The Innovator's Cookbook Part 2

Losing the Economic Development Race

RICHARD FLORIDA.

AuI walked across the campus of Pittsburgh's Carnegie Mellon University one delightful spring day, I came upon a table filled with young people chatting and enjoying the spectacular weather. Several had identical blue T-s.h.i.+rts with "[email protected]" written across them-Trilogy being an Austin, Texasbased software company with a reputation for recruiting our top students. I walked over to the table. "Are you guys here to recruit?" I asked. "No, absolutely not," they replied adamantly. "We're not recruiters. We're just hangin' out, playing a little Frisbee with our friends." How interesting, I thought. They've come to campus on a workday, all the way from Austin, just to hang out with some new friends.

I noticed one member of the group sitting slouched over on the gra.s.s, dressed in a tank top. This young man had spiked multicolored hair, full-body tattoos, and multiple piercings in his ears. An obvious slacker, I thought, probably in a band. "So what is your story?" I asked. "Hey man, I just signed on with these guys." In fact, as I would later learn, he was a gifted student who had inked the highest-paying deal of any graduating student in the history of his department, right at that table on the gra.s.s, with the recruiters who do not "recruit."

What a change from my own college days, just a little more than twenty years ago, when students would put on their dressiest clothes and carefully hide any counterculture tendencies to prove that they could fit in with the company. Today, apparently, it's the company trying to fit in with the students. In fact, Trilogy had wined and dined him over margarita parties in Pittsburgh and flown him to Austin for private parties in hip nightspots and aboard company boats. When I called the people who had recruited him to ask why, they answered, "That's easy. We wanted him because he's a rock star."

While I was interested in the change in corporate recruiting strategy, something even bigger struck me. Here was another example of a talented young person leaving Pittsburgh. Clearly, my adopted hometown has a huge number of a.s.sets. Carnegie Mellon is one of the world's leading centers for research in information technology. The University of Pittsburgh, right down the street from our campus, has a world-cla.s.s medical center. Pittsburgh attracts hundreds of millions of dollars per year in university research funding and is the sixth-largest center for college and university students on a per capita basis in the country. Moreover, the city is hardly a cultural backwater. It is home to three major sports franchises, renowned museums and cultural venues, a spectacular network of urban parks, fantastic industrial-age architecture, and great urban neighborhoods with an abundance of charming yet affordable housing. It is a friendly city, defined by strong communities and a strong sense of pride. In the 1986 Rand McNally survey, Pittsburgh was ranked "America's Most Livable City," and has continued to score high on such lists ever since.

Yet Pittsburgh's economy continues to putter along in a middling flatline pattern. Both the core city and the surrounding metropolitan area lost population in the 2000 census. And those bright young university people keep leaving. Most of Carnegie Mellon's prominent alumni of recent years-like Vinod Khosla, perhaps the best known of Silicon Valley's venture capitalists, and Rick Ras.h.i.+d, head of research and development at Microsoft-went elsewhere to make their marks. Pitt's vaunted medical center, where Jonas Salk created his polio vaccine and the world's premier organ-transplant program was started, has inspired only a handful of entrepreneurs to build biotech companies in Pittsburgh.

Over the years, I have seen the community try just about everything possible to remake itself so as to attract and retain talented young people, and I was personally involved in many of these efforts. Pittsburgh has launched a mult.i.tude of programs to diversify the region's economy away from heavy industry into high technology. It has rebuilt its downtown virtually from scratch, invested in a new airport, and developed a ma.s.sive new sports complex for the Pirates and the Steelers. But nothing, it seemed, could stem the tide of people and new companies leaving the region.

I asked the young man with the spiked hair why he was going to a smaller city in the middle of Texas, a place with a small airport and no professional sports teams, without a major symphony, ballet, opera, or art museum comparable to Pittsburgh's. The company is excellent, he told me. There are also terrific people and the work is challenging. But the clincher, he said, is that "It's in Austin!" There are lots of young people, he went on to explain, and a tremendous amount to do: a thriving music scene, ethnic and cultural diversity, fabulous outdoor recreation, and great nightlife. Though he had several good job offers from Pittsburgh high-tech firms and knew the city well, he said he felt it lacked the lifestyle options, cultural diversity, and tolerant att.i.tude that would make it attractive to him. As he summed it up: "How would I fit in here?"

This young man and his lifestyle proclivities represent a profound new force in the economy and life of America. He is a member of what I call the creative cla.s.s: a fast-growing, highly educated, and well-paid segment of the workforce on whose efforts corporate profits and economic growth increasingly depend. Members of the creative cla.s.s do a wide variety of work in a wide variety of industries-from technology to entertainment, journalism to finance, high-end manufacturing to the arts. They do not consciously think of themselves as a cla.s.s. Yet they share a common ethos that values creativity, individuality, difference, and merit.

More and more businesses understand that ethos and are making the adaptations necessary to attract and retain creative-cla.s.s employees-everything from relaxed dress codes, flexible schedules, and new work rules in the office to hiring recruiters who throw Frisbees. Most civic leaders, however, have failed to understand that what is true for corporations is also true for cities and regions: places that succeed in attracting and retaining creative cla.s.s people prosper; those that fail don't.

