  A major multinational firm was picking up and moving to Charlotte.  That happened only a few years ago.  Yesterday, it was announced that Chiquita has agreed to merge with the largest distributor of bananas in Europe, Fyffes, and the new global headquarters will be located in Ireland, where, as you guessed it, corporate taxes are lower.  Charlotte barely had time to celebrate the new headquarters before the new merger will move the global headquarters yet again.

So in a space of less than 30 years, Chiquita or its predecessors have been headquartered in:  New Orleans, Cincinnati, Charlotte and now Ireland.  The cycle time for a corporate headquarters is rapidly shrinking.  Chiquita was headquartered in New Orleans for about 50 years, Cincinnati for 30 years, Charlotte for 3 years.  The pace of change is accelerating everywhere and in every dimension.

So, what's this got to do with innovation? With all apologies to Thomas Friedman's "Hot, Flat and Crowded" there are three factors for innovators to consider:

  1. Your competition is global regardless of your product or service.
  2. Nothing is permanent, not competitive advantage, location, tax laws, trade protections, intellectual property, etc.  Always extract all the value you can from what you do now and simultaneously cannibalize your products before someone else does.
  3. We need to make cities, regions and states places where creative people "stick" which will attract entrepreneurs and large corporate innovators.
It is a geographically small world

Once the majority of the income in any industry is based on data and financial services, you compete with everyone everywhere because everything is digital.  Sure, Chiquita distributes bananas, but much of that revenue is hedged on Wall Street and other financial markets, and Chiquita maximizes its profits based on weather forecasts, consumer demand data and other factors.  Financial transactions and information matter, and they can be managed from anywhere.  The majority of the innovation is in the business model and services, not in the actual product - bananas.  The actual bananas are a small portion of the actual business and most of the labor force in Central America probably doesn't work for Chiquita anyway.  Increasingly, we all compete on information, intellectual property, financial transactions and ideas.  Anyone can compete with anyone anywhere.  Increasingly it is a very small competitive world, and anyone can compete with anyone else anywhere, anytime.

It's a really impermanent world

I like to tell the story in the banking world of the "3/6/3" financial model.  Retail bankers from the 60s and 70s knew it well:  borrow at 3%, lend at 6% and you're on the golf course at 3pm.  Those were the halcyon days of long product cycles, exceptional predictability in financial markets and low competition.  Today, nothing is permanent, fixed or inviolate, and your business plan had better be as flexible and dynamic as the markets you serve.  Cincinnati banked on Delta airline maintaining a hub, and had hoped to retain Chiquita, but mergers and low taxes came calling.  I'm sure Charlotte hoped that Chiquita would stay, but mergers and low taxes came calling.  Cities, regions and states need to rethink their value propositions to private enterprises, and private companies need to rethink their relationships with the market, their customers and competitors.  A recent Gartner study suggested that the average longevity of larger American firms is shrinking - that is, the birth, life and death cycle of large firms is getting shorter.  Your plans must incorporate the dynamic and impermanent nature of your markets.

Adoption of new technologies accelerates once the "infrastructure" is established.  For example, it will take a long time for electronic appliances to penetrate homes until electricity becomes a consistent service.  But once the infrastructures are in place, innovation accelerates.  Look no further than smartphones and what they are doing in terms of information and apps.  Smartphones have replaced point and shoot cameras, GPS devices and in some cases handheld computers.  As the platform solidifies, there will be an accelerating opportunity for innovation.

It could be a "sticky" world

Note that few firms are moving from Austin, or Silicon Valley, and few firms are migrating to Sudan, regardless of the tax implications or the weather.  There are factors that make a physical place "sticky", and factors that can make a corporation "sticky" for its employees and customers.  Every firm and every location needs to think carefully about how they become "sticky" for the best employees, customers and citizens.

Yes, everything is more mobile, but there are plenty of people who are willing to "stick" with the right company or location.  In fact while corporate headquarters are moving all the time (Boeing to Chicago, Chiquita to Charlotte, Ray-o-vac to Atlanta to name just a few), most people in the US exhibit less mobility than ever before.  Some of the lack of mobility is tied to homes that are underwater, but increasingly it seems that people are less likely to move to take new jobs.  That means that companies can command more loyalty and engagement if they'd like to, but so far most are more interested in lowering the tax base rather than creating more passion and loyalty from their best workers.

Richard Florida and others have written extensively about what makes a city or region "sticky", and when a place attracts and retains smart, creative people there is often a positive network effect, attracting more people with more ideas and more intellectual capital to that location.  As these things happen, the value of being "in that place" rises, incomes and home prices rise and so forth.  And, when or if one large corporation flits in and out, like Chiquita in Charlotte, if the place is truly an interesting, sticky place the people there will remain and start interesting new businesses rather than follow Chiquita onward to its new destination.  In other words, we need our locations to be destinations that people desire more than the businesses they work for.

What does a sticky location or business look like?  It's a place that pursues future possibilities rather than hunkering down to rest on past triumphs.  It's a place that encourages interaction, education, free exchange of ideas.  It's a place where many different "communities" interact and where funds and resources are allocated to the best ideas, not to favorite sons or pet projects.  It's a place where there is a critical mass of interested, and interesting people who have ideas they want to share, and where there are people who listen and implement those ideas.

Hot, Flat and Crowded or small, impermanent and sticky

Friedman borders on the Malthusian in his book, and for good reason.  Many of the issues he cites are real - overcrowding and global warming for example.  But in the midst of these issues are other issues and challenges just as important.  The world of innovation is increasingly smaller and more fiercely competitive, impermanent and rocked with constant, unexpected change. Places and organizations must become more "sticky" to attract and retain talent, with less regard to nameplate corporations which will come and go, drawn by tax incentives.  Places and businesses must compete on more than low labor costs, low taxes and corporate incentives.  They must differentiate on human capital, creativity and network effects brought on by a dynamic local population.

The first two factors are unavoidable.  Your business or geographic location will be buffeted by increasing competition and the accelerating pace of change and uncertainty.  The real question is whether your firm or location can create a place where interesting, vital, creative and innovative people "stick" regardless of the tos and fros of corporate behemoths chasing transient incentives.
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posted by Jeffrey Phillips at 5:03 AM


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