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June 18, 2009

The Business of Cities

Businesses interact with cities in thousands of different ways. They are important contributors to city tax revenue; they provide jobs to city residents; and they are heavy users of urban transportation, utilities, and communications services. They often become important members of the community, deeply involved in local philanthropy and charitable work. And some private enterprises or industries come to define the very city in which they locate.

In light of this symbiosis between the private sector and cities, IBM’s Global Innovation Outlook went looking for insights about how these important relationships are evolving in the age of urbanization. So we spent yesterday in New York engaging strategy executives with half a dozen global companies at a members meeting of The Conference Board, a non-profit organization that serves as a collaborative platform for private-sector companies.

We kicked off the conversation by stating a few facts about urbanization. Facts like by 2050 a full 70 percent of the human population will be living in cities. Or that we are adding urban population at the rate of two New York Cities every year. And then we asked the extent to which these companies were factoring these trends into their long-term strategic planning. We wanted to know two things: 1.) How do the geographies, demographics, and services that cities offer affect decisions on where companies locate facilities, and 2.) How does the trend of ever-bigger urban populations affect how companies make, market, distribute and sell their products and services.

Participants were a bit stumped on the first question, especially as it pertained to locating headquarters facilities. In fact, most agreed that the circumstances that led to headquartering in a particular city or region were not strategic, no longer relevant, or both. For example, one executive at an East Coast-based food distributor said the company was founded more than 100-years ago in New Jersey because that’s where they grew the food. But today, most of that food comes from California. However, the company’s ties to the community are so deep, there’s not a chance in the world the company headquarters would ever move.

There was a great deal of discussion about how some cities can grow extremely dependent on both individual corporate citizens or the industrial clusters that sometimes result. Detroit’s struggles at the hands of a declining American auto industry were frequently referenced. And on a smaller scale, the economic impact of the Carrier Corporation leaving Syracuse, N.Y. cannot be overlooked.

On the flip side, Seattle, Washington was held up as an example of a city that lost a major corporate citizen in Boeing, but remade itself with the rise of Microsoft and Starbucks. These success stories are no accident, and are often the result of long-term strategic planning on the part of the municipality, which lays the groundwork to facilitate the growth of particular industries. And one participant pointed out that cities should be very thoughtful about the type of industry they are trying to attract, because it can make a big difference. For example, a technology company may bring with it not only jobs, but a groundswell of localized innovation and entrepreneurial activity. Commodity companies, however, do not typically provide as much of an ancillary benefit.

On our second line of questioning, around how business models would need to change to accommodate the trend of urbanization, there was some early strategic thinking going on. While most corporate strategy groups are looking 3-5 years out at the most, everyone in the room knew that trends as globally important as urbanization could not be ignored.

“It’s going to change the way we manufacture and distribute products, there’s no question,” said one participant. “What kind of stores do we want, the size of our packaging, how the products are delivered. When you start to see the kinds of numbers that are building up in Asia, you have to start asking questions like, ‘Is China my market, or is Shanghai the market?’ The entry strategies suddenly become city driven.”

June 18, 2009 | Permalink

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