Stuck in old paradigms of economic development, cities like Buffalo, New Orleans, and Louisville struggled in the 1980s and The Creativity Index (Guide to Charts) The key to economic growth lies not just in the ability to attract the creative cla.s.s, but to translate that underlying advantage into creative economic outcomes in the form of new ideas, new high-tech businesses, and regional growth. To better gauge these capabilities, I developed a new measure called the Creativity Index (column 1). The Creativity Index is a mix of four equally weighted factors: the creative-cla.s.s share of the workforce (column 2 shows the percentage; column 3 ranks cities accordingly); high-tech industry, using the Milken Inst.i.tute's widely accepted Tech Pole Index, which I refer to as the High-Tech Index (column 4); innovation, measured as patents per capita (column 5); and diversity, measured by the Gay Index, a reasonable proxy for an area's openness to different kinds of people and ideas (column 6). This composite indicator is a better measure of a region's underlying creative capabilities than the simple measure of the creative cla.s.s, because it reflects the joint effects of its concentration and of innovative economic outcomes. The Creativity Index is thus my baseline indicator of a region's overall standing in the creative economy and I offer it as a barometer of a region's longer-run economic potential. The following tables present my Creativity Index ranking for the top ten and bottom ten metropolitan areas, grouped into three size categories (large, medium size, and small cities/regions).

Large Cities Creativity Rankings Rankings of 49 metro areas reporting populations over 1 million in the 2000 Census TOP TEN CITIES.

BOTTOM TEN CITIES.

1990s to become the next "Silicon Somewhere" by building generic high-tech office parks or subsidizing professional sports teams. Yet they lost members of the creative cla.s.s, and their economic dynamism, to places like Austin, Boston, Was.h.i.+ngton, D.C., and Seattle-places more tolerant, diverse, and open to creativity. Because of this migration of the creative cla.s.s, a new social and economic geography is emerging in America, one that does not correspond to old categories like East Coast versus West Coast or Sunbelt versus Frostbelt. Rather, it is more like the cla.s.s divisions that have increasingly separated Americans by income and neighborhood, extended into the realm of city and region.

THE CREATIVE SECRETARY.

The distinguis.h.i.+ng characteristic of the creative cla.s.s is that its members engage in work whose function is to "create meaningful new forms." The supercreative core of this new cla.s.s includes scientists and engineers, university professors, poets and novelists, artists, entertainers, actors, designers, and architects, as well as the "thought leaders.h.i.+p" of modern society: nonfiction writers, editors, cultural figures, think-tank researchers, a.n.a.lysts, and other opinion makers. Members of this supercreative core produce new forms or designs that are readily transferable and broadly useful-such as designing a product that can be widely made, sold, and used; coming up with a theorem or strategy that can be applied in many cases; or composing music that can be performed again and again.

Beyond this core group, the creative cla.s.s also includes "creative professionals" who work in a wide range of knowledge-intensive industries such as high-tech sectors, financial services, the legal and health care professions, and business management. These people engage in creative problem solving, drawing on complex bodies of knowledge to solve specific problems. Doing so typically requires a high degree of formal education and thus a high level of human capital. People who do this kind of work may sometimes come up with methods or products that turn out to be widely useful, but it's not part of the basic job description. What they are required to do regularly is think on their own. They apply or combine standard approaches in unique ways to fit the situation, exercise a great deal of judgment, perhaps try something radically new from time to time.

Much the same is true of the growing number of technicians and others who apply complex bodies of knowledge to working with physical materials. In fields such as medicine and scientific research, technicians are taking on increased responsibility to interpret their work and make decisions, blurring the old distinction between white-collar work (done by decision makers) and blue-collar work (done by those who follow orders). They acquire their own arcane bodies of knowledge and develop their own unique ways of doing the job. Another example is the secretary in today's pared-down offices. In many cases, this person not only takes on a host of tasks once performed by a large secretarial staff, but becomes a true office manager-channeling flows of information, devising and setting up new systems, often making key decisions on the fly. These people contribute more than intelligence or computer skills. They add creative value. Everywhere we look, creativity is increasingly valued. Firms and organizations value it for the results that it can produce and individuals value it as a route to self-expression and job satisfaction. Bottom line: as creativity becomes more valued, the creative cla.s.s grows.

Medium-Size Cities Creativity Rankings Rankings of 32 metro areas reporting populations 500,000 to 1 million in the 2000 Census TOP TEN CITIES.

BOTTOM TEN CITIES.

The creative cla.s.s now includes some 38.3 million Americans, roughly 30 percent of the entire U.S. workforce-up from just 10 percent at the turn of the twentieth century and less than 20 percent as recently as 1980. The creative cla.s.s has considerable economic power. In 1999, the average salary for a member of the creative cla.s.s was nearly $50,000 ($48,752), compared to roughly $28,000 for a working-cla.s.s member and $22,000 for a service-cla.s.s worker.

Not surprisingly, regions that have large numbers of creative-cla.s.s members are also some of the most affluent and growing.

THE NEW GEOGRAPHY OF CLa.s.s.

Different cla.s.ses of people have long sorted themselves into neighborhoods within a city or region. But now we find a large-scale re-sorting of people among cities and regions nationwide, with some regions becoming centers of the creative cla.s.s while others are composed of larger shares of working-cla.s.s or service-cla.s.s people. To some extent this has always been true. For instance, there have always been artistic and cultural communities like Greenwich Village, college towns like Madison and Boulder, and manufacturing centers like Pittsburgh and Detroit. The news is that such sorting is becoming even more widespread and p.r.o.nounced.

