Michael Porter - The Competetive Advantage of the Inner City

by Michael Porter

Professor Michael E. Porter of the Harvard Business School is widely recognized as a leading expert on competitiveness. Motivated by the absence of a convincing approach to inner city economic development, he has led a study of this intractable problem for the past two years and developed a new model that is rooted in private initiative and competitive advantage. Professor Porter has launched a new nonprofit organization, the Initiative for a Competitive Inner City (ICIC), to articulate and disseminate the new model, and to develop and implement a series of private sector initiatives to promote the growth of private, profitable businesses in America's inner cities and to create significant job opportunities for inner city residents. Professor Porter gives a summary of his paper, The Competitive Advantage of the Inner City:

The economic distress of America's inner cities is one of the most pressing issues facing the nation. The lack of businesses, investment and, most importantly, jobs in these disadvantaged urban areas not only perpetuates a crushing poverty but fuels other social problems such as crime and drug abuse. As the inner cities continue to deteriorate, the debate on how to aid them grows increasingly divisive and bitter.

Underscoring the current state of affairs is a sad reality: the numerous efforts to revitalize inner cities over the past few decades have clearly failed. Despite the investment of substantial resources and good faith efforts of many in the minority as well as the majority communities, the creation of a sustainable economic base in inner cities&shyp;and with it employment opportunities, wealth creation, role models, and improved infrastructure&shyp;still eludes us.

We believe that past efforts have been based on the wrong model. Assistance to inner cities has largely taken the form of relief programs such as income assistance, housing subsidies, and food stamps with the intent of addressing highly visible social needs. Genuine economic development initiatives aimed at building businesses in the inner city have been fragmented and ineffective. These limited efforts at economic development have taken the form of either outright subsidies and preferences for companies, or efforts to stimulate economic activity in tangential fields such as housing and neighborhood development. These approaches have largely failed. Without economically viable companies and jobs, social programs only grow larger.

Professor Michael Porter has taken an innovative approach to addressing the problems of America's inner cities by leading HBS field studies and research teams focusing on developing a new model to guide inner city economic development efforts, based on private initiative and competitive advantage.

Last spring, Porter supervised 18 students who applied their financial and management expertise to the problems of six companies in Boston's inner city. This year, the program is expanding to twelve Boston companies, and will include MBA teams from MIT and Babson business schools. The ICIC is also working with Columbia Business School to launch a course and field study program in Harlem beginning in January.

"We are approaching the inner cities not from a social perspective," Porter says, "but from the point of view of competition." Porter contends that inner cities, like other regions and nations, must build on their competitive advantages-location, demand conditions, access to regional clusters, and human resources-to become the base for genuinely profitable businesses that employ local residents.

To continue and expand this work, Porter has helped launch a nonprofit enterprise, the Initiative for a Competitive Inner City (ICIC). Whitney Tilson (MBA '94), serves as executive director of the effort, which has two primary objectives. The first is to articulate and disseminate the new model for inner city economic development. The second objective is to be a catalyst in mobilizing the private sector in the inner city. To this end, the ICIC is developing and implementing a series of initiatives, involving corporations and business school students, faculty, and alumni, designed to promote the growth of private, profitable businesses in America's inner cities and to create significant job opportunities for inner city residents.

Principles

Our new approach is based on a number of fundamental principles:

· The distress of inner cities is as much an economic as a social problem. Unless viable jobs can be created, social investments by themselves will be inadequate.

· To achieve successful economic development, the problem must be approached from a business and competitive strategy perspective.

· Inner city-based businesses will not be viable and successful unless they are genuinely profitable, without subsidies. Private investors and entrepreneurs-both within and outside the inner city-must build such businesses, driven primarily by economic interests.

· No business, wherever it is located, can be profitable unless it has a competitive advantage. An inner city economic development strategy must identify and augment these advantages. Ameliorating disadvantages is insufficient.

· An inner city economy can only be prosperous if it is integrated into the regional and national economy, based on trade and economic exchange. The strategic focus therefore should be on developing businesses with the potential not only to serve the local community but also to "export" outside it, competing in regional, national and global markets.

· There are existing and potential advantages in the inner city that revolve around physical location, demand conditions, access to regional clusters, and human resources.

· Disadvantages of an inner city location must be directly addressed, rather than attempting to offset them with subsidies.