In the leading centers of this new cla.s.s geography, the creative cla.s.s makes up more than 35 percent of the workforce. This is already the case in the greater Was.h.i.+ngton, D.C., region, the Raleigh-Durham area, Boston, and Austin-all areas undergoing tremendous economic growth. Despite their considerable advantages, large regions have not cornered the market as creative-cla.s.s locations. In fact, a number of smaller regions have some of the highest creative-cla.s.s concentrations in the nation-notably college towns like East Lansing, Michigan, and Madison, Wisconsin.

At the other end of the spectrum are regions that are being bypa.s.sed by the creative cla.s.s. Among large regions, Las Vegas, Grand Rapids, and Memphis harbor the smallest concentrations of the creative cla.s.s. Members of this cla.s.s have nearly abandoned a wide range of smaller regions in the outskirts of the South and Midwest. In small metropolitan areas like Victoria, Texas, and Jackson, Tennessee, the creative cla.s.s composes less than 15 percent of the workforce. The leading centers for the working cla.s.s among large regions are Greensboro, North Carolina, and Memphis, Tennessee, where the working cla.s.s makes up more than 30 percent of the workforce. Several smaller regions in the South and Midwest are veritable working-cla.s.s enclaves with 40 to 50 percent or more of their workforce in the traditional industrial occupations.

These places have some of the most minuscule concentrations of the creative cla.s.s in the nation. They are symptomatic of a general lack of overlap between the major creative-cla.s.s centers and those of the working cla.s.s. Of the twenty-six large cities where the working cla.s.s composes more than one-quarter of the population, only one, Houston, ranks among the top ten destinations for the creative cla.s.s.

Chicago, a bastion of working-cla.s.s people that still ranks among the top twenty large creative centers, is interesting because it shows how the creative cla.s.s and the traditional working cla.s.s can coexist. But Chicago has an advantage in that it is a big city, with more than a million members of the creative cla.s.s. The University of Chicago sociologist Terry Clark likes to say Chicago developed an innovative political and cultural solution to this issue. Under the second Mayor Daley, the city integrated the members of the creative cla.s.s into its culture and politics by treating them essentially as just another "ethnic group" that needed sufficient s.p.a.ce to express its ident.i.ty.

Las Vegas has the highest concentration of the service cla.s.s among large cities, 58 percent, while West Palm Beach, Orlando, and Miami also have around half. These regions rank near the bottom of the list for the creative cla.s.s. The service cla.s.s makes up more than half the workforce in nearly fifty small and medium-size regions across the country. Few of them boast any significant concentrations of the creative cla.s.s, save vacationers, and offer little prospect for upward mobility. They include resort towns like Honolulu and Cape Cod. But they also include places like Shreveport, Louisiana, and Pittsfield, Ma.s.sachusetts. For these places that are not tourist destinations, the economic and social future is troubling to contemplate.

PLUG-AND-PLAY COMMUNITIES.

Why do some places become destinations for the creative while others don't? Economists speak of the importance of industries having "low entry barriers," so that new firms can easily enter and keep the industry vital. Similarly, I think it's important for a place to have low entry barriers for people-that is, to be a place where newcomers are accepted quickly into all sorts of social and economic arrangements. All else being equal, they are likely to attract greater numbers of talented and creative people-the sort of people who power innovation and growth. Places that thrive in today's world tend to be plug-and-play communities where anyone can fit in quickly. These are places where people can find opportunity, build support structures, be themselves, and not get stuck in any one ident.i.ty. The plug-and-play community is one that somebody can move into and put together a life-or at least the facsimile of a life-in a week.

Creative centers also tend to be places with thick labor markets that can fulfill the employment needs of members of the creative cla.s.s, who, by and large, are not looking just for "a job" but for places that offer many employment opportunities.

Cities and regions that attract lots of creative talent are also those with greater diversity and higher levels of quality of place. That's because location choices of the creative cla.s.s are based to a large degree on their lifestyle interests, and these go well beyond the standard "quality-of-life" amenities that most experts think are important.

For instance, in 1998, I met Gary Gates, then a doctoral student at Carnegie Mellon. While I had been studying the location choices of high-tech industries and talented people, Gates had been exploring the location patterns of gay people. My list of the country's high-tech hot spots looked an awful lot like his list of the places with highest concentrations of gay people. When we compared these two lists with more statistical rigor, his Gay Index turned out to correlate very strongly to my own measures of high-tech growth. Other measures I came up with, like the Bohemian Index-a measure of artists, writers, and performers-produced similar results.

Talented people seek an environment open to differences. Many highly creative people, regardless of ethnic background or s.e.xual orientation, grew up feeling like outsiders, different in some way from most of their schoolmates. When they are sizing up a new company and community, acceptance of diversity and of gays in particular is a sign that reads "Nonstandard People Welcome Here."

The creative-cla.s.s people I study use the word diversity a lot, but not to press any political hot b.u.t.tons. Diversity is simply something they value in all its manifestations. This is spoken of so often, and so matter-of-factly, that I take it to be a fundamental marker of creative-cla.s.s values. Creative-minded people enjoy a mix of influences. They want to hear different kinds of music and try different kinds of food. They want to meet and socialize with people unlike themselves, trade views, and spar over issues.

As with employers, visible diversity serves as a signal that a community embraces the open meritocratic values of the creative age. The people I talked to also desired nightlife with a wide mix of options. The most highly valued options were experiential ones-interesting music venues, neighborhood art galleries, performance s.p.a.ces, and theaters. A vibrant, varied nightlife was viewed by many as another signal that a city "gets it," even by those who infrequently partake in nightlife. More than anything, the creative cla.s.s craves real experiences in the real world.

They favor active, partic.i.p.atory recreation over pa.s.sive, inst.i.tutionalized forms. They prefer indigenous street-level culture- a teeming blend of cafes, sidewalk musicians, and small galleries and bistros, where it is hard to draw the line between performers and spectators. They crave stimulation, not escape. They want to pack their time full of dense, high-quality, multidimensional experiences. Seldom has one of my subjects expressed a desire to get away from it all. They want to get into it all, and do it with eyes wide open.

Creative-cla.s.s people value active outdoor recreation very highly. They are drawn to places and communities where many outdoor activities are prevalent-both because they enjoy these activities and because their presence is seen as a signal that the place is amenable to the broader creative lifestyle. The creative-cla.s.s people in my studies are into a variety of active sports, from traditional ones like bicycling, jogging, and kayaking to newer, more extreme ones, like trail running and s...o...b..arding.

Places are also valued for authenticity and uniqueness. Authenticity comes from several aspects of a community-historic buildings, established neighborhoods, a unique music scene, or specific cultural attributes. It comes from the mix-from urban grit alongside renovated buildings, from the commingling of young and old, longtime neighborhood characters and yuppies, fas.h.i.+on models and "bag ladies." An authentic place also offers unique and original experiences. Thus a place full of chain stores, chain restaurants, and nightclubs is not authentic. You could have the same experience anywhere.

Today, it seems, leading creative centers provide a solid mix of high-tech industry, plentiful outdoor amenities, and an older urban center whose rebirth has been fueled in part by a combination of creativity and innovative technology, as well as lifestyle amenities. These include places like the greater Boston area, which has the Route 128 suburban complex, Harvard and MIT, and several charming inner-city Boston neighborhoods. Seattle has suburban Bellevue and Redmond (where Microsoft is located), beautiful mountains and country, and a series of revitalized urban neighborhoods. The San Francis...o...b..y area has everything from posh inner-city neighborhoods to ultrahip districts like SoMa (South of Market) and lifestyle enclaves like Marin County as well as the Silicon Valley. Even Austin includes traditional high-tech developments to the north, lifestyle centers for cycling and outdoor activities, and a revitalizing university/ downtown community centered on vibrant Sixth Street, the warehouse district, and the music scene-a critical element of a thriving creative center.

Small-Size Cities Creativity Rankings Rankings of 63 metro areas reporting populations 250,000 to 500,000 in the 2000 Census TOP TEN CITIES.

BOTTOM TEN CITIES.

INSt.i.tUTIONAL SCLEROSIS.

Even as places like Austin and Seattle are thriving, much of the country is failing to adapt to the demands of the creative age. It is not that struggling cities like Pittsburgh do not want to grow or encourage high-tech industries. In most cases, their leaders are doing everything they think they can to spur innovation and high-tech growth. But most of the time they are either unwilling or unable to do the things required to create an environment or habitat attractive to the creative cla.s.s. They pay lip service to the need to "attract talent," but continue to pour resources into recruiting call centers, underwriting big-box retailers, subsidizing downtown malls, and squandering precious taxpayer dollars on extravagant stadium complexes. Or they try to create facsimiles of neighborhoods or retail districts, replacing the old and authentic with the new and generic-and in doing so drive the creative cla.s.s away.

It is a telling commentary on our age that at a time when political will seems difficult to muster for virtually anything, city after city can generate the political capital to underwrite hundreds of millions of dollars of investments in professional sports stadiums. And you know what? They don't matter to the creative cla.s.s. Not once during any of my focus groups and interviews did the members of the creative cla.s.s mention professional sports as playing a role of any sort in their choice of where to live and work. What makes most cities unable to even imagine devoting those kinds of resources or political will to do the things that people say really matter to them?

The answer is simple. These cities are trapped by their past. Despite the lip service they might pay, they are unwilling or unable to do what it takes to attract the creative cla.s.s. The late economist Mancur Olson long ago noted that the decline of nations and regions is a product of an organizational and cultural hardening of the arteries he called "inst.i.tutional sclerosis." Places that grow up and prosper in one era, Olson argued, find it difficult and oftentimes impossible to adopt new organizational and cultural patterns, regardless of how beneficial they might be. Consequently, innovation and growth s.h.i.+ft to new places, which can adapt to and harness these s.h.i.+fts for their benefit. This phenomenon, he contends, is how England got trapped and how the United States became the world's great economic power. It also accounts for the s.h.i.+ft in economic activity from the old industrial cities to newer cities in the South and West, according to Olson.

Olson's a.n.a.lysis presciently identifies why so many cities across the nation remain trapped in the culture and att.i.tudes of the bygone organizational age, unable or unwilling to adapt to current trends. Cities like Detroit, Cleveland, and my current hometown of Pittsburgh were at the forefront of the organizational age. The cultural and att.i.tudinal norms of that age became so powerfully ingrained in these places that they did not allow the new norms and att.i.tudes a.s.sociated with the creative age to grow up, diffuse, and become generally accepted. This process, in turn, stamped out much of the creative impulse, causing talented and creative people to seek out new places where they could more readily plug in and make a go of it.