· Government policies and programs must shift markedly from past efforts and focus on enhancing the attractiveness of the inner city as a business location.

· Community-based organizations have an important role to play in making the inner city a hospitable place for business, building on their distinctive strengths. They should work to improve government services, facilitate business site development, participate in worker certification and training, and improve community attitudes toward business. Few community-based organizations, however, should dilute their resources by attempting to directly finance, advise, or operate companies.

· Corporations and businesspeople must move beyond charitable giving to social programs and contribute their business skills, contacts, and purchasing power. The nation's business school students, faculty and alumni are a strategic resource. In particular, many thousands of highly trained MBAs (especially minorities) could bring considerable talent to bear on helping build inner city businesses.

Policy Recommendations

This approach implies a new role for government at all levels. Our recommendations, discussed in greater detail in the paper, fall under five themes:

· Direct resources to distressed areas which have the greatest need

· Increase the economic value of an inner city location

· Deliver economic development programs and services through private sector, mainstream institutions instead of new, special purpose, or social service institutions

· Align the incentives in government programs with true economic performance

· Mobilize the private sector

Initiatives

To translate the research into action and mobilize the private sector, the ICIC is already planning or implementing three initiatives:

· Inner City Field Study Initiative. The ICIC seeks to engage a large, untapped resource-students, faculty and alumni of business schools nationwide-to contribute to economic development efforts in inner cities. As part of this effort, the ICIC hopes to inspire and assist business schools to develop field study programs whereby teams of students, supervised by faculty, are matched with inner city businesses. These intensive, for-academic-credit consulting assignments are designed to promote the growth of client companies, thereby creating job opportunities for local residents, by helping develop improved business practices and better strategies, targeted to the specific needs of each business.

The benefit of such direct assistance was illustrated in the spring of 1994 when Professor Porter launched a successful course at the Harvard Business School, involving 18 MBAs-half of whom were minorities-working with six inner city Boston companies. The course demonstrated that MBAs with prior experience and sophisticated business training can assist inner city companies in many areas, including identifying new markets, upgrading information systems, and improving controls, planning, and operations. These projects also proved to be invaluable to students, challenging all their managerial skills and exposing them to the problems and opportunities in the inner city.

The program is expanding this year to twelve Boston companies, and will include MBA teams from MIT and Babson business schools. The ICIC is also working with many other prominent business schools nationwide to launch new programs or partner with existing ones. The greatest progress has been made with Columbia Business School, which is launching a course and field study program in Harlem beginning in January. New programs are also under development at Yale School of Management and University of Maryland Business School.

· Inner City Business Advisors. The ICBA will employ a team of ethnically diverse, experienced managers and entrepreneurs to work directly with inner city companies, assisting them in three ways: a) providing direct management advice and training; b) forging critical links and networks between inner city companies and the resources and purchasing power of the surrounding business community (business schools, banks, corporations, etc.); and c) making ongoing recommendations designed to improve the inner city business environment to relevant government agencies, community groups, and other institutions.

In the spring of 1995, the ICIC intends to select two outstanding MBA graduates with relevant management experience for a demonstration project in Boston. Based on the success of this demonstration, as determined by increased growth and profitability of participating firms and meaningful job creation, the program will be expanded to other cities.

· Inner City Business Development Competition. The competition will leverage off the first two initiatives, which aim to make existing businesses more fundable and which, over time, seek to attract more high-caliber businesspeople to consider entrepreneurship in the inner city. The competition will provide a forum in which talented businesspeople seeking significant financing to build inner city-based companies will compete for prizes while gaining exposure to and assistance from prominent investors. The goal of the competition is to focus attention on the business potential of inner cities, and to help alleviate the equity capital access problem by connecting inner city entrepreneurs with major capital networks. A secondary program goal is to connect inner city entrepreneurs with experts in venture capital, marketing, manufacturing, etc., who can help them build their businesses.

The ICIC plans to hold the first Business Development Competition in the fall of 1995.

Conclusion

The time is right for a new approach based on economic principles. Our research has led us to conclude that the inner cities represent untapped economic potential. The talent and commitment in the minority community to take advantage of this economic potential is present as never before. Both the general public and inner city communities, tired of failed government efforts, are seeking a new direction. Attitudes in banks and corporations have changed visibly. All levels of government are receptive to change and new approaches. Given the right strategy, there is the real potential of reversing the outward migration of jobs and restoring economic vitality.