Most experts and scholars have not even begun to think in terms of a creative community. Instead, they tend to try to emulate the Silicon Valley model that author Joel Kotkin has dubbed the "nerdistan." But the nerdistan is a limited economic development model, which misunderstands the role played by creativity in generating innovation and economic growth. Nerdistans are bland, uninteresting places with acre upon acre of identical office complexes, row after row of asphalt parking lots, freeways clogged with cars, cookie-cutter housing developments, and strip malls sprawling in every direction. Many of these places have fallen victim to the very kinds of problems they were supposed to avoid. The comfort and security of places like Silicon Valley have gradually given way to sprawl, pollution, and paralyzing traffic jams. As one technology executive told the Wall Street Journal, "I really didn't want to live in San Jose. Every time I went up there, the concrete jungle got me down." His company eventually settled on a more urban Southern California location in downtown Pasadena close to the Caltech campus.

Kotkin finds that the lack of lifestyle amenities is causing significant problems in attracting top creative people to places like the North Carolina Research Triangle. He quotes a major real estate developer as saying, "Ask anyone where downtown is and n.o.body can tell you. There's not much of a sense of place here . . . The people I am selling s.p.a.ce to are screaming about cultural issues." The Research Triangle lacks the hip urban lifestyle found in places like San Francisco, Seattle, New York, and Chicago, laments a University of North Carolina researcher: "In Raleigh-Durham, we can always visit the hog farms."

THE KIDS ARE ALL RIGHT.

How do you build a truly creative community-one that can survive and prosper in this emerging age? The key can no longer be found in the usual strategies. Recruiting more companies won't do it; neither will trying to become the next Silicon Valley. While it certainly remains important to have a solid business climate, having an effective people climate is even more essential. By this I mean a general strategy aimed at attracting and retaining people-especially, but not limited to, creative people. This entails remaining open to diversity and actively working to cultivate it, and investing in the lifestyle amenities that people really want and use often, as opposed to using financial incentives to attract companies, build professional sports stadiums, or develop retail complexes.

The benefits of this kind of strategy are obvious. Whereas companies-or sports teams, for that matter-that get financial incentives can pull up and leave at virtually a moment's notice, investments in amenities like urban parks, for example, last for generations. Other amenities-like bike lanes or off-road trails for running, cycling, Rollerblading, or just walking your dog-benefit a wide swath of the population.

There is no one-size-fits-all model for a successful people climate. The members of the creative cla.s.s are diverse across the dimensions of age, ethnicity and race, marital status, and s.e.xual preference. An effective people climate needs to emphasize openness and diversity, and to help reinforce low barriers to entry. Thus it cannot be restrictive or monolithic.

Openness to immigration is particularly important for smaller cities and regions, while the ability to attract so-called bohemians is key for larger cities and regions. For cities and regions to attract these groups, they need to develop the kinds of people climates that appeal to them and meet their needs.

Yet if you ask most community leaders what kinds of people they'd most want to attract, they'd likely say successful married couples in their thirties and forties-people with good middleto upper-income jobs and stable family lives. I certainly think it is important for cities and communities to be good for children and families. But less than a quarter of all American households consist of traditional nuclear families, and focusing solely on their needs has been a losing strategy, one that neglects a critical engine of economic growth: young people.

Young workers have typically been thought of as transients who contribute little to a city's bottom line. But in the creative age, they matter for two reasons. First, they are workhorses. They are able to work longer and harder, and are more p.r.o.ne to take risks, precisely because they are young and childless. In rapidly changing industries, it's often the most recent graduates who have the most up-to-date skills. Second, people are staying single longer. The average age of marriage for both men and women has risen some five years over the past generation. College-educated people postpone marriage longer than the national averages. Among this group, one of the fastest-growing categories is the never-been-married. To prosper in the creative age, regions have to offer a people climate that satisfies this group's social interests and lifestyle needs, as well as address those of other groups.

Furthermore, a climate oriented to young people is also attractive to the creative cla.s.s more broadly. Creative-cla.s.s people do not lose their lifestyle preferences as they age. They don't stop bicycling or running, for instance, just because they have children. When they put their children in child seats or jogging strollers, amenities like traffic-free bike paths become more important than ever. They also continue to value diversity and tolerance. The middle-aged and older people I speak with may no longer hang around in nightspots until 4 A.M., but they enjoy stimulating, dynamic places with high levels of cultural interplay. And if they have children, that's the kind of environment in which they want them to grow up.

My adopted hometown of Pittsburgh has been slow to realize this. City leaders continue to promote Pittsburgh as a place that is good for families, seemingly unaware of the demographic changes that have made young people, singles, new immigrants, and gays critical to the emerging social fabric. People in focus groups I have conducted feel that Pittsburgh is not open to minority groups, new immigrants, or gays. Young women feel there are substantial barriers to their advancement. Talented members of racial and ethnic minorities, as well as professional women, express their desire to leave the city at a rate far greater than their white male counterparts. So do creative people from all walks of life.

Is there hope for Pittsburgh? Of course there is. First, although the region's economy is not dynamic, neither is it the basket case it could easily have become. Twenty years ago there were no significant venture capital firms in the area; now there are many, and thriving high-tech firms continue to form and make their mark. There are signs of life in the social and cultural milieu as well. The region's immigrant population has begun to tick upward, fed by students and professors at the universities and employees in the medical and technology sectors. Major suburbs to the east of the city now have Hindu temples and a growing Indian American population. The area's gay community, while not large, has become more active and visible. Pittsburgh's increasing status in the gay world is reflected in the fact that it is the "location" for Showtime's Queer as Folk series.

Many of Pittsburgh's creative cla.s.s have proven to be relentless cultural builders. The Andy Warhol Museum and the Mattress Factory, a museum/works.p.a.ce devoted to large-scale installation art, have achieved worldwide recognition. Street-level culture has a growing foothold in Pittsburgh, too, as main street corridors in several older working-cla.s.s districts have been transformed. Political leaders are in some cases open to new models of development. Pittsburgh mayor Tom Murphy has been an ardent promoter of biking and foot trails, among other things. The city contains absolutely first-rate architecture and its urban design community has become much more vocal about the need to preserve historic buildings, invest in neighborhoods, and inst.i.tute tough design standards. It would be very hard today (dare I say nearly impossible) to knock down historic buildings and dismember vibrant urban neighborhoods as was done in the past. As these new groups and efforts reach critical ma.s.s, the norms and att.i.tudes that have long prevailed in the city are being challenged.

For what it's worth, I'll put my money-and a lot of my effort-into Pittsburgh's making it. If Pittsburgh, with all of its a.s.sets and its emerging human creativity, somehow can't make it in the creative age, I fear the future does not bode well for other older industrial communities and established cities, and the lamentable new cla.s.s segregation among cities will continue to worsen.

The Rules of Innovation CLAYTON M. CHRISTENSEN.

Two decades ago, when I was just out of graduate school and working in the automotive industry, I got my first introduction to the statistical process-control chart. We used this laborious technique to make sure the machines employed in our manufacturing process did not drift out of control. Composed of three parallel horizontal lines, the "SPC" chart has long been an important tool in quality management. The center line represents the targeted value for the critical performance parameter of a product being manufactured. The lines above and below it represent the acceptable upper and lower control limits. If the product were, say, an axle, workers would plot the thickness of each piece they made on the chart. When I asked why there was typically a scatter of points around the target, my managers cited the randomness inherent in all processes.

The "Quality Movement" of the 1980s and '90s subsequently taught us that there isn't randomness in processes. Every deviation of the actual value from the target has a cause. It appears to be random when we don't know the cause. The Quality Movement developed methods for identifying those additional factors-and we discovered that if we could control or account for all of them, the result would be perfectly predictable, and there would be no need to inspect products as they emerged from manufacturing. The management of innovation today is where the Quality Movement was twenty years ago, in that many believe the outcomes of innovation efforts are unpredictable. The raison d'etre of the venture capital industry is belief in the unpredictability of new businesses. A few ventures will succeed; most won't, the VCs say. They therefore place a portfolio of bets, extracting premium prices for their capital in order to earn the high return required to compensate for the risk that unpredictability imposes. I believe, however, that innovation isn't random. Every undesired outcome has a cause. Those outcomes appear to be random when we don't understand all the factors that affect successful innovation. If we could understand and manage these variables, innovation wouldn't be nearly as risky as it appears.

The good news is that recent years have seen considerable progress in identifying important variables that affect the probability of success in innovation. I've cla.s.sified these variables into four sets: (1) taking root in disruption, (2) the necessary scope to succeed, (3) leveraging the right capabilities, and (4) disrupting compet.i.tors, not customers.

Of course, building successful businesses is such a complicated process, involving subtle interdependencies among so many variables in dynamic systems, that we're unlikely ever to make it perfectly predictable. But the more we can master these variables, the more we will be able to create new companies, products, processes, and services that achieve what we hope to achieve.

TAKE ROOT IN DISRUPTION.

The startling conclusion suggested by the research that led to my writing The Innovator's Dilemma was that many successful companies stumble from prominence not because they're badly managed but precisely because they are well managed. They listen to and satisfy the needs of their best customers, and they focus investments at the largest and most profitable tiers of their markets. Mastering these paradigms of good management gives established companies, as a group, an extraordinary track record in producing sustaining innovations that bring better products to established markets. It matters little whether the innovation is incrementally simple or radically difficult, as long as it enables good companies to make better products that they can sell for higher margins to their best customers in attractively sized markets. The companies that had led their industries in prior technologies led their industries in adopting new sustaining technologies in literally 100 percent of the cases we studied.

In contrast, the leading companies almost always were toppled when disruptive technologies emerged-products or services that weren't as good as those already used in established markets. Disruptive innovations don't initially perform well enough to be sold or used successfully in mainstream markets. But they have other attributes-most often simplicity, convenience, and low cost-that appeal to a new, small, and initially unattractive (to established firms) set of customers, who use them in new or low-end applications. The chances that a new company could become successful if its entry path was a sustaining strategy-trying to make a better product than the inc.u.mbents and selling it to the same customers-were about 6 percent in our study. The chances of success for firms that entered with a disruptive strategy were 33 percent. The disparity stems from the motivation and position of the leading firms. They have far more resources to throw at opportunities than entrants do. When newcomers attack customers and markets attractive to the leaders, the leaders overwhelm them.

All companies are burdened with "asymmetric" motivations in that they must move toward markets that promise higher profit margins and the most substantial and immediate growth and cannot move down market toward smaller opportunities and profit margins. When new entrants take root with customers in markets that are unattractive to the leaders, they are safer-and it has nothing to do with how much cash or proprietary technology they have. They are safe because the inc.u.mbents are motivated to ignore or even exit the very markets that the entrants are motivated to enter. Taking root in disruption, therefore, is the first condition that innovators need to meet to improve the probability of successfully creating a new growth business. If they cannot or do not do this, their odds of success are much smaller.

There are two tests to a.s.sess whether a market can be disrupted. At least one of these criteria must be met in order for an upstart to be disruptively successful. If a new growth business can meet both, the odds are even better.

1. Does the innovation enable less skilled or less wealthy customers to do for themselves things that only the wealthy or skilled intermediaries could previously do?

When an innovation fulfills this condition, even if it can't do all the things existing offerings can, potential customers excluded from the market tend to be delighted. For example, many people loved the first personal computers, no matter how clunky the booting process and limited the software the machines could run, because the alternative to which they compared the PC wasn't the minicomputer-it was no computer at all. Filling such a void reduces the capital commitments and technological achievements required for an innovation to become viable and creates new growth markets. I call the process of finding and nurturing these opportunities "creative creation." After a technology takes root in new markets, and after new growth is created, disruption can invade the established market and destroy its leading firms.

Even if innovators succeed in cramming disruptive technology into an existing market application, the inc.u.mbents typically win. Digital photography, online consumer banking, and hybridelectric vehicles are examples of potentially disruptive technologies that were deployed in such a sustaining fas.h.i.+on. Billions were spent on these innovations to beat out already acceptable and habitual technology; little net growth resulted, as sales of the new products cannibalized sales of the old; and the industry leaders maintained their rule.

2. Does the innovation target customers at the low end of a market who don't need all the functionality of current products? And does the business model enable the disruptive innovator to earn attractive returns at discount prices unattractive to the inc.u.mbents?

Wal-Mart, Dell Computer, and Nucor are examples of disruptive companies that attacked the low ends of their markets with business models that allowed them to make money at discount prices. Wal-Mart started by selling brand-name products at prices 20 percent below department-store prices and still earned attractive returns because it turned inventory over much more frequently. Such a disruptive strategy can create new growth businesses but does not create new markets or cla.s.ses of consumers. It has a high probability of success because the reported profit margins of established companies typically improve if they get out of low-end, low-margin products and add in their stead high-margin products positioned in more demanding market segments. By a.s.saulting the low end of the market and then moving up, a new company attacks, tier by tier, the markets from which established compet.i.tors are motivated to exit.

PICK THE SCOPE NEEDED TO SUCCEED.

The second set of variables that affects the probability that a new business venture will succeed relates to its degree of "integration." Highly integrated companies make and sell their own proprietary components and products across a wide range of product lines or businesses. Nonintegrated companies outsource as much as possible to suppliers and partners and use modular, open systems and components. Which style is likely to be successful is determined by the conditions under which companies must compete as disruption occurs.

In markets where product functionality is not yet good enough, companies must compete by making better products. This typically means making products whose architecture is interdependent and proprietary, because compet.i.tive pressure compels engineers to fit the pieces of their systems together in ever more efficient ways in order to wring the best performance possible out of the available technology. Standardization of interfaces (meaning fewer degrees of design freedom) forces them to back away from the frontier of what is technologically possible-which spells compet.i.tive trouble when functionality is inadequate. This helps explain why IBM, General Motors, Apple Computer, RCA, Xerox, and AT&T, as the most integrated firms during the not-good-enough era of their industries' histories, became dominant compet.i.tors. Intel and Microsoft (raps about the latter's supposed lack of innovation aside) have also dominated their pieces of the computer industry-compared to less integrated companies such as WordPerfect (now owned by Corel)-because their products have employed the sorts of proprietary, interdependent architectures that are necessary when pus.h.i.+ng the frontier of what is possible. This also helps us understand why NTT DoCoMo, with its integrated strategy, has been so much more successful in providing mobile access to the Internet than nonintegrated American and European compet.i.tors who have sought to interface with one another through negotiated standards. When the functionality of products has overshot what mainstream customers can use, however, companies must compete through improvements in speed to market, simplicity and convenience, and the ability to customize products to the needs of customers in ever smaller market niches. Here, compet.i.tive forces drive the design of modular products, in which the interfaces among components and subsystems are clearly specified. Ultimately, these coalesce as industry standards. Modular architectures help companies respond to individual customer needs and introduce new products faster by upgrading individual subsystems without having to redesign everything. Under these conditions (and only under these conditions), outsourcing t.i.tans like Dell and Cisco Systems can prosper-because modular architectures help them be fast, flexible and responsive.

LEVERAGE THE RIGHT CAPABILITIES.

Innovations fail when managers attempt to implement them within organizations that are incapable of succeeding. Managers can determine the innovation limits of their organizations quite precisely by asking three questions: (1) Do I have the resources to succeed? (2) Will my organization's processes facilitate success in this new effort? (3) Will my organization's values allow employees to prioritize this innovation, given their other responsibilities?

Beyond technology, the resources that drive innovative success are managers and money. Corporate executives often tap managers who have strong records of success in the mainstream to manage the creation of new growth businesses. Such choices can be the kiss of death, however, because the challenges confronting managers in a disruptive enterprise-and the skills required to overcome them-are different from those that prevail in the core business. Many innovations fail because managers do not know what they do not know as they make and implement their plans. That is, they a.s.sume that the same strategies and customer needs that apply in mature, stable markets will apply in disruptive ventures. But this is not the case, and by making such a.s.sumptions, managers close themselves off from opportunities to discover what customers really find useful in new, disruptive products. Innovators must avoid two common misconceptions in managing the other key resource, money. The first is that deep corporate pockets are an advantage when growing new businesses. They are not. Too much cash allows those running a new venture to follow a flawed strategy for too long. Having barely enough money forces the venture's managers to adapt to the desires of actual customers, rather than those of the corporate treasury, when looking for ways to get money-and forces them to uncover a viable strategy more quickly.

The second misconception is that patience is a virtue-that innovation entails large losses for sustained periods prior to reaping the huge upside that comes from disruptive technologies. Innovators should be patient about the new venture's size but impatient for profits. The mandate to be profitable forces the venture to zero in on a valid strategy. But when new ventures are forced to get big fast, they end up placing huge bets at a time when the right strategy simply cannot be known. In particular, they tend to target large, obvious, existing markets-and this condemns them to failure. Most of today's envisioned business opportunities for wireless Internet access, for example, involve big applications such as stock trading and multiplayer gaming that have already found homes on wired, desktop computers. Billions are being sunk into new wireless ventures committed to taking over these markets before innovators have a chance to learn what applications wireless is really best at delivering.

Resources such as technology, cash, and technical talent tend to be flexible, in that they can be used for a wide array of purposes. Processes, however-the central element in our second question-are typically inflexible. Their purpose is not to adapt quickly but to get the same job done reliably, again and again. The fact that a process facilitates certain tasks means that it will not work well for very different tasks. Failure is frequently rooted in the forced use of habitual but inappropriate processes for doing market research, strategic planning, and budgeting.

Sony, for example, was history's most successful disruptor. Between 1950 and 1980, it introduced twelve bona fide disruptive technologies that created exciting new markets and ultimately dethroned industry leaders-everything from radios and televisions to VCRs and the Walkman. Between 1980 and 1997, however, the company did not introduce a single disruptive innovation. Sony continued to produce sustaining innovations in its product businesses, of course. But even the new businesses that it created with its PlayStation and Vaio notebook computer were great but late entries into already established markets.

What drove Sony's s.h.i.+ft from a disruptive to a sustaining innovation strategy? Prior to 1980, all new product launch decisions were made by cofounder Akio Morita and a trusted team of a.s.sociates. They never did market research, believing that if markets did not exist they could not be a.n.a.lyzed. Their process for a.s.sessing new opportunities relied on personal intuition. In the 1980s, Morita withdrew from active management in order to be more involved in j.a.panese politics. The company consequently began hiring marketing and product-planning professionals who brought with them data-intensive, a.n.a.lytical processes of doing market research. Those processes were very good at uncovering unmet customer needs in existing product markets. But making the intuitive bets required to launch disruptive businesses became impossible.

A company's values-the focus of question three-determine the necessity of spinning out separate organizations for new ventures. Values are even less flexible than resources. Everyone in an organization-executives to sales force-must put a premium on the type of business that helps the company make money given its existing cost structure. If a new venture doesn't target order sizes, price points, and margins that are more attractive than other opportunities on the organization's plate, it won't get priority resources; it will languish and ultimately fail.

Nor is it just the values of the innovating company that matter, because suppliers and distributors have values, too, and they must put the highest priorities on opportunities that help them make money. This is why, with almost no exceptions, disruptive innovations take root in freestanding value networks-with new sales forces, distributors, and retailing channels.

DISRUPT COMPEt.i.tORS, NOT CUSTOMERS.

The fourth factor in successful innovation is minimizing the need for customers to reorder their lives. If an innovation helps customers do things they are already trying to do more simply and conveniently, it has a higher probability of success. If it makes it easier for customers to do something they weren't trying to do anyway, it will fail. Put differently, innovators should try to disrupt their compet.i.tors, never their customers.

The best way to understand what customers are actually trying to do, as opposed to what they say they want to do, is to watch them. For example, when interviewed by the college textbook industry, students say they would welcome the ability to probe more deeply into topics of interest that textbooks just touch on. In response, publishers have invested substantial sums to make richer information available on CDs and Web sites. But few students actually use these innovations, and little growth has resulted. Why? Because what most students really are trying to do is avoid reading textbooks at all. They say they would like to delve more deeply into their subjects. But what they really do is put off reading until the last possible minute-and then cram. To make it simpler and more convenient for students to do what they already are trying to do, a publisher could create an online facility called Cramming. Like all disruptive technologies, it would take root in a low-end market: the least conscientious students. Semester after semester, Cramming would then improve as a new "cramming-aid" growth business, without affecting textbook sales. Conscientious students would continue to purchase textbooks. At some point, however, learning the material online would be so much easier and less expensive that, tier by tier, students would stop buying texts. This path of innovation has a much higher chance of success than a direct a.s.sault that pits digital texts against conventional textbooks.

The observed probabilities of success in innovation are low. But these statistics stem from the sum of sustaining and disruptive strategies, many of which are attempted in organizations whose resources, processes, and values render them incapable of succeeding. Many innovators draw lessons from observing other successful companies in very different circ.u.mstances and attempt to succeed with just one or a few links in a chain of interdependent values. And many fail after a.s.suming that what customers say they want to do is what they actually would do.

Hence, the observed probabilities of success don't necessarily reflect what the true likelihood of success can be, if the critical variables in the complex and dynamic process of innovation are understood and managed effectively. Indeed, success may not be as difficult to achieve as it has seemed.

Customers as Innovators A New Way to Create Value STEFAN THOMKE AND ERIC VON HIPPEL.